S-1 1 ds1.htm FORM S-1 Form S-1
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As filed with the Securities and Exchange Commission on March 16, 2007.

Registration No. 333-            

 


UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


FORM S-1

REGISTRATION STATEMENT UNDER

THE SECURITIES ACT OF 1933

 


NIMBLEGEN SYSTEMS, INC.

(Exact Name of Registrant as Specified in its Charter)

 


 

Delaware   541710   39-2003768

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 


NimbleGen Systems, Inc.

One Science Court

Madison, Wisconsin 53711

(608) 218-7600

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 


Stanley D. Rose, Ph.D.

President and Chief Executive Officer

NimbleGen Systems, Inc.

One Science Court

Madison, Wisconsin 53711

(608) 218-7600

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

 


Copies of communications to:

 

Kenneth C. Hunt

Dennis F. Connolly

Godfrey & Kahn, S.C.

780 North Water Street

Milwaukee, Wisconsin 53202

(414) 273-3500

 

Gerald S. Tanenbaum

Cahill Gordon & Reindel LLP

80 Pine Street

New York, New York 10005

(212) 701-3000

Approximate date of commencement of proposed sale to the public:    As soon as practicable after this Registration Statement becomes effective.

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, check the following box:    ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨            

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective 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 statement number of the earlier effective registration statement for the same offering.    ¨            

 


CALCULATION OF REGISTRATION FEE

 


Title of each class of securities to be registered    Proposed maximum
aggregate offering
price(1)
   Amount of
registration
fee(2)

Common Stock, $0.001 par value per share

   $ 75,000,000    $ 2,303

 

(1)   Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) of the Securities Act of 1933, as amended.

 

(2)   Computed in accordance with Rule 457(o) under the Securities Act of 1933, as amended, to be $2,303, which is equal to .0000307 multiplied by the proposed maximum aggregate offering price of $75,000,000.

 


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, as amended, or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 



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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to completion, dated March 16, 2007

Preliminary prospectus

                     shares

LOGO

Common Stock

This is the initial public offering of our common stock. We are offering                      shares of the common stock offered by this prospectus. We expect the initial public offering price to be between $            and $            per share.

Currently no public market currently exists for our common stock. We are applying to have our common stock listed on The Nasdaq Global Market under the symbol “NMBL.”

Investing in our common stock involves a high degree of risk. See “ Risk factors” beginning on page 9.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

      Per share    Total

Initial public offering price

   $                 $             

Underwriting discounts and commission

   $      $  

Proceeds, before expenses, to NimbleGen Systems, Inc.

   $      $  

The underwriters have a 30-day option to purchase up to an additional                      shares of common stock from us to cover over-allotments, if any.

The underwriters are offering the common stock as set forth under “Underwriting.” Delivery of the shares will be made on or about                     , 2007.

JPMorgan

Thomas Weisel Partners LLC

 

Leerink Swann & Company   Robert W. Baird & Co.

The date of this prospectus is                     , 2007


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LOGO


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You should rely only on the information contained in this prospectus. Neither we, nor the underwriters, have authorized anyone to provide you with additional information or information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of shares of our common stock.

No action is being taken in any jurisdiction outside the United States to permit a public offering of the common stock or possession or distribution of this prospectus in that jurisdiction. Persons who come into possession of this prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restrictions as to this offering and the distribution of this prospectus applicable to those jurisdictions.

Table of contents

 

     Page

Prospectus summary

   1

Risk factors

   9

Special note regarding forward-looking statements

   30

Use of proceeds

   31

Dividend policy

   31

Capitalization

   32

Dilution

   34

Selected consolidated financial data

   36

Management’s discussion and analysis of financial condition and results of operations

   38

Business

   50

Management

   71

Executive and director compensation

   79

Certain relationships and related transactions

   97

Principal stockholders

   103

Description of capital stock

   108

Certain material United States federal income and estate tax consequences to non-United States holders of our common stock

  

113

Shares eligible for future sale

   117

Underwriting

   119

Legal matters

   121

Experts

   121

Change in accountants

   122

Where you can find more information

   122

Index to consolidated financial statements

   F-1

NimbleGen Systems, Inc.®, our logo, High Definition GenomicsSM and NimbleChipTM are our trademarks and service marks. All other service marks, trademarks and trade names referred to in this prospectus are the property of their respective owners. Unless the context required otherwise, the words “NimbleGen,” “we,” “company,” “us” and “our” refer to NimbleGen Systems, Inc. For purposes of this prospectus, the term “stockholder” shall refer to the holders of our common stock.


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Prospectus summary

This summary highlights selected information appearing elsewhere in this prospectus and does not contain all the information you should consider before investing in our common stock. You should carefully read this prospectus in its entirety before investing in our common stock, including the section entitled “Risk factors,” and our consolidated financial statements and related notes included elsewhere in this prospectus.

Our business

Overview

We are a leading innovator, manufacturer and marketer of a proprietary suite of microarrays, and related products and services, which we sell into the life sciences research market. Our proprietary microarrays offer an unmatched combination of high data quality and high information content. Our products and services enable scientists to obtain, analyze and integrate complex genomic data not previously accessible, providing a clearer and unprecedented understanding of genome structure, function and biology, which we refer to as High Definition GenomicsSM. In addition, our technology facilitates rapid, low-cost prototyping, allowing us to enter new markets rapidly with optimized products. Since inception, our revenues have grown substantially, primarily from sales to leading academic institutions, genomic research centers and government laboratories, as well as pharmaceutical, biotechnology and agrichemical companies.

A clear understanding of the many ways in which genomes vary in structure, function and activity is important to the development of improved diagnostics, therapeutics and agricultural products. According to Strategic Directions International, an analytical instrument consulting firm, approximately $5 billion is spent annually on tools used in the analysis of genome variation including microarrays, DNA sequencing and other analytical methods. Microarrays are primarily used for gene expression and single nucleotide polymorphism, or SNP, genotyping because they provide sufficient data quality, information content and throughput to enable the cost-effective study of genome-wide variation. There are many other types of genome variation that researchers routinely study, but the tools that allow them to be analyzed efficiently on a genome-wide basis are just beginning to emerge. Through our proprietary technology and rapid prototyping, we have become a leading company in introducing microarray-based product suites that enable the cost-effective genome-wide analysis for several of these types of variation, each of which has important scientific and medical implications. We believe these applications, and others that we plan to enable in the next several years, will compare favorably in market size to microarray-based expression analysis and SNP genotyping.

We believe that our technology is uniquely efficient for developing new microarray products and applications, manufacturing individual microarrays and scaling our operations. A microarray is a specialized substrate containing thousands to millions of individual spots, known as features, each comprised of specifically designed sequences of DNA, called probes. Our Maskless Array Synthesis, or MAS technology, combines proprietary chemistry and photolithography to build up these DNA sequences at each feature of our microarrays through light directed synthesis. In our process, we use readily available digital micromirror device chips, or DMDs, manufactured by Texas Instruments to pattern the light on a real-time basis, rather than patterning the light using a costly series of physical chromium masks that may take weeks to develop. DMDs are the engine

 

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inside the digital light processor systems, or DLPs, which Texas Instruments has developed for mass market applications such as high-definition television and cinematography. We use proprietary software to drive the DMD chips in real time to direct light. The combination of our proprietary instrument designs, algorithms, chemistry, optics, fluidics and software has allowed us to successfully commercialize microarrays made with DMD chips. Our technology allows us to deliver microarrays with a unique combination of product characteristics, including:

 

 

High data quality.    A number of our competitors use short DNA probes less than 25-30 bases long at each of their features. Such short DNA probes can lead to lower data quality and the need to use redundant features in order to provide useful data. By contrast, we have developed special high-yield photochemistry with which we routinely synthesize DNA probes up to 85 bases long at each of our features. These long probes can deliver enhanced sensitivity, specificity and precision at each feature, allowing each of our features to yield useful data and minimize the use of redundant features.

 

 

High information content.    Our standard microarrays use high-quality, long DNA probes to produce data from 385,000 different features in a single experiment. We have successfully developed and are preparing to commercialize a new generation of our microarrays that will allow us to obtain data on 2.1 million features in a single experiment. While some of our competitors currently make microarrays with more features than our products, their use of short DNA probes often requires high feature redundancy in order to have confidence in the resulting data, which yields a smaller amount of useful information from each experiment.

Our MAS technology used to manufacture our microarrays also provides significant competitive advantages to our business model:

 

 

Rapid prototyping and low-cost research and development.    Our technology allows us to design and then manufacture microarrays utilizing new probe sequences with very little set-up time and cost. We can generally design and then manufacture microarrays utilizing new probe sequences in a matter of days or even hours, as compared to weeks or months for some of our competitors. A number of leading genomic researchers have used our technology to quickly design and develop new applications which have become important new markets for us.

 

 

Modular, low-cost manufacturing.    We manufacture our microarrays in proprietary, automated bench-top modular units called MAS systems, which we design and build. In contrast to some of our competitors’ manufacturing processes, which can sometimes require significant up-front investments in factories costing tens of millions of dollars, our system allows us to operate with limited labor and relatively low fixed costs. Each MAS system costs us less than $200,000, can be rapidly built and is capable of manufacturing microarrays that can generate more than $1 million dollars of revenue per year. Consequently, we do not need to invest in production capacity significantly ahead of demand, and payback per manufacturing unit occurs rapidly. Our microarray manufacturing is performed by automated systems that require minimal human attention, take up little space, and operate in a low cost, light industrial environment that does not require expensive clean rooms.

 

 

Leverage external research and development.    We have increased the number of features on our microarrays with minimal R&D expense by leveraging advances in the DMD chips that Texas Instruments manufactures for mass-market applications, such as high-definition television and

 

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cinematography. For example, in 2007 we expect to use MAS systems that make microarrays with 2.1 million features, up from 385,000 features previously. We believe we have identified a low-cost path to increase feature content in our microarrays by at least another order of magnitude in the future using existing DMD chips together with advances we have already demonstrated in principle by applying innovations in our proprietary optics and other technologies.

Genomics and microarray applications

Genomics is the study of an organism’s entire genome, as well as the comparison of genomes between species, individuals, and even between different tissues or cells from the same individual. Genomes are extremely large: the human genome is more than 3 billion base pairs of DNA, and even bacteria have approximately 5 million base pairs of DNA. Genomic research became practical when variation could be measured on a large scale. Microarray-based products have emerged as vital tools in genomics because they are able to analyze hundreds of thousands or even millions of genetic data points in a single experiment. As additional types of variation have become practical to analyze on a genome-wide scale, corresponding new applications of microarrays have emerged as commercial markets.

Gene expression analysis and SNP genotyping were the first applications to emerge as large commercial markets for genomic microarrays. The annual markets for these applications are currently estimated at $2.7 billion and $1.0 billion, respectively. While we believe our technology is capable of being highly competitive in these established markets, we have elected to focus our resources on newer, emerging applications where there are no entrenched competitors and where our technology offers a substantial competitive advantage. The emerging applications that we are currently focused on commercializing include:

 

 

Comparative Genomic Hybridization, or CGH.    CGH addresses one of the most commonly documented forms of genomic variation, which involves differences in the number of copies of specific segments of DNA. DNA copy number changes underlie the majority of known genetic diseases. The market for CGH has historically been addressed by cytogenetic analysis, a $1.4 billion dollar research and diagnostics market in 2004. However, present cytogenetics technologies, including karyotyping and BAC clone arrays, yield data with low resolution on a genome-wide basis. Our CGH microarrays provide several orders of magnitude higher resolution than cytogenetic analysis, on a genome-wide basis.

 

 

Copy Number Polymorphism, or CNP.    There are many small regions of DNA throughout the genome that are known to vary in copy number between individuals. These normal copy number polymorphisms can be used as genetic markers in complex disease association studies, in a manner directly analogous to how SNPs are used today. For genome-wide CNP analysis, our microarrays combine superior coverage across the entire genome with the sensitivity to accurately detect different copy number variants.

 

 

Chromatin Immunoprecipitation assays on microarrays, or ChIP-chip.    This technique allows scientists to detect and measure levels of proteins that bind to DNA, such as transcription factors that regulate gene expression. For every condition in which scientists have studied changes in gene expression levels, a ChIP-chip experiment would enable them to determine the factors regulating gene expression and the genes they regulate. For genome-wide analysis of factors that bind DNA, our microarrays combine the high data content required for superior coverage with the sensitivity required to detect low-level binding events.

 

 

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DNA Methylation.    It is widely accepted that methylation of DNA is involved in regulating gene expression in specific tissues. For example, the methylation state of particular genes is thought to underlie the origin of certain cancers. Historically, scientists have been limited to analyzing the methylation state of individual genes, one at a time. Our DNA methylation microarrays allow scientists to study patterns of DNA methylation on a genome-wide basis with high resolution and sensitivity.

We have spent the past two years developing relationships with key opinion leaders, optimizing our technology for these applications and building a commercial organization, and believe that we are a technology leader in each of these applications. According to a study we commissioned from Frost and Sullivan, a business research consulting firm, these microarray applications collectively have the potential to become a $900 million market opportunity by 2012.

There are many applications of genomics beyond those listed above. We believe our inherently flexible technology and rapid prototyping will also position us well for new applications as they become practical. We believe our ability to rapidly and repeatedly develop new products addressing new applications, and manufacture those products in a light industrial environment, provides us with a sustainable competitive advantage.

Our products and services

 

 

Microarrays.    We have created and continuously expand a catalogue of designs of our microarrays, under our NimbleChipTM brand, which we can manufacture for our customers. As of February 2007, our product portfolio included more than 3,700 different microarray designs addressing a growing family of applications such as CGH, CNP, ChIP-chip, DNA methylation, among others. In addition, we frequently produce microarrays based on prototypes for new applications, and also produce custom designs for customers who desire them for non-standard applications.

 

 

Instruments, reagents and consumables.    We sell a variety of microarray-related products and plan to expand our offering to include a broad range of equipment, reagents and consumables used by our customers to process our microarrays. Such products will include hybridization stations, automated wash stations, scanning systems and other equipment that we will sell on an OEM basis under the NimbleGen brand. Examples of consumable kits under development include protocols optimized by us for labeling, RNA to cDNA conversion, hybridization reagents, and other methods used in conjunction with microarray analysis.

 

 

Analytical services.    We provide analytical services using our microarrays for applications including CGH, CNP, ChIP-chip, DNA methylation, among others. We have built one of the largest microarray analysis laboratories in the world in Iceland, and we service customers who desire to outsource their sample analysis, or who value our unique microarray technology, but do not have the expertise or equipment to process our microarrays. Customers throughout the world send us samples which we quality control test, label, hybridize to microarrays, and scan following application specific protocols desired by the customer. We return the results to the customer in electronic format.

 

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Our strategy

We intend to continue developing and commercializing a suite of products that enable scientists to analyze many different forms of genome variation. We expect that our strategy will include:

 

 

Maintaining and building our leadership position in important emerging microarray markets in which we have a significant competitive advantage to drive a high margin, recurring revenue business with rapid product innovations.

 

 

Selling our microarrays and providing an end-to-end solution, including instruments, consumables, reagents, analytical software and technical support, to help ensure that our customers are successful in working with our microarrays.

 

 

Offering services utilizing our microarrays, together with our end-to-end solution, in order to reach a broader customer base, encourage customer adoption by not requiring an expensive up-front equipment purchase, efficiently service customers who see the benefits of outsourcing with us, and facilitate rapid innovation in our microarray technology and applications.

 

 

Collaborating with genomics thought-leaders to create new applications for our technology, and helping them to be among the first to publish their results in peer-reviewed journals.

 

 

Improving the performance and capabilities of our products and our manufacturing technology through advances in chemistry, engineering and DMD chip technology.

 

 

Expanding our direct sales force in the United States and in select major countries around the world, and utilizing distribution partners elsewhere, to help promote our products and support customers.

 

 

Evaluating strategic partnerships and licensing opportunities to accelerate growth and leverage our technology in other important genomic markets and certain high-impact clinical diagnostics applications.

As part of our strategy to expand direct product sales worldwide, we announced license agreements with Affymetrix, Inc. and Oxford Gene Technology IP Limited in late 2006 and early 2007, respectively. We continue to operate one of the largest microarray analysis laboratories in the world in Iceland, which we built when our strategy was primarily focused on providing analytical services using our microarrays. In late 2006, we began a major expansion of our sales force and commercial infrastructure worldwide. We are now well positioned to meet the needs of our customers whether they prefer to take delivery of our microarrays and related products to analyze their own samples, or to outsource the entire process to our service laboratory. We continue to aggressively develop emerging applications in genomics and explore additional strategic growth opportunities.

Corporate information

We were incorporated in Delaware and commenced operations in 1999. Our principal offices are located at One Science Court, Madison, Wisconsin 53711, and our telephone number is (608) 218-7600. We maintain a website at http://www.nimblegen.com. The information contained on our website is not incorporated into and does not constitute a part of this prospectus, and the only information that you should rely on in making your decision whether to invest in our common stock is the information contained in this prospectus.

 

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The offering

 

Common stock offered by NimbleGen

                     shares

 

Common stock to be outstanding immediately following this offering

                     shares

 

Use of proceeds

We intend to use the net proceeds from this offering for sales and marketing initiatives, research and development activities, capital expenditures, working capital and general corporate purposes, which may include the acquisition of complementary technologies, products or businesses and funding operating losses. See “Use of proceeds.”

 

Dividend policy

We do not anticipate paying any cash dividends on our common stock. See “Dividend policy.”

 

Risk factors

See “Risk factors” and other information included in this prospectus for a discussion of the factors you should consider carefully before deciding to invest in shares of our common stock.

 

Proposed Nasdaq Global Market symbol

NMBL

The number of shares of common stock to be outstanding after this offering is based on                      shares outstanding as of                     , 2007 and excludes:

 

 

                     shares of common stock issuable upon the exercise of outstanding options, at a weighted average exercise price of approximately $             per share;

 

 

                     shares of common stock reserved for issuance under our 2000 stock option and restricted stock plan; and

 

 

                     shares to be available for issuance under our 2007 equity incentive plan and          shares available for issuance under our 2007 employee stock purchase plan.

Except as otherwise indicated, information in this prospectus reflects or assumes the following:

 

 

the conversion of all outstanding shares of our preferred stock into shares of common stock on a one-for-one basis immediately prior to the closing of this offering;

 

 

the exercise of warrants to purchase                      shares of common stock at an exercise price of $             per share immediately prior to the closing of this offering;

 

 

a one-for-       reverse stock split effected immediately prior to the completion of this offering;

 

 

no exercise by the underwriters of their over-allotment option; and

 

 

the filing of our restated certificate of incorporation and the adoption of our amended and restated bylaws upon the closing of this offering.

 

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Summary of consolidated financial data

The following table presents summary consolidated financial data. We derived the summary consolidated statements of operations data for the years ended December 31, 2004, 2005 and 2006 from our audited consolidated financial statements and notes thereto that are included elsewhere in this prospectus. Our historic results are not necessarily indicative of the results that may be expected in the future. You should read this data together with our consolidated financial statements and related notes included elsewhere in this prospectus and the “Management’s discussion and analysis of financial condition and results of operations” section of this prospectus.

 

Years ended December 31,    2004     2005     2006  
   

Consolidated statements of operations data:
(in thousands, except per share data)

      

Revenue:

      

Microarray and other

   $ 3,121     $ 8,457     $ 12,561  

Grant

     1,353       1,017       945  
                        

Total revenue

     4,474       9,474       13,506  

Cost and expenses:

      

Cost of revenue

     4,572       7,154       7,784  

Research and development

     3,415       1,911       2,637  

Selling, general and administrative

     4,624       5,618       9,288  

Amortization of licenses and patents

     109       119       530  
        

Total costs and expenses

     12,720       14,802       20,239  
        

Loss from operations

     (8,246 )     (5,328 )     (6,733 )

Other income (expense):

      

Interest expense

     (26 )     (7 )     (336 )

Non-cash interest expense

     (94 )     (11 )     (183 )

Interest income

     32       125       419  

Other income

     12       4       28  
        

Total other income (expense)

     (76 )     111       (72 )
        

Net loss

   $ (8,322 )   $ (5,217 )   $ (6,805 )
        

Net loss per common share:

      

Basic and diluted

   $ (5.63 )   $ (3.43 )   $ (4.40 )

Weighted average common shares outstanding used in computing net loss per common share:

      

Basic and diluted

     1,478,727       1,519,016       1,546,979  

Pro forma net loss per share (unaudited)(1):

      

Basic and diluted

       $ (0.35 )

Pro forma common shares outstanding (unaudited)(1):

      

Basic and diluted

         19,667,143  

Selected operating data (in thousands):

      

Net cash used in operating activities

   $ (7,529 )   $ (4,823 )   $ (3,932 )
   

(1)   The pro forma statement of operations data reflect the conversion of the outstanding shares of our preferred stock at December 31, 2006 on a one-for-one basis into an aggregate of 18,113,310 shares of common stock immediately prior to the closing of this offering.

 

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As of December 31, 2006    Actual    Pro forma as
adjusted(1)
               

Consolidated balance sheet data (in thousands):

     

Cash and cash equivalents

   $ 19,001    $             

Total assets

     41,713   

Long-term debt, less current portion of $2,189

     10,605   

Deferred revenues

     1,412   

Working capital

     10,314   

Convertible preferred stock

     62,156   

Temporary equity

     115   

Total stockholders’ equity

     18,301   
               

 

 

(1)   The pro forma as adjusted balance sheet data reflect (i) the conversion of all outstanding shares of our preferred stock on a one-for-one basis into an aggregate of                      shares of common stock immediately prior to the closing of this offering and (ii) the sale of                      shares of common stock in this offering at an assumed initial public offering price of $             per share, after deducting underwriting discounts and commissions and estimated offering expenses.

 

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Risk factors

An investment in our common stock involves significant risks. You should carefully consider the risks described below and the other information in this prospectus, including our consolidated financial statements and related notes, before you decide to invest in our common stock. If any of the following risks actually occur, our business, prospects, financial condition and results of operations could be materially harmed, the trading price of our common stock could decline, and you could lose all or part of your investment. The risks and uncertainties described below are those that we currently believe may materially affect us. Additional risks and uncertainties that we are unaware of or that we currently deem immaterial may also become important factors that affect us.

Risks relating to our business

We have limited experience in sales, marketing and field support and thus may be unable to successfully grow our business as anticipated.

Our ability to grow revenue and achieve profitability depends on attracting customers for our products and services. There are a limited number of research institutes and pharmaceutical, biotechnology and agricultural companies that are potential customers for these products and services. To market and sell our products and services, we intend to continue developing a sales, marketing and support group with the appropriate technical expertise. While we have assembled a preliminary team of sales, support and marketing executives, we need to hire more executives with sales, marketing and support experience in this area. In addition, as instrument sales become a larger part of our business, we will need either to build internal support services for customers using our instruments and to train customers on the use of our instruments, or to contract with one or more partners to do so on our behalf. There is no guarantee that we will be successful in hiring the necessary personnel or that we will be able to enter into such arrangements on favorable terms. If our sales, marketing, field application support and field service efforts, or those of any third-party sales and distribution partners, are not successful, our technologies and products may not gain market acceptance, which could materially impact our business operations. Any delay in establishing or inability to expand our sales, marketing and support capacity could hurt our business.

We depend on distributor relationships to sell and support our products and services in certain key geographical markets.

In certain territories, our products and services are marketed and sold through certain distributor relationships. These territories include certain key geographical markets such as Japan, China, Taiwan, Korea, Australia, and until recently, substantially all of Western Europe. Although we provide extensive training and marketing support, we can make no assurance of the level of performance to be delivered by our distribution partners. In each case, our distributor contracts define certain annual sales targets. Any failure of a distributor to effectively develop our business in the territories that they serve could have an adverse impact on our ability to grow our business as planned. In 2006, distributor sales accounted for approximately 20% of our revenue.

In late 2006, we began to develop a direct sales organization in Europe and discontinued exclusive distribution agreements covering certain countries. We intend to expand our European sales organization to directly cover more territories, in particular those regions that have not been effectively developed by distributors. If we are not able to effectively manage the transition to direct sales, our business could be disrupted.

 

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Recent enhancements to our business model may not result in the expected growth.

Our historical business model was focused primarily on providing genomic analysis of samples provided by our customers and supplying customers with the information that resulted from that analysis. Although sales of microarrays represented approximately 50% of our revenue, we sold those microarrays to a very limited customer base. However, following our entry into the license agreement with Affymetrix, Inc., we have expanded our business model to market our microarrays to a much larger customer base, and to sell a variety of additional microarray-related products. There is no assurance that we will be successful in implementing this expanded business model. There is no guarantee that the direct product sales component of our business model will generate the expected revenue growth, cash flow or profitability.

We have a history of net losses, expect to continue to incur net losses and may not achieve or maintain profitability.

We have incurred net losses each year since our inception, including a net loss for the year ended December 31, 2006. As of December 31, 2006, we had an accumulated deficit of approximately $44.5 million. Net losses may continue for the next several years as we pursue the expansion of our business. The presence and size of these potential net losses will depend, in part, on the rate of growth, if any, or decline in revenues and on the level of expenses. Research and development expenditures and sales, general and administrative costs have exceeded revenues to date, and we expect these expenses to increase in the future. We will need to generate significant revenues to achieve profitability, and even if we are successful in achieving profitability, there is no assurance we will be able to sustain profitability.

We expect that our results of operations will fluctuate. This fluctuation could cause our stock price to decline.

Our revenue is subject to fluctuations due to the timing of sales of high-value products and services projects, lengthy sales cycles, the timing and size of research projects our customers perform, changes in overall spending levels in the life sciences industry, the timing and amount of government grant funding programs, the impact of seasonal spending patterns and other unpredictable factors that may affect customer ordering patterns. Given the difficulty in predicting the timing and magnitude of sales for our products and services, we may experience quarter-to-quarter fluctuations in revenue resulting in the potential for a sequential decline in quarterly revenue. A large portion of our expenses are relatively fixed, including expenses for facilities, equipment and personnel. In addition, we expect operating expenses to continue to increase significantly. Accordingly, if revenue does not grow as anticipated, we may not be able to maintain profitability. Any significant delays in the commercial launch of our products, unfavorable sales trends in our existing product lines, or impacts from the other factors mentioned above, could adversely affect our revenue growth or cause a sequential decline in quarterly revenues. Due to the possibility of fluctuations in our revenue and expenses, we believe that quarterly comparisons of our operating results are not a good indication of our future performance. If our operating results fluctuate or do not meet the expectations of stock market analysts and investors, our stock price would probably decline.

We have a limited history of commercial sales, and our success depends on our ability to develop commercially successful products and on market acceptance of new and relatively unproven products.

We may not possess all of the resources, capability and intellectual property necessary to develop and commercialize all the products or services that may result from our technologies. You should

 

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evaluate us in light of the uncertainties and complexities affecting similarly situated companies developing tools for the life sciences and pharmaceutical industries. We must conduct a substantial amount of additional research and development before some of our products will be ready for sale and we currently have fewer resources available for research and development activities than many of our competitors. We may not be able to develop or launch new products in a timely manner, or at all, or they may not meet customer requirements or be of sufficient quality or at a price that enables us to compete effectively in the marketplace. Problems frequently encountered in connection with the development or early commercialization of new products and services might limit our ability to develop and successfully commercialize these products and services. In addition, we may need to enter into agreements to obtain intellectual property necessary to commercialize some of our products or services, which may not be available on favorable terms, or at all.

Historically, life sciences and pharmaceutical companies have analyzed genetic variation and function using a variety of technologies. In order to be successful, our products must meet the commercial requirements of the life sciences and pharmaceutical industries as tools for the large-scale analysis of genetic variation and function. Market acceptance will depend on many factors, including:

 

 

our ability to demonstrate to potential customers the benefits and cost effectiveness of our products and services relative to others available in the market;

 

 

the extent and effectiveness of our efforts to market, sell and distribute our products;

 

 

our ability to manufacture products in sufficient quantities with acceptable quality and reliability and at an acceptable cost;

 

 

the willingness and ability of customers to adopt new technologies requiring capital investments;

 

 

the extended time lag and sales expenses involved between the time a potential customer is contacted on a possible sale of our products and services and the time the sale is consummated or rejected by the customer;

 

 

the development of a market for our tools for the analysis of genomic and epi-genomic variation and function; and

 

 

our ability to develop and market additional products and enhancements to existing products that are responsive to the changing needs of our customers.

Our customers may find replacements for our microarray-related products or discover a method that allows them to use less than the expected amounts of such products.

The successful growth of our business depends, in part, on the sale of a variety of microarray-related products, including a broad range of equipment, reagents and consumables used by our customers to process our microarrays. Such products include hybridization stations, automated wash stations, scanning systems and other equipment that we sell on an OEM basis under the NimbleGen brand. Our customers or competitors could potentially produce these microarray-related products at a lower cost, which could exert pricing pressures on, or take market share from, our products. Similarly, our customers or competitors may discover a method of utilizing smaller quantities of our microarray-related products while achieving satisfactory results, which could reduce the amount of microarray-related products we are able to sell. In either case, there could be a material adverse effect on our business, financial condition and results of operations.

 

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The sales cycle for our products and services is lengthy, and we may spend considerable resources on unsuccessful sales efforts or may not be able to enter into agreements on the schedule we anticipate.

The sales cycle for our products and services is typically lengthy because customers often need to apply for funding from third party sources. In addition, we are often required to negotiate agreements containing terms unique to each customer. We may expend substantial funds and management effort without any assurance that we will successfully sell our products and services.

We derive a substantial amount of our revenues from only a few of our customers. A loss of one or more of these major customers, or a material adverse change in any such customer’s business, could adversely impact our business.

In the year ended December 31, 2006, our top five customers represented approximately 32% of total revenue. Any of our major customers could refuse to renew their contracts, or could negotiate concessions, particularly on price, that would have a material adverse effect on our business, financial condition and results of operations. In addition, our customers could experience a downturn in their business, find themselves in financial difficulties or consolidate, which could result in their ceasing or reducing their use of our products and services (or becoming unable to pay for products and services they had contracted to buy). If any key customer discontinues its relationship with us for any reason, or reduces or postpones current or expected purchase commitments for our products and services, our business, financial condition, cash flow and results of operations could be materially adversely affected.

Our business depends on research and development spending levels for academic, governmental and other research institutions, as well as pharmaceutical and biotechnology companies.

We expect that our revenues in the foreseeable future will be derived primarily from products and services provided to customers working in academic, governmental and other research institutions, as well as pharmaceutical and biotechnology companies. Our success will depend upon their demand for and use of our products and services. Our operating results may fluctuate substantially due to reductions and delays in research and development expenditures by these customers. For example, reductions in capital expenditures by these customers may result in lower than expected instrumentation sales and similarly, reductions in operating expenditures by these customers could result in lower than expected microarray and related consumables sales. These reductions and delays may result from factors that are not within our control, such as:

 

 

changes in economic conditions;

 

 

changes in government programs that provide funding to companies and research institutions;

 

 

changes in the regulatory environment affecting life sciences companies and life sciences research;

 

 

market-driven pressures on companies to consolidate and reduce costs; and

 

 

other factors affecting research and development spending.

We have limited financial resources and may need to raise additional funding, which may not be available on favorable terms, if at all.

We have limited financial resources. We have funded our operations thus far through private placements of equity securities, grants, revenues and borrowings. Our average monthly burn rate, based on the December 31, 2006 net cash used in operating activities, is estimated at $328,000. At December 31, 2006, we had $10.3 million in working capital. On December 22, 2006 and January 26, 2007, we completed private placements of our Series F convertible preferred stock, raising gross proceeds of $20.0 million.

 

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We may need to raise additional capital through public or private equity or debt financings in order to satisfy our projected future capital needs.

The amount of additional capital we may need to raise depends on many factors, many of which are difficult to predict or are outside of our control, including:

 

 

the progress of our efforts to commercialize new products and services;

 

 

the progress and scope of our research and development programs;

 

 

the timing, receipt and amount of license fees and other payments to present and future licensors; and

 

 

the costs of preparing, filing, prosecuting, maintaining, defending and enforcing patent claims and other intellectual property rights.

We cannot be certain that additional capital or borrowings under our existing credit facility will be available when and as needed or that our actual cash requirements will not be greater than anticipated. If we require additional capital at a time when investment in biotechnology companies or in the marketplace in general is limited due to the then prevailing market or other conditions, we may not be able to raise such funds at the time that we desire or any time thereafter. If we are unable to obtain financing on terms favorable to us, the holdings or rights of our stockholders may be adversely affected. For example, our stockholders may experience significant dilution and the newly issued securities may have rights, preferences or privileges senior to our existing stockholders. Furthermore, debt financing, if available, may involve restrictive covenants that could limit our flexibility in conducting future business activities. If we are unable to obtain adequate amounts of financing, we may be unable to execute our business plan, and we may be required to cease or reduce development or commercialization of our products, sell or otherwise relinquish rights to some or all of our technology or assets or merge with another entity.

Our success depends upon the continued emergence and growth of markets for analysis of variation in genome structure and function.

We design our products primarily for applications in life sciences research. The usefulness of our technology depends in part upon the continued interest in understanding the many ways in which genomes vary in structure, function and activity and their importance to the development of improved diagnostics, therapeutics and agricultural products. These markets are new and emerging, and they may not develop as quickly as we anticipate, or reach their full potential. Other methods of analysis of genomic variation may emerge and displace the methods we are developing. In addition, factors affecting research and development spending generally, such as changes in the regulatory environment affecting life sciences and pharmaceutical companies, and changes in government programs that provide funding to companies and research institutions, could harm our business. If demand for our products grows at a slower rate than we expect, we may not be able to achieve our goals for revenue growth, cash flow or profitability.

We could lose key personnel, which could materially affect our business and require us to incur substantial costs to recruit replacements for such lost personnel.

Any of our key personnel could terminate their employment with us, sometimes without notice, at any time. Stanley D. Rose, our chief executive officer, in particular, is a key member of our management team. We are also highly dependent on the principal members of our scientific and commercial staff. The loss of any of these persons’ services might adversely impact the achievement of our commercial objectives. In addition, recruiting and retaining qualified

 

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scientific personnel to perform future research and development work will be critical to our success. Competition for skilled personnel is intense and it is difficult to attract skilled executives and employees with technical expertise away from other successful companies in our industry. Competition for experienced scientists from numerous companies, academic and other research institutions may limit our ability to attract and retain new or current personnel.

Our collaborations with outside scientists may be subject to change, which could limit our access to their expertise.

We work extensively with scientific advisors and collaborators at academic and other institutions to develop applications of our technologies. These scientists are not our employees and may have other commitments that could limit their availability. Although our scientific advisors generally agree not to do competing work, if a conflict of interest between their work for us and their work for another entity arises, we may lose their services and any projects that they are working on may be adversely affected.

Our microarray manufacturing and service operations are conducted at a single location and any disruption at our facility could increase our expenses.

Substantially all of our microarray manufacturing and service operations are conducted at a single location in Iceland. While we have limited capability to manufacture our products and provide our services at our Madison, Wisconsin facility, we do not maintain a backup manufacturing or service facility and we therefore depend on our current facility for the continued operation of our business. We take precautions to safeguard our Iceland facility, including insurance, health, safety and data storage protocols. However, a natural disaster could cause substantial delays in our manufacturing operations, damage or destroy our manufacturing equipment or inventory, and cause us to incur additional expenses. The insurance we maintain against natural disasters may not be adequate to cover our losses in any particular case. With or without insurance, damage to our manufacturing facility or our other property due to a natural disaster or casualty event may have a material adverse effect on our business, financial condition and results of operations.

Our chemical manufacturing operations are conducted at a single location and any disruption at our facility could increase our expenses.

All of our manufacturing of proprietary chemicals used for microarray synthesis is conducted at a single location in Germany. While we have identified alternative sources for these chemicals, we do not routinely purchase these chemicals from these sources and we therefore depend on our current facility for the continued operation of our business. We take precautions to safeguard our German facility, including insurance, health, and safety protocols. However, a natural disaster could cause substantial delays in our manufacturing operations, damage or destroy our manufacturing equipment or inventory, and cause us to incur additional expenses. The insurance we maintain against natural disasters may not be adequate to cover our losses in any particular case. With or without insurance, damage to our manufacturing facility or our other property due to a natural disaster or casualty event may have a material adverse effect on our business, financial condition and results of operations.

If we are unable to find third-party manufacturers to manufacture components of our products, we may not be able to successfully commercialize our products.

The nature of our products requires customized components that currently are available from a limited number of sources. For example, we currently obtain our microarray substrates from a

 

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single vendor. If we are unable to secure a sufficient supply of those or other product components, we will be unable to meet demand for our products. In the event an existing supplier becomes unavailable, or that materials from any supplier fail to meet our quality requirements, we may not be able to validate an alternative supplier or obtain the required components, raw materials or products at the right quality on a timely basis or at commercially reasonable prices. To the extent such difficulties cannot be resolved within a reasonable time, and at a reasonable cost, our business, financial condition, results of operation and cash flows could be materially adversely affected.

Our manufacturing capacity may limit our ability to sell our products.

