S-1 1 autogenomicsinitials-1.htm AUTOGENOMICS REGISTRATION STATEMENT Autogenomics Initial S-1


As filed with the Securities and Exchange Commission on October 7, 2014
Registration No. 333- .

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
_____________________
AutoGenomics, Inc.
(Exact name of registrant as specified in its charter)
______________________
Delaware
3826
80-0252299
(State or other jurisdiction of
incorporation or organization)
(Primary Standard Industrial
Classification Code Number)
(I.R.S. Employer
Identification No.)
2980 Scott Street
Vista, California 92081
(760) 477-2248
(Address, including zip code and telephone number, including area code, of registrant’s principal executive offices)  
______________________
Fareed Kureshy
President and Chief Executive Officer
AutoGenomics, Inc.
2980 Scott Street
Vista, California 92081
(760) 477-2248
(Name, address, including zip code and telephone number, including area code, of agent for service)
Todd A. Hentges
Bingham McCutchen LLP
600 Anton Boulevard, 18th Floor
Costa Mesa, California 92626-7653
(714) 830-0600
copy to:
Charles S. Kim
Sean M. Clayton
David Peinsipp
Cooley LLP
4401 Eastgate Mall
San Diego, California 92121-1909
(858) 550-6000
 
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 of 1933, check the following box.  ¨
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier 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.  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
¨
 
Accelerated filer
¨
 
 
 
 
 
Non-accelerated filer
x
(Do not check if a smaller reporting company)
Smaller reporting company
¨
 
Title of Each Class of Securities to be Registered
Proposed Maximum Aggregate Offering Price (1) (2)
Amount of Registration Fee (3) (4)
Common Stock, $0.01 par value
$
60,000,000

$
7,728

(1) Estimated solely for the purpose of computing the amount of the registration fee, in accordance with Rule 457(o) promulgated under the Securities Act of 1933, as amended.
(2) Includes offering price of shares that the underwriters have the option to purchase to cover over-allotments, if any.
(3) Calculated pursuant to Rule 457(o) under the Securities Act of 1933, as amended, based on an estimate of the proposed maximum aggregate offering price.
(4) Includes $7,449.00 previously paid in connection with the withdrawn registration statement (registration no. 333-184121) of AutoGenomics, Inc. initially filed on September 27, 2012.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.




The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities 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 is not soliciting an offer to buy these securities in any jurisdiction where such offer or sale is not permitted.
 
SUBJECT TO COMPLETION, DATED , 2014
PRELIMINARY PROSPECTUS
 
Shares
Common Stock
$ per share

AutoGenomics, Inc. is offering                       shares of its common stock. This is our initial public offering, and no public market currently exists for our common stock. We expect the initial public offering price to be between $ and $ per share. We have applied to list our common stock on the NASDAQ Global Market under the symbol "AGMX."
We are an "emerging growth company," as defined under federal securities laws, and have elected to comply with certain reduced public company reporting requirements available to such companies.
Investing in our common stock involves a high degree of risk. Please read "Risk Factors" beginning on page 13.
 
Per Share
Total
Initial public offering price
$              
$             
Underwriting discounts and commissions (1)
$
$
Proceeds, before expenses, to us
$
$
(1) We refer you to "Underwriting" beginning on page 128 of this prospectus for additional information regarding total underwriting compensation. 
Delivery of the shares of common stock is expected to be made on or about                    , 2014. We have granted the underwriters an option for a period of 30 days to purchase, on the same terms and conditions set forth above, up to an additional shares of our common stock to cover over-allotments. If the underwriters exercise the option in full, the total underwriting discount payable by us will be $         and the total proceeds to us, before expenses, will be $ million.
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.


Stifel
    Canaccord Genuity
Cantor Fitzgerald & Co.

The date of this prospectus is                    , 2014.



 

Not all products have received all necessary domestic or international regulatory approvals or clearances for commercial sale. The vast majority of products sold by AutoGenomics are offered for sale to allow for the collection of research data, and may only be used for clinical purposes by laboratories certified under the Clinical Laboratory Improvements Amendments of 1988 and that have incorporated the products into laboratory-developed tests pursuant to guidelines issued by the College of American Pathologists. The U.S. Food and Drug Administration has not adopted these guidelines and AutoGenomics is not permitted to represent these products as in vitro diagnostic products.



TABLE OF CONTENTS
 
____________________________
Through and including , 2014 (25 days after the date of this prospectus), all dealers that effect transactions in our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer's obligation to deliver a prospectus when acting as an underwriter and with respect to their unsold allotments or subscriptions.
You should rely only on the information contained or incorporated by reference in this prospectus. Neither we nor the underwriters have authorized anyone to provide you with information different from, or in addition to, the information contained in this prospectus. We are offering to sell shares of our common stock and seeking offers to buy shares of 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 our common stock.
In this prospectus "we," "us," "our," "Company" and "AutoGenomics" refer to AutoGenomics, Inc. Unless otherwise indicated, all information in this prospectus assumes no exercise of the underwriters' over-allotment option.

 




PROSPECTUS SUMMARY

This summary highlights certain information contained in this prospectus. Because this is only a summary, it does not contain all of the information that may be important to you. For a more complete understanding of the information that you may consider important in making your investment decision, we encourage you to read this entire prospectus. Among the other information in this prospectus, you should carefully consider the information set forth under the heading "Risk Factors" and our financial statements and accompanying notes included elsewhere in this prospectus. Unless the context requires otherwise, the words "we," "us," "our," "Company" and "AutoGenomics" refer to AutoGenomics, Inc.
Our Company
We are a commercial stage molecular diagnostics company offering an innovative and proprietary technology platform to clinical reference laboratories, specialty clinics and hospital laboratories. Our platform consists of a family of multiplexing INFINITI analyzers, an extensive and expanding menu of genetic test panels, and proprietary microarrays, reagent modules and other related consumables. Our INFINITI analyzers, which include the INFINITI, the INFINITI PLUS and the recently introduced INFINITI HIGH THROUGHPUT SYSTEM, or INFINITI HTS, are easy to use and automate a number of the discrete processes of genetic analysis with minimal manual intervention, which reduces our customers' need for multiple, specialized instruments, and offer a variety of throughput capabilities together with a demonstrated high level of accuracy and reproducibility. Our genetic test panels are focused on large and growing markets primarily in the areas of personalized medicine, women's health, infectious diseases and genetic disorders. Genetic tests are performed on our INFINITI analyzers using our proprietary BioFilmChip microarrays, related Intellipac Reagent Management Modules and other related consumables.
Our genetic tests provide tools to physicians, clinicians and other health care providers to improve detection, treatment and monitoring of a broad spectrum of diseases and conditions. We currently offer 62 test panels for use on our analyzers and have 16 additional test panels in development. In the area of personalized medicine, we offer test panels in pain management, cardiovascular health assessment, oncology and mental health. These test panels offer customers the ability to identify a patient's genetic information, which can assist in improving drug efficacy, identifying non-responders and ultra-, normal- and poor-metabolizers and reducing adverse patient response. In the area of women's health, we offer test panels in cervical cancer, sexually transmitted diseases, or STDs, and vaginal infections. These test panels identify a wide spectrum of specific organisms simultaneously, which can eliminate the need for laboratories to perform multiple tests. The depth and breadth of our menu of test panels, all of which are designed to run on any of our INFINITI analyzers, allows laboratories to utilize laboratory space, labor and capital investment efficiently and conduct genetic tests in less time, thereby improving laboratory economics.
The proprietary design of our platform also allows us to introduce new and enhanced test panels to our menu of genetic tests without modifying our INFINITI analyzers. Based on our own research and customer demand, we intend to continue to increase the number of test panels offered in each of our target market segments, which we believe will further increase the utility of our platform to our customers. For example, we are developing several new test panels to guide the dosing and selection of statin drug therapies, to aid healthcare providers in the treatment of drug addiction and to assess risk and help guide therapy in the treatment of age-related macular degeneration. These test panels are currently in alpha trials and we expect to commercialize these test panels in 2015.
We launched our INFINITI HTS during February 2014 to meet the demand for high test-volume capabilities from our customers, particularly in the areas of personalized medicine and women's health. Our INFINITI HTS is a scalable, automated system comprised of three separate operating modules that provides flexible configuration to maximize workflow efficiency, and has the capacity to process up to 6,912 patient results per day with a single laboratory technician utilizing the same consumables as our other INFINITI analyzers. We believe our INFINITI HTS has the highest processing and throughput capacity of any molecular diagnostics system available in our target markets today. Additionally, for customers who seek a



1


fully automated and integrated solution, and have lower throughput requirements, we offer INFINITI and INFINITI PLUS analyzers designed to operate on a "load and go" basis, in which a technician only needs to load prepared samples along with the test-specific consumables into the analyzer to generate test results.
The following table illustrates the test capabilities of our primary INFINITI analyzers:
Instrument
Capacity per run (1)
Patient results (1)
INFINITI HTS
384 samples
up to 6,912 per day
INFINITI PLUS
48 samples
up to 192 per day
INFINITI
24 samples
up to 96 per day
(1) Figures assume the use of our four-patient multiple patient array test panel over a 24-hour period.     
In late 2013, as we prepared to launch our INFINITI HTS, we began operating our CLIA-certified laboratory to complement and support our efforts to attract customers entering the molecular diagnostics market, and potential INFINITI HTS customers in particular. Our laboratory services allow our customers to more quickly offer new or additional tests during the period when they are awaiting delivery, installation, training and validation of an INFINITI analyzer. Our CLIA-certified laboratory also provides new and existing customers with an alternative source of capacity to assist with their overflow testing needs. In addition, our laboratory enhances our product development efforts and allows us to offer hands-on training opportunities to our customers. Since the launch of our INFINITI HTS, many of these customers have utilized the services of our laboratory to supplement and facilitate sales of medium- and high-volume test products to their physicians, clinicians and healthcare providers.
We commenced sales of our INFINITI HTS in February 2014 through a small direct sales force in the United States.  Our net revenue was $11.2 million for the six months ended June 30, 2014, as compared to $10.5 million for the six months ended June 30, 2013.  Excluding net revenue from one historically large customer, Natural Molecular Testing Corporation, or NMTC, our net revenue for the six months ended June 30, 2013 was $5.4 million. We had no revenue from NMTC in the six months ended June 30, 2014.  Excluding net revenue from NMTC, our net revenue grew 108% for the six months ended June 30, 2014 as compared to the same period in 2013. Our net loss was $2.0 million for the six months ended June 30, 2014, as compared to $5.6 million for the six months ended June 30, 2013. Our accumulated deficit as of June 30, 2014 was $105.2 million.
For a comparison of our net revenue, including net revenue from NMTC and excluding net revenue from NMTC, by period for the six months ended June 30, 2014 and 2013, and the years ended December 31, 2013 and 2012, please see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations - As Adjusted Financial Information for the Six Months Ended June 30, 2014 and 2013 and Years Ended December 31, 2013 and 2012 (unaudited)."
Our Market Opportunity
Molecular diagnostics, or MDx, refers to the detection of DNA and RNA and their variations and mutations, and the use of such information to determine a patient’s susceptibility to disease, diagnose disease and infection, evaluate response to therapy and drug efficacy, identify non-responders and ultra-, normal- and poor-metabolizers and reduce adverse events. Frost & Sullivan, a market research company, estimated in 2012 that the MDx market will reach $6.2 billion in the United States during 2014 and forecasted a compound annual growth rate for the market in excess of 11%. The Centers for Medicare and Medicaid Services of the Department of Health and Human Services, or CMS, estimated in June 2014 that there were more than 5,900 independent clinical reference laboratories and specialty clinics and more than 8,900 hospital-based laboratories in the United States. We believe that less than 10% of these laboratories are currently performing MDx testing, and that we have an opportunity to expand our customer base by enabling more laboratories to participate in this growing market.



2


Our Target Markets
Personalized medicine
The optimal matching of treatment options to a patient's specific genetic profile has emerged as an important trend in medicine. More targeted and effective pharmacogenomic-based treatments have the potential to improve healthcare outcomes and lower healthcare costs, which we believe will lead to increased use of genetic testing. Many patients do not currently achieve the best possible outcome with the first drug that they are prescribed in treatment. Studies have linked the variation in efficacy of a patient's response to a prescribed drug treatment to patient-specific differences in the genes that code for drug-metabolizing enzymes, drug transporters or drug targets, which can be identified through the use of genetic testing. Our target markets in personalized medicine include:
Pain management. More than 116 million adult Americans suffer from acute or chronic pain each year. Studies have shown that only 58% of patients taking prescription medication reported pain relief. Additionally, approximately 80% of post-operative patients experience adverse events from pain medications. As of September 30, 2014, we offered 11 test panels in the area of pain management, which detect multiple mutations in specific drug-metabolizing genes and can enable physicians to select optimal therapies for pain management.
Cardiovascular health assessment. According to a report from the World Health Organization, or WHO, cardiovascular diseases were responsible for 30% of global deaths in 2008. The WHO estimates that by 2030 23.6 million people will die annually from some form of cardiovascular disease. As of September 30, 2014, we offered 20 test panels in the area of cardiovascular health assessment, five of which have received U.S. Food and Drug Administration, or FDA, 510(k) clearance, including our Plavix responder and Warfarin sensitivity test panels.
Mental health. Drugs associated with mental health, including drugs focused on central nervous system disorders, and treatment of depression and anti-psychotic therapy, represent a major component of overall pharmaceutical sales. According to the Centers for Disease Control and Prevention, or CDC, as much as 11% of the U.S. population is taking antidepressants at a given time. Despite this prevalence, approximately 30 to 40% of patients do not respond to the first medication prescribed. The resulting trial-and-error process delays effective treatment for patients and increases healthcare costs. Genetic testing provides the information to allow physicians to select the most appropriate drug or combination of drugs specific to the patient's genetic makeup. As of September 30, 2014, we offered 12 test panels in the area of mental health, which identify mutations in drug-metabolizing genes that can enable healthcare providers to select optimal therapies.
Women's health
According to the CDC, approximately 79 million Americans are infected with Human papillomavirus, or HPV, and approximately 14 million become infected each year. Current regulations from the U.S. Preventive Services Task Force recommend that MDx HPV tests for women be utilized in conjunction with cytology (Pap test) in standard five year intervals. The CDC estimates that there are nearly 20 million new cases of STDs each year, costing the nation approximately $16 billion in healthcare costs annually. As of September 30, 2014, we offered 19 test panels in the area of women's health. Key tests in this segment include four test panels for HPV testing and nine test panels designed to identify various microorganisms related to STDs and vaginal infections. We believe our women's health test panels are the most comprehensive menu of test panels in the market currently.
Other markets
We also target the markets of: (i) oncology to help manage chemotherapy treatments for breast, colorectal, lung, melanoma and thyroid cancers; (ii) infectious diseases for detection of influenza, nontuberculous mycobacteria, respiratory viruses and tuberculosis; and (iii) genetic disorders including, but not limited to, tests for identification of carriers of gene mutations associated with Bloom disease, Canavan disease, cystic fibrosis and Familial Mediterranean fever.



3


Limitations of Traditional Testing Methods
Traditional testing methods have a number of drawbacks and limitations, including:
Throughput limitations. Traditional systems in the market have throughput constraints and typically process a limited number of patient samples simultaneously.
High operating cost per reportable result. Many existing systems require specialized personnel and training, involve time-consuming protocols, require supplementary, discrete instrumentation and result in high labor costs.
Limited testing menu. Many existing MDx systems have limited test menus, leading to a need for a laboratory to purchase many different systems, all which require their own training, use and maintenance, as well as their own laboratory bench space and inventory.
Inability to multiplex. Many existing systems are only able to examine one biomarker at a time, and, in order to make a diagnosis, the laboratory must perform repeated tests on a sample. Serial testing is expensive, time-consuming and requires higher sample volumes.
Limited automation. Many existing systems automate only certain steps in the MDx testing process and do not enable testing of multiple patient samples in a single microarray.
Need for specialized labor. Many existing systems require specialized laboratory technicians and in some cases specialized training, adding to labor costs.
Our Solution
Our platform has been designed to enable a broad range of clinical reference laboratories, specialty clinics and hospital laboratories to start performing, or to more cost-effectively perform, genetic testing across a wide range of throughput levels, which we believe will drive adoption and use of our platform as well as expand the potential of the MDx testing market. Our platform has a number of key advantages, including:
Significantly higher throughput and better workflow. Our broad offering of INFINITI analyzers is designed to address our target customers' varied throughput and workflow requirements. Using one INFINITI HTS, laboratories are capable of producing up to 6,912 patient results per day.
Improved laboratory economics. Our INFINITI and INFINITI PLUS eliminate the need for complex protocols and manual intervention once a test is initiated, which is intended to improve the laboratory's economics by simplifying workflow and reducing the need for highly skilled technicians. Our INFINITI HTS allows individual components to remain active during the workflow process, which can significantly improve throughput time and reduce costs.
Broad menu of tests. We currently offer 62 test panels as part of our platform and have an additional 16 test panels in development. We believe that this represents the broadest available test menu on a single system in the market today.
Multiple patient array technology. Our proprietary multiple patient array, or MPA, technology is designed to test up to eight distinct patient samples on a single microarray.
Ability to multiplex. Many diseases and patient responses to therapy are caused by multiple genetic mutations that necessitate testing for multiple biomarkers to diagnose those diseases or to predict or monitor therapy response.
Increased accuracy of results. By reducing the risk of human error and contamination, we believe that our platform can provide more accurate and more reproducible test results compared to other less automated systems.
Our Products and Technology
Our platform is comprised of five key technological innovations: (1) our INFINITI analyzers; (2) our multiplexing test format; (3) our BioFilmChip microarrays; (4) our multiple patient array technology; and (5) our Intellipac Reagent Management Modules.



4


Our INFINITI analyzers
Our platform includes a family of analyzers, each of which is designed to address customer-specific needs based on the customer's workflow and throughput requirements, and automate the discrete processes in genetic analysis. Our INFINITI HTS is a scalable, multiplexing, random access, microarray-based system comprised of three independent operating modules. Our INFINITI and INFINITI PLUS analyzers integrate and automate the discrete processes of sample handling, reagent management, hybridization, detection, results analysis and reporting in a self-contained system. All of our INFINITI analyzers use similar underlying proprietary technology and the same consumables to generate consistent patient results presented in an identical format.
Our multiplexing test methods and multiple patient microarray
Our multiplexing technology allows our INFINITI analyzers to detect multiple biomarkers across multiple genes at the same time on a single microarray, eliminating the need to process multiple tests separately. For example, our pain management panel can detect multiple mutations associated with six different genes to determine the efficacy, toxicity and dosing of specific drugs. In addition, our test panel for HPV detects and genotypes all 14 high-risk types of HPV simultaneously on a single microarray from a single sample. Our proprietary MPA technology enables our INFINITI analyzers to process multiple patient samples on a single microarray, reducing our costs, increasing our test production capacity, and improving our customers' laboratory economics while increasing their throughput. For example, our MTBC OCTA (drug-resistant tuberculosis test panel) is designed to test up to eight patient samples on a single microarray, increasing throughput for our laboratory customers by up to 700%, while reducing their operating cost per reportable result by up to 87%, as compared to our single patient microarrays.
Our BioFilmChip microarrays and Intellipac Reagent Management Modules
Our proprietary BioFilmChip microarrays utilize our proprietary and patented manufacturing processes, and can be printed with up to 1,024 individual features of biochemical sensors, or biomarkers, depending on the requirements of the test. Our assay-specific Intellipac Reagent Management Modules provide the proprietary reagent used to complete our genetic tests. The reagent module is designed to communicate all relevant information about a test to the INFINITI analyzer without any intervention from the operator, saving time by automatically recording all pertinent test details, and reducing the possibility for human errors which could occur in manual systems by eliminating contamination risk.
Sales and Marketing
Our goal is to achieve broad adoption of our INFINITI analyzers in the market, and drive utilization to generate sales of our high-margin testing consumables. Our current sales and marketing strategy is focused on the broad introduction of our INFINITI HTS to customers in high-volume testing market segments, particularly personalized medicine and women's health, and emphasizes the high throughput testing capacity, ease of use, enhanced workflow, increased efficiency, low cost, high quality and consistent results of our platform as well as the potential versatility afforded by our broad menu of genetic test panels.
In the United States, we offer our family of INFINITI analyzers either through direct sales, monthly rental plans or our Reagent Access Plan, or RAP. Under the RAP, an INFINITI analyzer is placed at the customer’s location at no initial cost to the customer, and is subject to contractual minimum consumables purchasing thresholds. We have established a small direct sales force that is regionally deployed and performs market development as well as account management. We plan to significantly expand our sales force within the next 12 months.
Internationally, we market and sell our platform through our network of distributors. We have established 12 distributor relationships to market our platform in 23 countries outside the United States. We plan to expand our distributor network outside the United States to enter new markets and capitalize on growing international demand.



5


Manufacturing and Research and Development
We manufacture our family of INFINITI analyzers, BioFilmChips and Intellipac Reagent Management Modules at our facility in Vista, California. Our facility is registered with the FDA as a Medical Device Manufacturing Establishment. We have established a quality system that is in compliance with the FDA's Quality Systems Regulations and we have obtained ISO 13485:2003 certification for our facility. Our research and development efforts focus on developing additional genetic tests and INFINITI analyzers, improving or enhancing current tests and INFINITI analyzers, and supporting clinical trials for certain genetic tests.
Our Strategy
Our objective is to become a leading provider of genetic tests to clinical reference laboratories, specialty clinics and hospital laboratories in multiple growing market segments. One key element of our strategy is to focus on high-volume customers, particularly in the areas of personalized medicine and women’s health. We plan to continue to expand into other market segments through the development of additional test panels.
To achieve our objectives, we intend to:
Increase placements of our recently launched INFINITI HTS analyzer and expand penetration in the highest-volume testing market segments.
Target molecular diagnostics laboratories with high potential utilization of our INFINITI and INFINITI PLUS analyzers.
Develop and launch test panels in new areas and enhance our current test panels.
Significantly expand our domestic sales force, increase marketing expenditures and expand international distribution.
Pursue additional regulatory clearances, approvals and certifications for products and facilities, as necessary. 
Utilize our CLIA-certified laboratory to enhance and complement our product offerings.
Government Regulation
We have received FDA 510(k) clearance for our INFINITI and INFINITI Plus analyzers and five of our genetic test panels: CYP450 2C19, Factor II, Factor V, Factor II/V and Warfarin. Products for which we have received 510(k) clearance accounted for 39%, 18% and 14% of our net revenue for the six months ended June 30, 2014, and the years ended December 31, 2013 and 2012, respectively. We are currently in clinical trials collecting data to support a submission for 510(k) clearance for our INFINITI HTS, both of our CYP450 2C19 Plus test panels and all three of our CYP450 2D6 test panels. We intend to use a portion of the proceeds of this offering to conduct additional clinical trials for the collection of data, and to submit for 510(k) clearance, for an additional seven of our test panels that, together with our existing and in-process 510(k) cleared test panels, made up approximately 80% of consumables revenue for the six months ended June 30, 2014. We expect to conduct additional clinical trials for the collection of data, and to submit for 510(k) clearance, for test panels based on a variety of factors, including:
the regulatory environment for the use of genetic tests, in particular the FDA's requirements and limitations on marketing RUO tests, which may not be marketed as in vitro diagnostic products;
the demand by our existing and target customers for particular genetic tests that have received regulatory approvals or clearances;
the competitive environment for the use of genetic tests that have received regulatory approvals or clearances versus similar tests that have not; and
the size of the available market for the particular test, given the significant expense and time required to obtain regulatory approvals or clearances.



6


Internationally, we have obtained a Conformité Européenne, or CE, mark for our INFINITI and INFINITI PLUS analyzers and a total of 24 of our tests. This designation is supported by completed clinical and validation studies that demonstrate the analytical performance of each CE marked test. The CE mark facilitates the marketing and sale of our CE marked analyzers and tests in the European Union and the European Economic Area as well as certain other international markets.
Our test panels that are not 510(k) cleared are offered for sale in the United States under the RUO designation. These RUO tests are labeled "For Research Use Only. Not for use in diagnostic procedures." as required by FDA regulations. Sales of these test panels represented 61%, 82% and 86% of our net revenue for the six months ended June 30, 2014, and the years ended December 31, 2013 and 2012, respectively.
RUO test panels may only be used in the United States for clinical purposes by laboratories and other facilities certified under CLIA that have incorporated these products into their laboratory developed tests, or LDTs, pursuant to guidelines issued by the College of American Pathologists. We believe that nearly all of our RUO product sales are incorporated into LDTs. In order to develop an LDT utilizing our products, these certified laboratories and other facilities must develop and validate a test protocol that includes specimen collection, DNA extraction, polymerase chain reaction, or PCR, amplification, hybridization and detection, and data analysis, interpretation and reporting. Our products provide components that can be used by these certified laboratories and other facilities for the PCR amplification, hybridization and detection portions of these LDTs. We sell each of these components individually, as ordered by the customer in its discretion, and not as a kit or system. The validation process engaged in by these certified laboratories and other facilities can involve validation of the sample collection and extraction process, establishing limits of detection and analytical sensitivity, testing for specificity and cross-reactivity, including interfering substances, validation for assay accuracy, precision and reproducibility, and establishing reportable ranges of test results for the test system and reference values that will be measured against as controls. This validation process also requires verifying the result from the LDT against known standard samples or the results of a high-standard laboratory testing method such as sequencing, and can involve the testing of a large number of patient samples. This process may take from several weeks to several months or more to complete, and thus requires a significant investment by the customer.
We believe that all sales of our RUO products in the United States are to customers that are either certified in the manner described above and have incorporated our products into their LDTs, or that use such products for research only. We are not permitted to represent our RUO products as in vitro diagnostic products. We therefore train our personnel to only market these products to laboratories for research or investigational use in the collection of research data, and to not promote any off-label uses of our products.
We believe that we are in compliance with existing FDA rules and regulations governing our business, including those governing the marketing and sale of RUO tests; however, a significant change in existing laws, or their enforcement, may require us to change our business model or our business practices to maintain compliance with these laws. For instance, in June 2011, the FDA issued a Draft Guidance entitled "Commercially Distributed In Vitro Diagnostic Products Labeled for Research Use Only or Investigational Use Only: Frequently Asked Questions," and in November 2013 issued a guidance document entitled "Distribution of In Vitro Diagnostic Products Labeled for Research Use Only or Investigational Use Only," or the RUO Guidance, which highlights the FDA's interpretation that distribution of RUO products with any labeling, advertising or promotion that suggests that clinical laboratories can validate the test through their own procedures and subsequently offer it for clinical diagnostic use as an LDT is in conflict with RUO status. The RUO Guidance further articulates the FDA's position that any assistance offered in performing clinical validation or verification, or similar specialized technical support, to clinical laboratories, is in conflict with RUO status. The FDA has generally exercised its enforcement discretion to not enforce applicable regulations with respect to LDTs. However, the FDA has repeatedly indicated since 2010 that it intends to reconsider its policy regarding enforcement and to begin drafting an oversight framework for such tests, and most recently, on July 31, 2014, the FDA notified the U.S. Congress of the FDA's intent to modify its enforcement discretion approach to LDTs in a risk-based manner. If the RUO Guidance were to be enforced, it would limit our marketing of RUO test panels to general discovery laboratories and require us to seek FDA clearance for



7


our RUO test panels, which may require significant time and investment on our part and may reduce our revenues or increase our costs and adversely affect our business, prospects, results of operations or financial condition.
Risks Affecting Us
Our business is subject to numerous risks, as more fully described in the section entitled "Risk Factors" elsewhere in this prospectus, including the following:
Financial risks. We have a history of net losses and negative cash flows with an accumulated deficit of $105.2 million as of June 30, 2014, and may not be able to achieve or maintain profitability in the current fiscal year or in future fiscal periods.
Business risks. There is limited information available to evaluate our business, particularly with respect to our recently launched INFINITI HTS, and we face significant competition.
Product and customer risks. Our financial results depend on commercial acceptance of our platform and tests and the development of additional tests.
Regulatory risks. The majority of our net revenue is derived from the sale of products designated for research use only, or RUO; the FDA announced July 31, 2014 its intention to modify its enforcement discretion approach to laboratory developed tests, which may adversely affect our ability to sell our RUOs; violations of these regulations by us could significantly limit our ability to sell our products to our target customers, or otherwise require us to obtain regulatory approvals for our products at considerable time and expense.
Legal risks. Our success depends in part on our ability to operate without infringing or misappropriating the proprietary rights of others, our ability to own or license patents that are adequate to reduce competition and our ability to license intellectual property from third parties for certain tests and manufacturing processes needed for our business.
Company Information
We were incorporated as Neuron Technologies, Incorporated in California in April 1999, and changed our name to AutoGenomics, Incorporated in August 2000. We subsequently changed our name to AutoGenomics, Inc. in October 2002. We reincorporated in Delaware in November 2008. Our principal executive offices are located at 2980 Scott Street, Vista, California 92081. Our telephone number is (760) 477-2248. Our website address is www.autogenomics.com. Information contained in or that can be accessed through our website is not incorporated by reference into this prospectus and should not be considered to be part of this prospectus.
INFINITI, BioFilmChip, Intellipac and QMatic are our trademarks. All other service marks, trademarks and trade names referred to in this prospectus are the property of their respective owners. Some of our trademarks are referred to in this prospectus from time to time, solely for convenience, without their associated ® and ™ symbols. We retain, however, our rights to these trademarks notwithstanding such presentation, and we will assert, to the fullest extent under applicable law, our rights to our trademarks.



