NanoString Technologies
NanoString Technologies Inc (Form: 10-Q, Received: 08/08/2014 17:05:36)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File: Number 001-35980

 

 

NANOSTRING TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   20-0094687

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

530 Fairview Avenue North, Suite 2000

Seattle, Washington 98109

(Address of principal executive offices)

(206) 378-6266

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

The number of shares of registrant’s common stock outstanding as of August 5, 2014 was 18,119,435

 

 

 


Table of Contents

NANOSTRING TECHNOLOGIES, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2014

TABLE OF CONTENTS

 

         PAGE  

PART I - FINANCIAL INFORMATION

  

ITEM 1:

 

Financial Statements (unaudited)

  
 

Condensed Consolidated Balance Sheets at June 30, 2014 and December 31, 2013

     1  
 

Condensed Consolidated Statements of Operations – Three and Six Months Ended June  30, 2014 and 2013

     2  
 

Consolidated Statements of Comprehensive Loss – Three and Six Months Ended June  30, 2014 and 2013

     3   
 

Condensed Consolidated Statements of Cash Flows – Six Months Ended June 30, 2014 and 2013

     4  
 

Notes to Condensed Consolidated Financial Statements

     5  

ITEM 2:

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     12  

ITEM 3:

 

Quantitative and Qualitative Disclosures about Market Risk

     19  

ITEM 4:

 

Controls and Procedures

     20  

PART II - OTHER INFORMATION

  

ITEM 1:

 

Legal Proceedings

     20  

ITEM 1A:

 

Risk Factors

     20  

ITEM 2:

 

Unregistered Sales of Equity Securities and Use of Proceeds

     39  

ITEM 6:

 

Exhibits

     40  

SIGNATURES

     41  

EXHIBIT INDEX

     42   


Table of Contents

PART 1. FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated Financial Statements

NanoString Technologies, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except par value)

(Unaudited)

 

     June 30,     December 31,  
     2014     2013  

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 21,186     $ 9,941  

Short-term investments

     58,403       32,715  

Accounts receivable, net

     9,074       8,331  

Inventory

     6,407       6,750  

Prepaid expenses and other

     4,070       2,999  
  

 

 

   

 

 

 

Total current assets

     99,140       60,736  

Restricted cash

     143       201  

Deferred offering costs

     —         29  

Property and equipment, net

     5,050       3,065  

Other assets

     724       341  
  

 

 

   

 

 

 

Total assets

   $ 105,057     $ 64,372  
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Current liabilities:

    

Accounts payable

   $ 2,715     $ 3,354  

Accrued liabilities

     7,038       7,088  

Deferred revenue, current portion

     3,601       1,462  

Deferred rent, current portion

     716       590  

Long-term debt, current portion

     160       6,136  
  

 

 

   

 

 

 

Total current liabilities

     14,230       18,630  

Deferred revenue, net of current portion

     3,774       803  

Deferred rent, net of current portion

     991       1,313  

Long-term debt, net of current portion

     20,208       12,157  
  

 

 

   

 

 

 

Total liabilities

     39,203       32,903  
  

 

 

   

 

 

 

Commitment and contingencies

    

Stockholders’ equity

    

Preferred stock, $0.0001 par value, 15,000 shares authorized; none issued

     —         —    

Common stock, $0.0001 par value, 150,000 shares authorized; 18,101 and 14,620 shares issued and outstanding, respectively

     2       1  

Additional paid-in-capital

     218,187       158,278  

Other comprehensive income

     7       22  

Accumulated deficit

     (152,342     (126,832
  

 

 

   

 

 

 

Total stockholders’ equity

     65,854       31,469  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 105,057     $ 64,372  
  

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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NanoString Technologies, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except per share amounts)

(Unaudited)

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2014     2013     2014     2013  

Revenue:

        

Product and service

   $ 10,263     $ 7,218     $ 19,014     $ 12,894  

Collaboration

     618       —         618       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     10,881       7,218       19,632       12,894  
  

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses:

        

Cost of product and service revenue

     4,860       3,522       9,185       6,404  

Research and development

     5,274       3,626       10,006       6,685  

Selling, general and administrative

     12,880       6,708       23,554       12,834  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     23,014       13,856       42,745       25,923  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (12,133     (6,638     (23,113     (13,029
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

        

Interest income

     75       3       139       6  

Interest expense

     (2,015     (489     (2,551     (874

Other income (expense)

     (15     (9     15        (13

Revaluation of preferred stock warrant liability

     —         1,638        —         1,156   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

     (1,955     1,143        (2,397     275   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (14,088     (5,495     (25,510     (12,754

Accretion of mandatorily redeemable convertible preferred stock

     —         (2,311     —         (4,653
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (14,088   $ (7,806   $ (25,510   $ (17,407
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share - basic and diluted

   $ (0.78   $ (13.69   $ (1.46   $ (31.48
  

 

 

   

 

 

   

 

 

   

 

 

 

Shares used in computing basic and diluted net loss per share

     18,069       570       17,496       553  
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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NanoString Technologies, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(in thousands)

(Unaudited)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  

Net loss

   $ (14,088   $ (5,495   $ (25,510   $ (12,754

Unrealized loss on short-term investments

     (2     —         (15     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

   $ (14,090   $ (5,495   $ (25,525   $ (12,754
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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NanoString Technologies, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

     Six Months Ended  
     June 30,  
     2014     2013  

Operating activities

    

Net loss

   $ (25,510   $ (12,754

Adjustments to reconcile net loss to net cash used in operating activities:

    

Depreciation and amortization

     745       901  

Stock-based compensation

     2,298       488  

Net amortization of premium on short-term investments

     (26     —    

Amortization of debt discount

     51       110  

Revaluation of preferred stock warrant liability

     —         (1,156

Loss on extinguishment of debt

     581       —    

Interest accrued on long-term notes

     (348     99  

Loss on disposal of property and equipment

     —         1  

Gain on sale of investments

     (2     —    

Changes in operating assets and liabilities

    

Accounts receivable

     (743     (1,457

Inventory

     (1,061     (247

Prepaid expenses and other

     (936     (1,213

Other assets

     133       (131

Accounts payable

     (655     826  

Accrued liabilities

     (50     329  

Deferred revenue

     5,110       335  

Deferred rent

     (266     (373
  

 

 

   

 

 

 

Net cash used in operating activities

     (20,679     (14,242
  

 

 

   

 

 

 

Investing activities

    

Purchases of property and equipment

     (1,236     (254

Decrease in restricted cash

     59        —     

Proceeds from sale of short-term investments

     2,500       —     

Proceeds from maturity of short-term investments

     11,225       —     

Purchase of short-term investments

     (39,400     —     
  

 

 

   

 

 

 

Net cash used in investing activities

     (26,852     (254
  

 

 

   

 

 

 

Financing activities

    

Borrowings under long-term debt agreements

     20,000       5,000  

Deferred costs related to long-term debt agreement

     (770     —     

Repayment of long-term debt

     (18,094     (109

Net proceeds from public offering

     57,015       —     

Deferred offering costs

     —         (1,705

Proceeds from exercise of common stock warrants

     94        —     

Repurchase of shares related to common stock warrant exercise

     (94     —     

Proceeds from employee stock purchase plan

     442       —     

Proceeds from exercise of stock options

     183       373  
  

 

 

   

 

 

 

Net cash provided by financing activities

     58,776       3,559  
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     11,245        (10,937

Cash and cash equivalents

    

Beginning of period

     9,941       21,692  
  

 

 

   

 

 

 

End of period

   $ 21,186     $ 10,755  
  

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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NanoString Technologies, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

1. Description of Business

NanoString Technologies, Inc. (the “Company”) was incorporated in the state of Delaware on June 20, 2003. The Company’s headquarters are located in Seattle, Washington. The Company’s technology enables direct detection, identification and quantification of individual target molecules in a biological sample by attaching a unique color coded fluorescent reporter to each target molecule of interest. The Company markets its proprietary nCounter Analysis System, consisting of instruments and consumables, including its Prosigna Breast Cancer Assay, to academic, government, biopharmaceutical and clinical laboratory customers.

The Company has incurred losses to date and expects to incur additional losses in the foreseeable future. The Company continues to devote the majority of its resources to the growth of its business in accordance with its business plan. The Company’s activities have been financed primarily through the sale of equity securities, incurrence of indebtedness and, to a lesser extent, capital leases and other borrowings.

Public Equity Offering

In January 2014, the Company completed an underwritten public offering of 2,972,972 shares of common stock for total gross proceeds of $55.0 million. In February 2014, the underwriters partially exercised an overallotment option, purchasing 345,945 additional shares from the Company for additional gross proceeds of $6.4 million. After underwriters’ fees and commissions and other expenses of the offering, the Company’s aggregate net proceeds were approximately $57.0 million.

 

2. Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements reflect the accounts of the Company and its wholly-owned subsidiaries, NanoString Technologies International, Inc., NanoString Technologies Asia Pacific Limited, NanoString Technologies Singapore Pte. Limited, NanoString Technologies Europe Limited, NanoString Technologies Germany GmbH and NanoString Technologies SAS. The unaudited condensed consolidated balance sheet at December 31, 2013 has been derived from the audited consolidated financial statements at that date but does not include all of the information and disclosures required by generally accepted accounting principles in the United States of America (“U.S. GAAP”) for annual financial statements. These unaudited condensed consolidated financial statements and notes should be read in conjunction with the Company’s audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) and U.S. GAAP for unaudited condensed consolidated financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The accompanying unaudited condensed consolidated financial statements reflect all adjustments consisting of normal recurring adjustments which, in the opinion of management, are necessary for a fair statement of the Company’s financial position and results of its operations, as of and for the periods presented.

Unless indicated otherwise, all amounts presented in financial tables are presented in thousands, except for per share and par value amounts.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates. The results of the Company’s operations for the three and six month periods ended June 30, 2014 are not necessarily indicative of the results to be expected for the full year or for any other period.

Revenue Recognition

The Company recognizes revenue when (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the price to the customer is fixed or determinable and (4) collectability is reasonably assured. The Company generates the majority of its revenue from the sale of products and services. The Company’s products consist of its proprietary nCounter Analysis System and related consumables. Services consist of extended warranties and service fees for assay processing. A delivered product or service is considered to be a separate unit of accounting when it has value to the customer on a stand-alone basis. Products or services have value on a stand-alone basis if they are sold separately by any vendor or the customer could resell the delivered product.

 

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Instrument product revenue is recognized upon installation and calibration in geographic regions where such services are only available from the Company’s specialized technicians. In these regions, the sale of instruments and related installation and calibration are considered to be one unit of accounting, as the instruments are required to be professionally installed and calibrated before use. In certain geographic regions, installation and calibration services are available from other vendors, and in such regions they are considered separate revenue elements. For instruments sold for use primarily to run Prosigna assays, training must be provided prior to instrument revenue recognition. Consumables and in vitro diagnostic kits are considered to be separate units of accounting as they are sold separately. Consumables and in vitro diagnostic kit product revenue is recognized upon transfer of ownership, which is generally upon shipment.

Service revenue is recognized when earned, which is generally upon the rendering of the related services. Service agreements and service fees for assay processing are each considered separate units of accounting as they are sold separately. The Company offers service agreements on its nCounter Analysis System for periods ranging from 12 to 36 months after the end of the standard 12-month warranty period. Service agreements are generally separately priced. Revenue from service agreements is deferred and recognized in income on a straight-line basis over the service period.

For arrangements with multiple deliverables, the Company allocates the agreement consideration at the inception of the agreement to the deliverables based upon their relative selling prices. To date, selling prices have been established by reference to vendor specific objective evidence based on stand-alone sales transactions for each deliverable. Vendor specific objective evidence is considered to have been established when a substantial majority of individual sales transactions within the previous 12 month period fall within a reasonably narrow range, which the Company has defined to be plus or minus 15% of the median sales price of actual stand-alone sales transactions. The Company uses its best estimate of selling price for individual deliverables when vendor specific objective evidence or third-party evidence is unavailable. Allocated revenue is only recognized for each deliverable when the revenue recognition criteria have been met.

The Company entered into a collaborative agreement that generates upfront fees with subsequent milestone payments that may be earned upon completion of development-related milestones. The Company is able to estimate the total cost of services under the arrangement and recognizes collaboration revenue using a proportional performance model. Costs incurred to date compared to total expected costs are used to determine proportional performance, as this is considered to be representative of the delivery of outputs under the arrangement. Revenue recognized at any point in time is limited to cash received and amounts contractually due. Changes in estimates of total expected costs are accounted for prospectively as a change in estimate.

Recent Accounting Pronouncements

As an “emerging growth company,” the Jumpstart Our Business Startups Act allows the Company to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies.

In May 2014, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update entitled “ASU 2014-09, Revenue from Contracts with Customers.” The standard requires entities to recognize revenue through the application of a five step model, which includes identification of the contract, identification of the performance obligations, determination of the transaction price, allocation of the transaction price to the performance obligations, and recognition of revenue as the entity satisfies the performance obligations. The standard will become effective for the Company beginning January 1, 2017. The Company is currently evaluating the guidance to determine the potential impact on its consolidated results of operations, financial condition, cash flows, and financial statement disclosures.

In June 2014, FASB issued an accounting standards update entitled “ASU 2014-12, Compensation – Stock Compensation.” The standard requires entities that grant their employees share-based payments in which the terms of the award provide that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The standard will become effective for the Company beginning January 1, 2016. The Company is currently evaluating the guidance to determine the potential impact on its consolidated results of operations, financial condition, cash flows, and financial statement disclosures.

 

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3. Net Loss Per Share

Net loss attributable to common stockholders per share is computed by dividing the net loss allocable to common stockholders by the weighted average number of shares of common stock outstanding. Outstanding stock options, warrants and preferred stock have not been included in the calculation of the diluted net loss attributable to common stockholders per share because to do so would be anti-dilutive. Accordingly, the numerator and the denominator used in computing both basic and diluted net loss per share for each period are the same.

The following outstanding options, warrants and preferred stock were excluded from the computation of basic and diluted net loss per share for the periods presented because their effect would have been anti-dilutive (in thousands):

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
     2014      2013      2014      2013  

Options to purchase common stock

     3,337        1,796        3,337        1,796  

Convertible preferred stock (as converted)

     —          8,631        —          8,631  

Convertible preferred stock warrants (as converted)

     —          618        —          618  

Common stock warrants

     596         —          596         —    

 

4. Concentration of Risks

Financial instruments that potentially expose the Company to concentrations of credit risk consist principally of cash and cash equivalents, short-term investments and accounts receivable. Cash is invested in accordance with the Company’s investment policy, which includes guidelines intended to minimize and diversify credit risk. Most of the Company’s investments are not federally insured. The Company has credit risk related to the collectability of its accounts receivable. The Company performs initial and ongoing evaluations of its customers’ credit history or financial position and generally extends credit on account without collateral. The Company has not experienced any significant credit losses to date as a result of credit risk concentration.

The Company had no customers that individually represented more than 10% of total revenue during the three and six months ended June 30, 2014 and 2013. In addition, the Company had no customers that represented more than 10% of total accounts receivable as of June 30, 2014 and December 31, 2013.

The Company is also subject to supply chain risks related to the outsourcing of the manufacturing and production of its instruments to sole suppliers. Although there are a limited number of manufacturers for instruments of this type, the Company believes that other suppliers could provide similar products on comparable terms. Similarly, the Company sources certain raw materials used in the manufacture of consumables from certain sole suppliers. A change in suppliers could cause a delay in manufacturing and a possible loss of sales, which would adversely affect operating results.

 

5. Short-term Investments

Short-term investments consisted of available-for-sale securities as follows (in thousands):

 

Type of security as of June 30, 2014

   Amortized
cost
     Gross
unrealized
gains
     Gross
unrealized
losses
    Fair value  

U.S. government-related debt securities

   $ 1,534      $ 1      $ —       $ 1,535  

Corporate debt securities

     53,562        15        (9     53,568  

Asset-backed securities

     3,300        1        (1     3,300  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total available-for-sale securities

   $ 58,396      $ 17      $ (10   $ 58,403  
  

 

 

    

 

 

    

 

 

   

 

 

 

Type of security as of December 31, 2013

   Amortized
cost
     Gross
unrealized
gains
     Gross
unrealized
losses
    Fair value  

U.S. government-related debt securities

   $ 1,565      $ 1      $ —       $ 1,566  

Corporate debt securities

     31,128         24         (3     31,149   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total available-for-sale securities

   $ 32,693      $ 25      $ (3   $ 32,715  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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The fair values of available-for-sale securities by contractual maturity were as follows (in thousands):

 

Contractual maturity

   June 30,
2014
     December 31,
2013
 

Maturing in one year or less

   $ 52,082      $ 26,725  

Maturing in one to three years

     6,321        5,990  
  

 

 

    

 

 

 

Total available-for-sale securities

   $ 58,403      $ 32,715  
  

 

 

    

 

 

 

Realized gains and losses are determined based on the specific identification method and are reported in other income in the condensed consolidated statements of operations. Gross realized gains on sales of available-for-sale securities were $0 for the three months ended June 30, 2014 and 2013. Gross realized gains on sales of available-for-sale securities were approximately $2,000 and $0 for the six months ended June 30, 2014 and 2013, respectively. There were no realized losses on sales of available-for-sale securities for the three and six months ended June 30, 2014 and 2013.

 

6. Fair Value Measurements

The Company establishes the fair value of its assets and liabilities using the price that would be received to sell an asset or paid to transfer a financial liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy is used to measure fair value. The three levels of the fair value hierarchy are as follows:

 

Level 1    Quoted prices in active markets for identical assets and liabilities.
Level 2    Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
Level 3    Valuations derived from valuation techniques in which one or more significant inputs and significant value drivers are unobservable.

The recorded amounts of certain financial instruments, including cash, accounts receivable, prepaid expenses and other, accounts payable and accrued liabilities, approximate fair value due to their relatively short-term maturities. The recorded amount of the Company’s long-term debt approximates fair value because the related interest rates approximate rates currently available to the Company.

The Company’s available-for-sale securities by level within the fair value hierarchy were as follows (in thousands):

 

As of June 30, 2014

   Level 1      Level 2      Level 3      Total  

Cash equivalents:

           

Money market fund

   $ 16,400      $ —        $ —        $ 16,400  

Short-term investments:

           

U.S. government-related debt securities

     —          1,535        —          1,535  

Corporate debt securities

     —          53,568        —          53,568  

Asset-backed securities

     —          3,300        —          3,300   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 16,400      $ 58,403      $ —        $ 74,803  
  

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 2013

   Level 1      Level 2      Level 3      Total  

Cash equivalents:

           

Money market fund

   $ 8,454      $ —        $ —        $ 8,454  

Short-term investments:

           

U.S. government-related debt securities

     —          1,566        —          1,566  

Corporate debt securities

     —          31,149        —          31,149  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 8,454      $ 32,715      $ —        $ 41,169  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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7. Inventory

Inventory consisted of the following as of the date indicated (in thousands):

 

     June 30,
2014
     December 31,
2013
 

Raw materials

   $ 1,945       $ 2,164   

Work in process

     1,846         2,198   

Finished goods

     2,616         2,388   
  

 

 

    

 

 

 
   $ 6,407       $ 6,750   
  

 

 

    

 

 

 

 

8. Reserve for Product Warranties

The Company generally provides a one-year warranty on its nCounter Analysis Systems and establishes an accrual based on historical product repair rates and actual warranty costs incurred. Warranty expense is recorded as a component of cost of product and service revenue in the condensed consolidated statements of operations.

The following information reconciles changes in the Company’s warranty reserve and related costs (in thousands):

 

Warranty reserve, December 31, 2013

   $ 358  

Cost of warranty claims

     (28

Warranty accrual

     80  

Warranty reserve, March 31, 2014

     410  

Cost of warranty claims

     (32

Warranty accrual

     100  
  

 

 

 

Warranty reserve, June 30, 2014

   $ 478  
  

 

 

 

 

9. Long-term Debt and Obligations

In April 2014, the Company entered into a term loan agreement under which it may borrow up to $45.0 million, or up to an aggregate of approximately $52.0 million if the Company elects to exercise in full an option to defer payment of a portion of the interest that would accrue on the borrowing under the term loan agreement. Upon initial closing, the Company borrowed $20.0 million, the proceeds of which were primarily used to repay the outstanding balance under its former credit facility plus a related $1.0 million end of term payment, a $0.3 million make-whole premium, and interest accrued. The Company incurred and recorded a total charge to interest expense of $1.4 million related to the repayment of the former credit facility, including a loss on extinguishment of debt of $0.6 million. The Company has committed to borrow an additional $10.0 million under the term loan agreement no later than October 2014. Up to an additional $15.0 million, in increments of $5.0 million, may be borrowed under the agreement no later than May 2015, subject to a revenue requirement. All borrowings under the new term loan agreement will accrue interest at 12.5% annually, payable quarterly, of which 3.5% can be deferred during the first four years of the term at the Company’s option and paid together with the principal. The Company is required to pay only interest for the first five years of the term. Principal payments are due in four equal installments during the sixth year of the term. The Company has the option to prepay the term loans, in whole or in part, at any time subject to payment of a redemption fee of up to 4%, which declines over the term. The term loan agreement contains customary conditions to borrowings, events of default and negative covenants, including covenants that could limit the Company’s ability to, among other things, incur additional indebtedness, liens or other encumbrances, make dividends or other distributions; buy, sell or transfer assets; engage in any new line of business; and enter into certain transactions with affiliates. The new term loan agreement also includes liquidity and revenue-based financial covenants. The Company must also satisfy certain minimum annual revenue requirements, which shall initially be $40.0 million for 2014 with annual increases of $15.0 million for each subsequent fiscal year thereafter. If the Company’s actual revenues are below the minimum annual revenue requirement for any given year, the Company may avoid a related default by generating proceeds from an equity or subordinated debt issuance equal to the shortfall between its actual revenues and the minimum revenue requirement. The Company’s obligations under the new term loan agreement are collateralized by substantially all of its assets.

Borrowings, including current portion, consisted of the following (in thousands):

 

     June 30,
2014
    December 31,
2013
 

Landlord payable

   $ —       $ 49   

Capital lease

     368        410   

Term loans payable

     20,000        18,348   
  

 

 

   

 

 

 
     20,368        18,807   

Less: Unamortized debt discount

     —         (514

Current portion

     (160     (6,136
  

 

 

   

 

 

 

Non-current portion

   $ 20,208      $ 12,157   
  

 

 

   

 

 

 

 

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Scheduled future payments for principal obligations under outstanding debt facilities were as follows at June 30, 2014 (in thousands):

 

Long-term debt:

  

2014

   $ 77   

2015

     166   

2016

     120   

2017

     5   

2018 and thereafter

     20,000   
  

 

 

 
   $ 20,368   
  

 

 

 

 

10. Collaboration Agreement

In March 2014, the Company entered into a collaboration agreement with Celgene Corporation (“Celgene”) to develop, seek regulatory approval for, and commercialize a companion diagnostic assay for use in screening patients with diffuse Large B-Cell Lymphoma. The Company received an upfront payment of $5.8 million upon its delivery of certain information to Celgene, and is eligible to receive up to $17.0 million in success-based milestone payments related to development and regulatory milestones. The Company will retain all commercial rights to the diagnostic test developed under this collaboration. Assuming success in the clinical trial process, and subject to regulatory approval, the Company will market and sell the diagnostic assay and Celgene has agreed to make certain potential commercial payments to the Company in the event sales of the assay do not exceed certain pre-specified minimum annual revenues during the first three years following regulatory approval.

The Company uses a proportional performance model to recognize revenue over the Company’s performance period for the related agreement. Costs incurred to date compared to total expected costs are used to determine proportional performance, as this is considered to be representative of the delivery of outputs under the arrangement. Revenue recognized at any point in time is limited to cash received and amounts contractually due. Changes in estimates of total expected costs are accounted for prospectively as a change in estimate. Generally, all amounts received or due are classified as collaboration revenue as they are earned.

The process of successfully developing a product candidate, obtaining regulatory approval and ultimately commercializing a product candidate is highly uncertain and the attainment of any milestones is therefore uncertain and difficult to predict. In addition, certain milestones are outside the Company’s control and are dependent on the performance of Celgene and the outcome of a clinical trial and related regulatory processes. Accordingly, the Company is not able to reasonably estimate when, if at all, any milestone payments may be payable to the Company by Celgene.

For the three and six months ended June 30, 2014, the Company recognized collaboration revenue of $0.6 million. No such amounts were recognized in 2013. At June 30, 2014, the Company had recorded $5.1 million of deferred revenue related to the collaboration, of which $2.0 million is expected to be recognized as revenue within one year.

 

11. Commitments and Contingencies

From time to time, the Company may become involved in litigation relating to claims arising from the ordinary course of business. Management believes that there are no claims or actions pending against the Company currently, the ultimate disposition of which would have a material adverse effect on the Company’s consolidated results of operation, financial condition or cash flows.

 

12. Information about Geographic Areas

The Company operates as a single reportable segment and primarily enables customers to perform both research and clinical testing on its nCounter Analysis System. The Company has one sales force that sells these systems to both research and clinical testing labs, and has launched its first product, nCounter Elements reagents, that can be used for both research and diagnostic testing. In addition, the Company’s Prosigna Breast Cancer Assay is marketed to clinical laboratories. The Company has also entered into a companion diagnostic collaboration with Celgene Corporation.

 

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Table of Contents

The following table of total revenue is based on the geographic location of the Company’s customers, distributors and collaborator. For sales to distributors, their geographic location may be different from the geographic locations of the ultimate end user. Total revenue by geography was as follows (in thousands):

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
     2014      2013      2014      2013  

North America

   $ 7,387      $ 5,218      $ 13,376      $ 9,695  

Europe & Middle East

     2,130        1,494        3,893        2,110  

Asia Pacific

     1,364        506        2,363        1,089  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

   $ 10,881      $ 7,218      $ 19,632      $ 12,894  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue in the United States was $6.9 million, $4.3 million, $12.2 million and $7.9 million for the three and six month periods ended June 30, 2014 and 2013, respectively.

Substantially all of the Company’s assets, including long-lived assets, are located in the United States.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This section should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included in Part I, Item 1 of this report. This discussion contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are identified by words such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “will,” “may,” “seek” and other similar expressions. You should read these statements carefully because they discuss future expectations, contain projections of future results of operations or financial condition, or state other “forward-looking” information. These statements relate to our future plans, objectives, expectations, intentions and financial performance and the assumptions that underlie these statements. These forward-looking statements include, but are not limited to:

 

    our ability to successfully commercialize Prosigna, our first product for which we have obtained a CE mark in the European Union and, in September 2013, received 510(k) clearance from the U.S. Food and Drug Administration, or FDA;

 

    the implementation of our business model and strategic plans for our business;

 

    the regulatory regime and our ability to secure regulatory clearance or approval for the clinical use of our products, domestically and internationally;

 

    our ability to secure third-party reimbursement for the clinical use of our products;

 

    our strategic relationships, including with patent holders of our technologies, manufacturers and distributors of our products, collaboration partners and third parties who conduct our clinical studies;

 

    our intellectual property position;

 

    our expectations regarding the market size and growth potential for our business;

 

    any estimates regarding future expenses, revenues, capital requirements, liquidity, stock performance and macro-economic trends; and

 

    our ability to sustain and manage growth, including our ability to develop new products and enter new markets.

These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in this report in Part II, Item 1A — “Risk Factors,” and elsewhere in this report. These statements, like all statements in this report, speak only as of their date, and we undertake no obligation to update or revise these statements in light of future developments. In this report, “we,” “our,” “us,” “NanoString,” and “the Company” refer to NanoString Technologies, Inc. and its subsidiaries.

Overview

We develop, manufacture and sell robust, intuitive products that unlock scientifically valuable and clinically actionable genomic information from minute amounts of tissue. Our nCounter Analysis System directly profiles hundreds of molecules simultaneously using a novel barcoding technology that is powerful enough for use in research, yet simple enough for use in clinical laboratories worldwide. We market instruments and related consumables to researchers in academic, government, and biopharmaceutical laboratories for use in understanding fundamental biology and the molecular basis of disease and to clinical laboratories and medical centers for diagnostic use. We have an installed base of approximately 220 systems, which our customers have used to publish 500 peer-reviewed papers. As researchers discover how genomic information can be used to improve clinical decision-making, these discoveries can be translated and validated as diagnostic tests based on our nCounter Elements reagents. In certain situations, we intend to translate their discoveries into in vitro diagnostic assays. For example, in September 2013, we received 510(k) clearance from the U.S. Food and Drug Administration, or FDA, to market in the United States a version of our first molecular diagnostic product, the Prosigna Breast Cancer Assay, or Prosigna, providing an assessment of a patient’s risk of recurrence for breast cancer.

We derive a substantial majority of our revenue from the sale of our products, which consist of our nCounter instruments and related proprietary consumables, which we call CodeSets, nCounter Elements reagents and Master Kits, and our Prosigna in vitro diagnostic kits. We derive revenue from processing fees related to proof-of-principle studies we conduct for potential customers and extended service contracts for our nCounter Analysis Systems. We also generate revenue through development collaborations.

 

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We use third-party contract manufacturers to produce the two instruments comprising the nCounter Analysis System. We manufacture consumables at our Seattle, Washington facility. This operating model is designed to be capital efficient and to scale efficiently as our product volumes grow. We focus a substantial portion of our resources on researching and developing new technologies and products. We sell our products through our own sales force in the United States, Canada, Singapore, Israel and certain European countries. We sell through distributors in other parts of the world.

Our total revenue has increased to $19.6 million for the six months ended June 30, 2014 from $12.9 million for the first six months of 2013. Historically, we have generated a substantial majority of our revenue from sales to customers in North America; however, we expect sales in other regions to increase over time. We have never been profitable and had net losses of $25.5 million and $12.8 million for the six months ended June 30, 2014 and 2013, respectively, and as of June 30, 2014 our accumulated deficit was $152.3 million.

In March 2014, we entered into a collaboration agreement with Celgene Corporation, or Celgene, pursuant to which we will work collaboratively with Celgene to develop, seek regulatory approval for, and commercialize a companion diagnostic assay for use in screening patients with Diffuse Large B-Cell Lymphoma. We received an upfront payment of $5.8 million in June 2014 upon our delivery of certain information to Celgene, and are eligible to receive up to $17.0 million in success-based milestone payments related to development and regulatory milestones. We will retain all commercial rights to the diagnostic test developed under this collaboration and, assuming success in the clinical trial process, and subject to regulatory approval, expect to generate revenues from the sale of the resulting in vitro diagnostic kits.

Results of Operations

Revenue

Our product revenue consists of sales of our nCounter Analysis System and related consumables, including Prosigna in vitro diagnostic kits. Service revenue consists of fees associated with extended service agreements and conducting proof-of-principle studies. Our customer base is primarily composed of academic institutions, government laboratories, biopharmaceutical companies and clinical laboratories that perform analyses or testing using our nCounter Analysis System and purchase related consumables. Collaboration revenue is derived from our companion diagnostic development collaboration with Celgene Corporation.

The following table reflects total revenue by geography based on the geographic location of our customers, distributors and collaborator. North America consists of the United States, Canada and Mexico; and Asia Pacific includes Japan, China, South Korea, Singapore, Malaysia and Australia.

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014      2013      %
Change
    2014      2013      %
Change
 
     (In thousands)            (In thousands)         

North America

   $ 7,387       $ 5,218         42   $ 13,376       $ 9,695         38 %

Europe & Middle East

     2,130         1,494         43        3,893         2,110         85  

Asia Pacific

     1,364         506         170        2,363         1,089         117  
  

 

 

    

 

 

      

 

 

    

 

 

    

Total

   $ 10,881       $ 7,218         51      $ 19,632       $ 12,894         52  
  

 

 

    

 

 

      

 

 

    

 

 

    

The composition of revenue was as follows:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014      2013      %
Change
    2014      2013      %
Change
 
     (In thousands)            (In thousands)         

Product revenue:

                

Instruments

   $ 3,765       $ 2,523         49   $ 7,213       $ 4,162         73 %

Consumables

     5,857         4,305         36        10,643         8,004         33  

In vitro diagnostic kits

     181         —           —          242         —           —     
  

 

 

    

 

 

      

 

 

    

 

 

    

Total product revenue

     9,803         6,828         44        18,098         12,166         49  

Service revenue

     460         390         18        916         728         26  
  

 

 

    

 

 

      

 

 

    

 

 

    

Total product and service revenue

     10,263         7,218         42        19,014         12,894         47  

Collaboration revenue

     618         —           —          618         —           —     
  

 

 

    

 

 

      

 

 

    

 

 

    

Total revenue

   $ 10,881       $ 7,218         51      $ 19,632       $ 12,894         52  
  

 

 

    

 

 

      

 

 

    

 

 

    

 

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Instruments revenue increased significantly due to an increase in the number of instruments sold. The increases in consumables revenue were largely driven by growth in our installed base of instruments. Revenue from in vitro diagnostic kits relates to the sale of Prosigna kits, which began in the third quarter of 2013. The increases in service revenue were primarily related to an increase in the number of instruments covered by service agreements. Collaboration revenue for the three and six-month periods is related to our collaboration agreement with Celgene Corporation entered into in March 2014. We received an upfront payment of $5.8 million and are eligible to receive up to $17.0 million in success-based milestone payments related to development and regulatory milestones. We are using a proportional performance model to recognize revenue over our performance period for this agreement. The costs incurred to date compared to total expected costs are used to determine proportional performance.

Cost of Product and Service Revenue; Gross Profit; and Gross Margin

Cost of product and service revenue consists primarily of costs incurred in the production process, including costs of purchasing instruments from third-party contract manufacturers, consumable component materials and assembly labor and overhead, installation, warranty, service and packaging and delivery costs. In addition, cost of product and service revenue includes royalty costs for licensed technologies included in our products, provisions for slow-moving and obsolete inventory and stock-based compensation expense. We provide a one-year warranty on each nCounter Analysis System sold and establish a reserve for warranty repairs based on historical warranty repair costs incurred.

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014     2013     %
Change
    2014     2013     %
Change
 
     (In thousands)           (In thousands)        

Cost of product and service revenue

   $ 4,860      $ 3,522        38   $ 9,185      $ 6,404        43 %
  

 

 

   

 

 

     

 

 

   

 

 

   

Product and service gross profit

   $ 5,403      $ 3,696        46      $ 9,829      $ 6,490        51  
  

 

 

   

 

 

     

 

 

   

 

 

   

Product and service gross margin

     53     51       52     50  

The increase in cost of product and service revenue for the three and six-month periods ended June 30, 2014 as compared to the same periods in 2013 was related to the increased volume of both instruments and consumables sold. Product and service gross profit improved for both periods in 2014 due to cost efficiencies associated with increased consumables production volume and by several large consumable orders with unusually low per unit manufacturing costs. Partially offsetting these favorable variances was a shift in product mix toward instruments. Costs related to collaboration revenue are included in research and development expense.

Research and Development Expense

Research and development expenses consist primarily of salaries and benefits, occupancy, laboratory supplies, engineering services, consulting fees, costs associated with licensing molecular diagnostics rights and clinical study expenses (including the cost of tissue samples) to support the regulatory approval or clearance of diagnostic products. We have made substantial investments in research and development since our inception. Our research and development efforts have focused primarily on the tasks required to enhance our technologies and to support development and commercialization of new and existing products and applications. We believe that our continued investment in research and development is essential to our long-term competitive position and expect these expenses to increase in future periods.

Given the relatively small size of our research and development staff and the limited number of active projects at any given time, we have found that, to date, it has been effective for us to manage our research and development activities on a departmental basis. Accordingly, we do not require employees to report their time by project nor do we allocate our research and development costs to individual projects other than collaborations. Research and development expense by functional area was as follows:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014      2013      %
Change
    2014      2013      %
Change
 
     (In thousands)            (In thousands)         

Core nCounter platform technology

   $ 1,685       $ 817         106   $ 3,513       $ 1,429         146

Manufacturing process development

     555         358         55        1,044         736         42   

Life sciences products and applications

     942         665         42        1,803         1,401         29   

Diagnostic product development

     1,738         1,375         26        2,919         2,313         26   

Facility allocation

     354         411         (14     727         806         (10
  

 

 

    

 

 

      

 

 

    

 

 

    

Total

   $ 5,274       $ 3,626         45      $ 10,006       $ 6,685         50   
  

 

 

    

 

 

      

 

 

    

 

 

    

 

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Table of Contents

The increases in research and development expense reflected increases in personnel-related expenses primarily to support the advancement of our nCounter technology. In addition, there were increases in engineering costs for development of the next generation of our nCounter system, which is targeted to launch during the first half of 2015 and an increase in costs to support the Celgene collaboration agreement.

Selling, General and Administrative Expense

Selling, general and administrative expense consists primarily of costs for our sales and marketing, finance, legal, human resources, information technology, business development and general management functions, as well as professional services, such as legal, consulting and accounting services. We expect selling, general and administrative expense to increase in future periods as the number of sales, technical support and marketing and administrative personnel grows and we continue to introduce new products, broaden our customer base and grow our business. In particular, the continued commercialization of Prosigna requires us to establish a dedicated oncology diagnostics sales force which will increase selling and marketing expenses significantly. We also expect legal, accounting and compliance costs to increase as our business grows.

Selling, general and administrative expense was as follows:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014      2013      %
Change
    2014      2013      %
Change
 
     (In thousands)            (In thousands)         

Selling, general and administrative expense

   $ 12,880      $ 6,708        92   $ 23,554      $ 12,834        84

The increases for the periods presented were primarily attributable to increased staffing and personnel-related costs to support sales and marketing and administration; increased external marketing and other consulting costs related to the commercial launch of Prosigna; and increased corporate professional fees and other public company costs. Partially offsetting the increase for both periods was a reduction in external legal costs.

Other Income (Expense)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014     2013     %
Change
    2014     2013     %
Change
 
     (In thousands)           (In thousands)        

Interest income

   $ 75     $ 3       2,400   $ 139     $ 6       2,217

Interest expense

     (2,015     (489     312        (2,551     (874     192   

Other expense

     (15     (9     67        15        (13     (215

Revaluation of preferred stock warrant liability

     —         1,638        (100     —         1,156        (100
  

 

 

   

 

 

     

 

 

   

 

 

   

Total other income (expense)

   $ (1,955   $ 1,143        (271   $ (2,397   $ 275        (972
  

 

 

   

 

 

     

 

 

   

 

 

   

The increase in interest expense for both periods presented was primarily related to the costs incurred to pay off our former credit facility in April 2014. In addition, interest expense increased due to an increase in borrowing in 2014 as compared to 2013.

