Amendment No. 2 to Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on April 3, 2014

Registration No. 333-194390

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 2

to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

QUOTIENT LIMITED

(Exact name of registrant as specified in its charter)

 

 

 

Jersey, Channel Islands   2835   Not applicable
(State or other jurisdiction of incorporation or organization)   (Primary Standard Industrial Classification Code Number)  

(I.R.S. Employer

Identification Number)

Pentlands Science Park

Bush Loan, Penicuik, Midlothian

EH26 OPZ, United Kingdom

Tel: 011-44-0131-445-6159

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Stephen Unger

Quotient Biodiagnostics, Inc.

301 South State Street, Suite S-204

Newtown, Pennsylvania 18940

(215) 497-7006

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Alejandro E. Camacho, Esq.

Per B. Chilstrom, Esq.

Clifford Chance US LLP

31 West 52nd Street

New York, NY 10019

(212) 878-8000

 

Glenn R. Pollner, Esq.

Gibson, Dunn & Crutcher LLP

200 Park Avenue

New York, NY 10166

(212) 351-4000

 

 

Approximate date of commencement of proposed sale to public: As soon as practicable after this Registration Statement is declared 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, 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.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer   (Do not check if a smaller reporting company)  x    Smaller reporting company  

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of each Class of

Securities to be Registered

 

Amount

to be

Registered(1)

 

Proposed

Maximum

Offering Price

Per Share

 

Proposed

Maximum
Aggregate

Offering Price(2)

 

Amount of

Registration Fee(3)

Ordinary Shares of nil par value per share

  5,750,000   $16.00   $92,000,000   $11,849.60

 

 

(1)   Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(a) under the Securities Act of 1933, as amended, and includes ordinary shares that may be sold upon exercise of the underwriters’ option to purchase additional ordinary shares. See “Underwriting.”
(2)   Estimated solely for the purpose of calculating the registration fee.
(3)   The registrant previously paid $9,660 of this amount in connection with the initial filing of this Registration Statement.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. 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 we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

PRELIMINARY PROSPECTUS   SUBJECT TO COMPLETION, DATED APRIL 3, 2014

 

5,000,000 shares

LOGO

Ordinary Shares

 

 

This is the initial public offering of our ordinary shares. No public market currently exists for our ordinary shares. We are offering all of the 5,000,000 ordinary shares offered by this prospectus. We expect the initial public offering price to be between $14.00 and $16.00 per ordinary share.

We have applied to list our ordinary shares on The NASDAQ Global Market under the symbol “QTNT.”

We are an “emerging growth company” under applicable Securities and Exchange Commission rules and, as such, have elected to comply with certain reduced public company reporting requirements for this prospectus and future filings. See “Prospectus summary—Implications of being an emerging growth company.”

Investing in our ordinary shares involves a high degree of risk. Before buying any ordinary shares, you should carefully read the discussion of material risks of investing in our common stock in “Risk factors ” beginning on page 12 of this prospectus.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed on the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

 

      Per ordinary share    Total
Initial public offering price    $                                         $                         
Underwriting discounts(1)    $                                         $                         
Proceeds, before expenses, to us    $                                         $                         
(1)   See “Underwriting” for additional information regarding underwriter compensation.

The underwriters may also purchase up to an additional 750,000 ordinary shares at the public offering price, less the underwriting discounts and commissions payable by us, to cover over-allotments, if any, within 30 days from the date of this prospectus. If the underwriters exercise this option in full, the total underwriting discounts and commissions will be $                 and our total proceeds, before expenses, will be $                .

The underwriters are offering the common stock as set forth under “Underwriting.” Delivery of the shares will be made on or about                     , 2014.

 

UBS Investment Bank   Baird   Cowen and Company

 

 

Prospectus dated                 , 2014


Table of Contents

  

 

 

TABLE OF CONTENTS

 

 

     Page  

Prospectus summary

     1   

Risk factors

     12   

Cautionary note regarding forward-looking statements

     45   

Use of proceeds

     47   

Dividend policy

     48   

Capitalization

     49   

Dilution

     51   

Selected consolidated financial data

     53   

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

     55   

Business

     77   

Management

     106   

Executive compensation

     114   

Certain relationships and related party transactions

     123   

Principal shareholders

     125   

Description of share capital

     127   

Comparison of Jersey, Channel Islands Law and Delaware Law

     133   

Our ordinary shares and trading in the United States

     138   

Shares eligible for future sale

     140   

Certain tax considerations

     142   

Cautionary statement on the enforceability of civil liabilities

     148   

Underwriting

     149   

Legal matters

     157   

Experts

     158   

Where you can find more information

     159   

Index to financial statements

     F-1   

 

We and the underwriters have not authorized anyone to provide any information or to make any representations other than that contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. Do not rely upon any information or representations made outside of such sources. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We and the underwriters are not making an offer to sell, or soliciting an offer to buy, these securities in any jurisdiction where the offer, sale or solicitation is not permitted. You should assume that the information appearing in this prospectus and any free writing prospectus prepared by us is accurate only as of its respective date. Our business, financial condition, results of operations and prospects may have changed since such date.

We further note that the representations, warranties and covenants made by us in any agreement that is filed as an exhibit to the registration statement of which this prospectus is a part were made solely for the benefit of the parties to such agreement, including, in some cases, for the purpose of allocating risk among the parties to such agreement, and should not be deemed to be a representation, warranty or covenant made to you or for your benefit. Moreover, such representations, warranties or covenants were accurate only as of the date they were made. Accordingly, such representations, warranties and covenants should not be relied on as accurately representing the current state of our affairs.

Our trademark portfolio includes both United States and foreign trademark registrations and pending United States and foreign trademark applications. Other trademarks or trade names referred to in this prospectus are the property of their respective owners. Solely for convenience, the trademarks and trade names in this prospectus are generally referred to without the ® and ™ symbols, but such references should not be construed as any indicator that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto.

Certain market and industry data and forecasts included in this prospectus were obtained from independent market research, industry publications and surveys, governmental agencies and publicly

 

 

 

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available information. We did not fund and are not otherwise affiliated with the third party sources that we cite. Industry surveys, publications and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but that the accuracy and completeness of such information is not guaranteed. While we are not aware of any misstatements regarding the market or industry data presented herein, our estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under the heading “Risk factors” in this prospectus.

Under the laws of Jersey, Channel Islands, only holders of ordinary shares in uncertificated form in CREST (an electronic clearing system in the United Kingdom) and legal owners of shares in certificated form may be recorded in our share register as legal shareholders.

Cede & Co., as nominee for the Depository Trust Company, or DTC, will hold the ordinary shares sold in this offering in certificated form on behalf of and as nominee for investors who purchase beneficial interests in ordinary shares through this offering. We and DTC have no contractual relationship. Investors who purchase the ordinary shares (although recorded as owners within the DTC system) are legally considered holders only of beneficial interests in those shares and will have no direct rights against us. Each ordinary share reflected within the DTC system will represent evidence of beneficial ownership of one certificated ordinary share held by Cede & Co. The ordinary shares reflected within the DTC system will be freely transferable with delivery and settlement through the DTC system. Our ordinary shares included in this offering will be issued in certificated form and beneficial interests in the ordinary shares as reflected in the DTC system will be, once approved, traded on The NASDAQ Global Market. References in this prospectus to the ordinary shares being listed or traded on The NASDAQ Global Market shall mean the beneficial interests in the ordinary shares held by Cede & Co. Investors may, through their broker, elect to withdraw their ordinary shares from the DTC system, receive a share certificate and be listed as our legal shareholders, subject to customary fees. Please see “Our ordinary shares and trading in the United States.”

Our fiscal year ends on March 31. Unless otherwise noted, any reference to a year preceded by the word “fiscal” refers to the twelve months ended March 31 of that year. For example, references to “fiscal 2013” refer to the twelve months ended March 31, 2013. Any reference to a year not preceded by “fiscal” refers to a calendar year.

For investors outside of the United States:    We have not and the underwriters have not done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than the United States. Persons outside of the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the ordinary shares and the distribution of this prospectus outside of the United States.

 

 

 

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Prospectus summary

This summary highlights information contained in other parts of this prospectus. Because it is only a summary, it does not contain all of the information that you should consider before investing in our ordinary shares and it is qualified in its entirety by, and should be read in conjunction with, the more detailed information appearing elsewhere in this prospectus. You should read the entire prospectus carefully, especially “Risk factors” beginning on page 12 and our financial statements and the related notes beginning on page F-1, before deciding to buy our ordinary shares. Unless the context requires otherwise, references in this prospectus to “Quotient,” the “Company,” “we,” “us” and “our” refer to Quotient Limited and its consolidated subsidiaries.

OVERVIEW

We are an established, commercial-stage diagnostics company committed to reducing healthcare costs and improving patient care through the development and commercialization of innovative tests for blood grouping and serological disease screening, commonly referred to as transfusion diagnostics. Blood grouping involves specific procedures performed at donor or patient testing laboratories to characterize blood, which includes antigen typing and antibody identification.

Through our subsidiary Alba Biosciences Limited, or Alba, we have over 30 years experience manufacturing and supplying conventional reagent products used for blood grouping within the $2.8 billion global transfusion diagnostics market. We are developing MosaiQTM, our proprietary technology platform, to better address the comprehensive needs of this large and established market. We believe MosaiQTM has the potential to be a transformative technology, significantly reducing the cost of blood grouping in the donor and patient testing environments, while improving patient outcomes.

Transfusion medicine demands the highest standard of performance, quality and service. However, there has not been a major advancement in the automation of transfusion diagnostics over the past two decades. Consequently, complex and expensive manual testing procedures remain necessary in both donor and patient testing laboratories. We believe that, if approved for sale, MosaiQTM will be the first commercially available, fully automated testing platform capable of simultaneously identifying all clinically significant blood-group antigens and antibodies in either donor or patient blood, eliminating manual testing. MosaiQTM is also designed to perform all currently mandated serological disease screening tests, such as HIV and Hepatitis, and enable the low cost detection of additional pathogens, thereby increasing the safety of the blood supply.

We have designed MosaiQTM to offer a breadth of diagnostic tests that is unmatched by any commercially available transfusion diagnostic instrument platform. Time to result for MosaiQTM will be significantly quicker than existing methods for extended antigen typing and antibody identification and is expected to be equivalent to the time to result for current instrument platforms performing basic antigen typing. We believe that customer adoption of MosaiQTM will lead to improved patient outcomes through better and easier matching of donor and patient blood, given cost-effective extended antigen typing. Improved patient outcomes using MosaiQTM include the potential for reduced incidence of alloimmunization, where the patient develops allo-antibodies to foreign antigens introduced to the body through transfused blood. MosaiQTM will also offer the opportunity for substantial cost savings and a range of operational efficiencies for donor and patient testing laboratories.

Our internal feasibility studies have demonstrated a high degree of concordance, across a range of key blood group specificities, between results generated using the MosaiQTM methodology and results generated using predicate technologies for blood grouping. We used column agglutination technology (or

 

 

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CAT, a blood group testing system that incorporates microcolumns and glass bead microparticles) and, where CAT was not feasible, manual testing techniques, as the predicate technologies for our internal feasibility studies. Our antigen typing feasibility study demonstrated concordance of approximately 99% or greater for most tested specificities and our antibody identification feasibility study demonstrated overall concordance of 99.7%. We are continuing to optimize our blood grouping tests for MosaiQTM.

MosaiQTM will comprise two separate consumables, one for blood grouping and one for serological disease screening, and initially a high-throughput instrument. We expect to install the manufacturing system for the consumables and begin formal validation studies of the system by the end of 2014. Prototype units of the initial MosaiQTM instrument are also forecasted to be available at this time. We plan to commence formal field trials for the consumables and the initial MosaiQTM instrument in the second half of 2015 and we expect to file the necessary regulatory submissions to obtain U.S. Food and Drug Administration, or FDA, and other required marketing clearances in the first half of 2016. We anticipate initial commercial sales of MosaiQTM consumables, for research use only, in the first half of 2016. If approved for sale, we anticipate full commercial launch for MosaiQTM in Europe during the second half of 2016 and in the United States during the first half of 2017.

Through Alba, which we acquired in 2007, we have a proven track record and significant expertise in product development, manufacturing and quality, uniquely tailored to the highly regulated transfusion diagnostics market. Since we acquired Alba, we have introduced a range of FDA-licensed products in the United States under the Quotient brand, which we sell directly to donor testing laboratories, hospitals, and independent testing laboratories. We have also increased our emphasis on the development, manufacture, and sale of conventional reagent products to original equipment manufacturers, or OEMs, such as Ortho Clinical Diagnostics, Inc. (or Ortho), Bio-Rad Laboratories, Inc. (or Bio-Rad) and Grifols S.A. (or Grifols).

We generated total revenue of $14.4 million during the fiscal year ended March 31, 2013 and total revenue of $15.1 million during the nine months ended December 31, 2013. We generated product sales revenue of $13.8 million during the fiscal year ended March 31, 2013 and $12.3 million during the nine months ended December 31, 2013. A significant portion of these product sales revenues, 71% and 73%, respectively, were derived from products sold by standing purchase order. We incurred a net loss of $4.7 million for the fiscal year ended March 31, 2013 and a net loss of $5.0 million for the nine months ended December 31, 2013.

OUR COMPETITIVE STRENGTHS

We believe that our competitive strengths include the following:

 

  Ø  

Large and established market with attractive industry fundamentals.    We operate within the $2.8 billion global transfusion diagnostics market, which is integral to healthcare systems around the world. In 2011, 92 million blood donations were collected globally. We also estimate that over 90 million patients are blood grouped annually in the developed world. The donor testing market is highly concentrated. In the United States, the American Red Cross and Creative Testing Solutions account for approximately 70% of donor units tested.

 

  Ø  

Extensive expertise developing, manufacturing and commercializing products for the transfusion diagnostics market.    We have developed and manufacture over 40 conventional reagent products that are sold in the United States, a highly regulated market. Since 2010, we have sold directly to over 725 hospitals, donor collection agencies and independent testing laboratories throughout the United States.

 

 

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  Ø  

MosaiQTM—a transformative technology for the transfusion diagnostics market.    If approved for sale, we anticipate MosaiQTM will be the first fully automated, commercially available testing platform capable of simultaneously identifying all clinically significant blood-group antigens and antibodies, eliminating manual testing, which is complex and expensive. We believe MosaiQTM will deliver significant cost savings and operational efficiencies for donor testing laboratories and hospitals, while improving patient outcomes.

 

  Ø  

Established technical feasibility.    Our internal feasibility studies have shown a high degree of concordance between results generated using the MosaiQTM methodology and results generated using predicate blood grouping technologies, which we believe establishes technical feasibility for blood grouping. We have also adopted a similar approach for our disease screening consumable.

 

  Ø  

Advanced development and commercialization plan.    By combining current scientific methods, well-characterized tests and known manufacturing technologies, we believe we have substantially reduced the risks associated with the development of MosaiQTM. We are working with highly experienced technology development and engineering partners, including The Technology Partnership plc and STRATEC Biomedical AG, and collaborating with key potential customers. We intend to commercialize MosaiQTM ourselves in the highly concentrated donor testing market. Within the more fragmented global patient testing market, we intend to enter into an arrangement with one or more commercial partners to ensure successful commercialization.

 

  Ø  

Attractive “razor/razor blade” business model with limited reimbursement exposure.    We intend to pursue a “razor/razor blade” business model for MosaiQ, placing instruments and securing long-term agreements for the supply of blood grouping and/or disease screening consumables used by those instruments. MosaiQ is designed to be a highly cost-effective solution. We expect to generate attractive profit margins, while delivering substantial cost savings to our customers. We anticipate that MosaiQ will not be directly subject to reimbursement by governmental or commercial third-party payors in the United States.

 

  Ø  

Experienced senior management team.    We have a highly experienced leadership team with a track record of success within the healthcare industry. Our senior management team has an average of 15 years of individual industry experience, with a balance of skills covering strategy, operations, product development, commercialization and financial management.

OUR MARKET OPPORTUNITY

The global transfusion diagnostics market is large and established. Extensive blood grouping procedures are undertaken prior to transfusion in order to prevent transfusion reactions, which can range from mild to fatal. Donor blood and plasma is also screened for specific diseases, such as HIV and Hepatitis.

Total annual product sales, consisting primarily of reagents and instruments, in the global transfusion diagnostics market amounted to $2.8 billion in 2011, of which $1.3 billion occurred within the United States. We believe product sales to the highly concentrated donor testing market accounted for approximately $1.9 billion, with the more fragmented patient testing market accounting for the remaining $0.9 billion of sales.

According to the World Health Organization, 92 million blood donations were collected globally in 2011, with 48% being collected in 37 “high-income” countries. In addition, over 20 million plasma donations are collected each year in the United States and Europe. In the United States, 16 million blood donations were collected during 2011 based on data from the U.S. Department of Health and Human Services. The American Red Cross and Creative Testing Solutions collect or test approximately 70% of the donated blood in the United States.

 

 

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We estimate that over 90 million patients are blood grouped annually in the developed world, although only a small portion of these patients actually receive a blood transfusion.

LIMITATIONS OF CURRENT BLOOD GROUPING AND DISEASE SCREENING METHODS

A significant proportion of the overall cost of blood grouping is accounted for by the ongoing need for complex manual testing procedures. Additionally, with over 30 clinically significant blood-group antigens and antibodies to characterize, the required reagents for blood grouping (whether performed on instruments or manually) are both complex and extensive.

Existing blood grouping methods and instruments have a number of additional drawbacks, including:

 

  Ø  

Extensive antigen typing is not widely undertaken pre-transfusion due to cost and complexity, resulting in more patients developing antibodies, which complicates future transfusions;

 

  Ø  

Requirement for highly trained laboratory technicians;

 

  Ø  

Extensive, complex and expensive reagent requirements, some with shelf lives under 30 days;

 

  Ø  

Supply shortages of licensed reagents for some rare, but clinically significant blood-group antigens;

 

  Ø  

Incremental supervision, technical training and quality assurance costs;

 

  Ø  

Potential for testing or labeling errors given the large manual component;

 

  Ø  

Lower red blood cell or plasma yields for donor collection agencies;

 

  Ø  

Difficulty testing patients that can provide only low volumes of blood samples;

 

  Ø  

Costly service and support infrastructure needed to maintain multiple instrument platforms; and

 

  Ø  

Inability of existing instrument platforms to connect to laboratory automation (or track-based) systems.

Serological disease screening is already largely automated. However, it is undertaken using two separate instrument platforms, neither of which is integrated with commonly used blood grouping instruments.

THE MOSAIQTM SOLUTION

We believe that MosaiQTM has the potential to transform transfusion diagnostics by substantially reducing costs and offering a range of operational efficiencies within donor and patient testing laboratories, while also improving patient outcomes through a more complete characterization of donor and patient blood.

MosaiQTM will comprise two separate consumables, one for blood grouping and one for serological disease screening, and initially, a high-throughput instrument. The MosaiQTM blood grouping consumable will consist of two protein microarrays: one printed with red blood cells and the other printed with antibodies. Our novel approach incorporates existing, well-characterized tests for all clinically significant blood-group antigens and antibodies onto a single multiplex consumable. Using the same approach, we plan to incorporate all currently mandated serological disease screening tests onto a second disease screening consumable. Both consumables are designed to be processed using the same MosaiQTM high-throughput instrument.

We are collaborating with key potential donor and patient testing customers on the content of the MosaiQTM consumables and the design and function of the MosaiQTM instrument, including the American Red Cross and Creative Testing Solutions, along with several other major healthcare institutions.

 

 

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MosaiQTM Advantages

We expect the use of MosaiQTM for blood grouping and disease screening will offer both major cost saving opportunities and clinical benefits, including:

 

  Ø  

Improved clinical decision making and better matching of donor and patient blood;

 

  Ø  

Extended antigen typing for all donor units;

 

  Ø  

Comprehensive antibody identification;

 

  Ø  

Significantly reduced need for complex, manual testing procedures;

 

  Ø  

Standardization of blood grouping, reducing the potential for testing or labeling errors;

 

  Ø  

Consolidation of multiple instrument platforms;

 

  Ø  

Significantly simplified consumable requirements;

 

  Ø  

Substantially improved time to result for complex blood grouping procedures;

 

  Ø  

Significantly lower patient sample volume requirements;

 

  Ø  

Significantly increased shelf life for red blood cell-derived tests;

 

  Ø  

Reduced consumable waste;

 

  Ø  

Lower sample logistics costs;

 

  Ø  

Potential to electronically match donor and patient blood; and

 

  Ø  

Ability to integrate onto existing laboratory automation (track-based) systems.

OUR STRATEGY

In pursuing the MosaiQTM opportunity, we will continue to optimize the blood-grouping and disease screening tests, while working closely with our development partners to complete the manufacturing scale-up for the consumables and develop and manufacture the initial high-throughput instrument. In addition, we intend to:

 

  Ø  

collaborate with our key potential customers;

 

  Ø  

continue our dialogue with regulators to obtain required regulatory licenses and clearances;

 

  Ø  

engage one or more commercial partners for the global patient testing market; and

 

  Ø  

commercialize MosaiQTM for the global donor testing market.

We also intend to pursue a number of strategies in our conventional reagent business, including strengthening the Quotient brand, expanding our customer base and reinforcing our relationship with the FDA and other key regulators.

RISKS AFFECTING US

Our business is subject to a number of risks and uncertainties that you should understand before making an investment decision. These risks may have a material adverse effect on our business or operating results. These risks are discussed more fully in the section entitled “Risk factors” following this prospectus summary and include:

 

  Ø  

We have incurred losses since our commencement of operations and expect to incur losses in the future.

 

 

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  Ø  

The development of MosaiQ™ includes many factors, including factors beyond our control, and we may not commercialize it on a timely basis, or at all.

