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As filed with the Securities and Exchange Commission on September 12, 2013.

Registration No. 333-190226

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 4

to

FORM S-1

REGISTRATION STATEMENT

Under

The Securities Act of 1933

 

 

FOUNDATION MEDICINE, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   8071   27-1316416

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

One Kendall Square, Suite B3501

Cambridge MA, 02139

(617) 418-2200

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

 

 

Michael J. Pellini, M.D.

President and Chief Executive Officer

One Kendall Square, Suite B3501

Cambridge, MA 02139

(617) 418-2200

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

 

 

Copies to:

 

Kingsley A. Taft, Esq.

Arthur R. McGivern, Esq.

Goodwin Procter LLP

Exchange Place

53 State Street

Boston, MA 02109

(617) 570-1000

 

Robert W. Hesslein, Esq.

Senior Vice President and General Counsel

Foundation Medicine, Inc.

One Kendall Square, Suite B3501

Cambridge, MA 02139

(617) 418-2200

 

Patrick O’Brien, Esq.

Ropes & Gray LLP

Prudential Tower

800 Boylston Street

Boston, Massachusetts 02199-3600 (617) 951-7000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement .

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box. ¨

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

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

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

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

 

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

 

 

CALCULATION OF REGISTRATION FEE

 

 

 

Title of each class of

securities to be registered

  Amount to be
Registered(1)
   

Proposed

Maximum

Offering

Price Per Share(2)

   

Proposed

Maximum

Aggregate

Offering Price(2)

   

Amount

of Registration
Fee(3)

 

Common stock, par value $0.0001 per share

    5,750,000      $ 16.00      $ 92,000,000      $ 12,548.80   

 

(1) Includes 750,000 shares which the underwriters have the option to purchase.
(2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(a) under the Securities Act.
(3) Of this amount, $11,765 was previously paid in connection with the initial filing of this Registration Statement on July 29, 2013.

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

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. We may sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to completion. Dated September 12, 2013.

Prospectus

5,000,000 Shares

 

LOGO

Foundation Medicine, Inc.

Common Stock

 

 

This is an initial public offering of shares of common stock of Foundation Medicine, Inc.

We are offering 5,000,000 shares to be sold in this offering.

Prior to this offering, there has been no public market for our common stock. It is currently estimated that the initial public offering price per share will be between $14.00 and $16.00. We have applied to list our common stock on The NASDAQ Global Market under the symbol “FMI.”

We are an “emerging growth company” under applicable Securities and Exchange Commission rules and will be subject to reduced public company reporting requirements.

Investing in our common stock involves a high degree of risk. See “ Risk Factors ” on page 9 to read about factors you should consider before buying shares of the common stock.

 

 

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

 

 

 

     Per Share      Total  

Initial public offering price

   $                    $                

Underwriting discounts and commissions (1)

   $                    $     

Proceeds to us, before expenses

   $         $     

 

(1) We refer you to “Underwriting” beginning on page 155 for additional information regarding total underwriting compensation.

We have granted the underwriters an option to purchase up to an additional 750,000 shares of common stock from us at the initial price to public less the underwriting discount.

 

 

The underwriters expect to deliver the shares against payment in New York, New York on             , 2013.

 

Goldman, Sachs & Co.    J.P. Morgan
Leerink Swann    Sanford C. Bernstein

Prospectus dated             , 2013


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TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

Risk Factors

     9   

Special Note Regarding Forward-looking Statements

     41   

Use of Proceeds

     43   

Dividend Policy

     45   

Capitalization

     46   

Dilution

     48   

Selected Financial Data

     50   

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

     52   

Business

     79   

Management

     118   

Executive Compensation

     126   

Certain Relationships and Related Party Transactions

     138   

Principal Stockholders

     141   

Description of Capital Stock

     143   

Shares Eligible for Future Sale

     148   

Certain Material U.S. Federal Income Tax Considerations

     150   

Underwriting

     155   

Legal Matters

     159   

Experts

     159   

Where You Can Find More Information

     159   

Index to Financial Statements

     F-1   

 

 

Through and including                , 2013 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

 

We have not authorized anyone to provide you with any information or to make any representation, other than those contained in this prospectus or any free writing prospectus we have prepared. We take no responsibility for, and provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only in circumstances and in jurisdictions where it is lawful to so do. The information contained in this prospectus is accurate only as of its date, regardless of the time of delivery of this prospectus or of any sale of our common stock.

Neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than the United States. You are required to inform yourself about, and to observe any restrictions relating to, this offering and the distribution of this prospectus.

 

 


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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our common stock, you should carefully read this entire prospectus, including our financial statements and the related notes included elsewhere in this prospectus. You should also consider, among other things, the matters described under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in each case appearing elsewhere in this prospectus. Unless otherwise stated, all references to “us,” “our,” “Foundation,” “we,” the “Company” and similar designations refer to Foundation Medicine, Inc.

Overview

We are a commercial-stage company focused on fundamentally changing the way patients with cancer are treated. We derive revenue from selling products enabled by our molecular information platform to physicians and biopharmaceutical companies. Our platform includes proprietary methods and algorithms for analyzing tumor tissue samples across all types of cancer, as well as information aggregation and concise reporting capabilities. Our products provide genomic information about each patient’s individual cancer, enabling physicians to optimize treatments in clinical practice and enabling biopharmaceutical companies to develop targeted oncology therapies more effectively. We believe we have a significant first mover advantage in providing comprehensive molecular information products on a commercial scale.

FoundationOne, our first clinical product, is, to our knowledge, the only commercially available comprehensive molecular information product designed for use in the routine care of patients with cancer. We commenced our formal commercial launch of FoundationOne for solid tumors in June 2012 and expect to commence our commercial launch of FoundationOne for blood-based cancers, or hematologic malignancies, by early 2014.

We believe a new, comprehensive approach to providing molecular information for use in clinical settings can address an area of significant unmet medical need for patients suffering from advanced, or active metastatic, cancers. We estimate that there are approximately one million patients per year in the United States with newly-diagnosed or recurrent active metastatic cancers who fall into challenging treatment categories, including patients who have rare or aggressive diseases, patients whose disease has progressed after standard treatments, and patients who have tested negative under, or been ineligible for, traditional molecular diagnostic tests. We are initially targeting these patients for FoundationOne because we believe this patient population will currently benefit most from a comprehensive molecular information product. Our estimates are based upon a combination of feedback from our network of oncology thought leaders, data published by the National Cancer Institute in the Cancer Statistics Review, and focused market research that we commissioned. This market research consisted of an analysis of a third party database (that includes public and private cancer-related statistical information on tumor type, disease stage, clinical information, and disease outcomes) supplemented with confirmatory interviews from physicians who practice at a variety of cancer treatment centers, including academic research centers and community hospitals. As the number of available targeted therapies expands and as physicians gain further experience using comprehensive molecular information in their routine treatment decisions, we believe that the potentially addressable market for comprehensive molecular information products will expand over the next five years to include all patients who have metastatic disease, not limited to the challenging treatment categories noted above. We estimate that this potential market expansion could include an additional 800,000 total patients annually, based upon the same combination of sources of information we used to estimate the size of the patient population we are initially targeting for FoundationOne. For additional details on our target patient populations, see “Business—Market Opportunity.” Although we expect existing and future diagnostic

 

 

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testing providers to also target these patient populations, we believe FoundationOne is currently the only commercially available comprehensive molecular information product that provides a fully informative genomic profile in a concise and actionable format designed for use in the clinical setting.

We have experienced rapid adoption of FoundationOne. More than 1,500 physicians from large academic centers and community-based practices across more than 25 countries have ordered FoundationOne since its formal commercial launch in June 2012. We believe this rapid adoption of FoundationOne, accomplished with a nascent sales team, demonstrates the demand for and utility of a single, comprehensive product that helps oncologists effectively implement the promise of precision medicine. To further accelerate our growth and extend our competitive advantage, we are expanding our sales force, publishing scientific and medical advances, fostering relationships throughout the oncology community, and developing new products.

Key thought leaders at premier cancer centers have embraced our approach, as evidenced by their routine use of FoundationOne for their patients, as well as by our collaborations on clinical studies, peer-reviewed publications, and presentations at scientific and medical conferences. We believe that this validation of our approach by key thought leaders will also help drive adoption in the community oncology setting, where 85% of the approximately 10,000 oncologists in the United States practice. We believe the increasing use of our products, especially among thought leaders, along with the demonstration of the economic and clinical value of FoundationOne, will also help facilitate favorable reimbursement decisions.

We believe FoundationOne has a sustainable competitive advantage because it:

 

  Ÿ  

Comprehensively identifies clinically actionable information FoundationOne currently assesses 236 biologically relevant cancer genes for all classes of genomic alterations with high sensitivity and specificity, and has identified actionable alterations in 82% of the 3,936 clinical specimens we received and analyzed with FoundationOne following its formal commercial launch in June 2012 through May 17, 2013. FoundationOne identifies genomic alterations that other diagnostic tests cannot. Based on our quantitative analysis, FoundationOne finds more than three times the combined number of actionable genomic alterations identifiable using a collection of six other commercially available and commonly used diagnostic tests;

 

  Ÿ  

Incorporates the latest scientific and medical advances — We have extensive relationships across the scientific and medical oncology communities, including with key thought leaders and biopharmaceutical companies. These relationships help us incorporate new cancer genes, the latest scientific findings, newly available targeted therapeutics, and relevant clinical trials into FoundationOne;

 

  Ÿ  

Readily integrates into routine clinical practice — Our proprietary sample preparation processes and computational biology algorithms allow us to utilize small amounts of routinely collected tumor tissue from a wide variety of sample types, including tissue with low tumor purity. We detect and report the clinically relevant genomic alterations, generally within 14 to 17 days. We are dedicated to providing high-quality support to our customers, from order initiation and sample acquisition through report delivery and follow-up with our medical affairs team;

 

  Ÿ  

Provides actionable information that physicians can use — In a concise report, FoundationOne communicates the actionable genomic alterations in a patient’s cancer and matches these alterations with targeted therapies and relevant clinical trials. Through our online portal, Interactive Cancer Explorer, physicians can access this report and links to peer-reviewed literature; and

 

  Ÿ  

Promotes physician interaction to create a powerful network effect — We are continually augmenting our cancer knowledgebase, and we are expanding the functionality of our Interactive

 

 

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Cancer Explorer to allow for sharing of genomic and treatment data. Together, we believe these efforts will create a network effect of more users and ultimately more actionable information.

Our molecular information platform is currently used by 18 pharmaceutical partners to enhance the development of targeted oncology therapeutics. We use our core proprietary molecular information platform, computational biology, and information technology capabilities to analyze patient samples from both retrospective and prospective clinical trials. We provide our biopharmaceutical partners comprehensive genomic analysis and information relevant to precision medicine strategies. In addition to generating revenue, these relationships enable us to identify new cancer genes under investigation that can be incorporated into our platform at an early stage, as well as to participate in the newest oncology therapeutics and practice.

We are dedicated to ongoing innovation in our molecular information platform and new product pipeline. For example, we are incorporating RNA-based sequencing technology to analyze the additional gene fusions commonly found in hematologic malignancies and expect to commence our commercial launch of FoundationOne for hematologic malignancies incorporating this technology by early 2014. We are also exploring and developing new products that are scientifically advanced and clinically-relevant including, for example, products utilizing circulating tumor cells and cell-free plasma DNA, which is DNA that circulates in blood plasma outside of cells, and products that expand our offerings into additional areas such as epigenetics, which examines changes in gene expression that occur without changes in the underlying DNA, methylation, which is a chemical signaling mechanism that plays a role in regulation of gene expression, and immune response.

Over time, we will expand our ability to capture, aggregate, analyze, and facilitate the broader exchange of genomic data across the global oncology community. If we, in conjunction with oncologists, pathologists, biopharmaceutical companies, and academic researchers, can successfully capture and utilize this data, we believe we will play an even more integral role in transforming care for the millions of patients suffering from cancer.

We derive our revenue from selling products that are enabled by our molecular information platform. These products include test results sold to our clinical customers as the branded product FoundationOne, and test results sold as an unbranded product to biopharmaceutical customers.

We recorded total revenue of $10.6 million and $11.1 million for the year ended December 31, 2012 and the six months ended June 30, 2013, respectively, and our loss from operations during these periods was $21.9 million and $17.1 million, respectively. Our accumulated deficit totaled $64.2 million as of June 30, 2013.

We are implementing a comprehensive strategy to pursue favorable reimbursement and coverage decisions for FoundationOne and we have been reasonably successful to date in securing reimbursement for tests performed for patients covered by commercial third-party payors. We have not yet, however, received a coverage decision for FoundationOne from any commercial third-party payor or government payor, including Medicare. As a result, there is uncertainty surrounding the amount we will be paid for FoundationOne tests we perform for patients covered by commercial third-party payors and government payors. For example, of the 1,750 FoundationOne tests that we performed during 2012, 398 FoundationOne tests were for patients covered by Medicare for which we have not yet submitted claims for reimbursement. We also performed 641 FoundationOne tests during 2012 that were billed to commercial third-party payors but for which we had not been paid as of December 31, 2012; during the first six months of 2013, we received payment for 404 of these 641 FoundationOne tests. Ultimately, we believe that adoption of our products, increased support for our products by oncology thought leaders, the completion of clinical studies, and the publication of clinical data in medical and scientific journals will demonstrate the clinical utility of our products and foster favorable reimbursement decisions.

 

 

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Our Strategy

Our objective is to transform the care of patients with cancer by leading the development and commercialization of proprietary molecular information products that guide the diagnosis and treatment of cancer, and that enhance the development of cancer therapies. To achieve this objective our strategy is to:

 

  Ÿ  

Drive awareness and adoption of FoundationOne and our future clinical products .

 

  Ÿ  

Demonstrate the value of our products to patients, physicians, and payors .

 

  Ÿ  

Enable biopharmaceutical companies to more effectively develop new cancer therapies.

 

  Ÿ  

Invest in product enhancements and new product innovations .

 

  Ÿ  

Empower the broader cancer community with molecular information .

Risk Factors

Our business is subject to numerous risks and uncertainties, including those highlighted in the section entitled “Risk Factors” immediately following this prospectus summary. These risks include, but are not limited to, the following:

 

  Ÿ  

We may not be able to generate sufficient revenue from FoundationOne or our relationships with our biopharmaceutical partners to achieve or maintain profitability.

 

  Ÿ  

If commercial third-party payors or government payors fail to provide coverage or adequate reimbursement, or if there is a decrease in the amount of reimbursement for FoundationOne, our revenue and prospects for profitability would be harmed.

 

  Ÿ  

If we cannot compete successfully with our competitors, we may be unable to increase or sustain our revenue or achieve and sustain profitability.

 

  Ÿ  

If our sole laboratory facility becomes damaged or inoperable or our new laboratory facility fails to be certified under federal and state licensing requirements, our ability to conduct our business may be jeopardized.

 

  Ÿ  

We rely on a limited number of suppliers or, in some cases, a sole supplier, for some of our laboratory instruments and materials and may not be able to find replacements or immediately transition to alternative suppliers.

 

  Ÿ  

If we are unable to scale our operations to support increased demand for FoundationOne, our business could suffer.

 

  Ÿ  

We depend on our information technology systems, and any failure of these systems could harm our business.

Company and Other Information

We were incorporated under the laws of the State of Delaware in November 2009. Our principal executive office is located at One Kendall Square, Suite B3501, Cambridge MA 02139, and our telephone number is (617) 418-2200. Our website address is www.foundationmedicine.com. We do not incorporate the information on or accessible through our website into this prospectus, and you should not consider any information on, or that can be accessed through, our website as part of this prospectus.

We own various U.S. federal trademark registrations and applications, and unregistered trademarks and servicemarks, including Foundation Medicine ® , FoundationOne™, and Interactive Cancer Explorer™. All other trademarks or trade names referred to in this prospectus are the property of their respective owners. Solely for convenience, the trademarks and trade names in this prospectus are referred to without the ® and ™ symbols, but such references should not be construed as any indicator that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto. We do not intend the use or display of other companies’ trademarks and trade names to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

 

 

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THE OFFERING

 

Common stock offered by us

5,000,000 shares

 

Common stock to be outstanding after this offering

26,283,454 shares (27,033,454 shares if the underwriters exercise their option to purchase additional shares in full)

 

Underwriters’ option to purchase additional shares

We have granted a 30-day option to the underwriters to purchase up to an aggregate of 750,000 additional shares of common stock.

 

Use of proceeds by us

We estimate that we will receive net proceeds from this offering of approximately $ 66.9 million based upon an assumed initial public offering price of $ 15.00 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We expect to use the net proceeds from this offering to fund the expansion of our commercial and laboratory operations, ongoing and new clinical trials, continue building our technology infrastructure and capabilities, as well as for working capital and other general corporate purposes, including funding the costs of operating as a public company. See “Use of Proceeds” for additional information.

 

Risk factors

You should carefully read “Risk Factors” in this prospectus for a discussion of factors that you should consider before deciding to invest in our common stock.

 

Proposed NASDAQ Global Market trading symbol

“FMI”

The number of shares of our common stock to be outstanding after this offering is based on 4,155,428 shares of our common stock outstanding as of August 31, 2013, including 747,171 shares of common stock potentially subject to repurchase by us, and excludes:

 

  Ÿ  

2,150,117 shares of common stock issuable upon the exercise of stock options outstanding as of August 31, 2013 at a weighted-average exercise price of $3.04 per share;

 

  Ÿ  

50,000 shares of common stock issuable upon the exercise of a warrant outstanding at an exercise price of $4.00 per share, which warrant prior to the closing of this offering is exercisable to purchase preferred stock and will be exercisable for common stock following this offering;

 

  Ÿ  

1,355,171 shares of common stock reserved for future issuance under our 2013 Stock Option and Grant Plan, or the 2013 Plan (which includes 512,568 shares reserved for issuance under our Amended and Restated 2010 Stock Incentive Plan that will become available under our 2013 Stock Option and Grant Plan upon our initial public offering); and

 

  Ÿ  

788,503 shares of common stock reserved for future issuance under our 2013 Employee Stock Purchase Plan, or ESPP.

 

 

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Unless otherwise indicated, all information in this prospectus reflects or assumes the following:

 

  Ÿ  

the filing and effectiveness of our amended and restated certificate of incorporation and the adoption of our amended and restated bylaws, which will occur immediately prior to the closing of this offering;

 

  Ÿ  

a 1-for-4 reverse split of our common stock effected on September 12, 2013;

 

  Ÿ  

the conversion of all of our outstanding 68,512,134 shares of preferred stock into 17,128,026 shares of common stock upon the closing of this offering;

 

  Ÿ  

the conversion of the warrant exercisable into 200,000 shares of preferred stock into a warrant exercisable for 50,000 shares of common stock;

 

  Ÿ  

the 747,171 shares of our common stock subject to potential repurchase by us pursuant to their vesting terms are treated as outstanding shares of our common stock;

 

  Ÿ  

no issuance or exercise of stock options or warrants on or after August 31, 2013; and

 

  Ÿ  

no exercise by the underwriters of their option to purchase up to an additional 750,000 shares of common stock in this offering.

 

 

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SUMMARY FINANCIAL DATA

The following summary financial data for the years ended December 31, 2011 and 2012 are derived from our audited financial statements included elsewhere in this prospectus. The summary financial data as of June 30, 2013 and for the six months ended June 30, 2012 and 2013 have been derived from our unaudited financial statements included elsewhere in this prospectus. These unaudited financial statements have been prepared on a basis consistent with our audited financial statements and, in our opinion, contain all adjustments, consisting only of normal and recurring adjustments, necessary for a fair presentation of such financial data. You should read this data together with our audited financial statements and related notes included elsewhere in this prospectus and the information under the captions “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our historical results are not necessarily indicative of our future results, and our operating results for the six-month period ended June 30, 2013 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2013 or any other interim periods or any future year or period.

 

     Years Ended
December 31,
    Six Months Ended
June 30,
 
     2011     2012     2012     2013  
                 (unaudited)  
     (in thousands, except share and per share data)  

Statements of Operations Data:

  

Revenue

   $ 2,057      $ 10,645      $ 2,429      $ 11,120   

Costs and expenses

        

Cost of revenue

     258        5,681        1,830        4,597   

Sales and marketing

     1,555        3,454        1,347        4,686   

General and administrative

     6,992        8,644        3,699        7,905   

Research and development

     9,023        14,777        6,623        11,079   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     17,828        32,556        13,499        28,267   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (15,771     (21,911     (11,070     (17,147

Interest expense, net

     (421     (421     (221     (141

Other expense, net

     (845     (61     (53     (102
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (17,037   $ (22,393   $ (11,344   $ (17,390
  

 

 

   

 

 

   

 

 

   

 

 

 

Accretion of redeemable convertible preferred stock

     (296     (286     (162     (92
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss applicable to common stockholders

   $ (17,333   $ (22,679   $ (11,506   $ (17,482
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per common share applicable to common stockholders, basic and diluted (1)

   $ (14.06   $ (10.47   $ (6.15   $ (5.92
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding, basic and diluted

     1,232,658        2,166,832        1,871,431        2,950,996   
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per common share applicable to common stockholders, basic and diluted (1)

     $ (1.63     $ (0.87
    

 

 

     

 

 

 

Pro forma weighted-average common shares outstanding, basic and diluted

       13,910,719          20,129,030   
    

 

 

     

 

 

 

Comprehensive loss

   $ (17,037   $ (22,393   $ (11,344   $ (17,390
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) See Note 2 within the notes to our financial statements appearing elsewhere in this prospectus for a description of the method used to calculate basic and diluted net loss per share of common stock and pro forma basic and diluted net loss per share of common stock.

 

 

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     As of June 30, 2013  
     Actual     Pro Forma (1)     Pro Forma
As  Adjusted (2)(3)
 
     (unaudited)  
     (in thousands)  

Balance Sheet Data:

      

Cash and cash equivalents

   $ 35,965      $ 35,965      $ 102,865   

Working capital

     32,226        32,226        99,126   

Total assets

     52,269        52,269        119,169   

Notes payable, excluding current portion

     634        634        634   

Redeemable convertible preferred stock warrant liability

     328                 

Redeemable convertible preferred stock

     98,740                 

Accumulated deficit

     (64,209     (64,140     (64,140

Total stockholders’ (deficit) equity

   $ (58,851   $ 40,217      $ 107,117   

 

(1) Pro forma to reflect (i) the automatic conversion of all outstanding shares of our preferred stock into shares of our common stock, and the conversion of our outstanding warrant to purchase our Series A preferred stock into a warrant to purchase our common stock, upon the closing of this offering and (ii) the filing and effectiveness of our amended and restated certificate of incorporation, which will occur immediately prior to the closing of this offering.
(2) Pro forma as adjusted to reflect the pro forma adjustments described in (1) above, and to further reflect the sale of shares of our common stock offered in this offering, assuming an initial public offering price of $15.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.
(3) A $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share, the midpoint of the price range set forth on the cover of this prospectus, would increase (decrease) the pro forma as adjusted amount of each of cash and cash equivalents and total stockholders’ (deficit) equity by approximately $4.7 million, assuming that the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of one million shares offered by us would increase (decrease) the net proceeds to us from this offering by approximately $14.0 million, assuming the assumed initial public offering price remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. A one million share increase in the number of shares offered by us together with a concomitant $1.00 increase in the assumed initial public offering price of $15.00 per share, the midpoint of the price range set forth on the cover of this prospectus, would increase each of cash and cash equivalents and total stockholders’ (deficit) equity by approximately $19.5 million after deducting underwriting discounts and commissions and any estimated offering expenses payable by us. Conversely, a one million share decrease in the number of shares offered by us together with a concomitant $1.00 decrease in the assumed initial public offering price of $15.00 per share, the midpoint of the price range set forth on the cover of this prospectus, would decrease each of cash and cash equivalents and total stockholders’ (deficit) equity by approximately $17.7 million after deducting underwriting discounts and commissions and any estimated offering expenses payable by us.

 

 

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RISK FACTORS

Before you invest in our common stock, you should understand the high degree of risk involved. You should carefully consider the following risks and other information in this prospectus, including our consolidated financial statements and related notes included elsewhere in this prospectus, before you decide to purchase shares of our common stock. The following risks may adversely impact our business, financial condition, and operating results. As a result, the trading price of our common stock could decline and you could lose part or all of your investment.

Risks Relating to Our Business and Strategy

We may not be able to generate sufficient revenue from FoundationOne or our relationships with our biopharmaceutical partners to achieve and maintain profitability.

We believe our commercial success is dependent upon our ability to successfully market and sell our first molecular information product, FoundationOne for solid tumors, to physicians in clinical practice, to launch and commercialize FoundationOne for blood-based cancers, or hematologic malignancies, to continue to expand our current relationships and develop new relationships with biopharmaceutical partners, and to develop and commercialize new molecular information products. The demand for FoundationOne may decrease or may not continue to increase at historical rates for a number of reasons. In addition, FoundationOne does not yet have coverage contracts with or coverage decisions from commercial third-party payors and government payors, including Medicare. We have experienced early revenue growth from the sale of FoundationOne to physicians, principally since its formal commercial launch in June 2012. We may not be able to continue revenue growth or maintain existing revenue levels.

Our biopharmaceutical partners may decide to decrease or discontinue their use of our molecular information platform due to changes in research and product development plans, failures in their clinical trials, financial constraints, or utilization of internal molecular testing resources or molecular tests performed by other parties, which are circumstances outside of our control. In addition to reducing our revenue, this may reduce our exposure to early stage research that facilitates the incorporation of newly developed information about cancer into our molecular information platform and FoundationOne.

We are currently not profitable. Even if we succeed in increasing adoption of FoundationOne by physicians, maintaining and creating relationships with our existing and new biopharmaceutical partners and developing and commercializing additional molecular information products, we may not be able to generate sufficient revenue to achieve profitability.

FoundationOne may never achieve significant commercial market acceptance.

FoundationOne may never gain significant acceptance in the marketplace and, therefore, may never generate substantial revenue or profits for us. Our ability to achieve commercial market acceptance for FoundationOne will depend on several factors, including:

 

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our ability to convince the medical community of the clinical utility of our products and their potential advantages over existing molecular tests;

 

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the willingness of physicians and patients to utilize our products; and

 

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the agreement by commercial third-party payors and government payors to reimburse our products, the scope and amount of which will affect patients’ willingness or ability to pay for our products and likely heavily influence physicians’ decisions to recommend our products.

 

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In addition, physicians may rely on guidelines issued by industry groups, such as the National Comprehensive Cancer Network, medical societies, such as the College of American Pathologists, or other key oncology-related organizations before utilizing any diagnostic test. Although we have a number of company-sponsored clinical trials and clinical trials sponsored by individual physicians, or investigator-initiated clinical trials, underway to demonstrate the clinical utility of FoundationOne, it is not yet, and may never be, listed in any such guidelines.

We believe that the successful completion of clinical trials, publication of scientific and medical results in peer-reviewed journals, and presentations at leading conferences are critical to the broad adoption of FoundationOne. Publication in leading medical journals is subject to a peer-review process, and peer reviewers may not consider the results of studies involving FoundationOne sufficiently novel or worthy of publication.

The failure to be listed in physician guidelines or of our trials to produce favorable results or to be published in peer-reviewed journals could limit the adoption of our products. Failure to achieve widespread market acceptance of FoundationOne would materially harm our business, financial condition and results of operations.

We rely on a limited number of suppliers or, in some cases, sole suppliers, for some of our laboratory instruments and materials and may not be able to find replacements or immediately transition to alternative suppliers.

We rely on several sole suppliers, including Illumina, Inc., or Illumina, for certain laboratory substances used in the chemical reactions incorporated into our processes, or reagents, sequencers, equipment and other materials which we use in our laboratory operations. An interruption in our laboratory operations could occur if we encounter delays or difficulties in securing these reagents, sequencers, or other laboratory materials, and if we cannot then obtain an acceptable substitute. Any such interruption could significantly affect our business, financial condition, results of operations and reputation. We rely on Illumina as the sole supplier of the sequencers and various associated reagents, and as the sole provider of maintenance and repair services for these sequencers. Any disruption in Illumina’s operations could impact our supply chain and laboratory operations of our molecular information platform and our ability to conduct our business and generate revenue.

We believe that there are only a few other equipment manufacturers that are currently capable of supplying and servicing the equipment necessary for our laboratory operations, including sequencers and various associated reagents. The use of equipment or materials furnished by these replacement suppliers would require us to alter our laboratory operations. Transitioning to a new supplier would be time consuming and expensive, may result in interruptions in our laboratory operations, could affect the performance specifications of our laboratory operations or could require that we revalidate FoundationOne. There can be no assurance that we will be able to secure alternative equipment, reagents, and other materials, and bring such equipment, reagents, and materials on line and revalidate them without experiencing interruptions in our workflow. In the case of an alternative supplier for Illumina, there can be no assurance that replacement sequencers and various associated reagents will be available or will meet our quality control and performance requirements for our laboratory operations. If we should encounter delays or difficulties in securing, reconfiguring or revalidating the equipment and reagents we require for our products, our business, financial condition, results of operations and reputation could be adversely affected.

 

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If our sole laboratory facility becomes damaged or inoperable or we are required to vacate our existing facility, and our new laboratory facility has not yet been, or fails to be, certified under federal and state licensing requirements, our ability to conduct our genomic analyses and pursue our research and development efforts may be jeopardized.

We currently derive all of our revenue from tests conducted at a single laboratory facility located in Cambridge, Massachusetts. Our facility and equipment could be harmed or rendered inoperable by natural or man-made disasters, including war, fire, earthquake, power loss, communications failure, or terrorism, which may render it difficult or impossible for us to operate our molecular information platform for some period of time. The inability to perform our molecular tests or to reduce the backlog of analyses that could develop if our facility is inoperable, for even a short period of time, may result in the loss of customers or harm to our reputation, and we may be unable to regain those customers or repair our reputation in the future. Furthermore, our facility and the equipment we use to perform our research and development work could be unavailable or costly and time-consuming to repair or replace. It would be difficult, time-consuming, and expensive to rebuild our facility or license or transfer our proprietary technology to a third-party, particularly in light of the licensure and accreditation requirements for a commercial laboratory like ours. Even in the unlikely event we are able to find a third party with such qualifications to enable us to conduct our molecular tests, we may be unable to negotiate commercially reasonable terms.

We intend to move our laboratory into a new facility at our new corporate headquarters in Cambridge, Massachusetts in September 2013. This relocation could disrupt laboratory operations, resulting in an inability to meet customer turnaround time expectations, and could be delayed, resulting in slower realization of laboratory efficiencies anticipated from the use of the new facilities. We might also encounter delays in completing the transfer or issuance of new licenses or other approvals necessary to allow our clinical laboratory operations to commence at the new facility. Adverse consequences resulting from a delay in the laboratory relocation or resulting from an interruption of laboratory operations, including as a result of a failure to be certified under the Clinical Laboratory Improvement Amendments of 1988, or CLIA, the College of American Pathologists, or CAP, and state licensing requirements, could harm our relationships with our customers and our reputation, and could affect our ability to generate revenue.

We carry insurance for damage to our property and the disruption of our business, but this insurance may not cover all of the risks associated with damage or disruption to our business, may not provide coverage in amounts sufficient to cover our potential losses, and may not continue to be available to us on acceptable terms, if at all.

If we are unable to support demand for FoundationOne and our future products, including ensuring that we have adequate capacity to meet increased demand, or we are unable to successfully manage the evolution of our molecular information platform, our business could suffer.

As our volume grows, we will need to continue to increase our workflow capacity for sample intake, customer service, billing and general process improvements, expand our internal quality assurance program, and extend our platform to support comprehensive genomic analyses at a larger scale within expected turnaround times. We will need additional certified laboratory scientists and other scientific and technical personnel to process higher volumes of our molecular information products. Portions of our process are not automated and will require additional personnel to scale. We will also need to purchase additional equipment, some of which can take several months or more to procure, setup, and validate, and increase our software and computing capacity to meet increased demand. There is no assurance that any of these increases in scale, expansion of personnel, equipment, software and computing capacities, or process enhancements will be successfully implemented, or that we will have adequate space in our laboratory facility to accommodate such required expansion.

 

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As additional products are commercialized, such as FoundationOne for hematologic malignancies, we will need to incorporate new equipment, implement new technology systems and laboratory processes, and hire new personnel with different qualifications. For example, we are now scaling up our RNA sequencing capabilities and we believe we will be the first company to perform RNA sequencing for clinical testing at our clinical scale. Failure to manage this growth or transition could result in turnaround time delays, higher product costs, declining product quality, deteriorating customer service, and slower responses to competitive challenges. A failure in any one of these areas could make it difficult for us to meet market expectations for our products, and could damage our reputation and the prospects for our business.

New product development involves a lengthy and complex process and we may be unable to commercialize FoundationOne for hematologic malignancies or any other products we may develop on a timely basis, or at all.

FoundationOne for hematologic malignancies, for which we expect to commence our commercial launch by early 2014, will take time to commercialize, and its launch may be delayed or may not be successful. There can be no assurance that FoundationOne for hematologic malignancies will be successful in the evaluation of blood-based cancers for a variety of technical and market reasons. Our other new molecular information products, which are in various stages of early development, will take time to develop and commercialize, if we are able to commercialize them at all. There can be no assurance that our new products will be capable of reliably identifying relevant genomic alterations in forms of cancer other than cancers found in solid tumors. Before we can commercialize any new products, we will need to expend significant funds in order to:

 

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conduct substantial research and development, including validation studies and potentially clinical trials;

 

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further develop and scale our laboratory processes to accommodate different products; and

 

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further develop and scale our infrastructure to be able to analyze increasingly large amounts of data.

Our product development process involves a high degree of risk, and product development efforts may fail for many reasons, including:

 

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failure of the product to perform as expected at the research or development stage;

 

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lack of validation data; or

 

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failure to demonstrate the clinical utility of the product.

As we develop products, we will have to make significant investments in product development, marketing and selling resources. In addition, competitors may develop and commercialize competing products faster than we are able to do so.

If we cannot compete successfully with our competitors, we may be unable to increase or sustain our revenue or achieve and sustain profitability.

Personalized genomic diagnostics is a new area of science, and we face competition from companies that offer products or have conducted research to profile genes and gene expression in various cancers. Our principal competition comes from diagnostic companies that offer molecular diagnostic tests that capture only a single-marker or test panels that capture a limited number of the most well-known gene alterations, which are also known as hotspot panel tests. In addition, academic research centers, diagnostic companies and next generation sequencing, or NGS, platform developers are offering or developing NGS-based testing.

Our competitors include laboratory companies such as Bio-Reference Laboratories, Inc., Laboratory Corporation of America Holdings, Quest Diagnostics Incorporated, as well as companies

 

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such as Abbott Laboratories, Qiagen N.V., Roche Molecular Systems, Inc. and Sequenom, Inc. that manufacture or may manufacture diagnostic testing kits. In addition, companies such as Genomic Health, Inc. and Myriad Genetics, Inc. have well-established commercial organizations that sell molecular diagnostic tests for cancer to physicians and may develop tests which compete with FoundationOne.

Many hospitals and academic medical centers may also seek to perform the type of molecular testing we perform at their own facilities. As such, our competition may include entities such as the University of Michigan, Baylor Medical Genetics Laboratories, Washington University in St. Louis and other academic hospitals and research centers.

In addition to developing kits, certain diagnostic companies also provide NGS platforms. Illumina, Life Technologies Corporation, and other companies develop NGS platforms that are being sold directly to research centers, biopharmaceutical companies and clinical laboratories. While many of the applications for these platforms are focused on the research and development markets and others are focused on testing for non-cancer conditions, each of these companies has launched and will continue to commercialize products focused on the clinical oncology market. We believe diagnostic platform providers will seek to place sequencing machines in laboratories to develop NGS-based laboratory-developed tests, or LDTs. In addition, we believe these companies will also develop their own FDA-approved diagnostic kits, which can be sold to the clients who have purchased their platforms. Also, many private companies are developing information technology-based tools to support the integration of NGS testing into the clinical setting. These companies may also use their patent portfolios, developed in connection with developing their tests, to allege that FoundationOne infringes their patents, and we could face litigation with respect to such allegations and the validity of such patents.

In addition, because our proprietary molecular information platform consists largely of trade-secret protected technology and know-how and has only limited patent protection, new and existing companies could seek to develop molecular tests that compete with ours. These competitors could have technological, financial and market access advantages that are not currently available to us.

The molecular diagnostic industry is subject to rapidly changing technology which could make our molecular information platform, FoundationOne, and other products we develop obsolete.

Our industry is characterized by rapid technological changes, frequent new product introductions and enhancements and evolving industry standards, all of which could make our molecular information platform, FoundationOne, and the other molecular information products we are developing obsolete. Our future success will depend on our ability to keep pace with the evolving needs of our customers on a timely and cost-effective basis and to pursue new market opportunities that develop as a result of technological and scientific advances. In recent years, there have been numerous advances in technologies relating to the diagnosis and treatment of cancer. There have also been advances in methods used to analyze very large amounts of genomic information. We must continuously enhance our molecular information platform and develop new products to keep pace with evolving standards of care. If we do not update our molecular information platform to reflect new scientific knowledge about cancer biology, information about new cancer therapies, or relevant clinical trials, our molecular information platform could become obsolete and sales of FoundationOne and any new products could decline, which would have a material adverse effect on our business, financial condition, and results of operations.

If our products do not perform as expected, our operating results, reputation, and business will suffer.

Our success depends on the market’s confidence that we can provide reliable, high-quality molecular information products. There is no guarantee that the accuracy and reproducibility we have

 

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demonstrated to date will continue, particularly for clinical samples, as our test volume increases. We believe that our customers are likely to be particularly sensitive to product defects and errors, including if our products fail to detect genomic alterations with high accuracy from clinical specimens or if we fail to list or inaccurately include certain treatment options and available clinical trials in our test report. As a result, the failure of our products to perform as expected would significantly impair our operating results and our reputation. We may be subject to legal claims arising from any defects or errors.

We refer to the efficiency of our sequencing process as its yield. The sequencing process yields that we achieve depend on the design and operation of our sequencing process, which uses a number of complex and sophisticated biochemical, informatics, optical, and mechanical processes, many of which are highly sensitive to external factors. An operational or technology failure in one of these complex processes or fluctuations in external variables may result in sequencing processing yields that are lower than we anticipate or that vary between sequencing runs. In addition, we are regularly evaluating and refining our sequencing process. These refinements may initially result in unanticipated issues that further reduce our sequencing process yields or increase the variability of our sequencing yields. Low sequencing yields, or higher than anticipated variability, increases total sequencing costs and reduces the number of samples we can sequence in a given time period, which can cause variability in our operating results and damage our reputation.

If we lose the support of key thought leaders, it may be difficult to establish products enabled by our molecular information platform as a standard of care for patients with cancer, which may limit our revenue growth and ability to achieve profitability.

We have established relationships with leading oncology thought leaders at premier cancer institutions, such as the Memorial Sloan-Kettering Cancer Center, Vanderbilt-Ingram Cancer Center and The US Oncology Network. If these key thought leaders determine that our molecular information platform, FoundationOne or other products that we develop are not clinically effective or that alternative technologies are more effective, or if they elect to use internally developed products, we would encounter significant difficulty validating our testing platform, driving adoption, or establishing our molecular information platform and FoundationOne as a standard of care, which would limit our revenue growth and our ability to achieve profitability.

If we cannot maintain our current relationships, or enter into new relationships, with biopharmaceutical companies, our product development could be delayed.

We deploy our molecular information platform to analyze tissue samples provided by biopharmaceutical partners from their clinical trials. We have entered into agreements with biopharmaceutical companies in the cancer field including, for example, Agios Pharmaceuticals, Inc., ARIAD Pharmaceuticals, Inc., Array BioPharma Inc., AstraZeneca UK Limited, Celgene Corporation, Clovis Oncology, Inc., Eisai Co., Ltd., Johnson & Johnson, Novartis, and Sanofi, among others. In each of the years ended December 31, 2011 and 2012 and the six months ended June 30, 2013, our alliance with Novartis accounted for more than 10% of our revenue. The revenue attributable to Novartis may also fluctuate in the future, which could have an adverse effect on our financial condition and results of operations. In addition, the termination of this relationship could result in a temporary or permanent loss of revenue.

Our success in the future depends in part on our ability to maintain these relationships and to enter into new relationships. This can be difficult due to several factors, including internal and external constraints placed on these organizations, including Novartis, that can limit the number and type of relationships with companies like us that can be considered and consummated; the agreements governing our relationships are generally terminable at will by the our biopharmaceutical customers; our biopharmaceutical customers, including Novartis, may be dissatisfied with our products; and

 

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continued usage of our products among particular biopharmaceutical customers, including Novartis, may depend on whether the partner obtains positive data in its clinical trials or other administrative factors that are outside our control. Additionally, certain of our biopharmaceutical partners have contracted with us to provide testing for large numbers of samples, which could strain our testing capacity and restrict our ability to perform additional tests for other customers. If we fail to maintain these relationships, or enter into new ones, our business could suffer.

From time to time we expect to engage in discussions with biopharmaceutical companies regarding commercial opportunities. There is no assurance that any of these discussions will result in a commercial agreement, or if an agreement is reached, that the resulting engagement will be successful or that clinical studies conducted as part of the engagement will produce successful outcomes. Speculation in the industry about our existing or potential engagements with biopharmaceutical companies can be a catalyst for adverse speculation about us, our products, and our technology, which can result in harm to our reputation and our business.

We may be unable to manage our future growth effectively, which could make it difficult to execute our business strategy.

We anticipate growth in our business operations. This future growth could create strain on our organizational, administrative and operational infrastructure, including laboratory operations, quality control, customer service, and sales force management. We may not be able to maintain the quality or expected turnaround times of our products, or satisfy customer demand as it grows. Our ability to manage our growth properly will require us to continue to improve our operational, financial, and management controls, as well as our reporting systems and procedures. We plan to implement new enterprise software systems in a number of areas affecting a broad range of business processes and functional areas. The time and resources required to implement these new systems is uncertain, and failure to complete this in a timely and efficient manner could adversely affect our operations.

We have limited experience in marketing and selling our products, and if we are unable to expand our direct sales and marketing force to adequately address our customers’ needs, our business may be adversely affected.

We have limited experience in marketing and selling FoundationOne, which had its formal commercial launch in June 2012. We may not be able to market, sell, or distribute FoundationOne or other products we may develop effectively enough to support our planned growth. We sell FoundationOne in the United States through our own sales force and outside the United States with the assistance of distribution partners.

Our future sales in the United States will depend in large part on our ability to develop and substantially expand our sales force and to increase the scope of our marketing efforts. Our target market of physicians is a large and diverse market. As a result, we believe it is necessary to develop a sales force that includes sales representatives with specific technical backgrounds. We will also need to attract and develop marketing personnel with industry expertise. Competition for such employees is intense. We may not be able to attract and retain personnel or be able to build an efficient and effective sales and marketing force, which could negatively impact sales and market acceptance of our products and limit our revenue growth and potential profitability.

Our expected future growth will impose significant added responsibilities on members of management, including the need to identify, recruit, maintain, and integrate additional employees. Our future financial performance and our ability to commercialize our products and to compete effectively will depend, in part, on our ability to manage this potential future growth effectively, without compromising quality.

 

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Outside the United States we enlist distribution partners, and we may potentially enlist local laboratories, to assist with sales, distribution, and customer support. Locating, qualifying, and engaging distribution partners and local laboratories with local industry experience and knowledge will be necessary to effectively market and sell our products outside the United States. We may not be successful in finding, attracting, and retaining distribution partners or laboratories, or we may not be able to enter into such arrangements on favorable terms. Sales practices utilized by our distribution parties that are locally acceptable may not comply with sales practices standards required under United States laws that apply to us, which could create additional compliance risk. If our sales and marketing efforts are not successful outside the United States, we may not achieve significant market acceptance for our products outside the United States, which would materially and adversely impact our business operations.

The loss of any member of our senior management team or our inability to attract and retain highly skilled scientists, clinicians and salespeople could adversely affect our business.

Our success depends on the skills, experience and performance of key members of our senior management team, including Michael J. Pellini, M.D., our President and Chief Executive Officer. The individual and collective efforts of these employees will be important as we continue to develop our molecular information platform and additional products, and as we expand our commercial activities. The loss or incapacity of existing members of our executive management team could adversely affect our operations if we experience difficulties in hiring qualified successors. Our executive officers have employment agreements; however, the existence of an employment agreement does not guarantee the retention of the executive officer for any period of time. We do not maintain “key person” insurance on any of our employees.

Our research and development programs and laboratory operations depend on our ability to attract and retain highly skilled scientists and technicians. We may not be able to attract or retain qualified scientists and technicians in the future due to the competition for qualified personnel among life science businesses, particularly in Cambridge, Massachusetts. We also face competition from universities and public and private research institutions in recruiting and retaining highly qualified scientific personnel. We may have difficulties locating, recruiting or retaining qualified sales people. Recruiting and retention difficulties can limit our ability to support our research and development and sales programs. All of our employees are at-will, which means that either we or the employee may terminate their employment at any time.

If we were sued for product liability or professional liability, we could face substantial liabilities that exceed our resources.

The marketing, sale and use of our products could lead to the filing of product liability claims were someone to allege that our products identified inaccurate or incomplete information regarding the genomic alterations of the tumor or malignancy analyzed, reported inaccurate or incomplete information concerning the available therapies for a certain type of cancer, or otherwise failed to perform as designed. We may also be subject to liability for errors in, a misunderstanding of, or inappropriate reliance upon, the information we provide in the ordinary course of our business activities. A product liability or professional liability claim could result in substantial damages and be costly and time-consuming for us to defend.

We maintain product and professional liability insurance, but this insurance may not fully protect us from the financial impact of defending against product liability or professional liability claims. Any product liability or professional liability claim brought against us, with or without merit, could increase our insurance rates or prevent us from securing insurance coverage in the future. Additionally, any product liability lawsuit could damage our reputation, or cause current clinical partners to terminate existing agreements and potential clinical partners to seek other partners, any of which could impact our results of operations.

 

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We may acquire other businesses or form joint ventures or make investments in other companies or technologies that could negatively affect our operating results, dilute our stockholders’ ownership, increase our debt or cause us to incur significant expense.

We may pursue acquisitions of businesses and assets. We also may pursue strategic alliances and joint ventures that leverage our proprietary molecular information platform and industry experience to expand our offerings or distribution. We have no experience with acquiring other companies and limited experience with forming strategic partnerships. We may not be able to find suitable partners or acquisition candidates, and we may not be able to complete such transactions on favorable terms, if at all. If we make any acquisitions, we may not be able to integrate these acquisitions successfully into our existing business, and we could assume unknown or contingent liabilities. Any future acquisitions also could result in the incurrence of debt, contingent liabilities or future write-offs of intangible assets or goodwill, any of which could have a material adverse effect on our financial condition, results of operations, and cash flows. Integration of an acquired company also may disrupt ongoing operations and require management resources that we would otherwise focus on developing our existing business. We may experience losses related to investments in other companies, which could have a material negative effect on our results of operations and financial condition. We may not realize the anticipated benefits of any acquisition, technology license, strategic alliance, or joint venture.

To finance any acquisitions or joint ventures, we may choose to issue shares of our common stock as consideration, which would dilute the ownership of our stockholders. Additional funds may not be available on terms that are favorable to us, or at all. If the price of our common stock is low or volatile, we may not be able to acquire other companies or fund a joint venture project using our stock as consideration.

International expansion of our business exposes us to business, regulatory, political, operational, financial, and economic risks associated with doing business outside of the United States.

We currently have limited international operations, but our business strategy incorporates potentially significant international expansion. We plan to maintain sales representatives and distributor relationships, to conduct physician and patient association outreach activities, to extend laboratory capabilities and to expand payor relationships outside of the United States. Doing business internationally involves a number of risks, including:

 

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multiple, conflicting and changing laws and regulations such as privacy regulations, tax laws, export and import restrictions, employment laws, regulatory requirements, and other governmental approvals, permits, and licenses;

 

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failure by us or our distributors to obtain regulatory approvals for the use of our products in various countries;

 

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additional potentially relevant third-party patent rights;

 

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complexities and difficulties in obtaining protection and enforcing our intellectual property;

 

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difficulties in staffing and managing foreign operations;

 

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complexities associated with managing multiple payor reimbursement regimes, government payors, or patient self-pay systems;

 

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logistics and regulations associated with shipping tissue samples, including infrastructure conditions and transportation delays;

 

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limits in our ability to penetrate international markets if we are not able to conduct our molecular tests locally;

 

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financial risks, such as longer payment cycles, difficulty collecting accounts receivable, the impact of local and regional financial crises on demand and payment for our products, and exposure to foreign currency exchange rate fluctuations;

 

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natural disasters, political and economic instability, including wars, terrorism, and political unrest, outbreak of disease, boycotts, curtailment of trade, and other business restrictions; and

 

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regulatory and compliance risks that relate to maintaining accurate information and control over sales and distributors’ activities that may fall within the purview of the U.S. Foreign Corrupt Practices Act, or FCPA, its books and records provisions, or its anti-bribery provisions.

Any of these factors could significantly harm our future international expansion and operations and, consequently, our revenue and results of operations.

We could be adversely affected by violations of the FCPA and other worldwide anti-bribery laws.

International customers may currently order FoundationOne and we are subject to the FCPA, which prohibits companies and their intermediaries from making payments in violation of law to non-U.S. government officials for the purpose of obtaining or retaining business or securing any other improper advantage. Our reliance on independent distributors to sell FoundationOne internationally demands a high degree of vigilance in maintaining our policy against participation in corrupt activity, because these distributors could be deemed to be our agents, and we could be held responsible for their actions. Other U.S. companies in the medical device and pharmaceutical field have faced criminal penalties under the FCPA for allowing their agents to deviate from appropriate practices in doing business with these individuals. We are also subject to similar anti-bribery laws in the jurisdictions in which we operate, including the United Kingdom’s Bribery Act of 2010, which went into effect in the third quarter of 2011, which also prohibits commercial bribery and makes it a crime for companies to fail to prevent bribery. These laws are complex and far-reaching in nature, and, as a result, we cannot assure you that we would not be required in the future to alter one or more of our practices to be in compliance with these laws or any changes in these laws or the interpretation thereof. Any violations of these laws, or allegations of such violations, could disrupt our operations, involve significant management distraction, involve significant costs and expenses, including legal fees, and could result in a material adverse effect on our business, prospects, financial condition, or results of operations. We could also suffer severe penalties, including criminal and civil penalties, disgorgement, and other remedial measures.

Our employees, principal investigators, consultants, and commercial partners may engage in misconduct or other improper activities, including non-compliance with regulatory standards and requirements, and insider trading.

We are exposed to the risk of fraud or other misconduct by our employees, principal investigators, consultants, and commercial partners. Misconduct by these parties could include intentional failures to comply with the regulations of the FDA and non-U.S. regulators, comply with healthcare fraud and abuse laws and regulations in the United States and abroad, report financial information or data accurately, or disclose unauthorized activities to us. In particular, sales, marketing, and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing, and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs, and other business arrangements. Such misconduct could also involve the improper use of information obtained in the course of clinical studies, which could result in regulatory sanctions and cause serious harm to our reputation. We currently have a code of conduct applicable to all of our employees, but it is not always possible to identify and deter employee misconduct, and our code of conduct and the other precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses, or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to comply with these laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could result in the imposition of significant fines or other sanctions, which could have a significant impact on our business. Whether or

 

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not we are successful in defending against such actions or investigations, we could incur substantial costs, including legal fees, and divert the attention of management in defending ourselves against any of these claims or investigations.

We depend on our information technology systems, and any failure of these systems could harm our business.

We depend on information technology and telecommunications systems for significant elements of our operations, including our laboratory information management system, our computational biology system, our knowledge management system, our customer reporting, and our Interactive Cancer Explorer portal. We have installed, and expect to expand, a number of enterprise software systems that affect a broad range of business processes and functional areas, including for example, systems handling human resources, financial controls and reporting, contract management, regulatory compliance, and other infrastructure operations. In addition to the aforementioned business systems, we intend to extend the capabilities of both our preventative and detective security controls by augmenting the monitoring and alerting functions, the network design, and the automatic countermeasure operations of our technical systems. These information technology and telecommunications systems support a variety of functions, including laboratory operations, test validation, sample tracking, quality control, customer service support, billing and reimbursement, research and development activities, scientific and medical curation, and general administrative activities. In addition, our third-party billing and collections provider depends upon technology and telecommunications systems provided by outside vendors.

Information technology and telecommunications systems are vulnerable to damage from a variety of sources, including telecommunications or network failures, malicious human acts and natural disasters. Moreover, despite network security and back-up measures, some of our servers are potentially vulnerable to physical or electronic break-ins, computer viruses, and similar disruptive problems. Despite the precautionary measures we have taken to prevent unanticipated problems that could affect our information technology and telecommunications systems, failures or significant downtime of our information technology or telecommunications systems or those used by our third-party service providers could prevent us from conducting our comprehensive genomic analyses, preparing and providing reports to pathologists and oncologists, billing payors, processing reimbursement appeals, handling patient or physician inquiries, conducting research and development activities, and managing the administrative aspects of our business. Any disruption or loss of information technology or telecommunications systems on which critical aspects of our operations depend could have an adverse effect on our business.

Security breaches, loss of data and other disruptions could compromise sensitive information related to our business or prevent us from accessing critical information and expose us to liability, which could adversely affect our business and our reputation.

In the ordinary course of our business, we and our third-party billing and collections provider collect and store sensitive data, including legally protected health information, personally identifiable information, intellectual property and proprietary business information owned or controlled by ourselves or our customers, payors, and biopharmaceutical partners. We manage and maintain our applications and data utilizing a combination of on-site systems, managed data center systems, and cloud-based data center systems. We also communicate, and soon will facilitate the exchange of, sensitive patient data to customers through Interactive Cancer Explorer. These applications and data encompass a wide variety of business-critical information including research and development information, commercial information, and business and financial information. We face four primary risks relative to protecting this critical information, including: loss of access risk; inappropriate disclosure risk; inappropriate modification risk; and the risk of our being unable to adequately monitor our controls over the first three risks.

 

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The secure processing, storage, maintenance, and transmission of this critical information is vital to our operations and business strategy, and we devote significant resources to protecting such information. Although we take measures to protect sensitive information from unauthorized access or disclosure, our information technology and infrastructure, and that of our third-party billing and collections provider, may be vulnerable to attacks by hackers or viruses or breached due to employee error, malfeasance, or other disruptions. Any such breach or interruption could compromise our networks and the information stored there could be accessed by unauthorized parties, publicly disclosed, lost, or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, such as the Health Insurance Portability and Accountability Act of 1996, or HIPAA, and regulatory penalties. Although we have implemented security measures and a formal, dedicated enterprise security program to prevent unauthorized access to patient data, Interactive Cancer Explorer, which is currently accessible through our online portal and will also soon be accessible through our mobile applications, gives broad access to physicians, at which point we lose ability to control access, and there is no guarantee we can continue to protect our online portal or will be able to protect our mobile applications from breach. Unauthorized access, loss or dissemination could also disrupt our operations, including our ability to conduct our analyses, provide test results, bill payors or patients, process claims and appeals, provide customer assistance services, conduct research and development activities, collect, process, and prepare company financial information, provide information about our products and other patient and physician education and outreach efforts through our website, manage the administrative aspects of our business, and damage our reputation, any of which could adversely affect our business.

The U.S. Office of Civil Rights may impose penalties on a covered entity for a failure to comply with a requirement of HIPAA. Penalties will vary significantly depending on factors such as the date of the violation, whether the covered entity knew or should have known of the failure to comply, or whether the covered entity’s failure to comply was due to willful neglect. These penalties include civil monetary penalties of $100 to $50,000 per violation, up to an annual cap of $1,500,000. A person who knowingly obtains or discloses individually identifiable health information in violation of HIPAA may face a criminal penalty of up to $50,000 and up to one-year imprisonment. The criminal penalties increase to $100,000 and up to five years imprisonment if the wrongful conduct involves false pretenses, and to $250,000 and up to 10 years imprisonment if the wrongful conduct involves the intent to sell, transfer, or use identifiable health information for commercial advantage, personal gain, or malicious harm. The U.S. Department of Justice is responsible for criminal prosecutions under HIPAA. Furthermore, in the event of a breach as defined by HIPAA, the covered entity has specific reporting requirements under the HIPAA regulations. In the event of a significant breach, the reporting requirements could include notification to the general public.

In addition, the interpretation and application of consumer, health-related, and data protection laws in the United States, Europe and elsewhere are often uncertain, contradictory, and in flux. It is possible that these laws may be interpreted and applied in a manner that is inconsistent with our practices. If so, this could result in government-imposed fines or orders requiring that we change our practices, which could adversely affect our business. In addition, these privacy regulations may differ from country to country, and may vary based on whether testing is performed in the United States or in the local country. Complying with these various laws could cause us to incur substantial costs or require us to change our business practices and compliance procedures in a manner adverse to our business.

Economic or business instability may have a negative impact on our business.

Continuing concerns over United States health care reform legislation, geopolitical issues, the availability and cost of credit, and government stimulus programs in the United States and other countries have contributed to volatility for the global economy. If the economic climate does not improve, our business, including our access to patient samples and the addressable market for

 

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molecular information products that we may successfully develop, as well as the financial condition of our suppliers and our commercial third-party payors, could be adversely affected, resulting in a negative impact on our business, financial condition, and results of operations. Additionally, the instability has resulted in diminished liquidity and credit availability in the market, which could impair our ability to access capital if required or adversely affect our operations. In the event of further economic slowdown, investment in biopharmaceutical research and development may also experience a corresponding slowdown.

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

Our activities currently require the use of hazardous chemicals. We cannot eliminate the risk of accidental contamination or injury to employees or third parties from the use, storage, handling, or disposal of these materials. In the event of contamination or injury, we could be held liable for any resulting damages, and any liability could exceed our resources or any applicable insurance coverage we may have. Additionally, we are subject on an ongoing basis to federal, state, and local laws and regulations governing the use, storage, handling, and disposal of these materials and specified waste products. The cost of compliance with these laws and regulations may become significant and could negatively affect our operating results.

Our term loan contains restrictions that limit our flexibility in operating our business.

In November 2010, we entered into a loan and security agreement with Lighthouse Capital Partners, or Lighthouse, secured by a lien on equipment, fixtures or personal property financed pursuant to any agreements with Lighthouse. This loan contains various covenants that limit our ability to engage in specified types of transactions. These covenants limit our ability to, among other things:

 

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sell, transfer, lease or dispose of certain assets;

 

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encumber or permit liens on certain assets;

 

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make certain restricted payments, including paying dividends on, or repurchasing or making distributions with respect to, our common stock; and

 

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enter into certain transactions with affiliates.

A breach of any of the covenants under the loan and security agreement could result in a default under the loan. Upon the occurrence of an event of default under the loan, the lender could elect to declare all amounts outstanding to be immediately due and payable and terminate all commitments to extend further credit. If we are unable to repay those amounts, the lender could proceed against the collateral granted to them to secure such indebtedness.

Reimbursement and Regulatory Risks Relating to Our Business

If commercial third-party payors or government payors fail to provide coverage or adequate reimbursement, or if there is a decrease in the amount of reimbursement for FoundationOne or future products we develop, if any, our revenue and prospects for profitability would be harmed.

In both domestic and foreign markets, sales of FoundationOne or any future molecular information products we develop will depend, in large part, upon the availability of reimbursement from third-party payors. These third-party payors include government healthcare programs such as Medicare, managed care providers, private health insurers, and other organizations. In particular, we believe that obtaining a positive national coverage decision and favorable reimbursement rate from the Centers for Medicare and Medicaid Services, or CMS, for FoundationOne will be a necessary element in achieving material commercial success. Physicians and patients may not order FoundationOne

 

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unless commercial third-party payors and government payors pay for all, or a substantial portion, of the list price, and certain commercial third-party payors may not agree to reimburse FoundationOne if CMS does not issue a positive coverage decision.

There is currently no national coverage decision that determines whether and how our test is covered by Medicare. In the absence of a national coverage decision, local Medicare contractors that administer the Medicare program in various regions have some discretion in determining coverage and therefore payment for tests. Our local Medicare contractor, who would process our claims on behalf of Medicare, requested that we not submit claims for services provided to Medicare patients while the contractor assessed the appropriate coverage and payment for FoundationOne as a whole. Pending the response, no claims have been billed to either Medicare or Medicare patients. Accordingly, we do not currently receive any payment for FoundationOne provided to patients covered by Medicare. If CMS does not issue a positive national coverage decision with respect to FoundationOne, or if CMS denies reimbursement of FoundationOne, withdraws its coverage policies after reimbursement is obtained, reviews and adjusts the rate of reimbursement, or stops paying for FoundationOne altogether, our revenue and results of operations would be adversely affected.

We intend, before the end of 2013, to commence submitting claims to CMS for FoundationOne tests provided to Medicare patients. We will inform our Medicare contractor prior to submitting these claims for services provided to Medicare patients. The response of the Medicare contractor to the submission of such a claim is uncertain and the claim may be denied or paid, in whole or in part. If a claim is denied or paid in part, we may decide to appeal the denied claim or any denied portion of the claim. Alternatively, CMS may defer processing a claim pending a coverage or payment determination. Even if we do receive payments from CMS, the reimbursement rate may be lower than we expect, and if such rate is then adopted by commercial third-party payors, it would have an adverse effect on our revenues and results of operations. In addition, CMS may issue a negative coverage determination for FoundationOne that would apply to future claims. Although we would have the opportunity to submit additional materials to CMS in support of a positive coverage determination for FoundationOne, there is no guarantee that CMS would provide us with a positive coverage decision or reverse a negative coverage decision that it already issued.

Commercial third-party payors and government payors are increasingly attempting to contain healthcare costs by demanding price discounts or rebates and limiting both coverage on which diagnostic products they will pay for and the amounts that they will pay for new molecular diagnostic products. Because of the cost-containment trends, commercial third-party payors and government payors that currently provide reimbursement for, or in the future cover, FoundationOne may reduce, suspend, revoke, or discontinue payments or coverage at any time.

As a result, there is significant uncertainty surrounding whether the use of products that incorporate new technology, such as FoundationOne, will be eligible for coverage by commercial third-party payors and government payors or, if eligible for coverage, what the reimbursement rates will be for those products. The fact that a diagnostic product has been approved for reimbursement in the past, for any particular indication or in any particular jurisdiction, does not guarantee that such a diagnostic product will remain approved for reimbursement or that similar or additional diagnostic products will be approved in the future. Reimbursement of NGS-based cancer products by commercial third-party payors and government payors may depend on a number of factors, including a payor’s determination that products enabled by our molecular information platform are:

 

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not experimental or investigational;

 

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medically necessary;

 

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appropriate for the specific patient;

 

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cost-effective;

 

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supported by peer-reviewed publications;

 

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included in clinical practice guidelines; and

 

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supported by clinical utility studies.

As a result, our efforts to receive reimbursement on behalf of patients will take a substantial amount of time, and commercial third-party payors and government payors may never cover or provide adequate payment for FoundationOne or future molecular information products we develop. Our strategy to achieve broad reimbursement coverage is focused on demonstrating the clinical utility and economic benefits of FoundationOne, engaging with key members of the oncology community and increasing physician demand, but there is no assurance that we will succeed in any of these areas or that, even if we do succeed, we will receive favorable reimbursement decisions. If adequate third-party reimbursement is unavailable we may not be able to maintain price levels sufficient to realize an appropriate return on investment in product development. Furthermore, if a commercial third-party payor or government payor denies coverage, it may be difficult for us to collect from the patient, and we may not be successful.

In addition, we are currently considered a “non-contracting provider” by commercial third-party payors because we have not entered into specific contracts to provide FoundationOne to their covered patients, and as a result we take on primary responsibility for obtaining reimbursement on behalf of patients. If we were to become a contracting provider in the future, the amount of overall reimbursement we receive may decrease if we were to be reimbursed less money per product performed at a contracted rate than at a non-contracted rate, which could have a negative impact on our revenue. Further, we may be unable to collect payments from patients beyond that which is paid by their coverage and will experience lost revenue as a result.

The United States and foreign governments continue to propose and pass legislation designed to reduce the cost of healthcare. For example, in some foreign markets, the government controls the pricing of many healthcare products. We expect that there will continue to be federal and state proposals to implement governmental controls or impose healthcare requirements. In addition, the Medicare program and increasing emphasis on managed care in the United States will continue to put pressure on product pricing. Cost control initiatives could decrease the price that we would receive for any products in the future, which would limit our revenue and profitability.

Changes in the way that the FDA regulates products developed, manufactured, validated and performed by laboratories like ours could result in delay or additional expense in offering our products and products that we may develop in the future.

While the FDA currently exercises its enforcement discretion for LDTs by not enforcing its regulations, the FDA has stated that it has a mandate to regulate in this field and that it may address LDT regulation using a risk-based, phased-in approach similar to the existing in vitro diagnostic framework. In particular, as recently as June 2013, the Commissioner of the FDA has stated that “the FDA is working to make sure that the accuracy and clinical validity of high-risks tests are established before they come to market.” Thus, the FDA may seek to more actively regulate, including requiring clearance or approval of, our molecular information products in the future. Moreover, the FDA could disagree with our assessment that FoundationOne is a LDT, including FoundationOne for hematologic malignancies that we are developing with Memorial Sloan-Kettering Cancer Center, and could require us to seek clearance or approval to offer FoundationOne for clinical use. If the FDA requires us to seek clearance or approval to offer FoundationOne or any of our future products for clinical use, we may not be able to obtain such approvals on a timely basis, or at all. Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include any of the following sanctions: warning letters; fines; injunctions; civil or criminal penalties; recall or seizure of current or future products; operating restrictions; partial suspension or total shutdown of production;

 

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denial of applications; or challenges to clearances or approvals. In July 2010, the FDA’s Office of In-Vitro Diagnostic Device Evaluation and Safety held a public meeting to discuss oversight of LDTs. The FDA highlighted the lack of standardized clinical validation at the test level under current CLIA regulatory guidelines and noted that CLIA does not require post-market surveillance or monitoring of LDTs. The comment period for providing the FDA with written comments expired on August 15, 2010, but the FDA has not yet published additional guidance on the oversight of LDTs. We cannot provide any assurance that FDA regulation, including premarket review, will not be required for our molecular information products. If premarket review is required, our business could be negatively impacted if we are required to stop selling molecular information products pending their clearance or approval or the launch of any new products that we develop could be delayed by new requirements.

In addition, in June 2011, the FDA issued draft guidance regarding the sale and use of products labeled for research use only. Among other things, the draft guidance advises manufacturers to cease the sale of research use only products to customers that the manufacturer knows use the product for clinical diagnostic purposes. Certain of the reagents and other products we use in FoundationOne are labeled as research use only products. If the FDA were to enforce this June 2011 draft guidance, certain of our suppliers may cease selling research use only products to us and any failure to obtain an acceptable substitute could significantly and adversely affect our business, financial condition and results of operations.

Healthcare policy changes, including recently enacted legislation reforming the U.S. health care system, may have a material adverse effect on our financial condition, results of operations and cash flows.

In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, collectively referred to as the Affordable Care Act, was enacted in the United States, which made a number of substantial changes in the way health care is financed by both governmental and private insurers. Among other things, the Affordable Care Act:

 

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requires each medical device manufacturer to pay a sales tax equal to 2.3% of the price for which such manufacturer sells its medical devices, beginning in 2013. This tax may apply to FoundationOne and some or all of our products which are in development.

 

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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. In addition, a productivity adjustment is made to the fee schedule payment amount.

 

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establishes an Independent Payment Advisory Board to reduce the per capita rate of growth in Medicare spending. The Independent Payment Advisory Board has broad discretion to propose policies, which may have a negative impact on payment rates for our products beginning in 2016.

The Medicare Physician Fee Schedule rates for diagnostic tests are updated annually under the current statutory formula. For the past several years, the application of the statutory formula would have resulted in substantial payment reductions if Congress failed to intervene. In the past, Congress passed interim legislation to prevent the decreases. On November 1, 2012, CMS issued its 2013 Physician Fee Schedule Final Rule, or the Final Rule. In the Final Rule, CMS called for a reduction of approximately 26.5% in the 2013 conversion factor that is used to calculate physician reimbursement. However, the American Taxpayer Relief Act of 2012, which was signed into law on January 2, 2013, prevented this proposed cut and keeps the current reimbursement rate in effect until December 31, 2013. If similar proposed reductions are not offset in future years, the resulting decrease in payment could adversely impact our revenue and results of operations.

In addition, many of the Current Procedure Terminology, or CPT, procedure codes that we use to bill our products were recently revised by the American Medical Association, effective January 1, 2013.

 

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In the Final Rule, CMS announced that it has decided to keep the new molecular codes on the Clinical Laboratory Fee Schedule, rather than move them to the Physician Fee Schedule as some stakeholders had urged. CMS has also announced that for 2013 it will price the new codes using a “gapfilling” process by which it will refer the codes to the Medicare contractors to allow them to determine an appropriate price. Our reimbursement could be adversely affected by CMS’ action in this area. If it reduces reimbursement for the new test codes, then our revenue will be adversely affected. There can be no guarantees that Medicare and other payors will establish positive or adequate coverage policies or reimbursement rates.

We cannot predict whether future health care initiatives will be implemented at the federal or state level, or how any future legislation or regulation may affect us. The taxes imposed by the new federal legislation and the expansion of government’s role in the U.S. health care industry as well as changes to the reimbursement amounts paid by payors for our product and future products or our medical procedure volumes may reduce our profits and have a materially adverse effect on our business, financial condition, results of operations, and cash flows. Moreover, Congress has proposed on several occasions to impose a 20% coinsurance on patients for clinical laboratory tests reimbursed under the clinical laboratory fee schedule, which would require us to bill patients for these amounts. Because of the relatively low reimbursement for many clinical laboratory tests, in the event that Congress were to ever enact such legislation, the cost of billing and collecting for these tests would often exceed the amount actually received from the patient and effectively increase our costs of billing and collecting.

If we fail to comply with the complex federal, state, local and foreign laws and regulations that apply to our business, we could suffer severe consequences that could materially and adversely affect our operating results and financial condition.

We are subject to the CLIA, a federal law that regulates clinical laboratories that perform testing on specimens derived from humans for the purpose of providing information for the diagnosis, prevention, or treatment of disease. CLIA regulations mandate specific standards in the areas of personnel qualifications, administration, and participation in proficiency testing, patient test management, quality control, quality assurance, and inspections. We have a current certificate of accreditation under CLIA to conduct our genomic analyses through our accreditation by CAP. To renew this certificate, we are subject to survey and inspection every two years. Moreover, CLIA inspectors may make random inspections of our clinical reference laboratory.

We are also required to maintain a license to conduct testing in Massachusetts. Massachusetts laws establish standards for day-to-day operation of our clinical reference laboratory, including the training and skills required of personnel and quality control. We also maintain a license to conduct testing in California, Pennsylvania, Maryland, Florida, and Rhode Island. In addition, our clinical reference laboratory is required to be licensed on a product-specific basis by New York State. New York law also mandates proficiency testing for laboratories licensed under New York state law, regardless of whether or not such laboratories are located in New York. Our application for such a license from New York State is currently pending and we operate based on a waiver by New York State of the obligations to have the license. If we are unable to obtain the necessary approvals or if New York State does not extend our waiver, our business could suffer. Moreover, several other states require that we hold licenses to test specimens from patients in those states. Other states may have similar requirements or may adopt similar requirements in the future. Finally, we may be subject to regulation in foreign jurisdictions as we seek to expand international distribution of our products, which may require review of our products in order to offer our services or may have other limitations such as prohibitions on the export of tissue necessary for us to perform our tests that may limit our ability to distribute outside of the United States.