8


Implications of Being an Emerging Growth Company
We are an "emerging growth company," as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As an emerging growth company, we are eligible to comply with less stringent disclosure requirements than those applicable to larger, more established companies. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual gross revenue of at least $1.0 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of the prior June 30th, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.
So long as we qualify as an emerging growth company, we will, among other things, be exempted from (i) the auditor attestation requirement in the assessment of internal controls over financial reporting of Section 404(b) of the Sarbanes-Oxley Act; (ii) various existing and forthcoming executive compensation related disclosures, for example: "say-on-pay," "pay-for-performance" and "CEO pay ratio;" (iii) any rules that might be adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotation or supplemental auditor discussion and analysis reporting; and (iv) having to solicit advisory say-on-pay, say-on-frequency and say-on golden-parachute shareholder votes on executive compensation under Section 14A of the Securities Exchange Act of 1934, as amended, and will be permitted to comply with the SEC's detailed executive compensation disclosure requirements on the same basis as a smaller reporting company.
In addition, under Section 107(b) of the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.



9


The Offering
 
Common stock to be offered by us
          shares
Common shares to be outstanding immediately after this offering
          shares
Over-allotment option
We have granted the underwriters an option for 30 days from the date of this prospectus to purchase up to additional shares of our common stock at the initial public offering price to cover over-allotments.
Use of proceeds
We anticipate that we will use the net proceeds from this offering as follows: (i) to fund capital expenditures for expansion of manufacturing capabilities, (ii) to expand our sales and marketing efforts, (iii) to fund research and development, including regulatory efforts, (iv) to satisfy all of our outstanding notes payable and certain of our accounts payable and (v) the balance for working capital and general corporate purposes.
 
NASDAQ Global Market listing
We have applied to list our common stock on the NASDAQ Global Market under the symbol "AGMX."
Risk factors
Investing in our common stock involves a high degree of risk. You should carefully read and consider the information set forth under the heading "Risk Factors" and all other information set forth in this prospectus before deciding to invest in our common stock.
                     
 The number of shares of common stock outstanding after this offering is based on 11,717,275 shares of common stock outstanding as of September 30, 2014, after giving effect to the conversion of our convertible preferred stock into 7,974,932 shares of common stock immediately prior to the completion of this offering and excludes the following:
1,474,005 shares of common stock issuable upon exercise of options outstanding at a weighted average exercise price of $6.23 per share;
277,271 and 82,500 shares of common stock reserved for future issuance under our 2008 Equity Incentive Award Plan and 2008 Employee Stock Purchase Plan, respectively; and
warrants to purchase 3,881,734 shares of common stock at a weighted average exercise price of $6.04 per share.
Unless otherwise indicated, all information in this prospectus assumes an initial public offering price of$      per share. The conversion into common stock of our Series C, Series E and Series NC Convertible Preferred Stock is predicated on the offering referred to in this prospectus resulting in net proceeds to us of $25 million or more.
Except as otherwise indicated, all information in this prospectus assumes:
no issuance of any options under our 2008 Equity Incentive Award Plan and no exercise of any outstanding warrants or options, in each case after the respective dates as of which information is presented; and
no exercise by the underwriters of their over-allotment option.




10


Summary Financial Data
The following tables summarize our financial data as of the periods indicated below. We have derived the following summary statement of operations data for the years ended December 31, 2013 and 2012 from our audited financial statements included elsewhere in this prospectus, which have been prepared in accordance with U.S. generally accepted accounting principles. The statements of operations data for the six months ended June 30, 2014 and 2013, and the balance sheet data as of June 30, 2014, are derived from our unaudited financial statements included elsewhere in this prospectus. We have prepared unaudited financial information on the same basis as the audited financial statements and have included, in our opinion, all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of the financial information set forth in those statements.
Our historical results are not necessarily indicative of the results that may be expected in the future, and our interim results are not necessarily indicative of the results expected for the full fiscal year. The summary historical financial data should be read together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements included elsewhere in this prospectus.
 
Six Months Ended June 30,
 
Years Ended December 31,
 
2014
 
2013
 
2013
 
2012
 
(in thousands, except share and per share data)
 
(unaudited)
 
 
 
 
Statements of Operations Data:
 
 
 
 
 
 
 
Net revenue
$
11,212

 
$
10,506

 
$
18,083

 
$
18,409

Cost of sales and services
4,095

 
3,998

 
7,758

 
7,147

Gross profit
7,117

 
6,508

 
10,325

 
11,262

Operating expenses:
 
 
 
 
 
 
 
Research and development
1,041

 
1,209

 
2,306

 
2,355

General and administrative
2,126

 
6,550

 
8,302

 
4,715

Sales and marketing
3,534

 
1,284

 
2,998

 
2,269

Total operating expenses
6,701

 
9,043

 
13,606

 
9,339

Income/(loss) from operations
416

 
(2,535
)
 
(3,281
)
 
1,923

Interest expense, net
(890
)
 
(875
)
 
(1,820
)
 
(2,602
)
Gains/(loss) on extinguishment of debt
(1,872
)
 
(140
)
 
(140
)
 
(1,996
)
Other income/(expense), net
(4
)
 
(2,094
)
 
(1,877
)
 
5

Change in the fair value of stock warrant liabilities
375

 
91

 
46

 
163

Net loss
$
(1,975
)
 
$
(5,553
)
 
$
(7,072
)
 
$
(2,507
)
Net loss from continuing operations
per common share, basic and diluted
$
(0.53
)
 
$
(1.86
)
 
$
(2.21
)
 
$
(0.94
)
Weighted average shares used in per share amounts
3,742,343

 
2,989,275

 
3,200,260

 
2,654,180

 
 
 
 
 
 
 
 




11


 
As of June 30, 2014
 
Actual
 
Pro forma (1)
 
Pro forma as adjusted (2)
 
(unaudited and in thousands)
Balance Sheet Data:
 
 
 
 
 
Cash and cash equivalents
$
404

 
$
404

 
$
Current assets
10,441

 
10,441

 


Total assets
12,760

 
12,760

 


Total debt (3)
18,491

 
18,491

 

Convertible preferred stock (4)
53,165

 

 

Total stockholders' equity/(deficit)
(77,046
)
 
(23,881
)
 
 

(1)
On a pro forma basis after giving effect to the conversion of all outstanding shares of convertible preferred stock into common stock, which will occur immediately prior to the completion of this offering.
(2)
On a pro forma as adjusted basis after giving effect to (i) the conversion of all outstanding shares of convertible preferred stock into common stock, which will occur immediately prior to the completion of this offering, (ii) the sale of shares of our common stock in this offering at an assumed initial offering price of $ per share, the midpoint of the range on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and our estimated offering expenses and (iii) the application of $20.8 million of the net proceeds of this offering to repay the principal and accrued interest as of June 30, 2014 under our outstanding promissory notes. A $1.00 increase or decrease in the assumed initial public offering price of $  per share would increase or decrease, as applicable, the net proceeds to us from this offering by approximately $  million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and our estimated offering expenses.
(3)
Amounts include principal only of promissory notes payable as of June 30, 2014.
(4)
Our convertible preferred stock has been classified as temporary equity on our balance sheets instead of in stockholders' equity/(deficit) due to the possibility of the occurrence of certain change in control events that are outside of our control, including our sale or transfer of control, which trigger the rights of holders of the convertible preferred stock to force redemption. Accordingly, these shares are considered contingently redeemable. We have adjusted the carrying values of the convertible preferred stock to their liquidation values at each period end.
As Adjusted Financial Information for the Six Months Ended June 30, 2014 and 2013 and Years Ended December 31, 2013 and 2012 (unaudited)
The unaudited as adjusted financial data below sets forth the net revenue for the six-month periods ended June 30, 2014 and 2013 and the years ended December 31, 2013 and 2012, excluding all revenue attributable to NMTC (in thousands).
 
Six Months Ended June 30,
 
 
 
Years Ended December 31,
 
 
 
2014
 
2013
 
Change
 
2013
 
2012
 
Change
Net revenue (as reported)
$
11,212

 
$
10,506

 
$
706

 
$
18,083

 
$
18,409

 
$
(326
)
Net revenue from NMTC

 
5,116

 
(5,116
)
 
5,116

 
7,749

 
(2,633
)
As adjusted net revenue
$
11,212

 
$
5,390

 
$
5,822

 
$
12,967

 
$
10,660

 
$
2,307




12


RISK FACTORS
Before deciding to invest in our common stock, you should carefully consider each of the following risk factors and all of the other information set forth in this prospectus. The following risks and the risks described elsewhere in this prospectus, including in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations," could materially harm our business, financial condition, future results and cash flow. If that occurs, 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 not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business.
Financial Risks
We have a history of operating losses and negative cash flows and may not be able to achieve or maintain profitability.
We have incurred substantial costs to develop our technology since our inception in 1999. As of June 30, 2014, we had an accumulated deficit of $105.2 million. We expect to continue to spend substantial financial and other resources on introducing new products, expanding our sales and marketing activities, further developing our technology and manufacturing capabilities, engaging in laboratory testing, manufacturing new products and seeking regulatory approvals. As a result, we will need to continue to generate additional revenue in order to achieve and maintain profitability. Our ability to generate additional revenue will depend on our ability to successfully implement our business strategies and address the risks and uncertainties facing us, and we cannot assure you that we will be successful in these efforts. Even if we do address these risks successfully and implement our business strategies, we may not generate sufficient revenue to maintain profitability. We cannot assure you that we would be able to increase profitability on a quarterly or annual basis in the future, or at all.
We may not be able to meet our cash requirements without obtaining additional capital from external sources, and if we are unable to do so, we may have to curtail or cease operations.
We anticipate that our current cash and cash equivalents and cash provided by this offering and our operating activities will be sufficient to meet our currently estimated cash requirements for at least the next 12 months; however, we expect capital outlays and operating expenditures to increase over the next several years as we expand our infrastructure, test panel commercialization, training and support, manufacturing and research and development activities. We operate in a market that makes our prospects difficult to evaluate, and we may need additional financing to execute on our current or future business strategies. The amount of additional capital we may need to raise depends on many factors, including:
the level of research and development investment required to maintain and improve our technology, including efforts to expand our menu of test panels, invest in the development of new products and to seek regulatory approval for new products;
the amount of future cash provided by or used in operating activities, including expansion of our sales force and marketing activities;
our need or decision to acquire or license complementary technologies or acquire complementary businesses;
changes in regulatory policies or laws that affect our operations; and
the costs of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights.
We cannot be certain that additional capital 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 diagnostics 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 raise additional capital, we may be required to curtail some or all of our operations, including commercialization and research and development efforts, and forced to forego otherwise valuable business opportunities. Any failure to raise additional capital when needed could have an adverse effect on us. In addition, if we raise additional funds through the issuance of common stock, preferred stock or convertible securities, the percentage ownership of our stockholders could be significantly diluted, and any preferred stock or convertible securities may have rights, preferences or privileges senior to those of common stockholders. If we obtain additional debt financing, a substantial portion of our operating cash flow or other cash resources may be dedicated to the payment of principal



13


and interest on such indebtedness, and the terms of the debt securities issued could impose significant restrictions on our operations. If we raise additional funds through collaborations and licensing arrangements, we may be required to relinquish significant rights to our technologies or products, or grant licenses on terms that are not favorable to us.
Our ability to use our net operating loss and research and development credit carryforwards may be subject to limitations.
As of June 30, 2014, we had approximately $72.4 million of net operating loss carryforwards and $1.2 million of research and development credit carryforwards for U.S. federal tax purposes. Realization of any tax benefit from our carryforwards is dependent on our ability to generate future taxable income and the absence of certain "ownership changes" of our common stock. An "ownership change," as defined in the applicable federal income tax rules, could place significant limitations, on an annual basis, on the amount of our future taxable income that may be offset by our carryforwards. Such limitations, in conjunction with the net operating loss expiration provisions, could effectively eliminate our ability to utilize a substantial portion of our carryforwards.
Although we have not conducted a study to make this determination, it is possible that we have incurred one or more "ownership changes" in the past, in which case our ability to use our carryforwards may be limited. In addition, the issuance of shares of our common stock (including due to this offering) could cause an "ownership change" which could also limit our ability to use our carryforwards. Other issuances of shares of our common stock which could cause an "ownership change" include the issuance of shares of common stock upon future conversion or exercise of outstanding options and warrants.
Business Risks
There is limited information available to evaluate our business, products and strategy.
We are a commercial stage company in the rapidly evolving market for molecular diagnostics, or MDx, and we face numerous risks and uncertainties. We recently launched our INFINITI HTS and we cannot predict the challenges, expenses, difficulties, complications and delays frequently encountered in the launch of a new product. Further, our operations are subject to many of the risks inherent in the growth of a business. We cannot assure you that we will be successful in continuing to place our INFINITI analyzers and targeting high-volume users of genetic tests, achieving anticipated revenue growth or achieving and maintaining profitability. Our failure to meet any of these goals could have an adverse effect on us and may force us to reduce or cease our operations.
Our operating results may be variable and unpredictable.
Due to the nature of the molecular diagnostics testing market and facets of our business, our revenue and operating results may be difficult to predict and may vary significantly from period to period. The sales cycles for our analyzers is generally between three and six months, which makes it difficult for us to accurately forecast revenue in a given period. Specifically, initial sales of our consumables are often dependent on completing customer validation processes that may be time-consuming and unique to each customer. In addition to its length, the sales cycle associated with our products is subject to a number of significant risks, including the budgetary constraints of our customers, their inventory management practices and possibly internal acceptance reviews and the timing of U.S. Food and Drug Administration, or FDA, approval and review, all of which are beyond our control. Sales of our products also involve the purchasing decisions of clinical reference laboratories, specialty clinics and hospital laboratories, which can require many levels of pre-approvals, further lengthening sales time. These purchasing decisions are subject to a number of significant risk factors beyond their and our control and are difficult for us to predict. For example, clinical reference laboratories, specialty clinics and hospital laboratories may purchase fewer of our consumables due to a decline in the volumes of tests needed at these facilities. As a result, we may expend considerable resources on unsuccessful sales efforts or we may not be able to complete sales as anticipated. Our manufacturing, installation and training cycles for our INFINITI analyzers also typically involve a significant investment of working capital by us before we begin to receive revenue from our customers, and can be dependent in part on our inventory levels and the availability of our working capital. As a result, we may incur inventory-carrying and other working capital expenses that may vary over time and that may make our operating results difficult to forecast.
Our revenue and operating results are also variable and difficult to predict due to differences in revenue recognition when our customers purchase, versus rent or lease, our INFINITI analyzers. Changes in any of these



14


relative mixes can have an impact on the timing of our recognition of revenue, as instrument sales result in revenue to us upon the delivery of the instrument and instrument leases or rentals involve the recapture of instrument costs through the sale of consumables, or on our gross margin, as consumable sales typically have significantly higher margins than those of instrument sales.
Further, our revenue and operating results are variable and difficult to predict because many of our test panels have been launched relatively recently. As a result, we do not have sufficient history with these new test panels to reliably predict revenue for those tests. Any period-to-period variations in our revenue and operating results may cause our stock price to fluctuate significantly in the future.
Our inability to pay our indebtedness and trade payables could adversely affect our reputation and business prospects.
In the past, we have been in default on indebtedness owed to various persons due to our inability to repay our debts by their applicable maturity dates. We have also periodically been unable to timely pay various trade payables, including amounts owed to our suppliers, service providers and landlord. We currently are behind on making timely payments to some of our suppliers and service providers. These events have had a negative impact on our reputation and perceived creditworthiness, and may make it more difficult for us to maintain existing relationships and enter into new relationships with suppliers and service providers, or to obtain future financing, particularly debt financing. In addition, concerns about our long-term ability to continue operations may deter potential customers from investing the time and resources necessary to install and train on our analyzers and use our platform to conduct genetic testing. Our reputation has been harmed from our past failure to timely pay our debt and trade payables, and it may take us some time to repair our reputation. In the meantime, we may receive less favorable terms from our suppliers and service providers, find it more difficult to obtain financing, and face challenges convincing customers to invest in the long-term use of our platform.
We face significant competition from large competitors that are well capitalized and from alternative technologies and products.
We face, and will continue to face, significant competition from organizations such as large in vitro diagnostics companies and large reference laboratories that compete directly or indirectly with us in the general molecular diagnostics market. We compete in an industry characterized by: (i) rapid technological change, (ii) evolving industry standards and regulatory requirements, (iii) emerging competition and (iv) new product introductions. Our competitors may develop and commercialize products and technologies that may mitigate any advantages our products may currently have and that may compete successfully with our products and technologies. Since several potentially competing companies and institutions have greater financial resources, more established brand names and larger existing customer bases than we do, they may be able to: (a) provide broader services and product lines, (b) make greater investments in research and development, (c) undertake more extensive sales efforts and marketing campaigns and (d) adopt more aggressive pricing policies than we are able. Some of our competitors are also our suppliers, and there can be no assurance that these suppliers will continue to provide us products at competitive prices or at all. Many of our competitors have also been able to enter into long-term, exclusive agreements with major potential customers, often by offering favorable pricing and other terms. Until these agreements expire, our ability to place our analyzers with and sell our testing consumables to these customers will be limited. Even after exclusive agreements expire, we may not be able to compete with the terms offered by our competitors in their efforts to extend exclusive relationships with these major potential customers. In addition, we compete against companies on the basis of the relative regulatory status of their and our products. Some of our competitors may have already received regulatory approval and conducted extensive clinical trials for tests we seek to sell. Any tests that we offer on a research use only, or RUO, basis may be at a competitive disadvantage to similar tests offered by others that have received FDA clearances or approvals, particularly as the FDA has announced its intention to modify its enforcement discretion approach to laboratory developed tests, or LDTs, which may have an adverse effect on sales of our RUO products even in advance of final regulations taking effect.
We also expect to continue to face competition from enhanced or alternative technologies and products. One or more of our competitors could develop a product that is superior to a product we offer or intend to offer or our technology and products may be rendered obsolete or uneconomical by advances in existing technologies. At least



15


one of our competitors currently offer on a commercial basis self-contained, integrated systems for molecular diagnostics testing that are similar in many ways to our products. If we are unable to keep pace with technological advances in the molecular diagnostics market, our business, financial condition and results of operations may suffer.
Our business may be adversely affected if we fail to capture a share of the rapidly growing molecular diagnostics testing market.
There are barriers to the adoption of widespread genetic testing, including the need to increase physician education on molecular research use and diagnostic testing and to keep physicians up-to-date on new and emerging technologies, as well as overcoming coverage denials from insurance companies. We cannot assure you that we will be successful in capturing a significant share of the MDx market by expanding the sale of our products at the prices we currently project. In the event that the market in general, or our market share in particular, does not grow as we expect, our business may be adversely affected.
Growth in our business could strain our managerial, operational, manufacturing, customer support, sales, financial and information systems resources.
The anticipated future growth necessary to expand our operations will place a significant strain on our managerial, operational, manufacturing, sales, financial and information systems resources. These increased demands could cause us to operate our business less effectively, which in turn could cause deterioration in the financial performance of our business. To increase revenue and achieve growth, we will need to expand our sales efforts and continue to improve and develop our products. The future growth of our business will also require us to expand our customer support resources, including adding additional personnel for customer training and technical product support. If our customer support infrastructure does not keep pace with future growth of our customer base, we may lose customers and our reputation and future sales potential may be harmed. In addition, we will need to improve our financial and managerial controls, reporting systems and procedures, and will also need to expand, train and manage our workforce. We may be unable to hire, train and retain a sufficient number of qualified personnel or successfully manage our growth. This growth may also place increased burdens on our international distributors, increase the complexities we face related to international sales and increase our inventory-related risk. Future growth will also make it difficult for us to adequately predict the expenditures we will need to make in the future. If we do not make the necessary capital or other expenditures to accommodate our anticipated growth, or if we are unable to manage our growth effectively, our business, financial condition and results of operations will suffer. We cannot anticipate all of the demands that our expanding operations will impose on our business, controls and procedures, personnel and systems, and our failure to appropriately address such demands could have an adverse effect on us.
The loss of the services of one or more of our key personnel or failure to attract and retain other highly qualified personnel in the future could adversely affect operations and result in a loss of revenue.
We are dependent on the continued services and performance of senior management and educated, technically-trained personnel. We currently do not have employment or severance agreements with any of these persons other than Fareed Kureshy, our President and Chief Executive Officer. Certain of the members of our senior management, including certain of our named executive officers, are at, close to or past traditional retirement age in the United States. Our business depends and will depend in the future on the ability to identify, attract, hire, train, retain and motivate senior management and other highly skilled technical, managerial, marketing and customer service personnel. Competition for such personnel is intense, and we cannot assure you that we will be able to successfully attract and retain sufficiently qualified personnel in the future. While we do not currently expect any of our senior management or other technically-trained personnel to retire or otherwise cease employment with us in the near-term, we will need to effectively plan for management succession to maintain effective leadership and continuity in our business. The failure to attract and retain necessary senior management and technically-trained personnel and to successfully plan for management succession could adversely affect our business and result in a loss of revenue.



16


We rely on the innovation and resources of larger industry participants and public programs to advance genetic research, establish the medical relevance of biomarkers and educate physicians and clinicians on molecular diagnostics.
The link between the genetic variations that our products detect and the underlying disease states, or responses to medications, is not always fully medically validated, and our current and future products may involve biomarkers whose medical relevance is unproven. Additionally, the availability of validated biomarkers is dependent on significant investment in genetic research, often funded through public programs for which there are no assurances of ongoing support. The adoption of molecular diagnostics is dependent to a great extent on the education and training of physicians and clinicians. We do not have the resources to undertake such training, and we are relying on larger industry participants and professional medical colleges to establish, communicate and educate physicians and clinicians regarding the use and application of molecular diagnostics. The genetic test results produced by our platform (including as used by our in-house laboratory) are reported to our customers in a format that also indicates potential options for treatment and dosing based on the specific test result. These presented options are based on publicly available information and open-source data repositories. We do not independently verify this information. If this information were to be incorrect, or if in the future similar information for genetic tests that we develop were not publicly available, we would be required to develop or obtain such information through our own or private resources, which could be expensive and time-consuming and which would in turn adversely affect our business and results of operations.
We may be unsuccessful in our long-term goal of expanding our product offerings outside the United States.
For the six months ended June 30, 2014, and the years ended December 31, 2013 and 2012, 13%, 14% and 9%, respectively, of our revenue was from customers in countries outside the United States, including countries in Europe, Asia, the Middle East and South America. We are dependent on third-party distributor relationships in these countries to market, sell and provide customer and technical support for our products. Distributors may not commit the necessary resources to market, sell and support our products to the level of our expectations. If distributors do not perform adequately, or we are unable to locate distributors in particular geographic areas, our ability to realize long-term international revenue growth would be adversely affected. Furthermore, there are risks inherent in doing business internationally, including:
imposition of governmental controls and changes in laws, regulations or policies;
political and economic instability;
changes in U.S. and other national government trade policies affecting the markets for our products;
changes in regulatory practices, tariffs and taxes; and
currency exchange rate fluctuations, devaluations and other conversion restrictions.
Any of these factors could have an adverse effect on our business, results of operations or financial condition.
Manufacturing risks, shortages and inefficiencies may adversely affect our production ability.
We must manufacture or engage third parties to manufacture components of our products in sufficient quantities and on a timely basis, while maintaining product quality and acceptable manufacturing costs and complying with regulatory requirements. In determining the required quantities of our products and the manufacturing schedule, we must make significant judgments and estimates based on historical experience, inventory levels, current market trends and other related factors. Because of the inherent nature of estimates, there could be significant differences between our estimates and the actual amounts of products we require. We generally manufacture our INFINITI analyzers only when ordered by our customers, and a significant influx of instrument orders could result in significant backlogs. In such a situation our ability to manufacture our INFINITI analyzers could be adversely impacted if we do not have sufficient working capital or labor on hand to support the purchasing of components, and the assembly of the same, necessary for the manufacture of our analyzers. For example, from February 2014 through September 30, 2014, we received a higher number of orders for our INFINITI HTS than anticipated, and our ability to fulfill all of these orders has been delayed due to manufacturing lead time, influenced by parts availability and supplier availability. In the future, our inability to timely fulfill analyzer orders could have an adverse impact on our revenue and results of operations.