We are currently ramping up our capacity to meet our anticipated demand for our products. There are uncertainties inherent in expanding our manufacturing capabilities and we may not be able to increase our capacity in a timely manner. For example, manufacturing and product quality issues may arise as we increase production rates at our manufacturing facility and launch new products. As a result, we may experience difficulties in meeting customer, collaborator and internal demand, in which case we could lose customers or be required to delay new product introductions, and demand for our products could decline. Additionally, in the past, we have experienced variations in manufacturing conditions that have temporarily reduced production yields. We may encounter similar or previously unknown manufacturing difficulties in the future that could significantly reduce production yields, impact our ability to launch or sell these products, or to produce them economically, prevent us from achieving expected performance levels or cause us to set prices that hinder wide adoption by customers.

If we use biological and hazardous materials in a manner that causes injury, we could be liable for damages.

Our research and development activities sometimes involve the controlled use of potentially harmful biological materials, hazardous materials and chemicals. We cannot completely eliminate the risk of accidental contamination or injury to third parties from the use, storage, handling or disposal of these materials. In the event of contamination or injury, we could be held liable for any resulting damages, and any liability could be excluded from insurance coverage or exceed our resources.

Our products could in the future be subject to regulation by the U.S. Food and Drug Administration or other regulatory agencies.

Our products are not currently subject to U.S. Food and Drug Administration, or FDA, clearance or approval. However, in the future, certain of our products or related applications could be subject to FDA regulations, the FDA’s regulatory jurisdiction could be expanded to include our products, or both. Even where a product is exempted from FDA clearance or approval, the FDA may impose restrictions as to the types of customers to which we can market and sell our products. Such regulation and restrictions may materially and adversely affect our business, financial condition and results of operations.

Laws and regulations are also in effect in many countries that could affect our products. The number and scope of these requirements are increasing. We may not be able to obtain regulatory approvals in such countries or may incur significant costs in obtaining or maintaining our foreign regulatory approvals. In addition, the export by us of certain of our products may be subject to FDA or other export restrictions.

 

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As our operations expand, our costs to comply with environmental laws and regulations will increase, and failure to comply with these laws and regulations could harm our financial results.

Our operations involve the use, transportation, storage and disposal of hazardous substances, and as a result we are subject to environmental and health and safety laws and regulations. As we expand our operations, our use of hazardous substances will increase and may lead to additional and more stringent requirements. The cost to comply with these and any future environmental and health and safety regulations could be substantial. In addition, our failure to comply with laws and regulations, and any releases of hazardous substances into the environment or at our disposal sites, could expose us to substantial liability in the form of fines, penalties, remediation costs and other damages, or could lead to a curtailment or shut down of our operations. These types of events, if they occur, would adversely impact our financial results.

If management is unable to effectively manage the increasing size and complexity of our organization, our operating results will suffer.

Our employees are based in Madison, Wisconsin; Reykjavik, Iceland; Waldkraiburg, Germany; and various field locations worldwide. We have increased staff substantially since the end of 2005, and we plan to hire additional personnel at all of these sites. As a result, we face challenges inherent in efficiently managing and coordinating the activities of our increasing number of employees located in different countries, including the need to implement appropriate systems, financial controls, policies, standards, benefits and compliance programs. The inability to successfully manage a growing and internationally diverse organization could hurt our business, and, as a result, the market price of our common stock could decline.

If we are unable to manage the challenges associated with our international operations, the growth of our business could be limited.

We have operations in Reykjavik, Iceland and Waldkraiburg, Germany, as well as sales personnel located in various sites throughout Europe. We are subject to a number of risks and challenges that specifically relate to these international operations. Our international operations may not be successful if we are unable to meet and overcome these challenges, which could limit the growth of our business and may have an adverse effect on our business and operating results. These risks include:

 

 

interruption to transportation flows for delivery of components of our products to us and finished products to our customers;

 

 

fluctuations in foreign currency exchange rates that may increase the U.S. dollar cost of our international operations;

 

 

difficulty managing operations in multiple locations;

 

 

local regulations that may restrict or impair our ability to conduct manufacturing or research and development activities;

 

 

export and trade barriers and taxes;

 

 

longer payment cycles and greater difficulty in accounts receivables collection;

 

 

failure of local laws to provide the same degree of protection against infringement of our intellectual property; and

 

 

geopolitical turmoil, including terrorism and war.

 

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Because our products involve use of the Internet and involve transmission of customer data and results over the Internet, security risks in electronic commerce and data transmission may deter future use of our products.

The service component of our business model requires our customers to send us genetic samples that we analyze at our facility in Iceland. The results of our analysis are transmitted through the Internet to our bioinformatics group in Madison and ultimately to the customer. A fundamental requirement to conduct business over the Internet is the secure transmission of confidential information over public networks and the willingness of customers to allow us to transmit that information over these networks. We could become liable for monetary damages as a result of our mishandling of a customer’s confidential data which could materially harm our business reputation and financial condition. Furthermore, any mishandling of customer data could result in the termination of any customer agreements into which we may enter. We may be required to incur significant costs to protect against security breaches or to alleviate problems caused by breaches, and these efforts may not be successful. In addition, potential customers may be unwilling to allow us to transmit confidential information using the Internet, particularly if there is a well-publicized compromise of our security or other companies’ security.

Our business is dependent on the continuous, effective, reliable and secure operation of its computer hardware, software and Internet applications and related tools and functions.

Because our business requires manipulating and analyzing large amounts of data, we depend on the continuous, effective, reliable and secure operation of its computer hardware, software, networks, Internet servers and related infrastructure. To the extent that our hardware or software malfunctions, our business could suffer.

Our computer and communications hardware is protected through physical and software safeguards. However, it is still vulnerable to fire, storm, flood, power loss, earthquakes, telecommunications failures, physical or software break-ins, and similar events. In addition, our database products are complex and sophisticated, and as such, could contain data, design or software errors that could be difficult to detect and correct. Software defects could be found in current or future products. If we fail to maintain and further develop the necessary computer capacity and data to support its computational needs and its customers’ requirements, it could result in loss of or delay in revenues and market acceptance. In addition, any sustained disruption in Internet access provided by third parties could adversely impact our business.

We will incur significant increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives.

We have never operated as a public company. As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002, as well as new rules subsequently implemented by the SEC and The Nasdaq Global Market, have imposed various new requirements on public companies, including requiring changes in corporate governance practices. Our management and other personnel will need to devote a substantial amount of time to these new compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect these new rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to incur substantial costs to maintain the same or similar coverage.

 

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We have identified material weaknesses in the design and operation of our internal controls as of the three year period ended December 31, 2006, which, if not properly remediated, could result in material misstatements in our financial statements in future periods.

In connection with the audit of NimbleGen Systems, Inc.’s financial statements for each of the three years in the period ended December 31, 2006, our independent auditors reported to our management and the audit committee of the board of directors that certain significant deficiencies in internal controls resulted in several material weaknesses in the design and operation of our internal controls as of December 31, 2006.

A deficiency in internal control (control deficiency) exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. Control deficiencies may individually, or in a combination, give rise to a significant deficiency or a material weakness.

A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects a company’s ability to initiate, authorize, record, process or report financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the company’s financial statements that is more than inconsequential will not be prevented or detected by the company’s internal controls. A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected by the company’s internal controls.

In connection with the audit, our independent auditors recommended in a letter to our management and the audit committee of our board of directors that:

 

 

management establish processes to identify complex accounting transactions and also ensure that accounting personnel receive appropriate training so as to properly execute complex accounting transactions;

 

 

while the president, board of directors and our attorney review our monthly financial statements, in many instances it is very difficult to detect errors or fraudulent financial reporting at the financial statement level, and therefore lower-level, more preventative detailed review and controls are necessary to reduce the risk of errors or fraud to a reasonable level;

 

 

we rectify a lack of segregation of duties in key accounting processes such as revenue and inventory purchasing as there were no documented formal accounting policies and procedures that required timely reconciliation and thorough reviews of reconciliations for all accounts; and

 

 

in connection with our information technology controls, we make improvements in four areas in controls, including incompatible duties, processes and process documentation, best practice suggestions, and review procedures not in place.

Our independent auditors noted several control deficiencies, as well, of a lesser magnitude than the material weaknesses, including our processes regarding segregation of duties, third party service organizations and perpetual inventory. The material weaknesses and control deficiencies were for the three year period ended in December 31, 2006. Our remediation process has not yet been completed and we cannot assure you that the measures we have taken or will take to

 

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remediate the identified control deficiencies will result in adequate controls over our financial processes and reporting in the future. If we are unable to establish appropriate internal controls over financial reporting, it could cause us to fail to meet our reporting obligations or result in material misstatements in our financial statements.

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud, which could harm our reputation and operating results.

Effective internal controls are necessary for us to provide reliable and accurate financial reports and effectively prevent fraud. We have devoted significant resources and time to comply with the internal control over financial reporting requirements of the Sarbanes-Oxley Act of 2002. In addition, Section 404 under the Sarbanes-Oxley Act of 2002 requires that we assess and our auditors attest to the design and operating effectiveness of our controls over financial reporting. Our compliance with the annual internal control report requirement for each fiscal year will depend on the effectiveness of our financial reporting and data systems and controls across our operating subsidiaries. Furthermore, we have made acquisitions in the past and may do so again in the future, and we expect these systems and controls to become increasingly complex to the extent that we integrate acquisitions and our business grows. Likewise, the complexity of our systems and controls may become more difficult to manage as we transform our operating structure and continue to expand our business. To effectively manage these changes, we will need to continue to improve our operational, financial and management controls and our reporting systems and procedures. We cannot be certain that these measures will ensure that we design, implement and maintain adequate controls over our financial processes and reporting in the future, especially in the case of future acquisitions of companies that are not in compliance with Section 404 of the Sarbanes-Oxley Act of 2002. Any failure to implement required new or improved controls, difficulties encountered in their implementation or operation, or difficulties in the assimilation of acquired businesses into our control system could harm our operating results or cause it to fail to meet our financial reporting obligations. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock and our access to capital.

Future acquisitions and other transactions may absorb significant resources, may be unsuccessful and could dilute the holders of our stock.

As part of our strategy, we may pursue partnerships, acquisitions, investments and other strategic relationships and alliances. Partnerships, acquisitions, investments and other strategic relationships and alliances may involve significant cash expenditures, debt incurrence, additional operating losses, and expenses that could have a material effect on our financial condition and results of operations. These transactions involve numerous other risks, including:

 

 

difficulties integrating acquired technologies and personnel into our business;

 

 

diversion of management from daily operations;

 

 

inability to obtain required financing on favorable terms;

 

 

entry into new markets in which we have little previous experience;

 

 

potential loss of key employees or customers of acquired companies or of NimbleGen; and

 

 

assumption of the liabilities and exposure to unforeseen liabilities.

It may be difficult for us to complete these transactions quickly or to integrate these businesses efficiently into our current business. Any acquisitions, investments or other strategic relationships

 

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and alliances by us may ultimately have a negative impact on our business and financial condition. In addition, acquisitions and other transactions may involve the issuance of a substantial amount of our stock without the approval of the holders of our stock. Any issuances of this nature will be dilutive to holders of our stock.

Our effective tax rate may vary significantly.

Our future effective tax rates could be adversely affected by various internal and external factors. These factors include, but are not limited to, earnings being lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates; changes in the valuation of our deferred tax assets and liabilities; or changes in tax laws or interpretations thereof; changes in tax rates, future levels of research and development spending, and changes in overall levels of pretax earnings. Any new interpretative accounting guidance related to accounting for uncertain tax positions could adversely affect our tax provision.

Risks relating to our intellectual property

If we fail to adequately protect our proprietary technologies, third parties may be able to use our technologies, which could prevent us from competing in the genomic analysis instrument and genomics services market.

Our success depends in part on our ability to obtain patents and maintain adequate protection of the intellectual property related to our technologies and products. The patent positions of genetic analysis instrument sales and services companies and other biotechnology companies, including us, are generally uncertain and involve complex legal and factual questions. Future changes in U.S. and international patent law could also adversely affect our ability to obtain patents. We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary technologies are covered by valid and enforceable patents or are effectively maintained as trade secrets. The laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the U.S., and many companies have encountered significant problems in protecting and defending their proprietary rights in foreign jurisdictions. We may not be able to detect infringement by third parties in any country before our competitive position has been harmed. We have applied and will continue to apply for patents covering our technologies, processes and products, as and when we deem appropriate. However, third parties may challenge these applications, or these applications may fail to result

in issued patents. Our existing patents and any future patents we obtain may not be sufficiently broad to prevent others from practicing our technologies or from developing competing products. Others may in the future independently develop similar or alternative technologies or design around our patents. Our patents may be challenged or invalidated or fail to provide us with any competitive advantage. We are currently seeking resolution to an administrative action with the U.S. Patent and Trademark Office to determine the scope of third party protection for related technologies.

Moreover, we only have patents issued in selected countries. In those countries in which we do not have patent protection, third parties may be able to produce, use and sell products covered by our patents. Importation to the U.S. of data produced through our proprietary technologies in countries where we have not sought patent protection for such technologies may not necessarily violate U.S. law. As a result, our competitive advantage in producing such data may be harmed.

We also rely on trade secret protection for our confidential and proprietary information. However, trade secrets are difficult to protect. We protect our proprietary information and

 

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processes, in part, with confidentiality agreements with employees and consultants. However, third parties may breach these agreements, we may not have adequate remedies for any such breach or our trade secrets may still otherwise become known by our competitors. Further, the laws of some foreign countries do not protect proprietary trade secret rights to the same extent as the laws of the U.S. In addition, our competitors may independently develop substantially equivalent proprietary information.

Litigation or third-party claims of intellectual property infringement could require us to spend substantial time and money and adversely affect our ability to develop and commercialize our technologies and products.

Our commercial success depends in part on our ability to avoid infringing patents and proprietary rights of third parties and not breaching any licenses that we have entered into with regard to our technologies. Other parties have filed, and in the future are likely to continue to file, patent applications covering imaging, image analysis, fluid delivery, DNA arrays on solid surfaces, chemical and biological reagents for DNA sequencing, genes, gene fragments, the analysis of gene sequences, gene expression, DNA amplification and the manufacture and use of DNA chips or microarrays, which are tiny glass or silicon wafers on which tens or hundreds of thousands of DNA molecules can be arrayed on the surface for subsequent analysis. In addition, we may be unaware of patents or pending patent applications that could materially affect some or all of our business. It is possible that we may unintentionally infringe intellectual property rights owned by or licensed to third parties. We may receive notices claiming infringement from third parties as well as invitations to take licenses under third-party patents. Any legal action against us or our licensors or strategic partners claiming damages and seeking to enjoin commercial activities relating to our products and processes affected by third-party rights may require us or our strategic partners to obtain licenses in order to continue to manufacture or market the affected products and processes. In addition, these actions may subject us to potential liability or damages. We or our licensors or strategic partners may not prevail in an action and any licenses required under a patent may not be made on commercially acceptable terms, or at all.

We may also incorrectly believe that we were the first to invent a particular technology. Our invention may be preempted by other competing technologies filed with the U.S. Patent and Trademark Office, international trade bodies, or other nations. Further, we may also become aware that other inventors have filed patent applications for inventions that we believe are otherwise covered by our patents. We may be obliged to participate in interference actions in order to resolve such questions. We may also face disputes with current or former employees regarding invention and/or assignment of our patented technologies. Litigation may be required to resolve these questions. Such interference actions and litigation may require substantial expenditures and occupy management and key personnel.

Finally, future changes in U.S. and international patent law could also heighten the risk that we will infringe other proprietary technologies through the shipment of our arrays or raw sequencing data either into or from the U.S. We are unable at this time to fully predict whether decisions to be rendered by U.S courts and/or international bodies will view the sale of such products, when used as components in the assembly of otherwise patented technologies, as an infringing act. We currently do not receive indemnification from our customers or our suppliers for third party infringement claims that may arise through the sale of our products. Infringement claims arising through such sales would likewise require substantial expenditures and occupy management and key personnel and could harm our competitive position.

 

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We license patent rights from third-party owners. If such owners do not properly maintain or enforce the patents underlying such licenses, our competitive position and business prospects will be harmed.

We are a party to license agreements that give us rights to third-party intellectual property that we believe may be necessary or useful for our business, such as our agreements with the Wisconsin Alumni Research Foundation, or WARF, Affymetrix, Inc. and Oxford Gene Technology IP Limited, or OGT. We intend to enter into additional licenses of intellectual property with third parties in the future. Our success will depend in part on the ability of our licensors to obtain, maintain and enforce patent protection for our licensed intellectual property, in particular, those patents to which we have secured exclusive rights. Our licensors may not successfully prosecute the patent applications to which we are licensed. Even if patents are issued in respect of these patent applications, our licensors may fail to maintain these patents, may determine not to pursue litigation against other companies that are infringing these patents, or may pursue such litigation less aggressively than we would. Without protection for the intellectual property we license, other companies might be able to offer substantially identical products for sale, which could adversely affect our competitive business position and harm our business prospects.

If we fail to comply with our obligations under any licenses or related agreements, we could lose license rights that may be necessary for marketing our products.

Our current licenses impose, and any future licenses we enter into are likely to impose, various development, commercialization, funding, royalty, diligence, sublicensing, insurance and other obligations on us.

Our principal obligations under our license agreement with WARF are as follows:

 

 

an obligation to provide WARF with a certain percentage of our outstanding equity interests;

 

 

obligations for the payment of annual royalties;

 

 

an obligation to pay to WARF a certain percentage of the payments we receive in consideration of certain sublicenses that we grant under our license from WARF;

 

 

an obligation to apply appropriate patent markings under applicable law to the licensed products;

 

 

an obligation to reimburse WARF for certain of its costs in prosecuting or maintaining its patents under which we are licensed;

 

 

an obligation to indemnify WARF with respect to certain matters, including the manufacture, sale and use of licensed products, arising from any of our rights and obligations under the license agreement and to maintain certain liability insurance; and

 

 

an obligation to disclose to WARF, and license to it at its option, certain improvements that we make to any of the inventions claimed in WARF’s patents licensed to us.

Our principal obligations under our license agreement with Affymetrix, Inc. are as follows:

 

 

obligations for the payment of annual royalties and certain one-time, non-refundable, up-front fees;

 

 

an obligation to sell licensed products and licensed services subject to certain contractual and label restrictions on use consistent with the license agreement;

 

 

an obligation to indemnify Affymetrix with respect to our exercise of our rights and obligations under the license agreement;

 

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an obligation to notify Affymetrix of a material infringement of the licensed patents by a recipient of licensed products or licensed services and to assist Affymetrix in halting, and to not contribute to or induce, any such infringement; and

 

 

an obligation to not sue Affymetrix with respect to its manufacture or use for its internal research or development purposes of any microarrays made by a digital light processor from Texas Instruments Incorporated or a functionally equivalent device (i.e., a computer-controlled device for modulated, light-directed synthesis).

Our principal obligations under our license agreement with OGT are as follows:

 

 

obligations for the payment of an annual fee;

 

 

obligations for the payment of annual royalties;

 

 

an obligation to not practice the licensed process and to not make or supply licensed product, other than as licensed by OGT;

 

 

an obligation to not sublicense recipients of licensed products or licensed services to manufacture of Nucleic Acid Arrays (a licensed product) or to use licensed products or licensed services outside the licensed field;

 

 

an obligation to supply licensed products and services generally only under our own name and only through agents and distributors who receive remuneration customary to the market in which they operate;

 

 

an obligation to supply licensed products and licensed services subject to certain contractual and label restrictions;

 

 

an obligation to not engage in or induce indirect or contributory infringement of the licensed patent rights and to supply certain array-related products not designed solely for use with the licensed products subject to certain label restrictions;

 

 

an obligation to indemnify OGT with respect to certain matters, including uses or supplies of licensed products or licensed services under the license agreement, and to maintain certain liability insurance; and

 

 

an obligation to not assert any claim under certain array-related patent rights against OGT or its affiliates, to prevent their own internal research.

If we breach any of these obligations, the licensor may have the right to terminate the license, which could result in our being unable to develop, manufacture and sell products that are covered by the licensed technology or a competitor’s gaining access to the licensed technology. For additional details regarding our obligations under our current licenses, please see “Business—Intellectual property.”

Confidentiality agreements with employees and others may not adequately prevent disclosure of trade secrets and other proprietary information.

We also rely on trade secrets, know-how and technology, which are not protected by patents, to maintain our competitive position. In order to protect such proprietary technologies and processes, we also rely in part on confidentiality agreements with our collaborators, employees, consultants, outside scientific collaborators and sponsored researchers and other advisors. These agreements may not effectively prevent disclosure of confidential information and may not

 

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provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover trade secrets and proprietary information, and in such cases we could not assert any trade secret rights against such party. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.

Risks relating to our industry

We operate in an intensely competitive industry with rapidly evolving technologies, and our competitors may develop products and technologies that our customers consider superior in certain aspects or that make ours obsolete.

The life sciences industry is highly fragmented, very competitive and characterized by rapid technological change. Currently, some of our customers consider that microarrays produced by our competitors are superior to ours in certain respects, including our current software programs, our CGH applications, the dynamic range of our microarrays and probe density. In addition, the area of genomics research is rapidly evolving. Competition among entities developing genomic research technologies is intense. Many of our competitors have substantially greater research and product development capabilities and financial, scientific, marketing and customer support resources than we do. As a result, our competitors may be able to respond more quickly to new or emerging technologies, applications or market developments by devoting greater resources to the development, promotion and sale of products and services, which could impair sales of our products and services.

We face competition primarily from life sciences companies such as Affymetrix, Inc., Agilent Technologies, Inc., Applied Biosystems, Inc., Beckman Coulter, Becton Dickinson, CombiMatrix Corporation, Digital Gene Technologies, Inc., Enzo Life Sciences, Inc., febit, GE Healthcare, Illumina, Inc., Invitrogen Corporation, Molecular Devices, Inc. (which is being acquired by MDS Inc.), Nanogen, Inc., Sequenom and Takara Biosciences, and academic and research institutions and government agencies, both in the United States and abroad. Our competitors are using a variety of genome analysis methodologies. For example, Affymetrix, Agilent, Applied Biosystems and Illumina have products for certain forms of genome analysis which are directly competitive with our products. In addition, several companies are working on developing next generation DNA sequencing tools that could be competitive in certain target markets. Such companies include Applied Biosystems, 454 Life Sciences, Helicos BioSciences and Illumina. In order to successfully compete against existing and future technologies, we will need to demonstrate to potential customers that our technologies and capabilities are superior to those of our competitors. Our future success will also depend on our ability to maintain a competitive position with respect to technological advances. Rapid technological development by others may make our technologies and future products obsolete.

Any products that are developed based on our technologies will compete in highly competitive markets. Competitors may be more effective at using their technologies to develop commercial products than us. Moreover, some of our competitors have, and others may, introduce novel genetic analysis platforms before we do which, if adopted by customers, could eliminate the market for our new genetic analysis systems. Furthermore, our competitors may obtain intellectual property rights that would limit the advantages of using our technologies. As a result, our competitors’ products or technologies may render our technologies and products obsolete or noncompetitive.

 

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Our competitors may also combine operations through merger, acquisition, licensing, distribution arrangements, partnerships and other activities. Such arrangements may give our competitors advantages they did not previously have, such as the ability to rapidly expand their product offerings and service capabilities to meet a broader range of customer needs, and lead to even more intense competition.

It is possible that new technology, including next-generation sequencing, will displace microarray technology in the near future, and our inability to develop new products, continually enhance our product performance to keep pace with rapidly changing technology and customer requirements could adversely affect our ability to compete effectively.

New technologies, techniques or products, including next-generation sequencing, could emerge which might displace the microarray technology and allow the analysis of genomic information with similar or better price-performance than our system and could exert pricing pressures on or take market share from our products. It is critical to our success for us to anticipate changes in technology and customer requirements and to successfully introduce new, enhanced and competitive technology to meet our current and prospective customers’ needs on a timely basis. We could incur substantial costs if we need to modify our system to adapt to technological changes or developments. We may not have adequate resources available to develop new technologies or be able to successfully introduce enhancements to our system. There can be no guarantee that we will be able to maintain our technological advantages over emerging technologies in the future and we will need to respond to technological innovation in a rapidly changing industry. If we fail to keep pace with emerging technologies our system will become uncompetitive, our market share will decline and our business, revenue, financial condition and operating results could suffer materially.

We are subject to evolving legislative, judicial and ethical standards on use of technology and biotechnology.

The pursuit of genomics research is occurring within the broader context of myriad decisions related to the use of genetic information. Issues associated with medical ethics, data access, intellectual property protection, national and international legislative initiatives and other variables may have a significant impact on the breadth of genomics research conducted. For example, future legislative decisions limiting funding for, or the use of, stem cell research may have an adverse impact on spending for genomic research tools in this particular market segment.

Risks relating to this offering and ownership of our common stock

The price of our common stock may fluctuate significantly, which could lead to losses for stockholders.

The trading prices of the stock of newly public companies can experience extreme price and volume fluctuations. These fluctuations often have been unrelated or out of proportion to the operating performance of these companies. We expect our stock price to be similarly volatile. These broad market fluctuations may continue and could harm our stock price. Any negative change in the public’s perception of the prospects of companies that employ similar technology or sell into similar markets could also depress our stock price, regardless of our actual results.

Factors affecting the trading price of our common stock will include:

 

 

variations in our operating results;

 

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changes in our operating results as a result of any problems with our internal controls;

 

 

announcements of technological innovations, new services or service enhancements, strategic alliances or significant agreements by us or by our competitors;

 

 

recruitment or departure of key personnel;

 

 

changes in the estimates of our operating results or changes in recommendations by any securities analyst that elects to follow our common stock;

 

 

market conditions in our industry, the industries of our customers and the economy as a whole;

 

 

sales of large blocks of our common stock; and

 

 

changes in accounting principles or changes in interpretations of existing principles, which could affect our financial results.

Substantial sales of our common stock by our stockholders could depress our stock price regardless of our operating results.

Sales of substantial amounts of our common stock in the public market after this offering could reduce the prevailing market prices for our common stock. Upon the closing of this offering, based on                      shares outstanding as of                     , 2007, we will have                      shares of common stock outstanding. Of these, all of the shares sold in this offering will be freely tradable without restriction or further registration. Substantially all of the                      shares of our common stock held by existing stockholders are subject to lock-up agreements with the underwriters which prohibit the sale of such shares for 180 days after the date of this prospectus, subject to a possible extension under certain circumstances. All of these shares will be eligible for resale upon the expiration of the lock-up period and in some cases to volume restrictions under Rule 144 and our right of repurchase.

Our directors, executive officers and major stockholders will own approximately         % of our outstanding common stock after this offering, which could limit your ability to influence the outcome of key transactions, including changes of control.

After this offering, directors, executive officers, and current holders of 5% or more of our outstanding common stock, will, in the aggregate, own approximately         % of our outstanding common stock. As a result, a small number of stockholders will have voting control and would be able to control the election of directors and the approval of significant corporate transactions. This concentration of ownership may also delay, deter or prevent a change of control of our company and will make some transactions more difficult or impossible without the support of these stockholders.

We have implemented anti-takeover provisions that could discourage or prevent a takeover, even if an acquisition would be beneficial in the opinion of our stockholders.

Provisions of our certificate of incorporation and bylaws could make it more difficult for a third party to acquire us, even if doing so would be beneficial in the opinion of our stockholders. These provisions include:

 

 

authorizing the issuance of “blank check” preferred stock that could be issued by our board of directors to increase the number of outstanding shares and thwart a takeover attempt;

 

 

establishing a classified board of directors, which could discourage a takeover attempt;

 

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prohibiting cumulative voting in the election of directors, which would limit the ability of less than a majority of stockholders to elect director candidates;

 

 

limiting the ability of stockholders to call special meetings of stockholders;

 

 

prohibiting stockholder action by written consent and requiring that all stockholder actions be taken at a meeting of our stockholders; and

 

 

establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.

In addition, Section 203 of the Delaware General Corporation Law may discourage, delay or prevent a change of control of our company. Generally, Section 203 prohibits stockholders who, alone or together with their affiliates and associates, own more than 15% of the subject company from engaging in certain business combinations for a period of three years following the date that the stockholder became an interested stockholder of such subject company without approval of the board or 66 2/3% of the independent stockholders. The existence of these provisions could adversely affect the voting power of holders of common stock and limit the price that investors might be willing to pay in the future for shares of our common stock. See “Description of capital stock—Anti-takeover provisions” included elsewhere in this prospectus.

An active trading market for our common stock may not develop.

Prior to this offering, there has been no public market for our common stock. Although we will apply to have our common stock approved for quotation on The Nasdaq Global Market, an active trading market for our shares may never develop or be sustained following this offering. Accordingly, you may not be able to sell your shares quickly or at the market price if trading in our stock is not active. The initial public offering price for our common stock was determined through negotiations between the underwriters and us. The initial public offering price may vary from the market price of our common stock after the closing of this offering. Investors may not be able to sell their common stock at or above the initial public offering price.

If equity research analysts do not publish research or reports about our business or if they issue unfavorable commentary or downgrade our common stock, the price of our common stock could decline.

The trading market for our common stock may rely in part on the research and reports that equity research analysts publish about us and our business. We do not control the opinions of these analysts. The price of our stock could decline if one or more equity analysts downgrade our stock or if those analysts issue other unfavorable commentary or cease publishing reports about us or our business.

A significant portion of our total outstanding shares may be sold into the public market in the near future, which could cause the market price of our common stock to drop significantly, even if our business is doing well.

Sales of a substantial number of shares of our common stock in the public market could occur at any time after the expiration of the lock-up agreements described in the “Underwriting” section. These sales, or the market perception that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. After this offering, we will have shares of common stock outstanding based on the number of shares outstanding as of                     , 2007. This includes the shares that we are selling in this offering, which may be resold

 

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in the public market immediately. The remaining                      shares, or         % of our outstanding shares after this offering will be able to be sold, subject to any applicable volume limitations under federal securities laws, in the near future as set forth below.

 

Number of shares    % of total outstanding   

Date available for sale

into public market

 
  

%

   On the date of this prospectus
  

%

   90 days after the date of this prospectus
  

%

   180 days after the date of this prospectus due to the expiration of the lock-up agreements between the holders of these shares and the underwriters; however, J.P. Morgan Securities Inc. can waive the provisions of these lock-up agreements and allow these stockholders to sell their shares at any time
  

%

   Between 181 and 365 days after the date of this prospectus, depending on the requirements of the federal securities laws
 

In addition, as of                     , 2007, there were                      shares of common stock issuable upon the exercise of outstanding options,                      shares subject to outstanding warrants,                      shares available for issuance under our 2000 stock option and restricted stock plan,                      shares available for issuance under our 2007 equity incentive plan and                      shares available for issuance under our 2007 employee stock purchase plan, that will become eligible for sale in the public market to the extent permitted by any applicable vesting requirements, the lock-up agreements and Rule 144 and 701 under the Securities Act of 1933, as amended. Moreover, after this offering, holders of an aggregate of approximately                      shares of our common stock as of                     , 2007, will have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. We also intend to register all shares of our common stock that we may issue under our employee benefit plans. Once we register these shares, they can be freely sold in the public market upon issuance, subject to the lock-up agreements.

We have not paid dividends in the past and do not expect to pay dividends in the future.

We have never declared or paid cash dividends on our capital stock. We currently intend to retain all future earnings for the operation and expansion of our business and, therefore, do not anticipate declaring or paying cash dividends in the foreseeable future. The payment of dividends will be at the discretion of our board of directors and will depend on our results of operations, capital requirements, financial condition, prospects, contractual arrangements, any

 

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limitations on payments of dividends present in our current and future debt agreements, and other factors our board of directors may deem relevant. We are subject to several covenants under our debt arrangements that place restrictions on our ability to pay dividends. If we do not pay dividends, a return on your investment will only occur if our stock price appreciates.

We have broad discretion to use the offering proceeds, and our investment of these proceeds may not yield a favorable, or any, return.

The net majority of the proceeds of this offering are not allocated for specific uses. Additionally, we may decide to use proceeds that are currently anticipated for a specific use for a different purpose. Thus, our management has broad discretion over how these proceeds are used and could spend the proceeds in ways with which you may not agree. We cannot assure you that the proceeds will be invested in a way that yields a favorable, or any, return for us.

New investors in our common stock will experience immediate and substantial dilution.

The initial public offering price will be substantially higher than the book value per share of our common stock. If you purchase common stock in this offering, you will incur dilution of $             in net tangible book value per share of common stock, based on an assumed initial public offering price of $             per share. In addition, the number of shares available for issuance under our stock option and employee stock purchase plans may increase annually without further stockholder approval. Investors will incur additional dilution upon the exercise of stock options and warrants. See “Dilution.”

The availability of shares for sale in the future could reduce the market price of our common stock.

In the future, we may issue securities to raise cash for acquisitions. We may also acquire interests in outside companies by using a combination of cash and our common stock or just our common stock. We may also issue securities convertible into our common stock. Any of these events may dilute your ownership interest in our company and have an adverse impact on the price of our common stock.

In addition, sales of a substantial amount of our common stock in the public market, or the perception that these sales may occur, could reduce the market price of our common stock. This could also impair our ability to raise additional capital through the sale of our securities.

 

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Special note regarding forward-looking statements

This prospectus includes forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends affecting the financial condition of our business. Forward-looking statements should not be read as guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time those statements are made and/or management’s good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to:

 

 

the impact of competition and technological change;

 

 

general economic and business conditions, both nationally and in our markets;

 

 

the timing of and change in necessary existing and future regulatory clearances that affect our business;

 

 

our relationships with our distributors;

 

 

our ability to maintain relationships with our key suppliers; and

 

 

other risk factors included under “Risk factors” in this prospectus.

In addition, in this prospectus, the words “believe,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “predict,” “potential” and similar expressions, as they relate to NimbleGen, our business and our management, are intended to identify forward-looking statements. In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this prospectus may not occur and actual results could differ materially from those anticipated or implied in the forward-looking statements.

Forward-looking statements speak only as of the date the statements are made. You should not put undue reliance on any forward-looking statements. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information, except to the extent required by applicable securities laws. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.

 

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Use of proceeds

We estimate that the net proceeds to us from the sale of the shares of common stock offered by us will be approximately $            , or approximately $             if the underwriters’ over-allotment option is exercised in full, based on an assumed initial public offering price of $             per share and after deducting underwriting discounts and commissions and estimated offering expenses.

The principal purposes of this offering are to obtain additional capital and to create a public market for our common stock. We intend to use the net proceeds from this offering for:

 

 

expanding the commercial infrastructure for our microarray products and services by adding to our sales and marketing capabilities to support shipments of microarrays to a broader range of customers;

 

 

increasing research and development on manufacturing process improvement, new biological applications, next generation manufacturing systems, as well as tools for data analysis and integration;

 

 

capital expenditures to build additional production capacity to keep ahead of growing demand; and

 

 

working capital and general corporate purposes, which may include the acquisition of complementary technologies, products or businesses and funding operating losses.

The amounts that we actually expend for the purposes above will vary significantly depending on a number of factors, including future revenue growth, if any, and the amount of cash we generate from operations. As a result, we will retain broad discretion in the allocation of the net proceeds of this offering. We have no present commitments or agreements with respect to any acquisitions. Pending the deployment of the net proceeds from this offering, we intend to invest them primarily in interest bearing, investment-grade, short-term securities.

Dividend policy

We have never declared or paid and do not anticipate declaring or paying any cash dividends on our common stock in the near future. Any future determination as to the declaration and payment of dividends, if any, will be at the discretion of our board of directors and will depend on then existing conditions, including our financial condition, operating results, contractual restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant.

 

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Capitalization

The following table shows:

 

 

our capitalization as of December 31, 2006; and

 

 

our capitalization as of December 31, 2006, on a pro forma as adjusted basis, giving effect to (i) the automatic conversion of all outstanding shares of our preferred stock into an aggregate of                      shares of common stock, (ii) the exercise of warrants to purchase                      shares of our common stock, immediately prior to the closing of this offering as if such conversion and exercise had occurred on December 31, 2006, and (iii) the sale by us of              shares of common stock in this offering, at an initial public offering price of $             per share, after deducting underwriting discounts and commissions and estimated offering expenses.