 

  Ø  

Obtaining regulatory authorization for MosaiQTM will take time, require material expenditures and ultimately may not succeed.

 

  Ø  

Our substantial reliance on third parties to develop MosaiQTM exposes us to a number of risks that may delay the development and commercialization of MosaiQTM or result in higher costs to us.

 

  Ø  

MosaiQTM consumables have not been manufactured on a commercial scale and are subject to unforeseen scale-up risks.

 

  Ø  

We expect to rely on third parties to conduct studies of MosaiQ™ and our other transfusion diagnostics products that will be required by the FDA or other regulatory authorities and those third parties may not perform satisfactorily.

 

  Ø  

Our commercial success will largely depend upon the degree of market acceptance of MosaiQ™ by donor collection agencies, hospitals and independent testing laboratories.

 

  Ø  

We are dependent upon our three largest OEM clients for a substantial portion of our total revenues. If any of our key OEM customers terminates or reduces the scope of its relationship with us, our product sales will suffer.

 

  Ø  

The transfusion diagnostics market is highly competitive. If we fail to compete effectively, our business and operating results will suffer.

 

  Ø  

If we or our commercial partners fail to comply with extensive foreign and domestic regulations, sales of our products in new and existing markets and the development and commercialization of any new product candidates, including MosaiQTM, could be delayed or prevented.

 

  Ø  

Approval and/or clearance by the FDA and foreign regulatory authorities for our transfusion diagnostics products could take significant time and require significant development expenditures.

 

  Ø  

The extent to which we can protect our products and technologies through intellectual property rights that we own, acquire or license is uncertain.

 

  Ø  

MosaiQTM depends on certain technologies that are licensed to us. We do not control these technologies and any loss of our rights to them could prevent us from manufacturing our products.

IMPLICATIONS OF BEING AN EMERGING GROWTH COMPANY

As a company with less than $1.0 billion in revenue during our most recently completed fiscal year, we qualify as an emerging growth company as defined in Section 2(a) of the Securities Act of 1933, as amended, or the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable generally to public companies that are not emerging growth companies. These provisions include:

 

  Ø  

reduced disclosure about our executive compensation arrangements;

 

  Ø  

not being subject to non-binding shareholder advisory votes on executive compensation or golden parachute arrangements; and

 

  Ø  

an exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting.

 

 

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We may take advantage of these exemptions for up to five years or such earlier time that we are no longer an emerging growth company. We will cease to be an emerging growth company upon the earlier of (i) the last day of the fiscal year in which our annual gross revenues exceed $1.0 billion, (ii) the last day of the fiscal year that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, or the Exchange Act, which would occur if the market value of our ordinary shares held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter and we have been publicly reporting for at least 12 months or (iii) the date on which we have issued more than $1.0 billion in non-convertible debt during the preceding three-year period. We may choose to take advantage of some or all of these reduced disclosure obligations. The JOBS Act permits emerging growth companies to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We are choosing to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.

CORPORATE HISTORY AND INFORMATION

Quotient Limited is a limited liability no par value company incorporated under the laws of Jersey, Channel Islands. Our registered address is Elizabeth House, 9 Castle Street, St Helier, JE2 3RT, Jersey, Channel Islands. Our agent for service of process is our wholly owned U.S. subsidiary, Quotient Biodiagnostics, Inc., 301 South State Street, Suite S-204, Newton, Pennsylvania 18940.

We were incorporated in Jersey, Channel Islands in 2012. Our principal executive offices are located at Pentlands Science Park, Bush Loan, Penicuik, Midlothian, EH26 OPZ, United Kingdom, and our telephone number is 011-44-0131-445-6159. Our website address is www.quotientbd.com. Information contained on our website is not incorporated by reference into this prospectus and should not be considered to be part of this prospectus, and you should not rely on any such information in making the decision whether to purchase our ordinary shares.

 

 

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The Offering

 

Ordinary shares offered by us

5,000,000 shares

 

Ordinary shares to be outstanding after this offering

14,376,547 shares

 

Option to purchase additional shares

750,000 shares

 

Use of proceeds

We estimate that the net proceeds from our sale our ordinary shares in this offering will be approximately $66.8 million, or approximately $77.2 million if the underwriters exercise their option to purchase additional shares in full, based upon an assumed initial public offering price of $15.00 per share, which is the midpoint of the range of prices set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

  With the net proceeds from this offering, we expect to invest (i) approximately $26.0 million on the conversion of the MosaiQTM manufacturing facility and the installation of the initial manufacturing system for consumables, and (ii) approximately $28.0 million on development of the initial MosaiQTM consumables and instrument. We will use the balance of the net proceeds of this offering for general corporate purposes.

 

Prior to final allocation of the net proceeds of this offering as described under “Use of proceeds,” we plan to invest the net proceeds of this offering on an interim basis in high-quality, short-term, interest-bearing obligations, investment-grade instruments or certificates of deposit.

 

Risk factors

Investing in our ordinary shares involves risks. See the section titled “Risk factors” beginning on page 12 and the other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our ordinary shares.

 

Proposed NASDAQ Global Market symbol

“QTNT”

 

 

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The number of ordinary shares that will be outstanding following this offering is based on 9,376,547 ordinary shares issued as of March 31, 2014 and excludes:

 

  Ø  

64,000 ordinary shares issuable upon exercise of an outstanding warrant as of March 31, 2014, at an exercise price of $9.38 per ordinary share;

 

  Ø  

779,462 ordinary shares issuable upon the exercise of options outstanding as of March 31, 2014, at a weighted-average exercise price of $3.52 per ordinary share; and

 

  Ø  

1,500,000 ordinary shares reserved for future grant or issuance under our 2014 Stock Incentive Plan, or the 2014 Plan, which will become effective in connection with this offering.

Unless otherwise noted, the information in this prospectus assumes the following:

 

  Ø  

the conversion immediately prior to this offering of all outstanding preference shares, A ordinary shares and B ordinary shares into ordinary shares, and the consolidation immediately prior to this offering of 100 outstanding ordinary shares into 32 new ordinary shares, resulting in, as of December 31, 2013, an aggregate of 9,356,533 ordinary shares;

 

  Ø  

the conversion of an outstanding warrant to purchase C preference shares as of December 31, 2013 into a warrant to purchase 64,000 ordinary shares immediately prior to this offering;

 

  Ø  

no options, warrants or shares were issued after December 31, 2013 and no outstanding options or warrants were exercised after December 31, 2013;

 

  Ø  

the effectiveness of our Amended Articles of Association immediately prior to this offering; and

 

  Ø  

the sale of all ordinary shares offered by this prospectus other than the ordinary shares subject to the underwriters’ option to purchase additional ordinary shares.

 

 

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Summary consolidated financial data

The following tables summarize our consolidated financial data. The consolidated statement of income for the fiscal years ended March 31, 2013, 2012 and 2011 have been derived from our audited consolidated financial statements appearing elsewhere in this prospectus. The consolidated statement of income data for the nine months ended December 31, 2013 and 2012 and the historical consolidated balance sheet data as of December 31, 2013 have been derived from our unaudited consolidated financial statements appearing elsewhere in this prospectus.

We have prepared the unaudited consolidated interim financial information presented below on the same basis as our audited consolidated financial statements. The unaudited consolidated financial information includes all adjustments, consisting only of normal recurring adjustments that are necessary for a fair presentation of our financial position and results of operations for these periods. Our historical results are not necessarily indicative of the results that may be expected in the future and our results for any interim period are not necessarily indicative of the results that may be expected for a full fiscal year. You should read the summary of our financial data set forth below together with our financial statements and the related notes to those statements, as well as “Management’s discussion and analysis of financial condition and results of operations” appearing elsewhere in this prospectus. The summary financial data in this section are not intended to replace our financial statements and the accompanying notes.

 

 

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    Year ended March 31,     Nine months ended
December 31,
 
     2013     2012     2011     2013     2012  
    (in thousands, except share and per share data)  
                      (unaudited)  

Consolidated statement of loss:

         

Revenue:

         

Product sales

  $ 13,753      $ 11,550      $ 9,545      $ 12,332      $ 10,319   

Other revenues

    618        669        489        2,768        618   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    14,371        12,219        10,034        15,100        10,937   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenues

    (7,169     (6,749     (5,628     (6,271     (5,384
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    7,202        5,470        4,406        8,829        5,553   

Operating expenses:

         

Sales and marketing

    (2,252     (1,674     (1,456     (2,057     (1,630

Research and development, net of government grants

    (2,617     (1,749     (1,703     (4,916     (1,883

General and administrative expenses:

         

Compensation expense in respect of share options and management equity incentives

    (471     —          —          (701     (335

Other general and administrative expenses

    (6,353     (6,011     (5,346     (5,442     (4,584
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total general and administrative expense

    (6,824     (6,011     (5,346     (6,143     (4,919
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    (11,693     (9,434     (8,505     (13,116     (8,432
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

    (4,491     (3,964     (4,099     (4,287     (2,879

Other income (expense):

         

Interest expense, net

    (234     (340     (312     (582     (192

Other, net

    11        (169     (210     (83     29   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expenses), net

    (223     (509     (522     (665     (163
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (4,714     (4,473     (4,621     (4,952     (3,042

Provision for income taxes

    —          —          —          —          —     

Net loss

  $ (4,714   $ (4,473   $ (4,621   $ (4,952   $ (3,042
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss available to ordinary shareholders

  $ (4,714   $ (4,473   $ (4,621   $ (4,952   $ (3,042

Loss per ordinary share—basic and diluted

  $ (62.97   $ (78.04   $ (81.16   $ (34.34   $ (40.82

Weighted-average shares outstanding—basic and diluted

    74,866        57,317        56,936        144,178        74,523   

 

     As of December 31, 2013  
     Actual     Pro Forma(1)      Pro Forma  as
Adjusted(2)
 
           (in thousands)         
           (unaudited)         

Consolidated balance sheet data:

       

Cash and cash equivalents

   $ 13,756      $ 13,756       $ 80,525   

Total assets

     26,378        26,378         93,147   

Long-term debt

     14,579        14,579         14,579   

Total liabilities

     22,184        21,763         21,763   

Total shareholders’ equity (deficit)

   $ (26,569   $ 4,615       $ 71,384   

 

(1)   Pro forma gives effect to (i) the conversion and consolidation of all outstanding preference shares, A ordinary shares and B ordinary shares as of December 31, 2013 into an aggregate of 9,356,533 ordinary shares immediately prior to this offering and (ii) the conversion of an outstanding warrant to purchase C preference shares as of December 31, 2013 into a warrant to purchase 64,000 ordinary shares immediately prior to this offering and the resultant reclassification of our warrant liability to shareholders’ equity (deficit).
(2)   Pro forma as adjusted reflects the pro forma adjustments discussed in footnote (1) and gives effect to our issuance and sale of ordinary shares at an assumed initial public offering price of $15.00 per share, the midpoint of the range of prices set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

 

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Risk factors

Investing in our ordinary shares involves a high degree of risk. You should carefully consider the risks and uncertainties described below together with all of the other information contained in this prospectus, including our consolidated financial statements and the related notes appearing at the end of this prospectus, before deciding whether to invest in our ordinary shares. If any of the following risks actually occurs, our business, prospects, operating results and financial condition could suffer materially, the trading price of our ordinary shares 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.

RISKS RELATED TO OUR BUSINESS, INDUSTRY AND FUTURE PLANS

Investors should consider our business and prospects in light of the risks and difficulties we expect to encounter in the markets in which we compete, and the prospects of our development projects, particularly MosaiQTM. Factors that may contribute to fluctuations in our operating results include many of the risks described in this section. These fluctuations may make financial planning and forecasting difficult. In addition, these fluctuations may result in unanticipated decreases in our available cash, which could negatively affect our business and prospects. Investors should not rely on our operating results for any prior periods as an indication of our future operating performance.

We have incurred losses since our commencement of operations and expect to incur losses in the future.

We have incurred net losses and negative cash flows from operations in each fiscal year since we commenced operations in 2007. As of December 31, 2013, we had an accumulated deficit of $10.1 million. We expect our operating losses to continue at least for the next several years as we continue our investment in the development and commercialization of MosaiQTM. Our total revenue was $15.1 million for the nine months ended December 31, 2013, $14.4 million for the fiscal year ended March 31, 2013 and $12.2 million for the fiscal year ended March 31, 2012. Our net loss was $5.0 million for the nine months ended December 31, 2013, $4.7 million for the fiscal year ended March 31, 2013 and $4.5 million for the fiscal year ended March 31, 2012. Because of the numerous risks and uncertainties associated with developing and commercializing MosaiQTM and the other products we may develop, we are unable to predict the magnitude of any future operating losses. Our historic losses, combined with expected future losses, have had and will continue to have an adverse effect on our cash resources, shareholders’ deficit and working capital. Our ability to achieve or sustain profitability is based on numerous factors, many of which are beyond our control, including market acceptance of our products, future product development, and our market penetration and margins.

We may need to raise additional capital, which may not be available on favorable terms, if at all, and which may cause dilution to shareholders, restrict our operations or adversely affect our ability to operate our business.

We may need or decide to raise additional funds through public or private debt or equity financing or through other means. We cannot be certain that we will be able to obtain additional financing on favorable terms, if at all, and any additional financings could result in additional dilution to our then existing shareholders or restrict our operations or adversely affect our ability to operate our business. If we are unable to obtain needed financing on acceptable terms, we may not be able to implement our business plan, which could have a material adverse effect on our business, financial condition and results

 

 

 

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Risk factors

 

 

of operations. We may not be able to meet our business objectives, our share price may fall and investors may lose some or all of their investment. If we raise funds by issuing equity securities, the percentage ownership of our then shareholders will be reduced.

If we do not achieve, sustain or successfully manage our anticipated growth, our business and prospects will be harmed.

We have experienced significant revenue growth in a short period of time. If we are unable to maintain adequate revenue growth, our financial results could suffer. Furthermore, significant growth will place strains on our management and our operational and financial systems and processes. If we do not successfully forecast the timing of regulatory authorization for product marketing and subsequent demand for our products or manage our anticipated expenses accordingly, our operating results will be harmed.

The development of MosaiQTM includes many factors, including factors beyond our control, and we may not commercialize it on a timely basis, or at all.

Our future revenue growth and profitability will substantially depend on our ability to successfully commercialize MosaiQTM. We will need to complete development and obtain marketing authorizations from the FDA and other regulatory authorities before we can commercialize MosaiQTM. Our ability to successfully commercialize MosaiQTM may be affected by the following factors, among others:

 

  Ø  

the scope of and progress made in our development activities;

 

  Ø  

our ability to successfully complete field trial studies;

 

  Ø  

our ability to obtain and maintain FDA and other regulatory authorizations;

 

  Ø  

threats posed by competing technologies;

 

  Ø  

our, or any commercial partner’s, ability to market MosaiQTM to donor collection agencies, hospitals and independent testing laboratories;

 

  Ø  

our ability to successfully optimize the individual tests to be included on both the blood grouping and disease screening consumables;

 

  Ø  

the occurrence of unforeseen technical difficulties in the design and build of the manufacturing system for the consumables;

 

  Ø  

the occurrence of unforeseen technical difficulties in the design and manufacturing of the initial high-throughput instrument;

 

  Ø  

the occurrence of unforeseen technical difficulties in the development of software and the integration of the consumables, the instrument and software;

 

  Ø  

delays resulting from the failure of third-party suppliers or contractors to meet their obligations in a timely and cost-effective manner; and

 

  Ø  

endorsement and acceptance by donor collection agencies, hospitals and independent testing laboratories.

Development and commercialization of novel products, such as MosaiQTM, is inherently uncertain. At any point, we may abandon development of MosaiQTM or we may be required to expend considerable resources addressing unforeseen technical challenges or otherwise to complete and commercialize MosaiQTM, which would adversely impact potential revenue and our expenses. In addition, any delay in

 

 

 

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product development would provide others with additional time to commercialize competing products before we introduce MosaiQTM, which in turn may adversely affect our growth prospects and operating results. Although we believe that our cost estimates and our project completion and commercialization schedule for MosaiQTM are reasonable, we cannot assure you that the actual costs or time required to complete the project will not substantially exceed our current estimates.

Obtaining regulatory authorization for MosaiQTM will take time, require material expenditures and ultimately may not succeed.

MosaiQTM will be subject to CE-marking in Europe. In the United States, the FDA has indicated that it will require MosaiQTM to obtain approval of a biologics license application, or BLA, for the blood grouping consumable and traditional 510(k) clearances for the instrument and the initial disease screening consumable, comprising two tests, Cytomegalovirus, or CMV, and syphilis. The final disease screening consumable, comprising additional tests, will be subject to BLA approval. The process of complying with the requirements of the FDA and comparable agencies is generally costly, time consuming and burdensome, and regulatory authorization is never guaranteed, irrespective of time and financial expenditures. Furthermore, given the complexities of the regulatory pathway for MosaiQTM, there may be delays in obtaining marketing authorization, or we may not be able to obtain marketing authorization at all. Moreover, the manufacturing process of the MosaiQTM consumables is based on novel technologies and the FDA and regulatory agencies in other jurisdictions may have limited experience reviewing product candidates using these technologies, which may also result in delays in obtaining regulatory authorization for MosaiQTM.

Among other things, our manufacturing facility will be subject to pre-approval inspection by the FDA and other applicable regulators. In addition, we are required to perform field trial studies to obtain regulatory authorizations for MosaiQTM. Field trial studies are subject to factors within and outside of our control and the outcome of these studies is uncertain. For example, success in early feasibility studies may not be replicated in later field trial studies. Although our internal blood grouping feasibility studies have demonstrated a high degree of concordance, across a range of key specificities, between results generated by the MosaiQTM methodology and results using predicate technologies for antigen typing and antibody identification, and although our initial feasibility work on the disease screening consumable has been positive, there is no guarantee that our analytical testing will meet the FDA’s or other regulatory authorities’ requirements, that our field trial studies will be successful, that the FDA or other regulatory authorities will provide marketing authorization for MosaiQTM based on the studies we have completed or, if we obtain market authorization, that the prognostic information that may be reported will differentiate MosaiQTM from alternatives in the United States or other markets. Even if our field trials are successful and we obtain the necessary regulatory authorizations, the regulatory review process will still take time and require material expenditures.

Our substantial reliance on third parties to develop MosaiQTM exposes us to a number of risks that may delay the development and commercialization of MosaiQTM or result in higher costs to us.

We have outsourced certain elements of the development of MosaiQTM. Our dependence on third parties for the development of our manufacturing system for consumables and our initial high-throughput instrument may subject us to a number of risks. For example, our third-party developers may not be able to develop or manufacture components of the MosaiQTM system, or may apply insufficient resources to the development of MosaiQTM in the manner required to meet our technical and commercial requirements, on our expected timetable or within our expected cost estimates. If our existing third-party developers are unable, or fail, to meet our requirements, there can be no assurance that we will be able to

 

 

 

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Risk factors

 

 

enter into relationships with other third parties necessary to successfully develop MosaiQTM. Any of these risks could materially harm our business and adversely affect our future revenues.

MosaiQTM consumables have not been manufactured on a commercial scale and are subject to unforeseen scale-up risks.

While we have developed working prototypes of the MosaiQTM consumables, there can be no assurance that we can manufacture MosaiQTM consumables at a scale that is adequate for our commercial needs. We may face significant or unforeseen difficulties in manufacturing the MosaiQTM consumables, including but not limited to:

 

  Ø  

technical issues relating to manufacturing products on a commercial scale at reasonable cost, and in a reasonable time frame;

 

  Ø  

difficulty meeting demand or timing requirements for consumable orders due to excessive costs or lack of capacity for part or all of an operation or process;

 

  Ø  

lack of skilled labor or unexpected increases in labor costs needed to produce or maintain our manufacturing systems or perform certain required operations;

 

  Ø  

changes in government regulations or in quality or other requirements that lead to additional manufacturing costs or an inability to supply product in a timely manner, if at all; and

 

  Ø  

increases in raw material or component supply cost or an inability to obtain supplies of certain critical supplies needed to complete our manufacturing processes.

These and other difficulties may only become apparent when scaling up the manufacturing of the MosaiQTM consumables to more substantive commercial scale. In the event our MosaiQTM consumables cannot be manufactured in sufficient commercial quantities, our future prospects could be significantly impacted and our financial prospects would be materially harmed.

We expect to rely on third parties to conduct studies of MosaiQ™ and our other transfusion diagnostics products that will be required by the FDA or other regulatory authorities and those third parties may not perform satisfactorily.

We do not have the ability to independently conduct the field trial studies or other studies that may be required to obtain FDA and other regulatory clearances or approvals for MosaiQTM as well as our conventional reagent products. Accordingly, we expect to rely on third parties, such as independent testing laboratories and hospitals, to conduct such studies. Our reliance on these third parties will reduce our control over these activities. These third-party contractors may not complete activities on schedule or conduct studies in accordance with regulatory requirements or our study design. We cannot control whether they devote sufficient time, skill and resources to our studies. Our reliance on third parties that we do not control will not relieve us of any applicable requirement to prepare, and ensure compliance with, various procedures required under good clinical practices. If these third parties do not successfully carry out their contractual duties or regulatory obligations or meet expected deadlines, if the third parties need to be replaced or if the quality or accuracy of the data they obtain is compromised due to their failure to adhere to our clinical protocols or regulatory requirements or for other reasons, our studies may be extended, delayed, suspended or terminated, and we may not be able to obtain regulatory approval for MosaiQTM or our other transfusion diagnostic products.

 

 

 

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Our commercial success will largely depend upon the degree of market acceptance of MosaiQTM by donor collection agencies, hospitals and independent testing laboratories.