17


We may also experience unforeseen technical complications in the processes we use to develop, manufacture, customize or receive orders for our products. Such complications could materially delay or limit the use of products we attempt to commercialize, substantially increase the anticipated cost of our products or prevent us from implementing our processes at appropriate quality and scale levels, thereby causing our business to suffer.
We have relationships with suppliers who are sources of raw materials and components for our product offerings. We do not have long-term agreements with our suppliers and have not arranged for alternate suppliers. It may be difficult to find alternate suppliers in a timely manner or on terms acceptable to us. Additionally, the availability of some components of the INFINITI analyzers may be limited as only a few outside vendors produce them. In the event that we become subject to a shortage of components or raw materials, our business, financial condition and results of operations could be adversely affected.
We will incur increased costs as a result of being a public company, and our management will be required to devote substantial time to new compliance matters.
We will incur significant legal, accounting, and other expenses as a public company, including costs resulting from public company reporting obligations under the Securities Exchange Act of 1934, as amended, and the rules and regulations regarding corporate governance practices, including those under the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act, and the listing requirements of the NASDAQ Global Market.
Our management and other personnel will need to devote a substantial amount of time to ensure that we comply with all of these requirements. Moreover, despite recent reforms made possible by the JOBS Act, the reporting requirements, rules, and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly, particularly after we are no longer an "emerging growth company." Any changes that we make to comply with these obligations may not be sufficient to allow us to satisfy our obligations as a public company on a timely basis, or at all.
We also expect these 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 accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These factors could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, particularly to serve on our audit and compensation committees, or as executive officers.
Our business and future operating results may be adversely affected by catastrophic or other events outside of our control.
We develop and manufacture our platform in our facility located in Vista, California. Any damage to our facilities or the manufacturing equipment we use would be costly and could require substantial lead-time to repair or replace. Our business and operating results may be harmed due to interruption of our manufacturing by events outside of our control, including earthquakes and fires. Other possible disruptions may include power loss and telecommunications failures. In the event of a disruption, we may lose customers and we may be unable to regain those customers thereafter. Our insurance may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms, or at all.
Product Risks
Our financial results depend on commercial acceptance of our platform, its menu of tests and the development of additional tests and other products.
Our future depends on the success of our platform, which depends primarily on its acceptance by our targets customers as a reliable, accurate and cost-effective replacement for traditional MDx testing methods. Many clinical reference laboratories, specialty clinics and hospital laboratories already use molecular diagnostics testing instruments in which they have made substantial investments, and may be reluctant to change their current procedures for performing such analyses. In addition, many laboratories and clinics currently rely on LDTs that are redundant to LDTs that they would create and validate using our RUO products. These laboratories and clinics may be reluctant to discontinue using their LDTs due to the time and expense already invested in developing and validating these tests and their familiarity with these tests compared to our platform. If we are unable to displace



18


molecular diagnostics testing instruments and LDTs currently in use, our market opportunity will be limited and we may not be able to achieve significant sales of our products.
We continue to seek to develop additional tests for our platform as well as additional products to respond to what we perceive to be the needs of clinical reference laboratories, specialty clinics and hospital laboratories; however, we cannot guarantee that we will be able to develop enough additional tests or other products in a timely manner or in a manner that is cost-effective or at all. The development of new or enhanced tests and other products is a complex and uncertain process requiring the accurate anticipation of technological and market trends, as well as precise technological execution. We are currently not able to estimate when or if we will be able to develop, obtain licenses to third-party intellectual property on commercially acceptable terms for, obtain regulatory approval or clearance for, commercialize or sell, additional tests or enhance existing products. If we are unable to increase sales of our platform or to successfully develop, obtain licenses to third-party intellectual property on commercially acceptable terms for, obtain regulatory approval or clearance for, and commercialize, additional tests or other products, our revenue, prospects and ability to achieve or maintain profitability would be impaired.
We are subject to risks relating to the placement of INFINITI analyzers under our Reagent Access Plans.
In the United States, we offer the INFINITI analyzers through direct sale, monthly rental plans and our Reagent Access Plan, or RAP. As of September 30, 2014 and December 31, 2013, we had 58 and 48, respectively, INFINITI analyzers placed with customers under RAPs, representing 24.8% and 23.3%, respectively, of our total analyzer placements. Under our RAP, an INFINITI analyzer is placed at the customer's location at no direct cost to the customer with the intent of generating recurring demand for our high-margin testing consumables, including our test-specific BioFilmChips and Intellipac Reagent Management Modules. The customers under our RAPs are required by the terms of the plans to purchase minimum amounts of consumables; however, in some cases, customers have not met this requirement. We have the right to reclaim an INFINITI analyzer placed with a customer pursuant to a RAP if the customer does not purchase the minimum amount of consumables. During the nine months ended September 30, 2014, no analyzers were reclaimed, and for the year ended December 31, 2013, we reclaimed 14 INFINITI analyzers, either because the respective customer failed to purchase the minimum amount of consumables or otherwise elected not to retain the INFINITI analyzer at the end of the term of the applicable RAP. We bear the costs of producing these INFINITI analyzers and rely on the revenue from the sale of consumables to recoup our costs. As a result, we could expend significant resources to produce INFINITI analyzers for our RAPs and not generate enough revenue from the sale of consumables to recoup our costs, in which case our business could be adversely affected.
Our products are subject to recalls even after receiving FDA clearance or approval, or after affixing the CE marking, which would harm our reputation and business.
We are subject to medical device reporting regulations (e.g., MDR, vigilance reporting) that require us to report to the FDA or governmental authorities in other countries if our products cause or contribute to a death or serious injury, or malfunction in a way that would be reasonably likely to contribute to death or serious injury if the malfunction were to recur. The FDA and similar governmental authorities in other countries have the authority to require the recall of our products in the event of material deficiencies or defects in design or manufacturing. To date, we have not been required to make any reports under the MDR or vigilance reporting regulations and we have not conducted any product recalls. A government mandated, or voluntary, recall by us could occur as a result of component failures, manufacturing errors or design defects, including defects in labeling. Any recall would divert managerial and financial resources and could harm our reputation with customers. There can be no assurance that there will not be product recalls in the future or that such recalls would not have an adverse effect on our business.
If our products contain undetected defects or errors or do not operate as expected, we could incur significant unexpected expenses, experience product returns and lost sales, suffer damage to our brand and reputation and be subject to product liability or other claims and product recalls and other field or regulatory actions.
Our products are complex and may contain undetected defects, errors or failures, particularly when first introduced or when new versions are released. Some errors and defects may be discovered only after a product has been installed and used by the customer. To the extent our products incorporate technologies of third parties, we will be dependent on the reliability of these technologies. If our products contain undetected defects or errors or do not operate as expected, we could experience decreased sales and increased product returns, loss of customers and



19


market share and increased service, warranty and insurance costs. In addition, our reputation and brand could be damaged, and we could face potential legal claims regarding our products and be subject to product recalls or corrections and other field or regulatory actions. A successful product liability or other claim or product recall could result in negative publicity and further harm our reputation, result in unexpected expenses and adversely impact our business, financial condition and results of operations. In addition, we may be subject to claims resulting from false identification of genetic variations or other misdiagnoses made in connection with our tests. Litigating any such claims could be costly. We could expend significant funds during any litigation proceeding brought against us. Further, if a court were to require us to pay damages to a plaintiff or if we agree to pay damages in settlement of a claim, the amount of such damages could adversely affect our business, financial condition and results of operations.
We have limited experience with the specialized film coating process needed to produce our BioFilmChip microarrays, and there are limited alternative sources for this aspect of our manufacturing process.
Our BioFilmChip microarrays are formed by coating polyester film with several layers of emulsion. To date, we have outsourced the special film coating process needed to produce our BioFilmChip microarrays. In connection with the establishment of manufacturing operations at our Vista, California facility, we purchased the film coating equipment required to conduct this process ourselves. We have not yet installed this equipment and have no experience as a company conducting the film coating process. If we are unable to successfully operate and maintain this equipment and produce the coated film necessary for our BioFilmChip microarrays, we will have to continue to outsource this operation to a third party. Film coating capacity is limited and is becoming less available in the marketplace as film vendors move away from analog formats and focus increasingly on digital formats. Although we believe we have adequate coated film for the foreseeable future, we cannot guarantee that we would be able to obtain an alternative supply if we are unable to manufacture the coated film ourselves.
We will need to expand manufacturing capacity by ourselves or with third parties.
We will need either to continue to build internal manufacturing capacity or contract with one or more manufacturing partners, or both. We currently rely solely on internal manufacturing of our end products. Due to the complexity of our manufacturing process and the advanced technologies we employ, we may encounter difficulties in manufacturing our end products. We may not be able to build manufacturing capacity internally or find one or more suitable manufacturing partners, or both, to meet the volume, regulatory and quality requirements necessary to be successful in the market. If our products do not consistently meet our customers' performance expectations or the requirements of the FDA and authorities in other countries, we may be unable to generate sufficient revenue to become profitable. Significant additional resources, implementation of additional manufacturing equipment and changes in our manufacturing processes and organization may be required for the scale-up of each new product prior to commercialization or to meet increasing customer demand once commercialization begins, and this work may not be successfully or efficiently completed. Any delay in establishing or inability to expand our manufacturing capacity could delay our ability to develop or sell our products, which would result in lost revenue and adversely harm our business, financial condition and results of operations.
Customer Risks
We have in the past derived a significant portion of our revenue from a small number of customers and the loss of one or more of these customers, a significant decline in sales to one or more of these customers, or a delay in collection of payments from one or more of these customers could have an adverse effect on our financial condition and results of operations.
We have in the past derived a significant portion of our revenue from a few major customers. For fiscal years 2013 and 2012, we had two customers that together comprised 43% and 59%, respectively, of our total revenue, although during the six months ended June 30, 2014 no customer accounted for more than 10% of our revenue. With the recent adoption of our INFINITI HTS, we expect that a significant and increasing portion of our revenue will be derived from those of our customers that conduct high-volume testing. This could lead to a significant percentage of our revenue being concentrated in a small number of customers, unless and until we are able to increase the number of placements of our INFINITI HTS. Our continued business relationship with these major customers, and the amount of purchases and timing of payment by these major customers, may be impacted by several factors beyond our control, including product offerings by our competitors, pricing pressures or the financial health of these customers. The loss of any of these major customers, or a significant decline in sales to or a delay in collection of



20


payments from any of these customers, would adversely affect our business, financial condition and results of operations. For example, in the fourth quarter of 2012 one of our key customers, who was then utilizing a beta-trial version of our INFINITI HTS, significantly decreased its ordering volumes during the quarter, which resulted in substantially lower net revenue for that quarter compared to the prior quarter. This customer subsequently filed for U.S. bankruptcy protection during 2013, and as a result we recorded $4.5 million in bad debt expense in 2013.
Our business may suffer if we have difficulty acquiring and retaining customers.
A large part of our business strategy depends on our ability to place our INFINITI analyzers with customers that are high-volume users of genetic tests in our areas of focus to drive sales of our consumable products. We may not succeed in attracting and retaining a sufficiently large customer base for our platform in order to execute on our strategy. The FDA may restrict the ability of laboratories certified under the Clinical Laboratories Improvements Act of 1988, or CLIA, to offer LDTs, which would have an adverse impact on our sale of RUO consumable products to those laboratories. If we are unable to establish a sufficient installed base of INFINITI analyzers, in particular our INFINITI HTS analyzers, or if customers with which we place INFINITI analyzers do not use them, we may not be able to generate revenue or successfully implement our business strategy. In addition, if we are unable to bring our products to market as quickly as anticipated or to acquire and develop our customer base as quickly as we have projected, our ability to generate revenue could be adversely impacted.
Failure by our customers or distributors to pay for products we have sold to them, or failure or third-party payors to cover, or adequately reimburse our customers for the use of our tests, could impact our ability to continue sales and have an adverse effect on our financial condition and results of operations.
In certain cases, we may not be able to recognize revenue on sales even though we may have delivered products to our customers or distributors. For example, we have in the past sold, and may continue to sell, our INFINITI analyzers to certain of our international distributors where our ability to collect payment was not reasonably assured. Although our customers and distributors are required to pay us for the products that we sell to them, from time to time certain of our customers and distributors have not paid us or have delayed payment. In particular, some of our distributors experience long delays in receiving reimbursement from foreign government payors and healthcare providers, which in turn causes them to withhold payment to us. As of June 30, 2014 and December 31, 2013, approximately $7.7 million and $6.3 million, respectively, of our net accounts receivable were 90 days or more past due. This included, as of June 30, 2014 and December 31, 2013, approximately $4.5 million in net accounts receivable from one of our former major customers that filed for U.S. bankruptcy protection. We recorded $4.5 million in bad debt expense in 2013 related to this customer.
In the past we have deferred, and in the future we may be required to defer, the recognition of revenue where the collection of payment is not reasonably assured until such payment is received. Deferring the recognition of revenue could negatively impact our results of operations for any period in which the related sales occurred. Although we have reserved for or deferred the recognition of revenue related to the amount of all late payments on our balance sheets, we also may incur unexpected costs or losses resulting from these sales in the event of any delays or failures to make payment for the related products. If we are unable to collect payment from our customers or distributors for products we have sold to them, we may never be able to recover our costs to manufacture and sell such products, which could have an adverse effect on our financial condition and results of operations.
We sell our products primarily to clinical reference laboratories, specialty clinics and hospital laboratories, substantially all of which receive reimbursement for the healthcare services they provide to their customers from third-party payors, such as Medicare and Medicaid, private insurance plans and managed care programs. These third-party payors may deny reimbursement if they determine that a medical product was not used in accordance with cost-effective treatment methods, as determined by the third-party payor, or was used for an unapproved indication. Third-party payors also may refuse to reimburse for procedures and devices deemed to be experimental or medically unnecessary. In the United States, the American Medical Association assigns specific Current Procedural Terminology, or CPT, codes, which are necessary for reimbursement of diagnostic tests. Once the CPT code is established, the Centers for Medicare and Medicaid Services of the Department of Health and Human Services establishes reimbursement payment levels and coverage rules under Medicaid and Medicare, and private payors independently establish rates and coverage rules. Although there are previously assigned CPT codes for the tests that we offer and most of our tests are approved for reimbursement by Medicare and Medicaid as well as most third-party payors, certain of our future products may not be approved for reimbursement, and past coverage of our



21


current tests is not a guarantee for future coverage. Third-party payors are increasingly attempting to contain healthcare costs by limiting both coverage and the level of reimbursement for medical products and services. Increasingly, Medicare, Medicaid and other third-party payors are challenging the prices charged for medical services, including diagnostic tests. Levels of reimbursement may decrease in the future, and future legislation, regulation or reimbursement policies of third-party payors may adversely affect the demand for and price levels of our products. If our customers are not reimbursed for our products, they may reduce or discontinue purchases of our products or fail to make payment on amounts owed to us. For example, in 2013 our then-largest customer quit purchasing our products and sought protection under U.S. bankruptcy laws as a result of being unable to obtain reimbursement for medical services being performed by such customer.
If our customers are unwilling or unable to validate our platform or follow required protocols, our business could be harmed.
In most cases, we are dependent on our customers to validate our INFINITI analyzers and the associated tests we offer. These test validation processes are done on a test-by-test basis and can take anywhere from several weeks to several months or more to complete, and we do not generate revenue from these customers for sales of the tests being validated during these processes. Individual laboratories have their own validation procedures and protocols that our system and tests must pass and we cannot predict how long each validation process will take or whether laboratories will be willing or able to validate our INFINITI analyzer. To the extent that any laboratories are unwilling or unable to validate our INFINITI analyzer, we will not be able to generate meaningful revenue from sales to these laboratories.
Proper use of our INFINITI analyzers also requires our customers to follow certain sample collection and other protocols. Unlike our INFINITI and INFINITI PLUS analyzers, which are embodied in a single instrument box, our INFINITI HTS is a modular system with three instrument boxes, and so requires the observation by our customers of additional and more detailed protocols. If we are unable to develop or properly train our customers on these protocols or if, despite our efforts, customers do not follow the required protocols, the applicable INFINITI analyzer may not generate a result or a correct result. With respect to international customers, we are generally dependent on our distributors to provide support services. Failure by our customers to follow required protocols may lead to a perception, even if unfounded, that the applicable INFINITI analyzer does not function properly. Such perceptions could damage our reputation and brand and reduce the frequency that our customers use our INFINITI analyzers and purchase our consumables.
The spending policies of our customers have a significant effect on the demand for our products.
Our targeted customers include clinical reference laboratories, specialty clinics and hospital laboratories, and their respective spending policies can have a significant effect on the demand for our products. These policies are based on a wide variety of factors, including governmental regulation or price controls, reimbursement policies, the resources available for purchasing diagnostic tests, the spending priorities among various types of diagnostic tests and the policies regarding capital expenditures during recessionary periods. Any decrease in spending by clinical reference laboratories, specialty clinics and hospital laboratories could cause our revenue to decline. We have no control over our customers' spending policies. As a result, we are subject to significant volatility in revenue, which could result in an adverse effect on our operating results.
Regulatory Risks
We conduct business in a heavily regulated industry, and changes in regulations or the FDA's enforcement discretion, or violations of regulations or guidance by us, could adversely affect our business, prospects, results of operations or financial condition.
The clinical laboratory testing industry is highly regulated, and we cannot assure you that the regulatory environment in which we operate will not change significantly and adversely in the near future. In particular, the laws and regulations governing the marketing of molecular research use or diagnostic products for use as laboratory-developed tests are extremely complex and in many instances there are no significant regulatory or judicial interpretations of these laws and regulations. While we believe that we are currently in material compliance with applicable laws and regulations as historically enforced by the FDA, we cannot assure you that the FDA or other regulatory agencies would agree with our determination, and a determination that we have violated these laws, or a public announcement that we are being investigated for possible violations of these laws, could adversely affect our



22


business, prospects, results of operations or financial condition. Additionally, in November 2013 the FDA issued a Guidance document entitled "Distribution of In Vitro Diagnostic Products Labeled for Research Use Only or Investigational Use Only," or the RUO Guidance, which highlights the FDA's interpretation that distribution of RUO products with any labeling, advertising or promotion that suggests that clinical laboratories can validate the test through their own procedures and subsequently offer it for clinical diagnostic use as an LDT is in conflict with RUO status. The RUO Guidance further articulates the FDA's position that any assistance offered in performing clinical validation or verification, or similar specialized technical support, to clinical laboratories, is in conflict with RUO status. More recently, on July 31, 2014, the FDA notified the United States Congress of its intent to modify its enforcement discretion approach to LDTs in a risk-based manner, and this may require us to change our business model in order to maintain compliance with these laws. If we engage in any activities that are in conflict with the RUO status held by the majority of tests that we sell, we may be subject to immediate, severe and broad FDA enforcement action that would adversely affect our ability to continue operations. Accordingly, if the FDA finds that we are distributing our RUO products in a manner that is inconsistent with its guidance, we may be forced to stop distribution of our RUO tests until we are in compliance, which, would reduce our revenue, increase our costs and adversely affect our business, prospects, results of operations and financial condition.
Our failure to comply with regulatory requirements or receive any required regulatory clearance or approval for our products or operations in the United States or abroad would adversely affect our revenue and potential for future growth.
As a manufacturer of molecular research use and diagnostics products, our products are medical devices that are subject to extensive regulation in the United States by the FDA, and by respective authorities in foreign countries where we do business. The FDA regulates virtually all aspects of a medical device's design and testing, manufacture, safety, labeling, storage, recordkeeping, reporting, clearance and approval, promotion and distribution. The FDA also regulates the export of medical devices to foreign countries. Failure to comply with the regulatory requirements of the FDA and other applicable U.S. regulatory requirements may subject a company to administrative or judicially imposed sanctions ranging from warning letters to criminal penalties or product withdrawal or recall. Unless an exemption applies, a medical device must receive either clearance or premarket approval from the FDA before it can be marketed in the United States. The FDA's 510(k) clearance process for Class II devices usually takes from three to 12 months, but may take significantly longer. The premarket approval process for Class III devices generally takes from one to three years from the time the application is filed with the FDA, but also can be significantly longer. Premarket approval typically requires extensive clinical data and can be significantly longer, more expensive and more uncertain than the 510(k) clearance process. Despite the time, effort and expense expended, there can be no assurance that a particular device ultimately will be cleared or approved by the FDA through either the 510(k) clearance process or the premarket approval process.
Medical devices may only be marketed for the indications for which they are approved or cleared. We may be required to obtain additional new premarket approvals, premarket approval supplements or 510(k) clearances to market additional products or for new indications for or modifications to our existing products. We cannot be certain that we would obtain additional premarket approvals or 510(k) clearances in a timely manner or at all. We have modified various aspects of our devices in the past and we determined that new approvals, supplements or clearances were not required. The FDA may not agree with our decisions not to seek approvals, supplements or clearances for particular device modifications. If the FDA requires us to obtain premarket approvals, supplement approvals, or 510(k) clearances for any modification to a previously cleared or approved device, we may be required to cease manufacturing and marketing the modified device or to recall such modified device until we obtain FDA clearance or approval and we may be subject to significant regulatory fines or penalties. For example, we have not yet submitted a 510(k) notification for our INFINITI HTS analyzer and are presently selling it on an RUO basis only.  Our ability to obtain 510(k) clearance for the INFINITI HTS may be adversely impacted by our existing sale of the device as RUO equipment. In addition, we cannot assure you that the FDA will clear or approve such submissions in a timely manner, if at all.
A significant portion of our revenue is derived from genetic test panels sold as research use only and that are not intended for diagnostic purposes. Sales of our RUO products accounted for 61%, 82% and 86% of our net revenue for the six months ended June 30, 2014, and years ended December 31, 2013 and 2012, respectively. Under the FDA's current enforcement discretion approach to LDTs, laboratories regulated under the Clinical Laboratory Improvement Amendments of 1988, or CLIA, may validate the use of LDTs, specifically for use in their laboratory



23


using any labeled products, which may include our RUO-labeled products. While the FDA does not regulate LDTs, it has issued guidance on acceptable distribution practices for in vitro diagnostic products labeled for Research Use Only and on responding to unsolicited requests for off-label information. We have procedures designed to comply with these requirements and we believe that the sale of our products complies with the FDA's laws and regulations. If the FDA disagrees with the marketing of RUO products, or in its intended modification of LDT enforcement discretion imposes substantial changes to the regulation or enforcement of LDTs that are marketed by us, the broad use of RUO tests may be limited and a significant reduction in the sale of these products could occur. A decline in the sales of our RUO products would reduce our revenue, increase our operating expenses and adversely affect our business and results of operations.
On December 4, 2009, the FDA issued a letter to us indicating that certain of our promotional materials for our RUO tests may include diagnostic/clinical claims which may cause these products to be in vitro diagnostic tests for clinical use for which FDA clearance or approval is required. In addition, the FDA noted that the allegations in its letter may not constitute an exhaustive list of potential violations and noted that we are required to comply with the RUO requirements for all of our products that have not received FDA clearance or approval. We responded to the FDA's allegations in a letter dated December 14, 2009 and believe that we have taken appropriate action to modify and revise the promotional materials in light of the FDA's concerns. However, the FDA has not responded to our submission and has not confirmed its agreement with our approach. If the FDA does not agree with our approach, it could require that we take additional steps, initiate enforcement action or require that we recall or withdraw certain or all of our RUO products from the market. In addition, we could be subject to enforcement through other government agencies or private litigants, based on allegations similar to those contained in the FDA's December 14, 2009 letter, including but not limited to actions seeking fines, injunctions, consent decrees, civil penalties and criminal prosecution, any of which could material adversely impact our business. Our failure to comply with the FDA's regulatory requirements, obtain FDA clearance or approvals of new or existing products or product modifications or enhancements that we develop in the future, any limitations imposed by the FDA on such products' development or use, or the costs of obtaining FDA clearance or approvals, could have an adverse effect on our business, particularly given the proportion of our business that is reliant upon RUO products.
In many of the foreign countries in which we market our products, including those countries in the European Union, we are subject to extensive regulations similar to those of the FDA. As discussed under "Business — Government Regulation," there are additional regulatory requirements outside of the United States, including certifications, registrations or approvals that may require third-party certification of compliance with ISO 13485:2003, a quality management system standard developed by the International Organization for Standardization, or ISO. This certification must be satisfied in order for us to market our products in those jurisdictions. If we fail to satisfy such requirements or obtain the requisite certifications, registrations or approvals in these countries, it could have an adverse effect on our international operations.
Government payors, such as Medicare and Medicaid, and non-government payors, such as health plans, continue to implement controls and limits on the utilization and reimbursement of healthcare services, including in the area of genetic testing.
Government and non-government payors have in the past sought, and continue to seek, to reduce and limit utilization and reimbursement of healthcare services, including in the area of genetic testing. The Medicare Clinical Laboratory Fee Schedule is currently under review, and amounts paid to providers under such schedule is expected to change in upcoming years. Analyte-specific billing codes for genetic testing are also under review and are undergoing changes over time, and CMS has in the past expressed the opinion that certain analyte-specific billing codes should not be covered under Medicare. We expect that government and non-government payors will continue over time to expend efforts to reduce utilization of genetic testing services, adopt increasingly more stringent cost controls and otherwise reduce reimbursements. These efforts, if successful, may have an adverse impact on the volume of our sales of genetic testing products and in-house laboratory services or on the profitability of our genetic testing products and in-house laboratory services, or both.
Federal budgetary limitations and changes in healthcare policy, such as the creation of broad limits for diagnostic products or requirements that Medicare patients pay for portions of clinical laboratory tests or services received, could substantially diminish the sale of, or inhibit the utilization of diagnostic tests, increase costs, divert management’s attention and adversely affect our ability to generate revenue and achieve profitability. For example,



24


on several occasions, the U.S. Congress has considered imposing a 20% patient co-insurance amount for clinical laboratory services, which would require beneficiaries to pay a portion of the cost of their clinical laboratory testing. Although that requirement has not been enacted at this time, such an obligation could be imposed at some point in the future, which would make it more difficult for us to collect adequate reimbursement for our products, and thus might adversely affect our business and product sales.
If the FDA or another regulatory agency determines that we have promoted off-label use of our products, or are not in compliance with restrictions on the marketing of products labeled for research use only, we may be subject to various penalties, including civil or criminal penalties.
The FDA and other regulatory agencies actively enforce regulations prohibiting the promotion of a medical device for a use that has not been cleared or approved by the FDA. Use of a device outside its cleared or approved indications is known as "off-label" use. If the FDA or another regulatory agency determines that our promotional materials or training constitutes promotion of an off-label use, it could require us to modify our training or promotional materials or subject us to regulatory enforcement actions, including the issuance of a warning letter, injunction, seizure, civil fine and criminal penalties.
As required by the FDA, we have a policy in place requiring that our labeling and marketing practices comply with FDA regulations for products labeled for research use only. We also have a policy in place to refrain from making statements that could be considered off-label promotion of our products. Although our policy is to refrain from making statements that could be considered off-label promotion of our products, the FDA or another regulatory agency could conclude that we have engaged in off-label promotion or marketing of products labeled for research use only. If the FDA disagrees with the marketing of these products, we may be subject to a variety of enforcement actions ranging from public warning letters, fines, injunctions, consent decrees and civil penalties to suspension or delayed issuance of approvals, seizure or recall of our products, total or partial shutdown of production, withdrawal of approvals or clearances already granted, and criminal prosecution. In addition, the off-label use of our products may increase the risk of injury to patients, and, in turn, the risk of product liability claims. Product liability claims are expensive to defend and could divert our management’s attention and result in substantial damage awards against us. In addition, violations of the Federal Food, Drug, and Cosmetic Act may lead to investigations alleging violations of federal and state health care fraud and abuse laws, as well as state consumer protection laws, which may lead to costly penalties and may adversely impact our business.
If we fail to comply with the FDA's Quality System regulation and similar requirements in other jurisdictions, our manufacturing could be delayed, and our product sales and profitability could suffer.
Our manufacturing processes are required to comply with the FDA's Quality System regulation, which covers the procedures concerning (and documentation of) the design, testing, production processes, controls, quality assurance, labeling, packaging, storage and shipping of our devices. We also are subject to similar requirements in other jurisdictions and to state requirements and licenses applicable to manufacturers of medical devices. In addition, we must engage in extensive recordkeeping and reporting and must make available our manufacturing facilities and records for periodic and unscheduled inspections by governmental agencies, including the FDA, state authorities and comparable agencies in other countries. Moreover, failure to pass a Quality System regulation inspection or to comply with these and other applicable regulatory requirements could result in disruption of our operations and manufacturing delays. Failure to take adequate corrective action could result in, among other things, significant fines, suspension of approvals, seizures or recalls of products, operating restrictions and criminal prosecutions. Any failure to comply with applicable requirements could adversely affect our product sales and profitability.
Failure to comply with the Clinical Laboratory Improvement Amendments of 1988 and state laws governing clinical laboratories would negatively affect our business, and we may be required to expend significant amounts of resources to comply with these requirements.
We are subject to the CLIA a federal law that regulates clinical laboratories that perform testing on specimens derived from humans for the purpose of providing information for the diagnosis, prevention or treatment of disease. CLIA, which is administered by CMS, is intended to ensure the quality and reliability of clinical laboratories in the United States by mandating specific standards in the areas of personnel qualifications, administration, participation in proficiency testing, patient test management, quality control, quality assurance and inspections. The failure to