 

As of December 31, 2006 (in thousands)    Actual     Pro forma
as adjusted
                

Long-term debt, less current portion of $2,189

   $ 10,605     $             

Temporary equity:

    

Redeemable common stock, $0.001 par value: 100,000 shares issued and outstanding

     115    

Stockholders’ equity:

    

Series E Convertible Preferred Stock, $0.001 par value, 8,359,935 shares authorized, 7,732,840 shares issued and outstanding, actual; preferred stock, par value $0.001 per share,                      shares authorized, no shares issued and outstanding, pro forma as adjusted

     28,545    

Series F Convertible Preferred Stock, $0.001 par value, 10,446,470 shares authorized, 10,380,470 shares issued and outstanding, actual; preferred stock, par value $0.001 per share,                      shares authorized, no shares issued and outstanding, pro forma as adjusted

     33,611    

Common stock, $0.001 par value, 24,500,000 shares authorized; 1,453,833 shares issued and outstanding, actual;                  shares authorized, par value $0.001 per share,                 ;                      shares issued and outstanding, pro forma as adjusted

     2    

Additional paid-in capital

     864    

Notes receivable from stockholder

     (219 )  

Unearned stock-based compensation

     (1 )  

Accumulated deficit

     (44,501 )  
              

Total stockholders’ equity

   $ 18,301     $  
              

Total capitalization

   $ 29,021     $  
                

 

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The outstanding share information set forth above is as of December 31, 2006, and excludes on an actual basis:

 

 

1,606,947 shares of common stock and 610,000 shares of Series E Preferred Stock issuable upon the exercise of outstanding options, at weighted average exercise prices of approximately $1.01 and $0.46 per share, respectively;

 

 

1,620,825 shares of common stock and 235,000 shares of Series E Preferred Stock reserved for issuance under our 2000 stock option and restricted stock plan; and

 

 

             shares to be available for issuance under our 2007 equity incentive plan and              shares to be available under our 2007 employee stock purchase plan.

 

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Dilution

If you invest in our common stock, your interest will be diluted immediately to the extent of the difference between the public offering price per share of our common stock and the pro forma net tangible book value per share of our common stock after this offering. As of December 31, 2006, our pro forma net tangible book value is approximately $             million, or $             per share of common stock. Pro forma net tangible book value per share represents the amount of our total tangible assets less total liabilities, divided by shares of common stock outstanding after giving effect to (1) the conversion of all outstanding shares of our preferred stock into an aggregate of                  shares of common stock and (2) the exercise of warrants to purchase              shares of common stock at an exercise price of $             per share, immediately prior to the closing of this offering.

Dilution in pro forma net tangible book value per share represents the difference between the amount per share paid by buyers of shares of our common stock in this offering and the pro forma net tangible book value per share of our common stock immediately following this offering.

After giving effect to the receipt of the net proceeds from our sale of shares of common stock in this offering at an assumed initial public offering price of $             per share and after expenses, our pro forma net tangible book value as of December 31, 2006, would have been approximately $             million, or $             per share of common stock. This represents an immediate increase in pro forma net tangible book value of $             per share to existing stockholders and an immediate dilution of $             per share to new investors purchasing shares at the initial public offering price. The following table illustrates the per share dilution:

 


Assumed initial public offering price

      $  

Pro forma net tangible book value as of December 31, 2006

   $                
         

Increase in pro forma net tangible book value attributable to new investors as of December 31, 2006

     

Pro forma net tangible book value as of December 31, 2006, as adjusted to give effect to this offering

      $  

Dilution to new investors

      $             
 

The following table shows, on the pro forma basis described above, the difference between existing stockholders and new investors in this offering with respect to the number of shares of common stock purchased from us, the total consideration paid and the average price paid per share, before deducting underwriting discounts and commissions and estimated offering expenses.

 

      Shares purchased    Total consideration    Average
price
per share
(in thousands)    Number    Percent    Amount    Percent   
 

Existing stockholders

      %    $                 %    $             

New investors

              
    

Total

      100.0%    $                 100.0%    $             
 

 

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The outstanding share information set forth above is as of December 31, 2006, and excludes on an actual basis:

 

 

1,606,947 shares of common stock and 610,000 shares of Series E Preferred Stock issuable upon the exercise of outstanding options, at weighted average exercise prices of approximately $1.01 and $0.46, respectively, per share;

 

 

1,620,825 shares of common stock reserved and 235,000 shares of Series E Preferred Stock for issuance under our 2000 stock option and restricted stock plan; and

 

 

                 shares to be available for issuance under our 2007 equity incentive plan and                  shares to be available for issuance under our 2007 employee stock purchase plan.

To the extent that any outstanding options are exercised, new investors will experience further dilution.

 

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Selected consolidated financial data

The following selected consolidated financial data should be read in conjunction with, and are qualified by reference to, our consolidated financial statements and related notes and “Management’s discussion and analysis of financial condition and results of operations” appearing elsewhere in this prospectus. The consolidated statements of operations for the years ended December 31, 2004, 2005 and 2006, and the consolidated balance sheet data at December 31, 2005 and 2006, are derived from, and are qualified by reference to, the consolidated financial statements that have been audited by our independent registered public accounting firm, which are included elsewhere in this prospectus. The consolidated statements of operations data for the years ended December 31, 2002 and 2003 and the consolidated balance sheet data at December 31, 2002 and 2003 are derived from our audited consolidated financial statements not included in this prospectus. The historical results presented below are not necessarily indicative of future results.

 

Years ended December 31,   2002     2003     2004     2005     2006  
   

Consolidated statements of operations data:
(in thousands, except per share data)

  

       

Revenue:

         

Microarray and other

  $ 585     $ 2,017     $ 3,121     $ 8,457     $ 12,561  

Grant

    1,312       1,091       1,353       1,017       945  
       

Total revenue

    1,897       3,108       4,474       9,474       13,506  

Cost and expenses:

         

Cost of revenue

    4,790       4,305       4,572       7,154       7,784  

Research and development

    3,047       3,233       3,415       1,911       2,637  

Selling, general and administrative

    3,248       3,357       4,624       5,618       9,288  

Amortization of licenses and patents

                109       119       530  
       

Total costs and expenses

    11,085       10,895       12,720       14,802       20,239  
       

Loss from operations

    (9,188 )     (7,787 )     (8,246 )     (5,328 )     (6,733 )

Other income (expense):

         

Interest expense

    (65 )     (60 )     (26 )     (7 )     (336 )

Non-cash interest expense

                (94 )     (11 )     (183 )

Interest income

    78       38       32       125       419  

Other income (expense)

    (8 )     (10 )     12       4       28  
       

Total other income (expense)

    5       (32 )     (76 )     111       (72 )
       

Net loss

  $ (9,183 )   $ (7,819 )   $ (8,322 )   $ (5,217 )   $ (6,805 )
       

Net loss per common share:

         

Basic and diluted

  $ (8.24 )   $ (6.91 )   $ (5.63 )   $ (3.43 )   $ (4.40 )

Weighted average common shares outstanding used in computing net loss per common share:

         

Basic and diluted

    1,115,440       1,132,033       1,478,727       1,519,016       1,546,979  

Pro forma net loss per share (unaudited)(1):

         

Basic and diluted

          $ (0.35 )

Pro forma common shares outstanding (unaudited)(1):

         

Basic and diluted

            19,667,143  
   

 

(1)   The pro forma statement of operations data reflect the conversion of all outstanding shares of our preferred stock at December 31, 2006 on a one-for-one basis into an aggregate of 18,113,310 shares of common stock immediately prior to the closing of this offering.

 

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As of December 31,    2002    2003    2004    2005    2006
 

Consolidated balance sheet data
(in thousands):

              

Cash and cash equivalents

   $ 2,627    $ 3,032    $ 7,678    $ 9,273    $ 19,001

Total assets

     5,201      5,896      10,854      15,905      41,713

Long-term debt

     655      467      363      174      12,794

Deferred revenue

          58      327      1,180      1,412

Working capital

     1,837      2,603      7,499      9,631      10,314

Convertible preferred stock

     19,397      27,570      40,323      49,121      62,156

Temporary equity

               2      2      115

Stockholders’ equity

     3,453      3,987      8,774      12,160      18,301
 

 

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Management’s discussion and analysis of financial condition and results of operations

You should read the following discussion of our consolidated financial condition and results of operations in conjunction with the financial statements and the notes thereto included elsewhere in this prospectus. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly in “Risk factors.”

Overview

NimbleGen Systems, Inc. is a leading innovator, manufacturer and marketer of a proprietary suite of microarrays, and related products and services, which we sell into the life sciences research market. We were incorporated in 1999 to develop and commercialize technology for the manufacture of DNA microarrays utilizing DMD chips as part of a highly automated system for the light directed synthesis of DNA microarrays. Our core technology was developed at the University of Wisconsin, the rights to which were secured through a license agreement with WARF. We believe our technology allows us to offer our customers an unmatched combination of high data quality and high information content. As a consequence, our products and services enable scientists to obtain, analyze and integrate complex genomic data not previously accessible, providing a clearer and unprecedented understanding of genome structure, function and biology.

Since our inception in 1999, our annual revenues have grown to $13.5 million for the year ended December 31, 2006. Our sales have grown primarily by selling to leading academic institutions, genomic research centers and government laboratories, as well as pharmaceutical, biotechnology and agrichemical companies.

While we continue to grow our revenue, we have incurred substantial operating losses since our inception. We have continued to invest in the development of our microarray technology, in the procurement of additional technology required for production of our products, in the development of new products which take advantage of our core production technology and in building and expanding our commercial business operations.

As of December 31, 2006, our accumulated deficit was $44.5 million. We expect to incur additional operating losses as we continue to make improvements to our technology platform, develop new products based upon our core technologies, and grow our commercial organization. At December 31, 2006, we had a cash balance of $19.0 million.

Our expenses have consisted primarily of costs incurred in research and development, manufacturing scale-up, business development and general and administrative costs associated with our operations. We expect our research and development expenses to increase in the future as we continue to develop our products and our core manufacturing platform. Also, our selling and marketing expenses will increase as we commercialize our products, and general and administrative expenses will grow as we expand our operations and assume the obligations of a public reporting company. We do expect, though, that these costs will grow at a slower rate than will revenue. We also expect to continue to invest capital in our manufacturing operations and in working capital and intellectual property as we expand our operations.

 

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As part of our strategy to expand direct product sales worldwide, in late 2006 and early 2007, we announced license agreements with Affymetrix, Inc. and Oxford Gene Technology IP Limited. Prior to entering into these license agreements, the primary focus of our commercial operations involved performing analytical services utilizing our microarrays in our Iceland facility. We also sold microarrays directly to the U.S. government and to a limited number of customers in certain territories.

Going forward, we anticipate that our business mix will be weighted more toward direct sales of microarrays, but we expect that our service business will remain a significant portion of our revenue. As microarray sales grow, we will incur increasing royalty payments and it is likely that these royalty payments will exceed what the company has experienced in the past, both in absolute terms and as a percentage of sales. In addition to selling microarrays more broadly, our new expanded business strategy includes selling a variety of microarray-related reagents, consumables, instruments and supplies. As a consequence, we also anticipate that sales of such items will exceed past experience, both in absolute and in relative terms.

Results of operations

The following discussion compares the historical results of operations for the years ended December 31, 2004, 2005 and 2006.

Revenue

We generate revenue principally from the sale of microarrays directly to customers and from fees charged for the delivery of data which we generate by performing analytical services using our microarrays. Our major application areas currently include both microarray sales and microarray services optimized for the following applications: gene expression, comparative genomic hybridization, or CGH, chromatin immunoprecipitation assays on microarrays, or ChIP-chip, and comparative genomic sequencing, or CGS. We also generate revenue though the sale of instruments, reagents and other supplies, and through performance on research grants. We recognize revenue from the sale of products and services in accordance with the SEC’s Staff Accounting Bulletin No. 104, Revenue Recognition in Financial Statements.

 

(in thousands)    2004    2005     2006  
   

Microarray sales

   $ 1,440    $ 3,730     $ 5,012  

% change year over year

        159%       34%  

Microarray services

     1,274      4,558       6,620  

% change year over year

        258%       45%  

Other revenue

     407      169       929  

% change year over year

        (58% )     *  
                       

Microarray and other revenue

     3,121      8,457       12,561  

% change year over year

        171%       49%  

Grant revenue

     1,353      1,017       945  

% change year over year

        (25% )     (7% )
        

Total revenue

   $ 4,474    $ 9,474     $ 13,506  

% change year over year

        112%       43%  
   

 

*   Not meaningful

 

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2006 vs. 2005

In 2006, sales growth was primarily due to an increase in unit volume from sales of our microarrays and microarray services, offset by certain price declines in products for mature applications. Unit growth came from expanding sales to our existing customer base, as well as an ongoing increase in the number of customers. In 2006, we sold a single MAS production unit. It is not our strategy to routinely sell our MAS production units, but we occasionally may do so. We expect to sell other types of instruments in the future, such as scanners, hybridization stations, wash stations and other similar equipment used in the process of utilizing microarrays to generate genomic information.

2005 vs. 2004

In 2005, sales growth was primarily due to increased unit volume from sales of microarrays and microarray services for new applications. In 2005, we launched our ChIP-chip application and also benefited from a full year of sales of our CGH application, which was first launched in 2004.

Grant revenue

Historically, we applied for and received grants, typically provided by the National Institute of Health, or NIH, and related to various aspects of development of our core platform technology and its applications. While we recognize these grants as revenue, we are only reimbursed for costs specifically attributable to the subject project. In 2006, the majority of our grant revenue was from the ENCODE project, or Encyclopedia of DNA Elements, sponsored by the National Human Genome Research Institute, a department within the NIH.

Gross margin and cost of revenue

Gross margin reflects the difference between revenue and cost of revenue. Cost of revenue consists of materials and supplies used in the manufacture of product, royalties, depreciation on manufacturing capital equipment, rent, salaries and related expenses for management and personnel associated with our manufacturing and quality control departments. In 2005 and 2006, cost of revenue was primarily incurred in our facilities in Iceland and Germany. In 2004, we also incurred cost of revenue in our facility in Madison, Wisconsin.

 

(in thousands)    2004     2005    2006
 

Revenue

   $ 4,474     $ 9,474    $ 13,506

Cost of revenue

     4,572       7,154      7,784
      

Gross margin

   $ (98 )   $ 2,320    $ 5,722

Gross margin %

     (2% )     24%      42%
 

2006 vs. 2005

In 2006, we continued to improve the efficiency of our manufacturing processes. Material costs declined from 24% of revenue in 2005 to 18% of revenue in 2006. As production has expanded, we have increasingly been able to buy materials in greater quantities resulting in higher volume discounts. Overhead costs have also declined as a percentage of revenue. While manufacturing costs have declined, royalties as a percentage of revenues have increased from 3% of revenue in 2005 to 4% of revenue in 2006. In 2006, stock-based compensation allocated to cost of revenue was $3,000.

 

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2005 vs. 2004

In 2005, we made improvements in the efficiency of our manufacturing operations. Material costs declined from 25% of revenue in 2004 to 24% of revenue in 2005. In late 2005, we moved our Icelandic operations from a subleased space of 4,200 square feet into a new, approximately 15,510 square foot facility, without a material increase in rent. While manufacturing costs have declined, royalties as a percentage of revenue have increased from 1% of revenue in 2004 to 3% of revenue in 2005.

Research and development expenses

Research and development expenses consist primarily of salaries and related personnel costs, material costs for microarrays and application development, fees paid to consultants, depreciation and facilities costs and other expenses related to the design, development, testing and enhancement of our products, services and manufacturing platform. Research and development costs are expensed as incurred.

 

(in thousands)    2004    2005     2006
 

Research and development

   $ 3,415    $ 1,911     $ 2,637

% change year over year

        (44% )     38%

% of revenue

     76%      20%       20%
 

2006 vs. 2005

The $726,000 increase from 2005 to 2006 primarily resulted from employee additions and from a $500,000 increase in materials used to build and test next generation prototypes. In 2006, stock-based compensation allocated to research and development expense was $2,000.

2005 vs. 2004

In 2004, our German operation was primarily engaged in research and development activities associated with our manufacturing platform. In February 2005, the focus of that operation changed from research and development to the production of chemistry used in our manufacturing operations. The costs of our German operation, since that time, are recorded in cost of revenue.

Selling, general and administrative expenses

Selling, general and administrative, or SG&A, expenses consist primarily of salaries and related personnel costs for product management and marketing groups, field sales and customer service groups, and accounting, finance, human resource management, legal and executive management and allowance for doubtful accounts.

 

(in thousands)    2004    2005    2006
 

Selling, general and administrative

   $ 4,624    $ 5,618    $ 9,288

% change year over year

        21%      65%

% of revenue

     103%      59%      69%
 

2006 vs. 2005

The growth in SG&A expense from 2005 to 2006 primarily resulted from the addition of employees in our business development, product marketing and sales teams. Prior to 2006, we

 

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served Europe and Asia through a network of distributors and agents. In late 2006, we chose to serve certain European countries through a direct sales force and we hired a vice president to develop and lead our European organization. We will be adding sales people throughout 2007 to staff that organization. In addition, SG&A costs increased in 2006 due to professional fees incurred in preparation for our potential initial public offering and in establishing an internal control over financial reporting infrastructure appropriate for a public company. In 2006, stock-based compensation allocated to SG&A expense was $40,000.

In late 2005, we provided financing to an employee for the exercise of stock options. The loan was a non-recourse instrument and therefore resulted in variable accounting of the underlying stock. The intrinsic value of the underlying shares was recognized to the extent of vesting resulting in 2006 non-cash compensation expense of $481,000.

2005 vs. 2004

For the period from 2004 to 2005, SG&A costs increased primarily from the addition of employees to the business development team.

Amortization of licenses and patents

We capitalize acquired licenses and patents and amortize them over their useful life. In future years, we will review long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of an asset may not be fully recoverable. An impairment loss would be recognized if the estimated future cash flows from the use of the asset are less than the carrying amount of that asset. To date, there has been no such impairment.

 

(in thousands)    2004    2005    2006
 

Amortization of licenses and patents

   $ 109    $ 119    $ 530

% change year over year

        9%      345%

% of revenue

     2%      1%      4%
 

2006 vs. 2005

In 2006, amortization of licenses and patents grew significantly, resulting from the acquisition of a number of license agreements collectively totaling $15.3 million. We have determined that these license agreements have varied useful lives but the significant majority of the assets will be amortized over six years. These licenses and patents were acquired at various times in the fourth quarter of 2006; therefore, amortization expense does not represent a charge for the full year.

2005 vs. 2004

In 2004 and 2005, amortization of licenses and patents was related to our acquisition of certain intangible assets of Light Biology, Inc. in 2004.

 

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Interest expense and non-cash interest expense

 

(in thousands)    2004    2005     2006
 

Interest expense

   $ 26    $ 7     $ 336

% change year over year

        (73% )     *

% of revenue

     1%      0%       2%

Non-cash interest expense

   $ 94    $ 11     $ 183

% change year over year

        (88% )     *

% of revenue

     2%      0%       1%
 

 

*   Not meaningful

2006 vs. 2005

In 2006, cash interest expense resulted primarily from borrowing under a credit facility provided by General Electric Capital Corporation, or GECC. Please see “—Cash flows provided by financing activities,” below.

In 2006, non-cash interest expense consisted of amortization related to the value of warrants issued and other fees incurred in conjunction with the GECC debt facility. Additionally, non-cash interest expense included the amortization of the debt discount attributable to a license fee obligation.

2005 vs. 2004

Interest expense in 2005 and 2004 is attributable to debt assumed in the 2004 acquisition of certain assets of Light Biology, Inc., as well as to a loan provided by the State of Wisconsin in 2001 for early technology development. Both loans were retired in 2006.

Interest and other income

Interest income results from cash and cash equivalents, primarily money market accounts. We maintain cash balances in excess of federally insured limits.

 

(in thousands)    2004    2005    2006
 

Interest income

   $ 32    $ 125    $ 419

% change year over year

        291%      235%

% of revenue

     1%      1%      3%
 

2006 vs. 2005

Interest income increased primarily due to a higher average balance of cash and cash equivalents arising from the issuance of Series F Preferred Stock in October 2005, the draw-down of funds under the GECC credit facility at various times throughout 2006, and the additional issuance of Series F Preferred Stock in December 2006.

2005 vs. 2004

Interest income increased primarily due to a higher average balance of cash and cash equivalents arising from the issuances of Series F Preferred Stock in November 2004 and October 2005.

Liquidity and capital resources

To date, we have funded our working capital needs and our capital expenditure requirements using cash from sales of equity securities, debt instruments and cash from our operations, including customer advance payments, and, to a lesser extent, through government grants. Since

 

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our inception through January 2007, we have obtained financing of approximately $70 million through private placements of equity securities. At December 31, 2006, we had $19.0 million in cash and cash equivalents, and our net working capital, which is calculated by subtracting our current liabilities from our current assets, was $10.3 million. As of December 31, 2006, we had $10.6 million of long-term debt.

Cash flows

 

(in thousands)    2004     2005     2006  
   

Net cash flows used in operating activities

   $ (7,529 )   $ (4,823 )   $ (3,932 )

Net cash flows used in investing activities

     (100 )     (1,979 )     (6,671 )

Net cash flows provided by financing activities

     12,275       8,397       20,331  
        

Net change in cash

   $ 4,646     $ 1,595     $ 9,728  

Beginning cash and cash equivalents

     3,032       7,678       9,273  

Ending cash and cash equivalents

   $ 7,678     $ 9,273     $ 19,001  
   

Cash flows provided by operating activities

2006 vs. 2005

The decrease in net cash used in operating activities was primarily due to improved management of our working capital, primarily accounts receivable collections that resulted in the decrease in accounts receivable of $159,000 despite an increase in revenue of $4 million.

2005 vs. 2004

The decrease in net cash used in operating activities was primarily due to the reduction in net loss of $3.1 million, offset by the increase in accounts receivable of $1.7 million and an increase in inventory of $592,000.

Cash flows used in investing activities

2006 vs. 2005

In 2006, cash used in investing activities increased primarily as a result of the acquisition of licenses and the purchase of parts for our MAS 3.x system. Throughout 2006, we entered into a number of license agreements as part of our strategy to expand sales of microarray products directly to customers worldwide and which provide rights to certain other intellectual property. We began acquiring the parts necessary for the construction of our MAS 3.x systems that are capable of manufacturing three microarrays simultaneously, with each microarray containing up to 2.1 million features. We also acquired certain material handling equipment for providing our microarray services.

2005 vs. 2004

In 2005, cash used in investing activities increased primarily due to the purchase of capital equipment used in our manufacturing operations.

 

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Cash flows provided by financing activities

2006 GECC debt facility

On June 30, 2006, we entered into a secured $10 million credit facility with GECC. The facility initially consisted of a $5 million term loan (Term A), a $4 million working capital revolving credit facility, and a $1 million term loan conditioned on certain performance requirements. In September 2006, we met the performance requirements and drew down an additional $1 million of term debt under this facility (Additional Term A). In December 2006, we expanded the facility to include an additional $2.5 million in term debt (Term B). In December 2006, the facility was modified to limit total borrowing from GECC to $11 million. In January 2007, we expanded the facility again by an additional $2.5 million (Term C). As of December 31, 2006, the total amount borrowed under the GECC facility was $8.5 million. In January 2007, an additional $2.5 million was borrowed.

The Term A facility bears interest at a fixed rate of 11.96% and is fully amortized over three years beginning March 2007. The Additional Term A facility also bears interest at a fixed rate of 11.96% and is fully amortized over three years beginning May 2006. The Term B and C facilities both bear interest at a fixed rate of 11.78% and 11.97%, respectively, and are fully amortized over three years beginning in February and March 2007, respectively.

As part of the Term A agreement, we issued detachable warrants for the purchase of 40,000 Series F Preferred Stock for $4.50 per share. In December 2006, we performed a recapitalization, described below, and pursuant to that recapitalization cancelled the then outstanding warrants and reissued warrants for 66,000 of Series F Preferred Stock at $5.00 per share and 4,000 shares of Series E Preferred Stock at $4.20 per share.

In late December 2006, we borrowed $2.5 million of the Term B facility at a fixed interest rate of 11.78% with monthly principal and interest payments over three years. As part of the Term B and Term C facilities, we issued detachable warrants for the purchase of 30,000 Series F Preferred Stock.

2006 recapitalization and issuance of Series F Preferred Stock

In December 2006, we amended our certificate of incorporation to (i) reduce the liquidation preference and modify certain other rights of the Series F Preferred Stock, (ii) reclassify each outstanding share of the Series F Preferred Stock into 0.10 shares of Series E Preferred Stock and 1.65 shares of Series F Preferred Stock and (iii) increase the number of authorized shares of common stock and the number of authorized shares of both Series E and Series F Preferred Stock. In connection with this transaction, we incurred $100,000 of legal fees.

Following the recapitalization, we again amended our certificate of incorporation to increase the number of authorized shares of common stock and the number of authorized shares of both Series E and Series F Preferred Stock. In conjunction with this amendment, we issued 2,500,000 shares of Series F Preferred Stock for proceeds of $12.2 million, net of issuance costs of $237,000.

2005 issuance of Series F Preferred Stock

During 2005, we issued 1,934,630 shares of Series F Preferred Stock for proceeds of $8.6 million, net of issuance costs of $40,000.

 

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2004 bridge financing and issuance of Series F Preferred Stock

During 2004, we received proceeds of $2.8 million from the issuance of unsecured subordinated promissory notes, which we refer to as the bridge notes. On September 30, 2004, we converted the principal amount of the bridge notes, plus the accrued interest into 619,190 shares of Series F Preferred Stock.

Operating capital and capital expenditure requirements

We have incurred substantial operating losses since our inception. As of December 31, 2006, our accumulated deficit was $44.5 million. We expect to incur additional operating losses as we continue to improve our technology platform, develop new products based upon our core technologies and grow our commercial organization.

Under our licensing agreements, we incurred a note payable of $5.3 million due the earlier of March 2008 or 90 days following an initial public offering. The note has been valued at $4.4 million using an imputed interest rate of 11.75%.

In addition, further licensing obligations were incurred in December 2006 for $1 million and $5 million, which are payable in 2007.

Our future capital requirements depend on numerous factors. These factors include, but are not limited to, the following:

 

 

market acceptance of new product applications;

 

 

timing of our release of the MAS 3.x manufacturing platform;

 

 

costs associated with our sales and marketing initiatives and manufacturing activities;

 

 

rate of progress and cost of our research and development activities; and

 

 

effects of competing technological and market developments.

We believe that our current cash and cash equivalents, along with the cash we expect to generate from operations, will be sufficient to meet our anticipated cash needs for working capital and capital expenditures throughout 2007. If these sources of cash and the net proceeds from this offering are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or debt securities or obtain a credit facility. The sale of additional equity or convertible debt securities could result in dilution to our stockholders. If additional funds are raised through the issuance of debt securities, these securities could have rights senior to those associated with our common stock and could contain covenants that would restrict our operations. Additional financing may not be available at all, or in amounts or on terms acceptable to us. If we are unable to obtain this additional financing, we may be required to reduce the scope of our planned product development and marketing efforts.

 

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Contractual obligations and commitments

The following table is a summary of our long-term contractual cash obligations as of December 31, 2006:

 

           

Payments due by period

(in thousands)    Total    Less than
1 year
   1 – 3
years
   3 – 5
years
  

More than

5 years

 

Long-term debt obligations

   $ 15,281    $ 3,695    $ 11,586    $    $

Capital lease obligations

                        

Operating lease obligations

     2,334      540      666      620      508

Purchase obligations

                        

Other long-term commitment

     5,012      25      1,737      1,550      1,700
 

Off-balance sheet arrangements

We do not have any off-balance sheet arrangements.

Inflation

We do not believe that inflation has had a material impact on our business and operating results during the periods presented.

Critical accounting policies and estimates

The discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as revenue and expenses during the reporting periods. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could therefore differ materially from those estimates under different assumptions or conditions.

Our significant accounting policies are more fully described in the notes to our consolidated financial statements included elsewhere in this prospectus. We believe the following are our critical accounting policies including the more significant estimates and assumptions used in preparation of our consolidated financial statements.

Revenue recognition

We recognize revenue, including sales to distributors, from product sales in accordance with the SEC’s Staff Accounting Bulletin No. 104, Revenue Recognition in Financial Statements, or SAB 104. SAB 104 requires recognition of revenues from product sales that require no continuing performance on our part if four basic criteria have been met:

 

 

there is persuasive evidence of an arrangement;

 

 

delivery has occurred and title has passed to our customer;

 

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the fee is fixed and determinable and no further obligation exists; and

 

 

collectibility is reasonably assured.

To the extent entitlements to future products are included in a multi-element arrangement, revenue is recognized upon delivery, provided fair value for the elements exists. In multi-element arrangements that include entitlement to a future product, if fair value does not exist for all undelivered elements, revenue for the entire arrangement is deferred until all elements are delivered or when fair value can be established according to Emerging Issues Task Force Issue No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables, or EITF 00-21.

Grant revenue results primarily from research grants received from U.S. government entities. Revenues from research contracts are generated from the efforts of our technical staff and include the costs for material and subcontract efforts. Our research grant contracts generally provide for the payment of negotiated fixed hourly rates for labor hours incurred plus reimbursement of other allowable costs. Grant revenue is recorded in the period in which the associated costs are incurred, up to the limit of the prior approval funding amounts contained in each agreement. The costs associated with these grants are reported in cost of revenue.

Stock-based compensation expense

Effective January 1, 2006, we adopted the provisions of SFAS No. 123R, Share-Based Payment: An Amendment of FASB Statement Nos. 123 and 95 (SFAS 123R) for our stock option plans. We previously accounted for these plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related interpretations and disclosure requirements established by SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123).

We adopted SFAS 123R using the prospective transition method. Under this transition method, compensation cost recognized for 2006 includes the cost for all new awards (or awards modified, repurchased, or cancelled) granted and vested in 2006. This cost was based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. Compensation cost for options is recognized in earnings, net of estimated forfeitures, on a straight-line basis over the requisite service period. Awards granted prior to January 1, 2006 continue to be accounted for under the intrinsic value method of APB 25.

Upon the adoption of SFAS 123(R) on January 1, 2006, we began to use the Black-Scholes valuation model to value stock options. We use historical stock prices of companies considered as a peer group as the basis for our volatility assumptions. The assumed risk-free rates were based on U.S. Treasury rates in effect at the time of grant with a term consistent with the expected option lives. We employed the plain-vanilla method of estimating the expected term of the options as prescribed by SAB 107 as we did not have significant historical experience. Prior to the adoption of FAS 123(R) on January 1, 2006, the Company used the minimum value method which allowed for no volatility to be used in the Company’s Black-Scholes calculation to value the options.

Quantitative and qualitative disclosures about market risk

We do not utilize derivative financial instruments, derivative commodity instruments or other market risk sensitive instruments, positions or transactions.

 

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From time to time, we invest our excess cash primarily in money market funds, U.S. government securities, corporate bonds and commercial paper. Accordingly, we believe that while the instruments we hold are subject to changes in the financial standing of the issuer of such securities, we are not subject to any material risks arising from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices or other market changes that affect market risk sensitive instruments.

Recent accounting pronouncements

In September 2006, the SEC issued SAB 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108), which states that registrants should use both a balance sheet approach and an income statement approach when quantifying and evaluating materiality of a misstatement. The interpretations in SAB 108 contain guidance on correcting errors under the dual approach as well as provide transition guidance for correcting errors. This interpretation does not change the requirements within SFAS 154 for the correction of an error in financial statements. SAB 108 is effective for annual financial statements covering the first fiscal year ending after November 15, 2006. We adopted this interpretation in the fourth quarter of 2006 and it did not have a material impact on the consolidated financial statements.

In September 2006, the FASB issued SFAS 157, Fair Value Measurements (SFAS 157). This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Financial Accounting Standards Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We do not expect the adoption of SFAS 157 in 2008 to have a material impact on its results of operations or financial position.

In June 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income Taxes, which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. The adoption of FIN No. 48 is not expected to have any significant effect on our consolidated financial position or results of operations.

In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS 159 permits entities to choose to measure at fair value many financial instruments and certain other items that are not currently required to be measured at fair value. Subsequent changes in fair value for designated items will be required to be reported in earnings in the current period. SFAS 159 also establishes presentation and disclosure requirements for similar types of assets and liabilities measured at fair value. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We are currently assessing the effect of implementing this guidance, which directly depends on the nature and extent of eligible items elected to be measured at fair value, upon initial application of the standard on January 1, 2008.

 

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Business

Overview

We are a leading innovator, manufacturer and marketer of a proprietary suite of microarrays, and related products and services, which we sell into the life sciences research market. Our proprietary microarrays offer an unmatched combination of high data quality and high information content. Our products and services enable scientists to obtain, analyze and integrate complex genomic data not previously accessible with existing technology, providing a clearer and unprecedented understanding of genome structure, function and biology, which we refer to as High Definition GenomicsSM. In addition, our technology facilitates rapid, low-cost prototyping, allowing us to enter new markets rapidly with optimized products. Since inception, our revenues have grown substantially, primarily from sales to leading academic institutions, genomic research centers and government laboratories, as well as pharmaceutical, biotechnology and agrichemical companies.

A clear understanding of the many ways in which genomes vary in structure, function and activity is important to the development of improved diagnostics, therapeutics and agricultural products. According to Strategic Directions International, an analytical investment consulting firm, approximately $5 billion is spent annually on tools used in the analysis of genome variation including microarrays, DNA sequencing and other analytical methods. Microarrays are primarily used for gene expression and SNP genotyping because they provide sufficient data quality, information content and throughput to enable the cost-effective study of genome-wide variation. There are many other types of genome variation that researchers routinely study, but the tools that allow them to be analyzed efficiently on a genome-wide basis are just beginning to emerge. Through our proprietary technology and rapid prototyping, we have become a leading company in introducing microarray-based product suites that enable the cost-effective genome-wide analysis for several of these types of variation, each of which has important scientific and medical implications. We believe these applications, and others that we plan to enable in the next several years, will compare favorably in market size to microarray-based expression analysis and SNP genotyping.

A brief history of genomic research

From the birth of genetics in the 19th Century until the 1970s, scientists developed an increasing appreciation that there were relationships between a person’s genetic makeup and that person’s propensity for certain diseases. By the mid-20th Century, scientists began to understand the molecular basis of genetic variation, and it had become clear that genetic differences were caused by variations in a master molecule called DNA. For example, it was recognized in 1959 that Down’s Syndrome resulted when a patient had three copies of chromosome 21 instead of the normal two copies.

Until the late 1970s, scientists studied variant genes and the diseases that resulted from them by studying individual genes. During this period, it might take years for a scientist to even find which gene caused a particular inherited disease, or years to elucidate the structure of nucleotides that made up that single variant gene. Gradually, it became obvious that many disorders are caused by the coordinated activity of many genes or genetic events occurring throughout the genome, leading scientists to begin to study genetic variation on a genome-wide basis instead of a gene-by-gene basis.

In the 1980s, the industry began to develop systems and tools that greatly sped up the process of studying genetic variation. Eventually, the combination of emerging tools and the desire to study variation on a genome-wide basis culminated in the first large-scale U.S. government-subsidized

 

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effort called the Human Genome Project. The Human Genome Project was a 13-year, $3 billion effort that culminated in 2001 with publication of the draft consensus sequence of the three billion nucleotides that make up the human genome.

The Human Genome Project allowed clinical geneticists to more easily map the location of individual variant genes that caused particular diseases. However, one of the results of the Human Genome Project was a general recognition that there was enormous variation in human biology that could not be explained by the nucleotide sequence alone. In addition, it was clear that many diseases were caused by complex genetic variations that could only be understood through genome-wide analysis. Further, genetic variation, to some extent, can explain a differential response to drugs by patients.

As a result, large government-subsidized follow-on projects emerged to study other types of variation in genome structure, function and activity. These projects included sequencing of the genomes of hundreds of other organisms such as viruses, bacteria, plants and animals. In addition, projects were launched to study specific forms of genetic variation and their consequences. These included the HapMap Project, the ENCODE Project, the Model ENCODE Project and the Cancer Genome Atlas Project, among others. Each of these projects resulted in a reference database that could be used by scientists for further study in subsequent projects.

The genetic variation being studied in each of these projects had, to some extent, previously been identified with tools that were limited to analysis of small genomic regions. A combination of these government-subsidized projects and continued demand from academic and pharmaceutical researchers provided incentive for companies to develop new tools to enable the cost-effective, high throughput, genome-wide analysis of the particular forms of genome variation being studied.

Microarray-based products have emerged as vital tools in genomics research because they are able to analyze hundreds of thousands or even millions of genetic data points in a single experiment. A microarray is a specialized substrate containing thousands to millions of individual spots, known as features, each comprised of specifically designed sequences of DNA, called probes. Each probe can be used to detect the presence and quantity of their complementary sequence in DNA derived from a biological sample. DNA microarrays thus enable detection of thousands or millions of DNA sequences in parallel.

The number of features and length of microarray probes determine quantity and quality of information content. An ideal microarray for genome-wide analysis would have as many features as possible to give high information content, with highly sensitive and specific probes at each feature to give high data quality. Suppliers compete on maximizing the information content and data quality from each microarray. Long probes with 50 or more nucleotides are generally able to obtain more sensitive and specific measurements than shorter probes. More sensitive probes are able to detect nucleotide sequences that are found in very low concentrations in the sample being analyzed. More sensitive probes allow the scientist to be confident that the sequence is accurately detected.

Genomes are extremely large: the human genome is more than 3 billion base pairs of DNA, and even bacteria have approximately 5 million base pairs of DNA. Small variation can occur anywhere along the billions of base pairs and can have significant consequences. As additional types of variation become practical to analyze on a genome-wide scale, corresponding new applications of microarrays have emerged as commercial markets. We expect this trend to continue for many years.

 

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The first applications to emerge as large commercial opportunities for genomic microarrays have been gene expression profiling and SNP genotyping.