MosaiQTM may not gain sufficient market acceptance by donor collection agencies, hospitals and independent testing laboratories. If the product does not achieve an adequate level of acceptance by these critical customer groups, our future revenue growth and profitability would be materially impacted. The degree of market acceptance of MosaiQTM will depend on a number of factors, including:

 

  Ø  

the efficacy and potential advantages of MosaiQTM over alternative technologies, techniques and products, including both conventional technologies such as existing testing methods from Ortho, Immucor, Bio-Rad, Grifols and Beckman Coulter, as well as new technologies from such companies or new competitors;

 

  Ø  

limitations contained in the approved labeling for MosaiQTM;

 

  Ø  

the willingness of our target customers to transition from existing technologies, products and procedures and to adopt MosaiQTM;

 

  Ø  

the ability to offer attractive pricing for MosaiQTM;

 

  Ø  

the strength of marketing and distribution support and the timing of market introduction of competitive products; and

 

  Ø  

outcomes from field trial studies, the regulatory approval process, and other publicity concerning MosaiQTM or competing products.

Our efforts to educate donor collection agencies, hospitals, independent testing laboratories and other members of the medical community on the benefits of MosaiQTM may require significant resources and may never be successful. Such efforts to educate the marketplace may require more resources than are required by conventional or new technologies marketed by our competitors. If we were to incorrectly forecast our ability to penetrate various markets, expenditures that we make may not result in the benefits that we expect, which could harm our results of operations. Moreover, in the event that MosaiQTM is the subject of industry or clinical guidelines, field trial studies or scientific publications that are unhelpful or damaging, or otherwise call into question the benefits of MosaiQTM, we may have difficulty convincing prospective customers to adopt MosaiQTM.

Our commercialization plan for MosaiQTM in the patient testing market depends on entering into arrangements with one or more commercial partners.

A key element of our commercialization strategy for MosaiQTM is to identify and engage one or more partners with existing global sales and support infrastructures to commercialize MosaiQTM for the patient testing market. Until we engage such a partner to assist us in our commercialization efforts in this highly fragmented market, we do not believe we would be able to optimally commercialize MosaiQTM without significant additional funds to build a global sales and support infrastructure. To date, we have not entered into any such commercialization arrangements. Any commercial partner with whom we may enter into such arrangements may not commit sufficient resources, as MosaiQ™ may compete for time, attention and resources with such partner’s internal programs, or otherwise may not perform its obligations as expected. Even if we successfully establish new commercialization arrangements, these relationships may never result in the successful commercialization of MosaiQTM.

 

 

 

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Risk factors

 

 

Other companies or institutions may develop and market novel or improved methods for transfusion diagnostics, which may make MosaiQ™ less competitive or obsolete.

The market for transfusion diagnostics is large and established, and our competitors may possess significantly greater financial resources and have larger development and commercialization capabilities than we do. Although we are not aware of any companies that are pursuing an alternative fully automated blood grouping and disease screening platform like MosaiQTM, a platform or technology that competes with MosaiQTM may be developed. We may be unable to compete effectively against these competitors either because their diagnostic platforms are superior or because they may have more expertise, experience, financial resources or stronger business relationships.

We have leased a factory in Eysins, Switzerland, which will become the principal manufacturing site for the MosaiQTM consumables, and any delay in completing the conversion of this factory space or obtaining regulatory approval, may delay or prevent the launch of MosaiQTM.

We have leased a manufacturing facility in Eysins, Switzerland, which will become the principal manufacturing site for the MosaiQTM consumables. Conversion of this facility is expected to require a significant capital commitment, and our failure to complete this project on time and on budget may result in the need for us to raise and expend additional capital. In addition, the building, installation and validation of the MosaiQTM manufacturing system is subject to many risks, including the fact that, in connection with products that will be sold in the United States, this new facility will be subject to a pre-approval inspection by the FDA, and, in connection with products sold outside the United States, this new facility will be subject to pre-approval inspection by applicable foreign regulators, which could prevent or delay the launch of MosaiQTM.

Our near-term success is dependent upon our ability to expand our customer base and introduce new conventional reagent products.

Our current customer base is primarily composed of donor testing laboratories and hospitals that use our conventional reagent products for blood grouping, along with original equipment manufacturers, or OEMs (for example, Ortho, Bio-Rad and Grifols). Our success will depend, in part, upon our ability to expand our customer base and increase our market penetration of existing customers through the development and commercialization of new products after obtaining regulatory authorization. Attracting new customers and introducing new products requires substantial time and expense. Any failure to expand our existing customer base, or launch new products, would adversely affect our operating results.

Our financial performance depends in part upon our ability to successfully develop and market new products in a rapidly changing technological and economic environment. If we fail to successfully introduce new conventional reagent products, we could lose market share. We could also lose market share if our competitors introduce new products or technologies that render our conventional reagent products less competitive or obsolete. In addition, delays in the introduction of new products due to regulatory, developmental or other obstacles could negatively impact our revenue and market share, as well as our earnings.

 

 

 

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We are dependent upon our three largest OEM clients for a substantial portion of our total revenues. If any of our key OEM customers terminates or reduces the scope of its relationship with us, our product sales will suffer.

We develop, manufacture and sell a range of our conventional reagent products to customers who are major OEMs. These products are sold in bulk, for inclusion in products manufactured by these OEM customers, or as finished, vialled products. Product sales to our three largest OEM customers accounted for 64% of our total revenues and product sales to Ortho accounted for 55% of our total revenues in the fiscal year ended March 31, 2013. If any of our OEM customer agreements are terminated, particularly our agreement with Ortho, or the scope of our OEM customer relationships is otherwise reduced, our product sales could decrease, and our results of operations may be negatively impacted. In particular, a change of control of any of our OEM customers could negatively impact our relationship. Further, we may not be able to enter into new customer agreements on satisfactory terms, or at all.

Our OEM customers, including Ortho, are also our competitors. Our business may be harmed if, as a result of the commercialization of MosaiQTM, Ortho or our other OEM customers perceive MosaiQTM as a competitive product, resulting in a discontinuation of Ortho’s or our other OEM customers’ purchases from us. Johnson & Johnson, the parent company of Ortho, has reportedly agreed to sell Ortho to Carlyle Group L.P., a global asset management firm.

Gross margin volatility may negatively impact our profitability.

Our gross margin has been volatile from period to period in the past and may be volatile in the future due to various factors, including changes in product mix, shipment cycles and manufacturing costs. Gross margins on our conventional reagent products vary depending upon the product, with whole blood control products, rare antibodies and red blood cell-derived products generating higher margins. Depending upon the sales mix of these products, our gross margin could vary significantly from period to period. Our conventional reagent products are manufactured by us. As such, gross margins for these products could be impacted by a rise in the costs of raw materials and labor, as well as overhead and the efficiency of our manufacturing operations. Our gross margin may also be negatively impacted by increased competition. Specifically, suppliers in the market seeking to maintain or grow market share may foster a competitive environment of pricing pressures that could negatively impact the profitability of product sales.

If we are unable to maintain our network of direct sales representatives, we may not be able to generate anticipated sales of our current or future products.

We expect our direct sales representatives to develop long-lasting relationships with the customers they serve. If our direct sales representatives fail to adequately promote, market and sell our conventional reagent products, our sales could significantly decrease. If a substantial number of our direct sales representatives were to leave us within a short period of time, our sales could be adversely affected. If a direct sales representative were to depart and be retained by one of our competitors, we may be unable to prevent them from helping competitors solicit business from our existing customers, which could further adversely affect our sales. We may be unable to hire additional qualified direct sales representatives to work with us. We may also not be able to enter into agreements with them on favorable or commercially reasonable terms, if at all. Failure to hire or retain qualified direct sales representatives would prevent us from expanding our business and generating sales.

 

 

 

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Risk factors

 

 

We or our suppliers may experience development or manufacturing problems or delays that could limit the growth of our revenue or increase our losses.

We may encounter unforeseen situations in the manufacturing of our conventional reagent products that could result in delays or shortfalls in our production. Our suppliers may also face similar delays or shortfalls. In addition, our or our suppliers’ production processes may have to change to accommodate any significant future expansion of our manufacturing capacity, which may increase our or our suppliers’ manufacturing costs, delay production of our products, reduce our product gross margin and adversely impact our business. If we are unable to keep up with demand for our products by successfully manufacturing and shipping our products in a timely manner, our revenue could be impaired, market acceptance for our products could be adversely affected and our customers might instead purchase our competitors’ products. In addition, developing manufacturing procedures for new products would require developing specific production processes for those products. Developing such processes could be time consuming and any unexpected difficulty in doing so can delay the introduction of a product.

Demand for our products depends in part on the operating budgets of our customers and their spending levels, a reduction in which could limit demand for our products and adversely affect our business.

In the near term, we expect that our revenue will be derived primarily from sales of our conventional reagent products to hospitals and independent testing laboratories for blood grouping, either directly or through our OEM customers. The demand for our products will depend in part upon the operational budgets of these customers, which are impacted by factors beyond our control, such as:

 

  Ø  

global macroeconomic conditions;

 

  Ø  

changes in the regulatory environment;

 

  Ø  

differences in budgetary cycles;

 

  Ø  

market-driven pressures to consolidate operations and reduce costs; and

 

  Ø  

market acceptance of new technologies.

Our operating results may fluctuate due to reductions and delays in expenditures by our customers. Any decrease in our customers’ budgets or expenditures, or in the size, scope or frequency of operating expenditures, could materially and adversely affect our business, operating results and financial condition.

The transfusion diagnostics market is highly competitive. If we fail to compete effectively, our business and operating results will suffer.

We face significant competition in the transfusion diagnostics market. We currently compete with established diagnostic companies that design, manufacture and market instruments and consumables for blood grouping. We believe our principal competitors in the transfusion diagnostics market are Ortho, Immucor and Bio-Rad.

Most of our current competitors have greater financial resources than we do, making them better equipped to fund research and development, manufacturing and marketing efforts or license technologies and intellectual property from third parties. Our competitors can be expected to continue to improve the performance of their products and to introduce new products with competitive price and performance characteristics. Although we believe we have advantages over our competitors, maintaining these advantages will require us to continue to invest in research and development, sales and marketing and customer service and support.

 

 

 

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Our current competitors are either privately owned, publicly-traded companies or are divisions of publicly-traded companies, and enjoy a number of competitive advantages over us, including:

 

  Ø  

greater name and brand recognition, financial and human resources;

 

  Ø  

broader product lines;

 

  Ø  

larger sales forces and more established distributor networks;

 

  Ø  

substantial intellectual property portfolios;

 

  Ø  

larger and more established customer bases and relationships; and

 

  Ø  

better established, larger scale, and lower cost manufacturing capabilities.

We believe that the principal competitive factors in all of our target markets include:

 

  Ø  

cost of capital equipment;

 

  Ø  

cost of consumables and supplies;

 

  Ø  

reputation among customers;

 

  Ø  

innovation in product offerings;

 

  Ø  

flexibility and ease-of-use;

 

  Ø  

accuracy and reproducibility of results;

 

  Ø  

compatibility with existing laboratory processes, tools and methods;

 

  Ø  

breadth of clinical decisions that can be influenced by information generated by tests; and

 

  Ø  

economic benefit accrued to customers based on testing services enabled by products.

We cannot assure investors that we will be successful in the face of competition from new products and technologies introduced by our existing competitors or new companies entering our markets. In addition, we cannot assure investors that our competitors do not have or will not develop products or technologies that currently or in the future will enable them to produce competitive products with greater capabilities or at lower costs than ours.

New technologies, techniques or products could emerge that might offer better combinations of price and performance than our current or future products and systems.

It is critical to our success that we anticipate changes in technology and customer requirements and to successfully introduce, on a timely and cost-effective basis, new, enhanced and competitive technologies that meet the needs of current and prospective customers. If we do not successfully innovate and introduce new technology into our product lines or manage the transitions to new product offerings, our revenues, results of operations and business will be adversely impacted. Competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. We anticipate that we will face increased competition in the future as existing companies and competitors develop new or improved products and as new companies enter the market with new technologies.

 

 

 

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We are dependent on single source suppliers for some of the components and materials used in our conventional reagent products, and supply chain interruptions could negatively impact our operations and financial performance.

Our products are manufactured by us and we obtain supplies from a limited number of suppliers. In some cases, critical components required to manufacture our products may only be available from a sole supplier or limited number of suppliers, any of whom would be difficult to replace. The supply of any of our manufacturing materials may be interrupted because of poor vendor performance or other events outside our control, which may require us, among other things, to identify alternate vendors and result in lost sales and increased expenses. Even if the manufacturing materials that we source are available from other parties, the time and effort involved in validating the new supplies and obtaining any necessary regulatory approvals for substitutes could impede our ability to replace such components in a timely manner or at all.

In particular, some of our conventional reagent products are derived from blood having particular or rare combinations of antibodies or antigens, which are found in a limited number of individuals. If we had difficulty in obtaining sufficient quantities of such blood, we would need to establish a viable alternative, which may take both time and expense to either identify and/or develop.

The loss of a sole supplier would impair our ability to deliver products to our customers in a timely manner and would adversely affect our sales and operating results and negatively impact our reputation. Our business would also be harmed if any of our suppliers could not meet our quality and performance specifications and quantity and delivery requirements.

If our Edinburgh, Scotland facility becomes unavailable or inoperable, we will be unable to produce and ship many of our conventional reagent products.

All our conventional reagent products are produced in our Edinburgh, Scotland manufacturing facility. While we believe we have reliable suppliers of raw materials, our reagent production is highly dependent on the uninterrupted and efficient operation of the Edinburgh, Scotland facility and we currently have no alternative manufacturing capabilities. Therefore, if a catastrophic event occurred at the Edinburgh, Scotland facility, such as a fire or contamination, many of our products could not be produced until the manufacturing portion of the facility was restored and cleared by the FDA. We maintain a disaster plan to minimize the effects of such a catastrophe and we have obtained insurance to protect against certain business interruption losses (we have £22 million of coverage for our Edinburgh manufacturing facility and an additional £1 million of coverage for our research and development activities). However, there can be no assurance that such coverage will be adequate or that such coverage will continue to remain available on acceptable terms, if at all.

Our customers, including our U.S. commercial operations, receive all of their conventional reagent products from our Edinburgh, Scotland manufacturing facility. If circumstances arose that disrupted our international distribution of products from Edinburgh, we would need to establish an alternate distribution channel, which may take both time and expense to establish.

The landlord for our Edinburgh, Scotland manufacturing operation is Scottish National Blood Transfusion Service, or SNBTS. The lease on our Edinburgh, Scotland facility ends in August 2014. We have commenced discussions with SNBTS to extend this lease to allow us time to design and build a new manufacturing facility near Edinburgh, Scotland. There can be no assurance that SNBTS will extend the existing lease on acceptable terms or terms equivalent to those we currently have.

 

 

 

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We plan to build a new, expanded manufacturing facility for our conventional reagent products, which may result in overlapping operations and duplicative costs, impair manufacturing operations, delay or prevent the launch of new products or require us to expend additional capital.

To meet expected future demand for our conventional reagent products, we plan to lease a new expanded manufacturing facility in Edinburgh, Scotland near our existing manufacturing facility. Although the new facility will be leased, we will fund its design and completion using our existing cash balances. This project is expected to require a capital commitment of approximately $6 million, and our failure to complete the new facility on time and on budget may result in the need for us to expend additional capital and may impair the efficient operation of our manufacturing system. In addition, moving our manufacturing operations to a new facility may result in overlapping operations and duplicative costs during the transition period. Furthermore, changes in our manufacturing process or procedure, including a change in the location where our products are manufactured, will require prior FDA review and approval of the manufacturing process and procedures. Any new facility will be subject to a pre-approval inspection by the FDA and would again require us to demonstrate product comparability to the FDA. There are comparable foreign requirements as well. This review may be costly and time consuming and could delay or prevent the launch of any new product.

We generate a substantial portion of our revenue internationally and are subject to various risks relating to our international activities.

A significant proportion of our revenues are earned in U.S. Dollars but the costs of our manufacturing operations are payable mainly in Pounds Sterling. As a result, fluctuations in foreign currency exchange rates against the U.S. Dollar could impact our financial results adversely. We believe a significant percentage of our future revenue and costs will come from international sources.

Engaging in international business also involves a number of difficulties and risks, including:

 

  Ø  

required compliance with existing and changing foreign regulatory requirements and laws;

 

  Ø  

required compliance with anti-bribery laws, such as the U.S. Foreign Corrupt Practices Act and UK Bribery Act, data privacy requirements, labor laws and anti-competition regulations;

 

  Ø  

export or import restrictions;

 

  Ø  

various reimbursement and insurance regimes;

 

  Ø  

laws and business practices favoring local companies;

 

  Ø  

longer payment cycles and difficulties in enforcing agreements and collecting receivables through certain foreign legal systems;

 

  Ø  

political and economic instability;

 

  Ø  

potentially adverse tax consequences, tariffs, customs charges, bureaucratic requirements and other trade barriers;

 

  Ø  

difficulties and costs of staffing and managing foreign operations; and

 

  Ø  

difficulties protecting or procuring intellectual property rights.

The occurrence of any of these factors in the countries in which we operate could materially adversely affect our business, results of operations and financial condition.

 

 

 

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Our term loan agreement contains restrictive and financial covenants that may limit our operating flexibility.

Our $15 million term loan agreement with MidCap Financial contains certain restrictive covenants that limit our ability to merge with other companies or consummate certain changes of control, acquire other companies, engage in new lines of business, make certain investments, pay dividends, transfer or dispose of assets, amend certain material agreements or enter into various specified transactions. We therefore may not be able to engage in any of the foregoing transactions unless we obtain the consent of the lender or terminate the term loan agreement. The loan agreement also contains certain financial covenants, including minimum revenue requirements, and is secured by all of our assets. There is no guarantee that we will be able to generate sufficient cash flow or sales to meet the financial covenants or pay the principal and interest under the agreement. Furthermore, there is no guarantee that future working capital, borrowings or equity financing will be available to repay or refinance the amounts outstanding under the agreement.

Undetected errors or defects in our products could expose us to product liability claims, harm our reputation or decrease market acceptance of our products.

The sale and use of products or services based on our technologies could lead to the filing of product liability claims if someone were to allege that one of our products contained a design or manufacturing defect, which resulted in the failure to adequately perform the analysis for which it was designed. A product liability claim could result in substantial damages and be costly and time consuming to defend, either of which could materially harm our business or financial condition. We maintain insurance that includes product liability coverage of approximately $8 million as of December 31, 2013 and we believe our insurance coverage is adequate for our business. However, there can be no assurance that insurance coverage for these risks will continue to be available or, if available, that it will be sufficient to cover potential claims or that the present level of coverage will continue to be available at a reasonable cost. Our existing insurance may have to be increased in the future if we are successful at introducing new transfusion diagnostics products and this will increase our costs. Under certain of our customer and license agreements, we have agreed to provide indemnification for product liability claims arising out of the use of our products. In the event that we are held liable for a claim or for damages exceeding the limits of our insurance coverage, we may be required to make substantial payments.

Regardless of merit or eventual outcome, liability claims may result in:

 

  Ø  

decreased demand for our products and product candidates;

 

  Ø  

injury to our reputation;

 

  Ø  

costs of related litigation;

 

  Ø  

substantial monetary awards to patients and others;

 

  Ø  

loss of revenue; and

 

  Ø  

the inability to commercialize our products and product candidates.

Any of these outcomes may have an adverse effect on our consolidated results of operations, financial condition and cash flows, and may increase the volatility of our share price.

We may also be subject to warranty claims for damages related to errors or defects in our products. A material liability claim or other occurrence that harms our reputation or decreases market acceptance of our products could harm our business and operating results. In the event that we experience a product performance problem, we may be required to, or may voluntarily recall or suspend selling the products until the problem is resolved. Depending on the product as well as the availability of acceptable substitutes, such a product recall or suspension could significantly impact our operating results.

 

 

 

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The outcome of any current or future disputes, claims and litigation could have a material adverse impact on our business, financial condition and results of operations.

We are currently involved in a dispute regarding the 2007 purchase of our Alba subsidiary in which the seller is alleging it is owed approximately $3.1 million. See “Business – Legal proceedings.” In addition, we may, from time to time, be party to litigation in the normal course of business, including class action and product liability lawsuits. Due to the inherent uncertainties of litigation, it is not possible to predict the final outcome of these lawsuits or determine the amount of any potential losses we may incur. In the event we are required or determine to pay amounts in connection with any such lawsuits, such amounts could be significant and could have a material adverse impact on our liquidity, business, financial condition and results of operations.

We are highly dependent on our senior management team and other key employees, and our success depends on our ability to retain our managerial personnel and to attract additional personnel.

Our success is dependent upon the efforts of our senior management and staff, including sales, technical and management personnel, many of whom have very specialized industry and technical expertise that is not easily replaced. In particular, our success depends in part upon the continued service of our Chairman and Chief Executive Officer, Paul Cowan, who is critical to the overall management of our company. This includes the shaping of our culture and our strategic direction. If key individuals leave us, we could be adversely affected if suitable replacement personnel are not quickly recruited. We have entered into employment agreements with our executive officers and senior managers, including our Chairman and Chief Executive Officer, but none of these agreements guarantees the service of the individual for a specified period of time. Our future success depends on our ability to continue to attract, retain and motivate qualified personnel. There is intense competition for medical technologists and in some markets there is a shortage of qualified personnel in our industry. If we are unable to continue to attract or retain highly qualified personnel, the development, growth and future success of our business could be adversely affected.

We may seek to grow our business through acquisitions of or investments in new or complementary businesses, products or technologies, and the failure to manage acquisitions or investments, or the failure to integrate them with our existing business, could have a material adverse effect on us.