 

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Any sanction imposed under CLIA, its implementing regulations, or state or foreign laws or regulations governing licensure, or our failure to renew a CLIA certificate, a state or foreign license, or accreditation, could have a material adverse effect on our business. Most CLIA deficiencies are not classified as “condition-level” deficiencies, and there are no adverse effects upon the laboratory operations as long as the deficiencies are corrected. Remediation of these deficiencies are routine matters, with corrections occurring within several hours or weeks. More serious CLIA deficiencies could rise to the level of “condition-level” deficiencies, and CMS has the authority to impose a wide range of sanctions, including revocation of the CLIA certification along with a bar on the ownership or operation of a CLIA certified laboratory by any owners or operators of the deficient laboratory. There is an administrative hearing procedure that can be pursued by the laboratory in the event of imposition of such sanctions, during which the sanctions are stayed, but the process can take a number of years to complete. If we were to lose our CLIA certification or CAP accreditation, we would not be able to operate our clinical reference laboratory and conduct our molecular tests, which would result in material harm to our business and results of operations.

Our operations are subject to other extensive federal, state, local and foreign laws and regulations, all of which are subject to change. These laws and regulations currently include, among others:

 

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HIPAA, which established comprehensive federal standards with respect to the privacy and security of protected health information and requirements for the use of certain standardized electronic transactions, particularly with respect to our online portal, Interactive Cancer Explorer;

 

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amendments to HIPAA under the Health Information Technology for Economic and Clinical Health Act, which strengthen and expand HIPAA privacy and security compliance requirements, increase penalties for violators, extend enforcement authority to state attorneys general, and impose requirements for breach notification;

 

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the federal Anti-Kickback Statute, which prohibits knowingly and willfully offering, paying, soliciting, or receiving remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual, or the furnishing, arranging for, or recommending of an item or service that is reimbursable, in whole or in part, by a federal health care program;

 

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the federal Stark physician self-referral law, which prohibits a physician from making a referral for certain designated health services covered by the Medicare program, including laboratory and pathology services, if the physician or an immediate family member has a financial relationship with the entity providing the designated health services, unless the financial relationship falls within an applicable exception to the prohibition;

 

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the federal False Claims Act, which imposes liability on any person or entity that, among other things, knowingly presents, or causes to be presented, a false or fraudulent claim for payment to the federal government;

 

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the federal Civil Monetary Penalties Law, which prohibits, among other things, the offering or transfer of remuneration to a Medicare or state health care program beneficiary if the person knows or should know it is likely to influence the beneficiary’s selection of a particular provider, practitioner, or supplier of services reimbursable by Medicare or a state health care program, unless an exception applies;

 

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other federal and state fraud and abuse laws, such as anti-kickback laws, prohibitions on self-referral, fee-splitting restrictions, prohibitions on the provision of products at no or discounted cost to induce physician or patient adoption, and false claims acts, which may extend to services reimbursable by any third-party payor, including private insurers;

 

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the prohibition on reassignment of Medicare claims, which, subject to certain exceptions, precludes the reassignment of Medicare claims to any other party;

 

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the rules regarding billing for diagnostic tests reimbursable by the Medicare program, which prohibit a physician or other supplier from marking up the price of the technical component or professional component of a diagnostic test ordered by the physician or other supplier and supervised or performed by a physician who does not “share a practice” with the billing physician or supplier;

 

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state laws that prohibit other specified practices, such as billing physicians for testing that they order; waiving coinsurance, copayments, deductibles, and other amounts owed by patients; billing a state Medicaid program at a price that is higher than what is charged to one or more other payors; and

 

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similar foreign laws and regulations that apply to us in the countries in which we operate.

Our failure to comply could lead to civil or criminal penalties, exclusion from participation in government health care programs, or prohibitions or restrictions on our laboratory’s ability to conduct commercial activities. We believe that we are in material compliance with all statutory and regulatory requirements, but there is a risk that one or more government agencies could take a contrary position. These laws and regulations are complex and are subject to interpretation by the courts and by government agencies. If one or more such agencies alleges that we may be in violation of any of these requirements, regardless of the outcome, it could damage our reputation and adversely affect important business relationships with third parties, including managed care organizations and other commercial third-party payors.

The FDA and other regulatory agencies strictly regulate the promotional claims that may be made about prescription products. If we are found to have improperly promoted off-label uses, we may become subject to significant fines and other liability.

FoundationOne delivers to physicians a report that describes a tumor’s genomic alterations and matches them with FDA-approved therapies or open clinical trials for therapies targeting cancers driven by those alterations. In some cases, the therapies identified in our report are not approved for the patient’s tumor type or disease state. The FDA and other regulatory agencies strictly regulate the promotional claims that may be made about prescription drug and device products. In particular, a product may not be promoted for uses or indications beyond those contained in such product’s approved labeling. The U.S. government has levied large civil and criminal fines against companies for alleged improper promotion and has enjoined several companies from engaging in off-label promotion. The FDA has also requested that companies enter into consent decrees or permanent injunctions under which specified promotional conduct is changed or curtailed. If the FDA determines that we have engaged in off-label promotion in our FoundationOne report by providing information regarding approved therapies, we may be subject to civil or criminal fines.

In addition, incentives exist under applicable laws that encourage competitors, employees, and physicians to report violations of rules governing promotional activities for pharmaceutical products. These incentives could lead to so-called whistleblower lawsuits as part of which such persons seek to collect a portion of monies allegedly overbilled to government agencies due to, for example, promotion of pharmaceutical products beyond labeled claims. These incentives could also lead to suits that we have mischaracterized a competitor’s product in the marketplace and, as a result, we could be sued for alleged damages to our competitors. Such lawsuits, whether with or without merit, are typically time-consuming and costly to defend. Such suits may also result in related shareholder lawsuits, which are also costly to defend.

 

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We may be subject to fines, penalties, licensure requirements, or legal liability, if it is determined that through our FoundationOne reports we are practicing medicine without a license.

Our FoundationOne reports delivered to physicians provide information regarding FDA-approved therapies and clinical trials that oncologists may use in making treatment decisions for their patients. We make members of our organization available to discuss the information provided in the report. State laws prohibit the practice of medicine without a license. Our customer service representatives provide support to our customers, including assistance in interpreting the FoundationOne report results. A governmental authority or individual actor could allege that the identification of available therapies and clinical trials in our reports and the related customer service we provide constitute the practice of medicine. A state may seek to have us discontinue the inclusion of certain aspects of our reports or the related services we provide or subject us to fine, penalties, or licensure requirements. Any determination that we are practicing medicine without a license may result in significant liability to us.

If the validity of an informed consent from a patient enrolled in a clinical trial with one of our biopharmaceutical partners was challenged, we could be forced to stop using some of our resources, which would hinder our molecular information product development efforts.

We have implemented measures to ensure that all clinical data and genetic and other biological samples that we receive from our biopharmaceutical partners have been collected from subjects who have provided appropriate informed consent for purposes which extend to our product development activities. We seek to ensure these data and samples are provided to us on a subject de-identified manner. We also have measures in place to ensure that the subjects from whom the data and samples are collected do not retain or have conferred on them any proprietary or commercial rights to the data or any discoveries derived from them. Our biopharmaceutical partners conduct clinical trials in a number of different countries, and, to a large extent, we rely upon them to comply with the subject’s informed consent and with local law and international regulation. The collection of data and samples in many different countries results in complex legal questions regarding the adequacy of informed consent and the status of genetic material under a large number of different legal systems. The subject’s informed consent obtained in any particular country could be challenged in the future, and those informed consents could prove invalid, unlawful, or otherwise inadequate for our purposes. Any findings against us, or our biopharmaceutical partners, could deny us access to or force us to stop using some of our clinical samples, which would hinder our molecular information product development efforts. We could become involved in legal challenges, which could consume our management and financial resources.

Ethical, legal and social concerns related to the use of genomic information could reduce demand for our molecular information products.

Genomic testing, like that conducted using our molecular information platform and FoundationOne, has raised ethical, legal, and social issues regarding privacy and the appropriate uses of the resulting information. Governmental authorities could, for social or other purposes, limit or regulate the use of genomic information or genomic testing or prohibit testing for genetic predisposition to certain conditions, particularly for those that have no known cure. Similarly, these concerns may lead patients to refuse to use genomic tests even if permissible.

Ethical and social concerns may also influence U.S. and foreign patent offices and courts with regard to patent protection for technology relevant to our business. These and other ethical, legal and social concerns may limit market acceptance of our products or reduce the potential markets for products enabled by our molecular information platform, either of which could have an adverse effect on our business, financial condition, or results of operations.

 

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Intellectual Property Risks Related to Our Business

Litigation or other proceedings or third-party claims of intellectual property infringement could require us to spend significant time and money and could prevent us from selling our products or impact our stock price.

Third parties have asserted and may in the future assert that we are employing their proprietary technology without authorization. As we continue to commercialize FoundationOne in its current or an updated form, launch new products, and enter new markets, we expect that competitors will claim that our products infringe their intellectual property rights as part of business strategies designed to impede our successful commercialization and entry into new markets. We occasionally receive letters from third parties inviting us to take licenses under, or alleging that we infringe, their patents. Third parties may have obtained, and may in the future obtain, patents under which such third parties may claim that the use of our technologies constitutes patent infringement.

We could incur substantial costs and divert the attention of our management and technical personnel in defending ourselves against any of these claims. Any adverse ruling or perception of an adverse ruling in defending ourselves against these claims could have a material adverse impact on our cash position and stock price. Furthermore, 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 or misappropriation 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, all of which could have a material adverse impact on our cash position and business and financial condition.

In addition, we may be unable to obtain these licenses at a reasonable cost, if at all. We could therefore incur substantial costs related to royalty payments for licenses obtained from third parties, which could negatively affect our gross margins. Moreover, we could encounter delays in product introductions while we attempt to develop alternative methods or products. 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 would materially affect our ability to grow and maintain profitability and have a material adverse impact on our business.

Developments in patent law could have a negative impact on our business.

From time to time, the United States Supreme Court, or the Supreme Court, other federal courts, the United States Congress or the United States Patent and Trademark Office, or the USPTO, may change the standards of patentability and any such changes could have a negative impact on our business.

Two cases involving diagnostic method claims and “gene patents” have recently been decided by the Supreme Court. On March 20, 2012, the Supreme Court issued a decision in  Mayo Collaborative v. Prometheus Laboratories , or Prometheus , a case involving patent claims directed to optimizing the amount of drug administered to a specific patient. According to that decision, Prometheus’ claims failed to incorporate sufficient inventive content above and beyond mere underlying natural correlations to allow the claimed processes to qualify as patent-eligible processes that apply natural laws. On June 13, 2013, the Supreme Court subsequently decided Association for Molecular Pathology v. Myriad Genetics , or Myriad , a case brought by multiple plaintiffs challenging the validity of patent claims held by Myriad Genetics, Inc. relating to the breast cancer susceptibility genes BRCA1 and BRCA2, holding that isolated genomic DNA that exists in nature, such as the DNA constituting the BRCA1 and BRCA2 genes, is not patentable subject matter, but that cDNA, which is an artificial construct created from RNA transcripts of genes, may be patent eligible.

On July 3, 2012, the USPTO issued a memorandum to patent examiners providing interim guidelines for examining process claims for patent eligibility in view of the Supreme Court decision in

 

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Prometheus . The guidance indicates that claims directed to a law of nature, a natural phenomenon, or an abstract idea that do not meet the eligibility requirements should be rejected as non-statutory subject matter. We cannot assure you that our efforts to seek patent protection for our technology and products will not be negatively impacted by the decisions described above, rulings in other cases or changes in guidance or procedures issued by the USPTO.

We cannot fully predict what impact the Supreme Court’s decisions in Prometheus and Myriad may have on the ability of biopharmaceutical companies or other entities to obtain or enforce patents relating to genes or genomic discoveries in the future. Despite the USPTO memorandum described above, the Prometheus decision is new and the contours of when certain method claims allegedly directed to laws of nature or natural phenomenon meet the patent eligibility requirements are not clear and may take many years to develop via interpretation in the courts. There are many patents claiming diagnostic methods based on similar or related correlations that issued before Prometheus , and although some of these patents may be invalid under the standard set forth in Prometheus , until successfully challenged, these patents are presumed valid and enforceable, and certain third parties could allege that we infringe, or request that we obtain a license to, these patents. Whether based on patents issued prior to or after Prometheus , we could have to defend ourselves against claims of patent infringement, or choose to license rights, if available, under patents claiming such methods. Moreover, although the Supreme Court has held in Myriad that isolated genomic DNA is not patent-eligible subject matter, certain third parties could allege that activities that we may undertake infringe other classes of gene-related patent claims, and we could have to defend ourselves against these claims by asserting non-infringement and/or invalidity positions, or pay to obtain a license to these claims. In any of the foregoing or in other situations involving third-party intellectual property rights, if we are unsuccessful in defending against claims of patent infringement, we could be forced to pay damages or be subjected to an injunction that would prevent us from utilizing the patented subject matter in question if we are unable to obtain a license on reasonable terms. Such outcomes could materially affect our ability to offer our products and have a material adverse impact on our business. Even if we are able to obtain a license or successfully defend against claims of patent infringement, the cost and distraction associated with the defense or settlement of these claims could have a material adverse impact on our business.

In addition, the Leahy-Smith America Invents Act, or the America Invents Act, which was signed into law in 2011, includes a number of significant changes to U.S. patent law. These changes include a transition from a “first-to-invent” system to a “first-to-file” system, changes to the way issued patents are challenged, and changes to the way patent applications are disputed during the examination process. These changes may favor larger and more established companies that have greater resources to devote to patent application filing and prosecution. The USPTO has developed new and untested regulations and procedures to govern the full implementation of the America Invents Act, and many of the substantive changes to patent law associated with the America Invents Act, and, in particular, the first-to-file provisions, became effective on March 16, 2013. Substantive changes to patent law associated with the America Invents Act may affect our ability to obtain patents, and if obtained, to enforce or defend them. Accordingly, it is not clear what, if any, impact the America Invents Act will ultimately have on the cost of prosecuting our patent applications, our ability to obtain patents based on our discoveries and our ability to enforce or defend any patents that may issue from our patent applications, all of which could have a material adverse effect on our business.

We may be unable to protect or enforce our intellectual property effectively, which could harm our competitive position.

Obtaining and maintaining a strong patent position is important to our business. Our patent applications are in the early stages of prosecution and none have yet issued as patents. Patent law relating to the scope of claims in the technology fields in which we operate is complex and uncertain, so we cannot be assured that we will be able to obtain or maintain patent rights, or that the patent

 

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rights we may obtain will be valuable, provide an effective barrier to competitors or otherwise provide competitive advantages. Others have filed, and in the future are likely to file, patent applications that are similar or identical to ours or those of our licensors. To determine the priority of inventions, or demonstrate that we did not derive our invention from another, we may have to participate in interference or derivation proceedings in the USPTO or in court that could result in substantial costs in legal fees and could substantially affect the scope of our patent protection. We cannot be assured our patent applications will prevail over those filed by others. Also, our intellectual property rights may be subject to other challenges by third parties. Patents we obtain could be challenged in litigation or in administrative proceedings such as ex parte reexam, inter partes review, or post grant review in the United States or opposition proceedings in Europe or other jurisdictions.

Obtaining and maintaining a patent portfolio entails significant expense and resources. Part of the expense includes periodic maintenance fees, renewal fees, annuity fees, various other governmental fees on patents and/or applications due in several stages over the lifetime of patents and/or applications, as well as the cost associated with complying with numerous procedural provisions during the patent application process. We may or may not choose to pursue or maintain protection for particular inventions. In addition, there are situations in which failure to make certain payments or noncompliance with certain requirements in the patent process can result in abandonment or lapse of a patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. If we choose to forgo patent protection or allow a patent application or patent to lapse purposefully or inadvertently, our competitive position could suffer.

Legal actions to enforce our patent rights can be expensive and may involve the diversion of significant management time. In addition, these legal actions could be unsuccessful and could also result in the invalidation of our patents or a finding that they are unenforceable. We may or may not choose to pursue litigation or interferences against those that have infringed on our patents, or used them without authorization, due to the associated expense and time commitment of monitoring these activities. If we fail to protect or to enforce our intellectual property rights successfully, our competitive position could suffer, which could harm our results of operations.

If we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed.

In addition to patent protection, we also rely upon copyright and trade secret protection, as well as non-disclosure agreements and invention assignment agreements with our employees, consultants and third-parties, to protect our confidential and proprietary information. For example, significant elements of FoundationOne, including aspects of sample preparation, computational-biological algorithms, and related processes and software, are based on unpatented trade secrets and know-how that are not publicly disclosed. In addition to contractual measures, we try to protect the confidential nature of our proprietary information using physical and technological security measures. Such measures may not, for example, in the case of misappropriation of a trade secret by an employee or third party with authorized access, provide adequate protection for our proprietary information. Our security measures may not prevent an employee or consultant from misappropriating our trade secrets and providing them to a competitor, and recourse we take against such misconduct may not provide an adequate remedy to protect our interests fully. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret can be difficult, expensive, and time-consuming, and the outcome is unpredictable. In addition, trade secrets may be independently developed by others in a manner that could prevent legal recourse by us. If any of our confidential or proprietary information, such as our trade secrets, were to be disclosed or misappropriated, or if any such information was independently developed by a competitor, our competitive position could be harmed.

 

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We may not be able to enforce our intellectual property rights throughout the world.

The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. Many companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. The legal systems of some countries, particularly developing countries, do not favor the enforcement of patents and other intellectual property protection, especially those relating to biotechnology. This could make it difficult for us to stop the infringement of our patents, if obtained, or the misappropriation of our other intellectual property rights. For example, many foreign countries have compulsory licensing laws under which a patent owner must grant licenses to third parties. In addition, many countries limit the enforceability of patents against third parties, including government agencies or government contractors. In these countries, patents may provide limited or no benefit. Patent protection must ultimately be sought on a country-by-country basis, which is an expensive and time-consuming process with uncertain outcomes. Accordingly, we may choose not to seek patent protection in certain countries, and we will not have the benefit of patent protection in such countries.

Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business. Accordingly, our efforts to protect our intellectual property rights in such countries may be inadequate. In addition, changes in the law and legal decisions by courts in the United States and foreign countries may affect our ability to obtain adequate protection for our technology and the enforcement of intellectual property.

Third parties may assert ownership or commercial rights to inventions we develop.

Third parties may in the future make claims challenging the inventorship or ownership of our intellectual property. For example, we rely on certain third parties to provide us with tissue samples and biological materials that we use to conduct our genomic analyses. We have written agreements with collaborators that provide for the ownership of intellectual property arising from our collaborations. These agreements provide that we must negotiate certain commercial rights with collaborators with respect to joint inventions or inventions made by our collaborators that arise from the results of the collaboration. In some instances, there may not be adequate written provisions to address clearly the resolution of intellectual property rights that may arise from a collaboration. If we cannot successfully negotiate sufficient ownership and commercial rights to the inventions that result from our use of a third-party collaborator’s materials where required, or if disputes otherwise arise with respect to the intellectual property developed with the use of a collaborator’s samples, we may be limited in our ability to capitalize on the market potential of these inventions. In addition, we may face claims by third parties that our agreements with employees, contractors, or consultants obligating them to assign intellectual property to us are ineffective, or in conflict with prior or competing contractual obligations of assignment, which could result in ownership disputes regarding intellectual property we have developed or will develop and interfere with our ability to capture the commercial value of such inventions. Litigation may be necessary to resolve an ownership dispute, and if we are not successful, we may be precluded from using certain intellectual property, or may lose our exclusive rights in that intellectual property. Either outcome could have an adverse impact on our business.

Third parties may assert that our employees or consultants have wrongfully used or disclosed confidential information or misappropriated trade secrets.

We employ individuals who were previously employed at universities or other diagnostic or biopharmaceutical companies, including our competitors or potential competitors. Although we try to ensure that our employees and consultants do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we or our employees, consultants or independent contractors have inadvertently or otherwise used or disclosed intellectual property, including trade secrets or other proprietary information, of a former employer or other third parties.

 

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Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.

Risks Relating to Our Financial Condition and Capital Requirements

We are an early, commercial-stage company and have a limited operating history, which may make it difficult to evaluate our current business and predict our future performance.

We are an early, commercial-stage company and have a limited operating history. We were incorporated in Delaware and began operations in November 2009. Our limited operating history, particularly in light of our business model based upon sales of novel products enabled by our molecular information platform and the rapidly evolving genomic analysis industry, may make it difficult to evaluate our current business and predict our future performance. Any assessment of our profitability or prediction about our future success or viability is subject to significant uncertainty. We have encountered and will continue to encounter risks and difficulties frequently experienced by early, commercial-stage companies in rapidly evolving industries. If we do not address these risks successfully, our business will suffer.

We have a history of net losses. We expect to incur net losses in the future and we may never achieve sustained profitability.

We have historically incurred substantial net losses, including a net loss of $22.4 million in 2012. From our inception in 2009 through June 30, 2013, we had an accumulated deficit of $64.2 million. We expect our losses to continue as a result of ongoing research and development expenses and increased sales and marketing costs. These losses have had, and will continue to have, an adverse effect on our working capital, total assets, and stockholders’ equity. Because of the numerous risks and uncertainties associated with our research, development, and commercialization efforts, we are unable to predict when we will become profitable, and we may never become profitable. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our inability to achieve and then maintain profitability would negatively affect our business, financial condition, results of operations, and cash flows.

We may need to raise additional capital to fund our existing operations, develop our molecular information platform, commercialize new products and expand our operations.

Based on our current business plan, we believe the net proceeds from this offering, together with our current cash and cash equivalents and anticipated cash flow from operations, will be sufficient to meet our anticipated cash requirements over at least the next 12 months and for the foreseeable future. If our available cash balances, net proceeds from this offering, and anticipated cash flow from operations are insufficient to satisfy our liquidity requirements including because of lower demand for our products as a result of lower than currently expected rates of reimbursement from commercial third-party payors and government payors or other risks described in this prospectus, we may seek to sell common or preferred equity or convertible debt securities, enter into an additional credit facility or another form of third-party funding, or seek other debt financing.

We may consider raising additional capital in the future to expand our business, to pursue strategic investments, to take advantage of financing opportunities, or for other reasons, including to:

 

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increase our sales and marketing efforts to drive market adoption of FoundationOne and address competitive developments;

 

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fund development and marketing efforts of any future products;

 

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  Ÿ  

further expand our clinical laboratory operations;

 

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expand our technologies into other types of cancers;

 

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acquire, license or invest in technologies;

 

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acquire or invest in complementary businesses or assets; and

 

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finance capital expenditures and general and administrative expenses.

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

 

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our ability to achieve revenue growth;

 

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our rate of progress in establishing reimbursement arrangements with domestic and international commercial third-party payors and government payors;

 

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the cost of expanding our laboratory operations and offerings, including our sales and marketing efforts;

 

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our rate of progress in, and cost of the sales and marketing activities associated with, establishing adoption of and reimbursement for FoundationOne;

 

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our rate of progress in, and cost of research and development activities associated with, products in research and early development;

 

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the effect of competing technological and market developments;

 

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costs related to international expansion; and

 

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the potential cost of and delays in product development as a result of any regulatory oversight applicable to our products.

The various ways we could raise additional capital carry potential risks. If we raise funds by issuing equity securities, dilution to our stockholders could result. Any equity securities issued also could provide for rights, preferences, or privileges senior to those of holders of our common stock. If we raise funds by issuing debt securities, those debt securities would have rights, preferences, and privileges senior to those of holders of our common stock. The terms of debt securities issued or borrowings pursuant to a credit agreement could impose significant restrictions on our operations. If we raise funds through collaborations and licensing arrangements, we might be required to relinquish significant rights to our platform technologies or products, or grant licenses on terms that are not favorable to us.

The credit markets and the financial services industry have experienced a period of unprecedented turmoil and upheaval characterized by the bankruptcy, failure, collapse, or sale of various financial institutions and an unprecedented level of intervention from the United States federal government. These events have generally made equity and debt financing more difficult to obtain. Accordingly, additional equity or debt financing might not be available on reasonable terms, if at all. In addition, our current loan and security agreement with Lighthouse restricts our ability to raise funds through additional debt or other financing options. If we cannot secure additional funding when needed, we may have to delay, reduce the scope of, or eliminate one or more research and development programs or sales and marketing initiatives. In addition, we may have to work with a partner on one or more of our development programs, which could lower the economic value of those programs to us.

We will incur significant costs as a result of operating as a public company and our management expects to devote substantial time to public company compliance programs.

As a public company, we will incur significant legal, accounting and other expenses due to our compliance with regulations and disclosure obligations applicable to us, including compliance with the

 

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Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, as well as rules implemented by the SEC and the NASDAQ Stock Market, or NASDAQ. The SEC and other regulators have continued to adopt new rules and regulations and make additional changes to existing regulations that require our compliance. In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, was enacted. There are significant corporate governance and executive compensation related provisions in the Dodd-Frank Act that have required the SEC to adopt additional rules and regulations in these areas. Stockholder activism, the current political environment, and the current high level of government intervention and regulatory reform may lead to substantial new regulations and disclosure obligations, which may lead to additional compliance costs and impact, in ways we cannot currently anticipate, the manner in which we operate our business. Our management and other personnel will devote a substantial amount of time to these compliance programs and monitoring of public company reporting obligations and as a result of the new corporate governance and executive compensation related rules, regulations, and guidelines prompted by the Dodd-Frank Act and further regulations and disclosure obligations expected in the future, we will likely need to devote additional time and costs to comply with such compliance programs and rules. These rules and regulations will cause us to incur significant legal and financial compliance costs and will make some activities more time-consuming and costly.

To comply with the requirements of being a public company, we may need to undertake various actions, including implementing new internal controls and procedures and hiring new accounting or internal audit staff. The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file with the SEC is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that information required to be disclosed in reports under the Securities Exchange Act of 1934, or the Exchange Act, is accumulated and communicated to our principal executive and financial officers. Our current controls and any new controls that we develop may become inadequate and weaknesses in our internal control over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls could adversely affect the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting that we may be required to include in our periodic reports we will file with the SEC under Section 404 of the Sarbanes-Oxley Act, harm our operating results, cause us to fail to meet our reporting obligations, or result in a restatement of our prior period financial statements. In the event that we are not able to demonstrate compliance with the Sarbanes-Oxley Act, that our internal control over financial reporting is perceived as inadequate or that we are unable to produce timely or accurate financial statements, investors may lose confidence in our operating results and the price of our ordinary shares could decline. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on NASDAQ.

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

 

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weaknesses in our internal control over financial reporting, we will be unable to assert that our internal control over financial reporting is effective.

Our independent registered public accounting firm may not be required to formally attest to the effectiveness of our internal control over financial reporting until the later of our second annual report or the first annual report required to be filed with the SEC following the date we are no longer an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, depending on whether we choose to rely on certain exemptions set forth in the JOBS Act. We cannot assure you that there will not be material weaknesses or significant deficiencies in our internal controls in the future. If we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, which could have a material adverse effect on the price of our ordinary shares.

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

In general, under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an “ownership change” is subject to annual limitations on its ability to use its pre-change net operating loss carryforwards or other tax attributes, or NOLs, to offset future taxable income or reduce taxes. Our past issuances of stock and other changes in our stock ownership may have resulted in ownership changes within the meaning of Section 382 of the Code; accordingly, our pre-change NOLs may be subject to limitation under Section 382. If we determine that we have not undergone an ownership change, the Internal Revenue Service could challenge our analysis, and our ability to use our NOLs to offset taxable income could be limited by Section 382 of the Code. Future changes in our stock ownership, including in connection with this offering and some of which are outside of our control, could result in ownership changes under Section 382 of the Code further limiting our ability to utilize our NOLs. Furthermore, our ability to use NOLs of companies that we may acquire in the future may be subject to limitations. For these reasons, we may not be able to use a material portion of the NOLs, even if we attain profitability.

Risks Related to Our Common Stock

We expect that our stock price may fluctuate significantly.

Prior to this offering, you could not buy or sell our common stock publicly. Although we anticipate our common stock being approved for listing on NASDAQ, an active trading market for our shares may never develop or be sustained following this offering. We will negotiate and determine the initial public offering price with the underwriters based on several factors. This price may vary from the market price of our common stock after this offering. You may be unable to sell your shares of common stock at or above the initial offering price. The market price of shares of our common stock could be subject to wide fluctuations in response to many risk factors listed in this section, and others beyond our control, including:

 

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actual or anticipated fluctuations in our financial condition and operating results;

 

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actual or anticipated changes in our growth rate relative to our competitors;

 

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competition from existing products or new products that may emerge;

 

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

 

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failure to meet or exceed financial estimates and projections of the investment community or that we provide to the public;

 

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issuance of new or updated research or reports by securities analysts;

 

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  Ÿ  

fluctuations in the valuation of companies perceived by investors to be comparable to us;

 

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share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;

 

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additions or departures of key management or scientific personnel;

 

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disputes or other developments related to proprietary rights, including patents, litigation matters, and our ability to obtain patent protection for our technologies;

 

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changes to reimbursement levels by commercial third-party payors and government payors, including Medicare, and any announcements relating to reimbursement levels;

 

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announcement or expectation of additional debt or equity financing efforts;

 

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sales of our common stock by us, our insiders or our other stockholders; and

 

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general economic and market conditions.

These and other market and industry factors may cause the market price and demand for our common stock to fluctuate substantially, regardless of our actual operating performance, which may limit or prevent investors from readily selling their shares of common stock and may otherwise negatively affect the liquidity of our common stock. In addition, the stock market in general, and NASDAQ and biopharmaceutical companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. In the past, when 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 brought a lawsuit against us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management.

Our principal stockholders will exercise significant control over our company.

Assuming they do not purchase shares in this offering, investment funds affiliated with Third Rock Ventures and Kleiner Perkins Caufield & Byers, and Google Ventures 2011, L.P., our current largest stockholders, will beneficially own, in the aggregate, shares representing approximately 47.7% of our outstanding capital stock immediately after this offering. Although we are not aware of any voting arrangements that will be in place among these stockholders following this offering, if these stockholders were to choose to act together, as a result of their stock ownership, they may be able to influence our management and affairs and control all matters submitted to our stockholders for approval, including the election of directors and approval of any merger, consolidation, or sale of all or substantially all of our assets. This concentration of ownership may have the effect of delaying or preventing a change in control of our company and might affect the market price of our common stock.

Future sales of shares by existing stockholders could cause our stock price to decline.

If our existing stockholders sell, or indicate an intent to sell, substantial amounts of our common stock in the public market after the 180-day contractual lock-up and other legal restrictions on resale discussed in this prospectus lapse, the trading price of our common stock could decline significantly and could decline below the initial public offering price. Based on shares outstanding as of August 31, 2013, upon the completion of this offering, we will have 26,283,454 outstanding shares of common stock, assuming no exercise of outstanding options. Of these shares, assuming no shares are purchased in this offering by our existing stockholders, 5,018,750 shares of common stock, plus any shares sold pursuant to the underwriters’ option to purchase additional shares, will be immediately freely tradable, without restriction, in the public market.

After the lock-up agreements pertaining to this offering expire and based on shares outstanding as of August 31, 2013, an additional 21,264,704 shares will be eligible for sale in the public market. In

 

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addition, upon issuance, the 2,150,117 shares subject to outstanding options under our stock option plans, the 1,355,171 shares reserved for future issuance under our stock option plans and the 788,503 shares reserved for future issuance under our employee stock purchase plan will become eligible for sale in the public market in the future, subject to certain legal and contractual limitations. Moreover, 180 days after the completion of this offering, holders of approximately 17,178,026 shares of our common stock, including 50,000 shares issuable upon exercise of our outstanding warrant, will have the right to require us to register these shares under the Securities Act of 1933, as amended, or the Securities Act, pursuant to an investors’ rights agreement. If our existing stockholders sell substantial amounts of our common stock in the public market, or if the public perceives that such sales could occur, this could have an adverse impact on the market price of our common stock, even if there is no relationship between such sales and the performance of our business.

We will have broad discretion in how we use the net proceeds of this offering. We may not use these proceeds effectively, which could affect our results of operations and cause our stock price to decline.

We will have considerable discretion in the application of the net proceeds of this offering, including for any of the purposes described in the section entitled “Use of Proceeds.” We intend to use the net proceeds from this offering for expansion of our commercial and laboratory operations, ongoing and new clinical trials, supporting our molecular information platform, and for working capital and other general corporate purposes. As a result, investors will be relying upon management’s judgment with only limited information about our specific intentions for the use of the balance of the net proceeds of this offering. We may use the net proceeds for purposes that do not yield a significant return or any return at all for our stockholders. In addition, pending their use, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value.

We are an “emerging growth company” and will be able to avail ourselves of reduced disclosure requirements applicable to emerging growth companies, which could make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the Jumpstart our Business Startups Act of 2012, or the JOBS Act, and we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, 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 shareholder approval of any golden parachute payments not previously approved. In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we are electing not to take advantage of such extended transition period, and as a result we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to not take advantage of the extended transition period for complying with new or revised accounting standards is irrevocable. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile. We may take advantage of these reporting exemptions until we are no longer an emerging growth company. We will remain an emerging growth company until the earliest of (i) the last day of the fiscal year in which we have total annual gross revenue of $1.0 billion or more; (ii) the last

 

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day of our fiscal year following the fifth anniversary of the date of the completion of this offering; (iii) the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous three years; and (iv) the date on which we are deemed to be a large accelerated filer under the rules of the SEC.

We have never paid dividends on our capital stock and we do not anticipate paying any dividends in the foreseeable future. Consequently, any gains from an investment in our common stock will likely depend on whether the price of our common stock increases.

We have not paid dividends on any of our classes of capital stock to date and we currently intend to retain our future earnings, if any, to fund the development and growth of our business. In addition, the terms of our indebtedness with Lighthouse prohibit us from paying dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future. Consequently, in the foreseeable future, you will likely only experience a gain from your investment in our common stock if the price of our common stock increases.

Investors in this offering will pay a higher price than the book value of our common stock.

If you purchase common stock in this offering, you will pay more for your shares than the amounts paid by existing stockholders for their shares. You will incur immediate and substantial dilution of $10.77 per share, representing the difference between our pro forma net tangible book value per share after giving effect to this offering and an assumed initial public offering price of $15.00 per share, the midpoint of the price range set forth on the cover of this prospectus. In the past, we issued restricted stock, options and a warrant to acquire capital stock at prices significantly below the assumed initial public offering price. To the extent any outstanding options or warrants are ultimately exercised, you will sustain further dilution.

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

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

Anti-takeover provisions contained in our certificate of incorporation and bylaws, as well as provisions of Delaware law, could impair a takeover attempt.

Our certificate of incorporation, bylaws and Delaware law contain or will contain provisions which could have the effect of rendering more difficult, delaying or preventing an acquisition deemed undesirable by our board of directors. Our corporate governance documents include or will include provisions:

 

  Ÿ  

creating a classified board of directors whose members serve staggered three-year terms;

 

  Ÿ  

authorizing “blank check” preferred stock, which could be issued by our board of directors without stockholder approval and may contain voting, liquidation, dividend, and other rights superior to our common stock;

 

  Ÿ  

limiting the liability of, and providing indemnification to, our directors and officers;

 

  Ÿ  

limiting the ability of our stockholders to call and bring business before special meetings;

 

  Ÿ  

requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of candidates for election to our board of directors;

 

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  Ÿ  

controlling the procedures for the conduct and scheduling of board of directors and stockholder meetings; and

 

  Ÿ  

providing our board of directors with the express power to postpone previously scheduled annual meetings and to cancel previously scheduled special meetings.

These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management.

As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation law, which prevents some stockholders holding more than 15% of our outstanding common stock from engaging in certain business combinations without approval of the holders of substantially all of our outstanding common stock.

Any provision of our certificate of incorporation, bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.

Our certificate of incorporation designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or other employees.

Our certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, our certificate of incorporation or our bylaws, or (iv) any action asserting a claim against us governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and consented to the provisions of our certificate of incorporation described above. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and other employees. Alternatively, if a court were to find these provisions of our certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition or results of operations.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus, including the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” contains forward-looking statements that are based on our management’s belief and assumptions and on information currently available to our management. Although we believe that the expectations reflected in these forward-looking statements are reasonable, these statements relate to future events or our future financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Forward-looking statements in this prospectus include, but are not limited to, statements about:

 

  Ÿ  

the evolving treatment paradigm for cancer, including physicians’ use of molecular information and targeted oncology therapeutics and the market size for molecular information products;

 

  Ÿ  

physicians’ need for molecular information products and any perceived advantage of our products over those of our competitors, including the ability of our molecular information platform to help physicians treat their patients’ cancers, our first mover advantage in providing comprehensive molecular information products on a commercial scale or the sustainability of our competitive advantages;

 

  Ÿ  

our ability to generate revenue from sales of products enabled by our molecular information platform to physicians in clinical practice and our biopharmaceutical partners, including our ability to increase adoption of FoundationOne and expand existing or develop new relationships with biopharmaceutical partners;

 

  Ÿ  

our ability to increase the commercial success of FoundationOne;

 

  Ÿ  

our plans or ability to obtain reimbursement for FoundationOne, including expectations as to our ability or the amount of time it will take to achieve successful reimbursement from third-party payors, such as commercial insurance companies and health maintenance organizations, and government insurance programs, such as Medicare and Medicaid;

 

  Ÿ  

the outcome or success of our clinical trials;

 

  Ÿ  

the ability of our molecular information platform to enhance our biopharmaceutical partners’ ability to develop targeted oncology therapies;

 

  Ÿ  

our ability to comprehensively assess cancer tissue simultaneously for all known genomic alterations across all known cancer-related genes, including our ability to update our molecular information platform to interrogate new cancer genes and incorporate new targeted oncology therapies and clinical trials;

 

  Ÿ  

our ability to scale our molecular information platform, including the capacity to process additional tests at high specificity and sensitivity as our volume increases;

 

  Ÿ  

our ability to capture, aggregate, analyze, or otherwise utilize genomic data in new ways;

 

  Ÿ  

the acceptance of our publications in peer-reviewed journals or of our presentations at scientific and medical conference presentations;

 

  Ÿ  

our relationships with our suppliers from whom we obtain laboratory reagents, equipment, or other materials which we use in our molecular information platform, some of which are sole source arrangements;

 

  Ÿ  

our plans and ability to develop and commercialize new products, including to commence our commercial launch of FoundationOne for hematologic malignancies by early 2014;

 

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  Ÿ  

the expansion of the capabilities of our Interactive Cancer Explorer portal and the development and launch of its associated applications in 2014;

 

  Ÿ  

the impact of the relocation our laboratory into a new facility in 2013;

 

  Ÿ  

federal, state, and foreign regulatory requirements, including potential FDA regulation of FoundationOne and the other tests performed using our molecular information platform;

 

  Ÿ  

our ability to protect and enforce our intellectual property rights, including our trade secret protected proprietary rights in our molecular information platform;

 

  Ÿ  

our anticipated cash needs and our estimates regarding our capital requirements and our needs for additional financing; and

 

  Ÿ  

anticipated trends and challenges in our business and the markets in which we operate.

In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology. These statements are only predictions. You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which are, in some cases, beyond our control and which could materially affect results. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under “Risk factors” and elsewhere in this prospectus. If one or more of these risks or uncertainties occur, or if our underlying assumptions prove to be incorrect, actual events or results may vary significantly from those implied or projected by the forward-looking statements. No forward-looking statement is a guarantee of future performance. You should read this prospectus and the documents that we reference in this prospectus and have filed with the Securities and Exchange Commission as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from any future results expressed or implied by these forward-looking statements.

The forward-looking statements in this prospectus represent our views as of the date of this prospectus. We anticipate that subsequent events and developments will cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should therefore not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this prospectus.

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from the sale of 5,000,000 shares of common stock in this offering will be approximately $66.9 million based upon an assumed initial public offering price of $15.00 per share, the midpoint of the price range set forth on the cover of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters exercise their option to purchase additional shares in full, we estimate that our net proceeds will be approximately $77.4 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

A $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share would increase (decrease) the net proceeds to us from this offering by approximately $4.7 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of one million shares offered by us would increase (decrease) the net proceeds to us from this offering by approximately $14.0 million, assuming the assumed initial public offering price remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. A one million share increase in the number of shares offered by us together with a concomitant $1.00 increase in the assumed initial public offering price of $15.00 per share, the midpoint of the price range set forth on the cover of this prospectus, would increase the net proceeds to us from this offering by approximately $19.5 million after deducting underwriting discounts and commissions and any estimated offering expenses payable by us. Conversely, a one million share decrease in the number of shares offered by us together with a concomitant $1.00 decrease in the assumed initial public offering price of $15.00 per share, the midpoint of the price range set forth on the cover of this prospectus, would decrease the net proceeds to us from this offering by approximately $17.7 million after deducting underwriting discounts and commissions and any estimated offering expenses payable by us.

The principal purposes of this offering are to increase our financial flexibility, create a public market for our common stock, and to facilitate our access to the public equity markets. We currently expect to use the net proceeds from this offering as follows:

 

  Ÿ  

approximately $18.0 million for the expansion of our commercial operations, including the growth of our sales force within the United States and internationally;

 

  Ÿ  

approximately $10.0 million for the expansion of our laboratory operations to support future growth;

 

  Ÿ  

approximately $12.0 million to fund ongoing and new clinical trials to demonstrate the utility of our products and support our reimbursement efforts; and

 

  Ÿ  

approximately $10.0 million to continue the expansion of our technology infrastructure and capabilities for our molecular information platform.

We expect expenditures in connection with these above-described items will utilize the substantial majority of the expected net proceeds from the offering. We expect to use the remainder of any net proceeds from this offering for new product development, including costs related to the development of products in areas such as epigenetics, methylation, and immune response, capital expenditures, including costs related to required expansion in connection with increased demand, and working capital and other general corporate purposes, including the costs of operating as a public company. Although we currently anticipate that we will use the net proceeds from this offering as described above, there may be circumstances where a reallocation of funds is necessary. The amounts and timing of our actual expenditures will depend upon numerous factors, including our commercialization efforts, demand for our products, rates of reimbursement, the costs of equipment,

 

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the progress of our research and development efforts, our operating costs and the other factors described under “Risk Factors” in this prospectus. Accordingly, our management will have flexibility in applying the net proceeds from this offering. An investor will not have the opportunity to evaluate the economic, financial or other information on which we base our decisions on how to use the proceeds.

The costs and timing of our commercialization efforts are highly uncertain, are subject to substantial risks and can often change. Accordingly, we may change the allocation of use of these proceeds among the uses described above as a result of contingencies such as the demand for our products, rates of reimbursement, the costs of equipment, the progress of our research and development efforts and operating costs and expenditures. Although we may use a portion of the net proceeds of this offering for the acquisition or licensing, as the case may be, of additional technologies, other assets or businesses, or for other strategic investments or opportunities, we have no current understandings, agreements or commitments to do so.

Pending these uses, we intend to invest the net proceeds in high quality, investment grade instruments, certificates of deposit or direct or guaranteed obligations of the U.S. government, or hold as cash.

 

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DIVIDEND POLICY

We have never declared or paid any dividends on our capital stock. We currently intend to retain all available funds and any future earnings, if any, to fund the development and expansion of our business and we do not anticipate paying any cash dividends in the foreseeable future. Any future determination to pay dividends will be made at the discretion of our board of directors. In addition, the terms of our outstanding indebtedness restrict our ability to pay dividends, and any future indebtedness that we may incur could preclude us from paying dividends. Investors should not purchase our common stock with the expectation of receiving cash dividends.

 

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CAPITALIZATION

The following table sets forth our cash, cash equivalents and capitalization as of June 30, 2013:

 

  Ÿ  

on an actual basis;

 

  Ÿ  

on a pro forma basis to give effect to (i) the conversion of all outstanding shares of our preferred stock into an aggregate of 17,128,026 shares of common stock upon the closing of this offering, (ii) the conversion of our outstanding warrant to purchase 200,000 shares of our Series A preferred stock into a warrant to purchase 50,000 shares of our common stock upon closing of this offering, and (iii) the filing and effectiveness of our amended and restated certificate of incorporation, which will occur immediately prior to the closing of this offering; and

 

  Ÿ  

on a pro forma as adjusted basis to give further effect to our sale in this offering of 5,000,000 shares of common stock at an assumed initial public offering price of $15.00 per share (the midpoint of the range set forth on the cover page of this prospectus), after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

You should read the following table together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Description of Capital Stock,” and the financial statements and related notes appearing elsewhere in this prospectus.

 

     As of June 30, 2013  
     Actual     Pro Forma     Pro Forma
As Adjusted
 
     (unaudited)  
     (in thousands, except share and per
share data)
 

Cash and cash equivalents

   $ 35,965      $ 35,965      $ 102,865   
  

 

 

   

 

 

   

 

 

 

Notes payable

   $ 2,346      $ 2,346      $ 2,346   

Warrant to purchase preferred stock

     328                 

Series A redeemable convertible preferred stock, $0.0001 par value; 43,950,000 shares authorized, 43,750,000 issued and outstanding (actual); no shares authorized, issued or outstanding (pro forma and pro forma as adjusted)

     43,045                 

Series B redeemable convertible preferred stock, $0.0001 par value; 24,762,134 shares authorized, issued and outstanding (actual); no shares authorized, issued or outstanding (pro forma and pro forma as adjusted)

     55,695                 

Stockholders’ (deficit) equity:

      

Undesignated preferred stock, par value $0.0001; no shares authorized, issued or outstanding (actual); 5,000,000 shares authorized, no shares issued or outstanding (pro forma and pro forma as adjusted)

                     

Common stock, $0.0001 par value; 96,000,000 shares authorized, 4,153,024 shares issued and outstanding (actual) (1) , 96,000,000 shares authorized, 21,281,058 issued and outstanding (pro forma ) (1) ; 150,000,000 shares authorized, 26,281,058 shares issued and outstanding (pro forma as adjusted) (1)

            2        2   

Additional paid-in capital

     5,358        104,355        171,254   

Accumulated deficit

     (64,209     (64,140     (64,140
  

 

 

   

 

 

   

 

 

 

Total stockholders’ (deficit) equity

     (58,851     40,217        107,117   
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 42,563      $ 42,563      $ 109,463   
  

 

 

   

 

 

   

 

 

 

 

(1) Shares issued and outstanding include 962,703 shares of unvested common stock which are subject to repurchase by us as of June 30, 2013.

 

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The information above is illustrative only and our capitalization following the completion of this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing.

A $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share, the midpoint of the estimated price range shown on the cover page of this prospectus, would increase (decrease) the amount of cash and cash equivalents, additional paid-in capital, total stockholders’ equity (deficit) and total capitalization on a pro forma as adjusted basis by approximately $4.7 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of one million shares offered by us would increase (decrease) cash and cash equivalents, total stockholders’ equity (deficit) and total capitalization on a pro forma as adjusted basis by approximately $14.0 million, assuming the assumed initial public offering price remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. A one million share increase in the number of shares offered by us together with a concomitant $1.00 increase in the assumed initial public offering price of $15.00 per share, the midpoint of the price range set forth on the cover of this prospectus, would increase each of cash and cash equivalents and total stockholders’ (deficit) equity by approximately $19.5 million after deducting underwriting discounts and commissions and any estimated offering expenses payable by us. Conversely, a one million share decrease in the number of shares offered by us together with a concomitant $1.00 decrease in the assumed initial public offering price of $15.00 per share, the midpoint of the price range set forth on the cover of this prospectus, would decrease each of cash and cash equivalents and total stockholders’ (deficit) equity by approximately $17.7 million after deducting underwriting discounts and commissions and any estimated offering expenses payable by us. The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.

The actual, pro forma and pro forma as adjusted information set forth in the table excludes (i) 2,172,892 shares of common stock issuable upon the exercise of stock options outstanding as of June 30, 2013 with a weighted-average exercise price of $3.04 per share, (ii) 50,000 shares of common stock issuable upon the exercise of a warrant outstanding as of June 30, 2013 at an exercise price of $4.00 per share, which warrant prior to the closing of this offering is exercisable for shares of preferred stock, (iii) 1,355,171 shares of common stock reserved for future issuance under our 2013 Stock Option and Grant Plan (which includes 492,218 shares reserved for issuance under our Amended and Restated 2010 Stock Incentive Plan that will become available under our 2013 Stock Option and Grant Plan upon our initial public offering), and (iv) 788,503 shares of common stock reserved for future issuance under our 2013 Employee Stock Purchase Plan.

 

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DILUTION

If you invest in our common stock in this offering, your interest will be diluted to the extent of the difference between the public offering price per share of our common stock and the pro forma net tangible book value per share of our common stock immediately after this offering.

The net tangible book value of our common stock as of June 30, 2013 was $(58.9) million, or $(18.45) per share of common stock. Net tangible book value per share represents our total tangible assets less our total tangible liabilities, divided by the number of shares of common stock before giving effect to the conversion of all outstanding shares of preferred stock into shares of common stock, upon the completion of this offering. The pro forma net tangible book value of our common stock as of June 30, 2013 was $40.2 million, or approximately $1.98 per share of common stock. Pro forma net tangible book value gives effect to the conversion of all outstanding shares of preferred stock into 17,128,026 shares of common stock and the conversion of the outstanding warrant to purchase Series A preferred stock into a warrant to purchase shares of common stock upon the closing of this offering.

Net tangible book value dilution per share to new investors represents the difference between the amount per share paid by purchasers of common stock in this offering and the pro forma net tangible book value per share of our common stock immediately after the completion of this offering. After giving effect to (i) the automatic conversion of all outstanding shares of preferred stock into shares of common stock immediately prior to completion of this offering and (ii) our sale of 5,000,000 shares in this offering at an assumed initial public offering price of $15.00 per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses, our pro forma as adjusted net tangible book value as of June 30, 2013 would have been $4.23 per share. This represents an immediate increase in net tangible book value of $2.25 per share to existing stockholders and an immediate dilution in net tangible book value of $10.77 per share to purchasers of common stock in this offering, as illustrated in the following table:

 

Assumed initial public offering price per share

      $ 15.00   

Pro forma net tangible book value per share as of June 30, 2013

   $ 1.98      

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

     2.25      
  

 

 

    

Pro forma as adjusted net tangible book value per share at June 30, 2013 after giving effect to the offering

      $ 4.23   
     

 

 

 

Dilution per share to new investors

      $ 10.77   

A $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share would increase (decrease) the pro forma as adjusted net tangible book value, by $0.18 per share and the dilution to new investors by $0.82 per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions and estimated expenses payable by us. Similarly, each increase (decrease) of one million shares offered by us would increase (decrease) the pro forma as adjusted net tangible book value by $0.37 per share and the dilution to new investors by $0.37 per share, assuming the assumed initial public offering price remains the same and after deducting underwriting discounts and commissions and estimated expenses payable by us. A one million share increase in the number of shares offered by us together with a concomitant $1.00 increase in the assumed initial public offering price of $15.00 per share, the midpoint of the price range set forth on the cover of this prospectus, would increase the pro forma as adjusted net tangible book value by approximately $0.58 million after deducting underwriting discounts and commissions and any estimated offering expenses payable by us. Conversely, a one million share decrease in the number of shares offered by us together with a concomitant $1.00 decrease in the assumed initial public offering price of $15.00 per share, the

 

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midpoint of the price range set forth on the cover of this prospectus, would decrease the pro forma as adjusted net tangible book value by approximately $0.55 million after deducting underwriting discounts and commissions and any estimated offering expenses payable by us. If the underwriters exercise their over-allotment option in full, the pro forma as adjusted net tangible book value would be $4.51 per share, and the dilution in pro forma net tangible book value per share to investors in this offering would be $10.49 per share.

The following table summarizes, on a pro forma as adjusted basis as of June 30, 2013, the differences between the number of shares of common stock purchased from us, the total consideration and the average price per share paid by existing stockholders (giving effect to the conversion of all of our preferred stock into 17,128,026 shares of common stock prior to the completion of this offering) and by investors participating in this offering, after deducting estimated underwriting discounts and commissions and estimated offering expenses, at an assumed initial public offering price of $15.00 per share, the midpoint of the price range set forth on the cover of this prospectus.

 

     Shares Purchased     Total Consideration     Avg price /
share
 
     Number      Percent     Amount      Percent    

Existing stockholders

     21,281,058         81   $ 99,923,000         57   $ 4.70   

New investors

     5,000,000         19        75,000,000         43        15.00   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

     26,281,058         100   $ 174,923,000         100   $ 6.66   

The above discussion and tables are based on 4,153,032 shares of common stock issued and outstanding as of June 30, 2013 and also reflects the conversion of all outstanding shares of preferred stock into an aggregate of 17,128,026 shares of common stock immediately prior to the completion of this offering, and excludes:

 

  Ÿ  

2,172,892 shares of common stock issuable upon the exercise of stock options outstanding as of June 30, 2013 at a weighted-average exercise price of $3.04 per share;

 

  Ÿ  

50,000 shares of common stock issuable upon the exercise of a warrant outstanding as of June 30, 2013 at an exercise price of $4.00 per share, which warrant prior to the closing of this offering is exercisable to purchase Series A preferred stock;

 

  Ÿ  

1,355,171 shares of common stock reserved for future issuance under our 2013 Stock Option and Grant Plan, or the 2013 Plan (which includes 492,218 shares reserved for issuance under our Amended and Restated 2010 Stock Incentive Plan that will become available under our 2013 Stock Option and Grant Plan upon our initial public offering); and

 

  Ÿ  

788,503 shares of common stock reserved for future issuance under our ESPP.

A $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share, the midpoint of the price range set forth on the cover of this prospectus, would increase (decrease) the total consideration paid by new investors by approximately $4.7 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

If the underwriters exercise their option to purchase additional shares in full, pro forma as adjusted net tangible book value as of June 30, 2013 will increase to $117.6 million, or $4.51 per share, representing an increase to existing stockholders of $2.53 per share, and there will be an immediate dilution of an additional $10.49 per share to new investors.

To the extent that outstanding options and warrants are exercised or shares are issued under our ESPP, you will experience further dilution. In addition, we may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of these securities may result in further dilution to our stockholders.

 

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SELECTED FINANCIAL DATA

You should read the following selected historical consolidated financial data below together with “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements, related notes and other financial information included elsewhere in this prospectus. The selected financial data in this section are not intended to replace the financial statements and are qualified in their entirety by the financial statements and related notes included elsewhere in this prospectus.

The following selected statements of operations data for the years ended December 31, 2011 and 2012 and the balance sheet data as of December 31, 2011 and 2012 are derived from our audited financial statements appearing elsewhere in this prospectus. The selected statements of operations data for the six months ended June 30, 2012 and 2013 and the balance sheet data as of June 30, 2013 have been derived from our unaudited financial statements included elsewhere in this prospectus. In our opinion, these unaudited financial statements have been prepared on a basis consistent with our audited financial statements and contain all adjustments, consisting only of normal and recurring adjustments, necessary for a fair presentation of such financial data. You should read this data together with our audited financial statements and related notes appearing elsewhere in this prospectus and the information under the captions “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our historical results are not necessarily indicative of our future results, and our operating results for the six-month period ended June 30, 2013 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2013 or any other interim periods or any future year or period.

 

     Years Ended
December 31,
    Six Months Ended
June 30,
 
     2011     2012     2012     2013  
                 (unaudited)  
     (in thousands, except share and per share data)  

Statements of Operations Data:

        

Revenue

   $ 2,057      $ 10,645      $ 2,429      $ 11,120   

Costs and expenses

        

Cost of revenue

     258        5,681        1,830        4,597   

Sales and marketing

     1,555        3,454        1,347        4,686   

General and administrative

     6,992        8,644        3,699        7,905   

Research and development

     9,023        14,777        6,623        11,079   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     17,828        32,556        13,499        28,267   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (15,771     (21,911     (11,070     (17,147

Interest expense, net

     (421     (421     (221     (141

Other expense, net

     (845     (61     (53     (102
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (17,037   $ (22,393   $ (11,344   $ (17,390
  

 

 

   

 

 

   

 

 

   

 

 

 

Accretion of redeemable convertible preferred stock

     (296     (286     (162     (92
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss applicable to common stockholders

   $ (17,333   $ (22,679   $ (11,506   $ (17,482
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per common share applicable to common stockholders, basic and diluted (1)

   $ (14.06   $ (10.47   $ (6.15   $ (5.92
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding, basic and diluted

     1,232,658        2,166,832        1,871,431        2,950,996   
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per common share applicable to common stockholders, basic and diluted (1)

     $ (1.63     $ (0.87
    

 

 

     

 

 

 

Pro forma weighted-average common shares outstanding, basic and diluted

       13,910,719          20,129,030   
    

 

 

     

 

 

 

Comprehensive loss

   $ (17,037   $ (22,393   $ (11,344   $ (17,390
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) See Note 2 within the notes to our financial statements appearing elsewhere in this prospectus for a description of the method used to calculate basic and diluted net loss per share of common stock and pro forma basic and diluted net loss per share of common stock.

 

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     December 31,     June 30,  
     2011     2012     2013  
                 (unaudited)  
     (in thousands)  

Balance Sheet Data:

      

Cash and cash equivalents

   $ 10,852      $ 54,838      $ 35,965   

Working capital

     7,521        49,856        32,226   

Total assets

     18,065        66,039        52,269   

Notes payable, excluding current portion

     3,041        1,441        634   

Redeemable convertible preferred stock warrant liability

     94        225        328   

Redeemable convertible preferred stock

     32,455        98,658        98,740   

Accumulated deficit

     (24,426     (46,819     (64,209

Total stockholders’ deficit

   $ (22,303   $ (43,397   $ (58,851

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read together with our “Selected Financial Data” and our financial statements, related notes, and other financial information included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those described in, or implied by, the forward-looking statements. Factors that could cause or contribute to those differences include, but are not limited to, those identified below and those discussed above in the section entitled “Risk Factors.”

Overview

We are a commercial-stage company focused on fundamentally changing the way patients with cancer are treated. We derive revenue from selling products enabled by our molecular information platform to physicians and biopharmaceutical companies. Our platform includes proprietary methods and algorithms for analyzing tumor tissue samples across all types of cancer, as well as information aggregation and concise reporting capabilities. Our products provide genomic information about each patient’s individual cancer, enabling physicians to optimize treatments in clinical practice and enabling biopharmaceutical companies to develop targeted oncology therapies more effectively.

FoundationOne, our first clinical product, is, to our knowledge, the only commercially available comprehensive molecular information product designed for use in the routine care of patients with cancer. In November 2011, we first offered for sale FoundationOne for clinical use to a limited network of key oncology thought leaders and their colleagues and leading academic centers. We then commenced our formal commercial launch of FoundationOne for solid tumors in June 2012 and expect to commence our commercial launch of FoundationOne for blood-based cancers, or hematologic malignancies, by early 2014. Prior to commercial sales of FoundationOne for clinical use, we generated revenue from our molecular information platform under relationships with biopharmaceutical partners, starting in December 2010. Our molecular information platform is currently used by 18 biopharmaceutical partners to enhance the development of targeted oncology therapies. To accelerate our growth and enhance our competitive advantage, we are extending our sales force, publishing scientific and medical advances, fostering relationships throughout the oncology community, and developing new products.

We have experienced rapid adoption of FoundationOne. More than 1,500 physicians from large academic centers and community-based practices have ordered FoundationOne since its formal commercial launch in June 2012. We believe this rapid adoption of FoundationOne, accomplished with a nascent sales team, demonstrates the demand for and utility of a single comprehensive product that helps oncologists effectively implement the promise of precision medicine.

Since our inception in 2009, we have devoted substantially all of our resources to the development of our molecular information platform, the commercialization of FoundationOne for solid tumors, and the development of new products such as FoundationOne for hematologic malignancies. We have incurred significant losses since our inception, and as of June 30, 2013, our accumulated deficit was $64.2 million. We expect to continue to incur operating losses over the near term as we expand our commercial operations, conduct clinical trials, and invest in our molecular information platform and additional product offerings.

Financial Operations Overview

Revenue

We derive our revenue from selling products that are enabled by our molecular information platform. The information provided in our test results is branded as FoundationOne for our clinical

 

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customers and is not branded for our biopharmaceutical customers. For the years ended December 31, 2011 and 2012, and the six months ended June 30, 2013, revenue totaled $2.1 million, $10.6 million, and $11.1 million, respectively.

The principal focus of our commercial operations currently is to continue to drive adoption of products enabled by our molecular information platform. In particular, we seek to increase sales volume of FoundationOne for solid tumors in the clinical setting. For the year ended December 31, 2012, which included only seven months of sales of FoundationOne subsequent to its formal commercial launch in June 2012, and for the six months ended June 30, 2013, we performed approximately 1,750 and 2,766 FoundationOne tests for ordering physicians, respectively. Similarly, we seek to increase the volume of tests enabled by our molecular information platform that we perform for our biopharmaceutical customers. For the year ended December 31, 2012, we performed approximately 1,350 tests, and for the six months ended June 30, 2012 and 2013, we performed approximately 479 and 1,218 tests for our biopharmaceutical customers, respectively.

For many physician orders within the United States, the payment we ultimately receive depends upon the rate of reimbursement from commercial third-party payors and government payors. Currently we are not a participating provider with any commercial third-party payors and therefore do not have specific coverage decisions for the FoundationOne test with established payment rates. Currently, commercial third-party payors reimburse our claims based upon the stacked CPT codes, the predominant methodology, or based on other methods such as percentages of charges or other formulas that are not made known to us. In addition, a small portion of payors outsource our claims to preferred provider organizations or third-party administrators, who process our claims and pay us directly at negotiated rates. Coverage and payment is determined by the third-party payor on a case-by-case basis. We are not currently a participating provider in any state Medicaid program and therefore do not have coverage decisions under which our test is covered by these Medicaid programs. We are a participating provider in the Medicare program but we do not have a coverage decision and have not yet submitted claims for our test to Medicare. We may also negotiate rates with patients, if the patient is responsible for payment. Our efforts in obtaining reimbursement based on individual claims, including pursuing appeals or reconsiderations of claim denials, take a substantial amount of time, and bills may not be paid for many months. Furthermore, if a third-party payor denies coverage after final appeal, payment may not be received at all.

We currently recognize revenue on a cash basis from commercial third-party payors and from patients who make co-payments, pay deductibles, or pay other amounts that we have been unable to collect from their third-party payors because the payment is not fixed or determinable and collectibility is not reasonably assured, including due to the fact that we do not have coverage decisions in place and have a limited history of collecting claims. We expect to use judgment in assessing whether the fee is fixed or determinable and whether collectibility is reasonably assured as we continue to gain payment experience with third-party payors and patients. Costs associated with performing tests are recorded as tests are processed. These costs are recorded regardless of when or whether revenue is recognized with respect to those tests. Because we currently recognize revenue on a cash basis from commercial third-party payors, the costs of those FoundationOne tests are recognized in advance of any associated revenues. Because of the increasing period-to-period FoundationOne test volumes that we have observed to date, our revenue from these payors is lower and our net loss is higher than if we were recognizing revenue from these payors on an accrual basis in the period during which the work was performed and costs were incurred.

There is currently no national coverage decision that determines whether and how our test is covered by Medicare. In the absence of a national coverage decision, local Medicare contractors that administer the Medicare program in various regions have some discretion in determining coverage and therefore payment for tests. Our local Medicare contractor, who would process our claims on behalf of Medicare, requested that we not submit claims for services provided to Medicare patients while the

 

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contractor assessed the appropriate coverage and payment for FoundationOne as a whole. Pending the response, no claims have been billed to either Medicare or Medicare patients and we have not generated any revenue from these FoundationOne tests. As a result, while we incur costs to perform these FoundationOne tests, we are not currently generating revenue from the sale of FoundationOne for patients covered by Medicare. Our net loss is therefore higher than if we were recognizing revenue from the sale of FoundationOne for patients covered by Medicare. FoundationOne tests for patients covered by Medicare represented approximately 28% and 29% of total FoundationOne tests ordered by physicians in the United States during 2012 and the six months ended June 30, 2013, respectively.

We intend to seek a national coverage determination from our Medicare contractor, which, if obtained, will establish a standard for the reimbursement for our Medicare claims. If we do not receive definitive direction from our Medicare contractor regarding our submission of claims for services provided to Medicare patients, we intend, before the end of 2013, to commence submitting claims to Medicare for FoundationOne tests provided to Medicare patients. The response of the Medicare contractor to the submission of such a claim is uncertain and the claim may be denied or paid, in whole or in part. If a claim is denied or paid in part, we may decide to appeal the denied claim or any denied portion of the claim. Our Medicare contractor may also issue a negative coverage determination for FoundationOne that would apply to future claims or may defer processing a claim pending a coverage or payment determination. If a claim is paid by our Medicare contractor, either upon acceptance of the claim or following a successful appeal of a denied claim, we will generate revenue from Medicare for FoundationOne testing.

We expect that the current lack of coverage decisions and the uncertainty of reimbursement on a case-by-case basis may continue to negatively impact our revenue and earnings, particularly as FoundationOne test volumes increase period-to-period. Following our achievement of a coverage decision from a commercial third-party payor or government payor or once we have a sufficient history of claims collections with any such payor that we conclude the fee for FoundationOne tests for individuals insured by such payor is sufficiently fixed or determinable and collectability is reasonably assured, we will begin to recognize revenue from such payor on an accrual basis. As of June 30, 2013, we had cash and cash equivalents of approximately $36.0 million. We do not believe that the adverse impacts on our liquidity related to the absence of coverage decisions from commercial third-party payors and government payors will materially adversely affect our business or prospects over at least the next 12 months and likely not for the foreseeable future. If we are not able to obtain coverage decisions from commercial third-party payors and government payors over the longer term, however, and our available cash balances, net proceeds from this offering, and cash flow from claims for reimbursement on behalf of each patient on a case-by-case basis and other operations are insufficient to satisfy our liquidity requirements, we may require additional capital beyond our currently anticipated amounts. Additional capital may not be available on reasonable terms, or at all.

We recognize revenue from the sale of our products to certain hospitals, cancer centers, other institutions, and patients at the time results are reported to physicians if all revenue recognition criteria have been met.

We also receive a small portion of revenue from patients who make co-payments and pay deductibles. In addition, while we take on the primary responsibility for obtaining third-party reimbursement on behalf of patients, including appeals for any initial denials, we ultimately do bill patients for amounts that we have been unable to collect from their third-party payors. While we are not currently seeking reimbursement from Medicare or billing Medicare patients, we may decide to provide appropriate notices to patients covered by Medicare to enable us to bill a patient for all or part of a claim that is denied coverage by our Medicare contractor. We offer a comprehensive patient assistance program to support patients whose incomes are below certain thresholds and to allow for extended payment terms, as necessary, given the patient’s economic situation.

 

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Revenue from our biopharmaceutical customers are based on a negotiated price per test or on the basis of agreements to provide certain testing volumes or other deliverables over defined periods. We recognize revenue upon delivery of the test results, or over the period that testing volume or other deliverables are provided, as appropriate.

We expect our revenue to increase over time as we expand our commercial efforts within and outside of the United States. Positive reimbursement decisions from commercial third-party payors and government payors, such as Medicare and Medicaid, would eliminate much of the uncertainty around payment, should allow us to recognize revenue earlier, and increase our overall revenue growth from ordering physicians within the United States. We also expect to grow our biopharmaceutical customer base. Over time, we expect that our revenue from ordering physicians within and outside of the United States will significantly exceed revenue from our biopharmaceutical customers, given the higher percentage of patients with cancer who are treated outside of clinical trial settings.

Cost of Revenue and Operating Expenses

We allocate certain overhead expenses, such as rent, utilities, and depreciation to cost of revenue and operating expense categories based on headcount and facility usage. As a result, an overhead expense allocation is reflected in cost of revenue and each operating expense category.

Cost of Revenue

Cost of revenue consists of personnel expenses, including salary, bonuses, employee benefits and stock-based compensation expenses, cost of laboratory supplies, depreciation of laboratory equipment and amortization of leasehold improvements, shipping costs, and certain allocated overhead expenses. We expect these costs will increase in absolute dollars as we increase our sales volume, but will decrease as a percentage of revenue over time as our sales increase and we gain operating efficiencies. During the year ended December 31, 2012 and the six months ended June 30, 2013, our cost of revenue represented approximately 53% and 41%, respectively, of our total revenue. Our cost of revenue during the year ended December 31, 2011 was primarily attributable to a pilot agreement with a biopharmaceutical customer.

Costs associated with performing tests are recorded as tests are processed. These costs are recorded regardless of whether revenue is recognized with respect to those tests. Because we currently recognize revenue on a cash basis from commercial third-party payors and patients who make co-payments, pay deductibles or pay other amounts that we have been unable to collect from their insurers, the costs of those tests are often recognized in advance of any associated revenues.

Sales and Marketing Expenses

Our sales and marketing expenses include costs associated with our sales organization, including our direct sales force and sales management, client services, marketing, reimbursement, and business development personnel who are focused on our biopharmaceutical customers. These expenses consist principally of salaries, commissions, bonuses, employee benefits, travel, and stock-based compensation, as well as marketing and educational activities, and allocated overhead expenses. We expense all sales and marketing costs as incurred.

During the years ended December 31, 2011 and 2012, and the six months ended June 30, 2013, our sales and marketing expenses represented approximately 76%, 32%, and 42%, respectively, of our total revenue. We expect our sales and marketing costs to continue to increase in absolute dollars as we expand our sales force, increase our presence within and outside of the United States, and increase our marketing activities to drive further awareness and adoption of FoundationOne and our future products.

 

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General and Administrative Expenses

Our general and administrative expenses include costs for our executive, accounting and finance, legal and human resources functions. These expenses consist principally of salaries, bonuses, employee benefits, travel, and stock-based compensation, as well as professional services fees such as consulting, audit, tax and legal fees, and general corporate costs and allocated overhead expenses. We expense all general and administrative expenses as incurred.

We expect that our general and administrative expenses will increase after this offering, primarily due to the costs of operating as a public company, such as additional legal, accounting, corporate governance, and investor relations expenses, and higher directors’ and officers’ insurance premiums.

Research and Development Expenses

Our research and development expenses consist primarily of costs incurred for new product research and development, significant product improvements, clinical trials to evaluate the clinical utility of FoundationOne, the development of our knowledgebase for genomic and clinical data, and the development of our online tools, such as our online portal and mobile applications for Interactive Cancer Explorer. Costs to develop our online tools are recorded as research and development unless they meet the criteria to be capitalized as internal-use software costs. These activities include the following costs:

 

  Ÿ  

personnel-related expenses such as salaries, bonuses, employee benefits, and stock-based compensation;

 

  Ÿ  

fees for contractual and consulting services;

 

  Ÿ  

costs to manage and synthesize our medical data and to expand our knowledgebase;

 

  Ÿ  

clinical trials;

 

  Ÿ  

laboratory supplies; and

 

  Ÿ  

allocated overhead expenses.

We expect that our overall research and development expenses will continue to increase in absolute dollars as we continue to innovate our molecular information platform, develop additional products, expand our genomic and medical data management resources, and conduct our ongoing and new clinical trials.

Interest Expense, Net

Interest expense, net consists primarily of interest expense on our loan balance and the amortization of debt discounts. Interest income consists of interest earned on our cash and cash equivalents. During the years ended December 31, 2011 and 2012, and the six months ended June 30, 2013, interest income was not material, although we expect our interest income to increase as we invest the net proceeds from this offering.