25


comply with CLIA requirements can result in enforcement action, including the revocation, suspension, or limitation of our CLIA certificate, as well as a directed plan of correction, state on-site monitoring, civil money penalties, civil injunctive suit or criminal penalties. We must maintain CLIA compliance and certification to be eligible to bill for tests provided to Medicare beneficiaries. If we were to be found out of compliance with CLIA program requirements and subjected to sanction, our business and reputation could be harmed. Even if it were possible for us to bring our laboratory back into compliance, we could incur significant expenses and potentially lose revenue in doing so.
We are also required to maintain a license to conduct testing in California. California laws establish standards for day-to-day operation of our clinical laboratory, including the training and skills required of personnel and quality control. Several other states require that we hold licenses to test specimens from patients residing in those states, and we currently hold licenses in all these states. Other states may adopt similar requirements in the future. Finally, we may in the future become subject to regulation in foreign jurisdictions if we engage in international sales of our genetic testing laboratory services. If we are not in compliance with a particular state’s or foreign jurisdiction’s licensing requirements, we may be unable to accept test specimens from patients residing in that state or foreign jurisdiction, as applicable, which could adversely affect our business.
We have a current certificate of accreditation under CLIA to perform testing. To renew our CLIA certificate, we are subject to survey and inspection every two years to assess compliance with program standards. Moreover, CLIA inspectors may make random inspections of our laboratory. The standards applicable to the testing that we perform may change over time. New interpretations of current regulations or future changes in regulations under CLIA or other governmental regulatory bodies, may make it difficult or impossible for us to comply with CLIA and other applicable regulations, which would significantly harm our business. We can offer no assurance that we will be able to operate profitably should regulatory compliance requirements become substantially more costly in the future.
The imposition of additional healthcare legislation could significantly impact our earnings and negatively impact our results of operations and cash flows.
In March 2010, significant reforms to the healthcare system in the form of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 were adopted as law in the United States. This legislation included provisions that, among other things, reduce or limit Medicare reimbursement (including in respect of clinical laboratory fees such as those collected by our in-house laboratory) and impose an excise tax of 2.3% on U.S. sales of most medical devices, including some of our products. Other elements of this legislation, such as comparative effectiveness research, new requirements to report certain financial arrangements with physicians and teaching hospitals, an independent payment advisory board, payment system reforms, including shared savings pilots, and other provisions, could meaningfully change the way health care is developed and delivered, and may materially impact numerous aspects of our business. The long-term impact of this law on us is uncertain. However, this new legislation, or any future legislation, could reduce medical procedure volumes, lower reimbursement for our products, and impact the demand for our products or the prices at which we sell our products. In addition, various healthcare reform proposals have also emerged at the state level. We cannot predict with certainty what healthcare initiatives, if any, will be implemented at the state level, or what the ultimate effect of federal healthcare reform or any future legislation or regulation may have on us or on our customers’ purchasing decisions regarding our products and services.
We are subject, directly or indirectly, to federal and state healthcare fraud and abuse and other laws and regulations and could face substantial penalties if we are unable to fully comply with such laws.
As a provider of clinical laboratory testing services, we are subject to extensive and frequently changing federal, state and local laws and regulations governing various aspects of our business. For example, we are subject to healthcare fraud and abuse regulation and enforcement by both the federal government and the states in which we conduct our business. These healthcare laws and regulations include, for example:
the federal Anti-Kickback Law, which constrains our marketing practices, educational programs, pricing policies, and relationships with healthcare providers or other entities, by prohibiting, among other things, persons or entities from soliciting, receiving, offering or providing remuneration, directly or indirectly, in return for or to induce either the referral of an individual for, or the purchase, lease order or recommendation of, any good, facility, item or services for which payment may be made, in whole or in part, under a federal healthcare program such as the Medicare and Medicaid programs;



26


federal civil and criminal false claims laws and civil monetary penalty laws, which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid or other third-party payors that are false or fraudulent, and which may apply to entities like us to the extent that our interactions with customers may affect their billing or coding practices;
the federal Health Insurance Portability and Accountability Act of 1996, as amended, or HIPAA, which imposes certain requirements relating to the privacy, security and transmission of individually identifiable health information, and also established federal crimes for knowingly and willfully executing a scheme to defraud any healthcare benefit program or making false statements in connection with the delivery of or payment for healthcare benefits, items or services, and which imposed certain requirements relating to privacy, security, and transmission of individually identifiable health information;
the federal physician self-referral law, commonly known as the Stark Law, which prohibits a physician from making a referral to an entity for certain designated health services reimbursed by Medicare or Medicaid if the physician (or a member of the physician’s family) has a financial relationship with the entity, and which also prohibits the submission of any claims for reimbursement for designated health services furnished pursuant to a prohibited referral;
the federal Physician Payment Sunshine Act, and its implementing regulations, which requires manufacturers of certain drugs, devices, biologicals and medical supplies for which payment is available under Medicare, Medicaid or the Children's Health Insurance Program (with certain exceptions) to report annually to the United States Department of Health and Human Services information related to payments or other transfers of value made to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors) and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members;
federal consumer protection and unfair competition laws, which broadly regulate marketplace activities and activities that potentially harm consumers; and
state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws, which may apply to items or services reimbursed by any third-party payor, including commercial insurers and state laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways, with differing effects.
In addition, our in-house laboratory is also subject to certification and licensing requirements, laws relating to the health and safety of laboratory workers and the handling, transportation and disposal of medical specimens, infectious and hazardous waste and radioactive materials, and laws, rules and regulations of government and non-government payors relating to billing and reimbursement of genetic tests. Without limiting the above, the clinical laboratory industry is subject to particular scrutiny regarding:
test ordering and billing practices;
marketing, sales and pricing practices;
insurance;
"anti-markup" legislation;
health information privacy and security; and
consumer protection and unfair trade practices.
We are unable to predict what additional federal or state legislation or regulatory initiatives may be enacted in the future regarding our business or the healthcare industry in general, or what effect such legislation or regulations may have on us. Federal or state governments may impose additional restrictions or adopt interpretations of existing laws that could have an adverse effect on us.
We incur significant costs in complying with these laws and regulations. Because of the breadth of these laws and the narrowness of available statutory and regulatory exemptions, it is possible that some of our business activities could be subject to challenge under one or more of such laws. If our operations, or our sales techniques or product placement strategies, are found to be in violation of, or to encourage or assist the violation by third parties of, any of the laws described above or any other governmental regulations that apply to us, or if we fail to maintain, renew or obtain necessary permits, licenses and approvals related to our in-house laboratory, we may be subject to



27


penalties, including civil and criminal penalties, damages, fines, exclusion from the Medicare and Medicaid programs, disgorgement, contractual damages, reputational harm, diminished profits and future earnings, suspension or revocation of certifications or licenses that are required to operate our business, injunctions and other associated remedies, the curtailment or restructuring of our operations, denial or withdrawal of product clearances, or private "qui tam" actions brought by individual whistleblowers in the name of the government, any of which could have an adverse effect on our business. We currently rely on our general Code of Ethics and Professional Standards policy, and do not have detailed and sophisticated compliance programs in place, in regard to our relationships with healthcare providers, and we will need to implement a detailed and sophisticated compliance program as our operations grow. Any penalties, damages, fines, exclusions, curtailment or restructuring of our operations could adversely affect our ability to operate our business and our financial results. The risk of our being found in violation of these laws is increased by the fact that many of these laws are broad and their provisions are open to a variety of interpretations. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business.
We use hazardous chemicals and biological materials in our business. Any claims relating to improper handling, storage or disposal of these materials could be time consuming and costly.
Our research and development and manufacturing processes, as well as the operations of our CLIA-certified in-house laboratory, involve the controlled use of hazardous materials, including chemicals, and biological materials, and our operations produce hazardous waste products. We cannot eliminate the risk of accidental contamination or discharge and any resultant injury from these materials. We may be sued for any injury or contamination that results from our use or the use by third parties of these materials, and our liability may exceed our insurance coverage and our total assets. Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of these hazardous materials and specified waste products, as well as the discharge of pollutants into the environment and human health and safety matters. Compliance with environmental laws and regulations may be expensive, and may impair our research, development and production efforts. If we fail to comply with these requirements, we could incur substantial costs, including civil or criminal fines and penalties, cleanup costs, or capital expenditures for control equipment or operational changes necessary to achieve and maintain compliance. In addition, we cannot predict the impact on our business of new or amended environmental laws or regulations, or any changes in the way existing and future laws and regulations are interpreted and enforced.
As a public company, we will be subject to the requirements related to Section 404 of the Sarbanes-Oxley Act. If we are unable to comply with these requirements in a timely manner, it may affect the reliability of our internal control over financial reporting and negatively impact our business and stock price.
Beginning with our annual report on Form 10-K for the year ending December 31, 2015, we will be required to furnish a report by management on the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act. In addition, our independent registered public accounting firm will be required to attest to the effectiveness of our internal controls over financial reporting beginning with our annual report on Form 10-K following the later of the year following our first annual report required by the Securities and Exchange Commission, and the date on which we are no longer an "emerging growth company." We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual gross revenue of at least $1.0 billion or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of the prior June 30th, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.
The process of designing and implementing effective internal controls and procedures is a continuous effort that requires us to anticipate and react to changes in our business and economic and regulatory environments. We cannot assure you that our efforts will be adequate to satisfy our reporting obligations as a public company or that we will be able to successfully complete the procedures and certification and attestation requirements related to Section 404 of the Sarbanes-Oxley Act or that we or our independent registered public accounting firm will not identify additional material weaknesses or significant deficiencies in our internal control over financial reporting. If we identify any reason that we cannot certify as to the effectiveness of our internal control over financial reporting, we could incur additional costs remedying the cause of our failure to certify as to the effectiveness of our internal



28


control over financial reporting, and our reputation, investor perceptions of us and the price of our common stock could be adversely affected and you may not be able to rely on our financial statements.
Failure to timely or accurately bill for our in-house laboratory services in compliance with applicable rules and regulations could have an adverse effect on our business.
Our in-house laboratory bills, and is reimbursed by, various healthcare payors from time to time, including Medicare, Medicaid and insurance companies. The rules and regulations surrounding this billing and reimbursement process are complicated, non-uniform and constantly changing. Changes in these rules and regulations, or the manner in which they are implemented by the applicable payors, may result in additional costs, time and expense to us, which may in turn affect our profitability and our results of operations. Our failure to timely and correctly bill our applicable healthcare payors, and their failure or reluctance to timely reimburse us, could result in an increase in the age of our in-house laboratory accounts receivable and may have an adverse effect on our cash flows and as a result, our results of operations.
In addition, our in-house laboratory may from time-to-time perform tests in advance of payment and without certainty as to the outcome of the billing process. In cases where we do receive a fixed fee per test, we may still have disputes over pricing and billing. We receive payment from individual patients and from a variety of payors, such as commercial insurance carriers and governmental programs. Each payor typically has different billing requirements. Among the factors complicating our billing of third-party payors are:
disputes among payors regarding which party is responsible for payment;
disparity in coverage among various payors;
different process, information and billing requirements among payors; and
incorrect or missing billing information, which is required to be provided by the prescribing clinician.
Additionally, from time to time, payors change processes that may affect timely payment. These changes may result in uneven cash flow or impact the timing of revenue recognized with these payors. These billing complexities, and the related uncertainty in obtaining payment for our products, could negatively affect our revenue, cash flow and profitability.
Our in-house laboratory operations and reputation may be impaired if we do not comply with applicable privacy and information securities laws, regulations and policies.
Our in-house laboratory may from time to time receive, produce and/or maintain sensitive patient data and other personal patient information, including legally protected health information, and personally identifiable information about our customers, payors and patients. The secure processing, storage, maintenance and transmission of this critical information is vital to our operations and business strategy. If we do not adequately safeguard that data and information and it were to become available to persons or entities that should not have access to it, our business could be impaired, our reputation could suffer and we could be subject to fines, penalties and litigation. Unauthorized access, loss or dissemination could also disrupt our operations, including our ability to process tests, provide test results, bill payors or patients, process claims and appeals, provide customer assistance services, conduct research and development activities, collect, process and prepare company financial information, provide information about our tests and other patient and physician education and outreach efforts through our website, and manage the administrative aspects of our business and damage our reputation, any of which could adversely affect our business. Any such breach could also result in the compromise of our trade secrets and other proprietary information, which could adversely affect our competitive position. In addition, the interpretation and application of consumer, health-related, privacy and data protection laws in the United States, Europe and elsewhere are often uncertain, contradictory and in flux. It is possible that these laws may be interpreted and applied in a manner that is inconsistent with our practices. If so, this could result in government-imposed fines or orders requiring that we change our practices, which could adversely affect our business. Complying with these various laws could cause us to incur substantial costs or require us to change our business practices and compliance procedures in a manner adverse to our business.



29


If we seek FDA approvals of one or more of our genetic test panels, we may fail to receive favorable clinical results from such test panels that require clinical trials, and even if we receive favorable clinical results, we may still fail to receive the necessary clearances or approvals to market these genetic test panels.
We continually invest in the research and development of new products to expand the menu of testing options for our platform. To commercialize our products, we may be required to undertake time-consuming and costly development activities, sometimes including clinical trials, for which the outcome is uncertain. We do not currently intend to seek PMA approval from the FDA for any of our current genetic test panels. However, if we do determine to seek such approval, we will not know whether clinical trials of our genetic test panels or any other pre-clinical or clinical trials will begin on time or be completed on schedule, if at all. The commencement and completion of clinical trials can be delayed for a number of reasons, including delays related to:
obtaining sufficient funding for the clinical trial;
satisfying regulatory requirements to commence a clinical trial;
reaching agreement on acceptable terms with prospective clinical research organizations, or CROs, clinical investigators and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs, clinical investigators and clinical trial sites;
obtaining institutional review board approval to initiate and conduct a clinical trial at a prospective site;
identifying, recruiting and training suitable clinical investigators; and
identifying, recruiting and enrolling subjects to participate in clinical trials.
Clinical trials may also be delayed, halted or repeated as a result of ambiguous or negative interim results or unforeseen complications in testing. In addition, a clinical trial may be suspended or terminated by us, the FDA, the institutional review board overseeing the clinical trial, any of our clinical trial sites, or other regulatory authorities due to a number of factors, including:
failure by us, our employees, our CROs or their employees to conduct the clinical trial in accordance with all applicable FDA or other regulatory requirements or our clinical protocols;
inspection of the clinical trial operations or trial sites by the FDA or other regulatory authorities resulting in the imposition of a clinical hold;
lack of adequate funding to continue the clinical trial, including the incurrence of unforeseen costs due to enrollment delays, requirements to conduct additional trials and studies and increased expenses associated with the services of our CROs and other third parties;
lack of effectiveness of any product candidate during clinical trials;
slower than expected rates of subject recruitment and enrollment rates in clinical trials;
failure of our CROs or other third-party contractors to comply with all contractual requirements or to perform their services in a timely or acceptable manner; or
unfavorable results from ongoing clinical trials and pre-clinical studies.
Clinical investigations of in vitro diagnostic tests, including our products and product candidates, typically are exempt from the investigational device exemption, or IDE, requirements. Thus, we do not need the FDA's prior approval to conduct clinical trials of our products, provided the testing is non-invasive, does not require an invasive sampling procedure that presents a significant risk, does not intentionally introduce energy into the subject and is not used as a diagnostic procedure without confirmation of the diagnosis by another, medically established diagnostic device or procedure. The FDA requires each sponsor of a clinical trial to make this determination in the first instance, but the FDA can review any decision. If the FDA disagrees with our decision not to submit an IDE for the clinical trials we conduct, the agency may retroactively require us to submit an IDE and halt the clinical trial until the IDE is approved.
Products that appear promising during early development and preclinical studies may, nonetheless, fail to demonstrate the results needed to support regulatory approval or commercial viability. Even if we receive favorable clinical results, we may still fail to obtain the necessary FDA clearance and approvals. Any such failure, or any material delay in obtaining the necessary clearance or approvals, could adversely affect our business, financial condition and results of operations.



30


Our international operations are subject to trade and anti-corruption laws and regulations.
Due to the international scope of our operations, we are subject to a complex system of import- and export-related laws and regulations, including U.S. regulations issued by the Bureau of Industry and Security and the Office of Foreign Assets Control, as well as the counterparts of these agencies in other countries. Any alleged or actual violations of these U.S. and foreign regulations may subject us to government scrutiny, investigation and civil and criminal penalties, and may limit our ability to import or export our products or to provide services outside the United States. We cannot predict the nature, scope or effect of future regulatory requirements to which our operations might be subject or the manner in which existing laws might be administered or interpreted.
In addition, the U.S. Foreign Corrupt Practices Act and similar foreign anti-corruption laws generally prohibit companies and their intermediaries from making improper payments or providing anything of value to improperly influence foreign government officials for the purpose of obtaining or retaining business, or obtaining an unfair advantage. Recent years have seen a substantial increase in the global enforcement of anti-corruption laws. Our international distributors are domiciled in areas of the world with laws, rules and business practices that differ from those in the United States. As a result, we face the reputational and legal risk that our international distributors will violate applicable laws, rules and business practices. If we or our international distributors are determined to be in violation of these laws, rules and business practices, it may result in severe criminal or civil sanctions for us or our distributors, could disrupt our business, and could result in an adverse effect on our reputation, business and results of operations or financial condition.
Legal Risks
We may not be able to compete effectively if we are unable to protect our proprietary rights.
Our success depends in part on our ability to protect our intellectual property rights, which involve complex legal, scientific and factual questions and uncertainties. We rely upon patent, trade secret, copyright and contract laws to protect proprietary technology and trademark law to protect brand identities. We cannot be certain that we have taken adequate steps to prevent misappropriation of our technology or that our competitors will not independently develop technologies that are substantially equivalent or superior to ours. We also cannot be certain that we have taken adequate steps to protect our inventions through patents or our brand identities through trademarks. To date we have not sought trademark protection for our brand identities in countries outside of the United States, and this may adversely affect our ability to prevent unauthorized use of these brand identities after we, or our distributors, have expended resources to increase their recognition. Our success depends in part on our ability to obtain and maintain patent protection for our products and their use, maintain trade secret protection and operate without infringing upon the proprietary rights of others. Our policy is to protect our proprietary technology through patents, where appropriate, and in other cases, through trade secrets. In addition, we rely on the licenses of patents of third parties. We cannot assure you that any patent applications filed by, assigned to, or licensed to us will be granted, that any patents issued to or licensed by us will provide us with any competitive advantages or adequate protection for inventions, that any patents issued to or licensed by us will not be challenged, invalidated, held to be unenforceable, or circumvented by others or that issued patents, or patents that may be issued, will provide protection against competitive products or otherwise be commercially valuable.
If we fail to obtain and/or maintain sufficient patent protection for our products, our ability to realize a competitive advantage for these products could be materially affected, which may have an adverse effect on our results of operations. In particular, if we fail to obtain and/or maintain patent protection, competitors may be able to produce products that would be directly competitive with our products using similar or identical processes with impunity. Moreover, should any government or court limit or alter patent rights relating to specific genetic information or diagnostic methods, our business could be materially and adversely affected.
Patent law relating to the scope of claims in the fields of healthcare and biosciences generally, and molecular diagnostics in particular, is evolving. Our patent rights and those of others are subject to this uncertainty. For example, our assays utilize specific primer sequences to target genes correlated with various diseases and physiological states. In Mayo Collaborative Services v. Prometheus Laboratories, Inc., 132 S. Ct. 1289 (U.S. 2012), the U.S. Supreme Court invalidated a set of claims that were based on determining a correlation between the concentration of a marker molecule and a disease state. The following year, the Court invalidated claims directed towards specific gene sequences as involving naturally occurring DNA in Association for Molecular Pathology v.



31


Myriad Genetics, Inc., 133 S. Ct. 2107 (U.S. 2013).  How these and related issues are eventually resolved by the courts could adversely impact us with respect to the scope of our patent protection, as well as validity of patents held by others. 
Our patent rights on our products might conflict with the patent rights of others, whether existing now or in the future. We cannot assure you that the inventors of the patents and applications that we own and license were the first to invent or the first to file on the claimed inventions, and if others were determined to be the first inventors, such determination could materially reduce or even eliminate the value of such patents. We also cannot assure you that a third party does not have or will not obtain patents that dominate the patents we own or license now or in the future. Consequently, we could be subject to charges of patent infringement. The defense and prosecution of patent claims are both costly and time-consuming even if the outcome is ultimately in our favor. An adverse outcome could subject us to significant liabilities to third parties, require disputed rights to be licensed from third parties or require us to cease selling the affected products. As our products are distributed in the marketplace, we expect to face opposition to our intellectual property by competitors. If we face opposition to our intellectual property, we likely will incur substantial costs defending our patents.
Additionally, we rely on trade secrets and proprietary know-how, which we seek to protect, in part, by confidentiality agreements with our collaborators, employees and consultants. We cannot assure you that these agreements will not be breached, that we will have adequate remedies for any such breach or that our trade secrets will not otherwise become known or be independently developed by competitors.
Our success will depend partly on our ability to operate without infringing or misappropriating the proprietary rights of others.
The in vitro diagnostics industry has a history of patent litigation and likely will continue to experience patent litigation suits. A third party could claim that we are infringing a patent, which could prevent us from selling our INFINITI analyzers and tests, or from developing new technologies we expect to utilize or products we expect to sell. We may be sued for infringing or misappropriating the proprietary rights of others. We may have to pay substantial damages, including treble damages and the opposing party's attorney fees, for past infringement if it is determined that our products or their use infringe on a third party's proprietary rights. In addition, in the future we may need to obtain one or more licenses to the intellectual property of others, and the failure to obtain such licenses could prevent us from manufacturing or selling the affected products. Our platform utilizes a wide variety of technologies and we cannot assure you that we have identified or can identify all inventions and patents that may be infringed by the development, manufacture, sale and use of our platform, including its various components. If relevant patents are upheld as valid and enforceable and we are found to infringe, we could be prevented from selling our system unless we can obtain a license to use technology or ideas covered by such patents or are able to redesign our platform to avoid infringement. A license may not be available at all or on commercially reasonable terms, and we may not be able to redesign our platform to avoid infringement.
The landscape for intellectual property rights in the field of genetics is complex. Although a significant amount of intellectual property in the field of genetics is already in the public domain, some of our existing and future tests for our platform could require modification, or the acquisition of certain rights from third parties related to those tests which we have not yet obtained, to avoid infringement. We may not be able to make such modifications or obtain such rights at all or on terms that are commercially acceptable. If we sell an otherwise infringing test without such modifications or such rights, a third party patent holder may sue us for patent infringement. If a court finds that we infringed the third party's patent and that the infringement was willful, we could be ordered to pay treble damages and the patent holder’s attorneys' fees, and we may be enjoined from further selling our tests, which may adversely impact our business, financial condition or results of operations.
We also enter into collaborative agreements with research and academic institutions for the development of additional or enhanced tests to be run on our system. Under these agreements, the institution typically retains the intellectual property rights to any inventions or discoveries made solely by the institution, while we receive a right to negotiate a license to these intellectual property rights. If these institutions independently develop intellectual property that is necessary for us to sell new tests that arise from the collaboration, there can be no assurance that we will be able to obtain a license through our negotiation rights. Acquisition of any necessary intellectual property rights from third parties related to any of our existing or future tests, including licenses to patents, could also be



32


time-consuming and expensive, and could require us to pay significant royalties to third parties. And likewise any such rights may not be available on commercially reasonable terms or at all.
We cannot assure you that any third party intellectual property rights to use technology or biomarkers that we determine are necessary to our business and the development of new tests for our platform can be acquired on commercially reasonable terms or at all. Resulting limitations on our ability to offer certain tests or expand our menu of test panels could have an adverse effect on our business, financial condition and results of operations and negatively impact a key basis upon which we compete.
We have hired and will continue to hire individuals who have experience in molecular diagnostics and these individuals may have confidential trade secret or proprietary information of third parties. We cannot assure you that these individuals will not use this third-party information in connection with performing services for us or otherwise reveal this third-party information to us. Thus, we could be sued for misappropriation of proprietary information and trade secrets. Such claims are expensive to defend and could divert our attention and result in substantial damage awards and injunctions that could have an adverse effect on our business, financial condition or results of operations.
We may need to initiate lawsuits to protect or enforce our patents or other proprietary rights, which would be expensive and, if unsuccessful, may cause us to lose some of our intellectual property rights.
To protect or enforce our patent rights, it may be necessary for us to initiate patent litigation proceedings against third parties, such as infringement suits or interference proceedings. These lawsuits would be expensive, take significant time and would divert management's attention from other business concerns. In the event that we seek to enforce any of our patents against an infringing party, it is likely that the party defending the claim will seek to invalidate the patents we assert, which could put our patents at risk of being invalidated, held unenforceable, or interpreted narrowly, and our patent applications at risk of not being issued. Further, these lawsuits may provoke the defendants to assert claims against us. The patent position of in vitro diagnostics firms is highly uncertain, involves complex legal and factual questions and recently has been the subject of much litigation. We cannot assure you that we will prevail in any of such suits or proceedings or that the damages or other remedies awarded to us, if any, will be commercially valuable.
In the normal course of business, we are subject to litigation, which, if adversely determined, could cause us to incur substantial losses.
We are, from time to time, during the normal course of operating our businesses, subject to various litigation claims and legal disputes. Some of the litigation claims may not be covered under our insurance policies or our insurance carriers may seek to deny coverage. As a result, we might be required to incur significant legal fees, which may have an adverse impact on our financial position. In addition, because we cannot predict the outcome of any action, it is possible that, as a result of current or future litigation, we will be subject to adverse judgments or settlements that could significantly reduce our earnings or result in losses. See "Business — Legal Proceedings."
Risks Relating to this Offering and our Common Stock
There has been no prior market for our common stock, and an active trading market may not develop.
Prior to this offering, there has been no public market for our common stock. An active trading market may not develop following the closing of this offering or, if developed, may not be sustained. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair market value and increase the volatility of your shares. An inactive market may also impair our ability to raise capital by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration.
The price of our common stock may be volatile and fluctuate substantially, which could result in substantial losses for investors purchasing shares in this offering.
The initial public offering price for the shares of our common stock sold in this offering will be determined by negotiation between the representatives of the underwriters and us. This price may not reflect the market price of our common stock following this offering. In addition, the market price of our common stock is likely to be highly volatile and may fluctuate substantially due to many factors, including:
actual or anticipated fluctuations in our results of operations;



33


variance in our financial performance from the expectations of market analysts;
conditions and trends in the markets we serve;
changes in our pricing policies or the pricing policies of our competitors;
legislation or regulatory policies, practices or actions;
the announcements of significant new products, contracts, acquisitions or strategic alliances by us or our competitors;
 
the commencement or outcome of litigation;
our ability to repay remaining indebtedness after completion of this offering;
our sale of common stock or other securities in the future or sales of our common stock by our significant stockholders;
changes in market valuation or earnings of our competitors;
the trading volume of our common stock;
the loss of key personnel;
changes in the estimated future size and growth rate of our markets;
general economic conditions; and
general volatility of the stock market.
These broad market and industry factors may materially harm the market price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been instituted against that company. Such litigation, if instituted against us, could result in substantial costs and a diversion of management’s attention and resources, which could adversely harm our financial condition and results of operations.
If equity research analysts do not publish research or reports about our business or if they issue unfavorable commentary or downgrade our common stock, the price of our common stock could decline.
The trading market for our common stock will rely in part on the research and reports that equity research analysts publish about our business and us. The price of our stock could decline if one or more equity research analysts downgrade our stock or if those analysts issue other unfavorable commentary or cease publishing reports about our business or us.
We currently do not intend to pay dividends on our common stock and, consequently, your only opportunity to achieve a return on your investment is if the price of our common stock appreciates.
We currently do not plan to declare dividends on shares of our common stock for the foreseeable future. See "Dividend Policy" for more information. Consequently, your only opportunity to achieve a return on your investment in our company will be if the market price of our common stock appreciates and you sell your shares at a profit. There is no guarantee that the price of our common stock that will prevail in the market after this offering will ever exceed the price that you pay. In addition, the lack of dividends may limit the number of potential buyers of our common stock.
Future sales of our common stock may depress our share price.
After this offering, we will have shares of common stock outstanding, based upon our outstanding shares as of September 30, 2014 after giving effect to the conversion of our convertible preferred stock into common stock. Sales of substantial amounts of our common stock in the public market following this offering, or the perception that these sales may occur, could cause the market price of our common stock to decline. After the lock-up agreements pertaining to this offering expire, additional stockholders will be able to sell their shares in the public market, subject to legal restrictions on transfer. As described in "Shares Eligible for Future Sale — Registration Rights," we also have granted certain of our security holders registration rights which, subject to certain limitations, will permit them to cause us to file a registration statement with respect to the registrable securities held by them. As soon as practicable upon completion of this offering, we also intend to file a registration statement covering shares of our common stock issuable upon exercise of outstanding stock options or reserved for future issuance under our equity incentive and stock purchase plans. We may also sell additional shares of common stock in subsequent public



34


offerings, which may adversely affect market prices for our common stock. See "Shares Eligible for Future Sale" for more information.
We have broad discretion in the use of the net proceeds from this offering, and our investment of these proceeds may not yield a favorable return.
Our management will have broad discretion in the application of the net proceeds from this offering, including for any of the purposes described in "Use of Proceeds." Accordingly, you will have to rely upon the judgment of our management with respect to the use of the proceeds. Our management may spend a portion or all of the net proceeds from this offering in ways that our stockholders may not desire or that may not yield a significant return or any return at all. Of the net proceeds from this offering, we intend to use approximately $ million to satisfy outstanding accounts payable to advisers and service providers incurred in connection with our prior capital raising activities conducted from 2008 through 2013, and approximately $ million to retire existing debt obligations. The payment of these amounts will not enhance our business operations or increase our revenue. The failure by our management to effectively apply the remaining net proceeds from this offering could harm our business. Pending their use, we may also invest the net proceeds from this offering in a manner that does not produce income or that loses value.
As a new investor, you will experience immediate and substantial dilution as a result of this offering.
The initial public offering price of our common stock will be considerably more than the net tangible book value per share of our outstanding common stock. Accordingly, investors purchasing shares of common stock in this offering will:
pay a price per share that substantially exceeds the value of our assets after subtracting liabilities; and
contribute % of the total amount invested to fund our company, and will own % of the shares of common stock outstanding after this offering and the use of proceeds therefrom.
To the extent that outstanding stock options and warrants are exercised, there will be further dilution to new investors. See "Dilution" for more information.
Certain provisions of our corporate governing documents and Delaware law could make an acquisition of our company more difficult.
Our certificate of incorporation and bylaws contain provisions that may make the acquisition of our company more difficult without the approval of our board of directors. For example, our certificate of incorporation and bylaws:
authorize the issuance of preferred stock that can be created and issued by our board of directors without prior stockholder approval, commonly referred to as "blank check" preferred stock, with rights senior to those of our common stock;
limit the persons who can call special stockholder meetings;
provide that a supermajority vote of our stockholders is required to amend our bylaws and some portions of our certificate of incorporation;
establish advance notice requirements to nominate persons for election to our board of directors or to propose matters that can be acted on by stockholders at stockholder meetings;
do not provide for cumulative voting in the election of directors; and
provide for the filling of vacancies on our board of directors between annual meetings by action of a majority of the directors and not by the stockholders.  
These and other provisions in our organizational documents could allow our board of directors to affect your rights as a stockholder in a number of ways, including making it more difficult for stockholders to replace members of the board of directors. Because our board of directors is responsible for approving the appointment of members of our management team, these provisions could in turn affect any attempt to replace the current management team. These provisions could also limit the price that investors would be willing to pay in the future for shares of our common stock.