From time to time, we expect to consider opportunities to acquire or make investments in other technologies, products and businesses that may enhance our capabilities, complement our current products or expand the breadth of our product offerings, markets or customer base. Potential and completed acquisitions and strategic investments involve numerous risks, including:

 

  Ø  

problems assimilating the purchased technologies, products or business operations;

 

  Ø  

issues maintaining uniform standards, procedures, controls and policies;

 

  Ø  

unanticipated costs associated with acquisitions;

 

  Ø  

diversion of management’s attention from our core business;

 

  Ø  

adverse effects on existing business relationships with suppliers and customers;

 

  Ø  

risks associated with entering new markets in which we have limited or no experience;

 

  Ø  

potential loss of key employees of acquired businesses; and

 

  Ø  

increased legal and accounting compliance costs.

 

 

 

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We have no current commitments with respect to any acquisition or investment. Any acquisitions we undertake could be expensive and time consuming and may disrupt our ongoing business and prevent management from focusing on our operations. If we are unable to manage acquisitions or investments, or integrate any acquired businesses, products or technologies effectively, our business, results of operations and financial condition may be materially adversely affected.

We may enter into collaborations, in-licensing arrangements, joint ventures, strategic alliances or partnerships with third parties that may not result in the development of commercially viable products or the generation of significant future revenues.

In the ordinary course of our business, we may enter into collaborations, in-licensing arrangements, joint ventures, strategic alliances or partnerships to develop proposed products and to pursue new markets. Proposing, negotiating and implementing collaborations, in-licensing arrangements, joint ventures, strategic alliances or partnerships may be a lengthy and complex process. Other companies, including those with substantially greater financial, marketing, sales, technology or other business resources, may compete with us for these opportunities or arrangements. We may not identify, secure, or complete any such transactions or arrangements in a timely manner, on a cost-effective basis, on acceptable terms or at all. We have limited institutional knowledge and experience with respect to these business development activities, and we may also not realize the anticipated benefits of any such transaction or arrangement. In particular, these collaborations may not result in the development of products that achieve commercial success or result in significant revenues and could be terminated prior to developing any products.

Additionally, we may not be in a position to exercise sole decision-making authority regarding the transaction or arrangement, which could create the potential risk of creating impasses on decisions, and our collaborators may have economic or business interests or goals that are, or that may become, inconsistent with our business interests or goals. It is possible that conflicts may arise with our collaborators, such as conflicts concerning the achievement of performance milestones, or the interpretation of significant terms under any agreement, such as those related to financial obligations or the ownership or control of intellectual property developed during the collaboration. If any conflicts arise with our current or future collaborators, they may act in their self-interest, which may be adverse to our best interest, and they may breach their obligations to us. In addition, we have limited control over the amount and timing of resources that our current collaborators or any future collaborators devote to our collaborators’ or our future products. Disputes between us and our collaborators may result in litigation or arbitration which would increase our expenses and divert the attention of our management. Further, these transactions and arrangements are contractual in nature and may be terminated or dissolved under the terms of the applicable agreements and, in such event, we may not continue to have rights to the products relating to such transaction or arrangement or may need to purchase such rights at a premium.

RISKS RELATED TO GOVERNMENT REGULATION

If we or our commercial partners fail to comply with extensive foreign and domestic regulations, sales of our products in new and existing markets and the development and commercialization of any new product candidates, including MosaiQTM, could be delayed or prevented.

Our reagents and other products are subject to regulation by governmental and private agencies in the United States and abroad, which, among other things, regulate the testing, manufacturing, packaging, labeling, distribution, promotion, marketing, import and export of medical supplies and devices. Certain international regulatory bodies also impose import and tax restrictions, tariff regulations, and duties on imported products. Delays in agency review can significantly delay new product introduction and may result in a product becoming “outdated” or losing its market opportunity before it can be introduced.

 

 

 

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Also, the FDA and international agencies have the authority to require a recall or modification of products in the event of a defect or to prohibit or limit the distribution or importation of the product.

FDA approval of a BLA or clearance of a 510(k) generally is required before we can market new reagents in the United States or make significant changes to existing products. The process of obtaining licenses, marketing clearances and approvals from regulatory agencies can be time consuming and expensive. There is no assurance that marketing authorizations will be granted or that agency reviews will not involve delays that would adversely affect our ability to commercialize our products, including MosaiQTM.

If any of our products were to fail to perform in the manner represented during review of the product application, particularly concerning clinical performance, one or more of these agencies could place restrictions on the labeling, marketing, distribution or use of the product, require us to cease manufacturing and selling that product, or even recall previously-placed products, and, if the product must be modified in order to resolve the problem, to resubmit the product for market authorization before we could sell it again. Depending upon the product, and the availability of acceptable substitutes, such an agency action could result in significantly reduced revenues and earnings for an indefinite period.

We currently anticipate marketing MosaiQTM consumables to laboratories for research use only, or RUO, in the first half of 2016. While such products are not currently regulated by the FDA as medical devices assuming they meet certain requirements, such as they do not make claims related to safety, effectiveness or diagnostic utility and they are not intended for human clinical diagnostic or prognostic use, if the FDA were to conclude that our RUO-labeled products were medical devices, they would need to meet the requirements applicable to medical devices.

Federal, state and foreign regulations regarding the manufacture and sale of our products are subject to change. We cannot predict what impact, if any, such changes might have on our business. In addition, there can be no assurance that regulation of our products will not become more restrictive in the future and that any such development would not have a material adverse effect on our business.

If we or our suppliers fail to comply with ongoing regulatory requirements, or if we experience unanticipated problems with our products, these products could be subject to restrictions or withdrawal from the market.

Any product for which we obtain marketing approval or clearance in the United States or in international jurisdictions, along with the manufacturing processes and promotional activities for such product, will be subject to continual review and periodic inspections by the FDA and other regulatory bodies. Furthermore, our suppliers may be subject to similar regulatory oversight and may not currently be or may not continue to be in compliance with applicable regulatory requirements. Our failure or the failure of one of our suppliers to comply with statutes and regulations administered by the FDA and other regulatory bodies, or our failure to take adequate action in response to any observations, could result in, among other things, any of the following enforcement actions, any one of which could harm our reputation and could cause our product sales and profitability to suffer:

 

  Ø  

fines and civil penalties;

 

  Ø  

the requirement to take corrective actions;

 

  Ø  

delays in approving or clearing, or refusal to approve or clear, our products;

 

  Ø  

withdrawal or suspension of approval or clearances by the FDA or other regulatory bodies;

 

  Ø  

product recall or seizures;

 

  Ø  

interruption of production;

 

 

 

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  Ø  

restrictions on labeling, marketing, distribution or use of our products;

 

  Ø  

an import or export ban on our products;

 

  Ø  

injunctions; and

 

  Ø  

criminal prosecution.

We may also receive warning letters or untitled letters, such as the warning letter we received from the FDA in 2009 regarding compliance with current good manufacturing practices at our Edinburgh facility regarding various antisera products. Following corrective actions that took place between February and April 2009, we received a response acceptance letter from the FDA in June 2009. We have not received any such warning letters or untitled letters since this time.

Any regulatory approval or clearance of a product may also be subject to limitations on the indicated uses for which the product may be marketed. If the FDA or another regulatory body determines that our promotional materials, training or other activities constitute promotion of an unapproved use, it could request that we cease or modify our training or promotional materials or subject us to regulatory enforcement actions. It is also possible that other federal, state or foreign enforcement authorities might take action if they consider our training or promotional materials to constitute promotion of an unapproved use, which could result in significant fines or penalties under applicable statutory authorities, such as laws prohibiting false claims for reimbursement. Additionally, we may be required to conduct costly post-market testing and we may be required to report adverse events and malfunctions related to our products. Later discovery of previously unknown problems with our products, including unanticipated adverse events, manufacturing problems or failure to comply with regulatory requirements may result in restrictions on such products or manufacturing processes. Other potential consequences include revisions to the approved labeling, withdrawal of the products from the market, voluntary or mandatory recalls, fines, suspension of regulatory approvals, product seizures, injunctions or the imposition of civil or criminal penalties.

Furthermore, the FDA and various other authorities will inspect our facilities and those of our suppliers from time to time to determine whether we are in compliance with regulations relating to the manufacture of transfusion diagnostics products, including regulations concerning design, manufacture, testing, quality control, product labeling, distribution, promotion and record-keeping practices. A determination that we are in material violation of such regulations could lead to the imposition of civil penalties, including warning or untitled letters, fines, product recalls, field actions, product seizures or, in extreme cases, criminal sanctions.

Additionally, healthcare policy has been a subject of extensive discussion in the executive and legislative branches of the federal and many state governments and healthcare laws and regulations are subject to change. Our reagent product business strategy, and the development of the commercialization strategy for MosaiQ™, have been based on existing healthcare policies. We cannot predict what additional changes, if any, will be proposed or adopted or the effect that such proposals or adoption may have on our business, financial condition and results of operations.

Approval and/or clearance by the FDA and foreign regulatory authorities for our transfusion diagnostics products could take significant time and require significant development expenditures.

Obtaining FDA and other regulatory clearances or approvals for MosaiQ™ and our newly developed conventional reagent products can be expensive and uncertain. It can take from several months to several years from the date of submission of the application, and generally requires detailed and comprehensive

 

 

 

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scientific and clinical data. As with all blood transfusion products, the FDA and other regulatory authorities reserve the right to redefine the regulatory path at the time of submission or during the review process, and could require a more burdensome approach than we currently anticipate. For example, it will be necessary for us to refile a BLA that we submitted in 2013 for the sale of additional monoclonal antibody products as a result of application deficiencies brought to our attention by the FDA. Our BLA application was not accepted by the FDA as a result of industrywide changes in study design requirements, while previously-accepted product manufacturing and stability documentation was also rejected. We established a dedicated team to address the deficiencies and have discussed the team’s mandate with the FDA. We believe these efforts will be completed by April 2014 and the findings will be incorporated into subsequent FDA submissions. We have also de-emphasized the products represented by this BLA in our conventional reagent development plan, preferring to focus on higher value programs with shorter development timelines. Notwithstanding the time and expense, these efforts may never result in FDA approval or clearance or that of other regulatory authorities. Even if we were to obtain regulatory approval or clearance, it may not be for the uses we believe are important or commercially attractive, in which case we would not be permitted to market our product for those uses.

Our use of biological and hazardous materials and wastes requires us to comply with regulatory requirements, including environmental, health and safety laws, regulations and permitting requirements and subjects us to significant costs and exposes us to potential liabilities.

The handling of materials used in the manufacture of transfusion diagnostics products involves the controlled use of biological and hazardous materials and wastes. The primary hazardous materials we handle or use include human blood donations. Our business and facilities and those of our suppliers are subject to federal, state, local and foreign laws and regulations relating to the protection of human health and the environment, including those governing the use, manufacture, storage, handling and disposal of, and exposure to, such materials and wastes. In addition, under some environmental laws and regulations, we could be held responsible for costs relating to any contamination at our past or present facilities and at third-party waste disposal sites even if such contamination was not caused by us. A failure to comply with current or future environmental laws and regulations, including the failure to obtain, maintain or comply with any required permits, could result in severe fines or penalties. Any such expenses or liability could have a significant negative impact on our business, results of operations and financial condition. In addition, we may be required to incur significant costs to comply with regulatory requirements in the future.

Our relationships with customers are subject to applicable anti-kickback, fraud and abuse and other domestic healthcare laws and regulations, which could expose us to criminal sanctions, civil penalties, contractual damages, reputational harm and diminished profits and future earnings.

Healthcare providers, physicians at hospitals and public health departments play a primary role in the recommendation and ordering of our reagents and other products, and may play an important role in the recommendation and ordering of the MosaiQ™ system. Our arrangements with customers may expose us to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain the business or financial arrangements and relationships through which we market, sell and distribute our product. Restrictions under applicable federal and state healthcare laws and regulations in the United States include the following:

 

  Ø  

The federal healthcare anti-kickback statute prohibits, among other things, persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, order or recommendation of, any good or service, for which payment may be made under federally funded

 

 

 

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healthcare programs such as Medicare and Medicaid. This statute has been broadly interpreted to apply to manufacturer arrangements with prescribers, purchasers and formulary managers, among others. Several other countries, including the United Kingdom, have enacted similar anti-kickback, fraud and abuse, and healthcare laws and regulations.

 

  Ø  

The federal False Claims Act imposes criminal and civil penalties against individuals or entities for knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false or fraudulent or making a false statement material to a false or fraudulent action or improperly avoiding, decreasing or concealing an obligation to pay money to the federal government.

 

  Ø  

HIPAA imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program and also imposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information. In addition, HIPAA created criminal liability for knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false statement in connection with the delivery of or payment for healthcare benefits, items or services.

 

  Ø  

The federal Physician Payment Sunshine Act requirements under the PPACA (as defined below) require manufacturers of drugs, devices, biologics and medical supplies to report to HHS information related to payments and other transfers of value made to or at the request of covered recipients, such as physicians and teaching hospitals, and physician ownership and investment interests in such manufacturers. Payments made to physicians and research institutions for clinical trials are included within the ambit of this law. Certain state laws and regulations also require the reporting of certain items of value provided to health care professionals.

 

  Ø  

Analogous state laws and regulations, such as state anti-kickback and false claims laws, may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers.

Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations involve substantial costs. We may be subject to qui tam litigation brought by private individuals on behalf of the government under the federal False Claims Act, with potential liability including mandatory treble damages and significant per-claim penalties, currently set at $5,500 to $11,000 per false claim. Additionally, it is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, exclusion from government funded healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of our operations. Exclusion, suspension and debarment from government funded healthcare programs would significantly impact our ability to commercialize, sell or distribute any product. If any of the physicians or other providers or entities with whom we expect to do business are found to be not in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs.

 

 

 

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We are subject to the UK Bribery Act, the U.S. Foreign Corrupt Practices Act and other anti-corruption laws, as well as export control laws, customs laws, sanctions laws and other laws governing our operations. If we fail to comply with these laws, we could be subject to civil or criminal penalties, other remedial measures, and legal expenses, which could adversely affect our business, results of operations and financial condition.

Our operations are subject to anti-corruption laws, including the UK Bribery Act 2010, or Bribery Act, the U.S. Foreign Corrupt Practices Act, or FCPA, and other anti-corruption laws that apply in countries where we do business. The Bribery Act, FCPA and these other laws generally prohibit us and our employees and intermediaries from bribing, being bribed or making other prohibited payments to government officials or other persons to obtain or retain business or gain some other business advantage. We and our commercial partners operate in a number of jurisdictions that pose a high risk of potential Bribery Act or FCPA violations, and we participate in collaborations and relationships with third parties whose actions could potentially subject us to liability under the Bribery Act, FCPA or local anti-corruption laws. In addition, we cannot predict the nature, scope or effect of future regulatory requirements to which our international operations might be subject or the manner in which existing laws might be administered or interpreted.

We are also subject to other laws and regulations governing our international operations, including regulations administered by the governments of the United Kingdom, the United States and authorities in the European Union, including applicable export control regulations, economic sanctions on countries and persons, customs requirements and currency exchange regulations, collectively referred to as the Trade Control laws.

There is no assurance that we will be completely effective in ensuring our compliance with all applicable anti-corruption laws, including the Bribery Act, the FCPA or other legal requirements and Trade Control laws. If we are not in compliance with the Bribery Act, the FCPA and other anti-corruption laws or Trade Control laws, we may be subject to criminal and civil penalties, disgorgement and other sanctions and remedial measures, and legal expenses, which could have an adverse impact on our business, financial condition, results of operations and liquidity. Likewise, any investigation of any potential violations of the Bribery Act, the FCPA, other anti-corruption laws or Trade Control laws by UK, U.S. or other authorities could also have an adverse impact on our reputation, our business, results of operations and financial condition.

Healthcare policy changes, including recently enacted legislation reforming the U.S. healthcare system, may have a material adverse effect on our business.

Changes in government policy could have a significant impact on our business by increasing the cost of doing business, affecting our ability to sell our products and negatively impacting our profitability. Such changes could include modifications to existing legislation, such as U.S. tax policy, or entirely new legislation, such as the Patient Protection and Affordable Care Act (PPACA) that became law in March 2010. The PPACA makes changes that are expected to significantly impact the pharmaceutical and medical device industries and clinical laboratories. Elements of this legislation could meaningfully change the way healthcare services are delivered and may materially impact aspects of our business. We cannot predict whether future healthcare initiatives will be implemented at the federal or state level or in countries outside of the United States in which we may do business, or the effect any future legislation or regulation will have on us.

 

 

 

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RISKS RELATED TO INTELLECTUAL PROPERTY

The extent to which we can protect our products and technologies through intellectual property rights that we own, acquire or license is uncertain.

We employ a variety of proprietary and patented technologies and methods in connection with the products we sell or are developing, including MosaiQTM. We license some of these technologies from third parties. We cannot provide any assurance that the intellectual property rights that we own or license provide effective protection from competitive threats or that we would prevail in any litigation in which our intellectual property rights are challenged. In addition, we cannot provide any assurances that we will be successful in obtaining new proprietary or patented technologies or methods in the future, whether through acquiring ownership or through licenses from third parties.

We cannot assure investors that any of our currently pending or future patent applications will result in issued patents, and we cannot predict how long it may take for a patent to issue on any of our pending patent applications, assuming a patent does issue. Further, we cannot assure investors that other parties will not challenge any patents issued or exclusively licensed to us or that courts or administrative agencies will hold our patents or the patents we license on an exclusive basis to be valid and enforceable. We cannot guarantee investors that we will be successful in defending challenges made against our patents and other intellectual property rights. Any third-party challenge to any of our patents could result in the unenforceability or invalidity of some or all of the claims of such patents and could be time consuming and expensive.

The extent to which the patent rights of life sciences companies effectively protect their products and technologies is often highly uncertain and involves complex legal and factual questions for which important legal principles remain unresolved. No consistent policy regarding the proper scope of allowable claims of patents held by such companies has emerged to date in the United States. Various courts, including the U.S. Supreme Court, have rendered decisions that impact the scope of patentability of certain inventions or discoveries relating to diagnostics tests or genomic diagnostics. These decisions generally stand for the proposition that inventions that recite laws of nature are not themselves patentable unless they have sufficient additional features that provide practical assurance that the processes are genuine inventive applications of those laws rather than patent drafting efforts designed to monopolize a law of nature itself. What constitutes a “sufficient” additional feature for this purpose is uncertain. While we do not generally rely on gene sequence patents, this evolving case law in the United States may adversely impact our ability to obtain new patents and may facilitate third-party challenges to our existing owned and exclusively licensed patents.

We cannot predict the breadth of claims that may be allowed or enforced in patents we own or in those to which we have exclusive license rights. For example:

 

  Ø  

the inventor(s) named in one or more of our patents or patent applications might not have been the first to have made the relevant invention;

 

  Ø  

the inventor (or his assignee) might not have been the first to file a patent application for the claimed invention;

 

  Ø  

others may independently develop similar or alternative products and technologies or may successfully replicate our product and technologies;

 

  Ø  

it is possible that the patents we own or in which have exclusive license rights may not provide us with any competitive advantages or may be challenged by third parties and found to be invalid or unenforceable;

 

 

 

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  Ø  

any patents we obtain or exclusively license may expire before, or within a limited time period after, the products and services relating to such patents are commercialized;

 

  Ø  

we may not develop or acquire additional proprietary products and technologies that are patentable; and

 

  Ø  

others may acquire patents that could be asserted against us in a manner that could have an adverse effect on our business.

Changes in either the patent laws or in interpretations of patent laws in the United States or other countries may diminish the value of our intellectual property rights. In particular, in September 2011, the U.S. Congress passed the Leahy-Smith America Invents Act, or the AIA, which became effective in March 2013. The AIA reforms U.S. patent law in part by changing the standard for patent approval for certain patents from a “first to invent” standard to a “first to file” standard and developing a post-grant review system. It is too early to determine what the effect or impact the AIA will have on the operation of our business and the protection and enforcement of our intellectual property. However, the AIA and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business and financial condition. Patent applications in the United States and many foreign jurisdictions are not published until at least eighteen months after filing and it is possible for a patent application filed in the United States to be maintained in secrecy until a patent issues on the application. In addition, publications in the scientific literature often lag behind actual discoveries. We therefore cannot be certain that others have not filed patent applications that cover inventions that are the subject of pending applications that we own or exclusively license or that we or our licensors, as applicable, were the first to invent the technology (pre-AIA) or first to file (post-AIA). Our competitors may have filed, and may in the future file, patent applications covering technology that is similar to or the same as our technology. Any such patent application may have priority over patent applications that we own or exclusively license and, if a patent issues on such patent application, we could be required to obtain a license to such patent in order to carry on our business. If another party has filed a U.S. patent application covering an invention this is similar to, or the same as, an invention that we own or license, we or our licensors may have to participate in an interference or other proceeding in the U.S. Patent and Trademark Office, or PTO, or a court to determine priority of invention in the United States, for pre-AIA applications and patents. For post-AIA applications and patents, we or our licensors may have to participate in a derivation proceeding to resolve disputes relating to inventorship. The costs of these proceedings could be substantial, and it is possible that such efforts would be unsuccessful, resulting in our inability to obtain or retain any U.S. patent rights with respect to such invention.

Some of our competitors may be better able to sustain the costs of complex patent disputes and litigation than we can because they have substantially greater resources. In addition, any uncertainties resulting from the initiation and continuation of any disputes or litigation could have a material adverse effect on our ability to raise the funds necessary to continue our operations.

In addition to pursuing patents on our technology, we seek to protect our intellectual property and proprietary technology by entering into intellectual property assignment and non-disclosure agreements with our employees, consultants and third party collaborators. See “—We may be unable to adequately prevent disclosure of trade secrets and other proprietary information.”

 

 

 

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Obtaining and maintaining our patent protection depends upon compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non compliance with these requirements.

The PTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other provisions during the patent prosecution process and following the issuance of a patent. There are situations in which noncompliance with these requirements can result in abandonment or lapse of a patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, competitors might be able to enter the market earlier than would otherwise have been the case if our patent were in force.

Our intellectual property rights may not be sufficient to protect our competitive position and to prevent others from manufacturing, using or selling competing products.

The scope of our owned and exclusively licensed intellectual property rights may not be sufficient to prevent others from manufacturing, using or selling competing products. For example, our manufacturing process for MosaiQTM consumables depends in part on intellectual property that we expect to in-license on an exclusive basis, and such rights may be limited. Our competitors may have obtained or be able to develop or obtain a license to similar intellectual property. Competitors could purchase our product and attempt to replicate some or all of the competitive advantages we derive from our development efforts, willfully infringe our intellectual property rights, design around our protected technology or develop their own competitive technologies and thereby avoid infringing our intellectual property rights. If our intellectual property is not sufficient to effectively prevent our competitors from developing and selling similar products, our competitive position and our business could be adversely affected.

MosaiQTM depends on certain technologies that are licensed to us. We do not control these technologies and any loss of our rights to them could prevent us from manufacturing our products.

We rely on licenses to various proprietary technologies that are material to our business, including the development of MosaiQTM. We have entered into an exclusive license with The Technology Partnership plc, or TTP, to patented technologies to enable high volume manufacturing of MosaiQTM consumables. In addition, STRATEC Biomedical AG, or STRATEC, has agreed to grant us licenses to certain of its pre-existing technologies, and has granted us licenses to its technologies to be developed under our development agreement with it for the MosaiQ instrument. Our rights to use these technologies will be subject to the continuation of and our compliance with the terms of those licenses. If we were to lose access to these licenses, we would be unable to manufacture MosaiQTM consumables or commercialize MosaiQ instruments until we obtained access to a comparable technology.

We may not control the prosecution, maintenance or filing of the patents to which we now hold or in the future intend to acquire licenses. Enforcement of our licensed patents or defense of any claims asserting the invalidity of these patents may be subject to the control or cooperation of our licensors. We cannot be certain that our licensors will prosecute, maintain, enforce and defend the licensed patent rights in a manner consistent with the best interests of our business. We also cannot be certain that drafting or prosecution of the licensed patents and patent applications by the relevant licensors have been or will be conducted in compliance with applicable laws and regulations, will result in valid and enforceable patents or that any patents or patents that may issue in the future on any patent applications owned by or exclusively licensed to us will provide any competitive advantage.

 

 

 

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Certain of our licenses contain, and any future licenses may contain, provisions that allow the licensor to terminate the license upon the occurrence of certain events, such as material breach by us or our insolvency. For example, the licenses granted under the development agreement with STRATEC would be null and void upon termination of the development agreement by STRATEC. The TTP license is for uses that include antigen typing, antibody detection and serological screening of donated blood for infectious diseases (collectively, the initial purpose), as well as all human blood sample diagnostic testing on batch processing instruments (collectively, the additional purposes), with the exception of companion diagnostics, epigenetics, and nucleic acid sequencing. If any of certain agreed upon license payments are not made by us when due, we will lose the license to the additional purposes, but not the initial purpose. TTP may terminate its license agreement with us if we assist another party in disputing the validity and/or scope of any of TTP’s patented intellectual property covered by the agreement. If the licensors of the technologies we rely on were to terminate our license agreements, the commercialization of MosaiQTM could be prevented or delayed, and we may be unable to find a suitable replacement technology at an acceptable cost or at all. Our rights under each of the licenses may be subject to our continued compliance with the terms of the license, including certain diligence, disclosure and confidentiality obligations and the payment of fees. If we breach any of our license agreements and fail to cure the breach within any applicable cure period, our licensors may take action against us, including termination of the applicable license. Determining the scope of our licenses and related obligations can be difficult and could lead to disputes between us and the licensors. An unfavorable resolution of such a dispute could lead to termination of the license to which a dispute relates. If a licensor terminates a license agreement because of a breach by us that we fail to timely cure, we might no longer have the right to produce or sell some or all of our products and we may be subject to other liabilities, which could have a material adverse effect on our business.

We may become involved in disputes relating to our intellectual property rights, and may need to resort to litigation in order to defend and enforce our intellectual property rights.

Extensive litigation regarding patents and other intellectual property rights has been common in the medical diagnostics industry. Litigation may be necessary to assert infringement claims, protect trade secrets or know-how and determine the enforceability, scope and validity of certain proprietary rights. Litigation may even be necessary to resolve disputes of inventorship or ownership of proprietary rights. The defense and prosecution of intellectual property lawsuits, PTO interference or derivation proceedings and related legal and administrative proceedings (e.g., a re-examination) in the United States and internationally involve complex legal and factual questions. As a result, such proceedings are costly and time consuming to pursue, and their outcome is uncertain.

Even if we prevail in such a proceeding in which we assert our intellectual property rights against third parties, the remedy we obtain may not be commercially meaningful or adequately compensate us for any damages we may have suffered. If we do not prevail in such a proceeding, our patents could potentially be declared to be invalid, unenforceable or narrowed in scope, or we could otherwise lose valuable intellectual property rights. Similar proceedings involving the intellectual property we exclusively license could also have an impact on our business. Further, if any of our other owned or exclusively licensed patents are declared invalid, unenforceable or narrowed in scope, our competitive position could be adversely affected.

We could face claims that our activities or the manufacture, use or sale of our products infringe the intellectual property rights of others, which could cause us to pay damages or licensing fees and limit our ability to sell some or all of our products and services.

Our research, development and commercialization activities may infringe or be claimed to infringe patents or other intellectual property rights owned by other parties of which we may be unaware because the relevant patent applications may have been filed but not yet published. Certain of our competitors and

 

 

 

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other companies have substantial patent portfolios, and may attempt to use patent litigation as a means to obtain a competitive advantage or to extract licensing revenue. In addition to patent infringement claims, we may also be subject to other claims relating to the violation of intellectual property rights, such as claims that we have misappropriated trade secrets or infringed third party trademarks. The risks of being involved in such litigation may also increase as we gain greater visibility as a public company and as we gain commercial acceptance of our products and move into new markets and applications for our products.

Regardless of merit or outcome, our involvement in any litigation, interference or other administrative proceedings could cause us to incur substantial expense and could significantly divert the efforts of our technical and management personnel. Any public announcements related to litigation or interference proceedings initiated or threatened against us could cause our share price to decline. An adverse determination, or any actions we take or agreements we enter into in order to resolve or avoid disputes, may subject us to the loss of our proprietary position or to significant liabilities, or require us to seek licenses that may include substantial cost and ongoing royalties. Licenses may not be available from third parties, or may not be obtainable on satisfactory terms. An adverse determination or a failure to obtain necessary licenses may restrict or prevent us from manufacturing and selling our products and offering our services. These outcomes could materially harm our business, financial condition and results of operations.

We may not be able to adequately protect our intellectual property outside of the United States.

The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States, and many companies have encountered significant problems in protecting and defending such rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to biotechnology, which could make it difficult for us to stop the infringement of our patents and for licensors, if they were to seek to do so, to stop infringement of patents that are licensed to us. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial cost and divert our efforts and attention from other aspects of our business. Additionally, prosecuting and maintaining intellectual property (particularly patent) rights are very costly endeavors, and for these and other reasons we may not pursue or obtain patent protection in all major markets. We do not know whether legal and government fees will increase substantially and therefore are unable to predict whether cost may factor into our global intellectual property strategy.

In addition to the risks associated with patent rights, the laws in some foreign jurisdictions may not provide protection for our trade secrets and other intellectual property. If our trade secrets or other intellectual property are misappropriated in foreign jurisdictions, we may be without adequate remedies to address these issues. Additionally, we also rely on confidentiality and assignment of invention agreements to protect our intellectual property in foreign jurisdictions. These agreements may provide for contractual remedies in the event of misappropriation, but we do not know to what extent, if any, these agreements and any remedies for their breach, will be enforced by a foreign court. In the event our intellectual property is misappropriated or infringed upon and an adequate remedy is not available, our future prospects will likely diminish. The sale of products that infringe our intellectual property rights, particularly if such products are offered at a lower cost, could negatively impact our ability to achieve commercial success and may materially and adversely harm our business.

 

 

 

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Our failure to secure trademark registrations could adversely affect our business and our ability to market our products and product candidates.

Our trademark applications in the United States and any other jurisdictions where we may file may not be allowed for registration, and our registered trademarks may not be maintained or enforced. During trademark registration proceedings, we may receive rejections. Although we are given an opportunity to respond to those rejections, we may be unable to overcome such rejections. In addition, in the PTO and in corresponding foreign agencies, third parties are given an opportunity to oppose pending trademark applications and to seek to cancel registered trademarks. Opposition or cancellation proceedings may be filed against our applications and/or registrations, and our applications and/or registrations may not survive such proceedings. Failure to secure such trademark registrations in the United States and in foreign jurisdictions could adversely affect our business and our ability to market our products and product candidates.

We may be unable to adequately prevent disclosure of trade secrets and other proprietary information, or the misappropriation of the intellectual property we regard as our own.

We rely on trade secrets to protect our proprietary know how and technological advances, particularly where we do not believe patent protection is appropriate or obtainable. Nevertheless, trade secrets are difficult to protect. We rely in part on confidentiality agreements with our employees, consultants, third party collaborators and other advisors to protect our trade secrets and other proprietary information. These agreements generally require that the other party to the agreement keep confidential and not disclose to third parties all confidential information developed by us or made known to the other party by us during the course of the other party’s relationship with us. These agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. Monitoring unauthorized disclosure is difficult, and we do not know whether the steps we have taken to prevent such disclosure are, or will be, adequate. If we were to seek to pursue a claim that a third party had illegally obtained and was using our trade secrets, it would be expensive and time consuming, and the outcome would be unpredictable. Further, courts outside the United States may be less willing to protect trade secrets. In addition, others may independently discover our trade secrets and proprietary information and therefore be free to use such trade secrets and proprietary information. Costly and time consuming litigation could be necessary to enforce and determine the scope of our proprietary rights. In addition, our trade secrets and proprietary information may be misappropriated as a result of breaches of our electronic or physical security systems in which case we may have no legal recourse. Failure to obtain, or maintain, trade secret protection could enable competitors to use our proprietary information to develop products that compete with our products or cause additional, material adverse effects upon our competitive business position.

We may be subject to claims that our employees have wrongfully used or disclosed alleged trade secrets of their former employers.

As is common our industry, we employ individuals who were previously employed at other companies in our industry or in related industries, including our competitors or potential competitors. We may be subject to claims that these employees or we have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management.

 

 

 

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RISKS RELATED TO OUR ORDINARY SHARES AND THIS OFFERING

We are eligible to be treated as an emerging growth company and we cannot be certain that the reduced disclosure requirements applicable to emerging growth companies will not make our ordinary shares less attractive to investors.

We are an emerging growth company, as defined in the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including (1) not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, (2) reduced disclosure obligations regarding executive compensation in this prospectus and our periodic reports and proxy statements and (3) exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. In addition, as an emerging growth company, we are not required to provide five years of selected financial data in this prospectus. We could be an emerging growth company for up to five years, although circumstances could cause us to lose that status earlier, including if the market value of our ordinary shares held by non-affiliates exceeds $700 million as of September 30 in any fiscal year before that time or if we have total annual gross revenue of $1.0 billion or more during any fiscal year before that time, in which cases we would no longer be an emerging growth company as of the following March 31 or, if we issue more than $1.0 billion in non-convertible debt during any three-year period before that time, we would cease to be an emerging growth company immediately. We cannot predict if investors will find our ordinary shares less attractive because we may rely on these exemptions. If some investors find our ordinary shares less attractive as a result, there may be a less active trading market for our ordinary shares and our share price may be more volatile.

Under the JOBS Act, emerging growth companies can also 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, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

There is no established trading market for our ordinary shares.

This offering constitutes our initial public offering of our ordinary shares, and no public market for our ordinary shares currently exists. We have applied to list our ordinary shares on The NASDAQ Global Market, or NASDAQ. There can be no assurance that an active trading market for our ordinary shares will develop or be sustained after this offering is completed. The initial offering price will be determined by negotiations among the lead underwriters and us. Among the factors that may be considered in determining the initial offering price will be our future prospects and the prospects of our industry in general, our revenue, net income and certain other financial and operating information in recent periods, and the financial ratios, market prices of securities and certain financial and operating information of companies engaged in activities similar to ours. Nevertheless, there can be no assurance that following this offering our ordinary shares will trade at a price equal to or greater than the offering price.

 

 

 

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Our share price is likely to be volatile, and purchasers of our ordinary shares could incur substantial losses.

Like other early-stage medical diagnostic companies, the market price of our ordinary shares is likely to be volatile. The factors below may also have a material adverse effect on the market price of our ordinary shares:

 

  Ø  

fluctuations in our results of operations;

 

  Ø  

our ability to enter new markets;

 

  Ø  

negative publicity;

 

  Ø  

changes in securities or industry analyst recommendations regarding our company, the sectors in which we operate, the securities market generally and conditions in the financial markets;

 

  Ø  

regulatory developments affecting MosaiQTM or our industry, including announcement of new adverse regulatory decisions in respect of MosaiQTM;

 

  Ø  

announcements of studies and reports relating to our products, including MosaiQTM, or those of our competitors;

 

  Ø  

changes in economic performance or market valuations of our competitors;

 

  Ø  

actual or anticipated fluctuations in our annual and quarterly financial results;

 

  Ø  

conditions in the industries in which we operate;

 

  Ø  

announcements by us or our competitors of new products, acquisitions, strategic relations, joint ventures or capital commitments;

 

  Ø  

additions to or departures of our key executives and employees;

 

  Ø  

fluctuations of exchange rates;

 

  Ø  

release or expiry of lock-up or other transfer restrictions on our outstanding ordinary shares; and

 

  Ø  

sales or perceived sales of additional shares of our ordinary shares.

In addition, the securities of life sciences companies have recently experienced significant volatility. The volatility of the securities of life sciences companies often does not relate to the operating performance of those companies. As we operate in a single industry, we are especially vulnerable to these factors to the extent that they affect our industry or our products, or to a lesser extent our markets. In the past, securities class action litigation has often been initiated against companies following periods of volatility in their stock price. This type of litigation could result in substantial costs and divert our management’s attention and resources, and could also require us to make substantial payments to satisfy judgments or to settle litigation.

If securities or industry analysts do not publish research or reports about our business or publish negative reports about our business, our share price and trading volume could decline.

The trading market for our ordinary shares will depend on the research and reports that securities or industry analysts publish about us or our business. Currently, we do not have any analyst coverage and we may not obtain analyst coverage in the future. In the event we obtain analyst coverage, we will not have any control over such analysts. If one or more of the analysts who cover us downgrade our shares or change their opinion of our shares, our share price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.

 

 

 

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Substantial future sales of our ordinary shares in the public market, or the perception that these sales could occur, could cause the price of our ordinary shares to decline, irrespective of the underlying performance of our business.

Additional sales of our ordinary shares in the public market after this initial public offering, or the perception that these sales could occur, could cause the market price of our ordinary shares to decline. Upon completion of this offering, we will have 14,376,547 ordinary shares outstanding, assuming no exercise of the underwriters’ overallotment option. All ordinary shares sold in this offering will be freely transferable without restriction or additional registration under the Securities Act. A limited number of ordinary shares may be available for sale shortly after this offering since they are not subject to existing contractual and legal restrictions on resale. The remaining ordinary shares outstanding after this offering will be available for sale upon the expiration of a lock-up period, which we expect will expire 180 days after the date of this prospectus, subject to volume and other restrictions as applicable under Rule 144 under the Securities Act, or Rule 144. Any or all of these shares may be released prior to expiration of the lock-up period at the discretion of the lead underwriters for this offering. To the extent any of these shares are sold into the market, particularly in substantial quantities, the market price of our ordinary shares could decline. See “Shares eligible for future sale.”

We have never paid cash dividends and do not intend to pay cash dividends on our ordinary shares in the foreseeable future.

We have never paid dividends on ordinary shares and do not anticipate paying any cash dividends on our ordinary shares in the foreseeable future. In addition, pursuant to the term loan agreement with MidCap Financial, we are precluded from paying any cash dividends without MidCap Financial’s consent. Under Jersey, Channel Islands law, any payment of dividends would be subject to relevant legislation and our Amended Articles of Association provide that all dividends must be approved by our Board of Directors and, in some cases, our shareholders, and may only be paid from our distributable profits available for the purpose, determined on an unconsolidated basis.

Galen Partners LLP, Mrs. Deidre Cowan (the wife of our Chairman and Chief Executive Officer) and management own a significant percentage of our ordinary shares and will be able to exercise significant influence over matters subject to shareholder approval.

As set forth under the heading “Principal shareholders,” as of December 31, 2013, certain entities affiliated with Galen Partners LLP, Mrs. Deidre Cowan (the wife of our Chairman and Chief Executive Officer), and our executive officers and directors, together with their respective affiliates, held substantially all of our outstanding ordinary shares and we expect that, upon completion of this offering, the same group will continue to hold at least 64.9% of our outstanding ordinary shares. Accordingly, even after this offering, these shareholders will be able to exert a significant degree of influence over our management and affairs and over matters requiring shareholder approval, including the election of our Board of Directors and approval of significant corporate transactions. This concentration of ownership could have the effect of entrenching our management and/or our Board of Directors, delaying or preventing a change in our control or otherwise discouraging a potential acquirer from attempting to obtain control of us, which in turn could have a material and adverse effect on the fair market value of our ordinary shares.

Management will have broad discretion as to the use of the proceeds from this offering, and we may not use the proceeds effectively.

Our management will have broad discretion as to the application of the net proceeds of this offering and could use them for purposes other than those currently contemplated. Our shareholders may not agree with the manner in which our management chooses to allocate and spend the net proceeds. Moreover,

 

 

 

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our management may use the net proceeds for corporate purposes that may not increase our profitability or our market value. See “Use of proceeds” for a description of our management’s intended use of the proceeds from this offering.

You will incur immediate and substantial dilution as a result of this offering.

If you purchase ordinary shares in this offering, assuming a public offering price of $15.00, the midpoint of the range of prices set forth on the cover of this prospectus, you will incur immediate and substantial dilution of $10.10 per share, representing the difference between the assumed initial public offering price of $15.00 per share and our pro forma net tangible book value per share after giving effect to this offering. Moreover, we have previously issued warrants to acquire preference shares, which will be converted into warrants to purchase ordinary shares upon completion of this offering, and options to acquire ordinary shares at prices significantly below the assumed initial public offering price. Based on outstanding warrants and options as of March 31, 2014, following the completion of this offering, there will be 64,000 ordinary shares subject to outstanding warrants and 779,462 ordinary shares subject to outstanding options. To the extent that these outstanding warrants or options are ultimately exercised, you will incur further dilution.

We will incur increased costs as a result of being a public company whose ordinary shares are publicly traded in the United States and our management expects to devote substantial time to public company compliance programs.

As a public company, we will incur significant legal, insurance, accounting and other expenses that we did not incur as a private company. In addition, our administrative staff will be required to perform additional tasks. For example, in anticipation of becoming a public company, we will need to adopt additional internal controls and disclosure controls and procedures, retain a transfer agent, adopt an insider trading policy and bear all of the internal and external costs of preparing and distributing periodic public reports in compliance with our obligations under the securities laws. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment will result in increased general and administrative expenses and may divert management’s time and attention. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us and our business may be harmed. In connection with this offering, we are increasing our directors’ and officers’ insurance coverage, which will increase our insurance costs. In the future, it will be more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our Board of Directors, particularly to serve on our audit committee and remuneration committee, and qualified executive officers.

In addition, in order to comply with the requirements of being a public company, we may need to undertake various actions, including implementing new internal controls and procedures and hiring new accounting or internal audit staff. The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file with the Securities and Exchange Commission, or the SEC, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that information required to be disclosed in reports under the Exchange Act is accumulated and communicated to our principal executive and financial officers. Any failure to develop or maintain effective controls could adversely affect the results of periodic management evaluations. In the event that we are not able to demonstrate compliance with the Sarbanes-Oxley Act, that our internal

 

 

 

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Risk factors

 

 

control over financial reporting is perceived as inadequate, or that we are unable to produce timely or accurate financial statements, investors may lose confidence in our operating results and the price of our ordinary shares could decline. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on NASDAQ.

We are not currently required to comply with the SEC’s rules that implement Section 404 of the Sarbanes-Oxley Act, and are therefore not yet required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. Upon becoming a public company, we will be required to comply with certain of these rules, which will require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of our internal control over financial reporting commencing with our second annual report. This assessment will need to include the disclosure of any material weaknesses in our internal control over financial reporting identified by our management or our independent registered public accounting firm. We are just beginning the costly and challenging process of implementing the system and processing documentation needed to comply with such requirements. We may not be able to complete our evaluation, testing and any required remediation in a timely fashion.

Our independent registered public accounting firm will not be required to attest formally to the effectiveness of our internal control over financial reporting until the later of our second annual report or the first annual report required to be filed with the SEC following the date we are no longer an emerging growth company. We cannot assure you that there will not be material weaknesses or significant deficiencies in our internal controls in the future.

We cannot guarantee that we will be able to satisfy the continued listing standards of NASDAQ going forward.

We expect our ordinary shares to be initially listed on NASDAQ. However, we cannot ensure that we will be able to satisfy the continued listing standards of NASDAQ going forward. If we cannot satisfy the continued listing standards going forward, The NASDAQ Stock Market may commence delisting procedures against us, which could result in our ordinary shares being removed from listing on NASDAQ. If our ordinary shares were to be delisted, the liquidity of our ordinary shares could be adversely affected and the market price of our ordinary shares could decrease. Delisting could also adversely affect our shareholders’ ability to trade or obtain quotations on our shares because of lower trading volumes and transaction delays. These factors could contribute to lower prices and larger spreads in the bid and ask price for our ordinary shares. You may also not be able to resell your shares at or above the price you paid for such shares or at all.