The revaluation of the preferred stock warrant liability for the three and six-month periods ended June 30, 2013 resulted from a re-measurement of the fair value of preferred stock warrants using the Black-Scholes option pricing model, which was primarily

 

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impacted by a decrease in the valuation of the underlying stock. Upon closing of our initial public offering in July 2013, all outstanding preferred stock was automatically converted into common stock, and the warrants to purchase preferred stock converted into warrants to purchase common stock. As a result, the preferred stock warrant liability was reclassified to stockholders’ equity.

Liquidity and Capital Resources

As of June 30, 2014, we had cash, cash equivalents and short-term investments totaling $79.6 million. We believe our existing cash, cash equivalents and short-term investments will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. However, we may need to raise additional capital to expand the commercialization of our products, fund our operations and further our research and development activities. Our future funding requirements will depend on many factors, including: market acceptance of our products; the cost and timing of establishing additional sales, marketing and distribution capabilities; the cost of our research and development activities; the cost and timing of regulatory clearances or approvals; the effect of competing technological and market developments; and the extent to which we acquire or invest in businesses, products and technologies, although we currently have no commitments or agreements relating to any of these types of transactions.

If we require additional funds in the future, we may not be able to obtain such funds on acceptable terms, or at all. If we raise additional funds by issuing equity or equity-linked securities, our stockholders may experience dilution. Debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. Any debt or additional equity financing that we raise may contain terms that are not favorable to us or our stockholders. If we raise additional funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish some rights to our technologies or our products, or grant licenses on terms that are not favorable to us. If we are unable to raise adequate funds, we may have to liquidate some or all of our assets, or delay, reduce the scope of or eliminate some or all of our development programs. If we do not have, or are not able to obtain, sufficient funds, we may have to delay development or commercialization of our products or license to third parties the rights to commercialize products or technologies that we would otherwise seek to commercialize. We also may have to reduce marketing, customer support or other resources devoted to our products or cease operations.

Sources and Uses of Funds

Since inception, we have financed our operations primarily through the sale of equity securities and, to a lesser extent, from borrowings.

In April 2014, we entered into a term loan agreement under which we may borrow up to $45.0 million, or up to an aggregate of approximately $52.0 million if we elect to exercise in full an option to defer payment of a portion of the interest that would accrue on the borrowing under the term loan agreement. Upon initial closing, we borrowed $20.0 million, the proceeds of which were primarily used to repay the outstanding balance under our former credit facility plus a related $1.0 million end of term payment, a $0.3 million make-whole premium, and interest accrued. We incurred and recorded a total charge to interest expense of $1.4 million related to the repayment of our former credit facility, including a loss on extinguishment of debt of $0.6 million. We have committed to borrow an additional $10.0 million under the term loan agreement no later than October 2014. Up to an additional $15.0 million, in increments of $5.0 million, may be borrowed under the agreement no later than May 2015, subject to a revenue requirement. All borrowings under the new term loan agreement will accrue interest at 12.5% annually, payable quarterly, of which 3.5% can be deferred during the first four years of the term at our option and paid together with the principal. We are required to pay only interest for the first five years of the term. Principal payments are due in four equal installments during the sixth year of the term. We have the option to prepay the term loans, in whole or in part, at any time subject to payment of a redemption fee of up to 4%, which declines over the term. The term loan agreement contains customary conditions to borrowings, events of default and negative covenants, including covenants that could limit our ability to, among other things, incur additional indebtedness, liens or other encumbrances, make dividends or other distributions; buy, sell or transfer assets; engage in any new line of business; and enter into certain transactions with affiliates. The new term loan agreement also includes liquidity and revenue-based financial covenants. We must also satisfy certain minimum annual revenue requirements, which shall initially be $40.0 million for 2014 with annual increases of $15.0 million for each subsequent fiscal year thereafter. If our actual revenues are below the minimum annual revenue requirement for any given year, we may avoid a related default by generating proceeds from an equity or subordinated debt issuance equal to the shortfall between our actual revenues and the minimum revenue requirement. Our obligations under the new term loan agreement are collateralized by substantially all of our assets.

Our principal uses of cash are funding our operations, satisfaction of our obligations under our debt instruments, and other working capital requirements. Over the past several years, our revenue has increased significantly from year to year and, as a result, our cash flows from customer collections have increased. However, our operating expenses have also increased as we have invested in growing our existing research business and in developing Prosigna and preparing it for commercialization. As a result, our cash used in operating activities has increased. We expect our operating cash requirements to increase in the future as we (1) increase sales and marketing activities to expand the installed base of our nCounter Analysis Systems among research customers and clinical laboratories, (2) commercialize, and conduct studies to expand the clinical utility of, Prosigna and (3) develop new applications, chemistry and instruments for our nCounter platform.

 

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Historical Cash Flow Trends

The following table shows a summary of our cash flows for the periods indicated (in thousands):

 

     Six Months Ended
June 30,
 
     2014     2013  

Cash used in operating activities

   $ (20,679   $ (14,242

Cash used in investing activities

     (26,852     (254

Cash provided by financing activities

     58,776       3,559  

Operating Cash Flows

We derive operating cash flows from cash collected from the sale of our products and services. These cash flows received are outweighed by our use of cash for operating expenses to support the growth of our business. As a result, we have historically experienced negative cash flows from operating activities as we have expanded our business in the United States and other markets and this will likely continue for the foreseeable future.

Net cash used in operating activities for the six months ended June 30, 2014 consisted of our net loss of $25.5 million, less $1.5 million of cash provided by changes in assets and liabilities which was significantly impacted by the deferred revenue balance of $5.1 million related to the Celgene collaboration. Net loss was further reduced by $3.3 million of net non-cash items, such as depreciation and amortization, amortization of premium on short-term investments, loss on extinguishment of debt, and stock-based compensation.

Net cash used in operating activities for the six months ended June 30, 2013 consisted of our net loss of $12.8 million and $1.9 million of cash used for working capital purposes. These uses were partially offset by $0.4 million of net non-cash items, such as depreciation and amortization, stock-based compensation and change in the fair value of preferred stock warrants.

Investing Cash Flows

Our most significant investing activities for the six months ended June 30, 2014 were related to the purchase and sale of short-term investments. Because we manage our cash usage with respect to our total cash, cash equivalents and short-term investments, we do not consider these cash flows to be important to an understanding of our liquidity and capital resources.

In the six months ended June 30, 2014 and 2013, we purchased $1.2 million and $0.3 million, respectively, of property and equipment required to support the growth and expansion of our operations.

Financing Cash Flows

Historically, we have funded our operations through the issuance of equity securities and the incurrence of indebtedness.

Net cash provided by financing activities for the six months ended June 30, 2014 consisted of net proceeds of $57.0 million from our public offering of common stock, proceeds of $20.0 million from our new term loan agreement, Employee Stock Purchase Plan proceeds of $0.4 million and $0.2 million of proceeds from the exercise of stock options. These proceeds were partially offset by the repayment of the outstanding balance under our former credit facility in the amount of $18.1 million and deferred costs related to our new term loan agreement in the amount of $0.8 million.

Net cash provided by financing activities for the six months ended June 30, 2013 consisted of proceeds from term loan borrowings of $5.0 million and proceeds from exercise of stock options of $0.4 million. These proceeds were partially offset by payments for deferred offering costs of $1.7 million and repayments of borrowings of $0.1 million.

Critical Accounting Policies and Significant Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements which have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and related disclosure of contingent assets and liabilities, revenue and expenses at the date of the financial statements. Generally, we base our estimates on historical experience and on various other assumptions in accordance with GAAP that we believe to be reasonable under the circumstances. Actual results may differ from these estimates.

Critical accounting policies and estimates are those that we consider the most important to the portrayal of our financial condition and results of operations because they require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our critical accounting policies and estimates include those related to:

 

    revenue recognition;

 

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    stock-based compensation;

 

    inventory valuation;

 

    fair value measurements; and

 

    income taxes.

We have updated our revenue recognition policy to address the accounting treatment related to the collaboration agreement with Celgene Corporation, but there have been no material changes in our critical accounting policies and estimates in the preparation of our condensed consolidated financial statements during the six months ended June 30, 2014 compared to those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the SEC on March 27, 2014.

Revenue Recognition

We generate the majority of our revenue from sales of products and services. Our products consist of our proprietary nCounter Analysis Systems and related consumables. Services consist of extended service contracts and service fees for assay processing.

Revenue is recognized when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the price to the customer is fixed or determinable; and (4) collectability is reasonably assured. The evaluation of these revenue recognition criteria requires significant management judgment. For instance, we use judgment to assess collectability based on factors such as the customer’s creditworthiness and past collection history, if applicable. If we determine that collection of a payment is not reasonably assured, revenue recognition is deferred until receipt of payment. We also use judgment to assess whether a price is fixed or determinable including but not limited to, reviewing contractual terms and conditions related to payment terms.

Instrument product revenue is recognized upon installation and calibration in geographic regions where such services are only available from our specialized technicians. In these regions, the sale of instruments and related installation and calibration are considered to be one unit of accounting, as instruments are required to be professionally installed and calibrated before use. In certain geographic regions, installation and calibration services are available from other vendors, and in such regions they are considered separate revenue elements. Consumables and in vitro diagnostic kits are considered to be separate units of accounting as they are sold separately. Consumables and in vitro diagnostic kit product revenue is recognized upon transfer of ownership, which is generally upon shipment.

Some of our sales arrangements involve the delivery or performance of multiple products or services. Significant interpretation is sometimes required to determine the appropriate accounting, including whether the deliverables specified in a multiple element arrangement should be treated as separate units of accounting for revenue recognition purposes, and, if so, how the related sales price should be allocated among the elements, when to recognize revenue for each element, and the period over which revenue should be recognized. Revenue recognition for arrangements with multiple deliverables is based on the individual units of accounting determined to exist in the arrangement. A delivered element is considered a separate unit of accounting when the delivered element has value to the customer on a stand-alone basis. Elements are considered to have stand-alone value when they are sold separately or when the customer could resell the element on a stand-alone basis.

For multiple-element arrangements, we allocate arrangement consideration at the inception of the arrangement to the deliverables based on the relative selling price method. The selling price used for each deliverable is based on vendor-specific objective evidence, or VSOE, if available, third-party evidence, or TPE, if VSOE is not available, or best estimated selling price, or BESP, if neither VSOE nor TPE is available. BESP is determined in a manner consistent with that used to establish the price to sell the deliverable on a stand-alone basis. To date, selling prices have been established by reference to VSOE based on stand-alone sales transactions for each deliverable. VSOE is considered to have been established when a substantial majority of individual sales transactions within the previous 12-month period fall within a reasonably narrow range, which we have defined to be plus or minus 15% of the median sales price of actual stand-alone sales transactions. Allocated revenue is only recognized for each deliverable when the revenue recognition criteria have been met.

Revenue from the sales of our products that are not part of multiple element arrangements is recognized when no significant obligations remain undelivered and collection of the receivables is reasonably assured, which is generally when delivery has occurred.

Accruals for estimated warranty expenses are made at the time that the associated revenue is recognized. We use judgment to estimate these accruals and, if we were to experience an increase in warranty claims or if costs of servicing our products under warranty were greater than our estimates, our cost of revenue could be adversely affected in future periods.

Revenue from the sales of our services is recognized when no significant obligations remain undelivered and collection of the receivables is reasonably assured, which is generally when delivery has occurred. We offer extended service contracts on our nCounter Analysis Systems for periods ranging from 12 to 36 months after the end of the standard 12-month warranty period. Revenue from extended service contracts is deferred and recognized in income on a straight-line basis over the contract period.

 

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We entered into a collaborative agreement that generated upfront fees with the potential of milestone payments based upon the completion of development-related milestones. We are able to estimate the total cost of services to be provided under the arrangement and recognize collaboration revenue using a proportional performance model. Costs incurred to date compared to total expected costs are used to determine proportional performance, as this is considered to be representative of the delivery of outputs under the arrangement. Revenue recognized at any point in time is limited to cash received and amounts contractually due. Changes in estimates of total expected costs are accounted for prospectively as a change in estimate. From period to period, collaboration revenue can fluctuate substantially based on the achievement of development-related milestones.

Recent Accounting Pronouncements

As an “emerging growth company” the JOBS Act allows us to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. As a result, our financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies.

In May 2014, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update entitled “ASU 2014-09, Revenue from Contracts with Customers.” The standard requires entities to recognize revenue through the application of a five step model, which includes identification of the contract, identification of the performance obligations, determination of the transaction price, allocation of the transaction price to the performance obligations, and recognition of revenue as the entity satisfies the performance obligations. The standard will become effective for us beginning January 1, 2017. We are currently evaluating the guidance to determine the potential impact on our consolidated results of operations, financial condition, cash flows, and financial statement disclosures.

In June 2014, FASB issued an accounting standards update entitled “ASU 2014-12, Compensation – Stock Compensation.” The standard requires entities that grant their employees share-based payments in which the terms of the award provide that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The standard will become effective for us beginning January 1, 2016. We are currently evaluating the guidance to determine the potential impact on our consolidated results of operations, financial condition, cash flows, and financial statement disclosures.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to various market risks, including changes in interest rates and foreign currency exchange rates. Market risk is the potential loss arising from adverse changes in market rates and prices. Prices for our products are largely denominated in U.S. dollars and, as a result, we do not face significant risk with respect to foreign currency exchange rates.

Interest Rate Risk

Generally, our exposure to market risk has been primarily limited to interest income sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because the majority of our investments are in short-term debt securities. The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive without significantly increasing risk. To minimize risk, we maintain our portfolio of cash, cash equivalents and short-term investments in a variety of interest-bearing instruments, which have included U.S. government and agency securities, high-grade U.S. corporate bonds, asset-backed securities, and money market funds. Declines in interest rates, however, would reduce future investment income. A 1% decline in interest rates, occurring on July 1, 2014 and sustained throughout the period ended June 30, 2015, would not be material.

As of June 30, 2014, the principal outstanding under our term borrowings was $20.0 million. The interest rates on our term borrowings under our credit facility are fixed. If overall interest rates had increased by 10% during the periods presented, our interest expense would not have been affected.

Foreign Currency Exchange Risk

As we expand internationally our results of operations and cash flows will become increasingly subject to fluctuations due to changes in foreign currency exchange rates. Historically, a majority of our revenue has been denominated in U.S. dollars, although we sell our products and services in local currency outside of the United States, principally the Euro. Our expenses are generally denominated in the currencies in which our operations are located, which is primarily in the United States. The effect of a 10% adverse change in exchange rates on foreign denominated cash, receivables and payables would not have been material for the periods presented. As our operations in countries outside of the United States grow, our results of operations and cash flows will be subject to fluctuations due to changes in foreign currency exchange rates, which could harm our business in the future. To date, we have not entered into any material foreign currency hedging contracts although we may do so in the future.

 

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Inflation Risk

We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could adversely affect our business, financial condition and results of operations.

 

Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures. Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, have evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) prior to the filing of this quarterly report. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of the end of the period covered by this quarterly report, our disclosure controls and procedures were, in design and operation, effective.

(b) Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting during the quarter ended June 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent limitation on the effectiveness of internal control.

The effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, any system of internal control over financial reporting, including ours, no matter how well designed and operated, can only provide reasonable, not absolute assurances. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but cannot assure you that such improvements will be sufficient to provide us with effective internal control over financial reporting.

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

We are not engaged in any material legal proceedings. However, in the normal course of business, we may from time to time be named as a party to legal claims, actions and complaints, including matters involving employment, intellectual property or others.

 

Item 1A. Risk Factors

You should carefully consider the following risk factors, in addition to the other information contained in this report, including the section of this report captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes. If any of the events described in the following risk factors and the risks described elsewhere in this report occurs, our business, operating results and financial condition could be seriously harmed. This report on Form 10-Q also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of factors that are described below and elsewhere in this report.

Risks Related to our Business and Strategy

We have incurred losses since we were formed and expect to incur losses in the future. We cannot be certain that we will achieve or sustain profitability.

We have incurred losses since we were formed and expect to incur losses in the future. We incurred net losses of $25.5 million and $12.8 million for the six months ended June 30, 2014 and 2013, respectively. As of June 30, 2014, we had an accumulated deficit of $152.3 million. We expect that our losses will continue for at least the next several years as we will be required to invest significant additional funds toward development and commercialization of our technology. We also expect that our selling, general and administrative expenses will continue to increase due to the additional costs associated with establishing a dedicated oncology sales force and the increased administrative costs associated with being a public company. Our ability to achieve or sustain profitability is based on numerous factors, many of which are beyond our control, including the market acceptance of our products, future product development and our market penetration and margins. We may never be able to generate sufficient revenue to achieve or sustain profitability.

 

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Our financial results may vary significantly from quarter to quarter which may adversely affect our stock price.

Investors should consider our business and prospects in light of the risks and difficulties we expect to encounter in the new, uncertain and rapidly evolving markets in which we compete. Because these markets are new and evolving, predicting their future growth and size is difficult. We expect that our visibility into future sales of our products, including volumes, prices and product mix between instruments and consumables, and revenue from licensing agreements, including the amount and timing of payments pursuant to collaboration agreements such as our agreement with Celgene Corporation, will continue to be limited and could result in unexpected fluctuations in our quarterly and annual operating results.

Numerous other factors, many of which are outside our control, may cause or contribute to significant fluctuations in our quarterly and annual operating results. These fluctuations may make financial planning and forecasting difficult. In addition, these fluctuations may result in unanticipated changes in our available cash, which could negatively affect our business and prospects. Factors that may contribute to fluctuations in our operating results include many of the risks described in this section. In addition, one or more of such factors may cause our revenue or operating expenses in one period to be disproportionately higher or lower relative to the others. Our products involve a significant capital commitment by our customers and accordingly involve a lengthy sales cycle. We may expend significant effort in attempting to make a particular sale, which may be deferred by the customer or never occur. Accordingly, comparing our operating results on a period-to-period basis may not be meaningful, and investors should not rely on our past results as an indication of our future performance. If such fluctuations occur or if our operating results deviate from our expectations or the expectations of securities analysts, our stock price may be adversely affected.

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

We have experienced significant revenue growth in a short period of time. We may not achieve similar growth rates in future periods. Investors should not rely on our operating results for any prior periods as an indication of our future operating performance. If we are unable to maintain adequate revenue growth, our financial results could suffer and our stock price could decline. Furthermore, growth will place significant strains on our management and our operational and financial systems and processes. For example, commercialization of the Prosigna Breast Cancer Assay, or Prosigna, in Europe and the United States and development and commercialization of this test and other diagnostic products worldwide are key elements of our growth strategy and will require us to hire and retain additional sales and marketing, regulatory, manufacturing and quality assurance personnel. If we do not successfully forecast the timing of regulatory clearance or approval for product marketing in additional jurisdictions and subsequent demand for our diagnostic products or manage our anticipated expenses accordingly, our operating results will be harmed.

If Prosigna fails to achieve and sustain sufficient market acceptance, we will not generate expected revenue, and our prospects may be harmed.

Commercialization of Prosigna in Europe, the United States and the other jurisdictions in which we intend to pursue regulatory approval or clearance is a key element of our strategy. Currently, most oncologists seeking sophisticated gene expression analysis for diagnosing and profiling breast cancer in their patients, ship tissue samples to a limited number of centralized laboratories typically located in the United States. We may experience reluctance, or refusal, on the part of physicians to order, and third-party payors to pay for, Prosigna if the results of our research and clinical studies, and our sales and marketing activities relating to communication of these results, do not convey to physicians, third-party payors, and patients that Prosigna provides equivalent or better prognostic information than those centralized laboratories. In addition, breast cancer treatment guidelines recommend that chemotherapy be considered in many cases, in combination with other patient factors. Accordingly, physicians may be reluctant to order a test, such as Prosigna, that may suggest recommending against chemotherapy. Furthermore, our diagnostic tests are performed by pathologists in local laboratories, rather than by a vendor in a remote centralized laboratory, which requires us to educate pathologists regarding the benefits of this business model and oncologists regarding the reliability and consistency of results generated locally.

These hurdles may make it difficult to convince health care providers that tests using our technologies are appropriate options for cancer diagnostics, may be equivalent or superior to available tests, and may be at least as cost effective as alternative technologies. Furthermore, we may encounter significant difficulty in gaining inclusion in breast cancer treatment guidelines, obtaining patient reimbursement from public and private payors, and gaining broad market acceptance of Prosigna. If we fail to successfully commercialize Prosigna, we may never receive a return on the significant investments in sales and marketing, regulatory, manufacturing and quality assurance personnel we have made, and further investments we intend to make, which would adversely affect our growth prospects, operating results and financial condition.

Our future success is dependent upon our ability to expand our customer base and introduce new applications.

Our current customer base is primarily composed of academic institutions, government laboratories and biopharmaceutical companies that perform analyses using our nCounter Analysis System for research use only. In 2013, with the introduction of our first diagnostic products, we began selling into the clinical laboratory market. Our success will depend, in part, upon our ability to increase our market penetration among these customers and to expand our market by developing and marketing new research applications, developing a lower cost instrument that would be attractive to more researchers, and introducing diagnostic products into clinical laboratories after obtaining regulatory authorization. For example, we must convince physicians and third-party payors that our diagnostic products, such as Prosigna, are cost effective in obtaining prognostic information that can help inform treatment decisions and that our nCounter Analysis System could enable an equivalent or superior approach that lessens reliance on centralized laboratories. Furthermore, we expect that increasing the installed base of our nCounter Analysis Systems will drive demand for our relatively high margin consumable products. If we are not able to successfully increase our installed base of

 

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nCounter Analysis Systems, sales of our consumable products and our margins may not meet expectations. Attracting new customers and introducing new applications requires substantial time and expense. Any failure to expand our existing customer base, or launch new applications, would adversely affect our ability to improve our operating results.

Our research business depends on levels of research and development spending by academic and governmental research institutions and biopharmaceutical companies, a reduction in which could limit demand for our products and adversely affect our business and operating results.

In the near term, we expect that a large portion of our revenue will be derived from sales of our nCounter Analysis Systems to academic institutions, governmental laboratories and biopharmaceutical companies worldwide for research and development applications. The demand for our products will depend in part upon the research and development budgets of these customers, which are impacted by factors beyond our control, such as:

 

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

 

    macroeconomic conditions and the political climate;

 

    changes in the regulatory environment;

 

    differences in budgetary cycles;

 

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

 

    market acceptance of relatively new technologies, such as ours.

In addition, academic, governmental and other research institutions that fund research and development activities may be subject to stringent budgetary constraints that could result in spending reductions, reduced allocations or budget cutbacks, which could jeopardize the ability of these customers to purchase our products. Our operating results may fluctuate substantially due to reductions and delays in research and development expenditures by these customers. Any decrease in our customers’ budgets or expenditures, or in the size, scope or frequency of capital or operating expenditures, could materially and adversely affect our business, operating results and financial condition.

Our sales cycle is lengthy and variable, which makes it difficult for us to forecast revenue and other operating results.

Our sales process involves numerous interactions with multiple individuals within an organization, and often includes in-depth analysis by potential customers of our products, performance of proof-of-principle studies, preparation of extensive documentation and a lengthy review process. As a result of these factors, the large capital investment required in purchasing our instruments and the budget cycles of our customers, the time from initial contact with a customer to our receipt of a purchase order can vary significantly and be up to 12 months or longer. Given the length and uncertainty of our sales cycle, we have in the past experienced, and likely will in the future experience, fluctuations in our instrument sales on a period-to-period basis. Furthermore, we have begun placing instruments under reagent rental agreements, wherein a customer does not purchase an instrument upfront but instead pays a rental fee associated with each purchase of reagents. An increase in instruments placed under these reagent rental agreements may reduce the number of instruments we would otherwise sell in any period. In addition, any failure to meet customer expectations could result in customers choosing to retain their existing systems or to purchase systems other than ours.

Our reliance on distributors for sales of our products outside of the United States, and on clinical laboratories for delivery of Prosigna testing services, could limit or prevent us from selling our products and impact our revenue.

We have established exclusive distribution agreements for our nCounter Analysis System and related consumable products within parts of Europe, the Middle East, Asia Pacific and South America. We intend to continue to grow our business internationally, and to do so we must attract additional distributors and retain existing distributors to maximize the commercial opportunity for our products. There is no guarantee that we will be successful in attracting or retaining desirable sales and distribution partners or that we will be able to enter into such arrangements on favorable terms. Distributors may not commit the necessary resources to market and sell our products to the level of our expectations or may choose to favor marketing the products of our competitors. If current or future distributors do not perform adequately, or we are unable to enter into effective arrangements with distributors in particular geographic areas, we may not realize long-term international revenue growth.

Similarly, we have entered into agreements with clinical laboratories in the United States, Europe and Israel to provide Prosigna testing services. We do not provide testing services directly and, thus, we are reliant on these clinical laboratories to actively promote and sell Prosigna testing services. These clinical laboratories may take longer than anticipated to begin offering Prosigna testing services and may not commit the necessary resources to market and sell Prosigna testing services to the level of our expectations. Furthermore, we intend to contract with additional clinical laboratories to offer Prosigna testing services and we may be unsuccessful in attracting and contracting with new clinical laboratory providers. If current or future Prosigna testing service providers do not perform adequately, or we are unable to enter into contracts with additional clinical laboratories to provide Prosigna testing services, we may not be successful selling Prosigna and our future revenue prospects may be adversely affected.

 

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If we are unable to obtain additional regulatory clearances or approvals to market Prosigna in additional countries or if regulatory limitations are placed on our diagnostic products our business and growth will be harmed. In addition, if we do not obtain additional regulatory clearances or approvals to market products other than Prosigna for diagnostic purposes, we will be limited to marketing such products for research use only.

We have received regulatory clearance in the United States under a 510(k) for a version of our first diagnostic product, Prosigna, providing an assessment of a patient’s risk of recurrence for breast cancer, and we have obtained a CE mark for Prosigna which permits us to market that assay for diagnostic purposes in Europe. We do not have regulatory clearance or approval to market any other product for diagnostic purposes or to market Prosigna for diagnostic purposes in any other markets, other than Israel, Canada and Australia or to promote Prosigna in the United States for additional indications. Other than with respect to Prosigna in such jurisdictions, and our nCounter Elements reagents, we are limited to marketing our products for research use only, which means that we cannot make any diagnostic or clinical claims. We intend to seek regulatory authorizations to market Prosigna in other jurisdictions, as well as for other indications. For example, in July 2014, we submitted a 510(k) application to the FDA that seeks to include risk of late recurrence data in our U.S. Prosigna patient report, which may help inform patients and their healthcare providers regarding the use of extended endocrine therapy. We cannot assure investors that we will be successful in obtaining these regulatory clearances. If we do not obtain additional regulatory clearances or approvals to market future products or future indications for diagnostic purposes, if unexpected regulatory limitations are placed on our products or if we fail to successfully commercialize such products, the market potential for our diagnostic products would be constrained, and our business and growth prospects would be adversely affected.

As part of our current business model, we will seek to enter into strategic collaborations and licensing arrangements with third parties to develop diagnostic tests.

We have relied, and expect to continue to rely, on strategic collaborations and licensing agreements with third parties for discoveries based on which we develop diagnostic tests. For example, we licensed the rights to intellectual property that forms the basis of Prosigna from Bioclassifier, LLC, which was founded by several of our research customers engaged in translational research. Similarly, in connection with our collaboration with Celgene Corporation, we licensed the rights to intellectual property relating to a gene signature for lymphoma subtyping, which was discovered by a consortium of researchers including several of our research customers, from the National Institutes of Health. We intend to enter into more such arrangements with our research customers and other researchers, including biopharmaceutical companies, for development of future diagnostic products. However, there is no assurance that we will be successful in doing so. In particular, our customers are not obligated to collaborate with us or license technology to us, and they may choose to develop diagnostic products themselves or collaborate with our competitors. Establishing collaborations and licensing arrangements is difficult and time-consuming. Discussions may not lead to collaborations or licenses on favorable terms, if at all. To the extent we agree to work exclusively with a party in a given area, our opportunities to collaborate with others could be limited. Potential collaborators or licensors may elect not to work with us based upon their assessment of our financial, regulatory or intellectual property position. Even if we establish new relationships, they may never result in the successful development or commercialization of future tests.

New diagnostic product development involves a lengthy and complex process, and we may be unable to commercialize on a timely basis, or at all, any of the tests we develop.

Few research and development projects result in successful commercial products, and success in early clinical studies often is not replicated in later studies. For example, even though the results of our clinical studies that used samples from the Arimidex, Tamoxifen, Alone or in Combination, or ATAC, study and the Austrian Breast & Colorectal Cancer Study Group 8, or ABCSG8, study of postmenopausal women with HR+ early stage breast cancer were favorable, there is no guarantee that any future studies will be successful. At any point, we may abandon development of a product candidate or we may be required to expend considerable resources repeating clinical studies, which would adversely impact potential revenue and our expenses. In addition, any delay in product development would provide others with additional time to commercialize competing products before we do, which in turn may adversely affect our growth prospects and operating results.

Recently, we have entered into our first companion diagnostic collaboration with Celgene Corporation to develop an in vitro diagnostic assay to be used for subtyping certain lymphoma patients and we intend to enter into additional similar collaborations over time. The success of the development programs for such assays will be dependent on the success of the related drug trials conducted by our collaborators. There is no guarantee that those clinical trials will be successful and, as a result, we may expend considerable time and resources developing in vitro diagnostic assays that cannot gain regulatory approval. Although we expect such collaborations to provide funding to cover our costs of development, failure of these clinical trials would reduce our prospects for introducing new diagnostic products and would adversely impact our growth prospects and future operating results.

Our research and development efforts will be hindered if we are not able to contract with third parties for access to archival tissue samples.

Under standard clinical practice, tumor biopsies removed from patients are preserved and stored in formalin-fixed paraffin embedded, or FFPE, format. We rely on our ability to secure access to these archived FFPE tumor biopsy samples, as well as information pertaining to the clinical outcomes of the patients from which they were derived for our clinical development activities. Others compete with us for access to these samples. Additionally, the process of negotiating access to archived samples is lengthy because it typically involves numerous parties and approval levels to resolve complex issues such as usage rights, institutional review board approval, privacy rights, publication rights, intellectual property ownership and research parameters. If we are not able to negotiate access to archived tumor tissue samples with hospitals, clinical partners, pharmaceutical companies, or companies developing therapeutics on a timely basis, or at all, or if other laboratories or our competitors secure access to these samples before us, our ability to research, develop and commercialize future products will be limited or delayed.

 

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The life sciences research and diagnostic markets are highly competitive. If we fail to compete effectively, our business and operating results will suffer.

We face significant competition in the life sciences research and diagnostics markets. We currently compete with both established and early stage life sciences research companies that design, manufacture and market instruments and consumables for gene expression analysis, single cell analysis, polymerase chain reaction, or PCR, digital PCR, other nucleic acid detection and additional applications. These companies use well established laboratory techniques such as microarrays or quantitative PCR, or qPCR, as well as newer technologies such as next generation sequencing. We believe our principal competitors in the life sciences research market are Affymetrix, Agilent Technologies, Bio-Rad, Exiqon, Fluidigm, HTG Molecular Diagnostics, Illumina, Life Technologies (acquired by Thermo Fisher Scientific), Luminex, Perkin Elmer, Qiagen and Roche Applied Science. In addition, there are a number of new market entrants in the process of developing novel technologies for the life sciences market, including companies such as RainDance Technologies and Wafergen Bio-Systems.

We also compete with commercial diagnostics companies. We believe our principal competitor in the breast cancer diagnostics market is Genomic Health, which provides gene expression analysis at its central laboratory in Redwood City, California and currently commands a substantial majority of the market. We also face competition from companies such as Agendia, Clarient (a GE Healthcare company), Genoptix (a division of Novartis) and bioMeriéux, which also offer services by means of centralized laboratories that profile gene or protein expression in breast cancer. In Europe, we also face regional competition from smaller companies such as Sividon Diagnostics, maker of EndoPredict, a distributed test for breast cancer recurrence, and other independent laboratories.

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

 

    greater name and brand recognition, financial and human resources;

 

    broader product lines;

 

    larger sales forces and more established distributor networks;

 

    substantial intellectual property portfolios;

 

    larger and more established customer bases and relationships; and

 

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

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

 

    cost of capital equipment;

 

    cost of consumables and supplies;

 

    reputation among customers;

 

    innovation in product offerings;

 

    flexibility and ease-of-use;

 

    accuracy and reproducibility of results; and

 

    compatibility with existing laboratory processes, tools and methods.

We believe that additional competitive factors specific to the diagnostics market include:

 

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

 

    volume, quality, and strength of clinical and analytical validation data;

 

    availability of reimbursement for testing services; and

 

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

We cannot assure investors that our products will compete favorably or that we will be successful in the face of increasing 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. Any failure to compete effectively could materially and adversely affect our business, financial condition and operating results.

 

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We have limited experience in marketing and selling our products, and if we are unable to successfully commercialize our products, our business may be adversely affected.

We have limited experience marketing and selling our products into clinical laboratories. Our nCounter Dx Analysis System was introduced for sale in the clinical laboratory market in Europe and Israel in February 2013, and in the United States in November 2013. We sell our products through our own sales force in North America and through a combination of our own sales force and distributors in Europe, Middle East, Asia Pacific and South America. Many members of our original sales force were hired and our distributors were selected based on experience selling to research customers and not necessarily to clinical laboratories. If we are unable to market and sell our products effectively to clinical laboratories, our ability to sell diagnostic products, including Prosigna, will be adversely affected.

Our future sales of Prosigna will depend in large part on our ability to successfully establish an oncology sales force and to increase the scope of our marketing efforts. Because we have limited experience in marketing and selling our products in the diagnostics market, our ability to forecast demand, the infrastructure required to support such demand and the sales cycle to diagnostics customers is unproven. If we do not build an efficient and effective sales force targeting this market, our business and operating results will be adversely affected.

We may not be able to develop new products, enhance the capabilities of our systems to keep pace with rapidly changing technology and customer requirements or successfully manage the transition to new product offerings, any of which could have a material adverse effect on our business and operating results.

Our success depends on our ability to develop new products and applications for our technology in existing and new markets, while improving the performance and cost-effectiveness of our systems. New technologies, techniques or products could emerge that might offer better combinations of price and performance than our current or future products and systems. Existing markets for our products, including gene expression analysis, single cell analysis and copy number variation, as well as potential markets for our research and diagnostic product candidates, are characterized by rapid technological change and innovation. 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. It is critical to our success that we anticipate changes in technology and customer requirements and to successfully introduce new, enhanced and competitive technologies to meet our customers’ and prospective customers’ needs on a timely and cost-effective basis. If we do not successfully innovate and introduce new technology into our product lines, our business and operating results will be adversely impacted.

The development of new products may require new scientific discoveries or advancements and complex technology and engineering. Such developments typically involve external suppliers and service providers, making the management of development projects complex and subject to risks and uncertainties regarding timing, availability of required components or services and performance of such components or assembled products. For example, we are developing a new version of our nCounter Analysis System that is expected to be smaller and less expensive than the current version. If we do not successfully manage new product development processes, development work is not performed according to schedule, or such new technologies or products be adversely impacted, and our business and operating results may be harmed.

Additionally, we must carefully manage the introduction of new products. For example, we have begun testing manufacturing prototypes of the new version of our nCounter Analysis System and are targeting commercial launch of the new system in the first half of 2015. If customers believe that such products, including the new version of our nCounter system, will offer enhanced features or be sold for a more attractive price, they may delay purchases until such products are available. We may also have excess or obsolete inventory of older products as we transition to new products and our experience in managing product transitions is very limited. If we do not effectively manage the transitions to new product offerings, our revenues, results of operations and business will be adversely affected.

New market opportunities may not develop as quickly as we expect, limiting our ability to successfully market and sell our products.

The market for our products is new and evolving. Accordingly, we expect the application of our technologies to emerging opportunities will take several years to develop and mature and we cannot be certain that these market opportunities will develop as we expect. For example, in September 2013, we launched a single cell gene expression application for our nCounter Analysis System, which applies our technology to, amongst other things, improve single cell analytic workflow for gene expression analysis, and in July 2013, we launched nCounter Elements, a new digital molecular barcoding chemistry that allows users to design their own customized assays using standard sets of barcodes provided by us. The future growth of the market for these products depends on many factors beyond our control, including recognition and acceptance of our applications by the scientific community and the growth, prevalence and costs of competing methods of genomic analysis. If the markets for nCounter Elements, single cell analysis or others do not develop as we expect, our business may be adversely affected. In addition, we commercially launched Prosigna in Europe and Israel in February 2013 and we intend to offer Prosigna in other countries outside of the United States. Genomic testing for breast cancer is not widely available outside of the United States and the market for such tests is new. The future growth of the market for genomic breast cancer testing will depend on physicians’ acceptance of such testing and the availability of reimbursement for such tests. Our success in these new markets will depend to a large extent on our ability to successfully market, sell and establish reimbursement for products using our technologies. If we are not able to successfully market and sell our products or to achieve the revenue or margins we expect, our operating results may be harmed and we may not recover our product development and marketing expenditures.

 

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We are dependent on single source suppliers for some of the components and materials used in our products, and the loss of any of these suppliers could harm our business.

We rely on Precision System Science, Co., Ltd of Chiba, Japan, to build our nCounter Prep Station and Korvis LLC of Corvallis, Oregon, to build our nCounter Digital Analyzer. Each of these contract manufacturers are sole suppliers. Since our contracts with these instrument suppliers do not commit them to carry inventory or make available any particular quantities, they may give other customers’ needs higher priority than ours, and we may not be able to obtain adequate supplies in a timely manner or on commercially reasonable terms. We also rely on sole suppliers for various components we use to manufacture our consumable products. We periodically forecast our needs for such components and enter into standard purchase orders with them. If we were to lose such suppliers, there can be no assurance that we will be able to identify or enter into agreements with alternative suppliers on a timely basis on acceptable terms, if at all. If we should encounter delays or difficulties in securing the quality and quantity of materials we require for our products our supply chain would be interrupted which would adversely affect sales. If any of these events occur, our business and operating results could be harmed.

We may experience manufacturing problems or delays that could limit our growth or adversely affect our operating results

Our consumable products are manufactured at our Seattle, Washington facility using complex processes, sophisticated equipment and strict adherence to specifications and quality systems procedures. Any unforeseen manufacturing problems, such as contamination of our facility, equipment malfunction, or failure to strictly follow procedures or meet specifications, could result in delays or shortfalls in production of our consumable products. Identifying and resolving the cause of any such manufacturing issues could require substantial time and resources. 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, the introduction of new products may require the development of new manufacturing processes and procedures. While all of our codesets are produced using the same basic processes, significant variations may be required to meet product specifications. Developing such a process can be very time consuming, and any unexpected difficulty in doing so could delay the introduction of a product.