Other Expense, Net

Other expense, net consists of changes in the fair value of our investor rights obligation, which was the right to purchase additional shares of our Series A convertible preferred stock at a fixed price per share upon the achievement of certain pre-defined milestones that was settled in 2011, and changes in the fair value of our preferred stock warrant liability. These other expenses are offset, in part, by other income from grants received by us, including a grant from the Internal Revenue Service’s Qualifying Therapeutic Discovery Program.

 

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Results of Operations

Comparison of Years Ended December 31, 2011 and 2012

 

     Years Ended
December 31,
    Change  
     2011     2012     $     %  
     (in thousands, except percentages)  

Statements of Operations Data:

        

Revenue

   $ 2,057      $ 10,645      $ 8,588        418

Costs and expenses

        

Cost of revenue

     258        5,681        5,423        2,102   

Sales and marketing

     1,555        3,454        1,899        122   

General and administrative

     6,992        8,644        1,652        24   

Research and development

     9,023        14,777        5,754        64   
  

 

 

   

 

 

   

 

 

   

Total costs and expenses

     17,828        32,556        14,728        83   
  

 

 

   

 

 

   

 

 

   

Loss from operations

     (15,771     (21,911     (6,140     39   

Interest expense, net

     (421     (421     —          —     

Other expense, net

     (845     (61     784        93   
  

 

 

   

 

 

   

 

 

   

Net loss

   $ (17,037   $ (22,393   $ (5,356     31
  

 

 

   

 

 

   

 

 

   

Revenue

Total revenue for the year ended December 31, 2012 was $10.6 million and consisted of $8.0 million in revenue from our biopharmaceutical customers and $2.6 million in revenue from FoundationOne tests ordered by clinical physicians. During 2012, we performed approximately 1,350 tests for our biopharmaceutical customers and approximately 1,750 FoundationOne tests for ordering physicians.

For our biopharmaceutical customer revenue that was based on a negotiated price per test, the average revenue per test in 2012 was approximately $3,700. We expect this average revenue per test for biopharmaceutical customers to remain fairly consistent over time. Approximately $4.4 million of our biopharmaceutical revenue in 2012 represented minimum guaranteed payments under contracts with multiple element arrangements that were not negotiated on a price per test basis.

In 2012, the average revenue per FoundationOne test for clinical use that met our revenue recognition criteria during 2012 was approximately $3,800. This average revenue per FoundationOne test does not account for 641 FoundationOne tests that were billed to commercial third-party payors during 2012 and were not paid during 2012, or for the 398 FoundationOne tests that we performed during 2012 for patients covered by Medicare but for which claims were not submitted during 2012. Thus, our average revenue per FoundationOne test excludes tests for which we have not yet recognized revenue. Because we recognize revenue on a cash basis from commercial third-party payors and from patients who make co-payments, and our efforts to obtain payment for individual claims can take a substantial amount of time, there is typically a significant lag between the time the FoundationOne test is performed and the time we actually recognize the revenue from such test. As a result, if we were to include tests for which we have not recognized revenue in our average revenue per test calculation for a particular period, it would imply that we will not receive any revenue for such tests. Despite our lack of coverage decisions, we have been reasonably successful in securing reimbursement from commercial third-party payors for tests performed in prior periods. Similarly with respect to tests performed for patients covered by Medicare, we intend to submit claims to Medicare for these tests pending receipt of definitive direction from our Medicare contractor. We also expect to

 

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receive revenue from patients who make co-payments, pay deductibles, or pay other amounts that we have been unable to collect from third-party payors. While receipt of payment from third-party payors, Medicare, and patients in respect of these claims is not currently fixed and determinable and collectability is not reasonably assured, we do expect to receive revenue in the future for tests performed in this period. However, it is difficult to predict future revenue from the previously performed FoundationOne tests because the test is in an early stage of commercialization and we have limited payment history. As a result, we cannot be certain that the revenue per test we recognize in the future will equal or exceed the average revenue per test reported above.

We billed commercial third-party payors for these 641 FoundationOne tests performed during 2012 (but for which we had not recognized revenue as of December 31, 2012) at $5,800 per test, the current list price for FoundationOne, which represents a maximum potential revenue to us of $3.7 million, if collected in full. We will continue to make requests for payment and/or appeal payment decisions made by commercial third-party payors. Because we are in an early stage of commercialization, we have limited payment experience, and it is therefore difficult to predict future revenue from the previously performed FoundationOne tests.

Pending receipt of definitive direction from our Medicare contractor, we have not submitted claims to Medicare for the 398 FoundationOne tests performed during 2012 for patients covered by Medicare nor have we billed Medicare patients for these tests. Based upon the current $5,800 per test list price for FoundationOne, the 398 tests we performed for Medicare patients in 2012 represent a maximum potential revenue to us of $2.3 million, if collected in full. We currently expect to submit claims to Medicare for FoundationOne tests previously performed by us for patients covered by Medicare; however, we will continue to assess our ability to bill Medicare or Medicare patients for these tests, pending receipt of definitive direction from our Medicare contractor. Notwithstanding our current intentions to seek payment for these tests, our Medicare contractor may deny our claim, in whole or in part, we may never receive any revenue from any of the 398 FoundationOne tests that we performed during 2012 for patients covered by Medicare and even if we do receive revenue from these tests, we do not expect to receive the full $5,800 list price per test.

The cumulative amount of FoundationOne tests that have been billed to commercial third-party payors and completed for patients covered by Medicare for which we have not recognized revenue was 641 and 401 (3 of which were conducted during 2011), respectively, as of December 31, 2012. If commercial third-party payors or government payors agree to pay us for these FoundationOne tests in the future, we will recognize revenue for such FoundationOne tests in the period in which our revenue recognition criteria are met. Any revenue that we receive in respect of these previously performed FoundationOne tests will favorably impact our liquidity and results of operations in future periods.

Our revenue during 2011 was primarily attributable to a pilot agreement with a biopharmaceutical customer.

None of our revenue recognized in the year ended December 31, 2011 was associated with customers outside of the United States. The majority of our revenue from customers outside of the United States in the year ended December 31, 2012 was generated from two customers from whom we recognized revenue of $0.8 million.

Cost of Revenue

Cost of revenue increased to $5.7 million for the year ended December 31, 2012 from $0.3 million for the year ended December 31, 2011. This increase was caused primarily by our performance of tests for our ordering physicians and for our biopharmaceutical customers. The average cost per test does not differ materially by customer. Additional volume led to higher reagent and consumable costs,

 

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additional laboratory personnel-related costs, and higher depreciation expense related to new equipment purchases. Our cost of revenue during the year ended December 31, 2011 was primarily attributable to a pilot agreement with a biopharmaceutical customer.

Sales and Marketing Expenses

Sales and marketing expenses increased by 122% to $3.5 million for the year ended December 31, 2012 from $1.6 million for the year ended December 31, 2011. The increase was primarily due to an increase of $1.3 million in personnel-related costs as the result of hiring 10 employees over the course of the year in our sales, marketing, client service, and reimbursement departments, and an increase of $0.6 million in marketing costs related to our commercial launch of FoundationOne.

General and Administrative Expenses

General and administrative expenses increased by 24% to $8.6 million for the year ended December 31, 2012 from $7.0 million for the year ended December 31, 2011. The increase was primarily due to a $2.4 million increase in employee-related expenses, including a $1.4 million increase in stock-based compensation, to support and expand our legal, finance, and human resources infrastructure. This increase was offset by a $0.8 million decrease in legal fees driven by establishing an in-house legal team.

Research and Development Expenses

Research and development expenses increased by 64% to $14.8 million for the year ended December 31, 2012 from $9.0 million for the year ended December 31, 2011. The increase was primarily due to a $2.1 million increase in employee and contractor-related expenses, including stock-based compensation, to support our molecular information platform and product development, a $1.9 million increase in expenses related to clinical trials to evaluate the clinical utility of FoundationOne, a $1.5 million increase in technology expenses related to data management, FoundationOne report design and functionality, and customer interface development, and a $0.3 million increase in lab supplies to support product development.

Interest Expense, Net

Interest expense, net was $0.4 million for the years ended December 31, 2012 and 2011.

Other Expense, Net

Other expense, net decreased to $0.1 million for the year ended December 31, 2012 from $0.8 million for the year ended December 31, 2011. Other expense, net for the year ended December 31, 2011 included a $1.1 million fair value adjustment for our investor rights obligation and an insignificant fair value adjustment for our warrant liability, offset by $0.2 million in grant income from the Internal Revenue Service’s Qualifying Therapeutic Discovery Program. The investor rights obligation was settled and reclassified to additional paid-in capital in 2011. We recorded $0.1 million associated with the change in fair value of our warrant liability in the year ended December 31, 2012. Upon completion of this offering, the preferred stock warrant will automatically convert into a warrant to purchase common stock, and is expected to be reclassified into additional paid-in capital at that time unless exercised earlier.

 

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Comparison of Six Months Ended June 30, 2012 and 2013

 

     Six Months Ended
June 30,
    Change  
     2012     2013     $     %  
     (unaudited)  
     (in thousands, except percentages)  

Statement of Operations Data:

        

Revenue

   $ 2,429      $ 11,120      $ 8,691        358

Costs and expenses

        

Cost of revenue

     1,830        4,597        2,767        151   

Sales and marketing

     1,347        4,686        3,339        248   

General and administrative

     3,699        7,905        4,206        114   

Research and development

     6,623        11,079        4,456        67   
  

 

 

   

 

 

   

 

 

   

Total costs and expenses

     13,499        28,267        14,768        109   
  

 

 

   

 

 

   

 

 

   

Loss from operations

     (11,070     (17,147     (6,077     55   

Interest expense, net

     (221     (141     80        36   

Other expense, net

     (53     (102     (49     (92
  

 

 

   

 

 

   

 

 

   

Net loss

   $ (11,344   $ (17,390   $ (6,046     53
  

 

 

   

 

 

   

 

 

   

Revenue

Total revenue for the six months ended June 30, 2013 was $11.1 million and consisted of $6.0 million in revenue from our biopharmaceutical customers and $5.1 million in revenue from FoundationOne tests ordered by clinical physicians. During the six months ended June 30, 2013, we performed 1,218 tests for our biopharmaceutical customers and 2,766 FoundationOne tests for our ordering clinical physicians.

For our biopharmaceutical customer revenue that was based on a negotiated price per test, the average revenue per test in the first six months of 2013 was approximately $3,800. We expect this average revenue per test for biopharmaceutical customers to remain fairly consistent over time. Approximately $4.0 million of our biopharmaceutical revenue in the six months ended June 30, 2013 represented minimum guaranteed payments under contracts with multiple element arrangements that were not negotiated on a price per test basis.

In the first six months of 2013, we recognized revenue from 404 FoundationOne tests performed for clinical use during 2012 that were paid during the first six months of 2013.

During the six months ended June 30, 2013 the average revenue per FoundationOne test for clinical use that met our revenue recognition criteria during this period was approximately $3,700. This average revenue per FoundationOne test does not account for 1,117 FoundationOne tests that were billed to commercial third-party payors during the six months ended June 30, 2013 and were not paid during the six months ended June 30, 2013 or for the 611 FoundationOne tests that we performed during the six months ended June 30, 2013 for patients covered by Medicare but for which claims were not submitted during the six months ended June 30, 2013. We do not have comparable data from the first six months of 2012 because we had not yet formally launched FoundationOne. Thus, our average revenue per FoundationOne test excludes tests for which we have not yet recognized revenue. Because we recognize revenue on a cash basis from commercial third-party payors and from patients who make co-payments, and our efforts to obtain payment for individual claims can take a substantial amount of time, there is typically a significant lag between the time the FoundationOne test is performed and the time we actually recognize the revenue from such test. As a result, if we were to

 

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include tests for which we have not recognized revenue in our average revenue per test calculation for a particular period, it would imply that we will not receive any revenue for such tests. Despite our lack of coverage decisions, we have been reasonably successful in securing reimbursement from commercial third-party payors for tests performed in prior periods. Similarly with respect to tests performed for patients covered by Medicare, we intend to submit claims to Medicare for these tests pending receipt of definitive direction from our Medicare contractor. We also expect to receive revenue from patients who make co-payments, pay deductibles, or pay other amounts that we have been unable to collect from third-party payors. While receipt of payment from third-party payors, Medicare, and patients in respect of these claims is not currently fixed and determinable and collectability is not reasonably assured, we do expect to receive revenue in the future for tests performed in this period. However, it is difficult to predict future revenue from the previously performed FoundationOne tests because the test is in an early stage of commercialization and we have limited payment history. As a result, we cannot be certain that the revenue per test we recognize in the future will equal or exceed the average revenue per test reported above.

We billed commercial third-party payors for these 1,117 FoundationOne tests performed during the six months ended June 30, 2013 (but for which we had not recognized revenue as of June 30, 2013) at $5,800 per test, the current list price for FoundationOne, which represents a maximum potential revenue to us of $6.5 million, if collected in full. We will continue to make requests for payment and/or appeal payment decisions made by commercial third-party payors. Because we are in an early stage of commercialization, we have limited payment experience, and it is therefore difficult to predict future revenue from the previously performed FoundationOne tests.

Pending receipt of definitive direction from our Medicare contractor, we have not submitted claims to Medicare for the 611 FoundationOne tests performed during the six months ended June 30, 2013 for patients covered by Medicare nor have we billed Medicare patients for these tests. Based upon the current $5,800 per test list price for FoundationOne, the 611 tests we performed for Medicare patients during the six months ended June 30, 2013 represent a maximum potential revenue to us of approximately $3.5 million, if collected in full. We currently expect to submit claims to Medicare for FoundationOne tests previously performed by us for patients covered by Medicare; however, we will continue to assess our ability to bill Medicare or Medicare patients for these tests, pending receipt of definitive direction from our Medicare contractor. Notwithstanding our current intentions to seek payment for these tests, our Medicare contractor may deny our claim, in whole or in part, we may never receive any revenue from any of the 611 FoundationOne tests that we performed during the six months ended June 30, 2013 for patients covered by Medicare and even if we do receive revenue from these tests, we do not expect to receive the full $5,800 list price per test.

The cumulative amount of FoundationOne tests that have been billed to commercial third-party payors and completed for patients covered by Medicare for which we have not recognized revenue was 1,354 and 1,012, respectively, as of June 30, 2013. If commercial third-party payors or government payors agree to pay us for these FoundationOne tests in the future, we will recognize revenue for such FoundationOne tests in the period in which our revenue recognition criteria are met. Any revenue that we receive in respect of these previously performed FoundationOne tests will favorably impact our liquidity and results of operations in future periods.

Our revenue during the six months ended June 30, 2012 consisted primarily of revenue from our biopharmaceutical customers. For biopharmaceutical customer revenue that was based on a negotiated price per test, the average revenue per test was approximately $3,500 in the first six months of 2012 over approximately 300 tests.

Revenue from our international customers did not represent a significant driver of the increased revenue from the first six months of 2012 to the first six months of 2013.

 

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Cost of Revenue

Cost of revenue increased to $4.6 million for the six months ended June 30, 2013 from $1.8 million for the six months ended June 30, 2012. The increase was due to sales of FoundationOne for clinical use to ordering physicians and to increased testing volume with our biopharmaceutical customers, which drove higher reagent and consumable costs, additional laboratory personnel-related costs, and higher depreciation expenses related to equipment purchases. We expect our cost of revenue to increase as we expand our sales force and drive higher test volume from both our biopharmaceutical customers and our ordering physicians.

Sales and Marketing Expenses

Sales and marketing expenses increased by 248% to $4.7 million for the six months ended June 30, 2013 from $1.3 million for the six months ended June 30, 2012. The increase primarily resulted from a $2.1 million increase in personnel-related costs related to the expansion of our sales force, a $0.5 million increase in facilities expenses, an increase of $0.4 million in marketing expenses and an increase of $0.3 million in travel-related expenses.

General and Administrative Expenses

General and administrative expenses increased by 114% to $7.9 million for the six months ended June 30, 2013 from $3.7 million for the six months ended June 30, 2012. The increase was primarily driven by a $2.2 million increase in personnel-related costs, including a $1.4 million increase in stock-based compensation, a $1.5 million increase in facilities expenses and billing fees and a $0.4 million increase in legal fees.

Research and Development Expenses

Research and development expenses increased by 67% to $11.1 million for the six months ended June 30, 2013 from $6.6 million for the six months ended June 30, 2012. The increase was mainly related to a $1.7 million increase in personnel-related costs associated with new hires, including a $0.1 million increase in stock-based compensation, a $0.9 million increase in technology infrastructure spending, a $0.6 million increase in facilities expenses and a $1.3 million increase in clinical trial spending.

Interest Expense, Net

Interest expense, net was $0.2 million and $0.1 million for the six months ended June 30, 2012 and 2013, respectively.

Other Expense, Net

Other expense, net was insignificant for the six months ended June 30, 2012 and 2013.

Liquidity and Capital Resources

We have incurred losses and negative cash flows from operations since our inception in November 2009, and as of June 30, 2013, we had an accumulated deficit of $64.2 million. We expect that our sales and marketing, research and development, and general and administrative expenses will continue to increase. We expect these increased costs to be funded by our product revenue, subject to the rate of reimbursement we receive from commercial third-party payors and government payors, our existing cash and cash equivalents, and the net proceeds of this offering. We may also seek additional capital to fund our operations through equity offerings, debt financings, other third-party funding, or a combination thereof.

 

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We have funded our operations principally from the sale of preferred stock, product revenue and the incurrence of indebtedness. Since we have not received a coverage decision for FoundationOne from any commercial third-party payor and have a limited history of collecting claims, we currently recognize revenue on a cash basis from commercial third-party payors. We will continue to make requests for payment and/or appeal payment decisions made by commercial third-party payors. In addition, we currently expect to submit claims to Medicare for FoundationOne tests previously performed by us for patients covered by Medicare and we may receive payment for a portion of these FoundationOne tests, although our requests for payments could be denied in whole. If commercial third-party payors or government payors agree to pay us for these FoundationOne tests in the future, we will recognize revenue for such FoundationOne tests in the period in which our revenue recognition criteria are met. Any revenue that we receive in respect of these previously performed FoundationOne tests will favorably impact our liquidity in future periods.

In November 2010, we entered into a loan and security agreement, or the loan and security agreement, with Lighthouse Capital Partners, or Lighthouse, for $5.0 million, which was fully drawn by June 21, 2011. As of June 30, 2013, $2.3 million of principal and deferred interest payments were outstanding under the loan and security agreement. Under the terms of the loan and security agreement, we are precluded from entering into certain financing, restructuring and other transactions, including disposing of certain assets, and are subject to various non-financial covenants, including requirements that we maintain standard levels of insurance, maintain our assets in good condition, and file all required tax returns. The loan and security agreement also restricts our ability to pay dividends without the prior written consent of Lighthouse. We believe we were in compliance with all covenants under the loan and security agreement as of June 30, 2013.

As of June 30, 2013, we had cash and cash equivalents of approximately $36.0 million. Cash in excess of immediate requirements is invested in accordance with our investment policy, primarily with a view to liquidity and capital preservation. Currently, our funds are held in money market mutual funds consisting of U.S. government-backed securities.

We have occasionally received letters from third parties inviting us to take licenses under, or alleging that we infringe, their patents. While any potential infringement claims could pose an uncertainty for our business, no notice of alleged infringement that we have received to date has led to a lawsuit or a license, and, as a result, no such claim has had an impact on our results of operations.

Cash Flows

The following table sets forth the primary sources and uses of cash for each of the periods set forth below:

 

     Years Ended
December 31,
    Six Months Ended
June 30,
 
     2011     2012     2012     2013  
                 (unaudited)  
     (In thousands)  

Net cash provided by (used in):

        

Operating activities

   $ (14,133   $ (17,249   $ (11,002   $ (13,710

Investing activities

     (5,410     (3,183     (1,678     (3,023

Financing activities

     28,986        64,418        9,455        (2,140
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

   $ 9,443      $ 43,986      $ (3,225   $ (18,873
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating Activities .     Net cash used in operating activities in all periods resulted primarily from our net losses adjusted for non-cash charges and changes in components of working capital.

The net cash used in operating activities was $14.1 million for the year ended December 31, 2011, and consisted primarily of a net loss of $17.0 million adjusted for non-cash items including depreciation of

 

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$1.5 million, the change in fair value of the investor rights obligation of $1.1 million, non-cash interest expense of $0.1 million, stock-based compensation of $0.1 million, and a net decrease in operating assets and liabilities of $0.1 million. The significant items in the change in operating assets and liabilities include decreases in accounts payable of $0.3 million and deferred revenue of $1.1 million and an increase in inventory of $0.3 million, offset, in part, by a decrease in accounts receivable of $1.0 million, an increase in accrued expenses of $0.6 million and an increase in deferred rent of $0.4 million.

The net cash used in operating activities was $17.2 million for the year ended December 31, 2012, and consisted primarily of a net loss of $22.4 million adjusted for non-cash items including depreciation of $2.9 million, stock-based compensation expense of $1.5 million, and a net increase in operating assets and liabilities of $0.5 million. The significant items in the change in operating assets and liabilities include increases in accrued expenses of $1.4 million, accounts payable of $0.1 million, and deferred revenue of $1.6 million, partially offset by increases in accounts receivable of $1.9 million, prepaid expenses and other current assets of $0.2 million, and inventory of $0.5 million.

The net cash used in operating activities was $11.0 million for the six months ended June 30, 2012, and consisted primarily of a net loss of $11.3 million adjusted for non-cash items including depreciation of $1.3 million and stock-based compensation expense of $0.5 million and a net increase in operating assets and liabilities of $1.5 million. The significant items in the change in operating assets and liabilities include increases in accounts receivable of $1.9 million, prepaid expenses and other current assets of $0.3 million and inventory of $0.3 million and a decrease in accounts payable of $0.2 million, partially offset by increases in accrued expenses of $0.6 million and deferred revenue of $0.5 million.

The net cash used in operating activities was $13.7 million for the six months ended June 30, 2013, and consisted primarily of a net loss of $17.4 million adjusted for non-cash items including depreciation of $2.1 million, stock-based compensation expense of $2.0 million, and a net increase in operating assets and liabilities of $0.5 million. The significant items in the change in operating assets and liabilities include increases in accounts receivable of $1.9 million, and an increase in prepaid expenses and other current assets of $0.5 million, partially offset by an increase in accounts payable of $0.4 million, an increase in deferred rent of $0.8 million and an increase in deferred revenue of $0.5 million.

Investing Activities .     Net cash used in investing activities consisted of purchases of fixed assets and an increase in restricted cash related to a security deposit. Net cash used in investing activities for the years ended December 31, 2011 and 2012 was $5.4 million and $3.2 million, respectively, and consisted of purchases of property and equipment. Net cash used in investing activities for the six months ended June 30, 2012 was $1.7 million and consisted of purchases of property and equipment. Net cash used in investing activities for the six months ended June 30, 2013 was $3.0 million and consisted of an increase in restricted cash of $1.7 million related to our new laboratory and office facilities, and purchases of property and equipment of $1.3 million.

Financing Activities .     Net cash provided by financing activities for the year ended December 31, 2011 of $29.0 million included $26.3 million of net proceeds from the sale of Series A preferred stock and $3.0 million in net proceeds from our loan facility, offset, in part, by $0.4 million in loan principal repayments. Net cash provided by financing activities for the year ended December 31, 2012 was $64.4 million and reflects the sale of Series A preferred stock for net proceeds of $10.2 million and the sale of Series B preferred stock for net proceeds of $55.7 million, offset, in part, by $1.6 million in loan principal payments. Net cash provided by financing activities for the six months ended June 30, 2012 was $9.5 million and reflects the sale of Series A preferred stock for net proceeds of $10.2 million, offset in part by $0.8 million in loan principal payments. Net cash used in financing activities for the six months ended June 30, 2013 was $2.1 million and consisted of loan principal repayments and issuance costs related to our planned initial public offering.

Operating Capital Requirements

We expect to incur additional operating losses in the near future and our operating expenses will increase as we continue to expand our sales force, increase our marketing efforts to drive market

 

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adoption of FoundationOne for solid tumors, launch FoundationOne for hematologic malignancies, invest in clinical trials, innovate our molecular information platform, and develop new product offerings. Our liquidity requirements have and will continue to consist of sales and marketing expenses, research and development expenses, capital expenditures, working capital, debt service, and general corporate expenses. As demand for FoundationOne continues to increase from physicians and biopharmaceutical companies, we anticipate that our capital expenditure requirements will also increase in order to build additional capacity. We expect that we will use a portion of the net proceeds of this offering, in combination with our existing cash and cash equivalents, for these purposes and for the increased costs associated with being a public company. The amount by which we increase our sales and marketing expenses and research and development expenses will be dependent upon the net proceeds of this offering and cannot currently be estimated. We expect that our planned expenditures will be funded from our ongoing operations, as well as from the net proceeds of this offering.

Based on our current business plan, we believe the net proceeds from this offering, together with our current cash and cash equivalents and anticipated cash flow from operations, will be sufficient to meet our anticipated cash requirements over at least the next 12 months and for the foreseeable future. We may consider raising additional capital to expand our business, to pursue strategic investments, to take advantage of financing opportunities, or for other reasons. In the future, we expect our operating and capital expenditures to increase as we increase our headcount, expand our sales and marketing activities and continue to invest in new product offerings. As sales of FoundationOne grow, we expect our accounts receivable balance to increase. Any increase in accounts payable and accrued expenses may not be completely offset by increases in accounts receivable, which could result in greater working capital requirements.

If our available cash balances, net proceeds from this offering, and anticipated cash flow from operations are insufficient to satisfy our liquidity requirements including because of lower demand for our products as a result of lower than currently expected rates of reimbursement from commercial third-party payors and government payors or other risks described in this prospectus, we may seek to sell common or preferred equity or convertible debt securities, enter into an additional credit facility or another form of third-party funding, or seek other debt financing. The sale of equity and convertible debt securities may result in dilution to our stockholders and those securities may have rights senior to those of our common shares. If we raise additional funds through the issuance of preferred stock, convertible debt securities or other debt financing, these securities or other debt could contain covenants that would restrict our operations. Any other third-party funding arrangement could require us to relinquish valuable rights. We may require additional capital beyond our currently anticipated amounts. Additional capital may not be available on reasonable terms, or at all.

These estimates are forward-looking statements and involve risks and uncertainties and actual results could vary materially and negatively as a result of a number of factors, including the factors discussed in the section “Risk Factors” of this prospectus. We have based our estimates on assumptions that may prove to be wrong and we could utilize our available capital resources sooner than we currently expect. If we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, financial condition, and results of operations could be materially adversely affected.

Contractual Obligations and Commitments

The following table summarizes our contractual obligations at December 31, 2012.

 

     Total      2013      2014-2015      2016-2018      Thereafter  
     (in thousands)  

Operating lease (1)

   $ 2,900       $ 1,007       $ 1,893       $  —         $  —     

Notes payable (2)

     3,424         1,874         1,550         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,324       $ 2,881       $ 3,443       $  —         $ —     

 

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(1) We lease 22,506 square feet for office and laboratory space in Cambridge, Massachusetts under an operating lease that expires in July 2015.
(2) We entered into a loan agreement with Lighthouse to borrow up to $5,000,000 at a fixed interest rate of 8.25% on November 2010. The final payment will be made on December 31, 2014. Our notes payable balance includes interest payments.

The following table summarizes our contractual obligations at June 30, 2013.

 

     Total      2013      2014-2015      2016-2018      Thereafter  
     (in thousands)  

Operating leases (1)

   $ 29,536       $ 580       $ 6,862       $ 11,423       $ 10,671   

Notes payable (2)

     2,487         937         1,550         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 32,023       $ 1,517       $ 8,412       $ 11,423       $ 10,671   

 

(1) Our operating leases include the following:

 

  Ÿ  

22,506 square feet of office and laboratory space in Cambridge, Massachusetts under a lease that expires in July 2015;

 

  Ÿ  

approximately 10,000 square feet of office space in Cambridge, Massachusetts under a lease that expires in March 2014; and

 

  Ÿ  

61,591 square feet of office and laboratory space in Cambridge, Massachusetts under a lease that expires in February 2021.

 

(2) We entered into a loan agreement with Lighthouse to borrow up to $5,000,000 at a fixed interest rate of 8.25% on November 2010. The final payment is due on December 31, 2014. Our notes payable balance includes interest payments.

In July 2013, we entered into a Supply, Service and Support Agreement with Illumina, Inc., pursuant to which we agreed to purchase a minimum quantity of reagents and other consumables and access to services and capital equipment over a five-year term. Our minimum purchase commitment over the term of the agreement is approximately $6.1 million as of the effective date of the agreement.

Net Operating Loss Carryforwards

We have deferred tax assets of approximately $18.0 million as of December 31, 2012, which have been fully offset by a valuation allowance due to uncertainties surrounding our ability to realize these tax benefits. The deferred tax assets are primarily composed of federal and state tax net operating loss, or NOL, carryforwards and research and development tax credit carryforwards. As of December 31, 2012, we had federal NOL carryforwards of approximately $39.9 million and state NOL carryforwards of $39.1 million available to reduce future taxable income, if any. These federal NOL carryforwards expire at various times through 2029 and the state NOL carryforwards begin to expire in 2014. In general, if we experience a greater than 50 percent aggregate change in ownership of certain significant stockholders over a three-year period, or a Section 382 ownership change, utilization of our pre-change NOL carryforwards are subject to an annual limitation under Section 382 of the Internal Revenue Code of 1986, as amended, and similar state laws. Such limitations may result in expiration of a portion of the NOL carryforwards before utilization and may be substantial. If we experience a Section 382 ownership change in connection with this offering or as a result of future changes in our stock ownership, some of which changes are outside our control, the tax benefits related to the NOL carryforwards may be limited or lost.

 

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Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the Securities and Exchange Commission.

Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risk related to changes in interest rates. As of December 31, 2012, we had cash and cash equivalents of $54.8 million held primarily in money market mutual funds consisting of U.S. government-backed securities. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because our investments are in short-term securities. Due to the short-term duration of our investment portfolio and the low risk profile of our investments, an immediate one percent change in interest rates would not have a material effect on the fair market value of our portfolio.

Application of Critical Accounting Policies

We have prepared our financial statements in accordance with U.S. generally accepted accounting principles. Our preparation of these financial statements requires us to make estimates, assumptions, and judgments that affect the reported amounts of assets, liabilities, expenses, and related disclosures at the date of the financial statements, as well as revenue and expenses recorded during the reporting periods. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could therefore differ materially from these estimates under different assumptions or conditions.

While our significant accounting policies are described in more detail in note 2 to our financial statements included later in this prospectus, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our financial statements.

Revenue Recognition

We currently derive revenue from selling products that are enabled by our molecular information platform. We recognize revenue when all of the following criteria are present: persuasive evidence of an arrangement exists; delivery has occurred; the fee is fixed or determinable; and collectability is reasonably assured. We receive payments from: commercial third-party payors; certain hospitals and cancer centers with which we have direct bill relationships; individual patients; and our biopharmaceutical customers.

We currently recognize revenue on a cash basis for sales of our products for which we receive payments from commercial third-party payors and patients who make co-payments, pay deductibles or other amounts that we have been unable to collect from their third-party payors since the fee is not fixed or determinable and collectability is not reasonably assured. Our products are delivered electronically and, as such, there are no shipping and handling fees incurred by us or billed to our customers. We believe our products are exempt from state sales taxation due to the nature of our products. As a result, we do not charge our customers state sales tax. Because we have limited payment experience with third-party payors and patients, we have not concluded that the fee is fixed or determinable or that collectability is reasonably assured, and therefore, we recognize revenue on a cash basis. We expect to use judgment in our assessment of whether the fee is fixed or determinable and whether collectability is reasonably assured in determining when to recognize revenue in the future as we continue to gain payment experience with third-party payors and patients.

 

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We recognize revenue from the sale of our products to certain hospitals, cancer centers, other institutions and patients at the time results of our tests are reported to physicians, assuming all revenue recognition criteria have been met.

Our arrangements with biopharmaceutical customers are based on a negotiated price per test or an agreement to provide certain testing volume over a defined period. We recognize revenue from sales of our products to biopharmaceutical customers upon delivery of the test results or over the period the testing volume is provided, as appropriate.

For revenue arrangements with multiple deliverables, each deliverable is evaluated to determine whether it qualifies as a separate unit of accounting. This determination is based on whether the deliverable has “stand-alone value” to the customer and whether a general right of return exists. The consideration that is fixed or determinable is then allocated to each separate unit of accounting based on the relative selling price of each deliverable. The consideration allocated to each unit of accounting is recognized as the related goods or services are delivered, limited to the consideration that is not contingent upon future deliverables. We use judgment in identifying the deliverables in our arrangements, and in assessing whether each deliverable is a separate unit of accounting. We also use judgment in determining the period over which the deliverables are recognized in certain of our arrangements.

Accrued Expenses

As part of the process of preparing our financial statements, we are required to estimate our accrued expenses. This process involves reviewing quotations and contracts, identifying services that have been performed on our behalf, and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. The majority of our service providers invoice us monthly in arrears for services. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or prepaid accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and could result in us reporting amounts that are too high or too low in any particular period. To date, there have been no material differences from our estimates to the amounts actually incurred.

Stock-based Compensation

We have included stock-based compensation as part of our cost of revenue and our operating expenses in our statements of operations and comprehensive loss as follows:

 

     Years Ended
December 31,
     Six Months
Ended

June 30,
 
     2011      2012      2012      2013  
                   (unaudited)  
     (in thousands)  

Cost of revenue

   $ 1       $ 22       $ 5       $ 17   

Sales and marketing

             31         5         45   

General and administrative

     69         1,388         465         1,816   

Research and development

     3         94         33         117   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 73       $ 1,535       $ 508       $ 1,995   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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We account for stock-based compensation arrangements with our employees, consultants, and non-employee directors using a fair value method, which requires us to recognize compensation expense for costs related to all share-based payments. To date, our stock-based awards have included grants of stock options and restricted stock. The fair value method requires us to estimate the fair value of stock-based awards to employees and non-employees on the date of grant using the Black-Scholes option-pricing method. The fair value is then recognized, net of estimated forfeitures, as stock-based compensation expense over the requisite service period, which is typically the vesting period, of the award. Stock-based awards granted to non-employees are subject to periodic revaluation over their vesting term.

The Black-Scholes option-pricing model requires the input of subjective assumptions, including expected stock price volatility and the expected life of stock options. As a private company, we do not have sufficient history to estimate the volatility of our common stock price or the expected term of our stock options. We calculate expected volatility based on historical volatility data of a representative group of companies that are publicly traded. We selected representative companies with comparable characteristics to us, including risk profiles, position within the industry, and with historical stock price information sufficient to meet the expected term of the stock-based awards. We compute the historical volatility of this selected group using the daily closing prices for the selected companies’ shares during the equivalent period of the calculated expected term of our stock-based awards. We will continue to use the representative group volatility information until the historical volatility of our common stock is relevant to measure expected volatility for future stock option grants.

We determine the expected term of stock options according to the “simplified” method. Under this method, the expected term is calculated as the average of the time-to-vesting and the contractual life of the stock option. The assumed dividend yield is based on our expectation that we will not pay dividends in the foreseeable future, which is consistent with our history of not paying dividends. We determine the risk-free interest rate by using the equivalent to the expected term based on the U.S. Treasury yield curve in effect as of the date of grant. We estimate forfeitures at the time of grant and revise our estimates, as appropriate, but actual future forfeiture rates may differ. If actual results differ significantly from these estimates, stock-based compensation expense and our statements of operations and comprehensive loss could be materially impacted. For the years ended December 31, 2011 and 2012, and the six months ended June 30, 2012 and 2013, we estimated the fair value of stock options at their respective grant dates using the following assumptions:

 

     Years Ended
December 31,
    Six Months Ended
June 30,
 
     2011     2012     2012     2013  

Expected volatility

     68.6     68.0     69.0     67.1

Risk-free interest rate

     2.56     1.29     1.35     1.35

Expected stock option term (in years)

     6.25        6.25        6.25        6.25   

Expected dividend yield

                            

There is a high degree of subjectivity involved when using option-pricing models to estimate stock-based compensation. There is currently no market-based mechanism or other practical application to verify the reliability and accuracy of the estimates stemming from these valuation models, nor is there a means to compare and adjust the estimates to actual values. Although the fair value of stock-based awards is determined using an option-pricing model, that value may not be indicative of the fair value that would be observed in a market transaction between a willing buyer and willing seller. If factors change and we employ different assumptions when valuing our stock options, the compensation expense that we record in the future may differ significantly from what we have historically reported.

 

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Determination of the Fair Value of Common Stock on Grant Dates

We are a privately held company with no active public market for our common stock. Therefore, our board of directors, with the assistance and upon the recommendation of management and based upon independent third party valuations, has for financial reporting purposes periodically determined the estimated per share fair value of our common stock at various dates using contemporaneous valuations consistent with the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held Company Equity Securities Issued as Compensation , also known as the Practice Aid. We performed these contemporaneous valuations as of August 31, 2011, November 5, 2012, February 15, 2013, and May 10, 2013. In conducting these contemporaneous valuations, our board of directors considered all objective and subjective factors that it believed to be relevant in each valuation conducted, including management’s best estimate of our business condition, prospects, and operating performance at each valuation date. Within the contemporaneous valuations performed by our board of directors, a range of factors, assumptions, and methodologies were used. The significant factors included:

 

  Ÿ  

the fact that we are a privately held company with illiquid securities;

 

  Ÿ  

our stage of commercialization;

 

  Ÿ  

the likelihood of achieving a liquidity event for shares of our common stock, such as an initial public offering, given prevailing market conditions;

 

  Ÿ  

our historical operating results;

 

  Ÿ  

valuations of comparable public companies;

 

  Ÿ  

our discounted future cash flows, based on our projected operating results; and

 

  Ÿ  

our capital structure, including the rights and preferences of our various classes of equity.

The dates of our contemporaneous valuations have not always coincided with the dates of our stock-based compensation grants. In such instances, our board of directors’ estimates have been based on the most recent contemporaneous valuation of our shares of common stock and its assessment of additional objective and subjective factors it believed were relevant and which may have changed from the date of the most recent contemporaneous valuation through the date of the grant.

There are significant judgments and estimates inherent in these valuations. These judgments and estimates include assumptions regarding our future operating performance, stage of commercial growth, reimbursement from commercial third-party payors and government payors, the timing of a potential initial public offering or other liquidity event, and the determination of the appropriate valuation method at each valuation date. If we had made different assumptions, our stock-based compensation expense, net loss applicable to common stockholders, and net loss per share applicable to common stockholders could have been significantly different.

 

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The following table summarizes by grant date the number of shares of common stock subject to stock options granted from January 1, 2012 through the date of this prospectus, as well as the associated per share exercise price and the per share estimated fair value of the underlying common stock.

 

Date of Issuance

   Type of
Award
     Number
of
Shares
     Exercise Price
Per Share
     Common Stock Fair
Value Per Share

on Grant Date
 

January 10, 2012

     Option         464,908       $ 0.84       $ 0.84   

March 27, 2012

     Option         215,623         0.84         0.84   

May 24, 2012

     Option         127,999         0.84         1.80   

June 1, 2012

     Option         142,875         0.84         1.80   

July 24, 2012

     Option         107,622         0.84         1.80   

December 18, 2012

     Option         194,621         3.96         3.96   

March 7, 2013

     Option         635,422         4.16         4.16   

May 21, 2013

     Option         268,700         7.12         7.12   

May 22, 2013

     Option         80,000         7.12         7.12   

Common Stock Valuation Methodologies

Our board of directors estimated our enterprise value as of the various valuation dates using a market approach and an income approach, which are acceptable valuation methods in accordance with the Practice Aid. Under the market approach, enterprise value can be estimated by evaluating recent arm’s length transactions involving the sale of our preferred stock to investors and by comparisons to similar publicly traded companies. Under the income approach, enterprise value can be estimated using the discounted cash flow method. Additionally, each valuation reflects a marketability discount, resulting from the illiquidity of our common stock.

As provided in the Practice Aid, there are several approaches for allocating enterprise value of a privately held company among the securities held in a complex capital structure. The possible methodologies include the probability-weighted expected return method, or PWERM, the option-pricing method, or OPM, the current-value method, or a hybrid of the PWERM and the OPM, which we refer to as the hybrid method. Under the PWERM, shares are valued based upon the probability-weighted present value of expected future returns, considering various future outcomes available to us, as well as the rights of each share class. The OPM treats common stock and preferred stock as call options on the enterprise’s value. The exercise prices associated with these call options vary according to the liquidation preference of the preferred stock, the preferred stock conversion price, the exercise prices of common stock options, and other features of a company’s equity capital structure. The current-value method, which is generally only used for early stage companies, is based on first determining enterprise value using a market, income or asset-based approach, and then allocating that value to the preferred stock based on its liquidation preference or conversion value, whichever would be greater.

August 31, 2011 Valuation

We, with the assistance of a third-party valuation specialist, performed a contemporaneous valuation of our common stock as of August 31, 2011, and determined the fair value to be $0.84 per share as of that date. We used the back-solve method of the OPM, which derives the implied equity value for one type of equity security from a contemporaneous transaction involving another type of equity security. We applied the OPM back-solve method to solve for the equity value and corresponding value of common stock based on the $1.00 per share price paid for our Series A preferred stock. In August 2011, two unrelated investors, who had not previously invested in Foundation, purchased shares of our Series A preferred stock at a price of $1.00 per share. Given the proximity to the Series A preferred stock financing, we believed the per share issuance price of the Series A preferred stock provided an indication of the fair value of our equity as of August 31, 2011.

 

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The OPM treats common stock and preferred stock as call options on the total equity value of a company, with exercise prices based on the value thresholds at which the allocation among the various holders of a company’s securities changes. Under this method, the common stock has value only if the funds available for distribution to stockholders exceeds the value of the liquidation preference at the time of a liquidity event, such as a strategic sale or merger. The common stock is modeled as a call option on the underlying equity value at a predetermined exercise price. In the model, the exercise price is based on a comparison with the total equity value rather than, as in the case of a regular call option, a comparison with a per share stock price. The OPM uses the Black-Scholes option-pricing model to price the call options. This model defines the securities’ fair values as functions of the current fair value of a company and uses assumptions, such as the anticipated timing of a potential liquidity event and the estimated volatility of the equity securities.

We estimated the time to liquidity as 2.27 years based on then-current plans and estimates of our board of directors and management regarding a liquidity event. The risk-free rate was estimated as the interpolated 2.3 year yield on government bonds. We estimated annual volatility of 58% based on the observed historical volatility of publicly-traded shares issued by companies which are comparable to ours.

We applied a discount for lack of marketability to the value indicated for our common stock. We believed that a discount was appropriate because our common stock was unregistered, and because the holder of a minority interest in the common stock might not be able to influence the timing of a liquidity event. Our estimate of the appropriate discount for lack of marketability was based on quantitative methods, including the Protective Put Method (Chaffe) and the Asian Protective Put Method, consistent with the Practice Aid. We applied an estimated discount for lack of marketability of 25% to the value indicated for our common stock.

The following table summarizes the significant assumptions used to determine the fair value of our common stock of $0.84 as of August 31, 2011:

 

Years to liquidity

     2.27   

Annual volatility

     58

Risk-free interest rate

     0.21

Discount for lack of marketability (DLOM)

     25

As a result of the fact that there were no material changes to our business from August 31, 2011 to March 27, 2012, we utilized the August 31, 2011 valuation to determine the exercise price of option grants in January and March 2012.

November 5, 2012 Valuation

We, with the assistance of a third-party valuation specialist, performed a contemporaneous valuation of our common stock as of November 5, 2012, and determined the fair value to be $3.96 per share as of that date. We applied the OPM back-solve method to solve for our equity value and corresponding value of common stock based on the $2.26 per share price paid for our Series B preferred stock. In September 2012, several unrelated investors, who had not previously invested in Foundation, purchased shares of our Series B preferred stock at a price of $2.26 per share. Given the proximity to the Series B preferred stock financing and the arms-length nature of the transaction, we believed the per share issuance price of the Series B preferred stock provided an indication of the fair value of our equity as of November 5, 2012.

We estimated the time to liquidity as 2.50 years based on then-current plans and estimates of our board of directors and management regarding a liquidity event. The risk free rate was estimated as the

 

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interpolated 2.5 year yield on government bonds. We estimated annual volatility based on the observed historical volatility of publicly-traded shares issued by companies which are comparable to ours.

We applied a discount for lack of marketability to the value indicated for our common stock. Our estimate of the appropriate discount for lack of marketability took into consideration put option methodologies consistent with the Practice Aid. We applied an estimated discount for lack of marketability of 25% to the value indicated for our common stock.

The following table summarizes the significant assumptions used to determine the fair value of our common stock of $3.96 as of November 5, 2012:

 

Years to liquidity

     2.50   

Annual volatility

     49

Risk-free interest rate

     0.38

Discount for lack of marketability (DLOM)

     25

In preparing our December 31, 2012 financial statements, we concluded that the fair value of the common stock underlying the stock options granted between May 24, 2012 and July 24, 2012 with an exercise price of $0.84 per share was $1.80 per share for financial statement and reporting purposes. Our estimate of $1.80 per share was based on an analysis of the contemporaneous valuations of our common stock on August 31, 2011 and November 5, 2012, and an evaluation of the key business milestones which increased the fair value of our common stock during that period. The increase in the fair value of our common stock from $0.84 to $1.80 was primarily attributable to the formal commercial launch of FoundationOne in early June 2012. We utilized the $1.80 per share fair value in determining stock-based compensation expense for the above-mentioned grants for the year ended December 31, 2012 and the six months ended June 30, 2013.

The primary factors that supported the increase in the fair value of our common stock from $0.84 per share to $3.96 per share on November 5, 2012 were:

 

  Ÿ  

we commenced our formal commercial launch of FoundationOne for solid tumors in June 2012;

 

  Ÿ  

we secured $42.5 million in additional financing in September 2012;

 

  Ÿ  

in connection with the September financing, the participation and dividend rights of the previously outstanding preferred stock were modified, and those modifications were beneficial to holders of common stock; and

 

  Ÿ  

we continued to sign additional agreements with biopharmaceutical customers, which we believe demonstrated early demand for our product.

We utilized the November 5, 2012 valuation to determine the exercise price of options granted on December 18, 2012.

February 15, 2013 Valuation

We, with the assistance of a third-party valuation specialist, performed a contemporaneous valuation of our common stock as of February 15, 2013 and determined the fair value to be $4.16 per share as of that date. During the first quarter of 2013, management and our board of directors believed that a future initial public offering, or IPO, would be possible to the extent we continued to experience strong market adoption for FoundationOne, and received reasonable rates of reimbursement from commercial third-party payors. Without significant market penetration or reimbursement from commercial third-party and government payors, we believed that an IPO in 2013 would be unlikely.

To estimate our enterprise value, we used the hybrid method. The hybrid method is a PWERM where the equity value in one of the scenarios is calculated using an OPM. The hybrid method

 

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considers one IPO scenario and one OPM scenario. For the OPM scenario, the type of liquidity event or outcome is undefined. In order to estimate the investment return for the IPO scenario, we considered the price per share of our Series B preferred stock, the expected timing of an IPO, and an estimated rate of return on the Series B investment. In December 2012, three new investors, that had not previously invested in Foundation, purchased shares of our Series B preferred stock at a price of $2.26 per share. We assumed an IPO would occur 1.50 years after the investment, priced at a level to provide the Series B investors with an annual rate of return of 20%.

As a corroborative calculation, we considered the guideline public company, or GPC, method under the market approach. We considered various GPC’s for the February 15, 2013 valuation and concluded that the value we assumed for our IPO was consistent as a multiple of projected revenue with the multiples indicated by the GPC method.

In the OPM scenario, we applied the back-solve method to solve for the equity value and corresponding value of common stock based on the $2.26 per share price for the additional sale of Series B preferred stock to three new investors in December 2012. Given the proximity to the Series B preferred stock financing in December 2012, and the fact that this financing included and was led by unrelated investors, we believed the per share issuance price of the Series B preferred stock provided an indication of the fair value of our equity as of February 15, 2013. The values indicated for the shares of our preferred stock and common stock by the IPO scenario and the OPM scenario were probability weighted to estimate the fair value of our common stock as of the February 15, 2013 valuation date.

As a corroborative calculation to the OPM, we also considered the discounted cash flow method under the income approach. We converted our projected future cash flows to present value by applying a discount rate of 25%, which we selected based on studies of the rates of return expected by venture capitalists for companies in the bridge and IPO stage of development. The discounted cash flow method yielded an enterprise value which was consistent with the enterprise value indicated by the OPM back-solve method.

For the February 15, 2013 valuation, we estimated the fair value of our common stock by assigning a 90% weighting to the estimated fair value using the OPM back-solve method and a 10% weighting to the estimated fair value under the IPO scenario. We believed that the 90% weighting on the OPM back-solve method was appropriate due to the proximity of an additional issuance of our Series B preferred stock in December 2012 to the valuation date, and the fact that this December financing included and was led by unrelated investors. The weighting for the IPO scenario was deemed appropriate because at the time of the valuation, we believed that there was a possibility of following a successful Series B financing with an IPO, but given the following risks the probability of an IPO was assessed at only 10%:

 

  Ÿ  

there remained uncertainty as to the rate of adoption of FoundationOne given that we only had two quarters of commercial experience, and we believed that our ability to demonstrate a significant and sustained rate of market penetration was necessary to position us for a successful IPO;

 

  Ÿ  

on January 1, 2013, new Centers for Medicare and Medicaid Services, or CMS, reimbursement codes, which are used by commercial third-party payors and CMS, for molecular testing services took effect. There was significant uncertainty as to whether, and to what extent, we would get reimbursed for FoundationOne by commercial third-party payors and government payors. Because these codes had just taken effect, we did not then have sufficient experience with reimbursement under these new codes necessary to proceed with an IPO; and

 

  Ÿ  

we had not commenced a process to pursue an IPO of our common stock, our board of directors had not authorized any such process, and planning for an IPO can take a significant amount of time.

 

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After weighting the two scenarios, we applied a discount for lack of marketability of 25%, which yielded an estimated value attributable to common stockholders of $4.16 per share. The discount for lack of marketability of 25% was based on quantitative methods, including the Protective Put Method (Chaffe) and the Asian Protective Put Method, consistent with the Practice Aid.

The following table summarizes the significant assumptions used in the hybrid method to determine the fair value of our common stock as of February 15, 2013:

 

     IPO     OPM  

Probability weighting

     10     90

Years to liquidity

     1.37        2.22   

Annual volatility

     NA        48

Risk-free rate

     NA        0.26

Discount for lack of marketability (DLOM)

     25     25

The primary factors that supported an increase in the fair value of our common stock from $3.96 per share at December 18, 2012 to $4.16 per share at February 15, 2013 were:

 

  Ÿ  

we hired 17 new employees, including a Chief Business Officer and three additional members of our sales force; and

 

  Ÿ  

we made progress in scaling our laboratory and information technology capabilities to support our growth expectations.

May 10, 2013 Valuation

As a result of favorable capital market conditions, the strong initial adoption of FoundationOne, and the observed reimbursement trends from commercial third-party payors for FoundationOne under the new CMS reimbursement codes that took effect on January 1, 2013, an IPO became more probable in the near-term. During the second quarter of 2013, we began preparations for an IPO, including the selection of underwriters and outside legal counsel. We, our external advisors, the proposed underwriters and their advisors held an organizational meeting in May 2013 to formally begin the IPO process and the underwriter due diligence process.

As a result of these changes in facts and circumstances, we, with the assistance of a third-party valuation specialist, completed another contemporaneous valuation analysis as of May 10, 2013. To estimate our enterprise value, we used the hybrid method. For the IPO scenario, we used the GPC method under the market approach to estimate our enterprise value in an IPO. We estimated our value in an IPO based on GPC multiples of projected revenue.

As a corroborative calculation, we considered the annual rate of return for our Series B preferred stock investors based on our estimated value in an IPO. This calculation supported the value determined under the GPC method.

In the OPM scenario, we estimated our equity value using the discounted cash flow method under the income approach. We converted our projected future cash flows to present value by applying a discount rate of 25%, which we selected based on studies of the rates of return expected by venture capitalists for companies in the bridge and IPO stage of development.

We assigned a 60% probability of the IPO scenario and a 40% probability to the OPM scenario. The primary factors that supported these probabilities, and the primary reasons for the increase in the fair value of our common stock from $4.16 per share to $7.12 per share at May 21, 2013, were:

 

  Ÿ  

FoundationOne test volume and our customer base increased significantly during March, April, and the first week of May 2013;

 

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  Ÿ  

reimbursement received from commercial third-party payors under the new CMS reimbursement codes that took effect on January 1, 2013;

 

  Ÿ  

we entered into a collaboration with Memorial Sloan-Kettering Cancer Center for the development of FoundationOne for hematologic malignancies;

 

  Ÿ  

we entered into agreements with new and existing biopharmaceutical partners;

 

  Ÿ  

several of our scientific discoveries were accepted for publication and we were selected for several high profile presentations, including at the American Society of Clinical Oncology, or ASCO;

 

  Ÿ  

our decision to accelerate our field sales hiring plan based on observed adoption of FoundationOne; and

 

  Ÿ  

as a result of favorable capital market conditions and the factors noted above, we began the process of preparing for an IPO.

After weighting the two scenarios, we applied a discount for lack of marketability of 15%, which yielded an estimated value attributable to common stockholders of $7.12 per share. This discount for lack of marketability was based on quantitative methods, including the Protective Put Method (Chaffe) and the Asian Protective Put Method, consistent with the Practice Aid.

The following table summarizes the significant assumptions used in the hybrid method to determine the fair value of our common stock as of May 10, 2013:

 

     IPO     OPM  

Probability weighting

     60     40

Years to liquidity

     0.39        1.99   

Annual volatility

     NA        47

Risk-free rate

     NA        0.26

Discount for lack of marketability (DLOM)

     15     15

Estimated offering price

We and our underwriters determined the estimated price range set forth on the cover of this prospectus, which is $14.00 to $16.00 per share. In comparison, our estimate of the fair value of our common stock was $7.12 per share as of May 21, 2013. The May 21, 2013 valuation used a hybrid method in which the probability weighting for the IPO and option pricing model (OPM) scenarios was 60% and 40%, respectively, and the value per share for the IPO and OPM scenarios was $10.16 and $5.72, respectively (excluding a 15% discount for lack of marketability). Based on a 100% weighting of the IPO scenario and no discount for lack of marketability, the estimated value per share on May 21, 2013 would have been $10.16. We note that, as is typical in initial public offerings, the estimated price range for this offering was not derived using a formal determination of fair value, but was determined based upon discussions between us and the underwriters. Among the factors considered in setting the estimated range were prevailing market conditions and estimates of our business potential, the general condition of the securities market and the market prices of, and demand for, publicly-traded common stock of generally comparable companies.

In addition, we believe that the difference in value reflected between the midpoint of the estimated range and the board of directors’ determination of the fair value of our common stock on May 21, 2013 was primarily the result of the following company-specific and market and other external factors:

Company-specific factors:

 

  Ÿ  

The number of FoundationOne tests delivered to our ordering physicians has grown significantly, increasing from 1,140 tests delivered during the first quarter of 2013 to 1,626 tests

 

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delivered during the second quarter of 2013. In addition, we continue to experience significant growth in tests delivered during the third quarter of 2013. We have also expanded our sales force from 10 to 18 individuals since May 21, 2013, which significantly increases our commercial outreach.

 

  Ÿ  

We have continued to receive reimbursement from commercial third-party payors under the new Centers for Medicare and Medicaid Services reimbursement codes that took effect on January 1, 2013.

 

  Ÿ  

We are advancing the development of our second commercial product, FoundationOne for hematologic malignancies, and we remain on schedule to conduct our formal commercial launch of this product by early 2014. We have prepared a significant number of scientific abstracts for potential presentation at the American Society of Hematology, one of the leading medical conferences in hematologic malignancies, and we believe there is growing demand for this product offering in the marketplace.

 

  Ÿ  

On May 30, 2013, the US Oncology Network, one of the largest networks of integrated, community-based oncology practices in the United States, announced that we are its preferred provider for molecular diagnostic testing in cancer care. We believe this relationship is further validation of our approach, and will help to further extend our commercial outreach into community oncology practices.

 

  Ÿ  

Since May 21, 2013, we began billing under two new agreements with highly reputable hospitals to provide FoundationOne tests to their physicians, for which we receive direct payments at negotiated rates.

 

  Ÿ  

Since May 21, 2013, we entered into two new biopharmaceutical agreements through which we will provide our molecular information products.

 

  Ÿ  

In July 2013, we entered into a five-year supply, service and support agreement with Illumina through which Illumina will provide us with products and services that support the gene sequencing component of our molecular testing activities. This new agreement provides an established supply and pricing arrangement during the term of the agreement. We believe this new agreement reduces the risk of interruption to our supply chain and to our laboratory operations.

 

  Ÿ  

We have made significant progress in the construction of our new laboratory facility, which will enable us to more than double our operating capacity.

Market and other external factors:

 

  Ÿ  

Based upon preliminary discussions with our investors and potential investors, we believe there will be strong interest in investing in a company with our profile and at our stage of development.

 

  Ÿ  

Since our May 21, 2013 valuation, the market specific to initial public offerings has continued to perform well. There have been approximately 17 initial public offerings within the healthcare sector since May 21, 2013, and as of August 21, 2013, the average increase in price per share from the offering price across those companies was approximately 30%. Approximately 60% of initial public offerings in the healthcare sector during 2013 have occurred since our May 21, 2013 valuation.

 

  Ÿ  

There has been growing awareness among physicians and the public generally of the treatment benefits of a precision medicine approach to utilizing targeted therapeutics that are based on the specific genomic alterations driving individual cancer growth.

 

  Ÿ  

The estimated initial public offering price range necessarily assumes that the initial public offering has occurred, that a public market for our common stock has been created and that all

 

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outstanding shares of our preferred stock have been converted into common stock in connection with the initial public offering, and therefore excludes any discount for lack of marketability of our common stock, which was factored in the May 21, 2013 valuation.

 

  Ÿ  

Our preferred stock has substantial economic rights and preferences superior to our common stock. The midpoint of the estimated price range assumes the conversion of our preferred stock to common stock upon the completion of this offering and the corresponding elimination of such superior economic rights and preferences.

JOBS Act

In April 2012, the Jumpstart Our Business Startups Act, or the JOBS Act, was enacted in the United States. Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies.

 

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BUSINESS

Overview

We are a commercial-stage company focused on fundamentally changing the way patients with cancer are treated. We derive revenue from selling products enabled by our molecular information platform to physicians and biopharmaceutical companies. Our platform includes proprietary methods and algorithms for analyzing tumor tissue samples across all types of cancer, as well as information aggregation and concise reporting capabilities. Our products provide genomic information about each patient’s individual cancer, enabling physicians to optimize treatments in clinical practice and enabling biopharmaceutical companies to develop targeted oncology therapies more effectively. We believe we have a significant first mover advantage in providing comprehensive molecular information products on a commercial scale.

Our first clinical product, FoundationOne, is, to our knowledge, the only commercially available comprehensive molecular information product designed for use in the routine care of patients with cancer. We commenced our formal commercial launch of FoundationOne for solid tumors in June 2012 and expect to commence our commercial launch of FoundationOne for blood-based cancers, or hematologic malignancies, by early 2014. To accelerate our growth and enhance our competitive advantage, we are extending our sales force, publishing scientific and medical advances, fostering relationships throughout the oncology community, and developing new products.

The cancer treatment paradigm is evolving rapidly. Today, physicians increasingly use precision medicines to target cancers based on the specific genomic alterations driving their growth. Physicians need molecular information about their patients’ unique cancers to determine the optimal course of treatment. However, most currently available molecular diagnostic tests capture only a limited number of the most common and known genomic alterations. We believe this narrow approach often fails to identify relevant targeted treatment options.

We believe the oncology community needs a single product that can assess the known biologically relevant genomic alterations and distill complex molecular information into a concise and actionable format and we designed FoundationOne to be that product. We believe a new, comprehensive approach to providing molecular information for use in clinical settings can address an area of significant unmet medical need for patients suffering from advanced, or active metastatic, cancers. We estimate that there are approximately one million patients per year in the United States with newly-diagnosed or recurrent active metastatic cancers who fall into challenging treatment categories, including patients who have rare or aggressive diseases, patients whose disease has progressed after standard treatments, and patients who have tested negative under, or been ineligible for, traditional molecular diagnostic tests. We are initially targeting these patients for FoundationOne because we believe this patient population will currently benefit most from a comprehensive molecular information product. Our estimates are based upon a combination of feedback from our network of oncology thought leaders, data published by the National Cancer Institute in the Cancer Statistics Review, and focused market research that we commissioned. This market research consisted of an analysis of a third party database (that includes public and private cancer-related statistical information on tumor type, disease stage, clinical information, and disease outcomes) supplemented with confirmatory interviews from physicians who practice at a variety of cancer treatment centers, including academic research centers and community hospitals. As the number of available targeted therapies expands and as physicians gain further experience using comprehensive molecular information in their routine treatment decisions, we believe that the potentially addressable market for comprehensive molecular information products will expand over the next five years to include all patients who have metastatic disease, not limited to the challenging treatment categories noted above. We estimate that this potential market expansion could include an additional 800,000 total patients annually, based upon

 

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the same combination of sources of information we used to estimate the size of the patient population we are initially targeting for FoundationOne. For additional details on our target patient populations, see “Business—Market Opportunity” of this prospectus. Although we expect existing and future diagnostic testing providers to also target these patient populations, we believe FoundationOne is currently the only commercially available comprehensive molecular information product that provides a fully informative genomic profile in a concise and actionable format designed for use in the clinical setting.

We believe we have built the only molecular information platform that comprehensively assesses cancer tissue simultaneously for all four classes of genomic alterations across all cancer-related genes with the sensitivity and specificity required for routine medical practice. FoundationOne has identified at least one genomic alteration that is actionable, meaning the alteration is associated with an FDA-approved targeted therapy or with a clinical trial, in 82% of the 3,936 clinical specimens we received and analyzed with FoundationOne following its formal commercial launch in June 2012 through May 17, 2013. FoundationOne delivers this complex molecular information in a concise report that matches detected molecular alterations with potentially relevant treatment options and clinical trials. The FoundationOne report is also available to physicians through an online portal and soon through interactive mobile applications.

We have experienced rapid adoption of FoundationOne. More than 1,500 physicians from large academic centers and community-based practices across more than 25 countries have ordered FoundationOne since its formal commercial launch in June 2012. We believe this rapid adoption of FoundationOne, which has been accomplished with a nascent sales team, demonstrates the demand for and utility of a single, comprehensive product that helps oncologists effectively implement the promise of precision medicine.

We believe FoundationOne has a sustainable competitive advantage because it:

 

  Ÿ  

Comprehensively identifies clinically actionable information FoundationOne currently assesses 236 biologically relevant cancer genes for all classes of genomic alterations with high sensitivity and specificity, and has identified actionable alterations in 82% of the 3,936 clinical specimens we received and analyzed with FoundationOne following its formal commercial launch in June 2012 through May 17, 2013. FoundationOne identifies genomic alterations that other diagnostic tests cannot. Based on our quantitative analysis, FoundationOne finds more than three times the combined number of actionable genomic alterations identifiable using a collection of six commercially available and commonly used diagnostic tests;

 

  Ÿ  

Incorporates the latest scientific and medical advances — We have extensive relationships across the scientific and medical oncology communities, including with key thought leaders and leading biopharmaceutical companies. These relationships help us incorporate new cancer genes, the latest scientific findings, newly available targeted therapeutics, and relevant clinical trials into FoundationOne;

 

  Ÿ  

Readily integrates into routine clinical practice — Our proprietary sample preparation processes and computational biology algorithms allow us to utilize small amounts of routinely collected tumor tissue from a wide variety of sample types, including tissue with low tumor purity. We detect and report the clinically relevant genomic alterations, generally within 14 to 17 days. We are dedicated to providing high-quality support to our customers, from order initiation and sample acquisition through report delivery and follow-up with our medical affairs team;

 

  Ÿ  

Provides actionable information that physicians can use — In a concise report, FoundationOne communicates the actionable genomic alterations in a patient’s cancer and matches these alterations with targeted therapies and relevant clinical trials. Through our online portal, Interactive Cancer Explorer, physicians can access this report and links to topical peer-reviewed literature; and

 

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  Ÿ  

Promotes physician interaction to create a powerful network effect — We are continually augmenting our cancer knowledgebase, and we are expanding the functionality of our Interactive Cancer Explorer to allow for sharing of genomic and treatment data. Together, we believe these efforts will create a network effect of more users and ultimately more actionable information.

Key opinion leaders and leading cancer researchers, including oncologists at premier cancer institutions, such as Memorial Sloan-Kettering Cancer Center, Vanderbilt-Ingram Cancer Center, and The US Oncology Network, have embraced our approach and products. We believe that our relationships with thought leaders help validate our platform, drive adoption of our products in community oncology settings, and establish our leadership position in the field of molecular information related to cancer. We believe that the increasing use of our products, particularly among thought leaders, and the demonstration of the economic and clinical value of FoundationOne will help facilitate favorable reimbursement decisions. In addition to routinely using FoundationOne for clinical cases, many thought leaders collaborate with us on clinical studies, peer-reviewed publications, and medical and scientific conference presentations. Our effort in building these relationships furthers our ultimate goal—to facilitate better-informed treatment decisions for patients with cancer.

Our molecular information platform also is currently used by 18 biopharmaceutical partners to enhance their development of targeted oncology therapies. We use our core proprietary testing platform, computational biology, and information technology capabilities to analyze patient samples from both retrospective and prospective clinical trials. We provide our biopharmaceutical partners comprehensive genomic analysis and information relevant to precision medicine strategies. In addition to generating revenue, these relationships enable us to identify new cancer genes under investigation that can be incorporated into our platform at an early stage, as well as to participate in the newest oncology therapeutics and practice. We are actively working to expand these relationships.

We are dedicated to ongoing innovation in our molecular information platform and new product pipeline. Our product development investments have already yielded improvements to FoundationOne and the platform generally, enabling us to analyze more genes using less tissue while reducing turn-around time. Already more than 40% of FoundationOne customers use Interactive Cancer Explorer, the online portal we developed in consultation with Google Ventures, one of our investors, and launched in December 2012. We are also incorporating RNA-based sequencing technology to analyze the additional gene fusions commonly found in hematologic malignancies and expect to commence our commercial launch of FoundationOne for hematologic malignancies incorporating this technology by early 2014. In addition, we are exploring and developing new scientifically-advanced and clinically-relevant products that include, for example, products utilizing circulating tumor cells and, or cell-free plasma DNA, which is DNA that circulates in blood plasma outside of cells, and products that expand our offerings into additional areas such as epigenetics, which examines changes in gene expression that occur without changes in the underlying DNA, methylation, which is a chemical signaling mechanism that plays a role in regulation of gene expression, and immune response.

The increasing availability and understanding of molecular information about cancer is driving a revolution in the treatment of cancer. We seek to leverage the vast array of genomic data generated by our molecular information platform together with clinical data to position ourselves at the nucleus of this new treatment paradigm. Our biopharmaceutical partners have already begun using our data to further refine clinical trial design and drug development. In a recent example of the power of our molecular information platform, after a biopharmaceutical partner’s Phase 2 trial that used a narrowly focused test to screen trial subjects failed to meet its primary endpoint, we performed our comprehensive genomic analysis on trial subjects. Our analysis helped our biopharmaceutical partner predict a response to the drug, created new hypotheses to test in upcoming Phase 3 trials, and may have increased the target population who could benefit from this therapeutic approach.

 

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Over time, we will expand our ability to capture, aggregate, analyze, and facilitate the broader exchange of genomic data across the global oncology community. We are investing in our technology architecture to allow oncologists to share clinical data. Through Interactive Cancer Explorer, which is currently accessible through an online web portal and will also soon be accessible through mobile applications, we are building a data platform that efficiently captures and allows for the analysis of data that will create a network effect leading to more users and ultimately more useful data. If we, in conjunction with oncologists, pathologists, biopharmaceutical companies, and academic researchers, can successfully capture and utilize this data, we believe we will play an even more integral role in transforming care for the millions of patients suffering from cancer.

Our Strategy

Our objective is to transform the care of patients with cancer by leading the development and commercialization of proprietary genomic information products that guide the diagnosis and treatment of cancer, and that enhance the development of cancer therapies. To achieve this objective, our strategy is to:

 

  Ÿ  

Drive awareness and adoption of FoundationOne and our future clinical products — We are building an experienced, oncology-focused sales force, collaborating with thought leaders to validate our platform and influence utilization of our products, promoting physician interaction, engaging with patient advocacy and other key oncology stakeholders, and pursuing payment and reimbursement for our products.

 

  Ÿ  

Demonstrate the value of our products to patients, physicians, and payors To illustrate the value of our products, we are educating physicians and payors about the patients most likely to benefit from our products, conducting clinical trials and health economic studies, and communicating our data through peer-reviewed journals and conference presentations.

 

  Ÿ  

Enable biopharmaceutical companies to more effectively develop new cancer therapies — We are expanding our commercial relationships with biopharmaceutical partners to enable us to discover and interrogate new cancer genes, to assist in the development of novel targeted therapeutics, to improve clinical trial efficiency and outcomes, and to continue our involvement at the cutting edge of cancer treatment.

 

  Ÿ  

Invest in product enhancements and new product innovations — We are developing new molecular information products, such as FoundationOne for hematologic malignancies, conducting research and development into potential products to monitor disease progression utilizing circulating tumor cells and cell-free plasma DNA, and introducing powerful tools, such as our Interactive Cancer Explorer portal, to access and disseminate our molecular information.

 

  Ÿ  

Empower the broader cancer community with molecular information — We are investing in technology to allow oncologists to collaborate and share response rates and other clinical information. We have launched Interactive Cancer Explorer, and intend to make this information accessible through additional applications in 2014. Over time, we will expand our capacity to capture, aggregate, analyze and facilitate the broader exchange of genomic data across the global oncology community—a strategy that we believe eventually will create a network effect stimulating physician participation and the development of substantial amounts of data that, in turn, will positively impact the treatment of cancer.

 

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Our Industry

Despite enormous investment in research and the introduction of new treatments, cancer remains a critical area of unmet medical need. According to a 2012 American Cancer Society report, “Cancer Treatment and Survivorship Facts & Figures 2012-2013,” in 2012 in the United States, more than 13 million people were suffering from cancer and 1.6 million people were newly diagnosed with the disease. The global cancer burden is growing. The World Health Organization predicts in its Global Action Against Cancer publication that in 2020 there will be 16 million new cancer cases and 10 million cancer deaths globally. A recent report by the American Cancer Society, “The Global Economic Cost of Cancer,” estimates that the total annual economic impact of premature death and disability from cancer worldwide is approximately $900 billion.

According to the American Society of Clinical Oncology, there are more than 10,000 practicing oncologists treating patients with cancer in the United States. Whereas a small portion of oncologists practice in major academic-based cancer centers, the National Cancer Institute estimates that approximately 85% of the oncologists in the United States practice in community-based settings where the vast majority of patients with cancer are treated.

The diagnosis of cancer is complex and multidimensional. Practicing oncologists order multiple tests, including currently available molecular diagnostic tests, to better understand the genomic alterations that are driving their patients’ cancer growth. According to a Genomeweb web posting, “Clinical MDx Testing Growing Twice as Fast as Routine Dx; $58B by 2026?”, the global market for molecular diagnostic tests characterizing cancer was estimated to be $7.0 billion in 2011 and is projected to grow by more than 15% annually.

Cancer Treatment is Evolving to a Molecular-Based Paradigm

Cancer is not a single disease. The term cancer describes a class of diseases characterized by uncontrolled cell growth. Cells can experience uncontrolled growth if there are alterations to DNA, such as damage or mutations, and therefore disruption to the genes and proteins regulating cell division.