The dilutive effect of our warrants could have an adverse effect on the future market price of our ordinary shares or otherwise adversely affect the interests of our ordinary shareholders.

Based on outstanding warrants as of March 31, 2014, there will be an outstanding warrant to purchase 64,000 of our ordinary shares at an exercise price of $9.38 per share upon completion of this offering. This warrant is likely to be exercised if the market price of our ordinary shares equals or exceeds the warrant exercise price. To the extent such warrant is exercised, additional ordinary shares will be issued, which would dilute the ownership of existing shareholders. Further, if this warrant is exercised at any time in the future at a price lower than the book value per share of our ordinary shares, existing shareholders could suffer dilution of their investment.

 

 

 

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RISKS RELATED TO BEING A JERSEY, CHANNEL ISLANDS COMPANY LISTING ORDINARY SHARES

 

Our ordinary shares are issued under the laws of Jersey, Channel Islands, which may not provide the level of legal certainty and transparency afforded by incorporation in a United States state.

We are organized under the laws of the Jersey, Channel Islands, a British crown dependency that is an island located off the coast of Normandy, France. Jersey is not a member of the European Union. Jersey, Channel Islands legislation regarding companies is largely based on English corporate law principles. A further summary of applicable Jersey, Channel Islands company law is contained in this prospectus. However, there can be no assurance that Jersey, Channel Islands law will not change in the future or that it will serve to protect investors in a similar fashion afforded under corporate law principles in the United States, which could adversely affect the rights of investors.

Beneficial holders of our ordinary shares through the Depository Trust Company will not be legal shareholders of our company and therefore will have no direct rights as shareholders and must act through their participating broker to exercise those rights. As a result of this restriction, we are unable to comply with NASDAQ’s Direct Registration Program.

Under the laws of Jersey, Channel Islands, only holders of ordinary shares in the UK’s CREST electronic system or holders of shares in certificated form may be recorded in our share register as legal shareholders.

Cede & Co., as nominee for the Depository Trust Company, or DTC, will hold the ordinary shares in this offering on behalf of, and as nominee for, investors who purchase ordinary shares. We and DTC have no contractual relationship. Investors who purchase the ordinary shares (although recorded as owners within the DTC system) are legally considered holders of beneficial interests in those shares only and will have no direct rights against us. Investors who purchase ordinary shares in this offering must look solely to their participating brokerage in the DTC system for payment of dividends, the exercise of voting rights attaching to the ordinary shares and for all other rights arising with respect to the ordinary shares.

Under our Amended Articles of Association, the minimum notice period required to convene a general meeting is 14 clear days. When a general meeting is convened, you may not receive sufficient notice of a shareholders’ meeting to permit you to withdraw your ordinary shares from the DTC system to allow you to directly cast your vote with respect to any specific matter. In addition, a participating DTC brokerage firm may not be able to send voting instructions to you or carry out your voting instructions in a timely manner. We cannot assure you that you will receive voting materials in time to ensure that you can instruct your participating DTC brokerage, or its designee, to vote your shares. As a result, you may not be able to exercise your right to vote and you may lack recourse if your ordinary shares are not voted as you requested. In addition, if you hold your shares indirectly through the DTC system, you will not be able to call a shareholder meeting.

As a result of Jersey, Channel Islands law restrictions described above, we are unable to comply with NASDAQ’s Direct Registration Program requirements. NASDAQ Listing Rule 5210(c) requires that all securities listed on NASDAQ (except securities which are book-entry only) must be eligible for a Direct Registration Program operated by a clearing agency registered under Section 17A of the Exchange Act; provided, however, that a foreign issuer may follow its home country practice in lieu of this requirement

 

 

 

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Risk factors

 

 

if prohibited from complying by a law or regulation in its home country. As noted above, we are unable to comply with this requirement, and will follow our home country requirements providing that only holders of ordinary shares in the CREST electronic system or holders of shares in certificated form will be recorded in our share register. We do not intend to list our shares in the United Kingdom and, accordingly, we only anticipate issuing our shares in certificated form.

A change in our tax residence could have a negative effect on our future profitability.

We are organized under the laws of Jersey, Channel Islands. Our directors seek to ensure that our affairs are conducted in such a manner that we are not resident in any other jurisdiction for tax purposes. It is possible that in the future, whether as a result of a change in law or the practice of any relevant tax authority or as a result of any change in the conduct of our affairs following a review by our directors or for any other reason, we could become, or be regarded as having become, a resident in another higher tax jurisdiction. Should we become a tax resident in another jurisdiction, we may be subject to unexpected tax charges in such jurisdiction. Similarly, if the tax residency of any of our subsidiaries were to change from their current jurisdiction for any of the reasons listed above, we may be subject to similar tax consequences.

We may be or become classified as a passive foreign investment company for U.S. federal income tax purposes, which could result in materially adverse U.S. federal income tax consequences to U.S. investors in our ordinary shares.

A non-U.S. corporation will be a passive foreign investment company, or PFIC, for any taxable year in which (1) at least 75% of its gross income is passive income or (2) at least 50% of the value (determined on a quarterly basis) of its assets is attributable to assets that produce or are held for the production of passive income. Our status as a PFIC depends on certain facts outside of our control and the application of U.S. federal income tax rules that are not entirely clear. Accordingly, there can be no assurance that we will not be classified as a PFIC for our current taxable year or any future taxable year. If we are treated as a PFIC for any taxable year during which you hold our ordinary shares, such treatment could result in materially adverse U.S. federal income tax consequences to you if you are a U.S. taxable investor. For example, if we are or become a PFIC, you may become subject to increased tax liabilities under U.S. federal income tax laws and regulations, and will become subject to additional reporting requirements. We cannot assure you that we will not be a PFIC for our taxable year ending March 31, 2015 or any future taxable year. U.S. investors considering an investment in our ordinary shares are urged to consult their tax advisors regarding our possible status as a PFIC. See “Taxation—U.S. federal income tax consequences—Passive foreign investment company.”

U.S. withholding tax could apply to a portion of certain payments on the ordinary shares.

The United States has enacted rules, commonly referred to as “FATCA,” that generally impose a new reporting and withholding regime with respect to certain U.S. source payments (including dividends and interest), gross proceeds from the disposition of property that can produce U.S. source interest and dividends and certain payments made by entities that are classified as financial institutions under FATCA. The governments of Jersey, Channel Islands and the United States have entered into an agreement with respect to the implementation of FATCA. Under this agreement, we do not expect to be subject to withholding under FATCA on any payments we receive. Similarly, as currently drafted, we do not expect that withholding under FATCA will apply to payments on the ordinary shares. However, significant aspects of whether or how FATCA will apply to non-U.S. issuers like us remain unclear, and no assurance can be given that withholding under FATCA will not become relevant with respect to payments on the ordinary shares in the future. Even if FATCA were to become relevant to payments on

 

 

 

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the shares, it would not be applicable earlier than January 1, 2017. Prospective investors should consult their own tax advisors regarding the potential impact of FATCA, including the agreement relating to FATCA between the governments of Jersey and the United States, to an investment in the ordinary shares.

U.S. shareholders may not be able to enforce civil liabilities against us.

A number of our directors and executive officers and a number of directors of certain of our subsidiaries are not residents of the United States, and a substantial portion of the assets of such persons are located outside the United States. As a result, it may not be possible for investors to effect service of process within the United States upon such persons.

Judgments of U.S. courts may not be directly enforceable outside of the United States and the enforcement of judgments of U.S. courts outside of the United States may be subject to limitations. For further information on the enforcement of judgments of U.S. courts in Jersey, Channel Islands, see “Cautionary statement on the enforceability of civil liabilities”.

Investors may also have difficulties pursuing an original action brought in a court in a jurisdiction outside the United States for liabilities under the securities laws of the United States.

 

 

 

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Cautionary note regarding forward-looking statements

This prospectus contains forward-looking statements. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, and other future conditions, and include estimates and projections. Forward-looking statements can be identified by words such as “strategy,” “objective,” “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “target,” “potential,” “will,” “would,” “could,” “should,” “continue,” “contemplate,” “might,” “design” and other similar expressions, although not all forward-looking statements contain these identifying words. Although we believe that we have a reasonable basis for each forward-looking statement contained in this prospectus, we caution you that these statements are based on a combination of facts and factors currently known by us and our expectations of the future, about which we cannot be certain, and are subject to numerous known and unknown risks and uncertainties.

Forward-looking statements include statements about:

 

  Ø  

the development, regulatory approval and commercialization of MosaiQTM, including :

 

  Ø  

our and our partners’ ability to timely and cost-effectively complete the building of the manufacturing system for consumables;

 

  Ø  

our and our partners’ ability to timely and cost-effectively complete the design and development of the initial high-throughput instrument;

 

  Ø  

our and our partners’ ability to timely and cost-effectively complete the conversion of our recently leased facility located in Eysins, Switzerland to manufacture MosaiQTM consumables;

 

  Ø  

our ability to timely and successfully complete required regulatory submissions, field trial studies, and marketing clearances;

 

  Ø  

our planned initial and full commercial launches; and

 

  Ø  

our expected arrangements with one or more commercial partners.

 

  Ø  

the design of blood grouping and disease screening capabilities of MosaiQTM and the benefits of MosaiQTM for both customers and patients;

 

  Ø  

future demand for and customer adoption of MosaiQTM, the factors that we believe will drive such demand and our ability to address such demand;

 

  Ø  

our expected profit margins for MosaiQTM;

 

  Ø  

the size of the market for MosaiQTM ;

 

  Ø  

the effects of competition;

 

  Ø  

the regulation of MosaiQTM by the FDA or other regulatory bodies, or any unanticipated regulatory changes or scrutiny by such regulators;

 

  Ø  

future plans for our conventional reagent products;

 

  Ø  

our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others;

 

  Ø  

the status of our future relationships with customers, suppliers, and regulators relating to our conventional reagent products;

 

  Ø  

future demand for our conventional reagent products and our ability to meet such demand;

 

  Ø  

our ability to manage the risks associated with international operations;

 

 

 

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  Ø  

anticipated changes, trends and challenges in our business and the transfusion diagnostics market;

 

  Ø  

the expected outcome or impact of pending or threatened litigation;

 

  Ø  

our anticipated use of the net proceeds of this offering and our cost estimates regarding the conversion of our manufacturing facility in Eysins, Switzerland, the building of the manufacturing system for MosaiQTM consumables, the development of the initial MosaiQTM consumables and instrument and other MosaiQTM costs;

 

  Ø  

our anticipated cash needs, and our estimates regarding our capital requirements and capital expenditures (including the expected cost of a new expanded manufacturing facility in Edinburgh, Scotland); and

 

  Ø  

our plans for executive and director compensation for the future.

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place significant reliance on our forward-looking statements. The inclusion of forward-looking information should not be regarded as a representation by us, the underwriters or any other person that the future plans, estimates or expectations that we contemplate will be achieved. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. Important factors that could cause actual results and events to differ materially from those indicated in the forward-looking statements include those identified under the heading “Risk factors.” These factors should not be construed as exhaustive, and should be read in conjunction with the other cautionary statements included in this prospectus.

Many important factors, in addition to the factors described in this prospectus, may adversely and materially affect our results as indicated in forward-looking statements. You should read this prospectus and the documents that we have filed as exhibits to the registration statement of which this prospectus is a part completely and with the understanding that our actual future results may be materially different and worse from what we expect.

The forward-looking statements in this prospectus represent our views as of the date of this prospectus. We undertake no obligation to publicly update any forward-looking statements whether as a result of new information, future developments or otherwise.

 

 

 

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Use of proceeds

We estimate that the net proceeds of the sale of 5,000,000 ordinary shares in this offering will be approximately $66.8 million at an assumed initial public offering price of $15.00 per share, the midpoint of the range of prices set forth on the cover of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters exercise their option to purchase additional shares in full, we estimate that the net proceeds will be approximately $77.2 million after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

Each $1.00 increase or decrease in the assumed initial public offering price of $15.00 per share would increase or decrease our expected net proceeds by $4.6 million, assuming the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

We also may increase or decrease the number of shares we are offering. An increase of 1,000,000 shares in the number of shares offered by us would increase the net proceeds to us from this offering by approximately $13.9 million after deducting the underwriting discount and estimated offering expenses payable by us, assuming the assumed initial public offering price of $15.00 per share remains the same. Conversely, a decrease of 1,000,000 shares in the number of shares offered by us would decrease the net proceeds to us from this offering by approximately $13.9 million after deducting the underwriting discount and estimated offering expenses payable by us, assuming the assumed initial public offering price of $15.00 per share remains the same.

With the net proceeds from this offering, we expect to invest (i) approximately $26.0 million on the conversion of our recently leased MosaiQ manufacturing facility in Eysins, Switzerland and the installation of the initial manufacturing system for consumables and (ii) approximately $28.0 million on the development of the initial MosaiQ consumables and instrument. We intend to use the balance of the net proceeds of this offering for general corporate purposes. Based on our current cost estimates, we believe the net proceeds of this offering will be sufficient to complete the conversion of the Eysins facility and the development of the initial MosaiQ consumables and instrument. The remaining net proceeds, together with our existing capital resources, will be sufficient to fund our remaining expected development costs for MosaiQ through the completion of formal field trials.

Our expected use of the net proceeds from this offering is based upon our present plans and business condition. As of the date of this prospectus, we cannot predict with certainty all of the particular uses for the net proceeds to be received upon the completion of this offering or the amounts that we will actually spend on the uses set forth above. The amounts and timing of our actual use of proceeds will vary depending on numerous factors, in addition to the factors described under the heading “Risk factors” in this prospectus. As a result, management will retain broad discretion over the allocation of the net proceeds from this offering, and investors will be relying on the judgment of our management regarding the application of the net proceeds.

Prior to final allocation of the net proceeds of this offering as described above, we plan to invest the net proceeds of this offering on an interim basis in high-quality, short-term, interest-bearing obligations, investment-grade instruments or certificates of deposit.

We may also use a portion of the net proceeds to opportunistically acquire, license and invest in complementary products, technologies or businesses. However, we currently have no agreements or commitments to complete any such transaction.

 

 

 

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Dividend policy

We have never declared or paid cash dividends on our ordinary shares. We currently intend to retain all available funds and any future earnings, if any, to fund the development and expansion of our business and we do not anticipate paying any cash dividends in the foreseeable future. Any future determination as to the declaration and payment of dividends, if any, will be made at the complete discretion of our Board of Directors and will depend on then existing conditions, including our results of operations, financial conditions, contractual restrictions, capital requirements, business prospects and other factors our Board of Directors may deem relevant.

 

 

 

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Capitalization

The following table sets forth our cash, cash equivalents and capitalization as of December 31, 2013:

 

Ø  

on an actual basis;

 

Ø  

on a pro forma basis to give effect to (1) the conversion and consolidation of all preference and ordinary shares as of December 31, 2013 into an aggregate of 9,356,533 ordinary shares immediately prior to this offering, (2) the conversion of an outstanding warrant to purchase C preference shares as of December 31, 2013 into a warrant to purchase 64,000 ordinary shares immediately prior to this offering and the resultant reclassification of our warrant liability to shareholders’ equity (deficit) and (3) the effectiveness of our Amended Articles of Association immediately prior to this offering; and

 

Ø  

on a pro forma as adjusted basis, reflecting the pro forma adjustments discussed above and to give effect to our issuance and sale of 5,000,000 ordinary shares at an assumed initial public offering price of $15.00 per share, the midpoint of the range of prices set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The pro forma information below is illustrative only and our capitalization following the closing 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 information together with our consolidated financial statements and related notes appearing elsewhere in this prospectus and the information set forth under the heading “Selected consolidated financial data” and “Management’s discussion and analysis of financial condition and results of operations.”

 

 

 

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    As of December 31, 2013  
     Actual     Pro forma    

Pro Forma

As Adjusted

 
    (in thousands, except share and per
share data)
 
    (unaudited)  

Cash and cash equivalents(1)

  $ 13,756      $ 13,756      $ 80,525   
 

 

 

   

 

 

   

 

 

 

Long-term debt

  $ 14,579      $ 14,579      $ 14,579   

Preference share warrant liability

    421        —          —     

A preference shares (nil par value), 12,719,954 shares issued and outstanding actual; no shares issued and outstanding pro forma and pro forma as adjusted

    13,180        —          —     

B preference shares (nil par value), 14,583,407 shares issued and outstanding actual; no shares issued and outstanding pro forma and pro forma as adjusted

    14,991        —          —     

C preference shares (nil par value), 929,167 shares issued and outstanding actual; no shares issued and outstanding pro forma and pro forma as adjusted

    2,592        —          —     

Shareholders’ deficit(1):

     

Ordinary shares (nil par value), 40,029 ordinary shares, 244,142 A ordinary shares and 37,957 B ordinary shares issued and outstanding actual;                  ordinary shares issued and                  outstanding pro forma and                 ordinary shares issued and outstanding pro forma as adjusted, and no A ordinary shares and B ordinary shares issued and outstanding on a pro forma or pro forma as adjusted basis

    59        30,822        97,591   

Distribution in excess of capital

    (17,025     (16,604     (16,604

Accumulated other comprehensive income

    479        479        479   

Accumulated deficit

    (10,082     (10,082     (10,082
 

 

 

   

 

 

   

 

 

 

Total shareholders’ equity (deficit)

    (26,569     4,615        71,384   
 

 

 

   

 

 

   

 

 

 

Total capitalization

  $ 19,194      $ 19,194      $ 85,963   
 

 

 

   

 

 

   

 

 

 

 

(1)   A $1.00 increase or decrease in the assumed initial public offering price of $15.00 per ordinary share (the midpoint of the range of prices set forth on the cover of this prospectus) would increase or decrease our actual cash and cash equivalents by $4.6 million, after deducting the estimated underwriting discounts and commissions and estimated expenses payable by us. An increase of 1,000,000 shares in the number of shares offered by us would increase our pro forma as adjusted cash and cash equivalents, additional paid-in capital, total shareholders’ equity and total capitalization by approximately $13.9 million, assuming the assumed initial public offering price of $15.00 per share remains the same. Conversely, a decrease of 1,000,000 shares in the number of shares offered by us would decrease our pro forma as adjusted cash and cash equivalents, additional paid-in capital, total shareholders’ equity and total capitalization by approximately $13.9 million, assuming the assumed initial public offering price of $15.00 per share remains the same.

The table above does not include:

 

  Ø  

20,014 ordinary shares issued upon the exercise of options, at a price of $9.38 per share on March 28, 2014;

 

  Ø  

200,000 C preference shares issuable upon exercise of an outstanding warrant as of December 31, 2013, at an exercise price of $3.00 per share, which will be converted into a warrant to purchase 64,000 ordinary shares, at an exercise price of $9.38 per share, immediately prior to this offering;

 

  Ø  

720,756 ordinary shares issuable upon the exercise of options outstanding as of December 31, 2013, at a weighted-average exercise price of $2.53 per ordinary share; and

 

  Ø  

1,500,000 ordinary shares reserved for future grant or issuance under the 2014 Plan, which will become effective in connection with this offering.

 

 

 

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Dilution

If you invest in our ordinary shares in this offering, your interest will be diluted to the extent of the difference between the initial public offering price per share of our ordinary shares in this offering and the pro forma as adjusted net tangible book value per share of our ordinary shares after this offering. Dilution occurs because the per share offering price of our ordinary shares in this offering is substantially in excess of the net tangible book value per share attributable to our existing owners.

As of December 31, 2013, we had a pro forma net tangible book value of $3.6 million, or $0.39 per ordinary share, taking into account (1) the conversion of all outstanding preference and ordinary shares into ordinary shares immediately prior to this offering and (2) the conversion of our outstanding warrant to purchase C preference shares into a warrant to purchase ordinary shares immediately prior to this offering and the resultant reclassification of our warrant liability to shareholders’ equity (deficit). Without giving effect to the conversion of our outstanding warrant to purchase C preference shares into a warrant to purchase ordinary shares, we had a historical net tangible book value of $3.2 million, or $0.34 per ordinary share, as of December 31, 2013. Historical net tangible book value per share is equal to our total tangible assets, less total liabilities, divided by the adjusted number of outstanding ordinary shares.

Investors participating in this offering will incur immediate and substantial dilution. After giving effect to (1) the conversion of all preference and ordinary shares into ordinary shares immediately prior to this offering, (2) the conversion of our outstanding warrant to purchase C preference shares into a warrant to purchase ordinary shares immediately prior to this offering and (3) the sale of 5,000,000 ordinary shares in this offering, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, at an assumed initial public offering price of $15.00 per share, the midpoint of the range of prices set forth on the cover of this prospectus, our pro forma as adjusted net tangible book value as of December 31, 2013 would have been $70.4 million, or $4.90 per ordinary share. This represents an immediate increase in pro forma as adjusted net tangible book value of $4.51 per share to our existing shareholders and an immediate dilution of $10.10 per share to investors participating in this offering.

The following table illustrates this per share dilution:

 

Assumed initial public offering price per share

      $ 15.00  

Historical net tangible book value per share as of December 31, 2013

   $ 0.34      

Increase attributable to the conversion of outstanding warrant to purchase C preference shares

   $ 0.05      
  

 

 

    

Pro forma net tangible book value per share as of December 31, 2013

   $ 0.39      

Increase in net tangible book value per share attributable to new investors

   $ 4.51      

Pro forma as adjusted net tangible book value per share after this offering

      $ 4.90  
     

 

 

 

Dilution per share to new investors

      $ 10.10   
     

 

 

 

If the underwriters exercise their option to purchase additional shares in full, the pro forma as adjusted net tangible book value would be $5.35 per share representing an immediate dilution of $9.65 per share to new investors, based on the assumed initial public offering price of $15.00 per share, the midpoint of the range of prices set forth on the cover of this prospectus.