If our Seattle facility becomes unavailable or inoperable, we will be unable to continue manufacturing our consumables or process sales orders, and our business will be harmed.

We manufacture our consumable products in our facility in Seattle, Washington. In addition, our Seattle facility is the center for order processing, receipt of our prep station and digital analyzer manufactured by third-party contract manufacturers and shipping products to customers. Our facility and the equipment we use to manufacture our consumable products would be costly, and would require substantial lead time, to repair or replace. Seattle is situated near active earthquake fault lines. The facility may be harmed or rendered inoperable by natural or man-made disasters, including earthquakes and power outages, which may render it difficult or impossible for us to produce our tests for some period of time. The inability to manufacture consumables or to ship products to customers for even a short period of time may result in the loss of customers or harm our reputation, and we may be unable to regain those customers in the future. Although we possess insurance for damage to our property and the disruption of our business, this insurance, and in particular earthquake insurance, which is limited, may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms, if at all.

We expect to generate a substantial portion of our revenue internationally and are subject to various risks relating to our international activities which could adversely affect our operating results.

For the six months ended June 30, 2014 and 2013, approximately 32% and 25% of our revenue was generated from sales to customers located outside of North America. We believe that a significant percentage of our future revenue will come from international sources as we expand our overseas operations and develop opportunities in additional areas. Engaging in international business involves a number of difficulties and risks, including:

 

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

 

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

 

    export or import restrictions;

 

    various reimbursement and insurance regimes;

 

    laws and business practices favoring local companies;

 

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

 

    political and economic instability;

 

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

 

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    difficulties and costs of staffing and managing foreign operations; and

 

    difficulties protecting or procuring intellectual property rights.

As we expand internationally our results of operations and cash flows will become increasingly subject to fluctuations due to changes in foreign currency exchange rates. Historically, most of our revenue has been denominated in U.S. dollars, although we have sold our products and services in local currency outside of the United States, principally the Euro. Our expenses are generally denominated in the currencies in which our operations are located, which is primarily in the United States. As our operations in countries outside of the United States grow, our results of operations and cash flows will be subject to fluctuations due to changes in foreign currency exchange rates, which could harm our business in the future. For example, if the value of the U.S. dollar increases relative to foreign currencies, in the absence of a corresponding change in local currency prices, our revenue could be adversely affected as we convert revenue from local currencies to U.S. dollars. If we dedicate significant resources to our international operations and are unable to manage these risks effectively, our business, operating results and prospects will suffer.

Our ability to use net operating losses to offset future taxable income may be subject to certain limitations.

As of December 31, 2013, we had federal net operating loss carryforwards, or NOLs, to offset future taxable income of approximately $92.6 million, which expire in various years beginning in 2023, if not utilized. A lack of future taxable income would adversely affect our ability to utilize these NOLs. In addition, under Section 382 of the Internal Revenue Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its NOLs to offset future taxable income. We may have already experienced one or more ownership changes. Depending on the timing of any future utilization of our carryforwards, we may be limited as to the amount that can be utilized each year as a result of such previous ownership changes. However, we do not believe such limitations will cause our NOL and credit carryforwards to expire unutilized. In addition, future changes in our stock ownership as well as other changes that may be outside of our control, could result in additional ownership changes under Section 382 of the Internal Revenue Code. Our NOLs may also be impaired under similar provisions of state law. We have recorded a full valuation allowance related to our NOLs and other deferred tax assets due to the uncertainty of the ultimate realization of the future benefits of those assets.

Provisions of our debt instruments may restrict our ability to pursue our business strategies.

Our term loan agreement requires us, and any debt instruments we may enter into in the future may require us, to comply with various covenants that limit our ability to, among other things:

 

    dispose of assets;

 

    complete mergers or acquisitions;

 

    incur indebtedness;

 

    encumber assets;

 

    pay dividends or make other distributions to holders of our capital stock;

 

    make specified investments;

 

    engage in any new line of business; and

 

    engage in certain transactions with our affiliates.

These restrictions could inhibit our ability to pursue our business strategies. In addition, we are subject to financial covenants based on total revenue and minimum cash balances. If we default under our term loan agreement, and such event of default is not cured or waived, the lenders could terminate commitments to lend and cause all amounts outstanding with respect to the debt to be due and payable immediately, which in turn could result in cross defaults under other debt instruments. Our assets and cash flow may not be sufficient to fully repay borrowings under all of our outstanding debt instruments if some or all of these instruments are accelerated upon a default. We may incur additional indebtedness in the future. The debt instruments governing such indebtedness could contain provisions that are as, or more, restrictive than our existing debt instruments. If we are unable to repay, refinance or restructure our indebtedness when payment is due, the lenders could proceed against the collateral granted to them to secure such indebtedness or force us into bankruptcy or liquidation.

Our future capital needs are uncertain and we may need to raise additional funds in the future.

We believe that our existing cash and cash equivalents, including the funds raised in our January 2014 public offering, together with funds available under our term loan agreement, will be sufficient to meet our anticipated cash requirements for at least the next 12 months. However, we may need to raise substantial additional capital to:

 

    expand the commercialization of our products;

 

    fund our operations; and

 

    further our research and development.

 

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Our future funding requirements will depend on many factors, including:

 

    market acceptance of our products;

 

    the cost and timing of establishing additional sales, marketing and distribution capabilities;

 

    the cost of our research and development activities;

 

    the cost and timing of regulatory clearances or approvals;

 

    the effect of competing technological and market developments; and

 

    the extent to which we acquire or invest in businesses, products and technologies, including new licensing arrangements for new products.

We cannot assure you that we will be able to obtain additional funds on acceptable terms, or at all. If we raise additional funds by issuing equity or equity-linked securities, our stockholders may experience dilution. Additional debt financing, if available, may involve additional covenants restricting our operations or our ability to incur additional debt. Any debt or additional equity financing that we raise may contain terms that are not favorable to us or our stockholders. If we raise additional funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish some rights to our technologies or our products, or grant licenses on terms that are not favorable to us. If we do not have, or are not able to obtain, sufficient funds, we may have to delay development or commercialization of our products or license to third parties the rights to commercialize products or technologies that we would otherwise seek to commercialize. We also may have to reduce marketing, customer support or other resources devoted to our products or cease operations. Any of these factors could harm our operating results.

Acquisitions or joint ventures could disrupt our business, cause dilution to our stockholders and otherwise harm our business.

We may acquire other businesses, products or technologies as well as pursue strategic alliances, joint ventures, technology licenses or investments in complementary businesses. We have not made any acquisitions to date, and our ability to do so successfully is unproven. Any of these transactions could be material to our financial condition and operating results and expose us to many risks, including:

 

    disruption in our relationships with customers, distributors or suppliers as a result of such a transaction;

 

    unanticipated liabilities related to acquired companies;

 

    difficulties integrating acquired personnel, technologies and operations into our existing business;

 

    diversion of management time and focus from operating our business to acquisition integration challenges;

 

    increases in our expenses and reductions in our cash available for operations and other uses; and

 

    possible write-offs or impairment charges relating to acquired businesses.

Foreign acquisitions involve unique risks in addition to those mentioned above, including those related to integration of operations across different cultures and languages, currency risks and the particular economic, political and regulatory risks associated with specific countries.

Also, the anticipated benefit of any acquisition may not materialize. Future acquisitions or dispositions could result in potentially dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities or amortization expenses or write-offs of goodwill, any of which could harm our financial condition. We cannot predict the number, timing or size of future joint ventures or acquisitions, or the effect that any such transactions might have on our operating results.

If we are unable to recruit, train and retain key personnel, we may not achieve our goals.

Our future success depends on our ability to recruit, train, retain and motivate key personnel, including our senior management, research and development, manufacturing and sales and marketing personnel. Competition for qualified personnel is intense, particularly in the Seattle, Washington area. Our growth depends, in particular, on attracting, retaining and motivating highly-trained sales personnel with the necessary scientific background and ability to understand our systems at a technical level to effectively identify and sell to potential new customers. In particular, the commercial launch of Prosigna requires us to establish a dedicated oncology sales force to fully optimize the breast cancer diagnostic market opportunity. We do not maintain fixed term employment contracts or key man life insurance with any of our employees. Because of the complex and technical nature of our products and the dynamic market in which we compete, any failure to attract, train, retain and motivate qualified personnel could materially harm our operating results and growth prospects.

 

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

Our products may contain undetected errors or defects when first introduced or as new versions are released. Disruptions or other performance problems with our products may damage our customers’ businesses and could harm our reputation. If that occurs, we may incur significant costs, the attention of our key personnel could be diverted, or other significant customer relations problems may arise. We may also be subject to warranty and liability 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 adversely impact our business and operating results.

The sale and use of products or services based on our technologies, or activities related to our research and clinical studies, 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 cannot assure investors that our product liability insurance would adequately protect our assets from the financial impact of defending a product liability claim. Any product liability claim brought against us, with or without merit, could increase our product liability insurance rates or prevent us from securing insurance coverage in the future.

We face risks related to handling of hazardous materials and other regulations governing environmental safety.

Our operations are subject to complex and stringent environmental, health, safety and other governmental laws and regulations that both public officials and private individuals may seek to enforce. Our activities that are subject to these regulations include, among other things, our use of hazardous materials and the generation, transportation and storage of waste. We could discover that we or an acquired business is not in material compliance with these regulations. Existing laws and regulations may also be revised or reinterpreted, or new laws and regulations may become applicable to us, whether retroactively or prospectively, that may have a negative effect on our business and results of operations. It is also impossible to eliminate completely the risk of accidental environmental contamination or injury to individuals. In such an event, we could be liable for any damages that result, which could adversely affect our business.

Risks Related to Government Regulation and Diagnostic Product Reimbursement

Our “research use only” products for the research market could become subject to regulation as medical devices by the FDA or other regulatory agencies in the future which could increase our costs and delay our commercialization efforts, thereby materially and adversely affecting our business and results of operations.

In the United States, most of our products are currently labeled and sold for research use only, or RUO, and not for the diagnosis or treatment of disease, and are sold to pharmaceutical and biotechnology companies, academic and government institutions and research laboratories. Because such products are not intended for use in clinical practice in diagnostics, and the products cannot include clinical or diagnostic claims, they are not subject to regulation by the FDA as medical devices. In particular, while the FDA regulations require that RUO products be labeled, “For Research Use Only. Not for use in diagnostic procedures,” the regulations do not subject such products to the FDA’s pre- and post- market controls for medical devices. In November 2013, the FDA issued a final guidance on RUO products, which, among other things, reaffirmed that a company may not make clinical or diagnostic claims about an RUO product. Although not suggested in the final RUO guidance, if in the future the FDA modifies its approach to regulating our products labeled for research use only, it could reduce our revenue or increase our costs and adversely affect our business, prospects, results of operations or financial condition. In the event that the FDA requires marketing authorization of our RUO products in the future, there can be no assurance that the FDA will ultimately grant any clearance or approval requested by us in a timely manner, or at all.

In addition, we sell dual-use instruments with software that have both FDA-cleared functions and research functions, for which FDA approval or clearance is not required. Dual-use instruments are subject to FDA regulation since they are intended, at least in part, for use by customers performing clinical diagnostic testing. There is a risk that the FDA could take enforcement action against a manufacturer for distributing dual-use instruments if the FDA determines that approval or clearance was required for those functions for which FDA approval or clearance has not been obtained, and the instruments are being sold off-label. There is also a risk that the FDA could broaden its current regulatory enforcement of dual-use instruments through additional FDA oversight.

Our nCounter Elements reagents may be used by clinical laboratories to create Laboratory Developed Tests, which could in the future be the subject of additional FDA regulation as medical devices, which could materially and adversely affect our business and results of operations.

In February 2014, we launched nCounter Elements, a new digital molecular barcoding chemistry that allows users to design their own customized assays using standard sets of barcodes provided by us with the laboratories’ choice of oligonucleotide probes. In July 2013, we listed nCounter Elements as General Purpose Reagents, or GPR, with the FDA. GPRs are classified as Class I medical devices, and may be used in conjunction with appropriate analyte specific reagents and other general purpose reagents to create diagnostic test procedures or test systems.

 

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A clinical laboratory can use GPRs to create what is called a Laboratory Developed Test, or LDT. LDTs are diagnostic tests that are developed and performed by a laboratory and include genetic tests and other tests for rare conditions. Historically LDTs have not been subject to FDA regulation. On July 31, 2014, the FDA provided the U.S. Congress notice of its plans to release within 60 days its draft guidance for LDT regulation which would use a risk-based approach to regulating LDTs. Any restrictions on Laboratory Developed Tests by the FDA could restrict the demand for our products, including nCounter Elements. Additionally, compliance with additional regulatory burdens could be time consuming and costly. If the FDA issues final regulations for Laboratory Developed Tests or limits the acceptability of the raw materials used to make Laboratory Developed Tests, such regulation could adversely affect our prospects, results of operations and financial condition.

Approval and/or clearance by the FDA and foreign regulatory authorities for our diagnostic tests will take significant time and require significant research, development and clinical study expenditures and ultimately may not succeed.

Before we begin to label and market our products for use as clinical diagnostics in the United States, thereby subjecting them to FDA regulation as medical devices, unless an exemption applies, we are required to obtain either prior 510(k) clearance or prior pre-market approval, or PMA, from the FDA. In September 2013, we received FDA 510(k) clearance for Prosigna as a prognostic indicator for distant recurrence-free survival at 10 years in post-menopausal women with Stage I/II lymph node-negative or Stage II lymph node-positive (1–3 positive nodes) hormone receptor-positive breast cancer who have undergone surgery in conjunction with locoregional treatment and consistent with standard of care. In the future we plan to submit a separate application for approval of Prosigna to report intrinsic subtype and we expect that this application will require a PMA supported by additional clinical studies. We intend to pursue additional intended uses for Prosigna, which may require more burdensome regulatory processes than the 510(k) clearance process, including PMAs. Even if granted, a 510(k) clearance or PMA approval for any future product would likely place substantial restrictions on how our device is marketed or sold, and the FDA will continue to place considerable restrictions on our products, including, but not limited to, quality system regulations, registering manufacturing facilities, listing the products with the FDA, and complying with labeling, marketing, complaint handling, adverse event and medical device reporting requirements and corrections and removals. Obtaining FDA clearance or approval for diagnostics can be expensive and uncertain, and generally takes from several months to several years, and generally requires detailed and comprehensive scientific and clinical data. Notwithstanding the expense, these efforts may never result in FDA approval or clearance. 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.

Sales of our diagnostic products outside the United States are subject to foreign regulatory requirements governing clinical studies, vigilance reporting, marketing approval, manufacturing, product licensing, pricing and reimbursement. These regulatory requirements vary greatly from country to country. As a result, the time required to obtain approvals outside the United States may differ from that required to obtain FDA approval or clearance, and we may not be able to obtain foreign regulatory approvals on a timely basis or at all. Approval or clearance by the FDA does not ensure approval by regulatory authorities in other countries, and approval by one foreign regulatory authority does not ensure approval or clearance by regulatory authorities in other countries or by the FDA, and foreign regulatory authorities could require additional testing. In addition, FDA regulates exports of medical devices. Failure to comply with these regulatory requirements or to obtain required approvals or clearances could impair our ability to commercialize our diagnostic products outside of the United States.

We expect to rely on third parties in conducting any future studies of our diagnostic products that may 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 clinical studies or other studies that may be required to obtain FDA and other regulatory clearance or approval for our diagnostic products, including Prosigna. Accordingly, we expect to rely on third parties, such as medical institutions, clinical investigators, consultants, and collaborators to conduct such studies. Our reliance on these third parties for clinical development activities 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. 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 our diagnostic products.

We are subject to ongoing and extensive regulatory requirements, and our failure to comply with these requirements could substantially harm our business.

Certain of our products are regulated as medical devices, including Prosigna, the nCounter Dx Analysis System and nCounter Elements reagents. Accordingly, we are subject to ongoing International Organization for Standardization, or ISO, and FDA obligations and continued regulatory oversight and review, including routine inspections by EU Notified Bodies and by the FDA of our manufacturing facilities and compliance with requirements such as ISO 13485 and quality system regulations, which establish extensive requirements for quality assurance and control as well as manufacturing procedures; requirements pertaining to the registration of our manufacturing facilities and the listing of our devices with the FDA; continued complaint, adverse event and malfunction reporting; corrections and removals reporting; and labeling and promotional requirements. We may also be subject to

 

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additional FDA post-marketing obligations or requirements by the FDA to change our current product classifications which would impose additional regulatory obligations on us. The promotional claims we can make for Prosigna are limited to the cleared indication. For instance, in the United States the following special conditions for use are listed in the intended use: Prosigna is not intended for diagnosis, to predict or detect response to therapy or to help select the optimal therapy for patients. If we are not able to maintain regulatory compliance, we may not be permitted to market our medical device products and/or may be subject to enforcement by EU Competent Authorities and the FDA such as the issuance of warning or untitled letters, fines, injunctions, and civil penalties; recall or seizure of products; operating restrictions; and criminal prosecution. In addition, we may be subject to similar regulatory regimes of foreign jurisdictions as we continue to commercialize our products in new markets. Adverse Notified Body, EU Competent Authority or FDA action in any of these areas could significantly increase our expenses and limit our revenue and profitability.

If Medicare and other third-party payors in the United States and foreign countries do not approve reimbursement for diagnostic tests enabled by our technology, the commercial success of our diagnostic products would be compromised.

Successful commercialization of our diagnostic products depends, in large part, on the availability of adequate reimbursement for testing services that our diagnostic products enable from government insurance plans, managed care organizations and private insurance plans. There is significant uncertainty surrounding third-party reimbursement for the use of tests that incorporate new technology, such as Prosigna. For example, in June 2014, the Blue Cross and Blue Shield, or BCBS, Association Technology Evaluation Center affirmed their position that Prosigna should be considered investigational. Subsequently, at least two BCBS entities updated their coverage policies based on this evaluation. Also, in August 2014, UnitedHealthcare, the largest private health insurer in the United States, agreed with Laboratory Corporation of America, or Lab Corp, one of our commercial laboratory customers, to begin paying for Prosigna testing.

We continue to be in dialogue with representatives of the Molecular Diagnostic Services Program, or MolDX, regarding our application for Medicare reimbursement of Prosigna. In June 2014, MolDX requested that we modify our application to address new guidelines addressing MolDX’s clinical test evaluation process and to respond to questions raised by MolDX in its initial review of our application. Based on our most recent interactions with MolDX, we believe that MolDX’ s coverage determination and what, if any, additional clinical data or other information we will be asked to provide in connection with our application will be strongly influenced by the update to the National Comprehensive Cancer Network’s, or NCCN, treatment guidelines, which are expected later this year, and we do not expect MolDX to make a coverage determination until after the NCCN guideline update.

If we are unable to obtain positive policy decisions from third-party payors approving reimbursement for our tests at adequate levels, the commercial success of our products would be compromised and our revenue would be significantly limited. Even if we do obtain reimbursement for our tests, Medicare, Medicaid and private and other payors may withdraw their coverage policies, cancel their contracts with us at any time, review and adjust the rate of reimbursement, require co-payments from patients or stop paying for our tests, which would reduce revenue for testing services based on our technology, and indirectly, demand for diagnostic products. In addition, insurers, including managed care organizations as well as government payors such as Medicare and Medicaid, have increased their efforts to control the cost, utilization and delivery of healthcare services, which may include decreased coverage or reduced reimbursement. From time to time, Congress has considered and implemented changes to the Medicare fee schedules in conjunction with budgetary legislation, and pricing and payment terms, including the possible requirement of a patient co-payment for Medicare beneficiaries for tests covered by Medicare, and are subject to change at any time. Reductions in the reimbursement rate of third-party payors have occurred and may occur in the future. Reductions in the prices at which testing services based on our technology are reimbursed could have a negative impact on our revenue.

In many countries outside of the United States, various coverage, pricing and reimbursement approvals are required. We expect that it will take several years to establish broad coverage and reimbursement for testing services based on our products with payors in countries outside of the United States, and our efforts may not be successful.

We may be subject, directly or indirectly, to federal and state healthcare fraud and abuse laws and other federal and state laws applicable to our marketing practices. If we are unable to comply, or have not complied, with such laws, we could face substantial penalties.

As we commercialize Prosigna and any other potential diagnostic products in the United States, our operations will be directly, or indirectly through our customers, subject to various federal and state fraud and abuse laws, including, without limitation, the federal and state anti-kickback statutes and state and federal marketing compliance laws and gift bans. These laws may impact, among other things, our proposed sales and marketing and education programs and require us to implement additional internal systems for tracking certain marketing expenditures and reporting them to government authorities. In addition, we may be subject to patient privacy regulation by both the federal government and the states in which we conduct our business. The laws that may affect our ability to operate include:

 

    the federal Anti-kickback Law and state anti-kickback prohibitions;

 

    the federal physician self-referral prohibition, commonly known as the Stark Law, and the state equivalents;

 

    the federal Health Insurance Portability and Accountability Act of 1996, as amended;

 

    the Medicare civil money penalty and exclusion requirements;

 

    the federal False Claims Act civil and criminal penalties and state equivalents; and

 

    state physician gift bans and state and federal marketing expenditure disclosure laws.

If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our results of operations.

 

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Healthcare policy changes, including legislation reforming the United States healthcare system, may have a material adverse effect on our financial condition and results of operations.

The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, collectively, the PPACA, enacted in March 2010, makes changes that are expected to significantly impact the pharmaceutical and medical device industries and clinical laboratories. Beginning in 2013, each medical device manufacturer must pay a sales tax in an amount equal to 2.3% of the price for which such manufacturer sells its medical devices. The tax applies to our listed medical device products, which include the nCounter Dx Analysis System, Prosigna in vitro diagnostic kits and nCounter Elements reagents. The PPACA also mandates a reduction in payments for clinical laboratory services paid under the Medicare Clinical Laboratory Fee Schedule of 1.75% for the years 2011 through 2015 and a productivity adjustment to the Clinical Laboratory Fee Schedule. These or any future proposed or mandated reductions in payments may apply to some or all of the clinical laboratory tests that our customers use our technology to deliver to Medicare beneficiaries, and may indirectly reduce demand for our products.

Other significant measures contained in the PPACA include coordination and promotion of research on comparative clinical effectiveness of different technologies and procedures, initiatives to revise Medicare payment methodologies, such as bundling of payments across the continuum of care by providers and physicians, and initiatives to promote quality indicators in payment methodologies. The PPACA also includes significant new fraud and abuse measures, including required disclosures of financial arrangements with physician customers, lower thresholds for violations and increasing potential penalties for such violations. In addition, the PPACA establishes an Independent Payment Advisory Board, or IPAB, to reduce the per capita rate of growth in Medicare spending. The IPAB has broad discretion to propose policies to reduce health care expenditures, which may have a negative impact on payment rates for services, including our tests. The IPAB proposals may impact payments for clinical laboratory services that our customers use our technology to deliver beginning in 2016 and for hospital services beginning in 2020, and may indirectly reduce demand for our products.

In addition to the PPACA, the effect of which cannot presently be quantified, various healthcare reform proposals have also emerged from federal and state governments. Changes in healthcare policy, such as the creation of broad test utilization limits for diagnostic products in general or requirements that Medicare patients pay for portions of clinical laboratory tests or services received, could substantially impact the sales of our tests, increase costs and divert management’s attention from our business. Such co-payments by Medicare beneficiaries for laboratory services were discussed as possible cost savings for the Medicare program as part of the debt ceiling budget discussions in mid-2011 and may be enacted in the future. In addition, sales of our tests outside of the United States will subject us to foreign regulatory requirements, which may also change over time.

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. The taxes imposed by the new federal legislation and the expansion in government’s effect on the United States healthcare industry may result in decreased profits to us, lower reimbursements by payors for our products or reduced medical procedure volumes, all of which may adversely affect our business, financial condition and results of operations.

Risks Related to Intellectual Property

If we are unable to protect our intellectual property effectively, our business would be harmed.

We rely on patent protection as well as trademark, copyright, trade secret and other intellectual property rights protection and contractual restrictions to protect our proprietary technologies, all of which provide limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage. As of June 30, 2014, we owned or exclusively licensed seven issued U.S. patents and approximately 21 pending U.S. patent applications, including provisional and non-provisional filings. We also owned or licensed approximately 106 pending and granted counterpart applications worldwide, including 56 country-specific validations of four European patents. If we fail to protect our intellectual property, third parties may be able to compete more effectively against us and we may incur substantial litigation costs in our attempts to recover or restrict use of our intellectual property.

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 will take for such patents to be issued. Further, we cannot assure investors that other parties will not challenge any patents issued to us or that courts or regulatory agencies will hold our patents to be valid or enforceable. We cannot guarantee investors that we will be successful in defending challenges made against our patents and patent applications. Any successful third-party challenge to our patents could result in the third party or the unenforceability or invalidity of such patents.

The patent positions of life sciences companies can be highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved. No consistent policy regarding the breadth of claims allowed in such companies’ patents has emerged to date in the United States. Furthermore, in the biotechnology field, courts frequently render opinions that may affect the patentability of certain inventions or discoveries, including opinions that may affect the patentability of methods for analyzing or comparing DNA.

In particular, the patent positions of companies engaged in development and commercialization of genomic diagnostic tests, like Prosigna, are particularly uncertain. Various courts, including the U.S. Supreme Court, have recently rendered decisions that impact the scope of patentability of certain inventions or discoveries relating to genomic diagnostics. Specifically these decisions stand for the proposition that patent claims that recite laws of nature (for example, the relationships between gene expression levels

 

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and the likelihood of risk of recurrence of cancer) are not themselves patentable unless those patent claims 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 the law of nature itself. What constitutes a “sufficient” additional feature is uncertain. Accordingly, 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 licensed patents. One of our main areas of intellectual property, namely patents we license directed to the use of gene expression markers as part of genomic diagnostic tests, may be affected by these decisions.

The laws of some non-U.S. 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. 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.

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. We cannot predict the breadth of claims that may be allowed or enforced in our patents or in third-party patents. For example:

 

    We might not have been the first to make the inventions covered by each of our pending patent applications.

 

    We might not have been the first to file patent applications for these inventions.

 

    Others may independently develop similar or alternative products and technologies or duplicate any of our products and technologies.

 

    It is possible that our pending patent applications will not result in issued patents, and even if they issue as patents, they may not provide a basis for commercially viable products, may not provide us with any competitive advantages, or may be challenged and invalidated by third parties.

 

    We may not develop additional proprietary products and technologies that are patentable.

 

    The patents of others may have an adverse effect on our business.

 

    We apply for patents covering our products and technologies and uses thereof, as we deem appropriate. However, we may fail to apply for patents on important products and technologies in a timely fashion or at all.

In addition to pursuing patents on our technology, we take steps to protect our intellectual property and proprietary technology by entering into confidentiality agreements and intellectual property assignment agreements with our employees, consultants, corporate partners and, when needed, our advisors. Such agreements may not be enforceable or may not provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure or other breaches of the agreements, and we may not be able to prevent such unauthorized disclosure. 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 enforce 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. In addition, courts outside the United States may be less willing to protect trade secrets.

In addition, competitors could purchase our products 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 that fall outside of our intellectual property rights. If our intellectual property is not adequately protected so as to protect our market against competitors’ products and methods, our competitive position could be adversely affected, as could our business.

We have not yet registered certain of our trademarks, including “Prosigna,” in all of our potential markets. If we apply to register these trademarks, our applications may not be allowed for registration, and our registered trademarks may not be maintained or enforced. In addition, opposition or cancellation proceedings may be filed against our trademark applications and registrations, and our trademarks may not survive such proceedings. If we do not secure registrations for our trademarks, we may encounter more difficulty in enforcing them against third parties than we otherwise would.

To the extent our intellectual property, including licensed intellectual property, offers inadequate protection, or is found to be invalid or unenforceable, we would be exposed to a greater risk of direct competition. If our intellectual property does not provide adequate protection against our competitors’ products, our competitive position could be adversely affected, as could our business. Both the patent application process and the process of managing patent disputes can be time consuming and expensive.

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

We rely on licenses in order to be able to use various proprietary technologies that are material to our business, including our core digital molecular barcoding technology licensed from the Institute for Systems Biology and technology relating to Prosigna licensed from Bioclassifier, LLC. We do not own the patents that underlie these licenses. Our rights to use these technologies and employ the inventions claimed in the licensed patents are subject to the continuation of and compliance with the terms of those licenses.

 

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In some cases, we do not control the prosecution, maintenance, or filing of the patents to which we hold licenses, or the enforcement of these patents against third parties. Some of our patents and patent applications were either acquired from another company who acquired those patents and patent applications from yet another company, or are licensed from a third party. Thus, these patents and patent applications are not written by us or our attorneys, and we did not have control over the drafting and prosecution. The former patent owners and our licensors might not have given the same attention to the drafting and prosecution of these patents and applications as we would have if we had been the owners of the patents and applications and had control over the drafting and prosecution. We cannot be certain that drafting or prosecution of the licensed patents and patent applications by the licensors have been or will be conducted in compliance with applicable laws and regulations or will result in valid and enforceable patents and other intellectual property rights.

Enforcement of our licensed patents or defense of any claims asserting the invalidity of these patents is often subject to the control or cooperation of our licensors. Certain of our licenses contain provisions that allow the licensor to terminate the license upon specific conditions. Our rights under the licenses are subject to our continued compliance with the terms of the license, including the payment of royalties due under the license. Because of the complexity of our products and the patents we have licensed, determining the scope of the license and related royalty obligation can be difficult and can lead to disputes between us and the licensor. An unfavorable resolution of such a dispute could lead to an increase in the royalties payable pursuant to the license or termination of the license. If a licensor believed we were not paying the royalties due under the license or were otherwise not in compliance with the terms of the license, the licensor might attempt to revoke the license. If such an attempt were successful, we might be barred from producing and selling some or all of our products.

In addition, certain of the patents we have licensed relate to technology that was developed with U.S. government grants. Federal regulations impose certain domestic manufacturing requirements with respect to some of our products embodying these patents.

We may be involved in lawsuits to protect or enforce our patents and proprietary rights, to determine the scope, coverage and validity of others’ proprietary rights, or to defend against third-party claims of intellectual property infringement, any of which could be time-intensive and costly and may adversely impact our business or stock price.

We have received notices of claims of infringement and misappropriation or misuse of other parties’ proprietary rights in the past and may from time to time receive additional notices. Some of these claims may lead to litigation. We cannot assure investors that we will prevail in such actions, or that other actions alleging misappropriation or misuse by us of third-party trade secrets, infringement by us of third-party patents and trademarks or other rights, or the validity of our patents, trademarks or other rights, will not be asserted or prosecuted against us.

Litigation may be necessary for us to enforce our patent and proprietary rights or to determine the scope, coverage and validity of the proprietary rights of others. Litigation could result in substantial legal fees and could adversely affect the scope of our patent protection. The outcome of any litigation or other proceeding is inherently uncertain and might not be favorable to us, and we might not be able to obtain licenses to technology that we require. Even if such licenses are obtainable, they may not be available at a reasonable cost. We could therefore incur substantial costs related to royalty payments for licenses obtained from third parties, which could negatively affect our gross margins. Further, we could encounter delays in product introductions, or interruptions in product sales, as we develop alternative methods or products. In addition, if we resort to legal proceedings to enforce our intellectual property rights or to determine the validity, scope and coverage of the intellectual property or other proprietary rights of others, the proceedings could be burdensome and expensive, even if we were to prevail. Any litigation that may be necessary in the future could result in substantial costs and diversion of resources and could have a material adverse effect on our business, operating results or financial condition.

As we move into new markets and applications for our products, incumbent participants in such markets may assert their patents and other proprietary rights against us as a means of slowing our entry into such markets or as a means to extract substantial license and royalty payments from us. Our competitors and others may now and in the future have significantly larger and more mature patent portfolios than we currently have. In addition, future litigation may involve patent holding companies or other adverse patent owners who have no relevant product revenue and against whom our own patents may provide little or no deterrence or protection. Therefore, our commercial success may depend in part on our non-infringement of the patents or proprietary rights of third parties. We are aware of a third party, Genomic Health, Inc., that has issued patents and pending patent applications in the United States, Europe and other jurisdictions that claim methods of using certain genes that are included in Prosigna. We believe that Prosigna does not infringe any valid issued claim. Numerous significant intellectual property issues have been litigated, and will likely continue to be litigated, between existing and new participants in our existing and targeted markets and competitors may assert that our products infringe their intellectual property rights as part of a business strategy to impede our successful entry into those markets. Third parties may assert that we are employing their proprietary technology without authorization. In addition, our competitors and others may have patents or may in the future obtain patents and claim that use of our products infringes these patents. We could incur substantial costs and divert the attention of our management and technical personnel in defending against any of these claims. Parties making claims against us may be able to obtain injunctive or other relief, which could block our ability to develop, commercialize and sell products, and could result in the award of substantial damages against us. In the event of a successful claim of infringement against us, we may be required to pay damages and obtain one or more licenses from third parties, or be prohibited from selling certain products. We may not be able to obtain these licenses at a reasonable cost, if at all. We could

 

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therefore incur substantial costs related to royalty payments for licenses obtained from third parties, which could negatively affect our gross margins. In addition, we could encounter delays in product introductions while we attempt to develop alternative methods or products to avoid infringing third-party patents or proprietary rights. Defense of any lawsuit or failure to obtain any of these licenses on favorable terms could prevent us from commercializing products, and the prohibition of sale of any of our products could materially affect our ability to grow and gain market acceptance for our products.

Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. In addition, during the course of this kind of litigation, there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock.

In addition, our agreements with some of our suppliers, distributors, customers and other entities with whom we do business require us to defend or indemnify these parties to the extent they become involved in infringement claims against us, including the claims described above. We could also voluntarily agree to defend or indemnify third parties in instances where we are not obligated to do so if we determine it would be important to our business relationships. If we are required or agree to defend or indemnify any of these third parties in connection with any infringement claims, we could incur significant costs and expenses that could adversely affect our business, operating results, or financial condition.

We may be subject to damages resulting from claims that we or our employees have wrongfully used or disclosed alleged trade secrets of our employees’ former employers.

Many of our employees were previously employed at universities or other life sciences companies, including our competitors or potential competitors. Although no claims against us are currently pending, we or our employees 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. If we fail in defending such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights. A loss of key research personnel work product could hamper or prevent our ability to commercialize certain potential products, which could severely harm our business. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management.

Our products contain third-party open source software components, and failure to comply with the terms of the underlying open source software licenses could restrict our ability to sell our products.

Our products contain software tools licensed by third-party authors under “open source” licenses. Use and distribution of open source software may entail greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or other contractual protections regarding infringement claims or the quality of the code. Some open source licenses contain requirements that we make available source code for modifications or derivative works we create based upon the type of open source software we use. If we combine our proprietary software with open source software in a certain manner, we could, under certain open source licenses, be required to release the source code of our proprietary software to the public. This would allow our competitors to create similar products with less development effort and time and ultimately could result in a loss of product sales.

Although we monitor our use of open source software to avoid subjecting our products to conditions we do not intend, the terms of many open source licenses have not been interpreted by U.S. courts, and there is a risk that these licenses could be construed in a way that could impose unanticipated conditions or restrictions on our ability to commercialize our products. Moreover, we cannot assure investors that our processes for controlling our use of open source software in our products will be effective. If we are held to have breached the terms of an open source software license, we could be required to seek licenses from third parties to continue offering our products on terms that are not economically feasible, to re-engineer our products, to discontinue the sale of our products if re-engineering could not be accomplished on a timely basis, or to make generally available, in source code form, our proprietary code, any of which could adversely affect our business, operating results, and financial condition.

We use third-party software that may be difficult to replace or cause errors or failures of our products that could lead to lost customers or harm to our reputation.

We use software licensed from third parties in our products. In the future, this software may not be available to us on commercially reasonable terms, or at all. Any loss of the right to use any of this software could result in delays in the production of our products until equivalent technology is either developed by us, or, if available, is identified, obtained and integrated, which could harm our business. In addition, any errors or defects in third-party software, or other third-party software failures could result in errors, defects or cause our products to fail, which could harm our business and be costly to correct. Many of these providers attempt to impose limitations on their liability for such errors, defects or failures, and if enforceable, we may have additional liability to our customers or third-party providers that could harm our reputation and increase our operating costs.

We will need to maintain our relationships with third-party software providers and to obtain software from such providers that does not contain any errors or defects. Any failure to do so could adversely impact our ability to deliver reliable products to our customers and could harm our results of operations.

 

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Risks Related to Our Common Stock

The price of our common stock may be volatile, and you could lose all or part of your investment.

The trading price of our common stock has fluctuated and may continue to fluctuate substantially. The trading price of our common stock depends on a number of factors, including those described in this “Risk Factors” section, many of which are beyond our control and may not be related to our operating performance. These fluctuations could cause stockholders to lose all or part of their investment in our common stock. Factors that could cause fluctuations in the trading price of our common stock include the following:

 

    actual or anticipated quarterly variation in our results of operations or the results of our competitors;

 

    announcements by us or our competitors of new products, significant contracts, commercial relationships or capital commitments;

 

    failure to obtain or delays in obtaining product approvals or clearances from the FDA or foreign regulators;

 

    adverse regulatory or reimbursement announcements;

 

    issuance of new or changed securities analysts’ reports or recommendations for our stock;

 

    developments or disputes concerning our intellectual property or other proprietary rights;

 

    commencement of, or our involvement in, litigation;

 

    market conditions in the research and diagnostics markets;

 

    manufacturing disruptions;

 

    any future sales of our common stock or other securities;

 

    any change to the composition of the board of directors or key personnel;

 

    expiration of contractual lock-up agreements with our executive officers, directors and security holders;

 

    announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;

 

    general economic conditions and slow or negative growth of our markets; and

 

    the other factors described in this “Risk Factors” section.

The stock market in general, and market prices for the securities of life sciences and diagnostic companies like ours in particular, have from time to time experienced volatility that often has been unrelated to the operating performance of the underlying companies. These broad market and industry fluctuations may adversely affect the market price of our common stock, regardless of our operating performance. In several recent situations where the market price of a stock has been volatile, holders of that stock have instituted securities class action litigation against the company that issued the stock. If any of our stockholders were to bring a lawsuit against us, the defense and disposition of the lawsuit could be costly and divert the time and attention of our management and harm our operating results.

An active trading market for our common stock may not be sustained.

Although our common stock is listed on The NASDAQ Global Market, the market for our shares has demonstrated varying levels of trading activity. Furthermore, the current level of trading may not be sustained in the future. The lack of an active market for our common stock may impair investors’ ability to sell their shares at the time they wish to sell them or at a price that they consider reasonable, may reduce the fair market value of their shares and may impair our ability to raise capital.