Gene expression profiling with microarrays

One of the many ways in which genetic activity varies is in the pattern of gene expression. Genes that are expressed are transcribed, and the result is that the cell manufactures a protein that corresponds to the expressed gene. Only a small subset of all human genes is actually expressed in any given cell at any given time. The levels of expression of each gene are thus important measures of genetic variation and genome function.

Scientists have been studying expression levels of individual genes for many decades. As the Human Genome Project began to reveal the complete set of genes, scientists rapidly began using DNA microarrays to study gene expression on a genome-wide basis in a single experiment. By comparing gene expression patterns between cells from different environments, such as normal tissue compared to diseased tissue or in the presence or absence of a drug, specific genes or groups of genes that play a role in these processes can be identified.

There are approximately 30,000 annotated genes in the human genome. The first commercially available microarrays capable of simultaneously analyzing the expression level of these genes were introduced in the late 1990s. This technology used many features per microarray, each with short probes, and used a high degree of feature redundancy to make up for the lack of specificity at each feature. Scientists quickly embraced this new technology, and sales of microarray products for this application rose to several hundred million dollars. While a number of microarray technologies are now capable of analyzing gene expression levels, the first-mover in this application still dominates this market. Companies with other technologies that may be suitable or even superior for this market have generally chosen to focus on newer applications. The annual market for microarrays used in gene expression analysis is currently estimated at $2.7 billion.

SNP genotyping with microarrays

A second widely studied form of genetic variation is a single nucleotide polymorphism, or SNP. A SNP is a variation in a single position in a DNA sequence. It is estimated that between three and six million SNPs vary from person to person. Many of these SNPs were identified and catalogued through two major international efforts, one led by the industry-based SNP Consortium, and the other by the U.S. government-financed HapMap Project.

Although SNPs have been known to exist for decades, and studied for many years in relation to specific genetic locations, the absence of an affordable tool enabling high-throughput analysis of large numbers of SNPs across entire genomes represented a barrier to large-scale studies aimed at determining whether certain sets of SNPs might be associated with particular traits of interest. As the analytical capabilities of DNA microarray technology improved and costs per data point began to drop, it became feasible to analyze a sufficiently large number of SNPs at a practical cost per genotype. Microarrays began to be commercialized for this market several years ago, and the market quickly grew to several hundred million dollars annually. Two companies now dominate this market, and companies with other technologies that may be suitable or even superior for this market have generally chosen to focus on even newer applications. The annual market for SNP genotyping is currently estimated at $1.0 billion.

The SNP genotyping market demonstrated that an innovative company could establish an important market position even though it had not significantly participated in the gene

 

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expression market. This company established its market position with superior technology, close ties with key opinion leaders, and being adopted by a large government-sponsored program called the HapMap Project. This company’s technology uses long probes at each feature for improved data quality. However, they must manufacture their long probes individually, and therefore have to maintain large libraries of them, which makes it difficult to pioneer new applications quickly and cost effectively.

Measuring other forms of genome variation with microarrays

While we believe our technology is capable of being highly-competitive in the established markets for gene expression and SNP genotyping, we have elected to focus our resources on newer, emerging applications where there are no entrenched competitors and where our technology offers a substantial competitive advantage.

Gene expression and SNP genotyping are two of many possible types of genomic analysis. Ideally, scientists want to look for variation occurring at every individual location across the entire genome. Such variation includes differences such as nucleotide sequence, DNA copy number, DNA methylation, transcription factor binding, and DNA acetylation, among other factors either known today or not yet discovered. Scientists want to understand how these characteristics vary across individuals, in different tissue types, different stages of development, under exposure to different types of drugs, in the presence of disease, or under many other types of circumstances.

Until recently, however, no tools existed that could measure these types of variation on a genome-wide basis in a cost-effective, high throughput manner. Measurement of virtually all of these other aspects of genetic variation requires methods with the precision to distinguish between relatively small changes at individual sites of variation, and the high information content per microarray required to adequately sample 3 billion base pairs at practical cost. NimbleGen’s microarrays, with the precision offered by our long probes combined with the millions of probes per array that we now offer, is highly suited for these applications. Moreover, our technology inherently makes it cost effective to rapidly pioneer new applications.

In 2003, the National Institute of Health initiated the ENCODE Project, or ENCyclopedia of DNA Elements, in order to explore these emerging applications as a follow on to the original Human Genome Project. One of the key objectives of this project is to encourage development of tools that could be used to identify all of the functional elements of genomes and analyze how they may vary in structure or activity in different individuals, tissues and/or circumstances. According to the National Human Genome Research Institute in November 2006:

“While many of the protein-coding sequences [“genes”] are already known, others still remain to be identified. Beyond the [genes], most other sequence-based functional elements, such as non-protein-coding genes, transcriptional regulatory elements and determinants of chromosome structure and function, remain largely unknown. A comprehensive encyclopedia of all of these features is needed to fully utilize the sequence of the human genome to better understand human biology, to understand the biology of disease, to predict potential disease risk, and to stimulate the development of new therapies and other interventions for preventing and treating disease.”

We believe that as microarrays become available that enable high throughput and cost-effective analysis of each of these genome characteristics with sufficient resolution and precision, each emerging application is likely to attract research spending similar to what has been spent on microarrays for gene expression profiling and SNP genotyping. Our unique combination of long

 

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probes for high data quality, millions of non-redundant features for high information content, and our ability to rapidly and cost effectively create new products, is highly suited for these new markets. We currently offer a suite of products for the following emerging applications:

 

 

Comparative Genomic Hybridization, or CGH.    CGH addresses one of the most commonly documented forms of genomic variation, which involves differences in the number of copies of specific segments of DNA. DNA copy number changes underlie the majority of known genetic diseases. The market for CGH has historically been addressed by cytogenetic analysis, a $1.4 billion dollar research and diagnostics market in 2004. However, present cytogenetics technologies, including karyotyping and BAC clone arrays, yield data with low resolution on a genome-wide basis. Our CGH microarrays provide several orders of magnitude higher resolution than cytogenetic analysis, on a genome-wide basis.

 

 

Copy Number Polymorphism, or CNP.    There are many small regions of DNA throughout the genome that are known to vary in copy number between individuals. These normal copy number polymorphisms can be used as genetic markers in complex disease association studies, in a manner directly analogous to how single nucleotide polymorphisms (SNPs) are used today. For genome-wide CNP analysis, our microarrays combine superior coverage across the entire genome with the sensitivity to accurately detect different copy number variants.

 

 

Chromatin Immunoprecipitation assays on microarrays, or ChIP-chip.    This technique allows scientists to detect and measure levels of proteins that bind to DNA, such as transcription factors that regulate gene expression. For every condition in which scientists have studied changes in gene expression levels, a ChIP-chip experiment would enable them to determine the factors regulating gene expression and the genes they regulate. For genome-wide analysis of factors that bind DNA, our microarrays combine the high data content required for superior coverage with the sensitivity required to detect low-level binding events.

 

 

DNA Methylation.    It is widely accepted that methylation of DNA is involved in regulating gene expression in specific tissues. For example, the methylation state of particular genes is thought to underlie the origin of certain cancers. Historically, scientists have been limited to analyzing the methylation state of individual genes, one at a time. Our DNA methylation microarrays allow scientists to study patterns of DNA methylation on a genome-wide basis with high resolution and sensitivity.

We have spent the past two years developing relationships with key opinion leaders, optimizing our technology for these applications and building a commercial organization, and believe that we are a technology leader in each of these applications. According to a study we commissioned from Frost and Sullivan, a business research consulting firm, these microarray applications collectively have the potential to become a $900 million market opportunity by 2012.

There are many applications of genomics beyond those listed above. We believe our inherently flexible technology and rapid prototyping will also position us well for new applications as they become practical. We believe our ability to rapidly and repeatedly develop new products addressing new applications, and manufacture those products in a light industrial environment, provides us with a sustainable competitive advantage.

The NimbleGen solution

We believe that our products and services uniquely provide cost-effective solutions for both existing and emerging genomics applications that require high information content and high

 

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data quality. We believe that we are the technology leader in the CGH, CNP, ChIP-chip and methylation markets. We have spent the past several years developing relationships with key opinion leaders, optimizing our technology for these applications and establishing a commercial organization in order to maintain and build a leadership position in these markets. We believe our ability to rapidly and repeatedly develop new products addressing new applications, and manufacture those products in a light industrial environment without clean rooms, provides us with a sustainable competitive advantage.

Our microarrays, which combine the precision offered by our long probes with the millions of probes per array that we now offer, are highly suited for these emerging applications. Moreover, our technology inherently makes it cost effective to rapidly pioneer and manufacture products for new applications. Competitive advantages of our products include:

 

 

High data quality.    A number of our competitors use short DNA probes less than 25-30 bases long at each of their features. Such short DNA probes can lead to lower data quality and the need to use redundant features in order to provide useful data. By contrast, we have developed special high-yield photochemistry with which we routinely synthesize DNA probes up to 85 bases long at each of our features. These long probes can deliver enhanced sensitivity, specificity and precision at each feature, allowing each of our features to yield useful data and minimize the use of redundant features.

 

 

High information content.    Our standard microarrays use high-quality, long DNA probes to produce data from 385,000 different features in a single experiment. We have successfully developed and are preparing to commercialize a new generation of our microarrays that will allow us to obtain data on 2.1 million features in a single experiment. While some of our competitors currently make microarrays with more features than our products, their use of short DNA probes often requires high feature redundancy in order to have confidence in the resulting data, which yields a smaller amount of useful information from each experiment.

Our MAS technology used to manufacture our microarrays also provides significant competitive advantages to our business model:

 

 

Rapid prototyping and low-cost R&D.    Our technology allows us to design and then manufacture microarrays utilizing new sequences with very little set-up time and cost. We can generally design and then manufacture microarrays utilizing new sequences in a matter of days or even hours, as compared to weeks or months for some of our competitors. A number of leading genomic researchers have used our technology to quickly design and develop new applications which have become important new markets for us.

 

 

Modular, low-cost manufacturing.    We manufacture our microarrays in automated bench-top modular units called MAS systems, which we design and build. In contrast to some of our competitors’ manufacturing processes, which can sometimes require significant up-front investments in factories costing tens of millions of dollars, our system allows us to operate with limited labor and relatively low fixed costs. Each MAS system costs us less than $200,000, can be rapidly built and is capable of manufacturing microarrays that can generate more than $1 million dollars of revenue per year. Consequently, we do not need to invest in production capacity significantly ahead of demand, and payback per manufacturing unit occurs rapidly. Our microarray manufacturing is performed by automated systems that require minimal human attention, take up little space, and operate in a low-cost, light industrial environment that does not require expensive clean rooms.

 

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Leverage external research and development.    We have increased the number of features on our microarrays with minimal R&D expense by leveraging advances in the DMD chips that Texas Instruments manufactures for mass-market applications, such as high-definition television and cinematography. For example, in 2007 we expect to use MAS systems that make microarrays with 2.1 million features, up from 385,000 features previously. We believe we have identified a low-cost path to increase feature content in our microarrays by at least another order of magnitude in the future using existing DMD chips, together with advances we have already demonstrated in principle by applying innovations in our proprietary optics and other technologies.

Our strategy

We intend to continue developing and commercializing a suite of products that enable scientists to analyze many different forms of genome variation. We expect that our strategy will include:

 

 

Maintaining and building our leadership position in important emerging microarray markets in which we have a significant competitive advantage, such as CGH, CNP, ChIP-chip and methylation today and additional applications in the future, to drive a high margin, recurring revenue business with a rapid product innovation.

 

 

Selling our microarrays and providing an end-to-end solution, including instruments, consumables, reagents, analytical software and technical support, to help ensure that our customers are successful in working with our microarrays.

 

 

Offering services utilizing our microarrays, together with our end-to-end solution, in order to reach a broader customer base, encourage customer adoption by not requiring an expensive up-front equipment purchase, efficiently service customers who see the benefits of outsourcing with us, and facilitate rapid innovation in our microarray technology and applications.

 

 

Collaborating with genomics thought-leaders to create new applications for our technology, and helping them to be among the first to publish their results in peer-reviewed journals.

 

 

Improving the performance and capabilities of our products and our manufacturing technology through advances in chemistry, engineering and DMD chip technology.

 

 

Expanding our direct sales force in the United States and in select major countries around the world, and utilizing distribution partners elsewhere, to help promote our products and support customers.

 

 

Evaluating strategic partnerships and licensing opportunities to accelerate growth and leverage our technology in other important genomic markets and certain high-impact clinical diagnostics applications.

As part of our strategy to expand direct product sales worldwide, we announced license agreements with Affymetrix, Inc. and Oxford Gene Technology IP Limited in late 2006 and early 2007, respectively. We continue to operate one of the largest microarray analysis laboratories in the world in Iceland, which we built when our strategy was primarily focused on providing analytical services using our microarrays. In late 2006, we began a major expansion of our sales force and commercial infrastructure worldwide. We are now well positioned to meet the needs of our customers whether they prefer to take delivery of our microarrays and related products to analyze their own samples, or to outsource the entire process to our service laboratory. We continue to aggressively develop emerging applications in genomics and explore additional strategic growth opportunities.

 

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Overview of microarray production technologies

There are a number of different technologies used to create microarrays for genomic analysis. The characteristics of several of these production technologies inherently limit information content and data quality. Some of the more popular of these include:

 

 

Spotted oligo microarrays begin with oligonucleotides that have been synthesized individually using a traditional DNA synthesizer. A large collection of these oligonucleotides are synthesized and then inventoried in a library. A robotic spotting apparatus places each oligonucleotide in the library on a surface such as a glass microscope slide. The oligonucleotide probes are synthesized away from the surface and the synthetic chemistry allows them to be made as long probes, but the number of different oligonucleotides that can be spotted on a surface is limited because robotic spotting cannot dispense individual droplets less than a certain size and a certain distance apart. Currently, the most advanced spotted oligo microarrays on the market contain less than 50,000 features, and face significant technological hurdles to further increase density.

 

 

Ink-jet synthesized microarrays are manufactured using modified ink-jet printing technology. The oligonucleotide probes are synthesized in situ by serial deposition of each DNA monomer at the correct location and time on a glass surface. This process is a serial manufacturing process where each DNA monomer for each oligo is deposited independently. This is in contrast to photolithographic methods of microarray manufacture where all the oligonucleotide probes on a given array are manufactured in parallel simultaneously. Because ink-jet microarray manufacture is a serial process, and because each DNA monomer is deposited independently, scale-up of feature number with ink-jet manufactured arrays is difficult. Current ink-jet arrays contain up to 244,000 features, and arrays with as many as 1,000,000 features may be possible.

 

 

Bead-bound oligo microarrays also begin with oligonucleotide libraries that are synthesized in a DNA synthesizer. These oligonucleotides probes are then coated onto beads. Each oligonucleotide has a portion of its sequence designed to recognize a target, and a different portion designed to encode which target it is affixed to. The probe-coated beads are then allowed to self-assemble into discrete locations on a surface, with each location associated with the ends of individual fibers in a fiber optic bundle. This technology is currently capable of making microarrays of long probes with approximately 1,000,000 features. However, because of the need to manufacture, maintain, and dispense large libraries of oligonucleotides, as well as other aspects of the technology, it is difficult to develop new applications quickly and cost effectively.

 

 

Photolithographic synthesized oligo microarrays use oligonucleotide probes synthesized in situ on the surface of a substrate. The probes are synthesized using a method of photolithography which involves a combination of light-sensitive chemicals and a series of physical chromium masks that pattern light, similar to the way semiconductor chips are manufactured. The feature size allowed by the mask is smaller than in most other technologies and therefore millions of features can be placed in the active area of the chip. Since there are four different types of nucleotides that make up DNA, four different masks are generally created to direct the light for the synthesis of each nucleotide location in the array. As a result, up to 100 different masks may be required to direct light for arrays that use 25-base long nucleotides. This leads to long lead times and substantial costs for each design iteration used to develop each new type of array. The chemistry generally used to manufacture these arrays has a yield at each step of the synthesis that is suitable for 25-base long nucleotides, but generally does not have high

 

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enough yield to be suitable for long probes. To create photolithographic synthesized oligo arrays with 85 bases at each feature would require the creation of as many as 340 masks for each design iteration used to develop a new type of array, and would require a new chemistry with a significantly higher yield at each step. As a result, while microarrays of this type can have millions of features, they are currently limited to short probes at each feature, which we believe necessitates a high degree of feature redundancy to yield high quality data. Further, the nature of manufacturing these types of arrays requires very expensive clean rooms as used in a semiconductor manufacturing plant.

 

 

MAS-synthesized oligo microarrays is the technology at the heart of the NimbleGen system. None of our competitors have successfully commercialized this technology with high information content and high data quality. Further, we believe our intellectual property combined with our know-how provide a high barrier to the successful commercialization of this technology by others.

Our technology

Our technology relies on the proprietary and innovative use of instrument designs, algorithms, chemistry, optics, fluidics and software to manufacture our microarrays. Our microarrays use oligonucleotide probes synthesized in situ on a glass microscope slide that we use as a substrate. The probes are synthesized using our proprietary maskless photolithography. In our process, we use readily available DMD chips manufactured by Texas Instruments to pattern the light on a real-time basis, rather than patterning the light using a costly series of physical chromium masks that take weeks to develop.

We use the light directed by DMD chips to determine the specific locations where chemical reactions will occur on our microarray substrate, which is a glass slide. A series of light-sensitive chemicals are used. Chemical reactions take place in the locations which have been exposed to light, and not in the locations which have not been exposed. There are four different types of bases in DNA, known as A, G, T and C. To create a microarray with a specific base such as A at certain locations, we expose light in those exact locations where we want the A to be chemically attached. The light makes that location chemically sensitive to A when the chemical containing A is flowed over the array. After we have attached A bases in each precise location where we want them, we rinse the slide and re-expose with light where we want G base to attach. To create the pattern of AGTC where we want them for a single layer of the oligonucleotides, it requires 4 cycles of first exposing with light, then flooding the microarray with A, G, T or C chemicals, and then rinsing.

Texas Instruments develops DMD chips for mass-market applications, such as high-definition television and cinematography. For high definition television, for example, a DMD chip currently has over two million microscopic mirrors which are moved in real time, and each mirror directs the light for one pixel of the television picture.

Because we do not use physical masks, our technology allows us to prototype and then manufacture microarrays utilizing new sequences in a matter of hours. Furthermore, direction of the light to make long probes with 85 nucleotides requires additional real-time setting of the mirrors, but does not require additional capital investments in physical masks the way other processes would if they tried to make probes with 85 nucleotides instead of 25 nucleotides. To support the reproducible synthesis of long oligonucleotides in situ, we created special

 

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photochemistry with a very high yield in each step. The result is that our microarrays can have millions of discrete features, each with long oligonucleotide sequences that provide reproducible results and minimize the need for probe redundancy.

MAS systems.    We manufacture our high-density DNA microarrays using our proprietary MAS technology. The MAS system is a highly automated, bench top, solid-state, high-density DNA microarray fabrication instrument comprised of a maskless light projector based on DMD chips and proprietary optics, a DNA synthesizer with proprietary fluidics and reaction chamber, driven by our proprietary software and algorithms.

 

 

Maskless Light Projector.    Our Maskless Light Projector systems direct light using proprietary optics and other systems together with DMD chips. Currently, we use every other mirror of the DMD chip, in a checkerboard pattern, to create the features of our microarrays. Until late 2006, we used DMD chips with approximately 780,000 mirrors, which Texas Instruments originally developed for PowerPoint projectors and similar uses. The microarrays we manufacture using these chips have approximately 385,000 features.

In 2006, we began prototyping microarrays using DMD chips with 1.4 million mirrors each. Our new MAS system can project up to three separate images of each mirror on our substrates, and since we use every other mirror on a 1.4 million mirror DMD chip, our resulting microarrays have 2.1 million features. We have successfully produced microarrays containing 2.1 million features and plan to begin shipments of them in the first-half of 2007 and increase their roll-out throughout the year. For the foreseeable future, we also plan to continue manufacturing microarrays with up to 385,000 features for suitable applications.

Our current microarrays, as well as our microarrays with 2.1 million features, are read by commercially available scanners that were developed for other applications. We only use every other mirror of the DMD chips in a checkerboard pattern because of limitations in the resolution of commercially available scanners.

Increasing our microarray density from 385,000 to 2.1 million features required a significant amount of know-how, but only moderate R&D expenses. Our R&D expenses remain moderate because increasing the density of DMD chips is required by and internally funded by Texas Instruments for their mass-market applications.

Our strategy of using DMD chips to direct light inherently allows us to leverage our R&D expense and increase our information content at a fraction of the cost of other microarray technologies. Texas Instruments is continuing to invest in making new types of DMDs with larger numbers of mirrors, and we expect to be able to utilize them to make microarrays with even higher data content in the future.

While the DMD chips are made by Texas Instruments and are generally available, a number of aspects of our Maskless Light Projectors are protected by patents and patent applications.

 

 

Reaction Chamber.    To create each new microarray, we place a new substrate in our proprietary reaction chamber as a base for oligonucleotide synthesis. We synthesize each new nucleotide simultaneously onto the features that we have made light sensitive. We have designed and manufactured our reaction chambers to exacting standards, both with respect to materials, geometry, and other proprietary aspects. The reaction chamber must allow light from the microscopic mirrors of the DMD chip to pass through it without distortion. It also must allow liquid reagents to pass through it in small volumes with a high degree of precision

 

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in order to dispense chemicals and rinsing agents that are involved in the synthetic reactions that create our microarrays. Our reaction chamber is of our own design and is protected by patents and patent applications.

 

 

DNA synthesizer.    DNA synthesizers are liquid-handling systems that precisely control the flow of chemicals through reaction chambers to create oligonucleotides. We use DNA synthesizers to dispense photoreactive chemicals containing A, G, T and C nucleotides, as well as rinsing and other fluids, in the amounts and at the times when they are needed. We currently use commercially available DNA synthesizers in our MAS systems. In 2007, in connection with our 2.1 million feature microarrays, we plan to begin using DNA synthesizers of our own design, which we have successfully built and tested.

 

 

Personal computer and proprietary software.    Each of our MAS systems is controlled by an attached personal computer. Before we manufacture a microarray, a design file with a particular chip design is uploaded to that personal computer. Customers can select from a library of nucleotide designs that we have made in the past, or on occasion, design or ask us to design a new set of sequences for a set of microarrays. That particular design file is used to direct the desired sequences of nucleotides that the attached MAS system subsequently manufactures. Proprietary software controls a number of aspects of our MAS systems. This system controls the position of each DMD in realtime, and directs the operation of the DNA synthesizer, so that our microarrays are synthesized with the desired sequences of nucleotides at each specific location. The personal computer interfaces with our network to allow operators to monitor progress of chip production. The combination of the personal computer and DMDs allows us to have any of our MAS units manufacture any sequence of nucleotides our customers want, at any time. Once the desired nucleotide sequences are uploaded, the MAS system can manufacture the microarray in a few hours. As a result, a single MAS unit might make 5 or 10 copies of a single type of microarray on a particular day, or might make 5 or 10 different types of microarrays on the same day, with no set-up or change cost.

Long, isothermal probes.    When a new microarray is used, DNA extracted from biological samples that the customer wishes to analyze is prepared and applied to the microarray surface. A hybridization reaction occurs between the sample DNA and the oligonucleotide sequences at each feature of the microarray. For every oligonucleotide of a given length and sequence, there is a different temperature at which optimal and reproducible hybridization occurs. Other manufacturers use oligonucleotides of the same length at each feature of their microarrays, which results in inherent variability in data quality because the entire hybridization must be run at the same temperature for the entire microarray. By contrast, for some applications we design each of the oligonucleotide sequences on our microarrays to have an optimal length, so that each hybridizes with the sample more efficiently at the same temperature. We call this isothermal probe design, and it leads to greater data quality throughout our arrays. We were the first to publicly present the use of millions of long probes on a microarray, each a different probe of up to 85 bases in length, giving us a combination of high information content and data quality. Our isothermal probes are all long, to give increased sensitivity and data quality, but they are of varying lengths, to give optimal reproducibility.

Chemistry.    Since we routinely manufacture microarrays with probes that are up to 85 nucleotides long, we require up to 85 chemical steps to create a single oligonucleotide. The yield at each of these 85 steps must be extremely high in order to yield a sufficient quantity of the desired oligonucleotide sequence at each of the up to 2.1 million features of our microarrays.

 

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A critically important aspect of this synthesis is chemistry with a high step-yield. If a chemist connects two nucleotides together with 95% reproducibility, the step-yield is referred to as 95%. If three nucleotides are connected together and the step-yield at each of the two connections is 95%, the resulting reproducibility of the entire synthesis is 95% x 95%, or 0.952, which is 90.3%. Synthesizing an oligonucleotide that is 25 nucleotides long with a step-yield of 95% gives an overall reproducibility of 0.9524, which is only 29%. One strategy to compensate for the low reproducibility of chemistry used by other types of array manufacture is to synthesize redundant oligonucleotide sequences at a number of locations on a microarray. Redundancy increases accuracy but reduces the number of discrete data points yielded from using a microarray, thus lowering the information content.

Instead, we developed chemistry with much higher step-yields than this for our maskless arrays. We did this partly because we wanted to use long probes of up to 85 oligonucleotides, which would give superior data quality at each probe location. In addition, we did not want to have to increase our data quality needlessly by making redundant probe sequences at multiple features, which would reduce the amount of information content each of our microarrays would make available to the user. Synthesizing an oligonucleotide that is 85 nucleotides long with a step-yield of 95% would give an overall reproducibility of 0.9584, which is 1.3%. Instead, our chemistry division in Germany, NimbleGen Systems GmbH, created chemistry with a much higher step-yield. Chemistry with a step yield of 98%, for example, when used to create oligonucleotides that are 85 nucleotides long, gives a yield of 0.9884, which is 18.3%. A step-yield of 99%, while only 1% higher, would give a yield of 43% for a desired oligonucleotide sequence with 85 oligonucleotides. Our proprietary chemistry gives a step-yield high enough to make sufficient quantities of the desired oligonucleotide sequences at each location of our microarrays, without requiring redundant sequences at several feature locations on our microarrays. As a result, we can use long probes with their inherently greater data quality and still utilize all of the 385,000 or 2.1 million features of our microarrays. On some of our microarrays, we do use some redundancy to increase data quality, but since we start with longer probes, we use less redundancy than other technologies and the result is a higher overall degree of information content and data quality.

Each of our microarrays has a number of features specifically reserved for quality testing as part of the manufacturing and quality control process. At each of these features, we synthesize particular oligonucleotide sequences that are not known to occur in nature. We test these unnatural sequences on every chip we manufacture, prior to shipping it to a customer or using it with a customer’s sample, in order to control for quality of probe synthesis.

Multiplexing for applications that require lower data content.    A number of applications do not require the ability to survey the genome with as much resolution as possible. For example, if a researcher is measuring expression levels of the approximately 30,000 known human genes, then data content of 2.1 million features may be much larger than required. We have developed a proprietary technology that divides the surface of some of our 385,000-feature microarrays into two, four, or even six discrete areas. Each area can be used as if it were a separate microarray, with a different DNA sample hybridized on each. The technology that separates the areas from each other uses up space that could otherwise be used for probes, so the division is not perfectly efficient. In the fourth quarter of 2006, we announced the availability of microarrays that would otherwise offer 385,000 features into up to four separate arrays with 70,000 features each. We are able to offer these microarrays to the customer at only a small premium over the price of an undivided microarray with a similar number of features in total. In the future, we hope to be

 

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able to divide our microarrays into larger numbers of discrete areas, and to extend the technology into arrays that would otherwise offer 2.1 million features per microarray.

Microarray reuse.    We have recently developed proprietary protocols and reagents that enable efficient cleaning of microarrays so that they can be used two or even three times with no detectable change in activity. In our service operation, this capability allows us to significantly reduce costs by eliminating the most expensive cost component of an experiment—the cost of making a new microarray. The majority of our customers have fixed consumables budgets, and our ability to effectively offer them more data per dollar they have to spend is a significant competitive advantage. We believe that our customers in the scientific markets we currently serve will spend their entire consumables budget regardless of the price, but that a lower price per data point, for data of equivalent or better quality will increase our market share. We currently offer reuse only for some services, but are considering selling a reagent kit that will enable customers to clean, quality control test, and reuse microarrays in their own laboratories.

Bioinformatics.    Our business is fundamentally focused on enabling customers to generate large amounts of high quality data concerning genomic information. This information is inherently useful to customers only if they have software tools and programs that enable them to design experiments using microarrays, and analyze and organize the resulting data. We have developed a significant number of algorithms and software programs that our customers use to analyze and integrate data. We sell some of these programs, but in many cases license them to customers at no additional charge. Software engineers and computer scientists represent the largest group within our R&D Department. We are continually working on improving our software tools for application-specific data analysis. We have a major program focused on developing a database capability that can be accessed by our customers, along with software tools that allow effective integration of data across multiple applications. We believe that by enabling customers to view the integrated data concerning many forms of genome variation, we will enable them to get a clearer view of genome structure, function and biology.

We also use software and algorithms for internal use. Examples include predicting probe performance and thereby designing microarrays; application-specific data analysis; data integration across multiple applications; tracking of samples and work flow; acceptance of orders; and shipping large amounts of data from our service operation in Iceland to customers around the world.

Microarray manufacturing

We manufacture our microarrays at our facility in Reykjavik, Iceland using our MAS systems. Our microarray manufacturing is performed by automated systems that require minimal human attention, take up little space, and operate in a low cost, light industrial environment that does not require expensive clean rooms.

We expanded the facility in 2005 to our specifications. The facility now comprises approximately 15,510 square feet of combined office, laboratory and production space. We designed our production space to have room for approximately 40 MAS systems, although the facility contains only 21 MAS systems as of February 2007. Because we manufacture in a light industrial environment without clean rooms, we can add MAS systems on a modular basis. Each MAS system costs us less than $200,000, can be rapidly built and is capable of manufacturing microarrays that can generate more than a million dollars of revenue per year.

 

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Consequently, we do not need to invest in production capacity significantly ahead of demand, and payback per manufacturing unit occurs rapidly.

Until late 2006, we produced arrays exclusively with a generation of MAS system that we call MAS 2.x. MAS 2.x systems use DMD chips with 780,000 mirrors to manufacture standard NimbleGen microarrays with up to 385,000 features. Each of our MAS 2.x systems produces a single microarray at a time. At the end of 2006, our Reykjavik production facility employed 21 MAS 2.x systems.

Beginning in the first half of 2007, we plan to add to our factory a newer generation of MAS system that we call MAS 3.x. MAS 3.x systems are capable of manufacturing three microarrays simultaneously, with each array containing up to 2.1 million features. Because our MAS systems are modular, we can add these on a system by system basis, without shutting down or significantly disturbing the rest of our manufacturing operation. Because we currently utilize approximately half of our manufacturing space, and because MAS 3.x systems have approximately two times the throughput of MAS 2.x systems, we can significantly expand our production capacity within our current facility.

The raw materials in our microarrays consist of substrates and chemistry. We use off-the-shelf substrates and frequently evaluate new substrates that might improve product performance. We manufacture a number of key chemicals, which consist of custom photoreactive nucleotide precursors, at our subsidiary NimbleGen Systems GmbH in Waldkraiburg, Germany. Our MAS systems in Iceland use these key chemicals, together with a number of off-the-shelf chemicals, to produce our microarrays. We lease our facility in Germany, which was built specifically for chemical research and manufacturing, and consists of 1,850 square feet of laboratory, office and manufacturing space.

A portion of our facility in Iceland is devoted to processing samples which our customers ship to us from many parts of the world. When samples arrive at our facility, we quality control test them to verify that there the amount and quality of DNA is adequate for us to perform an analysis. Samples are then processed following application-specific protocols, and tagged with fluorescent labels. After the labels have been applied, the samples are hybridized against our microarrays specifically manufactured for the type of application and analysis the customer desires for that sample. After hybridization, the arrays are scanned, and we analyze the resulting data and format it into a report. We return the data and report to the customer in electronic format. The entire process is highly automated. Samples are tracked throughout the process using a sophisticated laboratory information management system that we built for this purpose. Our facility currently devotes approximately 2,000 square feet to this service operation.

Products and services

 

 

Microarrays.    We have created and continuously expand a catalogue of designs of our microarrays, under our NimbleChipTM brand, which we can manufacture for our customers. As of February 2007, our product portfolio included more than 3,700 different microarray designs addressing a growing family of applications such as CGH, CNP, ChIP-chip, DNA methylation, among others. In addition, we frequently produce microarrays based on prototypes for new applications, and also produce custom designs for customers who desire them for non-standard applications. In response to customer demand, in late 2006 and early 2007, we announced license agreements with Affymetrix, Inc. and Oxford Gene Technology IP Limited, respectively, as part of our strategy to expand direct sales of microarrays and related products worldwide.

 

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Instruments, reagents and consumables.    We sell a variety of microarray-related products and plan to expand our offering to include a broad range of equipment, reagents and consumables used by our customers to process our microarrays. Such products will include hybridization stations, automated wash stations, scanning systems, and other equipment that we will sell on an OEM basis under the NimbleGen brand. Examples of consumable kits under development include protocols optimized by us for labeling, RNA to cDNA conversion, hybridization reagents, and other methods used in conjunction with microarray analysis. We plan to begin shipping the first of these instruments and consumables kits later in 2007.

 

 

Analytical services.    We provide analytical services using our microarrays for applications including CGH, CNP, ChIP-chip, DNA methylation, among others. We have built one of the largest microarray analysis laboratories in the world in Iceland, and we service customers who desire to outsource their sample analysis, or who value our unique microarray technology, but do not have the expertise or equipment to process our microarrays . A portion of our facility in Iceland is devoted to processing samples which our customers ship to us from many parts of the world. When samples arrive at our facility, we quality control test them to verify that the amount and quality of DNA is adequate for us to perform an analysis. Samples are then processed following application-specific protocols, and tagged with fluorescent labels. After the labels have been applied, the samples are hybridized against our microarrays specifically manufactured for the type of application and analysis the customer desires for that sample. After hybridization, the arrays are scanned, and we analyze the resulting data and format it into a report. We return the data and report to the customer in electronic format. The entire process is highly automated. Samples are tracked throughout the process using a sophisticated laboratory information management system that we built for this purpose. Our facility currently devotes approximately 2,000 square feet to this service operation.

Sales and marketing

Our commercial activities are driven by product line managers who are responsible for strategic marketing on a worldwide basis. These individuals perform market research, define product specifications, develop strategic marketing plans, identify and manage relationships with external test sites, and prepare tactical marketing plans for product launch and post-launch product support and promotion. We are in the process of increasing the number of product line managers and support staff to support the growing family of new products we have introduced and are planning, and to support direct sales of microarrays and related products. We have a marketing communications department that supports a broad range of activities including print and online advertising, press releases, tradeshows, direct mail and brochures, application notes and data sheets, and our website.

Over the past several years we developed a direct sales organization in North America that until recently was focused on selling analytical services that we would fulfill in our facility in Iceland. Beginning in late 2006, we began to increase the size of this direct sales force to support greater focus on direct sales of microarrays and related products and address a larger customer base. Over the past several years, we also developed a network of representative organizations and distributors outside of North America to sell our services. These distributors were supported by a small number of our employees. In late 2006, to support greater focus on direct sales of microarrays and related products and address a larger customer base, we began developing a direct sales organization in Europe, and plan to sell directly or in conjunction with distributors. Outside of Europe and North America, we are currently planning to maintain and grow our

 

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relationships with distributors. This growing organization also will continue to sell our analytical services with our microarrays. At present, we have 28 sales representatives, field applications specialists, customer service and technical support personnel worldwide, which we anticipate growing substantially in support of direct sales of microarrays and related products and services.

Competition

Competition in technologies for genomic analysis is intense and is expected to increase. Further, many of the technologies and applications are new and rapidly evolving.

Our competition comes from other technologies that are used to perform many of the same functions for which we market our products. Our principal competitors include Affymetrix, Inc., Agilent Technologies, Inc. and Illumina, Inc. Other companies developing or marketing potentially competitive DNA microarray technology include Applied Biosystems, Beckman Coulter, Becton Dickinson, CombiMatrix, Digital Gene Technologies, Enzo Life Sciences, febit, GE Healthcare, Invitrogen, MetriGenix, Molecular Devices (which is being acquired by MDS Inc.), Nanogen, Sequenom and Takara Biosciences, and academic and research institutions and government agencies, both in the United States and abroad. In addition, several companies are working on developing next generation DNA sequencing tools that could be competitive in certain target markets. Such companies include Applied Biosystems, 454 Life Sciences, Helicos BioSciences and Illumina. In order to compete against existing and emerging technologies, we will need to continue to produce arrays with high data quality and information content that are optimal for existing and emerging applications, at affordable prices, all backed by application-specific software and comprehensive technical support.

We believe that future competition in existing and potential markets will come from existing competitors as well as other companies seeking to develop new technologies for sequencing and analyzing genetic information. In addition, pharmaceutical and biotechnology companies have significant needs for genomic information and may choose to develop or acquire competing technologies to meet these needs.