 

 

 

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Each $1.00 increase or decrease in the assumed initial public offering price of $15.00 per share would increase or decrease our pro forma as adjusted net tangible book value by $4.6 million, or $0.32 per share, and the dilution to investors purchasing shares in this offering by $4.6 million, or $0.32 per share, assuming the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. An increase or decrease of 1,000,000 shares in the number of shares offered by us at the assumed public offering price would increase or decrease our pro forma as adjusted net tangible book value after this offering by $13.9 million, or $0.97 per share, and the dilution per share to new investors in this offering by $13.9 million, or $0.97 per share assuming the assumed initial public offering price of $15.00 remains the same.

The following table summarizes, on a pro forma as adjusted basis as of December 31, 2013, the differences between the number of ordinary shares purchased from us, the total consideration and the average price per share paid by existing shareholders (giving effect to the conversion of all of our preference shares, A ordinary shares and B ordinary shares into ordinary shares immediately prior to this offering) and by investors participating in this offering, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, at an assumed initial public offering price of $15.00 per share, the midpoint of the range of prices set forth on the cover of this prospectus.

 

     Shares Purchased     Total Consideration     Average Price
Per Share
 
      Number      Percent     Amount      Percent    

Existing shareholders

     9,356,533         65   $ 30,822,000         32   $ 3.29   

New investors

     5,000,000         35   $ 66,769,000         68   $ 13.35   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

     14,356,533         100   $ 97,591,000         100   $ 6.80   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

The number of ordinary shares to be outstanding after this offering is based on ordinary shares outstanding as of December 31, 2013 and excludes the following:

 

  Ø  

20,014 ordinary shares issued upon the exercise of options, at a price of $9.38 per share on March 28, 2014;

 

  Ø  

200,000 C preference shares issuable upon exercise of an outstanding warrant as of December 31, 2013, at an exercise price of $3.00 per share, which will be converted into a warrant to purchase 64,000 ordinary shares, at an exercise price of $9.38 per share, immediately prior to this offering;

 

  Ø  

720,756 ordinary shares issuable upon the exercise of options outstanding as of December 31, 2013, at a weighted-average exercise price of $2.53 per ordinary share;

 

  Ø  

1,500,000 ordinary shares reserved for future grant or issuance under the 2014 Plan, which will become effective in connection with this offering.

To the extent that new options are issued under the 2014 Plan or we issue additional ordinary shares in the future, there will be further dilution to investors participating in this offering. See “Risk factors—You will incur immediate and substantial dilution as a result of this offering.”

 

 

 

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Selected consolidated financial data

The following tables summarize our consolidated financial data. The consolidated statement of income for the years ended March 31, 2013, 2012 and 2011 and the consolidated balance sheet data as of March 31, 2012 and 2013 have been derived from our audited consolidated financial statements appearing elsewhere in this prospectus. The consolidated statement of income for the nine months ended December 31, 2013 and 2012 and the consolidated balance sheet data as of December 31, 2013 have been derived from our unaudited consolidated financial statements appearing elsewhere in this prospectus.

We have prepared the unaudited consolidated interim financial information presented below on the same basis as our audited consolidated financial statements. The unaudited consolidated financial information includes all adjustments, consisting only of normal recurring adjustments that are necessary for a fair presentation of our financial position and results of operations for these periods. Our historical results are not necessarily indicative of the results that may be expected in the future and our results for any interim period are not necessarily indicative of the results that may be expected for a full fiscal year. You should read the summary of our financial data set forth below together with our financial statements and the related notes to those statements, as well as “Management’s discussion and analysis of financial condition and results of operations” appearing elsewhere in this prospectus. The summary financial data in this section are not intended to replace our financial statements and the accompanying notes.

 

 

 

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     Year ended March 31,     Nine months ended
December 31,
 
      2013     2012     2011     2013     2012  
     (in thousands, except share and per share data)  
                       (unaudited)  

Consolidated statement of loss:

          

Revenue:

          

Product sales

   $ 13,753      $ 11,550      $ 9,545      $ 12,332      $ 10,319   

Other revenues

     618        669        489        2,768        618   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     14,371        12,219        10,034        15,100        10,937   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenues

     (7,169     (6,749     (5,628     (6,271     (5,384
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     7,202        5,470        4,406        8,829        5,553   

Operating expenses:

          

Sales and marketing

     (2,252     (1,674     (1,456     (2,057     (1,630

Research and development, net of government grants

     (2,617     (1,749     (1,703     (4,916     (1,883

General and administrative expenses:

          

Compensation expense in respect of share options and management equity incentives

     (471     —          —          (701     (335

Other general and administrative expenses

     (6,353     (6,011     (5,346     (5,442     (4,584
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total general and administrative expense

     (6,824     (6,011     (5,346     (6,143     (4,919
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     (11,693     (9,434     (8,505     (13,116     (8,432
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (4,491     (3,964     (4,099     (4,287     (2,879

Other income (expense):

          

Interest expense

     (234     (340     (312     (582     (192

Other, net

     11        (169     (210     (83     29   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expenses), net

     (223     (509     (522     (665     (163
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (4,714     (4,473     (4,621     (4,952     (3,042

Provision for income taxes

     —          —          —          —          —     

Net loss

   $ (4,714   $ (4,473   $ (4,621   $ (4,952   $ (3,042
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss available to ordinary shareholders

   $ (4,714   $ (4,473   $
 
 
(4,621
  
  $ (4,952   $ (3,042

Loss per ordinary share—basic and diluted

   $ (62.97   $ (78.04   $ (81.16)      $ (34.34   $ (40.82

Weighted-average shares outstanding—basic and diluted

     74,866        57,317        56,936        144,178        74,523   

 

     As of March 31,     As of December 31,  
          2013             2012             2013      
     (in thousands)  

Consolidated balance sheet data:

         (unaudited

Cash and cash equivalents

   $ 4,219      $ 4,354      $ 13,756   

Total assets

     12,891        12,357        26,378   

Long-term debt

     3,000        3,000        14,579   

Total liabilities

     7,931        7,286        22,184   

Total shareholders’ equity (deficit)

   $ (23,061   $ (18,687   $ (26,569

 

 

 

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

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the financial statements and the related notes to those statements included later in this prospectus. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, beliefs and expectations that involve risks and uncertainties. Our actual results and the timing of events could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly in “Risk factors.”

OVERVIEW

We were incorporated in Jersey, Channel Islands on January 28, 2012. On February 16, 2012, we acquired the entire issued share capital of Alba Bioscience Limited (or Alba), Quotient Biodiagnostics, Inc. (or QBDI) and QBD (QSIP) Limited (or QSIP) from Quotient Biodiagnostics Group Limited (or QBDG), our predecessor.

The acquisition of Alba, QBDI and QSIP by us is treated for accounting purposes as a combination of entities under common control as these entities were all controlled by QBDG prior to their acquisition by us. We recognized the assets and liabilities of Alba, QBDI and QSIP at their carrying amounts in the financial statements of those companies. We are a continuation of QBDG and its subsidiaries and, accordingly, our consolidated financial statements include the assets, liabilities and results of operations of the subsidiaries transferred since their inception.

Our Business

We are an established, commercial-stage diagnostics company committed to reducing healthcare costs and improving patient care through the development and commercialization of innovative tests for blood grouping and serological disease screening, commonly referred to as transfusion diagnostics. Blood grouping involves specific procedures performed at donor or patient testing laboratories to characterize blood, which includes antigen typing and antibody identification.

Through our subsidiary Alba, we have over 30 years experience manufacturing and supplying conventional reagent products used for blood grouping within the $2.8 billion global transfusion diagnostics market. We are developing MosaiQTM, our proprietary technology platform, to better address the comprehensive needs of this large and established market. We believe MosaiQTM has the potential to be a transformative technology that will significantly reduce the cost of blood grouping in the donor and patient testing environments while improving patient outcomes.

We currently operate as one business segment with over 170 employees in the United States and the United Kingdom. Our principal markets are the United States, the United Kingdom and Japan. Based on the location of the customer, revenues outside the United States accounted for 48% of total revenue for the nine months ended December 31, 2013 and 58% and 60% during the fiscal years ended March 31, 2013 and 2012, respectively.

We have incurred net losses and negative cash flows from operations in each fiscal year since we commenced operations in 2007. As of December 31, 2013, we had an accumulated deficit of $10.1 million. We expect that our operating losses will continue at least for the next several years as we

 

 

 

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continue our investment in the development and commercialization of MosaiQ™. Our total revenue was $15.1 million for the nine months ended December 31, 2013, $14.4 million for the fiscal year ended March 31, 2013, and $12.2 million for the fiscal year ended March 31, 2012. Our net loss was $5.0 million for the nine months ended December 31, 2013, $4.7 million for the fiscal year ended March 31, 2013, and $4.5 million for the fiscal year ended March 31, 2012.

Revenue

We generate revenue from the sale of conventional reagent products directly to hospitals, donor collection agencies and independent testing laboratories in the United States, the United Kingdom and to distributors in Europe and the rest of the world, and indirectly through sales to our OEM customers. We recognize revenues in the form of product sales when the goods are shipped. Products sold by standing purchase orders as a percentage of revenue were 73% for the nine months ended December 31, 2013 and 71% and 58% during the fiscal years ended March 31, 2013 and 2012, respectively. We also provide product development services to our OEM customers. We recognize revenue from these contractual relationships in the form of product development fees, which are included in Other revenues. For a description of our revenue recognition policies, see “—Critical accounting policies and significant judgments and estimates—Revenue recognition and accounts receivable.”

Our revenue is denominated in multiple currencies. Sales in the United States and to certain of our OEM customers are denominated in U.S. Dollars. Sales in Europe and the rest of the world are denominated primarily in Pounds Sterling, Euros or Yen. Our expenses are generally denominated in the currencies in which our operations are located, which is primarily in the United Kingdom and United States. We operate globally and therefore changes in foreign currency exchange rates may become material to us in the future due to factors beyond our control. See “—Quantitative and qualitative disclosure about market risk—Foreign currency exchange risk.”

Cost of revenue and operating expenses

Cost of revenue consists of direct labor expenses, including employee benefits, overhead expenses, material costs and freight costs, along with the depreciation of manufacturing equipment and leasehold improvements. Our gross profit represents total revenue less the cost of revenue, and gross margin represents gross profit expressed as a percentage of total revenue. Our gross margin was 58% for the nine months ended December 31, 2013 and 50% and 45% the fiscal years ended March 31, 2013 and 2012, respectively. Excluding other revenues, which consist of product development fees, our gross margin on product sales was 49% for the nine months ended December 31, 2013 and 48% and 42% the fiscal years ended March 31, 2013 and 2012, respectively. We expect our overall cost of revenue to increase in absolute U.S. Dollars as we continue to increase our product sales volumes. However, we also believe that we can continue to achieve additional efficiencies in our manufacturing operations, primarily through increasing sales volumes, which should improve our gross margin on product sales.

Our sales and marketing expenses include costs associated with our sales organization, including our direct sales force, as well as our marketing and customer service personnel. These expenses consist principally of salaries, commissions, bonuses and employee benefits, as well as travel costs related to our sales activities. These expenses also include direct and indirect costs associated with our product marketing activities. We expense all sales and marketing costs as incurred. We expect sales and marketing expense to increase in absolute U.S. Dollars, primarily as a result of commissions on increased product sales in the United States, but decline as a percentage of product sales.

Our research and development expenses include costs associated with performing research, development, field trials and our regulatory activities. Research and development expenses include research personnel-

 

 

 

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related expenses, fees for contractual and consulting services, travel costs, laboratory supplies and depreciation of laboratory equipment. We expense all research and development costs as incurred, net of government grants received. In 2008, we were awarded grant funding totaling £1.8 million by Scottish Enterprise, a public body of the Scottish Government, relating to the development of MosaiQTM. Our research and development efforts are focused on developing new products and technologies for the global transfusion diagnostics market. We segregate research and development expenses for the MosaiQTM project from expenses for other research and development projects. We do not maintain detailed records of these other costs by activity. Since the 2007 purchase of Alba to December 31, 2013, total expenditures on the MosaiQTM project have amounted to approximately $12.2 million. We expect overall research and development expense to increase in absolute U.S. Dollars as we focus on completing the development of MosaiQTM.

Our general and administrative expenses include costs for our executive, accounting and finance, legal, corporate development, information technology and human resources functions. We expense all general and administrative expenses as incurred. These expenses consist principally of salaries, bonuses and employee benefits for the personnel performing these functions, including travel costs. These expenses also include share-based compensation, professional service fees (such as audit, tax and legal fees), costs related to our Board of Directors, and general corporate overhead costs, which includes depreciation and amortization. We expect our general and administrative expenses to increase after this offering, primarily due to the costs of operating as a public company, such as additional legal, accounting and corporate governance expenses, including expenses related to compliance with the Sarbanes-Oxley Act, directors’ and officers’ insurance premiums and investor relations expenses.

Net interest expense consists primarily of interest charges on our loan balances and the amortization of debt issuance costs. We amortize debt issuance costs over the life of the loan and report them as interest expense in our statements of operations.

Net other income (expense) consists primarily of realized exchange fluctuations resulting from the settlement of transactions in currencies other than the functional currencies of our businesses. Monetary assets and liabilities that are denominated in foreign currencies are measured at the period-end closing rate with resulting unrealized exchange fluctuations. The functional currencies of our businesses are Pounds Sterling and U.S. Dollars depending on the entity.

 

 

 

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RESULTS OF OPERATIONS

Comparison of nine months ended December 31, 2013 and 2012

The following table sets forth, for the periods indicated, the amounts of certain components of our statements of operations and the percentage of total revenue represented by these items, showing period-to-period changes.

 

     Nine months ended December 31,        
     2013     2012     Change  
      Amount     % of revenue     Amount     % of revenue     Amount     %  
     (in thousands, except percentages)  
Revenue:             

Product sales

   $ 12,332        82   $ 10,319        94   $ 2,013        20

Other revenues

     2,768        18     618        6     2,150        348
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     15,100        100     10,937        100     4,163        38

Cost of revenue

     6,271        42     5,384        49     887        16
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     8,829        58     5,553        51     3,276        59
Operating expenses:             

Sales and marketing

     2,057        14     1,630        15     427        26

Research and development

     4,916        33     1,883        17     3,033        261

General and administrative

     6,143        41     4,919        45     1,224        25
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     13,116        87     8,432        77     4,684        56
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (4,287     -28     (2,879     -26     (1,408     49
Other income (expense):             

Interest expense, net

     (582     -4     (192     -2     (390     203

Other, net

     (83     -1     29        0     (112     N/A   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense), net

     (665     -5     (163     -2     (502     308
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (4,952     -33     (3,042     -28     (1,910     63

Provision for income taxes

     0        0     0        0     0        N/A   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (4,952     -33   $ (3,042     -28   $ (1,910     63
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenue

Total revenue increased by 38% to $15.1 million for the nine months ended December 31, 2013, compared with $10.9 million for the nine months ended December 31, 2012. This increase in revenue was driven by growth from product sales of $2.0 million, or 20%, and $2.2 million from other revenues, which include product development fees. Products sold by standing purchase order were 73% of product sales for the nine months ended December 31, 2013, compared with 72% for the nine months ended December 31, 2012.

The below table sets forth revenue by product group:

 

     Nine months ended December 31,        
     2013     2012     Change  
      Amount      % of revenue     Amount      % of revenue     Amount      %  
     (in thousands, except percentages)  
Revenue:                

Product sales—OEM customers

   $ 8,718         58   $ 7,301         67   $ 1,417         19

Product sales—direct customers and distributors

     3,614         24     3,018         27     596         20

Other revenues

     2,768         18     618         6     2,150         348
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total revenue

   $ 15,100         100   $ 10,937         100   $ 4,163         38
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

 

 

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OEM Sales.    Product sales to OEM customers increased 19% to $8.7 million for the nine months ended December 31, 2013, compared with $7.3 million for the nine months ended December 31, 2012. This growth was primarily driven by increased sales of our whole blood control products to existing OEM customers and initial shipments of our rare anti-sera products.

Direct Sales to Customers and Distributors.    Direct product sales increased 20% to $3.6 million for the nine months ended December 31, compared with $3.0 million for the nine months ended December 31, 2012. Direct sales in the United States increased by $0.8 million primarily driven by sales of our reagent red blood cell products launched in July 2012. Direct sales outside the United States declined by $0.2 million primarily as a result of our initiative to better utilize manufacturing capacity by offering fewer products in Europe, which we started in April 2012.

Other Revenues.    Other revenues increased by $2.2 million to $2.8 million for the nine months ended December 31, 2013, compared with $0.6 million for the nine months ended December 31, 2012. During the nine months ended December 31, 2013, we recognized $2.7 million of product development fees associated with the development of a range of rare antisera products for an OEM customer.

Cost of revenue and gross margin

Cost of revenue increased by 16% to $6.3 million for the nine months ended December 31, 2013, compared with $5.4 million for the nine months ended December 31, 2012, reflecting growth in product sales volumes. Gross margin, which represents gross profit expressed as a percentage of total revenue, increased to 58% for the nine months ended December 31, 2013, compared with 51% for the nine months ended December 31, 2012. The gross margin improvement was primarily attributable to the increase in other revenues, which included $2.8 million of product development fees. Excluding other revenues, gross margin on product sales increased to 49% for the nine months ended December 31, 2013 period compared with 48% for the nine months ended December 31, 2012. The improved gross margin on product sales reflects increased sales volumes, improved revenue mix, the effect of our continuous manufacturing process improvement program and our decision to offer fewer products in Europe.

Sales and marketing expenses

Sales and marketing expense increased by 26% to $2.1 million for the nine months ended December 31, 2013, compared with $1.6 million for the nine months ended December 31, 2012. This increase resulted primarily from commissions paid on greater direct product sales in the United States and increased marketing expenses associated with a major industry conference. As a percentage of total product sales, sales and marketing expenses were 17% for the nine months ended December 31, 2013, compared with 16% for the nine months ended December 31, 2012.

Research and development expenses

 

     Nine months ended December 31,        
     2013     2012     Change  
      Amount     % of revenue     Amount     % of revenue     Amount      %  
     (in thousands, except percentages)  
Research and development expenses:              

MosaiQTM research and development

   $ 3,949        26   $ 1,953        18   $ 1,996         102

Other research and development

     1,260        8     883        8     377         43

Grant income

     (293     -2     (953     -9     660         -69
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total research and development expenses

   $ 4,916        33   $ 1,883        17   $ 3,033         261
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

 

 

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Research and development expenses increased by $3.0 million to $4.9 million for the nine months ended December 31, 2013, compared with $1.9 million for the nine months ended December 31, 2012, reflecting increased expenditure for MosaiQTM and reduced government grant income. Government grant income decreased by $0.7 million to $0.3 million for the nine months ended December 31, 2013, compared with $1.0 million for the nine months ended December 31, 2012. As a percentage of total revenue, research and development expenses increased to 33% for the nine months ended December 31, 2013, compared with 17% for the same period in 2012.

General and administrative expenses

General and administrative expenses increased by 25% to $6.1 million for the nine months ended December 31, 2013, compared with $4.9 million for the nine months ended December 31, 2012, reflecting greater personnel-related costs, increased facility rental charges and increased corporate development costs. We recognized $0.7 million of stock compensation expense in the nine months ended December 31, 2013 compared with $0.3 million in the nine months ended December 31, 2012. As a percentage of total revenue, general and administrative expenses decreased to 41% for the nine months ended December 31, 2013, compared with 45% for the same period in 2012.

Other income (expense)

Net interest expense was $0.6 million for the nine months ended December 31, 2013, compared with $0.2 million for the nine months ended December 31, 2012. Interest expense primarily consisted of interest charges on $3.0 million of borrowings from Haemonetics, Inc., which bore interest at 7.5% per annum, and on $15.0 million of borrowings from MidCap Financial LLC, which bore interest at LIBOR plus 6.7% (with a LIBOR floor of 2.00%). Part of the proceeds of the MidCap financial borrowings were used to repay the Haemonetics borrowings in full on December 9, 2013. Net interest expense for the nine months ended December 31, 2013 also included an exceptional charge of $0.3 million related to unamortized fees associated with the Haemonetics borrowings. For a description of these borrowings, see “—Liquidity and capital resources—Haemonetics Loan Notes” and “—Liquidity and capital resources—MidCap Term Loan Facility”. Net other expense included foreign exchange losses arising on monetary assets and liabilities denominated in foreign currencies.

 

 

 

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Comparison of Fiscal Years Ended March 31, 2013 and 2012

The following table sets forth, for the periods indicated, the amounts of certain components of our statements of operations and the percentage of total revenue represented by these items, showing period-to-period changes.