If securities or industry analysts do not publish research reports about our business, or if they issue an adverse opinion about our business, our stock price and trading volume could decline.

The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of the analysts who cover us issues an adverse opinion about our company, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

Future sales of our common stock in the public market could cause our stock price to fall.

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

 

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Holders of approximately 7.0 million shares (including shares underlying outstanding warrants), or approximately 39%, of our outstanding shares, have rights, subject to some conditions, to require us to file registration statements covering the sale of their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. We have also registered the offer and sale of all shares of common stock that we may issue under our equity compensation plans.

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

Our principal stockholders and management own a significant percentage of our stock and will be able to exercise significant influence over matters subject to stockholder approval.

Our executive officers, directors and principal stockholders, together with their respective affiliates, beneficially own approximately 42% of our outstanding common stock as of June 30, 2014. Accordingly, our executive officers, directors and principal stockholders will effectively be able to determine the composition of the board of directors, approve all matters requiring stockholder approval, including mergers and other business combinations, and continue to have significant influence over our operations. This concentration of ownership could have the effect of 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 adverse effect on our stock price and may prevent attempts by our stockholders to replace or remove the board of directors or management.

Our management team has broad discretion to use the net proceeds from our initial public offering and our January 2014 public offering and its investment of these proceeds may not yield a favorable return. We may invest the proceeds of these offerings in ways with which investors disagree.

We have broad discretion as to how to spend and invest the proceeds from our initial public offering and our January 2014 public offering, and we may spend or invest these proceeds in a way with which our stockholders disagree. Accordingly, investors will need to rely on our judgment with respect to the use of these proceeds and these uses may not yield a favorable return to our stockholders. In addition, until the net proceeds are used, they may be placed in investments that do not produce significant income or that may lose value.

Anti-takeover provisions in our charter documents and under Delaware or Washington law could make an acquisition of us difficult, limit attempts by our stockholders to replace or remove our current management and limit our stock price.

Provisions of our certificate of incorporation and bylaws may delay or discourage transactions involving an actual or potential change in our control or change in our management, including transactions in which stockholders might otherwise receive a premium for their shares, or transactions that our stockholders might otherwise deem to be in their best interests. Therefore, these provisions could adversely affect the price of our stock. Among other things, the certificate of incorporation and bylaws:

 

    permit the board of directors to issue up to 15,000,000 shares of preferred stock, with any rights, preferences and privileges as they may designate;

 

    provide that the authorized number of directors may be changed only by resolution of the board of directors;

 

    provide that all vacancies, including newly-created directorships, may, except as otherwise required by law, be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum;

 

    divide the board of directors into three classes;

 

    provide that a director may only be removed from the board of directors by the stockholders for cause;

 

    require that any action to be taken by our stockholders must be effected at a duly called annual or special meeting of stockholders and may not be taken by written consent;

 

    provide that stockholders seeking to present proposals before a meeting of stockholders or to nominate candidates for election as directors at a meeting of stockholders must provide notice in writing in a timely manner, and meet specific requirements as to the form and content of a stockholder’s notice;

 

    prevent cumulative voting rights (therefore allowing the holders of a plurality of the shares of common stock entitled to vote in any election of directors to elect all of the directors standing for election, if they should so choose);

 

    provide that special meetings of our stockholders may be called only by the chairman of the board, our chief executive officer or by the board of directors; and

 

    provide that stockholders are permitted to amend the bylaws only upon receiving at least two-thirds of the total votes entitled to be cast by holders of all outstanding shares then entitled to vote generally in the election of directors, voting together as a single class.

In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an

 

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“interested” stockholder. Likewise, because our principal executive offices are located in Washington, the anti-takeover provisions of the Washington Business Corporation Act may apply to us under certain circumstances now or in the future. These provisions prohibit a “target corporation” from engaging in any of a broad range of business combinations with any stockholder constituting an “acquiring person” for a period of five years following the date on which the stockholder became an “acquiring person.”

We are an “emerging growth company,” and any decision on our part to comply only with certain reduced reporting and disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act, enacted in April 2012, and, for as long as we continue to be an “emerging growth company,” we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to “emerging growth companies,” including, but not limited to, not being required to have our independent registered public accounting firm audit our internal control over financial reporting under Section 404, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We could be an “emerging growth company” until December 31, 2018, although, if we have more than $1.0 billion in annual revenue, if the market value of our common stock that is held by non-affiliates exceeds $700 million as of June 30 of any year, or we issue more than $1.0 billion of non-convertible debt over a three-year period before the end of that five-year period, we would cease to be an “emerging growth company” as of the following December 31. We cannot predict if investors will find our common stock less attractive if we choose to rely on these exemptions. If some investors find our common stock less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our common stock and our stock price may be more volatile.

As an “emerging growth company” the JOBS Act allows us to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We have elected to use this extended transition period under the JOBS Act. As a result, our financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies, which may make our common stock less attractive to investors.

Complying with the laws and regulations affecting public companies will increase our costs and the demands on management and could harm our operating results.

As a public company, and particularly after we cease to be an “emerging growth company,” we incur and will continue to incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act and rules subsequently implemented by the SEC and The NASDAQ Global Market impose numerous requirements on public companies, including requiring changes in corporate governance practices. Also, the Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and operating results. Our management and other personnel will need to devote a substantial amount of time to compliance with these laws and regulations. These burdens may increase as new legislation is passed and implemented, including any new requirements that the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 may impose on public companies. These requirements have increased and will continue to increase our legal, accounting, and financial compliance costs and have made and will continue to make some activities more time consuming and costly. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and in the future we may be required to accept reduced policy limits and coverage or to incur substantial costs to maintain the same or similar coverage. These rules and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors or our board committees or as executive officers.

The Sarbanes-Oxley Act requires, among other things, that we assess the effectiveness of our internal control over financial reporting annually and the effectiveness of our disclosure controls and procedures quarterly. In particular, beginning January 1, 2014, Section 404 of the Sarbanes-Oxley Act, or Section 404, requires us to perform system and process evaluation and testing of our internal control over financial reporting to allow management to report on, and our independent registered public accounting firm potentially to attest to, the effectiveness of our internal control over financial reporting. As an “emerging growth company,” we expect to avail ourselves of the exemption from the requirement that our independent registered public accounting firm attest to the effectiveness of our internal control over financial reporting under Section 404. However, we may no longer avail ourselves of this exemption when we cease to be an “emerging growth company.” When our independent registered public accounting firm is required to undertake an assessment of our internal control over financial reporting, the cost of our compliance with Section 404 will correspondingly increase. Our compliance with applicable provisions of Section 404 will require that we incur substantial accounting expense and expend significant management time on compliance-related issues as we implement additional corporate governance practices and comply with reporting requirements. Moreover, if we are not able to comply with the requirements of Section 404 applicable to us in a timely manner, or if we or our independent registered public accounting firm identifies deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by the SEC or other regulatory authorities, which would require additional financial and management resources.

Furthermore, investor perceptions of our company may suffer if deficiencies are found, and this could cause a decline in the market price of our stock. Irrespective of compliance with Section 404, any failure of our internal control over financial reporting could have a material adverse effect on our stated operating results and harm our reputation. If we are unable to implement these requirements effectively or efficiently, it could harm our operations, financial reporting, or financial results and could result in an adverse opinion on our internal control over financial reporting from our independent registered public accounting firm.

 

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The SEC adopted its final rule implementing Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act concerning conflict minerals in August 2012. The rule requires us to submit forms and reports to the SEC annually to disclose our determinations and due diligence measures. We do not directly purchase any conflict minerals. However, tracing these materials back to their country of origin is a complex task that may require us to, among other things, survey suppliers in our supply chain to understand what programs they have in place for tracing the source of minerals supplied to us or used in products supplied to us and to ensure that reasonable due diligence has been performed. However, we have not determined how many, or if any, of our supply chain partners use conflict minerals. Moreover, we may face a limited pool of suppliers who can provide us “conflict-free” components, parts and manufactured products, and we may not be able to obtain conflict-free products or supplies in sufficient quantities or at competitive prices for our operations, and may be required to disclose that our products are not “conflict free.” This could adversely affect our reputation and may harm relationships with business partners and customers, and our stock price could suffer as a result.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

(b) Use of Proceeds from Public Offering of Common Stock

On June 25, 2013, our registration statement on Form S-1 (No. 333-188704) was declared effective for our initial public offering, and on July 1, 2013 we consummated the initial public offering consisting of 5,400,000 shares of our common stock for $10.00 per share. As a result of the offering, we received total net proceeds of approximately $46.8 million, after deducting total expenses of $7.2 million, consisting of underwriting discounts and commissions of $3.8 million and offering-related expenses of approximately $3.4 million. No payments for such expenses were made directly or indirectly to (i) any of our officers or directors or their associates, (ii) any persons owning 10% or more of any class of our equity securities, or (iii) any of our affiliates. There has been no material change in the planned use of proceeds from our initial public offering from that described in the final Prospectus filed with the SEC pursuant to Rule 424(b)(4) on June 25, 2013.

 

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Table of Contents
Item 6. Exhibits and Financial Statement Schedules.

(a) Exhibits.

 

Exhibit
Number

 

Description

  10.1   Term Loan Agreement dated April 1, 2014 among the Company and certain of the Company’s subsidiaries and Capital Royalty Partners II L.P., Capital Royalty Partners II – Parallel Fund “A” L.P. and Parallel Investment Opportunities Partners II L.P. and forms of promissory note and PIK loan note to be issued thereunder.
  10.2   Security Agreement dated April 17, 2014 among the Company and certain of the Company’s subsidiaries and Capital Royalty Partners II L.P., Capital Royalty Partners II – Parallel Fund “A” L.P. and Parallel Investment Opportunities Partners II L.P. and form of joinder agreement to be issued thereunder.
  31.1   Certification of Chief Executive Officer pursuant to Rule 13a-14(a).
  31.2   Certification of Chief Financial Officer pursuant to Rule 13a-14(a).
  32.1*   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.
  32.2*   Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350.
101.INS**   XBRL Instance Document.
101.SCH**   XBRL Taxonomy Extension Schema Document.
101.CAL**   XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF**   XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB**   XBRL Taxonomy Extension Label Linkbase Document.
101.PRE**   XBRL Taxonomy Extension Presentation Linkbase Document.

 

* The Certifications attached as Exhibits 32.1 and 32.2 that accompany this Quarterly Report on Form 10-Q are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of NanoString Technologies, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Form 10-Q, irrespective of any general incorporation language contained in such filing.
** Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files in Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

40


Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

    NANOSTRING TECHNOLOGIES, INC.

Date: August 8, 2014

    By:  

/s/ R. Bradley Gray

      R. Bradley Gray
      President and Chief Executive Officer
      (Principal Executive Officer)

Date: August 8, 2014

    By:  

/s/ James A. Johnson

      James A. Johnson
      Chief Financial Officer
      (Principal Financial and Accounting Officer)

 

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Table of Contents

EXHIBIT INDEX

 

Exhibit
Number

 

Description

  10.1   Term Loan Agreement dated April 1, 2014 among the Company and certain of the Company’s subsidiaries and Capital Royalty Partners II L.P., Capital Royalty Partners II – Parallel Fund “A” L.P. and Parallel Investment Opportunities Partners II L.P. and forms of promissory note and PIK loan note to be issued thereunder.
  10.2   Security Agreement dated April 17, 2014 among the Company and certain of the Company’s subsidiaries and Capital Royalty Partners II L.P., Capital Royalty Partners II – Parallel Fund “A” L.P. and Parallel Investment Opportunities Partners II L.P. and form of joinder agreement to be issued thereunder.
  31.1   Certification of Chief Executive Officer pursuant to Rule 13a-14(a).
  31.2   Certification of Chief Financial Officer pursuant to Rule 13a-14(a).
  32.1*   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.
  32.2*   Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350.
101.INS**   XBRL Instance Document.
101.SCH**   XBRL Taxonomy Extension Schema Document.
101.CAL**   XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF**   XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB**   XBRL Taxonomy Extension Label Linkbase Document.
101.PRE**   XBRL Taxonomy Extension Presentation Linkbase Document.

 

* The Certifications attached as Exhibits 32.1 and 32.2 that accompany this Quarterly Report on Form 10-Q are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of NanoString Technologies, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Form 10-Q, irrespective of any general incorporation language contained in such filing.
** Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files in Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

42

Exhibit 10.1

EXECUTION VERSION

 

 

TERM LOAN AGREEMENT

dated as of

April 1, 2014

between

NANOSTRING TECHNOLOGIES, INC.

as Borrower,

The SUBSIDIARY GUARANTORS from Time to Time Party Hereto,

and

Capital Royalty Partners II L.P., Capital Royalty Partners II – Parallel Fund “A” L.P. and Parallel Investment Opportunities Partners II L.P.

as Lenders

U.S. $45,000,000

 

 

 


TABLE OF CONTENTS

 

             Page  

SECTION 1

   

DEFINITIONS

     1   

1.01

 

Certain Defined Terms

     1   

1.02

 

Accounting Terms and Principles

     22   

1.03

 

Interpretation

     22   

1.04

 

Changes to GAAP

     22   

SECTION 2

   

THE COMMITMENT

     23   

2.01

 

Commitments

     23   

2.02

 

Borrowing Procedures

     23   

2.03

 

Fees

     23   

2.04

 

Notes

     24   

2.05

 

Use of Proceeds

     24   

2.06

 

Defaulting Lenders

     24   

2.07

 

Substitution of Lenders

     25   

2.08

 

Permitted Commercialization Arrangements

     26   

SECTION 3

   

PAYMENTS OF PRINCIPAL AND INTEREST

     26   

3.01

 

Repayment

     26   

3.02

 

Interest

     27   

3.03

 

Prepayments

     28   

SECTION 4

 

PAYMENTS, ETC

     33   

4.01

 

Payments

     33   

4.02

 

Computations

     33   

4.03

 

Notices

     33   

4.04

 

Set-Off

     33   

SECTION 5

   

YIELD PROTECTION, ETC

     34   

5.01

 

Additional Costs

     34   

5.02

 

Illegality

     35   

5.03

 

Taxes

     35   

SECTION 6

   

CONDITIONS PRECEDENT

     38   

6.01

 

Conditions to the First Borrowing

     38   

6.02

 

Conditions to the Second Borrowing

     40   


TABLE OF CONTENTS

(continued)

 

             Page  

6.03

 

Conditions to the Optional Borrowing

     40   

6.04

 

Conditions to Each Borrowing

     41   

SECTION 7

   

REPRESENTATIONS AND WARRANTIES

     42   

7.01

 

Power and Authority

     42   

7.02

 

Authorization; Enforceability

     42   

7.03

 

Governmental and Other Approvals; No Conflicts

     42   

7.04

 

Financial Statements; Material Adverse Change

     42   

7.05

 

Properties

     43   

7.06

 

No Actions or Proceedings

     46   

7.07

 

Compliance with Laws and Agreements

     46   

7.08

 

Taxes

     47   

7.09

 

Full Disclosure

     47   

7.10

 

Regulation

     47   

7.11

 

Solvency

     47   

7.12

 

Subsidiaries

     47   

7.13

 

Indebtedness and Liens

     47   

7.14

 

Material Agreements

     48   

7.15

 

Restrictive Agreements

     48   

7.16

 

Real Property

     48   

7.17

 

Pension Matters

     49   

7.18

 

Collateral; Security Interest

     49   

7.19

 

Regulatory Approvals

     49   

7.20

 

Small Business Concern

     49   

7.21

 

Update of Schedules

     50   

SECTION 8

   

AFFIRMATIVE COVENANTS

     50   

8.01

 

Financial Statements and Other Information

     50   

8.02

 

Notices of Material Events

     52   

8.03

 

Existence; Conduct of Business

     54   

8.04

 

Payment of Obligations

     54   

 

-ii-


TABLE OF CONTENTS

(continued)

 

             Page  

8.05

 

Insurance

     54   

8.06

 

Books and Records; Inspection Rights

     55   

8.07

 

Compliance with Laws and Other Obligations

     55   

8.08

 

Maintenance of Properties, Etc

     55   

8.09

 

Licenses

     55   

8.10

 

Action under Environmental Laws

     56   

8.11

 

Use of Proceeds

     56   

8.12

 

Certain Obligations Respecting Subsidiaries; Further Assurances

     56   

8.13

 

Termination of Non-Permitted Liens

     59   

8.14

 

Intellectual Property

     59   

8.15

 

Small Business Documentation

     59   

8.16

 

Post-Closing Items

     59   

SECTION 9

   

NEGATIVE COVENANTS

     60   

9.01

 

Indebtedness

     60   

9.02

 

Liens

     62   

9.03

 

Fundamental Changes and Acquisitions

     64   

9.04

 

Lines of Business

     65   

9.05

 

Investments

     65   

9.06

 

Restricted Payments

     66   

9.07

 

Payments of Indebtedness

     67   

9.08

 

Change in Fiscal Year

     67   

9.09

 

Sales of Assets, Etc

     67   

9.10

 

Transactions with Affiliates

     68   

9.11

 

Restrictive Agreements

     69   

9.12

 

Amendments to Material Agreements

     69   

9.13

 

Operating Leases

     69   

9.14

 

Sales and Leasebacks

     69   

9.15

 

Hazardous Material

     70   

9.16

 

Accounting Changes

     70   

9.17

 

Compliance with ERISA

     70   

 

-iii-


TABLE OF CONTENTS

(continued)

 

             Page  

SECTION 10

   

FINANCIAL COVENANTS

     70   

10.01

 

Minimum Liquidity

     70   

10.02

 

Minimum Revenue

     70   

10.03

 

Cure Right

     71   

SECTION 11

   

EVENTS OF DEFAULT

     71   

11.01

 

Events of Default

     71   

11.02

 

Remedies

     75   

SECTION 12

   

MISCELLANEOUS

     75   

12.01

 

No Waiver

     75   

12.02

 

Notices

     75   

12.03

 

Expenses, Indemnification, Etc

     76   

12.04

 

Amendments, Etc

     77   

12.05

 

Successors and Assigns

     78   

12.06

 

Survival

     79   

12.07

 

Captions

     80   

12.08

 

Counterparts

     80   

12.09

 

Governing Law

     80   

12.10

 

Jurisdiction, Service of Process and Venue

     80   

12.11

 

Waiver of Jury Trial

     80   

12.12

 

Waiver of Immunity

     81   

12.13

 

Entire Agreement

     81   

12.14

 

Severability

     81   

12.15

 

No Fiduciary Relationship

     81   

12.16

 

Confidentiality

     81   

12.17

 

USA PATRIOT Act

     81   

12.18

 

Maximum Rate of Interest

     82   

12.19

 

Certain Waivers

     82   

12.20

 

Releases of Guarantees and Liens

     83   

 

-iv-


TABLE OF CONTENTS

(continued)

 

             Page  

SECTION 13

   

GUARANTEE

     84   

13.01

 

The Guarantee

     84   

13.02

 

Obligations Unconditional

     84   

13.03

 

Reinstatement

     85   

13.04

 

Subrogation

     85   

13.05

 

Remedies

     85   

13.06

 

Instrument for the Payment of Money

     86   

13.07

 

Continuing Guarantee

     86   

13.08

 

Rights of Contribution

     86   

13.09

 

General Limitation on Guarantee Obligations

     87   

SCHEDULES

 

Schedule 1

  -    Commitments

Schedule 7.05(b)

  -    Certain Intellectual Property

Schedule 7.05(c)

  -    Material Intellectual Property

Schedule 7.06

  -    Certain Litigation

Schedule 7.08

  -    Taxes

Schedule 7.12

  -    Information Regarding Subsidiaries

Schedule 7.13(a)

  -    Existing Indebtedness of Borrower and its Subsidiaries

Schedule 7.13(b)

  -    Liens Granted by the Obligors

Schedule 7.14

  -    Material Agreements of Obligors

Schedule 7.15

  -    Restrictive Agreements

Schedule 7.16

  -    Real Property Owned or Leased by Borrower or any Subsidiary

Schedule 7.17

  -    Pension Matters

Schedule 7.18

  -    Filings

Schedule 9.05

  -    Existing Investments

Schedule 9.10

  -    Transactions with Affiliates

Schedule 9.14

  -    Permitted Sales and Leasebacks

EXHIBITS

Exhibit A

  -    Form of Guarantee Assumption Agreement

Exhibit B

  -    Form of Notice of Borrowing

Exhibit C-1

  -    Form of Term Loan Note

 

-v-


TABLE OF CONTENTS

(continued)

 

              Page

Exhibit C-2

  -    Form of PIK Loan Note   

Exhibit D

  -    Form of U.S. Tax Compliance Certificate   

Exhibit E

  -    Form of Compliance Certificate   

Exhibit F

  -    Opinion Request   

Exhibit G

  -    Form of Landlord Consent   

Exhibit H

  -    Form of Subordination Agreement   

Exhibit I

  -    Form of Intercreditor Agreement   

Exhibit J

  -    Form of Non-Disturbance Agreement   

Exhibit K

  -    Form of Discounted Prepayment Option Notice   

Exhibit L

  -    Form of Lender Participation Notice   

Exhibit M

  -    Form of Discounted Voluntary Prepayment Notice   

 

-vi-


TERM LOAN AGREEMENT, dated as of April 1, 2014 (this “ Agreement ”), among NANOSTRING TECHNOLOGIES, INC., a Delaware corporation (“ Borrower ”), the SUBSIDIARY GUARANTORS from time to time party hereto and the Lenders from time to time party hereto.

WITNESSETH:

Borrower has requested the Lenders to make term loans to Borrower, and the Lenders are prepared to make such loans on and subject to the terms and conditions hereof. Accordingly, the parties agree as follows:

SECTION 1

DEFINITIONS

1.01 Certain Defined Terms . As used herein, the following terms have the following respective meanings:

Acceptable Discount ” has the meaning set forth in Section 3.03(c)(iii) .

Acceptance Date ” has the meaning set forth in Section 3.03(c)(ii) .

Accounting Change Notice ” has the meaning set forth in Section 1.04(a) .

Act ” has the meaning set forth in Section 12.17 .

Acquisition ” means any transaction, or any series of related transactions, by which any Person directly or indirectly, by means of a take-over bid, tender offer, amalgamation, merger, purchase of assets, or similar transaction having the same effect as any of the foregoing, (a) acquires any business or all or substantially all of the assets of any Person engaged in any business, (b) acquires control of securities of a Person engaged in a business representing more than 50% of the ordinary voting power for the election of directors or other governing body if the business affairs of such Person are managed by a board of directors or other governing body, or (c) acquires control of more than 50% of the ownership interest in any Person engaged in any business that is not managed by a board of directors or other governing body.

Affected Lender ” has the meaning set forth in Section 2.07(a) .

Affiliate ” means, with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified.

Agreement ” has the meaning set forth in the introduction hereto.

Applicable Discount ” has the meaning set forth in Section 3.03(c)(iii) .

Asset Sale ” is defined in Section 9.09 .

 

1


Asset Sale Net Proceeds ” means the aggregate amount of the cash proceeds received from any Asset Sale, plus, with respect to any non-cash proceeds of an Asset Sale, the fair market value of such non cash proceeds as reasonably determined by Borrower’s Board of Directors in accordance with GAAP, in each case, net of any bona fide costs incurred in connection with such Asset Sale.

Assignment and Acceptance ” means an assignment and acceptance entered into by a Lender and an assignee of such Lender.

Bankruptcy Code ” means Title II of the United States Code entitled “Bankruptcy.”

Benefit Plan ” means any employee benefit plan as defined in Section 3(3) of ERISA (whether governed by the laws of the United States or otherwise) to which any Obligor or Subsidiary thereof incurs or otherwise has any obligation or liability, contingent or otherwise.

Borrower ” has the meaning set forth in the introduction hereto.

Borrower Facilities ” means the premises located at (i) 530 Fairview Avenue N, Seattle, WA 98109 and (ii) 617 Eastlake Avenue E, Seattle WA 98109, which are leased by Borrower pursuant to the Borrower Leases.

Borrower Landlords ” means (i) BMR-530 Fairview Avenue LLC, a Delaware limited liability company and (ii) Blume Roy Building LLC.

Borrower Leases “ means (i) the Lease dated as of October 19, 2007 by and between Borrower and BMR-530 Fairview Avenue LLC and (ii) the Lease dated as of October 19, 2007 by and between Borrower and Blume Company, LLC, as amended or extended from time to time.

Borrower Party ” has the meaning set forth in Section 12.03(b) .

Borrowing ” means a borrowing consisting of Loans made on the same day by the Lenders according to their respective Commitments (including without limitation a borrowing of a PIK Loan).

Borrowing Date ” means the date of each Borrowing.

Borrowing Milestone ” has the meaning set forth in Section 6.03(d) .

Borrowing Notice Date ” means, (i) in the case of the first Borrowing, a date that is at least twelve Business Days prior to the Borrowing Date of such Borrowing and, (ii) in the case of a subsequent Borrowing, a date that is at least twenty Business Days prior to the Borrowing Date of such Borrowing.

Business Day ” means a day (other than a Saturday or Sunday) on which commercial banks are not authorized or required to close in New York City.

 

2


Capital Lease Obligations ” means, as to any Person, the obligations of such Person to pay rent or other amounts under a lease of (or other agreement conveying the right to use) real and/or personal Property which obligations are required to be classified and accounted for as a capital lease on a balance sheet of such Person under GAAP and, for purposes of this Agreement, the amount of such obligations shall be the capitalized amount thereof, determined in accordance with GAAP.

Change of Control ” means (a) the acquisition of ownership, directly or indirectly, beneficially or of record, by any Person or group of Persons acting jointly or otherwise in concert of capital stock representing more than 35% of the aggregate ordinary voting power represented by the issued and outstanding capital stock of Borrower, (b) during any period of twelve (12) consecutive calendar months, the occupation of a majority of the seats (other than vacant seats) on the board of directors of Borrower by Persons who were neither (i) nominated by the board of directors of Borrower, nor (ii) appointed by directors so nominated, or (c) the acquisition of direct or indirect Control of Borrower by any Person or group of Persons acting jointly or otherwise in concert; in each case whether as a result of a tender or exchange offer, open market purchases, privately negotiated purchases or otherwise; provided however, that the occurrence of a Qualified FPO shall not be deemed a Change of Control event.

Claims ” includes claims, demands, complaints, grievances, actions, applications, suits, causes of action, orders, charges, indictments, prosecutions, informations (brought by a public prosecutor without grand jury indictment) or other similar processes, assessments or reassessments.

Closing Date ” means the date as of which the Lenders notify Borrower that the conditions precedent set forth in Section 6.01 have been satisfied or waived.

Code ” means the Internal Revenue Code of 1986, as amended from time to time, and the rules and regulations promulgated thereunder from time to time.

Collateral ” means the collateral provided for in the Security Documents.

Commitment ” means, with respect to each Lender, the obligation of such Lender to make Loans to Borrower in accordance with the terms and conditions of this Agreement, which commitment is in the amount set forth opposite such Lender’s name on Schedule 1 under the caption “Commitment”, as such Schedule may be amended from time to time. The aggregate Commitments on the date hereof equal $45,000,000. For purposes of clarification, the amount of any PIK Loans shall not reduce the amount of the available Commitment.

Commitment Period ” means the period from and including the Closing Date and through and including May 29, 2015.

Commodity Account ” is defined in the Security Agreement.

Compliance Certificate ” has the meaning given to such term in Section 8.01(d) .

 

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Contracts ” means contracts, licenses, leases, agreements, obligations, promises, undertakings, understandings, arrangements, documents, commitments, entitlements or engagements under which a Person has, or will have, any liability or contingent liability (in each case, whether written or oral, express or implied).

Control ” means, in respect of a particular Person, the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ability to exercise voting power, by contract or otherwise. “Controlling” and “Controlled” have meanings correlative thereto.

Control Agent ” is defined in the Security Agreement.

Copyright ” is defined in the Security Agreement.

CRPPF ” means Capital Royalty Partners II – Parallel Fund “A” L.P.

Cure Amount ” has the meaning set forth in Section 10.03(a) .

Cure Right ” has the meaning set forth in Section 10.03(a) .

Default ” means any Event of Default and any event that, upon the giving of notice, the lapse of time or both, would constitute an Event of Default.

Defaulting Lender ” means, subject to Section 2.06 , any Lender that (a) has failed to perform any of its funding obligations hereunder, including in respect of its Loans, within three (3) Business Days of the date required to be funded by it hereunder, (b) has notified Borrower or any Lender that it does not intend to comply with its funding obligations or has made a public statement to that effect with respect to its funding obligations hereunder or under other agreements in which it commits to extend credit, or (c) has, or has a direct or indirect parent company that has, (i) become the subject of an Insolvency Proceeding, (ii) had a receiver, conservator, trustee, administrator, assignee for the benefit of creditors or similar Person charged with reorganization or liquidation of its business or a custodian appointed for it, or (iii) taken any action in furtherance of, or indicated its consent to, approval of or acquiescence in any such proceeding or appointment; provided that a Lender shall not be a Defaulting Lender solely by virtue of the ownership or acquisition of any equity interest in that Lender or any direct or indirect parent company thereof by a Governmental Authority.

Deposit Account ” is defined in the Security Agreement.

Disclosure Letter ” means that certain Disclosure Letter of even date herewith to which each of the Schedules referenced herein is attached. Each reference in this Agreement to a Schedule shall refer to the applicable Schedule attached to the Disclosure Letter.

Discount Range ” has the meaning set forth in Section 3.03(c)(ii) .

 

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Discounted Prepayment Option Notice ” has the meaning set forth in Section 3.03(c)(ii) .

Discounted Voluntary Prepayment ” has the meaning set forth in Section 3.03(c)(i) .

Discounted Voluntary Prepayment Notice ” has the meaning set forth in Section 3.03(c)(v) .

Dollars ” and “ $ ” means lawful money of the United States of America.

Domestic Subsidiary ” means any Subsidiary that is a corporation, limited liability company, partnership or similar business entity incorporated, formed or organized under the laws of the United States, any State of the United States or the District of Columbia.

Eligible Transferee ” means and includes a commercial bank, an insurance company, a finance company, a financial institution, any investment fund that invests in loans or any other “accredited investor” (as defined in Regulation D of the Securities Act) that is principally in the business of managing investments or holding assets for investment purposes, provided that the following conditions are met: (1) for any entity (other than an Affiliate of the Original Lenders) becoming a Lender on or prior to the second Borrowing Date, such entity shall have either (A) a rating of BBB or higher from Standard & Poor’s Rating Group and a rating of Baa2 or higher from Moody’s Investors Service, Inc. at the date that it becomes a Lender or (B) has total assets in excess of $1,000,000,000, and (2) for any entity (other than an Affiliate of the Original Lenders) becoming a Lender after the second Borrowing Date, such entity shall have sufficient funds to acquire or purchase the assigned Loans from an assigning Lender; and in each case which, through its applicable lending office, is capable of lending to Borrower without the imposition of any withholding or similar taxes; provided that notwithstanding the foregoing, “Eligible Transferee” shall not include (i) Borrower or any of Borrower’s Affiliates or Subsidiaries or (ii) unless a Default or Event of Default has occurred and is continuing, a direct competitor of Borrower or a vulture hedge fund, each as determined by the Majority Lenders. Notwithstanding the foregoing, (x) in connection with assignments by a Lender due to a forced divestiture at the request of any regulatory agency, the restrictions set forth herein shall not apply and Eligible Transferee shall mean any Person or party and (y) in connection with a Lender’s own financing or securitization transactions, the restrictions set forth herein shall not apply and Eligible Transferee shall mean any Person or party providing such financing or formed to undertake such securitization transaction and any transferee of such Person or party; provided that no such sale, transfer, pledge or assignment under this clause (y) shall release such Lender from any of its obligations hereunder or substitute any such Person or party for such Lender as a party hereto until the Majority Lenders shall have received and accepted an effective assignment agreement from such Person or party in form satisfactory to the Majority Lenders executed, delivered and fully completed by the applicable parties thereto, and shall have received such other information regarding such Eligible Transferee as the Majority Lenders reasonably shall require.

 

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Environmental Law ” means any federal, state, provincial or local governmental law, rule, regulation, order, writ, judgment, injunction or decree relating to pollution or protection of the environment or the treatment, storage, disposal, release, threatened release or handling of hazardous materials, and all local laws and regulations related to environmental matters and any specific agreements entered into with any competent authorities which include commitments related to environmental matters.

Equity Cure Right ” has the meaning set forth in Section 10.03(a) .

Equity Interest ” shall mean, with respect to any Person, any and all shares, interests, participations or other equivalents, including membership interests (however designated, whether voting or nonvoting), of equity of such Person, including, if such Person is a partnership, partnership interests (whether general or limited) and any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of property of, such partnership, but excluding debt securities convertible or exchangeable into such equity.

Equivalent Amount ” means, with respect to an amount denominated in one currency, the amount in another currency that would be purchased by the amount in the first currency determined by reference to the Exchange Rate at the time of determination.

ERISA ” means the United States Employee Retirement Income Security Act of 1974, as amended.

ERISA Affiliate ” means, collectively, any Obligor, Subsidiary thereof, and any Person under common control, or treated as a single employer, with any Obligor or Subsidiary thereof, within the meaning of Section 414(b), (c), (m) or (o) of the Code.

ERISA Event ” means (i) a reportable event as defined in Section 4043 of ERISA with respect to a Title IV Plan, excluding, however, such events as to which the PBGC by regulation has waived the requirement of Section 4043(a) of ERISA that it be notified within 30 days of the occurrence of such event; (ii) the applicability of the requirements of Section 4043(b) of ERISA with respect to a contributing sponsor, as defined in Section 4001(a)(13) of ERISA, to any Title IV Plan where an event described in paragraph (9), (10), (11), (12) or (13) of Section 4043(c) of ERISA is reasonably expected to occur with respect to such plan within the following 30 days; (iii) a withdrawal by any Obligor or any ERISA Affiliate thereof from a Title IV Plan or the termination of any Title IV Plan resulting in liability under Sections 4063 or 4064 of ERISA; (iv) the withdrawal of any Obligor or any ERISA Affiliate thereof in a complete or partial withdrawal (within the meaning of Section 4203 and 4205 of ERISA) from any Multiemployer Plan if there is any potential liability therefore, or the receipt by any Obligor or any ERISA Affiliate thereof of notice from any Multiemployer Plan that it is in reorganization or insolvency pursuant to Section 4241 or 4245 of ERISA; (v) the filing of a notice of intent to terminate, the treatment of a plan amendment as a termination under Section 4041 or 4041A of ERISA, or the commencement of proceedings by the PBGC to terminate a Title IV Plan or Multiemployer Plan; (vi) the imposition of liability on any Obligor or any ERISA Affiliate thereof pursuant to Sections 4062(e) or 4069 of ERISA or by reason of the application of Section 4212(c) of ERISA;

 

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(vii) the failure by any Obligor or any ERISA Affiliate thereof to make any required contribution to a Plan, or the failure to meet the minimum funding standard of Section 412 of the Code with respect to any Title IV Plan (whether or not waived in accordance with Section 412(c) of the Code) or the failure to make by its due date a required installment under Section 430 of the Code with respect to any Title IV Plan or the failure to make any required contribution to a Multiemployer Plan; (viii) the determination that any Title IV Plan is considered an at-risk plan or a plan in endangered to critical status within the meaning of Sections 430, 431 and 432 of the Code or Sections 303, 304 and 305 of ERISA; (ix) an event or condition which might reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Title IV Plan or Multiemployer Plan; (x) the imposition of any liability under Title I or Title IV of ERISA, other than PBGC premiums due but not delinquent under Section 4007 of ERISA, upon any Obligor or any ERISA Affiliate thereof; (xi) an application for a funding waiver under Section 303 of ERISA or an extension of any amortization period pursuant to Section 412 of the Code with respect to any Title IV Plan; (xii) the occurrence of a non-exempt prohibited transaction under Sections 406 or 407 of ERISA for which any Obligor or any Subsidiary thereof may be directly or indirectly liable; (xiii) a violation of the applicable requirements of Section 404 or 405 of ERISA or the exclusive benefit rule under Section 401(a) of the Code by any fiduciary or disqualified person for which any Obligor or any ERISA Affiliate thereof may be directly or indirectly liable; (xiv) the occurrence of an act or omission which would give rise to the imposition on any Obligor or any ERISA Affiliate thereof of fines, penalties, taxes or related charges under Chapter 43 of the Code or under Sections 409, 502(c), (i) or (1) or 4071 of ERISA; (xv) the assertion of a material claim (other than routine claims for benefits) against any Plan or the assets thereof, or against any Obligor or any Subsidiary thereof in connection with any such plan; (xvi) receipt from the IRS of notice of the failure of any Qualified Plan to qualify under Section 401(a) of the Code, or the failure of any trust forming part of any Qualified Plan to fail to qualify for exemption from taxation under Section 501(a) of the Code; (xvii) the imposition of any lien (or the fulfillment of the conditions for the imposition of any lien) on any of the rights, properties or assets of any Obligor or any ERISA Affiliate thereof, in either case pursuant to Title I or IV, including Section 302(f) or 303(k) of ERISA or to Section 401(a)(29) or 430(k) of the Code; or (xviii) the establishment or amendment by any Obligor or any Subsidiary thereof of any “welfare plan”, as such term is defined in Section 3(1) of ERISA, that provides post-employment welfare benefits in a manner that would increase the liability of any Obligor.

Event of Default ” has the meaning set forth in Section 11.01 .

Exchange Rate ” means the rate at which any currency (the “ Pre-Exchange Currency ”) may be exchanged into another currency (the “ Post-Exchange Currency ”), as quoted in the Wall Street Journal print edition on such day (or, if such day is not a day on which the Wall Street Journal is published, the immediately preceding day on which the Wall Street Journal was published). In the event that such rate does not appear in the Wall Street Journal print edition, the “Exchange Rate” with respect to exchanging such Pre-Exchange Currency into such Post-Exchange Currency shall be determined by reference to such other publicly available service for displaying exchange rates as may be agreed upon by Borrower and the Majority Lenders or, in

 

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the absence of such agreement, such Exchange Rate shall instead be determined by the Majority Lenders by any reasonable method as they deem applicable to determine such rate, and such determination shall be conclusive absent manifest error.