Regulatory matters

Regulation by governmental authorities in the United States and other countries may be a significant factor in the manufacturing, labeling, distribution and marketing of certain products and services that may be developed by us. We have made, and intend to continue to make, necessary expenditures for compliance with applicable laws, but any changes in these laws could increase our compliance costs. Current governmental regulations may change as a result of future legislation or administrative action and cannot be predicted.

Furthermore, we are regulated by federal, state and local laws in the United States, as well as other applicable foreign laws, relating to the protection of the environment, including those relating to the storage, treatment, disposal and discharge of regulated materials into the environment. We believe we are in material compliance with current applicable laws and regulations; however, under certain circumstances, we could be required to obtain permits, or to take other corrective actions, or to be held liable for damages and fines should contamination of the environment or individual exposures to hazardous substances occur. In addition, we cannot predict how changes in these laws and regulations, or their enforcement, or the development of new laws and regulations, will affect our business operations or the cost of compliance.

 

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Intellectual property

To establish and protect our proprietary technologies and products, we rely on a combination of patent, copyright, trademark and trade secret laws, as well as confidentiality provisions when executing contracts.

In the late 1990s, there were four groups attempting to produce genomic arrays using maskless arrays, of which NimbleGen was the only one that successfully commercialized the technology. We now have control of, or access to, all of the relevant intellectual property from these groups. Our company was founded with an exclusive worldwide license from WARF for their pioneering MAS patents, which is discussed in more detail below. We acquired certain assets of Light Biology, Inc., another early company in the field that never succeeded in commercializing products. We have a non-exclusive license from Invitrogen Corporation for their maskless array patents originally owned by Xeotron Corporation, another company that failed to perfect the technology. We have a non-exclusive license to patents owned by Affymetrix, Inc., who never commercialized maskless array technology, which is discussed in more detail below. Finally, we have a non-exclusive, world-wide license to various patents and other patent rights owned by Oxford Gene Technology IP Limited, covering certain technology relating to microarrays and certain microarray-related products, which is discussed in more detail below. In addition to the patents and licenses described above, our patent portfolio related to maskless arrays includes a number of patents and patent applications based on technology developed by us that was required to make maskless arrays practical and expand their applications.

NimbleGen Systems GmbH, NimbleGen’s wholly owned subsidiary, has licensed chemistry and related intellectual property from several sources.

As of March 16, 2007, we have four issued patents and 23 pending patent applications in the United States and 1 issued patent and 39 pending patent applications in foreign jurisdictions. In addition, under our exclusive worldwide license with WARF, we have under license three issued patents and three pending patent applications in the United States and five issued patents and eight pending patent applications in foreign jurisdictions. Our issued and pending patents, as well as patents under license, cover key aspects of our MAS systems, array technology and applications, and our chemistry.

We also rely, in part, on trade secret protection of some intellectual property. We attempt to protect trade secrets by entering into confidentiality agreements with third parties, employees and consultants. Our employees and consultants also sign agreements requiring that they assign to us their interests in patents and copyrights arising from their work for us.

WARF

Under our September 1999 license agreement (as amended in April 2000) with WARF, we have an exclusive, worldwide license to make, use and sell products utilizing certain technology covered by various WARF patents and patent applications relating to our MAS technology. We may grant sublicenses. The terms of the license require us to pay a royalty at a rate that is a percentage of the selling price of licensed products sold or transferred, provided that we must pay a minimum royalty per calendar year. The license continues until the expiration of the last-to-expire of the licensed patents unless the license is otherwise terminated under certain limited circumstances.

 

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Affymetrix, Inc.

Under our September 2006 license agreement (as amended in December 2006) with Affymetrix, Inc., we have a non-exclusive, worldwide license under the Affymetrix patent portfolio covering certain technology relating to microarrays and certain microarray-related products. We are licensed (i) to make licensed products and to have them made by certain approved suppliers, and to make certain microarray makers for our internal use only, (ii) to use licensed products for research purposes and DNA copy number diagnostics and (iii) to import, sell and offer for sale, including through certain distributors, licensed products and licensed services for research purposes and DNA copy number diagnostics. The terms of the license require us to pay license fees and a royalty at a rate that is a percentage of the net sales of licensed products and licensed services sold or transferred to others or manufactured or performed without any such sale or transfer, provided that we must pay a minimum royalty per calendar year. The license continues until the expiration of the last to expire of the licensed patent rights, unless the license is otherwise terminated under certain limited circumstances.

The license permits us to produce and sell two trillion features per year on microarrays for research purposes. The right to produce and sell two trillion features per year enables us to produce and sell on an annual basis more than five million of our 385,000 feature microarrays or approximately one million of our 2.1 million feature microarrays through 2010, which substantially exceeds our planned annual microarray production capacity. In 2006, for example, we could have produced and sold two hundred (200) times as many microarrays as we actually produced and sold without reaching this limit. Under the license, this feature number increases automatically by ten percent each year commencing on January 1, 2011. In addition, the license permits us to produce and sell (i) an unlimited number of features per year on microarrays used for DNA copy number diagnostics, (ii) nucleic acids cleaved or eluted from microarrays produced for research purposes, (iii) nucleic acid reagents and assays, (iv) NimbleGen instruments and (v) NimbleGen software.

Oxford Gene Technology IP Limited

Under our December 2006 license agreement with Oxford Gene Technology IP Limited, or OGT, we have a non-exclusive, worldwide license under various OGT patents and other patent rights covering certain technology relating to microarrays and certain microarray-related products. We are licensed to manufacture, have manufactured, use, keep, import, supply and offer for supply licensed products and licensed services for any purpose except for two specified purposes or uses. We may permit an end-user of a nucleic acid array supplied under the license to use this licensed product and other licensed products in licensed processes. The terms of this license require us to pay a non-creditable annual fee and a royalty at a rate that is a percentage of the net sales of licensed products supplied or used and licensed services supplied or practiced. The license continues so long as there is a valid claim in an issued patent or published patent application included in the licensed patent rights unless the license is otherwise terminated under certain limited circumstances.

Research and development

Our R&D is focused on developing and optimizing new applications for our microarrays, developing new software tools, developing the MAS systems to manufacture chips of increasing density, optimizing reagents and kits for use with our microarrays, and specifying instrumentation for use with our microarrays.

 

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Our internal R&D program is split into four areas: molecular biology, engineering, bioinformatics and chemistry. The molecular biology team is focused on developing and optimizing biochemical protocols for new applications, as well as supporting our production group and our customers. Our engineering team is responsible for design, development and manufacture of MAS instruments and other hardware used by our R&D scientists and production personnel. The bioinformatics group develops algorithms and programs for array design, experimental design, data analysis, data integration across applications, sample tracking and workflow. This group also provides IT support for us. The chemistry team focuses on development and manufacture of chemical entities used to make and process our microarrays.

Our use of DMD chips manufactured by Texas Instruments means that we benefit directly when Texas Instruments increases the number of micromirrors on their DMDs. All of the R&D expense associated with new product development of next-generation DMDs is borne by Texas Instruments. We have no costs associated with this development process. When Texas Instruments develops and commercializes a new DMD format with more mirrors (e.g., the increase from XGA DMDs to SXGA+ DMDs, with 786,000 and 1,400,000 mirrors, respectively), we simply purchase these new DMDs on the consumer electronics market. To increase the data content of our microarrays by using DMD chips with more mirrors to direct the light, we have invested significantly in developing MAS instruments of increased capability to utilize these more advanced DMD chips.

The nature of our technology enables us to rapidly and cost-effectively design and produce prototype microarrays for new applications. The inherent flexibility of guiding light for oligonuclotide synthesis with DMD chips allows customers to come to us with ideas for novel analytical approaches that can be rapidly prototyped. We are thus able to leverage our relationships with scientists around the world to identify new applications that might be suitable for our microarrays.

Research and development expenses were $3.4 million, $1.9 million and $2.6 million in 2004, 2005 and 2006, respectively. Research and development expenses consist primarily of company-sponsored expenses including salaries and related personnel costs, material costs for microarrays and product development, fees paid to consultants, depreciation and facilities costs and other expenses related to the design, development, testing and enhancement of our products and services.

Employees

As of February 2007, we had approximately 135 full-time and part-time employees worldwide, 92 of which are based in the United States and 43 of which are based abroad. None of our employees based in the United States are unionized or subject to collective bargaining agreements. We believe that our current relationship with our employees is good.

Scientific Advisory Board

A key component to our strategy is to leverage our collaboration with key thought-leaders in genomics research to increase adoption of our technology and to create new applications. Our Scientific Advisory Board is comprised of thought-leaders in the scientific community who are available to our scientific advisory committee, a standing committee of our board of directors, which we refer to as the Board, for consultation and advice. The following individuals are members of our Scientific Advisory Board:

Leroy Hood, M.D., Ph.D. is the chairman of the Scientific Advisory Board and has been a member of the Board since January 2007. Since 1999, Dr. Hood has been the co-founder and president of

 

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the Institute for Systems Biology in Seattle, Washington, a research institute dedicated to the integration of technology, computation, biology and medicine. He previously founded and was chairman of the cross-disciplinary Department of Molecular Biotechnology at the University of Washington. Dr. Hood was awarded the Lasker Prize in 1987 for his studies on the mechanism of immune diversity, the 2002 Kyoto Prize in Advanced Technology, the 2003 Lemelson–MIT Prize for Innovation and Invention for the development of the DNA sequencer, the 2004 Biotechnology Heritage Award for his pioneering efforts in molecular diagnostics the Association for Molecular Pathology Award for Excellence in Molecular Diagnostics, and in 2006 he received the Heinz Award in Technology, the Economy and Employment for his extraordinary breakthroughs in biomedical science at the genetic level.

Dr. Hood has received 14 honorary degrees from institutions such as Johns Hopkins, UCLA and Whitman College. He has published more than 600 peer-reviewed papers, received 14 patents and has co-authored textbooks in biochemistry, immunology, molecular biology and genetics, and is completing a textbook on systems biology. He is a member of the National Academy of Sciences, the American Philosophical Society, the American Association of Arts and Sciences and the Institute of Medicine. Dr. Hood has also played a role in founding more than 14 biotechnology companies, including Amgen Inc., Applied Biosystems, Inc., SystemsX Institute, Darwin and Rosetta Biosoftware. He is also a director of Accelarator Corp., Omeros Corporation and Roberts & Company Publishers, Inc. and a member of board of managers of Intelligent Medical Devices LLC. He is currently pioneering systems medicine and the systems approach to disease. Dr. Hood holds an M.D. from Johns Hopkins School of Medicine and a Ph.D. degree in biochemistry and a B.S. in biology from California Institute of Technology.

Fred Blattner, Ph.D. is one of our founders and is also a co-inventor of the MAS technology. Dr. Blattner serves as the Romnes Professor of Genetics and the director of the UW Genome Center at the University of Wisconsin—Madison. He completed his doctoral program at The Johns Hopkins University. Dr. Blattner’s postdoctoral research was conducted at McArdle Laboratory for Cancer Research at the University of Wisconsin—Madison. His research is focused on bacterial genomics where he was first to complete the sequence for E. coli strain 0157:H7, commonly referred to as the “hamburger strain” and highly pathogenic in man. His laboratory has also sequenced several other important bacterial organisms including the E. coli K-1 strain, responsible for neonatal sepsis and meningitis, as well as a widely used research strain of E. coli, the K-12 strain. By studying the virulence determinants of these and other bacteria, a common “pathosphere” of virulence genes will emerge determining the pathogenic potential of known and unknown bacterial species and strains.

Francesco Cerrina, Ph.D. is the John Bascom Professor of Electrical and Chemical Engineering and Director of the Center for NanoTechnology, at the University of Wisconsin—Madison, which he joined in 1984. He is one of our founders and is also a co-inventor of the MAS technology. Dr. Cerrina was also a founder, president and chief executive officer of Genetic Assemblies, Inc., based in Madison, Wisconsin. Dr. Cerrina completed his doctoral program at the University of Rome, Italy. Dr. Cerrina is a leader in lithography, where he has authored more than 200 papers. He is also an expert in more general semiconductor fabrication processes and in optics. His main research focus is in artificially engineered semiconductor micro and nano structures. Recently, Dr. Cerrina has begun research activity in the de-novo synthesis of DNA, extending the MAS technology platform to novel applications in the life sciences.

Harold “Skip” Garner, Ph.D. serves as a professor of biochemistry and internal medicine at the University of Texas Southwestern. Dr. Garner has over 15 years experience in the biotechnology

 

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arena. He holds the P. O’B. Montgomery, M.D., Distinguished Chair, is a member of the McDermott Center for Human Growth and Development (Human Genetics Center) and is a founding member of the Center for Biomedical Inventions. In addition, Dr. Garner initiated the University of Texas Southwestern microarray core facility and serves on numerous government committees and as a reviewer for many scientific journals. He received his B.S. in Nuclear Engineering at the University of Missouri—Rolla and a Ph.D. in plasma/high temperature matter physics from the University of Wisconsin—Madison in 1982. Dr. Garner also holds an honorary professional engineering degree.

Michael Sussman, Ph.D. is one of our founders and is also a co-inventor of the MAS technology. Dr. Sussman serves as a professor and is the director of the Biotechnology Center at the University of Wisconsin—Madison. He completed his doctoral program at Michigan State University. Dr. Sussman conducted his postdoctoral research work at Yale University and Yale Medical School. His main research focus is in signal transduction and bioenergetics of plant and fungi. Dr. Sussman’s laboratory was the first to report the discovery of a unique family of calcium sensitive protein kinases found only in plants and in particular Arabidopsis. To help understand and study this class of enzymes in plants, he has developed a method of insertional mutagenesis to “knock out” genes in Arabidopsis. This molecular method can be applied to eliminating any gene in plants for studying individual genes as well as pathway metabolism.

Properties and facilities

Our corporate headquarters, principal R&D facilities, and sales and marketing groups are located in Madison, Wisconsin, where we lease 20,696 square feet of combined office and manufacturing space. Our lease expires on August 31, 2007. We are currently negotiating to occupy 27,000 square feet of space that we hope to occupy prior to the expiration of our lease.

Our core laboratory and manufacturing facility is located in an industrial park in Reykjavik, Iceland. This facility, which we lease, was expanded in 2005 and comprises approximately 15,510 square feet of combined office, laboratory and production space. Our lease expires on September 14, 2013.

We also have a facility in Waldkraiburg, Germany, which is leased by our wholly-owned subsidiary, NimbleGen Systems GmbH. This facility was built specifically for chemical research and manufacturing, and consists of 1,850 square feet of laboratory, office and manufacturing space. Our lease has no expiration but can be terminated by either party upon at least six months notice.

We believe that our existing facilities are adequate for our current needs and that suitable additional or alternative space will be available on commercially reasonable terms to meet our future needs.

Legal proceedings

As of the date of this prospectus, we are not the subject of any material claims or legal proceedings. We are currently seeking resolution to an administrative action with the U.S. Patent and Trademark Office to determine the scope of third party protection for related technologies, as described in the “Risk factors—Risks relating to our intellectual property” section.

 

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Management

Directors and executive officers

 

Name    Age    Position
 

Robert J. Palay

   50    Founder, Chairman of the Board

Thomas M. Palay, Ph.D.

   53    Founder, Vice Chairman of the Board and Vice President

Stanley D. Rose, Ph.D.(4)

   51    President, Chief Executive Officer and Director

David S. Snyder

   46    Vice President—Finance and Chief Financial Officer

Emile F. Nuwaysir, Ph.D.

   38    Vice President—Business Development

Roland Green, Ph.D.

   42    Vice President—Research & Development and Chief Technology Officer

Daniel B. Clutter, Ph.D.

   48    Vice President—Sales

Steven W. Smith

   42    Vice President—Bioinformatics

Sanjiv Arora(1)(2)

   41    Director

Francesco Cerrina, Ph.D.(5)

   59    Founder and Director

Gregg C. Fergus(2)(3)

   43    Director

Leroy Hood, M.D., Ph.D.(3)(4)

   68    Director

Gerhard Kiewel(1)

   39    Director

David G. Lowe, Ph.D.(2)(3)(4)

   50    Director

Frank Mohler

   37    Director

John Neis(1)(2)

   51    Director

Peter K. Shagory(5)

   38    Director
 

 

(1)   Member of the audit committee.

 

(2)   Member of the compensation committee.

 

(3)   Member of the nominating and governance committee.

 

(4)   Member of the scientific advisory committee.

 

(5)   It is anticipated that this member will resign from the Board upon completion of the offering.

Robert J. Palay is one of our founders and has been chairman of the Board since our inception in 1999. From September 1999 through September 2000, he also served as our initial chief executive officer. Mr. Palay is a managing member of Tactics II General Partner LLC, the general partner of Tactics II Ventures, L.P., which specializes in early stage genomic, biomedical tools and developmental biology companies. He holds the position of chairman of the board of directors for two of Tactics II Venture’s portfolio companies, Cellular Dynamics, Inc. and Stem Cell Products, Inc. From 1985 through 1991, Mr. Palay worked for Sam Zell and Equity Group Investments, a privately-held investment company, where he served as vice president in both the acquisitions and asset management areas. Prior to that, he practiced law at Rudnick & Wolfe, n/k/a DLA Piper. He received an A.B., magna cum laude, from Harvard College, an M.B.A. from the J.L. Kellogg Graduate School of Management and a J.D. from the Northwestern University School of Law. Robert Palay is Thomas Palay’s brother.

 

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Thomas M. Palay is one of our founders, a vice president, has been vice chairman of the Board since our inception in 1999. He has been actively employed with us since March 2003 as a senior executive on a part-time basis. Dr. Palay is a managing member of Tactics II General Partner LLC, the general partner of Tactics II Ventures, L.P., which specializes in early stage genomic, biomedical tools and developmental biology companies. He holds the positions of president and chief executive officer for two of Tactics II Venture’s portfolio companies, Cellular Dynamics, Inc. and Stem Cell Products, Inc. Dr. Palay is also the Foley & Lardner-Bascom Professor of Law at the University of Wisconsin Law School. Prior to joining the faculty of the University of Wisconsin in 1980, he was a research fellow at the Brookings Institution in Washington, D.C. from 1979 to 1980. Dr. Palay has a B.A., summa cum laude, from Tufts University, a J.D. from the University of Pennsylvania and a Ph.D. from the University of Pennsylvania. Thomas Palay is Robert Palay’s brother.

Stanley D. Rose, Ph.D. has been president and chief executive officer and a member of the Board since September 2003. Dr. Rose was previously a founder, chairman and director of OpGen, a Madison, Wisconsin, based biotechnology company commercializing optical mapping technology for DNA analysis (from 2000 to 2005), and director of GenTel Biosciences, a Madison, Wisconsin, based biotechnology company focused on developing and commercializing multiplex immunoassays (from 2001 to 2005). Until the end of 2001, Dr. Rose was a fellow at Affymetrix, Inc., working on special projects in new business development. Prior to that, he was vice president of Affymetrix and general manager of a division created in February 2000 following the merger of Affymetrix and Genetic MicroSystems Inc. (GMS). Dr. Rose was co-founder, vice president and chief operating officer of GMS, a company that made instruments for creating and analyzing DNA microarrays. Prior to founding GMS in 1997, he served in various positions of senior management within the Perkin-Elmer Corporation (PE), a major diversified life sciences analytical tool company, dating back to 1989. During this period, Dr. Rose played key roles in PE’s life science businesses, first as director of the polymerase chain reaction (PCR) reagents business for the Perkin-Elmer Cetus joint venture (1989-1991), then as director of PE’s PCR business (1992-1994) during its most dynamic growth phase, then as director of new business development for the company’s Applied Biosystems division (1994-1995), and then as general manager of PE’s UV/fluorescence business (1996-1997). Prior to joining PE, Dr. Rose served as director of DNA products and services at Collaborative Research Inc., one of the original genomics research products companies, during a period when that company was making the first commercial efforts aimed at mapping and sequencing the human genome. Dr. Rose received a B.A. from Cornell University and a Ph.D. from the Massachusetts Institute of Technology.

David S. Snyder has been vice president—finance and chief financial officer since January 2006. From May 2005 to January 2006, Mr. Snyder served as chief financial officer of CompassCare, Inc., an early-stage company supplying enterprise-class software to the healthcare industry. Prior to CompassCare, he served from June 2003 to January 2005 as chief financial officer of Viking Acquisition, LLC, an investment company with interests in real estate and manufacturing. Prior to Viking Acquisition, he was engaged in non-profit and other consulting ventures (2001-2003). Mr. Snyder served as the chief financial officer for The Cobalt Group, Inc., a publicly-traded internet software company (2000-2001). He was also the chief financial officer for Strategic Hotel Capital, LLC, a $3 billion hotel real estate company sponsored by Goldman, Sachs & Co. (1997-2000), the chief financial officer of Mark Controls, Inc., a publicly-traded $100 million manufacturer of industrial equipment (1992-1994), and vice president of financial and strategic planning for Eagle Industries, Inc., a $2 billion manufacturing company sponsored by Sam Zell and Equity Group Investments (1988-1992). In addition to his experience in the position of chief financial officer, he has held positions of corporate strategy and business unit operations and has

 

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served as a consultant to a number of entrepreneurial ventures. Mr. Snyder received a B.A., summa cum laude, from Ottawa University and an M.B.A., with high distinction, from the Harvard Business School and was designated a George Fisher Baker Scholar.

Emile F. Nuwaysir, Ph.D. has been vice president—business development since November 2003. As one of our initial employees, he has served in both research and managerial positions and played a critical role in the development of the NimbleGen technology platform. Dr. Nuwaysir was initially hired as our molecular research and development group leader, was promoted to senior manager of technical and customer services in 2001 and later promoted to vice president—business development in 2003. He has seven patents pending or issued through these efforts. Dr. Nuwaysir held a postdoctoral fellowship with the National Institute of Environmental Health Sciences (NIEHS) within the National Institutes of Health, where he helped coordinate the development of the NIEHS Microarray Core Facility and developed ToxChip, a microarray used by the NIEHS and the National Center for Toxicogenomics in their human toxicology studies. He has also held a postdoctoral fellowship at the University of North Carolina-Chapel Hill, a research position at EI DuPont de Nemours, and a science consultant position with the law firm of Quarles and Brady LLP. He earned his Ph.D. in environmental toxicology with a focus in oncology from the University of Wisconsin—Madison in the McArdle Laboratory for Cancer Research.

Roland Green, Ph.D. has been vice president—research and development and chief technology officer since October 1999. Dr. Green is one of our founders and was our first employee. He is also a co-inventor of the MAS technology used by the company. Previously, Dr. Green was at the University of Wisconsin-Madison from 1994 to 1999 where he developed the MAS technology. Dr. Green has an interdisciplinary background that includes chemistry, molecular biology and genomics. He holds a B.S. from Colorado State University and a Ph.D. from the University of Wisconsin—Madison.

Daniel B. Clutter, Ph.D. has been vice president—sales since January 2004. From May 2002 until August 2003, Dr. Clutter served as director of sales for PanVera/Invitrogen Corporation, where he led the high throughput drug development assay sales team. From 2001 to 2002, Dr. Clutter was vice president of business development for Asterand, a provider of clinical tissue samples and tissue microarrays. Prior to Asterand, he served as account manager for Celera, a business group of Applera Corporation, a company providing early access to the privately sequenced genomes of human and mouse via subscription and proprietary software (2000-2001). Prior to Applera, Dr. Clutter served for 11 years (1988-2000) in various positions within Perkin Elmer Corporation, including director of midwest sales and service, national sales manager, account manager, national support manager, western U.S. support manager, northern California branch sales manager and application specialist. After receiving a B.S. in biochemistry from Purdue University and a Ph.D. from the Pennsylvania State University, Dr. Clutter joined the faculty at Stockton State College where he taught chemistry and biochemistry (1986-1988).

Steven W. Smith has been vice president—bioinformatics since November 2001. Mr. Smith was previously the owner of Genesmith Informatics, a consulting firm assisting small biotech companies with their informatics needs (2000-2001). From 1994 to 2000, Mr. Smith worked for the Wisconsin-based Genetics Computer Group. In 1996, he became manager of research and development, where he led the development and direction of the Wisconsin Sequence Analysis Package and related products. From 1990 to 1992, Mr. Smith was director of computation at the Harvard Genome Laboratory. There, he led the assembly and analysis of the Mycoplasma capricolum genome under the direction of Dr. Walter Gilbert. Mr. Smith holds a B.S. in computer science engineering from the School of Engineering, University of Illinois at Champaign—Urbana.

 

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Sanjiv Arora has been a member of the Board since October 2004. He is a managing director with Cargill Ventures, the venture capital arm of Cargill, Incorporated, a privately-held company with operations in 63 countries and revenues of over $75 billion. At Cargill Ventures, he focuses on life sciences investments, including medical devices, therapeutics and diagnostics. Mr. Arora has extensive experience in the medical device and healthcare industry. Prior to joining Cargill Ventures, he spent eight years as an equity analyst covering the medical technology industry for both UBS Warburg (2001-2003) and RBC Capital Markets (1996-2001). He was recognized as an industry expert in the cardiovascular, orthopedic, neuro and blood processing markets and his research coverage spanned the range of large-cap, small-cap and private companies. He began his career in the medical device industry and spent ten years in a variety of roles ranging from product design engineering and product planning for Guidant Corporation, a medical device company focused on cardiovascular disease; business development for St. Jude Medical, a medical device company focused on cardiovascular disease; and corporate development/product management for Boston Scientific Corporation, a diversified medical products company. Mr. Arora serves on the board of directors of Emphasis Medical, Inc. and holds a board observer seat for Sirtris Pharmaceuticals, Inc. Mr. Arora holds a B.S. in chemical engineering from the University of Minnesota, a M.S. in biomedical engineering from Duke University and an M.B.A. from Duke University.

Francesco Cerrina, Ph.D. has been a member of the Board since August 2000. Dr. Cerrina is the John Bascom Professor of Electrical and Chemical Engineering and Director of the Center for NanoTechnology, at the University of Wisconsin—Madison, which he joined in 1984. He is one of our founders and is also a co-inventor of the MAS technology. Dr. Cerrina was also a founder, president and chief executive officer of Genetic Assemblies, Inc., based in Madison, Wisconsin. Dr. Cerrina completed his doctoral program at the University of Rome, Italy. Dr. Cerrina is a leader in lithography, where he has authored more than 200 papers. He is also an expert in more general semiconductor fabrication processes and in optics. His main research focus is in artificially engineered semiconductor micro and nano structures. Recently, Dr. Cerrina has begun research activity in the de-novo synthesis of DNA, extending the MAS technology platform to novel applications in the life sciences.

Gregg C. Fergus has been a member of the Board since March 2007. Since January 2007, Mr. Fergus has served as the chief commercial officer of Cellular Dynamics International, Inc., a privately-held drug screening company. Since January 2007, he has also served as the chief commercial officer of Stem Cell Products, Inc., a privately-held stem-cell technology company. In addition, since January 2007, Mr. Fergus has served in a consulting role as an executive-in-residence for Baird Venture Partners, the U.S.-based venture capital arm of Baird Private Equity. Since January 2007, he has also served as a consultant with Caden Biosciences, Inc., a life sciences tools and services company. From 2005 to 2007, Mr. Fergus served as senior vice president of sales and global operations for Affymetrix, Inc., a manufacturer of consumables and systems for genetic analysis in the life sciences and clinical healthcare markets, where he was responsible for worldwide commercial development and grew the business to over $300 million in revenue. At Affymetrix, he also held the positions of vice president/general manager of North America (2002-2005) and vice president of worldwide sales (1998-2002) . Prior to Affymetrix, Mr. Fergus held high-level commercial roles at Covance and Amersham, now GE Healthcare (1988-1998). Mr. Fergus earned a B.S. in bacteriology from the University of Wisconsin—Madison.

Leroy Hood, M.D., Ph.D. has been a member of the Board since January 2007 and he serves as the chair of our Scientific Advisory Board. Since 1999, Dr. Hood has been the co-founder and

 

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president of the Institute for Systems Biology in Seattle, Washington, a research institute dedicated to the integration of technology, computation, biology and medicine. He previously founded and was chairman of the cross-disciplinary Department of Molecular Biotechnology at the University of Washington. Dr. Hood was awarded the Lasker Prize in 1987 for his studies on the mechanism of immune diversity, the 2002 Kyoto Prize in Advanced Technology, the 2003 Lemelson–MIT Prize for Innovation and Invention for the development of the DNA sequencer, the 2004 Biotechnology Heritage Award for his pioneering efforts in molecular diagnostics the Association for Molecular Pathology Award for Excellence in Molecular Diagnostics, and in 2006 he received the Heinz Award in Technology, the Economy and Employment for his extraordinary breakthroughs in biomedical science at the genetic level.

Dr. Hood has received 14 honorary degrees from institutions such as Johns Hopkins, UCLA and Whitman College. He has published more than 600 peer-reviewed papers, received 14 patents and has co-authored textbooks in biochemistry, immunology, molecular biology and genetics, and is completing a textbook on systems biology. He is a member of the National Academy of Sciences, the American Philosophical Society, the American Association of Arts and Sciences and the Institute of Medicine. Dr. Hood has also played a role in founding more than 14 biotechnology companies, including Amgen Inc., Applied Biosystems, Inc., SystemsX Institute, Darwin and Rosetta Biosoftware. He is also a director of Accelerator Corp., Omeros Corporation and Roberts & Company Publishers, Inc., and a member of the board of managers of Intelligent Medical Devices LLC. He is currently pioneering systems medicine and the systems approach to disease. Dr. Hood holds an M.D. from Johns Hopkins School of Medicine and a Ph.D. degree in biochemistry and a B.S. in biology from California Institute of Technology.

Gerhard Kiewel has been a member of the Board since January 2005. As vice president-finance, controlling and treasury, chief financial officer of the German-based SCHOTT AG, an international group providing innovative special glass products with annual revenue of over $2.5 billion worldwide, he is heading the financial organization of SCHOTT in North America since 2003. Mr. Kiewel as a member of the board of directors of SCHOTT Scientific Glass, Inc. and SCHOTT Lithotec, Inc., and holds the position of treasurer of SCHOTT’s activities in North America. Mr. Kiewel started his career with SCHOTT in 1994, and has worked in different financial positions in Germany, Switzerland and the U.S. Prior to SCHOTT, he worked for British Airways, London, as well as for a German-based wholesaler of food. He studied international finance in Osnabrueck, Germany and finished his studies with a masters degree in strategic management and export marketing management of Brunel University, West—London.

David G. Lowe, Ph.D. has been a member of the Board since January 2005. Dr. Lowe has been involved as a research scientist, managing and leading drug discovery programs, and advising and investing in life sciences companies since 1985. He joined Skyline Ventures, a life sciences venture capital partnership in June 2002 as a Kauffman Fellow and as a partner in December 2003. He is a molecular biologist and was director of Cardiovascular Research at Genentech, Inc., a biotechnology company, where he worked for 16 years. At Genentech, Dr. Lowe led drug discovery activities in biologics and small molecule therapeutics. He was responsible for drug discovery efforts that resulted in eight drug candidates taken into clinical development, including the successful cancer therapy Avastin. Dr. Lowe was a member of the therapeutic area team responsible for cardiovascular strategic planning and product portfolio management, and worked extensively with business development on in-licensing of early and late-stage therapeutics, and technology access. Dr. Lowe holds B.S. and Ph.D. degrees in biochemistry from the University of Toronto, Canada. He has authored over 60 peer-reviewed scientific publications

 

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and is an inventor on seven issued or pending U.S. patents. Dr. Lowe is also a director of NovaCardia, Proteon Therapeutics and Applied Genetic Technologies Inc., each a privately-held biotechnology company.

Frank Mohler has been a member of the Board since June 2006. Since April 2006, he has been a member of the corporate mergers and acquisitions team of the German-based SCHOTT AG, an international group providing innovative special glass products with annual revenues of $2 billion. Mr. Mohler is responsible for a large variety of strategic topics and different mergers and acquisitions activities. Prior to SCHOTT, he worked in the mergers and acquisitions team for Hauck & Aufthaeuser Corporate Finance GmbH, a privately-held German investment bank (November 2001-March 2006). He started his career with PricewaterhouseCoopers LLP in the field of corporate finance with a focus on the financial services industry. He studied at Johann Wolfgang Goethe-University, Frankfurt, Germany, and holds a degree in business administration.

John Neis has been a member of the Board since 2001. Mr. Neis is co-founder and managing director of Venture Investors LLC, a venture capital management company that serves as general partner or contract manager of five venture capital funds, and he serve as vice president, secretary, and is a member of the board of directors for Venture Investors of Wisconsin, Inc., one of the four funds under management which he joined in 1985. He also serves as a director of TomoTherapy, Inc. and Deltanoid Pharmaceuticals, Inc., all of which are portfolio companies of the funds managed by Venture Investors LLC. Mr. Neis serves on the board of directors of the Wisconsin Technology Council, Inc., an independent non-profit formed by bi-partisan legislation in Wisconsin to serve as a science and technology advisor to the governor and legislature. He is a member of the board of advisors for the Weinert Applied Ventures and Entrepreneurship Program in the School of Business and Tandem Press in the School of Education at the University of Wisconsin-Madison. Mr. Neis has a B.S. in finance from the University of Utah, an M.S. in marketing and finance from the University of Wisconsin—Madison and he is a chartered financial analyst (CFA).

Peter K. Shagory has been a member of the Board since January 2005. He is a partner in Baird Venture Partners, the U.S.-based venture capital arm of Baird Private Equity, and oversees its healthcare and life sciences investment effort. Prior to joining Baird Venture Partners in 2004, Mr. Shagory spent five years at Vector Fund Management, L.P. (VFM), a life-sciences venture capital firm, investing broadly across the medical device and biotechnology fields. Prior to VFM, Mr. Shagory spent over six years in corporate finance, mergers and acquisitions and merchant banking at J.P. Morgan & Co. and Banc One Capital Corporation. He is a member of the board of directors of Arbor Surgical Technologies, Inc., Caden Biosciences, Inc. and PharMEDium Healthcare Corporation. Mr. Shagory received his B.A. in finance from Miami University (Ohio) and his M.B.A. from the Amos Tuck School at Dartmouth College.

Board composition

Our Board may establish from time to time by resolution the authorized number of directors. Twelve directors are currently authorized. In accordance with our restated certificate of incorporation to be in effect upon the closing of this offering, our Board will be divided into three classes with staggered three-year terms. At each annual meeting of stockholders, the successors to directors whose terms then expire will be elected to serve from the time of election and qualification until the third annual meeting following election. Our directors will be divided among the three classes as follows:

 

 

the Class I directors will be Messrs. Sanjiv Arora, Gerhard Kiewel, Frank Mohler and John Neis, and their terms will expire at the annual meeting of stockholders to be held in 2008;

 

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the Class II directors will be Messrs. David G. Lowe, Robert J. Palay and Thomas M. Palay, and their terms will expire at the annual meeting of stockholders to be held in 2009; and

 

 

the Class III directors will be Messrs. Gregg C. Fergus, Leroy Hood and Stanley D. Rose, and their terms will expire at the annual meeting of stockholders to be held in 2010.

Our restated certificate of incorporation will provide that the authorized number of directors may be changed only by resolution of the Board. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the directors. The division of our Board into three classes with staggered three-year terms may delay or prevent a change of our management or a change of control at our company.

We believe our Board will determine that the following members of the Board are independent under the applicable rules and regulations of the SEC and Nasdaq: Mr. Sanjiv Arora, Dr. Francesco Cerrina, Mr. Gregg C. Fergus, Dr. Leroy Hood, Mr. Gerhard Kiewel, Dr. David G. Lowe, Mr. Frank Mohler, Mr. John Neis and Mr. Peter K. Shagory.

Board committees

Our Board has an audit committee, compensation committee and a scientific advisory committee. Upon the closing of this offering, our board will also have a nominating and governance committee. The composition and responsibilities of each committee are described below. Members serve on these committees until their resignation or until otherwise determined by our board.

Audit committee

Our audit committee oversees our corporate accounting and financial reporting process. Among other matters, the audit committee evaluates the independent auditors’ qualifications, independence and performance; determines the engagement of the independent auditors; reviews and approves the scope of the annual audit and the audit fee; discusses with management and the independent auditors the results of the annual audit and the review of our quarterly consolidated financial statements; approves the retention of the independent auditors to perform any proposed permissible non-audit services; monitors the rotation of partners of the independent auditors on the NimbleGen engagement team as required by law; reviews our critical accounting policies and estimates; oversees our internal audit function and annually reviews the audit committee charter and the committee’s performance. The current members of our audit committee are Mr. John Neis, who is the chair of the committee, and Messrs. Sanjiv Arora and Gerhard Kiewel. All members of our audit committee meet the requirements for financial literacy under the applicable rules and regulations of the SEC and Nasdaq. Our board has determined that Mr. Neis is an audit committee financial expert as defined under the applicable rules of the SEC and has the requisite financial sophistication as defined under the applicable rules and regulations of Nasdaq. Messrs. Neis, Arora and Kiewel are independent directors as defined under the applicable rules and regulations of the SEC and Nasdaq. The audit committee operates under a written charter that satisfies the applicable standards of the SEC and Nasdaq.