 

     Fiscal year ended March 31,        
     2013     2012     Change  
      Amount     % of revenue     Amount     % of revenue     Amount     %  
     (in thousands, except percentages)  
Revenue:             

Product sales

   $ 13,753        96   $ 11,550        95   $ 2,203        19

Other revenues

     618        4     669        5     (51     -8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     14,371        100     12,219        100     2,152        18

Cost of revenue

     7,169        50     6,749        55     420        6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     7,202        50     5,470        45     1,732        32
Operating expenses:             

Sales and marketing

     2,252        16     1,674        14     578        35

Research and development

     2,617        18     1,749        14     868        50

General and administrative

     6,824        47     6,011        49     813        14
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     11,693        81     9,434        77     2,259        24
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (4,491     -31     (3,964     -32     (527     13
Other income (expense):             

Interest expense, net

     (234     -2     (340     -3     106        -31

Other, net

     11        0     (169     -1     180        -107
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense), net

     (223     -2     (509     -4     286        -56
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (4,714     -33     (4,473     -37     (241     5

Provision for income taxes

     0        0     0        0     0        N/A   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (4,714     -33   $ (4,473     -37   $ (241     5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenue

Total revenue increased by 18% to $14.4 million for the fiscal year ended March 31, 2013, compared with $12.2 million for the fiscal year ended March 31, 2012. This increase reflected growth in product sales of $2.2 million, which was partially offset by a $0.1 million decrease in other revenues. Products sold by standing purchase order were 71% of product sales for the fiscal year ended March 31, 2013, compared with 58% for the fiscal year ended March 31, 2012.

The below table sets forth revenue by product group:

 

     Fiscal year ended March 31,        
     2013     2012     Change  
      Amount      % of revenue     Amount      % of revenue     Amount     %  
     (in thousands, except percentages)  
Revenue:               

Product sales—OEM customers

   $ 9,557         67   $ 7,754         63   $ 1,803        23

Product sales—direct customers and distributors

     4,196         29     3,796         31     400        11

Other revenues

     618         4     669         5     (51     -8
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total revenue

   $ 14,371         100   $ 12,219         100   $ 2,152        18
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

 

 

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OEM Sales.    Product sales to OEM customers increased by 23% to $9.6 million for the fiscal year ended March 31, 2013, compared with $7.8 million for the fiscal year ended March 31, 2012. This growth was primarily driven by increased sales of our whole blood control products to existing OEM customers.

Direct Sales to Customers and Distributors.    Direct product sales increased 11% to $4.2 million for the fiscal year ended March 31, 2013, compared with $3.8 million for the fiscal year ended March 31, 2012. Direct sales in the United States increased by $0.9 million, primarily driven by sales of our reagent red blood cell products launched in July of 2012. Direct sales outside the United States declined by $0.5 million primarily as a result of our initiative to better utilize manufacturing capacity by offering fewer products in Europe, which started in April 2012.

Other Revenues.    Other revenues declined by $0.1 million to $0.6 million for the fiscal year ended March 31, 2013, compared with $0.7 million for the fiscal year ended March 31, 2012. During our fiscal years ended March 31, 2013 and 2012, we recognized $0.5 million and $0.4 million, respectively, of product development fees from a third-party project. We also recognized $0.1 million and $0.3 million of development fees from OEM customers during the fiscal years ended March 31, 2013 and 2012, respectively.

Cost of revenue and gross margin

Cost of revenue increased by 6% to $7.2 million for fiscal year ended March 31, 2013, compared with $6.7 million for the fiscal year ended March 31, 2012, reflecting the growth in product sales volumes. Gross margin, which represents gross profit expressed as a percentage of total revenue, increased to 50% for the fiscal year ended March 31, 2013, compared with 45% for the fiscal year ended March 31, 2012. Excluding other revenues, the gross margin on product sales increased to 48% for the fiscal year ended March 31, 2013 compared with 42% for the fiscal year ended March 31, 2012, reflecting increased sales volumes, improved product mix, the effect of our continuous manufacturing process improvement program and our decision to offer fewer products in Europe. During the fiscal year ended March 31, 2012, our manufacturing operations experienced higher scrap costs, amounting to $0.2 million (or 2% of product sales).

Sales and marketing expenses

Sales and marketing expense increased by 35% to $2.3 million for the fiscal year ended March 31, 2013, compared with $1.7 million for the fiscal year ended March 31, 2012. This increase resulted primarily from higher personnel-related costs in our United States sales and marketing operations, including commissions on greater direct product sales in the United States. We also incurred additional marketing expenditures associated with the July 2012 introduction of our reagent red blood cell products in the United States. As a percentage of total product sales, sales and marketing expenses were 16% for the fiscal year ended March 31, 2013, compared with 14% for the fiscal year ended March 31, 2012.

Research and development expenses

 

     Fiscal year ended March 31,              
     2013     2012     Change  
      Amount     % of revenue     Amount     % of revenue     Amount     %  
     (in thousands, except percentages)  

Research and development expenses:

            

MosaiQTM research and development

   $ 2,582        18   $ 1,390        11   $ 1,192        86

Other research and development

     1,321        9     672        5     649        97

Grant income

     (1,286     -9     (313     -2     (973     311
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total research and development expenses

   $ 2,617        18   $ 1,749        14   $ 868        50
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

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Research and development expenses increased by $0.9 million to $2.6 million for the fiscal year ended March 31, 2013, compared with $1.7 million for the fiscal year ended March 31, 2012, reflecting increased product development expenditures of $0.7 million relating to our conventional reagent business. Increased expenditure on MosaiQTM of $1.2 million was offset by higher government grant income of $1.0 million. We recorded grant income of $1.3 million for the fiscal year ended March 31, 2013, compared with $0.3 million for the fiscal year ended March 31, 2012. As a percentage of total revenue, research and development expenses increased to 18% for the fiscal year ended March 31, 2013, compared with 14% for the fiscal year ended March 31, 2012.

General and administrative expenses

General and administrative expenses increased by 14% to $6.8 million for the fiscal year ended March 31, 2013, compared with $6.0 million for the fiscal year ended March 31, 2012, reflecting higher personnel-related costs as we expanded and strengthened our senior management team. We recognized $0.5 million of stock compensation expense in the fiscal year ended March 31, 2013, compared with none in the fiscal year ended March 31, 2012. As a percentage of total revenue, general and administrative expenses decreased to 47% for the fiscal year ended March 31, 2013, compared with 49% for the fiscal year ended March 31, 2012.

Other income (expense)

Net interest expense was $0.2 million for the fiscal year ended March 31, 2013, compared with $0.3 million for the fiscal year ended March 31, 2012. Interest expense primarily consists of interest charges on $3.0 million borrowings from Haemonetics, which bore interest at 7.5% per annum. The decrease in net interest expense was a result of higher average cash balances and reduced short-term borrowings in the twelve months ended March 31, 2013, compared with the twelve months ended March 31, 2012. Net other expense included foreign exchange gains arising on monetary assets and liabilities denominated in foreign currencies. Net other expense for the fiscal year ended March 31, 2012 also included a $127,000 charge related to the grant of warrants to shareholders in February 2012.

 

 

 

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Comparison of fiscal years ended March 31, 2012 and 2011

The following table sets forth, for the periods indicated, the amounts of certain components of our statements of operations and the percentage of total revenue represented by these items, showing period-to-period changes.

 

     Fiscal year ended March 31,        
     2012     2011     Change  
      Amount     % of revenue     Amount     % of revenue     Amount     %  
     (in thousands, except percentages)  
Revenue:             

Product sales

   $ 11,550        95   $ 9,545        95   $ 2,005        21

Other revenues

     669        5     489        5     180        37
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     12,219        100     10,034        100     2,185        22

Cost of revenue

     6,749        55     5,628        56     1,121        20
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     5,470        45     4,406        44     1,064        24
Operating expenses:             

Sales and marketing

     1,674        14     1,456        15     218        15

Research and development

     1,749        14     1,703        17     46        3

General and administrative

     6,011        49     5,346        53     665        12
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     9,434        77     8,505        85     929        11
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (3,964     -32     (4,099     -41     135        -3
Other income (expense):             

Interest expense, net

     (340     -3     (312     -3     (28     9

Other, net

     (169     -1     (210     -2     41        -20
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense), net

     (509     -4     (522     -5     13        -2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (4,473     -37     (4,621     -46     148        -3

Provision for income taxes

     0        0     0        0     0        N/A   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (4,473     -37   $ (4,621     -46   $ 148        -3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenue

Revenue increased by 22% to $12.2 million for the fiscal year ended March 31, 2012, compared with $10.0 million for the fiscal year ended March 31, 2011. This increase reflected growth from product sales of $2.0 million, or 21%, and a $0.2 million increase in other revenues. Products sold by standing purchase order were 58% of product sales for the fiscal year ended March 31, 2012, compared with 49% for the fiscal year ended March 31, 2011.

The below table sets forth revenue by product group:

 

     Fiscal year ended March 31,        
     2012     2011     Change  
      Amount      % of revenue     Amount      % of revenue     Amount      %  
     (in thousands, except percentages)  
Revenue:                

Product sales—OEM customers

   $ 7,754         63   $ 6,280         63   $ 1,474         23

Product sales—direct customers and distributors

     3,796         31     3,265         33     531         16

Other revenues

     669         5     489         5     180         37
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total revenue

   $ 12,219         100   $ 10,034         100   $ 2,185         22
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

OEM Sales.    Product sales to OEM customers increased 23% to $7.8 million for the fiscal year ended March 31, 2012, compared with $6.3 million for the fiscal year ended March 31, 2011 This growth was primarily driven by increased sales of our whole blood control products to existing OEM customers.

 

 

 

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Direct Sales to Customers and Distributors.    Direct product sales increased 16% to $3.8 million for the fiscal year ended March 31, 2012, compared with $3.3 million for the fiscal year ended March 31, 2011. Direct sales in the United States increased by $0.9 million, while direct sales outside the United States declined by $0.4 million as we discontinued certain lower margin product sales.

Other Revenues.    Other revenues increased by $0.2 million to $0.7 million for the fiscal year ended March 31, 2012, compared with $0.5 million for the fiscal year ended March 31, 2011. Other revenues during both periods related primarily to two development programs that generated product development fees.

Cost of revenue and gross margin

Cost of revenue increased by 20% to $6.7 million for the fiscal year ended March 31, 2012, compared with $5.6 million for the fiscal year ended March 31, 2011, reflecting growth in product sales volumes. Gross margin, which represents gross profit expressed as a percentage of total revenue, increased to 45% for the fiscal year ended March 31, 2012, compared with 44% for the fiscal year ended March 31, 2011. Excluding other revenues, the gross margin on product sales increased to 42% for the fiscal year ended March 31, 2012, compared with 41% for the fiscal year ended March 31, 2011, reflecting increased sales volumes and improved product sales mix offset by higher scrap costs, amounting to $0.2 million (or 2% of product sales).

Sales and marketing expenses

Sales and marketing expense increased by 15% to $1.7 million for the fiscal year ended March 31, 2012, compared with $1.5 million for the fiscal year ended March 31, 2011, reflecting primarily commissions on greater direct product sales in the United States. As a percentage of total product sales, sales and marketing expenses decreased to 14% for the fiscal year ended March 31, 2012, compared with 15% for the fiscal year ended March 31, 2011.

Research and development expenses

 

     Fiscal year ended March 31,              
     2012     2011     Change  
      Amount     % of revenue     Amount     % of revenue     Amount     %  
     (in thousands, except percentages)              

Research and development expenses:

            

MosaiQTM research and development

   $ 1,390        11   $ 1,385        14   $ 5        —  

Other research and development

     672        5     627        6     45        7

Grant income

     (313     -2     (309     -3     (4     1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total research and development expenses

   $ 1,749        14   $ 1,703        17   $ 46        3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Research and development expenses remained relatively constant at $1.7 million for the fiscal year ended March 31, 2012, compared with the fiscal year ended March 31, 2011. We recorded grant income of $0.3 million for the fiscal year ended March 31, 2012, compared with $0.3 million for the fiscal year ended March 31, 2011. As a percentage of total revenue, research and development expenses decreased to 14% for the fiscal year ended March 31, 2012, compared with 17% for the fiscal year ended March 31, 2011.

General and administrative expenses

General and administrative expenses increased by 12% to $6.0 million for the fiscal year ended March 31, 2012, compared with $5.3 million for the fiscal year ended March 31, 2011, reflecting primarily greater personnel-related costs. As a percentage of total revenue, general and administrative expenses decreased to 49% for the fiscal year ended March 31, 2012, compared with 53% for the fiscal year ended March 31, 2011.

 

 

 

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Other income (expense)

Net interest expense was $0.3 million for the fiscal year ended March 31, 2012, compared with $0.3 million for the fiscal year ended March 31, 2011. Interest expense primarily consisted of interest charges on $3.0 million borrowings from Haemonetics, which bore interest at 7.5% per annum. The increase in net interest expense was a result of lower average cash balances and increased short-term borrowings in the twelve months ended March 31, 2012 compared with the twelve months ended March 31, 2011. Net other expense includes foreign exchange gains and losses arising on monetary assets and liabilities denominated in foreign currencies. Foreign exchange losses in the twelve months ended March 31, 2012 were $42,000, compared with $210,000 for the fiscal year ended March 31, 2011. Net other expense for the fiscal year ended March 31, 2012 included a $127,000 expense related to the grant of warrants to shareholders in February 2012.

QUARTERLY RESULTS OF OPERATIONS

The following table sets forth selected unaudited consolidated quarterly statements of operations data for our seven most recent completed fiscal quarters. We have prepared the consolidated quarterly operations data on a basis consistent with the audited consolidated financial statements included elsewhere in this prospectus. In the opinion of management, the quarterly consolidated operations data reflects all necessary adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of this data. Historical results are not necessarily indicative of the results to be expected in future periods and the results for a quarterly period are not necessarily indicative of the operating results for a full year. This information should be read in conjunction with the consolidated financial statements included elsewhere in this prospectus.

 

    Quarter ended  
    2012     2013  
     Jun 30     Sept 30     Dec 31     Mar 31     Jun 30     Sept 30       Dec 31  
    (Dollars in thousands, except percentages)  
Revenue:              

Product sales

  $ 3,112      $ 3,776      $ 3,431      $ 3,435      $ 3,907      $ 4,515      $ 3,910   

Other revenues

    356        262        —          —          2,768        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    3,468        4,038        3,431        3,435        6,675        4,515        3,910   

Cost of revenue

    (1,623     (1,969     (1,792     (1,786     (2,055     (2,275     (1,941
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    1,845        2,069        1,639        1,649        4,620        2,240        1,969   
Operating expenses:              

Sales and marketing

    (476     (529     (625     (621     (620     (610     (826

Research and development

    (678     (568     (637     (734     (1,618     (1,591     (1,708

General and administrative

    (1,615     (1,612     (1,692     (1,906     (1,879     (2,030     (2,234
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    (2,769     (2,709     (2,954     (3,261     (4,117     (4,231     (4,768
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit (loss)

    (924     (640     (1,315     (1,612     503        (1,991     (2,799
Other income (expense):              

Interest expense, net

    (65     (53     (74     (42     (77     (81     (424

Other, net

    62        (55     22        (18     (31     (7     (45
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense), net

    (3     (108     (52     (60     (108     (88     (469
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    (927     (748     (1,367     (1,672     395        (2,079  

 

(3,268

Provision for income taxes

    —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (927   $ (748   $ (1,367   $ (1,672   $ 395      $ (2,079   $ (3,268
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of Product Sales from Standing Purchase Order

    72%        70%        73%        71%        74%        72%        72%   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

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Our quarterly product sales can fluctuate depending upon the shipment cycles for our red blood cell based products, which account for approximately two-thirds of our current product sales. For these products, we typically experience 13 sales cycles per year. This equates to three shipments of each product per quarter, except for one quarter per year when four shipments occur, which is usually in the first and second quarter of the fiscal year. The timing of shipment of bulk antisera products to our OEM customers may also move revenues from quarter to quarter. We also experience some seasonality in demand around holiday periods in both Europe and the United States. As a result of these factors, we expect to continue to see seasonality and quarter-to-quarter variations in our product sales.

The timing of product development fees included in other revenues is mostly dependent upon the achievement of pre-negotiated project and milestones.

LIQUIDITY AND CAPITAL RESOURCES

Since our commencement of operations in 2007, we have incurred net losses and negative cash flows from operations. During the nine months ended December 31, 2013, we had a net loss of $5.0 million and used $4.6 million of cash for operating activities. We incurred a net loss of $4.7 million and used $3.6 million of cash for operating activities during the fiscal year ended March 31, 2013. During the fiscal year ended March 31, 2012, we incurred a net loss of $4.5 million and used $3.1 million of cash for operating activities. As described under results of operations, this use of cash was primarily attributable to our investment in the development of MosaiQTM. As of December 31, 2013, we had an accumulated deficit of $10.5 million.

Our principal source of funding has been investment in new share capital by our shareholders, which in the fiscal years ended March 31, 2013 and March 31, 2012 amounted to $4.3 million and $12.2 million, respectively. From March 31, 2013 to December 31, 2013, we issued new share capital amounting to $2.9 million and also incurred net new borrowings of $11.4 million. From our incorporation in 2012 to December 31, 2013, we have raised $18.3 million of gross proceeds through the private placement of our ordinary and preference shares. As of December 31, 2013, we had cash and cash equivalents of $13.8 million.

Haemonetics Loan Notes

In 2010, we borrowed $3.0 million from Haemonetics, Inc., a healthcare company providing blood management solutions, by issuing loan notes in the same amount. Our borrowings from Haemonetics bore interest at a rate of 7.5% per annum calculated and payable quarterly in arrears, and were redeemable in March of 2017. On December 9, 2013, we repaid our Haemonetics borrowings in full with the proceeds of our MidCap Financial term loan agreement described below.

MidCap Term Loan Facility

On December 6, 2013, we entered into a secured term loan facility with MidCap Financial LLC under which MidCap Financial advanced $15.0 million to our U.S. subsidiary. The term loan bears interest at LIBOR + 6.7% (with a LIBOR floor of 2.00%). Interest is payable monthly in arrears and principal is repayable commencing on July 1, 2015 in 30 monthly installments. The loan is secured by all of our assets, including the equity of all our subsidiaries. Under the terms of the agreement, we granted MidCap Financial a warrant to purchase 200,000 C preference shares at an exercise price of $3.00 per share. We used $3.0 million of the proceeds of this facility to repay the Haemonetics borrowings and the balance is available for general working capital purposes, including ongoing investment in MosaiQTM.

 

 

 

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Additionally, the terms of the term loan agreement contain various affirmative and negative covenants. In particular, we are not permitted to allow our consolidated net product revenue over a 12-month period to be lower than a range of minimum thresholds specified in the agreement, which increase each month. The testing dates are on the 15th of each month from January 2014 to February 2017, and the testing periods are the twelve full months ending one full calendar month preceding each testing date. In the event of our breach of the agreement, we may not be allowed to draw amounts under the agreement, and to the extent we have any amounts outstanding at the time of any breach, we may be required to repay such amounts earlier than anticipated. In addition, in the event of a default, the lender could foreclose on the collateral securing the loan.

CASH FLOWS FOR THE NINE MONTHS ENDED DECEMBER 31, 2013 AND 2012

Operating activities

Net cash used in operating activities was $4.6 million during the nine months ended December 31, 2013, which included net losses of $5.0 million and non-cash items of $1.1 million. Non-cash items were depreciation and amortization expense of $376,000 and a share-based compensation expense of $701,000. We also experienced a net cash outflow of $0.7 million from changes in operating assets and liabilities during the period, consisting primarily of an increase in inventory of $0.9 million. The increase in inventory was primarily related to the growth of our product sales revenue.

Net cash used in operating activities was $2.1 million during the nine months ended December 31, 2012, which included net losses of $3.0 million and non-cash items of $0.9 million. Non-cash items were depreciation and amortization expense of $568,000 and share-based compensation expense of $335,000. We also had a net cash outflow of $49,000 from changes in operating assets and liabilities during the period.

Investing activities

Net cash used in investing activities was $0.3 million and $0.8 million for the nine months ended December 31, 2013 and 2012, respectively. These amounts related primarily to purchases of property and equipment and capitalized expenditures related to obtaining regulatory licenses for our conventional reagent products.

Financing activities

Net cash provided by financing activities was $14.2 million during the nine months ended December 31, 2013, consisting primarily of share issuance proceeds of $2.9 million and net borrowings of $11.4 million, which was offset by $149,000 of capital lease payments. Net cash provided by financing activities during the nine months ended December 31, 2012 was $299,000 related to proceeds from capital leases.

CASH FLOWS FOR THE FISCAL YEARS ENDED MARCH 31, 2013 AND 2012

Operating activities

Net cash used in operating activities was $3.6 million during the fiscal year ended March 31, 2013, which included net losses of $4.7 million and non-cash items of $1.2 million. Non-cash items were depreciation and amortization expense of $691,000 and share-based compensation expense of $471,000. We also had a net cash outflow of $0.1 million from changes in operating assets and liabilities during the period, including an increase in inventory of $0.8 million offset by an increase in accrued compensation expenses of $0.7 million. The increase in inventory was due primarily to the growth of our product sales. The increase in accrued compensation expenses was primarily related to increases in accrued bonuses.

 

 

 

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Net cash used in operating activities was $3.1 million during the fiscal year ended March 31, 2012, which included net losses of $4.5 million and non-cash items of $1.1 million. The non-cash items consisted of depreciation and amortization expense of $989,000 and a preference share warrant charge of $127,000. We also had a net cash inflow of $0.3 million from changes in operating assets and liabilities during the period, including an increase in inventory of $0.4 million offset by an increase in accounts payable of $1.1 million. The increase in inventory and accounts payable were primarily due to the growth of our product sales.

Investing activities

Net cash used in investing activities was $1.1 million for the fiscal year ended March 31, 2013, consisting of purchases of property and equipment of $0.9 million and purchases of intangible assets of $0.2 million.

Net cash used in investing activities was $0.4 million for the fiscal year ended March 31, 2012, consisting of purchases of property and equipment of $0.3 million and purchases of intangible assets of $0.1 million.

Financing activities

Net cash provided by financing activities was $4.7 million during the fiscal year ended March 31, 2013, consisting of $4.3 million from the issuance of preference shares and $0.4 million of net capital lease financing.

Net cash provided by financing activities was $6.7 million during the fiscal year ended March 31, 2012, consisting primarily of $12