35


In addition, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which, subject to certain exceptions, impose certain restrictions on mergers and other business combinations between any holder of 15% or more of our common stock and us. See "Description of Capital Stock — Provisions of Our Certificate of Incorporation and Bylaws and Delaware Law That May Have an Anti-Takeover Effect."



36


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that reflect our current views with respect to, among other things, future events or our future financial performance. All statements in this prospectus other than statements of historical fact, including statements regarding future events, our future financial performance, business strategy and plans, predictions about our markets, and objectives of management for future operations, are forward-looking statements.
In some cases, you can identify forward-looking statements by terminology including "anticipates," "believes," "can," "continue," "could," "estimates," "expects," "intends," "may," "might," "plans," "potential," "predicts," "should," "will" or "would," or the negative of these terms or other comparable terminology. Forward-looking statements used in this prospectus address topics such as, among other things:
our business strategy;
our development of new products;
our anticipated growth strategies;
future demand for our products;
anticipated trends in our business, trends in the market for our products and trends in the adoption of new technologies;
competition and competitive factors or trends in our market;
uncertainty regarding our future operating results, including our projected sales, net sales, financial results, cash flows, pricing and similar items;
our intended use of proceeds from this offering;
our plans for additional clinical trials and seeking regulatory clearances for our INFINITI HTS and additional test panels;
our ability to continue to control costs and maintain quality;
anticipated changes in our expenses over future periods;
the impact of U.S. health care reform legislation and other health care policy changes;
the protection or acquisition of, investment in or legal proceedings regarding our intellectual property;
our ability to obtain FDA or other regulatory clearances or approvals;
the regulatory environment for our products and our business, and our ability to comply with and adapt to such environment; and
the plans, objectives, expectations and intentions expressed in this prospectus that are not historical facts.
These statements are only predictions. Actual events or results may differ materially. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in "Risk Factors." We cannot guarantee future results, levels of activity, performance or achievements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, or to conform these statements to actual results or changes in our expectations.
Moreover, we operate in a competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this prospectus may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.




37


MARKET, INDUSTRY AND OTHER DATA
Unless otherwise indicated, information contained in this prospectus concerning our industry and the market segments in which we operate, including our general expectations and market position, market opportunity and market size, is based on information from various sources, on assumptions that we have made that are based on that information and other similar sources and on our knowledge of the markets for our products. This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to or reliance on such estimates. In addition, projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate is necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in "Risk Factors" and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.



38


USE OF PROCEEDS
We estimate that our net proceeds from this offering will be approximately $ million, based upon an assumed initial public offering price of $ per share, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, or approximately $ million if the underwriters' option to purchase additional shares is exercised in full. A $1.00 increase or decrease in the assumed initial public offering price of $ per share would increase or decrease, as applicable, the net proceeds to us from this offering by approximately $ million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, an increase or decrease in the number of shares we sell in the offering will increase or decrease, as applicable, our net proceeds by an amount equal to such number of shares multiplied by the public offering price, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
We intend to use the net proceeds of this offering for the following purposes:
$ million to fund capital expenditures for expansion of manufacturing capabilities; 
$ million to expand our sales and marketing efforts;
$ million to fund research and development, including $    million to fund our regulatory efforts related to seeking 510(k) clearance for the following seven test panels: CYP450-2B6 QUAD, CYP450-3A4, CYP450-3A5, CYP450-3A4/3A5, CYP450-3A4/3A5 duplex, bacterial vaginosis and CT-NG QUAD;
$ million to satisfy all of our outstanding notes payable and certain of our accounts payable; and
the balance for working capital and general corporate purposes.
The expected use of the net proceeds of this offering represents our current intentions based upon our present plans and business condition. The amounts and timing of our actual expenditures may vary significantly and will depend upon numerous factors, such as the level of research and development investment required by our business (including for clinical studies and trials), cash flows from operations, the anticipated growth of our business and other factors. Pending the allocation of the net proceeds of this offering, we intend to invest the net proceeds in short-term, interest-bearing obligations, investment grade instruments, and certificates of deposit or guaranteed obligations of the U.S. government.
We are required by the terms of our outstanding subordinated promissory notes to use 50% of the net cash proceeds of this offering to repay outstanding senior and subordinated indebtedness. As of June 30, 2014, we had outstanding total indebtedness and accrued interest under these promissory notes of approximately $20.8 million, and our promissory notes have a weighted-average fixed annual interest rate of 8.6%. These notes mature in December 2014, June 2015 and November 2015.
DIVIDEND POLICY
We do not anticipate paying any cash dividends after this offering and for the foreseeable future. Instead, we anticipate that all of our earnings on our common stock will be used to provide working capital, to support our operations and to finance the growth and development of our business. Any future determination relating to dividend policy will be made at the discretion of our board of directors and will depend on our future earnings, capital requirements, financial condition, future prospects, financing arrangements, applicable Delaware law, which provides that dividends are only payable out of surplus or current net profits, and other factors our board of directors deems relevant.



39


CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2014:
on an actual basis;
on a pro forma basis to reflect the assumed conversion of all outstanding shares of our Series A, Series B, Series C, Series D, Series E and Series NC Convertible Preferred Stock into 7,974,932 shares of our common stock. All preferred stock will convert automatically to common stock immediately prior to the closing of this offering, except for Series C, Series E and Series NC Convertible Preferred Stock, each of which converts automatically only if this offering results in net proceeds to us of at least $25.0 million after deducting underwriting discounts and commissions, which we expect to occur in connection with the completion of this offering; and
on a pro forma as adjusted basis to additionally reflect the sale of shares of our common stock in this offering at an assumed initial offering price of $ per share, and after deducting estimated underwriting discounts and commissions and our estimated offering expenses, and the application of approximately $20.8 million of the net proceeds of this offering to repay principal and accrued interest as of June 30, 2014 under all of our outstanding promissory notes, including notes to related parties.



40


The pro forma and pro forma as adjusted information below is illustrative only and our capitalization following the completion of this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read this table together with "Use of Proceeds," "Selected Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Description of Capital Stock" and our financial statements and the related notes appearing elsewhere in this prospectus.  
 
As of June 30, 2014
 
Actual
 
Pro  forma
 
Pro forma
as
 
adjusted  (1)
 
(unaudited and in thousands,
except share and per share data)
Senior and subordinated promissory notes
$
20,774

 
$
20,774

 
$

Convertible preferred stock, $0.01 par value, 30,000,000 authorized, actual, pro forma and pro forma as adjusted (2)
 
 
 
 
 
Series A Convertible Preferred Stock, $0.01 par value, 1,589,600 authorized, 1,042,290 issued and outstanding, actual, 0 issued and outstanding, pro forma and pro forma as adjusted
4,990

 

 

Series B Convertible Preferred Stock, $0.01 par value, 4,515,858 authorized, 1,626,519 issued and outstanding, actual, 0 issued and outstanding, pro forma and pro forma as adjusted
12,288

 

 

Series C Convertible Preferred Stock, $0.01 par value, 6,850,000 authorized, 2,336,083 issued and outstanding, actual, 0 issued and outstanding, pro forma and pro forma as adjusted
17,647

 

 

Series D Convertible Preferred Stock, $0.01 par value, 3,423,258 authorized, 1,288,651 issued and outstanding, actual, 0 issued and outstanding, pro forma and pro forma as adjusted
11,126

 

 

Series E Convertible Preferred Stock, $0.01 par value, 5,500,000 authorized, 266,655 issued and outstanding, actual, 0 issued and outstanding, pro forma and pro forma as adjusted
1,381

 

 

Series NC Convertible Preferred Stock, $0.01 par value, 4,287,074 authorized, 1,414,734 issued and outstanding, actual, 0 issued and outstanding pro forma and pro forma as adjusted
5,733

 

 

Stockholders’ equity/(deficit):
 
 
 
 
 
Common stock, $0.01 par value, 220,000,000 authorized, actual, pro forma and pro forma as adjusted, 3,742,343 issued and outstanding, actual, 11,675,921 issued and outstanding, pro forma and issued and outstanding, pro forma as adjusted
113

 
113

 
 
Additional paid-in capital
26,141

 
79,306

 
 
Accumulated deficit
(105,172
)
 
(105,172
)
 

Total stockholders' equity/(deficit)
(78,918
)
 
(25,753
)
 

Total capitalization
$
(4,979
)
 
$
(4,979
)
 
$
(1)
A $1.00 increase or decrease in the assumed initial public offering price of $ per share in this offering would increase or decrease, as applicable, each of additional paid-in capital, total stockholders' equity/(deficit) and total capitalization by $ million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, an increase or decrease in the number of shares we sell in the offering will increase or decrease, as applicable, our net proceeds by an amount equal to such increased or decreased number of shares multiplied by the public offering price, less estimated underwriting discounts and commissions and estimated offering expenses payable by us.
(2)
Our convertible preferred stock has been classified as temporary equity on our balance sheets instead of stockholders’ deficit due to the possibility of the occurrence of certain change in control events that are outside of our control, including our sale or transfer of control, which trigger the rights of holders of the convertible preferred stock to cause its redemption. Accordingly, these shares are considered contingently redeemable.



41


DILUTION
As of June 30, 2014, we had a net tangible book deficit of $77.0 million, or approximately $20.59 per share of common stock, not taking into account the conversion of all outstanding series of convertible preferred stock into common stock. Net tangible book deficit per share represents the amount of our total tangible assets less total liabilities, divided by the number of common shares outstanding.
Included in our total liabilities as of June 30, 2014 is approximately $20.8 million of indebtedness and accrued interest under our outstanding promissory notes.
After giving effect to the conversion of all outstanding series of convertible preferred stock into common stock, as of June 30, 2014 we would have had a net tangible book deficit of $23.9 million, or $2.04 per share of common stock. Pro forma net tangible book deficit per share represents the amount of our total tangible assets less our total liabilities, divided by the number of shares of common stock outstanding as of June 30, 2014 after giving effect to the conversion of all outstanding series of convertible preferred stock into shares of common stock, which will occur immediately prior to the completion of this offering.
After giving effect to the sale by us of shares of common stock in this offering at an assumed initial public offering price of $ per share, and after deducting underwriting discounts and commissions and the estimated offering expenses payable by us, our pro forma net tangible book value as of June 30, 2014 would have been approximately $ million, or approximately $ per share. This amount represents an immediate increase in pro forma net tangible book value of $ per share to our existing stockholders and an immediate dilution in pro forma net tangible book value of approximately $ per share to new investors purchasing shares of common stock in this offering at the assumed initial public offering price. We determine dilution to new investors participating in this offering by subtracting the pro forma net tangible book value per share after this offering from the amount of cash that a new investor will pay for a share of common stock in this offering.
Assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions, a $1.00 increase or decrease in the assumed initial public offering price of $  per share would increase or decrease, as applicable, the pro forma net tangible book value by $ per share to our existing stockholders, and the dilution in pro forma net tangible book value by $ per share to new investors participating in this offering.
The following table illustrates this dilution on a per share basis:
Actual net tangible book deficit per share as of June 30, 2014
$
(20.59
)
 
Assumed initial public offering price per share
 
$
Increase in pro forma net tangible book value upon conversion of convertible stock
$
22.63

 
Pro forma net tangible book value per share as of June 30, 2014
$
2.04

 
Increase in pro forma as adjusted net tangible book value per share attributable to this offering
 
 
Pro forma as adjusted net tangible book value per share after this offering
 
 
Dilution in pro forma as adjusted net tangible book value per share to new stockholders
 
$
The discussion above assumes no exercise of the underwriters’ over-allotment option. If the underwriters' over-allotment option is exercised in full our adjusted pro forma net tangible book value at June 30, 2014 would have been $ million, or $ per share of common stock, representing an immediate increase in pro forma net tangible book value of $ per share of common stock to our existing stockholders and an immediate dilution of $ per share to investors participating in this offering.
In addition, the above discussion and table assume no exercise of stock options or warrants to purchase common stock or preferred stock. As of June 30, 2014, we had outstanding options to purchase a total of 1,530,295 shares of common stock, warrants to purchase a total of 3,906,484 shares of common stock and warrants to purchase 354,427 shares of our preferred stock convertible into 128,146 shares of common stock, at weighted average exercise prices of $6.20 per share, $6.09 per share and $3.64 per share, respectively.



42


If all of the outstanding options and warrants as of June 30, 2014 with exercise prices at or below $ per share, had been exercised (and the convertible preferred stock issuable upon the exercise of the preferred stock purchase warrants was converted into common stock), our pro forma net tangible book deficit would have been $ per share of common stock, representing an immediate increase in pro forma net tangible book value of $ per share of common stock and dilution in pro forma net tangible book value to investors in this offering would be $ per share of common stock.




43


SELECTED FINANCIAL DATA
The selected financial data set forth below is derived in part from and should be read in conjunction with our financial statements, the related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. The statement of operations data for each of the years ended December 31, 2013 and 2012, and the balance sheet data as of December 31, 2013 and 2012 were derived from our audited financial statements appearing elsewhere in this prospectus. The statement of operations data for the six months ended June 30, 2014 and 2013 and the balance sheet data as of June 30, 2014 were derived from our unaudited financial statements appearing elsewhere in this prospectus. The unaudited financial data, in management’s opinion, has been prepared on the same basis as the audited financial statements and related notes included elsewhere in this prospectus, and include all adjustments, consisting only of normal recurring adjustments, that our management considers necessary for a fair presentation of the information for the periods presented. The results of operations for the years ended December 2013 and 2012 and for the six months ended June 30, 2014 and 2013 are not necessarily indicative of the results that may be expected for the year ended December 31, 2014 or any other period.
 
Six Months Ended June 30,
 
Years Ended December 31,
 
2014
 
2013
 
2013
 
2012
 
(in thousands, except share and per share data)
 
(unaudited)
 
 
Statement of Operations Data:
 
 
 
 
 
 
 
Product revenue, net
$
5,212

 
$
10,390

 
$
16,938

 
$
18,307

Service revenue, net
6,000

 
116

 
1,145

 
102

Net revenue
$
11,212

 
$
10,506

 
$
18,083

 
$
18,409

 
 
 
 
 
 
 
 
Cost of sales
2,418

 
3,011

 
5,726

 
7,147

Cost of services
1,677

 
987

 
2,032

 

Gross profit
7,117

 
6,508

 
10,325

 
11,262

Operating expenses:
 
 
 
 
 
 
 
Research and development
1,041

 
1,209

 
2,306

 
2,355

General and administrative
2,126

 
6,550

 
8,302

 
4,715

Sales and marketing
3,534

 
1,284

 
2,998

 
2,269

Total operating expenses
6,701

 
9,043

 
13,606

 
9,339

Income/(loss) from operations
416

 
(2,535
)
 
(3,281
)
 
1,923

Interest expense, net
(890
)
 
(875
)
 
(1,820
)
 
(2,602
)
Gains/(loss) on extinguishment of debt
(1,872
)
 
(140
)
 
(140
)
 
(1,996
)
Other income/(expense), net
(4
)
 
(2,094
)
 
(1,877
)
 
5

Change in the fair value of stock warrant liabilities
375

 
91

 
46

 
163

Net loss
$
(1,975
)
 
$
(5,553
)
 
$
(7,072
)
 
$
(2,507
)
Net loss from continuing operations
per common share, basic and diluted
$
(0.53
)
 
$
(1.86
)
 
$
(2.21
)
 
$
(0.94
)
Weighted average common shares used in per share amounts
3,742,343

 
2,989,275

 
3,200,260

 
2,654,180

 
 
 
 
 
 
 
 



44


 
As of June 30,
 
As of December 31,
 
2014
 
2013
 
2012
 
(unaudited and in thousands)
Balance Sheet Data:
 
 
 
 
 
Cash and cash equivalents
$
404

 
$
2,053

 
$
332

Current Assets
10,441

 
8,267

 
6,250

Total assets
12,760

 
10,392

 
10,047

Total debt
18,491

 
18,995

 
17,529

Convertible preferred stock
53,165

 
53,165

 
53,165

Total stockholders' equity/(deficit)
(77,046
)
 
(77,387
)
 
(76,206
)







45


MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with "Selected Financial Data" and our financial statements and the related notes appearing elsewhere in this prospectus. This discussion may contain forward-looking statements that are based upon current expectations that involve risks and uncertainties. Our actual results and the timing of many events could differ materially from those anticipated in forward-looking statements as a result of many factors, including those set forth under "Risk Factors" and elsewhere in this prospectus. You should carefully read the "Risk Factors" section of this prospectus to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements. Please also see the section titled "Special Note Regarding Forward-Looking Statements."
Overview
We are a commercial stage molecular diagnostics company offering an innovative and proprietary technology platform to clinical reference laboratories, specialty clinics and hospital laboratories. Our platform consists of a family of multiplexing INFINITI analyzers, an extensive and expanding menu of genetic test panels, and proprietary microarrays, reagent modules and other related consumables. Our INFINITI analyzers, which include the INFINITI, the INFINITI PLUS and the recently introduced INFINITI HIGH THROUGHPUT SYSTEM, or INFINITI HTS, are easy to use and automate a number of the discrete processes of genetic analysis with minimal manual intervention, which reduces our customers' need for multiple, specialized instruments, and offer a variety of throughput capabilities together with a demonstrated high level of accuracy and reproducibility. Our genetic test panels are focused on large and growing markets primarily in the areas of personalized medicine, women's health, infectious diseases and genetic disorders. Genetic tests are performed on our INFINITI analyzers using our proprietary BioFilmChip microarrays, related Intellipac Reagent Management Modules and other related consumables.
In the United States, we offer our family of INFINITI analyzers to our customers either through direct sales, monthly rental plans and our Reagent Access Plan, or RAP. Under the RAP, an INFINITI analyzer is placed at the customer’s location at no initial cost to the customer. We then seek to recover the cost of the analyzer over time by generating significant recurring demand for our testing consumables, including our test-specific BioFilmChips, which are our proprietary microarrays, and Intellipac Reagent Management Modules, which provide the proprietary reagent used to complete our genetic tests. We have established a nine-person domestic direct sales force that is regionally deployed and performs market development as well as account management. We intend to significantly expand the size of our sales force within the next 12 months.
Internationally, we offer our INFINITI analyzers solely through our network of distributors that sell to our customers. We have established 12 distributor relationships to market our platform in 23 countries outside the United States. Our distributor agreements allow the purchase of our products at a discounted price. The distributors then resell our products to customers in the territories covered by their respective agreements. We plan to expand our distributor network outside the United States. During the six months ended June 30, 2014 and 2013, and the years ended December 31, 2013 and 2012, sales outside the United States accounted for 13%, 8%, 14% and 9% of product sales, respectively. We expect sales growth outside of the United States to keep pace generally with our anticipated growth of domestic sales. We primarily sell our BioFilmChips, Intellipac Reagent Management Modules and other consumables pursuant to standard purchase orders.
As a commercial stage company in the rapidly evolving market for molecular diagnostics, we face numerous risks and uncertainties. The sales cycles for our analyzers is typically lengthy, which makes it difficult for us to accurately forecast revenue for any given period. Our manufacturing, installation and training cycles for our INFINITI analyzers also typically involve a significant investment of working capital by us before we begin to receive revenue from our customers, particularly under our RAP, and our ability to fulfill orders for our analyzers is primarily dependent on manufacturing lead time. Our manufacturing lead time can be affected by ordering and delivery delays, parts availability, supplier availability as well as market demand, because many of the components for our analyzers demand spans across multiple segments of manufacturing and industry. As a result, we may incur inventory-carrying and other working capital expenses that may vary over time and that may make our operating results in any given period difficult for us to forecast. Our revenue and operating results in a given period may also vary due to the changing mix among any of the following factors:



46


whether our customers purchase, rent or lease our INFINITI analyzers, each of which impact the way in which we recognize revenue;
the mix of sales of our INFINITI analyzers as compared to consumables; and
the introduction of new or enhanced tests.
Changes in any of these relative mixes can have an impact on the timing of our recognition of revenue, as analyzer sales result in revenue to us upon the delivery of the analyzer and analyzer leases or rentals involve the recapture of analyzer costs through the sale of consumables, or on our gross margin, as consumables sales typically have significantly higher margins than those of analyzer sales. Further, our revenue and operating results are difficult to predict because many of our tests have been launched relatively recently, and we have a number of tests in development. As a result, we do not have sufficient history with these new and in-development tests to reliably forecast revenue for those tests. As of June 30, 2014, we had cash and cash equivalents of $0.4 million. We have historically been exposed to a concentration of credit risk with a small number of large customers, but we have seen a decrease in that concentration with the expansion of our customer base, which we expect to continue. For the six months ended June 30, 2014, no customer accounted for 10% or more of our revenue, and for the six months ended June 30, 2013 one customer, Natural Molecular Testing Corporation, or NMTC, accounted for 49% of our revenue. For the years ended December 31, 2013 and 2012, our two largest customers each period, NMTC and AI Biotech, accounted for 31% and 12%, and 43% and 16%, respectively, of our revenue.
Key Factors Affecting Performance
Sales of test panels
We generate substantially all of our revenue through the sale of our genetic tests directly to customers and through our CLIA-certified laboratory, and we expect this trend to continue for the foreseeable future. Average revenue per microarray and average tests per microarray are key factors we use to measure our business. For the six months ended June 30, 2014 and 2013, and for the years ended December 31, 2013 and 2012, our average revenue per microarray was $65.34, $65.58, $66.73 and $81.53, respectively, and our average tests per microarray was 2.00, 1.76, 1.66 and 1.73, respectively. For purposes of calculating average revenue per microarray, we consider a "microarray" to consist of a single BioFilmChip and the portion of the associated Intellipac Reagent Management Module and related amplification mixture required to perform the genetic test. We calculate our average tests per microarray based on the average number of tests available to run on each microarray that is included in the foregoing calculation. Our wide variety of genetic test panels are sold at various prices and, accordingly, our average revenue per microarray is impacted by the mix of tests sold during each period. However, we expect our average test per microarray to increase as our multiple patient arrays, or MPAs, further penetrate the market and duplex and quad test panels replace single and duplex test panels.
Due to the wide variety in throughput capability for, and the levels of customer utilization of, our analyzers, we believe that the total number of analyzers sold, rented and placed with customers does not provide a direct correlation to our future revenue growth, and thus we do not view it as a key metric for our business. Additionally, many of our customers utilize more than one model of our analyzers, and because the same consumables can be used on all of our analyzers, we are not able to accurately calculate our consumables sold by each type of analyzer or revenue dollars earned by each type of analyzer.
Since its introduction in February 2014, we have received 20 orders from customers for INFINITI HTS analyzers. As of September 30, 2014, 2014, we have delivered 17 HTS analyzers and we expect to deliver the remaining HTS orders by the end of the year. Customer demand has been outpacing our manufacturing lead time, but we do not expect this trend to continue. Of these remaining orders, four analyzers are sales where we expect to recognize revenue upon shipping, and six are RAPs. Under the RAP, an INFINITI analyzer is placed at the customer's location at no initial cost to the customer, subject to contractual minimum consumables sales thresholds. If these consumables sales thresholds are not met, we have the right to reclaim our INFINITI analyzer from the customer. During the nine months ended September 30, 2014 no analyzers were reclaimed, and for the year ended December 31, 2013, we reclaimed 14 INFINITI analyzers either because the respective customer failed to purchase the minimum amount of consumables or otherwise elected not to retain the INFINITI analyzer at the end of the term of the applicable RAP. We primarily sell our consumables pursuant to standard purchase orders that may be issued and filled or canceled on relatively short notice. Accordingly, we do not have a material backlog of consumables.