Compensation committee

Our compensation committee reviews and recommends policies relating to compensation and benefits of our officers and employees. The compensation committee reviews and approves

 

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corporate goals and objectives relevant to compensation of our chief executive officer and other executive officers, evaluates the performance of these officers in light of those goals and objectives, and sets the compensation of these officers based on such evaluations. The compensation committee also administers the issuance of stock options and other awards under our stock plans. The compensation committee will review and evaluate, at least annually, the performance of the compensation committee and its members, including compliance of the compensation committee with its charter. The anticipated members of our compensation committee are Mr. Sanjiv Arora, who is chair of the committee, Messrs. Gregg C. Fergus and John Neis, and Dr. David G. Lowe. The composition of our compensation committee will meet the criteria for independence under, and the functioning of our compensation committee will comply with, the applicable rules and regulations of the SEC and Nasdaq.

Nominating and governance committee

Upon the closing of this offering, our Board will form a nominating and governance committee. The nominating and governance committee will be responsible for making recommendations to our Board regarding candidates for directorships and the size and composition of our board. In addition, the nominating and governance committee will be responsible for overseeing our corporate governance guidelines and reporting and making recommendations to our board concerning governance matters. The anticipated members of the nominating and governance committee are Dr. David G. Lowe, who is the chair of the committee, Mr. Gregg C. Fergus and Dr. Leroy Hood. The composition of our nominating and governance committee will meet the criteria for independence under, and the functioning of our nominating and governance committee will comply with, the applicable rules and regulations of the SEC and Nasdaq.

Scientific advisory committee

Our scientific advisory committee monitors and advises our Board on scientific developments relating to our business. The scientific advisory committee is charged with establishing and maintaining a Scientific Advisory Board comprised of thought-leaders in the scientific community to consult with and advise the committee. The members of the scientific advisory committee are Dr. Leroy Hood, who is the chair of both the committee and the Scientific Advisory Board, and Drs. David G. Lowe and Stanley D. Rose.

Compensation committee interlocks and insider participation

None of the members of our compensation committee has at any time during the prior three years been an officer or employee of ours. None of our executive officers currently serves or in the prior three years has served as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on our Board or compensation committee.

 

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Executive and director compensation

Compensation discussion and analysis

Overview

Our Board appoints the members of its compensation committee and delegates to the compensation committee the responsibility for overseeing the design and administration of our executive compensation program. The principal elements of our executive compensation program are base salary, annual bonus, and equity incentives in the form of stock options. Certain of our executive officers are also entitled to a value-sharing bonus in the event we are sold or we consummate a qualifying initial public offering. Our chief financial officer, vice president—business development and vice president—research and development and chief technology officer are also entitled to post-termination severance upon certain termination events.

Objectives of our executive compensation program

The objectives of our executive compensation program are to:

 

 

attract, motivate and retain executive officers with the knowledge, skills and experience that are critical to our success;

 

 

provide our executive officers with both cash and equity incentives that will promote strong individual and company performance; and

 

 

enhance stockholder value by aligning the interests of our executive officers with those of our stockholders.

Process for executive compensation program

While our compensation committee has the authority to approve compensation paid under our executive compensation program, in practice our compensation committee generally makes recommendations to our Board based upon management’s request and recommendations to it by our chief executive officer. Our Board considers and exercises final approval over the recommendations of the compensation committee regarding the compensation of our named executive officers, including the terms of their employment agreements. The employment agreements with each of our named executive officers and the value-sharing bonus agreements with our executive officers were negotiated by members of our compensation committee, the chairman of the board or our chief executive officer.

The compensation committee meets periodically to make recommendations for base salaries, bonuses and stock option awards to be paid or granted to our named executive officers. In 2006, we engaged Strategic Consulting Group, SCG, to undertake separate reviews of director and chief executive officer compensation trends at comparable companies. For the purpose of this review, SCG considered two industry surveys of companies of comparable size in a cross section of industries and a selected group of peer companies in the life science tools and services sector. During 2006, base salary, bonus structure, and option grants for our directors and chief executive officer were set in large part based on the SCG’s report. Our compensation committee also considered (i) our historical and expected performance, (ii) alignment of individual performance with our goals and operational priorities and (iii) the anticipated level of difficulty in replacing our chief executive officer, chief financial officer and other officers with persons of comparable experience, skill and knowledge. The compensation committee will have the right to hire a compensation consultant in the future, but has not yet made any decisions to do so.

 

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Each component of our executive compensation program is considered separately and the Board and compensation committee do not generally take into account amounts realized from prior compensation in establishing other elements of compensation. The compensation committee and the Board consider the compensation of each named executive officer relative to each other named executive officer so that the executive compensation program is applied consistently among our executives. This is not a mechanical process, and our compensation committee and our Board has used their judgment and experience and worked with our chief executive officer to determine the appropriate mix of compensation for each individual. In his capacity as a director, our chief executive officer participated in the compensation decisions made by the Board for 2006. One of our other officers, Dr. Thomas Palay, also a director, served as the chairman of the compensation committee of the Board for 2006.

General compensation philosophy

Our compensation program is designed to drive shareholder value by fostering teamwork throughout our company by tying incentive compensation to company-wide financial performance measures. All senior management members, including the named executive officers, have a significant element of compensation at risk in the form of equity compensation and bonuses tied to the creation of shareholder value. Each year our incentive plans are established to ensure that the specific criteria and measures for awards are based on relevant market-driven needs, as well as driving continued improvement in the creation of shareholder value.

Components of our executive compensation program

Salary.    Each named executive officer’s salary varies with the scope of his respective responsibilities and is intended to provide a basic level of compensation for performing the job expected of him. The compensation committee and the Board believe that the named executive officers’ annual salaries must be competitive in our industry and with the market generally with respect to the knowledge, skills and experience that are necessary to meet the requirements of the named executive officers’ positions with us. To that end, our Board may, in its discretion, grant salary raises.

Annual bonus.    Each of our named executive officers is eligible to receive an annual cash bonus as determined in the discretion of our Board, after taking into consideration the recommendation of the compensation committee. We provide an opportunity for our executives to earn annual cash bonuses as an incentive and timely reward for exemplary corporate and individual performance in a given year. Because the goals established by the compensation committee were not achieved, no annual bonuses were awarded for 2006.

Stock options.    We award stock options to our named executive officers based on various factors, including the responsibilities of the individual executive officer, his past performance, anticipated future contributions, prior stock option grants and the executive’s total compensation. We use stock options as a component of our executive compensation program to provide an incentive to our executives to focus on long-term performance, as the primary method for our executives to acquire an equity interest in our company and to align the interests of our executives with those of our stockholders. All stock options granted to our executive officers in 2006 were granted at exercise prices at or above the fair market value of our common stock on the date of grant as determined by independent appraisals obtained at the direction of the compensation committee. All of these options are subject to a four-year vesting schedule. It is the intention of the compensation committee to award long-term equity incentives to our executives following completion of our initial public offering on an annual basis, although more

 

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frequent awards may be made at the discretion of the compensation committee, such as in the case of promotions or newly hired executives. It is also our intention to set the exercise price of options at the closing market price of our common stock on the grant date of those options.

Value-sharing bonus.    In recognition of their past contributions and in exchange for their ongoing services and contributions to our company, we agreed in October 2005 to pay a value-sharing bonus to our chief executive officer, our vice president of business development, our vice president of research and development and chief technology officer, and our vice president of sales if there is a “triggering company transaction.” A “triggering company transaction” means:

 

 

a qualified initial public offering, which means the closing of a firm commitment underwritten public offering pursuant to an effective registration statement under the Securities Act covering the offering and sale of our common stock in which the per share price reflects a pre-money offering valuation of our company of at least $150 million; or

 

 

a sale of our company, either through another person’s acquisition of our securities, or a merger or consolidation, or a sale of all or substantially all of our assets, following which our stockholders own less than a majority of the voting power represented by the acquiring person’s outstanding voting securities.

The value-sharing bonus for the participating named executive officers will be an amount equal to between 0.1% percent and 4% of the lesser of:

 

 

the “net company value,” which is based on the price at which our common stock is sold in a qualified initial public offering or stock acquisition or the consideration received by our stockholders in a stock or asset sale, less $20 million; and

 

 

$22 million.

We anticipate that this offering will be a qualified initial public offering for purposes of this agreement.

Post-termination severance.    As part of the negotiated employment agreement with our chief financial officer, we have agreed to provide benefits to him in the event he is involuntarily terminated not for “cause” or if he voluntarily terminates his employment for “good reason” prior to September 18, 2009. We agreed to this provision because we believed, in light of the nature of our business and industry, it was necessary in order to attract an individual with his knowledge, skills and experience to this position. We recognized from his perspective that even in a competitive market for individuals with the knowledge, skills and experience to serve as a company’s chief financial officer, the number of comparable positions at comparable companies is limited and finding a replacement position following a termination may take a substantial amount of time. Furthermore, this provision expires after a limited term.

We agreed to these events as triggering a payment because they involve an involuntary termination or constructive termination that do not arise from misconduct or similar grounds and that, in the absence of the provision, could result in the loss of substantial benefits that the chief financial officer would otherwise have earned.

As part of negotiated letter agreements with our vice president of business development and our vice president of research and development and chief technology officer, we have agreed to provide benefits to each of them in the event their employment is terminated by the company, other than for cause, and the termination occurs within a specified time frame after either a

 

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change in control of the company or the hiring of a new chief executive officer by the company. We entered into these letter agreements for the same substantive reasons specified above with respect to the employment agreement with our chief financial officer.

Other compensation.    Our named executive officers receive the same general health and welfare benefits and participate in our 401(k) plan on the same basis as all of our other full-time employees. We did not provide any personal benefits or perquisites or pension, deferred compensation or other retirement benefits to our named executive officers in 2006. The compensation and benefits we offer under our executive compensation program may change over time as the compensation committee and the Board determines is appropriate.

Stock ownership guidelines

We have not implemented any stock ownership guidelines for our named executive officers. The compensation committee will continue to periodically re-evaluate whether it would be appropriate for us to adopt stock ownership guidelines for our named executive officers. As noted above, we have issued stock options to our named executive officers and have an equity incentive plan in place pursuant to which more stock options and other equity incentives can be issued in the future, which we believe will allow our executives to own equity in our company and accordingly align their interests with those of our other stockholders.

 

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Tax implications of our executive compensation program

Section 162(m) of the Internal Revenue Code generally disallows a tax deduction to public corporations for compensation over $1 million for any fiscal year paid to the corporation’s chief executive officer and four other most highly compensated executive officers in service as of the end of any fiscal year. Because we did not have a class of publicly traded stock in 2006, Section 162(m) did not affect the deductibility of the compensation we paid to our named executive officers in 2006, but it could do so following the completion of this offering.

Section 162(m) also provides that qualifying performance-based compensation will not be subject to the limits on deductibility if certain requirements are met. Where necessary for covered executives, the committee intends to seek to structure compensation amounts and plans that meet the requirements for deductibility under this provision. However, the compensation committee may implement compensation arrangements that do not satisfy these requirements for deductibility if it determines that such arrangements are appropriate under the circumstances. In addition, because of uncertainties as to the application and interpretation of Section 162(m) and the regulations issued thereunder, the compensation committee cannot assure that the compensation intended by the compensation committee to satisfy the requirements for deductibility under Section 162(m) will in fact be deductible.

Summary compensation table for fiscal year 2006

 

Name and Principal Position    Year    Salary($)    Bonus($)    Option
Awards(1)($)
  

All Other

Compensation($)

   Total($)
 

Stanley D. Rose, Ph.D.

President and Chief Executive Officer

   2006    330,116             330,116

David S. Snyder

Vice President–Finance and Chief Financial Officer

   2006    195,817       26,156       221,973

Emile F. Nuwaysir, Ph.D.

Vice President–Business Development

   2006    182,081       22,429       204,510

Roland Green, Ph.D.

Vice President–Research and Development and Chief Technology Officer

   2006    182,154       21,742       203,896

Daniel B. Clutter, Ph.D.

Vice President–Sales

   2006    248,344       11,695       260,039
 
(1)   The value of options in this table includes (i) the dollar amount recognized by the company for financial statement reporting purposes in accordance with FAS 123R in 2006 for stock options granted in February 2006 and (ii) the dollar amount that would have been recognized by the company for financial statement reporting purposes in 2006 under the modified prospective transition method in accordance with FAS 123R for awards of stock options granted prior to 2006. For a discussion of valuation assumptions, see Note 2 to the company’s consolidated financial statements included elsewhere in this prospectus regarding stock compensation.

 

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Grants of plan-based awards for fiscal year 2006(1)

 

Name   Grant Date  

All Other

Option Awards:

Number of Securities
Underlying Options(#)

 

Exercise or Base

Price of Option

Awards($/Sh)

    Grant Date Fair
Value of Stock and
Option Awards(2)($)
 

Stanley D. Rose, Ph.D.

         

David S. Snyder

  2/9/06   60,000   0.024     966
  2/9/06   150,000   0.456 (3)   45,855
  12/26/06   70,000   1.149     53,725

Emile F. Nuwaysir, Ph.D.

  12/26/06   60,000   1.149     46,050

Roland Green, Ph.D.

  12/26/06   60,000   1.149     46,050

Daniel B. Clutter, Ph.D.

  12/26/06   40,000   1.149     30,700
 
(1)   Except as otherwise indicated, all option grants are over shares of the company’s common stock. Further details regarding the company’s option awards in 2006 can be found in the “Compensation Discussion & Analysis” section above and in Note 1 to the “Outstanding equity awards at fiscal year-end for fiscal year 2006” table, below.
(2)   Reflects the grant date fair value of option awards granted in 2006, computed in accordance with FAS 123R.
(3)   Reflects an option over shares of the company’s Series E Preferred Stock.

Outstanding equity awards at fiscal year-end for fiscal year 2006

 

Name    Option Awards
  

Number of

Securities

Underlying

Unexercised

Options

(#) Exercisable

  

Number of

Securities

Underlying

Unexercised

Options

(#) Unexercisable(1)

   

Option

Exercise

Price($)

  

Option

Expiration

Date

 

Stanley D. Rose, Ph.D.

   180,000      1.28    9/9/13

David S. Snyder

   12,500    47,500 (2)   0.024    2/9/16
   31,250    118,750 (3)   0.456    2/9/16
      70,000 (4)   1.149    12/26/16

Emile F. Nuwaysir, Ph.D.

   5,000      0.300    11/22/10
   2,500      0.300    1/23/11
   1,000      0.750    5/31/11
   15,000    5,000 (5)   1.280    5/10/13
   81,250    68,750 (3)   0.456    10/7/15
      60,000 (4)   1.149    12/26/16

Roland Green, Ph.D.

   37,500      0.300    11/22/10
   7,500      1.28    11/22/10
   1,000      0.750    5/31/11
   3,125      1.280    4/2/12
   2,700    900 (6)   1.280    4/30/13
   81,250    68,750 (3)   .456    10/7/15
      60,000 (4)   1.149    12/26/16

Daniel B. Clutter, Ph.D.

   25,000    25,000 (7)   1.280    1/1/14
   21,667    18,333 (8)   .456    10/7/15
      40,000 (4)   1.149    12/26/16
 

 

(1)  

While all options in this table are immediately exercisable, to the extent they are listed in the “unexercisable” column, the option only entitles the executive to purchase shares of restricted stock. Thus, until the relevant vesting requirements are met for each award, the options are over restricted stock. All shares of options have been granted as incentive stock options and,

 

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unless otherwise indicated, entitle the executive to purchase shares of the company’s common stock. Under the option award agreements, if an executive exercises the option before the shares vest, the executive would be purchasing shares of restricted stock. The executive is not entitled to vote any of the restricted shares, but instead, is required to execute a proxy appointing an agent designated by the Board to vote the restricted shares. An executive is entitled to receive dividends on the restricted shares. If an executive terminates employment while holding restricted shares, the company has a six-month call right following such termination to purchase the executive’s restricted shares at the option exercise price paid by the executive for the restricted shares. Under the option award agreements, an executive is required to sign a stockholders agreement with respect to the shares he purchases upon the exercise of the option. The stockholders agreement imposes certain transfer restrictions upon the shares, as well as a right of first refusal for the benefit of the company and drag-along rights for the benefit of controlling shareholders in a sale. The provisions of the stockholders agreement apply to the shares of restricted stock even after the shares have vested. It is anticipated that the company will waive the requirement for an executive to sign such a stockholders agreement upon the exercise of the options in connection with the completion of the offering.

 

(2)   Options under this award vest at a rate of 1,250 on the first day of each calendar month until the option is fully vested.

 

(3)   Options under this award vest at a rate of 3,125 shares on the first day of each calendar month until the option is fully vested. Options under this award entitle the executive to purchase shares of the company’s Series E Preferred Stock.

 

(4)   25% of the options under this award will vest on each of 12/26/07, 12/26/08, 12/26/09 and 12/26/10.

 

(5)   The remaining options under this award will vest on 5/10/07.

 

(6)   The remaining options under this award will vest on 4/30/07.

 

(7)   12,500 of the options under this award will vest on 1/1/07, with the remaining 12,500 vesting on 1/1/08.

 

(8)   Options under this award vest at a rate of 833 1/3 shares on the first day of each calendar month until the option is fully vested. Options under this award entitle the executive to purchase shares of the company’s Series E Preferred Stock.

Options exercises and stock vested for fiscal year 2006

 

Name    Option Awards(1)    Stock Awards(2)
  

Number of

Shares

Acquired on

Exercise(#)

  

Value

Realized on
Exercise($)

  

Number of

Shares

Acquired on
Vesting(#)

  

Value

Realized on

Vesting($)

 

Stanley D. Rose, Ph.D.

         300,000    328,500

David S. Snyder

           

Emile F. Nuwaysir, Ph.D.

           

Roland Green, Ph.D.

           

Daniel B. Clutter, Ph.D.

           
 

 

(1)   No stock options were exercised by any of the executives in fiscal year 2006.

 

(2)   A portion of the Restricted Series E Preferred Stock purchased by Mr. Rose in 2005 upon exercise of the stock option granted to him in 2005 vested on a monthly basis during 2006 and has been valued for the purpose of this table based upon an estimate of such shares prepared by an independent appraisal performed as of December 26, 2006 ($1.551 per share) less the purchase price he paid for such shares of $0.456 per share.

Director compensation

The members of our Board did not receive any compensation for their service as members of the Board in 2006. As of December 31, 2006, the following directors had, in the aggregate, outstanding stock option awards for the following number of shares of our common stock: Mr. Robert J. Palay—128,544; Dr. Thomas M. Palay—128,544; Mr. Sanjiv Arora—0; Dr. Francesco Cerrina—14,592; Mr. Gregg C. Fergus—0; Dr. Leroy Hood—0; Mr. Gerhard Kiewel—0; Dr. David G. Lowe—0; Mr. Frank Mohler—0; Mr. John Neis—0; and Mr. Peter K. Shagory—0. With the exception of 5,356 shares under each of Mr. Robert Palay’s and Dr. Thomas Palay’s options, all such options were fully vested as of December 31, 2006. The unvested portion of Mr. Robert Palay’s and Dr. Thomas Palay’s options were fully vested as of February 5, 2007.

 

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Employment, change of control and severance agreement

Employment or severance agreements

In connection with his employment as president and chief executive officer of the company in 2003, we entered into an employment agreement with Dr. Rose whereby we agreed to employ him and he, in turn, agreed to certain nondisclosure, nonsolicitation and noncompetition restrictions on behalf of the company. Dr. Rose’s employment agreement does not contain any severance protection in the event of his termination of employment.

Upon the commencement of their employment in 1999, we entered into employment agreements with Drs. Nuwaysir and Green whereby we agreed to employ each of them and they, in turn, agreed to certain nondisclosure and nonsolicitation restrictions on behalf of the company. Later, in 2003, we entered into letter agreements with both executives which provide for three months of severance benefits, in the event their employment is terminated, other than for “cause” (as defined in the Option Plan) and the termination occurs within 90 days (or 180 days for Dr. Green) after either (i) a “change in control” of the company or (ii) a new chief executive officer is hired by the company. The severance benefits would be based upon Dr. Nuwaysir’s and Dr. Green’s salary in effect as of the date of such a termination, would be payable over the three-month period following the termination, and would be conditioned upon their execution of a release for the benefit of the company. The amount of severance benefits payable to Dr. Nuwasyir or Dr. Green upon such a termination, if it had occurred on December 31, 2006, would have been $50,000 each.

We entered into an employment agreement with Mr. Snyder in September 2006. Mr. Snyder’s employment agreement provides for reimbursement of relocation and/or commuting expenses attributable to Mr. Snyder’s move and/or commute from his home in Illinois. Mr. Snyder, in the agreement, agreed to certain noncompetition and nonsolicitation covenants in favor of the company. Under the agreement, in the event Mr. Snyder’s employment is terminated by the company, other than for “cause” (as defined in his employment agreement) or by Mr. Snyder for “good reason” (as defined in his employment agreement) before September 18, 2009, Mr. Snyder will receive a severance benefit, payable to him in a lump sum, equal to his base salary in effect at the time of the termination plus his target bonus for that year, conditioned upon his execution of a release for the benefit of the company. The amount of the severance benefit payable to Mr. Snyder under his employment agreement upon such a termination, if it had occurred on December 31, 2006, would have been $343,750.

In connection with his employment as vice president-sales in 2004, we entered into an employment agreement with Dr. Clutter whereby we agreed to employ him and he, in turn, agreed to certain nondisclosure, nonsolicitation and noncompetition restrictions on behalf of the company. Dr. Clutter’s employment agreement does not contain any severance protection in the event of his termination of employment.

Value-sharing bonuses

As described in the “Compensation discussion and analysis” section above, we entered into value-sharing bonus arrangements with certain of the named executives officers in October 2005 if there is a “triggering company transaction” (generally, a qualified IPO or a sale of a majority of the company). In addition, the value-sharing bonus would also be paid if an executive’s employment is terminated by the company, other than for “cause” or, for Dr. Rose, upon his

 

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voluntary termination for “good reason” (as defined in his value-sharing bonus arrangement) within the 180 day period preceding a “triggering company transaction.” The amount of the value-sharing bonus that would be received by each participating executive is based on a percentage of the lesser of (i) the “net company value” (the company value determined under the terms of the relevant triggering event) or (ii) $22 million. If a triggering company transaction had occurred on December 31, 2006 and the net company value was at least $22 million at such time, each of the following executives would have been entitled to receive the following amounts: Dr. Rose—$880,000 (4%); Dr. Nuwaysir—$330,000 (1.5%); Dr. Green—$330,000 (1.5%); and Dr. Clutter—$22,000 (0.1%).

Acceleration of stock options

Shares of common stock (and in certain cases, Series E Preferred Stock) underlying the stock options granted to the executives under our 2000 stock option and restricted stock plan (the “Option Plan”) will become vested upon certain events set forth in the stock option agreements entered into between the company and each executive or, for certain of the options held by Drs. Nuwaysir and Green, as set forth in each of their letter agreements with the company. For purpose of this discussion, the vesting of the underlying shares of a stock option is referred to as the vesting of the option. For each of the following executives, certain of their unvested options will become vested upon the occurrence of one or more of the following events, among others:

David Snyder—Vice President—Finance and Chief Financial Officer

 

 

for all awards, upon a termination of his employment due to death or disability, or upon an involuntary termination of his employment, other than for “cause” or upon a voluntary termination of his employment for “good reason” (as both terms are defined in his option agreement) within 180 days prior to or two years following a “change of control” (as defined in the Option Plan).

In the event each of his unvested options were accelerated for any of the above-described reasons on December 31, 2006, Mr. Snyder would have realized a benefit equal to as much as $183,469 attributable to the acceleration of his unvested options (based on the difference between an estimated fair market value of the common stock of $1.149 per share on such date or $1.551 per share for the Series E Preferred Stock on such date (both per an independent appraisal performed as of December 26, 2006) and the exercise price of each option).

Emile Nuwaysir, Ph.D.—Vice President—Business Development

 

 

for all awards, upon a termination of his employment due to death or disability;

 

 

for the award granted to him in 2003, upon a termination of his employment by the company, other than for “cause,” within 90 days after a “change in control” of the company (as such terms are defined in the Option Plan) or within 90 days after the Company hires a new chief executive officer, conditioned on his execution of a release for the benefit of the company;

 

 

for the award granted to him in 2005, upon a “change of control” of the company or a “qualified IPO” (as defined in his option agreement) or upon a termination of his employment within 180 days prior to a “change of control” of the company or a “qualified IPO,” conditioned on his execution of a release for the benefit of the company; and

 

 

for the award granted to him in 2006, upon an involuntary termination of his employment, other than for “cause” or upon a voluntary termination of his employment for “good reason” (as both terms are defined in his option agreement) within 180 days prior to or two years following a “change of control” (as defined in the Option Plan).

 

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In the event each of his unvested options were accelerated for any of the above-described reasons on December 31, 2006, Dr. Nuwaysir would have realized a benefit equal to as much as $75,281 attributable to the acceleration of his unvested options (based on the difference between an estimated fair market value of the common stock of $1.149 per share on such date or $1.551 per share for the Series E Preferred Stock on such date (both per an independent appraisal performed as of December 26, 2006) and the exercise price of each option).

Roland Green, Ph.D.—Vice President—Research & Development and Chief Technology Officer

 

 

for all awards, upon a termination of his employment due to death or disability;

 

 

for the award granted to him in 2003, upon a termination of his employment within 12 months after a “change in control” of the company (as defined in the Option Plan) or within 180 days after the company hires a new chief executive officer, conditioned on his execution of a release for the benefit of the company;

 

 

for the award granted to him in 2005, upon a “change of control” of the company or a “qualified IPO” (as defined in his option agreement) or upon a termination of his employment within 180 days prior to a “change of control” of the company or a “qualified IPO,” conditioned on his execution of a release for the benefit of the company; and

 

 

for the award granted to him in 2006, upon an involuntary termination of his employment, other than for “cause” or upon a voluntary termination of his employment for “good reason” (as both terms are defined in his option agreement) within 180 days prior to or two years following a “change of control” (as defined in the Option Plan).

In the event each of his unvested options were accelerated for any of the above-described reasons on December 31, 2006, Dr. Green would have realized a benefit equal to as much as $75,281 attributable to the acceleration of his unvested options (based on the difference between an estimated fair market value of the common stock of $1.149 per share on such date or $1.551 per share for the Series E Preferred Stock on such date (both per an independent appraisal performed as of December 26, 2006) and the exercise price of each option).

Daniel Clutter, Ph.D.—Vice President—Sales

 

 

for all awards, upon a termination of his employment due to death or disability;

 

 

for the award granted to him in 2005, upon a “change of control” of the company or a “qualified IPO” (as defined in his option agreement) or upon a termination of his employment within 180 days prior to a “change of control” of the company, conditioned on his execution of a release for the benefit of the company; and

 

 

for the award granted to him in 2006, upon an involuntary termination of his employment, other than for “cause” or upon a voluntary termination of his employment for “good reason” (as both terms are defined in his option agreement) within 180 days prior to or two years following a “change of control” (as defined in the Option Plan).

In the event each of his unvested options were accelerated for any of the above-described reasons on December 31, 2006, Dr. Clutter would have realized a benefit equal to as much as $20,075 attributable to the acceleration of his unvested options (based on the difference between an estimated fair market value of the common stock of $1.149 per share on such date or $1.551 per share for the Series E Preferred Stock on such date (both per an independent appraisal performed as of December 26, 2006) and the exercise price of each option).

 

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2000 stock option and restricted stock plan

The following is a description of the material features and provisions of our 2000 stock option and restricted stock plan, as amended effective April 12, 2005.

Objectives

The 2000 stock option and restricted stock plan is designed to attract and retain certain selected officers, key employees, non-employee directors and consultants whose skills and talents are important to our operations and to the operations of our subsidiaries, and to reward them for making major contributions to our success. These objectives are accomplished by making awards under the plan, thereby providing participants with a proprietary interest in our growth and performance.

Administration

The 2000 stock option and restricted stock plan is administered by a committee appointed by our Board for such purpose. If at any time no such committee is appointed, the plan will be administered by our board.

The plan administrator has full and exclusive power to interpret the plan, to determine which current and prospective employees, non-employee directors and consultants participate in the plan, to grant waivers of award restrictions, to determine the provisions of award agreements and to adopt such rules, regulations and guidelines for carrying out the plan as it may deem necessary or proper.

Except to the extent prohibited by applicable law or the applicable rules of a stock exchange, the administrator may delegate to the chief executive officer and to our other senior officers its duties under the plan pursuant to any conditions or limitations the administrator may establish. The administrator may revoke any such delegation at any time.

Eligibility

Current and prospective employees, non-employee directors, consultants or other persons who provide services to us or to any of our subsidiaries, who hold, or will hold, positions of responsibility and whose performance, in the judgment of the plan administrator or our management, as applicable, can have a significant effect on our success, are eligible for an award under the plan.

Stock available for awards

Subject to certain adjustments set forth in the plan, the number of shares of our common stock that may be issued for awards during the term of the plan is 1,750,000 shares (not counting, for purposes of determining the maximum number of shares, common stock issued upon the conversion of Series E Preferred Stock acquired pursuant to an award under the plan) and 1,335,000 shares of Series E Preferred Stock, all of which may be in the form of incentive stock options. Any shares subject to an award that are used in settlement of tax withholding obligations will be deemed not to have been issued for purposes of determining the maximum number of shares available for issuance under the plan. Likewise, if a stock option is exercised by tendering shares, either actually or by attestation, to us as full or partial payment for such

 

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exercise under the plan, only the number of shares issued net of the shares tendered will be deemed issued for purposes of determining the maximum number of shares available for issuance under the plan.

Awards

Awards available under the plan include grants of stock options or shares of restricted stock pursuant to such terms, conditions, performance requirements and limitations as the administrator may establish in order to fulfill the objectives of the plan. Stock options are a grant of a right to purchase of number of shares of our common stock or Series E Preferred Stock pursuant to the terms of the plan. A stock option under the plan may be in the form of a nonqualified stock option or an incentive stock option. Restricted stock is an award of common stock or Series E Preferred Stock for such consideration as the administrator may specify and which may contain transferability or forfeiture provisions, including a requirement of future services and other restrictions and conditions as may be established with the administrator and set forth in the award agreement.

The terms, conditions, performance requirements and limitations applicable to each award under the plan are set forth in the related award agreement. Such terms, conditions, requirements and limitations may include, but are not limited to, continuous service with us or our subsidiaries, conditions under which acceleration of vesting will occur, and achievement of specific vesting conditions.

The price at which shares of common stock or Series E Preferred Stock may be purchased under a stock option will be paid in full at the time of exercise in cash or by other means, including by means of tendering shares of common stock or Series E Preferred Stock valued at fair market value on the date of exercise, if permitted by the administrator, or any combination thereof.

We have the right to deduct applicable taxes from any award payment and to withhold, at the time of delivery or vesting of shares under the plan, an appropriate number of shares for payment of taxes required by law or to take such other action as may be necessary in our opinion to satisfy all obligations for the withholding of such taxes. We may defer delivery with respect to common stock or Series E Preferred Stock obtained pursuant to an award under the plan until arrangement satisfactory to us have been made with respect to any such withholding obligation. If our common stock or Series E Preferred Stock is used to satisfy withholding, such stock will be valued based on the fair market value on the date the shares are withheld.

Amendment or termination

Our Board may, at any time, amend or terminate the plan. However, no amendment or termination may, in the absence of written consent to the change by the affected plan participant, adversely affect the rights of the participant or beneficiary under any award granted under the plan prior to the date such amendment is adopted. In addition, no amendment may increase the number of shares of our common stock or Series E Preferred Stock that may be delivered pursuant to awards under the plan without the approval of our shareholders, except for certain adjustments as set forth in the plan.

Termination of employment

If the employment of a participant terminates, or service to us by any non-employee participant terminates, other than due to death or disability of such participant, all unvested awards held by

 

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such participant (except as otherwise provided in the related award agreement) will immediately terminate, and all awards to the extent vested but unexercised will terminate three months after such termination of employment or service and will be exercisable during the three-month period, unless the award agreement provides otherwise. Notwithstanding the foregoing, if a participant’s termination of employment is a termination for cause, as defined in the plan, to the extent any award is not effectively exercised or has not vested prior to such termination, it will lapse or be forfeited immediately upon such termination. However, in all events, an award will not be exercisable after the end of its term as set forth in the related award agreement.

If the employment of a participant terminates, or service to us by any non-employee participant terminates, due to death or following a participant’s disability, all unvested awards then held by the participant (except as otherwise provided in the related award agreement) will immediately terminate, and all awards to the extent vested but unexercised will terminate one year after such termination of employment or service, and will be exercisable during the one-year period, unless the award agreement provides otherwise. However, in all events, an award will not be exercisable after the end of its term as set forth in the related award agreement.

Adjustments

In the event of any change in our outstanding common stock or Series E Preferred Stock by reason of a stock split, stock dividend, combination or reclassification of shares, recapitalization, merger, or similar event, the administrator may adjust proportionally the number of shares of common stock or Series E Preferred Stock reserved under the plan and covered by outstanding awards denominated in stock, and the appropriate fair market value and other price determinations for such awards. In the event of any other change affecting the common stock or Series E Preferred Stock or any distribution (other than normal cash dividends) to holders of our common stock or Series E Preferred Stock, such adjustments as may be deemed equitable by the administrator, including adjustments to avoid fractional shares, will be made to give proper effect to such event.

In the event that we merge or consolidate with another corporation and we are not the survivor, or in the event of a sale or disposition of all or substantially all of our assets to another entity, an equivalent option or right applicable to the stock or other equity interests in the surviving or acquiring corporation or entity may be substituted for each outstanding award in lieu of such award, on such terms as are determined by the administrator exercising its reasonable judgment. If an equivalent option or right is not so substituted for any outstanding award, such award will become fully vested and exercisable and will be exercisable for a period of 15 days from the date the administrator gives written notice to the participant stating that a substituted option or right will not be issued and that the award is therefore fully vested and exercisable. If not exercised, the award will terminate at the end of this 15-day period.

2007 equity incentive plan

Our Board plans to adopt, subject to stockholder approval, our 2007 equity incentive plan, which will become effective upon the closing of this offering. The following is a description of the material features and provisions of our 2007 equity incentive plan.

 

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Objectives

Our 2007 equity incentive plan permits us to provide compensation alternatives such as incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, deferred stock awards, and performance share awards, using or based on our common stock.

Administration and eligibility

The 2007 equity incentive plan will be administered by our compensation committee. The compensation committee will have full power and authority to select the participants to whom awards will be granted, to make any combination of awards to participants, to accelerate the exercisability or vesting of any award and to determine the specific terms and conditions of each award, subject to the provisions of the 2007 equity incentive plan.

Stock available for awards

We have reserved                      shares of our common stock for the issuance of awards under the 2007 equity incentive plan, which may be treasury stock or authorized but unissued stock.

Awards

The exercise price of stock options awarded under the 2007 equity incentive plan may not be less than the fair market value of the common stock on the date of the option grant and the term of each option granted under the 2007 equity incentive plan will not exceed ten years from the date of grant. The compensation committee will determine at what time or times each option may be exercised (provided that in no event may it exceed ten years from the date of grant) and, subject to the provisions of the 2007 equity incentive plan, the period of time, if any, after retirement, death, disability or other termination of employment during which options may be exercised.

Stock appreciation rights may be granted under our 2007 equity incentive plan that allows the recipient to receive the appreciation in the fair market value of our common stock between the exercise date and the date of grant. The compensation committee determines the terms of stock appreciation rights, including when such rights become exercisable. When such rights become exercisable, the participant is entitled to shares of our common stock with a value equal to the excess of the fair market value of one share of common stock on the date of exercise over the grant value for such stock appreciation right, multiplied by the number of stock appreciation rights exercised.

Restricted stock, restricted stock unit awards, deferred stock awards, and performance share awards may also be granted under our 2007 equity incentive plan. Restricted stock awards are shares of our common stock that vest in accordance with terms and conditions established by the compensation committee. The compensation committee may impose whatever conditions to vesting it determines to be appropriate. Shares of restricted stock that do not vest are subject to our right of repurchase or forfeiture. Restricted stock unit awards are units entitling the recipient to receive shares of stock upon the lapse of vesting conditions, and subject to such restrictions and other conditions, as the compensation committee shall determine. Deferred stock awards are units entitling the recipient to receive shares of stock paid out on a deferred basis, and subject to such restrictions and conditions, as the compensation committee shall determine. Performance

 

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share awards are units entitling the recipient to receive shares of stock upon the attainment of specified performance goals, and subject to such restrictions and conditions, as the compensation committee shall determine. The compensation committee will determine the number of shares of restricted stock, restricted stock unit awards, deferred stock awards, or performance share awards granted to a participant in the 2007 equity incentive plan.

2007 employee stock purchase plan

Our Board plans to adopt, subject to stockholder approval, our 2007 employee stock purchase plan. The 2007 employee stock purchase plan is designed to comply with the requirements of Section 423 of the Internal Revenue Code of 1986 and will become effective upon the closing of this offering. The following is a description of the material features and provisions of the 2007 employee stock purchase plan.