Surgery is often the first line of therapy for cancer where possible and, according to the American Cancer Society, most patients with cancer will have some type of surgery. Surgery often presents the greatest chance for a cure, especially if the cancer has been detected early in its development and has not spread to other parts of the body. Many patients, however, require therapeutic intervention beyond surgery alone.

Physicians have used radiation as a cancer therapy since the early 20th century, and modern radiation techniques deliver therapy with significant precision. Nevertheless, even today, radiation’s use and efficacy is limited because the high doses necessary to kill cancer cells often cause damage to healthy cells in the treatment area and fail to kill all cancer cells, particularly if the cancer has spread to other parts of the body.

Physicians began using chemotherapy in the 1940s as a drug therapy approach that acts by killing cells that divide rapidly, one of the main properties of most cancer cells. These cytotoxic therapies are often prescribed by a trial and error approach—both because certain chemotherapies have limited efficacy with some patients and the treatment effect might be inconsistent, and because the therapies’ indiscriminate destruction of healthy cells involved in critical biological functions can cause severe toxic side effects in some patients.

More recently, oncologists are integrating a precision medicine approach by utilizing therapeutics that target cancers based on the specific genomic alterations driving their growth. We believe the

 

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oncology community is generally beginning to change clinical practice so that oncologists treat each individual’s cancer according to its unique genomic alterations that impact the underlying biological pathways within the patient’s tumors, rather treating a patient’s tumors based on their initial anatomical location in the body, such as the breast, colon or lung. In addition, as a result of advancements in cancer biology and genomic technology that enable the identification of new cancer genes, biopharmaceutical companies are directing more research and development resources towards targeted therapies. There are currently more than 40 approved targeted oncology therapies on the market and approximately 950 unique clinical trials testing more than 470 targeted oncology therapies. In 2011, global spending on the targeted oncology therapies totaled $21.7 billion as compared to just $2.0 billion in 2002.

The rapid increase in molecular information about cancer and the increasing array of targeted oncology therapeutics are making it more difficult for physicians to make treatment decisions. The National Comprehensive Cancer Network estimates that 50% to 75% of cancer therapies in the United States are used off label, meaning that physicians prescribe therapies for clinical indications in manners different from those approved by FDA. Off-label usage of traditional cytotoxic therapies is often driven by physicians struggling to treat a patient’s disease after it fails to respond to initial treatment regimens. Targeted therapies are used off label by oncologists who have expertise in genomics or access to diagnostic tools that allow them to make informed decisions about off-label use of targeted therapies.

In order to maximize the utility of diverse cancer-related molecular information to better guide the use of targeted therapies, we believe a new approach is needed. Specifically, the oncology community needs a single product that can assess the known and biologically relevant genomic alterations, and distill complex molecular information into a concise and actionable format.

Current Challenges of Diagnosing Cancer on a Molecular Level

Today, physicians are faced with numerous challenges when making decisions on how to best utilize currently available molecular diagnostics for cancer, including:

 

  Ÿ  

the inherent limitations of molecular diagnostic tests that are typically capable of identifying only single marker or test panels that capture a limited number of genomic markers and address only a subset of the four classes of genomic alterations found in cancers, which are also known as hotspot panel tests;

 

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insufficient and/or poor quality tumor biopsy tissue relative to the amount and quality needed to perform all desired or required tests; and

 

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the difficulty of integrating existing molecular diagnostic tests into clinical practice, including the decisions about which tests to order and how to effectively match the genomic information provided by tests with current targeted therapies or clinical trials.

Single-Marker or Hotspot Panel Tests May Miss Actionable Information

Most currently available molecular diagnostic tests are single-marker or hotspot panel tests that capture only one or a limited number of the most common, well-known gene alterations that these tests are designed to target. There are four classes of genomic alterations that are clinically relevant to the treatment of cancer: base pair substitutions; copy number alterations; short insertions and deletions; and gene rearrangements and fusions. Hotspot panel tests generally are only able to identify base pair substitutions and specific gene rearrangements, cannot detect copy number alterations, and sometimes lack the sensitivity to identify short insertions and deletions.

The following table summarizes the uses and inherent limitations of the current testing methods utilized in commercially available single-marker and hotspot panel tests for cancer that are most

 

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commonly ordered according to results of a 2008 survey of oncologists and hematologists published in the Journal of Clinical Pathology article, “Molecular testing for somatic cancer mutations: a survey of current and future testing in UK laboratories.” Although oncologists may order these tests to look for one or a limited number of specific gene alterations, we believe the inherent limitations of tests using these methods are understood by pathologists and genomicists who perform the tests and the oncologists who order them.

 

Name

  

Uses

   Limitations
Polymerase chain reaction , or PCR-based tests, a technology used for amplifying DNA sequences   

Enable the detection of short fragment DNA or RNA sequences.

   Single-gene tests for specific
and limited number of mutations.

 

Only identify known and select
base substitutions and short
insertions or deletions, such as
BRAF V600E.

   
Immunohistochemical , or IHC, stains, a process used to diagnose abnormal cells   

Utilize antibody proteins to identify certain antigens that are unique to various types of cancer.

   Only identify the expressed
presence of a known and select
protein or specific protein
marker, such as HER2, related
to a particular genomic
alteration.
   
FISH-based DNA probes, a mechanism for detecting DNA sequences through the use of fluorescent technology    Reveal specific genomic abnormalities, including insertion/deletions and rearrangements.    Only detect select gene
rearrangements, such as EML4-
ALK.

 

Difficult to test for multiple
markers.

Since current hotspot panel tests typically cannot detect many genomic alterations present in cancer, physicians who use these tests may fail to identify actionable information about their patients’ cancers that could inform a preferable treatment approach. We believe the limitations of this narrowly-focused approach of looking for a limited number of pre-selected genomic alterations will be further compounded as more actionable genomic alterations are identified and additional targeted therapies are developed.

Limited Tissue Availability and Poor Tissue Quality Restrict Testing Options

Many clinical tumor samples are provided from standard biopsies, needle biopsies or fine needle aspirates that yield very small tissue amounts. Small amounts of tissue samples limit the number of diagnostic tests a physician can order, and ordering one or a limited number of tests that look for one or a limited number of genomic alterations necessarily increases the likelihood that a physician may fail to identify other genomic alterations and ultimately therapeutic options.

Clinical tumor specimens also often have low tumor purity, meaning that the relevant genomic alterations occur in low frequencies within the sample and are difficult to detect. Moreover, the vast majority of clinical samples are stored as formalin-fixed and paraffin-embedded, or FFPE, specimens. FFPE preservation can damage DNA and RNA. Low tumor purity or damage to DNA or RNA may limit the availability of hotspot tests to identify certain genomic alterations.

Molecular Diagnostics are Difficult to Integrate into Clinical Practice

Physicians today face an increasingly difficult decision about which single-marker or hotspot tests to order. There are a growing number of tests, each specific to a different cancer type and each having

 

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limited ability to detect multiple genomic alterations. Typically, only a small amount of tumor biopsy is available, forcing the physician to order only a subset of desired diagnostic tests, often one test at a time in a serial manner. Furthermore, tests are usually selected based on the traditional treatment paradigm of the cancer’s location in the body or by simple trial and error.

Running multiple, disjointed tests also poses logistical challenges associated with routing samples to several different laboratories and high costs associated with conducting multiple tests. Moreover, limited tissue availability may prevent relevant tests from being ordered, tests conducted may miss genomic alterations, and the results may not be delivered soon enough to be used during the typical treatment cycle for a patient. Even if a physician has enough tumor sample to order a sufficient number of hotspot and individual molecular tests to identify relevant genomic alterations and receives the results of all of these tests in a timely fashion, the physician would commonly receive a series of uncoordinated individual reports from different laboratories that are difficult to interpret and synthesize. Compounding these challenges, especially in the community oncology setting, is how to effectively match the genomic information provided by tests with current targeted therapies or clinical trials for a particular patient. As a result of one or a combination of these current limitations, physicians may fail to identify or to prescribe a potentially appropriate targeted oncology therapy or to direct a patient to a potentially appropriate clinical trial.

The Opportunity for a Single, Comprehensive Molecular Information Solution

In order to harness the potential of understanding the genomic drivers of a patient’s cancer and new therapies targeted at specific genomic alterations, we believe the oncology community needs a new approach: a single molecular information platform that can assess a solid tumor or hematologic malignancy for the presence of biologically relevant genomic alterations. This solution would also provide actionable assistance to physicians in matching the genomic alterations identified in their patients’ cancers with relevant available therapeutic alternatives and clinical trials.

Our Solution — A Single Molecular Information Platform to Improve Patient Care

 

LOGO

Our molecular information platform, which includes proprietary technology, methods and computational algorithms, is the product of years of research and development and significant capital investment. Through this platform we deliver comprehensive genomic insights into cancer to support physicians in the improvement of clinical patient care, to support biopharmaceutical companies in the development of novel cancer therapeutics, and to drive further research and development to advance

 

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our understanding of oncology. The first molecular information product enabled by our platform is branded as FoundationOne for our clinical customers.

FoundationOne Integrates Complex Molecular Information into Routine Clinical Care

FoundationOne is, to our knowledge, the first commercially available comprehensive molecular information product for analysis of routine cancer specimens in a clinical setting. We believe FoundationOne is the only molecular information product that can comprehensively assess cancer tissue simultaneously for all four classes of genomic alterations with sufficient sensitivity and specificity for routine medical practice. Moreover, FoundationOne delivers this complex molecular information in a concise report that matches detected molecular alterations with potentially relevant treatment options and clinical trials. We perform FoundationOne in our laboratory located in Cambridge, Massachusetts, which is certified under the Clinical Laboratory Improvement Amendments, or CLIA, accredited by the College of American Pathologists, or CAP, and licensed by Massachusetts and other states.

Optimization and Automation Enables FoundationOne Workflow to Deliver Report in 14-17 days.

 

LOGO

A Comprehensive Clinical Assessment of Actionable Alterations in Cancer Genes

FoundationOne reports on the genes known to be altered in human solid tumors that are validated targets for therapy or are unambiguous drivers of cancer. We have selected this set of genes based upon the advice of an international group of key opinion leaders in oncology and cancer biology, input offered by our biopharmaceutical partners and our extensive review of the relevant literature. The current version of FoundationOne interrogates 236 genes (representing 3,734 exons, which are sequences of DNA molecules, or nucleotides, involved in DNA replication that encode for proteins) across all four classes of genomic alterations, as well as 47 introns, which are sequences of nucleotides involved in DNA replication that do not encode for proteins, of 19 genes commonly involved in rearrangements. The test includes those genes implicated in cancers for which a targeted therapy is FDA-approved and for which targeted therapies are in current or near-term clinical development. We update FoundationOne periodically to reflect new scientific and medical knowledge about cancer biology, including newly relevant cancer genes along with newly available targeted therapeutics and clinical trials.

 

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We believe FoundationOne’s ability to identify actionable genomic alterations far exceeds that of other commercially available molecular diagnostic tests. We define an actionable alteration as an identified genomic alteration in an analyzed cancer cell associated with an FDA-approved targeted therapy in the tumor type, an FDA-approved targeted therapy in another tumor type or an open clinical trial for which the alteration confers eligibility. Our comparative quantitative analysis demonstrated that running four commercially available tests that also utilize NGS plus two relevant and commonly-used hotspot tests together would collectively identify only a maximum of 31% of the actionable genomic alterations that can be identified by FoundationOne. We presented this comparative quantitative analysis at the American Society of Clinical Oncology, or ASCO, in 2013 and have included it in a manuscript that has been accepted for publication in a high-profile scientific journal.

FoundationOne’s ability to identify actionable alterations is greater than other commercially available molecular tests, in part, because we believe FoundationOne:

 

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interrogates many more cancer-related genes than other molecular diagnostic tests;

 

  Ÿ  

examines the entire coding region of each gene analyzed, enabling much broader interrogation of potential alterations for each gene;

 

  Ÿ  

is the only molecular diagnostic product that can comprehensively assess cancer tissue simultaneously for all classes of genomic alterations; and

 

  Ÿ  

assesses tumor samples with high sensitivity and specificity across all four classes of genomic alterations for a wide array of cancer-related genes.

FoundationOne has identified at least one actionable genomic alteration in 82% of the 3,936 clinical specimens we received and analyzed with FoundationOne following its formal commercial launch in June 2012 through May 17, 2013 because of its high sensitivity and specificity of interrogation of cancer-related genes for all classes of genomic alterations. We had previously applied this same methodology in an analysis of our first 2,221 clinical cases and determined that FoundationOne identified at least one actionable genomic alteration in 76% of reported clinical cases. We presented the results of this earlier analysis at ASCO’s annual meeting in June 2013. While we do not regularly analyze the percentage of our performed tests that identify actionable genomic alterations, we have not observed any patterns that we believe would substantially alter the typical frequency with which FoundationOne identifies actionable genomic alterations.

A Validated and Highly Precise Process of Testing

Our proprietary methods and workflow make FoundationOne suitable for clinical use at a commercial scale. Standard biopsies and needle biopsies obtained in a clinical setting often yield very small tissue amounts that have a low concentration of tumor cells and are preserved in a FFPE format. We have developed proprietary techniques for optimizing pre-sequencing sample preparation and have built post-sequencing computational algorithms that enable FoundationOne to be sufficiently sensitive to perform comprehensive genomic analysis on routine clinical tumor samples. We have optimized our NGS processes to maximize throughput, efficiency and quality. These laboratory processes designed to support FoundationOne have allowed us to successfully deliver results in 97% of all clinical tumor samples we have analyzed to date, against a sample failure rate of 3%.

FoundationOne has undergone an extensive analytical validation that demonstrates test performance using both reference specimens and hundreds of actual FFPE clinical cancer specimens with results derived from prior standard diagnostic tests. We performed validation studies in which FoundationOne testing was conducted on previously characterized cell lines known to contain various base substitutions and cancer specimens known to contain various insertions, deletions, and copy number alterations to evaluate whether FoundationOne was capable of detecting these predefined

 

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genomic alterations. FoundationOne was found to be highly sensitive in identifying these genomic alterations even where the percentage of cells in test samples containing the alterations (versus normal cells not containing the alterations) was very low. Specifically, FoundationOne was able to detect 99% of base substitutions contained in test samples in which less than 10% of the cells contained the alterations, 97% of insertions and deletions in samples in which 10 to 20% of the cells contained the alterations, and 99% of copy number alterations of at least 8-fold in which 30% of the cells contained the alterations. In aggregate, FoundationOne detected greater than 99% of the genomic alterations contained in the samples tested in the validation study. We believe these results demonstrate the importance of our proprietary methods, algorithms, and advanced bioinformatics, and will help to set the industry standards for validation of NGS-based clinical diagnostics. The analytic validation results of our studies on FoundationOne have been accepted for publication in a peer-reviewed scientific journal.

A Report Physicians Can Readily Understand and Use to Guide Patient Care

We designed the FoundationOne report, in collaboration with leading oncologists, to deliver actionable information in a manner that seamlessly integrates into their practices. We present the results from FoundationOne in a medically relevant and we believe practice-friendly manner that empowers physicians to make informed treatment decisions. During a period of active treatment, patients typically visit their physician every three to four weeks. FoundationOne delivers actionable information to a physician for use typically within 14 to 17 days from the time the sample is received.

The first page of the FoundationOne report clearly illustrates the test’s key findings. Specifically, it lists the analyzed tumor’s actionable genomic alterations and matches them with either FDA-approved therapies or open clinical trials for therapies targeting these alterations. The report also identifies noteworthy absences of genomic alterations typically associated with anatomical tumors of the same type. In addition, the report includes summaries of and references to supporting data from peer-reviewed publications and clinical trial information.

An Example of Page One of a FoundationOne Report.

 

LOGO    Patient Name
    
   Report Date
    
  

Diagnosis

 

Breast carcinoma
(NOS)

                          

Date of Birth

   Not Given    Client    Cancer Center    Specimen Received    Not Given

Gender

   Female    Ordering Physician    Doctor, Paul    Specimen Site    Lung

FMI Case #

   SRF000009    Additional Recipient    Not Given    Date of Collection    Not Given

Medical Record #

      FMI Client #    -1    Specimen Type    Slide

Specimen ID

   Not Given    Pathologist    Not Given          

A BOUT THE T EST :

FoundationOne is a next-generation sequencing (NGS) based assay which identifies genomic alterations within hundreds of cancer-related genes.

 

P ATIENT R ESULTS

   

T UMOR T YPE : B REAST C ARCINOMA ( NOS )

     
 

6 genomic alterations

     

Genomic Alterations Identified

 

ERBB2 amplification

PIK3CA H1047L

AURKA amplification

TP53 R342P

CREBBP P858S

ZNF217 amplification

     

6 therapies associated with potential clinical benefit

     
     

0 therapies associated with lack of response

     
     

6 clinical trials

     
      For a complete list of the genes assayed, please refer to the Appendix

 

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T HERAPEUTIC I MPLICATIONS

    
    

Genomic Alterations
Detected

   

FDA Approved Therapies

(in patient’s tumor type)

   

FDA Approved Therapies

(in another tumor type)

    Potential Clinical Trials
           

ERBB2

amplification

     

Ado-trastuzumab

emtansine

Lapatinib

Pertuzumab

Trastuzumab

      None       Yes, see clinical trials section

PIK3CA

H1047L

    None    

Temsirolimus

Everolimus

    Yes, see clinical trials section

AURKA

amplification

    None     None     Yes, see clinical trials section

TP53

R342P

    None     None     None

CREBBP

P858S

    None     None     None

ZNF217

amplification

      None       None       None
           
           
           
Note: Genomic alterations detected may be associated with activity of certain FDA approved drugs; however, the agents listed in this report may have varied clinical evidence in the patient’s tumor type. Neither the therapeutic agents nor the trials identified are ranked in order of potential or predicted efficacy for this patient, nor are they ranked in order of level of evidence for this patient’s tumor type.

Ordering physicians can also access their FoundationOne report through our Interactive Cancer Explorer, which we developed in consultation with Google Ventures, one of our investors. We deliver the FoundationOne report along with easy access to current information about the reported genomic alterations, associated therapies, and clinical trials. We are also developing additional applications for Interactive Cancer Explorer that we expect to launch in 2014, through which physicians will be able to access their FoundationOne reports on tablet computers and other mobile devices.

Expanding FoundationOne to Hematologic Malignancies

We expect to commence our commercial launch of FoundationOne for hematologic malignancies, our second commercial product, by early 2014. Hematologic malignancies, most commonly leukemias, lymphomas, and myelomas, are cancers that affect the body’s blood, lymphatic system, or bone marrow. Taken together, hematologic malignancies account for approximately 10% of new cancer diagnoses in the United States. Although some physicians today use molecular diagnostic testing to identify certain known genomic alterations to help diagnose hematologic malignancies, we believe there is a large unmet need for a comprehensive hematologic molecular information solution.

Similar to FoundationOne for solid tumors, we are designing FoundationOne for hematologic malignancies to be a single molecular information product to fit the realities of routine medical practice, including volume and quality limits of cancer specimens, demands on turnaround time and the need for a synthesized report that matches detected molecular alterations with potentially relevant targeted therapies and clinical trials. This new product will use RNA sequencing in addition to DNA sequencing to better enable identification of the unique genes and classes of genomic alterations that are characteristic of hematologic malignancies. We believe FoundationOne for hematologic malignancies will be the first commercially available comprehensive molecular information product for analysis of hematologic malignancies specimens in a clinical setting.

We are developing FoundationOne for hematologic malignancies in collaboration with Memorial Sloan-Kettering Cancer Center, or MSKCC, a leading academic cancer center. Leveraging the clinical and genomic expertise in hematologic malignancies of MSKCC’s clinicians, we believe FoundationOne for hematologic malignancies will be a best-in-class molecular information product that furthers our

 

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collective goal of making it possible for all patients to be treated with the therapies that are matched with their particular cancers.

Strong Evidence of Actionability in Clinical Experience for FoundationOne

We designed FoundationOne to address challenges associated with the everyday clinical management of patients diagnosed with cancer. We have experienced rapid adoption of FoundationOne. More than 1,500 physicians from large academic centers and community-based practices across more than 25 countries have ordered FoundationOne since its formal commercial launch in June 2012.

We have already served a growing number of patients for whom we identified actionable alterations that we believe would not have otherwise been detected and who have responded to therapies that we believe would not have otherwise been utilized. FoundationOne has identified at least one actionable alteration in 82% of the 3,936 clinical specimens we received and analyzed with FoundationOne following its formal commercial launch in June 2012 through May 17, 2013.

We believe that the following case studies illustrate the power of FoundationOne to impact treatment regimens for patients in a clinical setting.

Case Study 1: FoundationOne Identifies Actionable Alteration Missed by Hotspot Tests—Patient Receives Matched Targeted Therapy.

Page One of FoundationOne Report for Case Study 1.

 

LOGO   

Patient Name

 

  

Report Date

 

  

Diagnosis

 

Lung
Adenocarcinoma

                          

Date of Birth

      Client       Specimen Received   

Gender

      Physician       Specimen Site   

FMI Case #

      Additional Recipient       Specimen Date   

Medical Record #

      FMI Client #       Specimen Type   

Block ID

        Pathologist               

A BOUT THE T EST :

FoundationOne is a next-generation sequencing (NGS) based assay which identifies genomic alterations within hundreds of cancer-related genes.

 

P ATIENT R ESULTS

   

T UMOR T YPE : L UNG A DENOCARCINOMA

     
 

1 genomic alteration

     

Genomic Alterations Identified

ALK rearrangement, intron 19

 

Select Genes with No Actionable Alterations Detected

EGFR

KRAS

BRAF

     

0 therapies associated with potential clinical benefit

     
     

0 therapies associated with lack of response

     
     

0 clinical trials

     

 

T HERAPEUTIC I MPLICATIONS

    
    

Genomic Alterations
Detected

   

FDA Approved Therapies

(in patient’s tumor type)

   

FDA Approved Therapies

(in another tumor type)

    Potential Clinical Trials
           

ALK

Rearrangement,

intron 19

      Crizotinib       None       None
           
           
           
Note: Genomic alterations detected may be associated with activity of certain FDA approved drugs; however, the agents listed in this report may have varied clinical evidence in the patient’s tumor type. Neither the therapeutic agents nor the trials identified are ranked in order of potential or predicted efficacy for this patient, nor are they ranked in order of level of evidence for this patient’s tumor type.

 

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We received and analyzed a tumor specimen from a 43 year-old man diagnosed with metastatic adenocarcinoma of the lung involving his bones and pleura. Previous traditional diagnostic tests on the specimen, including a customary FISH-based test, revealed no actionable alterations. The patient received chemotherapy, which was of transient benefit and which he tolerated poorly. FoundationOne detected an actionable alteration, an ALK fusion, which was not identified in the initial testing. The patient was then treated with XALKORI ® (crizotinib), a targeted therapy that inhibits the activity of the ALK fusion protein. This treatment shrank the tumor and led to improvements in the patient’s symptoms. The patient experienced near complete resolution of disease for 16 months. The patient recently experienced one site of disease progression and, as of May 2013, is continuing on XALKORI (crizotinib). Without FoundationOne, this patient likely would have proceeded through various chemotherapies and likely would not have received XALKORI (crizotinib) because the ALK fusion was not identified by traditional diagnostic tests and XALKORI (crizotinib) is only prescribed upon confirmation of the ALK fusion alteration. These results were published in the Journal of Thoracic Oncology in September 2012.

Case Study 2: FoundationOne Identifies Actionable Mutation that is Not Otherwise Tested for In Breast Cancer—Patient Receives Matched Targeted Therapy.

Page One of FoundationOne Report for Case Study 2.

 

LOGO   

Patient Name

 

  

Report Date

 

  

Diagnosis

 

Breast Carcinoma

                          

Date of Birth

      Client       Specimen Received   

Gender

      Physician       Specimen Site   

FMI Case #

      Additional Recipient       Specimen Date   

Medical Record #

      FMI Client #       Specimen Type   

Block ID

        Pathologist               

A BOUT THE T EST :

FoundationOne is a next-generation sequencing (NGS) based assay which identifies genomic alterations within hundreds of cancer-related genes.

 

P ATIENT R ESULTS

   

T UMOR T YPE : B REAST C ARCINOMA

     
 

4 genomic alterations

     

Genomic Alterations Identified

ERBB2 amplification

PIK3CA F1047R

EGFR L858R

TP53 K132N

     

6 therapies associated with potential clinical benefit

     
     

0 therapies associated with lack of response

     
     

50+ clinical trials

     

 

T HERAPEUTIC I MPLICATIONS

    
    

Genomic Alterations
Detected

   

FDA Approved Therapies

(in patient’s tumor type)

   

FDA Approved Therapies

(in another tumor type)

    Potential Clinical Trials
           

ERBB2

amplification

     

Lapatinib

Trastuzumab

      None       Yes

PIK3CA

F1047R

    None    

Temsirolimus

Everolimus

    Yes

EFGR

L858R

    None    

Erlotinib

Gefitinib

    Yes

TP53

      None       None       Yes
           
           
           
Note: Genomic alterations detected may be associated with activity of certain FDA approved drugs; however, the agents listed in this report may have varied clinical evidence in the patient’s tumor type. Neither the therapeutic agents nor the trials identified are ranked in order of potential or predicted efficacy for this patient, nor are they ranked in order of level of evidence for this patient’s tumor type.

 

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We received and analyzed a tumor specimen from a middle-aged woman diagnosed with metastatic inflammatory breast cancer (IBC). She had initially received combination chemotherapy and targeted therapy including Herceptin ® (trastuzumab), a commonly prescribed targeted therapy for breast cancer, but her disease progressed within 12 months. Few treatment options remained. FoundationOne identified several genomic alterations, among them an EGFR point mutation. This type of alteration is associated with unprecedented sensitivity to tyrosine kinase inhibitors targeting EGFR such as Iressa ® (gefitinib) and Tarceva ® (erlotinib) and are present in 20% of lung adenocarcinomas. However, this alteration is not reported with reproducible frequency in other tumor types, and, it would have been unlikely to have been included in a testing panel for breast cancer. On the basis of this finding, the patient commenced Tarceva (erlotinib) therapy as part of a combination regimen. Because therapies have traditionally been indicated based on the tumor’s anatomical location in the body, in this case, the breast, and because Tarceva (erlotinib) therapy is associated with a mutation commonly associated with lung (but not breast) cancer, it is likely that, without FoundationOne, this EGFR point mutation would not have been identified and Tarceva (erlotinib) therapy would not have been commenced. While on Tarceva (erlotinib) therapy, the patient experienced durable symptomatic and radiographic benefit that lasted eight months. The results of this case study, which have not yet been published, are expected to be submitted to a peer-reviewed journal in the near future.

Our Platform for Biopharmaceutical Research and Development

For many of the same reasons FoundationOne provides information that is well suited for the clinical setting, our molecular information platform enhances the ability of our biopharmaceutical partner to develop targeted oncology therapies. We deploy our molecular information platform to analyze tissue samples provided by biopharmaceutical partners from their clinical trials. We use our core proprietary platform testing, computational biology and information technology capabilities to provide our biopharmaceutical partners with comprehensive genomic profiling and information relevant to precision medicine strategies for both retrospective and prospective clinical studies and other drug development activities. Our platform capabilities enable our partners to:

 

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accelerate clinical development timelines and increase the likelihood of patient response by prospectively analyzing tumor specimens to identify patients with certain genomic alterations for enrollment in clinical trials for targeted cancer therapeutics;

 

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guide usage and inform future development opportunities for experimental and marketed therapies by retrospectively analyzing clinical trial patients to stratify them as responders or non-responders based on presence or absence of certain genomic alterations;

 

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create opportunities for drug combination studies or new target discovery by identifying mechanisms of primary and acquired resistance; and

 

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inform improvements to clinical trial design by contributing to the understanding of why some clinical studies have not met their primary endpoints.

As of June 2013, we have ongoing relationships with 18 biopharmaceutical partners, many of which are the leaders in developing targeted cancer therapies. Our relationships with our biopharmaceutical partners have expanded over time. Our publicly announced biopharmaceutical customers include Agios Pharmaceuticals, Inc., ARIAD Pharmaceuticals, Inc., Array BioPharma Inc., AstraZeneca UK Limited, Celgene Corporation, Clovis Oncology, Inc., Eisai Co., Ltd., Johnson & Johnson, Novartis, and Sanofi.

In addition to customary clinical settings in which physicians prescribe an FDA-approved therapy, approximately 3% of patients with cancer in the United States are currently enrolled in clinical trials of new experimental therapies sponsored by biopharmaceutical companies. By broadening our relationships with our biopharmaceutical partners, we expect to deploy our molecular information platform for an increasing portion of patients with cancer enrolled in clinical trials both in and outside

 

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the United States. We expect these relationships will continue to expand and may provide us with opportunities to sell our molecular information products for companion diagnostics development, research and development projects, and new target discovery and validation.

In addition to generating revenue, our relationships with our biopharmaceutical partners enable us to identify new genes under investigation that can be incorporated early into our molecular information platform and our products, and more broadly allow us to actively participate in the newest oncology therapeutics and practice. Also, we believe our activities with leading drug development companies that are focused on cancer therapeutics further our relationships with the broader oncology community, including thought leaders who are important to the adoption of our commercial products. We believe our biopharmaceutical customers provide us with near and longer term revenue and important strategic opportunities.

Biopharmaceutical Services Agreement

In November 2011, we entered into a laboratory master services agreement with Novartis pursuant to which we agreed to perform our molecular diagnostic tests on samples provided by Novartis. Pursuant to the agreement, we were paid based on the number of tests we performed. The original term of the agreement commenced in November 2011 and was set to expire in November 2014. In May 2012, we amended this agreement to extend the term through May 1, 2014 and to include certain guaranteed quarterly minimum payments by Novartis to us in return for our providing sufficient laboratory capacity to perform up to a maximum number of tests. We may bill Novartis for any extra services performed if during the first and second contract years together or the third contract year alone Novartis provides excess samples such that the value of our services ultimately exceeds the payments already received under the quarterly schedule. The agreement also establishes a joint steering committee responsible for facilitating communication between the parties, overseeing collaboration and periodically reviewing and setting overall goals and strategy for provision of our services to Novartis. Except for termination due to material breach of the agreement, Novartis is responsible for payments on services rendered through the termination date. The agreement also contains customary representations and warranties, indemnification, assignment, data privacy security measures and other provisions.

Market Opportunities for FoundationOne

We believe that the ability of FoundationOne to comprehensively address all solid tumors, and soon hematologic malignancies, and to deliver a clear, concise report detailing actionable genomic alterations and corresponding treatment options will continue to drive its adoption by physicians. In developing our commercialization strategy, we worked with our network of oncology thought leaders to identify the initial subsets of patients with cancer for whom FoundationOne was most likely to positively inform treatment decisions. Our initial marketing and selling efforts have focused on driving awareness of the potential utility of FoundationOne in these subsets of patients, defined as:

 

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patients who had tested negative under the traditional hotspot tests for their tumor type, such as negative for alterations in the genes EGFR, ALK, and KRAS in non-small cell lung cancer;

 

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patients for whom there was not enough available tissue to perform multiple hotspot molecular tests, such as patients with non-small cell lung cancer with very little tumor tissue left in archive;

 

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patients for whom standard treatments had been tried and failed, such as patients with breast cancer who continue to progress despite multiple chemotherapy regimens;

 

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patients with rare or uncommon tumors, such as certain sarcomas or non-colon/small-bowel gastrointestinal tumors, for whom no standard treatment approach exists; and

 

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patients who had an aggressive disease, such as pancreatic cancer, or were late in the progression of their disease.

 

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While these groups are not mutually exclusive, we estimate that there are approximately one million patients annually in the United States who suffer from the above-described or similar cancers based upon a combination of feedback from our network of oncology thought leaders, data published by the National Cancer Institute in the Cancer Statistics Review, and focused market research that we commissioned. This market research consisted of an analysis of a third party database (that included public and private cancer-related statistical information on tumor type, disease stage, clinical information, and disease outcomes) supplemented with confirmatory interviews from physicians who practice at a variety of cancer treatment centers, including academic research centers and community hospitals.

As the number of available targeted therapies expands and as physicians gain further experience using comprehensive molecular information in their routine treatment decisions, we believe that the potentially addressable market for comprehensive molecular information products will expand over the next five years to include all patients who have metastatic disease, not limited to the challenging treatment categories noted above. These patients may include, for example, those who are earlier in the treatment cycle, those who suffer from a broader set of disease conditions or those patients diagnosed with rare and uncommon cancers regardless of stage. Our marketing and sales activities will then expand to driving awareness of the potential utility of FoundationOne in this broader set of patients. We estimate that this potential market expansion could include an additional 800,000 total patients annually, based upon the same combination of sources of information we used to estimate the size of the patient population we are initially targeting for FoundationOne.

Commercialization Strategy for FoundationOne

We aim to drive awareness and adoption of our comprehensive molecular information products through our commercialization strategy to:

 

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build an experienced, oncology-focused sales force in the United States and international distribution channels that are supported by dedicated company personnel;

 

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collaborate with oncology thought leaders and leading institutions on FoundationOne clinical cases, clinical research, publications, and product development;

 

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foster adoption and promote physician engagement through our medical affairs and client services efforts, and by developing and deploying practice-friendly technology resources to physicians;

 

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publish important medical and scientific data in peer-reviewed journals and present at major industry conferences, and conduct clinical trials; and

 

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work with patient advocacy groups and medical societies to drive awareness of FoundationOne and the importance of incorporating molecular diagnostics into cancer treatment.

Through these efforts, we seek to drive awareness of FoundationOne’s unique capabilities throughout the oncology community—from patients suffering from cancer, to the physicians treating them, to the third-party payors for these treatments and to biopharmaceutical companies developing new treatments—all with the goal of facilitating better-informed treatment decisions for the greatest number of patients with cancer. We believe that by driving physician and patient demand for FoundationOne and by being part of improving patient outcomes, we will drive sales and obtain favorable reimbursement decisions by third-party payors.

 

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Building An Experienced, Oncology-Focused Sales Force

United States

Our sales force in the United States targets oncologists and pathologists at hospitals and cancer centers. We launched FoundationOne for solid tumors in June 2012 with a sales force of only two people that has grown to 15 sales professionals, as of June 30, 2013, with backgrounds in oncology, pathology, therapeutics, and/or laboratory services. These sales professionals have an average of 11 years of experience in clinical oncology sales working at leading biopharmaceutical or specialty reference laboratory companies. We will continue to grow this specialized, oncology-focused sales force and support it with medical specialists who bring extensive knowledge in the design and use of molecular information products.

Our current sales efforts focus on building relationships with thought leaders at leading academic research institutions to demonstrate the clinical usefulness of FoundationOne. We also are building relationships in community oncology practice settings through leading physician networks. For example, The US Oncology Network, whose members include approximately 10% of all U.S. oncologists, selected us as one of its preferred molecular information partners. Other oncology networks, such as Cancer Treatment Centers of America, which has five centers nationally, have chosen to use FoundationOne across all of their centers. These networks expect to use FoundationOne to streamline ordering and data collection, to provide access to and guidance about use of the most advanced cancer testing and treatments, and to support their clinical trials.

As part of our early launch strategy to drive adoption, our sales force initially targeted key opinion leaders and leading cancer researchers. As we grow our sales force, we will increasingly have the capacity to target community hospitals and community-based cancer centers that need a reliable and collaborative partner for comprehensive molecular information testing.

International

Our international sales strategy is currently focused on partnering with leading distributors and selling directly to academic and medical centers. We have targeted various markets outside of the United States, principally based upon the demand from those markets and our own market assessments. As a result of these factors, we have and are responding to opportunities in Central and South America, Western Europe, portions of the Middle East, and Asia, and anticipate exploring opportunities in other geographic areas as well. We are expanding our internal capacity to serve high demand markets by adding dedicated regional managers located outside the United States to oversee our relationships at the local level.

Collaborating with Thought Leaders To Shape the New Cancer Treatment Paradigm

We believe physicians look to peers and key thought leaders in the medical community when evaluating a new technology. Oncology thought leaders have historically been early adopters of new technologies because they have greater access to new therapies, clinical trials, and diagnostic tools than many community oncologists. Since our inception, our founders, medical affairs group, senior management, and now sales personnel and reimbursement teams have leveraged existing and built new relationships with these early adopters.

Key opinion leaders, or KOLs, and leading cancer researchers have embraced our comprehensive molecular information approach, including oncologists at premier cancer institutions such as Memorial Sloan-Kettering Cancer Center, Vanderbilt-Ingram Cancer Center, and The US Oncology Network. In addition to routinely using FoundationOne for clinical cases, these individuals and institutions collaborate with us on clinical studies, peer-reviewed publications, and medical and

 

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scientific conference presentations. We believe our relationships with KOLs help validate our platform, drive adoption of our clinical products in community oncology settings and international markets, establish our leadership position in the field of molecular information about cancer and thereby further our ultimate goal—to facilitate better-informed treatment decisions for the greatest number of patients with cancer.

Our relationships with KOLs in oncology have been instrumental in driving adoption of FoundationOne for solid tumors. We believe initial awareness of FoundationOne within the community oncology setting was largely driven by our publications and presentations with KOLs and the resulting peer-to-peer interaction they generated. We believe our effective engagement with KOLs largely explains why the majority of physician customers for FoundationOne placed their original orders even before being visited by our nascent sales team. We will continue to nurture these relationships with thought leaders as we drive adoption of FoundationOne for solid tumors and as we develop FoundationOne for hematologic malignancies in collaboration with MSKCC.

Promoting Physician Interaction and Creating a Network Effect

We believe that if we can continue to integrate the results of our products into the everyday clinical practice of oncologists, we will become an even more important partner in their efforts to treat patients with cancer. Our goal is for physicians to use Interactive Cancer Explorer, our online portal, which we developed in consultation with Google Ventures, one of our investors, in the context of their busy clinical practices, to shape each patient’s treatment plan. Through Interactive Cancer Explorer, we deliver the key genomic information identified by FoundationOne in an organized fashion along with access to current information about the reported genomic alterations, associated therapies and clinical trials. Launched in December 2012, already more than 40% of our FoundationOne customers use Interactive Cancer Explorer.

Interactive Cancer Explorer presents complex genomic information in a we believe practice-friendly interface that links directly into publicly available databases, such as PubMed and clinicaltrials.gov. The portal also provides direct links or references to journal articles and clinical trials information relevant to a patient’s identified genomic alterations. In the future, we intend for Interactive Cancer Explorer to link to additional public and private data sources like The Cancer Genome Atlas, the Cancer Genome Project, and others, as we continue to rationalize, correlate, and incorporate disparate sources of information into our products. By making this information more readily accessible to physicians, we make it easier for them to bring new, relevant information to each patient’s treatment plan. We are also developing additional applications for Interactive Cancer Explorer that we expect to launch in 2014.

The better we can integrate our solutions into a physician’s routine clinical practice, the more likely a physician is to order FoundationOne. Therefore, we have engineered our client support capabilities, such as online ordering and assistance with tissue sample procurement, to make it easier for physicians to use FoundationOne in their clinical practices.

Additionally, we are investing in our technology architecture to allow physicians to collaborate and share response rates and other clinical information with each other, regardless of location, in compliance with applicable privacy regulations. Over time, we will expand our capacity to capture, aggregate, analyze and facilitate the broader exchange of genomic data across the global oncology community. We are developing a data platform that efficiently captures and allows for the analysis of data that we believe will eventually create a network effect as more data is gathered, which we expect will lead to more users, more comprehensive datasets, and ultimately more business opportunities.

 

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Supporting Adoption Through Publications and Clinical Trials

We believe the successful completion of multiple clinical trials, our publication of scientific and medical results in peer-reviewed journals, and presentations at leading conferences are critical to the broad adoption of products enabled by our proprietary platform. Our publications and presentations to date have helped communicate FoundationOne’s capabilities and the clinical results that early adopters of our platform have achieved. We will continue to use these channels to drive commercial adoption of FoundationOne and obtain favorable reimbursement decisions.

From the beginning of 2012 through June 2013, we had:

 

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12 peer-reviewed articles published or accepted for publication, including by Nature Medicine , Cancer Discovery , Journal of Clinical Oncology , Journal of Thoracic Oncology , Blood , and Genome Medicine ;

 

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10 additional manuscripts under consideration for publication by major journals, including Nature , Nature Medicine , Nature Genetics , Nature Biotechnology , Journal of Clinical Oncology, and Cancer Discovery ;

 

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over 35 poster presentations based on clinical and research data that have been accepted and presented at major scientific conferences on themes that include the identification of multiple novel actionable drug targets, known drug targets in novel tumor types, novel resistance mechanisms to targeted therapies, new insights into models of metastasis and novel hypotheses on the molecular basis of response or resistance to certain targeted therapies; and

 

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delivered more than 20 speaking presentations at scientific meetings such as ASCO, American Association of Cancer Research (AACR), San Antonio Breast Cancer Symposium, US and Canadian Association of Pathology (USCAP), and Advances in Genome Biology and Technology (AGBT), among others.

We have a number of company-sponsored clinical trials and clinical trials sponsored by individual physicians, or investigator-initiated clinical trials, underway, such as:

 

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The US Oncology Decision Impact Study.     This study is designed to assess the impact of FoundationOne on physician decision-making in a real world setting. FoundationOne will be performed on solid tumors from 300 patients during their second or later line of therapy. When the patient progresses, the impact of FoundationOne in switching a physician’s recommended next course of treatment will be evaluated. Other endpoints may be evaluated as well.

 

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The FoundationOne Registry.     The objective of this study is to better understand the impact of FoundationOne on a clinical population including, importantly, how physicians act on the results and how the results impact care and outcomes. The study is designed to recruit 3,000 patients over three years, with the initial 500 patients drawn from all patients for whom the FoundationOne test is ordered. A wide array of clinical variables will be assessed, including subsequent treatments and responses to those treatments. These patients will be followed for one year. The later cohorts of patients will be adaptive, with entry criteria to be determined based on initial outcomes of the study.

 

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The MD Anderson Prospective Study . This study aims to compare the clinical outcomes of patients who are treated with targeted therapy after testing with FoundationOne compared to historical outcomes for patients treated with chemotherapy. The study is designed to enroll a group of 300 patients with advanced solid tumors who are screened at enrollment with FoundationOne. These patients will then be treated with a targeted therapy selected on the basis of the FoundationOne test. The clinical outcomes for these patients will be compared to recent historical results for patients who received treatment with conventional chemotherapy for the same tumor types and stage.

 

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Engaging With Patient Advocacy Groups and Other Important Stakeholders to Drive Awareness

We have established relationships with many patient advocacy groups to drive awareness of our test and to educate the advocacy community and other key stakeholders, including major medical societies and networks, about the shifting oncology paradigm towards precision medicine.

Patient advocates are important stakeholders in the cancer community because they have influence within the patient community and with health care providers, key opinion leaders, and policy makers. We established our advocacy relations program early in 2011 with the following goals:

 

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develop awareness around genomic testing;

 

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position us as a patient-centered company within the patient community by creating goodwill and becoming a trustworthy corporate partner;

 

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effectively shape the dialogue around cancer genomics with key constituents; and

 

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work with advocates to help increase genomics conversation and drive the use of molecular information testing.

To date, we have been successful in establishing key relationships to help educate advocates about us and our capabilities in oncology. Some of the organizations we engage with include Friends of Cancer Research, Patient Advocate Foundation, Clearity Foundation, American Cancer Society Cancer Action Network, Lung Cancer Foundation of America, Bonnie J. Addario Lung Cancer Foundation, Uniting Against Lung Cancer, Pancreatic Cancer Action Network, and Education Network to Advance Cancer Clinical Trials. In late 2012, we hosted our first advocate roundtable with representatives from 10 patient advocacy organizations, establishing our commitment to understanding patients’ needs and positioning us as a neutral facilitator of oncology stakeholders, with important insight and relationships across industry, advocacy and regulatory bodies. Through these activities to date, we have developed the basis for a meaningful advocacy relations program, with opportunities to more strategically engage advocates moving forward.

Our relationships with other influential organizations that shape the delivery of care are also critical as we work to develop and educate the market. We aim to work with many organizations, including the National Comprehensive Cancer Network, ASCO, CAP and others regarding the role of NGS and broader molecular profiling in the evaluation of patients and their tumors. We are working with these organizations both on potential educational initiatives as well as the evolution of guidelines, which today are very much tumor-type specific, to recognize the growing importance of the molecular characterization of the collection of diseases known as cancer.

Payment and Reimbursement for Our Molecular Information Products

The principal groups that currently pay us, or that we expect to pay us in the future, for our molecular information products include:

 

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our biopharmaceutical customers, with whom we have individual agreements;

 

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certain hospitals, cancer centers, and other institutions that pay us directly at negotiated rates for their physicians’ test orders;

 

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international patients and distributors who pay us directly at agreed-upon prices;

 

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commercial third-party payors who currently pay us based on Current Procedural Terminology, or CPT, codes;

 

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government payors, including Medicare, with whom we have agreed to defer billing, and state Medicaid plans, to which we are currently applying; and

 

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patients who make co-payments and pay deductibles and other amounts that we have been unable to collect from their third-party payors.

 

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We believe that FoundationOne presents a unique solution for commercial third-party payors and government payors who are faced with an increasingly complex and dynamic cancer diagnostic and treatment environment. These complexities include a growing number of single-marker and hotspot panel tests, the increasing number and cost burden of targeted oncology therapies, and an underlying shift in physicians’ treatment of cancer that is based on molecular pathways rather than tumor location. In addition, this shifting treatment paradigm comes at a time when commercial third-party payors and government payors are increasingly making significant efforts to contain healthcare costs. We believe the use of FoundationOne aligns with payors’ goals to improve the safety, efficacy, and affordability of cancer diagnosis and treatment.

Adequate reimbursement is an important factor in achieving broad clinical adoption of FoundationOne. At the same time, we believe broad clinical adoption will help drive favorable reimbursement decisions. To achieve broad reimbursement coverage with commercial third-party payors and government payors, including Medicare and Medicaid, we are focused on demonstrating the economic and clinical value of FoundationOne to payors by:

 

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Setting a High Bar for Validation and Performance.     FoundationOne provides actionable results that are highly reproducible and sensitive, and we believe that a majority of our actionable results would not be detected by any other commercial tests on the market today. Patients may benefit from our detection of otherwise unknown genomic alterations that can lead to their physicians choosing alternate therapies. We have presented data on the reproducibility, sensitivity, specificity, and comprehensive scope of FoundationOne at numerous conferences and in peer-reviewed journals. Moreover, our approach to the analytic validation of our test has recently been submitted to a peer-reviewed journal.

 

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Increasing Physician Demand.     More than 1,500 physicians from both large academic centers and community-based practices across more than 25 countries have ordered FoundationOne since its formal commercial launch in June 2012. Many of the initial orders for FoundationOne occurred as we were only starting to build our sales force. We believe that this adoption, including significant repeat usage, demonstrates physician demand for a single, comprehensive solution to help in the treatment of their patients. In addition, we believe that increasing utilization of our products and their impact on improving outcomes for patients with cancer will lead to favorable reimbursement decisions.

 

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Engaging Key Members of the Oncology Community .     We will continue to work with oncology thought leaders, patient advocacy groups, and cancer networks. We believe these relationships help validate our platform, drive adoption of our products in the broad community oncology setting and establish our leadership position in the field of molecular information about cancer. In addition, we believe adoption of our products by key members of the oncology community will help to influence FoundationOne’s listing in practice guidelines as well as coverage decisions by commercial third party payors and government payors.

 

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Publishing in Peer-Reviewed Publications.     We seek to publish in scientific and medical journals such as Nature Medicine , Journal of Thoracic Oncology , Cancer Discovery , Clinical Cancer Research , Blood , and others. Our publications have covered novel scientific findings, clinical actionability of test results, individual patient outcomes, and common traits of genomic alterations in primary and metastatic tumors, among many others. We believe that our approach, which we have designed to be rigorous and data-driven, is important in establishing evidence of our analytical validity and clinical utility with payors.

 

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Demonstrating Clinical Utility.     To demonstrate the impact of FoundationOne on physician treatment decisions and patient outcomes, we are conducting a number of clinical studies with organizations such as US Oncology, MD Anderson Cancer Center, MSKCC, and other leading academic medical centers. We are also enrolling patients into a registry through which we will track changes in physician treatment patterns as well as patient outcome data.

 

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Improving Economics .    We have built economic models to measure the financial benefits of using FoundationOne in guiding patient treatment by selecting targeted therapies for each patient and for minimizing the use of drugs that will not likely have a positive impact. We plan to use the data we gather through the use of these models as we meet with commercial third-party payors and government payors.

Since, to our knowledge, FoundationOne is the only commercially available comprehensive molecular information product designed to assess all types of solid tumors and soon hematologic malignancies, we believe there is no direct precedent for reimbursement of our test by commercial third-party payors and government payors. In addition, the reimbursement environment is evolving as regulators and payors try to establish new rules and frameworks for paying for molecular diagnostic tests.

The current list price for the FoundationOne test is $5,800. Payment for the test is not certain and may come from various sources. Actual payment will often be less than the list price. Sources of current or potential payment include: (1) commercial third-party payors, such as health insurance or managed care plans; (2) government health benefit programs such as Medicare and Medicaid; (3) other healthcare providers, such as hospitals, cancer centers and other institutions; (4) international distributors; and (5) individual patients. Currently we are not a participating provider with any commercial third-party payors and therefore do not have specific coverage decisions for the FoundationOne test with established payment rates. Currently, commercial third-party payors reimburse our claims based upon the stacked CPT codes, the predominant methodology, or based on other methods such as percentages of charges or other formulas that are not made known to us. In addition, a small portion of payors outsource our claims to preferred provider organizations or third-party administrators, who process our claims and pay us directly at negotiated rates. Coverage and payment is determined by the third-party payor on a case-by-case basis. We are not currently a participating provider in any state Medicaid program and therefore do not have coverage decisions under which our test is covered by these Medicaid programs. We are a participating provider in the Medicare program but, as described below, we do not have a coverage decision and have not yet submitted claims for our test to Medicare. We do have in place agreements with various healthcare providers and with international distributors pursuant to which we process tests on specimens submitted, and the providers or distributors pay us for the test results based on negotiated rates. Those rates vary but are less than our list price. We may also negotiate rates with individual patients, if the patient is responsible for payment.

In 2012, we submitted claims to commercial third-party payors using CPT codes that were procedural-based, and we have been reimbursed for a significant majority of these claims following the completion of the claims process. On January 1, 2013, new Centers for Medicare & Medicaid Services, or CMS, reimbursement codes for molecular testing services took effect. We elected to submit claims to commercial third-party payors using these new CPT codes and have received payments based on these claims. We do not expect CPT codes specific to next generation sequencing to be available until 2015 at the earliest, and we expect to continue our current approach until those new codes exist or until we have coverage decisions from payors.

Since we are not currently a participating provider with commercial third-party payors, and we have not received a coverage decision from any commercial third-party payor, payment for our test is uncertain. We request that physicians discuss the patient’s responsibility should their policy not cover FoundationOne. We undertake the primary responsibility for obtaining third-party reimbursement on behalf of patients, including appeals for any initial denials, prior to billing a patient. With this practice established, we believe that most patients receiving the FoundationOne test know that they may be responsible for some portion of the cost of the test should their third-party payor deny or limit coverage.

 

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We also offer a comprehensive patient assistance program to support patients whose incomes are below certain thresholds and to allow for extended payment terms, as necessary given the patient’s economic situation.

We enrolled in the Medicare program in order to bill Medicare for FoundationOne. There is currently no national coverage decision that determines whether and how our test is covered by Medicare. In the absence of a national coverage decision, local Medicare contractors that administer the Medicare program in various regions have some discretion in determining coverage and therefore payment for tests. Our local Medicare contractor, who would process our claims on behalf of Medicare, requested that we not submit claims for services provided to Medicare patients while the contractor assessed the appropriate coverage and payment for FoundationOne as a whole. Pending the response, no claims have been billed to either Medicare or Medicare patients.

Currently, we have not yet received definitive direction from our Medicare contractor. If we do not receive definitive direction, we intend, before the end of 2013, to commence submitting claims to Medicare for FoundationOne tests provided to Medicare patients. The response of the Medicare contractor to the submission of such a claim is uncertain and the claim may be denied or paid, in whole or in part. If a claim is denied or paid in part, we may decide to appeal the denied claim or any denied portion of the claim. Our Medicare contractor may also issue a negative coverage determination for FoundationOne that would apply to future claims or may defer processing a claim pending a coverage or payment determination. Given the uncertain response, we may determine to provide appropriate notices to patients covered by Medicare to enable us to bill a Medicare patient for all or part of a claim that is denied coverage by our Medicare contractor. We will also assess our ability to submit claims to Medicare, or bill Medicare patients, for the tests for which claims are currently being held. In the event of a Medicare denial for tests currently held, our ability to bill Medicare patients for such tests will be limited.

We are also in the process of registering to participate in state Medicaid plans. The number of patients covered by Medicaid plans is expected to increase significantly over the next several years in connection with the Affordable Care Act that was signed into law on March 23, 2010.

Amidst a rapidly evolving reimbursement environment, we have implemented a comprehensive strategy to receive payment for the sale of our products. Ultimately, we believe that our focus on the rapid adoption of our products will both enable better-informed treatment options to the greatest number of patients with cancer and drive favorable reimbursement decisions.

Investing in Ongoing and New Product Innovations

We were founded as a scientifically and medically driven company and are dedicated to ongoing innovation both in our molecular information platform and our commercial product pipeline. We have invested, and continue to invest, significant time and resources toward the improvement of our platform and products and toward the introduction of new products.

We believe we have a first mover advantage in offering comprehensive molecular information products that interrogate with precision the genes known to be altered in human cancer. Since commencing our formal commercial launch of FoundationOne in June 2012, we have continued to invest in its improvement, including by updating the product in December 2012 from 180 genes to include the entire coding sequence of 236 genes, enhancing methods to utilize less tissue, lower tumor purity requirements and achieve higher sensitivity, and creating processing improvements to drive down turn-around time.

We have also incorporated RNA-based sequencing technology to analyze the additional gene fusions commonly found in hematologic malignancies and in the future we may incorporate RNA-based

 

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sequencing into FoundationOne. We expect to commence our commercial launch of FoundationOne for hematologic malignancies by early 2014. Key milestones that we need to complete prior to this launch include continuing validation activities, increasing laboratory production capacity to meet commercial demand and preparing the marketing strategy for the product.

We endeavor to stay at the cutting edge of genomic testing and cancer care and to maintain our advantages by continuously exploring and developing new clinically-relevant approaches to molecular information products. Our ongoing research efforts to advance our product pipeline and expand the impact of molecular information for improving cancer care include:

 

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further refinement to the hybrid capture strategy by which we isolate cancer genes of interest from tumor samples so that we can more rapidly incorporate novel cancer genes as they are discovered into FoundationOne;

 

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potential development and introduction of new products for monitoring patients’ tumor burden over time, utilizing new technologies that enable processing of circulating tumor cells and cell-free plasma DNA; and

 

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enhancing molecular profiling ability through RNA sequencing and developing plans to expand into epigenetics, methylation, immune response, and other areas.

In addition, Interactive Cancer Explorer, our online portal, allows physicians to access the key genomic information identified by FoundationOne along with current information about the reported genomic alterations, associated therapies and clinical trials. Google Ventures, one of our equity investors, provided us with advice and consultation on the design of Interactive Cancer Explorer portal without charge and is currently advising us on concept development for future features of Interactive Cancer Explorer and providing recruiting assistance for technical personnel. Google Ventures provides this type of free support to its portfolio companies from time to time and although it has no contractual obligation to continue to provide such support, Google Ventures may continue to provide such free assistance upon our request. Interactive Cancer Explorer presents complex genomic information in what we believe is a practice-friendly interface that links directly into publicly available databases, such as PubMed and clinicaltrials.gov. The portal also provides direct links or references to journal articles and clinical trials information relevant to a patient’s identified genomic alterations. In the future, we intend for Interactive Cancer Explorer to link to additional public and private data sources like The Cancer Genome Atlas, The Cancer Genome Project, and others, as we continue to rationalize, correlate, and incorporate disparate sources of information into our products. By making this information more readily accessible to physicians, we make it easier for them to bring new, relevant information to each patient’s treatment plan. We are also developing additional applications for Interactive Cancer Explorer that we expect to launch in 2014.

Building a Cancer Knowledgebase to Improve Patient Care

The increasing availability and understanding of molecular information about cancer is driving a revolution in treating the entire class of diseases. We will seek to leverage the vast array of genomic data generated by our molecular information platform together with clinical data to position ourselves at the nucleus of this new treatment paradigm.

Our biopharmaceutical partners have already begun using our data to further refine clinical trial design and drug development. For example, at the annual meeting of ASCO in 2013, one of our biopharmaceutical partners presented both clinical and genomic data regarding a Phase 2 trial of their therapy in patients with advanced ovarian cancer that failed to meet its endpoint. Before our involvement, a minority of patients had been tested for a limited set of genomic alterations using traditional hotspot panel tests. We were subsequently engaged by the biopharmaceutical company to

 

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conduct comprehensive genomic profiling on the clinical trial patient samples. Our analysis identified a significant number of additional genomic variants that predicted response to the drug, created new hypotheses to test in upcoming Phase 3 trials, and may have increased the target population who could benefit from this therapeutic approach.

We are investing in our technology infrastructure to allow oncologists to collaborate and share response rates and other clinical information in a manner compliant with privacy laws. We have launched our Interactive Cancer Explorer portal, which we developed in consultation with Google Ventures, one of our investors, and through which we report test results and link to relevant scientific and medical literature and clinical trial information. We also intend to make Interactive Cancer Explorer accessible through mobile applications in 2014. Over time, we will expand our capacity to capture, aggregate, analyze and facilitate the broader exchange of genomic data across the global oncology community. We are developing a data platform that efficiently captures and allows for the analysis of data that we believe will eventually create a network effect as more data is gathered which will lead to more users and ultimately more comprehensive datasets.

We believe that our molecular information platform will continue to add to the collective knowledgebase of cancer biology and clinical practice and potentially contribute to advancements in the treatment of cancer by:

 

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creating additional utility for our physician customers by delivering new potentially actionable information through our Interactive Cancer Explorer portal;

 

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informing patient care decisions;

 

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providing molecular epidemiology for novel and known targets for target validation;

 

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identifying known drug targets in novel tumor types;

 

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identifying novel resistance mechanisms to targeted therapy;

 

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discovering new insights into models of metastasis;

 

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illuminating new cancer targets, including determining the role of genomic variants of previously unknown significance;

 

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enabling combination therapy; and

 

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enhancing clinical trial design.

Though we are in the early stages of data aggregation, we expect the importance of our molecular information strategy will increase with the number of our patient cases and as we augment the database with clinical data. If we, in conjunction with oncologists, pathologists, biopharmaceutical companies and academic researchers, can successfully capture and utilize this data, we believe we can continue to play an even more integral part in transforming care for the millions of patients suffering from cancer.

Operations

Composition of a FoundationOne Analysis

We perform all FoundationOne tests in our diagnostic laboratory located in Cambridge, Massachusetts. When a physician orders FoundationOne, he or she does not need to alter the standard surgical technique or tissue handling processes. The physician’s staff typically completes a FoundationOne order form (either by hand, electronically, or via electronic medical records technology), packages the specimen in a kit we provide and then ships the kit via overnight carrier.

 

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Once we receive the specimen at our laboratory and enter all pertinent information about the specimen into our clinical laboratory information management system, we prepare the specimen for testing. Each FoundationOne analysis consists of three parts: specimen preparation, sequencing, and data analysis.

Specimen Preparation

Our first step is pathology review, in which we assess the quality of the tissue sample to determine if it is suitable for testing using FoundationOne. We are able to process samples for testing using a very small amount of DNA. In general, the sample must be at least 40 microns in thickness and consist of at least 20% tumor cells. Approximately 95% of all specimens we receive meet these requirements. Almost all samples meeting our tissue requirements will allow extraction of enough high-quality DNA (50 nanograms) for FoundationOne analysis.

Following test ordering, pathology review and DNA extraction, the extracted DNA is broken down into small fragments which we then manipulate using standard and molecular biology techniques, some of which represent our trade secrets and know-how, to create a complex mixture of DNA molecules. We then separate DNA fragments from the relevant cancer genes through our proprietary hybrid capture process. After hybrid capture, we are ready to interrogate the DNA content to determine where the critical genomic alterations exist.

Sequencing

The content of each DNA molecule is determined using a process called sequencing in which sequences of DNA molecules, or nucleotides, are identified in every position of every molecule. NGS involves the massively parallel sequencing of DNA or RNA isolated from human cells that, in the context of cancer, can be applied to genes throughout the entire cancer genome. FoundationOne is able to detect genomic alterations that may be present in as low as 1% of all cells being tested. We have made substantial modifications to our process in order to maximize throughput, efficiency and quality based upon the NGS technology we currently use that is supplied by Illumina, Inc.

Data Analysis

At the end of the sequencing process we have identified the sequence of every DNA molecule in the mix and that data is entered into a sophisticated series of our proprietary computational algorithms designed to detect and identify all genomic alterations present in the cancer sample.

The first analysis looks at the quality of every sequence and discards anything below a certain quality threshold. The next step involves a careful alignment of every DNA sequence with a known reference sequence. We have validated our algorithms that perform this alignment by running tens of thousands of samples through the process, and we are continually improving our ability to perform this analysis. Once all DNA sequences are aligned against the reference, specific algorithms look for differences between the sequenced DNA and the reference. These differences represent potential genomic alterations.

Not all of the genomic alterations that are detected are responsible for driving the cancer. Therefore, we further distill the alterations to a point where we have a list of only those alterations where there is a therapy, FDA-approved drug or available clinical trial, for which the patient is eligible based on the genomic characteristics of his or her sample. A qualified computational biologist further scrutinizes identified alterations to ensure accuracy.

The last part of our process involves synthesizing the information regarding the identified alterations into actionable information. This is a multi-faceted procedure performed by a team of trained

 

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scientists that culminates in the production and review of a patient result report. This document contains information about the alterations detected and what therapeutic options may be available based on the genomic findings. It is this result report that is returned to the ordering physician who can use the data in conjunction with a clinical assessment to inform his or her treatment decisions.

A FoundationOne report is typically delivered to the physician within 14 to 17 days from our receipt of the sample.

Quality Assurance

We are committed to providing reliable and accurate molecular information to our customers. Accurate specimen identification, timely communication of results and prompt correction of errors is critical. We monitor our quality through a variety of methods, including performance improvement indicators, proficiency testing, internal and external audits, and satisfaction surveys. Any quality concerns and incidents are subject to risk assessment, root cause analysis and a corrective action plan that is reviewed monthly with department management to ensure that we are providing the best products possible to our customers. Protection of patient results from misuse and improper access is important and thus patient confidential information is limited to necessary personnel.

We have established a comprehensive quality assurance program for our laboratory designed to produce accurate and timely test results and to ensure the consistent high quality of our tests. Our quality assurance program includes policies and procedures covering personnel qualifications and training requirements, process and test validation, quality control of reagents and test processes, proficiency testing, routine monitoring, and internal audit. Quality control metrics are assessed at various points in the testing process and final disposition of patient results requires adherence to quality control metrics that meet and exceed recommendations by professional organizations and regulatory authorities. Additionally, the long-term trends in quality control metrics is reviewed monthly by management. Our quarterly internal quality assurance audits cover pre-analytic, analytic and post-analytic functions, assess improvement indicators, and sets new metrics for the following quarter. We also have an extensive, internally administered program of specimen proficiency testing to ensure that test performance is reproducible and functioning optimally.

Policies and procedures have been developed to satisfy all applicable requirements necessary for federal and state licensures and accreditation for clinical diagnostic laboratories. We follow the policies and procedures for patient and employee safety, hazardous waste disposal and fire codes stated in the general laboratory procedure manuals. We believe that all pertinent regulations of CLIA, Occupational Safety and Health Administration, Environmental Protection Agency, and FDA are satisfied by following the established guidelines and procedures of our quality assurance program.

Reproducibility

Our ability to reproduce high quality results is critical to ensuring that we deliver better-informed treatment options to the greatest number of patients with cancer. We have worked to ensure the results of FoundationOne are commensurate by conducting an extensive analytical validation that robustly demonstrates test performance using both reference specimens and hundreds of routine FFPE clinical cancer specimens with results derived from prior standard diagnostic tests. In validation studies on actual clinical cancer specimens, including samples where as few as 20% of the nuclei in the specimen were derived from tumor cells, high accuracy was observed across all classes of genomic alterations, including sensitivity greater than 99% for detection of base substitutions, greater than 98% for detection of insertions and deletions, and greater than 95% for detection of copy number alterations. Our specificity is greater than 99% across all classes of alterations.

 

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Supply Agreement

In July 2013, we entered into a five-year supply, service and support agreement, or the supply agreement, with Illumina for Illumina to provide products and services that support and can be used for the gene sequencing component of our molecular testing activities. During the term of the supply agreement, Illumina will supply us with sequencers, reagents and other consumables for use with the Illumina sequencers, and service contracts for the maintenance and repair of the sequencers.

During the term of the supply agreement, we are required to make a rolling forecast of our expected needs for reagents and other consumables, and we may place purchase orders for reagents and other consumables that conform to such forecast. Illumina may not unreasonably reject conforming purchase orders and will, in its reasonable discretion, accept additional purchase orders for quantities of reagents and other consumables beyond our forecast requirements. During each six-month period we have a binding obligation to purchase an amount of reagents and other consumables equal to the greater of a percentage of our six-month forecast and a fixed minimum amount. Subject to discounts that vary depending on the volume of hardware and reagents and other consumables ordered, the price for sequencers and for service contracts is based on Illumina list prices, and the price for reagents and other consumables is based on contract prices that are fixed for a set period of time and may increase thereafter subject to limitations. The supply agreement does not require us to order minimum amounts of hardware, or to use exclusively the Illumina platform for conducting our sequencing.

We may use equipment, reagents and other materials supplied by third parties in the operation of our business. The agreement contains customary use limitations, representations and warranties, indemnification, limitations of liability, and other provisions.

Intellectual Property

Our business relies upon proprietary technologies, methods and processes, product designs and branding that we have invented, developed or licensed. Our policy is to seek patent protection and trademark registration for commercially valuable assets we develop, as appropriate, and maintain as trade secrets other aspects of our proprietary platform, processes, and know-how.

Patents

Our patent portfolio includes pending U.S. provisional and utility applications, and strategically focused corresponding international applications filed via the Patent Cooperation Treaty, or PCT. We will be filing foreign national or regional counterpart applications, as we deem appropriate and of commercial value, with the first such filing beginning in late June 2013. We believe our portfolio of patent applications includes applications that will protect our business in the United States and in foreign jurisdictions in which we elect to pursue and are successful in obtaining patent rights. These applications fall into three broad categories:

 

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applications relating to our genomic testing procedures, including claims directed to process advances in solution hybridization, bait selection and capture, mutation calling algorithms, somatic versus germline alteration differentiation and reduction of off-target hybridization;

 

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applications relating to genomic discoveries, including claims relating to novel genomic alterations correlated to various cancers and associated methods of treatment of patients harboring such genomic alterations; and

 

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applications relating to genomic information delivery, including claims directed to web-mediated systems for capturing, managing, tracking and reporting genomic information and associated clinical outcome data.

 

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A number of our patent applications that pertain to genomic alterations and associated methods of treatment provide us with potential royalty-bearing licensing opportunities. These opportunities arise primarily with companies developing or selling therapeutic products for cancer treatment. These companies may determine that the products or tests they are developing or selling require a license to the methods claimed in our patent applications.

Trade Secrets and Trademarks

In addition to patents, we rely on trade secrets and know-how to develop and maintain our competitive position. For example, significant elements of FoundationOne, including aspects of sample preparation, computational-biological algorithms, and related processes and software, are based on unpatented trade secrets and know-how that are not publicly disclosed. We protect trade secrets and know-how by establishing confidentiality agreements and invention assignment agreements with our employees, consultants, scientific advisors, contractors and commercial partners. These agreements generally provide that all confidential information developed or made known during the course of an individual or entity’s relationship with us must be kept confidential during and after the relationship and that all inventions or developments resulting from work performed for us or relating to our business and conceived or completed during the period of employment or assignment, as applicable, shall be our exclusive property. In addition, we take other appropriate precautions, such as physical and technological security measures, to guard against misappropriation of our proprietary technology by third parties. We have also adopted policies and conduct training that provides guidance on our expectations, and our advice for best practices, in protecting our trade secrets.

We also seek trademark protection in the United States and in foreign jurisdictions where available and when appropriate. “Foundation Medicine” is a registered mark in the United States and other countries, and “FoundationOne” is a registered mark in several countries with registration pending in the United States.

Competition

We believe FoundationOne is currently the only commercially available comprehensive molecular information product that provides a fully informative genomic profile in a concise and actionable format designed for use in the clinical setting. Our principal competition comes from existing mainstream diagnostic companies that offer single-marker or hotspot panel tests that can capture only the most common and known gene alterations and a limited set of gene rearrangements. Although these tests are unable to detect copy number alterations and often miss short insertions and deletions, in many circumstances, these are the diagnostic methods that physicians use and have used for many years. It may be difficult to change the methods or behavior of the referring physicians to incorporate FoundationOne into their practices. In addition, academic research centers and NGS platform developers are offering or developing NGS-based testing intended to be comprehensive for known cancer genes that may seek to compete with FoundationOne on the number of genes they interrogate. However, we are not aware of any of these tests having sufficient sensitivity and specificity, operational scale, or reporting elements to fit the realities of current clinical practice, including volume and quality limits of tumor samples, demands on turnaround time and ease of use.

Single-Marker and Hotspot Panel Tests

We may face competition from companies that offer products or have conducted research to profile genes and gene expression in various cancers. Personalized genetic diagnostics is a new area of science, and we cannot predict what tests others will develop that may compete with or provide results comparable or superior to the results we are able to achieve. Our competitors include laboratory companies such as Bio-Reference Laboratories, Inc., Laboratory Corporation of America

 

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Holdings, Quest Diagnostics Incorporated, as well as companies that manufacture or may manufacture diagnostic testing kits such as Abbott Laboratories, Qiagen N.V., Roche Molecular Systems, Inc. and Sequenom, Inc. These kits, which companies often include with capital equipment and reagents to local pathology laboratories, can be used directly by the physician, which can facilitate adoption. In addition, companies such as Genomic Health, Inc. and Myriad Genetics, Inc. have well-established commercial organizations that sell molecular diagnostic tests to physicians and may develop tests which compete with FoundationOne on price.

Academic Research Centers and NGS Platforms

Many hospitals and academic centers may look to internalize the type of comprehensive molecular testing we perform. Our competition may include entities such as the University of Michigan, Baylor Medical Genetics Laboratories, Washington University in St. Louis and other academic hospitals and research centers. Although these academic centers could have greater access to, and ability to drive adoption with, certain key thought leaders than we do, we expect that the competition from these academic centers will, for the most part, be restricted to their local markets.

In addition to developing kits, certain life sciences and diagnostic companies also provide NGS platforms. Illumina, Life Technologies Corporation, and other companies develop NGS platforms that are being sold directly to research centers, pharmaceutical companies and clinical laboratories. While many of the applications for these platforms are focused on the research and development markets and others are focused on testing for non-cancer conditions, each of these companies has launched and may continue to commercialize products used in the clinical oncology market. We believe diagnostic platform providers will seek to place sequencing machines in laboratories to develop LDT sequencing-based services. In addition, we believe these companies may also develop their own FDA-approved diagnostic kits, which could be sold to clients who have purchased their platforms. Many private companies are developing information technology-based tools to support the integration of NGS testing into the clinical setting. These companies could have substantially greater financial, technical and other resources than we do and may be more successful than we may be in achieving widespread market acceptance. Any tests they develop may be more effective, or more effectively marketed and sold, than FoundationOne.