47


Investment in infrastructure and growth
Our ability to increase our sales of genetic tests and to further penetrate our target markets are dependent in large part on our ability to invest in our infrastructure and in our sales and marketing efforts. In order to drive future growth, we plan to hire additional sales personnel and invest in marketing our products to our target customers both in the United States and internationally. This will lead to corresponding increases in our operating expenses, and thus may negatively impact our operating results in the short term, although we believe that these investments will grow and improve our business and financial condition over the long term. Marketing and selling to our target customers involves a substantial amount of time and effort, as it generally involves physical site visits and an investment in educating potential customers regarding the capabilities and benefits of molecular diagnostics testing in general and of our INFINITI analyzers specifically. There can be a significant amount of time invested in marketing to a customer before that customer makes a purchasing decision, followed by what can be a material amount of time invested by the customer in validating the applicable INFINITI analyzer. As a result, it will be difficult for us to determine whether and when our investments in sales and infrastructure will be recovered through sales to new customers or additional sales to existing customers. In the past it has taken approximately six months to complete a sales cycle for our INFINITI analyzer. Recent demand for our product has reduced this sales cycle to closer to three months, although we expect our sales cycle trend to return to its historical levels in the foreseeable future.
We will also incur substantial operating costs in connection with our transition to operating as a public company.
Utilization of our products
We believe there is significant opportunity to increase the number and type of genetic test panels we sell as awareness of opportunities in molecular diagnostics testing becomes more apparent to our targeted customer base. We have invested significant time and effort to develop detailed educational materials to be used by, and to inform, our customers’ sales and marketing networks. We believe that this will assist our customers in taking advantage of meaningful growth opportunities in molecular diagnostics testing in our target market segments, which may result in increased demand for our products. We believe that as more of our present and future customers realize the potential of molecular diagnostics testing, our sales will continue to grow and diversify.
For a discussion of additional factors affecting our performance, see "Risk Factors."
Financial Operations Overview
Revenue
We generate revenue from the sale of our products and services. Our products include our INFINITI analyzers and our high-margin consumables used to run tests with our analyzers. Our consumables include our BioFilmChips, Intellipac Reagent Management Modules and various other disposable products consumed in the testing process. Generally, the pricing of our consumables for customers that participate in our RAP is higher than for our customers who own, or rent monthly, an INFINITI analyzer; however, we may discount the price of consumables depending on the volume and nature of the products purchased by our customers. Revenue generated by our CLIA-certified laboratory is classified as services revenue in our financial statements. We expect that increases in our revenue will be driven largely by the growth of the overall molecular diagnostics market, increased utilization of our products by our existing customers, the expansion of our domestic sales force and international distribution network, the placement of additional INFINITI analyzers with new and with existing customers, and our development of additional and enhanced tests for sale in connection with our platform.
In late 2013, as we prepared to launch our INFINITI HTS, we began operations of a CLIA-certified laboratory to complement and support our efforts to attract customers entering the molecular diagnostics market, in particular potential INFINITI HTS customers. This laboratory is located at our headquarters in Vista, California and is licensed in the State of California as well as a number of other applicable states. Our laboratory provides molecular testing services to other reference laboratories in the areas of personalized medicine, women’s health, oncology, infectious diseases and genetic disorders. We expect that growth in revenue generated from our laboratory will decline as a percentage of overall growth in revenue as we manufacture and sell our INFINITI HTS analyzers, because substantially all of our laboratory revenue is currently generated from sales to INFINITI HTS customers. As new customers complete validation of their INFINITI HTS analyzers and begin conducting their own genetic testing, we



48


expect that our laboratory will provide fewer test services to them, and that the services revenue generated from sales to these customers will transition to product revenue. We anticipate that our overall laboratory revenue will stabilize and remain relatively flat for the foreseeable future as new INFINITI HTS customers utilize the services of our CLIA-certified laboratory during the time that sales to these customers are consummated, their INFINITI HTS analyzers are manufactured and delivered, and our customers validate their own laboratory developed tests, or LDTs, on our INFINITI HTS analyzers.
The variability of our revenue from period to period depends in part on our product sales mix of INFINITI analyzers and consumables as well as tests received from our HTS customers for genetic testing. We anticipate that our revenue from the sale of consumables will become a larger portion of our total revenue over time as we expand our customer base and our customers increase their utilization of our INFINITI analyzers. In the United States, we believe that for the foreseeable future our RAPs will continue to account for more placements of INFINITI analyzers than direct sales.
Cost of sales and services
Cost of sales and cost of services includes manufacturing and laboratory expenses related to product costs, including materials, labor, general manufacturing overhead and other costs, and royalty obligations. Cost of sales also includes estimated product warranty costs. Our general manufacturing overhead and other costs include indirect labor, facilities costs and depreciation of capitalized manufacturing equipment. Cost of sales also includes depreciation (over a three year period) of capitalized INFINITI analyzers placed under our RAPs, since we place the analyzers at the customers’ facility at no direct cost to the customer. We expect cost of sales to decline slightly as a percentage of revenue, as our consumables sales mix shifts to higher average tests per microarray.
Research and development
Research and development expenses include (i) the cost of personnel and consultants related to our activities in developing and improving our INFINITI analyzers and the development and expansion of our menu of test panels and (ii) expenditures related to clinical studies and trials undertaken to validate and obtain FDA and other regulatory clearances for our genetic tests. We expense all research and development costs in the period in which they are incurred. Continued development and improvement of our INFINITI analyzers and expansion of our menu of test panels are key aspects of our business strategy and we expect that our research and development expenditures will increase for the foreseeable future. We expect research and development costs to remain generally flat as a percentage of revenue.
General and administrative
General and administrative expenses include the costs of personnel and consultants charged to administration, finance and accounting, human resources and regulatory affairs. General and administrative expenses also include corporate, administration, accounting, patent, facility and other costs and depreciation. We expect general and administrative expenses to increase for the foreseeable future as a result of the need to hire additional personnel to support the anticipated growth of our business and as a result of additional legal and accounting expenses related to compliance with operating as a public company, including Securities and Exchange Commission and securities exchange listing requirements, directors’ and officers’ insurance premiums and investor relations expenses. We expect general and administrative costs to decline slightly as a percentage of revenue over time.
Sales and marketing
Sales and marketing expenses include the commissions owed to our customers for laboratory test referrals, costs of personnel related to selling and marketing our INFINITI analyzers, customer support, advertising, trade show participation and other expenses. We expect our sales and marketing expenses to increase significantly for the foreseeable future, as we incur significant commission expense to our customers when we collect payments from our laboratory testing of patient samples they provide. Additionally, we plan to expand our sales and marketing organization to drive the growth in sales of our INFINITI analyzers and consumables products, and as we increase our technical customer support personnel to service this additional growth. We expect sales and marketing costs to be generally flat or slightly increase as a percentage of revenue over time.



49


Interest income
Interest income includes interest earned on our cash balances. These balances are invested primarily in money market accounts.
Interest expense
Interest expense relates to our outstanding promissory notes, which are more fully described in this prospectus under the heading "Use of Proceeds" and in "Note 3. Promissory Notes" of our financial statements included elsewhere in this prospectus. We intend to satisfy all of our outstanding promissory note indebtedness in connection with the completion of this offering, and as a result do not expect this expense to recur during the foreseeable future.
Promissory notes and warrants
We have issued promissory notes in connection with a number of private placement financings since 1999. In certain of these financings, the promissory notes were issued with separate common stock or preferred stock warrants to purchase shares of our common stock. The fair value of these warrants is allocated as a debt discount using the relative fair value allocation method determined using the Black-Scholes valuation model. The discount is amortized using the effective interest method over the term of the related promissory notes.
Change in the fair value of warrant liabilities
One of our outstanding warrants to purchase shares of our common stock provides for adjustment of the exercise price based upon subsequent issuances at prices per share that are below the exercise price of the warrant, and is classified as a liability and recorded at fair value regardless of the timing of the redemption feature or the redemption price or the likelihood of redemption. Our outstanding warrants to purchase shares of our convertible preferred stock are also classified as a liability and recorded at fair value regardless of the timing of the redemption feature or the redemption price or the likelihood of redemption. These warrants are subject to re-measurement at each balance sheet date and any change in fair value is recognized as a component of other interest income (expense), net. We will continue to adjust the liability for changes in fair value until the earlier of the conversion, exercise or expiration of the warrants. The last of these preferred stock warrants expired in August 2014.
All of our other outstanding warrants to purchase shares of our common stock that do not provide for exercise price adjustments were determined to be equity instruments and thus included in stockholders deficit upon issuance and are not subject to re-measurement.
Critical Accounting Policies, Significant Judgments and Estimates
Our financial statements and related notes included elsewhere in this prospectus have been prepared in accordance with U.S. generally accepted accounting policies. The preparation of these statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. We base such estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Changes in accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from the estimates made by company management. We evaluate our estimates and assumptions on an ongoing basis. To the extent that there are material differences between these estimates and actual results, our future financial statement preparation, financial condition, results of operations and cash flows will be affected.
The following accounting policies involve a greater degree of judgment and complexity than our other accounting policies. Accordingly, we believe these policies are the most critical to understanding and evaluating our financial condition and results of operations.
Revenue recognition
Our revenue is primarily derived from sales of our INFINITI analyzers, and the BioFilmChips, Intellipac Reagent Management Modules and various disposable items consumed by our diagnostic testing process (collectively, our consumables) sold directly to our customers or as service revenue through our CLIA-certified laboratory. We recognize revenue when persuasive evidence of an arrangement exists, the price to the buyer is fixed or determinable, collectability is reasonably assured and risk of loss transfers to the customer, normally upon shipment. Revenue from our CLIA-certified laboratory also requires the ordered test to be completed and the test



50


results to be accessible by the ordering physician prior to revenue recognition. For sales that include customer-specific acceptance criteria, revenue is recognized when the acceptance criteria have been met. We extend credit to customers based upon the evaluation of the customer's financial condition. Collectability is assessed based on a number of factors, including payment history and the creditworthiness of a customer. If we determine that collection is not reasonably assured, we do not recognize revenue until collection becomes reasonably assured, which is generally upon receipt of cash payment. Our service revenue is derived primarily from the CLIA-certified laboratory's genetic testing services, as well as warranty service on INFINITI analyzers and technical and customer services provided to purchased analyzers. Our laboratory's testing services are substantially all performed for our INFINITI HTS analyzer customers as they await delivery, installation and validation of the analyzer. Our laboratory service revenues are reported net of a contractual rate allowance based on published rate tables and historical experience. In addition, we incur sales and marketing fees to our contractual customers based on a fixed percentage of net service revenue collected from third-party insurers or responsible parties. This fee is included in sales and marketing costs in our accompanying statement of operations.
In instances where final acceptance of the product or analyzer is required, we defer revenue until all the acceptance criteria have been met. The rights granted in the RAP in exchange for a minimum annual purchase commitment constitutes a leasing arrangement. When a customer enters into a RAP agreement, the lease revenue is dependent on purchases of consumables, which is not measurable at the inception of the lease, and thus is accounted for as contingent rentals in their entirety. Accordingly, lease revenue are excluded from minimum lease payments but included in revenue as the consumables are purchased. The cost of the leased equipment is depreciated over its useful life and the expense included in cost of sales.
Arrangements to sell products to customers frequently include multiple deliverables, including the sale of the INFINITI analyzer combined with the sale of consumables. We sell internationally through a network of distributors. Sales to these foreign distributors include training of their field agents who are responsible for installation, training and maintenance for their customers internationally. We do not provide any price protection, rights of return, or extended payment terms to our distributors. We follow authoritative guidance on multiple-element arrangements, and we allocate arrangement consideration in multiple-element revenue arrangements at the inception of an arrangement to all deliverables or those packages in which all components of the package are delivered at the same time, based on the relative selling price method in accordance with the selling price hierarchy, which includes: (i) vendor-specific objective evidence, or VSOE, if available; (ii) third-party evidence if VSOE is not available; and (iii) best estimate of selling price, if neither VSOE nor third-party evidence is available. We establish selling price using management's best estimate, considering internal factors such as historical selling prices, pricing practices and controls and customer segment pricing strategies.
Contractual rate allowance
We are exposed to a certain level of uncertainty regarding the revenues earned from our laboratory services. We have not entered into contractual or capitation agreements for Medicare or private insurance, and estimate revenues based on published price lists and payment history. The difference between the amount we expect to collect and the amount reimbursed is reserved against using a contractual rate allowance; revenue is presented net of the contractual rate allowance.
Allowance for uncollectable accounts
We regularly monitor customer payments and specifically identify outstanding amounts to be allowed for, as well as record general accruals based on the age, history and experience of outstanding receivables with our customers and with third-party payors.
Warranty reserve
We provide a one-year warranty on domestic sales of our INFINITI analyzers. Accruals are provided for the estimated warranty expense at the time the associated revenue is recognized. The estimates of warranty expense are based on actual expenses incurred historically to service our INFINITI analyzers. We also provide a warranty for consumables products, estimated on a variety of inputs including historical performance, historical costs, projected reliability and service costs. Warranty expense accruals inherently require the use of management judgment. If we were to experience an increase in warranty claims or if our cost of servicing these warranties increased, our gross



51


margins would be adversely affected. We periodically review our actual warranty expense to ensure that it is not materially different than our estimates.
Deferred tax valuation allowance
We account for income taxes utilizing the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and for tax loss carryforwards. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income or expense in the period that includes the enactment date. Future tax benefits are recognized to the extent that realization of such benefit is more likely than not.
At December 31, 2013, we had federal tax net operating loss carryforwards of $72.4 million and state tax net operating loss carryforwards of $41.2 million. The federal tax net operating loss carryforwards will begin to expire in 2020. The state tax net operating loss carryforwards began to expire in 2012. Utilization of net operating loss carryforwards, credit carryforwards and certain deductions may be subject to substantial annual limitation as a result of ownership change limitations provided by the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, and similar state provisions. The tax benefits related to future utilization of federal and state net operating loss carryforwards, credit carryforwards and other deferred tax assets may be limited or lost if cumulative changes in ownership exceed 50% within any three-year period.
Convertible preferred stock warrant liabilities
We use the Black-Scholes valuation model to calculate the fair value of our preferred stock warrants. The inputs utilized in this valuation model are discussed below. Each of these inputs is subjective and generally requires significant judgment to determine. The last of our preferred stock warrants expired in August 2014.
Fair value of our preferred stock. Because our stock is not publicly traded, we must estimate the fair value of our preferred stock, as discussed below.
Expected term. The expected term is the remaining contractual life of the applicable preferred stock warrant.
Volatility. As we do not have a trading history for our preferred stock, the expected stock price volatility for our preferred stock is estimated by taking the average historic price volatility for industry peers based on daily price observations over a period equivalent to the expected term of the preferred stock warrants. Industry peers consist of several public companies similar in size, stage of life cycle and financial leverage. We do not rely on implied volatilities of our industry peers' publicly traded common stock because the volume of such trading activity has been relatively low. The volatility for all periods presented was calculated within the range of 52% and 57%.
Risk-free interest rate. The risk-free interest rate is based on the yields of U.S. Treasury securities with maturities similar to the contractual term of the preferred stock warrants.
Dividend yield. We have not historically paid cash dividends or distributions and do not intend to pay cash dividends or distributions in the foreseeable future. Consequently, we used an expected dividend yield of zero.
The fair value of the preferred stock underlying our outstanding preferred stock warrants has historically been determined by our board of directors. Because there has been no public market for our capital stock, our board of directors has determined the fair value of the preferred stock at the time of issuance by considering a number of objective and subjective factors including valuations performed by unrelated third-party specialists, which included valuations of comparable companies, operating and financial performance, lack of liquidity of capital stock and general and industry-specific economic outlook. For each period in which the fair value of preferred stock warrant liabilities was assessed, our business enterprise value was first determined. This enterprise value then was allocated across our capital structure using a Probability Weighted Expected Return Method, or PWERM, model as the primary approach and an Option Pricing Model, or OPM, analysis as a confirming approach. Under the PWERM model, various future potential liquidity scenarios were forecasted and the allocable value to each class of security in our capital structure in each respective scenario was determined. The probability that each potential liquidity event would occur was then assessed. The future proceeds were then discounted to determine the present value of proceeds in each scenario for each security class. The probability weighted present value of each security class was then determined to conclude the value of the preferred stock. Under the confirming OPM analysis, the Black-Scholes



52


option pricing framework was used to determine the proceeds allocable to each security class. A series of option tranches was established whereby each tranche represented the value allocable to various security classes between computed breakpoints. Break points are the value inflection points, or indifference points, whereby the allocation to securities change based on the underlying economic rights of each security class. The breakpoints served as the strike prices in the Black-Scholes option calculations and tranche values were determined based on the difference between option values in each tranche. The proceeds of the value of each option tranche were then allocated to each respective security class based on the economic rights to the security class between breakpoints. The value allocable to each respective security class was then totaled across all option tranches to conclude the fair value of each security class.
We have classified our convertible preferred stock warrants as a liability and have re-measured the liability to estimated fair value at June 30, 2014 (unaudited) and December 31, 2013 and 2012 using the Black-Scholes valuation model.
Stock-based compensation
Compensation expense related to stock-based transactions, including employee stock options, is measured and recognized in the financial statements based on fair value. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service period and classified in the statement of operations based on the department to which the related employee reports. Determining the fair value of stock-based awards at the grant date requires judgment. We use the Black-Scholes valuation model to determine the fair value of grants. The determination of the grant date fair value of grants using a valuation model is affected by assumptions regarding a number of complex and subjective variables. These variables include the fair value of our common stock, the expected term of our options, our expected stock price volatility over the expected term of the options, stock option exercise and cancellation behaviors, risk-free interest rates, and expected dividends, which are estimated as follows:
Fair value of our common stock. Because our stock is not publicly traded, we must estimate the fair value of our common stock, as discussed in "Common stock valuations" below.
Expected term. We estimate the expected term of our options using the simplified method allowed under SEC guidance.
Volatility. As we do not have a trading history for our common stock, the expected stock price volatility for our common stock is estimated by taking the average historic price volatility for industry peers based on daily price observations over a period equivalent to the expected term of the stock options. Industry peers consist of several public companies similar in size, stage of life cycle and financial leverage. We do not rely on implied volatilities of traded options in our industry peers' common stock because the volume of such trading activity has been relatively low. We intend to continue to consistently apply this process using the same or similar public companies until a sufficient amount of historical information regarding the volatility of our own common stock price becomes available, or until circumstances change such that the identified companies are no longer similar to us, in which case we would utilize more suitable companies whose share prices are publicly available in the calculation. The volatility for all periods presented was calculated within the range of 52% and 57%.
Risk-free interest rate. The risk-free interest rate is based on the yields of U.S. Treasury securities with maturities similar to the expected term of the options for each option group.
Dividend yield. We have not historically paid cash dividends or distributions and do not intend to pay cash dividends or distributions in the foreseeable future. Consequently, we used an expected dividend yield of zero.
Common stock valuations
We are required to estimate the fair value of the common stock underlying our stock-based awards when performing the fair value calculations with the Black-Scholes valuation model. The fair value of the common stock underlying our stock-based awards was determined on each grant date by our board of directors, with input from management. This fair value has been calculated on an as-converted basis for each period, assuming for such purposes that all outstanding convertible preferred stock has been converted into common stock without taking into account any dividend or liquidation preferences. All options to purchase shares of our common stock granted under our incentive stock option plans are intended to be granted with an exercise price per share no less than the fair value per share of our common stock underlying those options on the date of grant, based on the information known to us



53


on the date of grant. In the absence of a public trading market for our common stock, on each grant date, we develop an estimate of the fair value of our common stock in order to determine an exercise price for the option grants. We have determined the fair value of our common stock using methodologies, approaches and assumptions consistent with the American Institute of Certified Public Accountants, or AICPA, Audit and Accounting Practice Aid Series: Valuation of Privately Held Company Equity Securities Issued as Compensation, or the AICPA Practice Guide. In addition, our board of directors considered various objective and subjective factors, along with input from management to determine the fair value of our common stock, including:
valuations performed by third-party specialists;
the prices at which we sold shares of common and preferred stock to third parties;
the superior rights and preferences of the preferred stock relative to our common stock at the time of each grant;
our results of operations and financial position;
our stage of development, status of our research and development efforts and business strategy;
the lack of an active public market for our common and our preferred stock; and
the likelihood of achieving a liquidity event such as an initial public offering, or IPO, or sale of our company in light of prevailing market conditions.
The determination of fair value of our common stock also involves complex and subjective judgments including estimates of revenue, earnings, assumed market growth rates and estimated costs, as well as appropriate discount rates. At the time of each of the below-referenced valuations, the estimates used in the discounted cash flow approach included our best estimates of our revenue and revenue growth rates for several years into the future. Although each time we prepared such forecasts we did so based on assumptions that we believed to be reasonable and appropriate at that time, there can be no assurance that any such estimates for earlier periods or for future periods will prove to be accurate.
Our board of directors utilizes the methodologies described above to calculate our implied enterprise value as of each stock option grant date, taking into account our ability or inability to achieve certain milestones, principally among which was the completion of an IPO. A PWERM analysis is then used to allocate a portion of this implied enterprise value based on six possible scenarios: (i) an IPO of our common stock in the immediate future at a price per share of our common stock based on an implied enterprise value equal to a multiple of our management's estimate of our then current-year revenue; (ii) an IPO of our common stock at the end of the subsequent fiscal year at a price per share of our common stock based on an implied enterprise value equal to a multiple of our management's estimate of our next fiscal year's revenue; (iii) a merger or sale of our company at a date that is approximately two and one-half years in the future at a price per share of our common stock based on an implied enterprise value equal to a multiple of our management's estimate of that future fiscal year's revenue; (iv) a merger or sale of our company at the end of the second future fiscal year ending after the then-current fiscal year at a price per share of our common stock based on an implied enterprise value equal to a multiple of our management's estimate of that future fiscal year's revenue; (v) a dissolution of our company with no value available to be distributed to the holders of our common stock; and (vi) remaining a private company. For the IPO scenarios, the value assigned to our common stock was determined using the number of outstanding shares of our common stock assuming the conversion of all outstanding shares of our preferred stock into shares of our common stock. For the merger or sale scenarios, a break point analysis was used to determine the various enterprise values at which holders of each series of our outstanding shares of preferred stock would elect to convert their shares of our preferred stock into shares of our common stock and the points at which the holders of outstanding options and warrants to acquire shares of our common stock would exercise their options or warrants. The values allocated to our common stock as of a future date under each scenario by the PWERM analysis are then discounted using a weighted-average cost of capital to calculate an implied present value of our common stock under the PWERM analysis.
There is inherent uncertainty in these estimates and if we had made different assumptions than those used, the amount of our stock-based compensation expense, net loss and net loss per share amounts could have been significantly different. Following the closing of this offering, the fair value per share of our common stock for purposes of determining stock-based compensation expense will be the closing price of our common stock as reported on The NASDAQ Global Market on the applicable grant date.



54


The following table illustrates our stock option grant information since January 1, 2013, including the estimated fair value of our common stock on the date of grant:
Grant date
 
Number of shares subject to options granted
 
Option exercise price
 
Estimated value of common stock per share at date of grant
October 15, 2013
 
423,529
 
$6.67
 
$6.67
December 23, 2013
 
119,390
 
$6.67
 
$6.67
Our board of directors determined that the fair value of our common stock at October 15, 2013 and December 23, 2013 was equal to the price per share paid during a private placement equity transaction during September 2013. Additionally, a retrospective analysis as at December 31, 2013 finalized during May 2014 supported such valuation. These values could materially differ from our common stock's share value upon completion of this offering for many reasons, included but not limited to the uncertainties surrounding our ability to complete this offering, cashflow constraints, the potential price volatility of shares of our common stock, the impact of our large accounts payable obligations, and our not operating on a profitable basis.
Useful lives of property and equipment
Property and equipment is recorded at cost and is depreciated on a straight-line basis over the following estimated useful lives:
Reagent access plan assets
3 or 5 years
Equipment
5-7 years
Computer equipment and software
3 years
Leasehold improvements
various
Furniture
5 years
Management must use judgment in determining the estimated useful lives of its assets. Changes in circumstances, such as technological advances, changes to our business model, changes in our business strategy, or changes in the planned use of property and equipment, could result in the actual useful lives differing from our current estimates.
Allowance for excess and obsolete inventory
We record our inventories at cost and regularly perform analysis and market value adjustments. The value that we will realize through sales on our inventory cannot be known with exact certainty, we rely on past sales experience and future sales forecasts to project it. In analyzing our inventory levels, we classify certain inventory as either excess or obsolete. These classifications are maintained for all classes of inventory.
Recently Issued Accounting Standards
Under Section 107(b) of the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. Management has reviewed all recent accounting standard’s updates issued by the Financial Accounting Standards Board and anticipates no material impact from any of their adoption.



55


Results of Operations
The financial data set forth below is derived in part from and should be read in conjunction with our financial statements and the related notes included elsewhere in this prospectus. The following tables set forth selected items in our statements of operations for the periods presented, together with the difference in amounts over such periods in dollars (in thousands) and in percentages.
 
Six Months Ended
June 30,
 
 
 
Years Ended
December 31,
 
 
 
2014
 
2013
 
Change
 
2013
 
2012
 
Change
 
(unaudited)
 
 
 
 
 
 
Product revenue, net
$
5,212

 
$
10,390

 
$
(5,178
)
 
$
16,938

 
$
18,307

 
$
(1,369
)
Service revenue, net
6,000

 
116

 
5,884

 
1,145

 
102

 
1,043

Net revenue
11,212

 
10,506

 
706

 
18,083

 
18,409

 
(326
)
 
 
 
 
 
 
 
 
 
 
 
 
Cost of sales
2,418

 
3,011

 
(593
)
 
5,726

 
7,147

 
(1,421
)
Cost of services
1,677

 
987

 
690

 
2,032

 

 
2,032

Gross profit
7,117

 
6,508

 
609

 
10,325

 
11,262

 
(937
)
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Research and development
1,041

 
1,209

 
(168
)
 
2,306

 
2,355

 
(49
)
General and administrative
2,126

 
6,550

(1) 
(4,424
)
 
8,302

(1) 
4,715

 
3,587

Sales and marketing
3,534

 
1,284

 
2,250

 
2,998

 
2,269

 
729

Total operating expenses
6,701

 
9,043

 
(2,342
)
 
13,606

 
9,339

 
4,267

Income/(loss) from operations
416

 
(2,535
)
 
2,951

 
(3,281
)
 
1,923

 
(5,204
)
Interest expense, net
(890
)
 
(875
)
 
(15
)
 
(1,820
)
 
(2,602
)
 
782

Gains/(loss) on extinguishment of debt
(1,872
)
 
(140
)
 
(1,732
)
 
(140
)
 
(1,996
)
 
1,856

Other income/(expense), net
(4
)
 
(2,094
)
 
2,090

 
(1,877
)
 
5

 
(1,882
)
Change in the fair value of stock warrant liabilities
375

 
91

 
284

 
46

 
163

 
(117
)
Net income/(loss)
$
(1,975
)
 
$
(5,553
)
 
$
3,578

 
$
(7,072
)
 
$
(2,507
)
 
$
(4,565
)
(1) 
Includes $4.5 million in bad debt expense relating to NMTC as described below. 
Comparison of the Six Months Ended June 30, 2014 and 2013 (unaudited)
Income/(loss) from operations and net loss. The improvement in income/(loss) from operations and net loss was primarily a result of lower general and administrative expenses in 2014 compared to 2013 due to $4.5 million bad debt expense in 2013. The improvement was also partially offset by an increase in sales and marketing expenses resulting from commissions resulting from the introduction of our INFINITI HTS analyzer and the increased volume of operations in our CLIA-certified laboratory. The net loss during 2014 improved further due to other expenses in 2013 resulting from terminated financing transactions.
Our largest customer up to and during 2013 was NMTC. During January 2013, the Centers for Medicare and Medicaid Services, or CMS, temporarily suspended reimbursement for certain diagnostic tests while it determined reimbursement rates and implemented new molecular diagnostic CPT codes. This suspension adversely affected the cash flows of several of our customers, including NMTC, who became delinquent on its 2013 receivables during the first quarter of 2013, and filed for Chapter 11 protections during the fourth quarter of 2013. Accordingly, we recorded a total of $4.5 million in bad debt expense in 2013 associated with NMTC's delinquency. In September 2013, CMS issued "gap-fill" pricing decisions for molecular diagnostic CPT codes and such guidance has been consistent with reimbursements we have received.



56


Net revenue. The increase in net revenue during the six months ended June 30, 2014 is due primarily to the $5.9 million increase in service revenue from the sales of our genetic test panels by our CLIA-certified laboratory to our INFINITI HTS customers. This increase was partially offset by a $5.1 million decrease in product revenues due to the loss of a significant customer, NMTC, during 2013 due to bankruptcy. Excluding revenue from NMTC recorded during the six months ended June 30, 2013, net revenue increased by $5.9 million, or 109%, during the six months ended June 30, 2014 as compared to the same period in 2013. Net revenue was comprised of $5.2 million product revenue and $6.0 million service revenue for the six months ended June 30, 2014, and $10.4 million and $0.1 million during the same period in 2013, respectively. The increase in service revenue during the first six months of 2014 as compared to the same period in 2013 was due to the recent introduction of our INFINITI HTS and the resulting sale of services by our CLIA-certified laboratory to new INFINITI HTS customers during the delivery, installation, training and validation period. We expect that in future periods a significant portion of services revenue will transition to product revenue as new INFINITI HTS customers complete this installation, training and validation period, and for this transitioning services revenue to be replaced by revenue generated from new INFINITI HTS customers.
Cost of sales and services. Total cost of sales and services remained substantially unchanged during the six month periods ended June 30, 2014 and June 30, 2013. Gross profit margin was 63.5% for the six months ended June 30, 2014 as compared to 61.9% for the six months ended June 30, 2013. We expect gross margins to not vary significantly between cost of sales and cost of services. Cost of sales was $2.4 million and $3.0 million, and cost of services was $1.7 million and $1.0 million, for the six months ended June 30, 2014 and 2013, respectively. The increase in cost of services during the first six months of 2014 as compared to the same period in 2013 was due to the recent introduction of our INFINITI HTS and the resulting sale of services by our CLIA-certified laboratory to new INFINITI HTS customers.
Operating expenses. Research and development expenses consists of personnel costs and costs to develop our diagnostic testing products and future generations of testing platforms. These costs remained relatively unchanged between the six month periods ended June 30, 2014 and June 30, 2013.
General and administrative expenses decreased during the six month period ended June 30, 2014 primarily due to bad debt expense of $4.5 million recorded in the six month period ended June 30, 2013. Without this bad debt expense, general and administrative expenses were relatively unchanged between the two periods.
Sales and marketing expenses increased during the six months ended June 30, 2014 primarily due to the introduction of the INFINITI HTS and commencement of operations of our CLIA-certified laboratory. Substantially all of the patient samples provided to our laboratory for testing are from current INFINITI HTS analyzer customers, and we are obligated to pay sales and marketing fees based on a fixed percentage of lab testing revenues collected from third-party insurers.
Non-operating expenses. Net interest expense remained relatively unchanged between the two periods.
Other expenses decreased during 2014 compared to 2013 as a result of the terminated IPO efforts during the first quarter of 2013 and the expensing of previously deferred related costs during the year.
The change in the fair value of warrant liabilities increased during 2014 due to the upcoming expiration of preferred stock warrants.
Gains/(losses) on extinguishment of debt. During the six months ended June 30, 2014, certain of our notes payable were refinanced at maturity and such refinances were considered extinguishment of debt as the terms of the new debt were substantially different than the refinanced debt. Such extinguishment resulted in non-cash expenses of $1.9 million for the six months ended June 30, 2014, representing the fair value of the warrants granted in conjunction with such refinances, and had no impact on our liquidity.
Comparison of the Years Ended December 31, 2013 and 2012
Income/(loss) from operations and net loss. The increase in loss from operations and net loss during 2013 was primarily driven by the increase in general and administrative expenses due to (i) $4.5 million in bad debt expense resulting from allowing for of all accounts receivables of NMTC during 2013 with no such expense in 2012, (ii) a $0.4 million increase in stock-based compensation and (iii) a $0.3 million decrease in net revenue.