Excluded Taxes ” means any of the following Taxes imposed on or with respect to a Recipient or required to be withheld or deducted from a payment to a Recipient: (a) Taxes imposed on or measured by net income (however denominated), franchise Taxes and branch profits Taxes, in each case imposed by the United States as a result of such Recipient being organized under the laws of, or having its principal office or, in the case of any Lender, its applicable lending office located in, the United States, (b) Other Connection Taxes, (c) U.S. federal withholding Taxes that are imposed on amounts payable to a Lender to the extent that the obligation to withhold amounts existed on the date that (i) such Lender became a “Lender” under this Agreement or (ii) such Lender changes its lending office, except in each case to the extent such Lender is a direct or indirect assignee of any other Lender that was entitled, at the time the assignment of such other Lender became effective, to receive additional amounts under Section 5.03 or such Lender was entitled to receive additional amounts under Section 5.03 immediately before it changed its lending office, (d) any Taxes imposed in connection with FATCA, and (e) Taxes attributable to such Recipient’s failure to comply with Section 5.03(e) .

FATCA ” means Sections 1471 through 1474 of the Code, as of the date of this Agreement (or any amended or successor version that is substantively comparable and not materially more onerous to comply with), any current or future regulations promulgated thereunder or official interpretations thereof and any agreements entered into pursuant to Section 1471(b)(1) of the Code.

First-Tier Foreign Subsidiary ” means a Foreign Subsidiary that is a direct Subsidiary of Borrower or any of its Domestic Subsidiaries.

Foreign Lender ” means a Lender that is not a U.S. Person.

Foreign Subsidiary ” means a Subsidiary of Borrower that is not a Domestic Subsidiary.

GAAP ” means generally accepted accounting principles in the United States of America, as in effect from time to time, set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants, in the statements and pronouncements of the Financial Accounting Standards Board and in such other statements by such other entity as may be in general use by significant segments of the accounting profession that are applicable to the circumstances as of the date of determination. Subject to Section 1.02 , all references to “GAAP” shall be to GAAP applied consistently with the principles used in the preparation of the financial statements described in Section 7.04(a) .

Governmental Approval ” means any consent, authorization, approval, order, license, franchise, permit, certificate, accreditation, registration, filing or notice, of, issued by, from or to, or other act by or in respect of, any Governmental Authority.

 

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Governmental Authority ” means any nation, government, branch of power (whether executive, legislative or judicial), state, province or municipality or other political subdivision thereof and any entity exercising executive, legislative, judicial, monetary, regulatory or administrative functions of or pertaining to government, including without limitation regulatory authorities, governmental departments, agencies, commissions, bureaus, officials, ministers, courts, bodies, boards, tribunals and dispute settlement panels, and other law-, rule- or regulation-making organizations or entities of any State, territory, county, city or other political subdivision of the United States.

Guarantee ” of or by any Person (the “ guarantor ”) means any obligation, contingent or otherwise, of the guarantor guaranteeing or having the economic effect of guaranteeing any Indebtedness or other obligation of any other Person (the “ primary obligor ”) in any manner, whether directly or indirectly, and including any obligation of the guarantor, direct or indirect, (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation or to purchase (or to advance or supply funds for the purchase of) any security for the payment thereof, (b) to purchase or lease property, securities or services for the purpose of assuring the owner of such Indebtedness or other obligation of the payment thereof, (c) to maintain working capital, equity capital or any other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Indebtedness or other obligation or (d) as an account party in respect of any letter of credit or letter of guaranty issued to support such Indebtedness or obligation; provided, that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business.

Guarantee Assumption Agreement ” means a Guarantee Assumption Agreement substantially in the form of Exhibit A by an entity that, pursuant to Section 8.12(a) , is required to become a “Subsidiary Guarantor” hereunder in favor of the Lenders.

Guaranteed Obligations ” has the meaning set forth in Section 13.01 .

Hazardous Material ” means any substance, element, chemical, compound, product, solid, gas, liquid, waste, by-product, pollutant, contaminant or material which is hazardous or toxic, and includes, without limitation, (a) asbestos, polychlorinated biphenyls and petroleum (including crude oil or any fraction thereof) and (b) any material classified or regulated as “hazardous” or “toxic” or words of like import pursuant to an Environmental Law.

Hedging Agreement ” means any interest rate exchange agreement, foreign currency exchange agreement, commodity price protection agreement or other interest or currency exchange rate or commodity price hedging arrangement.

Indebtedness ” of any Person means, without duplication, (a) all obligations of such Person for borrowed money or obligations of such Person with respect to deposits or advances of any kind by third parties, (b) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments, (c) all obligations of such Person upon which interest charges are customarily paid, (d) all obligations of such Person under conditional sale or other title retention agreements relating to property acquired by such Person, (e) all obligations of such Person in

 

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respect of the deferred purchase price of property or services (excluding current accounts payable incurred in the ordinary course of business), (f) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on property owned or acquired by such Person, whether or not the Indebtedness secured thereby has been assumed, (g) all Guarantees by such Person of Indebtedness of others, (h) all Capital Lease Obligations of such Person, (i) all obligations, contingent or otherwise, of such Person as an account party in respect of letters of credit and letters of guaranty (j) obligations under any Hedging Agreement currency swaps, forwards, futures or derivatives transactions, and (k) all obligations, contingent or otherwise, of such Person in respect of bankers’ acceptances. The Indebtedness of any Person shall include the Indebtedness of any other entity (including any partnership in which such Person is a general partner) to the extent such Person is liable therefor as a result of such Person’s ownership interest in or other relationship with such entity, except to the extent the terms of such Indebtedness provide that such Person is not liable therefor.

Indemnified Party ” has the meaning set forth in Section 12.03(b) .

Indemnified Taxes ” means (a) Taxes, other than Excluded Taxes, imposed on or with respect to any payment made by or on account of any Obligation and (b) to the extent not otherwise described in clause (a), Other Taxes.

Insolvency Proceeding ” means (i) any case, action or proceeding before any court or other Governmental Authority relating to bankruptcy, reorganization, insolvency, liquidation, receivership, dissolution, winding-up or relief of debtors, or (ii) any general assignment for the benefit of creditors, composition, marshaling of assets for creditors, or other, similar arrangement in respect of any Person’s creditors generally or any substantial portion of such Person’s creditors, in each case undertaken under U.S. Federal, state or foreign law, including the Bankruptcy Code.

Intellectual Property ” means all Patents, Trademarks, Copyright, and Technical Information, whether registered or not, domestic and foreign. Intellectual Property shall include all:

(a) applications or registrations relating to such Intellectual Property;

(b) rights and privileges arising under applicable Laws with respect to such Intellectual Property;

(c) rights to sue for past, present or future infringements of such Intellectual Property; and

(d) rights of the same or similar effect or nature in any jurisdiction corresponding to such Intellectual Property throughout the world.

Interest-Only Period ” means the period from and including the first Borrowing Date and through and including the twentieth (20 th ) Payment Date following the first Borrowing Date.

 

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Interest Period ” means, with respect to each Borrowing, (i) initially, the period commencing on and including the Borrowing Date thereof and ending on and including the next Payment Date, and, (ii) thereafter, each period beginning on and including the day following the immediately preceding Interest Period and ending on and including the next succeeding Payment Date; provided that the term “Interest Period” shall include any period selected by the Majority Lenders from time to time in accordance with the definition of “Post-Default Rate”.

Invention ” means any novel, inventive and useful art, apparatus, method, process, machine (including article or device), manufacture or composition of matter, or any novel, inventive and useful improvement in any art, method, process, machine (including article or device), manufacture or composition of matter.

Investment ” means, for any Person: (a) the acquisition (whether for cash, property, services or securities or otherwise) of capital stock, bonds, notes, debentures, partnership or other ownership interests or other securities of any other Person or any agreement to make any such acquisition (including any “short sale” or any sale of any securities at a time when such securities are not owned by the Person entering into such sale); (b) the making of any deposit with, or advance, loan or other extension of credit to, any other Person (including the purchase of property from another Person subject to an understanding or agreement, contingent or otherwise, to resell such property to such Person), but excluding any such advance, loan or extension of credit having a term not exceeding 90 days arising in connection with the sale of inventory or supplies by such Person in the ordinary course of business; (c) the entering into of any Guarantee of, or other contingent obligation with respect to, Indebtedness or other liability of any other Person and (without duplication) any amount committed to be advanced, lent or extended to such Person; or (d) the entering into of any Hedging Agreement.

IRS ” means the U.S. Internal Revenue Service or any successor agency, and to the extent relevant, the U.S. Department of the Treasury.

Knowledge ” means the actual knowledge of any Responsible Officer, so long as such Person is an officer of Borrower.

Landlord Consent ” means a Landlord Consent substantially in the form of Exhibit G .

Laws ” means, collectively, all international, foreign, federal, state, provincial, territorial, municipal and local statutes, treaties, rules, guidelines, regulations, ordinances, codes and administrative or judicial precedents or authorities, including the interpretation or administration thereof by any Governmental Authority charged with the enforcement, interpretation or administration thereof, and all applicable administrative orders, directed duties, requests, licenses, authorizations and permits of, and agreements with, any Governmental Authority, in each case whether or not having the force of law.

Lender Participation Notice ” has the meaning set forth in Section 3.03(c)(iii) .

 

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Lenders ” means Capital Royalty Partners II L.P., CRPPF and PIOP, together with their successors and each assignee of a Lender pursuant to Section 12.05(b) and “Lender” means any one of them.

Lien ” means any mortgage, lien, pledge, charge or other security interest, or any lease, title retention agreement, mortgage, restriction, easement, right-of-way, option or adverse claim (of ownership or possession) or other encumbrance of any kind or character whatsoever or any preferential arrangement that has the practical effect of creating a security interest.

Liquidity ” means the balance of unencumbered cash and Permitted Cash Equivalent Investments (which for greater certainty shall not include any undrawn credit lines), in each case, to the extent held in an account over which the Lenders have a first priority perfected security interest.

Loan ” means (i) each loan advanced by a Lender pursuant to Section 2.01 and (ii) each PIK Loan deemed to have been advanced by a Lender pursuant to Section 3.02(d) . For purposes of clarification, any calculation of the aggregate outstanding principal amount of Loans on any date of determination shall include both the aggregate principal amount of loans advanced pursuant to Section 2.01 and not yet repaid, and all PIK Loans deemed to have been advanced and not yet repaid, on or prior to such date of determination.

Loan Documents ” means, collectively, this Agreement, the Notes, the Security Documents, any subordination agreement or any intercreditor agreement entered into by Lenders with any other creditors of Obligors, and any other present or future document, instrument, agreement or certificate executed by Obligors for the benefit of Lenders in connection with this Agreement or any of the other Loan Documents, all as amended, restated, or otherwise modified.

Loss ” means judgments, debts, liabilities, expenses, costs, damages or losses, contingent or otherwise, whether liquidated or unliquidated, matured or unmatured, disputed or undisputed, contractual, legal or equitable, including loss of value, professional fees, including fees and disbursements of legal counsel on a full indemnity basis, and all costs incurred in investigating or pursuing any Claim or any proceeding relating to any Claim.

Majority Lenders ” means, at any time, Lenders having at such time in excess of 50% of the aggregate Commitments (or, if such Commitments are terminated, the outstanding principal amount of the Loans) then in effect, ignoring, in such calculation, the Commitments of and outstanding Loans owing to any Defaulting Lender.

Margin Stock ” means “margin stock” within the meaning of Regulations U and X.

Material Adverse Change ” and “ Material Adverse Effect ” mean a material adverse change in or effect on (i) the business, financial condition, operations, performance or Property of Borrower and its Subsidiaries taken as a whole, (ii) the ability of any Obligor to perform its obligations under the Loan Documents, or (iii) the legality, validity, binding effect or enforceability of the Loan Documents or the rights and remedies of the Lenders under any of the

 

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Loan Documents. For the avoidance of doubt, the following events, in and of themselves, shall not constitute a Material Adverse Change or a Material Adverse Effect (it being understood, however, that the consequences of any such event might, when considered with other events, give rise to a Material Adverse Change or Material Adverse Effect): (t) a claimed, or notice of, breach or termination of a Permitted Commercialization Arrangement, (u) negative or equivocal clinical study results in respect of the Product or any other product, (v) delay in the introduction of any new products, (w) a going concern qualification in an auditor’s opinion, (x) any delay in obtaining regulatory clearances or approvals to market or sell any product that does not result in the loss of the ability to sell the Product in the United States, (y) the initiation or continuance of litigation involving claims of infringement of a patent or trademark, or misappropriation of intellectual property, of a third party, (z) the failure of a patent application listed on Schedule 7.05(b) to issue in any jurisdiction in which it is filed, or (aa) any voluntary or involuntary recall.

Material Agreements ” means (A) the agreements which are listed in Schedule 7.14 (as updated by Borrower from time to time in accordance with Section 7.21 to list all such agreements that meet the description set forth in clause (B) of this definition) and (B) all other agreements held by the Obligors from time to time, the absence or termination of any of which would reasonably be expected to result in a Material Adverse Effect; provided, however, that “Material Agreements” exclude all: (i) licenses implied by the sale of a product; and (ii) paid-up licenses for commonly available software programs under which an Obligor is the licensee. “Material Agreement” means any one such agreement.

Material Indebtedness ” means, at any time, any Indebtedness of any Obligor, the outstanding principal amount of which, individually or in the aggregate, exceeds $500,000 (or the Equivalent Amount in other currencies).

Material Intellectual Property ” means, the Obligor Intellectual Property described in Schedule 7.05(c) and any other Obligor Intellectual Property after the date hereof the loss of which would reasonably be expected to have a Material Adverse Effect.

Maturity Date ” means the earlier to occur of (i) the twenty-fourth (24 th ) Payment Date following the first Borrowing Date, and (ii) the date on which the Loans are accelerated pursuant to Section 11.02 .

Maximum Rate ” has the meaning set forth in Section 12.18.

Minimum Required Revenue ” has the meaning set forth in Section 10.02.

Multiemployer Plan ” means any multiemployer plan, as defined in Section 400l(a)(3) of ERISA, to which any ERISA Affiliate incurs or otherwise has any obligation or liability, contingent or otherwise.

“nCounter Elements” means general purpose reagents containing generic reporter probes and capture probes that customers can combine with independently sourced oligonucleotides to create their own customized reagents.

 

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Non-Consenting Lender ” has the meaning set forth in Section 2.07(a) .

Non-Disclosure Agreement ” has the meaning set forth in Section 12.16 .

Non-Disturbance Agreement ” means a non-disturbance agreement in substantially the form attached hereto as Exhibit J .

Note ” means a promissory note, in substantially the form attached hereto as Exhibit C-1 or C-2 , executed and delivered by Borrower to the Lenders in accordance with Section 2.04 or 3.02(d) .

Notice of Borrowing ” has the meaning set forth in Section 2.02 .

Notice of Default Interest ” has the meaning set forth in Section 3.02(b) .

Obligations ” means, with respect to any Obligor, all amounts, obligations, liabilities, covenants and duties of every type and description owing by such Obligor to any Lender, any other indemnitee hereunder or any participant, arising out of, under, or in connection with, any Loan Document, whether direct or indirect (regardless of whether acquired by assignment), absolute or contingent, due or to become due, whether liquidated or not, now existing or hereafter arising and however acquired, and whether or not evidenced by any instrument or for the payment of money, including, without duplication, (i) if such Obligor is Borrower, all Loans, (ii) all interest, whether or not accruing after the filing of any petition in bankruptcy or after the commencement of any insolvency, reorganization or similar proceeding, and whether or not a claim for post-filing or post-petition interest is allowed in any such proceeding, and (iii) all other fees, expenses (including fees, charges and disbursements of counsel), interest, commissions, charges, costs, disbursements, indemnities and reimbursement of amounts paid and other sums chargeable to such Obligor under any Loan Document.

Obligor Intellectual Property ” means Intellectual Property owned by or licensed to any of the Obligors.

Obligors ” means, collectively, Borrower and the Subsidiary Guarantors and their respective successors and permitted assigns.

Offered Loans ” has the meaning set forth in Section 3.03(c)(iii) .

Original Lenders ” means Capital Royalty Partners II L.P., CRPPF and PIOP.

Other Connection Taxes ” means, with respect to any Recipient, Taxes imposed as a result of a present or former connection between such Recipient and the jurisdiction imposing such Tax (other than connections arising from such Recipient having executed, delivered, become a party to, performed its obligations under, received payments under, received or perfected a security interest under, engaged in any other transaction pursuant to or enforced any Loan Document, or sold or assigned an interest in any Loan or Loan Document).

 

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Other Taxes ” means all present or future stamp, court or documentary, intangible, recording, filing or similar Taxes that arise from any payment made under, from the execution, delivery, performance, enforcement or registration of, from the receipt or perfection of a security interest under, or otherwise with respect to, any Loan Document, except any such Taxes that are Other Connection Taxes imposed with respect to an assignment (other than an assignment made pursuant to Section 5.03(g) ).

Participant ” has the meaning set forth in Section 12.05(e) .

Patents ” is defined in the Security Agreement.

Payment Date ” means each March 31, June 30, September 30, December 31 and the Maturity Date, commencing on the first Payment Date to occur following the first Borrowing Date; provided that if any such date shall occur on a day that is not a Business Day, the applicable Payment Date shall be the next preceding Business Day.

PBGC ” means the United States Pension Benefit Guaranty Corporation referred to and defined in ERISA and any successor entity performing similar functions.

Permitted Acquisition ” means any acquisition by Borrower or any of its wholly-owned Subsidiaries, whether by purchase, merger or otherwise, of all or substantially all of the assets of, all of the Equity Interests of, or a business line or unit or a division of, any Person; provided that :

(a) immediately prior to, and after giving effect thereto, no Default or Event of Default shall have occurred and be continuing or would result therefrom;

(b) all transactions in connection therewith shall be consummated, in all material respects, in accordance with all applicable Laws and in conformity with all applicable Governmental Approvals;

(c) in the case of the acquisition of all of the Equity Interests of such Person, all of the Equity Interests (except for any such securities in the nature of directors’ qualifying shares required pursuant to applicable Law) acquired, or otherwise issued by such Person or any newly formed Subsidiary of Borrower in connection with such acquisition, shall be owned 100% by Borrower, a Subsidiary Guarantor or any other Subsidiary, and Borrower shall have taken, or caused to be taken, as of the date such Person becomes a Subsidiary of Borrower, each of the actions set forth in Section 8.12 , if applicable;

(d) Borrower and its Subsidiaries shall be in compliance with the financial covenants set forth in Section 10.01 and Section 10.02 on a pro forma basis after giving effect to such acquisition; and

(e) such Person (in the case of an acquisition of Equity Interests) or assets (in the case of an acquisition of assets or a division) (i) shall be engaged or used, as the case

 

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may be, in the same or similar business or lines of business, or businesses ancillary thereto in which Borrower and/or its Subsidiaries are engaged or (ii) shall have a similar customer base as Borrower and/or its Subsidiaries.

Permitted Cash Equivalent Investments ” means (i) marketable direct obligations issued or unconditionally guaranteed by the United States or any agency or any State thereof having maturities of not more than two (2) years from the date of acquisition, (ii) commercial paper maturing no more than one (1) year after its creation and having the highest rating from either Standard & Poor’s Ratings Group or Moody’s Investors Service, Inc. and (iii) money market funds registered according to SEC Rule 2a-7 of the Investment Company Act of 1940, as amended, with assets under management of at least $1,000,000,000.

Permitted Commercialization Arrangement ” means such commercialization, research and development, co-marketing and other collaborative arrangements, including joint ventures, whether or not such arrangements provide for licenses to Patents, Trademarks, Copyrights or other Intellectual Property rights and assets of Borrower, with Persons (including a Permitted Commercialization Arrangement Vehicle) with a primary line of business in the development, commercialization or manufacture of medical, diagnostic or pharmaceutical products or devices; provided that any such licenses must be bona fide arms’-length transfers of the right to use such Intellectual Property that do not have the economic substance of a sale and Borrower retains legal ownership of such Intellectual Property.

Permitted Commercialization Arrangement Vehicle ” means an entity, which may be a joint venture enterprise, engaged in the business of a Permitted Commercialization Arrangement and in which the Borrower or its Subsidiaries have substantial representation in the governing body of such entity.

Permitted Cure Debt ” means Indebtedness incurred in connection with the exercise of the Subordinated Debt Cure Right and (i) that is governed by documentation containing representations, warranties, covenants and events of default no more burdensome or restrictive than those contained in the Loan Documents unless such terms are also offered to Lenders hereunder, (ii) that has a maturity date later than the Maturity Date, (iii) in respect of which no cash payments of principal or interest are required prior to the Maturity Date, and (iv) in respect of which the holders have agreed in favor of Borrower and Lenders (A) that prior to the date on which the Commitments have expired or been terminated and all Obligations have been paid in full indefeasibly in cash, such holders will not exercise any remedies available to them in respect of such Indebtedness, and (B) that such Indebtedness is unsecured, and (C) to terms of subordination that are no less favorable to the Lenders than as set forth in Exhibit H or otherwise satisfactory to the Majority Lenders.

Permitted Indebtedness ” means any Indebtedness permitted under Section 9.01 .

Permitted Liens ” means any Liens permitted under Section 9.02 .

 

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Permitted Priority Debt ” means Indebtedness of Borrower, in an amount not to exceed at any time the sum of 80% of the face amount at such time of Borrower’s non delinquent accounts receivable and 50% of the fair market value of Borrower’s eligible inventory at the time of any advance; provided that (a) such Indebtedness, if secured, is secured solely by Borrower’s deposits, accounts receivable, inventory and cash proceeds thereof but is otherwise unsecured, and (b) the holders or lenders thereof have executed and delivered to Lenders an intercreditor agreement in substantially the form attached hereto as Exhibit I and with such changes thereto as shall be mutually satisfactory to the Majority Lenders and the provider of such Indebtedness.

Permitted Priority Liens ” means (i) Liens permitted under Section 9.02(c), (d), (e), (f), (g), (j) , (n)  and (ii) Liens permitted under Section 9.02(b) provided that such Liens are also of the type described in Section 9.02(c), (d), (e), (f), (g), (j) and (n).

Permitted Refinancing ” means, with respect to any Indebtedness, any extensions, renewals and replacements of such Indebtedness; provided that such extension, renewal or replacement (i) shall not increase the outstanding principal amount of such Indebtedness, (ii) contains terms relating to outstanding principal amount, amortization, maturity, collateral (if any) and subordination (if any), and other material terms taken as a whole no less favorable in any material respect to Borrower and its Subsidiaries or the Lenders than the terms of any agreement or instrument governing such existing Indebtedness, (iii) shall have an applicable interest rate which does not exceed the rate of interest of the Indebtedness being replaced, and (iv) shall not contain any new requirement to grant any lien or security or to give any guarantee that was not an existing requirement of such Indebtedness.

Permitted Subordinated Debt ” means Indebtedness incurred, so long as Borrower is a Publicly Reporting Company, pursuant to registration on Rule 144A (i) that is governed by documentation containing representations, warranties, covenants and events of default no more burdensome or restrictive than those contained in the Loan Documents unless such terms are also offered to the Lenders hereunder, (ii) that has a maturity date later than the Maturity Date, (iii) in respect of which no cash principal payments are required prior to the Maturity Date, (iv) that has a maximum annual cash interest rate of 5% prior to the Maturity Date, (v) that is governed by subordination terms that are no less favorable to Lenders than as set forth in Exhibit H , and (vi) that is unsecured except by an interest escrow account (a “ Subordinated Debt Interest Escrow Account ”) funded by the proceeds of such Indebtedness which holds no more than the cash interest due in respect of the next three years on the outstanding principal amount of such Indebtedness.

Person ” means any individual, corporation, company, voluntary association, partnership, limited liability company, joint venture, trust, unincorporated organization or Governmental Authority or other entity of whatever nature.

PIK Loan ” has the meaning set forth in Section 3.02(d).

PIK Period ” means the period beginning on the first Borrowing Date through and including the earlier to occur of (i) the sixteenth (16 th ) Payment Date after the first Borrowing Date and (ii) the date on which any Event of Default shall have occurred ( provided that if such

 

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Event of Default shall have been cured or waived, the PIK Period shall resume until the earlier to occur of the next Event of Default and the sixteenth (16 th ) Payment Date after the first Borrowing Date).

PIOP ” means Parallel Investment Opportunities Partners II L.P., a Delaware limited partnership.

Plan ” means any employee pension benefit plan (other than a Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section 412 of the Code or Section 302 of ERISA, and in respect of which Borrower or any ERISA Affiliate is (or, if such plan were terminated, would under Section 4069 of ERISA be deemed to be) an “employer” as defined in Section 3(5) of ERISA.

Post-Default Rate ” has the meaning set forth in Section 3.02(b) .

“Prepayment Premium” has the meaning set forth in Section 3.03(a) .

Product ” means the principal version in the market of (i) the nCounter ® Analysis System and its essential components, or (ii) the nCounter-based Prosigna™ Breast Cancer Prognostic Gene Signature Assay, and each of their respective commercially available successors.

Property ” of any Person means any property or assets, or interest therein, of such Person.

Proportionate Share ” means, with respect to any Lender, the percentage obtained by dividing (a) the sum of the Commitment (or, if the Commitments are terminated, the outstanding principal amount of the Loans) of such Lender then in effect by (b) the sum of the Commitments (or, if the Commitments are terminated, the outstanding principal amount of the Loans) of all Lenders then in effect.

Proposed Discounted Prepayment Amount ” has the meaning set forth in Section 3.03(c)(ii) .

Publicly Reporting Company ” means an issuer generally subject to the public reporting requirements of the Securities and Exchange Act of 1934.

Qualified FPO ” means an underwritten follow on public offering of the securities exchange-listed Equity Interests of Borrower, excluding such offerings to which only Strategic Investors subscribe.

Qualified Plan ” means an employee benefit plan (as defined in Section 3(3) of ERISA) other than a Multiemployer Plan (i) that is or was at any time maintained or sponsored by any Obligor or any ERISA Affiliate thereof or to which any Obligor or any ERISA Affiliate thereof has ever made, or was ever obligated to make, contributions, and (ii) that is intended to be tax qualified under Section 401(a) of the Code.

 

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Qualifying Lenders ” has the meaning set forth in Section 3.03(c)(iv) .

Qualifying Loans ” has the meaning set forth in Section 3.03(c)(iv) .

Real Property Security Documents ” means the Landlord Consent in substantially the form attached hereto as Exhibit G , and any mortgage or deed of trust or any other real property security document executed or required hereunder to be executed by any Obligor and granting a security interest in real Property owned or leased (as tenant) by any Obligor in favor of the Lenders.

Recipient ” means any Lender or any other recipient of any payment to be made by or on account of any Obligation.

Redemption Date ” has the meaning set forth in Section 3.03(a) .

Redemption Price ” has the meaning set forth in Section 3.03(a) .

Register ” has the meaning set forth in Section 12.05(d) .

Regulation T ” means Regulation T of the Board of Governors of the Federal Reserve System, as amended.

Regulation U ” means Regulation U of the Board of Governors of the Federal Reserve System, as amended.

Regulation X ” means Regulation X of the Board of Governors of the Federal Reserve System, as amended.

Regulatory Approvals ” means any registrations, licenses, authorizations, permits or approvals issued by any Governmental Authority and applications or submissions related to any of the foregoing.

Requirement of Law ” means, as to any Person, any statute, law, treaty, rule or regulation or determination, order, injunction or judgment of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its Properties or revenues.

Responsible Officer ” of any Person means each of the president, chief executive officer, chief financial officer and senior vice president (operations/administration) of such Person.

Restricted Payment ” means any dividend or other distribution (whether in cash, securities or other property) with respect to any Equity Interest of Borrower or any of its Subsidiaries, or any payment (whether in cash, securities or other property), including any sinking fund or similar deposit, on account of the purchase, redemption, retirement, acquisition,

 

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cancellation or termination of any such shares of capital stock of Borrower or any of its Subsidiaries or any option, warrant or other right to acquire any such shares of capital stock of Borrower or any of its Subsidiaries.

Restrictive Agreement ” has the meaning set forth in Section 7.15 .

Revenue ” of a Person means all revenue properly recognized under GAAP, consistently applied, less all rebates, discounts and other price allowances.

SBA ” means U.S. Small Business Administration.

SBIC ” means Small Business Investment Company.

SBIC Act ” means Small Business Investment Act of 1958, as amended.

SEC ’ means U.S. Securities and Exchange Commission.

Security Agreement ” means the Security Agreement, dated as of the date hereof, among the Obligors and the Lenders, granting a security interest in the Obligors’ personal Property in favor of the Lenders.

Security Documents ” means, collectively, the Security Agreement, each Short-Form IP Security Agreement, each Real Property Security Document, and each other security document, control agreement or financing statement required or recommended to perfect Liens in favor of the Lenders.

Securities Account ” has the meaning set forth in the Security Agreement.

Short-Form IP Security Agreements ” means short-form copyright, patent or trademark (as the case may be) security agreements dated as of the Closing Date entered into by one or more Obligors in favor of the Lenders, each in form and substance satisfactory to the Majority Lenders (and as amended, modified or replaced from time to time).

Solvent ” means, with respect to any Person at any time, that (a) the present fair saleable value of the Property of such Person is greater than the total amount of liabilities (including contingent liabilities) of such Person, (b) the present fair saleable value of the Property of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured and (c) such Person has not incurred and does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person’s ability to pay as such debts and liabilities mature.

Specified Financial Covenants ” has the meaning set forth in Section 10.03(a) .

Strategic Investor ” means a non-financial investor with operations in a field analogous or relating to the Borrower’s business, as determined by the Borrower’s Board of Directors in its business judgment.

 

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Subordinated Debt Cure Right ” has the meaning set forth in Section 10.03(a) .

Subordinated Debt Interest Escrow Account ” has the meaning set forth in the definition of Permitted Subordinated Debt.

Subsidiary ” means, with respect to any Person (the “ parent ”) at any date, any corporation, limited liability company, partnership, association or other entity the accounts of which would be consolidated with those of the parent in the parent’s consolidated financial statements if such financial statements were prepared in accordance with GAAP as of such date, as well as any other corporation, limited liability company, partnership, association or other entity (a) of which securities or other ownership interests representing more than 50% of the equity or more than 50% of the ordinary voting power or, in the case of a partnership, more than 50% of the general partnership interests are, as of such date, owned, controlled or held, or (b) that is, as of such date, otherwise Controlled, by the parent or one or more subsidiaries of the parent or by the parent and one or more subsidiaries of the parent.

Subsidiary Guarantors ” means each of the Subsidiaries of Borrower identified under the caption “SUBSIDIARY GUARANTORS” on the signature pages hereto and each Subsidiary of Borrower that becomes, or is required to become, a “Subsidiary Guarantor” after the date hereof pursuant to Section 8.12(a) or (b) .

Substitute Lender ” has the meaning set forth in Section 2.07(a) .

Taxes ” means all present or future taxes, levies, imposts, duties, deductions, withholdings (including backup withholding), assessments, fees or other charges imposed by any Governmental Authority, including any interest, additions to tax or penalties applicable thereto.

Technical Information ” means all trade secrets and other proprietary or confidential information, which may include information of a scientific, technical, or business nature in any form or medium, standards and specifications, conceptions, ideas, innovations, discoveries, Invention disclosures, all documented research, developmental, demonstration or engineering work, data, plans, reports, summaries, experimental data, manuals, models, samples, know-how, technical information, systems, methodologies, computer programs or information technology.

Title IV Plan ” means an employee benefit plan (as defined in Section 3(3) of ERISA) other than a Multiemployer Plan (i) that is or was at any time maintained or sponsored by any Obligor or any ERISA Affiliate thereof or to which any Obligor or any ERISA Affiliate thereof has ever made, or was obligated to make, contributions, and (ii) that is or was subject to Section 412 of the Code, Section 302 of ERISA or Title IV of ERISA.

Trademarks ” is defined in the Security Agreement.

Transactions ” means the execution, delivery and performance by each Obligor of this Agreement and the other Loan Documents to which such Obligor is intended to be a party and the Borrowings (and the use of the proceeds of the Loans).

 

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U.S. Person ” means a “United States Person” within the meaning of Section 7701(a)(30) of the Code.

U.S. Tax Compliance Certificate ” has the meaning set forth in Section 5.03(e)(ii)(B)(3) .

Use of Proceeds Statement ” has the meaning set forth in Section 6.01(g)(xi) .

Withdrawal Liability ” means, at any time, any liability incurred (whether or not assessed) by any ERISA Affiliate and not yet satisfied or paid in full at such time with respect to any Multiemployer Plan pursuant to Section 4201 of ERISA.

1.02 Accounting Terms and Principles . All accounting determinations required to be made pursuant hereto shall, unless expressly otherwise provided herein, be made in accordance with GAAP. All components of financial calculations made to determine compliance with this Agreement, including Section 10 , shall be adjusted to include or exclude, as the case may be, without duplication, such components of such calculations attributable to any Acquisition consummated after the first day of the applicable period of determination and prior to the end of such period, as determined in good faith by Borrower based on assumptions expressed therein and that were reasonable based on the information available to Borrower at the time of preparation of the Compliance Certificate setting forth such calculations.

1.03 Interpretation . For all purposes of this Agreement, except as otherwise expressly provided herein or unless the context otherwise requires, (a) the terms defined in this Agreement include the plural as well as the singular and vice versa; (b) words importing gender include all genders; (c) any reference to a Section, Annex, Schedule or Exhibit refers to a Section of, or Annex, Schedule or Exhibit to, this Agreement; (d) any reference to “this Agreement” refers to this Agreement, including all Annexes, Schedules and Exhibits hereto, and the words herein, hereof, hereto and hereunder and words of similar import refer to this Agreement and its Annexes, Schedules and Exhibits as a whole and not to any particular Section, Annex, Schedule, Exhibit or any other subdivision; (e) references to days, months and years refer to calendar days, months and years, respectively; (f) all references herein to “include” or “including” shall be deemed to be followed by the words “without limitation”; (g) the word “from” when used in connection with a period of time means “from and including” and the word “until” means “to but not including”; and (h) accounting terms not specifically defined herein shall be construed in accordance with GAAP (except for the term “property” , which shall be interpreted as broadly as possible, including, in any case, cash, securities, other assets, rights under contractual obligations and permits and any right or interest in any property, except where otherwise noted). Unless otherwise expressly provided herein, references to organizational documents, agreements (including the Loan Documents) and other contractual instruments shall be deemed to include all permitted subsequent amendments, restatements, extensions, supplements and other modifications thereto.

1.04 Changes to GAAP . If, after the date hereof, any change occurs in GAAP or in the application thereof and such change would cause any amount required to be determined for the purposes of the covenants to be maintained or calculated pursuant to Section 8 , 9 or 10 to be materially different than the amount that would be determined prior to such change, then:

(a) Borrower will provide a detailed notice of such change (an “ Accounting Change Notice ”) to the Lenders concurrently with the delivery of the next Compliance Certificate;

 

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(b) either Borrower or the Majority Lenders may indicate within 90 days following the date of the Accounting Change Notice that they wish to revise the method of calculating such financial covenants or amend any such amount, in which case the parties will in good faith attempt to agree upon a revised method for calculating the financial covenants;

(c) until Borrower and the Majority Lenders have reached agreement on such revisions, (i) such financial covenants or amounts will be determined without giving effect to such change and (ii) all financial statements, Compliance Certificates and similar documents provided hereunder shall be provided together with a reconciliation between the calculations and amounts set forth therein before and after giving effect to such change in GAAP;

(d) if no party elects to revise the method of calculating the financial covenants or amounts, then the financial covenants or amounts will not be revised and will be determined in accordance with GAAP without giving effect to such change; and

(e) any Event of Default arising as a result of such change which is cured by operation of this Section 1.04 shall be deemed to be of no effect ab initio .

SECTION 2

THE COMMITMENT

2.01 Commitments . Each Lender agrees severally, on and subject to the terms and conditions of this Agreement (including Section 6 ), to make up to two (2) (or if Borrower elects to borrow the first $30,000,000 in two instead of one Borrowings, three (3)) term loans (provided that PIK Loans shall be deemed not to constitute “term loans” for purposes of this Section 2.01 ) to Borrower, each on a Business Day during the Commitment Period in Dollars in an aggregate principal amount for such Lender not to exceed such Lender’s Commitment; provided , however , that at no time shall any Lender be obligated to make a Loan in excess of such Lender’s Proportionate Share of the amount by which the then effective Commitments exceeds the aggregate principal amount of Loans outstanding at such time. Amounts of Loans repaid may not be reborrowed.

2.02 Borrowing Procedures . Subject to the terms and conditions of this Agreement (including Section 6 ), each Borrowing (other than a Borrowing of PIK Loans) shall be made on written notice in the form of Exhibit B given by Borrower to the Lenders not later than 11:00 a.m. (Central time) on the Borrowing Notice Date (a “ Notice of Borrowing ”).

2.03 Fees . On the first Borrowing Date, Borrower shall pay to each Lender, out of the proceeds of the Loan advanced by such Lender on such Borrowing Date, a financing fee in an amount equal to 1% of the Loan to be advanced by such Lender on such Borrowing Date.

 

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2.04 Notes . If requested by any Lender, the Loans of such Lender shall be evidenced by one or more promissory notes (each a “ Note ”). Borrower shall prepare, execute and deliver to the Lenders such promissory note(s) payable to the Lenders (or, if requested by the Lenders, to the Lenders and their registered assigns) and in the form attached hereto as Exhibit C-1 . Thereafter, the Loans and interest thereon shall at all times (including after assignment pursuant to Section 12.05 ) be represented by one or more promissory notes in such form payable to the payee named therein (or, if such promissory note is a registered note, to such payee and its registered assigns).

2.05 Use of Proceeds . Borrower shall use the proceeds of the Loans for general working capital purposes and corporate purposes and to pay fees, costs and expenses incurred in connection with the Transactions; provided that the Lenders shall have no responsibility as to the use of any proceeds of Loans in the amount made by PIOP. No portion of any proceeds of Loans in the amount made by PIOP (i) will be used to acquire realty or to discharge an obligation relating to the prior acquisition of realty; (ii) will be used outside of the United States (except to pay for services to be rendered outside the United States and to acquire from abroad inventory, material and equipment or property rights for use or sale in the United States, unless prohibited by Part 107.720 of the United States Code of Federal Regulations); or (iii) will be used for any purpose contrary to the public interest (including but not limited to activities which are in violation of law) or inconsistent with free competitive enterprise, in each case, within the meaning of Part 107.720 of Title 13 of the United States Code of Federal Regulations. Borrower will use the proceeds of the Loans in the amount made by PIOP for only those purposes specified in the SBA Form 1031 provided to the Lenders, and Borrower shall not violate any SBA regulations which may be applicable to it.

2.06 Defaulting Lenders .

(a) Adjustments . Notwithstanding anything to the contrary contained in this Agreement, if any Lender becomes a Defaulting Lender, then, until such time as that Lender is no longer a Defaulting Lender, to the extent permitted by applicable law:

(b) Waivers and Amendments . Such Defaulting Lender’s right to approve or disapprove any amendment, waiver or consent with respect to this Agreement shall be restricted as set forth in Section 12.04 .