Share reserve

A total of 250,000 shares of our common stock will be made available for sale. In addition, our 2007 employee stock purchase plan provides for annual increases in the number of shares available for issuance under the 2007 employee stock purchase plan on the first day of each calendar year, beginning with the first calendar year after the year in which the initial public offering of our stock occurs, equal to the lesser of:

 

 

the number of shares purchased hereunder in the previous year; or

 

 

such lesser amount as our Board may determine.

Administration

Our compensation committee administers the 2007 employee stock purchase plan. Our compensation committee has full and exclusive authority to interpret the terms of the 2007 employee stock purchase plan and determine eligibility, which determinations are final and binding on all participants, their successors and beneficiaries and us.

Eligibility

All of our employees are eligible to participate if they are customarily employed by us or any participating subsidiary for at least twenty hours per week. However, an employee may not be granted rights to purchase stock if:

 

 

such employee immediately after the grant would own stock or options possessing 5% or more of the total combined voting power or value of all classes of our capital stock; or

 

 

such employee’s rights to purchase stock under all of our employee stock purchase plans would accrue at a rate that exceeds $25,000 worth of our stock (determined at the fair market value of the shares at the time such right is granted) for each calendar year in which such rights are outstanding.

Plan years

Our 2007 employee stock purchase plan is intended to qualify under Section 423 of the Internal Revenue Code of 1986, and provides for consecutive twelve-month plan years, each of which begins on the first business day after January 1st, with the exception of the first plan year which

 

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will commence on the first business day of the calendar quarter after the quarter in which the initial public offering of our stock occurs.

Limitations

Our 2007 employee stock purchase plan permits participants to purchase common stock through payroll deductions, with a minimum deduction of $10 per pay period and a maximum which will be determined consistent with the parameters of Section 423 of the Internal Revenue Code of 1986. No interest is paid on payroll deductions.

Purchase of shares

Amounts deducted and accumulated by the participant are used to purchase shares of our common stock on the last business day of each calendar quarter. The purchase price is 85% of the fair market value of our common stock on the last business day of the applicable calendar quarter. Participants may end their participation at any time during a plan year, and will be paid their payroll deductions since the last purchase date. However, a participant cannot re-enroll in the 2007 employee stock purchase plan until a subsequent plan year. Participation ends automatically upon termination of employment with us.

Transferability

A participant may not transfer rights granted under the 2007 employee stock purchase plan other than by will, the laws of descent and distribution or as otherwise provided under the 2007 employee stock purchase plan.

Change in control transaction

In the event of a change in control, as defined under the 2007 employee stock purchase plan, the Committee will shorten the plan year then in effect and will use the payroll deductions to purchase shares of our stock at 85% of their then fair market value.

Plan amendment and termination

Our 2007 employee stock purchase plan will automatically terminate in 2017, unless we terminate it sooner. In addition, our Board has the authority to amend, suspend or terminate our 2007 employee stock purchase plan, except that no amendment shall be made without shareholder consent to increase the shares in the 2007 employee stock purchase plan in excess of the automatic increases set forth above, or as otherwise required by applicable law.

Registration of shares on Form S-8

We intend to file with the SEC a registration statement on Form S-8 covering the shares of common stock issuable under the 2000 stock option and restricted stock plan, the 2007 equity incentive plan and the 2007 employee stock purchase plan.

401(k) plan

We sponsor a defined contribution plan intended to qualify under Section 401 of the Code, or a 401(k) plan. Employees who are at least 18 years of age are generally eligible to participate and

 

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may enter the plan on the first day of the plan quarter coinciding with or next following the date they become eligible. Participants may make pre-tax contributions to the plan of up to 15% of their eligible compensation, subject to a statutorily prescribed annual limit. Each participant is fully vested in his or her contributions and the investment earnings. Contributions by the participants to the plan, and the income earned on these contributions, are generally not taxable to the participants until withdrawn. Participant contributions are held in trust as required by law. Individual participants may direct the trustee to invest their accounts in authorized investment alternatives.

Limitations of liability and indemnification

Our restated certificate of incorporation and amended and restated bylaws, each to be effective upon the completion of this offering, will provide that we will indemnify our directors and officers, and may indemnify our employees and other agents, to the fullest extent permitted by the Delaware General Corporation Law, which prohibits our restated certificate of incorporation from limiting the liability of our directors for the following:

 

 

any breach of the director’s duty of loyalty to us or to our stockholders;

 

 

acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law;

 

 

unlawful payment of dividends or unlawful stock repurchases or redemptions; and

 

 

any transaction from which the director derived an improper personal benefit.

If Delaware law is amended to authorize corporate action further eliminating or limiting the personal liability of a director, then the liability of our directors will be eliminated or limited to the fullest extent permitted by Delaware law, as so amended. Our restated certificate of incorporation does not eliminate a director’s duty of care and, in appropriate circumstances, equitable remedies, such as injunctive or other forms of non-monetary relief, remain available under Delaware law. This provision also does not affect a director’s responsibilities under any other laws, such as the federal securities laws or other state or federal laws. Under our amended and restated bylaws, we are also empowered to enter into indemnification agreements with our directors, officers, employees and other agents and to purchase insurance on behalf of any person whom we are required or permitted to indemnify.

In addition to the indemnification required in our restated certificate of incorporation and amended and restated bylaws, we entered into indemnification agreements with each of our current directors, officers, and some employees before the completion of this offering. These agreements provide for the indemnification of our directors, officers, and some employees for all reasonable expenses and liabilities incurred in connection with any action or proceeding brought against them by reason of the fact that they are or were our agents. We believe that these bylaw provisions and indemnification agreements are necessary to attract and retain qualified persons as directors and officers. We also maintain directors’ and officers’ liability insurance.

The limitation of liability and indemnification provisions in our restated certificate of incorporation and amended and restated bylaws may discourage stockholders from bringing a lawsuit against directors for breach of their fiduciary duties. They may also reduce the likelihood of derivative litigation against directors and officers, even though an action, if successful, might benefit us and our stockholders. A stockholder’s investment may be harmed to the extent we pay

 

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the costs of settlement and damage awards against directors and officers pursuant to these indemnification provisions. Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, or the Securities Act, may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. There is no pending litigation or proceeding naming any of our directors or officers as to which indemnification is being sought, nor are we aware of any pending or threatened litigation that may result in claims for indemnification by any director or officer.

 

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Certain relationships and related transactions

Other than compensation arrangements which are described in “Executive and director compensation” and the transactions described below, since January 1, 2004, there has not been, and there is not currently proposed, any transaction or series of similar transactions to which we were or will be a party in which the amount involved exceeded or will exceed $120,000 and in which any related party, including any holder of five percent or more of any class of our capital stock, any director or any executive officer had or will have a direct or indirect material interest.

Private placements and reclassification of securities

Between May 2004 and January 2007, we engaged in several private placements of our securities to accredited investors and reclassified our Series F Preferred Stock.

In May and June of 2004, we raised approximately $2.8 million through the issuance of subordinated convertible promissory notes and warrants to purchase up to approximately 912,000 shares of our common stock. In September and October of 2004, we raised approximately $10 million through the issuance of approximately 2.2 million shares of our Series F Preferred Stock. In September 2004, we also issued approximately 620,000 shares of our Series F Preferred Stock in exchange for the subordinated convertible promissory notes issued in May and June of 2004 and the interest accrued on the notes, and we issued approximately 6.8 million shares of our Series E Preferred Stock in exchange for all of our outstanding Series A, Series B, Series C and Series D Preferred Stock.

In June 2005, we raised approximately $305,000 through the issuance of approximately 68,000 shares of our Series F Preferred Stock. In November and December of 2005, we raised approximately $8.4 million through the issuance of approximately 1.9 million shares of our Series F Preferred Stock.

In December 2006, we reclassified the approximately 4.8 million shares of our outstanding Series F Preferred Stock into approximately 7.9 million shares of our Series F Preferred Stock and approximately 480,000 shares of our Series E Preferred Stock. Also, in December of 2006 and January of 2007, we raised approximately $20 million through the issuance of approximately four million shares of our Series F Preferred Stock.

In connection with each of these private placements and the reclassification, we entered into agreements with the purchasers, or in the case of the reclassification, our stockholders, that provided for, among other things, registration rights, pre-emptive rights, rights of first refusal, co-sale rights, agreements regarding the number and election of our directors, market stand-off obligations and various reporting obligations. Upon the completion of this offering, our ongoing obligations under these agreements, except for our obligations regarding registration rights, which are described in the section entitled “Description of capital stock,” will terminate.

 

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The following tables summarize the participation by our five percent stockholders, executive officers and directors in these private placements and the reclassification:

 

2004                        
 
Name    May/June 2004(1)    September/October 2004
  

Notes

($)

  

Warrants

(#)

  

Series E
Preferred

Stock(2)

(#)

  

Series F
Preferred

Stock(3)

(#)

 

5% Stockholders

           

Skyline Entities(4)

   366,648    119,983    1,047,619    381,405

Cargill, Incorporated

            888,889

Schott AG

         2,690,477   

Brookside Capital Partners Fund, L.P.

           

Venture Investors Early Stage Fund III Limited Partnership

   509,234    166,655    390,953    390,941

Executive Officers and Directors

           

Robert J. Palay(5)

   152,770    49,989    23,571    111,726

Thomas M. Palay, Ph.D.(5)

   152,770    49,989    23,571    111,726

Stanley D. Rose, Ph.D.

   50,850    16,678       11,300

David S. Snyder

           

Emile F. Nuwaysir, Ph.D.

   4,583    1,483    3,571    1,018

Roland Green, Ph.D.

   18,332    6,011       4,073

Daniel B. Clutter, Ph.D.

   12,204    4,003       2,712

Steven W. Smith

   6,102    2,001       1,356

Sanjiv Arora(6)

            888,889

Francesco Cerrina, Ph.D.(7)

           

Gregg C. Fergus

           

Leroy Hood, M.D., Ph.D.

           

Gerhard Kiewel(8)

         2,690,477   

David G. Lowe, Ph.D.(4)

   366,648    119,983    1,047,619    381,405

Frank Mohler(8)

         2,690,477   

John Neis(9)

   509,234    166,655    390,953    390,941

Peter K. Shagory(10)

   305,540    100,013    260,476    223,452
 

 

(1)   Represents principal of and interest accrued through the date of exchange in September 2004 on subordinated convertible promissory notes convertible into Series F Preferred Stock and shares of common stock and warrants to purchase common stock for an exercise price of $0.01 per share issued by us in May and June of 2004.

 

(2)   Represents Series E Preferred Stock issued by us in exchange for outstanding shares of Series A, B, C and D Preferred Stock.

 

(3)  

Includes the following number of shares of Series F Preferred Stock issued by us in exchange for the subordinated convertible promissory notes issued in May and June of 2004: 75,035 shares to Skyline Venture Partners Qualified Purchaser II, L.P., 6,441 shares to Skyline Venture Partners II, L.P., 113,163 shares to Venture Investors Early Stage Fund III Limited Partnership, 33,948 shares to Tactics II LLC, 11,300 shares to Stanley B. Rose, Ph.D., 1,018 shares to Emile F. Nuwaysir, Ph.D., 4,073 shares to Roland Green, Ph.D., 2,712 shares to Daniel B. Clutter, Ph.D., 1,356 shares to Steven W. Smith, 39,933 shares to Baird Venture Partners I Limited Partnership and 27,964 shares to BVP I Affiliates Fund Limited Partnership. Also includes the following number of shares of Series F Preferred Stock issued by us at a purchase price of $4.50 per share: 276,218 shares to Skyline Venture Partners Qualified Purchaser II, L.P., 23,711 shares to Skyline Venture Partners II, L.P., 888,889 shares to Cargill, Incorporated, 277,778

 

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shares to Venture Investors Early Stage Fund III Limited Partnership, 77,778 shares to Tactics II LLC, 91,488 shares to Baird Venture Partners I Limited Partnership and 64,067 shares to BVP I Affiliates Fund Limited Partnership.

 

(4)   Includes the holdings of Skyline Venture Partners Qualified Purchaser II, L.P., Skyline Venture Partners II, L.P. and Skyline Expansion Fund, L.P.

 

(5)   Includes the holdings of Tactics II Investments LLC and Tactics II LLC.

 

(6)   Includes the holdings of Cargill, Incorporated.

 

(7)   Includes the holdings of NimbleGen, Inc.

 

(8)   Includes the holdings of Schott AG.

 

(9)   Includes the holdings of Venture Investors Early Stage Fund III Limited Partnership.

 

(10)   Includes the holdings of Baird Venture Partners I Limited Partnership and BVP I Affiliates Fund Limited Partnership.

 

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2005            
 
Name    June 2005    November 2005
  

Series F
Preferred Stock(1)

(#)

  

Series F
Preferred Stock(2)

(#)

 

5% Stockholders

     

Skyline Entities(3)

      333,334

Cargill, Incorporated

   4,612    666,667

Schott AG

     

Brookside Capital Partners Fund, L.P.

     

Venture Investors Early Stage Fund III Limited Partnership

      88,889

Executive Officers and Directors

     

Robert J. Palay(4)

      55,556

Thomas M. Palay, Ph.D.(4)

      55,556

Stanley D. Rose, Ph.D.

      111,112

David S. Snyder

     

Emile F. Nuwaysir, Ph.D.

     

Roland Green, Ph.D.

     

Daniel B. Clutter, Ph.D.

      1,112

Steven W. Smith

     

Sanjiv Arora(5)

      666,667

Francesco Cerrina, Ph.D.

     

Gregg C. Fergus

     

Leroy Hood, M.D., Ph.D.

     

Gerhard Kiewel

     

David G. Lowe, Ph.D.(3)

      333,334

Frank Mohler

     

John Neis(6)

      88,889

Peter K. Shagory(7)

      88,889
 

 

(1)   Represents shares of Series F Preferred Stock issued by us at a purchase price of $4.50 per share in June 2005.

 

(2)   Represents shares of Series F Preferred Stock issued by us at a purchase price of $4.50 per share in November 2005.

 

(3)   Includes the holdings of Skyline Venture Partners Qualified Purchaser II, L.P., Skyline Venture Partners II, L.P. and Skyline Expansion Fund, L.P.

 

(4)   Includes the holdings of Tactics II Investments LLC and Tactics II LLC.

 

(5)   Includes the holdings of Cargill, Incorporated.

 

(6)   Includes the holdings of Venture Investors Early Stage Fund III Limited Partnership.

 

(7)   Includes the holdings of Baird Venture Partners I Limited Partnership and BVP I Affiliates Fund Limited Partnership.

 

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2006-2007                        
 
     December 2006(1)    December 2006(2)    January 2007(3)
  

Series E
Preferred Stock

(#)

  

Series F

Preferred Stock

(#)

  

Series F

Preferred Stock

(#)

  

Series F

Preferred Stock

(#)

 

5% Stockholders

           

Skyline Entities(4)

   71,474    1,179,319    388,876    81,857

Cargill, Incorporated

   156,017    2,574,277    100,000   

Schott AG

           

Brookside Capital Partners Fund, L.P.

         1,200,000    444,806

Venture Investors Early Stage Fund III Limited Partnership

   47,983    791,720      

Executive Officers and Directors

           

Robert J. Palay(5)

   16,728    276,015      

Thomas M. Palay, Ph.D.(5)

   16,728    276,015      

Stanley D. Rose, Ph.D.

   12,241    201,980      

David S. Snyder

           

Emile F. Nuwaysir, Ph.D.

   102    1,680      

Roland Green, Ph.D.

   407    6,720      

Daniel B. Clutter, Ph.D.

   382    6,310      

Steven W. Smith

   136    2,237      

Sanjiv Arora(6)

   156,017    2,574,277    100,000   

Francesco Cerrina, Ph.D.

           

Gregg C. Fergus

           

Leroy Hood, M.D., Ph.D.

           

Gerhard Kiewel

           

David G. Lowe, Ph.D.(4)

   71,474    1,179,319    388,876    81,857

Frank Mohler

           

John Neis(7)

   47,983    791,720      

Peter K. Shagory(8)

   31,234    515,363      
 

 

(1)   Represents shares of Series E Preferred Stock and shares of Series F Preferred Stock issued by us in December 2006 in exchange for outstanding shares of Series F Preferred Stock as part of a reclassification.

 

(2)   Represents shares of Series F Preferred Stock issued by us at a purchase price of $5.00 per share in December 2006.

 

(3)   Represents shares of Series F Preferred Stock issued by us at a purchase price of $5.00 per share in January 2007.

 

(4)   Includes the holdings of Skyline Venture Partners Qualified Purchaser II, L.P., Skyline Venture Partners II, L.P. and Skyline Expansion Fund, L.P.

 

(5)   Includes the holdings of Tactics II Investments LLC and Tactics II LLC.

 

(6)   Includes the holdings of Cargill, Incorporated.

 

(7)   Includes the holdings of Venture Investors Early Stage Fund III Limited Partnership.

 

(8)   Includes the holdings of Baird Venture Partners I Limited Partnership and BVP I Affiliates Fund Limited Partnership.

 

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Transactions with our executive officers and directors

From time to time, we have issued options to purchase shares of our common stock and our Series E Preferred Stock under our 2000 stock option and restricted stock plan to our executive officers and directors.

Prior to the completion of this offering, we intend to enter into indemnification agreements with each of our executive officers and directors, providing for indemnification against certain reasonable expenses and liabilities incurred in connection with any action or proceeding brought against them. For more information regarding these agreements, see “Executive and director compensation.”

In October 2005, Dr. Rose exercised an option to purchase 450,000 shares of our Series E Preferred Stock. He paid the exercise price by delivering a promissory note payable to us in the principal amount of $205,200. The note bears interest on the unpaid principal balance from the date of issue at a fluctuating rate equal to the Federal long-term rate under Section 1274(d) of the Internal Revenue Code, compounded annually. Principal and all interest accrued on the note is payable in one lump-sum payment due on the first to occur of October 7, 2015, a change in control of the company, a public offering of our common stock in which the per share price reflects a pre-money offering valuation of the company of at least $150 million, or the 90th day after Dr. Rose’s termination of employment with us. The note is secured by a pledge of the stock acquired pursuant to the exercise of the option.

 

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Principal stockholders

The following table presents information as to the beneficial ownership of our common stock as of March 12, 2007 by:

 

 

each of the executive officers listed in the summary compensation table;

 

 

each of our directors;

 

 

all of our directors and executive officers as a group; and

 

 

each stockholder known by us to be the beneficial owner of more than 5% of our common stock.

Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Unless otherwise indicated below, to our knowledge, the persons and entities named in the table have sole voting and sole investment power with respect to all shares beneficially owned, subject to community property laws where applicable. Shares of our common stock subject to options or warrants that are currently exercisable or exercisable within 60 days of March 12, 2007 are deemed to be outstanding and to be beneficially owned by the person holding the options or warrants for the purpose of computing the percentage ownership of that person but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.

This table lists applicable percentage ownership based on 1,553,833 shares of common stock outstanding as of March 12, 2007 and after giving effect to the conversion of our outstanding preferred stock into 19,613,310 shares of common stock immediately prior to the closing of this offering.

 

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Unless otherwise indicated, the address for each of the stockholders in the table below is c/o NimbleGen Systems, Inc., One Science Drive, Madison, Wisconsin 53711.

 

     Beneficial Ownership Prior to the Offering     
Name and Address of Beneficial Owner  

Shares
    Beneficially
Owned(1)

(#)

  

Options or
Warrants
Exercisable
Within
60 Days of
    March 12, 2007

(#)

   Percent
before the
Offering(2)
  Percent after
the Offering
 

5% Stockholders

         

Skyline Entities(3)

c/o Skyline Venture Partners II, L.P.

525 University Avenue, #520

         

Palo Alto, CA 94301

  2,989,128    119,983    14.04%  

Cargill, Incorporated(4)

1200 Park Place, Suite 300

         

San Mateo, CA 94403

  2,830,294       13.37%  

Schott AG(5)

Hattenbergstrasse 10

         

Mainz, Germany D-55122

  2,690,477       12.71%  

Brookside Capital Partners Fund, L.P.(6)

c/o Brookside Capital

111 Huntington Avenue

         

Boston, MA 02199

  1,644,806       7.77%  

Venture Investors Early Stage Fund III Limited Partnership(7)

505 South Rosa Road

         

Madison, WI 53719.

  1,397,311    166,655    6.55%  

Executive Officers and Directors

         

Robert J. Palay(8)

  1,259,847    328,533    5.86%  

Thomas M. Palay, Ph.D.(9)

  1,259,847    328,533    5.86%  

Stanley D. Rose, Ph.D.(10)

70 Chocolate Hole

St John, VI 00830.

  1,490,899    826,678    6.78%  

David S. Snyder(11)

  280,000    280,000    1.31%  

Emile F. Nuwaysir, Ph.D.(12)

2022 Madison Street

Madison, WI 53711

  255,336    239,983    1.19%  

Roland Green, Ph.D.(13)

506 Ozark Trail

Madison, WI 53705

  343,363    268,736    1.60%  

Daniel B. Clutter, Ph.D.(14)

517 Vanderbilt Drive

Waunakee, WI 53597

  140,695    134,003    *  
 

 

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     Beneficial Ownership Prior to the Offering     
Name and Address of Beneficial Owner   Shares
    Beneficially
Owned(1)
   Options or
Warrants
Exercisable
Within
60 Days of
    March 12, 2007
   Percent
before the
    Offering
  Percent after
the Offering
 

Steven W. Smith(15)

2854 Richardson Street

Fitchburg, WI 53711

  108,374    106,001    *  

Sanjiv Arora(16)

c/o Cargill Ventures

15407 McGinty Road West

Wayzata, MN 55391

  2,830,294       13.37%  

Francesco Cerrina, Ph.D.(17)

NimbleGen, Inc.

4810 Waukesha Street

Madison, WI 53705

  442,092    14,592    2.09%  

Gregg C. Fergus(18)

c/o Baird Venture Partners

510 Charmany Drive, Suite 172

Madison, WI 53719

  25,000    25,000    *  

Leroy Hood, M.D., Ph.D.(19)

c/o Institute for System Biology

1441 North 34th Street

Seattle, WA 98103

  35,000    35,000    *  

Gerhard Kiewel(20)

c/o SCHOTT North America, Inc.

555 Taxler Road

Elmsford, NY 10523

  2,690,477       12.71%  

David G. Lowe, Ph.D.(21)

c/o Skyline Ventures

525 University Avenue, Suite 520

Palo Alto, CA 94301

  2,989,128    119,983    14.04%  

Frank Mohler(22)

c/o SCHOTT AG

Hatlenbergstrasse 10

Mainz, Germany B-55122

  2,690,477       12.71%  

John Neis(23)

505 South Rosa Road

Madison, WI 53719

  1,397,311    166,655    6.55%  

Peter K. Shagory(24)

c/o Robert W. Baird & Co.

227 West Monroe, Ste. 2200

Chicago, IL 60606

  907,086    100,013    4.27%  

All executive officers and directors as a group (17 persons)(25)

  15,473,446    2,886,221    64.23%  
 

 

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*   Represents beneficial ownership of less than one percent (1%) of the outstanding shares of our common stock.

 

(1)   Includes shares of common stock issuable pursuant to stock options or warrants exercisable within 60 days of March 12, 2007.

 

(2)   Calculated based on Rule 13d-3(d)(1)(i) of the Securities Exchange Act of 1934, as amended, using 21,167,143 shares of common stock, which includes 1,553,833 shares of our common stock outstanding on March 12, 2007, and the conversion of our outstanding preferred stock into 19,613,310 shares of common stock immediately prior to the closing of this offering. In calculating this amount, shares of our common stock subject to options or warrants that are currently exercisable or exercisable within 60 days of March 12, 2007 are deemed to be outstanding and to be beneficially owned by the person holding the options or warrants for the purpose of computing the percentage ownership of that person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.

 

(3)   Includes 92,094 shares of common stock, 1,010,155 shares of Series E Preferred Stock, which will be converted into 1,010,155 shares of common stock immediately prior to the closing of the offering, and 905,643 shares of Series F Preferred Stock, which will be converted into 905,643 shares of common stock immediately prior to the closing of the offering, held by Skyline Venture Partners Qualified Purchaser Fund II, L.P.; 7,906 shares of common stock, 86,716 shares of Series E Preferred Stock, which will be converted into 86,716 shares of common stock immediately prior to the closing of the offering, and 77,742 shares of Series F Preferred Stock, which will be converted into 77,742 shares of common stock immediately prior to the closing of the offering, held by Skyline Venture Partners II, L.P.; and 22,222 shares of Series E Preferred Stock, which will be converted into 22,222 shares of common stock immediately prior to the closing of the offering, and 666,667 shares of Series F Preferred Stock, which will be converted into 666,667 shares of common stock immediately prior to the closing of the offering, held by Skyline Expansion Fund, L.P. Also includes 110,517 shares of common stock issuable pursuant to warrants held by Skyline Venture Partners Qualified Purchaser Fund II, L.P. and 9,466 shares of common stock issuable pursuant to warrants held by Skyline Venture Partners II, L.P.

 

(4)   Includes 156,017 shares of Series E Preferred Stock, which will be converted into 156,017 shares of common stock immediately prior to the closing of the offering, and 2,674,277 shares of Series F Preferred Stock, which will be converted into 2,674,277 shares of common stock immediately prior to the closing of the offering.

 

(5)   Includes 2,690,477 shares of Series E Preferred Stock, which will be converted into 2,690,477 shares of common stock immediately prior to the closing of the offering.

 

(6)   Includes 1,644,806 shares of Series E Preferred Stock, which will be converted into 1,644,806 shares of common stock immediately prior to the closing of the offering.

 

(7)   Includes 438,936 shares of Series E Preferred Stock, which will be converted into 438,936 shares of common stock immediately prior to the closing of the offering, and 791,720 shares of Series F Preferred Stock, which will be converted into 791,720 shares of common stock immediately prior to the closing of the offering.

 

(8)   Includes 405,000 shares of common stock held by Tactics II Investments LLC and 250,299 shares of Series E Preferred Stock, which will be converted into 250,299 shares of common stock immediately prior to the closing of the offering, 276,015 shares of Series F Preferred Stock, which will be converted into 276,015 shares of common stock immediately prior to the closing of the offering, and 49,989 shares of common stock issuable pursuant to warrants held by Tactics II LLC. Also includes 278,544 shares of common stock issuable pursuant to stock options which are exercisable within 60 days of March 12, 2007, 134,375 shares of which will remain subject to vesting restrictions for more than 60 days after March 12, 2007.

 

(9)   Includes 405,000 shares of common stock held by Tactics II Investments LLC and 250,299 shares of Series E Preferred Stock, which will be converted into 250,299 shares of common stock immediately prior to the closing of the offering, 276,015 shares of Series F Preferred Stock, which will be converted into 276,015 shares of common stock immediately prior to the closing of the offering, and 49,989 shares of common stock issuable pursuant to warrants held by Tactics II LLC. Also includes 278,544 shares of common stock issuable pursuant to stock options which are exercisable within 60 days of March 12, 2007, 134,375 shares of which will remain subject to vesting restrictions for more than 60 days after March 12, 2007.

 

(10)   Includes 462,241 shares of Series E Preferred Stock, which will be converted into 462,241 shares of common stock immediately prior to the closing of the offering, and 201,980 shares of Series F Preferred Stock, which will be converted into 201,980 shares of common stock immediately prior to the closing of the offering. Also includes 810,000 shares of common stock issuable pursuant to stock options which are exercisable within 60 days of March 12, 2007, 630,000 shares of which will remain subject to vesting restrictions for more than 60 days after March 12, 2007.

 

(11)   Includes 150,000 shares of Series E Preferred Stock, which will be converted into 150,000 shares of common stock immediately prior to the closing of the offering, issuable pursuant to stock options which are exercisable within 60 days of March 12, 2007, 109,375 shares of which will remain subject to vesting restrictions for more than 60 days after March 12, 2007. Also includes 130,000 shares of common stock issuable pursuant to stock options which are exercisable within 60 days of March 12, 2007, 113,750 shares of which will remain subject to vesting restrictions for more than 60 days after March 12, 2007.

 

(12)   Includes 3,673 shares of Series E Preferred Stock, which will be converted into 3,673 shares of common stock immediately prior to the closing of the offering, and 1,680 shares of Series F Preferred Stock, which will be converted into 1,680 shares of common stock immediately prior to the closing of the offering. Also includes 150,000 shares of Series E Preferred Stock, which will be converted into 150,000 shares of common stock immediately prior to the closing of the offering, issuable pursuant to stock options which are exercisable within 60 days of March 12, 2007, 53,125 of which will remain subject to vesting restrictions for more than 60 days after March 12, 2007, but will become fully vested upon the completion of the offering, and 88,500 shares of common stock issuable pursuant to stock options which are exercisable within 60 days of March 12, 2007, 60,000 shares of which will remain subject to vesting restrictions for more than 60 days after March 12, 2007.

 

(13)  

Includes 407 shares of Series E Preferred Stock, which will be converted into 407 shares of common stock immediately prior to the closing of the offering, and 6,720 shares of Series F Preferred Stock, which will be converted into 6,720 shares of common stock immediately prior to the closing of the offering. Also includes 150,000 shares of Series E Preferred Stock, which will be

 

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converted into 150,000 shares of common stock immediately prior to the closing of the offering, issuable pursuant to stock options which are exercisable within 60 days of March 12, 2007, 53,125 of which will remain subject to vesting restrictions for more than 60 days after March 12, 2007, but will become fully vested upon the completion of the offering, and 112,725 shares of common stock issuable pursuant to stock options which are exercisable within 60 days of March 12, 2007, 60,000 shares of which will remain subject to vesting restrictions for more than 60 days after March 12, 2007.

 

(14)   Includes 382 shares of Series E Preferred Stock, which will be converted into 382 shares of common stock immediately prior to the closing of the offering, and 6,310 shares of Series F Preferred Stock, which will be converted into 6,310 shares of common stock immediately prior to the closing of the offering. Also includes 40,000 shares of Series E Preferred Stock, which will be converted into 40,000 shares of common stock immediately prior to the closing of the offering, issuable pursuant to stock options which are exercisable within 60 days of March 12, 2007, 14,166 2/3 of which will remain subject to vesting restrictions for more than 60 days after March 12, 2007, but will become fully vested upon the completion of the offering, and 90,000 shares of common stock issuable pursuant to stock options which are exercisable within 60 days of March 12, 2007, 52,500 shares of which will remain subject to vesting restrictions for more than 60 days after March 12, 2007.

 

(15)   Includes 136 shares of Series E Preferred Stock, which will be converted into 136 shares of common stock immediately prior to the closing of the offering, and 2,237 shares of Series F Preferred Stock, which will be converted into 2,237 shares of common stock immediately prior to the closing of the offering. Also includes 40,000 shares of Series E Preferred Stock, which will be converted into 40,000 shares of common stock immediately prior to the closing of the offering, issuable pursuant to stock options which are exercisable within 60 days of March 12, 2007, 14,166 2/3 shares of which will remain subject to vesting restrictions for more than 60 days after March 12, 2007, but will become fully vested upon the completion of the offering, and 64,000 shares of common stock issuable pursuant to stock options which are exercisable within 60 days of March 12, 2007, 30,400 shares of which will remain subject to vesting restrictions for more than 60 days after March 12, 2007.

 

(16)   Includes 156,017 shares of Series E Preferred Stock, which will be converted into 156,017 shares of common stock immediately prior to the closing of the offering, and 2,674,277 shares of Series F Preferred Stock, which will be converted into 156,017 shares of common stock immediately prior to the closing of the offering, held by Cargill, Incorporated.

 

(17)   Includes 427,500 shares of common stock held by NimbleGen, Inc.

 

(18)   Includes 25,000 shares of common stock issuable upon the exercise of stock options granted subject to an amendment of the stockholders agreement.

 

(19)   Includes 35,000 shares of common stock issuable upon the exercise of stock options granted subject to an amendment of the stockholders agreement.

 

(20)   Includes 2,690,477 shares of Series E Preferred Stock, which will be converted into 2,690,477 shares of common stock immediately prior to the closing of the offering, held by Schott AG.

 

(21)   Includes 92,094 shares of common stock, 1,010,155 shares of Series E Preferred Stock, which will be converted into 1,010,155 shares of common stock immediately prior to the closing of the offering, and 905,643 shares of Series F Preferred Stock, which will be converted into 905,643 shares of common stock immediately prior to the closing of the offering, held by Skyline Venture Partners Qualified Purchaser Fund II, L.P.; 7,906 shares of common stock, 86,716 shares of Series E Preferred Stock, which will be converted into 86,716 shares of common stock immediately prior to the closing of the offering, and 77,742 shares of Series F Preferred Stock, which will be converted into 77,742 shares of common stock immediately prior to the closing of the offering, held by Skyline Venture Partners II, L.P.; and 22,222 shares of Series E Preferred Stock, which will be converted into 22,222 shares of common stock immediately prior to the closing of the offering, and 666,667 shares of Series F Preferred Stock, which will be converted into 666,667 shares of common stock immediately prior to the closing of the offering, held by Skyline Expansion Fund, L.P. Also includes warrants to purchase 110,517 shares of common stock held by Skyline Venture Partners Qualified Purchaser Fund II, L.P. and warrants to purchase 9,466 shares of common stock held by Skyline Venture Partners II, L.P.

 

(22)   Includes 2,690,477 shares of Series E Preferred Stock, which will be converted into 2,690,477 shares of common stock immediately prior to the closing of the offering, held by Schott AG.

 

(23)   Includes 438,936 shares of Series E Preferred Stock, which will be converted into 438,936 shares of common stock immediately prior to the closing of the offering, and 791,720 shares of Series F Preferred Stock, which will be converted into 791,720 shares of common stock immediately prior to the closing of the offering, held by Venture Investors Early Stage Fund III Limited Partnership. Also includes 166,655 shares of common stock issuable pursuant to the exercise of warrants held by Venture Investors Early Stage Fund III Limited Partnership.

 

(24)   Includes 171,565 shares of Series E Preferred Stock, which will be converted into 171,565 shares of common stock immediately prior to the closing of the offering, 303,105 shares of Series F Preferred Stock, which will be converted into 303,105 shares of common stock immediately prior to the closing of the offering, and 58,825 shares of common stock issuable pursuant to warrants held by Baird Venture Partners I Limited Partnership and 120,145 shares of Series E Preferred Stock, which will be converted into 120,145 shares of common stock immediately prior to the closing of the offering, 212,258 shares of Series F Preferred Stock, which will be converted into 212,258 shares of common stock immediately prior to the closing of the offering, and 41,188 shares of common stock issuable pursuant to warrants held by BVP I Affiliates Fund Limited Partnership.

 

(25)   Includes 450,000 shares of Series E Preferred Stock, which will be converted into 450,000 shares of common stock immediately prior to the closing of the offering. Also includes 530,000 shares of Series E Preferred Stock, which will be converted into 530,000 shares of common stock immediately prior to the closing of the offering, issuable pursuant to stock options which are exercisable within 60 days of March 12, 2007, 243,958 1/3 shares of which will remain subject to vesting restrictions for more than 60 days after March 12, 2007, and 1,852,313 shares of common stock issuable pursuant to stock options which are exercisable within 60 days of March 12, 2007, 1,215,400 shares of which will remain subject to vesting restrictions for more than 60 days after March 12, 2007.

 

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Description of capital stock

General

Upon the closing of this offering, our restated certificate of incorporation will authorize us to issue up to                      shares of common stock, $0.001 par value per share, and                      shares of preferred stock, $0.001 par value per share. The following information assumes the filing of our restated certificate of incorporation and the conversion of all outstanding shares of our preferred stock into shares of common stock upon the completion of this offering.

As of December 31, 2006, and assuming the conversion of all outstanding preferred stock into common stock immediately prior to the consummation of this offering, there were outstanding:

 

 

                     shares of our common stock held by approximately              stockholders; and

 

                     shares issuable upon exercise of outstanding stock options.

Common stock

Dividend rights

Subject to preferences that may apply to shares of preferred stock outstanding at the time, the holders of outstanding shares of our common stock are entitled to receive dividends out of funds legally available at the times and in the amounts that our Board may determine.

Voting rights

Each holder of common stock is entitled to one vote for each share of common stock held on all matters submitted to a vote of stockholders. Cumulative voting for the election of directors will not be provided for in our restated certificate of incorporation, which means that the holders of a majority of the shares voted can elect all of the directors then standing for election.

No preemptive or similar rights

Our common stock is not entitled to preemptive rights and is not subject to conversion or redemption.

Right to receive liquidation distributions

Upon our dissolution, liquidation or winding-up, the assets legally available for distribution to our stockholders are distributable ratably among the holders of our common stock, subject to the preferential rights and payment of liquidation preferences, if any, on any outstanding shares of preferred stock.

Preferred stock

Upon the completion of this offering, our Board will have the authority, without further action by our stockholders, to issue up to                      shares of preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof. These rights, preferences and privileges could include dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences, sinking fund terms and the number of shares constituting any series or

 

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the designation of such series, any or all of which may be greater than the rights of common stock. The issuance of our preferred stock could adversely affect the voting power of holders of common stock and the likelihood that such holders will receive dividend payments and payments upon liquidation. In addition, the issuance of preferred stock could have the effect of delaying, deferring or preventing a change of control of our company or other corporate action. Upon completion of this offering, no shares of preferred stock will be outstanding, and we have no present plan to issue any shares of preferred stock.