57


Net revenue. Net revenue for the years ended December 31, 2013 and 2012 decreased very slightly between the two periods, as the loss of one large customer was replaced with a larger number of smaller customers. As a percentage of net revenue, markets outside the United States were 14% and 7% for the years ended December 31, 2013 and 2012, respectively. Net revenue was comprised of $16.9 million product revenue and $1.1 million service revenue during 2013, and $18.3 million and $0.1 million during 2012, respectively.
Cost of sales and services. The decrease in cost of sales is due to the loss of a major customer, NMTC, in early 2013 and the resulting reduction in product sales. The increase in cost of services is primarily due to expenses resulting from the commencement of operations of our CLIA-certified laboratory during 2013 with no such expense in 2012.
Operating expenses. Research and development expenses consisting of personnel costs and costs to develop our diagnostic testing products and future generations of testing platforms. These costs remained relatively unchanged between the two periods.
General and administrative expenses increased primarily due to $4.5 million in bad debt expense resulting from the reserve for outstanding accounts receivable of NMTC during 2013. The increase was partially offset by a decrease in legal expenses resulting from 2012 financing activities that did not reoccur during 2013.
Sales and marketing expenses increased primarily due to increased expenses from the commencement of operations of our CLIA-certified laboratory, in addition to stock-based compensation expense and salary and wage increases resulting from additional headcount during 2013 as compared to 2012.
Non-operating expenses. Net interest expense decreased primarily as a result of refinancing of promissory notes during 2012 and associated common stock warrants recorded as a debt premium and amortized as a credit interest expense, with no such refinancings occurring during 2013.
Other expenses increased during 2013 as a result of the expenses relating to terminated financing transactions during 2013.
The change in the fair value of warrant liabilities is attributable to a decrease in the fair value of our common stock and in the contractual life over which the associated preferred stock warrant liabilities are marked to market.
Gains/(losses) on extinguishment of debt. During the year ended December 31, 2012, certain of our notes payable were refinanced at maturity and such refinances were considered extinguishment of debt as the terms of the new debt were substantially different than the refinanced debt. Such extinguishment resulted in non-cash expenses $2.0 million for the year ended December 31, 2012, representing the fair value of the warrants granted in conjunction with such refinances, and had no impact on our liquidity.
As Adjusted Financial Information for the Six Months Ended June 30, 2014 and 2013 and Years Ended December 31, 2013 and 2012 (unaudited)
The unaudited as adjusted financial data below sets forth the net revenue for the six month periods ended June 30, 2014 and 2013 and the years ended December 31, 2013 and 2012 excluding all revenue attributable to NMTC (in thousands).
 
Six Months Ended June 30,
 
 
 
Years Ended December 31,
 
 
 
2014
 
2013
 
Change
 
2013
 
2012
 
Change
Net revenue (as reported)
$
11,212

 
$
10,506

 
$
706

 
$
18,083

 
$
18,409

 
$
(326
)
Net revenue from NMTC

 
5,116

 
(5,116
)
 
5,116

 
7,749

 
(2,633
)
As adjusted net revenue
$
11,212

 
$
5,390

 
$
5,822

 
$
12,967

 
$
10,660

 
$
2,307

At each of June 30, 2014 (unaudited) and December 31, 2013, $4.5 million in net accounts receivable due from NMTC remains unpaid. Because of the uncertainty regarding collectability of this receivable, we allowed for 100% of this receivable during 2013. We believe these 108% and 22% increases in as adjusted net revenue for the six months ended June 30, 2014 and year ended December 31, 2013 compared to the same periods in prior years, respectively, are important metrics of our continuing business, by presenting only revenues which we expect to



58


continue. We monitor our revenue concentration as a measure of our market penetration and as a factor in determining our technology's adoption.
Liquidity and Capital Resources
Historical cash flows
From our inception in April 1999 through June 30, 2014, we have financed our operations primarily through sales of privately placed shares of convertible preferred stock, promissory notes and associated warrants and net cash provided by operating activities.
Our primary uses of cash are to fund operating expenses, inventory purchases, service our debt and the acquisition of machinery and equipment. Cash used to fund operating expenses excludes the impact of non-cash items such as the provision for excess and obsolete inventory, equipment depreciation, stock-based compensation and non-cash interest expense and is impacted by the timing of when we pay these expenses as reflected in the change in our outstanding accounts payable and accrued expenses. Acquisitions of machinery and equipment primarily consist of our cost to manufacture our INFINITI analyzers utilized in our RAPs, purchases of laboratory equipment, computer hardware and software and the cost of facility improvements.
As of June 30, 2014 (unaudited), we had cash and cash equivalents of $0.4 million compared to $2.1 million and $0.3 million as of December 31, 2013 and 2012, respectively. Our long-term liquidity could be negatively impacted by our indebtedness related to promissory notes with maturity dates in the last quarter of 2015. However, we are required to use the proceeds of the offering referred to in this prospectus to repay these notes, and so the impact of these notes is not considered significant. See "Use of Proceeds."
The following table summarizes our cash flows for each of the periods indicated (in thousands):
 
Six Months Ended
June 30, 
 
Years Ended
December 31,
 
2014
 
2013
 
2013
 
2012
 
(unaudited)
 
 
 
 
Net cash provided by/(used in) operating activities
$
(1,068
)
 
$
(121
)
 
$
(1,675
)
 
$
654

Net cash provided by/(used in) investing activities
(581
)
 
(489
)
 
(809
)
 
(355
)
Net cash provided by/(used in) financing activities

 
287

 
4,304

 
(28
)
Net increase/(decrease) in cash
$
(1,649
)
 
$
(323
)
 
$
1,820

 
$
271

Operating activities. Net cash used in operating activities for the six months ended June 30, 2014 compared to 2013 was primarily driven by increases in operating expenses from the growth in our CLIA-laboratory.
Net cash provided by operating activities for the year ended December 31, 2013 compared to 2012 was primarily driven by a reduction in cash collections from accounts receivable during 2013, due to NMTC, with no such cash collection shortfalls in 2012.
Investing activities. Net cash used in investing activities for all periods noted above consisted primarily of invested capital and facility investment to manufacture the INFINITI analyzers utilized in our RAPs and purchases of machinery and equipment, including furniture, computer equipment and software, in support of all functional areas of the business.
Financing activities. Net cash provided by financing activities for the six months ended June 30, 2014 compared to 2013 was primarily driven by $1.0 million of financing activities during the period compared to minimal activity in the prior year.
Net cash provided by financing activities for the year ended December 31, 2013 compared to 2012 was primarily driven by $4.2 million in proceeds from the issuance of common stock, with no such issuances in 2012.
Capital resources. We anticipate that our current cash and cash equivalents, together with cash provided by this offering and our operating activities will be sufficient to meet our currently estimated cash requirements for at least the next 12 months. We have discussed the expected use of the net proceeds from this offering elsewhere in this prospectus.



59


We expect capital outlays and operating expenditures to increase over the next several years as we expand our infrastructure, commercialization, manufacturing and research and development activities, and as a result we may need additional capital financing. The amount of additional capital we may need to raise depends on many factors, including:     
the level of research and development investment required to maintain and improve our technology, including efforts to expand our menu of test panels, to fund clinical studies and trials of our tests and to invest in the development of new analyzers;
the amount of future cash provided by or used in operating activities;
the costs of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights;
our need or decision to acquire or license complementary technologies or acquire complementary businesses; and
changes in regulatory policies or laws that affect our operations.
We cannot be certain that additional capital 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 diagnostics companies or in the marketplace in general is limited by 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. In addition, if we raise additional funds through the issuance of common stock or securities convertible into shares of common stock, the percentage ownership of our stockholders could be significantly diluted, and these newly issued securities may have rights, preferences or privileges senior to those of existing stockholders. If we obtain additional debt financing, a substantial portion of our operating cash flow may be dedicated to the payment of principal and interest on such indebtedness, and the terms of the debt securities issued could impose significant restrictions on our operations. If we raise additional funds through collaborations and licensing arrangements, we might be required to relinquish significant rights to our technologies or products, or grant licenses on terms that are not favorable to us.
Promissory notes. As of June 30, 2014 (unaudited), we had $2.3 million in principal amount of outstanding promissory notes with an interest rate of 8.5% due December 2014, $1.0 million in principal amount of outstanding promissory notes with an interest rate of 10.0% due June 2015, $14.5 million in principal amount of outstanding promissory notes with an interest rate of 8.5% due November 2015, and $0.1 million in principal amount of outstanding promissory notes with an interest rate of 8.5% due November 2015. During the six months ended June 30, 2014 and the year ended December 31, 2012, certain of our notes payable were refinanced at maturity and such refinances were considered extinguishment of debt as the terms of the new debt were substantially different than the refinanced debt. Such extinguishment resulted in non-cash expenses of $1.9 million and $2.0 million for the six months ended June 30, 2014 and the year ended December 31, 2012, respectively, representing the fair value of the warrants granted in conjunction with such refinances, and had no impact on our liquidity.
We granted the holders of our $14.5 million in principal amount of outstanding promissory notes with an interest rate of 8.5% due November 2015 a security interest in our accounts receivable and proceeds therefrom. We are required to use 50% of the proceeds of this offering to repay substantially all of our outstanding promissory notes, and we intend to use a portion of the proceeds of this offering to repay all of our outstanding indebtedness.



60


Contractual Obligations
As of June 30, 2014, the annual amounts of future minimum payments under certain of our contractual obligations were:
 
Payments due by period
Total
 
Less than
1 year
 
1-3 years
 
3-5 years
 
More than 
5 years
 
 
(unaudited and in thousands)
Contractual obligations:
 
 
 
 
 
 
 
 
 
Promissory notes (1)
20,775

 
$
4,316

 
$
16,459

 
$

 
$

Operating lease (2)
38,655

 
1,834

 
3,967

 
4,249

 
28,605

   Total
$
59,430

 
$
6,150

 
$
20,426

 
$
4,249

 
$
28,605

(1)
From September 2008 through March 2013, we issued $17.5 million aggregate principal amount of promissory notes in private placements to certain accredited investors of which $2.5 million in aggregate principal amount was issued to directors, executive officers, and holders of more than 5% of our common stock. The notes bear a weighted-average annual interest rate of 8.6%, with the principal and accrued interest (shown above accrued through June 30, 2014), with substantially all maturing during November 2015. We can prepay our outstanding promissory notes at any time without penalty. We are required to use 50% of our cash proceeds from this offering to repay our senior and subordinated promissory notes. See "Use of Proceeds."
(2)
Our lease for our corporate offices in Vista, California commenced on February 1, 2009 and will expire in December 2029. This facility houses our research and development, manufacturing and warehousing operations and our administrative offices.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements or any special-purpose entities.

Qualitative and Quantitative Disclosures about Market Risk
Our exposure to market risk is currently confined to our cash and cash equivalents. We have not used derivative financial instruments for speculation or trading purposes. In addition, we have not invested in auction rate securities. Our promissory notes have a weighted-average fixed annual interest rate of 8.6%. These notes will be retired in connection with the completion of this offering. See "Use of Proceeds."
The primary objective of our investment activities is to preserve our capital for the purpose of funding operations while at the same time maximizing the income we receive from our investments without significantly increasing risk. To achieve these objectives, we invest our cash primarily in liquid money market funds. As a result, we believe we have minimal interest rate risk. Due to our limited funds invested in interest bearing accounts, a one percentage point change in the average interest rate on invested funds would have had a minimal effect on interest income for the six months ended June 30, 2014 and 2013 and years ended December 31, 2013 and 2012.
Our international sales are all denominated and paid in U.S. dollars and as a result we believe we are not exposed to foreign exchange currency risk.



61


OUR BUSINESS
Overview
We are a commercial stage molecular diagnostics company offering an innovative and proprietary technology platform to clinical reference laboratories, specialty clinics and hospital laboratories. Our platform consists of a family of multiplexing INFINITI analyzers, an extensive and expanding menu of genetic test panels, and proprietary microarrays, reagent modules and other related consumables. Our INFINITI analyzers, which include the INFINITI, the INFINITI PLUS and the recently introduced INFINITI HIGH THROUGHPUT SYSTEM, or INFINITI HTS, are easy to use and automate a number of the discrete processes of genetic analysis with minimal manual intervention, which reduces our customers' need for multiple, specialized instruments, and offer a variety of throughput capabilities together with a demonstrated high level of accuracy and reproducibility. Our genetic tests are focused on large and growing markets primarily in the areas of personalized medicine, women's health, infectious diseases and genetic disorders. Genetic tests are performed on our INFINITI analyzers using our proprietary BioFilmChip microarrays, related Intellipac Reagent Management Modules and other related consumables.
We believe genetic testing is improving the way patients are diagnosed, monitored and managed, by providing actionable information that can lead to enhanced patient care. Our genetic tests provide tools to physicians, clinicians and other health care providers to improve detection, treatment and monitoring of a broad spectrum of diseases and conditions. Frost & Sullivan estimated in 2012 that the molecular diagnostics market will reach $6.2 billion in the United States during 2014 and forecasted a compound annual growth rate for the market in excess of 11%. The Centers for Medicare and Medicaid Services, or CMS, of the Department of Health and Human Services estimated in June 2014 that there were more than 5,900 independent clinical reference laboratories and specialty clinics, and more than 8,900 hospital-based laboratories, in the United States. We believe that less than 10% of these laboratories are currently performing molecular diagnostics testing, and that we have an opportunity to expand our customer base as more laboratories seek to participate in this growing market.
We currently offer 62 test panels for use on our analyzers and have 16 additional test panels in development. In the area of personalized medicine, we offer test panels in pain management, cardiovascular health assessment, oncology and mental health. These test panels offer our customers the ability to identify a patient's genetic information, which can assist in improving drug efficacy, identifying non-responders and ultra-, normal- and poor-metabolizers, and reducing adverse patient response. In the area of women's health, we offer test panels in cervical cancer, sexually transmitted diseases, or STDs, and vaginal infections. These test panels identify a wide spectrum of specific organisms simultaneously, which can eliminate the need for laboratories to perform multiple tests. The depth and breadth of our menu of genetic test panels, all of which are designed to run on any of our INFINITI analyzers, allows laboratories to utilize space, labor and capital investment efficiently and to conduct genetic tests in less time, thereby improving laboratory economics. The proprietary design of our platform also allows us to introduce new and enhanced test panels to our menu of genetic tests without modifying our INFINITI analyzers. Based on our own research and customer demand, we intend to continue to increase the number of tests offered in each of our target market segments, which we believe will further increase the utility of our platform to our customers.
We launched our INFINITI HTS during February 2014 to meet the demand for high test-volume capabilities from our customers, particularly in the areas of personalized medicine and women's health. Our INFINITI HTS is a scalable, automated system comprised of three separate operating modules that provides flexible configuration to maximize workflow efficiency, and has the capacity to process up to 6,912 patient results per day with a single laboratory technician utilizing the same consumables as our other INFINITI analyzers. We believe our INFINITI HTS has the highest processing and throughput capacities of any molecular diagnostics system available in our target markets today. Additionally, for customers who seek a fully automated and integrated solution, and have lower throughput requirements, we offer INFINITI and INFINITI PLUS analyzers designed to operate on a "load and go" basis, in which a technician only needs to load prepared samples along with the test-specific consumables into the analyzer to generate test results.
We believe that compared to traditional genetic testing methods, our platform can significantly improve workflow, throughput and testing accuracy, while reducing our customers' operating cost per reportable result, thereby improving laboratory economics. We believe that these and other attributes of our platform can decrease the cost and complexity of genetic testing and reduce the need for specialized laboratory personnel, training, equipment



62


and facilities.
In late 2013, as we prepared to launch our INFINITI HTS, we began operations of a CLIA-certified laboratory to complement and support our efforts to attract customers entering the molecular diagnostics market, and potential INFINITI HTS customers in particular. Our laboratory services allow our customers to more quickly offer new or additional tests during the period when they are awaiting delivery, installation, training and validation of an INFINITI analyzer. Our CLIA-certified laboratory also provides new and existing customers with an alternative source of capacity to assist with their overflow testing needs. In addition, our laboratory enhances our product development efforts and allows us to offer hands-on training opportunities for our customers. Since the launch of our INFINITI HTS, many of these customers have utilized the services of our laboratory's INFINITI HTS capabilities to supplement and facilitate sales of medium- and high-volume test products to physicians, clinicians and healthcare providers.
Since the introduction of our INFINITI HTS and commencement of operations in our CLIA-certified laboratory, we have focused our sales and marketing efforts primarily on clinical reference laboratories, specialty clinics and hospital laboratories with high-volume genetic testing opportunities in the personalized medicine and women’s health market segments. We believe that our platform, together with our CLIA-certified laboratory and our training capabilities, will continue to attract additional customers, and enable existing laboratories and clinics to start performing genetic testing on a cost-effective basis in a high-volume setting.    
We have received FDA 510(k) clearance for our INFINITI and INFINITI Plus analyzers and five of our genetic test panels: CYP450 2C19, Factor II, Factor V, Factor II/V and Warfarin. Products for which we have received 510(k) clearance accounted for 39%, 18% and 14% of our net revenue for the six months ended June 30, 2014, and the years ended December 31, 2013 and 2012, respectively. We are currently in clinical trials collecting data to support a submission for 510(k) clearance for our INFINITI HTS, both of our CYP450 2C19 Plus test panels and all three of our CYP450 2D6 test panels. We intend to use a portion of the proceeds of this offering to conduct additional clinical trials for the collection of data, and to submit for 510(k) clearance, for an additional seven of our test panels that, together with our existing and in-process 510(k) cleared test panels, made up approximately 80% of consumables revenue for the six months ended June 30, 2014. We expect to conduct additional clinical trials for the collection of data, and to submit for 510(k) clearance, for test panels based on a variety of factors, including:
the regulatory environment for the use of genetic tests, in particular the FDA's requirements and limitations on marketing RUO tests, which may not be marketed as in vitro diagnostic products;
the demand by our existing and target customers for particular genetic tests that have received regulatory approvals or clearances;
the competitive environment for the use of genetic tests that have received regulatory approvals or clearances versus similar tests that have not; and
the size of the available market for the particular test, given the significant expense and time required to obtain regulatory approvals or clearances.
Internationally, we have obtained a Conformité Européenne, or CE, mark for our INFINITI and INFINITI PLUS analyzers and a total of 24 of our tests. This designation is supported by completed clinical and validation studies that demonstrate the analytical performance of each CE marked test. The CE mark facilitates the marketing and sale of our CE marked analyzers and tests in the European Union and the European Economic Area as well as certain other international markets.
Our test panels that are not 510(k) cleared are offered for sale in the United States under the RUO designation. These RUO tests are labeled "For Research Use Only. Not for use in diagnostic procedures." as required by FDA regulations. Sales of these test panels represented 61%, 82% and 86% of our net revenue for the six months ended June 30, 2014, and the years ended December 31, 2013 and 2012, respectively.
RUO test panels may only be used in the United States for clinical purposes by laboratories and other facilities certified under CLIA that have incorporated these products into their LDTs pursuant to guidelines issued by the College of American Pathologists. We believe that nearly all of our RUO product sales are incorporated into laboratory developed tests, or LDTs. In order to develop an LDT utilizing our products, these certified laboratories and other facilities must develop and validate a test protocol that includes specimen collection, DNA extraction,



63


polymerase chain reaction, or PCR, amplification, hybridization and detection, and data analysis, interpretation and reporting. Our products provide components that can be used by these certified laboratories and other facilities for the PCR amplification, hybridization and detection portions of these LDTs. We sell each of these components individually, as ordered by the customer in its discretion, and not as a kit or system. The validation process engaged in by these certified laboratories and other facilities can involve validation of the sample collection and extraction process, establishing limits of detection and analytical sensitivity, testing for specificity and cross-reactivity, including interfering substances, validation for assay accuracy, precision and reproducibility, and establishing reportable ranges of test results for the test system and reference values that will be measured against as controls. This validation process also requires verifying the result from the LDT against known standard samples or the results of a high-standard laboratory testing method such as sequencing, and can involve the testing of a large number of patient samples. This process may take from several weeks to several months or more to complete, and thus requires a significant investment by the customer.
We believe that all sales of our RUO products in the United States are to customers that are either certified in the manner described above and have incorporated our products into their LDTs, or that use such products for research only. We are not permitted to represent our RUO products as in vitro diagnostic products. We therefore train our personnel to only market these products to laboratories for research or investigational use in the collection of research data, and to not promote any off-label uses of our products.
We believe that we are in compliance with existing FDA rules and regulations governing our business, including those governing the marketing and sale of RUO tests; however, a significant change in existing laws, or their enforcement, may require us to change our business model or our business practices to maintain compliance with these laws. For instance, in June 2011, the FDA issued a Draft Guidance entitled "Commercially Distributed In Vitro Diagnostic Products Labeled for Research Use Only or Investigational Use Only: Frequently Asked Questions," and in November 2013 issued a guidance document entitled "Distribution of In Vitro Diagnostic Products Labeled for Research Use Only or Investigational Use Only," or the RUO Guidance, which highlights the FDA's interpretation that distribution of RUO products with any labeling, advertising or promotion that suggests that clinical laboratories can validate the test through their own procedures and subsequently offer it for clinical diagnostic use as an LDT is in conflict with RUO status. The RUO Guidance further articulates the FDA's position that any assistance offered in performing clinical validation or verification, or similar specialized technical support, to clinical laboratories, is in conflict with RUO status. The FDA has generally exercised its enforcement discretion to not enforce applicable regulations with respect to LDTs. However, the FDA has repeatedly indicated since 2010 that it intends to reconsider its policy regarding enforcement and to begin drafting an oversight framework for such tests, and most recently, on July 31, 2014, the FDA notified the U.S. Congress of the FDA's intent to modify its enforcement discretion approach to LDTs in a risk-based manner. If the RUO Guidance were to be enforced, it would limit our marketing of RUO test panels to general discovery laboratories and require us to seek FDA clearance for our RUO test panels, which may require significant time and investment on our part and may reduce our revenues or increase our costs and adversely affect our business, prospects, results of operations or financial condition.
Our Strategy
Our objective is to become a leading provider of genetic tests to clinical reference laboratories, specialty clinics and hospital laboratories in multiple growing market segments. Our INFINITI analyzers can address a wide range of customer throughput requirements and, combined with our large and expanding menu of test panels, we believe gives us a significant competitive advantage within the molecular diagnostics market. We believe that our ability to develop new tests to meet customer demand will enable us to take advantage of emerging opportunities in genetic testing and drive additional consumables sales. One key element of our strategy is to focus on high-volume customers, particularly in the areas of personalized medicine and women's health. We plan to continue to expand into other market segments through the development of additional test panels.
To achieve our objectives, we intend to:
Increase placements of our recently launched INFINITI HTS and expand penetration in the highest volume testing market segments. Our INFINITI HTS and menu of test panels provide an easy to use, automated solution with greater breadth of diagnostic information at a lower operating cost per reported result as compared to traditional testing methods. We believe that our INFINITI HTS's process automation, ability to multiplex and broad menu of test panels in the area of high-volume testing are compelling features that are attractive to



64


customers in our target market segments. We believe that these factors will lead to increased INFINITI HTS market penetration.
Target molecular diagnostics laboratories with high potential utilization of our INFINITI and INFINITI PLUS analyzers. We believe that our INFINITI and INFINITI PLUS analyzers' automation, "load and go" design and broad menu of test panels designed to address various throughput requirements, will generate demand from both medium to larger clinical reference laboratories seeking a more flexible and efficient molecular diagnostics platform and from smaller clinical reference laboratories, specialty clinics and hospital laboratories for whom it has not previously been cost-effective to develop their own tests.
Develop and launch test panels in new areas and enhance our current test panels. We plan to add test panels for cholesterol-lowering drugs (statin drug therapy), susceptibility to drug addiction and risk of age-related macular degeneration during 2015. In addition, we continue to create test panels that combine multiple genetic tests on a single microarray to enable our customers to increase throughput capability and significantly decrease the operating cost per reportable result and improve laboratory economics. We believe that continuing to expand and enhance our broad menu of genetic tests will drive additional placements of our INFINITI analyzers and capture additional consumable sales.
Significantly expand our domestic sales force, increase marketing expenditures and expand international distribution of our products. We believe there is a meaningful opportunity to further penetrate existing markets and customers by expanding our direct U.S. sales and marketing organization. In the future, we plan to strengthen and enhance specific target market opportunities by hiring application specialists with in-depth knowledge about those markets, such as transfusion centers, newborn screening and drug addiction and rehabilitation centers. We also plan to expand our existing distributor network outside the United States to enter new markets and capitalize on growing international demand.
Expand FDA approvals. We intend to pursue additional regulatory clearances, approvals and certifications for products and facilities, as necessary. We have received U.S. Food and Drug Administration, or FDA, 510(k) clearance for our INFINITI and INFINITI PLUS analyzers and five of our genetic tests, and we have submitted an additional notification to the FDA for 510(k) clearance of our UGT1A1 test.
Utilize our CLIA-certified laboratory to enhance and complement our product offerings. Our CLIA-certified laboratory enables us to provide a broad range of services to assist clinical reference laboratories and specialty clinics as they enter the molecular diagnostics market using our platform. We expect to attract a number of customers to our platform by providing an enhanced level of customer support, including services offered by our CLIA-certified laboratory.
Our Market Opportunity
Molecular diagnostics, or MDx, refers to the detection of genetic material, including DNA and RNA and their variations and mutations, and the use of such information to diagnose disease, determine a patient's susceptibility to disease, evaluate response to drug therapy or establish a patient's prognosis. MDx is one of the largest and fastest growing segments in the $50 billion in vitro diagnostics industry. Frost & Sullivan estimated in 2012 that the MDx market will reach $6.2 billion in the United States during 2014 and forecasted a compound annual growth rate for the market in excess of 11%. CMS has estimated in June 2014 there were more than 5,900 independent clinical reference laboratories and specialty clinics and more than 8,900 hospital-based laboratories in the United States. We believe that less than 10% of these laboratories are currently performing MDx testing, and that we have an opportunity to expand our customer base by enabling more laboratories to participate in this growing market.
A fundamental goal of personalized medicine is to deliver the right treatment to the right patient at the right time, and we believe MDx testing is helping to achieve this objective. Increasing knowledge of genetic biomarkers and continued genetic biomarker discoveries in the areas of drug metabolism, drug dosing, use of genetic information to increase the efficacy of chemotherapy agents, identification of infectious diseases and use of genetic biomarkers in monitoring the progression of diseases are driving the growth of MDx testing companies. There is a growing awareness that personalized, predictive and preventative medicine initiatives can improve healthcare outcomes and lower costs. This can be achieved through the earlier diagnosis of disease, improved monitoring of disease progression and more personalized treatment based on a patient's distinct genetic profile. We believe the genetic information generated by our platform can enable a physician to differentiate patient-specific characteristics, design personalized treatment approaches and ultimately improve patient outcomes.