(c) Reallocation of Payments . Any payment of principal, interest, fees or other amounts received by the Lenders for the account of such Defaulting Lender (whether voluntary or mandatory, at maturity, pursuant to Section 11 or otherwise), shall be applied at such time or times as follows: first, as Borrower may request (so long as no Default exists), to the funding of any Loan in respect of which such Defaulting Lender has failed to fund its portion thereof as required by this Agreement; second, if so determined by the Majority Lenders and Borrower, to be held in a non-interest bearing deposit account and released in order to satisfy obligations of such Defaulting Lender to fund Loans under this Agreement; third, to the payment of any amounts owing to the Lenders as a result of any judgment of a court of competent jurisdiction

 

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obtained by any Lender against such Defaulting Lender as a result of such Defaulting Lender’s breach of its obligations under this Agreement; fourth, so long as no Default exists, to the payment of any amounts owing to Borrower as a result of any judgment of a court of competent jurisdiction obtained by Borrower against such Defaulting Lender as a result of such Defaulting Lender’s breach of its obligations under this Agreement; and fifth, to such Defaulting Lender or as otherwise directed by a court of competent jurisdiction; provided that if (A) such payment is a payment of the principal amount of any Loans in respect of which such Defaulting Lender has not fully funded its appropriate share and (B) such Loans were made at a time when the conditions set forth in Section 6 were satisfied or waived, such payment shall be applied solely to pay the Loans of all non-Defaulting Lenders on a pro rata basis prior to being applied to the payment of any Loans of such Defaulting Lender. Any payments, prepayments or other amounts paid or payable to a Defaulting Lender that are applied (or held) to pay amounts owed by a Defaulting Lender pursuant to this Section 2.06(c) shall be deemed paid to and redirected by such Defaulting Lender, and each Lender irrevocably consents hereto.

(d) Defaulting Lender Cure . If Borrower and the Majority Lenders agree in writing in their sole discretion that a Defaulting Lender should no longer be deemed to be a Defaulting Lender, that Lender will, to the extent applicable, purchase that portion of outstanding Loans of the other Lenders or take such other actions as necessary to cause the Loans to be held on a pro rata basis by the Lenders in accordance with their Proportionate Share, whereupon that Lender will cease to be a Defaulting Lender; provided that no adjustments will be made retroactively with respect to fees accrued or payments made by or on behalf of Borrower while that Lender was a Defaulting Lender; and provided, further, that except to the extent otherwise expressly agreed by the affected parties, no change hereunder from Defaulting Lender to Lender will constitute a waiver or release of any claim of any party hereunder arising from that Lender’s having been a Defaulting Lender.

2.07 Substitution of Lenders.

(a) Substitution Right . If any Lender (an “ Affected Lender ”), (i) becomes a Defaulting Lender or (ii) does not consent to any amendment, waiver or consent to any Loan Document for which the consent of the Majority Lenders is obtained but that requires the consent of other Lenders (a “ Non-Consenting Lender ”), then (x) Borrower may elect to pay in full such Affected Lender with respect to all Obligations due to such Affected Lender (which for the avoidance of doubt, shall not include any Prepayment Premium due) or (y) either Borrower or the Majority Lenders shall identify any willing Lender or Affiliate of any Lender or Eligible Transferee (in each case, a “ Substitute Lender ”) to substitute for such Affected Lender; provided that any substitution of a Non-Consenting Lender shall occur only with the consent of Majority Lenders.

(b) Procedure . To substitute such Affected Lender or pay in full all Obligations owed to such Affected Lender, Borrower shall deliver a notice to such Affected Lender. The effectiveness of such payment or substitution shall be subject to the delivery by Borrower (or, as may be applicable in the case of a substitution, by the Substitute Lender) of (i) payment for the

 

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account of such Affected Lender, of, to the extent accrued through, and outstanding on, the effective date for such payment or substitution, all Obligations owing to such Affected Lender (which for the avoidance of doubt, shall not include any Prepayment Premium) and (ii) in the case of a substitution, an Assignment and Acceptance executed by the Substitute Lender, which shall thereunder, among other things, agree to be bound by the terms of the Loan Documents; provided, however, that if the Affected Lender does not execute such Assignment and Acceptance within ten (10) Business Days of delivery of the notice required hereunder, such Affected Lender shall be deemed to have executed such Assignment and Acceptance.

(c) Effectiveness . Upon satisfaction of the conditions set forth in Section 2.07(a) and (b) , the Control Agent shall record such substitution or payment in the Register, whereupon (i) in the case of any payment in full of an Affected Lender, such Affected Lender’s Commitments shall be terminated and (ii) in the case of any substitution of an Affected Lender, (A) such Affected Lender shall sell and be relieved of, and the Substitute Lender shall purchase and assume, all rights and claims of such Affected Lender under the Loan Documents, except that the Affected Lender shall retain such rights under the Loan Documents that expressly provide that they survive the repayment of the Obligations and the termination of the Commitments, (B) such Affected Lender shall no longer constitute a “Lender” hereunder and such Substitute Lender shall become a “Lender” hereunder and (C) such Affected Lender shall execute and deliver an Assignment and Acceptance to evidence such substitution; provided , however , that the failure of any Affected Lender to execute any such Assignment and Acceptance shall not render such sale and purchase (or the corresponding assignment) invalid.

2.08 Permitted Commercialization Arrangements. Lenders each understand and agree that Borrower and its Subsidiaries will enter into Permitted Commercialization Arrangements that will, in the reasonable opinion of Borrower’s Board of Directors, support the business and operations of the Company and permit Borrower to repay the Obligations hereunder. Lenders further agree to cooperate reasonably with Borrower in implementing such Permitted Commercialization Arrangements, which cooperation will include entering into Non-Disturbance Agreements or other similar agreements with such modifications thereto as shall be reasonably requested by Borrower and the counterparties thereto unless such modifications are materially adverse to the interest of Lenders.

SECTION 3

PAYMENTS OF PRINCIPAL AND INTEREST

3.01 Repayment .

(a) Repayment . During the Interest-Only Period, no payments of principal of the Loans shall be due. Borrower agrees to repay to the Lenders the outstanding principal amount of the Loans, on each Payment Date occurring after the Interest-Only Period, in equal installments. The amounts of such installments shall be calculated by dividing (i) the sum of the aggregate principal amount of the Loans outstanding on the first day following the end of the Interest-Only Period, by (b) the number of Payment Dates remaining prior to the Maturity Date.

(b) Application . Any optional or mandatory prepayment of the Loans shall be applied to the installments thereof under Section 3.01(a) in the inverse order of maturity. To the extent not previously paid, the principal amount of the Loans, together with all other outstanding Obligations, shall be due and payable on the Maturity Date.

 

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3.02 Interest .

(a) Interest Generally . Subject to Section 3.02(d) , Borrower agrees to pay to the Lenders interest on the unpaid principal amount of the Loans and the amount of all other outstanding Obligations, in the case of the Loans, for the period from the applicable Borrowing Date, and in the case of any other Obligation, from the date such other Obligation is due and payable, in each case, until paid in full, at a rate per annum equal to 12.50%.

(b) Default Interest . Notwithstanding the foregoing, if an Event of Default has occurred and is continuing, as of the earlier of (i) the date on which the Lenders deliver to Borrower a written notice pursuant to this Section 3.02(b) (such notice, a “ Notice of Default Interest ”) that the Loans shall bear interest at the Post-Default Rate because an Event of Default has occurred and is continuing, and (ii) if Borrower shall have failed to deliver notice pursuant to Section 8.02(a) of such Event of Default, the date on which such Event of Default occurred, and during the continuance of any such Event of Default, the interest payable pursuant to Section 3.02(a) shall increase by 4.00%  per annum (such aggregate increased rate, the “ Post-Default Rate ”). Notwithstanding any other provision herein (including Section 3.02(d) ), if interest is required to be paid at the Post-Default Rate, it shall be paid entirely in cash. If any other Obligation is not paid when due under the applicable Loan Document, the amount thereof shall accrue interest at a rate equal to 4.00%  per annum (without duplication of interest payable at the Post-Default Rate).

(c) Interest Payment Dates . Subject to Section 3.02(d) , accrued interest on the Loans shall be payable in arrears on the last day of each Interest Period in cash, and upon the payment or prepayment of the Loans (on the principal amount being so paid or prepaid); provided that interest payable at the Post-Default Rate shall be payable from time to time on demand.

(d) Paid In-Kind Interest . Notwithstanding Section 3.01(a) , at any time during the PIK Period, Borrower may elect to pay the interest on the outstanding principal amount of the Loans payable pursuant to Section 3.01 as follows: (i) only 9.00% of the 12.50%  per annum interest in cash and (ii) 3.50% of the 12.50%  per annum interest as compounded interest, added to the aggregate principal amount of the Loans (the amount of any such compounded interest being a “ PIK Loan ”). At the request of the Lenders, each PIK Loan may be evidenced by a Note in the form of Exhibit C-2 . The principal amount of each PIK Loan shall accrue interest in accordance with the provisions of this Agreement applicable to the Loans.

 

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3.03 Prepayments .

(a) Optional Prepayments . Borrower shall have the right to optionally prepay in whole or in part (in multiples of $5,000,000 of principal amount) the outstanding principal amount of the Loans in whole or in part (in multiples of $5,000,000 of principal amount) on any Payment Date (a “ Redemption Date ”) for an amount equal to the aggregate principal amount of the Loans being prepaid plus the Prepayment Premium plus any accrued but unpaid interest and any fees which are due and owing (such aggregate amount, the “ Redemption Price ”). The applicable “ Prepayment Premium ” shall be an amount calculated pursuant to Section 3.03(a)(i) .

(i) If the Redemption Date occurs:

(A) on or prior to the fourth (4 th ) Payment Date, the Prepayment Premium shall be an amount equal to 4.00% of the aggregate outstanding principal amount of the Loans being prepaid on such Redemption Date (prior to giving effect to such redemption);

(B) after the fourth (4 th ) Payment Date, and on or prior to the eighth (8 th ) Payment Date, the Prepayment Premium shall be an amount equal to 3.00% of the aggregate outstanding principal amount of the Loans being prepaid on such Redemption Date (prior to giving effect to such redemption);

(C) after the eighth (8 th ) Payment Date, and on or prior to the twelfth (12 th ) Payment Date, the Prepayment Premium shall be an amount equal to 2.00% of the aggregate outstanding principal amount of the Loans being prepaid on such Redemption Date (prior to giving effect to such redemption);

(D) after the twelfth (12 th ) Payment Date, and on or prior to the sixteenth (16 th ) Payment Date, the Prepayment Premium shall be an amount equal to 1.00% of the aggregate outstanding principal amount of the Loans being prepaid on such Redemption Date (prior to giving effect to such redemption);

(E) after the sixteenth (16 th ) Payment Date, the Prepayment Premium shall be an amount equal to 0.00% of the aggregate outstanding principal amount of the Loans being prepaid on such Redemption Date (prior to giving effect to such redemption).

(ii) To determine the aggregate outstanding principal amount of the Loans, and how many Payment Dates have occurred, as of any Redemption Date for purposes of Section 3.03(a) :

(A) if, as of such Redemption Date, Borrower shall have made only one Borrowing, the number of Payment Dates shall be deemed to be the number of Payment Dates that shall have occurred following the first Borrowing Date;

(B) if, as of such Redemption Date, Borrower shall have made more than one Borrowing, then the Redemption Price shall equal the sum of multiple Redemption Prices calculated with respect to the Loans of each Borrowing, each of which Redemption Prices shall be calculated based on solely the aggregate outstanding principal amount of the Loans borrowed in such Borrowing (and PIK Loans subsequently borrowed in respect of interest

 

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payments thereon), as though the applicable number of Payment Dates equals the number of Payment Dates that shall have occurred following the applicable Borrowing Date. In the case of any partial prepayment, the amount of such prepayment shall be allocated to Loans made in the various Borrowings (and PIK Loans in respect thereof) in the order in which such Borrowings were made;

(iii) No partial prepayment shall be made under this Section 3.03(a) in connection with any event described in Section 3.03(b) .

(iv) On or prior to any Redemption Date, the Lenders may notify Borrower of a reduction in the amounts due under Section 3.03(a)(i) with respect to any portion of the Loans held by any entity licensed by the SBA as an SBIC.

(b) Mandatory Prepayments.

(i) Asset Sales . In the event of any contemplated Asset Sale not permitted under Section 9.09 , Borrower shall provide 30 days’ prior written notice of such Asset Sale to the Lenders and, if within such notice period Majority Lenders advise Borrower that a prepayment is required pursuant to this Section 3.03(b)(i) , Borrower shall: (x) if the assets sold represent substantially all of the assets or revenues of Borrower, or represent any specific line of business which either on its own or together with other lines of business sold over the term of this Agreement account for revenue generated by such lines of business exceeding 15% of the revenue of Borrower in the immediately preceding year, prepay the aggregate outstanding principal amount of the Loans in an amount equal to the Redemption Price applicable on the date of such Asset Sale in accordance with Section 3.03(a) , and (y) in the case of all other Asset Sales not described in the foregoing clause (x) , prepay the Loans in an amount equal to the entire amount of the Asset Sale Net Proceeds of such Asset Sale, plus any accrued but unpaid interest and any fees which are due and owing, credited in the following order:

(A) first, in reduction of Borrower’s obligation to pay any unpaid interest and any fees which are due and owing;

(B) second, in reduction of Borrower’s obligation to pay any Claims or Losses referred to in Section 12.03 which are due and owing;

(C) third, in reduction of Borrower’s obligation to pay any amounts due and owing on account of the unpaid principal amount of the Loans;

(D) fourth, in reduction of any other Obligation which are due and owing; and

(E) fifth, to Borrower or such other Persons as may lawfully be entitled to or directed by Borrower to receive the remainder.

 

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(ii) Change of Control . In the event of a Change of Control, Borrower shall immediately provide notice of such Change of Control to the Lenders and, if within 10 days of receipt of such notice Majority Lenders notify Borrower in writing that a prepayment is required pursuant to this Section 3.03(b)(ii) , Borrower shall prepay the aggregate outstanding principal amount of the Loans in an amount equal to the Redemption Price applicable on the date of such Change of Control in accordance with Section 3.03(a) .

(c) Optional Prepayments Below Par .

(i) Notwithstanding anything to the contrary set forth in this Agreement or any other Loan Document, Borrower shall have the right to prepay Loans to the Lenders up to four (4) times a calendar year at a discount to the par value of such Loans and on a non pro rata basis (each, a “ Discounted Voluntary Prepayment ”) pursuant to the procedures described in this Section 3.03(c) ; provided that (A) any Discounted Voluntary Prepayment shall be offered to all Lenders on a pro rata basis, (B) Borrower shall deliver to the Lenders, together with each Discounted Prepayment Option Notice, a certificate of a Responsible Officer of Borrower (1) certifying that no Default has occurred and is continuing or would result from the Discounted Voluntary Prepayment, (2) certifying that neither Borrower nor any of its Affiliates has any material non-public information with respect to Borrower, its Subsidiaries or the Loans that either (a) has not been disclosed to the Lenders prior to such time, or (b) if not disclosed to the Lenders, could reasonably be expected to have a material effect upon, or other be material to (i) a Lender’s decision to participate in a Discounted Voluntary Prepayment, or (ii) to the market price of the Loans, (3) certifying that no Default has occurred within the six (6) months prior to the date of such notice, (4) certifying that Borrower was not in breach of Section 10.02 hereof during the most recently completed twelve (12) month period prior to the date of such notice, (5) certifying that each of the conditions to such Discounted Voluntary Prepayment contained in this Section 3.03(c) has been satisfied and (6) specifying the aggregate principal amount of Loans Borrower is offering to prepay pursuant to such Discounted Voluntary Prepayment, (C) the aggregate amount of Loans prepaid pursuant to this Section 3.03(c) (valued at the par amount thereof) shall not be less than 20% of the Loans still outstanding, and (D) a period of at least thirty (30) days has passed since the previous Discounted Voluntary Prepayment.

(ii) To the extent Borrower seeks to make a Discounted Voluntary Prepayment, Borrower will provide written notice to the Lenders substantially in the form of Exhibit K hereto (each, a “ Discounted Prepayment Option Notice ”) that Borrower desires to prepay Loans in an aggregate principal amount specified therein by Borrower (each, a “ Proposed Discounted Prepayment Amount ”), in each case at a discount to the par value of such Loans as specified below. The Proposed Discounted Prepayment Amount of any Loans shall not be less than 20% of the par value of the Loans still outstanding (unless otherwise agreed by the Lenders). The Discounted Prepayment Option Notice shall further specify with respect to the proposed Discounted Voluntary Prepayment (A) the Proposed Discounted Prepayment Amount for Loans to be prepaid, (B) a discount range (which may be a single percentage) selected by Borrower with respect to such proposed Discounted Voluntary Prepayment equal to a percentage of par of the principal amount of the Loans to be prepaid (the “ Discount Range ”), and (C) the date by which Lenders are required to indicate their election to participate in such proposed Discounted Voluntary Prepayment, which shall be at least ten Business Days following the date of the Discounted Prepayment Option Notice (the “ Acceptance Date ”).

 

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(iii) On or prior to the Acceptance Date, each such Lender may specify by written notice substantially in the form of Exhibit L hereto (each, a “ Lender Participation Notice ”) to the Lenders (A) a maximum discount to par (the “ Acceptable Discount ”) within the Discount Range (for example, a Lender specifying a discount to par of 20% would accept a purchase price of 80% of the par value of the Loans to be prepaid) and (B) a maximum principal amount (subject to rounding requirements specified by the Lenders) of the Loans to be prepaid held by such Lender with respect to which such Lender is willing to permit a Discounted Voluntary Prepayment at the Acceptable Discount (“ Offered Loans ”). Based on the Acceptable Discounts and principal amounts of the Loans to be prepaid specified by the Lenders in the applicable Lender Participation Notice, the Lenders, in consultation with Borrower, shall determine the applicable discount for such Loans to be prepaid (the “ Applicable Discount ”), which Applicable Discount shall be (A) the percentage specified by Borrower if Borrower has selected a single percentage pursuant to Section 3.03(ii) for the Discounted Voluntary Prepayment or (B) otherwise, the highest Acceptable Discount at which Borrower can pay the Proposed Discounted Prepayment Amount in full (determined by adding the principal amounts of Offered Loans commencing with the Offered Loans with the highest Acceptable Discount); provided that in the event that such Proposed Discounted Prepayment Amount cannot be repaid in full at any Acceptable Discount, the Applicable Discount shall be the lowest Acceptable Discount specified by the Lenders that is within the Discount Range. The Applicable Discount shall be applicable for all Lenders who have offered to participate in the Discounted Voluntary Prepayment and have Qualifying Loans (as defined below). Any Lender with outstanding Loans to be prepaid whose Lender Participation Notice is not received by Borrower by the Acceptance Date shall be deemed to have declined to accept a Discounted Voluntary Prepayment of any of its Loans at any discount to their par value within the Applicable Discount.

(iv) Borrower shall make a Discounted Voluntary Prepayment by prepaying those Loans to be prepaid (or the respective portions thereof) offered by the Lenders (“ Qualifying Lenders ”) that specify an Acceptable Discount that is equal to or greater than the Applicable Discount (“ Qualifying Loans ”) at the Applicable Discount; provided that if the aggregate proceeds required to prepay all Qualifying Loans (disregarding any interest payable at such time) would exceed the amount of aggregate proceeds required to prepay the Proposed Discounted Prepayment Amount, such amounts in each case calculated by applying the Applicable Discount, Borrower shall prepay such Qualifying Loans ratably among the Qualifying Lenders based on their respective principal amounts of such Qualifying Loans (subject to rounding requirements specified by the Lenders). If the aggregate proceeds required to prepay all Qualifying Loans (disregarding any interest payable at such time) would be less than the amount of aggregate proceeds required to prepay the Proposed Discounted Prepayment Amount, such amounts in each case calculated by applying the Applicable Discount, Borrower shall prepay all Qualifying Loans.

 

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(v) Each Discounted Voluntary Prepayment shall be made within five Business Days of the Acceptance Date (or such later date as the Lenders shall reasonably agree, given the time required to calculate the Applicable Discount and determine the amount and holders of Qualifying Loans), without premium or penalty, upon irrevocable notice substantially in the form of Exhibit M hereto (each a “ Discounted Voluntary Prepayment Notice ”), delivered to the Lenders no later than 1:00 p.m. New York City Time, three Business Days prior to the date of such Discounted Voluntary Prepayment, which notice shall (A) specify the date and amount of the Discounted Voluntary Prepayment and the Applicable Discount determined by the Lenders, (B) certifying that neither Borrower nor any of its Affiliates has any material non-public information with respect to Borrower, its Subsidiaries or the Loans that either (a) has not been disclosed to the Lenders prior to such time, or (b) if not disclosed to the Lenders, could reasonably be expected to be have a material effect upon, or other be material to (i) a Lender’s decision to participate in a Discounted Voluntary Prepayment, or (ii) to the market price of the Loans, and (C) state that no Default or Event of Default has occurred and is continuing or would result from the Discounted Voluntary Prepayment. If any Discounted Voluntary Prepayment Notice is given, the amount specified in such notice shall be due and payable to the applicable Lenders, subject to the Applicable Discount on the applicable Loans, on the date specified therein together with accrued interest (on the par principal amount) to and including such date on the amount prepaid. The par principal amount of each Discounted Voluntary Prepayment of a Loan shall be applied to reduce the remaining installments of such Loans in the inverse order of maturity.

(vi) To the extent not expressly provided for herein, each Discounted Voluntary Prepayment shall be consummated pursuant to reasonable procedures (including as to timing, rounding, minimum amounts, Interest Periods and calculation of Applicable Discount in accordance with Section 3.03(c)(iii) above) established by the Lenders and Borrower.

(vii) Prior to the delivery of a Discounted Voluntary Prepayment Notice, (A) upon written notice to the Lenders, Borrower may withdraw or modify its offer to make a Discounted Voluntary Prepayment pursuant to any Discounted Prepayment Option Notice and (B) any Lender may withdraw its offer to participate in a Discounted Voluntary Prepayment pursuant to any Lender Participation Notice.

(viii) Nothing in this Section 3.03(c) shall require Borrower to undertake any Discounted Voluntary Prepayment. No Discounted Voluntary Prepayment shall be subject to the requirements of Section 3.03(a) , but for purposes of clarification, Borrower may make a prepayment in accordance with, and subject to Section 3.03(a) following any Discounted Prepayment Option Notice that fails to result in a Discounted Voluntary Prepayment being consummated.

(ix) For the avoidance of doubt, any Loans that are prepaid pursuant to this Section 3.03(c) shall be deemed cancelled immediately upon giving effect to such prepayment.

 

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SECTION 4

PAYMENTS, ETC.

4.01 Payments .

(a) Payments Generally . Each payment of principal, interest and other amounts to be made by the Obligors under this Agreement or any other Loan Document shall be made in Dollars, in immediately available funds, without deduction, set off or counterclaim, to an account to be designated by the Majority Lenders by notice to Borrower, not later than 4:00 p.m. (Central time) on the date on which such payment shall become due (each such payment made after such time on such due date to be deemed to have been made on the next succeeding Business Day).

(b) Application of Payments . Each Obligor shall, at the time of making each payment under this Agreement or any other Loan Document, specify to the Lenders the amounts payable by such Obligor hereunder to which such payment is to be applied (and in the event that Obligors fail to so specify, or if an Event of Default has occurred and is continuing, the Lenders may apply such payment in the manner they determine to be appropriate).

(c) Non-Business Days . If the due date of any payment under this Agreement (other than of principal of or interest on the Loans) would otherwise fall on a day that is not a Business Day, such date shall be extended to the next succeeding Business Day, and, in the case of any payment accruing interest, interest thereon shall be payable for the period of such extension.

4.02 Computations . All computations of interest and fees hereunder shall be computed on the basis of a year of 360 days and actual days elapsed (including the first day but excluding the last day) occurring in the period for which payable.

4.03 Notices . Each notice of optional prepayment shall be effective only if received by the Lenders not later than 4:00 p.m. (Central time) on the date one Business Day prior to the date of prepayment. Each notice of optional prepayment shall specify the amount to be prepaid and the date of prepayment.

4.04 Set-Off .

(a) Set-Off Generally . Upon the occurrence and during the continuance of any Event of Default, the Lenders and each of their Affiliates are hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by the Lenders or such Affiliate to or for the credit or the account of Borrower against any and all of the Obligations, whether or not the Lenders shall have made any demand and although such obligations may be unmatured. The Lenders agree promptly to notify Borrower after any such set-off and application, provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of the Lenders and their Affiliates under this Section 4.04 are in addition to other rights and remedies (including other rights of set-off) that the Lenders and their Affiliates may have.

(b) Exercise of Rights Not Required . Nothing contained herein shall require the Lenders to exercise any such right or shall affect the right of the Lenders to exercise, and retain the benefits of exercising, any such right with respect to any other indebtedness or obligation of Borrower.

 

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SECTION 5

YIELD PROTECTION, ETC.

5.01 Additional Costs .

(a) Change in Requirements of Law Generally . If, on or after the date hereof, the adoption of any Requirement of Law, or any change in any Requirement of Law, or any change in the interpretation or administration thereof by any court or other Governmental Authority charged with the interpretation or administration thereof, or compliance by any of the Lenders (or its lending office) with any request or directive (whether or not having the force of law) of any such Governmental Authority, shall impose, modify or deem applicable any reserve (including any such requirement imposed by the Board of Governors of the Federal Reserve System), special deposit, contribution, insurance assessment or similar requirement, in each case that becomes effective after the date hereof, against assets of, deposits with or for the account of, or credit extended by, a Lender (or its lending office) or shall impose on a Lender (or its lending office) any other condition affecting the Loans or the Commitment, and the result of any of the foregoing is to increase the cost to such Lender of making or maintaining the Loans, or to reduce the amount of any sum received or receivable by such Lender under this Agreement or any other Loan Document, by an amount deemed by such Lender to be material (other than (i) Indemnified Taxes and (ii) Taxes described in clause (c)  or (d)  of the definition of “Excluded Taxes”), then Borrower shall pay to such Lender on demand such additional amount or amounts as will compensate such Lender for such increased cost or reduction.

(b) Change in Capital Requirements . If a Lender shall have determined that, on or after the date hereof, the adoption of any Requirement of Law regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any Governmental Authority charged with the interpretation or administration thereof, or any request or directive regarding capital adequacy (whether or not having the force of law) of any such Governmental Authority, in each case that becomes effective after the date hereof, has or would have the effect of reducing the rate of return on capital of a Lender (or its parent) as a consequence of a Lender’s obligations hereunder or the Loans to a level below that which a Lender (or its parent) would have achieved but for such adoption, change, request or directive by an amount reasonably deemed by it to be material, then Borrower shall pay to such Lender on demand such additional amount or amounts as will compensate such Lender (or its parent) for such reduction.

(c) Notification by Lender . The Lenders will promptly notify Borrower of any event of which it has knowledge, occurring after the date hereof, which will entitle a Lender to compensation pursuant to this Section 5.01 . Before giving any such notice pursuant to this Section 5.01(c) such Lender shall designate a different lending office if such designation (x)

 

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will, in the reasonable judgment of such Lender, avoid the need for, or reduce the amount of, such compensation and (y) will not, in the reasonable judgment of such Lender, be materially disadvantageous to such Lender. A certificate of the Lender claiming compensation under this Section 5.01 , setting forth the additional amount or amounts to be paid to it hereunder, shall be conclusive and binding on Borrower in the absence of manifest error.

(d) Notwithstanding anything herein to the contrary, (x) the Dodd-Frank Wall Street Reform and Consumer Protection Act and all requests, rules, guidelines or directives thereunder or issued in connection therewith and (y) all requests, rules, guidelines or directives promulgated by the Bank for International Settlements, the Basel Committee on Banking Supervision (or any successor or similar authority) or the United States or foreign regulatory authorities, in each case pursuant to Basel III, shall in each case be deemed to constitute a change in Requirements of Law for all purposes of this Section 5.01 , regardless of the date enacted, adopted or issued.

5.02 Illegality . Notwithstanding any other provision of this Agreement, in the event that on or after the date hereof the adoption of or any change in any Requirement of Law or in the interpretation or application thereof by any competent Governmental Authority shall make it unlawful for a Lender or its lending office to make or maintain the Loans (and, in the opinion of such Lender, the designation of a different lending office would either not avoid such unlawfulness or would be disadvantageous to such Lender), then such Lender shall promptly notify Borrower thereof following which (a) the Lender’s Commitment shall be suspended until such time as such Lender may again make and maintain the Loans hereunder and (b) if such Requirement of Law shall so mandate, the Loans shall be prepaid by Borrower on or before such date as shall be mandated by such Requirement of Law in an amount equal to the Redemption Price applicable on the date of such prepayment in accordance with Section 3.03(a) .

5.03 Taxes .

(a) Payments Free of Taxes . Any and all payments by or on account of any Obligation shall be made without deduction or withholding for any Taxes, except as required by applicable law. If any applicable law requires the deduction or withholding of any Tax from any such payment by an Obligor, then such Obligor shall be entitled to make such deduction or withholding and shall timely pay the full amount deducted or withheld to the relevant Governmental Authority in accordance with applicable law and, if such Tax is an Indemnified Tax, then the sum payable by such Obligor shall be increased as necessary so that after such deduction or withholding has been made (including such deductions and withholdings applicable to additional sums payable under Section 5.01 ) the applicable Recipient receives an amount equal to the sum it would have received had no such deduction or withholding been made.

(b) Payment of Other Taxes by Borrower . Borrower shall timely pay to the relevant Governmental Authority in accordance with applicable law, or at the option of each Lender, timely reimburse it for, Other Taxes.

(c) Evidence of Payments . As soon as practicable after any payment of Taxes by Borrower to a Governmental Authority as a withholding Tax pursuant to this Section 5.03 ,

 

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Borrower shall deliver to each Lender the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of the return reporting such payment or other evidence of such payment reasonable satisfactory to the applicable Lender.

(d) Indemnification . Borrower shall reimburse and indemnify each Recipient, within 10 days after demand therefor, for the full amount of any Indemnified Taxes (including Indemnified Taxes imposed or asserted on or attributable to amounts payable under Section 5.01 ) payable or paid by such Recipient or required to be withheld or deducted from a payment to such Recipient and any reasonable expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority; provided that Borrower shall not be required to indemnify a Recipient pursuant to this Section 5.03(d) to the extent that such Recipient fails to notify Borrower of its intent to make a claim for indemnification under this Section within 180 days after a claim is asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability delivered to Borrower by a Lender shall be conclusive absent manifest error.

(e) Status of Lenders .

(i) Any Lender that is entitled to an exemption from, or reduction of withholding Tax with respect to payments made under any Loan Document shall timely deliver to Borrower such properly completed and executed documentation reasonably requested by Borrower as will permit such payments to be made without withholding or at a reduced rate of withholding. In addition, any Lender shall deliver such other documentation prescribed by applicable law or as reasonably requested by Borrower as will enable Borrower to determine whether or not such Lender is subject to backup withholding or information reporting requirements.

(ii) Without limiting the generality of the foregoing, in the event that Borrower is a U.S. Person:

(A) any Lender that is a U.S. Person shall deliver to Borrower on or prior to the date on which such Lender becomes a Lender under this Agreement (and from time to time thereafter upon the reasonable request of Borrower), executed originals of IRS Form W-9 (or successor form) certifying that such Lender is exempt from U.S. Federal backup withholding tax;

(B) any Foreign Lender shall, to the extent it is legally entitled to do so, deliver to Borrower (in such number of copies as shall be requested by the recipient) on or prior to the date on which such Foreign Lender becomes a Lender under this Agreement (and from time to time thereafter upon the reasonable request of Borrower), whichever of the following is applicable:

(1) in the case of a Foreign Lender claiming the benefits of an income tax treaty to which the United States is a party (x) with respect to payments of interest

 

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under any Loan Document, executed originals of IRS Form W-8BEN (or successor form) establishing an exemption from, or reduction of, U.S. Federal withholding Tax pursuant to the “interest” article of such tax treaty and (y) with respect to any other applicable payments under any Loan Document, IRS Form W-8BEN (or successor form) establishing an exemption from, or reduction of, U.S. Federal withholding Tax pursuant to the “business profits” or “other income” article of such tax treaty;

(2) executed originals of IRS Form W-8ECI (or successor form);

(3) in the case of a Foreign Lender claiming the benefits of the exemption for portfolio interest under Section 881(c) of the Code, (x) a certificate substantially in the form of Exhibit D to the effect that such Foreign Lender is not a “bank” within the meaning of Section 881(c)(3)(A) of the Code, a “10 percent shareholder” of the applicable Borrower within the meaning of Section 881(c)(3)(B) of the Code, or a “controlled foreign corporation” described in Section 881(c)(3)(C) of the Code (a “ U.S. Tax Compliance Certificate ”) and (y) executed originals of IRS Form W-8BEN (or successor form); or

(4) to the extent a Foreign Lender is not the beneficial owner, executed originals of IRS Form W-8IMY (or successor form), accompanied by IRS Form W-8ECI (or successor form), IRS Form W-8BEN (or successor form), a U.S. Tax Compliance Certificate, IRS Form W-9 (or successor form), and/or other certification documents from each beneficial owner, as applicable; provided that if the Foreign Lender is a partnership and one or more direct or indirect partners of such Foreign Lender are claiming the portfolio interest exemption, such Foreign Lender may provide a U.S. Tax Compliance Certificate on behalf of each such direct and indirect partner.

(C) any Foreign Lender shall, to the extent it is legally entitled to do so, deliver to Borrower (in such number of copies as shall be requested by the recipient) on or prior to the date on which such Foreign Lender becomes a Lender under this Agreement (and from time to time thereafter upon the reasonable request of Borrower), executed originals of any other form prescribed by applicable law as a basis for claiming exemption from or a reduction in U.S. Federal withholding Tax, duly completed, together with such supplementary documentation as may be prescribed by applicable law to permit Borrower to determine the withholding or deduction required to be made; and

(D) any Recipient shall deliver to Borrower any forms and information necessary to establish that such Recipient is not subject to withholding tax under FATCA.

Each Recipient agrees that if any form or certification it previously delivered expires or becomes obsolete or inaccurate in any respect, it shall promptly update such form or certification or notify Borrower in writing of its legal inability to do so.

(f) Treatment of Certain Refunds . If any party determines, in its sole discretion exercised in good faith, that it has received a refund of any Taxes as to which it has been

 

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indemnified pursuant to this Section 5.03 (including by the payment of additional amounts pursuant to Section 5.01 ), it shall pay to the indemnifying party an amount equal to such refund (but only to the extent of indemnity payments made under this Section 5.03 with respect to the Taxes giving rise to such refund), net of all out-of-pocket expenses (including Taxes) of such indemnified party and without interest (other than any interest paid by the relevant Governmental Authority with respect to such refund). Such indemnifying party, upon the written request of such indemnified party, shall repay to such indemnified party the amount paid over pursuant to this paragraph (plus any penalties, interest or other charges imposed by the relevant Governmental Authority) in the event that such indemnified party is required to repay such refund to such Governmental Authority. Notwithstanding anything to the contrary in this Section 5.03(f) , in no event will the indemnified party be required to pay any amount to an indemnifying party pursuant to this Section 5.03(f) the payment of which would place the indemnified party in a less favorable net after-Tax position than the indemnified party would have been in if the indemnification payments or additional amounts giving rise to such refund had never been paid. This Section 5.03(f) shall not be construed to require any indemnified party to make available its Tax returns (or any other information relating to its Taxes that it deems confidential) to the indemnifying party or any other Person.

(g) Mitigation Obligations . If Borrower is required to pay any Indemnified Taxes or additional amounts to any Lender or to any Governmental Authority for the account of any Lender pursuant to Section 5.01 or this Section 5.03 , then such Lender shall (at the request of Borrower) use commercially reasonable efforts to designate a different lending office for funding or booking its Loans hereunder or to assign and delegate its rights and obligations hereunder to another of its offices, branches or Affiliates if, in the sole reasonable judgment of such Lender, such designation or assignment and delegation would (i) eliminate or reduce amounts payable pursuant to Section 5.01 or this Section 5.03 , as the case may be, in the future, (ii) not subject such Lender to any unreimbursed cost or expense and (iii) not otherwise be disadvantageous to such Lender. Borrower hereby agrees to pay all reasonable costs and expenses incurred by any Lender in connection with any such designation or assignment and delegation.

SECTION 6

CONDITIONS PRECEDENT

6.01 Conditions to the First Borrowing . The obligation of each Lender to make a Loan as part of the first Borrowing shall not become effective until the following conditions precedent shall have been satisfied or waived in writing by the Majority Lenders:

(a) Borrowing Date . Such Borrowing shall be made within 12 Business Days of the date hereof.

(b) Amount of First Borrowing . The amount of such Borrowing shall be between $20,000,000 and $30,000,000, at Borrower’s election. If Borrower elects to borrow less than $30,000,000 at the first Borrowing, Borrower must borrow in a second Borrowing within the 6 month period following the Closing Date the difference between $30,000,000 and the amount of the first Borrowing.

 

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(c) Terms of Material Agreements, Etc . Lenders shall be reasonably satisfied with the terms and conditions of the Obligors’ Material Agreements.

(d) No Law Restraining Transactions . No applicable law or regulation shall restrain, prevent or, in the reasonable judgment of the Lenders, impose materially adverse conditions upon the Transactions.

(e) Payment of Fees . Lenders shall be satisfied with the arrangements to deduct the fees set forth herein (including without limitation the financing fee required pursuant to Section 2.03 ) from the proceeds advanced.

(f) Lien Searches . Lenders shall be satisfied with Lien searches regarding Borrower and its Subsidiaries made prior to the Closing Date.

(g) Documentary Deliveries . The Lenders shall have received the following documents, each of which shall be in form and substance satisfactory to the Lenders:

(i) Agreement . This Agreement duly executed and delivered by Borrower and each of the other parties hereto.

(ii) Security Documents .

(A) The Security Agreement, duly executed and delivered by each of the Obligors;

(B) Each of the Short-Form IP Security Agreements, duly executed and delivered by the applicable Obligor;

(C) UCC-1 financing statements against each Obligor in its jurisdiction of formation or incorporation, as the case may be; and

(D) Without limitation, all other documents and instruments reasonably required to perfect the Lenders’ Lien on, and security interest in, the Collateral required to be delivered on or prior to the Closing Date (including delivery of any capital stock certificates and undated stock powers executed in blank) shall have been duly executed and delivered and be in proper form for filing, and shall create in favor of the Lenders, a perfected Lien on, and security interest in, the Collateral, subject to no Liens other than Permitted Liens.