Our Competitive Strengths

Our molecular information platform enables us to offer comprehensive molecular information products that interrogate with precision the genes known to be altered in human cancer. FoundationOne is uniquely differentiated from other oncology diagnostic products because, to our knowledge, it is the first and only product to comprehensively address all solid tumors, and soon hematologic malignancies, and to deliver a clear, concise report detailing actionable treatment alternatives. We believe FoundationOne has a sustainable competitive advantage on the basis of:

 

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our ability to assess 236 biologically relevant cancer genes and all classes of genomic alterations with high sensitivity and specificity, unlike currently available single gene and hotspot molecular diagnostic tests, which focus only on a limited numbers of genes and a subset of genomic alteration types;

 

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our proprietary optimizations allow us to utilize a wide variety of sample types, including small biopsies and fine needle aspirates, and samples with low tumor purity;

 

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our ability to leverage our founders’ expertise and our relationships with oncology thought leaders to keep pace with scientific and medical advances to, among other things, incorporate newly relevant cancer genes along with newly available targeted therapeutics and clinical trials;

 

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our ability to deliver, in a concise report, actionable information regarding the relevant genomic alterations in a patient’s cancer and to match these alterations with targeted therapies based on peer-reviewed literature in a medically relevant time frame;

 

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our ability to deliver complex information through the convenience and utility of our Interactive Cancer Explorer;

 

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our efforts to capture, aggregate, analyze, and facilitate the broader exchange of genomic data across the global oncology community to create a network effect as more data is gathered which will lead to more users and ultimately more comprehensive datasets;

 

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our ability to leverage the vast array of genomic data generated by our molecular information platform together with clinical data to position ourselves at the nucleus of this new treatment paradigm; and

 

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our ability to actively participate in the development of the newest oncology therapeutics and practice through our relationships with our biopharmaceutical partners.

Governmental Regulations

Clinical Laboratory Improvement Amendments of 1988 and State Regulation

As a clinical laboratory, we are required to hold certain federal and state licenses, certifications and permits to conduct our business. As to federal certifications, in 1988, Congress passed the Clinical Laboratory Improvement Amendments, or CLIA, establishing quality standards for all laboratory testing to ensure the accuracy, reliability and timeliness of patient test results regardless of where the test was performed. Our laboratory is CLIA certified and accredited by the College of American Pathologists, or CAP, a CLIA approved accrediting organization. In addition, we are required to meet certain laboratory licensing requirements for states with regulations beyond CLIA . For more information on state licensing requirements, see the section entitled “Government Regulations— States’ Laboratory Testing.

Under CLIA, a laboratory is any facility which performs laboratory testing on specimens derived from humans for the purpose of providing information for the diagnosis, prevention or treatment of disease, or the impairment of, or assessment of health. CLIA also requires that we hold a certificate applicable to the type of work we perform and comply with certain standards. CLIA further regulates virtually all clinical laboratories by requiring they be certified by the federal government and comply with various operational, personnel, facilities administration, quality and proficiency requirements intended to ensure that their clinical laboratory testing services are accurate, reliable and timely. Laboratories must register and list their tests with CMS, the agency that oversees CLIA. CLIA compliance and certification is also a prerequisite to be eligible to bill for services provided to governmental payor program beneficiaries and for many private payors. CLIA is user-fee funded. Therefore, all costs of administering the program must be covered by the regulated facilities, including certification and survey costs.

We are subject to survey and inspection every two years to assess compliance with program standards, and may be subject to additional unannounced inspections. Laboratories performing high complexity testing are required to meet more stringent requirements than laboratories performing less complex tests. In addition, a laboratory like ours that is certified as “high complexity” under CLIA may develop, manufacture, validate and use proprietary tests referred to as laboratory developed tests, or LDTs. To date, the FDA has taken the position that LDTs currently do not require FDA approval; however, CLIA requires full validation including accuracy, precision, specificity, sensitivity, and establishment of a reference range for any LDT used in clinical testing.

In addition to CLIA requirements, we elect to participate in the accreditation program of CAP. CMS has deemed CAP standards to be equally or more stringent than CLIA regulations and has approved CAP as a recognized accrediting organization. Inspection by CAP is performed in lieu of CMS for accredited laboratories. Therefore, because we are accredited by the CAP Laboratory Accreditation Program, we are deemed to also comply with CLIA.

 

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CLIA provides that a state may adopt laboratory regulations that are more stringent than those under federal law, and a number of states have implemented their own more stringent laboratory regulatory requirements. State laws may require that laboratory personnel meet certain qualifications, specify certain quality control procedures, facility requirements or prescribe record maintenance requirements.

State Laboratory Testing

Several states require the licensure of out-of-state laboratories that accept specimens from those states. For example, New York requires a laboratory to hold a permit which is issued after an on-site inspection and approval of testing methodology, and has various requirements over and above CLIA and CAP, including those for personnel qualifications, proficiency testing, physical facility, and equipment and quality control standards. Our laboratory holds the required licenses for these states which include Massachusetts, Maryland, Rhode Island, Pennsylvania, Florida and California. Our laboratory is currently in the process of seeking New York State licensing, and currently operates legally under the NY non-permitted laboratory test request program.

From time to time, other states may require out of state laboratories to obtain licensure in order to accept specimens from the state. If we identify any other state with such requirements or if we are contacted by any other state advising us of such requirements, we intend to follow instructions from the state regulators as to how we should comply with such requirements.

FDA

The United States Food and Drug Administration, or FDA, regulates the sale and distribution in interstate commerce of medical devices under the Federal Food, Drug, and Cosmetic Act, or the FDCA, including in vitro diagnostic devices, reagents and instruments used to perform diagnostic testing. Devices must undergo premarket review by FDA prior to commercialization unless the device is of a type exempted from such review by statute, regulation, or pursuant to FDA’s exercise of enforcement discretion. FDA, to date, has generally not exercised its authority to actively regulate the development and use of LDTs, which are tests that are designed, manufactured, validated and used within a single laboratory, and therefore we do not believe that our LDT currently requires pre-market clearance or approval. It is possible, perhaps likely, that FDA will more actively regulate LDTs, which could lead to premarket and post-market obligations. Indeed, in July 2010, FDA held a two-day public meeting on the oversight of LDTs in which the agency stated it decided to exercise authority over LDTs, but had not decided how it would exercise that authority. Since then FDA has stated its intention to address LDT regulation using a risk-based, phased-in approach stating as recently as June 2013 that it “is working to make sure that the accuracy and clinical validity of high-risks tests are established before they come to market.” FDA now is required to notify Congress at least 60 days prior to issuing a draft or final guidance regulating LDTs and provide the anticipated details of the action under section 1143 of the Food and Drug Administration Safety and Innovation Act of 2012. In the meantime, we maintain our CLIA accreditation, which permits the use of LDTs for diagnostic purposes.

FDA regulations pertaining to medical devices govern, among other things, the research, design, development, pre-clinical and clinical testing, manufacture, safety, effectiveness, clearance or approval, record-keeping, packaging, labeling, storage, adverse event reporting, advertising, promotion, marketing, sales, distribution and import and export of medical devices. Pursuant to the FDCA, medical devices are subject to varying degrees of regulatory control and are classified in one of three classes depending on the controls FDA determines necessary to reasonably ensure their safety and effectiveness.

Class I devices are those for which reasonable assurance of safety and effectiveness can be provided by adherence to FDA’s general controls for medical devices, which include applicable

 

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portions of FDA’s Quality System Regulation, or QSR, facility registration and product listing, reporting of adverse medical events and appropriate, truthful and non-misleading labeling, advertising and promotional materials. Many Class I devices are exempt from premarket regulation; however, some Class I devices require premarket clearance by FDA through the 510(k) premarket notification process described below.

Class II devices are subject to FDA’s general controls, and any other special controls, such as performance standards, postmarket surveillance, and FDA guidelines, deemed necessary by FDA to provide reasonable assurance of the devices’ safety and effectiveness. Premarket review and clearance by FDA for Class II devices are accomplished through the 510(k) premarket notification procedure, although some Class II devices are exempt from the 510(k) requirements. Premarket notifications are subject to user fees, unless a specific exemption applies. To obtain 510(k) clearance, a manufacturer must submit a premarket notification demonstrating that the proposed device is “substantially equivalent” to a predicate device, which is a previously cleared 510(k) device or a preamendment device that was in commercial distribution before May 28, 1976, for which FDA has not yet called for the submission of a premarket approval, or PMA, application. In determining substantial equivalence, FDA assesses whether the proposed device has the same intended use as the predicate device, and the same technological characteristics as the predicate device or different technological characteristics but the information submitted in the premarket notification demonstrates the device is as safe and effective as a legally marketed device and does not raise different questions of safety and effectiveness than the predicate device. FDA may request additional information, including clinical data. Under the FDCA, a manufacturer submits a premarket notification 90 days before introducing a device into interstate commerce, but FDA’s review of the premarket notification can take significantly longer. If FDA determines that the device is substantially equivalent to the predicate device(s), the subject device may be marketed. However, if FDA makes a not substantially equivalent determination, then the device would be regulated as a Class III device, discussed below. If a manufacturer obtains a 510(k) clearance for its device and then makes a modification could significantly affect the device’s safety or effectiveness, a new premarket notification must be submitted to FDA.

Class III devices are deemed by FDA to pose the greatest risk, such as those for which reasonable assurance of the device’s safety and effectiveness cannot be assured solely by the general controls and special controls described above and that are life-sustaining or life-supporting. Some preamendment Class III devices for which FDA has not yet required a PMA require FDA’s clearance of a premarket notification in order to be marketed. However, most Class III devices are required to undergo the PMA process in which the manufacturer must demonstrate reasonable assurance of the safety and effectiveness of the device to FDA’s satisfaction. A PMA application must provide valid scientific evidence, typically extensive preclinical and clinical trial data and information about the device and its components regarding, among other things, device design, manufacturing and labeling. PMA applications (and supplemental PMA applications) are subject to significantly higher user fees than are 510(k) premarket notifications. Some PMA applications are exempt from a user fee, for example a small business’s first PMA.

After a PMA application is submitted and found to be sufficiently complete, FDA begins an in-depth review of the submitted information. During this review period, FDA may request additional information or clarification of information already provided. FDA also may convene an advisory panel of outside experts to review and evaluate the application and provide recommendations to FDA as to the approvability of the device. In addition, FDA generally will conduct a pre-approval inspection of the manufacturing facility to ensure compliance with the QSR. FDA can delay, limit or deny approval of a PMA application for many reasons.

If the FDA’s evaluations of both the PMA application and the manufacturing facilities are favorable, FDA will either issue an approval letter authorizing commercial marketing or an approvable

 

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letter that usually contains a number of conditions that must be met in order to secure final approval. If the FDA’s evaluations are not favorable, FDA will deny approval of the PMA or issue a not approvable letter. The agency may determine that additional clinical trials are necessary, in which case the PMA approval may be delayed while the trials are conducted and the data acquired are submitted in an amendment to the PMA. Even with additional trials, FDA may not approve the PMA application. The PMA process, including the gathering of clinical and nonclinical data and the submission to and review by FDA, can take several years, and the process can be expensive and uncertain.

Even if FDA approves a PMA, the agency can impose post approval conditions that it believes necessary to ensure the safety and effectiveness of the device, including, among other things, restrictions on labeling, promotion, sale and distribution. After approval of a PMA, a new PMA or PMA supplement may be required for a modification to the device, its labeling or its manufacturing process.

A clinical trial may be required in support of a 510(k) submission and generally is required for a PMA application. These trials generally require an Investigational Device Exemption, or IDE, approved by FDA for a specified number of patients, unless the product is exempt from IDE requirements or deemed a non-significant risk device eligible for more abbreviated IDE requirements. The IDE application must be supported by appropriate data, such as animal and laboratory testing results, showing that it is safe to test the device in humans and that the testing protocol is scientifically sound. Clinical trials may begin 30 days after the submission of the IDE application unless FDA disapproves the IDE or places the trial on clinical hold. Additionally, clinical trials may not begin until their protocol and informed consent receive approval from the appropriate institutional review boards, or IRBs, at the clinical trial sites. All clinical trials must be conducted in accordance with the FDA’s IDE regulations.

Even if regulatory approval or clearance of a device is granted, FDA may impose limitations on the uses and indications for which the device may be labeled and promoted, and the device remains subject to significant regulatory requirements. Medical devices may be marketed only for the uses and indications for which they are cleared or approved. Device manufacturers must register their facilities and list their devices with FDA. A device manufacturer’s manufacturing processes and those of some of its suppliers are required to comply with the applicable portions of the QSR, which covers quality management, design, production and process controls, quality assurance, labeling, packaging, shipping, and complaint handling. Device manufacturers must submit to the FDA medical device reports for deaths, serious injuries, and certain malfunctions and report certain field corrections and product recalls or removals. Some manufacturers also may be subject to post-market surveillance regulations. Facility records and manufacturing processes are subject to periodic unscheduled inspections by FDA.

Failure to comply with applicable regulatory requirements can result in enforcement action by FDA, which may include any of the following sanctions: public warning letters, fines, injunctions, civil or criminal penalties, recall or seizure of products, operating restrictions, partial suspension or total shutdown of production, delays in or denial of 510(k) clearance or PMA applications for new products, challenges to existing 510(k) clearances or PMA applications, and a recommendation by FDA to disallow a device manufacturer from entering into government contracts. FDA also has the authority to request repair, replacement or refund of the cost of any device manufactured or distributed. In the event that a supplier fails to maintain compliance with a device manufacturer’s quality requirements, the manufacturer may have to qualify a new supplier and could experience manufacturing delays as a result.

We believe that our LDT would likely be regulated as either a Class II or Class III device. Accordingly, some level of premarket review—either a 510(k) or a PMA—would likely be required for our test if FDA no longer applies its enforcement discretion to LDTs. While the data requirements are typically greater for Class III devices, the data required for Class II devices has increased, and it is

 

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likely that some amount of clinical data (retrospective or prospective or both) would be required for either type of submission. Currently, FDA is undertaking a review of the adequacy of the 510(k) process. It is difficult to predict what changes may result, but it should be assumed that any changes will increase, not decrease, the regulatory requirements. We cannot assure you that our product and future products will not require 510(k) clearance or PMA approval in the future, or, in such an event, that such approval or clearance would be forthcoming.

HIPAA and HITECH

Under the administrative simplification provisions of the Health Insurance Portability and Accountability Act, or HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, the United States Department of Health and Human Services issued regulations that establish uniform standards governing the conduct of certain electronic health care transactions and protecting the privacy and security of protected health information used or disclosed by health care providers and other covered entities. Three principal regulations with which we are required to comply have been issued in final form under HIPAA: privacy regulations, security regulations, and standards for electronic transactions, which establish standards for common health care transactions.

The privacy regulations cover the use and disclosure of protected health information by health care providers. They also set forth certain rights that an individual has with respect to his or her protected health information maintained by a health care provider, including the right to access or amend certain records containing protected health information or to request restrictions on the use or disclosure of protected health information. The security regulations establish requirements for safeguarding the confidentiality, integrity, and availability of protected health information that is electronically transmitted or electronically stored. The HITECH Act, among other things, established certain health information security breach notification requirements. A covered entity must notify any individual whose protected health information is breached. The HIPAA privacy and security regulations establish a uniform federal “floor” and do not supersede state laws that are more stringent or provide individuals with greater rights with respect to the privacy or security of, and access to, their records containing protected health information. Massachusetts, for example, has a state law that protects the privacy of personal information of Massachusetts residents.

These laws contain significant fines and other penalties for wrongful use or disclosure of protected health information. Additionally, to the extent that we submit electronic health care claims and payment transactions that do not comply with the electronic data transmission standards established under HIPAA and HITECH, payments to us may be delayed or denied.

Federal, State and Foreign Fraud and Abuse Laws

In the United States, there are various fraud and abuse laws with which we must comply and we are potentially subject to regulation by various federal, state and local authorities, including CMS, other divisions of the U.S. Department of Health and Human Services (e.g., the Office of Inspector General), the U.S. Department of Justice and individual U.S. Attorney offices within the Department of Justice, and state and local governments. We also may be subject to foreign fraud and abuse laws.

In the United States, the federal Anti-Kickback Statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce or in return for patient referrals for, or purchasing, leasing, ordering or arranging for the purchase, lease or order of, any health care item or service reimbursable under a governmental payor program. Courts have stated that a financial arrangement may violate the Anti-Kickback Statute if any one purpose of the arrangement is to encourage patient referrals or other federal health care program business, regardless of whether

 

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there are other legitimate purposes for the arrangement. The definition of “remuneration” has been broadly interpreted to include anything of value, including gifts, discounts, credit arrangements, payments of cash, consulting fees, waivers of co-payments, ownership interests and providing anything at less than its fair market value. Recognizing that the Anti-Kickback Statute is broad and may technically prohibit many innocuous or beneficial arrangements within the health care industry, the U.S. Department of Health and Human Services issued a series of regulatory “safe harbors.” These safe harbor regulations set forth certain provisions, which, if met, will assure health care providers and other parties that they will not be prosecuted under the federal Anti- Kickback Statute. Although full compliance with these provisions ensures against prosecution under the federal Anti-Kickback Statute, the failure of a transaction or arrangement to fit within a specific safe harbor does not necessarily mean that the transaction or arrangement is illegal or that prosecution under the federal Anti-Kickback Statute will be pursued. Penalties for federal anti-kickback violations are severe, and include imprisonment, criminal fines, civil money penalties, and exclusion from participation in federal health care programs. Many states also have anti-kickback statutes, some of which may apply to items or services reimbursed by any third-party payor, including commercial insurers.

Legislation defining two new federal crimes related to health care were recently enacted: health care fraud and false statements relating to health care matters. The health care fraud statute prohibits knowingly and willfully executing a scheme to defraud any health care benefit program, including private payors. A violation of this statute is a felony and may result in fines, imprisonment or exclusion from governmental payor programs such as the Medicare and Medicaid programs. The false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for health care benefits, items or services. A violation of this statute is a felony and may result in fines, imprisonment or exclusion from governmental payor programs.

Finally, another development affecting the health care industry is the increased enforcement of the federal False Claims Act and, in particular, actions brought pursuant to the False Claims Act’s “whistleblower” or “qui tam” provisions. The False Claims Act imposes liability on any person or entity that, among other things, knowingly presents, or causes to be presented, a false or fraudulent claim for payment by a federal governmental payor program. The qui tam provisions of the False Claims Act allow a private individual to bring actions on behalf of the federal government alleging that the defendant has defrauded the federal government by submitting a false claim to the federal government and permit such individuals to share in any amounts paid by the entity to the government in fines or settlement. When an entity is determined to have violated the False Claims Act, it may be required to pay up to three times the actual damages sustained by the government, plus civil penalties ranging from $5,500 to $11,000 for each false claim.

In addition, various states have enacted false claim laws analogous to the federal False Claims Act, although many of these state laws apply where a claim is submitted to any third-party payor and not merely a governmental payor program.

In Europe various countries have adopted anti-bribery laws providing for severe consequences, in the form of criminal penalties and/or significant fines, for individuals and/or companies committing a bribery offence. Violations of these anti-bribery laws, or allegations of such violations, could have a negative impact on our business, results of operations and reputation. For instance, in the United Kingdom, under the new Bribery Act 2010, which went into effect in July 2011, a bribery occurs when a person offers, gives or promises to give a financial or other advantage to induce or reward another individual to improperly perform certain functions or activities, including any function of a public nature. Bribery of foreign public officials also falls within the scope of the Bribery Act 2010. Under the new regime, an individual found in violation of the Bribery Act of 2010, faces imprisonment of up to 10 years. In addition, the individual can be subject to an unlimited fine, as can commercial organizations for failure to prevent bribery.

 

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Physician Referral Prohibitions

Under a federal law directed at “self-referral,” commonly known as the “Stark Law,” there are prohibitions, with certain exceptions, on referrals for certain designated health services, including laboratory services, that are covered by the Medicare and Medicaid programs by physicians who personally, or through a family member, have an investment or ownership interest in, or a compensation arrangement with, an entity performing the tests. The prohibition also extends to payment for any testing referred in violation of the Stark Law. A person who engages in a scheme to circumvent the Stark Law’s referral prohibition may be fined up to $100,000 for each such arrangement or scheme. In addition, any person who presents or causes to be presented a claim to the Medicare or Medicaid programs in violation of the Stark Law is subject to civil monetary penalties of up to $15,000 per bill submission, an assessment of up to three times the amount claimed and possible exclusion from participation in federal governmental payor programs. Bills submitted in violation of the Stark Law may not be paid by Medicare or Medicaid, and any person collecting any amounts with respect to any such prohibited bill is obligated to refund such amounts. Many states have comparable laws that are not limited to Medicare and Medicaid referrals.

Corporate Practice of Medicine

Numerous states have enacted laws prohibiting business corporations, such as us, from practicing medicine and employing or engaging physicians to practice medicine, generally referred to as the prohibition against the corporate practice of medicine. These laws are designed to prevent interference in the medical decision-making process by anyone who is not a licensed physician. For example, California’s Medical Board has indicated that determining what diagnostic tests are appropriate for a particular condition and taking responsibility for the ultimate overall care of the patient, including providing treatment options available to the patient, would constitute the unlicensed practice of medicine if performed by an unlicensed person. Violation of these corporate practice of medicine laws may result in civil or criminal fines, as well as sanctions imposed against us and/or the professional through licensure proceedings. Typically such laws are only applicable to entities that have a physical presence in the state.

Other Regulatory Requirements

Our laboratory is subject to federal, state and local regulations relating to the handling and disposal of regulated medical waste, hazardous waste and biohazardous waste, including chemical, biological agents and compounds, blood and bone marrow samples and other human tissue. Typically, we use outside vendors who are contractually obligated to comply with applicable laws and regulations to dispose of such waste. These vendors are licensed or otherwise qualified to handle and dispose of such waste.

The U.S. Occupational Safety and Health Administration has established extensive requirements relating to workplace safety for health care employers, including requirements to develop and implement programs to protect workers from exposure to blood-borne pathogens by preventing or minimizing any exposure through needle stick or similar penetrating injuries.

Segment and Geographical Information

We operate in one reportable business segment and derive revenue from multiple countries, with 100%, 89.1%, and 86.2% coming from the United States in fiscal years 2011 and 2012, and during the six months ended June 30, 2013, respectively.

 

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In January 2011, we announced a pilot alliance with Novartis as our first biopharmaceutical relationship. This alliance has continued to expand and Novartis has accounted for more than 10% of our revenues in each of the years ended December 31, 2011 and 2012 and the six months ended June 30, 2013.

Employees

As of August 31, 2013, we had 142 full-time employees, with 120 in technology, research and development, business development and laboratory and commercial operations, and 22 in general and administrative functions. We had 123 full-time employees in our Cambridge, Massachusetts facilities, and 19 of our full-time employees work remotely. None of our employees is represented by a labor union with respect to his or her employment with us.

Facilities

In March 2010, we entered into a lease effective through October 2015 for approximately 22,500 square feet of space in Cambridge, Massachusetts. Our CLIA laboratory is currently located at this facility. In March 2013, we entered into a new lease effective through 2021 for approximately 61,591 square feet of space in a new facility in Cambridge, Massachusetts. We expect to transition our principal executive office, all of our employees, and CLIA laboratory to this new facility in September and October of 2013. We believe these facilities are sufficient to meet our current needs.

Research and Development Expenses

Research and development expenses were $14.8 million for the year ended December 31, 2012 and $9.0 million for the year ended December 31, 2011. The 64% increase was primarily due to a $2.1 million increase in employee and contractor-related expenses, including stock-based compensation, to support our molecular information platform and product development, a $1.9 million increase in expenses related to clinical trials to evaluate the clinical utility of FoundationOne, a $1.5 million increase in technology expenses related to data management, FoundationOne report design and functionality, and customer interface development, and a $0.3 million increase in lab supplies to support product development.

Legal Proceedings

From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. We have received, and may in the future continue to receive, letters from third parties inviting us to take licenses under, or alleging that we infringe, their patents. While to date no such notice has ever led to a lawsuit, or a license, future litigation may be necessary to defend ourselves, our partners and our customers by determining the scope, enforceability, and validity of third-party proprietary rights or to establish our proprietary rights. The results of any current or future litigation cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.

 

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MANAGEMENT

Directors and Executive Officers

Our executive officers and directors and their respective ages and positions as of August 31, 2013:

 

Name

   Age     

Position

Executive officers:

     

Michael J. Pellini, M.D.

     47       President, Chief Executive Officer and Director

Steven J. Kafka, Ph.D.

     44       Chief Operating Officer

Kevin Krenitsky, M.D.

     46       Chief Commercial Officer and Senior Vice President

Vincent A. Miller, M.D.

     51       Chief Medical Officer

Robert W. Hesslein, J.D.

     60       Senior Vice President and General Counsel

Jason Ryan

     39       Vice President, Finance

Non-management directors:

     

Alexis Borisy(1)(2)

     41       Chairman of the Board of Directors

Brook Byers(1)(3)

     68       Director

Evan Jones(2)

     56       Director

Mark Levin(1)(3)

     63       Director

David Schenkein, M.D.(2)(3)

     56       Director

Krishna Yeshwant, M.D.(1)(2)

     35       Director

 

(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
(3) Member of the Nominating and Corporate Governance Committee.

Executive Officers

Michael J. Pellini, M.D. , has served as our President and Chief Executive Officer and as a member of our board of directors since May 2011. Dr. Pellini joined us from Clarient, Inc., or Clarient, a General Electric Healthcare Company, where he held the position of president and chief operating officer from April 2008 to April 2011 and served on its board of directors from May 2007 to April 2009. Dr. Pellini served as vice president, life sciences at Safeguard Scientifics, Inc. (NYSE: SFE), a private equity and venture capital firm specializing in expansion financings, growth capital, management buyouts, recapitalizations, industry consolidations, corporate spinouts, growth stage, and early stage financings, from March 2007 to April 2008 and, as part of this role, was detailed to Clarient beginning in July 2007. Dr. Pellini received a B.A. from Boston College, an M.B.A. from Drexel University and an M.D. from Jefferson Medical College of Thomas Jefferson University. Dr. Pellini’s qualifications to sit on our board of directors include his extensive leadership, executive, managerial, business, and diagnostic company experience, along with his years of industry experience in the development and commercialization of pharmaceutical products.

Steven J. Kafka, Ph.D. , joined us in January 2013 and serves as our Chief Operating Officer. Dr. Kafka was previously chief operating officer and chief financial officer at Aileron Therapeutics Inc., or Aileron, a biopharmaceutical company based in Cambridge, Massachusetts from September 2009 to October 2012. Before Aileron, from September 2006 to September 2009, Dr. Kafka was vice president of finance at Infinity Pharmaceuticals, Inc. (NASDAQ: INFI), a drug discovery and development company. Dr. Kafka earned his B.A. with Distinction and Honors from Stanford University and his Ph.D. from Harvard University.

Kevin Krenitsky, M.D. , joined us in June 2011 and serves as our Chief Commercial Officer and Senior Vice President, International Strategy. Prior to joining Foundation, he served as president of

 

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Enzo Clinical Labs, Inc., or Enzo, a full service clinical reference laboratory, from March 2009 to June 2011. Before his employment at Enzo, he was the chief executive officer of BioServe Biotechnologies, Ltd., a global biotechnology company specializing in processing genetic diagnostic tests from 2007 to February 2009. From 2006 to 2007, he was the interim chief executive officer of Parkway Clinical Laboratories Inc., a clinical diagnostic lab providing comprehensive routine and esoteric testing. Dr. Krenitsky received a B.S. in business management from the University of Scranton and an M.D. from Jefferson Medical College.

Vincent A. Miller, M.D. , was appointed to serve as our Chief Medical Officer on July 31, 2013. He joined us in October 2011 and served as our Senior Vice President, Clinical Development between then and July 2013. Dr. Miller served between July 1991 and October 2011 as an attending physician, and Dr. Miller has served since November 2011 to the present as a consulting physician, at Memorial Sloan-Kettering Cancer Center. Dr. Miller earned his B.A. from the University of Pennsylvania and his M.D. from the University of Medicine and Dentistry of New Jersey in Newark.

Robert W. Hesslein, J.D. , has served as our Senior Vice President and General Counsel since May 2012. Mr. Hesslein was previously senior vice president and deputy general counsel at Genzyme Corporation, or Genzyme, a biotechnology company based in Cambridge, Massachusetts, which is now a wholly-owned subsidiary of Sanofi (NYSE: SNY), from 1996 to 2012. Before Genzyme, from 1990 to 1996, Mr. Hesslein was a second vice president and counsel at The New England, a mutual life insurance corporation. From 1978 to 1990, Mr. Hesslein was an associate and subsequently a partner at Csaplar & Bok, a Boston law firm. Mr. Hesslein earned his B.A. with Honors from Yale University and his J.D. from The Cornell Law School.

Jason Ryan has served as our Vice President, Finance since March 2012. He previously served as our Senior Director, Finance from May 2011 to March 2012. Prior to joining us, Mr. Ryan led the finance and strategic planning functions of Taligen Therapeutics, Inc., which was acquired by Alexion Pharmaceuticals, Inc. (NASDAQ: ALXN), from May 2009 to April 2011, Codon Devices Inc. from May 2007 to May 2009, and Genomics Collaborative, Inc., which was acquired by SeraCare Life Sciences, Inc. (NASDAQ: SRLS), from September 1998 to September 2004. He began his career at Deloitte & Touche. Mr. Ryan holds a B.S. in economics from Bates College and an M.B.A. from Babson College, and earned a C.P.A. in Massachusetts.

Non-Management Directors

Alexis Borisy has served as a member of our board of directors since 2009 and Chairman since 2011. He co-founded Foundation in 2009 and served as our interim Chief Executive Officer through May 2011. Since 2009, Mr. Borisy has been a partner at Third Rock Ventures, a life sciences venture capital firm focused on the formation, development and strategy of new companies. In addition, since earlier this year, Mr. Borisy has served as chairman of Warp Drive Bio, LLC, a life sciences company focusing on genomics where he served as chief executive officer from 2011 to 2013. From 2007 through 2012, Mr. Borisy served as chairman a FORMA Therapeutics, Inc., a life science company focused on targeting cancers for treatment. In 2000, Mr. Borisy founded CombinatoRx, Inc. (now Zalicus Inc. (NASDAQ: ZLCS)), a drug development company, and served as its chief executive officer and on its board of directors from 2000 to 2009. Mr. Borisy holds an A.B. in chemistry from the University of Chicago, and an A.M. from Harvard University. We believe Mr. Borisy’s detailed knowledge of our company and long tenure with us, having served as one of our founders, along with his experience working with and serving on the boards of directors of life sciences companies and his experience working in the venture capital industry qualifies him to serve on our board of directors.

Brook Byers has served as a member of our board of directors since 2011. Mr. Byers has been a venture capital investor since 1972 and is a managing partner of Kleiner Perkins Caufield & Byers. He has been closely involved with more than 50 new technology-based ventures, many of which have

 

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already become public companies. He formed the first life sciences practice group in the venture capital profession at Kleiner Perkins Caufield & Byers in 1984. Mr. Byers served on the board of directors of Genomic Health, Inc. (NASDAQ: GHDX) from 2001 to 2011 and serves on the board of directors of Pacific Biosciences of California, Inc. (NASDAQ: PACB). Mr. Byers holds a B.S. in electrical engineering from the Georgia Institute of Technology and an M.B.A. from Stanford University. We believe that Mr. Byers possesses specific attributes that qualify him to serve as a member of our Board of Directors, including his experience with growing multiple companies in the life sciences industry and his leadership in precision medicine initiatives.

Evan Jones has served as a member of our board of directors since 2013. Since 2007, Mr. Jones has served as managing member of jVen Capital, LLC, a life sciences investment company. He also serves as executive chairman of OpGen, Inc., a privately held genetic analysis company. Previously, he co-founded Digene Corporation, or Digene, a publicly traded biotechnology company focused on women’s health and molecular diagnostic testing that was sold to Qiagen N.V. (NASDAQ: QGEN) in 2007. He served as chairman of Digene’s board of directors from 1995 to 2007, as Digene’s chief executive officer from 1990 to 2006, and as Digene’s president from 1990 to 1999. Mr. Jones has served as a member of the board of directors of CAS Medical Systems, Inc. (NASDAQ: CASM), a developer of patient vital signs monitoring products and technologies, since June 2008, and Fluidigm Corporation (NASDAQ: FLDM), a technology company that develops, manufactures and markets microfluidic systems in the life science and agricultural biotechnology industries, since March 2011. Mr. Jones received a B.A. from the University of Colorado and an M.B.A. from The Wharton School at the University of Pennsylvania. We believe that Mr. Jones’ qualifications to serve on our board of directors include his extensive experience in the molecular diagnostic testing industry, including as chief executive officer of a public company focused on molecular diagnostic testing, as well as his service as a board member with other public and private companies.

Mark Levin has served as a member of our board of directors since 2010. Mr. Levin currently serves as a partner at Third Rock Ventures, a life sciences venture capital firm focused on the formation, development and strategy of new companies, which he co-founded in 2007. Mr. Levin served as founding chief executive officer of Millennium Pharmaceuticals, Inc. from 1993 to 2005. Mr. Levin was co-founder of the life sciences effort of the Mayfield Fund, a global venture capital firm, where he was also the founding chief executive officer of Cell Genesys, Inc. from 1989 to 1991, Tularik Inc. from 1991 to 1992, Focal, Inc. from 1992 to 1993, and StemCells, Inc. (NASDAQ: STEM) from 1990 to 1992. Mr. Levin started his career as a process engineer and project leader at Eli Lilly and Company (NASDAQ: LLY) and Genentech, Inc. Mr. Levin holds both a B.S. and M.S. in chemical and biomedical engineering from Washington University. We believe Mr. Levin’s experience working with and serving on the boards of directors of life sciences companies and his experience working in the venture capital industry qualifies him to serve on our board of directors.

David Schenkein, M.D., has served as a member of our board of directors since 2010. Dr. Schenkein currently serves as the chief executive officer of Agios Pharmaceuticals, Inc., or Agios, a biopharmaceutical company, a position he has held since August 2009. Prior to joining Agios, Dr. Schenkein was the senior vice president, clinical hematology/oncology at Genentech, Inc., or Genentech, where he was responsible for leading the medical and scientific strategies for their bio-oncology portfolio. Prior to joining Genentech, Dr. Schenkein spent 17 years in academic and clinical medicine as an attending physician in hematology/oncology at the Tufts-New England Medical Center, where he was an associate professor and held the position of director of the cancer center. Dr. Schenkein holds a B.A. in chemistry from Wesleyan University and an M.D. from the State University of New York Upstate Medical School. We believe Dr. Schenkein’s medical experience as an oncologist and extensive background in the biotechnology industry, including his roles at Agios and Genentech, provide a critical contribution to our board of directors.

 

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Krishna Yeshwant, M.D. , has served as a member of our board of directors since 2011. Dr. Yeshwant currently serves as a partner at Google Ventures, a venture-capital fund. Dr. Yeshwant has been working with Google Ventures since June 2008. Before joining Google Ventures, in 1996 he founded Stanford Students Consulting, an electronic data interchange company that was acquired by Hewlett-Packard Company (NYSE: HPQ) in 2000. In 2000, he founded Recourse Technologies, Inc., a network security company that was acquired by Symantec Corporation (NASDAQ: SYMC) in 2002. Since 2009, Dr. Yeshwant has also been employed by Partners Healthcare, a not-for-profit health care system, as an Internal Medicine physician at Brigham and Women’s Hospital. Dr. Yeshwant has a B.S. in Computer Science from Stanford University, an M.D. from Harvard Medical School and an M.B.A. from Harvard Business School. We believe Dr. Yeshwant’s medical experience as a physician and experience working with and serving on the boards of directors of life sciences companies and his experience working in the venture capital industry qualifies him to serve on our board of directors.

Founding Advisors

We leverage the expertise of our founding advisors to help us build and guide the deployment of our molecular information platform. Our founding advisors are world leaders in the fields of cancer genomics, cancer biology, clinical oncology, and information sciences, and consist of: Eric Lander, Ph.D., who serves as the Founding Director of the Broad Institute, Professor of Biology at Massachusetts Institute of Technology, and Professor of Systems Biology at Harvard Medical School and was a key leader of the Human Genome Project; Todd Golub, M.D., who is a founding member of the Broad Institute, serving as Director of its Cancer Program and Chief Scientific Officer, as well as the Charles A. Dana Investigator in Human Cancer Genetics at the Dana-Farber Cancer Institute, an investigator at Howard Hughes Medical Institute and Professor of Pediatrics at Harvard Medical School; Levi Garraway, M.D., Ph.D., who is an Associate Professor of Medicine in the Department of Medical Oncology at the Dana-Farber Cancer Institute, Harvard Medical School, as well as a faculty member of Dana-Farber’s Center for Cancer Genome Discovery and a Senior Associate Member of the Broad Institute; and Matthew Meyerson, M.D., Ph.D., who serves as Professor of Pathology at Dana-Farber Cancer Institute and Harvard Medical School, Director of the Center for Cancer Genome Discovery at Dana-Farber Cancer Institute, and a Senior Associate Member of the Broad Institute. We intend to continue to leverage the expertise of our founding advisors by seeking their counsel on important topics across a range of key disciplines relevant to our medical and scientific expertise, our molecular information platform and our business strategy.

Composition of Our Board of Directors

Our board of directors currently consists of seven members, all of whom were elected pursuant to the board composition provisions of our stockholders’ voting agreement. These board composition provisions will terminate immediately prior to the closing of this offering, upon which there will be no further contractual obligations regarding the election of our directors. Our nominating and governance committee and board of directors may thereafter consider a broad range of factors relating to the qualifications and background of nominees, which may include but is not limited to diversity considerations such as race, gender, or national origin. We have no formal policy regarding board diversity. Our nominating and governance committee’s and board of directors’ priority in selecting board members is identification of persons who will further the interests of our stockholders through their established record of professional accomplishment, knowledge of our business, understanding of the competitive landscape, professional and personal experiences and expertise relevant to our growth strategy, and the ability to contribute positively to the collaborative culture among board members. Our directors hold office until their successors have been elected and qualified or until the earlier of their resignation or removal.

Our amended and restated certificate of incorporation and amended and restated bylaws, which will become effective immediately prior to the closing of this offering, also provide that our directors

 

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may be removed only for cause by the affirmative vote of the holders of at least 75% of the shares entitled to vote in an annual election of directors, and that any vacancy on our board of directors, including a vacancy resulting from an enlargement of our board of directors, may be filled only by vote of a majority of our directors then in office.

Director Independence.     Our board of directors has determined that all members of the board of directors, except Dr. Pellini and Mr. Borisy, are independent, as determined in accordance with the rules of the NASDAQ Stock Market. In making such independence determination, the board of directors considered the relationships that each such non-employee director has with us and all other facts and circumstances that the board of directors deemed relevant in determining their independence, including the beneficial ownership of our capital stock by each non-employee director. In considering the independence of the directors listed above, our board of directors considered the association of our directors with the holders of more than 5% of our common stock. Upon the closing of this offering, we expect that the composition and functioning of our board of directors and each of its committees will comply with all applicable requirements of the NASDAQ Stock Market and the rules and regulations of the SEC. There are no family relationships among any of our directors or executive officers.

Staggered Board.     In accordance with the terms of our amended and restated certificate of incorporation and amended and restated bylaws that will become effective upon the completion of this offering, our board of directors will be divided into three classes, class I, class II and class III, with each class serving staggered three-year terms. Upon the expiration of the term of a class of directors, directors in that class will be eligible to be elected for a new three-year term at the annual meeting of stockholders in the year in which their term expires.

 

  Ÿ  

Our Class I directors will be Mark Levin, Brook Byers and Michael Pellini;

 

  Ÿ  

Our Class II directors will be David Schenkein and Krishna Yeshwant; and

 

  Ÿ  

Our Class III directors will be Evan Jones and Alexis Borisy.

Our amended and restated certificate of incorporation and amended and restated bylaws that will become effective immediately prior to the closing of this offering provide that the authorized number of directors may be changed only by resolution of the board of directors. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class shall consist of one third of the board of directors.

The division of our board of directors into three classes with staggered three-year terms may delay or prevent stockholder efforts to effect a change of our management or a change in control.

Board Leadership Structure and Board’s Role in Risk Oversight

The positions of our Chairman of the board and Chief Executive Officer are presently separated. Separating these positions allows our Chief Executive Officer to focus on our day-to-day business, while allowing the Chairman of the board to lead the board of directors in its fundamental role of providing advice to and independent oversight of management. Our board of directors recognizes the time, effort and energy that the Chief Executive Officer must devote to his position in the current business environment, as well as the commitment required to serve as our Chairman, particularly as the board of directors’ oversight responsibilities continue to grow. Our board of directors also believes that this structure ensures a greater role for the non-management directors in the oversight of our company and active participation of the independent directors in setting agendas and establishing priorities and procedures for the work of our board of directors. Our board of directors believes its administration of its risk oversight function has not affected its leadership structure. Although our amended and restated bylaws that will be in effect upon the completion of this offering will not require

 

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our Chairman and Chief Executive Officer positions to be separate, our board of directors believes that having separate positions is the appropriate leadership structure for us at this time.

Our board of directors oversees the management of risks inherent in the operation of our business and the implementation of our business strategies. Our board of directors performs this oversight role by using several different levels of review. In connection with its reviews of the operations and corporate functions of our company, our board of directors addresses the primary risks associated with those operations and corporate functions. In addition, our board of directors reviews the risks associated with our company’s business strategies periodically throughout the year as part of its consideration of undertaking any such business strategies.

Each of our board committees also oversees the management of our risk that falls within the committee’s areas of responsibility. In performing this function, each committee has full access to management, as well as the ability to engage advisors. Our Vice President, Finance reports to the audit committee and is responsible for identifying, evaluating and implementing risk management controls and methodologies to address any identified risks. In connection with its risk management role, our audit committee meets privately with representatives from our independent registered public accounting firm, and privately with our Vice President, Finance. The audit committee oversees the operation of our risk management program, including the identification of the primary risks associated with our business and periodic updates to such risks, and reports to our board of directors regarding these activities.

Board Committees

Our board of directors has established an audit committee, a compensation committee and a nominating and corporate governance committee, each of which operates pursuant to a separate charter adopted by our board of directors. The composition and functioning of all of our committees will comply with all applicable requirements of the Sarbanes-Oxley Act of 2002, the NASDAQ Stock Market and the Securities and Exchange Commission, or SEC, rules and regulations.

Audit Committee

Evan Jones, David Schenkein and Krishna Yeshwant currently serve on the audit committee, which is chaired by Evan Jones. Our board of directors has determined that each member of the audit committee is “independent” for audit committee purposes as that term is defined in the rules of the SEC and the applicable NASDAQ Stock Market rules. Our board of directors has designated Evan Jones as an “audit committee financial expert,” as defined under the applicable rules of the SEC. The audit committee’s responsibilities include:

 

  Ÿ  

appointing, approving the compensation of, and assessing the independence of our independent registered public accounting firm;

 

  Ÿ  

approving auditing and permissible non-audit services, and the terms of such services, to be provided by our independent registered public accounting firm;

 

  Ÿ  

reviewing the internal audit plan with the independent registered public accounting firm and members of management responsible for preparing our financial statements;

 

  Ÿ  

reviewing and discussing with management and the independent registered public accounting firm our annual and quarterly financial statements and related disclosures as well as critical accounting policies and practices used by us;

 

  Ÿ  

reviewing the adequacy of our internal control over financial reporting;

 

  Ÿ  

establishing policies and procedures for the receipt and retention of accounting-related complaints and concerns;

 

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  Ÿ  

recommending, based upon the audit committee’s review and discussions with management and the independent registered public accounting firm, whether our audited financial statements shall be included in our Annual Report on Form 10-K;

 

  Ÿ  

monitoring the integrity of our financial statements and our compliance with legal and regulatory requirements as they relate to our financial statements and accounting matters;

 

  Ÿ  

preparing the audit committee report required by SEC rules to be included in our annual proxy statement;

 

  Ÿ  

overseeing our compliance with applicable legal and regulatory requirements;

 

  Ÿ  

reviewing all related party transactions for potential conflict of interest situations and approving all such transactions; and

 

  Ÿ  

reviewing quarterly earnings releases.

Compensation Committee

Alexis Borisy, Brook Byers, Mark Levin and Krishna Yeshwant currently serve on the compensation committee, which is chaired by Alexis Borisy. Under NASDAQ Stock Market rules, we are permitted to phase in our compliance with the independent compensation committee requirements set forth in NASDAQ Marketplace Rule 5605(d). Our board of directors has determined that each of Brook Byers, Mark Levin and Krishna Yeshwant is “independent” as that term is defined in the applicable NASDAQ Stock Market rules. Within one year of our listing on The NASDAQ Global Market, we expect that Mr. Borisy will be independent under NASDAQ Stock Market rules, as his service as our chief executive officer ended in May 2011. The compensation committee’s responsibilities include:

 

  Ÿ  

annually reviewing and recommending to our board of directors corporate goals and objectives, and determination of the achievement thereof, relevant to the compensation of our Chief Executive Officer and other executive officers;

 

  Ÿ  

evaluating the performance of our Chief Executive Officer in light of such corporate goals and objectives and recommending to our board of directors the compensation of our Chief Executive Officer;

 

  Ÿ  

determining, or reviewing and recommending to our board of directors for approval, the compensation of our other executive officers;

 

  Ÿ  

reviewing and establishing our overall management compensation philosophy and policy;

 

  Ÿ  

overseeing and administering our compensation and similar plans;

 

  Ÿ  

evaluating and assessing potential current compensation advisors in accordance with the independence standards identified in the applicable NASDAQ Stock Market rules;

 

  Ÿ  

retaining and approving the compensation of any compensation advisors;

 

  Ÿ  

reviewing and approving, or reviewing and recommending to our board of directors for approval, our policies and procedures for the grant of equity-based awards;

 

  Ÿ  

determining or reviewing and making recommendations to our board of directors with respect to director compensation;

 

  Ÿ  

preparing the compensation committee report required by SEC rules to be included in our annual proxy statement;

 

  Ÿ  

reviewing and discussing with management the compensation discussion and analysis to be included in our annual proxy statement or Annual Report on Form 10-K; and

 

  Ÿ  

reviewing and discussing with our board of directors corporate succession plans for the Chief Executive Officer and other key officers.

 

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Nominating and Corporate Governance Committee

David Schenkein, Brook Byers and Mark Levin currently serve on the nominating and corporate governance committee, which is chaired by David Schenkein. Our board of directors has determined that each member of the nominating and corporate governance committee is “independent” as that term is defined in the applicable NASDAQ Stock Market rules. The nominating and corporate governance committee’s responsibilities include:

 

  Ÿ  

developing and recommending to our board of directors criteria for board and committee membership;

 

  Ÿ  

establishing procedures for identifying and evaluating board of director candidates, including nominees recommended by stockholders;

 

  Ÿ  

identifying individuals qualified to become members of the board of directors;

 

  Ÿ  

recommending to our board of directors the persons to be nominated for election as directors and to each of the board’s committees;

 

  Ÿ  

developing and recommending to our board of directors a set of corporate governance guidelines; and

 

  Ÿ  

overseeing the evaluation of our board of directors and management.

Our board of directors may establish other committees from time to time.

Compensation Committee Interlocks and Insider Participation

None of the members of our compensation committee has at any time during the prior three years been one of our officers or employees, other than Alexis Borisy, who served as our chief executive officer until May 2011. None of our executive officers currently serves, or in the past fiscal year has served, as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on our board of directors or compensation committee.

Corporate Governance

Prior to the completion of this offering, we will adopt a written code of business conduct and ethics that applies to our directors, officers and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. Following the completion of this offering, a current copy of the code will be posted on the Corporate Governance section of our website, which is located at www.foundationmedicine.com. If we make any substantive amendments to, or grant any waivers from, the code of business conduct and ethics for any officer, we will disclose the nature of such amendment or waiver on our website or in a current report on Form 8-K.

Limitation of Liability

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers, or controlling persons, we have been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

 

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EXECUTIVE COMPENSATION

Executive Compensation Overview

Historically, our executive compensation program has reflected our growth and corporate goals. To date, the compensation of Michael J. Pellini, M.D., our President and Chief Executive Officer, and the other executive officers identified below in the summary compensation table, who we refer to as the named executive officers, has consisted of a combination of base salary, bonuses and long-term incentive compensation in the form of restricted common stock and stock options. Our executive officers and all salaried employees are also eligible to receive health and welfare benefits.

As we transition from a private company to a publicly-traded company, we will evaluate our compensation values and philosophy and compensation plans and arrangements as circumstances require. At a minimum, we expect to review executive compensation annually with input from a compensation consultant if and when determined by the compensation committee. As part of this review process, we expect the board of directors and the compensation committee to apply our compensation philosophy when considering the compensation levels needed to ensure our executive compensation program remains competitive. We will also review whether we are meeting our retention objectives and the potential cost of replacing a key employee.

Compensation Tables

Summary Compensation Table—2012

The following table presents information regarding the total compensation awarded to, earned by, and paid to our chief executive officer and the two most highly-compensated executive officers (other than the chief executive officer) who were serving as executive officers at the end of the last completed fiscal year for services rendered in all capacities to us for the year ended December 31, 2012. These individuals are our named executive officers for 2012.

 

Name and principal position

  Year     Salary
($)
    Option
awards

($)(1)
    Non-equity
incentive plan
compensation
($)
    All other
compensation
($)
    Total
($)
 

Michael J. Pellini, M.D.,

    2012        395,000        130,157        158,000        60,713 (2)       743,870   
President and Chief Executive Officer            

Kevin Krenitsky, M.D.,

    2012        330,000        13,232        102,800               446,032   
Chief Commercial Officer & Senior Vice President, International Strategy            

Vincent A. Miller, M.D.,

    2012        334,995        42,000        117,250        80,953 (3)       575,198   

Chief Medical Officer

           

 

(1) Amounts reflect the grant date fair value of option awards granted in 2012 in accordance with Accounting Standards Codifcation Topic 718. For information regarding assumptions underlying the valuation of equity awards, see note 2 to our financial statements and the discussion under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Application of Critical Accounting Policies—Stock-Based Compensation” included elsewhere in this prospectus. These amounts do not correspond to the actual value that will be recognized by the named executive officers.
(2)

Pursuant to the terms of his employment agreement, Dr. Pellini is entitled to living expense assistance in connection with his commuting to our principal executive offices in Cambridge, Massachusetts. This amount represents (i) an aggregate of $43,273 for reimbursed expenses for

 

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airline travel between Dr. Pellini’s principal residence and Boston, and reimbursed expenses for parking, transportation and related travel incidentals, and (ii) for one-third of the aggregate costs related to a corporate apartment in Cambridge, Massachusetts utilized by Dr. Pellini and two other executives.

(3) Pursuant to the terms of his employment agreement, Dr. Miller is entitled to living expense assistance in connection with his commuting to our principal executive offices in Cambridge, Massachusetts. This amount represents (i) an aggregate of $13,513 for reimbursed expenses for airline travel, parking, transportation and related travel incidentals, and (ii) for one-third of the aggregate costs related to a corporate apartment in Cambridge, Massachusetts utilized by Dr. Miller and two other executives. Dr. Miller was also paid a bonus of $50,000 in 2012, representing a portion of his signing bonus.

Employment Agreements with Our Named Executive Officers

We have entered into an employment agreement with each of the named executive officers. These employment agreements provide for “at will” employment.

Michael J. Pellini, M.D . On September 9, 2013, we entered into an amended and restated employment agreement with Dr. Pellini for the position of President and Chief Executive Officer. Dr. Pellini currently receives a base salary of $406,850, which is subject to review and adjustment in accordance with our corporate policy. Dr. Pellini is also eligible for an annual discretionary bonus with a target amount of up to 40% of his base salary, payable at the discretion of the compensation committee. The amount of such bonus will be determined annually based upon individual and/or our achievement of certain measurable goals established by the compensation committee after discussion with Dr. Pellini. Dr. Pellini is eligible to participate in employee benefit plans generally available to our executive employees, subject to the terms of those plans. Dr. Pellini is entitled to living and travel expense assistance in connection with his commuting to our principal executive offices in Cambridge, Massachusetts. We provide annual living expense assistance to Dr. Pellini in an amount up to $50,000. All commuting expense assistance amounts are grossed up for applicable state and federal taxes. In connection with his original hiring, we agreed to make an equity award to Dr. Pellini in the form of an option to purchase 550,000 shares of our common stock. This amount represented 5.5% of our shares on a fully-diluted basis. We agreed to grant Dr. Pellini an option to purchase additional shares to maintain his 5.5% ownership if we increased the size of our Series A financing on or prior to March 14, 2012. Following the closing of the second tranche of our Series A financing, we granted Dr. Pellini an additional option to purchase 148,158 shares of our common stock. Pursuant to the agreement, both the initial and subsequent option grants are subject to the following terms: 25% of the two stock options will immediately vest upon the closing of this offering and, upon any later change of control, 100% of the then unvested portion of the two stock options will immediately vest. For purposes of payments made, benefits provided or equity awards accelerated that would constitute an “excess parachute payment” within the meaning of Section 280G of the Internal Revenue of Code of 1986, as amended, or the Code, Dr. Pellini’s agreement provides that we will make a “gross-up” payment in an amount equal to 100% of the applicable excise tax with regard to such payments.

Kevin Krenitsky, M.D . On March 7, 2013, we entered into an employment agreement with Dr. Krenitsky for the position of Chief Commercial Officer & Senior Vice President, International Strategy. Dr. Krenitsky currently receives a base salary of $338,350, which is subject to review and adjustment at the discretion of the compensation committee. Dr. Krenitsky is also eligible for an annual discretionary bonus with a target amount of up to 35% of his base salary, payable at the discretion of the compensation committee based on its assessment of our performance and Dr. Krenitsky’s performance against goals established by the compensation committee. Dr. Krenitsky is eligible to participate in employee benefit plans generally available to our full-time employees, subject to the terms of those plans.

 

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Vincent A. Miller, M.D. On August 1, 2011, we entered into an employment agreement with Dr. Miller for the position of Senior Vice President, Clinical Development, which was amended on March 7, 2013 and September 10, 2013. In July 2013, Dr. Miller was promoted to the position of our Chief Medical Officer. Dr. Miller currently receives a base salary of $345,000, which is subject to review and adjustment at the discretion of the compensation committee. Dr. Miller is also eligible for an annual discretionary bonus with a target amount of up to 35% of his base salary, payable at the discretion of the compensation committee based on its assessment of our performance and Dr. Miller’s performance against goals established by the compensation committee. Dr. Miller is entitled to living and travel expense assistance in connection with his commuting to our principal executive offices in Cambridge, Massachusetts. We provide annual living expense assistance to Dr. Miller in an amount up to $35,000. All commuting expense assistance amounts are grossed up for applicable state and federal taxes. Dr. Miller is eligible to participate in employee benefit plans generally available to our full-time employees, subject to the terms of those plans.

The employment agreements with Drs. Pellini, Miller and Krenitsky provide for certain payments and benefits in the event of an involuntary termination of employment. In addition, each of Drs. Pellini, Miller and Krenitsky are entitled to accelerated vesting of certain outstanding and unvested equity awards held by them in certain circumstances. The information below describes certain compensation and equity acceleration that may become payable as a result of certain events. These payments and benefits are in addition to benefits available generally to salaried employees, including distributions under our 401(k) plan, accrued benefits under our health and welfare plans and arrangements, and accrued vacation pay. Outstanding equity awards for the named executive officers as of December 31, 2012 are set forth under “Outstanding Equity Awards at Fiscal Year End Table—2012.”

Involuntary Termination of Employment and Change of Control

Pursuant to his employment agreement, Dr. Pellini is eligible to receive certain payments and benefits in the event his employment is terminated by us without “cause” (as defined in his employment agreement) or he terminates his employment with “good reason” (as defined in his employment agreement). Pursuant to his employment agreement, each of Dr. Krenitsky and Dr. Miller is eligible to receive certain payments and benefits in the event his employment is terminated by us without “cause” (as defined in the pertinent employment agreement) or in the event that, following a deemed liquidation event or a change of control resulting in the payment of proceeds to our stockholders (a “change of control”), he terminates his employment with “good reason” (as defined in the employment agreements).

Dr. Pellini is eligible to receive 18 months of base salary continuation, pro-rated target bonus and 18 months of COBRA continuation medical benefits paid by us in the event of a termination by us without cause or by Dr. Pellini for good reason, provided that he executes and does not revoke a release agreement. Dr. Miller is eligible to receive 12 months of base salary continuation, pro-rated target bonus and 12 months of COBRA continuation medical benefits paid by us in the event of a termination by us without cause or by Dr. Miller for good reason, provided that he executes and does not revoke a release agreement. In addition, the options and restricted stock held by Dr. Pellini and Dr. Miller that would have become vested in the 12-month period following termination of employment would become vested. Dr. Krenitsky is eligible to receive nine months of base salary continuation (but subject to offset by compensation earned during the severance period) and up to nine months of COBRA continuation medical benefits subsidized by us in the event of a termination by us without cause or, following a change of control, by the officer for good reason, provided that he executes, not revokes and fully complies with a separation agreement that includes a general release of us and our affiliates.

In addition to the previously described severance provisions, pursuant to the terms of his employment agreement and the option award agreements with Dr. Pellini, in the event of a change in control, 100% of the unvested portion of his options would immediately become vested. Pursuant to

 

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the employment agreements with Dr. Krenitsky and Dr. Miller, in the event of a termination by us without cause, or by the officer for good reason, in each case following a change in control, 100% of the unvested portion of each of their options would immediately become vested.

Definitions

For purposes of the employment agreement with Dr. Pellini, “cause” means:

 

  Ÿ  

conviction of a felony;

 

  Ÿ  

willful failure to substantially perform (other than by reason of disability) the officer’s duties and responsibilities as set forth in, or determined in accordance with, the employment agreement that results in material harm to us, which failure continues, or which harm remains unremedied, after 10 days’ notice setting forth in reasonable detail the nature of such failure;

 

  Ÿ  

material breach of the officer’s employment agreement that results in material harm to us, which breach continues or remains uncured after 10 days’ notice setting forth in reasonable detail the nature of such breach; or

 

  Ÿ  

material fraudulent conduct by the officer with respect to us.

For purposes of the employment agreements with each of Dr. Pellini and Dr. Miller, “good reason” means:

 

  Ÿ  

a material diminution in the officer’s responsibilities, authority or duties;

 

  Ÿ  

a material diminution in the officer’s base salary, except for across-the-board salary reductions based on our financial performance similarly affecting all or substantially all of our senior management employees;

 

  Ÿ  

a material breach by us of the officer’s employment agreement or any of the agreements he has with us relating to his options or other types of our equity; or

 

  Ÿ  

for purposes of Dr. Miller’s employment agreement, his work location is located more than 50 miles from the office location at which Dr. Miller was working as of the effective date of the change in control.

For purposes of the employment agreements with each of Dr. Miller and Dr. Krenitsky, “cause” means:

 

  Ÿ  

conviction of, or the entry of a pleading of guilty or nolo contendere to, any crime involving (A) fraud or embezzlement, or (B) any felony;

 

  Ÿ  

willful failure to perform (other than by reason of disability), or gross negligence in the performance of, the officer’s duties and responsibilities as set forth in his job description;

 

  Ÿ  

material breach by the officer of any provision of his employment agreement or any of the other agreements he has with us, which breach continues or remains uncured after 30 days’ notice setting forth in reasonable detail the nature of such breach; or

 

  Ÿ  

material fraudulent conduct by the officer with respect to us.

For purposes of the employment agreement with Dr. Krenitsky, “good reason” means:

 

  Ÿ  

a change in title, responsibility and authority to a position less than his title, responsibility and authority as of the effective date of the change in control (by reference to his title, responsibility and authority within his business unit following a change in control, and not necessarily us as a whole);

 

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  Ÿ  

the officer’s work location is located more than 50 miles from the office location at which the officer was working as of the effective date of the change in control; or

 

  Ÿ  

a material breach by us of his employment agreement, his option agreements or any of the agreements he has with us relating to his employment, which breach continues or remains uncured after 30 days’ notice from the officer setting forth in reasonable detail the nature of such breach.

Outstanding Equity Awards at Fiscal Year-End Table—2012

The following table summarizes, for each of the named executive officers, the number of shares of common stock underlying outstanding stock options held as of December 31, 2012.

 

    Option Awards     Stock Awards  

Name

  Number of
securities
underlying
unexercised
options (#)
exercisable
    Number of
securities
underlying
unexercised
options (#)
unexercisable
    Option
exercise
price ($)
    Option
expiration
date
    Number
of
Shares
That
Have Not
Vested

(#)
    Market Value
of Shares or
Units of
Stock That
Have Not
Vested(1)

($)
 

Michael J. Pellini, M.D.

                                343,750 (2)      5,156,250   
    55,559        92,599 (3)      0.84        1/10/2022                 
           97,748 (4)      0.84        3/27/2022                 

Kevin Krenitsky, M.D.

                                85,937 (5)      1,289,055   
    4,687        20,313 (6)      0.84        3/27/2022                 

Vincent A. Miller, M.D.

                                77,343 (7)      1,160,145   
    4,687        20,313 (8)      0.84        1/10/2022                 
           25,000 (9)      0.84        1/10/2022                 

 

(1) There was no public market for our common stock at December 31, 2012. We have estimated the market value of the unvested stock awards based on an assumed initial public offering price of $15.00 per share, the midpoint of the range listed on the cover of this prospectus.
(2) On May 9, 2011, Dr. Pellini was granted an option for 550,000 shares of our common stock, 25% of such option to vest on May 9, 2012, and the remaining unvested shares to vest in equal quarterly installments through May 9, 2015. Pursuant to the terms of his option agreement, Dr. Pellini early exercised his option on May 12, 2011. Pursuant to the terms of Dr. Pellini’s corresponding restricted stock agreement, the remaining unvested shares will vest in equal quarterly installments through May 9, 2015. Vesting of 25% of the restricted shares subject to the agreement accelerates in connection with an IPO and the remaining shares accelerate in connection with an acquisition event.
(3) Represents options to purchase shares of our common stock granted on January 11, 2012. The shares underlying these options vest as follows: 25% vest on May 9, 2012, with the remainder of the shares vesting in equal quarterly installments over the following three years through May 9, 2015. Vesting of 25% of the options subject to the stock option agreement, to the extent unvested, accelerate in connection with an IPO and the remaining then unvested options will accelerate in connection with an acquisition event.
(4) Represents options to purchase shares of our common stock granted on March 27, 2012. The shares underlying these options vest as follows: 25% vest on March 27, 2013, with the remainder of the shares vesting in equal quarterly installments over the following three years through March 27, 2016.
(5)

On June 15, 2011, Dr. Krenitsky was granted an option for 137,500 shares of our common stock, 25% of such option to vest on May 31, 2012, and the remaining unvested shares to vest in equal quarterly installments through May 31, 2015. Pursuant to the terms of his option agreement, Dr. Krenitsky early exercised his option on August 4, 2011. Under the terms of Dr. Krenitsky’s

 

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corresponding restricted stock agreement, the remaining unvested shares will vest in equal quarterly installments through May 31, 2015.

(6) Represents options to purchase shares of our common stock granted on March 27, 2012. The shares underlying these options vest in equal quarterly installments over four years through March 27, 2016.
(7) Pursuant to the terms of Dr. Miller’s restricted stock agreement, the remaining unvested shares will vest in equal quarterly installments through October 15, 2015.
(8) Represents options to purchase shares of our common stock granted on January 11, 2012. The shares underlying these options vest in equal quarterly installments over four years through October 17, 2015.
(9) Represents options to purchase shares of our common stock granted on January 11, 2012. The shares underlying these options will commence vesting on December 31, 2013 and thereafter vest in quarterly installments through October 17, 2015.

Director Compensation

The following table presents the total compensation for each person who served as a member of our board of directors during 2012, other than Dr. Pellini. Other than as set forth in the table and described more fully below, we did not pay any compensation, make any equity awards or non-equity awards to, or pay any other compensation to any of the non-employee members of our board of directors in 2012. Dr. Pellini, who is also our Chief Executive Officer, receives no compensation for his service as a director, and, consequently, is not included in this table. The compensation received by Dr. Pellini as our Chief Executive Officer during 2012 is presented in “Summary Compensation Table—2012.” Mr. Jones, a current member of the Board, was elected in 2013 and is not included in the following table.

In 2012, we did not maintain any standard fee arrangements for the non-employee members of our board of directors for their service as a director. We intend to put in place a formal director compensation policy for all of our non-employee directors prior to the completion of this offering.

Director Compensation Table—2012

 

Director name

   Fees earned or
paid in  cash
($)
    Option awards
($)
     All other
compensation

($)
     Total
($)
 

Alexis Borisy

                              

Brook Byers

                              

Mark Levin

                              

David Schenkein, M.D.

   $ 35,000 (1)                     $ 35,000 (1)  

Krishna Yeshwant, M.D.

                              

 

(1) Dr. Schenkein received payments for service as a director pursuant to a board service agreement.

 

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Our board of directors has adopted a non-employee director compensation policy, effective as of the closing of this offering, that is designed to provide a total compensation package that enables us to attract and retain, on a long-term basis, high caliber non-employee directors. Under the policy, all non-employee directors will be paid cash compensation from and after the completion of this offering, as set forth below:

 

 

     Annual Retainer  

Board of Directors:

  

All non-employee members

   $ 35,000   

Additional retainer for Board Chairperson

   $ 50,000   

Audit Committee:

  

Chairperson

   $ 15,000   

Non-Chairperson members

   $ 7,500   

Compensation Committee:

  

Chairperson

   $ 10,000   

Non-Chairperson members

   $ 5,000   

Nominating and Corporate Governance Committee:

  

Chairperson

   $ 10,000   

Non-Chairperson members

   $ 5,000   

Under the non-employee director compensation policy, each person who is initially appointed or elected to the board of directors will be eligible for an option grant to purchase up to 26,771 shares of our common stock under our 2013 Plan on the date he or she first becomes a non-employee director, which will vest in two equal annual installments during the two years following the grant date, subject to the director’s continued service on the board of directors. In addition, on the date of the annual meeting of stockholders, each continuing non-employee director will be eligible to receive an annual option grant to purchase up to 13,385 shares of our common stock, which will vest in full upon the earlier of the first anniversary of the date of grant or the date of the following annual meeting of stockholders. All of the foregoing options will be granted at fair market value on the date of grant.

Compensation Risk Assessment

We believe that although a portion of the compensation provided to our executive officers and other employees is performance-based, our executive compensation program does not encourage excessive or unnecessary risk taking. This is primarily due to the fact that our compensation programs are designed to encourage our executive officers and other employees to recognize and support both short-term and long-term strategic goals, in particular in connection with our pay-for-performance compensation philosophy. As a result, we do not believe that our compensation programs are reasonably likely to have a material adverse effect on us.

Employee Share Plans

Share Options

The two equity incentive plans described in this section are the Foundation Medicine, Inc. Amended and Restated 2010 Stock Incentive Plan, or the 2010 Plan, and the Foundation Medicine, Inc. 2013 Stock Option and Grant Plan, or the 2013 Plan. Prior to this offering, we granted awards to eligible participants under the 2010 Plan. Following the closing of this offering, we expect to grant awards to eligible participants only under the 2013 Plan. In addition, our Senior Executive Cash Incentive Bonus Plan, or the Bonus Plan, which will be used following completion of this offering, is described below.

 

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2010 Plan

The 2010 Plan was approved by our board of directors and our stockholders on March 29, 2010 and was most recently amended on March 7, 2013. Under the 2010 Plan, 4,232,500 shares of common stock have been reserved for issuance in the form of stock options, restricted stock, restricted stock units and other stock-based awards.

The shares issuable pursuant to awards granted under the 2010 Plan are authorized but unissued shares. The shares underlying any awards that are forfeited, repurchased terminated, surrendered or cancelled without having been exercised are available for issuance under the 2010 Plan. Shares tendered by a participant to exercise options are also added to the number of shares available for issuance under the 2010 Plan.

The 2010 Plan is administered by our board of directors, which has full power to select the employees, prospective employees, directors and service providers to whom awards will be granted and to determine the specific terms and conditions of each award, subject to the provisions of the 2010 Plan.

The option exercise price of each option granted under the 2010 Plan is determined by our board of directors and may not to be less than the fair market value of a share of common stock on the date of grant. The term of each option is fixed by the board of directors. The board of directors determines at what time or times each option may be exercised when granting the option.

The board of directors may grant awards under the 2010 Plan entitling the participants to acquire shares of common stock subject to the right of repurchase (or forfeiture if issued at no cost) in the event the conditions specified by the board of directors in connection with the awards are not met. The board of directors may also grant awards of restricted stock units under the 2010 Plan entitling the participants to receive shares of common stock or cash at the time the awards vest.

The board of directors may also grant other stock-based awards under the 2010 Plan such as stock appreciation rights and other types of awards which entitle the participants to receive shares of common stock or cash in the future.

The 2010 Plan provides that, upon a reorganization event, which includes a merger or a sale of substantially all of our common stock, the board of directors may take any one or a combination of the following actions with respect to outstanding awards other than restricted stock and restricted stock units: (i) require that awards be substituted with new awards of the successor entity on substantially identical terms; (ii) provide for a cash payment equal to the in-the-money value of the awards; (iii) provide for full vesting of the awards; or (iv) provide that all awards not exercised within a specified period will terminate upon the closing of the transaction. In the case of restricted stock awards and restricted stock units, unless the board of directors determines otherwise in connection with a reorganization event, the repurchase and other rights of ours with respect to restricted stock and restricted stock units shall inure to the benefit of our successors and shall apply to the cash, securities or other property paid with respect to the common stock in connection with the reorganization.

Our board of directors may amend the 2010 Plan but no such action may adversely affect the rights of an award holder without such holder’s consent. Approval by our stockholders of amendments to the 2010 Plan must be obtained if required by law.

As of August 31, 2013, options to purchase 2,150,117 shares of common stock and 608,108 shares of restricted stock were outstanding under the 2010 Plan. Our board of directors has determined not to make any further awards under the 2010 Plan following the closing of this offering. Shares of common stock originally reserved for issuance under our 2010 Plan but which were not issued or subject to awards under the 2010 Plan on the effective date of our 2013 Plan, and shares

 

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subject to outstanding options or forfeiture restrictions under our 2010 Plan on the effective date of our 2013 Plan that are subsequently forfeited or terminated for any reason before being exercised, will become available for awards under our 2013 Plan.

2013 Plan

In September 2013, our board of directors adopted and our stockholders approved our 2013 Plan to replace the 2010 Plan. Our 2013 Plan provides us flexibility to use various equity-based incentive and other awards as compensation tools to motivate our workforce. These tools include stock options, stock appreciation rights, restricted stock, restricted stock units, unrestricted stock, performance share awards and cash-based awards. The 2013 Plan will become effective immediately prior to the closing of this offering.

We have initially reserved 1,355,171 shares of common stock for the issuance of awards under the 2013 Plan, which includes 512,568 shares of common stock reserved for issuance under the 2010 Plan. The 2013 Plan provides that the number of shares reserved and available for issuance will automatically increase each January 1, beginning on January 1, 2014, by 4% of the outstanding number of shares of our common stock on the immediately preceding December 31 or such lesser number as determined by our compensation committee. This number is subject to adjustment in the event of a stock split, stock dividend or other change in our capitalization. In addition, shares not needed to fulfill any obligations under the 2010 Plan will also be available for issuance under the 2013 Plan.