65


Genetic testing is increasingly used as a primary tool to provide actionable information to the healthcare provider for improved patient care. Information provided by genetic testing is playing a key role in guiding therapy, assessing disease risk, improving drug efficacy, identifying non-responders and ultra-, normal- and poor-metabolizers and reducing adverse events. For example, in personalized medicine, the identification of genetic biomarkers that affect drug-metabolizing enzymes has improved dosing of drugs for conditions as wide-ranging as pain management, cardiac assessment and mental health, and has benefited patients by helping them avoid adverse events, adverse drug interactions or ineffective treatments.
Our Target Markets
Personalized medicine
More targeted and effective pharmacogenomic-based treatments have the potential to improve healthcare outcomes and lower healthcare costs, which we believe will lead to increased use of genetic testing. Healthcare providers are able to better treat patients by enhancing efficacy while minimizing possible adverse events by conducting genetic tests prior to prescribing drugs. Many pharmaceutical companies, researchers and pharmacy benefit companies are screening drugs for differences in efficacy and toxicity among individuals with varied genetic profiles. Regulatory agencies have revised drug labels to improve safety and efficacy based on information provided by genetic testing.
Many patients do not currently achieve the best possible outcome with the first drug that they are offered in treatment. For example, according to The Case For Personalized Medicine, 4th edition (2014), published by the Personalized Medicine Coalition, a large number of patients, including 38% of those being treated for depression, 40% of those being treated for asthma, 43% of those being treated for diabetes and 50% of those being treated for arthritis will not respond to initial drug treatments. Studies have linked the variation in efficacy of a patient's response to a prescribed drug treatment to differences in the genes that code for drug-metabolizing enzymes, drug transporters or drug targets, which can be identified through the use of genetic testing. Genetic and other molecular diagnostic testing can assist a physician in selecting an optimal drug therapy in the first instance, and eliminate the otherwise commonly used trial-and-error method of identifying optimal drug therapy for an individual patient. Key tests in our personalized medicine market segment include test panels to assess drug metabolism in pain management, cardiac assessment and mental health. Our leading test panels in this area are our CYP450 2C19, CYP450 2D6I and CYP450 3A4/CYP450 3A5, which are used to determine gene variants that affect the metabolism and efficacy of drugs such as platelet therapy, those for treatment of psychiatric disorders and those prescribed for pain management.
Our target markets in personalized medicine include the following segments:
Pain management. More than 116 million adult Americans suffer from acute or chronic pain each year, and drugs are the "first line" of treatment for most forms of pain. The goal of successful pain management is to effectively control patient pain without causing excess side effects from the medication prescribed. However, studies have shown that only 58% of patients taking prescription medication reported pain relief. Additionally, approximately 80% of post-operative patients experience adverse events from pain medications. In particular, opioids such as hydrocodone, codeine, oxycodone and morphine are frequently prescribed for the relief of chronic and moderate to severe post-surgical pain. According to the IMS Health National Prescription Audit, hydrocodone alone accounted for more than 135.3 million prescriptions in 2012, and many of these patients can experience adverse events from these medications. Opioid-related adverse events include nausea, constipation and respiratory depression, which can be severe. Additionally, opioids are highly addictive and induce drug-resistance and tolerance. As of September 30, 2014, we offered 11 test panels in the area of pain management, which detect multiple mutations associated with six different drug-metabolizing genes: CYP450 2B6, CYP450 2C9, CYP450 2C19, CYP450 2D6, CYP450 3A4 and CYP450 3A5. Identification of these mutations can assist physicians in improving selection and dosing of drugs and better manage patient treatment by reducing adverse events and improving efficacy.
Cardiovascular health assessment. According to a report from the World Health Organization, or WHO, cardiovascular diseases were responsible for 30% of global deaths in 2008. The WHO estimates that by 2030, 23.3 million people will die annually from some form of cardiovascular disease. With the increasing prevalence of cardiovascular diseases, information generated by genetic testing is becoming increasingly important for drug



66


efficacy, managing cardiovascular condition and overall treatment of disease. For example, it is now widely accepted that the efficacy of one of the most commonly used cardiovascular drugs, Plavix (clopidogrel), to reduce the risk of heart attack, unstable angina, stroke prevention of stent thrombosis and cardiovascular death following acute coronary syndrome, is heavily influenced by a patient's genetics. Plavix has received a "black box" warning label from the FDA that identifies the chance of limited effectiveness for patients who are poor metabolizers of the drug, and that informs physicians of the availability of genetic tests to identify such patients. Plavix is metabolized into its active form by CYP450 2C19. By utilizing genetic testing, including the test panels that we offer, the cardiologist can determine whether the patient is a poor-, normal- or ultra-metabolizer or a non-responder before the drug therapy is administered. As of September 30, 2014, we offered 20 test panels in the area of cardiovascular health assessment, five of which have received FDA 510(k) clearance, including our Plavix responder and Warfarin sensitivity test panels.
Mental health. Drugs associated with mental health, including drugs focused on central nervous system disorders, and treatment of depression and anti-psychotic therapy, represent a major component of overall pharmaceutical sales. According to the Centers for Disease Control and Prevention, or CDC, as much as 11% of the U.S. population is taking antidepressants at a given time. Despite this prevalence, approximately 30 to 40% of patients do not respond to the first medication prescribed. The resulting trial and error process delays effective treatment for patients and increases healthcare costs. Genetic testing can provide information to allow physicians to select a more appropriate drug or combination of drugs specific to the patient's genetic makeup and improve patient outcomes. Additionally, many doctors are taking greater precautions in choosing medications for young patients, because of potential developmental issues which could result from psychiatric drug treatment for minors, such as for attention deficit hyperactivity disorder. As of September 30, 2014, we offered 12 test panels in the area of mental health. Our test panels identify mutations in the drug metabolizing genes ApoE, CYP450 2D6, 2C19, 2B6 and 2C9, and can enable the healthcare provider to select optimal combinations of anti-convulsive, anti-depression and anti-psychotic drugs or stimulants for an individual patient.
Women's health
The women's health MDx testing market represents a substantial and growing market opportunity. According to the CDC, approximately 79 million Americans are infected with Human papillomavirus, or HPV, and approximately 14 million become infected each year. Current regulations from the U.S. Preventive Services Task Force recommend that MDx HPV tests for women be utilized in conjunction with cytology (Pap test) in standard five year intervals. Additionally, the CDC estimates that there are nearly 20 million new cases of STDs each year, costing the nation approximately $16 billion in healthcare costs annually. MDx testing in this market is currently a minority of the tests available, but is expanding significantly due to increased applications, better performance and improved pathogen identification capabilities. As of September 30, 2014, we offered 19 test panels in the area of women's health.
Key tests in this segment include four test panels for HPV testing and nine test panels designed to identify various microorganisms related to STDs and vaginal infections. Our HPV test panels are designed for screening and genotyping all 14 high-risk types of HPV simultaneously. Our STD panels are designed to identify the presence of six pathogens in one test panel: Chlamydia trachomatis, Neisseria gonorrhoeae, Ureaplasma urealyticum, Mycoplasma genitalium, Mycoplasma hominis and Trichomonas vaginalis. In addition, we have panels to test for Bacterial vaginosis (BV) and Candida vaginitis. Our Resolve-QUAD detects Gardnerella vaginalis, Mobiluncus spp., Candida albicans, Candida glabrata and Trichomonas vaginalis. Resolve-QUAD is able to detect incidences of BV, candidiasis and trichomoniasis. Our panels are designed to screen for multiple microorganisms simultaneously on a single sample. We believe our women's health test panels are the most comprehensive menu of test panels in the market currently.
Other markets
We also target the markets of: (i) oncology to help manage chemotherapy treatments for breast, colorectal, lung, melanoma and thyroid cancers; (ii) infectious diseases for detection of influenza, nontuberculous mycobacteria, respiratory viruses and tuberculosis; and (iii) genetic disorders including, but not limited to, tests for identification of carriers of gene mutations associated with Bloom disease, Canavan disease, cystic fibrosis and Familial Mediterranean fever.



67


New test panels in development
In addition to our current menu of 62 test panels, we are developing new test panels for the following markets:
Statin drug therapy. Statin drugs are some of the most prescribed medications in the world and are used to reduce the level of low-density lipoprotein cholesterol, or LDL, in the blood. According to the CDC, there are currently more than 71 million American adults (over 20 years of age) with high LDL. The Clinical Research Institute at Duke University estimates that over 43 million Americans aged 40 to 75 are currently prescribed the statin class of cholesterol lowering drugs, which will increase to 56 million Americans, half the population of this age group. However, statin LDL-lowering drugs can cause significant adverse events, including muscle aches, cramps and muscle weakness, and if not controlled, can lead to more serious muscular injury in certain patients. Our statin drug management test panel and decision support system is designed to identify individuals who are genetically susceptible to elevated liver enzymes or liver damage, or muscle pain (myalgia), while on certain statins and who may develop muscular injury (myopathy) while on high dose statin therapy. We are collaborating with Genomas, Inc., a biomedical company and genetic reference laboratory affiliated with the University of Connecticut in Hartford, on development of the test panel and decision support system. We expect this test panel will provide a reliable, cost-effective platform for clinical laboratories to provide results and guidance to physicians to optimize treatment strategies for LDL disorders. Our statin drug management panel will identify 34 mutations and will include a decision software application to develop risk scores to help guide a physician in the selection and dosing of statin therapies. This test panel is currently in alpha trials and we expect to launch commercially in 2015.
Drug addiction. Scientific advances have improved our understanding of drug abuse and addiction. Addiction is now recognized as a chronic relapsing brain disease expressed in the form of compulsive behaviors, and this understanding has improved healthcare providers' ability to both prevent and treat addiction. We believe that the use of genetic information for diagnosis, treatment, and prevention strategies can lead to reduced relapse and enhanced quality of life for many patients who are addicted or at risk for addiction. Drugs that have the ability to activate the mesolimbic brain reward pathway and increase dopamine levels have the potential to cause addiction in certain patients, suggesting that individual differences in a marker of dopamine function can influence a person's susceptibility to drug abuse. Our test panel identifies markers associated with multiple genes and 16 variants to aid healthcare providers in addiction and rehabilitation centers to use these genetic biomarkers to better understand why certain therapies are ineffective and when to change a certain drug regimen. This test panel is currently in alpha trials and we expect to launch commercially in 2015.
Age-related macular degeneration. Age-related macular degeneration, or AMD, is the leading cause of central vision impairment in persons over 50 years of age in developed countries. Both genetic and environmental factors play major roles in AMD etiology, and multiple gene variants and lifestyle factors such as smoking have been associated with the disease. We have developed a test panel to identify 21 genetic mutations for the potential of improved risk prediction and therapeutic intervention in AMD patients. Our AMD panel identifies the following genes associated with AMD: C3, C2, CBF, ABCA1, VEGFA and TIPM3. We believe this test can provide essential information to assess risk and help guide therapy for wet and dry forms of AMD. This test panel is currently in alpha trials and we expect to launch commercially in 2015.
Limitations of Traditional Testing Methods
A variety of traditional genetic testing methods have been developed, including DNA sequencing, gene expression and genotyping, to detect genetic biomarkers. These traditional testing methods have a number of drawbacks and limitations, including:
Throughput limitations. There is increasing demand for high throughput systems that can perform large test volumes in a single day, and deliver multiple multiplexed results per patient. Traditional systems in the market have throughput constraints and typically process a limited number of patient samples simultaneously.
High operating cost per reportable result. Because many existing systems require specialized personnel and training to complete complex and extensive protocols, the tests can be time-consuming and result in high labor costs. These processes may also use a significant amount of reagent, which can be costly. The use of supplementary, discrete instrumentation to perform semi-manual tests also increases costs, as compared to a system that automates all the discrete processes of genetic testing.



68


Limited testing menu. Many existing MDx systems have limited test menus. As a result, a laboratory may need to purchase additional systems with specific testing capability to satisfy its needs. This requires separate training of operators on the use and maintenance of each system and may require a significant amount of laboratory bench space and inventory. The combination of these factors often makes in-house MDx testing impractical, particularly for small and mid-size laboratories.
Inability to multiplex. In many cases, the predisposition to a genetic disorder, or the presence of a particular disease, condition or genetic variance affecting therapy, is caused by multiple genetic mutations that necessitate testing for multiple biomarkers to diagnose those diseases, conditions or variances. Many traditional technologies are only able to examine one biomarker at a time, and, in order to make a diagnosis, the laboratory must perform repeated tests on a sample. Without multiplexing capabilities, serial testing is required which is expensive, time consuming and requires higher sample volumes.
Limited automation. While a number of companies offer systems that can perform MDx tests, these systems tend to automate only certain steps in the testing process. The manual handling of samples can lead to an increased risk of sample contamination, and the lack of automation results in multiple, complex steps to achieve patient results and can increase the probability of operator error if any step is omitted or performed out of sequence. In addition, many of these traditional systems do not enable the testing of multiple patient samples in a single microarray, which reduces the cost-benefit of higher throughput.
Need for specialized labor. Specialized laboratory technicians and in some cases specialized training are required to properly perform and evaluate the quality and accuracy of the results of most traditional MDx technologies.
Our Solution
Our platform has been designed to enable a broad range of clinical reference laboratories, specialty clinics and hospital laboratories to more cost-effectively perform, or enter the market to perform genetic testing at variable levels of throughput, which we believe will drive adoption and use of our platform as well as expand the potential of the MDx testing market. We believe that many medium-sized clinical reference laboratories, specialty clinics and hospital laboratories are seeking to add or expand MDx capabilities to treat patients efficiently and provide a comprehensive offering. We believe that this trend is being facilitated in part by new technologies like ours.
Our platform has a number of key advantages, including:
Significantly higher throughput and better workflow. Our broad offering of INFINITI analyzers is designed to address our target customers' varied throughput and workflow requirements. Using one INFINITI HTS, laboratories are capable of producing up to 6,912 patient results per day. We believe that we can substantially increase a laboratory's workflow by enabling them to perform their tests on our highly integrated and automated system, which reduces or eliminates the need for laboratories to run tests in batches.
Improved laboratory economics. Our INFINITI and INFINITI PLUS eliminate the need for complex protocols and manual intervention once a test is initiated, which is intended to reduce the laboratory's operating cost per reportable result by simplifying workflow and reducing the need for highly skilled technicians. Our INFINITI HTS allows individual components to remain active during the workflow process, which can significantly improve throughput time and reduce costs.
Broad menu of test panels. We currently offer 62 test panels, which we believe represents the broadest available menu of test panels on a single system in the market today. The depth and breadth of our menu of test panels, all of which are designed to run on any of our INFINITI analyzers, allows laboratories to utilize space, labor and capital investment more efficiently and to conduct more genetic tests in less time at a lower operating cost per sample. In addition, we intend to increase the number of test panels available for use on our platform, including in the areas of statin drug therapy, drug addiction and AMD, and believe that laboratories using our system will be able to broaden their MDx offerings without significant additional capital investment or operator training.
Multiple patient array technology. Our proprietary multiple patient array, or MPA, technology is designed to test up to eight distinct patient samples on a single microarray. This enhances throughput by up to 700% while reducing operating cost per sample by up to 87% as compared to our single patient microarrays. Our MPA technology is particularly well suited for addressing high-volume test markets such as HPV and tuberculosis.



69


Ability to multiplex. The analysis of multiple genes from a single patient sample is commonly referred to as multiplexing. Many diseases and patient responses to therapy are caused by multiple genetic mutations that necessitate testing for multiple biomarkers to diagnose those diseases or to predict or monitor therapy response. Our platform is able to detect up to 1,024 individual features of biochemical sensors, or biomarkers, within a single microarray, which reduces the amount of sample needed, the time required to run the test and the need for multiple test panels.
Increased accuracy of results. Manual handling of samples is the most common cause of contamination in existing technologies. By reducing the risk of human error and contamination, we believe that our INFINITI analyzers can provide more accurate and reproducible test results compared to other less automated systems. In addition, where certain systems only use target or signal amplification (e.g., PCR amplification), we believe that our combined target and signal amplification technologies can increase the sensitivity and specificity over these widely used stand-alone amplification methods.
Our Products and Technology
Our platform is comprised of five key technological innovations: (1) our INFINITI analyzers; (2) our multiplexing test format; (3) our BioFilmChip microarrays; (4) our multiple patient array technology; and (5) our Intellipac Reagent Management Modules.
Our INFINITI analyzers
Our platform includes a family of analyzers, each of which is designed to address customer-specific needs based on the customer's workflow and throughput requirements. Our platform includes our INFINITI, INFINITI PLUS and INFINITI HTS analyzers. Our INFINITI analyzers automate the discrete processes in genetic analysis and offer a wide range of sample throughput. All of our INFINITI analyzers use the same proprietary technology and consumables to generate consistent patient results presented in an identical format. The following table illustrates the test capabilities of our primary INFINITI analyzers:
Instrument
Capacity per run (1)
Patient results (1)
INFINITI HTS
384 samples
up to 6,912 per day
INFINITI PLUS
48 samples
up to 192 per day
INFINITI
24 samples
up to 96 per day
(1) Figures assume the use of our four-patient multiple patient array test panel over a 24-hour period.          
Our newest analyzer, the INFINITI HTS, was commercially launched in February 2014 following a three-year design and development process. Our INFINITI HTS is a scalable, multiplexing, random access, microarray-based system comprised of three independent operating modules. We believe that the INFINITI HTS has the highest processing capacities of any molecular diagnostics system available in the market today. Our INFINITI HTS was developed in response to the demand from clinical reference laboratories and specialty clinics that perform MDx testing in personalized medicine and women's health. This platform features a hybridization chamber (INFINITI Incubator), a multi-channel microarray processing system (INFINITI Processor) and a built-in high resolution imaging system (INFINITI Ace). The modularity of the system is the key to its scalability. With rapid processing of samples on the INFINITI Incubator and scanning time of less than ten minutes for 96 multiplexed microarrays, the system significantly enhances test throughput capabilities for our laboratory customers.
The INFINITI HTS is designed to operate in a random and continuous access mode, allowing simultaneous processing of multiple tests within the same run, and is capable of producing up to 6,912 patient results per day with a single technician. Once testing is completed, the INFINITI HTS transmits test results to the laboratory's



70


information system for electronic transmission to the ordering physician. The INFINITI HTS automates the discrete processes of genetic analysis and is a scalable system which provides flexible configuration options to maximize high-volume work efficiency.
Our INFINITI and INFINITI PLUS analyzers are automated, multiplexing, continuous flow, random access microarray instruments that are designed to integrate all the discrete processes of genetic testing, including sample handling, reagent management and detection for the analyses of DNA sequences, into a self-contained system. These INFINITI analyzers feature a built-in confocal microscope and temperature cycler for target and signal amplification. They operate on a "load and go" basis. This means that to run a test, an operator need only load prepared samples into the applicable INFINITI analyzer, along with the test-specific BioFilmChips and Intellipac Reagent Management Modules, and the testing process will run to completion without any intervention or supervision from the operator.
 
INFINITI Analyzer
From the perspective of the technician, the test protocols are identical for each of our genetic tests, which eliminates the need for additional training of operators when additional tests are added. After the test is completed, the INFINITI analyzer generates an electronic report that can be transmitted directly to a laboratory information system.
    
The hardware in each of our INFINITI analyzers is controlled by our proprietary QMatic scheduling software, which is embedded within the onboard computer. The QMatic software has a schedule manager that is designed to control all operations of the analyzer, including test protocol, fluid handling, robotics, optical detection and results analysis. Key features include: (1) processing of multiple samples simultaneously; (2) running multiple samples and multiple tests at the same time; (3) test protocol monitoring; and (4) multiplexing different samples on the single microarray for increased throughput and reduced cost.
Tests are processed automatically and read by the built-in confocal microscope. The optics module in our INFINITI analyzers is a lightproof assembly comprised of a camera, a laser and a photomultiplier tube. Using an excitation wavelength from the laser light source, the camera takes micron-level pictures of reference fluorescent dye spots on the BioFilmChip. The integrated software uses that data to calculate the location of the spots on the specific microarray, and the optics module scans those calculated locations, and analyzes the microspots on the microarray.
Our multiplexing test methods
Our multiplexing technology allows our INFINITI analyzers to detect multiple biomarkers across multiple genes at the same time on a single microarray, eliminating the need to process multiple tests separately. For example, our pain management panel can detect multiple mutations associated with six different genes (CYP450 2B6, CYP450 2C9, CYP450 2C19, CYP450 2D6, CYP450 3A4 and CYP450 3A5) to determine the efficacy, toxicity and



71


dosing of specific drugs. In addition, our genetic test for HPV detects and genotypes all 14 high-risk types of HPV simultaneously on a single microarray from a single sample.
Our BioFilmChip microarrays
Our proprietary BioFilmChip microarrays consist of multiple layers of a hydro-gel matrix coated on polyester film sandwiched between a plastic base and a reaction body to form a microarray. Utilizing our proprietary and patented manufacturing processes, we coat polyester film with four different layers of emulsions and then cut the film into sections for each BioFilmChip. Each of the emulsion layers has a unique formulation designed to address a specific function necessary for the film to act as the base of the microarray. The microarrays are printed with up to 1,024 individual features of biochemical sensors depending on the requirements of the test. These spotted microarrays are then packaged into specifically designed magazines and are used on all INFINITI analyzers. We believe this process provides us a manufacturing, scale and operating cost advantage.
The BioFilmChip has a set of unique universal immobilized capture probes. A target gene-specific detection primer is hybridized (the reaction of complementary DNA sequences) to the PCR amplicon of the sample. PCR is an enzymatic reaction that makes millions of copies of DNA. The PCR-copied products are known as PCR amplicons. The hybridized detection primer is designed to extend in the presence of a fluorescence precursor to produce a fluorescent extension product that hybridizes to the microarray (the process increases the signal so that the detection system can read it). The detection primer has two complementary parts: one target-specific and the other immobilized capture probe-specific. After hybridization and washing of the excess unbound probes, the chip is scanned for fluorescence and the data is analyzed. Where certain systems only use target or signal amplification, we believe our combined target and signal amplification technologies can increase the sensitivity and specificity over these widely-used stand-alone amplification methods. For example, we have conducted internal studies that have demonstrated that our system has achieved sensitivity to the level of detection of ten copies of mycobacterium tuberculosis and five copies of HPV, which we believe is more sensitive than many other available tests.
        
BioFilm cross-sectional view             Microarray top view
             
Microarray side view          Microarray magazine         Intellipac reagent module
Multiple patient microarray
Our proprietary MPA technology enables our INFINITI analyzers to process multiple patient samples on a single microarray. This differentiating technology substantially reduces our per test product costs, reduces our inventory costs and increases our test production capacity. It also can create increased efficiency for our customers by lowering their operating costs and increasing their throughput, which leads to improved laboratory capacity, equipment utilization and improved economics. For example, our MTBC OCTA (drug-resistant tuberculosis test panel) is designed to test up to eight patient samples on a single microarray, increasing throughput for our laboratory



72


customers by up to 700% while reducing their operating cost per sample by up to 87%, as compared to our single patient microarrays. We are also developing an application to produce an MPA that permits samples from up to ten patients for certain tests to be processed simultaneously on a single microarray. Our MPA technology first processes the samples individually, where each sample is assigned a separate set of detection primer tags. The detection primer tags correspond to one of eight separate zones on the microarray (one zone for each sample). After the dye-labeled probes bind to the specific site on the microarray that corresponds to its detection primer tag, the INFINITI analyzers scan for the presence of the dye-labeled probes at the appropriate sites to determine whether the genetic variant being tested for is present in each of the samples. We can produce up to 1,024 microspots on a single BioFilmChip. Results are analyzed and presented in numerical format, and the electronic results report is transmitted directly to a laboratory information system.
Images of low- to medium-density spotted microarrays
Our Intellipac Reagent Management Modules
Our assay specific Intellipac Reagent Management Modules provide the proprietary reagent used to complete our genetic tests. Our platform will only operate with our proprietary reagent modules. The reagent module is designed to communicate all relevant information about a test to the INFINITI analyzer without any intervention from the laboratory technician, saving time by automatically recording all pertinent test details, and reducing the possibility for human errors which could occur in manual systems by eliminating contamination risk. A read-write memory chip embedded in the reagent module saves test-specific information, including reagent identification, expiration dates, lot number, amount of reagent remaining for future tests, specific instructions for test processing, the time last used and the serial number for the instrument. The INFINITI analyzer opens the reagent module and breaks the seal, reads all the needed information and prompts the laboratory technician for further action if needed.
Limitations of microarray test methods
In general, microarray test methods are subject to the possibility of false negative test results due to unexpected gene sequence variations. Nearly all genetic tests are designed to detect a sequence in the given region on the targeted genome. Because genetic test methods are premised upon identifying these specific gene sequences, the phenomenon of sequence variance in a gene away from the expected, mapped sequence being measured will result in the sample not being detected and the result being reported as a negative test. This is common to all genetic tests,



73


and as a result laboratory technicians and molecular biologists are generally aware of this possibility. Although unexpected gene sequence variations tend to be rare occurrences, when we or other industry participants identify that unexpected gene sequence variations are recurring, and that there is a market demand to test for this sequence variance, we may be inclined to modify our tests or develop new tests, to the extent commercially feasible, to capture the newly identified variations. These test modifications or new test developments go through our standard development process, and can involve significant time and expense.
Our Current Menu of Test Panels
We currently offer 62 test panels for use with our family of INFINITI analyzers. In the area of personalized medicine, we offer test panels in pain management, mental health, cardiovascular health assessment and oncology. In the area of women's health, we offer test panels in cervical cancer, STDs and vaginal infections. We also offer test panels in infectious diseases (including tests for tuberculosis and respiratory viruses), genetic disorders and newborn screening.



74


Product (1)
Application
Market Segments
Pain
management
(11 tests)
Mental
health
(12 tests)
Cardiovascular risk assessment
(20 tests)
Other
personalized
medicine
(21 tests)
Women’s
health
(19 tests)
Oncology
(23 tests)
Infectious
disease
(20 tests)
Genetic
disorders
(6 tests)
Newborn
screening
(3 tests)
5-FU (Fluorouracil)
Metabolism of leading cancer drug/toxicity assessment
 
 
 
s
 
s
 
 
 
ApoE QUAD
Drug metabolism
 
s
s
s
 
 
 
 
 
Ashkenazi Jewish Panel
Diseases more prevalent in the Ashkenazi Jewish population
 
 
 
 
 
 
 
s
s
Bacterial Vaginosis QUAD (3)
Bacterial infection - Sexually transmitted disease
 
 
 
 
s
 
s
 
 
BRAF (3)
KRAS and BRAF amino acid changes - Metastatic Colorectal Cancer
 
 
 
s
 
s
 
 
 
Breast Cancer Panel – AJ QUAD
Breast cancer risk
 
 
 
 
s
s
 
s
 
Candida Plus QUAD
Fungal infection – sexually transmitted disease
 
 
 
 
s
 
s
 
 
Candida Vaginitis QUAD (3)
Fungal infection - Sexually transmitted disease
 
 
 
 
s
 
s
 
 
CFTR-15
Cystic fibrosis gene mutation
 
 
 
 
 
 
 
s
s
CFTR-31 (3)
Cystic fibrosis gene mutation
 
 
 
 
 
 
 
s
s
CHEK-2
Familial breast cancer risk
 
 
 
 
s
s
 
s
 
CT-NG QUAD
Gonorrhea, chlamydia
 
 
 
 
s
 
s
 
 
CYP450 2B6 QUAD
Drug metabolism
s
s
 
 
 
 
 
 
 
CYP450 2C19 (2) (3)
Drug metabolism
s
s
s
s
 
 
 
 
 
CYP450 2C19 Plus (3)
Drug metabolism
s
s
s
s
 
 
 
 
 
CYP450 2C19 Plus Duplex
Drug metabolism
s
s
s
s
 
 
 
 
 
CYP450 2C9 - VKORC1 (3)
Sensitivity to Warfarin, drug metabolism
s
s
s
s
 
 
 
 
 
CYP450 2D6-BC
Drug metabolism
s
s