(iii) Notes . Any Notes requested in accordance with Section 2.04 .

(iv) Approvals . Copies of all material licenses, consents, authorizations and approvals of, and notices to and filings and registrations with, any Governmental Authority (including all foreign exchange approvals), and of all third-party consents and approvals, necessary in connection with the making and performance by the Obligors of the Loan Documents and the Transactions.

 

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(v) Corporate Documents . Certified copies of the constitutive documents of each Obligor (if publicly available in such Obligor’s jurisdiction of formation) and of resolutions of the Board of Directors (or shareholders, if applicable) of each Obligor authorizing the making and performance by it of the Loan Documents to which it is a party.

(vi) Incumbency Certificate . A certificate of each Obligor as to the authority, incumbency and specimen signatures of the persons who have executed the Loan Documents and any other documents in connection herewith on behalf of the Obligors.

(vii) Officer’s Certificate . A certificate, dated the Closing Date and signed by the President, a Vice President or a financial officer of Borrower, confirming compliance with the conditions set forth in Section 6.04 .

(viii) Opinions of Counsel . A favorable opinion, dated the Closing Date, of counsel to each Obligor in form acceptable to the Lenders and their counsel.

(ix) Insurance . Certificates of insurance evidencing the existence of all insurance required to be maintained by Borrower pursuant to Section 8.05(b) and the designation of the Lenders as the loss payees or additional named insured, as the case may be, thereunder.

(x) Other Liens . Duly executed and delivered copies of such acknowledgement letters as are reasonably requested by the Lenders with respect to existing Liens.

(xi) SBA Forms . Completed SBA Forms 480, 652, and 1031 (Parts A and B), showing Borrower’s financial projections (including balance sheets and income and cash flow statements) for the period described therein and a representation to PIOP of Borrower’s intended use of proceeds of the Loans (the “ Use of Proceeds Statement ”).

6.02 Conditions to the Second Borrowing . The obligation of each Lender to make a Loan as part of the second Borrowing is subject to the following conditions precedent:

(a) First Borrowing . A first Borrowing in an amount less than $30,000,000 shall have occurred.

(b) Borrowing Date . Such Borrowing shall occur on or prior to the date that is six (6) months after the Closing Date.

(c) Amount of Borrowing . The amount of such Borrowing shall equal an amount that is the difference between $30,000,000 and the amount of the first Borrowing.

6.03 Conditions to the Optional Borrowing . Any further Borrowing is fully optional to Borrower. The obligation of each Lender to make a Loan as part of the optional Borrowing is subject to the following conditions precedent:

(a) First and Second Borrowings . A first Borrowing of $30,000,000 or a first and second Borrowing totaling $30,000,000 shall have occurred.

 

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(b) Borrowing Date . Such optional Borrowing shall occur on or prior to May 29, 2015.

(c) Amount of Borrowing . The amount of such optional Borrowing shall not exceed $15,000,000 (which amount must be a multiple of $5,000,000), at Borrower’s election.

(d) Borrowing Milestone . Borrower shall have achieved, by a date not later than March 31, 2015, Revenue of not less than $40,000,000 (the “ Borrowing Milestone ”) during the twelve-month period prior to such date.

(e) Audit . The Lenders shall have had at least fourteen (14) days following receipt of the Notice of Borrowing to review Borrower’s books and records and confirm that Borrower has achieved the Borrowing Milestone .

(f) Notice of Borrowing . Borrower shall have delivered a Notice of Borrowing to the Lenders, certifying that Borrower has achieved the Borrowing Milestone within the last thirty (30) calendar days.

6.04 Conditions to Each Borrowing . The obligation of each Lender to make a Loan as part of any Borrowing (including the first Borrowing) is also subject to satisfaction of the following further conditions precedent on the applicable Borrowing Date:

(a) Commitment Period . Such Borrowing Date shall occur during the Commitment Period.

(b) No Default; Representations and Warranties . Both immediately prior to the making of such Loan and after giving effect thereto and to the intended use thereof:

(i) no Default shall have occurred and be continuing; and

(ii) the representations and warranties made by Borrower in Section 7 shall be true on and as of the Borrowing Date, and immediately after giving effect to the application of the proceeds of the Borrowing, with the same force and effect as if made on and as of such date (except that the representation regarding representations and warranties that refer to a specific earlier date shall be that they were true on such earlier date).

(c) Notice of Borrowing . Except in the case of any PIK Loan, Capital Royalty Partners II L.P. shall have received a Notice of Borrowing as and when required pursuant to Section 2.02 or 6.03(f) , as applicable.

Each Borrowing shall constitute a certification by Borrower to the effect that the conditions set forth in this Section 6.04 have been fulfilled as of the applicable Borrowing Date.

 

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SECTION 7

REPRESENTATIONS AND WARRANTIES

Borrower represents and warrants to the Lenders that:

7.01 Power and Authority . Each of Borrower and its Subsidiaries (a) is a duly organized and validly existing under the laws of its jurisdiction of organization, (b) has all requisite corporate or other power, and has all material governmental licenses, authorizations, consents and approvals necessary to own its assets and carry on its business as now being or as proposed to be conducted except to the extent that failure to have the same would not reasonably be expected to have a Material Adverse Effect, (c) is qualified to do business and is in good standing in all jurisdictions in which the nature of the business conducted by it makes such qualification necessary and where failure so to qualify would (either individually or in the aggregate) have a Material Adverse Effect, and (d) has full power, authority and legal right to make and perform each of the Loan Documents to which it is a party and, in the case of Borrower, to borrow the Loans hereunder.

7.02 Authorization; Enforceability . The Transactions are within each Obligor’s corporate powers and have been duly authorized by all necessary corporate and, if required, by all necessary shareholder action. This Agreement has been duly executed and delivered by each Obligor and constitutes, and each of the other Loan Documents to which it is a party when executed and delivered by such Obligor will constitute, a legal, valid and binding obligation of such Obligor, enforceable against each Obligor in accordance with its terms, except as such enforceability may be limited by (a) bankruptcy, insolvency, reorganization, moratorium or similar laws of general applicability affecting the enforcement of creditors’ rights and (b) the application of general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law).

7.03 Governmental and Other Approvals; No Conflicts . The Transactions (a) do not require any consent or approval of, registration or filing with, or any other action by, any Governmental Authority or any third party, except for (i) such as have been obtained or made and are in full force and effect and (ii) material filings and recordings in respect of the Liens created pursuant to the Security Documents, (b) will not violate any applicable law or regulation or the charter, bylaws or other organizational documents of Borrower and its Subsidiaries or any order of any Governmental Authority, other than any such violations that, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect, (c) will not violate or result in a default under any indenture, agreement or other instrument binding upon Borrower and its Subsidiaries or assets, or give rise to a right thereunder to require any payment to be made by any such Person, and (d) will not result in the creation or imposition of any Lien (other than Permitted Liens) on any asset of Borrower and its Subsidiaries.

7.04 Financial Statements; Material Adverse Change.

(a) Financial Statements . Borrower has heretofore furnished to the Lenders certain financial statements as provided for in Section 8.01 . Such financial statements present fairly, in

 

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all material respects, the financial position and results of operations and cash flows of Borrower and its Subsidiaries as of such dates and for such periods in accordance with GAAP, subject to year-end audit adjustments and the absence of footnotes in the case of the previously-delivered statements of the type described in Section 8.01(a) . Neither Borrower nor any of its Subsidiaries has any material contingent liabilities or unusual forward or long-term commitments not disclosed in the aforementioned financial statements.

(b) No Material Adverse Change . Since December 31, 2013, there has been no Material Adverse Change.

7.05 Properties .

(a) Property Generally . Each Obligor has good and marketable fee simple title to, or valid leasehold interests in, all its real and personal Property material to its business, subject only to Permitted Liens and except as would not reasonably be expected to interfere with its ability to conduct its business as currently conducted or to utilize such properties for their intended purposes.

(b) Intellectual Property . The Obligors acknowledge that the Lenders are relying on the following representations and warranties in entering into this Agreement:

(i) Schedule 7.05(b) (as amended from time to time by Borrower in accordance with Section 7.21 ) contains:

(A) a complete and accurate list of all applied for or issued Patents owned or licensed by any Obligor, including the jurisdiction and patent number;

(B) a complete and accurate list of all applied for or registered Trademarks owned or licensed by any Obligor, including the jurisdiction, trademark application or registration number and the application or registration date; and

(C) a complete and accurate list of all applied for or registered Copyrights;

(ii) Each Obligor is the sole or joint owner of all right, title and interest in and, subject to any exclusive licenses granted thereunder, has the right to use the Obligor Intellectual Property purported to be owned by such Obligor with no breaks in chain of title with good and marketable title, free and clear of any Liens or Claims of any kind whatsoever other than Permitted Liens. Without limiting the foregoing, and except as set forth in Schedule 7.05(b) (as amended from time to time by Borrower in accordance with Section 7.21 ):

(A) other than with respect to the Material Agreements, or as permitted by Section 9.09 , the Obligors have not transferred ownership of Material Intellectual Property, in whole or in part, to any other Person who is not an Obligor;

 

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(B) other than (i) the Material Agreements, (ii) customary restrictions in in-bound licenses of Intellectual Property and non-disclosure agreements, or (iii) as would have been or is permitted by Section 9.09 , there are no judgments, covenants not to sue, permits, grants, licenses, Liens (other than Permitted Liens), Claims, or other agreements or arrangements relating to Borrower’s Material Intellectual Property, including any development, submission, services, research, license or support agreements, which bind, obligate or otherwise restrict the Obligors;

(C) the use of any of the Obligor Intellectual Property, in the manner used by Borrower in the conduct of its business as of the date hereof, to the best of Borrower’s Knowledge, does not breach, violate, infringe or interfere with or constitute a misappropriation of any valid rights arising under any Intellectual Property of any other Person;

(D) there are no pending or, to Borrower’s Knowledge, threatened Claims against the Obligors asserted by any other Person involving the Obligor Intellectual Property, including any Claims of adverse ownership, invalidity, infringement, misappropriation, violation or other opposition to such Intellectual Property; the Obligors have not received any written notice from any Person that Borrower’s business, the use of the Obligor Intellectual Property, or the manufacture, use or sale of any product or the performance of any service by Borrower infringes upon, violates or constitutes a misappropriation of, or may infringe upon, violate or constitute a misappropriation of, or otherwise interferes with, any Intellectual Property of such Person;

(E) the Obligors have no Knowledge that the Obligor Intellectual Property is being infringed, violated, misappropriated or otherwise used by any other Person without the express authorization of the applicable Obligor. Without limiting the foregoing, the Obligors have not put any other Person on notice of actual or potential infringement, violation or misappropriation of any of the Obligor Intellectual Property; the Obligors have not initiated the enforcement of any Claim with respect to any of the Obligor Intellectual Property;

(F) all relevant current and former employees and consultants of Borrower have executed written confidentiality and invention assignment Contracts with Borrower that irrevocably assign to Borrower or its designee all of their rights to any Inventions relating to Borrower’s business;

(G) to the Knowledge of the Obligors, the Obligor Intellectual Property is all the Intellectual Property necessary for the operation of Borrower’s business as it is currently conducted;

(H) the Obligors have taken reasonable precautions to protect the secrecy, confidentiality and value of the trade secrets and confidential information in such Obligor’s Intellectual Property.

(I) each Obligor has delivered to the Lenders accurate and complete copies of all Material Agreements relating to the Obligor Intellectual Property;

(J) there are no pending or, to the Knowledge of any of the Obligors, threatened in writing Claims against the Obligors asserted by any other Person relating to the Material Agreements, including any Claims of breach or default under such Material Agreements;

 

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(iii) With respect to the Obligor Intellectual Property consisting of Patents, owned by an Obligor, except as set forth in Schedule 7.05(b) (as amended from time to time by Borrower in accordance with Section 7.21 ), and without limiting the representations and warranties in Section 7.05(b)(ii) :

(A) each of the issued claims in such Patents, to Borrower’s Knowledge, is valid and enforceable;

(B) the inventors identified in such Patents have executed written Contracts with Borrower (or other Obligor) or its predecessor-in-interest that properly and irrevocably assigns to Borrower (or other Obligor) or predecessor-in-interest all of their rights to any of the Inventions claimed in such Patents to the extent permitted by applicable law;

(C) none of such Patents, or the Inventions claimed in them, have been dedicated to the public except as a result of intentional decisions made by the applicable Obligor;

(D) to Borrower’s Knowledge, all prior art material to such Patents was adequately disclosed to or considered by the respective patent offices during prosecution of such Patents to the extent required by applicable law or regulation;

(E) subsequent to the issuance of such Patents, neither Borrower nor any Subsidiary Guarantors or their predecessors in interest, have filed any disclaimer of such Patents or filed any other voluntary reduction in the scope of the Inventions claimed in such Patents;

(F) Borrower has not received written notice that any such Patent is subject to any competing conception claims of allowable or allowed subject matter of any patent applications or patents of any third party, and no such Patent has been the subject of any interference, re-examination or opposition proceedings, nor are the Obligors aware of any basis for any such interference, re-examination or opposition proceedings;

(G) no such Patents, to Borrower’s Knowledge, have ever been finally adjudicated to be invalid, unpatentable or unenforceable for any reason in any administrative, arbitration, judicial or other proceeding, and, with the exception of publicly available documents in the applicable Patent Office recorded with respect to any Patents, the Obligors have not received any notice asserting that such Patents are invalid, unpatentable or unenforceable; if any of such Patents is terminally disclaimed to another patent or patent application, all patents and patent applications subject to such terminal disclaimer are included in the Collateral;

 

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(H) there is no fact or circumstance known to the Obligors that would cause them to reasonably conclude that any of the issued patents in such Patents is invalid or unenforceable;

(I) the Obligors have no Knowledge that they or any prior owner of such Patents or their respective agents or representatives have engaged in any conduct, or omitted to perform any necessary act, the result of which would invalidate or render unpatentable or unenforceable any such Patents; and

(J) all maintenance fees, annuities, and the like due or payable on the Patents have been timely paid or the failure to so pay was the result of an intentional decision by the applicable Obligor or would not reasonably be expected to result in a Material Adverse Change.

(iv) none of the foregoing representations and statements of fact contains any untrue statement of material fact or omits to state any material fact necessary to make any such statement or representation not misleading to a prospective Lender seeking full information as to the Obligor Intellectual Property and Borrower’s business.

(c) Material Intellectual Property . Schedule 7.05(c) (as amended from time to time by Borrower in accordance with Section 7.21 ) contains an accurate list of the Obligor Intellectual Property the loss of which would reasonably be expected to have a Material Adverse Effect, with an indication as to whether the applicable Obligor owns or has an exclusive or non-exclusive license to such Obligor Intellectual Property.

7.06 No Actions or Proceedings .

(a) Litigation . There is no litigation, investigation or proceeding pending or, to the best of Borrower’s Knowledge, threatened with respect to Borrower and its Subsidiaries by or before any Governmental Authority or arbitrator (i) that either individually or in the aggregate would reasonably be expected to have a Material Adverse Effect, except as specified in Schedule 7.06 (as amended from time to time by Borrower in accordance with Section 7.21 ) or (ii) that involves this Agreement or the Transactions.

(b) Environmental Matters . The operations and Property of Borrower and its Subsidiaries comply with all applicable Environmental Laws, except to the extent the failure to so comply (either individually or in the aggregate) would not reasonably be expected to have a Material Adverse Effect.

(c) Labor Matters . There are no labor actions or disputes involving the employees of Borrower that would reasonably be expected to have a Material Adverse Effect.

7.07 Compliance with Laws and Agreements . Each of the Obligors is in compliance with all laws, regulations and orders of any Governmental Authority applicable to it or its property and all indentures, agreements and other instruments binding upon it or its property, except where the failure to do so, individually or in the aggregate, would not reasonably be expected to result in a Material Adverse Effect. No Default has occurred and is continuing.

 

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7.08 Taxes . Except as set forth on Schedule 7.08 , each of the Obligors has timely filed or caused to be filed all material Tax returns and reports required to have been filed and has paid or caused to be paid all material Taxes required to have been paid by it, such Taxes not to exceed $50,000 at any time outstanding, except Taxes that are being contested in good faith by appropriate proceedings and for which such Obligor has set aside on its books adequate reserves with respect thereto in accordance with GAAP.

7.09 Full Disclosure . Borrower has disclosed to the Lenders all Material Agreements to which any Obligor is subject, and all other matters to its Knowledge, that, individually or in the aggregate, would reasonably be expected to result in a Material Adverse Effect. None of the reports, financial statements, certificates or other information furnished by or on behalf of the Obligors to the Lenders in connection with the negotiation of this Agreement and the other Loan Documents or delivered hereunder or thereunder (as modified or supplemented by other information so furnished) contains any material misstatement of material fact or omits to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that , with respect to projected financial information, Borrower represents only that such information was prepared in good faith based upon assumptions believed to be reasonable at the time.

7.10 Regulation .

(a) Investment Company Act . Neither Borrower nor any of its Subsidiaries is an “investment company” as defined in, or subject to regulation under, the Investment Company Act of 1940.

(b) Margin Stock . Neither Borrower nor any of its Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose, whether immediate, incidental or ultimate, of buying or carrying Margin Stock, and no part of the proceeds of the Loans will be used to buy or carry any Margin Stock in violation of Regulation T, U or X.

7.11 Solvency . Borrower is and, immediately after giving effect to the Borrowing and the use of proceeds thereof will be, Solvent.

7.12 Subsidiaries . Set forth on Schedule 7.12 is a complete and correct list of all Subsidiaries as of the date hereof. Each such Subsidiary is duly organized and validly existing under the jurisdiction of its organization shown in said Schedule 7.12 , and the percentage ownership by Borrower of each such Subsidiary is as shown in said Schedule 7.12 .

7.13 Indebtedness and Liens . Set forth on Schedule 7.13(a) is a complete and correct list of all material Indebtedness of each Obligor outstanding as of the date hereof. Schedule 7.13(b) lists of all Liens affirmatively granted by Borrower and other Obligors with respect to their respective Property and outstanding as of the date hereof.

 

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7.14 Material Agreements . Set forth on Schedule 7.14 (as amended from time to time by Borrower in accordance with Section 7.21 ) is a complete and correct list of (i) each Material Agreement and (ii) each agreement creating or evidencing any Material Indebtedness. No Obligor is in material default under any such Material Agreement or agreement creating or evidencing any Material Indebtedness. Except as otherwise disclosed on Schedule 7.14 , all material vendor purchase agreements and provider contracts of the Obligors are in full force and effect without material modification from the form in which the same were disclosed to the Lenders, except for such modifications as would not reasonably be expected to be adverse to the interests of Lenders.

7.15 Restrictive Agreements . None of the Obligors is subject to any indenture, agreement, instrument or other arrangement that prohibits, restricts or imposes any condition upon (a) the ability of Borrower or any Subsidiary to create, incur or permit to exist any Lien upon any of its property or assets (other than (x) customary provisions in contracts (including without limitation leases and in-bound licenses of Intellectual Property) restricting the assignment thereof, (y) restrictions or conditions imposed by any agreement governing secured Permitted Indebtedness permitted under Section 9.01(h) , to the extent that such restrictions or conditions apply only to the property or assets securing such Indebtedness, or (z) as such may apply to the interest of any such Obligor in a Permitted Commercialization Arrangement Vehicle), or (b) the ability of any Subsidiary to pay dividends or other distributions with respect to any shares of its capital stock or to make or repay loans or advances to Borrower or any other Subsidiary or to Guarantee Indebtedness of Borrower or any other Subsidiary (each, a “ Restrictive Agreement ”), except (i) those listed on Schedule 7.15 or otherwise permitted under Section 9.11 , (ii) restrictions and conditions imposed by law or by this Agreement, (iii) customary restrictions and conditions contained in agreements relating to the sale of a Subsidiary or assets pending such sale, provided such restrictions and conditions apply only to the Subsidiary or assets that are to be sold and such sale is permitted hereunder; (iv) any stockholder agreement, charter, by laws or other organizational documents of Borrower or any Subsidiary as in effect on the date hereof; and (v) limitations associated with Permitted Liens.

7.16 Real Property .

(a) Generally . Neither Borrower nor any of its Subsidiaries owns or leases (as tenant thereof) any real property, except as described on Schedule 7.16 (as amended from time to time by Borrower in accordance with Section 7.21 ).

(b) Borrower Lease . (i) Borrower has delivered a true, accurate and complete copy of the Borrower Leases to Lenders.

(ii) The Borrower Leases are in full force and effect and no default has occurred under the Borrower Leases and, to the Knowledge of Borrower, there is no existing condition which, but for the passage of time or the giving of notice, would reasonably be expected to result in a default under the terms of the Borrower Leases.

(iii) Borrower is the tenant under each Borrower Lease and has not transferred, sold, assigned, conveyed, disposed of, mortgaged, pledged, hypothecated, or encumbered any of its interest in, the Borrower Lease.

 

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7.17 Pension Matters . Schedule 7.17 sets forth, as of the date hereof, a complete and correct list of, and that separately identifies, (a) all Title IV Plans, (b) all Multiemployer Plans and (c) all material Benefit Plans. Each Benefit Plan, and each trust thereunder, intended to qualify for tax exempt status under Section 401 or 501 of the Code or other Requirements of Law so qualifies. Except for those that would not, in the aggregate, have a Material Adverse Effect, (x) each Benefit Plan is in compliance with applicable provisions of ERISA, the Code and other Requirements of Law, (y) there are no existing or pending (or to the Knowledge of any Obligor or Subsidiary thereof, threatened) claims (other than routine claims for benefits in the normal course), sanctions, actions, lawsuits or other proceedings or investigation involving any Benefit Plan to which any Obligor or Subsidiary thereof incurs or otherwise has or would have an obligation or any liability or Claim and (z) no ERISA Event is reasonably expected to occur. Borrower and each of its ERISA Affiliates has met all applicable requirements under the ERISA Funding Rules with respect to each Title IV Plan, and no waiver of the minimum funding standards under the ERISA Funding Rules has been applied for or obtained. As of the most recent valuation date for any Title IV Plan, the funding target attainment percentage (as defined in Section 430(d)(2) of the Code) is at least 60%, and neither Borrower nor any of its ERISA Affiliates knows of any facts or circumstances that would reasonably be expected to cause the funding target attainment percentage to fall below 60% as of the most recent valuation date. As of the date hereof, no ERISA Event has occurred in connection with which obligations and liabilities (contingent or otherwise) remain outstanding. No ERISA Affiliate would have any Withdrawal Liability as a result of a complete withdrawal from any Multiemployer Plan on the date this representation is made.

7.18 Collateral; Security Interest . Each Security Document is effective to create in favor of the Lenders a legal, valid and enforceable security interest in the Collateral subject thereto. The Security Documents collectively, when financing statements and other filings specified on Schedule 7.18 in appropriate form are filed in the offices specified on Schedule 7.18 , are effective to create in favor of the Lenders a legal, valid and enforceable security interest in the Collateral, which security interests are first-priority (except with respect to Permitted Priority Liens).

7.19 Regulatory Approvals . Borrower and its Subsidiaries hold, and will continue to hold, either directly or through licensees and agents, all Regulatory Approvals, licenses, permits and similar governmental authorizations of a Governmental Authority necessary or required for Borrower and its Subsidiaries to conduct their operations and business in the manner currently conducted.

7.20 Small Business Concer n. Borrower, together with its “affiliates” (as that term is defined in Title 13 of the United States Code of Federal Regulations) is a “Small Business” within the meaning of the SBIC Act, and the regulations promulgated thereunder (including part 107 and 121 of Title 13 of the United States Code of Federal Regulations). Borrower’s primary business

 

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activity does not involve, directly or indirectly, providing funds to others (other than to its Subsidiaries), the purchase or discounting of debt obligations, factoring or long term leasing of equipment with no provision for maintenance or repair, and Borrower is not classified under Major Group 65 (Real Estate) or Industry No. 1531 (Operative Builders) of the SIC Manual. Borrower acknowledges that it has been advised that PIOP is a Small Business Investment Company and licensee under the SBIC Act. The information regarding Borrower and its affiliates set forth in the SBA Form 480, Form 652, and Form 1031 is accurate and complete. Borrower acknowledges that the Lenders are relying on the representations and warranties made by Borrower to the SBA in the SBA Form 480 provided to the Lenders.

7.21 Update of Schedules . Each of Schedules 7.05(b) (in respect of the lists of Patents, Trademarks, and Copyrights under Section 7.05(b)(i) ), 7.05(c) , 7.06 , 7.14, 7.15 and 7.16 may be updated by Borrower from time to time (including concurrently with the delivery of each Compliance Certificate) in order to insure the continued accuracy of such Schedule as of any upcoming date on which representations and warranties are made incorporating the information contained on such Schedule. Such update may be accomplished by Borrower providing to the Lenders, in writing (including by electronic means), a revised version of such Schedule in accordance with the provisions of Section 12.02 . Each such updated Schedule shall be effective immediately upon the receipt thereof by the Lenders.

SECTION 8

AFFIRMATIVE COVENANTS

Each Obligor covenants and agrees with the Lenders that, as of the first Borrowing Date and until the Commitments have expired or been terminated and all Obligations (other than inchoate indemnity obligations) have been paid in full indefeasibly in cash:

8.01 Financial Statements and Other Information . Borrower will furnish to the Lenders:

(a) as soon as available and in any event within 5 days following the date Borrower files Form 10-Q with the Securities and Exchange Commission, the consolidated balance sheets of the Obligors as of the end of such quarter, and the related consolidated statements of income, shareholders’ equity and cash flows of Borrower and its Subsidiaries for such quarter and the portion of the fiscal year through the end of such quarter, prepared in accordance with GAAP consistently applied, all in reasonable detail and setting forth in comparative form the figures for the corresponding period in the preceding fiscal year, together with a certificate of a Responsible Officer of Borrower stating that such financial statements fairly present the financial condition of Borrower and its Subsidiaries as at such date and the results of operations of Borrower and its Subsidiaries for the period ended on such date and have been prepared in accordance with GAAP consistently applied, subject to changes resulting from normal, year-end audit adjustments and except for the absence of footnotes;

(b) as soon as available and in any event within 5 days following the date Borrower files Form 10-K with the Securities and Exchange Commission, the consolidated balance sheets of Borrower and its Subsidiaries as of the end of such fiscal year, and the related consolidated

 

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statements of income, shareholders’ equity and cash flows of Borrower and its Subsidiaries for such fiscal year, prepared in accordance with GAAP consistently applied, all in reasonable detail and setting forth in comparative form the figures for the previous fiscal year, accompanied by a report and opinion thereon of PriceWaterhouseCoopers LLP or another firm of independent certified public accountants of recognized national standing acceptable to the Lenders, which report and opinion shall be prepared in accordance with generally accepted auditing standards (provided that Lenders acknowledge that a going concern qualification, in and of itself, will not render such opinion unacceptable to Lenders);

(c) together with the financial statements required pursuant to Sections 8.01(a) and (b) , a compliance certificate of a Responsible Officer as of the end of the applicable accounting period (which delivery may, unless a Lender requests executed originals, be by electronic communication including fax or email and shall be deemed to be an original authentic counterpart thereof for all purposes) in the form of Exhibit E (a “ Compliance Certificate ”) including details of any issues that are material that are raised by auditors;

(d) as soon as available after delivering the information required pursuant to Sections 8.01(b) , a consolidated financial forecast for Borrower and its Subsidiaries for the following five fiscal years, including forecasted consolidated balance sheets, consolidated statements of income, shareholders’ equity and cash flows of Borrower and its Subsidiaries;

(e) promptly, and in any event within five Business Days after receipt thereof by an Obligor thereof, copies of each notice or other correspondence received from any securities regulator or exchange to the authority of which Borrower may become subject from time to time concerning any investigation or possible investigation or other inquiry by such agency regarding financial or other operational results of such Obligor;

(f) the information regarding insurance maintained by Borrower and its Subsidiaries as required under Section 8.05 ;

(g) within 5 days of filing, provide access (via posting and/or links on Borrower’s web site) to all reports on Form 10-K and Form 10-Q filed with the SEC, any Governmental Authority succeeding to any or all of the functions of the SEC or with any national securities exchange; and within 5 days of filing, provide notice and access (via posting and/or links of Borrower’s web site) to all reports on Form 8-K filed with the Securities and Exchange Commission, and copies of (or access to, via posting and/or links on Borrower’s web site) all other reports, proxy statements and other materials filed by Borrower with the SEC, any Governmental Authority succeeding to any of the functions of the SEC or with any national securities exchange;

(h) promptly following Lenders’ request at any time, proof of Borrower’s compliance with Section 10.01 ;

(i) prompt notice of the Borrower’s achievement of the Borrowing Milestone; and

 

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(j) within five (5) business days of each quarterly board meeting, copies of statements, reports and forecasts presented at such meetings of Borrower’s board of directors which are, in the sole reasonable judgment of Borrower’s CEO and/or CFO, necessary to understand the state of or outlook for the Borrower’s business operations, and which may be redacted. For avoidance of doubt for purposes of compliance with this Section 8.01(j) only, Borrower shall not be required to provide competitively sensitive information, confidential employee information, materials which fall under the attorney-client privilege, or materials provided to committees of the board of directors. In any case, Borrower will provide all information provided to holders of Permitted Cure Debt, provided that any such material may be redacted by Borrower to exclude information relating to the Lenders (including Borrower’s strategy regarding the Loans).

8.02 Notices of Material Events . Borrower will furnish to the Lenders written notice of the following promptly after a Responsible Officer first learns of the existence of:

(a) the occurrence of any Default;

(b) notice of the occurrence of any event with respect to its property or assets resulting in a Loss to the extent not covered by insurance aggregating $500,000 (or the Equivalent Amount in other currencies) or more;

(c) (A) any proposed acquisition of stock, assets or property by any Obligor that would reasonably be expected to result in environmental liability under Environmental Laws, and (B)(1) spillage, leakage, discharge, disposal, leaching, migration or release of any Hazardous Material required to be reported to any Governmental Authority under applicable Environmental Laws, and (2) all actions, suits, claims, notices of violation, hearings, investigations or proceedings pending, or to the best of Borrower’s Knowledge, threatened against or affecting Borrower or any of its Subsidiaries or with respect to the ownership, use, maintenance and operation of their respective businesses, operations or properties, relating to Environmental Laws or Hazardous Material;

(d) the assertion of any environmental matter by any Person against, or with respect to the activities of, Borrower or any of its Subsidiaries and any alleged violation of or non-compliance with any Environmental Laws or any permits, licenses or authorizations which would reasonably be expected to involve damages in excess of $500,000 other than any environmental matter or alleged violation that, if adversely determined, would not (either individually or in the aggregate) have a Material Adverse Effect;

(e) the filing or commencement of any action, suit or proceeding by or before any arbitrator or Governmental Authority against or directly affecting Borrower or any of its Affiliates that, if adversely determined, would reasonably be expected to result in a Material Adverse Effect;

(f) (i) on or prior to any filing by any ERISA Affiliate of any notice of intent to terminate any Title IV Plan, a copy of such notice and (ii) promptly, and in any event within ten

 

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days, after any Responsible Officer of any ERISA Affiliate knows or has reason to know that a request for a minimum funding waiver under Section 412 of the Code has been filed with respect to any Title IV Plan or Multiemployer Plan, a notice (which may be made by telephone if promptly confirmed in writing) describing such waiver request and any action that any ERISA Affiliate proposes to take with respect thereto, together with a copy of any notice filed with the PBGC or the IRS pertaining thereto;

(g) (i) the termination of any Material Agreement; (ii) the receipt by Borrower or any of its Subsidiaries of any default or termination notice under any Material Agreement; or (iii) any material amendment to a Material Agreement;

(h) the reports and notices as required by the Security Documents;

(i) concurrently with the delivery of each Compliance Certificate, notice of any material change in accounting policies or financial reporting practices by the Obligors;

(j) promptly after the occurrence thereof, notice of any labor controversy resulting in or threatening to result in any strike, work stoppage, boycott, shutdown or other material labor disruption against or involving an Obligor;

(k) a licensing agreement or arrangement entered into by Borrower or any Subsidiary in connection with any infringement or alleged infringement of the Intellectual Property of another Person;

(l) any other development that results in, or would reasonably be expected to result in, a Material Adverse Effect;

(m) concurrently with the delivery of each Compliance Certificate, the creation or other acquisition of any Intellectual Property by Borrower or any Subsidiary after the date hereof and during such prior fiscal year which is registered or becomes registered or the subject of an application for registration with the U.S. Copyright Office or the U.S. Patent and Trademark Office, as applicable, or with any other equivalent foreign Governmental Authority;

(n) any change to Borrower’s and each Subsidiary Guarantor’s ownership of Deposit Accounts, Securities Accounts and Commodity Accounts, by delivering to Lenders an updated Annex 7 to the Security Agreement setting forth a complete and correct list of all such accounts as of the date of such change; or

(o) such other information respecting the operations, properties, business or condition (financial or otherwise) of the Obligors (including with respect to the Collateral) as the Majority Lenders may from time to time reasonably request in writing.

Each notice delivered under this Section 8.02 shall be accompanied by a statement of a financial officer or other executive officer of Borrower setting forth in reasonable detail the event or development requiring such notice and any action taken or proposed to be taken with respect thereto.

 

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8.03 Existence; Conduct of Business . (a) Borrower will, and will cause each of its Subsidiaries to, do or cause to be done all things necessary to preserve, renew and keep in full force and effect its legal existence and the rights, licenses, permits, privileges and franchises material to the conduct of its business; provided that the foregoing shall not prohibit any merger, amalgamation, consolidation, liquidation or dissolution permitted under Section 9.03 .

(b) Without obtaining the prior written approval of PIOP, Borrower will not change within one (1) year after the Closing Date, Borrower’s business activity to a business activity to which a licensee under the SBIC Act is prohibited from providing funds by the SBIC Act, as more specifically set forth under Part 107.720 of Title 13 of the United States Code of Federal Regulations. If Borrower’s business activity changes to such a prohibited business activity or the proceeds are used for ineligible business activities, Borrower will use all commercially reasonable efforts and cooperate in good faith to assist PIOP to sell or transfer its Proportionate Share of the Loans in a commercially reasonable manner; provided that in no way shall this be considered PIOP’s sole remedy if Borrower’s business activity changes to such a prohibited business activity.

8.04 Payment of Obligations . Borrower will, and will cause each of its Subsidiaries to, pay and discharge its obligations, including (i) all Taxes, fees, assessments and governmental charges or levies imposed upon it or upon its properties or assets prior to the date on which penalties attach thereto, and all lawful claims for labor, materials and supplies which, if unpaid, might become a Lien upon any properties or assets of Borrower or any Subsidiary, except to the extent such Taxes, fees, assessments or governmental charges or levies, or such claims are being contested in good faith by appropriate proceedings and are adequately reserved against in accordance with GAAP; (ii) all lawful claims which, if unpaid, would by law become a Lien upon its property not constituting a Permitted Lien; and (iii) all Indebtedness other than Permitted Indebtedness, as and when due and payable, but subject to any subordination provisions contained in any instrument or agreement evidencing such Indebtedness.

8.05 Insurance . Borrower will, and will cause each of its Subsidiaries to maintain, with financially sound and reputable insurance companies, insurance in such amounts and against such risks as are customarily maintained by companies engaged in the same or similar businesses operating in the same or similar locations. Upon the written request of Majority Lenders, Borrower shall furnish the Lenders from time to time with full information as to the insurance carried by it and, if so requested, copies of all such insurance policies. Borrower also shall furnish to the Lenders from time to time upon the written request of the Majority Lenders a letter from Borrower’s insurance broker or other insurance specialist stating that all premiums which are due on the policies relating to insurance on the Collateral have been paid and that such policies are in full force and effect. Borrower shall use commercially reasonable efforts to ensure, or cause others to ensure, that all insurance policies required under this Section 8.05 shall provide that they shall not be terminated or cancelled nor shall any such policy be materially

 

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changed in a manner adverse to Borrower without at least 30 days’ (10 days’ for nonpayment of premium) prior written notice to Borrower and the Lenders. Receipt of notice of termination or cancellation of any such insurance policies or reduction of coverages or amounts thereunder shall entitle the Lenders to renew any such policies, cause the coverages and amounts thereof to be maintained at levels required pursuant to the first sentence of this Section 8.05 or otherwise to obtain similar insurance in place of such policies, in each case at the expense of Borrower.

8.06 Books and Records; Inspection Rights . Borrower will, and will cause each of its Subsidiaries to, keep proper books of record and account in which full, true and correct entries are made of all dealings and transactions in relation to its business and activities. Borrower will, and will cause each of its Subsidiaries to, permit any representatives designated by the Lender and not having a conflict of interest with Borrower (unless an Event of Default has occurred and is continuing), upon reasonable prior notice, to visit and inspect its properties, to examine and make extracts from its books and records, and to discuss its affairs, finances and condition with its officers and independent accountants, all at reasonable times (but not more often than once a year unless an Event of Default has occurred and is continuing).

8.07 Compliance with Laws and Other Obligations . Borrower will, and will cause each of its Subsidiaries to, (i) comply in all material respects with all laws, rules, regulations and orders of any Governmental Authority applicable to it or its property (including Environmental Laws) and (ii) comply in all material respects with all terms of Indebtedness and all other Material Agreements, except where the failure to do so, individually or in the aggregate, would not reasonably be expected to result in a Material Adverse Effect.

8.08 Maintenance of Properties, Etc .

(a) Borrower shall, and shall cause each of its Subsidiaries to, maintain and preserve all of its properties necessary or useful in the proper conduct of its business in good working order and condition in accordance with the general practice of other Persons of similar character and size, ordinary wear and tear and damage from casualty or condemnation excepted.

(b) If Borrower shall be in default under any Borrower Lease, Borrower shall permit Lender to cause the default or defaults under such Borrower Lease to be remedied.

(c) If Borrower acquires or becomes the owner of any real property or fee interest, Borrower shall (i) enter into a mortgage securing the Obligations in favor of the Lenders, and (ii) in connection therewith, execute real property security waivers reasonably requested by the Lenders in form reasonably satisfactory to the Lenders.

8.09 Licenses . Borrower shall, and shall cause each of its Subsidiaries to, obtain and maintain all licenses, authorizations, consents, filings, exemptions, registrations and other Governmental Approvals necessary in connection with the execution, delivery and performance of the Loan Documents, the consummation of the Transactions or the operation and conduct of its business and ownership of its properties, except where failure to do so would not reasonably be expected to have a Material Adverse Effect.