The shares issuable pursuant to awards granted under the 2013 Plan will be authorized but unissued shares or shares that we reacquire. The shares of common stock underlying any awards from the 2013 Plan and the 2010 Plan that are forfeited, cancelled, held back upon exercise or settlement of an award to satisfy the exercise price or tax withholding, reacquired by us prior to vesting, satisfied without any issuance of common stock, expire or are otherwise terminated (other than by exercise) under the 2010 Plan will be added back to the shares available for issuance under the 2013 Plan.

Under the 2013 Plan, stock options or stock appreciation rights with respect to no more than 1,355,171 shares may be granted to any one individual in any one calendar year. No more than the initial number of shares reserved and available for issuance under the 2013 Plan may be issued in the form of incentive stock options, such number to be cumulatively increased on January 1, 2014 and on each January 1 thereafter by the lesser of 4% of the outstanding number of shares of our common stock on the immediately preceding December 31 and 2,102,676 shares of our common stock.

The 2013 Plan is administered by the compensation committee. The compensation committee has full power to select, from among the individuals eligible for awards, the individuals to whom awards will be granted, to make any combination of awards to participants, and to determine the specific terms and conditions of each award, subject to the provisions of the 2013 Plan. Employees, non-employee directors and other key persons (including consultants) are eligible to receive awards under the 2013 Plan.

The 2013 Plan permits the granting of both options to purchase common stock intended to qualify as incentive stock options under Section 422 of the Code and options that do not so qualify. The exercise price of each stock option will be determined by the compensation committee but may not be less than 100% of the fair market value of our common stock on the date of grant or, in the case of an incentive stock option granted to a 10% owner, less than 110% of the fair market value of our common stock on the date of grant. The term of each stock option will be fixed by the compensation committee and may not exceed 10 years from the date of grant (or five years in the case of an incentive stock option granted to a 10% owner). The compensation committee will determine at what time or times each option may be exercised.

 

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The compensation committee may award stock appreciation rights subject to such conditions and restrictions as it may determine. Stock appreciation rights entitle the recipient to shares of common stock, or cash, equal to the value of the appreciation in our stock price over the exercise price. The exercise price of each stock appreciation right may not be less than 100% of fair market value of the common stock on the date of grant.

The compensation committee may award restricted stock or restricted stock units to participants subject to such conditions and restrictions as it may determine. These conditions and restrictions may include the achievement of certain performance goals and/or continued employment or service with us through a specified vesting period. The compensation committee may also grant cash-based awards to participants subject to such conditions and restrictions as it may determine. The compensation committee may also grant shares of common stock that are free from any restrictions under the 2013 Plan. Unrestricted stock may be granted to participants in recognition of past services or for other valid consideration and may be issued in lieu of cash compensation due to such participant.

The compensation committee may grant performance share awards to participants that entitle the recipient to receive share awards of common stock upon the achievement of certain performance goals and such other conditions as our compensation committee shall determine.

The compensation committee may grant cash bonuses under the 2013 Plan to participants, subject to the achievement of certain performance goals.

The compensation committee may grant performance-based awards to participants in the form of restricted stock, restricted stock units, performance shares or cash-based awards upon the achievement of certain performance goals and such other conditions as the compensation committee shall determine. The compensation committee may grant such performance-based awards under the 2013 Plan that are intended to qualify as “performance-based compensation” under Section 162(m) of the Code. Those awards would only vest or become payable upon the attainment of performance goals that are established by our compensation committee and related to one or more performance criteria. The performance criteria that could be used with respect to any such awards include: revenue, expense levels, cash flow, business development and financing milestones and developments, earnings before interest, taxes, depreciation and amortization, net income (loss) (either before or after interest, taxes, depreciation and/or amortization), changes in the market price of our common stock, economic value-added, funds from operations or similar measure, sales or revenue, acquisitions or strategic transactions, operating income (loss), cash flow (including, but not limited to, operating cash flow and free cash flow), return on capital, assets, equity, or investment, stockholder returns, return on sales, gross or net profit levels, productivity, expense, margins, operating efficiency, customer satisfaction, working capital, earnings (loss) per share, sales or market shares and number of clients, any of which may be measured either in absolute terms or as compared to any incremental increase or as compared to results of a peer group. From and after the time that we become subject to Section 162(m) of the Code, the maximum award that is intended to qualify as “performance-based compensation” under Section 162(m) of the Code that may be made to any one employee during any one calendar year period is 1,100,000 shares with respect to a stock-based award and $2,000,000 with respect to a cash-based award.

The 2013 Plan provides that, upon the effectiveness of a “sale event,” as defined in the 2013 Plan, in the event that all awards are not assumed or continued or substituted by the successor entity, all awards granted under the 2013 Plan shall terminate. In addition, in connection with the termination of the 2013 Plan upon a sale event, we may make or provide for a cash payment to participants holding options and stock appreciation rights, equal to the difference between the per share cash consideration payable to stockholders in the sale event and the exercise price of the options or stock appreciation rights.

 

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Our board of directors may amend or discontinue the 2013 Plan and our compensation committee may amend or cancel outstanding awards for purposes of satisfying changes in law or any other lawful purpose, including option repricing, but no such action may adversely affect rights under an award without the holder’s consent. Certain amendments to the 2013 Plan may require the approval of our stockholders.

No awards may be granted under the 2013 Plan after the date that is ten years from the date of stockholder approval of the 2013 Plan. Our board of directors has approved the issuance under the 2013 Plan of stock options to acquire an aggregate of 86,972 shares of common stock on the effective date of the registration statement of which this prospectus is a part. These stock options will have an exercise price equal to the public offering price. No other awards under the 2013 Plan have been made prior to the date hereof.

2013 Employee Stock Purchase Plan

Our 2013 Employee Stock Purchase Plan was adopted by our board of directors and approved by our stockholders in September 2013. Our 2013 Employee Stock Purchase Plan authorizes the initial issuance of up to a total of 788,503 shares of our common stock to participating employees.

All employees who have been employed by us or our designated subsidiaries for at least six weeks and whose customary employment is for more than 20 hours a week are eligible to participate in our 2013 Employee Stock Purchase Plan. Any employee who owns, or would own upon such purchase under our 2013 Employee Stock Purchase Plan, 5% or more of the voting power or value of our stock is not eligible to purchase shares under our 2013 Employee Stock Purchase Plan.

We may make one or more offerings to our employees to purchase stock under our 2013 Employee Stock Purchase Plan. If the 2013 Employee Stock Purchase Plan is implemented and unless otherwise determined by the administrator of our 2013 Employee Stock Purchase Plan, the first offering will begin on either January 1st or July 1st of the year designated by the administrator, and will end on the following June 30th or December 31st, respectively. Unless otherwise determined by the administrator, subsequent offerings will begin on the first business day occurring on or after each January 1st and July 1st and will end on the last business day occurring on or before the following June 30th and December 31st, respectively, each referred to as offering periods. The administrator may designate different offering periods in its discretion, but no offering shall exceed six months in duration or overlap with another offering.

Each employee who is a participant in our 2013 Employee Stock Purchase Plan may purchase shares by authorizing payroll deductions of up to 10% of his or her eligible compensation during an offering period. Unless the participating employee has previously withdrawn from the offering, his or her accumulated payroll deductions will be used to purchase common stock on the last business day of the offering period at a price equal to 85% of the fair market value of the common stock on the first business day or the last business day of the offering period, whichever is lower, provided that no more than the number of shares of common stock that would result in an employee owning stock possessing 5% or more of the total voting power of all classes of our stock or such other maximum number established by the compensation committee may be purchased by any one employee during each offering period. Under applicable tax rules, an employee may purchase no more than $25,000 worth of common stock, valued at the start of the purchase period, under our 2013 Employee Stock Purchase Plan in any calendar year.

An employee’s rights under our 2013 Employee Stock Purchase Plan terminate upon voluntary withdrawal from the plan or when the employee ceases employment for any reason and any accumulated payroll deductions of such employee will be refunded.

 

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Our 2013 Employee Stock Purchase Plan may be terminated or amended by our board of directors at any time. Amendments that increase the number of shares of our common stock authorized under our 2013 Employee Stock Purchase Plan and certain other amendments require the approval of our stockholders.

Bonus Plan

In July 2013, our board of directors adopted the Bonus Plan. The Bonus Plan provides for cash bonus payments based upon the attainment of performance targets established by the compensation committee. The payment targets will be related to financial and operational measures or objectives with respect to us, or Corporate Performance Goals, as well as individual performance objectives.

Our compensation committee may select Corporate Performance Goals from among the following: revenue; expense levels; cash flow (including, but not limited to, operating cash flow and free cash flow); business development and financing milestones; earnings before interest, taxes, depreciation and amortization; net income (loss) (either before or after interest, taxes, depreciation and/or amortization); changes in the market price of our common stock; economic value-added; sales; acquisitions or strategic transactions; operating income (loss); return on capital, assets, equity, or investment; stockholder returns; return on sales; gross or net profit levels; productivity; expense; margins; operating efficiency; customer satisfaction; clinical trial results; publications; reimbursement decisions; working capital; earnings (loss) per share of our common stock; sales or market shares and number of clients or units of products sold; bookings; and Adjusted EBIDTA, any of which may be measured in absolute terms, as compared to any incremental increase, in terms of growth, or as compared to results of a peer group.

Each executive officer who is selected to participate in the Bonus Plan will have a target bonus opportunity set for each performance period. The bonus formulas will be adopted in each performance period by the compensation committee and communicated to each executive. The Corporate Performance Goals will be measured at the end of each performance period after our financial reports have been published or such other appropriate time as the compensation committee determines. If the Corporate Performance Goals and individual performance objectives are met, payments will be made as soon as practicable following the end of each performance period. Subject to the rights contained in any agreement between the executive officer and us, an executive officer must be employed by us on the bonus payment date to be eligible to receive a bonus payment. The Bonus Plan also permits the compensation committee to approve additional bonuses to executive officers in its sole discretion.

401(k) Plan

We maintain a tax-qualified retirement plan that provides eligible employees in the United States with an opportunity to save for retirement on a tax-advantaged basis. All participants’ interests in their contributions are 100% vested when contributed. Pre-tax contributions are allocated to each participant’s individual account and are then invested in selected investment alternatives according to the participants’ directions. The retirement plan is intended to qualify under Sections 401(a) and 501(a) of the Code.

 

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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

Other than compensation arrangements, we describe below the transactions and series of similar transactions, during our last three fiscal years, to which we were a party or will be a party, in which:

 

  Ÿ  

the amounts involved exceeded or will exceed $120,000; and

 

  Ÿ  

any of our directors, executive officers or holders of more than 5% of our capital stock, or any member of the immediate family of the foregoing persons, had or will have a direct or indirect material interest.

Compensation arrangements for our directors and named executive officers are described elsewhere in this prospectus.

Sales and Purchases of Securities

Series A Financing

On March 30, 2010, we entered into a securities purchase agreement pursuant to which we issued an aggregate of 13,000,000 shares of our Series A Preferred Stock at a price of $1.00 per share in three tranches to certain investors. On August 8, 2011, we entered into an additional securities purchase agreement pursuant to which we issued an aggregate of 20,500,000 shares of our Series A Preferred Stock at a price of $1.00 per share in two tranches to certain investors. On April 18, 2012, we entered into a securities purchase agreement pursuant to which we issued an aggregate of 10,250,000 shares of our Series A Preferred Stock at a price of $1.00 per share to certain investors.

The following table summarizes the participation in the Series A Preferred Stock financing by any of our directors, executive officers, holders of more than 5% of our voting securities, or any member of the immediate family of the foregoing persons.

 

Name

   Shares of
Series A
Preferred Stock
     Aggregate
Purchase Price
Paid
 

Third Rock Ventures, L.P.(1)

     23,772,388       $ 23,772,388   

KPCB Holdings, Inc.(2)

     12,985,075       $ 12,985,075   

Google Ventures 2011, L.P.(3)

     6,742,537       $ 6,742,537   

David Schenkein, M.D.(4)

     250,000       $ 250,000   

 

(1) Alexis Borisy and Mark Levin, partners at Third Rock Ventures, of which Third Rock Ventures, L.P. is an affiliated fund, are members of our board of directors.
(2) Brook Byers, a partner at Kleiner Perkins Caufield & Byers, of which KPCB Holdings, Inc. is an affiliated fund, is a member of our board of directors.
(3) Google Ventures 2011, L.P. is a holder of more than 5% of our voting securities. Dr. Krishna Yeshwant, an affiliate of Google Ventures 2011, L.P., is a member of our board of directors.
(4) David Schenkein is a member of our board of directors.

Series B Financing

On September 10, 2012, we entered into a securities purchase agreement pursuant to which we issued an aggregate of 18,805,304 shares of our Series B Preferred Stock at a price of $2.26 per share to certain investors. The securities purchase agreement was subsequently amended in December 2012 to provide for the issuance of additional shares of our Series B Preferred Stock in one additional tranche, pursuant to which 5,956,830 shares of our Series B Preferred Stock were issued to certain investors.

 

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The following table summarizes the participation in the Series B Preferred Stock financing by any of our directors, executive officers, holders of more than 5% of our voting securities, or any member of the immediate family of the foregoing persons.

 

Name

   Shares of
Series B
Preferred Stock
     Aggregate
Purchase
Price Paid
 

Third Rock Ventures, L.P.(1)

     1,106,194       $ 2,499,998   

Google Ventures 2011, L.P.(2)

     3,036,075       $ 6,861,530   

KPCB Holdings, Inc.(3)

     1,106,194       $ 2,499,998   

jVen Capital, LLC(4)

     221,238       $ 499,998   

Laboratory Corporation of America Holdings

     4,424,778       $ 9,999,998   

Gates Ventures, LLC

     4,424,778       $ 9,999,998   

Wellington Management Company, LLP(5)

     4,368,143       $ 9,872,003   

 

(1) Alexis Borisy and Mark Levin, partners at Third Rock Ventures, of which Third Rock Ventures, L.P. is an affiliated fund, are members of our board of directors.
(2) Google Ventures 2011, L.P. is a holder of more than 5% of our voting securities. Dr. Krishna Yeshwant, an affiliate of Google Ventures 2011, L.P., is a member of our board of directors.
(3) Brook Byers, a partner at Kleiner Perkins Caufield & Byers, of which KPCB Holdings, Inc. is an affiliated fund, is a member of our board of directors.
(4) Evan Jones, the managing member of jVen Capital, LLC, is a member of our board of directors.
(5) Wellington Management Company, LLP, or Wellington Management, is an investment adviser registered under the Investment Advisers Act of 1940, as amended. Wellington Management, in such capacity, may be deemed to share beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of the shares held by its client accounts.

Consulting Arrangements

During the fiscal years ended December 31, 2010, 2011 and 2012, we incurred consulting fees to Third Rock Ventures, LLC in the amount of $691,000, $535,000 and $362,000, respectively. Third Rock Ventures, LLC is a management company that is party to a services agreement with Third Rock Ventures, L.P., the beneficial owner of more than 5% of our voting securities. Alexis Borisy and Mark Levin are members of our board of directors, and Mark Levin is a managing member of TRV GP, LLC, which is the general partner of Third Rock Ventures GP, L.P., the general partner of Third Rock Ventures, L.P. and a managing member of Third Rock Ventures, LLC. These consulting fees were paid to Third Rock Ventures, LLC in amounts mutually agreed upon in advance by us and Third Rock Ventures, LLC in consideration of certain strategic and ordinary course business operations consulting services provided to us on an as-needed basis, from time to time and at our request, by individuals related to Third Rock Ventures, LLC, including Mr. Borisy but not including Mr. Levin. Such fees were payable pursuant to invoices submitted to us by Third Rock Ventures, LLC from time to time. None of these consulting fees were paid directly or indirectly to Messrs. Borisy and Levin. The consulting fees paid to Third Rock Ventures, LLC did not exceed 5% of the consolidated gross revenue of Third Rock Ventures, LLC during any of these fiscal years. We are not currently party to a consulting agreement with Third Rock Ventures, LLC and we do not expect to engage Third Rock Ventures, LLC for consulting services on a going forward basis.

 

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Biopharmaceutical Relationship

In February 2013, we entered into a master services agreement with Agios Pharmaceuticals, Inc., or Agios, in the ordinary course pursuant to which we will perform tests utilizing our molecular information platform when ordered by Agios. To date, we have not performed any tests for Agios, invoiced Agios or otherwise received any payments from Agios under the master services agreement. In the event Agios elects to retain our services for a particular project, Agios would submit a specific work order for the applicable project, with a payment schedule for the particular project included in such work order. In the event we are asked to perform services beyond what is included in the applicable work order, such additional services and the corresponding compensation provided by Agios must be mutually agreed upon by the parties in writing prior to the provision of such services or our obligation to provide such services. Any payments for services will be made pursuant to invoices that we will submit to Agios. The agreement terminates at the later of February 28, 2015 and the completion of all services provided pursuant to outstanding work orders. We may terminate the agreement in the event Agios fails to pay a disputed invoice, following a negotiation between the parties in good faith. The agreement also contains customary confidentiality, indemnification, insurance and assignment provisions. David Schenkein, a member of our board of directors, is the chief executive officer of Agios. These fees will be paid by Agios in consideration of certain sequencing and related consulting services provided by us to Agios. Under the master services agreement, none of these fees will be paid directly or indirectly by Mr. Schenkein.

Indemnification Agreements

We intend to enter into agreements to indemnify our directors and executive officers to the maximum extent allowed under Delaware law. Subject to the provisions of these agreements, these agreements will, among other things, indemnify these individuals for certain expenses (including attorneys’ fees), judgments, fines and settlement amounts reasonably incurred by such person in any action or proceeding, including any action by or in our right, on account of any services undertaken by such person on behalf of us or that person’s status as a member of our board of directors.

Policies for Approval of Related Party Transactions

Our board of directors reviews and approves transactions with directors, officers and holders of 5% or more of our voting securities and their affiliates, or each, a related party. Prior to this offering, the material facts as to the related party’s relationship or interest in the transaction are disclosed to our board of directors prior to their consideration of such transaction, and the transaction is not considered approved by our board of directors unless a majority of the directors who are not interested in the transaction approve the transaction. Further, when stockholders are entitled to vote on a transaction with a related party, the material facts of the related party’s relationship or interest in the transaction are disclosed to the stockholders, who must approve the transaction in good faith.

In connection with this offering, we intend to adopt a written related party transactions policy that such transactions must be approved by our audit committee or another independent body of our board of directors.

 

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PRINCIPAL STOCKHOLDERS

The following table and footnotes set forth certain information known to us regarding beneficial ownership of our capital stock as of August 31, 2013, as adjusted to reflect the sale of common stock offered by us in this offering, for:

 

  Ÿ  

each person known by us to be the beneficial owner of more than 5% of our capital stock;

 

  Ÿ  

our named executive officers;

 

  Ÿ  

each of our directors; and

 

  Ÿ  

all executive officers and directors as a group.

Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Except as noted by footnote, and subject to community property laws where applicable, we believe based on the information provided to us that the persons and entities named in the table below have sole voting and investment power with respect to all common stock shown as beneficially owned by them.

The table lists applicable percentage ownership based on 21,283,454 shares of common stock outstanding as of August 31, 2013 and also lists applicable percentage ownership based on 26,283,454 shares of common stock assumed to be outstanding after the closing of the offering. These amounts assume the conversion of all outstanding shares of our preferred stock into common stock, which will occur immediately prior to the closing of this offering, and that no shares of our common stock are purchased by our directors or executive officers or by the beneficial owners of more than 5% of our capital stock in the offering. Options to purchase shares of common stock that are exercisable within 60 days of August 31, 2013 are deemed to be beneficially owned by the persons holding these options for the purpose of computing percentage ownership of that person, but are not treated as outstanding for the purpose of computing any other person’s ownership percentage.

 

     Number of
Shares
Beneficially

Owned
Prior to
this
Offering
     Percentage of Shares
Beneficially Owned
 

Name and address of beneficial owner(1)

     

Prior to this
Offering

   

After this
Offering

 

5% Stockholders

       

Third Rock Ventures, L.P.(2)

     6,569,645         30.9     25.0

KPCB Holdings, Inc.(3)

     3,522,817         16.6     13.4

Google Ventures 2011, L.P.(4)

     2,444,653         11.5     9.3

Laboratory Corporation of America Holdings(5)

     1,106,194         5.2     4.2

Gates Ventures, LLC (6)

     1,106,194         5.2     4.2

Wellington Management Company, LLP(7)

     1,092,034         5.1     4.2

Named executive officers and directors

       

Michael J. Pellini, M.D.(8)

     669,353         3.2     2.5

Kevin Krenitsky, M.D.(9)

     146,093         *        *   

Vincent A. Miller, M.D.(10)

     142,968         *        *   

Alexis Borisy(11)

     290,625         1.4     1.1

Brook Byers(3)

                      

Evan Jones(12)

     57,408         *        *   

Mark Levin(11)

                      

David Schenkein, M.D.(13)

     94,297         *        *   

Krishna Yeshwant, M.D.(4)

                      

All directors and named executive officers as a group (9 persons)

     1,400,744         6.6     5.3

 

* Represents beneficial ownership of less than one percent.
(1) Unless otherwise indicated, the address for each beneficial owner is c/o Foundation Medicine, Inc., One Kendall Square, Suite B3501, Cambridge, MA 02139.

 

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(2) Consists of 5,943,097 shares common stock issuable upon conversion of Series A Preferred Stock, 276,548 shares common stock issuable upon conversion of Series B Preferred Stock and 350,000 shares of common stock. All shares are held directly by Third Rock Ventures, L.P., or TRV LP. Each of Third Rock Ventures GP, LP, or TRV GP, the general partner of TRV LP, and Third Rock Ventures GP, LLC, or TRV LLC, the general partner of TRV GP, may be deemed to have voting and dispositive power over the shares held by TRV LP. Investment decisions with respect to the shares held by TRV LP are made by an investment committee at TRV GP comprised of Mark Levin, Kevin Starr, Bob Tepper, Neil Exter, Kevin Gillis, Lou Tartaglia, Craig Muir, Cary Pfeffer, Alexis Borisy and Craig Greaves. No stockholder, director, officer, manager, member or employee of TRV GP or TRV LLC has beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of any shares held by TRV LP. The address of Third Rock Ventures, L.P. is 29 Newbury Street, 3rd Floor, Boston, MA 02116.
(3) Consists of (i) 2,993,060 shares common stock issuable upon conversion of Series A Preferred Stock and 254,978 shares common stock issuable upon conversion of Series B Preferred Stock held by Kleiner Perkins Caufield & Byers XIV, LLC, or KPCB XIV, and (ii) 253,209 shares common stock issuable upon conversion of Series A Preferred Stock and 21,571 shares common stock issuable upon conversion of Series B Preferred Stock held by KPCB XIV Founders Fund, LLC, or KPCB XIV Founders. The shares held by KPCB XIV and KPCB XIV Founders are held for convenience in the name of “KPCB Holdings, Inc., as nominee.” KPCB Holdings, Inc. has no voting, dispositive or pecuniary interest in any such shares. The managing member of KPCB XIV and KPCB XIV Founders is KPCB XIV Associates, LLC, or KPCB XIV Associates. Brook Byers, L. John Doerr, Raymond Lane, Theodore Schlein, William Joy, William B. Gordon, the managing members of KPCB XIV Associates, exercise shared voting and dispositive control over the shares directly held by KPCB XIV and KPCB XIV Founders. Mr. Byers disclaims beneficial ownership of all shares held by KPCB XIV and KPCB XIV Founders except to the extent of his pecuniary interest therein. The address for all entities and individuals affiliated with Kleiner Perkins Caufield & Byers is 2750 Sand Hill Road, Menlo Park, California 94025.
(4) Consists of 1,685,635 shares common stock issuable upon conversion of Series A Preferred Stock and 759,018 shares common stock issuable upon conversion of Series B Preferred Stock. Google Ventures 2011 GP, L.L.C. is the general partner of Google Ventures 2011, L.P. Voting and dispositive power with respect to shares held by Google Ventures 2011, L.P. reside with the Google Ventures Investment Committee. Dr. Krishna Yeshwant is an affiliate of Google Ventures 2011, L.P., but is not a member of the Google Ventures Investment Committee and does not have voting or dispositive power over the shares held by Google Ventures 2011, L.P. Dr. Yeshwant disclaims beneficial ownership with respect to any such shares, except to the extent of his pecuniary interest therein, if any. The address for all entities and individuals affiliated with Google Ventures 2011, L.P. is 1600 Amphitheatre Parkway, Mountain View, California 94043.
(5) Consists of 1,106,194 shares common stock issuable upon conversion of Series B Preferred Stock. The address of Laboratory Corporation of America Holdings is 531 South Spring Street, Burlington, North Carolina 27215.
(6) Consists of 1,106,194 shares common stock issuable upon conversion of Series B Preferred Stock. William H. Gates III has voting and dispositive power over the shares held by Gates Ventures, LLC. The address of Gates Ventures, LLC is 2365 Carillon Point, Kirkland, Washington 98033.
(7) Wellington Management is an investment adviser registered under the Investment Advisers Act of 1940, as amended. Wellington Management, in such capacity, may be deemed to share beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of the shares held by its client accounts, which consist of (i) 305,836 shares common stock issuable upon conversion of Series B Preferred Stock held by Quissett Investors (Bermuda) L.P., or Quissett Investors, (ii) 280,973 shares common stock issuable upon conversion of Series B Preferred Stock held by Hawkes Bay Master Investors (Cayman) LP, or Hawkes Bay, (iii) 240,845 shares common stock issuable upon conversion of Series B Preferred Stock held by Quissett Partners, L.P., or Quissett Partners, (iv) 150,564 shares common stock issuable upon conversion of Series B Preferred Stock held by Salthill Partners, L.P., or Salthill Partners, and (v) 113,816 shares common stock issuable upon conversion of Series B Preferred Stock held by Salthill Investors (Bermuda) L.P., or Salthill Investors. Wellington Management Company, LLP is the investment advisor for Quissett Investors, Hawkes Bay, Quissett Partners, Salthill Partners and Salthill Investors. The address for all entities and individuals affiliated with Wellington Management Company, LLP is c/o Wellington Management Company, LLP, 280 Congress Street, Boston, MA 02210.
(8) Includes options to purchase 119,353 shares exercisable within 60 days of August 31, 2013.
(9) Includes options to purchase 8,593 shares exercisable within 60 days of August 31, 2013.
(10) Includes options to purchase 5,468 shares exercisable within 60 days of August 31, 2013.
(11) Represents shares held individually by the director. Investment decisions with respect to the shares held by TRV LP are made by an investment committee at TRV GP comprised of Mark Levin, Kevin Starr, Bob Tepper, Neil Exter, Kevin Gillis, Lou Tartaglia, Craig Muir, Cary Pfeffer, Alexis Borisy and Craig Greaves. No stockholder, director, officer, manager, member or employee of TRV GP or TRV LLC has beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of any shares held by TRV LP.
(12) Consists of (i) 55,309 shares common stock issuable upon conversion of Series B Preferred Stock held by jVen Capital, LLC and (ii) options to purchase 2,109 shares exercisable within 60 days of August 31, 2013. Evan Jones is the managing member of jVen Capital, LLC.
(13) Consists of (i) options to purchase 546 shares exercisable within 60 days of August 31, 2013 and (ii) 62,500 shares common stock issuable upon conversion of Series A Preferred Stock held in trusts for the benefit of Dr. Schenkein and certain of his family members. Dr. Schenkein has voting and dispositive power over the shares held by such trusts.

 

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DESCRIPTION OF CAPITAL STOCK

The following descriptions are summaries of the material terms of our amended and restated certificate of incorporation and amended and restated bylaws, which will be effective upon closing of this offering. The descriptions of the common stock and preferred stock give effect to changes to our capital structure that will occur immediately prior to the closing of this offering. We refer in this section to our amended and restated certificate of incorporation as our certificate of incorporation, and we refer to our amended and restated bylaws as our bylaws.

General

Upon completion of this offering, our authorized capital stock will consist of 150,000,000 shares of common stock, par value $0.0001 per share, and 5,000,000 shares of preferred stock, par value $0.0001 per share, all of which shares of preferred stock will be undesignated.

As of August 31, 2013, 4,155,428 shares of our common stock were outstanding and held by 75 stockholders of record. In addition, as of August 31, 2013, we had outstanding options to purchase 2,150,117 shares of our common stock, at a weighted average exercise price of $3.04 per share, 403,453 of which were exercisable, and an outstanding warrant to purchase 50,000 shares of our common stock, at an exercise price of $4.00 per share. These amounts assume the conversion of all outstanding shares of our preferred stock into common stock, which will occur immediately prior to the closing of this offering.

Common Stock

The holders of our common stock are entitled to one vote for each share held on all matters submitted to a vote of the stockholders. The holders of our common stock do not have any cumulative voting rights. Holders of our common stock are entitled to receive ratably any dividends declared by the board of directors out of funds legally available for that purpose, subject to any preferential dividend rights of any outstanding preferred stock. Our common stock has no preemptive rights, conversion rights or other subscription rights or redemption or sinking fund provisions.

In the event of our liquidation, dissolution or winding up, holders of our common stock will be entitled to share ratably in all assets remaining after payment of all debts and other liabilities and any liquidation preference of any outstanding preferred stock. The shares to be issued by us in this offering will be, when issued and paid for, validly issued, fully paid and non-assessable.

Preferred Stock

Immediately prior to the closing of this offering, all outstanding shares of our preferred stock will be converted into shares of our common stock. Immediately prior to the closing of this offering, our certificate of incorporation will be amended and restated to delete all references to such shares of preferred stock. Upon the closing of this offering, our board of directors will have the authority, without further action by our stockholders, to issue up to 5,000,000 shares of preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof. These rights, preferences and privileges could include dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences, sinking fund terms and the number of shares constituting, or the designation of, such series, any or all of which may be greater than the rights of common stock. The issuance of our preferred stock could adversely affect the voting power of holders of common stock and the likelihood that such holders will receive dividend payments and payments upon our liquidation. In addition, the issuance of preferred stock could have the effect of delaying, deferring or preventing a

 

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change in control of our company or other corporate action. Immediately after closing of this offering, no shares of preferred stock will be outstanding, and we have no present plans to issue any shares of preferred stock.

Warrant

In connection with the loan and security agreement, entered into with Lighthouse Capital Partners, or Lighthouse, in November 2010, we issued to Lighthouse a warrant exercisable for up to 200,000 shares of our Series A preferred stock. The warrant may be exercised at the option of the holder either by delivery of the exercise price in cash or by a cashless exercise. The warrant will automatically become a warrant for the purchase of 50,000 shares of our common stock upon the closing of this offering at an exercise price of $4.00 per share.

Registration Rights

Upon the completion of this offering, the holders of our registrable shares, as described in the Second Amended and Restated Investors’ Rights Agreement between us and the holders of these shares, or the investors’ rights agreement, including shares issuable upon the conversion of preferred stock or their permitted transferees, are entitled to rights with respect to the registration of these shares under the Securities Act of 1933, as amended, or the Securities Act. These rights are provided under the terms of the investors’ rights agreement, and include demand registration rights, short-form registration rights and piggyback registration rights. All fees, costs and expenses of underwritten registrations will be borne by us and all selling expenses, including underwriting discounts and selling commissions, will be borne by the holders of the shares being registered.

Demand Registration Rights

Upon the completion of this offering, the holders of 17,178,026 shares of our common stock, including shares issued upon the conversion of preferred stock and issuable upon exercise of the warrant, or their permitted transferees, are entitled to demand registration rights. Under the terms of the investors’ rights agreement, we will be required, upon the written request of holders of at least 25% of the shares issued pursuant to conversion of our preferred stock, to use our commercially reasonable efforts to effect the registration of all or a portion of these shares for public resale. We are required to effect only two registrations pursuant to this provision of the investors’ rights agreement. A demand for registration may not be made until six months after the completion of this offering.

Short Form Registration Rights

Upon the completion of this offering, the holders of 17,178,026 shares of our common stock, including shares issued upon the conversion of preferred stock and issuable upon exercise of the warrant, or their permitted transferees are also entitled to short form registration rights. If we are eligible to file a registration statement on Form S-3, upon the written request of holders of our common stock, issued upon conversion of our preferred stock upon consummation of this offering, to sell registrable securities at an aggregate price of at least $3,000,000, we will be required to use our best efforts to effect a registration of such shares. We are required to effect only two registrations in any 12 month period pursuant to this provision of the investors’ rights agreement.

Piggyback Registration Rights

Upon the completion of this offering, the holders of 17,178,026 shares of our common stock, including shares issued upon the conversion of preferred stock and issuable upon exercise of the warrant, or their permitted transferees, are entitled to piggyback registration rights. If we register any of

 

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our securities either for our own account or for the account of other security holders, the holders of these shares are entitled to include their shares in the registration. Subject to certain exceptions, we and the underwriters may limit the number of shares included in the underwritten offering if the underwriters believe that including these shares would adversely affect the offering.

Indemnification

Our investors’ rights agreement contains customary cross-indemnification provisions, under which we are obligated to indemnify holders of registrable shares in the event of material misstatements or omissions in the registration statement attributable to us, and they are obligated to indemnify us for material misstatements or omissions attributable to them.

Expiration of Registration Rights

The registration rights granted under the investors’ rights agreement will terminate on the fifth anniversary of the completion of this offering.

Anti-takeover Effects of Our Certificate of Incorporation, Bylaws and Delaware Law

Our certificate of incorporation and bylaws that will be effective upon consummation of this offering include a number of provisions that may have the effect of delaying, deferring or preventing another party from acquiring control of us and encouraging persons considering unsolicited tender offers or other unilateral takeover proposals to negotiate with our board of directors rather than pursue non-negotiated takeover attempts. These provisions include the items described below.

Board Composition and Filling Vacancies

Our certificate of incorporation provides for the division of our board of directors into three classes serving staggered three-year terms, with one class being elected each year. Our certificate of incorporation also provides that directors may be removed only for cause and then only by the affirmative vote of the holders of 75% or more of the shares then entitled to vote at an election of directors. Furthermore, any vacancy on our board of directors, however occurring, including a vacancy resulting from an increase in the size of our board, may only be filled by the affirmative vote of a majority of our directors then in office even if less than a quorum. The classification of directors, together with the limitations on removal of directors and treatment of vacancies, has the effect of making it more difficult for stockholders to change the composition of our board of directors.

No Written Consent of Stockholders

Our certificate of incorporation provides that all stockholder actions are required to be taken by a vote of the stockholders at an annual or special meeting, and that stockholders may not take any action by written consent in lieu of a meeting. This limit may lengthen the amount of time required to take stockholder actions and would prevent the amendment of our bylaws or removal of directors by our stockholders without holding a meeting of stockholders.

Meetings of Stockholders

Our certificate of incorporation and bylaws provide that only a majority of the members of our board of directors then in office may call special meetings of stockholders and only those matters set forth in the notice of the special meeting may be considered or acted upon at a special meeting of stockholders. Our bylaws limit the business that may be conducted at an annual meeting of stockholders to those matters properly brought before the meeting.

 

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Advance Notice Requirements

Our bylaws establish advance notice procedures with regard to stockholder proposals relating to the nomination of candidates for election as directors or new business to be brought before meetings of our stockholders. These procedures provide that notice of stockholder proposals must be timely given in writing to our corporate secretary prior to the meeting at which the action is to be taken. Generally, to be timely, notice must be received at our principal executive offices not less than 90 days nor more than 120 days prior to the first anniversary date of the annual meeting for the preceding year. Our bylaws specify the requirements as to form and content of all stockholders’ notices. These requirements may preclude stockholders from bringing matters before the stockholders at an annual or special meeting.

Amendment to Certificate of Incorporation and Bylaws

Any amendment of our certificate of incorporation must first be approved by a majority of our board of directors, and if required by law or our certificate of incorporation, must thereafter be approved by a majority of the outstanding shares entitled to vote on the amendment and a majority of the outstanding shares of each class entitled to vote thereon as a class, except that the amendment of the provisions relating to stockholder action, board composition, limitation of liability and the amendment of our certificate of incorporation must be approved by not less than 75% of the outstanding shares entitled to vote on the amendment, and not less than 75% of the outstanding shares of each class entitled to vote thereon as a class. Our bylaws may be amended by the affirmative vote of a majority of the directors then in office, subject to any limitations set forth in the bylaws; and may also be amended by the affirmative vote of at least 75% of the outstanding shares entitled to vote on the amendment, or, if our board of directors recommends that the stockholders approve the amendment, by the affirmative vote of the majority of the outstanding shares entitled to vote on the amendment, in each case voting together as a single class.

Undesignated Preferred Stock

Our certificate of incorporation provides for 5,000,000 authorized shares of preferred stock. The existence of authorized but unissued shares of preferred stock may enable our board of directors to discourage an attempt to obtain control of us by means of a merger, tender offer, proxy contest or otherwise. For example, if in the due exercise of its fiduciary obligations, our board of directors were to determine that a takeover proposal is not in the best interests of our stockholders, our board of directors could cause shares of preferred stock to be issued without stockholder approval in one or more private offerings or other transactions that might dilute the voting or other rights of the proposed acquirer or insurgent stockholder or stockholder group. In this regard, our certificate of incorporation grants our board of directors broad power to establish the rights and preferences of authorized and unissued shares of preferred stock. The issuance of shares of preferred stock could decrease the amount of earnings and assets available for distribution to holders of shares of common stock. The issuance may also adversely affect the rights and powers, including voting rights, of these holders and may have the effect of delaying, deterring or preventing a change in control of us.

Exclusive Jurisdiction for Certain Actions

Our certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, our certificate of incorporation or our bylaws, or (iv) any action asserting a claim against us governed by the internal affairs doctrine. Although we believe this provision benefits us by providing increased consistency in the application of Delaware law in the types of lawsuits to which it applies, the provision may have the effect of discouraging lawsuits against our directors and officers. The enforceability of similar exclusive forum provisions in other companies’ certificates of

 

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incorporation has been challenged in legal proceedings, and it is possible that a court could rule that this provision in our certificate of incorporation is inapplicable or unenforceable.

Section 203 of the Delaware General Corporation Law

Upon completion of this offering, we will be subject to the provisions of Section 203 of the Delaware General Corporation Law. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a three-year period following the time that this stockholder becomes an interested stockholder, unless the business combination is approved in a prescribed manner. Under Section 203, a business combination between a corporation and an interested stockholder is prohibited unless it satisfies one of the following conditions:

 

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before the stockholder became interested, our board of directors approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder;

 

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upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the voting stock outstanding, shares owned by persons who are directors and also officers, and employee stock plans, in some instances, but not the outstanding voting stock owned by the interested stockholder; or

 

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at or after the time the stockholder became interested, the business combination was approved by our board of directors and authorized at an annual or special meeting of the stockholders by the affirmative vote of at least two-thirds of the outstanding voting stock which is not owned by the interested stockholder.

Section 203 defines a business combination to include:

 

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any merger or consolidation involving the corporation and the interested stockholder;

 

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any sale, transfer, lease, pledge or other disposition involving the interested stockholder of 10% or more of the assets of the corporation;

 

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subject to exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder;

 

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subject to exceptions, any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; and

 

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the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation.

In general, Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by the entity or person.

Exchange Listing

We have applied to list our common stock on the NASDAQ Global Market under the trading symbol “FMI.”

Transfer Agent and Registrar

The transfer agent and registrar for our common stock will be American Stock Transfer & Trust Company, LLC. The transfer agent and registrar’s address is 59 Maiden Lane, New York, NY 10038, and its telephone number is (212) 936-5100.

 

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SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no public market for our shares. Future sales of our common stock in the public market, or the availability of such shares for sale in the public market, could adversely affect market prices prevailing from time to time. As described below, only a limited number of shares will be available for sale shortly after this offering due to contractual and legal restrictions on resale. Nevertheless, sales of our common stock in the public market after such restrictions lapse, or the perception that those sales may occur, could adversely affect the prevailing market price at such time and our ability to raise equity capital in the future.

Based on the number of shares outstanding as of August 31, 2013, upon the completion of this offering, 26,283,454 shares of our common stock will be outstanding, assuming no exercise of the underwriters’ option to purchase additional shares and no exercise of outstanding options. Of the outstanding shares, all of the shares sold in this offering will be freely tradable, except that any shares held by our affiliates, as that term is defined in Rule 144 under the Securities Act, may only be sold in compliance with the limitations described below.

Rule 144

In general, a person who has beneficially owned restricted stock for at least six months would be entitled to sell their securities provided that (i) such person is not deemed to have been one of our affiliates at the time of, or at any time during the 90 days preceding, a sale and (ii) we are subject to the Securities Exchange Act of 1934, as amended, or the Exchange Act, periodic reporting requirements for at least 90 days before the sale. Persons who have beneficially owned restricted shares for at least six months but who are our affiliates at the time of, or any time during the 90 days preceding, a sale, would be subject to additional restrictions, by which such person would be entitled to sell within any three-month period only a number of securities that does not exceed the greater of either of the following:

 

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1% of the number of shares then outstanding, which will equal approximately 262,835 shares immediately after this offering assuming no exercise of the underwriters’ option to purchase additional shares, based on the number of shares outstanding as of August 31, 2013; or

 

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the average weekly trading volume of our common stock on the NASDAQ Global Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale.

Provided, in each case, that we are subject to the Exchange Act periodic reporting requirements for at least 90 days before the sale. Such sales both by affiliates and by non-affiliates must also comply with the manner of sale, current public information and notice provisions of Rule 144.

Rule 701

Rule 701 under the Securities Act, as in effect on the date of this prospectus, permits resales of shares in reliance upon Rule 144 but without compliance with certain restrictions of Rule 144, including the holding period requirement. Most of our employees, executive officers or directors who purchased shares under a written compensatory plan or contract may be entitled to rely on the resale provisions of Rule 701, but all holders of Rule 701 shares are required to wait until 90 days after the date of this prospectus before selling their shares. However, substantially all Rule 701 shares are subject to lock-up agreements as described below and under “Underwriting” included elsewhere in this prospectus and will become eligible for sale upon the expiration of the restrictions set forth in those agreements.

 

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Lock-up Agreements

In connection with this offering, all of our directors and executive officers and certain holders of our shares, who collectively held 21,264,704 shares of common stock (assuming conversion of all of our outstanding shares of preferred stock) as of August 31, 2013, and substantially all of our optionholders who are not stockholders, have signed lock-up agreements which, subject to certain exceptions, prevent them from selling any of our common stock or any securities convertible into or exercisable or exchangeable for common stock for a period of not less than 180 days from the date of the preliminary prospectus prepared for this offering without the prior written consent of each of Goldman Sachs & Co. and J.P. Morgan Securities LLC. The representatives may in their sole discretion and at any time without notice release some or all of the shares subject to lock-up agreements prior to the expiration of the 180-day period. When determining whether or not to release shares from the lock-up agreements, the representatives may consider, among other factors, the stockholder’s reasons for requesting the release, the number of shares for which the release is being requested and market conditions at the time. In addition, our optionholders who have not executed lock-up agreements are nevertheless subject to similar restrictions set forth in the option agreements executed in connection with our 2010 Plan.

Registration Rights

Upon completion of this offering, the holders of 17,178,026 shares of common stock, which includes the 50,000 shares of common stock issuable upon exercise of our outstanding warrant, or their transferees will be entitled to various rights with respect to registration of these shares under the Securities Act. Registration of these shares under the Securities Act would result in these shares becoming fully tradable without restriction under the Securities Act immediately upon the effectiveness of the registration. See “Description of Capital Stock—Registration Rights” for additional information.

Stock Option Plans

We intend to file one or more registration statements on Form S-8 under the Securities Act to register our shares issued or reserved for issuance under our stock option plans. The first such registration statement is expected to be filed soon after the date of this prospectus and will automatically become effective upon filing with the SEC. Accordingly, shares registered under such registration statement will be available for sale in the open market, unless such shares are subject to vesting restrictions with us or the lock-up restrictions described above. As of August 31, 2013, we estimate that such registration statement on Form S-8 will cover approximately 5,072,587 shares.

 

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CERTAIN MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS

The following is a summary of certain material U.S. federal income tax considerations relating to the acquisition, ownership and disposition of shares of our common stock issued pursuant to this offering. This summary deals only with shares of our common stock acquired by a stockholder in this offering and that are held as a capital asset within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended, or the Code. This summary does not address the U.S. federal income tax considerations applicable to a stockholder that is subject to special treatment under U.S. federal income tax laws, including: a dealer in securities or currencies; a financial institution; a regulated investment company; a real estate investment trust; a tax-exempt organization; an insurance company; a person holding our common stock as part of a hedging, integrated, conversion or straddle transaction or a person deemed to sell our common stock under the constructive sale provisions of the Code; a trader in securities that has elected the mark-to-market method of accounting; an entity that is treated as a partnership for U.S. federal income tax purposes; a person that received our common stock in connection with services provided to the company or any of its affiliates; a U.S. person whose “functional currency” is not the U.S. dollar; a “controlled foreign corporation”; a “passive foreign investment company”; or a U.S. expatriate.

This summary is based upon provisions of the Code, and applicable Treasury regulations promulgated or proposed thereunder, rulings and judicial decisions, all as in effect as of the date hereof. Those authorities may be changed, perhaps with retroactive effect, or may be subject to differing interpretations, which could result in U.S. federal income tax consequences different from those discussed below. This summary does not address all aspects of U.S. federal income tax, does not address all tax considerations that may be relevant to stockholders in light of their personal circumstances and does not address any state, local, foreign, gift, estate or alternative minimum tax considerations.

For purposes of this discussion, a “U.S. holder” is a beneficial holder of our common stock that is: an individual citizen or resident of the United States for U.S. federal income tax purposes; a corporation (or any other entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States, any state thereof or the District of Columbia; an estate the income of which is subject to U.S. federal income taxation regardless of its source; or a trust if it (1) is subject to the primary supervision of a court within the United States and one or more U.S. persons (as defined in the Code) have the authority to control all substantial decisions of the trust or (2) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.

For purposes of this discussion, a “non-U.S. holder” is a beneficial holder of our common stock that is for U.S. federal income tax purposes an individual, corporation, estate or trust and is not a U.S. holder.

If a partnership (or an entity or arrangement that is treated as a partnership for U.S. federal income tax purposes) holds our common stock, the tax treatment of a person treated as a partner in the partnership for U.S. federal income tax purposes generally will depend upon the status of the partner and the activities of the partnership. Partnerships and other entities that are treated as partnerships for U.S. federal income tax purposes and persons holding our common stock through a partnership or other entity treated as a partnership for U.S. federal income tax purposes are urged to consult their own tax advisors.

This summary is for general information only and is not intended to be tax advice. Holders of our common stock are urged to consult their own tax advisors concerning the tax considerations related to the acquisition, ownership and disposition of our common stock in light of their particular circumstances, as well as any tax considerations arising under the laws of any other jurisdiction, including any state, local and foreign income and other tax laws.

 

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U.S. Holders

The following discussion is a summary of certain U.S. federal income tax considerations relevant to a U.S. holder of our common stock.

Distributions

Distributions with respect to our common stock, if any, generally will be includible in the gross income of a U.S. holder as ordinary dividend income to the extent of our current or accumulated earnings and profits, as determined for U.S. federal income tax purposes. Any portion of a distribution in excess of current and accumulated earnings and profits will be treated as a non-taxable return of capital, up to the U.S. holder’s adjusted tax basis in its shares of our common stock with respect to which the distribution was made. Any such distribution in excess of the U.S. holder’s adjusted tax basis in its shares will be treated as capital gain and as long-term capital gain if the U.S. holder’s holding period exceeds one year. If certain requirements are met (including certain holding period requirements), distributions constituting dividends paid to non-corporate U.S. holders generally will qualify for the reduced tax rate on qualified dividend income.

Distributions constituting dividends for U.S. federal income tax purposes that are paid to U.S. holders that are corporations may qualify for the 70% dividends received deduction, or DRD, which is generally available to corporations that own less than 20% of the voting power or value of the outstanding stock of the distributing corporation. A U.S. holder that is a corporation holding 20% or more of the distributing corporation (by vote and value) may be eligible for an 80% DRD with respect to any such dividends. No assurance can be given that we will have sufficient earnings and profits (as determined for U.S. federal income tax purposes) to cause any distributions to be treated as dividends eligible for a DRD. In addition, a DRD is available only if certain other requirements (including certain holding period requirements) are satisfied, and a DRD may be subject to limitations in certain circumstances, which are not discussed herein.

Sale, Exchange, Redemption or Certain Other Taxable Dispositions of Our Common Stock

A U.S. holder of shares of our common stock generally will recognize gain or loss on the taxable sale, exchange, redemption (provided the redemption is treated as a sale or exchange), or other taxable disposition of such shares in an amount equal to the difference between such U.S. holder’s amount realized on such disposition and such U.S. holder’s adjusted tax basis in its shares of our common stock disposed of. A U.S. holder’s amount realized generally will equal the amount of cash and the fair market value of any property received in consideration for the shares of common stock disposed of. Such gain or loss will be capital gain or loss, and will be long-term capital gain or loss if the U.S. holder’s holding period for the shares of our common stock disposed of exceeds one year at the time of disposition. The deductibility of capital losses is subject to certain limitations. U.S. holders should consult their tax advisors regarding the treatment of capital gains and capital losses.

Medicare Tax on Net Investment Income

An additional 3.8% Medicare tax will be imposed on certain net investment income of certain U.S. holders that are individuals, estates or trusts. Such tax applies to the lesser of (i) the U.S. holder’s net investment income for the relevant taxable year and (ii) the excess of the U.S. holder’s adjusted gross income (with certain adjustments) over a specified threshold amount. Net investment income generally includes dividends and net gains from the disposition of shares of our common stock. U.S. holders that are individuals, estates or trusts should consult their tax advisors regarding the effect, if any, of the Medicare tax on their ownership and disposition of our common stock.

 

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Information Reporting and Backup Withholding Tax

In general, information reporting will apply to payments of dividends on shares of our common stock and proceeds of a disposition of shares of our common stock to U.S. holders, other than certain exempt recipients such as corporations. Under U.S. federal income tax law, dividends and proceeds from the sale of shares of our common stock paid to a U.S. holder (other than an exempt recipient) may be subject to “backup” withholding at the then applicable rate. Backup withholding generally applies to a U.S. holder if the holder (i) fails to furnish to us or our paying agent a correct social security number or other taxpayer identification number, or TIN, or fails to furnish a certification of exempt status, (ii) has been notified by the IRS that it is subject to backup withholding as a result of the failure to properly report payments of interest or dividends or (iii) under certain circumstances, fails to provide a certified statement, signed under penalty of perjury, that the TIN provided is its correct number and that it is a U.S. person that is not subject to backup withholding. Backup withholding is not an additional tax. Any amounts withheld from payments to a U.S. holder under the backup withholding rules will be allowed as a credit against such holder’s U.S. federal income tax liability and may entitle the holder to a refund, provided that the required information is timely furnished to the IRS. Certain U.S. persons are exempt from backup withholding, including corporations, provided that their exemptions from backup withholding are properly established.

Non-U.S. Holders

The following is a summary of certain U.S. federal tax considerations applicable to a non-U.S. holder of our common stock.

Distributions

Distributions treated as dividends for U.S. federal income tax purposes (as described above under “—U.S. Holders—Distributions”), if any, that are paid to a non-U.S. holder with respect to shares of our common stock will be subject to U.S. federal withholding tax at a 30% rate (or a lower rate prescribed by an applicable income tax treaty) unless the dividends are effectively connected with the non-U.S. holder’s conduct of a trade or business in the United States (and, if required by an applicable income tax treaty, is attributable to a permanent establishment or fixed base maintained in the U.S.). To claim the exemption from withholding with respect to any such effectively connected income, the non-U.S. holder must furnish to us or our paying agent a properly executed IRS Form W-8ECI (or applicable successor form), certifying under penalties of perjury that a dividend paid on our common stock is not subject to withholding tax. The certification requirement also may require a non-U.S. holder to provide its U.S. taxpayer identification number.

If a non-U.S. holder is engaged in a trade or business in the United States and dividends with respect to our common stock are effectively connected with the conduct of such trade or business and, if required by an applicable income tax treaty, are attributable to a U.S. permanent establishment or fixed base, then the non-U.S. holder generally will be subject to U.S. federal income tax on such dividends on a net income basis in the same manner as if received by a U.S. holder (although the dividends will be exempt from the 30% U.S. federal withholding tax, provided the certification requirements are satisfied). In addition, if the non-U.S. holder is a corporation for U.S. federal income tax purposes, such holder may, under certain circumstances, be subject to an additional branch profits tax equal to 30% (or a lower rate prescribed by an applicable income tax treaty) of its effectively connected earnings and profits for the taxable year.

A non-U.S. holder who wishes to claim the benefit of an exemption or reduced rate of U.S. federal withholding tax under an applicable income tax treaty must furnish to us or our paying agent a valid IRS Form W-8BEN (or applicable successor form) certifying, under penalties of perjury, such non-U.S. holder’s qualification for the exemption or reduced rate. If a non-U.S. holder is eligible for an exemption

 

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or a reduced rate of U.S. federal withholding tax pursuant to an applicable income tax treaty, it may obtain a refund of any excess amounts withheld by filing an appropriate claim for refund with the IRS.

If a distribution exceeds our current and accumulated earnings and profits, the excess will be treated as a non-taxable return of capital, up to the non-U.S. holder’s adjusted tax basis in its shares of our common stock. Any remaining excess will be treated as capital gain, subject to the tax treatment described below in “—Sale, exchange, redemption or certain other taxable dispositions of our common stock.” If we are not able to determine whether or not a distribution will exceed current and accumulated earnings and profits at the time a distribution is made, we may withhold tax on the entire amount of such distribution at the same rate as we would withhold on a dividend. However, a non-U.S. holder may obtain a refund of any excess withholding by filing an appropriate claim for refund with the IRS.

Any distribution described in this section would also be subject to the discussion below in “Foreign Account Tax Compliance Act.”

Sale, Exchange, Redemption or Certain Other Taxable Dispositions of Our Common Stock

Subject to the discussions below regarding backup withholding and the Foreign Account Tax Compliance Act, a non-U.S. holder generally will not be subject to U.S. federal income tax or withholding tax on gain realized upon a sale, exchange or other taxable disposition of shares of our common stock unless: (i) the gain is effectively connected with the conduct of a trade or business in the United States (and, if required by an applicable income tax treaty, is attributable to a U.S. permanent establishment or a fixed base), of the non-U.S. holder; (ii) the non-U.S. holder is a non-resident alien individual who is present in the United States for 183 days or more in the taxable year of that disposition, and certain other conditions are met; or (iii) we are or have been a “U.S. real property holding corporation”, or a USRPHC, for U.S. federal income tax purposes at any time within the shorter of the five-year period preceding the disposition and the non-U.S. holder’s holding period for our common stock, or the relevant period.

If the first exception applies, the non-U.S. holder generally will be subject to U.S. federal income tax on a net basis with respect to such gain in the same manner as if such holder were a resident of the United States. In addition, if the non-U.S. holder is a corporation for U.S. federal income tax purposes, such gains may, under certain circumstances, also be subject to the branch profits tax at a rate of 30% (or at a lower rate prescribed by an applicable income tax treaty).

If the second exception applies, the non-U.S. holder generally will be subject U.S. federal income tax at a rate of 30% tax on the gain from a disposition of our common stock, which may be offset by capital losses allocable to U.S. sources during the taxable year of disposition (even though the non-U.S. holder is not considered a resident of the United States).

With respect to the third exception above, we believe we currently are not, and we do not anticipate becoming, a USRPHC for U.S. federal income tax purposes. Because the determination of whether we are a USRPHC depends on the fair market value of our U.S. real property interests relative to the fair market value of our other trade or business assets and our foreign real property interests, there can be no assurances that we will not become a USRPHC in the future. Generally, a corporation is a USRPHC only if the fair market value of its U.S. real property interests (as defined in the Code) equals or exceeds 50% of the sum of the fair market value of its worldwide real property interests plus its other assets used or held for use in a trade or business. Even if we are or become a USRPHC, a non-U.S. holder would not be subject to U.S. federal income tax on a sale, exchange or other taxable disposition of our common stock by reason of our status as a USRPHC so long as (i) our common stock continues to be regularly traded on an established securities market (within the meaning of Section 897(c)(3) of the Code) during the calendar year in which such disposition occurs and (ii) such

 

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non-U.S. holder does not own and is not deemed to own (directly, indirectly, or constructively) more than 5% of our common stock at any time during the relevant period. If we are a USRPHC and the requirements of (i) or (ii) are not met, gain on the disposition of shares of our common stock generally will be taxed in the same manner as gain that is effectively connected with the conduct of a U.S. trade or business, except that the branch profits tax will not apply.

Information Reporting and Backup Withholding Tax

We must report annually to the IRS and to each non-U.S. holder the gross amount of the distributions on our common stock paid to such holder and the tax withheld, if any, with respect to such distributions, regardless of whether withholding was required. This information also may be made available under a specific treaty or agreement with the tax authorities in the country in which the non-U.S. holder resides or is established. A non-U.S. holder will generally be subject to backup withholding at the then applicable rate for dividends paid to such holder unless such holder furnishes a valid IRS Form W-8BEN (or such other applicable form and documentation as required by the Code or the Treasury regulations) certifying under penalties of perjury that it is a non-U.S. holder (and the payor does not have actual knowledge or reason to know that such holder is a United States person as defined under the Code), or otherwise establishes an exemption. Dividends paid to non-U.S. holders subject to U.S. federal withholding tax, as described above in “Distributions,” generally will be exempt from U.S. backup withholding.

Information reporting and, depending on the circumstances, backup withholding will apply to the payment of the proceeds of a sale or other disposition of shares of our common stock by a non-U.S. holder effected by or through the U.S. office of any broker, U.S. or foreign, unless the holder certifies that it is not a United States person (as defined under the Code) and satisfies certain other requirements, or otherwise establishes an exemption. Generally, information reporting and backup withholding will not apply to a payment of disposition proceeds to a non-U.S. holder where the transaction is effected outside the U.S. through a non-U.S. office of a broker. However, for information reporting purposes, dispositions effected through a non-U.S. office of a broker with substantial U.S. ownership or operations generally will be treated in a manner similar to dispositions effected through a U.S. office of a broker. Prospective investors should consult their own tax advisors regarding the application of the information reporting and backup withholding rules to them.

Copies of the information returns may be made available to the tax authorities in the country in which the non-U.S. holder resides or is incorporated under the provisions of an applicable treaty or agreement.

Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be allowed as a credit against a non-U.S. holder’s U.S. federal income tax liability, if any, and may entitle such holder to a refund, provided that an appropriate claim is timely filed with the IRS.

Foreign Account Tax Compliance Act

Under the Foreign Account Tax Compliance Act, or FATCA, a 30% withholding tax will apply to dividends on, or gross proceeds from the sale or other disposition of, shares of our common stock paid to certain non-U.S. entities (including financial intermediaries) unless various information reporting and due diligence requirements, which are different from and in addition to the certification requirements described elsewhere in this discussion, have been satisfied (generally relating to ownership of by U.S. persons of interests in or accounts with those entities). The withholding rules applicable to payments of dividends on our common stock will be phased in beginning January 1, 2014. The withholding rules will apply to payments of gross proceeds from dispositions of U.S. common stock beginning January 1, 2017.

Holders of our common stock should consult their tax advisors regarding the possible impact of FATCA on their investment in our common stock, including, without limitation, the process and deadlines for meeting the applicable requirements to prevent the imposition of the 30% withholding tax under FATCA.

 

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UNDERWRITING

We and the underwriters named below have entered into an underwriting agreement with respect to the shares being offered. Subject to certain conditions, each underwriter has severally agreed to purchase the number of shares indicated in the following table. Goldman, Sachs & Co. and J.P. Morgan Securities, LLC are the representatives of the underwriters.

 

Underwriters

   Number of Shares  

Goldman, Sachs & Co.

  

J.P. Morgan Securities, LLC

  

Leerink Swann, LLC

  

Sanford C. Bernstein & Co., LLC

  
  

 

 

 

Total

     5,000,000   
  

 

 

 

The underwriters are committed to take and pay for all of the shares being offered, if any are taken, other than the shares covered by the option described below unless and until this option is exercised.

The underwriters have an option to buy up to an additional 750,000 from us to cover sales by the underwriters of a greater number of shares than the total number set forth in the table above. They may exercise that option for 30 days. If any shares are purchased pursuant to this option, the underwriters will severally purchase shares in approximately the same proportion as set forth in the table above.

The following tables show the per share and total underwriting discounts and commissions to be paid to the underwriters by us. Such amounts are shown assuming both no exercise and full exercise of the underwriters’ option to purchase 750,000 additional shares.

 

Paid by the Company

   No Exercise      Full Exercise  

Per Share

   $                        $                    

Total

   $         $     

Shares sold by the underwriters to the public will initially be offered at the initial public offering price set forth on the cover of this prospectus. Any shares sold by the underwriters to securities dealers may be sold at a discount of up to $                 per share from the initial public offering price. After the initial offering of the shares, the representatives may change the offering price and the other selling terms. The offering of the shares by the underwriters is subject to receipt and acceptance and subject to the underwriters’ right to reject any order in whole or in part.

We and our officers, directors, and holders of substantially all of our common stock, have agreed with the underwriters, subject to certain exceptions, not to dispose of or hedge any of their common stock or securities convertible into or exchangeable for shares of common stock during the period from the date of this prospectus continuing through the date 180 days after the date of the preliminary prospectus related to this offering, except with the prior written consent of the representatives. This agreement does not apply to any existing employee benefit plans. See “Shares Available for Future Sale” for a discussion of certain transfer restrictions.

Prior to the offering, there has been no public market for the shares. The initial public offering price has been negotiated among us and the representatives. Among the factors to be considered in determining the initial public offering price of the shares, in addition to prevailing market conditions, will be our historical performance, estimates of our business potential and earnings prospects, an assessment of our management and the consideration of the above factors in relation to market valuation of companies in related businesses.

 

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We have filed an application to list the common stock on the NASDAQ Global Market under the symbol “FMI”.

In connection with the offering, the underwriters may purchase and sell shares of common stock in the open market. These transactions may include short sales, stabilizing transactions and purchases to cover positions created by short sales. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in the offering, and a short position represents the amount of such sales that have not been covered by subsequent purchases. A “covered short position” is a short position that is not greater than the amount of additional shares for which the underwriters’ option described above may be exercised. The underwriters may cover any covered short position by either exercising their option to purchase additional shares or purchasing shares in the open market. In determining the source of shares to cover the covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase additional shares pursuant to the option described above. “Naked” short sales are any short sales that create a short position greater than the amount of additional shares for which the option described above may be exercised. The underwriters must cover any such naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market after pricing that could adversely affect investors who purchase in the offering. Stabilizing transactions consist of various bids for or purchases of common stock made by the underwriters in the open market prior to the completion of the offering.

The underwriters may also impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representatives have repurchased shares sold by or for the account of such underwriter in stabilizing or short covering transactions.

Purchases to cover a short position and stabilizing transactions, as well as other purchases by the underwriters for their own accounts, may have the effect of preventing or retarding a decline in the market price of our stock, and together with the imposition of the penalty bid, may stabilize, maintain or otherwise affect the market price of the common stock. As a result, the price of the common stock may be higher than the price that otherwise might exist in the open market. The underwriters are not required to engage in these activities and may end any of these activities at any time. These transactions may be effected on NASDAQ, in the over-the-counter market or otherwise.

European Economic Area

In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive, each, a Relevant Member State, each underwriter has represented and agreed that with effect from and including the date on which the Prospectus Directive is implemented in that Relevant Member State, or the Relevant Implementation Date, it has not made and will not make an offer of shares to the public in that Relevant Member State prior to the publication of a prospectus in relation to the shares which has been approved by the competent authority in that Relevant Member State or, where appropriate, approved in another Relevant Member State and notified to the competent authority in that Relevant Member State, all in accordance with the Prospectus Directive, except that it may, with effect from and including the Relevant Implementation Date, make an offer of shares to the public in that Relevant Member State at any time:

 

  (a) to legal entities which are authorised or regulated to operate in the financial markets or, if not so authorised or regulated, whose corporate purpose is solely to invest in securities;

 

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  (b) to any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than 43,000,000 and (3) an annual net turnover of more than 50,000,000, as shown in its last annual or consolidated accounts;

 

  (c) to fewer than 100 natural or legal persons (other than qualified investors as defined in the Prospectus Directive) subject to obtaining the prior consent of the representatives for any such offer; or

 

  (d) in any other circumstances which do not require the publication by us of a prospectus pursuant to Article 3 of the Prospectus Directive.

For the purposes of this provision, the expression an “offer of shares to the public” in relation to any shares in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the shares to be offered so as to enable an investor to decide to purchase or subscribe the shares, as the same may be varied in that Relevant Member State by any measure implementing the Prospectus Directive in that Relevant Member State and the expression Prospectus Directive means Directive 2003/71/EC and includes any relevant implementing measure in each Relevant Member State.

Each underwriter has represented and agreed that:

 

  (a) it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the Financial Services and Markets Act 2000, or FSMA) received by it in connection with the issue or sale of the shares in circumstances in which Section 21(1) of the FSMA does not apply to us; and

 

  (b) it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the shares in, from or otherwise involving the United Kingdom.

The shares may not be offered or sold by means of any document other than (i) in circumstances which do not constitute an offer to the public within the meaning of the Companies Ordinance (Cap.32, Laws of Hong Kong), or (ii) to “professional investors” within the meaning of the Securities and Futures Ordinance (Cap.571, Laws of Hong Kong) and any rules made thereunder, or (iii) in other circumstances which do not result in the document being a “prospectus” within the meaning of the Companies Ordinance (Cap.32, Laws of Hong Kong), and no advertisement, invitation or document relating to the shares may be issued or may be in the possession of any person for the purpose of issue (in each case whether in Hong Kong or elsewhere), which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the laws of Hong Kong) other than with respect to shares which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” within the meaning of the Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong) and any rules made thereunder.

This prospectus has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this prospectus and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of the shares may not be circulated or distributed, nor may the shares be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor under Section 274 of the Securities and Futures Act, Chapter 289 of Singapore, or the SFA, (ii) to a relevant person, or any person pursuant to Section 275(1A), and in accordance with the conditions, specified in Section 275 of the SFA or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.

 

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Where the shares are subscribed or purchased under Section 275 by a relevant person which is: (a) a corporation (which is not an accredited investor) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or (b) a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary is an accredited investor, shares, debentures and units of shares and debentures of that corporation or the beneficiaries’ rights and interest in that trust shall not be transferable for 6 months after that corporation or that trust has acquired the shares under Section 275 except: (1) to an institutional investor under Section 274 of the SFA or to a relevant person, or any person pursuant to Section 275(1A), and in accordance with the conditions, specified in Section 275 of the SFA; (2) where no consideration is given for the transfer; or (3) by operation of law.

The securities have not been and will not be registered under the Financial Instruments and Exchange Law of Japan, or the Financial Instruments and Exchange Law, and each underwriter has agreed that it will not offer or sell any securities, directly or indirectly, in Japan or to, or for the benefit of, any resident of Japan (which term as used herein means any person resident in Japan, including any corporation or other entity organized under the laws of Japan), or to others for re-offering or resale, directly or indirectly, in Japan or to a resident of Japan, except pursuant to an exemption from the registration requirements of, and otherwise in compliance with, the Financial Instruments and Exchange Law and any other applicable laws, regulations and ministerial guidelines of Japan.

The underwriters do not expect sales to discretionary accounts to exceed 5% of the total number of shares offered.

We estimate that our share of the total expenses of the offering, excluding underwriting discounts and commissions, will be approximately $2,850,000. We have agreed to reimburse the underwriters for all expenses related to the clearing of this offering with the Financial Industry Regulatory Authority (in an amount not to exceed $17,213).

We have agreed to indemnify the several underwriters against certain liabilities, including liabilities under the Securities Act.

The underwriters and their respective affiliates are full service financial institutions engaged in various activities, which may include sales and trading, commercial and investment banking, advisory, investment management, investment research, principal investment, hedging, market making, brokerage and other financial and non-financial activities and services. Certain of the underwriters and their respective affiliates have provided, and may in the future provide, a variety of these services to the issuer and to persons and entities with relationships with the issuer, for which they received or will receive customary fees and expenses.

In the ordinary course of their various business activities, the underwriters and their respective affiliates, officers, directors and employees may purchase, sell or hold a broad array of investments and actively trade securities, derivatives, loans, commodities, currencies, credit default swaps and other financial instruments for their own account and for the accounts of their customers, and such investment and trading activities may involve or relate to assets, securities and/or instruments of the issuer (directly, as collateral securing other obligations or otherwise) and/or persons and entities with relationships with the issuer. The underwriters and their respective affiliates may also communicate independent investment recommendations, market color or trading ideas and/or publish or express independent research views in respect of such assets, securities or instruments and may at any time hold, or recommend to clients that they should acquire, long and/or short positions in such assets, securities and instruments.

 

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LEGAL MATTERS

The validity of the shares of common stock offered by this prospectus will be passed upon for us by Goodwin Procter LLP, Boston, Massachusetts. Certain legal matters will be passed upon for the underwriters by Ropes  & Gray LLP, Boston, Massachusetts.

EXPERTS

The financial statements of Foundation Medicine, Inc. at December 31, 2011 and 2012, and for each of the two years in the period ended December 31, 2012, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent registered public accounting firm, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the SEC a registration statement on Form S-1 (File Number 333-190226) under the Securities Act with respect to the common stock we are offering by this prospectus. This prospectus does not contain all of the information included in the registration statement. For further information pertaining to us and our common stock, you should refer to the registration statement and to its exhibits. Whenever we make reference in this prospectus to any of our contracts, agreements or other documents, the references are not necessarily complete, and you should refer to the exhibits attached to the registration statement for copies of the actual contract, agreement or other document.

Upon the closing of the offering, we will be subject to the informational requirements of the Securities Exchange Act of 1934 and will file annual, quarterly and current reports, proxy statements and other information with the SEC. You can read our SEC filings, including the registration statement, over the Internet at the SEC’s website at www.sec.gov. You may also read and copy any document we file with the SEC at its public reference facility at 100 F Street, N.E., Room 1580, Washington, D.C. 20549.

You may also obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the SEC at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference facilities.

 

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FOUNDATION MEDICINE, INC.

Index to Financial Statements

 

     Page  

Report of Independent Registered Public Accounting Firm

     F-2   

Balance Sheets as of December 31, 2011 and 2012, June 30, 2013 (unaudited) and June  30, 2013 Pro Forma (unaudited)

     F-3   

Statements of Operations and Comprehensive Loss for the Years Ended December  31, 2011 and 2012 and the Six Months Ended June 30, 2012 and 2013 (unaudited)

     F-4   

Statements of Redeemable Convertible Preferred Stock and Stockholders’ (Deficit) Equity for the Years Ended December 31, 2011 and 2012 and the Six Months Ended June 30, 2013 (unaudited) and June 30, 2013 Pro Forma (unaudited)

     F-5   

Statements of Cash Flows for the Years Ended December 31, 2011 and 2012 and the Six Months Ended June  30, 2012 and 2013 (unaudited)

     F-6   

Notes to Financial Statements

     F-7   

 

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of

Foundation Medicine, Inc.

We have audited the accompanying balance sheets of Foundation Medicine, Inc. (the Company) as of December 31, 2011 and 2012, and the related statements of operations and comprehensive loss, redeemable convertible preferred stock and stockholders’ deficit, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Foundation Medicine, Inc. at December 31, 2011 and 2012, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles .

/s/ Ernst & Young LLP

Boston, Massachusetts

June 24, 2013, except for Note 14,

as to which the date is September 12, 2013

 

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FOUNDATION MEDICINE, INC.

Balance Sheets

(In thousands, except share and per share data)

 

    December 31,     June 30,     Pro Forma
June 30,
 
    2011     2012     2013     2013  
                (unaudited)  

Assets

     

Current assets:

       

Cash and cash equivalents

  $ 10,852      $ 54,838      $ 35,965      $ 35,965   

Accounts receivable

    278        2,195        4,114        4,114   

Inventory

    318        803        725        725   

Prepaid expenses and other current assets

    313        550        1,004        1,004   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    11,761        58,386        41,808        41,808   

Property and equipment, net

    6,106        7,465        7,260        7,260   

Restricted cash

    161        161        1,886        1,886   

Other assets

    37        27        1,315        1,315   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 18,065      $ 66,039      $ 52,269      $ 52,269   
 

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities, redeemable convertible preferred stock and stockholders’ (deficit) equity

       

Current liabilities:

       

Accounts payable

  $ 1,369      $ 1,609      $ 2,109      $ 2,109   

Accrued expenses

    1,039        3,463        3,530        3,530   

Deferred revenue

    154        1,622        2,090        2,090   

Current portion of deferred rent

    109        132        141        141   

Current portion of notes payable

    1,569        1,704        1,712        1,712   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    4,240        8,530        9,582        9,582   

Deferred revenue, net of current portion

           156        226        226   

Notes payable, net of current portion

    3,041        1,441        634        634   

Deferred rent, net of current portion

    419        287        1,504        1,504   

Warrant to purchase preferred stock

    94        225        328          

Restricted stock liability

    119        139        106        106   

Commitments and contingencies (Note 12)

       

Redeemable convertible preferred stock, $0.0001 par value per share:

       

Series A redeemable convertible preferred stock; 33,700,000 shares authorized at December 31, 2011, 43,950,000 shares authorized at December 31, 2012 and June 30, 2013; 33,500,000 shares issued and outstanding at December 31, 2011, 43,750,000 shares issued and outstanding at December 31, 2012 and June 30, 2013, and no shares issued and outstanding at June 30, 2013 (pro forma) (aggregate liquidation preference of $43,750 at December 31, 2012 and June 30, 2013)

    32,455        42,962        43,045          

Series B redeemable convertible preferred stock; 24,762,134 shares authorized at December 31, 2012 and June 30, 2013; no shares issued and outstanding at December 31, 2011, 24,762,134 issued and outstanding at December 31, 2012 and June 30, 2013 and no shares issued and outstanding at June 30, 2013 (pro forma) (aggregate liquidation preference of $55,962 at December 31, 2012 and June 30, 2013)

           55,696        55,695          

Stockholders’ (deficit) equity:

       

Common stock, $0.0001 par value, 52,700,000 shares authorized at December 31, 2011, and 96,000,000 shares authorized at December 31, 2012 and June 30, 2013; 1,651,625, 2,727,443 and 3,190,329 shares issued and outstanding at December 31, 2011 and 2012 and June 30, 2013, respectively, and 20,318,355 shares issued and outstanding at June 30, 2013 (pro forma)

                         2   

Additional paid-in capital

    2,123        3,422        5,358        104,355   

Accumulated deficit

    (24,426     (46,819     (64,209     (64,140
 

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholders’ (deficit) equity

    (22,303     (43,397     (58,851     40,217   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities, redeemable convertible preferred stock and stockholders’ (deficit) equity

  $ 18,065      $ 66,039      $ 52,269      $ 52,269   
 

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements

 

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Table of Contents

FOUNDATION MEDICINE, INC.

Statements of Operations and Comprehensive Loss

(In thousands, except share and per share data)

 

     Years Ended December 31,     Six Months Ended
June 30,
 
     2011     2012     2012     2013  
                 (unaudited)  

Revenue

   $ 2,057      $ 10,645      $ 2,429      $ 11,120   

Costs and expenses:

        

Cost of revenue

     258        5,681        1,830        4,597   

Sales and marketing

     1,555        3,454        1,347        4,686   

General and administrative

     6,992        8,644        3,699        7,905   

Research and development

     9,023        14,777        6,623        11,079   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     17,828        32,556        13,499        28,267   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (15,771     (21,911     (11,070     (17,147

Other income (expense):

        

Interest expense, net

     (421     (421     (221     (141

Other expense, net

     (845     (61     (53     (102
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

     (1,266     (482     (274     (243
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (17,037   $ (22,393   $ (11,344   $ (17,390
  

 

 

   

 

 

   

 

 

   

 

 

 

Accretion of redeemable convertible preferred stock

     (296     (286     (162     (92
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss applicable to common stockholders

   $ (17,333   $ (22,679   $ (11,506   $ (17,482
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per common share applicable to common stockholders, basic and diluted

   $ (14.06   $ (10.47   $ (6.15   $ (5.92
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding, basic and diluted

     1,232,658        2,166,832        1,871,431        2,950,996   
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per common share applicable to common stockholders, basic and diluted (unaudited)

     $ (1.63     $ (0.87
    

 

 

     

 

 

 

Pro forma weighted-average common shares outstanding, basic and diluted (unaudited)

       13,910,719          20,129,030   
    

 

 

     

 

 

 

Comprehensive loss

   $ (17,037   $ (22,393   $ (11,344   $ (17,390
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements

 

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Table of Contents

FOUNDATION MEDICINE, INC.

Statements of Redeemable Convertible Preferred Stock and Stockholders’ (Deficit) Equity

(In thousands, except share and per share data)

 

    Series A
Redeemable
Convertible
Preferred Stock
    Series B
Redeemable
Convertible
Preferred Stock
          Common Stock     Additional
Paid-In

Capital
    Accumulated
Deficit
    Total
Stockholders’
(Deficit)

Equity
 
    Shares     Amount     Shares     Amount           Shares     Amount        

Balance at December 31, 2010

    7,000,000      $ 5,821             $            912,906      $      $      $ (7,389   $ (7,389

Issuance of Series A redeemable convertible preferred stock, net of issuance costs of $162

    26,500,000        26,338                                                        

Settlement of Series A investor rights obligation

                                                  2,331               2,331   

Accretion of redeemable convertible preferred stock to redemption value

           296                                        (296            (296

Vesting of restricted stock

                                    738,719               15               15   

Stock-based compensation expense

                                                  73               73   

Net loss

                                                         (17,037     (17,037
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

    33,500,000        32,455                          1,651,625               2,123        (24,426     (22,303

Issuance of Series A redeemable convertible preferred stock, net of issuance costs of $22

    10,250,000        10,228                                                        

Issuance of Series B redeemable convertible preferred stock, net of issuance costs of $273

                  24,762,134        55,689                                          

Accretion of redeemable convertible preferred stock to redemption value

           279               7                          (286            (286

Vesting of restricted stock

                                    1,075,818               50               50   

Stock-based compensation expense

                                                  1,535               1,535   

Net loss

                                                         (22,393     (22,393
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2012

    43,750,000        42,962        24,762,134        55,696            2,727,443               3,422        (46,819     (43,397

Issuance costs related to Series B preferred stock offering (unaudited)

                         (10                                       

Accretion of redeemable convertible preferred stock to redemption value (unaudited)

           83               9                          (92            (92

Issuance of common stock in exchange for services (unaudited)

                633               4               4   

Exercise of stock options (unaudited)

                3,750               3               3   

Vesting of restricted stock (unaudited)

                                    458,503               26               26   

Stock-based compensation expense (unaudited)

                                                  1,995               1,995   

Net loss (unaudited)

                                                         (17,390     (17,390
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2013 (unaudited)

    43,750,000        43,045        24,762,134        55,695            3,190,329               5,358        (64,209     (58,851

Conversion of redeemable convertible preferred stock into common stock (unaudited)

    (43,750,000     (43,045     (24,762,134     (55,695         17,128,026        2        98,669        69        98,740   

Reclassification of warrant to purchase redeemable convertible preferred stock into warrant to purchase common stock (unaudited)

                                                  328               328   
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma balance at June 30, 2013 (unaudited)

         $             $            20,318,355      $ 2      $ 104,355      $ (64,140   $ 40,217   
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements

 

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FOUNDATION MEDICINE, INC.

Statements of Cash Flows

(In thousands)

 

      

Years Ended December 31,

     Six Months Ended
June 30,
 
       2011      2012      2012      2013  
                     (unaudited)  

Operating activities

             

Net loss

     $ (17,037    $ (22,393    $ (11,344    $ (17,390

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

             

Depreciation and amortization expense

       1,520         2,894         1,262         2,073   

Change in fair value of investor rights obligation

       1,067                           

Change in fair value of warrant liability

       34         131         52         103   

Stock-based compensation

       73         1,535         508         1,995   

Common stock issued in exchange for services

                               4   

Non-cash interest expense

       111         104         59         35   

Changes in operating assets and liabilities:

             

Accounts receivable

       973         (1,917      (1,863      (1,919

Inventory

       (318      (485      (296 )        78   

Prepaid expenses and other current assets

       (70      (237      (275      (454

Other assets

       (8      10                 4   

Accounts payable

       (338      147         (179      400   

Accrued expenses

       580         1,447         642         67   

Deferred rent

       376         (109      (52      756   

Deferred revenue

       (1,096      1,624         484         538   
    

 

 

    

 

 

    

 

 

    

 

 

 

Net cash used in operating activities

       (14,133      (17,249      (11,002      (13,710

Investing activities

             

Purchases of property and equipment

       (5,410      (3,183      (1,678      (1,298

Increase in restricted cash

                               (1,725
    

 

 

    

 

 

    

 

 

    

 

 

 

Net cash used in investing activities

       (5,410      (3,183      (1,678      (3,023

Financing activities

             

Proceeds from issuance of restricted stock and stock option exercises

       114         70         (4 )        (4 )  

Proceeds from issuance of Series A Preferred Stock and related investor rights, net of issuance costs

       26,338         10,228         10,228           

Proceeds from issuance of Series B Preferred Stock, net of issuance costs

               55,689                 (10

Issuance costs related to planned issuance of common stock

                               (1,292

Proceeds from issuance of notes payable

       2,974                           

Payments of notes payable

       (440      (1,569      (769      (834
    

 

 

    

 

 

    

 

 

    

 

 

 

Net cash provided by (used in) financing activities

       28,986         64,418         9,455         (2,140

Net increase (decrease) in cash and cash equivalents

       9,443         43,986         (3,225      (18,873

Cash and cash equivalents at beginning of period

       1,409         10,852         10,852         54,838   
    

 

 

    

 

 

    

 

 

    

 

 

 

Cash and cash equivalents at end of period

     $ 10,852       $ 54,838       $ 7,627       $ 35,965   
    

 

 

    

 

 

    

 

 

    

 

 

 

Supplemental disclosure of cash flow information

             

Cash paid for interest

     $ 308       $ 305       $ 169       $ 103   
    

 

 

    

 

 

    

 

 

    

 

 

 

Supplemental disclosure of non-cash investing and financing activities

             

Settlement of investor rights obligation

     $ 2,331       $       $       $   
    

 

 

    

 

 

    

 

 

    

 

 

 

Accretion of convertible preferred stock to redemption value

     $ 296       $ 286       $ 162       $ 92   
    

 

 

    

 

 

    

 

 

    

 

 

 

Acquisition of property and equipment included in accounts payable and accrued expenses

     $ 816       $ 1,070       $ 562       $ 100   
    

 

 

    

 

 

    

 

 

    

 

 

 

The accompanying notes are an integral part of these financial statements

 

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Table of Contents

FOUNDATION MEDICINE, INC.

Notes to Financial Statements

Years Ended December 31, 2011 and 2012

and Six Months Ended June 30, 2012 and 2013

(Information as of June 30, 2013 and for the six months ended June 30, 2012 and 2013 is unaudited)

 

1. Nature of Business

Foundation Medicine, Inc. (the “Company”) is a commercial-stage company focused on fundamentally changing the way patients with cancer are treated. The Company derives revenue from selling products enabled by its molecular information platform to physicians and biopharmaceutical companies. This platform includes proprietary methods and algorithms for analyzing tumor tissue samples across all types of cancer, as well as information aggregation and concise reporting capabilities. These products provide genomic information about each patient’s individual disease, enabling physicians to optimize treatments in clinical practice and enabling biopharmaceutical companies to develop targeted oncology therapies more effectively. The Company’s first clinical product, FoundationOne, which commenced its formal commercial launch in June 2012, is the only commercially available comprehensive molecular information product designed for use in routine patient care.

The Company, originally named Foundation Genomics, Inc., is a Delaware company founded in November 2009 and has a principal place of business in Cambridge, Massachusetts.

The Company believes that its cash resources of $54,838,000 at December 31, 2012 will be sufficient to allow the Company to fund its current operating plan through January 1, 2014, and into the foreseeable future. As the Company continues to incur losses, its transition to profitability is dependent upon a level of revenues adequate to support the Company’s cost structure. If the Company’s transition to profitability is not consistent with its current operating plan, the Company may have to seek other sources of capital.

 

2. Summary of Significant Accounting Policies

 

A. Basis of Presentation

The Company’s financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”). Any reference in these notes to applicable guidance is meant to refer to the authoritative United States generally accepted accounting principles as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Update (“ASU”) of the Financial Accounting Standards Board (“FASB”).

 

B. Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The Company bases its estimates on historical experience and other market-specific or other relevant assumptions that it believes to be reasonable under the circumstances. This process may result in actual results differing materially from those estimated amounts used in the preparation of the financial statements if these results differ from historical experience, or other assumptions do not turn out to be substantially accurate, even if such assumptions are reasonable when made. Significant estimates relied upon in preparing these financial statements include revenue recognition, the fair value of liability-classified warrants, accrued expenses, the determination of the fair value of stock awards issued, stock-based compensation expense, and the valuation allowance on the company’s deferred tax asset.

 

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Table of Contents

FOUNDATION MEDICINE, INC.

Notes to Financial Statements

 

The Company utilizes significant estimates and assumptions in determining the fair value of its Common Stock. The Company utilized various valuation methodologies in accordance with the framework of the 2004 American Institute of Certified Public Accountants Technical Practice Aid, Valuation of Privately-Held Company Equity Securities Issued as Compensation , to estimate the fair value of its Common Stock. Each valuation methodology includes estimates and assumptions that require the Company’s judgment. These estimates and assumptions include a number of objective and subjective factors, including external market conditions, the prices at which the Company sold shares of preferred stock, the superior rights and preferences of securities senior to the Company’s common stock at the time and the likelihood of achieving a liquidity event, such as an initial public offering or sale. Significant changes to the key assumptions used in the valuations could result in different fair values of common stock at each valuation date.

 

C. Unaudited Interim Presentation

The accompanying interim balance sheet as of June 30, 2013, the statements of operations and comprehensive loss and cash flows for the six months ended June 30, 2012 and 2013 and the statement of redeemable convertible preferred stock and stockholders’ deficit for the six months ended June 30, 2013 and the related footnote disclosures are unaudited. These unaudited interim financial statements have been prepared in accordance with GAAP. In management’s opinion, the unaudited interim financial statements have been prepared on the same basis as the audited financial statements and include all adjustments, which include only normal recurring adjustments necessary for the fair presentation of its statement of financial position as of June 30, 2013 and its statements of operations and comprehensive loss and cash flows for the six months ended June 30, 2012 and 2013. The results for the six months ended June 30, 2013 are not necessarily indicative of the results expected for the full fiscal year.

 

D. Unaudited Pro Forma Presentation

In 2013, the Company’s board of directors (the “Board”) authorized management of the Company to pursue the filing of a registration statement with the Securities and Exchange Commission (“SEC”) for the Company to sell shares of its common stock to the public. Immediately prior to the consummation of this offering, all outstanding shares of redeemable convertible preferred stock will automatically convert into common stock and a warrant exercisable for redeemable convertible preferred stock will convert into a warrant exercisable for common stock. The unaudited pro forma balance sheet information as of June 30, 2013 assumes the conversion of all outstanding redeemable convertible preferred stock as of that date into 17,128,026 shares of common stock and the conversion of the warrant exercisable for redeemable convertible preferred stock into a warrant exercisable for 50,000 shares of common stock, resulting in the reclassification of the related redeemable convertible preferred stock warrant liability to additional paid-in capital. The unaudited pro forma net loss per share applicable to common stockholders for the year ended December 31, 2012 and the six months ended June 30, 2013 was computed using the weighted average number of shares of common stock outstanding, including the pro forma effect of the conversion of all outstanding redeemable convertible preferred stock into shares of common stock, as if such conversion had occurred at the beginning of the respective periods, or the date of issuance, if later. The impact of the accretion of the redeemable convertible preferred stock has been excluded from the determination of net loss applicable to common stockholders used to compute pro forma net loss per share. Upon conversion of the redeemable convertible preferred stock into shares of the Company’s common stock in the event of an initial public offering (“IPO”), the holders of the redeemable convertible preferred stock are not entitled to receive undeclared dividends.

 

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Table of Contents

FOUNDATION MEDICINE, INC.

Notes to Financial Statements

 

E. Off-Balance Sheet Risk and Concentrations of Credit Risk

The Company has no off-balance sheet risk, such as foreign exchange contracts, option contracts, or other foreign hedging arrangements. Financial instruments, which potentially subject the Company to significant concentrations of credit risk, consist primarily of cash and cash equivalents and accounts receivable. The primary objectives for the Company’s investment portfolio are the preservation of capital and the maintenance of liquidity. The Company’s investment policy includes guidelines on the quality of the institutions and financial instruments and defines allowable investments that the Company believes minimizes the exposure to concentration of credit risk.

The Company routinely assesses the creditworthiness of its customers. The Company has not experienced any material losses related to receivables from individual customers, or groups of customers. The Company does not require collateral. Due to these factors, no additional credit risk beyond amounts provided for collection losses is believed by management to be probable in the Company’s accounts receivable.

 

F. Segment Information

Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company views its operations and manages its business in one operating segment, which is the business of delivering genomic information about cancer to its customers.

The Company’s revenue is generated primarily in the United States. The majority of the Company’s revenue from customers located outside the United States, which was generated from two customers, was $0, $788,000, $298,000 and $715,000 for the years ended December 31, 2011 and 2012 and the six months ended June 30, 2012 and 2013, respectively.

 

G. Cash and Cash Equivalents

The Company considers all highly liquid investments with original or remaining maturity from the date of purchase of three months or less to be cash equivalents. Cash and cash equivalents include bank demand deposits and money market funds that invest primarily in U.S. government treasuries. Cash equivalents are carried at cost, which approximates their fair market value.

 

H. Accounts Receivable

The Company’s accounts receivable consist primarily of amounts due from biopharmaceutical customers, and from certain hospitals, cancer centers and other institutions with whom it has direct-bill relationships for tests performed using its molecular information. There are no accounts receivable associated with amounts that are billed to commercial third-party payors or directly to patients, because this revenue is recognized on a cash basis (see Note 2 Section O). At each reporting period, management reviews all outstanding customer balances to determine if the facts and circumstances of each customer relationship indicate the need for a reserve. The Company did not have an allowance for doubtful accounts at December 31, 2011 and 2012 or at June 30, 2013.

Two accounts consisting of $148,000 and $94,000 represented 53% and 34%, respectively, of accounts receivable at December 31, 2011. Three accounts consisting of $784,000, $469,000 and $436,000 represented 36%, 21% and 20%, respectively, of accounts receivable at December 31, 2012. Two accounts consisting of $1,963,000 and 588,000 represented 48%, and 14%, respectively, of accounts receivable at June 30, 2013.

 

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FOUNDATION MEDICINE, INC.

Notes to Financial Statements

 

I. Inventory

Inventories are stated at the lower of cost or market on a first-in, first-out basis. In order to assess the ultimate realization of inventories, the Company is required to make judgments as to future demand requirements compared to current or committed inventory levels. The Company evaluates its inventories for excess quantities and obsolescence. Inventories that are considered excess or obsolete are expensed.

At December 31, 2011 and 2012 and June 30, 2013, inventory consisted of the following:

 

     December 31,      June 30,  
     2011      2012      2013  
            (in thousands)         

Raw materials

   $ 318       $ 406       $ 532   

Work-in-process

             397         193   
  

 

 

    

 

 

    

 

 

 
   $ 318       $ 803       $ 725   
  

 

 

    

 

 

    

 

 

 

 

J. Deferred Issuance Costs

Deferred issuance costs, which primarily consist of direct incremental legal and accounting fees relating to the potential IPO, are capitalized. The deferred issuance costs will be offset against IPO proceeds upon the consummation of the offering. In the event the offering is terminated, deferred issuance costs will be expensed. $0, $0 and $1,292,000 were capitalized and deferred as of December 31, 2011 and 2012 and June 30, 2013.

 

K. Property and Equipment

Property and equipment are stated at cost, less accumulated depreciation and amortization. Property and equipment are depreciated and amortized using the straight-line method over the estimated useful lives of the assets. Maintenance and repairs are expensed as incurred. The following estimated useful lives are used to depreciate the Company’s assets:

 

    

Estimated Useful Life

Computer equipment and software

   3 years

Lab equipment

   3 years

Furniture and fixtures

   5 years

Leasehold improvements

   Lesser of initial lease term or useful life

The Company capitalizes certain costs incurred for software developed or obtained for internal use, including external direct material and service costs. Capitalized internal-use software costs, which are included in property and equipment, are generally depreciated over three years.

The Company reviews long-lived assets when events or changes in circumstances indicate the carrying value of the assets may not be recoverable. Recoverability is measured by comparison of the assets’ book value to the future net undiscounted cash flows the assets are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the book value of the assets exceed their fair value, which is measured based on the projected discounted future net cash flows arising from the assets. No impairment losses have been recorded through June 30, 2013. (See Note 3)

 

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FOUNDATION MEDICINE, INC.

Notes to Financial Statements

 

L. Grants

In March 2011, the Company received notification from the Internal Revenue Service (“IRS”) that it had been awarded a grant in the amount of $244,479 pursuant to the qualifying therapeutic discovery grant program established by the IRS and the Secretary of Health and Human Services under the Patient Protection and Affordable Care Act of 2010. The grant was made with respect to certain of the Company’s qualifying research and development programs. The Company received the full amount related to the grant during 2011, and this amount was recorded as other income in the statement of operations and comprehensive loss for the year ended December 31, 2011.

 

M. Restricted Cash

Restricted cash consists of deposits securing collateral letters of credit issued in connection with the Company’s operating leases. As of December 31, 2011 and 2012 and June 30, 2013, the Company had restricted cash of $161,000, $161,000 and $1,886,000, respectively.

 

N. Fair Value of Financial Instruments

The Company is required to disclose information on all assets and liabilities reported at fair value that enables an assessment of the inputs used in determining the reported fair values. FASB Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), establishes a hierarchy of inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the company. Unobservable inputs are inputs that reflect a company’s assumptions about the inputs that market participants would use in pricing the asset or liability, and are developed based on the best information available in the circumstances. The fair value hierarchy applies only to the valuation inputs used in determining the reported fair value of the investments and is not a measure of the investment credit quality. The hierarchy defines three levels of valuation inputs:

 

Level 1 inputs    Quoted prices in active markets for identical assets or liabilities
Level 2 inputs    Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly

 

Level 3 inputs    Unobservable inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability

The fair value hierarchy prioritizes valuation inputs based on the observable nature of those inputs. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability. (See Note 5)

 

O. Revenue Recognition

The Company derives revenue from selling products that are enabled by its molecular information platform. The Company currently receives payments from: commercial third-party payors; certain hospitals and cancer centers with which it has direct-bill relationships; individual patients; and its biopharmaceutical customers.

 

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FOUNDATION MEDICINE, INC.

Notes to Financial Statements

 

The Company recognizes revenue in accordance with FASB ASC Topic 605, Revenue Recognition (“ASC 605”). Accordingly, the Company recognizes revenue when all of the following criteria are met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred; (iii) the fee is fixed or determinable; and (iv) collectability is reasonably assured. Criteria (i) is satisfied when the Company has an arrangement or contract in place. Criterion (ii) is satisfied when the Company delivers a report to the ordering physician or the biopharmaceutical customer. Determination of criteria (iii) and (iv) are based on management’s judgments regarding whether the fee is fixed or determinable, and the collectability of the fee is reasonably assured.

The Company recognizes revenue on a cash basis when it cannot conclude that criterion (iii) and (iv) have been met. The Company currently recognizes revenue on a cash basis from sales of its products for which the Company receives payments from commercial third-party payors and patients who make co-payments, pay deductibles or other amounts that the Company has been unable to collect from third-party payors. The Company’s products are delivered electronically and as such there are no shipping and handling fees incurred by the Company or billed to customers. The Company’s products are exempt from state sales taxation due to the nature of our products. As a result, the Company does not charge customers state sales tax. The Company expects to use judgment in its assessment of whether the fee is fixed or determinable and whether collectability is reasonably assured in determining when to recognize revenue in the future as it continues to gain payment experience with third-party payors and patients. Accordingly, the Company expects to recognize revenue on a cash basis for these customers until it has sufficient history to reliably estimate payment patterns.

The Company recognizes revenue from the sale of its products to certain hospitals, cancer centers, other institutions and patients at the time results of the test are reported to physicians, if criteria (i) through (iv) above are met.

Revenue from sales of the Company’s products to biopharmaceutical customers are based on a negotiated price per test or on the basis of an agreement to provide certain testing volume over a defined period. The Company recognizes revenue upon delivery of the test results, or over the period the testing volume is provided, as appropriate.

For revenue arrangements with multiple deliverables, the Company evaluates each deliverable to determine whether it qualifies as a separate unit of accounting. This determination is based on whether the deliverable has “stand-alone value” to the customer and whether a general right of return exists. The consideration that is fixed or determinable is then allocated to each separate unit of accounting based on the relative selling price of each deliverable. The consideration allocated to each unit of accounting is recognized as the related goods or services are delivered, limited to the consideration that is not contingent upon future deliverables. The Company uses judgment in identifying the deliverables in its arrangements, and in assessing whether each deliverable is a separate unit of accounting. The Company also uses judgment in determining the period over which the deliverables are recognized in certain of its arrangements. Any amounts received that do not meet the criteria for revenue recognition are recorded as deferred revenue until such criteria are met.

One customer arrangement, consisting of $1,750,000 of revenue, represented 85% of the Company’s total revenue for the year ended December 31, 2011. Two customer arrangements, consisting of $4,233,000 and $1,339,000 of revenue, represented 40% and 13%, respectively, of the Company’s revenue for the year ended December 31, 2012. Two customer arrangements, consisting of $1,058,000 and $544,000 of revenue, represented 44% and 22%, respectively, of the Company’s

 

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FOUNDATION MEDICINE, INC.

Notes to Financial Statements

 

revenue for the six months ended June 30, 2012. One customer arrangement, consisting of $3,425,000 of revenue, represented 31% of the Company’s revenue for the six months ended June 30, 2013.

 

P. Research and Development Expenses

Research and development costs are expensed as incurred and include salaries and benefits, facilities costs, overhead costs, clinical trial costs, contract services and other related costs.

 

Q. Redeemable Convertible Preferred Stock

The carrying value of the Company’s Series A and Series B redeemable convertible preferred stock (individually, “the Series A Preferred Stock” and “the Series B Preferred Stock”, and collectively, “the Preferred Stock”) is adjusted by periodic accretions such that the carrying value will equal the redemption amount at the redemption date. The carrying value is also adjusted to reflect dividends, when and if declared by the Board. The Board has not declared any dividends since inception.

 

R. Stock-Based Compensation

The Company accounts for stock-based compensation awards in accordance with FASB ASC Topic 718,  Compensation—Stock Compensation  (“ASC 718”) . ASC 718 requires all stock-based compensation to employees, including grants of employee stock options and restricted stock and modifications to existing stock options, to be recognized in the statement of operations and comprehensive loss based on their fair values.

Compensation expense related to awards to employees is recognized on a straight-line basis, based on the grant date fair value, over the requisite service period of the award, which is generally the vesting term. Awards to non-employees are adjusted through stock-based compensation expense as the awards vest to reflect the current fair value of such awards, and are expensed using the straight-line method.

The Company expenses restricted stock awards based on the fair value of the award on a straight-line basis over the requisite service period of the award. The unvested portion of awards of restricted stock to non-employees is subject to remeasurement over the vesting term.

The Company estimates the fair value of its stock-based awards to employees and directors using the Black-Scholes option pricing model, which requires the input of and subjective assumptions, including (a) the expected stock price volatility, (b) the expected term of the award, (c) the risk-free interest rate, and (d) expected dividends. Due to the lack of a public market for the trading of its common stock and a lack of company-specific historical and implied volatility data, the Company has based its estimate of expected volatility on the historical volatility of a representative group of companies that are publicly traded. The Company selected a representative group of companies with comparable characteristics to it, including risk profiles, position within the industry, and with historical share price information sufficient to meet the expected term of the stock-based awards. The Company computes the historical volatility of this selected group using the daily closing prices for the selected companies’ shares during the equivalent period of the calculated expected term of the stock-based awards. The Company will continue to apply this process until a sufficient amount of historical information regarding the volatility of its own stock price becomes available. The Company estimates the expected life of its employee stock options using the “simplified” method, whereby, the expected

 

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FOUNDATION MEDICINE, INC.

Notes to Financial Statements

 

life equals the arithmetic average of the vesting term and the original contractual term of the option due to its lack of sufficient historical data. The risk-free interest rates for periods within the expected term of the option are based on the U.S. Treasury securities with a maturity date commensurate with the expected term of the associated award. The Company has never paid, and does not expect to pay, dividends in the foreseeable future; therefore, the expected dividend yield is assumed to be zero.

Forfeitures are required to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The term “forfeitures” is distinct from “cancellations” and represents only the unvested portion of the surrendered option. Ultimately, the actual expense recognized over the vesting period will only be for those options that vest. (See Note 9)

 

S. Income Taxes

Income taxes are recorded in accordance with FASB ASC Topic 740, Income Taxes (“ASC 740”), which provides for deferred taxes using an asset and liability approach. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Tax benefits are recognized when it is more likely than not that a tax position will be sustained during an audit. Deferred tax assets are reduced by a valuation allowance if current evidence indicates that it is considered more likely than not that these benefits will not be realized. (See Note 19)

 

T. Net Loss Per Share

Basic net loss per share is calculated by dividing net loss applicable to common stockholders by the weighted-average shares outstanding during the period, without consideration for common stock equivalents. Diluted net loss per share is calculated by adjusting the weighted-average shares outstanding for the dilutive effect of common stock equivalents outstanding for the period, determined using the treasury-stock method. For purposes of the diluted net loss per share calculation, preferred stock, stock options and warrants are considered to be common stock equivalents but are excluded from the calculation of diluted net loss per share because their effect would be anti-dilutive. Therefore, basic and diluted net loss per share applicable to common stockholders were the same for all periods presented.

The amounts in the table below were excluded from the calculation of diluted weighted-average shares outstanding, prior to the use of the treasury stock method, due to their anti-dilutive effect:

 

                   Six Months Ended  
     Year Ended December 31,      June 30,  
     2011      2012      2013  

Series A Preferred Stock

     8,375,000         10,937,500         10,937,500   

Series B Preferred Stock

             6,190,526         6,190,526   

Series A Preferred Stock warrant

     50,000         50,000         50,000   

Outstanding stock options

     151,938         1,221,407         2,172,892   

Unvested restricted stock

     2,351,503         1,423,698         962,203   
  

 

 

    

 

 

    

 

 

 
     10,928,441         19,823,131         20,313,621   

The calculations for the unaudited pro forma basic and diluted net loss per share assume the conversion of all outstanding shares of Preferred Stock into shares of common stock, as if the

 

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FOUNDATION MEDICINE, INC.

Notes to Financial Statements

 

conversions had occurred at the beginning of the period or at the date of issuance if such shares were issued during the period. The impact of the accretion of the Preferred Stock has been excluded from the determination of pro forma net loss applicable to common stockholders. The holders of Preferred Stock are not entitled to receive undeclared dividends upon such conversion.

 

U. Comprehensive Income (Loss)

Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions, other events, and circumstances from non-owner sources. Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss), which includes certain changes in equity that are excluded from net income (loss). Comprehensive loss has been disclosed in the accompanying statements of operations and comprehensive loss and equals the Company’s net loss for all periods presented.

 

V. Application of new or revised accounting standards

On April 5, 2012, the Jump-Start Our Business Startups Act (the “JOBS Act”) was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for an “emerging growth company.” As an emerging growth company, the Company has elected to not take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards, and as a result, will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies.

 

W. Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies and adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its financial position or results of operations upon adoption.

 

X. Subsequent Events

The Company considers events or transactions that occur after the balance sheet date but prior to the issuance of the financial statements to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. (See Note 14)

 

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FOUNDATION MEDICINE, INC.

Notes to Financial Statements

 

3. Property and Equipment

Property and equipment and related accumulated depreciation and amortization are as follows:

 

     December 31,     June 30,  
     2011     2012     2013  
     (in thousands)  

Lab equipment

   $ 5,166      $ 8,163      $ 9,176   

Computer equipment

     1,024        2,904        3,021   

Software

     144        188        188   

Furniture and office equipment

     411        425        678   

Leasehold improvements

     440        474        475   

Construction in progress

     717               484   
  

 

 

   

 

 

   

 

 

 
     7,902        12,154        14,022   

Less accumulated depreciation and amortization

     (1,796     (4,689     (6,762
  

 

 

   

 

 

   

 

 

 
   $ 6,106      $ 7,465      $ 7,260   
  

 

 

   

 

 

   

 

 

 

Depreciation and amortization expense for the years ended December 31, 2011 and 2012 and the six months ended June 30, 2012 and 2013 was $1,520,000, $2,894,000, $1,262,000 and $2,073,000, respectively. The Company classifies capitalized internal use software in Lab Equipment, Computer Equipment and Software based on its intended use. Depreciation expense related to all capitalized internal use software for the years ended December 31, 2011 and 2012 and the six months ended June 30, 2012 and 2013 was $0, $221,000, $25,000 and $451,000, respectively. The remaining unamortized capitalized internal use software costs at December 31, 2011 and 2012 and June 30, 2012 and 2013 were $0, $1,157,000, $879,000 and $927,000, respectively.

 

4. Accrued Expenses

Accrued expenses consisted of the following:

 

     December 31,      June 30,  
     2011      2012      2013  
     (in thousands)  

Payroll and employee-related costs

   $ 285       $ 1,672       $ 1,773   

Professional services

     328         670         1,534   

Equipment purchases

     179         977           

Other

     247         144         223   
  

 

 

    

 

 

    

 

 

 
   $ 1,039       $ 3,463       $ 3,530   
  

 

 

    

 

 

    

 

 

 

 

5. Fair Value Measurements

As referenced in Note 2, accounting principles provide guidance for using fair value to measure assets and liabilities based on a hierarchy of inputs and requires management to make judgments and consider factors specific to the asset or liability.

The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, notes payable, and a warrant to purchase Series A Preferred Stock. The carrying amount of cash and cash equivalents, accounts receivable, accounts payable,

 

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FOUNDATION MEDICINE, INC.

Notes to Financial Statements

 

accrued liabilities and notes payable approximate their fair values because of the short-term nature of the instruments or, in the case of the notes payable, because the interest rates the Company believes it could obtain for similar borrowings is similar to its existing interest rates. The fair value measurements of the Company’s cash held in money market funds and warrant liability at December 31, 2011 and 2012 and June 30, 2013 is summarized in the table below:

 

     Fair Value Measurement at December 31, 2011  
     Quoted Prices
in Active
Markets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
     Total  
     (in thousands)  

Assets:

           

Cash held in money market funds

   $ 8,500       $       $       $ 8,500   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 8,500       $       $       $ 8,500   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Warrant to purchase preferred stock

   $       $       $ 94       $ 94   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $       $       $ 94       $ 94   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Fair Value Measurement at December 31, 2012  
     Quoted Prices
in Active
Markets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
     Total  
     (in thousands)  

Assets:

           

Cash held in money market funds

   $ 37,500       $       $       $ 37,500   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 37,500       $       $       $ 37,500   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Warrant to purchase preferred stock

   $       $       $ 225       $ 225   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $       $       $ 225       $ 225   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Fair Value Measurement at June 30, 2013  
     Quoted Prices
in Active
Markets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
     Total  

Assets:

     (in thousands)   

Cash held in money market funds

   $ 34,000       $       $       $ 34,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 34,000       $       $       $ 34,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Warrant to purchase preferred stock

   $       $       $ 328       $ 328   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $       $       $ 328       $ 328   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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FOUNDATION MEDICINE, INC.

Notes to Financial Statements

 

The following table sets forth a summary of changes in the fair value of the Company’s preferred stock warrant liability which represents a recurring measurement that is classified within Level 3 of the fair value hierarchy, wherein fair value is estimated using significant unobservable inputs (See Note 6):

 

     Year Ended December 31,           Six Months Ended
June 30,
 
     2011      2012             2012          2013    
     (in thousands)  

Beginning balance

   $ 60       $ 94          $ 94       $ 225   

Change in fair value

     34         131            53         103   
  

 

 

    

 

 

       

 

 

    

 

 

 

Ending balance

   $ 94       $ 225          $ 147       $ 328   
  

 

 

    

 

 

       

 

 

    

 

 

 

This liability represents a warrant to purchase Series A Preferred Stock that was issued in conjunction with the loan agreement, as more fully described in Note 6. The fair value of the warrant is calculated using a Black-Scholes option pricing model. See Note 6 for further discussion, as well as for a summary of the significant inputs and assumptions used to determine the fair value of the warrant.

The Company measures eligible assets and liabilities at fair value, with changes in value recognized in the statement of operations and comprehensive loss. Fair value treatment may be elected either upon initial recognition of an eligible asset or liability or, for an existing asset or liability, if an event triggers a new basis of accounting. The Company did not elect to remeasure any of its existing financial assets or liabilities, and did not elect the fair value option for any financial assets and liabilities transacted in the years ended December 31, 2011 and 2012 and the six months ended June 30, 2013.

 

6. Notes Payable

In November 2010, the Company entered into a loan agreement with Lighthouse Capital Partners VI, L.P., whereby the Company had access to borrow up to $5,000,000 (the “Loan Agreement”). The Company borrowed all $5,000,000 available under the Loan Agreement in increments greater than $100,000 through January 31, 2012 (the “Commitment Termination Date”). For each advance, the Company makes interest only payments at a fixed rate of 8.25% for six months, followed by 36 months of interest and principal payments and a final payment of 4.5% of the advance. The debt is secured by certain property and equipment. The final payments are amortized over the term of the advances and recorded in interest expense. Based on the current advances outstanding at June 30, 2013, the final payment will be made on December 31, 2014. At December 31, 2011 and 2012 and June 30, 2013, there was $4,610,000, $3,145,000 and $2,346,000, respectively, outstanding under the Loan Agreement, which includes $87,000, $154,000 and $197,000, respectively, of deferred interest payments due upon maturity of the loan.

Future principal payments under the Loan Agreement are as follows:

 

     December 31,
2012
 
     (in thousands)  

2013

   $ 1,704   

2014

     1,287   
  

 

 

 
   $ 2,991   
  

 

 

 

 

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Table of Contents

FOUNDATION MEDICINE, INC.

Notes to Financial Statements

 

In connection with the Loan Agreement, the Company issued a warrant to purchase up to 200,000 shares of the Series A Preferred Stock at a purchase price of $1.00 per share. As of December 31, 2012 and June 30, 2013, the warrant is exercisable for 200,000 shares of Series A Preferred Stock. The warrant has an eight-year term and has not yet been exercised as of December 31, 2012 or June 30, 2013. In accordance with ASC 480-10, Distinguishing Liabilities from Equity , the freestanding warrant for the Company’s redeemable convertible preferred shares is recognized as a liability and recorded at fair value. The initial fair value of the warrant of $60,000 was recorded as a liability and a discount to notes payable and is being accreted to interest expense over the term of the notes.

On December 31, 2011 and 2012 and on June 30, 2013, the warrant was revalued, resulting in increases of $34,000, $131,000 and $103,000, respectively. The warrant liability will be reported at fair value until the warrants are either exercised or expire. The fair value of the warrant was calculated using the Black-Scholes valuation model with the following assumptions:

 

     Year Ended
December 31,
    Six Months Ended
June 30,
 
       2011         2012       2012     2013  

Expected volatility

     68.6     68.0     68.8     67.5

Risk-free interest rate

     1.35     0.72     1.11     1.41

Expected life (in years)

     6.85        5.85        6.36        5.36   

Expected dividend yield

                

Reasonable changes in the assumptions used to value the warrant would not have a material impact on the liability balance at the end of any reporting period presented.

 

7. Redeemable Convertible Preferred Stock

As of December 31, 2012 and June 30, 2013, the authorized capital stock of the Company included 68,712,134 shares of preferred stock, $0.0001 par value, of which 43,950,000 shares are designated Series A Preferred Stock and 24,762,134 are designated Series B Preferred Stock.

In March 2010, the Company issued 7,000,000 shares of Series A Preferred Stock for cash proceeds of $7,000,000 (the “Series A financing”). In accordance with the terms of the Series A Preferred Stock Purchase Agreement for the Series A financing, the Company committed to sell up to an additional 18,000,000 shares of Series A Preferred Stock to existing holders of Series A Preferred Stock (“Series A Investors”) and to new investors, if any, for total proceeds of $18,000,000 upon the achievement of pre-defined milestones.

The right of the investors (the “Investor Rights Obligation”) to purchase Series A Preferred Stock represented a freestanding financial instrument. As such, the Company accounted for the Investor Rights Obligation as a liability. The Company adjusted the carrying value of the liability to its estimated fair value at each reporting date through the closing of the final tranche of the Series A financing. Increases or decreases in the fair value of the Investor Rights Obligation were recorded as other income (expense) in the statement of operations and comprehensive loss. The fair value of the liability was determined using a valuation model, which considers the probability of achieving the pre-defined milestones, the entity’s cost of capital, the estimated period the rights will be outstanding, consideration received for the instrument with the rights, the number of shares to be issued to satisfy the rights, the price of such shares and any changes in the fair value of the underlying instrument. At the date of

 

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FOUNDATION MEDICINE, INC.

Notes to Financial Statements

 

issuance in March 2010, the Company recorded the Investor Rights Obligation at its initial estimated fair value of $1,300,000. The change in fair value of the Investor Rights Obligation was $1,067,000 for the year ended December 31, 2011, and was recorded as other expense in the accompanying statement of operations and comprehensive loss.

In early 2011, the Company issued 6,000,000 shares of Series A Preferred Stock for gross proceeds of $6,000,000. In August 2011, the Company issued 15,000,000 shares of Series A Preferred Stock for gross proceeds of $15,000,000 and committed to sell an additional 5,500,000 shares of Series A Preferred Stock to one of its Series A Investors for proceeds of $5,500,000, which was completed in October 2011. The carrying value of the Investor Rights Obligation was settled in additional paid-in capital at the respective settlement dates throughout 2011, resulting in an increase of $2,331,000 to additional paid-in capital.

In April of 2012, the Company issued 10,250,000 shares of Series A Preferred Stock at $1.00 per share, for gross proceeds of $10,250,000.

In September 2012, the Company issued 18,805,304 shares of Series B Preferred Stock at $2.26 per share, for gross proceeds of $42,500,000 (the “Series B financing”). In December 2012, the Company issued 5,956,830 shares of Series B Preferred Stock for gross proceeds of $13,462,000.

In connection with the Series B financing in September 2012, the Company amended certain rights and privileges of the Series A Investors. The Company adopted a qualitative policy pursuant to which it assessed whether the amendment fundamentally changed the nature of the preferred shares in order to determine the appropriate accounting treatment. The Company has accounted for the impact of the amendment as a modification of the Series A Preferred Stock due to the limited impact of the amended terms on the economic expectations of both the Company and the holders of the Series A Preferred Stock. The amendment included the forfeiture of accrued dividends and the removal of the Series A Preferred Stock liquidation preference above the original issue price, among other changes. The Company concluded that the removal of these rights led to a decrease in the fair value of the Series A Preferred Stock. Accordingly, the Company has not recorded the change in the statement of operations and comprehensive loss.

The rights, preferences, and privileges of the Preferred Stock are as follows:

Conversion

Shares of Preferred Stock are convertible into common stock on a four-for-one basis, adjustable for certain dilutive events. Conversion is at the option of the holders of Preferred Stock, although a conversion is automatic upon the earlier of (A) the consummation of a firm-commitment underwritten public offering resulting in (i) gross proceeds to the Company of at least $30,000,000, (ii) at a price per share at least equal to $9.96 (as adjusted for stock splits, stock dividends, combinations, subdivisions, recapitalizations, or certain dilutive events) and (iii) the listing of the common stock on a nationally recognized securities exchange or trading system, or (B) the consent of at least 60% of the holders of the Series A Preferred Stock with respect to the shares of Series A Preferred Stock, at least two-thirds of the holders of the Series B Preferred Stock with respect to the shares of Series B Preferred Stock or at least two-thirds of the holders of the Preferred Stock with respect to all shares of the Preferred Stock.

The Company performs assessments of all terms and features of its redeemable convertible preferred stock in order to identify any potential embedded features that would require bifurcation or any beneficial conversion features. As part of this analysis, the Company assessed the economic characteristics and risks of its Preferred Stock, including conversion, liquidation and redemption

 

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FOUNDATION MEDICINE, INC.

Notes to Financial Statements

 

features, as well as dividend and voting rights. Based on the Company’s determination that each series of its Preferred Stock is an “equity host,” the Company determined that the features of the Preferred Stock are most closely associated with an equity host, and, although the Preferred Stock includes conversion features, such conversion features do not require bifurcation as a derivative liability.

The Company accounts for potentially beneficial conversion features under ASC 470-20, Debt with Conversion and other Options . At the time of each of the issuances of Preferred Stock, the common stock into which the Series A Preferred Stock and B Preferred Stock is convertible had a fair value less than the effective conversion price of the Preferred Stock and as such, there was no intrinsic value on the respective commitment dates.

Dividends

Holders of the Preferred Stock are entitled to receive dividends when, as and if declared by the Board.

Liquidation Preference

Holders of the Preferred Stock have preferences to the assets of the Company in the event of any voluntary or involuntary liquidation or dissolution of the Company, including a change of control. Upon such an event, the holders of the Preferred Stock are entitled to receive, on a pari passu basis, an amount per share equal to their respective original purchase price (as adjusted for stock splits, stock dividends, combinations, subdivisions, recapitalizations, or certain dilutive events), plus any dividends declared but unpaid thereon.

Voting Rights

Holders of the Preferred Stock are entitled to vote as a single class with the holders of common stock, and shall have one vote for each equivalent common share into which the Preferred Stock is convertible. A two-thirds vote of the holders of Preferred Stock is required in order to amend the certificate of incorporation and the bylaws, pay or declare any dividends (except dividends payable solely in shares of common stock), reclassify common stock or establish another class of stock, create or authorize additional shares of Preferred Stock, effect a sale, liquidation or merger of the Company, repurchase or redeem any capital stock, or engage in any action which would adversely affect the holders of the Preferred Stock. A 60% vote of the holders of the Series A Preferred Stock is required to amend the Series A Preferred Stock.

Redemption

At any time on or after September 10, 2017, within 60 days of the receipt of a written request from the holders of at least two-thirds of the shares of the Preferred Stock, all of the outstanding shares of Preferred Stock are redeemable at a price equal to the greater of the respective original purchase price per share (as adjusted for stock splits, stock dividends, combinations, subdivisions, recapitalizations, or certain dilutive events) plus all declared but unpaid dividends, or the fair market value as determined by an independent third-party. If the Company does not have sufficient funds available to redeem the Preferred Stock on the redemption date, the Company shall redeem a pro rata portion of each holder’s shares of Preferred Stock out of funds available and shall redeem the

 

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FOUNDATION MEDICINE, INC.

Notes to Financial Statements

 

remaining shares as soon as practicable after the Company has funds available. The balance of any unpaid amounts at the redemption date shall accrue interest at 12% per annum.

As the Preferred Stock may become redeemable upon an event that is outside of the control of the Company, the Preferred Stock has been classified outside of permanent equity.

 

8. Stockholders’ (Deficit) Equity

Common Stock

Common stockholders are entitled to one vote per share. Holders of common stock are entitled to receive dividends, when and if declared by the Board. The voting, dividend, and liquidation rights of the holders of the common stock are subject to, and qualified by, the rights of the holders of the Preferred Stock.

The Company has reserved for future issuance the following number of shares of common stock:

 

     December 31, 2012      June 30, 2013  

Series A Preferred Stock

     10,937,500         10,937,500   

Series B Preferred Stock

     6,190,526         6,190,526   

Series A Preferred Stock Warrant

     50,000         50,000   

Unvested restricted stock

     1,423,698         962,703   

Common stock options

     1,221,407         2,172,892   

Shares available for issuance under the 2010 Plan

     252,452         492,218   
  

 

 

    

 

 

 
     20,075,583         20,805,839   
  

 

 

    

 

 

 

 

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FOUNDATION MEDICINE, INC.

Notes to Financial Statements

 

In November 2009, the Company issued 2,125,000 shares of common stock to the founders of the Company for consideration equal to the par value per share, the then estimated fair value of the common stock. The founders entered into restricted stock agreements whereby the shares of common stock issued are subject to vesting and become fully vested in 2013. An additional 112,500 shares of common stock subject to repurchase were issued to employees and consultants at fair value during the year ended December 31, 2010. Shares subject to repurchase by the Company are recorded as a liability at their original purchase price. Shares subject to repurchase that were issued to non-employees are revalued at each vesting date and at the end of the reporting period, with changes in fair value recorded as stock-based compensation expense on a straight-line basis. As the Company’s right to repurchase the shares lapses, the liability is reclassified to additional paid-in capital. At December 31, 2012 and June 30, 2013, 547,526 and 275,000 of these shares, respectively, remain potentially subject to repurchase by the Company, and therefore are not considered outstanding for accounting purposes. The following table shows a roll forward of restricted stock activity outside of the 2010 Stock Plan, as discussed below:

 

     Number of
Shares
 

Unvested at December 31, 2010

     1,706,250   

Granted

       

Vested

     (614,974
  

 

 

 

Unvested at December 31, 2011

     1,091,276   

Granted

       

Vested

     (543,750
  

 

 

 

Unvested at December 31, 2012

     547,526   

Granted

       

Vested

     (272,526
  

 

 

 

Unvested at June 30, 2013

     275,000   
  

 

 

 

Total stock-based compensation expense recognized for restricted stock issued outside of the 2010 Plan was $62,000, $1,284,000, $424,000 and $1,638,000 for the years ended December 31, 2011 and 2012 and the six months ended June 30, 2012 and 2013, respectively. As of December 31, 2012 and June 30, 2013, $2,168,000 and $1,958,000, respectively, of unrecognized compensation expense related to restricted stock is expected to be recognized over weighted average periods of 0.9 and 0.4 years, respectively.

2010 Stock Incentive Plan

In 2010, the Company adopted the Foundation Medicine, Inc. 2010 Stock Incentive Plan (the “2010 Stock Plan”) under which it may grant restricted stock, incentive stock options (ISOs) and non-statutory stock options to eligible employees, officers, directors and consultants to purchase up to 1,162,500 shares of common stock. In the years ended December 31, 2011 and 2012 and the six months ended June 30, 2013, the Company amended the 2010 Stock Plan to increase the number of shares of common stock available for issuance to 2,162,500, 3,037,500 and 4,232,500, respectively. As of December 31, 2012 and June 30, 2013 there were 252,452 and 492,218 awards, respectively, available for future grant under the 2010 Stock Plan.

Terms of stock award agreements, including vesting requirements, are determined by the board of directors, subject to the provisions of the 2010 Stock Plan. Options granted by the Company

 

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FOUNDATION MEDICINE, INC.

Notes to Financial Statements

 

typically vest over a four-year period. Certain of the options are subject to acceleration of vesting in the event of certain change of control transactions. The options are exercisable from the date of grant for a period of 10 years. For options granted to date, the exercise price equaled the estimated fair value of the common stock as determined by the Board on the date of grant.

Restricted Stock

The 2010 Stock Plan allows for granting of restricted stock awards. For restricted stock granted to employees, the intrinsic value on the date of grant is recognized as stock-based compensation expense ratably over the period in which the restrictions lapse. For restricted stock granted to non-employees the intrinsic value is remeasured at each vesting date and at the end of the reporting period. The following table shows a roll forward of restricted stock activity pursuant to the 2010 Stock Plan:

 

     Number of
Shares
 

Unvested at December 31, 2010

     78,177   

Granted

     139,414   

Vested

     (27,383
  

 

 

 

Unvested at December 31, 2011

     190,208   

Granted

       

Vested

     (66,615
  

 

 

 

Unvested at December 31, 2012

     123,593   

Granted

       

Vested

     (25,703
  

 

 

 

Unvested at June 30, 2013

     97,890   
  

 

 

 

All restricted stock issued from the 2010 Stock Plan had a grant date fair value of $0.08 per share. Total stock-based compensation expense recognized for restricted stock issued from the 2010 Stock Plan was $2,000, $36,000, $12,000 and $53,000 for the years ended December 31, 2011 and 2012 and the six months ended June 30, 2012 and 2013, respectively. As of December 31, 2012 and June 30, 2013, $44,000 and $40,000, respectively, of unrecognized compensation expense related to restricted stock issued from the 2010 Stock Plan is expected to be recognized over weighted-average periods of 2.5 and 2.0 years, respectively.

 

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FOUNDATION MEDICINE, INC.

Notes to Financial Statements

 

Stock Options

A summary of stock option activity under the 2010 Stock Plan for the year ended December 31, 2012 and the six months ended June 30, 2013, is as follows:

 

     Number of
Shares
    Weighted-
Average
Exercise Price
     Weighted-
Average
Remaining
Contractual
Term
(In Years)
     Aggregate
Intrinsic
Value
 
     (in thousands, except share numbers)  

Outstanding as of December 31, 2010

     410,625      $ 0.08         

Granted

     1,059,375        0.08         

Exercised

     (1,282,250     0.08          $ 975   

Cancelled

     (35,813     0.08         
  

 

 

   

 

 

    

 

 

    

 

 

 

Outstanding as of December 31, 2011

     151,937      $ 0.08         9.0       $ 115   

Granted

     1,253,657        1.32         

Exercised

     (155,164     0.52          $ 535   

Cancelled

     (29,023     0.36         
  

 

 

   

 

 

    

 

 

    

 

 

 

Outstanding as of December 31, 2012

     1,221,407      $ 1.28         9.3       $ 3,282   

Granted

     971,625        5.20         

Exercised

     (3,750     0.84          $ 24   

Cancelled

     (16,391     2.60         
  

 

 

   

 

 

    

 

 

    

 

 

 

Outstanding as of June 30, 2013

     2,172,891      $ 3.04         9.2       $ 8,900   
  

 

 

   

 

 

    

 

 

    

 

 

 

Exercisable as of December 31, 2012

     142,739      $ 0.68         8.9       $ 475   
  

 

 

   

 

 

    

 

 

    

 

 

 

Vested and expected to vest at December 31, 2012(1)

     1,113,540      $ 1.28         9.3       $ 3,001   
  

 

 

   

 

 

    

 

 

    

 

 

 

Exercisable as of June 30, 2013

     360,931      $ 1.00         8.6       $ 2,216   
  

 

 

   

 

 

    

 

 

    

 

 

 

Vested and expected to vest at June 30, 2013(1)

     1,991,696      $ 3.00         9.2       $ 8,231   
  

 

 

   

 

 

    

 

 

    

 

 

 
(1) This represents the number of vested options plus the number of unvested options expected to vest at the respective dates, based on unvested options adjusted for estimated forfeitures.

Certain stock options contain provisions allowing for the early exercise into shares subject to repurchase. For the year ended December 31, 2012 and the six months ended June 30, 2013, 119,812 and no options, respectively, were exercised prior to vesting. At December 31, 2012 and June 30, 2013, 752,578 and 589,813 shares, which were early exercised, respectively, remain subject to repurchase, and therefore are not considered outstanding for accounting purposes.

The weighted-average fair value of options granted for the year ended December 31, 2012 and the six months ended June 30, 2013 was $1.08 and $3.20 per share, respectively. The Company recorded total stock-based compensation expense for stock options granted to employees, directors and non-employees from the 2010 Stock Plan of $9,000, $215,000, $72,000 and $304,000 during the year, ended December 31, 2011, 2012 and the six months ended June 30, 2012 and 2013, respectively. As of December 31, 2012 and June 30, 2013, unrecognized compensation cost of

 

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FOUNDATION MEDICINE, INC.

Notes to Financial Statements

 

$1,078,000 and $3,578,000, respectively, related to non-vested employee stock-based compensation arrangements is expected to be recognized over weighted-average periods of 3.2 and 3.3 years, respectively.

The Company recorded stock-based compensation expense in the statements of operations and comprehensive loss as follows:

 

     Years Ended
December 31,
     Six Months
Ended

June 30,
 
     2011      2012      2012      2013  
                   (unaudited)  
     (in thousands)  

Cost of revenue

   $ 1       $ 22       $ 5       $ 17   

Sales and marketing

             31         5         45   

General and administrative

     69         1,388         465         1,816   

Research and development

     3         94         33         117   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 73       $ 1,535       $ 508       $ 1,995   
  

 

 

    

 

 

    

 

 

    

 

 

 

The weighted-average assumptions used to estimate the fair value of stock options using the Black-Scholes option pricing model were as follows:

 

     Years Ended
December 31,
    Six Months Ended
June 30,
 
     2011     2012     2012     2013  

Expected volatility

     67.1     68.8     69.0     67.1

Risk-free interest rate

     2.56     1.29     1.35     1.35

Expected option term (in years)

     6.25        6.25        6.25        6.25   

Expected dividend yield

                

 

9. Income Taxes

The Company accounts for income taxes under ASC 740. Deferred income tax assets and liabilities are determined based upon differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

For the years ended December 31, 2011 and 2012, the Company did not have a current or deferred income tax expense or benefit.

As of December 31, 2012 the Company had federal and state net operating loss carryforwards of approximately $39,883,000 and $39,146,000, respectively, which were available to reduce future taxable income. The net operating loss carryforwards expire at various times beginning in 2029 for federal purposes and 2014 for state purposes. The Company also had federal and state tax credits of approximately $344,000 and $758,000, respectively, which may be used to offset future tax liabilities. These tax credit carryforwards will expire at various times beginning in 2029 for federal purposes and 2024 for state purposes.

The net operating loss and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. Net operating loss and tax credit

 

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FOUNDATION MEDICINE, INC.

Notes to Financial Statements

 

carryforwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant stockholders over a three-year period in excess of 50%, as defined under Sections 382 and 383 of the Internal Revenue Code, respectively, as well as similar state provisions. This could limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities. The amount of the annual limitation is determined based on the value of the Company immediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in future years.

The Company has not recorded any reserves for uncertain tax positions as of December 31, 2011 or 2012. The Company has not, as yet, conducted a study of research and development credit carryforwards. This study may result in an adjustment to the Company’s research and development credit carryforwards; however, until a study is completed and any adjustment is known, no amounts are being presented as an uncertain tax position. As of December 31, 2012, the Company had no accrued interest or penalties related to uncertain tax positions. Since the Company is in a loss carryforward position, the Company is generally subject to examination by the U.S. federal, state and local income tax authorities for all tax years in which a loss carryforward is available. The Company is not currently under examination by the Internal Revenue Service or any other jurisdictions for any tax years.

The principal components of the Company’s deferred tax assets are as follows:

 

     December 31,  
     2011     2012  
     (in thousands)  

Deferred tax assets:

    

Net operating loss carryforwards

   $ 8,669      $ 15,616   

Research and development credits

     649        845   

Deferred revenue

     60        697   

Accrued bonus

     86        593   

Deferred rent

     207        164   

Other

     13        68   
  

 

 

   

 

 

 

Gross deferred tax assets

     9,684        17,983   

Deferred tax liability

     (16     (28

Valuation allowance

     (9,668     (17,955
  

 

 

   

 

 

 

Net deferred tax assets

   $      $   
  

 

 

   

 

 

 

ASC 740 requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. After consideration of all the evidence, both positive and negative, the Company has recorded a valuation allowance against its deferred tax assets at December 31, 2011 and 2012, respectively, because the Company’s management has determined that is it more likely than not that these assets will not be fully realized. The increase in the valuation allowance of $8,287,000 in 2012 primarily relates to the net loss incurred by the Company during that period.

 

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Table of Contents

FOUNDATION MEDICINE, INC.

Notes to Financial Statements

 

A reconciliation of the income tax expense at the federal statutory tax rate to the Company’s effective income tax rate follows:

 

     Year Ended December 31,  
         2011             2012      

Statutory tax rate

     34.0     34.0

State taxes, net of federal benefit

     4.9        4.8   

Permanent differences

     (2.3     (2.5

Research and development credit

     2.9        1.1   

Other

     (0.6     (0.3

Change in valuation allowance

     (38.9     (37.1
  

 

 

   

 

 

 

Effective tax rate

     0.0     0.0
  

 

 

   

 

 

 

 

10. Significant Agreements

Biopharmaceutical Customer

In November 2011, the Company entered into a Master Services Agreement (“MSA”) with a Biopharmaceutical Customer (“Customer”) establishing the legal and administrative framework for collaboration. In May 2012, the Company and Customer amended the MSA to include certain guaranteed quarterly minimum payments by Customer in return for the Company providing sufficient laboratory capacity to perform up to a maximum number of tests. The agreement has an initial two year term beginning on the amendment date, during which Customer shall pay the Company $14,200,000. The Customer may elect to extend the agreement for one additional year during which the Customer would pay the Company an additional $7,900,000. The Company identified three deliverables under the agreement: provision of one full-time project manager, participation on a joint steering committee and the provision of sufficient laboratory capacity to test a minimum number of samples provided by Customer. The Company assessed the agreement as a multiple-element arrangement pursuant to ASC 605-25 – Revenue Recognition: Multiple-Element Arrangements , and determined the deliverables were not separable due to a lack of stand-alone value for certain deliverables. The deliverables did not have standalone value as a result of the fact that the provision of a full-time project manager and the participation on a joint steering committee are not sold separately by any vendor, and a customer could not resell these deliverables on a standalone basis without the provision of the laboratory services. Thus, the arrangement is accounted for as a single unit of accounting and revenue is being recognized over the initial two-year performance period. The Company recognized revenue of $4,233,000 and $3,425,000 for the year ended December 31, 2012 and the six months ended June 30, 2013, respectively.

 

11. Commitments and Contingencies

One Kendall Square

In May 2010, the Company commenced a facility lease which expires in October 2015. The lease is subject to fixed rate escalation increases. As a result, the Company recognizes rent expense on a straight-line basis for the full amount of the commitment including the minimum rent increases over the lease term. The future minimum rental payments under the lease are included in the future minimum rental payments below. The Company recorded $803,000, $875,000, $438,000 and $438,000 of rent expense in the years ended December 31, 2011 and 2012 and the six months ended June 30, 2012 and 2013, respectively, associated with this lease.

 

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FOUNDATION MEDICINE, INC.

Notes to Financial Statements

 

150 Second Street

In 2013, the Company signed two additional facility leases. The first lease commenced in March 2013 and has a one year expected term. The second lease commences in September 2013 and has an eight year expected term. The second lease is subject to fixed rate escalation increases and the landlord waived $3,300,000 of the Company’s rent obligation. As a result, the Company will recognize rent expense on a straight-line basis over the expected lease term. The Company began recording rent expense in April 2013 upon gaining access to and control of the space. The landlord has also agreed to fund up to $9,200,000 million in tenant improvements. The Company records the tenant improvements as assets and deferred rent on the balance sheet. Deferred rent is amortized as a reduction in rent expense over the term of the lease agreement. Upon execution of the lease agreement, the Company paid a security deposit of $1,725,000, which is included in restricted cash as of June 30, 2013. The future minimum rent payments under the leases total $27,028,000.

As of December 31, 2012, the minimum future rent payments under the Company’s lease agreements are as follows:

 

     (in thousands)  

2013

   $ 1,007   

2014

     1,030   

2015

     863   
  

 

 

 

Total minimum lease payments

   $ 2,900   
  

 

 

 

Legal Matters

The Company, from time to time, is party to litigation arising in the ordinary course of its business. Management does not believe that the outcome of these claims will have a material adverse effect on the financial position, results of operations or cash flows of the Company based on the status of proceedings at this time.

 

12. Related Party Transactions

Since inception, the Company has received consulting and management services from an investor. The Company paid this investor approximately $535,000, $362,000 and $117,767 for these services during the years ended December 31, 2011 and 2012 and the six months ended June 30, 2013, respectively. Of these amounts, $4,000, $92,000 and $1,000 of amounts due to the investor were included in accounts payable and accrued expenses at December 31, 2011 and 2012 and June 30, 2013, respectively.

The Company recognized revenue of $287,000 and $526,000 in the year ended December 31, 2012 and the six months ended June 30, 2013, respectively, from an arrangement with an investor executed in the year ended December 31, 2012. Of these amounts, $88,000 and $0 were included in accounts receivable at December 31, 2012 and June 30, 2013, respectively.

 

13. 401(k) Savings Plan

The Company maintains a defined contribution savings plan covering all eligible U.S. employees under Section 401(k) of the Internal Revenue Code. Company contributions to the plan may be made at the discretion of the Board. To date, the Company has not made any contributions to the plan.

 

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FOUNDATION MEDICINE, INC.

Notes to Financial Statements

 

14. Subsequent Events

The Company has completed an evaluation of all subsequent events after the audited balance sheet date of December 31, 2012 and the unaudited balance sheet date of June 30, 2013 through September 12, 2013, the date this Registration Statement on Form S-1 was filed with the SEC, to ensure that this filing includes appropriate disclosure of events both recognized in the financial statements as of December 31, 2012 and June 30, 2013, and events which occurred subsequently but were not recognized in the financial statements. Except as described below, the Company has concluded that no subsequent event has occurred that requires disclosure.

Supply Agreement

In July 2013, the Company entered into a Supply, Service and Support Agreement with Illumina, Inc., under which the Company agreed to purchase a minimum quantity of reagents and other consumables and access to services and capital equipment over a five-year term. The Company’s minimum purchase commitment over the term of the agreement is approximately $6,100,000 as of the effective date.

Reverse Stock Split

In September 2013, the Company’s board of directors and stockholders approved a one-for-four reverse stock split of the Company’s common stock. The reverse stock split became effective on September 12, 2013. All share and per share amounts in the financial statements have been retroactively adjusted for all periods presented to give effect to the reverse stock split, including reclassifying an amount equal to the reduction in par value to additional paid-in capital.

 

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Table of Contents

 

 

5,000,000 Shares

 

LOGO

Foundation Medicine, Inc.

Common Stock

 

 

 

 

 

Goldman, Sachs & Co.   J.P. Morgan
Leerink Swann   Sanford C. Bernstein

 

 

 

 

 

 


Table of Contents

PART II

Information Not Required in Prospectus

Item 13. Other Expenses of Issuance and Distribution.

The following table sets forth the fees and expenses, other than underwriting discounts and commissions, payable in connection with the registration of the common stock hereunder. All amounts are estimates except the SEC registration fee.

 

SEC registration fee

   $ 12,549   

FINRA filing fee

   $ 14,300   

NASDAQ listing fee

   $ 125,000   

Blue Sky fees and expenses

   $ 30,000   

Printing and engraving expenses

   $ 275,000   

Legal fees and expenses

   $ 1,685,000   

Accounting fees and expenses

   $ 600,000   

Transfer agent and registrar fees and expenses

   $ 10,000   

Miscellaneous

   $ 98,151   
  

 

 

 

Total

   $ 2,850,000   
  

 

 

 

 

  * To be provided by amendment.

Item 14. Indemnification of Directors and Officers.

Section 145 of the Delaware General Corporation Law, or the DGCL, authorizes a corporation to indemnify its directors and officers against liabilities arising out of actions, suits and proceedings to which they are made or threatened to be made a party by reason of the fact that they have served or are currently serving as a director or officer to a corporation. The indemnity may cover expenses (including attorneys’ fees) judgments, fines and amounts paid in settlement actually and reasonably incurred by the director or officer in connection with any such action, suit or proceeding. Section 145 permits corporations to pay expenses (including attorneys’ fees) incurred by directors and officers in advance of the final disposition of such action, suit or proceeding. In addition, Section 145 provides that a corporation has the power to purchase and maintain insurance on behalf of its directors and officers against any liability asserted against them and incurred by them in their capacity as a director or officer, or arising out of their status as such, whether or not the corporation would have the power to indemnify the director or officer against such liability under Section 145.

We have adopted provisions in our certificate of incorporation and bylaws to be in effect at the completion of this offering that limit or eliminate the personal liability of our directors to the fullest extent permitted by the DGCL, as it now exists or may in the future be amended. Consequently, a director will not be personally liable to us or our stockholders for monetary damages or breach of fiduciary duty as a director, except for liability for:

 

  Ÿ  

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

 

  Ÿ  

any act or omission not in good faith or that involves intentional misconduct or a knowing violation of law;

 

  Ÿ  

any unlawful payments related to dividends or unlawful stock purchases, redemptions or other distributions; or

 

  Ÿ  

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

These limitations of liability do not alter director liability under the federal securities laws and do not affect the availability of equitable remedies such as an injunction or rescission.

 

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In addition, our bylaws provide that:

 

  Ÿ  

we will indemnify our directors, officers and, in the discretion of our board of directors, certain employees to the fullest extent permitted by the DGCL, as it now exists or may in the future be amended; and

 

  Ÿ  

we will advance reasonable expenses, including attorneys’ fees, to our directors and, in the discretion of our board of directors, to our officers and certain employees, in connection with legal proceedings relating to their service for or on behalf of us, subject to limited exceptions.

We have entered into indemnification agreements with each of our directors and intend to enter into such agreements with certain of our executive officers. These agreements provide that we will indemnify each of our directors, certain of our executive officers and, at times, their affiliates to the fullest extent permitted by Delaware law. We will advance expenses, including attorneys’ fees (but excluding judgments, fines and settlement amounts), to each indemnified director, executive officer or affiliate in connection with any proceeding in which indemnification is available and we will indemnify our directors and officers for any action or proceeding arising out of that person’s services as a director or officer brought on behalf of us and/or in furtherance of our rights. Additionally, each of our directors may have certain rights to indemnification, advancement of expenses and/or insurance provided by their affiliates, which indemnification relates to and might apply to the same proceedings arising out of such director’s services as a director referenced herein. Nonetheless, we have agreed in the indemnification agreements that our obligations to those same directors are primary and any obligation of the affiliates of those directors to advance expenses or to provide indemnification for the expenses or liabilities incurred by those directors are secondary.

We also maintain general liability insurance which covers certain liabilities of our directors and officers arising out of claims based on acts or omissions in their capacities as directors or officers, including liabilities under the Securities Act.

The underwriting agreement filed as Exhibit 1.1 to this registration statement provides for indemnification of us and our directors and officers by the underwriters against certain liabilities under the Securities Act and the Exchange Act.

Item 15. Recent Sales of Unregistered Securities.

The following list sets forth information as to all securities we have sold since January 1, 2010, which were not registered under the Securities Act.

 

  1. On September 10, 2012, we issued an aggregate of 18,805,304 shares of our Series B preferred stock to 19 investors for aggregate consideration of approximately $42.5 million. On December 28, 2012, we issued an aggregate of 5,956,830 shares of our Series B preferred stock to five investors for aggregate consideration of approximately $13.5 million.