Anti-takeover provisions

Certificate of incorporation and bylaws to be in effect upon the completion of this offering

Our restated certificate of incorporation to be in effect upon the completion of this offering will provide for our Board to be divided into three classes, with staggered three-year terms. Only one class of directors will be elected at each annual meeting of our stockholders, with the other classes continuing for the remainder of their respective three-year terms. Because our stockholders do not have cumulative voting rights, our stockholders holding a majority of the shares of common stock outstanding will be able to elect all of our directors. Our restated certificate of incorporation and amended and restated bylaws to be effective upon the completion of this offering will provide that all stockholder action must be effected at a duly called meeting of stockholders and not by a consent in writing, and that only our Board, chairman of the Board, president and chief executive officer may call a special meeting of stockholders.

Our restated certificate of incorporation will require a 75% stockholder vote for the amendment, repeal or modification of certain provisions of our restated certificate of incorporation and amended and restated bylaws relating to the classification of our Board, the requirement that stockholder actions be effected at a duly called meeting, and the designated parties entitled to call a special meeting of the stockholders. The combination of the classification of our Board, the lack of cumulative voting and the 75% stockholder voting requirements will make it more difficult for our existing stockholders to replace our Board as well as for another party to obtain control of us by replacing our Board. Since our Board has the power to retain and discharge our officers, these provisions could also make it more difficult for existing stockholders or another party to effect a change in management. In addition, the authorization of undesignated preferred stock makes it possible for our Board to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to change our control.

These provisions may have the effect of deterring hostile takeovers or delaying changes in our control or management. These provisions are intended to enhance the likelihood of continued stability in the composition of our Board and its policies and to discourage certain types of transactions that may involve an actual or threatened acquisition of us. These provisions are designed to reduce our vulnerability to an unsolicited acquisition proposal. The provisions also are intended to discourage certain tactics that may be used in proxy fights. However, such provisions could have the effect of discouraging others from making tender offers for our shares and, as a consequence, they also may inhibit fluctuations in the market price of our shares that could result from actual or rumored takeover attempts. Such provisions may also have the effect of preventing changes in our management.

 

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Section 203 of the Delaware general corporation law

We are subject to Section 203 of the Delaware General Corporation Law, which prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years after the date that such stockholder became an interested stockholder, with the following exceptions:

 

 

before such date, the board of directors of the corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested holder;

 

 

upon completion of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction began, excluding for purposes of determining the voting stock outstanding (but not the outstanding voting stock owned by the interested stockholder) those shares owned (i) by persons who are directors and also officers and (ii) employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or

 

 

on or after such date, the business combination is approved by the board of directors and authorized at an annual or special meeting of the stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock that is not owned by the interested stockholder.

In general, Section 203 defines business combination to include the following:

 

 

any merger or consolidation involving the corporation and the interested stockholder;

 

 

any sale, transfer, pledge or other disposition (in one transaction or a series of transactions) of 10% or more of the assets of the corporation involving the interested stockholder;

 

 

subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder;

 

 

any transaction involving the corporation that has the effect of increasing the proportionate share of the stock or any class or series of the corporation beneficially owned by the interested stockholder; or

 

 

the receipt by the interested stockholder of the benefit of any loss, advances, guarantees, pledges or other financial benefits by or through the corporation.

In general, Section 203 defines an “interested stockholder” as an entity or person who, together with the person’s affiliates and associates, beneficially owns, or within three years prior to the time of determination of interested stockholder status did own, 15% or more of the outstanding voting stock of the corporation.

Acceleration of options upon change of control

Under our 2000 stock option and restricted stock plan and 2007 equity incentive plan, in the event of certain mergers, a reorganization or consolidation of our company with or into another corporation or the sale of all or substantially all of our assets or all of our capital stock wherein the successor corporation does not assume outstanding options or issue equivalent options, our Board is required to accelerate vesting of options outstanding under that plan.

 

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Registration rights

Demand registration rights

After the completion of this offering, the holders of 19,613,310 shares of our common stock will be entitled to certain demand registration rights. At any time beginning 180 days after the effective date of the registration statement of which this prospectus is a part, two different groups of holders of these shares, by demand of the holders of at least 50% of these shares held by either such group, can request that we register all or a portion of their shares. At the election of holders of either group, a combination of holders from both such groups, by demand of the holders of at least 50% of these shares, may exercise the requesting group’s demand registration rights. We will be required to file only two registration statements pursuant to the exercise by each such group of its demand registration rights. We will not be required to effect a demand registration during the period beginning 60 days prior to the filing, and ending six months following the effectiveness, of a registration statement relating to a public offering of our securities.

Piggyback registration rights

After the completion of this offering, the holders of 19,613,310 shares of common stock will be entitled to certain piggyback registration rights. As a result, whenever we propose to file a registration statement under the Securities Act, other than with respect to a registration related to employee benefit plans or corporate reorganizations, the holders of registrable securities are entitled to notice of the registration and have the right, subject to limitations that the underwriters may impose on the number of shares included in the registration, to include their registrable shares in the registration. It is anticipated that the agreement affording holders piggyback registration rights will be amended to eliminate such registration rights with respect to this offering.

Form S-3 registration rights

After the completion of this offering, the holders of 19,613,310 shares of our common stock will be entitled to request that we register their shares on Form S-3 if we are eligible to file a registration statement on Form S-3 and if the aggregate price to the public of the shares offered is at least $5.0 million. These stockholders may make an unlimited number of requests for registration on Form S-3. However, we will not be required to effect a registration on Form S-3 during the period starting with the filing of and ending on the date six months following the effective date of registration statement pertaining to a public offering.

Except in certain circumstances with respect to the exercise of demand registration rights, we will pay the registration expenses of the holders of registrable securities for the demand, piggyback or S-3 registrations.

The registration rights described above will expire, with respect to any particular stockholder, after our initial public offering, when that stockholder can sell its shares under Rule 144 of the Securities Act during any 90-day period.

In connection with this offering, substantially all the stockholders that have registration rights agreed not to sell or otherwise dispose of any securities without the prior written consent the underwriters for a period of 180 days, which may be extended in certain circumstances. See the “Underwriting” section.

 

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WARF

In addition to the registration rights described above, after the completion of this offering, WARF will be entitled to certain registration rights with respect to its shares of our common stock under the Standard Equity Agreement dated September 27, 1999, as amended August 30, 2000. As of March 12, 2007, WARF held 100,000 shares of our common stock and warrants to purchase up to 65,019 shares of our common stock for a purchase price of $0.01 per share.

Listing

We are applying to have our common stock listed on The Nasdaq Global Market under the symbol “NMBL.”

Transfer agent and registrar

After the completion of this offering the transfer agent and registrar for our common stock will be                     .

 

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Certain material United States federal income and

estate tax consequences to non-United States holders of

our common stock

The following discussion describes certain material U.S. federal income and estate tax consequences to non-U.S. holders (as defined below) of the acquisition, ownership and disposition of our common stock issued pursuant to this offering. This discussion is not a complete analysis of all the potential U.S. federal income tax consequences relating thereto, nor does it address any estate or gift tax consequences (except to the limited extent provided below under “U.S. federal estate tax”) or any tax consequences arising under any state, local or foreign tax laws or any other U.S. federal tax laws. This discussion is for general information only and does not constitute tax advice. This discussion is based on the Internal Revenue Code of 1986 (the “Code”), Treasury Regulations promulgated thereunder, judicial decisions, and published rulings and administrative pronouncements of the Internal Revenue Service, or the IRS, all as in effect as of the date of this offering. These authorities may change, possibly with retroactive effect, resulting in U.S. federal income tax consequences different from those discussed below. We have not sought, nor do we plan to seek a ruling from the IRS with respect to the matters discussed below, and there can be no assurance that the IRS will not take a contrary position regarding the tax consequences of the acquisition, ownership or disposition of our common stock, or that any such contrary position would not be sustained by a court.

This discussion is limited to non-U.S. holders who purchase our common stock issued pursuant to this offering and who hold our common stock as a capital asset within the meaning of Section 1221 of the Code (generally, property held for investment). This discussion does not address all U.S. federal income tax considerations that may be relevant to a particular holder in light of that holder’s particular circumstances. This discussion also does not consider any specific facts or circumstances that may be relevant to holders subject to special rules under the U.S. federal income tax laws, including, without limitation, U.S. expatriates, partnerships and other pass-through entities, “controlled foreign corporations,” “passive foreign investment companies,” corporations that accumulate earnings to avoid U.S. federal income tax, financial institutions, insurance companies, brokers, dealers or traders in securities, commodities or currencies, tax-exempt organizations, tax-qualified retirement plans, persons subject to the alternative minimum tax, and persons holding our common stock as part of a hedging or conversion transaction or straddle, or a constructive sale, or other risk reduction strategy.

PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS REGARDING THE PARTICULAR U.S. FEDERAL INCOME TAX CONSEQUENCES TO THEM OF ACQUIRING, OWNING AND DISPOSING OF OUR COMMON STOCK, AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER U.S. FEDERAL ESTATE AND GIFT TAX LAWS, ANY STATE, LOCAL OR FOREIGN TAX LAWS AND ANY OTHER U.S. FEDERAL TAX LAWS.

Definition of non-U.S. holder

For purposes of this discussion (except as otherwise provided in the estate tax discussion), a non-U.S. holder is any beneficial owner of our common stock that is an individual, corporation, estate or trust and is not a “United States Person.” A United States Person is any of the following:

 

 

an individual who is a citizen or resident of the United States for federal income tax purposes;

 

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a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized under the laws of the United States, any state thereof or the District of Columbia;

 

 

an estate the income of which is subject to U.S. federal income tax regardless of its source; or

 

 

a trust that (1) is subject to the primary supervision of a U.S. court and the control of one or more U.S. persons or (2) has validly elected to be treated as a U.S. person for U.S. federal income tax purposes.

If a partnership (or other entity taxed as a partnership for U.S. federal income tax purposes) holds our common stock, the tax treatment of a partner in the partnership generally will depend on the status of the partner and upon the activities of the partnership. Accordingly, partnerships that hold our common stock and partners in such partnerships are urged to consult their tax advisors regarding the specific U.S. federal income tax consequences to them.

Distributions on our common stock

Payments on our common stock will constitute dividends for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Amounts not treated as dividends for U.S. federal income tax purposes will constitute a return of capital and will first be applied against and reduce a holder’s adjusted tax basis in the common stock, but not below zero. Any excess will be treated as capital gain.

Dividends paid to a non-U.S. holder of our common stock that are not effectively connected with a United States trade or business conducted by such holder generally will be subject to U.S. federal withholding tax at a rate of 30% of the gross amount of the dividends, or such lower rate specified by an applicable tax treaty. To receive the benefit of a reduced treaty rate, a non-U.S. holder must furnish to us or our paying agent a valid IRS Form W-8BEN (or applicable successor form) certifying such holder’s qualification for the reduced rate. This certification must be provided to us or our paying agent prior to the payment of dividends and must be updated periodically. Non-U.S. holders that do not timely provide us or our paying agent with the required certification, but which qualify for a reduced treaty rate, may obtain a refund of any excess amounts withheld by timely filing an appropriate claim for refund with the IRS.

If a non-U.S. holder holds our common stock in connection with the conduct of a trade or business in the United States, and dividends paid on the common stock are effectively connected with such holder’s United States trade or business, the non-U.S. holder will be exempt from U.S. federal withholding tax. To claim the exemption, the non-U.S. holder must furnish to us or our paying agent a properly executed IRS Form W-8ECI (or other applicable form).

Any dividends paid on our common stock that are effectively connected with a non-U.S. holder’s U.S. trade or business generally will be subject to U.S. federal income tax on a net income basis in the same manner as if such holder were a United States Person, unless an applicable tax treaty provides otherwise. A non-U.S. holder that is a foreign corporation also may be subject to a branch profits tax equal to 30% (or such lower rate specified by an applicable tax treaty) of its effectively connected earnings and profits for the taxable year. Non-U.S. holders are urged to consult any applicable tax treaties that may provide for different rules.

 

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A non-U.S. holder who claims the benefit of an applicable income tax treaty generally will be required to satisfy applicable certification and other requirements prior to the distribution date. Non-U.S. holders should consult their tax advisors regarding their entitlement to benefits under a relevant income tax treaty.

Gain on disposition of our common stock

A non-U.S. holder generally will not be subject to U.S. federal income tax on any gain realized upon the sale, exchange, redemption or other taxable disposition of our common stock unless:

 

 

the gain is effectively connected with the non-U.S. holder’s conduct of a trade or business in the United States, and if required by an applicable tax treaty, attributable to a permanent establishment maintained by the non-U.S. holder in the United States;

 

 

the non-U.S. holder is a nonresident alien individual present in the United States for 183 days or more during the taxable year of the disposition and certain other requirements are met; or

 

 

our common stock constitutes a “United States Real Property Interest” by reason of our status as a “United States real property holding corporation,” or USRPHC, for U.S. federal income tax purposes at any time within the shorter of the five-year period preceding the disposition or the non-U.S. holder’s holding period for our common stock (the “applicable period”).

Generally, a corporation is a USRPHC if the fair market value of its United States Real Property Interests equals or exceeds 50% of the sum of the fair market value of its worldwide real property interests plus its other assets used or held for use in a trade or business. We believe that we currently are not and will not become a USRPHC. However, because the determination of whether we are a USRPHC depends on the fair market value of our U.S. real property interests relative to the fair market value of our other business assets, there can be no assurance that we will not become a USRPHC in the future. In the event we do become a USRPHC, as long as our common stock is regularly traded on an established securities market, our common stock will be treated as United States Real Property Interests only with respect to a non-U.S. holder that actually or constructively holds more than 5% of our common stock at some time during the applicable period.

Unless an applicable tax treaty provides otherwise, gain described in the first bullet point above will generally be subject to U.S. federal income tax on a net income basis in the same manner as if such holder were a United States Person. Non-U.S. holders that are foreign corporations also may be subject to a branch profits tax equal to 30% (or such lower rate specified by an applicable tax treaty) of its effectively connected earnings and profits for the taxable year. Non-U.S. holders are urged to consult any applicable tax treaties that may provide for different rules.

Gain described in the second bullet point above will be subject to U.S. federal income tax at a flat 30% rate, but may be offset by U.S. source capital losses.

Gain described in the third bullet point above generally will be taxed in the same manner as gain described in the first bullet point above, except that the branch profits tax will not apply.

U.S. federal estate tax

Any of our common stock that is owned or treated as owned by an individual who is a non-U.S. holder (as defined for estate tax purposes) at the time of death will be included in the individual’s gross estate for U.S. federal estate tax purposes and may be subject to U.S. federal estate tax, unless an applicable estate tax treaty provides otherwise.

 

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Information reporting and backup withholding

Generally, we must report annually to the IRS and to each non-U.S. holder the amount of dividends paid to such holder and the amount of tax, if any, withheld with respect to such dividends. The IRS may make the information returns reporting such dividends and withholding available to the tax authorities in the country in which the non-U.S. holder is resident.

In addition, a non-U.S. holder may be subject to information reporting requirements and backup withholding tax (currently at a 28% rate) with respect to dividends paid on, and the proceeds of disposition of (including a redemption), shares of our common stock, unless, generally, such holder certifies under penalties of perjury (usually on IRS Form W-8BEN) that such holder is not a United States person or such holder otherwise establishes an exemption. Additional rules relating to information reporting requirements and backup withholding tax with respect to payments of the proceeds from the disposition of shares (including a redemption) of our common stock are as follows:

 

 

If the proceeds are paid to or through the United States office of a broker, they generally will be subject to backup withholding tax and information reporting, unless the non-U.S. holder certifies under penalties of perjury (usually on IRS Form W-8BEN) that such holder is not a United States person or such holder otherwise establishes an exemption.

 

 

If the proceeds are paid to or through a non-United States office of a broker that is not a United States person and is not a foreign person with certain specified United States connections (a “United States-related person”), information reporting and backup withholding tax will not apply.

 

 

If the proceeds are paid to or through a non-United States office of a broker that is a United States person or a United States related person, they generally will be subject to information reporting (but not to backup withholding tax), unless the non-U.S. holder certifies under penalties of perjury (usually on IRS Form W-8BEN) that such holder is not a United States person or such holder otherwise establishes an exemption.

Backup withholding is not an additional tax. Any amounts withheld under the backup withholding tax rules may be allowed as a refund or a credit against a non-U.S. holder’s United States federal income tax liability, provided the required information is timely furnished by such holder to the IRS.

 

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Shares eligible for future sale

Prior to this offering, there has been no public market for our common stock, and we cannot predict the effect, if any, that market sales of shares of our common stock or the availability of shares of our common stock for sale will have on the market price of our common stock prevailing from time to time. Nevertheless, sales of substantial amounts of our common stock, including shares issued upon exercise of outstanding warrants or options, in the public market after this offering could adversely affect market prices prevailing from time to time and could impair our ability to raise capital through the sale of our equity securities.

Upon the completion of this offering, based on the number of shares outstanding as of                     , 2007, we will have                      shares of common stock outstanding, assuming no exercise of the underwriters’ over allotment option and no exercise of outstanding options. Of the outstanding shares, all of the shares sold in this offering will be freely tradable, except that any shares held by our affiliates, as that term is defined in Rule 144 under the Securities Act, may only be sold in compliance with the limitations described below.

The remaining                      shares of common stock will be deemed restricted securities as defined under Rule 144. Restricted securities may be sold in the public market only if registered or if they qualify for an exemption from registration under Rule 144, 144(k) or 701 promulgated under the Securities Act, which rules are summarized below. Subject to the lock-up agreements described below, all of these restricted securities will be available for sale in the public market beginning 180 days after the date of this prospectus under Rule 144, subject in some cases to volume limitations, Rule 144(k) or Rule 701.

Lock-up agreements

All of our directors and officers and substantially all of our stockholders have signed lock-up agreements under which they have agreed not to sell, transfer or dispose of, directly or indirectly, any shares of our common stock or any securities into or exercisable or exchangeable for shares of our common stock without the prior written consent of J.P. Morgan Securities Inc. for a period of 180 days, subject to a possible extension under certain circumstances, after the date of this prospectus. These agreements are described below under “Underwriting.”

Rule 144

In general, under Rule 144 as currently in effect, a person, or group of persons whose shares are required to be aggregated, who has beneficially owned shares that are restricted securities as defined in Rule 144 for at least one year is entitled to sell, within any three-month period commencing 90 days after the date of this prospectus, a number of shares that does not exceed the greater of:

 

 

1% of the then outstanding shares of our common stock, which will be approximately                      shares immediately after this offering; or

 

 

the average weekly trading volume in our common stock on The Nasdaq Global Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale.

In addition, a person who is not deemed to have been an affiliate at any time during the three months preceding a sale and who has beneficially owned the shares proposed to be sold for at least two years would be entitled to sell these shares under Rule 144(k) without regard to the

 

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requirements described above. To the extent that shares were acquired from one of our affiliates, a person’s holding period for the purpose of effecting a sale under Rule 144 would commence on the date of transfer from the affiliate.

Rule 701

In general, under Rule 701 of the Securities Act, any of our employees, directors, officers, consultants or advisors who purchased shares from us in connection with a compensatory stock or option plan or other written agreement is eligible to resell those shares in reliance on Rule 144, but without compliance with certain restrictions, including the holding period contained in Rule 144. However, substantially all shares issued under Rule 701 are subject to lock-up agreements and will only become eligible for sale at the expiration of such agreements.

Registration rights

On the date beginning 180 days after the date of this prospectus, the holders of 7,732,840 shares of our Series E Preferred Stock and 11,880,470 shares of our Series F Preferred Stock, which will be converted into an aggregate of 19,613,310 shares of our common stock immediately prior to the closing of the offering, or their transferees, will be entitled to certain rights with respect to the registration of those shares under the Securities Act. In addition, WARF is entitled to certain rights with respect to the registration of its shares of our common stock under the Securities Act of 1933, as amended, pursuant to the Standard Equity Agreement dated September 27, 1999, as amended August 30, 2000. As of March 12, 2007, WARF held 100,000 shares of our common stock and warrants to purchase up to 65,019 shares of our common stock for a purchase price of $0.01 per share. For a description of these registration rights, please see “Description of capital stock—Registration rights.” After these shares are registered, they will be freely tradable without restriction under the Securities Act.

Stock options

As of December 31, 2006, options to purchase a total of 1,605,947 shares of our common stock and options to purchase a total of 610,000 shares of our Series E Preferred Stock, which will be converted into options to purchase a total of 610,000 shares of our common stock immediately prior to the closing of the offering, were outstanding. We intend to file a registration statement on Form S-8 under the Securities Act to register all shares of our common stock subject to outstanding options, all shares of our common stock issued upon exercise of stock options and all shares of our common stock issuable under our stock option and employee stock purchase plans. Accordingly, shares of our common stock issued under these plans will be eligible for sale in the public markets, subject to vesting restrictions and the lock-up agreements described above.

 

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Underwriting

J.P. Morgan Securities Inc. is acting as sole bookrunner and lead manager for this offering and Thomas Weisel Partners LLC, Leerink Swann & Co., Inc. and Robert W. Baird & Co. Incorporated are acting as co-managers.

We and the underwriters named below have entered into an underwriting agreement covering the common stock to be sold in this offering. Each underwriter has severally agreed to purchase, and we have agreed to sell to each underwriter, the number of shares of common stock set forth opposite its name in the following table.

 

Name    Number of shares
 

J.P. Morgan Securities Inc.

  

Thomas Weisel Partners LLC

  

Leerink Swann & Co., Inc.

  

Robert W. Baird & Co. Incorporated

  
    

Total

  
 

The underwriting agreement provides that if the underwriters take any of the shares presented in the table above, then they must take all of the shares. No underwriter is obligated to take any shares allocated to a defaulting underwriter except under limited circumstances. The underwriting agreement provides that the obligations of the underwriters are subject to certain conditions precedent, including the absence of any material adverse change in our business and the receipt of certain certificates, opinions and letters from us, our counsel and our independent auditors.

The underwriters are offering the shares of common stock, subject to the prior sale of shares, and when, as and if such shares are delivered to and accepted by them. The underwriters will initially offer to sell shares to the public at the initial public offering price shown on the front cover page of this prospectus. The underwriters may sell shares to securities dealers at a discount of up to $             per share from the initial public offering price. Any such securities dealers may resell shares to certain other brokers or dealers at a discount of up to $             per share from the initial public offering price. After the initial public offering, the underwriters may vary the public offering price and other selling terms.

If the underwriters sell more shares than the total number shown in the table above, the underwriters have the option to buy up to an additional                      shares of common stock from the Company to cover such sales. They may exercise this option during the 30-day period from the date of this prospectus. If any shares are purchased under this option, the underwriters will purchase shares in approximately the same proportion as shown in the table above. If any additional shares of common stock are purchased, the underwriters will offer the additional shares on the same terms as those on which the shares are being offered.

The following table shows the per share and total underwriting discounts that we will pay to the underwriters. These amounts are shown assuming both no exercise and full exercise of the underwriters’ option to purchase additional shares.

 

      Without
overallotment exercise
   With full
overallotment exercise
 

Per share

   $                                         $                                     

Total

   $      $  
 

 

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The underwriters have advised us that they may make short sales of our common stock in connection with this offering, resulting in the sale by the underwriters of a greater number of shares than they are required to purchase pursuant to the underwriting agreement. The short position resulting from those short sales will be deemed a “covered” short position to the extent that it does not exceed the shares subject to the underwriters’ overallotment option and will be deemed a “naked” short position to the extent that it exceeds that number. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the trading price of the common stock in the open market that could adversely affect investors who purchase shares in this offering. The underwriters may reduce or close out their covered short position either by exercising the overallotment option or by purchasing shares in the open market. In determining which of these alternatives to pursue, the underwriters will consider the price at which shares are available for purchase in the open market as compared to the price at which they may purchase shares through the overallotment option. Any “naked” short position will be closed out by purchasing shares in the open market. Similar to the other stabilizing transactions described below, open market purchases made by the underwriters to cover all or a portion of their short position may have the effect of preventing or retarding a decline in the market price of our common stock following this offering. As a result, our common stock may trade at a price that is higher than the price that otherwise might prevail in the open market.

The underwriters have advised us that, pursuant to Rule 104 under Regulation M, they may engage in transactions, including stabilizing bids or the imposition of penalty bids, that may have the effect of stabilizing or maintaining the market price of the shares of common stock at a level above that which might otherwise prevail in the open market. A “stabilizing bid” is a bid for or the purchase of shares of common stock on behalf of the underwriters for the purpose of fixing or maintaining the price of the common stock. A “penalty bid” is an arrangement permitting the underwriters to claim the selling concession otherwise accruing to an underwriter or syndicate member in connection with the offering if the common stock originally sold by that underwriter or syndicate member is purchased by the underwriters in the open market pursuant to a stabilizing bid or to cover all or part of a syndicate short position. The underwriters have advised us that stabilizing bids and open market purchases may be effected on The Nasdaq Global Market, in the over-the-counter market or otherwise and, if commenced, may be discontinued at any time.

One or more of the underwriters may facilitate the marketing of this offering online directly or through one of its affiliates. In those cases, prospective investors may view offering terms and a prospectus online and, depending upon the particular underwriter, place orders online or through their financial advisor.

We estimate that our total expenses for this offering, excluding underwriting discounts, will be approximately $            .

We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act.

We and our executive officers and directors and the holders of substantially all of our outstanding common stock and common stock equivalents have agreed that, during the period beginning from the date of this prospectus and continuing to and including the date 180 days after the date of this prospectus, none of them will, directly or indirectly, offer, sell, offer to sell, contract to sell or otherwise dispose of any shares of our common stock without the prior written consent of J.P. Morgan Securities Inc., except in limited circumstances.

 

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We may issue shares of common stock or securities convertible into or exchangeable or exercisable for shares of common stock for the benefit of our employees, directors and officers under benefit plans described in this prospectus provided that, during the term of the lock-up, we will not file a registration statement covering shares of our common stock issuable upon exercise of options outstanding on the date we enter into the underwriting agreement.

We intend to apply to list our common stock on The Nasdaq Global Market under the symbol “NMBL.”

There has been no public market for the common stock prior to this offering. We and the underwriters will negotiate the initial public offering price. In determining the initial public offering price, we and the underwriters expect to consider a number of factors in addition to prevailing market conditions, including:

 

 

the history of and prospects for our industry;

 

an assessment of our management;

 

our present operations;

 

our historical results of operations;

 

the trend of our revenues and earnings; and

 

our earnings prospects.

We and the underwriters will consider these and other relevant factors in relation to the price of similar securities of generally comparable companies. Neither the Company nor the underwriters can assure investors that an active trading market will develop for the common stock, or that the common stock will trade in the public market at or above the initial public offering price.

From time to time in the ordinary course of their respective businesses, certain of the underwriters and their affiliates perform various financial advisory, investment banking and commercial banking services from time to time for us and our affiliates.

Baird Venture Partners I Limited Partnership and BVP I Affiliates Fund Limited Partnership are affiliated with Robert W. Baird & Co. Incorporated and collectively beneficially own 4.27% of the Company in preferred stock and warrants as of March 12, 2007. These entities are currently entitled to have one board seat on our Board. This Board seat is not compensated for any attendance. In addition, Robert W. Baird & Co. Incorporated (directly and through an affiliate) is a limited partner of Venture Investors Early Stage Fund III Limited Partnership, or VIES Fund. As a limited partner, it has no control (voting or otherwise) of the preferred stock and warrants held by the VIES Fund.

Legal matters

Certain legal matters with respect to the legality of the issuance of the shares of common stock offered by this prospectus will be passed upon for us by Godfrey & Kahn, S.C., Milwaukee, Wisconsin. Various shareholders of Godfrey & Kahn, S.C. currently beneficially own              shares of our common stock. Certain legal matters in connection with the offering will be passed upon for the underwriters by Cahill Gordon & Reindel LLP, New York, New York.

Experts

Our consolidated financial statements for the years ended December 31, 2004, 2005 and 2006 were audited by Grant Thornton LLP. The consolidated financial statements as of December 31,

 

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2004, 2005 and 2006, and for each of the three years in the period ended December 31, 2006, included in this prospectus have been so included in reliance on the reports of Grant Thornton LLP, independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.

Change in accountants

On July 25, 2006, with the approval of our Board, we dismissed Virchow, Krause & Company, LLP as our independent registered public accounting firm previously engaged as the principal accountant to audit our consolidated financial statements and engaged Grant Thornton LLP as our independent registered public accounting firm.

During the 2004 and 2005 fiscal years and the subsequent interim period preceding Virchow, Krause & Company, LLP’s dismissal, there were no adverse opinions or disclaimer opinions, or qualifications as to uncertainty, audit scope or accounting principles to the accountants reports or on the financial statements. During the same period, there were no reportable events (as defined in Item 304(a)(1)(v) of Regulation S-K) or disagreements with Virchow, Krause & Company, LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which reportable events or disagreements, if not resolved to the satisfaction of Virchow, Krause & Company, LLP, would have caused it to make reference to the subject matter of the reportable events or disagreements in connection with its reports.

Virchow, Krause & Company, LLP was provided with a copy of the above statements and we requested that it furnish a letter addressed to the Commission stating whether it agrees with these statements. A copy of Virchow, Krause & Company LLP’s letter, if any, will be included as an exhibit to the registration statement of which this prospectus is a part.

During the 2004 and 2005 fiscal years, and the subsequent interim period prior to engaging Grant Thornton LLP, neither we nor anyone on our behalf consulted Grant Thornton LLP regarding either (1) the application of accounting principles to a specified transaction regarding us, either completed or proposed, or the type of audit opinion that might be rendered on our consolidated financial statements, or (2) any matter regarding us that was a disagreement, as that term is defined in Item 304(a)(1)(iv) of Regulation S-K, or a reportable event, as that term is defined in Item 304(a)(1)(v) of Regulation S-K. Grant Thornton LLP has reported on the consolidated financial statements for each of the fiscal years ended December 31, 2004, 2005 and 2006.

Where you can find more information

We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the common stock. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement, some items of which are contained in exhibits to the registration statement as permitted by the rules and regulations of the Commission. For further information with respect to us and our common stock, we refer you to the registration statement, including the exhibits and the consolidated financial statements and notes filed as a part of the registration statement. Statements contained in this prospectus concerning the contents of any contract or any other document are not

 

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necessarily complete. If a contract or document has been filed as an exhibit to the registration statement, please see the copy of the contract or document that has been filed. Each statement in this prospectus relating to a contract or document filed as an exhibit is qualified in all respects by the filed exhibit. The exhibits to the registration statement should be referenced for the complete contents of these contracts and documents. You may obtain copies of this information by mail from the Public Reference Room of the SEC, 100 F Street, N.E., Room 1580, Washington, D.C. 20549, at prescribed rates. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website that contains reports, proxy statements and other information about issuers, like us, that file electronically with the SEC. The address of that website is www.sec.gov.

As a result of this offering, we will become subject to the information and reporting requirements of the Exchange Act and, in accordance with this law, will file periodic reports, proxy statements and other information with the Commission. These periodic reports, proxy statements and other information will be available for inspection and copying at the Commission’s public reference facilities and the website of the SEC referred to above. We maintain a website at www.nimblegen.com where these periodic reports, proxy statements and other information will be available in the future; however, the information on our website is not included or incorporated by reference into this prospectus.

 

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Index to consolidated financial statements

 

     Page

Report of independent registered public accounting firm

   F-2

Consolidated balance sheets

   F-3

Consolidated statements of operations

   F-4

Consolidated statements of temporary equity and stockholders’ equity

   F-5

Consolidated statements of cash flows

   F-7

Notes to consolidated financial statements

   F-8

 

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Report of independent registered public accounting firm

To the Board of Directors and Stockholders

NimbleGen Systems, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of NimbleGen Systems, Inc. and its Subsidiaries (the Company) as of December 31, 2005 and 2006, and the related consolidated statements of operations, temporary equity and stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2006. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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 also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2005 and 2006, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.

/S/ GRANT THORNTON LLP

Madison, Wisconsin

March 15, 2007

 

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NimbleGen Systems, Inc. consolidated balance sheets

 

     As of December
31,
 
(in thousands, except share and per share amounts)   2005     2006  
             

Assets

   

Current assets:

   

Cash and cash equivalents

  $  9,273     $19,001  

Accounts receivable, net of allowance for doubtful accounts of $61 and $317

  2,806     2,391  

Inventories

  961     1,243  

Prepaid expenses and other current assets

  334     371  
           

Total current assets

  13,374     23,006  

Property and equipment, net

  1,890     2,863  

Acquired licenses and patents, net of amortization of $228 and $758

  367     15,141  

Debt issuance costs, net of amortization of $32

      232  

Restricted cash

  226     416  

Other long-term assets

  48     55  
           

Total assets

  $15,905     $41,713  
           

Liabilities, temporary equity and stockholders’ equity

   

Current liabilities:

   

Accounts payable

  $  1,149     $  1,362  

License fee payable

      6,000  

Accrued liabilities

  1,240     1,729  

Deferred revenue

  1,180     1,412  

Current maturities of long-term debt

  174     2,189  
           

Total current liabilities

  3,743     12,692  

Long-term debt, less current portion of $2,189

      10,605  

Commitments and contingencies (see note 5)

   

Temporary equity:

   

Redeemable common stock, $0.001 par value;

   

100,000 shares issued and outstanding

  2     115  

Stockholders’ equity:

   

Series E Convertible Preferred Stock, $0.001 par value; authorized: 8,113,332 and 8,359,935 shares at December 31, 2005 and 2006; issued and outstanding: 7,215,337 and 7,732,840 shares at December 31, 2005 and 2006

  27,997     28,545  

Series F Convertible Preferred Stock, $0.001 par value; authorized: 4,909,118 and 10,446,470 shares at December 31, 2005 and 2006; issued and outstanding: 4,776,042 and 10,380,470 shares at December 31, 2005 and 2006

  21,124     33,611  

Common stock, $0.001 par value; authorized:
16,992,450 and 24,500,000 shares at December 31, 2005 and 2006; issued and outstanding: 1,448,783 and 1,453,833 shares at December 31, 2005 and 2006

  2     2  

Additional paid-in capital

  957     864  

Notes receivable from stockholder

  (219 )   (219 )

Unearned stock-based compensation

  (5 )   (1 )

Accumulated deficit

  (37,696 )   (44,501 )
           

Total stockholders’ equity

  12,160     18,301  
           

Total liabilities, temporary equity and stockholders’ equity

  $ 15,905     $ 41,713  
           
             

See accompanying notes to consolidated financial statements.

 

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NimbleGen Systems, Inc. consolidated statements of operations

 

     Years ended December 31,  
(in thousands, except per share amounts)    2004     2005    

2006

 
   

Revenue:

      

Microarray and other revenue

   $      3,121     $      8,457     $      12,561  

Grant

   1,353     1,017     945  
                  

Total revenue

   4,474     9,474     13,506  

Costs and expenses:

      

Cost of revenue

   4,572     7,154     7,784  

Research and development

   3,415     1,911     2,637  

Selling, general and administrative

   4,624     5,618     9,288  

Amortization of licenses and patents

   109     119     530  
      

Total costs and expenses

   12,720     14,802     20,239  
      

Loss from operations

   (8,246 )   (5,328 )   (6,733 )

Other income (expense):

      

Interest expense

   (26 )   (7 )   (336 )

Non-cash interest expense

   (94 )   (11 )   (183 )

Interest income

   32     125     419  

Other income

   12     4     28  
      

Total other income (expense)

   (76 )   111     (72 )
      

Net loss

   $     (8,322 )   $     (5,217 )   $     (6,805 )
      

Net loss per common share, basic and diluted

   $       (5.63 )   $       (3.43 )   $       (4.40 )

Weighted average common shares outstanding used in computing net loss per share

   1,478,727     1,519,016     1,546,979  
   

See accompanying notes to consolidated financial statements.

 

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NimbleGen Systems, Inc. consolidated statements of temporary equity and stockholders’ equity

 

(in thousands)   Temporary
Equity
    Preferred Stock
Series
A, B, C & D
    Preferred Stock
Series E
  Preferred Stock
Series F
  Common Stock  

Additional

Paid-in
Capital

  Notes
Receivable
from
Stockholder
   

Unearned
Stock-Based
Compensation

   

Accumulated
Deficit

    Total
Temporary
and
Stockholders’
Equity
 
  Shares   Amount     Shares     Amount     Shares   Amount   Shares   Amount   Shares   Amount          
   

Balances at December 31, 2003

  100   $ 128     6,322     $ 27,570       $     $   —   1,245   $   1   $   527   $   (72 )   $   (10 )   $   (24,157 )   $   3,987  

Issuance of Series C and common stock for patents

          40       222                 198     1     254                       477  

Conversion of Series A, B, C and D to Series E

          (6,362 )     (27,792 )   6,765     27,792                                        

Issuance of Series F:

                             

Cash

                          2,222     9,718                                 9,718  

Conversion of debt and accrued interest