 

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8.10 Action under Environmental Laws . Borrower shall, and shall cause each of its Subsidiaries to, upon becoming aware of the presence of any Hazardous Materials or the existence of any environmental liability under applicable Environmental Laws with respect to their respective businesses, operations or properties, take all actions, at their cost and expense, as shall be necessary or advisable to investigate and clean up the condition of their respective businesses, operations or properties, including all required removal, containment and remedial actions, and restore their respective businesses, operations or properties to a condition in compliance with applicable Environmental Laws.

8.11 Use of Proceeds . The proceeds of the Loans will be used only as provided in Section 2.05 . No part of the proceeds of the Loans will be used, whether directly or indirectly, for any purpose that entails a violation of any of the Regulations of the Board of Governors of the Federal Reserve System, including Regulations T, U and X. Neither Borrower nor any of its affiliates (as that term is defined in Section 121.103 of Title 13 of the United States Code of Federal Regulation) will engage in any activities or use directly or indirectly the proceeds from the Loans for any purpose for which an SBIC is prohibited from providing funds by the SBIC Act as set forth in Section 107.720 of Title 13 of the United States Code of Federal Regulation.

8.12 Certain Obligations Respecting Subsidiaries; Further Assurances.

(a) Subsidiary Guarantors . Borrower will take such action, and will cause each of its Subsidiaries to take such action, from time to time as shall be necessary to ensure that all Subsidiaries that are Domestic Subsidiaries, and such Foreign Subsidiaries as are required under Section 8.12(b) , are “Subsidiary Guarantors” hereunder. Without limiting the generality of the foregoing, in the event that Borrower or any of its Subsidiaries shall form or acquire any new Subsidiary that is a Domestic Subsidiary or a Foreign Subsidiary meeting the requirements of Section 8.12(b) , Borrower and its Subsidiaries will promptly and in any event within thirty (30) days (or such longer time as consented to by the Majority Lenders in writing) of the formation or acquisition of such Subsidiary:

(i) cause such new Subsidiary to become a “Subsidiary Guarantor” hereunder, and a “Grantor” under the Security Agreement, pursuant to a Guarantee Assumption Agreement;

(ii) take such action or cause such Subsidiary to take such action (including delivering such shares of stock together with undated transfer powers executed in blank) as shall be necessary to create and perfect valid and enforceable first priority (subject to Permitted Priority Liens) Liens on substantially all of the personal property of such new Subsidiary as collateral security for the obligations of such new Subsidiary hereunder;

(iii) to the extent that the parent of such Subsidiary is not a party to the Security Agreement or has not otherwise pledged Equity Interests in its Subsidiaries in accordance with the terms of the Security Agreement and this Agreement, cause the parent of such Subsidiary to execute and deliver a pledge agreement in favor of the Lenders in respect of all outstanding issued shares of such Subsidiary; and

(iv) deliver such proof of corporate action, incumbency of officers, opinions of counsel and other documents as is consistent with those delivered by each Obligor pursuant to Section 6.01 on the Closing Date or as the Majority Lenders shall have requested.

 

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(b) Foreign Subsidiaries .

(i) Subject to Section 8.12(c) , in the event that, at any time, Foreign Subsidiaries who are not Subsidiary Guarantors have, in the aggregate, (i) total revenues constituting 15% or more of the total revenues of Borrower and its Subsidiaries on a consolidated basis, or (ii) total assets constituting 15% or more of the total assets of Borrower and its Subsidiaries on a consolidated basis, promptly (and, in any event, within thirty (30) days after such time (or such longer time as consented to by the Majority Lenders in writing)) Borrower shall cause one or more of such Foreign Subsidiaries to become Subsidiary Guarantors in the manner set forth in Section 8.12(a) , such that, after such Subsidiaries become Subsidiary Guarantors, the non-guarantor Foreign Subsidiaries in the aggregate shall cease to have revenues or assets, as applicable, that meet the thresholds set forth in clauses (i)  and (ii)  above; provided however that notwithstanding the foregoing, any Foreign Subsidiary that individually generates revenue constituting 10% or more of the total revenues of Borrower and its Subsidiaries on a consolidated basis, or individually owns total assets constituting 10% or more of the total assets of Borrower and its Subsidiaries on a consolidated basis shall be required to become a Subsidiary Guarantor in the manner set forth in Section 8.12(a) ; provided further that no Foreign Subsidiary shall be required to become a Subsidiary Guarantor if doing so would result in material adverse tax consequences for Borrower and its Subsidiaries, taken as a whole. For the avoidance of doubt, revenues and assets of Foreign Subsidiaries considered in the calculation of the preceding thresholds shall not include intercompany revenues and assets that are eliminated in consolidation. For the purposes of this section, the determination of whether a “material adverse tax consequence” shall be deemed to result from such Foreign Subsidiary becoming a Subsidiary Guarantor shall be made by the Majority Lenders in their sole reasonable discretion, following consultation with Borrower, taking into consideration and weighing, among others, the following relevant factors: (i) the magnitude of an increase in Borrower’s tax liability or a reduction in Borrower’s net operating loss carryforward, taken as a whole; (ii) the amount of revenues generated by or assets accumulated at such Foreign Subsidiary compared with those generated by or accumulated at the Obligors; (iii) whether the Loans are over- or under-collateralized; (iv) the financial performance of the Borrower and its Subsidiaries, taken as a whole, and the Obligors’ ability to perform the Obligations at such time; and (v) the cost to the Borrower and its Subsidiaries balanced against the practical benefit to the Lenders.

(ii) Subject to Section 8.12(c) , Borrower shall grant a perfected first priority security interest and Lien in 65% of the voting stock of all First-Tier Foreign Subsidiaries in favor of the Lenders as Collateral for the Obligations. Without limiting the generality of the foregoing, in the event that Borrower shall form or acquire any new Subsidiary that is a First-Tier Foreign Subsidiary, Borrower will promptly and in any event within thirty (30)days of the formation or acquisition of such Subsidiary (or such longer time as consented to by the Majority Lenders in writing) grant a perfected first priority security interest and Lien in 65% of the voting

 

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stock of such Subsidiary in favor of the Lenders as Collateral for the Obligations, including entering into any necessary US law security documents and delivery of certificated securities issued by such First-Tier Foreign Subsidiary. Notwithstanding anything else contained in this Section 8.12(b)(ii) , the Lenders shall not require any foreign law documents to perfect, register or otherwise document a security interest in the voting stock of any Foreign Subsidiary in a jurisdiction outside the United States unless either (1) such Foreign Subsidiary has assets or revenues representing more than the greater of (A) $3,000,000 or (B) 5% of Borrower’s total consolidated assets or revenues (subject to the reimbursement limitations described in Section 8.12(c) ), or (2) the Lenders bear all legal and filing costs, fees, expenses and other amounts relating to such perfection, registration or documentation of such security interest in the voting stock of such Foreign Subsidiary in such foreign jurisdiction.

(c) Further Assurances . Borrower will, and will cause each of its Subsidiaries to, take such action from time to time as shall reasonably be requested by the Majority Lenders writing to effectuate the purposes and objectives of this Agreement. Without limiting the generality of the foregoing, Borrower will, and will cause each Person that is required to be a Subsidiary Guarantor or whose voting stock is required to be pledged to, take such action from time to time (including executing and delivering such assignments, security agreements, control agreements and other instruments) as shall be reasonably requested by the Majority Lenders to create, in favor of the Lenders, perfected security interests and Liens in substantially all of the personal property of each Subsidiary Guarantor or voting stock of each First-Tier Foreign Subsidiary, as applicable, as collateral security for the Obligations; provided that (i) any such security interest or Lien shall be subject to the relevant requirements of the Security Documents, (ii) no actions in any jurisdiction outside the United States shall be required in order to create any security interests in immaterial assets, including immaterial Intellectual Property; (iii) no filings in respect of any security interest or Lien shall be required in any jurisdiction that imposes recording fees based on the aggregate principal amount of Indebtedness secured (except where the Lenders are willing to bear all such filing costs); (iv) no actions in any jurisdiction outside the United States shall be required where the cost of obtaining or perfecting a security interest in such assets exceeds the practical benefit to the Lenders afforded thereby, as reasonably determined by Majority Lenders (in consultation with the Obligors); provided, further, that any such foreign guarantees and foreign security will be limited or not required if (or to the extent) (A) it is limited by applicable corporate benefit, maintenance of capital, “thin capitalization” rules and financial assistance restrictions or (B) if the same would violate the fiduciary duties of a Subsidiary’s directors or contravene any legal prohibition or regulatory condition or it is generally accepted (taking into account market practice in respect of the giving of guarantees and security for financial obligations in the relevant jurisdiction) that it would result in a material risk of personal or criminal liability on the part of any officer or director of a Subsidiary; provided that notwithstanding any provision under this Agreement or other Loan Document to the contrary (other than Section 9.09(f) ), Borrower and its Subsidiaries shall not be responsible for legal and filing costs, fees, expenses and other amounts in excess of $15,000 in respect of actions required under this Section 8.12 or Section 8.16(b) for each foreign jurisdiction, or $50,000 in the aggregate for all foreign jurisdictions.

 

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8.13 Termination of Non-Permitted Liens . In the event that Borrower or any of its Subsidiaries shall become aware or be notified by the Lenders of the existence of any outstanding Lien against any Property of Borrower or any of its Subsidiaries, which Lien is not a Permitted Lien, Borrower shall use its best efforts to promptly terminate or cause the termination of such Lien.

8.14 Intellectual Property .

(a) Notwithstanding any provision in this Agreement or any other Loan Documents to the contrary, the Lenders are not assuming any liability or obligation of Borrower, the Subsidiary Guarantors or their Affiliates of whatever nature, whether presently in existence or arising or asserted hereafter. All such liabilities and obligations shall be retained by and remain obligations and liabilities of the Obligors, the Subsidiary Guarantors and/or their Affiliates as the case may be. Without limiting the foregoing, the Lenders are not assuming and shall not be responsible for any liabilities or Claims of Borrower, the Subsidiary Guarantors or their Affiliates, whether present or future, absolute or contingent and whether or not relating to the Obligors, the Obligor Intellectual Property, and/or the Material Agreements, and Borrower shall indemnify and save harmless the Lenders from and against all such liabilities, Claims and Liens.

(b) In the event that the Obligors acquire Obligor Intellectual Property during the term of this Agreement, then the provisions of this Agreement shall automatically apply thereto and any such Obligor Intellectual Property shall automatically constitute part of the Collateral hereunder, without further action by any party, in each case from and after the date of such acquisition (except that any representations or warranties of any Obligor shall apply to any such Obligor Intellectual Property only from and after the date, if any, subsequent to such acquisition that such representations and warranties are brought down or made anew as provided herein).

8.15 Small Business Documentation . Borrower shall accurately complete, execute, and deliver to PIOP prior to the Closing Date, SBA Forms 480, 652, and 1031 (Parts A and B).

8.16 Post-Closing Items .

(a) Borrower shall use commercially reasonable efforts to cause the landlords of all of its leased properties engaged in manufacturing to execute and deliver to Lenders, not later than sixty (60) days after the Closing Date, Landlord Consents in respect of such properties.

(b) Borrower shall use commercially reasonable efforts to execute and deliver to the Lenders such duly executed Intellectual Property security agreements as the Lenders may require with respect to Material Intellectual Property located outside the United States, and take such other action as the Lenders may reasonably deem necessary or appropriate to duly record or otherwise perfect the security interest created thereunder in that portion of the Collateral consisting of Material Intellectual Property located outside the United States, provided that notwithstanding any provision under this Agreement or other Loan Document to the contrary (other than Section 9.09(f) ), Borrower and its Subsidiaries shall not be responsible for legal and filing costs, fees, expenses and other amounts in excess of $15,000 in respect of actions required under Section 8.12 or this Section 8.16(b) for each foreign jurisdiction, or $50,000 in the aggregate for all foreign jurisdictions.

 

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(c) Borrower shall deliver to Lenders original stock certificates (or the equivalent) representing 65% of the voting stock of each First-Tier Foreign Subsidiary and related stock powers no later than thirty (30) days following the Closing Date (or such later date as Majority Lenders may permit).

(d) Borrower shall deliver to Lenders duly executed control agreements in favor of Lenders for all Borrower’s Deposit Accounts, Securities Accounts and Commodity Accounts (other than Excluded Accounts (as defined in the Security Agreement)) no later than thirty (30) days following the Closing Date (or such later date as Majority Lenders may permit).

SECTION 9

NEGATIVE COVENANTS

Each Obligor covenants and agrees with the Lenders that, as of the first Borrowing Date and until the Commitments have expired or been terminated and all Obligations (other than inchoate indemnity obligations) have been paid in full indefeasibly in cash:

9.01 Indebtedness . Borrower will not, and will not permit any of its Subsidiaries to, create, incur, assume or permit to exist any Indebtedness, whether directly or indirectly, except:

(a) the Obligations;

(b) Indebtedness existing on the date hereof and set forth on Schedule 7.13(a) and Permitted Refinancings thereof;

(c) Permitted Priority Debt;

(d) accounts payable and purchasing card balances owing to trade creditors for goods and services and current operating liabilities (not the result of the borrowing of money) incurred in the ordinary course of Borrower’s or its Subsidiary’s business in accordance with customary terms and paid within the specified time, unless contested in good faith by appropriate proceedings and reserved for in accordance with GAAP;

(e) Indebtedness consisting of guarantees resulting from endorsement of negotiable instruments for collection by Borrower or any Subsidiary Guarantor in the ordinary course of business;

(f) Indebtedness (i) of Obligors to each other; (ii) of any Subsidiary not a Subsidiary Guarantor to any other Subsidiary not a Subsidiary Guarantor; and (iii) of an Obligor to a Subsidiary that is not a Subsidiary Guarantor incurred in the ordinary course of business in an amount not to exceed as of the date incurred the greater of (A) $5,000,000 (or the Equivalent Amount in other currencies) or (B) 5% of the total consolidated assets of Borrower and its

 

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Subsidiaries, in the aggregate at any time outstanding for all such Indebtedness, so long as the terms of such Indebtedness (including interest rates and fees) are no less favorable to Borrower or such Subsidiary Guarantor than in a comparable arm’s length transaction with a Person not an Affiliate of Borrower.

(g) Guarantees (i) by an Obligor of Indebtedness of another Obligor and (ii) by any Subsidiary not a Subsidiary Guarantor of Indebtedness of any other Subsidiary not a Subsidiary Guarantor;

(h) normal course of business equipment financing, provided that (i) at the time of incurrence thereof, the outstanding principal amount of such Indebtedness or the capitalized amount of the remaining lease or similar payments under the relevant lease or other applicable agreement or instrument that would appear on a balance sheet of such Person as of such date in accordance with GAAP, shall not exceed $5,000,000 (or the Equivalent Amount in other currencies), and (ii) if secured, the collateral therefor consists solely of the assets being financed, the products and proceeds thereof and books and records related thereto;

(i) Unsecured Indebtedness in connection with corporate credit cards in an aggregate principal amount not exceeding $1,000,000 at any time outstanding;

(j) Indebtedness in respect of any agreement providing for treasury, depositary, cash management services, including in connection with any automated clearing house transfers of funds or any similar transactions, securities settlements, foreign exchange contracts, assumed settlement, netting services, overdraft protections and other cash management, intercompany cash pooling and similar arrangements, in each case in the ordinary course of business;

(k) Permitted Subordinated Debt in an aggregate principal amount at any time outstanding not to exceed the greater of (i) $125,000,000 and (ii) 25% of Borrower’s market capitalization at the time of issuance;

(l) Indebtedness with respect to letters of credit outstanding, provided that at any time in any given calendar year, the outstanding principal amount of such Indebtedness shall not exceed (i) $1,000,000 at any time outstanding, or (ii) if inclusive of letters of credit issued to support a facility expansion, $2,500,000 at any time outstanding;

(m) (i) Indebtedness in an outstanding principal amount of up to $5,000,000 incurred, assumed or otherwise acquired in connection with a Permitted Acquisition (which may be Indebtedness existing prior to the Permitted Acquisition secured by the assets acquired as described in Section 9.02(k)(ii) ), and (ii) and Permitted Refinancings thereof;

(n) Permitted Cure Debt;

(o) contingent return obligations consistent with market practice in respect of unspent advances to the company by a third-party entity (each such entity a “ Research Partner ”) whereby such funds and any interest thereon are used to pay costs and expenses for the research performed and expenses incurred in compliance with agreements between Borrower or its Subsidiaries and such Research Partner;

 

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(p) obligations under bona fide time-based licenses of Borrower or any Subsidiary in the ordinary course of business;

(q) advance or deposits from customers or vendors received in the ordinary course of business and held with a deposit bank insured by the Federal Deposit Insurance Corporation;

(r) Indebtedness (other than for borrowed money) that may be deemed to exist pursuant to any guarantees, warranty or contractual service obligations, performance, surety, statutory, appeal, bid, prepayment guarantee, payment (other than payment of Indebtedness) or completion of performance guarantees or similar obligations incurred in the ordinary course of business;

(s) Indebtedness consisting of (i) the bona fide financing of insurance premiums or self-insurance obligations (which must be commercially reasonable and consistent with insurance practices generally) or (ii) take-or-pay obligations contained in supply or similar agreements, in each case, in the ordinary course of business;

(t) any indemnification, purchase price adjustment, earn-out or similar obligations incurred in connection with Investments permitted by Section 9.03(e) (but subject to the same monetary limits as described in Section 9.03(e) );

(u) other unsecured Indebtedness in an aggregate principal amount not to exceed $500,000 at any time outstanding;

(v) workers’ compensation claims, payment obligations in connection with health disability or other types of social security benefits, unemployment or other insurance obligations, reclamation and statutory obligations, in each case incurred in the ordinary course of Borrower’s or its Subsidiary’s business; and

(w) Indebtedness approved in advance in writing by the Majority Lenders.

9.02 Liens . Borrower will not, and will not permit any of its Subsidiaries to, create, incur, assume or permit to exist any Lien on any property or asset now owned by it, or assign or sell any income or revenues (including accounts receivable) or rights in respect of any thereof, except:

(a) Liens securing the Obligations;

(b) any Lien on any property or asset of Borrower or any of its Subsidiaries existing on the date hereof and set forth in Schedule 7.13(b) ; provided that (i) no such Lien shall extend to any other property or asset of Borrower or any of its Subsidiaries and (ii) any such Lien shall secure only those obligations which it secures on the date hereof and extensions, renewals and replacements thereof that do not increase the outstanding principal amount thereof;

 

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(c) Liens described in the definition of “Permitted Priority Debt”;

(d) Liens securing Indebtedness permitted under Section 9.01(h) ; provided that such Liens are restricted solely to the collateral described in Section 9.01(h) ;

(e) Liens imposed by law which were incurred in the ordinary course of business, including (but not limited to) carriers’, warehousemen’s and mechanics’ liens, liens relating to leasehold improvements and other similar liens arising in the ordinary course of business and which (x) do not in the aggregate materially detract from the value of the Property subject thereto or materially impair the use thereof in the operations of the business of such Person or (y) are being contested in good faith by appropriate proceedings, which proceedings have the effect of preventing the forfeiture or sale of the Property subject to such liens and for which adequate reserves have been made if required in accordance with GAAP;

(f) Liens, pledges or deposits made in connection with and to secure payment of workers’ compensation, unemployment insurance or other similar social security legislation in the ordinary course of business (other than Liens imposed by ERISA);

(g) Liens securing Taxes, assessments and other governmental charges, the payment of which is not yet due or is being contested in good faith by appropriate proceedings promptly initiated and diligently conducted and for which such reserve or other appropriate provisions, if any, as shall be required by GAAP shall have been made;

(h) servitudes, easements, rights of way, restrictions and other similar encumbrances on real Property imposed by applicable Laws and encumbrances consisting of zoning or building restrictions, easements, licenses, restrictions on the use of property or minor imperfections in title thereto which, in the aggregate, are not material, and which do not in any case materially detract from the value of the property subject thereto or interfere with the ordinary conduct of the business of any of the Obligors;

(i) with respect to any real Property, (A) (i) such defects or encroachments as might be revealed by an up-to-date survey of such real Property; (ii) the reservations, limitations, provisos and conditions expressed in the original grant, deed or patent of such property by the original owner of such real Property pursuant to applicable Laws; and (iii) rights of expropriation, access or user or any similar right conferred or reserved by or in applicable Laws, which, in the aggregate for (i), (ii) and (iii), are not material, and which do not in any case materially detract from the value of the property subject thereto or interfere with the ordinary conduct of the business of any of the Obligors, and (B) leases or subleases granted in the ordinary course of business;

(j) Bankers liens, rights of setoff and similar Liens incurred on deposits made in the ordinary course of business;

 

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(k) (i) Liens securing Indebtedness permitted in reliance on Section 9.01(m) , provided that such Liens extend solely to the assets acquired in such Permitted Acquisition; and (ii) Liens on property acquired in and existing at the time of a Permitted Acquisition, provided that such Liens do not attach to any other property of any other Obligor or Subsidiary; and provided that such Liens are of the type otherwise permitted under this Section 9.02 ;

(l) Non-exclusive licenses or sublicenses, leases or subleases of property (other than real Property or Intellectual Property) granted in the ordinary course of Borrower’s business, if the leases, subleases, licenses and sublicenses do not prohibit an Obligor from granting Control Agent or any Lender a security interest in such property;

(m) Liens arising from judgments, decrees or attachments in circumstances not constituting an Event of Default under Section 11.01(l) ;

(n) cash collateral arrangements made (i) with respect to letters of credit permitted by Section 9.01(l) but not exceeding the amount of the Indebtedness permitted by Section 9.01(l) and (ii) with respect to the Subordinated Debt Interest Escrow Account;

(o) Liens in connection with transfers permitted under Section 9.09; and

(p) Liens the creation of which did not involve Borrower’s or its Subsidiaries’ consensual participation or involvement encumbering assets not to exceed $50,000 in the aggregate in any fiscal year.

provided that no Liens otherwise permitted under any of the foregoing (other than Section 9.02(a), (k), (m) or (o) ) shall apply to any Material Intellectual Property.

9.03 Fundamental Changes and Acquisitions . Borrower will not, and will not permit any of its Subsidiaries to, (i) enter into any transaction of merger, amalgamation or consolidation (ii) liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution) (iii) make any Acquisition or otherwise acquire any business or substantially all the property from, or capital stock of, or be a party to any acquisition of, any Person, except:

(a) Borrower and its Subsidiaries may make Investments permitted under Section 9.05(e) and 9.05(f) ;

(b) any Subsidiary may be merged, amalgamated or consolidated with or into Borrower or any Subsidiary Guarantor;

(c) any Subsidiary may sell, lease, transfer or otherwise dispose of any or all of its property (upon voluntary liquidation or otherwise) to Borrower or any Subsidiary Guarantor;

(d) the sale, transfer or other disposition of the capital stock of any Subsidiary to Borrower or any Subsidiary Guarantor;

 

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(e) Borrower and its Subsidiaries may make Permitted Acquisitions in an aggregate amount (as measured by the total purchase price) (i) not exceeding 25% of Borrower’s market capitalization at the time the transaction is first disclosed to Lenders, (ii) greater than 25% but less than 40% of Borrower’s market capitalization at the time the transaction is first disclosed to Lenders, provided that Majority Lenders first consent to such transaction, such consent not to be unreasonably withheld, or (iii) in excess of 40% of Borrower’s market capitalization at the time the transaction is first disclosed to Lenders, but only with Majority Lenders’ prior consent; and

(f) Borrower and its Subsidiaries may enter into Permitted Commercialization Arrangements.

9.04 Lines of Business . Borrower will not, and will not permit any of its Subsidiaries to, engage to any material extent in any business other than the business engaged in on the date hereof by Borrower or any Subsidiary or a business reasonably related thereto.

9.05 Investments . Borrower will not, and will not permit any of its Subsidiaries to, make, directly or indirectly, or permit to remain outstanding any Investments except:

(a) Investments outstanding on the date hereof and identified in Schedule 9.05 ;

(b) operating deposit accounts with banks;

(c) extensions of credit in the nature of accounts receivable or notes receivable arising from the sales or leases of goods or services in the ordinary course of business;

(d) Permitted Cash Equivalent Investments;

(e) Investments by Borrower or Subsidiary Guarantors in Subsidiary Guarantors;

(f) Investments by Borrower or Subsidiary Guarantors in Foreign Subsidiaries in an aggregate amount at any time outstanding (net of payments for inventory and equipment, any intercompany loan repayments and returns of cash, inventory and equipment, whether made by cash payment or by offset of amounts owed by Borrower or such Subsidiary Guarantor to such Foreign Subsidiary) not to exceed the greater of (A) $10,000,000 (or the Equivalent Amount in other currencies) or (B) 10% of the total consolidated assets of Borrower and its Subsidiaries, it being understood that transfers of inventory and equipment in the ordinary course of business will be counted against the foregoing limits at an amount no less than the GAAP value of such asset (which shall not be less than cost or depreciated value); provided that any such offset in respect of payment for services shall not exceed an amount that is consistent with the application of arm’s length principles under Section 482 of the Code and regulations thereunder. For the avoidance of doubt, no transfer of Intellectual Property to a Foreign Subsidiary (other than non-exclusive licenses) shall be permitted under this Section 9.05(f) ;

(g) Hedging Agreements entered into in the ordinary course of Borrower’s financial planning solely to hedge currency risks (and not for speculative purposes) and in an aggregate net exposure amount for all such Hedging Agreements not in excess of $1,000,000 (or the Equivalent Amount in other currencies);

 

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(h) Investments consisting of security deposits with utilities, landlords and other like Persons made in the ordinary course of business;

(i) employee loans, travel advances and guarantees in accordance with Borrower’s usual and customary practices with respect thereto (if permitted by applicable law) which in the aggregate shall not exceed $1,000,000 outstanding at any time (or the Equivalent Amount in other currencies);

(j) Investments received in connection with any Insolvency Proceedings in respect of any customers, suppliers or clients and in settlement of delinquent obligations of, and other disputes with, customers, suppliers or clients;

(k) Investments (excluding non-exclusive licenses of Intellectual Property and exclusive (with respect to jurisdiction only) licenses of Intellectual Property outside of the U.S.) as part of a Permitted Commercialization Arrangement, provided that the value of the cash and tangible property components of such Investment (valued at cost) shall not in any fiscal year exceed $10,000,000 (or such greater amount approved by the Majority Lenders, such approval not to be unreasonably withheld), provided the portion of such limit not used in any fiscal year shall not be available in any succeeding fiscal year;

(l) Investments permitted under Section 9.03 ;

(m) Investments permitted by Borrower’s investment policy as in effect as of the date of this Agreement, with such changes thereto as shall be approved by Borrower’s Board of Directors with the consent to Majority Lenders, which consent shall not be unreasonably withheld.

9.06 Restricted Payments . Borrower will not, and will not permit any of its Subsidiaries to, declare or make, or agree to pay or make, directly or indirectly, any Restricted Payment, except:

(a) Borrower may declare and pay dividends with respect to its capital stock payable solely in additional shares of its common stock;

(b) Borrower may purchase, redeem, retire, or otherwise acquire shares of its capital stock or other Equity Interests with the proceeds received from a substantially concurrent issue of new shares of its capital stock or other Equity Interests;

(c) for payments pursuant to employee stock plans, which payments must be approved by Borrower’s Board of Directors comprised of disinterested members;

(d) for the payment of dividends by any Subsidiary Guarantor to Borrower or to any other Subsidiary Guarantor;

 

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(e) a Restricted Payment by any Subsidiary Guarantor to Borrower or to any other Subsidiary Guarantor; and

(f) a Restricted Payment by any Subsidiary not a Subsidiary Guarantor to Borrower or any other Subsidiary.

9.07 Payments of Indebtedness . Borrower will not, and will not permit any of its Subsidiaries to, make any payments in respect of any Indebtedness other than (i) the Obligations and (ii) subject to any applicable terms of subordination, other Permitted Indebtedness.

9.08 Change in Fiscal Year . Borrower will not, and will not permit any of its Subsidiaries to, change the last day of its fiscal year from that in effect on the date hereof, except to change the fiscal year of a Subsidiary acquired in connection with an Acquisition to conform its fiscal year to that of Borrower.

9.09 Sales of Assets, Etc . Unless Borrower simultaneously makes the prepayment required under Section 3.03(b)(i) , Borrower will not, and will not permit any of its Subsidiaries to, sell, lease, exclusively license (in terms of geography or field of use), transfer, or otherwise dispose of any of its Property (including accounts receivable and capital stock of Subsidiaries) to any Person in one transaction or series of transactions (any thereof, an “ Asset Sale ”), except for any of the following:

(a) transfers of cash for equivalent value and inventory in the ordinary course of its business, including the transfer of nCounter systems to collaborators as compensation for services rendered in the ordinary course of business;

(b) sales, loans or leases of inventory in the ordinary course of its business on ordinary business terms (including reagent rental agreements);

(c) tangible property transfers to a Permitted Commercialization Arrangement Vehicle but subject to the monetary limit on Investments as described under Section 9.05(k) ;

(d) transfers of Property by any Obligor to any other Obligor;

(e) dispositions of any Property that is obsolete or worn out or no longer used or useful in the Business;

(f) placements of specialized equipment for manufacturing, with a fair market value not to exceed the sum of $3,000,000 in the aggregate, with foreign or domestic contract manufacturers where Borrower retains title to such equipment and maintains the Lenders’ Lien on such equipment (such Lien being acknowledged by such manufacturer) with a right to recover the equipment; provided that notwithstanding Section 8.12(c) and 8.16(b) , Borrower shall be solely responsible for paying (or reimbursing Lenders) for all legal and filing costs relating to the creation and maintenance of Lenders’ Lien on such Property in foreign jurisdictions.

 

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(g) dispositions consisting of the sale, transfer, assignment or other disposition of unpaid and overdue accounts receivable in connection with the collection, compromise or settlement thereof in the ordinary course of business and not as part of a financing transaction;

(h) dispositions of property to the extent that (i) such property is exchanged for credit against the purchase price of similar replacement property or (ii) the proceeds of such disposition are applied to the purchase price of such replacement property within 180 days;

(i) dispositions resulting from casualty events;

(j) non-exclusive licenses of Borrower’s and its Subsidiaries’ Intellectual Property;

(k) licenses for the use of the Intellectual Property of Borrower or its Subsidiaries (but not to any of Borrower’s other Affiliates, except for a Permitted Commercialization Arrangement Vehicle) that are approved by Borrower’s Board of Directors and which would not result in a legal transfer of title of the licensed property but that may be exclusive (i) in respects other than territory (such as field of use or scope) and (ii) as to territory, only as to discrete areas outside of the United States; provided that any such license of such Intellectual Property covering the Product may be exclusive only as to territory and only as to discrete areas outside of the United States;

(l) exclusive and non-exclusive licenses covering nCounter Elements or diagnostic gene content other than for nCounter-based Prosigna™ Breast Cancer Prognostic Gene Signature Assay;

(m) any transaction permitted under Section 9.03 or 9.05 ; and

(n) the disposition of other property in aggregate amount not to exceed $250,000 in any single year.

9.10 Transactions with Affiliates . Borrower will not, and will not permit any of its Subsidiaries to, sell, lease, license or otherwise transfer any assets to, or purchase, lease, license or otherwise acquire any assets from, or otherwise engage in any other transactions with, any of its Affiliates, unless such transaction (other than a transaction of the type described in Section 9.10(b) , for which consent is required as described therein) is no less favorable to Borrower than those that would be obtained in a comparable arm’s-length transaction with a Person not an Affiliate of Borrower; provided that the foregoing restriction shall not apply to the following:

(a) transactions between or among Obligors;

(b) transactions consented to by Majority Lenders, which consent shall not be unreasonably withheld, which increase the tax efficiency of Borrower and its Subsidiaries as a whole that are undertaken between Borrower and its Subsidiaries in good faith based on advice of external legal counsel and that comply with arm’s length principles pursuant to Section 482 of the Code and regulations thereunder;

 

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(c) the transactions set forth on Schedule 9.10 ;

(d) transactions permitted under Sections 9.01(f) , (g) , (m)  (with respect to Section 9.01(m) , only to the extent such Indebtedness is assumed or acquired from the acquired target), 9.03(b) to (d) , 9.05(a) , (f) and (i) , 9.06 (a) and (c) to (f) ; and

(e) transactions under Permitted Commercialization Arrangements permitted under Sections 9.03(f), 9.05(k), and 9.09(c) and (k) , but only if such transactions have first been approved by a majority of the board members of Borrower’s board of directors, exclusive of any interested board members, exercising their reasonable business judgment and fiduciary duties to Borrower, and, only so long as Borrower is a Publicly Reporting Company.

9.11 Restrictive Agreements . Borrower will not, and will not permit any of its Subsidiaries to, directly or indirectly, enter into, incur or permit to exist any Restrictive Agreement that contains terms and provisions that are inconsistent with those found in the Loan Documents such that a conflict would exist that would cause, or would reasonably be expected to cause, a material breach of any Loan Document or such Restrictive Agreement.

9.12 Amendments to Material Agreements . Borrower will not, and will not permit any of its Subsidiaries to, (i) terminate any Material Agreement that is listed on Schedule 9.12 at the time of the first Borrowing or at the time of each subsequent Borrowing (other than for a PIK Loan) (unless replaced with another agreement that, viewed as a whole, is on better terms for Borrower or such Subsidiary) or (ii) make any amendment, restatement or alteration which is tantamount to a termination of any such Material Agreement described in Section 9.12(i) , without in each case the prior written consent of the Lender (which consent shall not be unreasonably withheld or delayed).

9.13 Operating Leases . Borrower will not, and will not permit any of its Subsidiaries to, make any expenditures in respect of operating leases, except for:

(a) real estate operating leases;

(b) operating leases between Borrower and any of its wholly-owned Subsidiaries or between any of Borrower’s wholly-owned Subsidiaries; and

(c) other operating leases that would not cause Borrower and its Subsidiaries, on a consolidated basis, to make payments exceeding in any calendar year Three Million Five Hundred Thousand Dollars ($3,500,000) (or the Equivalent Amount in other currencies).

9.14 Sales and Leasebacks . Except as disclosed on Schedule 9.14 , Borrower will not, and will not permit any of its Subsidiaries to, become liable, directly or indirectly, with respect to any lease, whether an operating lease or a Capital Lease Obligation, of any property (whether real, personal, or mixed), whether now owned or hereafter acquired, (i) which Borrower or such Subsidiary has sold or transferred or is to sell or transfer to any other Person and (ii) which Borrower or such Subsidiary intends to use for substantially the same purposes as property which has been or is to be sold or transferred.

 

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9.15 Hazardous Material . Borrower will not, and will not permit any of its Subsidiaries to, use, generate, manufacture, install, treat, release, store or dispose of any Hazardous Material, except in compliance with all applicable Environmental Laws or where the failure to comply would not reasonably be expected to result in a Material Adverse Change.

9.16 Accounting Changes . Borrower will not, and will not permit any of its Subsidiaries to, make any significant change in accounting treatment or reporting practices, except as required or permitted by GAAP.

9.17 Compliance with ERISA . No ERISA Affiliate shall cause or suffer to exist (a) any event that would result in the imposition of a Lien with respect to any Title IV Plan or Multiemployer Plan or (b) any other ERISA Event that would, in the aggregate, have a Material Adverse Effect. No Obligor or Subsidiary thereof shall cause or suffer to exist any event that would result in the imposition of a Lien with respect to any Benefit Plan that would have a Material Adverse Effect.

SECTION 10

FINANCIAL COVENANTS

10.01 Minimum Liquidity . Borrower shall maintain at all times Liquidity in an amount which shall exceed the greater of (i) $2,000,000 and (ii) to the extent Borrower has incurred Permitted Priority Debt, the minimum cash balance required of Borrower by Borrower’s Permitted Priority Debt creditors.

10.02 Minimum Revenue . Borrower and its Subsidiaries shall have annual Revenue (for each respective calendar year, the “ Minimum Required Revenue ”):

(a) during the twelve month period beginning on January 1, 2014, of at least $40,000,000;

(b) during the twelve month period beginning on January 1, 2015, of at least $55,000,000;

(c) during the twelve month period beginning on January 1, 2016, of at least $70,000,000;

(d) during the twelve month period beginning on January 1, 2017, of at least $85,000,000;

(e) during the twelve month period beginning on January 1, 2018, of at least $100,000,000;

(f) during the twelve month period beginning on January 1, 2019, of at least $115,000,000; and

(g) during each subsequent twelve month period thereafter, of at least an amount that is $15,000,000 more than the Minimum Required Revenue for the immediately preceding twelve month period.

 

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10.03 Cure Right .

(a) Notwithstanding anything to the contrary contained in Section 11 , in the event that Borrower fails to comply with the covenants contained in Section 10.02(a) through (c)  (such covenants for such applicable periods being the “ Specified Financial Covenants ”), Borrower shall have the right at any time in the twelve (12) months prior to, or within 90 (ninety) days of, the end of the respective calendar year:

(i) to issue additional shares of Equity Interests in exchange for cash (the “ Equity Cure Right ”), or

(ii) to borrow Permitted Cure Debt (the “ Subordinated Debt Cure Right ” and, collectively with the Equity Cure Right, the “ Cure Right ”),

in an amount equal to the Minimum Required Revenue less Borrower’s annual Revenue or up to the remaining available amount of Permitted Subordinated Debt permitted under Section 9.01(k) (the “ Cure Amount ”). The cash therefrom immediately shall be contributed as equity or subordinated debt (only as permitted pursuant to Section 9.01 ), as applicable, to Borrower, and upon the receipt by Borrower of the Cure Amount pursuant to the exercise of such Cure Right, such Cure Amount shall be deemed to constitute Revenue of Borrower for purposes of the Specified Financial Covenants and the Specified Financial Covenants shall be recalculated for all purposes under the Loan Documents. If, after giving effect to the foregoing recalculation, Borrower shall then be in compliance with the requirements of the Specified Financial Covenants, Borrower shall be deemed to have satisfied the requirements of the Specified Financial Covenants as of the relevant date of determination with the same effect as though there had been no failure to comply therewith at such date, and the applicable breach of the Specified Financial Covenants that had occurred, the related Default and Event of Default, shall be deemed cured without any further action of Borrower or Lenders for all purposes under the Loan Documents.

SECTION 11

EVENTS OF DEFAULT

11.01 Events of Default . Each of the following events shall constitute an “ Event of Default ”:

(a) Borrower shall fail to pay any principal of any Loan when and as the same shall become due and payable, whether at the due date thereof or at a date fixed for prepayment thereof or otherwise;

 

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(b) any Obligor shall fail to pay any Obligation (ot