 

  2. On November 1, 2010, we issued a Preferred Stock Purchase Warrant to Lighthouse Capital Partners VI, L.P., exercisable for an aggregate of up to 200,000 shares of our Series A preferred stock.

 

  3.

On March 30, 2010, we issued an aggregate of 7,000,000 shares of our Series A preferred stock to one investor for aggregate consideration of approximately $7.0 million. On February 7, 2011, we issued an aggregate of 1,000,000 shares of our Series A preferred stock to one existing investor for aggregate consideration of approximately $1.0 million. On March 30, 2011, we issued an aggregate of 5,000,000 shares of our Series A preferred stock to one existing investor for aggregate consideration of approximately $5.0 million. On October 14, 2011, we issued an aggregate of 5,500,000 shares of our Series A preferred stock to one existing investor for aggregate consideration of approximately $5.5 million. On August 8, 2011, we issued an aggregate of 10,000,000 shares of our Series A preferred

 

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stock to one investor for aggregate consideration of approximately $10.0 million. On August 23, 2011, we issued an aggregate of 5,000,000 shares of our Series A preferred stock to one investor for aggregate consideration of approximately $5.0 million. On April 18, 2012, we issued an aggregate of 10,250,000 shares of our Series A preferred stock to four existing investors for aggregate consideration of approximately $10.3 million.

 

  4. Between August 5, 2010 and August 31, 2013, we have granted stock options to purchase an aggregate of 3,722,770 shares of our common stock with exercise prices ranging from $0.08 to $7.12 per share to our employees, consultants and directors pursuant to our 2010 Plan. Of these, options covering an aggregate of 87,660 shares were cancelled without being exercised.

 

  5. We sold an aggregate of 1,441,159 shares of common stock to employees, directors and consultants for cash consideration in the aggregate amount of $187,018.14 upon the exercise of stock options.

We deemed the offers, sales and issuances of the securities described in paragraphs (1) through (3) above to be exempt from registration under the Securities Act, in reliance on Section 4(2) of the Securities Act, including Regulation D and Rule 506 promulgated thereunder, regarding transactions by an issuer not involving a public offering. All purchasers of securities in transactions exempt from registration pursuant to Regulation D represented to us that they were accredited investors and were acquiring the shares for investment purposes only and not with a view to, or for sale in connection with, any distribution thereof and that they could bear the risks of the investment and could hold the securities for an indefinite period of time. The purchasers received written disclosures that the securities had not been registered under the Securities Act and that any resale must be made pursuant to a registration statement or an available exemption from such registration.

We deemed the grants of stock options described in paragraph (4) and the issuances of shares of common stock upon the exercise of stock options described in paragraph (5) as exempt pursuant to Section 4(2) of the Securities Act or to be exempt from registration under the Securities Act in reliance on Rule 701 of the Securities Act as offers and sales of securities under compensatory benefit plans and contracts relating to compensation in compliance with Rule 701. Each of the recipients of securities in any transaction exempt from registration either received or had adequate access, through employment, business or other relationships, to information about us.

All certificates representing the securities issued in the transactions described in this Item 15 included appropriate legends setting forth that the securities had not been offered or sold pursuant to a registration statement and describing the applicable restrictions on transfer of the securities. There were no underwriters employed in connection with any of the transactions set forth in this Item 15.

Item 16. Exhibits and Financial Statement Schedules.

(a) Exhibits:

The exhibits to the registration statement are listed in the Exhibit Index to this registration statement and are incorporated herein by reference.

(b) Financial Statements Schedules:

Schedules have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto.

 

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Item 17. Undertakings.

Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, or the Act, may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is therefore unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

The Registrant hereby undertakes that:

 

  (a) The Registrant will provide to the underwriter at the closing as specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser.

 

  (b) For purposes of determining any liability under the Securities Act of 1933, as amended, the information omitted from a form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act of 1933, as amended, shall be deemed to be part of this registration statement as of the time it was declared effective.

 

  (c) For the purpose of determining any liability under the Securities Act of 1933, as amended, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

 

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SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Amendment No. 4 to Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Cambridge, Commonwealth of Massachusetts, on September 12, 2013.

 

FOUNDATION MEDICINE, INC.

By:

 

/s/ Michael J. Pellini, M.D.

  Michael J. Pellini, M.D.
  President and Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, as amended, this Amendment No. 4 to Registration Statement has been signed by the following person in the capacities and on the date indicated.

 

Name

  

Title

  

Date

/s/ Michael J. Pellini, M.D.     

Michael J. Pellini, M.D.

   President, Chief Executive Officer and Director (Principal Executive Officer)    September 12, 2013

/s/ Jason Ryan     

Jason Ryan

   Vice President, Finance (Principal Financial and Accounting Officer)    September 12, 2013

*

Alexis Borisy

   Director    September 12, 2013

*

Brook Byers

   Director    September 12, 2013

*

Evan Jones

   Director    September 12, 2013

*

Mark Levin

   Director    September 12, 2013

*

David Schenkein, M.D.

   Director    September 12, 2013

*

Krishna Yeshwant, M.D.

   Director    September 12, 2013

 

* Pursuant to Power of Attorney

 

By:

 

/s/ Michael J. Pellini, M.D.

 

Michael J. Pellini, M.D.

Attorney-in-Fact

 

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EXHIBIT INDEX

 

Exhibit
No.
 

Exhibit Index

  1.1   Form of Underwriting Agreement
  3.1   Fifth Amended and Restated Certificate of Incorporation of the Registrant, as amended and currently in effect
  3.2**   Form of Sixth Amended and Restated Certificate of Incorporation of the Registrant (to be effective upon completion of this offering)
  3.3**   Bylaws of the Registrant, as amended and currently in effect
  3.4**   Form of Amended and Restated Bylaws of the Registrant (to be effective upon completion of this offering)
  4.1   Form of Common Stock certificate of the Registrant
  4.2**   Warrant to Purchase Preferred Stock of the Registrant, dated as of November 1, 2010, issued to Lighthouse Capital Partners VI, L.P.
  4.3**   Second Amended and Restated Investors’ Rights Agreement, by and between the Registrant and the Investors named therein, dated as of June 20, 2013
  5.1   Opinion of Goodwin Procter LLP
10.1†**   Amended and Restated 2010 Stock Incentive Plan and forms of agreements thereunder
10.2†   2013 Stock Option and Incentive Plan and forms of agreements thereunder
10.3†   Executive Employee Offer Letter issued by the Registrant to Michael J. Pellini, dated as of September 9, 2013
10.4†**   Executive Employee Offer Letter issued by the Registrant to Kevin Krenitsky, dated as of March 7, 2013
10.5†**   Executive Employee Offer Letter issued by the Registrant to Robert W. Hesslein, dated as of March 7, 2013
10.6†**   Executive Employee Offer Letter issued by the Registrant to Jason Ryan, dated as of March 7, 2013
10.7†   Executive Employee Offer Letter issued by the Registrant to Steven J. Kafka, dated as of May 21, 2013, as amended
10.8**   Form of Indemnification Agreement, to be entered into between the Registrant and its directors and officers
10.9**   Lease Agreement, by and between the Registrant and RB Kendall Fee, LLC, dated as of July 13, 2010
10.10**   Lease, by and between the Registrant and 150 Second Street, LLC, dated as of February 4, 2013
10.11**   Lease, by and between the Registrant and 150 Second Street, LLC, dated as of March 27, 2013
10.12**   Loan and Security Agreement, by and between the Registrant and Lighthouse Capital Partners VI, L.P., dated as of November 1, 2010, as amended
10.13#   Supply and Support Agreement, by and between the Registrant and Illumina, Inc., effective as of July 25, 2013
10.14#**   Laboratory Master Services Agreement, by and between the Registrant and Novartis Pharmaceuticals Corporation, dated as of November 21, 2011, as amended
10.15   Executive Employee Offer Letter issued by the Registrant to Vincent A. Miller, dated as of August 1, 2011, as amended

 

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Exhibit
No.
 

Exhibit Index

10.16†   2013 Employee Stock Purchase Plan
21.1**   Subsidiaries of the Registrant
23.1   Consent of Ernst & Young LLP
23.2   Consent of Goodwin Procter LLP (included in Exhibit 5.1)
24.1**   Power of Attorney (included in page II-5)

 

  * To be included by amendment
  ** Previously filed.
  Indicates a management contract or any compensatory plan, contract or arrangement.
  # Application has been made to the Securities and Exchange Commission for confidential treatment of certain provisions. Omitted material for which confidential treatment has been requested was filed separately with the Securities and Exchange Commission.

 

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Exhibit 1.1

Foundation Medicine, Inc.

Common Stock

 

 

Underwriting Agreement

                     , 2013

Goldman, Sachs & Co.,

J.P. Morgan Securities LLC

  As representatives of the several Underwriters

    named in Schedule I hereto,

c/o Goldman, Sachs & Co.

200 West Street,

New York, New York 10282-2198

c/o J. P. Morgan Securities LLC

383 Madison Avenue

New York, NY 10179

Ladies and Gentlemen:

Foundation Medicine, Inc., a Delaware corporation (the “Company”), proposes, subject to the terms and conditions stated herein, to issue and sell to the Underwriters named in Schedule I hereto (the “Underwriters”), for whom you are acting as representatives (the “Representatives”), an aggregate of [•] shares (the “Firm Shares”) and, at the election of the Underwriters, up to [•] additional shares (the “Optional Shares”) of Common Stock, par value $0.0001 per share (“Stock”), of the Company (the Firm Shares and the Optional Shares that the Underwriters elect to purchase pursuant to Section 2 hereof being collectively called the “Shares”).

1. The Company represents and warrants to, and agrees with, each of the Underwriters that:

(a) A registration statement on Form S-1 (File No. 333-190226) (the “Initial Registration Statement”) in respect of the Shares has been filed with the Securities and Exchange Commission (the “Commission”); the Initial Registration Statement and any post-effective amendment thereto, each in the form heretofore


delivered to you, and, excluding exhibits thereto, to you for each of the other Underwriters, have been declared effective by the Commission in such form; other than a registration statement, if any, increasing the size of the offering (a “Rule 462(b) Registration Statement”), filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended (the “Act”), which became effective upon filing, no other document with respect to the Initial Registration Statement has heretofore been filed with the Commission; and no stop order suspending the effectiveness of the Initial Registration Statement, any post-effective amendment thereto or the Rule 462(b) Registration Statement, if any, has been issued and no proceeding for that purpose has been initiated or, to the Company’s knowledge, threatened by the Commission (any preliminary prospectus included in the Initial Registration Statement or filed with the Commission pursuant to Rule 424(a) of the rules and regulations of the Commission under the Act is hereinafter called a “Preliminary Prospectus”; the various parts of the Initial Registration Statement and the Rule 462(b) Registration Statement, if any, including all exhibits thereto and including the information contained in the form of final prospectus filed with the Commission pursuant to Rule 424(b) under the Act in accordance with Section 5(a) hereof and deemed by virtue of Rule 430A under the Act to be part of the Initial Registration Statement at the time it was declared effective, each as amended at the time such part of the Initial Registration Statement became effective or such part of the Rule 462(b) Registration Statement, if any, became or hereafter becomes effective, are hereinafter collectively called the “Registration Statement”; the Preliminary Prospectus relating to the Shares that was included in the Registration Statement immediately prior to the Applicable Time (as defined in Section 1(c) hereof) is hereinafter called the “Pricing Prospectus”; such final prospectus, in the form first filed pursuant to Rule 424(b) under the Act, is hereinafter called the “Prospectus”; and any “issuer free writing prospectus” as defined in Rule 433 under the Act relating to the Shares is hereinafter called an “Issuer Free Writing Prospectus”); any oral or written communication with potential investors undertaken in reliance on Section 5(d) of the Act is hereinafter called a “Section 5(d) Communication”; and any Section 5(d) Communication that is a written communication within the meaning of Rule 405 under the Act is hereinafter called a “Section 5(d) Writing”;

(b) No order preventing or suspending the use of any Preliminary Prospectus or any Issuer Free Writing Prospectus has been issued by the Commission, and each Preliminary Prospectus, at the time of filing thereof, conformed in all material respects to the requirements of the Act and the rules and regulations of the Commission thereunder, and did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided , however , that this representation and warranty shall not apply to any statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company by an Underwriter through a Representative expressly for use therein;

 

2


(c) For the purposes of this Agreement, the “Applicable Time” is [            :            ] [    ].m. (Eastern time) on the date of this Agreement; the Pricing Prospectus, as supplemented by the information listed on Schedule II(b) hereto, taken together (collectively, the “Pricing Disclosure Package”), as of the Applicable Time, did not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; and each Issuer Free Writing Prospectus listed on Schedule II(a) and Section 5(d) Writing listed on Schedule II(c) hereto does not conflict with the information contained in the Registration Statement, the Pricing Prospectus or the Prospectus and each such Issuer Free Writing Prospectus and Section 5(d) Writing, as supplemented by and taken together with the Pricing Disclosure Package as of the Applicable Time, did not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided , however , that this representation and warranty shall not apply to statements or omissions made in an Issuer Free Writing Prospectus or Section 5(d) Writing in reliance upon and in conformity with information furnished in writing to the Company by an Underwriter through a Representative expressly for use therein;

(d) The Registration Statement conforms, and the Prospectus and any further amendments or supplements to the Registration Statement and the Prospectus will conform, in all material respects to the requirements of the Act and the rules and regulations of the Commission thereunder. The Registration Statement does not, and the Prospectus and any other further amendments or supplements to the Registration Statement will not, as of the applicable effective date as to each part of the Registration Statement and as of the applicable filing date as to the Prospectus and any amendment or supplement thereto, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that this representation and warranty shall not apply to any statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company by an Underwriter through a Representative. expressly for use therein;

(e) Neither the Company nor any of its subsidiaries has sustained since the date of the latest audited financial statements included in the Pricing Prospectus any material loss or material interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Pricing Prospectus; and, since the respective dates as of which information is given in the Registration Statement and the Pricing Prospectus, there has not been any change in the capital stock (other than

 

3


(A) as a result of the exercise or settlement (including any “net” or “cashless” exercises or settlements) of stock options or restricted stock units or the award of stock options or restricted stock units in the ordinary course of business pursuant to the Company’s equity plans that are described in the Pricing Prospectus or (B) the repurchase of shares of Common Stock of the Company, which were issued pursuant to the early exercise of stock options by option holders and are subject to repurchase by the Company as disclosed in the Pricing Prospectus) or long-term debt of the Company or any of its subsidiaries or any material adverse change, or any development involving a prospective material adverse change, in or affecting the general affairs, management, financial position, stockholders’ equity or results of operations of the Company and its subsidiaries, taken as a whole, otherwise than as set forth or contemplated in the Pricing Prospectus;

(f) The Company and its subsidiaries do not own any real property and have good and marketable title to all personal property owned by them, in each case free and clear of all liens, encumbrances and defects except such as are described in the Pricing Prospectus or such as do not materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company and its subsidiaries; and any real property and buildings held under lease by the Company and its subsidiaries are held by them, to the Company’s knowledge, under valid, subsisting and enforceable leases (subject to the effects of (A) bankruptcy, insolvency, fraudulent conveyance, fraudulent transfer, reorganization, moratorium or other similar laws relating to or affecting the rights or remedies of creditors generally; (B) the application of general principles of equity (including, without limitation, concepts of materiality, reasonableness, good faith and fair dealing, regardless of whether enforcement is considered in proceedings at law or in equity); and (C) applicable law and public policy with respect to rights to indemnity and contribution) with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company and its subsidiaries;

(g) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware, with power and authority (corporate and other) to own its properties and conduct its business as described in the Pricing Prospectus, and has been duly qualified as a foreign corporation for the transaction of business and is in good standing under the laws of each other jurisdiction in which it owns or leases properties or conducts any business so as to require such qualification, or is subject to no material liability or disability by reason of the failure to be so qualified in any such jurisdiction except where the failure to be so qualified or be in good standing in such jurisdictions would not, individually or in the aggregate, reasonably be expected to have a material adverse effect on the financial position, stockholders’ equity or results of operations of the Company and its subsidiaries, taken as a whole (a “Material Adverse Effect”); and each subsidiary of the Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation;

 

4


(h) The Company has an authorized, issued and outstanding capitalization as set forth in the Pricing Prospectus and all of the issued shares of capital stock of the Company have been duly and validly authorized and issued and are fully paid and non-assessable and conform to the description of the capital stock contained in the Pricing Prospectus and Prospectus; and all of the issued shares of capital stock of each subsidiary of the Company have been duly and validly authorized and issued, are fully paid and non-assessable and (except as otherwise set forth in the Pricing Prospectus) are owned directly or indirectly by the Company, free and clear of all liens, encumbrances, equities or claims;

(i) The Shares to be issued and sold by the Company to the Underwriters hereunder have been duly authorized and, when issued and delivered against payment therefor as provided herein, will be validly issued and fully paid and non-assessable and will conform to the description of the Stock contained in the Prospectus;

(j) The issue and sale of the Shares and the compliance by the Company with this Agreement and the consummation by the Company of the transactions herein contemplated will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, (A) any indenture, mortgage, deed of trust, loan agreement, lease or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries is bound or to which any of the property or assets of the Company or any of its subsidiaries is subject, (B) the Certificate of Incorporation, By-laws or similar organizational documents of the Company or any of its subsidiaries or any statute or (C) any order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company or any of its subsidiaries or any of their properties, except in the case of (A) and (C) for such violations that would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect; and no consent, approval, authorization, order, registration or qualification of or with any such court or governmental agency or body is required for the issue and sale of the Shares or the consummation by the Company of the transactions contemplated by this Agreement, except the registration under the Act of the Shares, the approval by the Financial Industry Regulatory Authority (“FINRA”) of the underwriting terms and arrangements, the approval for listing the Shares on the Nasdaq Global Market (“NASDAQ”) and such consents, approvals, authorizations, registrations or qualifications as may be required under state securities or Blue Sky laws in connection with the purchase and distribution of the Shares by the Underwriters;

 

5


(k) Neither the Company nor any of its subsidiaries is (i) in violation of its Certificate of Incorporation or By-laws or similar organizational documents, (ii) in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any indenture, mortgage, deed of trust, loan agreement, lease or other agreement or instrument to which it is a party or by which it or any of its properties may be bound or (iii) in violation of any law or statute or any judgment, order, rule or regulation of any court or arbitrator or governmental or regulatory authority (collectively, the “Regulatory Authorities”), except in the case of (ii) or (iii) for such violations or defaults as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect;

(l) The statements set forth in the Pricing Prospectus and Prospectus under the caption “Description of Capital Stock”, insofar as they purport to constitute a summary of the terms of the Company’s capital stock, under the captions “Business – Government Regulations”, “Certain Material U.S. Federal Income Tax Considerations”, and under the caption “Underwriting”, insofar as they purport to describe the provisions of the laws and documents referred to therein, are accurate, complete and fair;

(m) Other than as set forth in the Pricing Prospectus, there are no legal or governmental proceedings pending to which the Company or any of its subsidiaries is a party or of which any property of the Company or any of its subsidiaries is the subject which, if determined adversely to the Company or any of its subsidiaries, would, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect; and, to the Company’s knowledge, no such proceedings are threatened by any Regulatory Authorities or threatened by others;

(n) The Company is not and, after giving effect to the offering and sale of the Shares and the application of the proceeds thereof, will not be an “investment company”, as such term is defined in the Investment Company Act of 1940, as amended (the “Investment Company Act”);

(p) At the time of filing the Initial Registration Statement the Company was not and, as of each Time of Delivery, will not be an “ineligible issuer,” as defined under Rule 405 under the Act;

(q) Ernst & Young LLP, who have certified certain financial statements of the Company and its subsidiaries, are independent public accountants as required by the Act and the rules and regulations of the Commission thereunder;

(r) The Company maintains a system of internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that complies with the requirements of the Exchange Act applicable to the Company and has been designed by the Company’s principal executive officer and principal financial officer, or under their supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

 

6


The Company’s internal accounting controls are sufficient to provide reasonable assurance that (i) transactions are executed in accordance with the general or specific authorizations of the Company’s management; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (iii) access to assets is permitted only in accordance with the general or specific authorization of the Company’s management; (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. The Company is not aware of any material weaknesses in its internal control over financial reporting;

(s) Since the date of the latest audited financial statements included in the Pricing Prospectus, there has been no change in the Company’s internal control over financial reporting that has materially and adversely affected, or is reasonably likely to materially and adversely affect, the Company’s internal control over financial reporting;

(t) The Company maintains disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Exchange Act) that are designed to comply with the requirements of the Exchange Act; such disclosure controls and procedures have been designed to ensure that material information relating to the Company and its subsidiaries is made known to the Company’s principal executive officer and principal financial officer by others within those entities; and such disclosure controls and procedures are effective;

(u) Except as disclosed in the Pricing Prospectus, the Company owns or has valid, binding and enforceable licenses or other rights under the patents and patent applications, copyrights, trademarks, trademark registrations, service marks, service mark registrations, trade names, service names and know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures) necessary for, or used in the conduct, or the proposed conduct, of the business of the Company in the manner described in the Pricing Prospectus (collectively, the “Enabling Intellectual Property”); to the knowledge of the Company, the patents, trademarks, and copyrights held or licensed by the Company included within the Enabling Intellectual Property are valid, enforceable, and subsisting; except as disclosed in the Pricing Prospectus, (i) the Company is not obligated to pay a material royalty, grant a license, or provide other material consideration to any third party in connection with the Enabling Intellectual Property, (ii) other than notices occasionally received in the ordinary course of business from third parties claiming infringement or inviting the party to take licenses under third-party patents, the Company has not received written notice of any claim of infringement, misappropriation or conflict with any asserted rights of others with respect to any of the Company’s products, proposed products, processes or Enabling Intellectual

 

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Property, (iii) neither the sale nor use of any of the discoveries, inventions, products, proposed products or processes of the Company referred to in the Pricing Prospectus do or will, to the knowledge of the Company, infringe, interfere or conflict with any right or valid patent claim of any third party, and (iv) to the knowledge of the Company, no third party has any ownership right in or to any Enabling Intellectual Property that is owned by the Company, other than any co-owner of any patent constituting Enabling Intellectual Property who is listed on the records of the U.S. Patent and Trademark Office (the “USPTO”) and any co-owner of any patent application constituting Enabling Intellectual Property who is named in such patent application, and, to the knowledge of the Company, no third party has any ownership right in or to any Enabling Intellectual Property in any field of use that is exclusively licensed to the Company, other than any licensor to the Company of such Enabling Intellectual Property;

(v) All patents and patent applications owned by or licensed to the Company or under which the Company has rights have, to the knowledge of the Company, been duly and properly filed and maintained; to the knowledge of the Company, the parties prosecuting such applications have complied with their duty of candor and disclosure to the USPTO in connection with such applications; and the Company is not aware of any facts required to be disclosed to the USPTO that were not disclosed to the USPTO and which would preclude the grant of a patent in connection with any such application or could form the basis of a finding of invalidity with respect to any patents that have issued with respect to such applications;

(w) The studies and tests conducted by or, to the Company’s knowledge, on behalf of or sponsored by the Company were, and if still pending are being, conducted in all material respects in accordance with standard medical and scientific research procedures; the Company has operated and currently is in compliance in all respects with all applicable rules and regulations of the U.S. Food and Drug Administration, the United States Department of Health and Human Services, the Centers for Medicare and Medicaid Services or any other Regulatory Authorities, except to the extent that any non-compliance thereof would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect; except as disclosed in the Pricing Prospectus, the Company has not received any notice from the Regulatory Authorities requiring the termination or suspension of any studies or tests conducted by or, to the Company’s knowledge, on behalf of or sponsored by the Company;

(x) The Company has full right, power and authority to execute and deliver this Agreement and to perform its obligations hereunder; and all action required to be taken for the due and proper authorization, execution and delivery by it of this Agreement and the consummation by it of the transactions contemplated hereby has been duly and validly taken;

 

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(y) This Agreement has been duly authorized, executed and delivered by the Company;

(z) From the time of initial confidential submission of the Initial Registration Statement (or, if earlier, the first date on which a Section 5(d) Communication was made) through the date hereof, the Company has been and is an “emerging growth company” as defined in Section 2(a)(19) of the Act (an “Emerging Growth Company”);

(aa) The Company has not (i) engaged in, or authorized any other person to engage in, any Section 5(d) Communications, other than Section 5(d) Communications with the prior consent of the Representatives with entities that are qualified institutional buyers as defined in Rule 144A under the Act or institutions that are accredited investors as defined in Rule 501(a) under the Act; or (ii) distributed, or authorized any other person to distribute, any Section 5(d) Writings, other than those distributed with the prior consent of the Representatives that are listed on Schedule II(b) hereto;

(bb) The Company and its subsidiaries have insurance covering their respective properties, operations, personnel and businesses, including business interruption insurance, which insurance insures against such risks and, to the Company’s knowledge, is in such amounts as is reasonably prudent and customary in the business in which it is engaged; and neither the Company nor any of its subsidiaries (i) has received written notice from any insurer or agent of such insurer that capital improvements or other expenditures are required or necessary to be made in order to continue such insurance or (ii) believes that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage at a reasonable cost from similar insurers;

(cc) The Company and each of its subsidiaries (i) are in compliance with all, and have not violated any, laws, regulations, ordinances, rules, orders, judgments, decrees, permits or other legal requirements of any Regulatory Authority, including without limitation any international, national, state, provincial, regional, or local authority, relating to the protection of human health or safety, the environment, or natural resources, or to hazardous or toxic substances or wastes, pollutants or contaminants (“Environmental Laws”) applicable to such entity, which compliance includes, without limitation, obtaining, maintaining and complying with all permits and authorizations and approvals required by Environmental Laws to conduct their respective businesses, and (ii) have not received written notice of any actual or alleged violation of Environmental Laws, or of any potential liability for or other obligation concerning the presence, disposal or release of hazardous or toxic substances or wastes, pollutants or contaminants, except in the case of either (i) or (ii) where the failure to comply or the potential liability or obligation would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Except as described in the Pricing Disclosure Package

 

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and the Prospectus, (A) there are no proceedings that are pending against the Company or any of its subsidiaries under Environmental Laws in which a Regulatory Authority is also a party and (B) the Company and its subsidiaries are not aware of any issues regarding compliance with Environmental Laws, or liabilities under Environmental Laws or concerning hazardous or toxic substances or wastes, pollutants or contaminants, that would reasonably be expected to have a Material Adverse Effect;

(dd) Except as described in the Pricing Prospectus, there are no contracts, agreements or understandings between the Company or any subsidiary and any person granting such person the right to require the Company or any subsidiary to file a registration statement under the Act with respect to any securities of the Company or any subsidiary;

(ee) Except as described in the Pricing Prospectus, the Company and each of its subsidiaries have filed all material federal, state, local and foreign income and franchise tax returns required to be filed through the date hereof, subject to permitted extensions, and have paid all material taxes due thereon. Except as described in the Pricing Disclosure Package, no material tax deficiency has been determined adversely to the Company or any of its subsidiaries;

(ff) Neither the Company nor any of its subsidiaries nor, to the knowledge of the Company, any director, officer, agent, employee or other person associated with or authorized to act on behalf of the Company or any of its subsidiaries has (i) used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expense relating to political activity; (ii) made any direct or indirect unlawful payment to any foreign or domestic government official or employee from corporate funds; (iii) violated or is in violation of any provision of the Foreign Corrupt Practices Act of 1977 or the U.K. Bribery Act; or (iv) made any bribe, rebate, payoff, influence payment, kickback or other unlawful payment;

(gg) The operations of the Company and its subsidiaries are and have been conducted at all times in material compliance with applicable financial recordkeeping and reporting requirements of the Currency and Foreign Transactions Reporting Act of 1970, as amended, the money laundering statutes of all jurisdictions, the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any governmental agency (collectively, the “Money Laundering Laws”) and no action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving the Company or any of its subsidiaries with respect to the Money Laundering Laws is pending or, to the knowledge of the Company, threatened;

(hh) None of the Company, any of its subsidiaries or, to the knowledge of the Company, any director, officer, agent, employee or affiliate of the Company or any of its subsidiaries is currently subject to any U.S. sanctions administered by the Office of Foreign Assets Control of the U.S. Department of the Treasury

 

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(“OFAC”); and the Company will not, directly or indirectly, use the proceeds of the offering of the Shares hereunder, or lend, contribute or otherwise make available such proceeds to any subsidiary, joint venture partner or other person or entity, for the purpose of financing the activities of any person currently subject to any U.S. sanctions administered by OFAC;

(ii) The financial statements included in the Registration Statement, the Pricing Disclosure Package and the Prospectus, together with the related schedules and notes, present fairly the financial position of the Company and its subsidiaries in all material respects at the dates indicated and the statement of operations, stockholders’ equity and cash flows of the Company and its subsidiaries for the periods specified; said financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) applied on a consistent basis throughout the periods involved. The supporting schedules, if any, present fairly in accordance with GAAP the information required to be stated therein. The selected financial data and the summary financial information included in the Registration Statement, the Pricing Disclosure Package and the Prospectus present fairly the information shown therein in all material respects and have been compiled on a basis consistent with that of the financial statements included therein. Except as included therein, no historical or pro forma financial statements or supporting schedules are required to be included in the Registration Statement, the Pricing Disclosure Package or the Prospectus under the Act or the rules and regulations promulgated thereunder; and

(jj) There are no debt securities or preferred stock of, or guaranteed by, the Company that are rated by a “nationally recognized statistical rating organization,” as such term is defined in Section 3(a)(62) of the Exchange Act.

2. Subject to the terms and conditions herein set forth, (a) the Company agrees to issue and sell to each of the Underwriters, and each of the Underwriters agrees, severally and not jointly, to purchase from the Company, at a purchase price per share of $[•], the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I hereto and (b) in the event and to the extent that the Underwriters shall exercise the election to purchase Optional Shares as provided below, the Company agrees to issue and sell to each of the Underwriters, and each of the Underwriters agrees, severally and not jointly, to purchase from the Company, at the purchase price per share set forth in clause (a) of this Section 2, that portion of the number of Optional Shares as to which such election shall have been exercised (to be adjusted by you so as to eliminate fractional shares) determined by multiplying such number of Optional Shares by a fraction, the numerator of which is the maximum number of Optional Shares which such Underwriter is entitled to purchase as set forth opposite the name of such Underwriter in Schedule I hereto and the denominator of which is the maximum number of Optional Shares that all of the Underwriters are entitled to purchase hereunder.

 

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The Company hereby grants to the Underwriters the right to purchase at their election up to [•] Optional Shares, at the purchase price per share set forth in the paragraph above, for the sole purpose of covering sales of shares in excess of the number of Firm Shares, provided that the purchase price per Optional Share shall be reduced by an amount per share equal to any dividends or distributions declared by the Company and payable on the Firm Shares but not payable on the Optional Shares. Any such election to purchase Optional Shares may be exercised only by written notice from you to the Company, given within a period of 30 calendar days after the date of this Agreement, setting forth the aggregate number of Optional Shares to be purchased and the date on which such Optional Shares are to be delivered, as determined by you but in no event earlier than the First Time of Delivery (as defined in Section 4 hereof) or, unless you and the Company otherwise agree in writing, earlier than two or later than ten business days after the date of such notice.

3. Upon the authorization by you of the release of the Firm Shares, the several Underwriters propose to offer the Firm Shares for sale upon the terms and conditions set forth in the Prospectus.

4. (a) The Shares to be purchased by each Underwriter hereunder, in electronic form, and in such authorized denominations and registered in such names as the Representatives may request upon at least forty-eight hours’ prior notice to the Company shall be delivered by or on behalf of the Company to the Representatives, through the facilities of the Depository Trust Company (“DTC”), for the account of such Underwriter, against payment by or on behalf of such Underwriter of the purchase price therefor by wire transfer of Federal (same-day) funds to the account specified by the Company to the Representatives at least forty-eight hours in advance. The time and date of such delivery and payment shall be, with respect to the Firm Shares, 9:30 a.m., New York City time, on [•], 2013 or such other time and date as the Representatives and the Company may agree upon in writing, and, with respect to the Optional Shares, 9:30 a.m., New York City time, on the date specified by the Representatives in each written notice given by the Representatives of the Underwriters’ election to purchase such Optional Shares, or such other time and date as the Representatives and the Company may agree upon in writing. Such time and date for delivery of the Firm Shares is herein called the “First Time of Delivery”, such time and date for delivery of the Optional Shares, if not the First Time of Delivery, is herein called the “Second Time of Delivery”, and each such time and date for delivery is herein called a “Time of Delivery”.

(b) The documents to be delivered at each Time of Delivery by or on behalf of the parties hereto pursuant to Section 8 hereof, including the cross receipt for the Shares and any additional documents requested by the Underwriters pursuant to Section 8(l) hereof, will be delivered at the offices of Ropes & Gray LLP, Prudential Tower, 800 Boylston St., Boston, MA 02199 (the “Closing Location”), and the Shares will be delivered at the office of DTC or its

 

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designated location, all at such Time of Delivery. A meeting will be held at the Closing Location at [            :            ] p.m., New York City time, on the New York Business Day next preceding such Time of Delivery, at which meeting the final drafts of the documents to be delivered pursuant to the preceding sentence will be available for review by the parties hereto. For the purposes of this Section 4, “New York Business Day” shall mean each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in New York City are generally authorized or obligated by law or executive order to close.

5. The Company agrees with each of the Underwriters:

(a) To prepare the Prospectus in a form approved by you and to file such Prospectus pursuant to Rule 424(b) under the Act not later than the Commission’s close of business on the second business day following the execution and delivery of this Agreement, or, if applicable, such earlier time as may be required by Rule 430A(a)(3) under the Act; to make no further amendment or any supplement to the Registration Statement or the Prospectus prior to the last Time of Delivery which shall be disapproved by you promptly after reasonable notice thereof; to advise you, promptly after it receives notice thereof, of the time when any amendment to the Registration Statement has been filed or becomes effective or any amendment or supplement to the Prospectus has been filed and to furnish you with copies thereof; to file promptly all material required to be filed by the Company with the Commission pursuant to Rule 433(d) under the Act; to advise you, promptly after it receives notice thereof, of the issuance by the Commission of any stop order or of any order preventing or suspending the use of any Preliminary Prospectus or other prospectus in respect of the Shares, of the suspension of the qualification of the Shares for offering or sale in any jurisdiction, of the initiation or threatening of any proceeding for any such purpose, or of any request by the Commission for the amending or supplementing of the Registration Statement or the Prospectus or for additional information; and, in the event of the issuance of any stop order or of any order preventing or suspending the use of any Preliminary Prospectus or other prospectus relating to the Shares or suspending any such qualification, to promptly use its reasonable best efforts to obtain the withdrawal of such order;

(b) Promptly from time to time to take such action as you may reasonably request to qualify the Shares for offering and sale under the securities laws of such jurisdictions as you may request and to comply with such laws so as to permit the continuance of sales and dealings therein in such jurisdictions for as long as may be necessary to complete the distribution of the Shares, provided that in connection therewith the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction or subject itself to taxation in any such jurisdiction in which it was not otherwise subject to taxation;

 

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(c) Prior to 10:00 a.m., New York City time, on the New York Business Day next succeeding the date of this Agreement (or such other time as may be agreed to between the Company and the Representatives) and from time to time, to furnish the Underwriters with written and electronic copies of the Prospectus in New York City in such quantities as you may reasonably request, and, if the delivery of a prospectus (or in lieu thereof, the notice referred to in Rule 173(a) under the Act) is required at any time under the Act in connection with the offering or sale of the Shares and if at such time any event shall have occurred as a result of which the Prospectus as then amended or supplemented would include an untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made when such Prospectus (or in lieu thereof, the notice referred to in Rule 173(a) under the Act) is delivered, not misleading, or, if for any other reason it shall be necessary during such same period to amend or supplement the Prospectus in order to comply with the Act, to notify you and upon your request to prepare and furnish without charge to each Underwriter and to any dealer (whose name and address the underwriters shall furnish to the Company) in securities as many written and electronic copies as you may from time to time reasonably request of an amended Prospectus or a supplement to the Prospectus which will correct such statement or omission or effect such compliance; and in case any Underwriter is required to deliver a prospectus (or in lieu thereof, the notice referred to in Rule 173(a) under the Act) in connection with sales of any of the Shares at any time thereafter, upon your request but at the expense of such Underwriter, to prepare and deliver to such Underwriter as many written and electronic copies as you may request of an amended or supplemented Prospectus complying with Section 10(a)(3) of the Act;

(d) To make generally available to its securityholders as soon as practicable (which may be satisfied by filing with the Commission’s Electronic Data Gathering Analysis and Retrieval System (“EDGAR”)), but in any event not later than sixteen months after the effective date of the Registration Statement (as defined in Rule 158(c) under the Act), an earnings statement of the Company and its subsidiaries (which need not be audited) complying with Section 11(a) of the Act and the rules and regulations of the Commission thereunder (including, at the option of the Company, Rule 158);

(e)(1) During the period beginning from the date hereof and continuing to and including the date 180 days after the date of the Prospectus (the “Lock-Up Period”) not to (i) offer, sell, contract to sell, pledge, grant any option to purchase, make any short sale or otherwise transfer or dispose of, directly or indirectly, or file with the Commission a registration statement under the Act relating to, any securities of the Company that are substantially similar to the Shares, including but not limited to any options or warrants to purchase shares of Stock or any securities that are convertible into or exchangeable for, or that represent the right to receive, Stock or any such substantially similar securities, or publicly disclose

 

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the intention to make any offer, sale, pledge, disposition or filing or (ii) enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of the Stock or any such other securities, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Stock or such other securities, in cash or otherwise, without the prior written consent of each Representative; provided, however, that the foregoing restrictions shall not apply to (a) the Shares to be sold hereunder, (b) any shares of Common Stock issued by the Company (i) upon the exercise or settlement of options or restricted stock units pursuant to the Company’s equity plans existing on, or upon the conversion or exchange of convertible or exchangeable securities outstanding as of, the date of this Agreement, provided that such options, restricted stock units or securities are disclosed in, or contemplated by, the Pricing Prospectus, (c) any shares of Common Stock or securities convertible or exercisable into, exchangeable for or that represent the right to receive shares of Common Stock, issued by the Company, in each case pursuant to the Company’s equity plans disclosed in the Pricing Prospectus, (d) any shares of Common Stock or any security convertible into or exercisable for shares of Common Stock issued by the Company in connection with the acquisition by the Company or any of its subsidiaries of not less than a majority or controlling portion of the securities, business, property or other assets of another person or entity or pursuant to an employee benefit plan assumed by the Company in connection with such acquisition, or (e) any shares of Common Stock or any security convertible into or exercisable for shares of Common Stock issued by the Company in connection with a transaction with an unaffiliated third party that includes a bona fide commercial relationship (including joint ventures, marketing or distribution arrangements, collaboration agreements or intellectual property license agreements); provided that in the case of clauses (d) or (e), the aggregate number of shares of Common Stock that the Company may sell or issue or agree to sell or issue pursuant to clauses (d) and (e) shall not exceed 5% of the total number of shares of the Common Stock issued and outstanding immediately following the completion of the transactions contemplated by this Agreement; and provided further that in the case of clauses (b) through (e) the Company shall (i) cause each recipient of such securities to execute and deliver to you, on or prior to the issuance of such securities, a lock-up agreement on substantially the same terms as the lock-up agreements referenced in Section 8(j) hereof for the remainder of the Company Lock-Up Period, and (ii) enter stop transfer instructions with the Company’s transfer agent and registrar on such securities, which the Company agrees it will not waive or amend without the prior written consent of each Representative;

(e)(2) If the Representatives, in their sole discretion, agree to release or waive the restrictions set forth in a lock-up letter described in Section 8(j) hereof for an officer or director of the Company and provide the Company with notice of the impending release or waiver at least three business days before the effective

 

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date of the release or waiver, the Company agrees to announce the impending release or waiver by a press release substantially in the form of Annex II hereto through a major news service at least two business days before the effective date of the release or waiver or as otherwise permitted under FINRA Rule 5131.

(f) During a period of three years from the effective date of the Registration Statement, so long as the Company is subject to the reporting requirements of either Section 13 or Section 15(d) of the Exchange Act, to furnish to its stockholders as soon as practicable after the end of each fiscal year an annual report (including a balance sheet and statements of income, stockholders’ equity and cash flows of the Company and its consolidated subsidiaries certified by independent public accountants) and, as soon as practicable after the end of each of the first three quarters of each fiscal year (beginning with the fiscal quarter ending after the effective date of the Registration Statement), to make available to its stockholders consolidated summary financial information of the Company and its subsidiaries for such quarter in reasonable detail; provided that no reports, documents or other information needs to be furnished pursuant to this Section 5(f) to the extent they are available on EDGAR;

(g) During a period of three years from the effective date of the Registration Statement, to furnish to you copies of all reports or other communications (financial or other) furnished to stockholders, and to deliver to you as soon as they are available, copies of any reports and financial statements furnished to or filed with the Commission or any national securities exchange on which any class of securities of the Company is listed; provided that no reports, documents or other information needs to be furnished pursuant to this Section 5(g) to the extent they are available on EDGAR;

(h) To use the net proceeds received by it from the sale of the Shares pursuant to this Agreement in the manner specified in the Pricing Prospectus under the caption “Use of Proceeds”;

(i) To use its reasonable best efforts to list the Shares on NASDAQ;

(j) To file with the Commission such information on Form 10-Q or Form 10-K as may be required by Rule 463 under the Act;

(k) If the Company elects to rely upon Rule 462(b), the Company shall file a Rule 462(b) Registration Statement with the Commission in compliance with Rule 462(b) by 10:00 p.m., Washington, D.C. time, on the date of this Agreement, and the Company shall at the time of filing either pay to the Commission the filing fee for the Rule 462(b) Registration Statement or give irrevocable instructions for the payment of such fee pursuant to Rule 111(b) under the Act;

(l) Upon request of any Underwriter, to furnish, or cause to be furnished, to such Underwriter an electronic version of the Company’s trademarks, servicemarks and corporate logo for use on the website, if any, operated by such Underwriter for the purpose of facilitating the on-line offering of the Shares (the “License”); provided, however , that the License shall be used solely for the purpose described above, is granted without any fee and may not be assigned or transferred; and

 

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(m) To promptly notify you if the Company ceases to be an Emerging Growth Company at any time prior to the later of (i) completion of the distribution of the Shares within the meaning of the Act and (ii) completion of the 180-day restricted period referred to in Section 5(e)(1) hereof.

6. (a) The Company represents and agrees that, without the prior consent of the Representatives, it has not made and will not make any offer relating to the Shares that would constitute a “free writing prospectus” as defined in Rule 405 under the Act and each Underwriter represents and agrees that, without the prior consent of the Company and the Representatives, it has not made and will not make any offer relating to the Shares that would constitute a free writing prospectus; any such free writing prospectus the use of which has been consented to by the Company and the Representatives is listed on Schedule II(a) hereto;

(b) The Company has complied and will comply with the requirements of Rule 433 under the Act applicable to any Issuer Free Writing Prospectus, including timely filing with the Commission or retention where required and legending; and the Company represents that it has satisfied and agrees that it will satisfy the conditions under Rule 433 under the Act to avoid a requirement to file with the Commission any electronic road show;

(c) Each Underwriter represents and agrees that (i) any Section 5(d) Communications undertaken by it were with entities that are qualified institutional buyers as defined in Rule 144A under the Act or institutions that are accredited investors as defined in Rule 501(a) under the Act and (ii) it will not distribute, or authorize any other person to distribute, any Section 5(d) Writing, other than those distributed with the prior consent of the Company; and

(d) The Company agrees that if at any time following issuance of an Issuer Free Writing Prospectus or Section 5(d) Writing prepared or authorized by it any event occurred or occurs as a result of which such Issuer Free Writing Prospectus or Section 5(d) Writing prepared or authorized by it would conflict with the information in the Registration Statement, the Pricing Prospectus or the Prospectus or would include an untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances then prevailing, not misleading, the Company will give prompt notice thereof to the Representatives and, if requested by the Representatives, will prepare and furnish without charge to each Underwriter an Issuer Free Writing Prospectus, Section 5(d) Writing prepared or authorized by the Company or other document which will correct such conflict, statement or omission; provided,

 

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however, that this covenant shall not apply to any statements or omissions in an Issuer Free Writing Prospectus or Section 5(d) Writing prepared or authorized by the Company made in reliance upon and in conformity with information furnished in writing to the Company by an Underwriter through the Representatives expressly for use therein.

7. The Company covenants and agrees with the several Underwriters that the Company will pay or cause to be paid the following: (i) the fees, disbursements and expenses of the Company’s counsel and accountants in connection with the registration of the Shares under the Act and the expenses incurred in connection with the preparation, printing, reproduction and filing of the Registration Statement, any Preliminary Prospectus, any Issuer Free Writing Prospectus and the Prospectus and amendments and supplements thereto and the mailing and delivering of copies thereof to the Underwriters and dealers; (ii) the cost of printing or producing any Agreement among Underwriters, this Agreement, the Blue Sky Memorandum, closing documents (including any compilations thereof) and any other documents in connection with the offering, purchase, sale and delivery of the Shares; (iii) all expenses in connection with the qualification of the Shares for offering and sale under state securities laws as provided in Section 5(b) hereof, including the reasonable and documented fees and disbursements of counsel for the Underwriters in connection with such qualification and in connection with the Blue Sky survey; (iv) all fees and expenses in connection with listing the Shares on NASDAQ; (v) the filing fees incident to, and the reasonable fees and disbursements of counsel for the Underwriters in connection with, any required review by FINRA of the terms of the sale of the Shares; (vi) the cost of preparing stock certificates; (vii) the cost and charges of any transfer agent or registrar; and (viii) all other costs and expenses of the Company related to investor presentations or any “road show” undertaken in connection with the marketing of the Shares, including without limitation, expenses associated with the production of road show slides and graphics, fees and expenses of any consultants engaged in connection with the road show presentations, travel and lodging of the representatives and officers of the Company and any such consultants (not including the Underwriters and their representatives); provided, however, that the cost of any aircraft chartered in connection with the road show shall be paid 50% by the Company and 50% by the Underwriters; and (ix) all other costs and expenses incident to the performance of its obligations hereunder which are not otherwise specifically provided for in this Section; provided, however, that the amount payable by the Company pursuant to subsections (iii) and (v) and for the fees and disbursements of counsel to the Underwriters described in subsections (iii) and (v) of this Section 7 shall not exceed $30,000 in the aggregate. It is understood, however, that, except as provided in this Section, and Sections 9 and 12 hereof, the Underwriters will pay all of their own costs and expenses, including the fees of their counsel, stock transfer taxes on resale of any of the Shares by them, and any advertising expenses connected with any offers they may make.

 

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8. The obligations of the Underwriters hereunder, as to the Shares to be delivered at each Time of Delivery, shall be subject, in their discretion, to the condition that all representations and warranties and other statements of the Company herein are, at and as of such Time of Delivery, true and correct, the condition that the Company shall have performed all of its obligations hereunder theretofore to be performed, and the following additional conditions:

(a) The Prospectus shall have been filed with the Commission pursuant to Rule 424(b) under the Act within the applicable time period prescribed for such filing by the rules and regulations under the Act and in accordance with Section 5(a) hereof; all material required to be filed by the Company pursuant to Rule 433(d) under the Act shall have been filed with the Commission within the applicable time period prescribed for such filing by Rule 433; if the Company has elected to rely upon Rule 462(b) under the Act, the Rule 462(b) Registration Statement shall have become effective by 10:00 P.M., Washington, D.C. time, on the date of this Agreement; no stop order suspending the effectiveness of the Registration Statement or any part thereof shall have been issued and no proceeding for that purpose shall have been initiated or threatened by the Commission; no stop order suspending or preventing the use of the Prospectus or any Issuer Free Writing Prospectus shall have been initiated or threatened by the Commission; and all requests for additional information on the part of the Commission shall have been complied with to your reasonable satisfaction;

(b) Ropes & Gray LLP, counsel for the Underwriters, shall have furnished to you their written opinion, dated such Time of Delivery, in form and substance satisfactory to the Representatives, and covering such matters as the Representatives may reasonably request, and such counsel shall have received such papers and information as they may reasonably request to enable them to pass upon such matters;

(c) Goodwin Procter LLP, counsel for the Company, shall have furnished to you their written opinion, dated such Time of Delivery, substantially in the form previously agreed upon by the parties;

(d) Lando & Anastasi, LLP, special counsel for the Company with respect to intellectual property matters, shall have furnished to you their written opinion, dated such Time of Delivery, substantially in the form previously agreed upon by the parties;

(e) McDonald Hopkins LLC, special counsel for the Company with respect to healthcare regulatory matters, shall have furnished to you their written opinion, dated such Time of Delivery, substantially in the form previously agreed upon by the parties;

 

19


(f) On the date of the Prospectus at a time prior to the execution of this Agreement, at 9:30 a.m., New York City time, on the effective date of any post-effective amendment to the Registration Statement filed subsequent to the date of this Agreement and also at each Time of Delivery, Ernst & Young LLP shall have furnished to you a letter or letters, dated the respective dates of delivery thereof, in form and substance satisfactory to you, to the effect set forth in Annex I hereto (the executed copy of the letter delivered prior to the execution of this Agreement is attached as Annex I(a) hereto and a draft of the form of letter to be delivered on the effective date of any post-effective amendment to the Registration Statement and as of each Time of Delivery is attached as Annex I(b) hereto);

(g) (i) Neither the Company nor any of its subsidiaries, taken as a whole, shall have sustained since the date of the latest audited financial statements included in the Pricing Prospectus any loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Pricing Prospectus, and (ii) since the dates as of which information is given in the Pricing Prospectus there shall not have been any change in the capital stock (other than (A) as a result of the exercise or settlement (including any “net” or “cashless” exercises or settlements) of stock options or restricted stock units or the award of stock options or restricted stock units in the ordinary course of business pursuant to the Company’s equity plans that are described in the Pricing Prospectus or (B) the repurchase of shares of Common Stock of the Company, which were issued pursuant to the early exercise of stock options by option holders and are subject to repurchase by the Company as disclosed in the Pricing Prospectus) or long-term debt of the Company or any of its subsidiaries or any change, or any development involving a prospective change, in or affecting the general affairs, management, financial position, stockholders’ equity or results of operations of the Company and its subsidiaries, taken as a whole, otherwise than as set forth or contemplated in the Pricing Prospectus, the effect of which, in any such case described in clause (i) or (ii), is in your judgment so material and adverse as to make it impracticable or inadvisable to proceed with the public offering or the delivery of the Shares being delivered at such Time of Delivery on the terms and in the manner contemplated in the Prospectus;

 

20


(h) On or after the Applicable Time there shall not have occurred any of the following: (i) a suspension or material limitation in trading in securities generally on the New York Stock Exchange or on NASDAQ; (ii) a suspension or material limitation in trading in the Company’s securities on NASDAQ; (iii) a general moratorium on commercial banking activities declared by either Federal, New York State or Massachusetts Commonwealth authorities or a material disruption in commercial banking or securities settlement or clearance services in the United States; (iv) the outbreak or escalation of hostilities involving the United States or the declaration by the United States of a national emergency or war or (v) the occurrence of any other calamity or crisis or any change in financial, political or economic conditions in the United States or elsewhere, if the effect of any such event specified in clause (iv) or (v) in your judgment makes it impracticable or inadvisable to proceed with the public offering or the delivery of the Shares being delivered at such Time of Delivery on the terms and in the manner contemplated in the Prospectus;

(i) The Shares to be sold at such Time of Delivery shall have been duly listed, subject to notice of issuance on NASDAQ;

(j) The Company shall have obtained and delivered to the Underwriters executed copies of an agreement from the officers, directors, employees and stockholders of the Company listed on Schedule III hereto, substantially to the effect set forth in Annex III hereof;

(k) The Company shall have complied with the provisions of Section 5(c) hereof;

(l) The Company shall have furnished or caused to be furnished to you at such Time of Delivery certificates of officers of the Company satisfactory to you as to the accuracy of the representations and warranties of the Company herein at and as of such Time of Delivery, as to the performance by the Company of all of its obligations hereunder to be performed at or prior to such Time of Delivery, as to the matters set forth in subsections (a) and (f) of this Section 8 and as to such other matters as you may reasonably request; and

(m) FINRA shall have confirmed that it has not raised any objection with respect to the fairness and reasonableness of the underwriting terms and arrangements relating to the offering of the Shares.

9. (a) The Company will indemnify and hold harmless each Underwriter, its affiliates (as such term is defined in Rule 501(b) under the Act (each, an “Affiliate”)), its selling agents and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act (each an “Underwriter Indemnified Party”) against any losses, claims, damages or liabilities, joint or several, to which such Underwriter Indemnified Party may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a

 

21


material fact contained in the Registration Statement, any Preliminary Prospectus, the Pricing Prospectus or the Prospectus, or any amendment or supplement thereto, any Issuer Free Writing Prospectus or any “issuer information” filed or required to be filed pursuant to Rule 433(d) under the Act, or Section 5(d) Writing, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse each Underwriter Indemnified Party for any legal or other expenses reasonably incurred by such Underwriter Indemnified Party in connection with investigating or defending any such action or claim as such expenses are incurred; provided , however , that the Company shall not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, any Preliminary Prospectus, the Pricing Prospectus or the Prospectus, or any amendment or supplement thereto, or any Issuer Free Writing Prospectus, or Section 5(d) Writing in reliance upon and in conformity with written information furnished to the Company by any Underwriter through the Representatives expressly for use therein.

(b) Each Underwriter, severally and not jointly, will indemnify and hold harmless the Company, its directors, officers and Affiliates and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act (each a “Company Indemnified Party”) against any losses, claims, damages or liabilities to which such Company Indemnified Party may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, any Preliminary Prospectus, the Pricing Prospectus or the Prospectus, or any amendment or supplement thereto, or any Issuer Free Writing Prospectus, or Section 5(d) Writing, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration Statement, any Preliminary Prospectus, the Pricing Prospectus or the Prospectus, or any amendment or supplement thereto, or any Issuer Free Writing Prospectus, or Section 5(d) Writing, in reliance upon and in conformity with written information furnished to the Company by such Underwriter through the Representatives expressly for use therein; and will reimburse each Company Indemnified Party for any legal or other expenses reasonably incurred by such Company Indemnified Party in connection with investigating or defending any such action or claim as such expenses are incurred.

 

22


(c) Promptly after receipt by an indemnified party under subsection (a) or (b) of this Section 9 of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under such subsection, notify the indemnifying party in writing of the commencement thereof; but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to any indemnified party otherwise than under such subsection unless and to the extent the indemnifying party may have been materially prejudiced by such omission. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party), and, after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party under such subsection for any legal expenses of other counsel or any other expenses, in each case subsequently incurred by such indemnified party, in connection with the defense thereof other than reasonable costs of investigation. No indemnifying party shall, without the written consent of the indemnified party, effect the settlement or compromise of, or consent to the entry of any judgment with respect to, any pending or threatened action or claim in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified party is an actual or potential party to such action or claim) unless such settlement, compromise or judgment (i) includes an unconditional release of the indemnified party from all liability arising out of such action or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of any indemnified party.

(d) If the indemnification provided for in this Section 9 is unavailable to or insufficient to hold harmless an indemnified party under subsection (a) or (b) above in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other from the offering of the Shares. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law or if the indemnified party failed to give the notice required under subsection (c) above, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand

 

23


and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the Underwriters on the other and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contribution pursuant to this subsection (d) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this subsection (d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this subsection (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (d), no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters’ obligations in this subsection (d) to contribute are several in proportion to their respective underwriting obligations and not joint.

(e) The obligations of the Company under this Section 9 shall be in addition to any liability which the Company may otherwise have and shall extend, upon the same terms and conditions, to each person, if any, who controls any Underwriter within the meaning of the Act and each broker-dealer affiliate of any Underwriter; and the obligations of the Underwriters under this Section 9 shall be in addition to any liability which the respective Underwriters may otherwise have and shall extend, upon the same terms and conditions, to each officer and director of the Company (including any person who, with his or her consent, is named in the Registration Statement as about to become a director of the Company) and to each person, if any, who controls the Company within the meaning of the Act.

 

24


10. (a) If any Underwriter shall default in its obligation to purchase the Shares that it has agreed to purchase hereunder at a Time of Delivery, you may in your discretion arrange for you or another party or other parties to purchase such Shares on the terms contained herein. If within thirty-six hours after such default by any Underwriter you do not arrange for the purchase of such Shares, then the Company shall be entitled to a further period of thirty-six hours within which to procure another party or other parties satisfactory to you to purchase such Shares on such terms. In the event that, within the respective prescribed periods, you notify the Company that you have so arranged for the purchase of such Shares, or the Company notifies you that it has so arranged for the purchase of such Shares, you or the Company shall have the right to postpone such Time of Delivery for a period of not more than seven days, in order to effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectus, or in any other documents or arrangements, and the Company agrees to file promptly any amendments or supplements to the Registration Statement or the Prospectus which in your opinion may thereby be made necessary. The term “Underwriter” as used in this Agreement shall include any person substituted under this Section with like effect as if such person had originally been a party to this Agreement with respect to such Shares.

(b) If, after giving effect to any arrangements for the purchase of the Shares of a defaulting Underwriter or Underwriters by you and the Company as provided in subsection (a) above, the aggregate number of such Shares which remains unpurchased does not exceed one-eleventh of the aggregate number of all the Shares to be purchased at such Time of Delivery, then the Company shall have the right to require each non-defaulting Underwriter to purchase the number of Shares which such Underwriter agreed to purchase hereunder at such Time of Delivery and, in addition, to require each non-defaulting Underwriter to purchase its pro rata share (based on the number of Shares which such Underwriter agreed to purchase hereunder) of the Shares of such defaulting Underwriter or Underwriters for which such arrangements have not been made; but nothing herein shall relieve a defaulting Underwriter from liability for its default.

(c) If, after giving effect to any arrangements for the purchase of the Shares of a defaulting Underwriter or Underwriters by you and the Company as provided in subsection (a) above, the aggregate number of such Shares which remains unpurchased exceeds one-eleventh of the aggregate number of all the Shares to be purchased at such Time of Delivery, or if the Company shall not exercise the right described in subsection (b) above to require non-defaulting Underwriters to purchase Shares of a defaulting Underwriter or Underwriters, then this Agreement (or, with respect to the Second Time of Delivery, the obligations of the Underwriters to purchase and of the Company to sell the Optional Shares) shall thereupon terminate, without liability on the part of any non-defaulting Underwriter or the Company, except for the expenses to be borne by the Company and the Underwriters as provided in Section 7 hereof and the indemnity and contribution agreements in Section 9 hereof; but nothing herein shall relieve a defaulting Underwriter from liability for its default.

 

25


11. The respective indemnities, agreements, representations, warranties and other statements of the Company and the several Underwriters, as set forth in this Agreement or made by or on behalf of them, respectively, pursuant to this Agreement, shall remain in full force and effect, regardless of any investigation (or any statement as to the results thereof) made by or on behalf of any Underwriter or any controlling person of any Underwriter, or the Company, or any officer or director or controlling person of the Company, and shall survive delivery of and payment for the Shares.

12. If this Agreement shall be terminated pursuant to Section 10 hereof, the Company shall not then be under any liability to any Underwriter except as provided in Sections 7 and 9 hereof; but, if for any other reason, any Shares are not delivered by or on behalf of the Company as provided herein, the Company will reimburse the Underwriters through you for all out-of-pocket expenses approved in writing by you, including fees and disbursements of counsel, reasonably incurred by the Underwriters in making preparations for the purchase, sale and delivery of the Shares not so delivered, but the Company shall then be under no further liability to any Underwriter except as provided in Sections 7 and 9 hereof.

13. In all dealings hereunder, you shall act on behalf of each of the Underwriters, and the parties hereto shall be entitled to act and rely upon any statement, request, notice or agreement on behalf of any Underwriter made or given by you.

All statements, requests, notices and agreements hereunder shall be in writing, and if to the Underwriters shall be delivered or sent by mail, telex or facsimile transmission to you as the Representatives to Goldman, Sachs & Co., 200 West Street, New York, New York 10282-2198, Attention: Registration Department, and to J.P. Morgan Securities LLC, 383 Madison Avenue, New York, New York 10179, Attention: Equity Syndicate Desk; and if to the Company shall be delivered or sent by mail, telex or facsimile transmission to the address of the Company set forth in the Registration Statement, Attention: Secretary; and if to any stockholder that has delivered a lock-up agreement described in Section 8(j) hereof shall be delivered or sent by mail to his, her or its respective address as such stockholder provides in writing to the Company; provided , however , that any notice to an Underwriter pursuant to Section 9(c) hereof shall be delivered or sent by mail, telex or facsimile transmission to such Underwriter at its address set forth in its Underwriters’ Questionnaire, or telex constituting such Questionnaire, which address will be supplied to the Company by you upon request; provided , further , that notices under subsection 5(e) shall be in writing, and if to the Underwriters shall be delivered or sent by mail, telex or facsimile transmission to you as the Representatives at Goldman, Sachs & Co., 200 West Street, New York, New York 10282-2198, Attention: Control Room; and to J.P. Morgan Securities LLC, 383 Madison Avenue, New York, New York 10179, Attention: Equity Syndicate Desk. Any such statements, requests, notices or agreements shall take effect upon receipt thereof.

 

26


In accordance with the requirements of the USA Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)), the Underwriters are required to obtain, verify and record information that identifies their respective clients, including the Company, which information may include the name and address of their respective clients, as well as other information that will allow the Underwriters to properly identify their respective clients.

14. This Agreement shall be binding upon, and inure solely to the benefit of, the Underwriters, the Company and, to the extent provided in Sections 9 and 11 hereof, the officers and directors of the Company and each person who controls the Company or any Underwriter, and their respective heirs, executors, administrators, successors and assigns, and no other person shall acquire or have any right under or by virtue of this Agreement. No purchaser of any of the Shares from any Underwriter shall be deemed a successor or assign by reason merely of such purchase.

15. Time shall be of the essence of this Agreement. As used herein, the term “business day” shall mean any day when the Commission’s office in Washington, D.C. is open for business.

16. The Company acknowledges and agrees that (i) the purchase and sale of the Shares pursuant to this Agreement is an arm’s-length commercial transaction between the Company, on the one hand, and the several Underwriters, on the other, (ii) in connection therewith and with the process leading to such transaction each Underwriter is acting solely as a principal and not the agent or fiduciary of the Company, (iii) no Underwriter has assumed an advisory or fiduciary responsibility in favor of the Company with respect to the offering contemplated hereby or the process leading thereto (irrespective of whether such Underwriter has advised or is currently advising the Company on other matters) or any other obligation to the Company except the obligations expressly set forth in this Agreement and (iv) the Company has consulted its own legal and financial advisors to the extent it deemed appropriate. The Company agrees that it will not claim that the Underwriters, or any of them, has rendered advisory services of any nature or respect, or owes a fiduciary or similar duty to the Company, in connection with such transaction or the process leading thereto.

17. This Agreement supersedes all prior agreements and understandings (whether written or oral) between the Company and the Underwriters, or any of them, with respect to the subject matter hereof.

18. THIS AGREEMENT AND ANY MATTERS RELATED TO THIS TRANSACTION SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS THAT WOULD RESULT

 

27


IN THE APPLICATION OF ANY LAW OTHER THAN THE LAWS OF THE STATE OF NEW YORK. The Company agrees that any suit or proceeding arising in respect of this agreement or your engagement will be tried exclusively in the U.S. District Court for the Southern District of New York or, if that court does not have subject matter jurisdiction, in any state court located in The City and County of New York and the Company agrees to submit to the jurisdiction of, and to venue in, such courts.

19. This Agreement may be executed by any one or more of the parties hereto in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same instrument.

20. Notwithstanding anything herein to the contrary, the Company is authorized to disclose to any persons the U.S. federal and state income tax treatment and tax structure of the potential transaction and all materials of any kind (including tax opinions and other tax analyses) provided to the Company relating to that treatment and structure, without the Underwriters imposing any limitation of any kind. However, any information relating to the tax treatment and tax structure shall remain confidential (and the foregoing sentence shall not apply) to the extent necessary to enable any person to comply with securities laws. For this purpose, “tax structure” is limited to any facts that may be relevant to that treatment.

 

28


If the foregoing is in accordance with your understanding, please sign and return to us five counterparts hereof, and upon the acceptance hereof by you, on behalf of each of the Underwriters, this letter and such acceptance hereof shall constitute a binding agreement between each of the Underwriters and the Company. It is understood that your acceptance of this letter on behalf of each of the Underwriters is pursuant to the authority set forth in a form of Agreement among Underwriters, the form of which shall be submitted to the Company for examination upon request, but without warranty on your part as to the authority of the signers thereof.

 

Very truly yours,
Foundation Medicine, Inc.

By:

 

 

  Name:
  Title:

Accepted as of the date hereof:

Goldman, Sachs & Co.

 

By:  

 

  Name:
  Title:

J.P. Morgan Securities LLC

 

By:  

 

  Name:
  Title:

On behalf of each of the Underwriters

 

29


SCHEDULE I

 

Underwriter

   Total
Number of
Firm
Shares to
be
Purchased
   Number of
Optional
Shares to
be
Purchased
if
Maximum
Option
Exercised

Goldman, Sachs & Co.

     

J.P. Morgan Securities LLC

     

Leerink Swann LLC

     

Sanford C. Bernstein & Co., LLC

     
  

 

  

 

Total

     
  

 

  

 

 

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SCHEDULE II

 

(a) Issuer Free Writing Prospectuses:

 

(b) Materials other than the Pricing Prospectus that comprise the Pricing Disclosure Package:

 

     The initial public offering price per share for the Shares is $[•]

 

     The number of Shares purchased by the Underwriters is [•]

 

(c) Section 5(d) Writings


SCHEDULE III

[Persons from whom lock-up agreements requested.]


ANNEX I(a)

[Executed Comfort Letter]


ANNEX I(b)

Form of Comfort Letter

[To be provided under separate cover]


ANNEX II

[Form of Press Release]

Foundation Medicine, Inc.

[Date]

Foundation Medicine, Inc. (the “Company”) announced today that Goldman, Sachs & Co. and J.P. Morgan Securities LLC, the book-running managers in the Company’s recent public sale of       shares of common stock, is [waiving] [releasing] a lock-up restriction with respect to shares of the Company’s common stock held by [certain officers or directors] [an officer or director] of the Company. The [waiver] [release] will take effect on         , 20     , and the shares may be sold on or after such date.

This press release is not an offer for sale of the securities in the United States or in any other jurisdiction where such offer is prohibited, and such securities may not be offered or sold in the United States absent registration or an exemption from registration under the United States Securities Act of 1933, as amended.

 

1


ANNEX III

Form of Lock-Up Agreement

                     , 2013

Goldman, Sachs & Co.

J.P. Morgan Securities LLC

    As Representatives of the several

    Underwriters listed in Schedule 1

    to the Underwriting Agreement

    referred to below

c/o Goldman, Sachs & Co.

200 West Street

New York, NY 10282-2198

c/o J.P. Morgan Securities LLC

383 Madison Avenue

New York, NY 10179

Re: Foundation Medicine, Inc. - Lock-Up Agreement

Ladies and Gentlemen:

The undersigned understands that you, as representatives (each a “Representative” and together, the “Representatives”), propose to enter into an Underwriting Agreement on behalf of the several Underwriters named in Schedule I to such agreement (collectively, the “Underwriters”), with Foundation Medicine, Inc., a Delaware corporation (the “Company”), providing for a public offering (the “Public Offering”) of the Common Stock of the Company (the “Shares”) pursuant to a Registration Statement on Form S-1 to be filed with the Securities and Exchange Commission (the “SEC”).

In consideration of the agreement by the Underwriters to offer and sell the Shares, and of other good and valuable consideration the receipt and sufficiency of which is hereby acknowledged, the undersigned agrees that, during the period specified in the following paragraph (the “Lock-Up Period”), the undersigned will not offer, sell, contract to sell, pledge, grant any option to purchase, make any short sale or otherwise dispose of any shares of Common Stock of the Company, or any options or warrants to purchase any shares of Common Stock of the Company, or any securities convertible into, exchangeable for or that represent the right to receive shares of Common Stock of the Company, whether now owned or hereinafter acquired, owned directly by the undersigned (including holding as a custodian)

 

1


or with respect to which the undersigned has beneficial ownership within the rules and regulations of the SEC (collectively the “Undersigned’s Shares”) or publicly disclose the intention to take any of the foregoing actions, except as provided herein. The foregoing restriction is expressly agreed to preclude the undersigned from engaging in any hedging or other transaction which is designed to or which reasonably could be expected to lead to or result in a sale or disposition of the Undersigned’s Shares even if such Shares would be disposed of by someone other than the undersigned. Such prohibited hedging or other transactions would include without limitation any short sale or any purchase, sale or grant of any right (including without limitation any put or call option) with respect to any of the Undersigned’s Shares or with respect to any security that includes, relates to, or derives any significant part of its value from such Shares.

The Lock-Up Period will commence on the date set forth on the cover of the preliminary prospectus used in connection with the road show relating to the Public Offering and continue for 180 days after the public offering date set forth on the final prospectus used for the Public Offering (the “Public Offering Date”) pursuant to the Underwriting Agreement.

If the undersigned is an officer or director of the Company, (i) the Representatives agree that, at least three business days before the effective date of any release or waiver of the foregoing restrictions in connection with a transfer of shares of Common Stock, the Representatives will notify the Company of the impending release or waiver, and (ii) the Company has agreed in the Underwriting Agreement to announce the impending release or waiver by press release through a major news service or as otherwise permitted under FINRA Rule 5131 at least two business days before the effective date of the release or waiver. Any release or waiver granted by each Representative hereunder to any such officer or director shall only be effective two business days after the date of such announcement. The provisions of this paragraph will not apply if (a) the release or waiver is effected solely to permit a transfer not for consideration and (b) the transferee has agreed in writing to be bound by the same terms described in this letter to the extent and for the duration that such terms remain in effect at the time of the transfer.

[In the event that during the Lock-Up Period, each of the Representatives waive any prohibition on the transfer of shares of Common Stock, or any securities convertible into or exercisable for shares of Common Stock, held by (a) any person or entity that beneficially owns 1% or more of the outstanding shares of Common Stock, (b) any director or officer of the Company (or any member of such director’s or officer’s immediate family or any trust or estate planning vehicle for the benefit of any such director or officer), or (c) any Holder (as such term is defined in the Second Amended and Restated Investors’ Rights Agreement, dated June 20, 2013, by and among the Company and certain security holders of the Company), the Representatives shall be deemed to have also waived the prohibitions set forth in this Lock-Up Agreement that would otherwise have applied to the undersigned with respect to the same percentage of the undersigned’s shares of Common Stock as the relative percentage of aggregate shares held by such party receiving the waiver which are subject to such waiver. The provisions of this paragraph will not apply: (1) unless and until each of the

 

2


Representatives have first waived more than 1%, in the aggregate, of the Company’s total outstanding shares of Common Stock from such prohibitions or (2) if (a) the release or waiver is effected solely to permit a transfer not for consideration and (b) the transferee has agreed in writing to be bound by the same terms described in this Lock-Up Agreement to the extent and for the duration that such terms remain in effect at the time of the transfer, provided that, subject to the exception set forth in clause (1) of this paragraph, any subsequent waiver by the Representatives of the prohibition on the transfer of shares of Common stock or other securities by the transferee shall trigger the provisions of this paragraph regardless of such transferee’s level of ownership of the outstanding shares of Common Stock. Furthermore, the provisions of this paragraph will apply in the event that the Representatives grant a release or waiver solely to allow a holder of Common Stock to participate as a selling stockholder in a follow-on public offering of such shares of Common Stock pursuant to a registration statement on Form S-1; provided that (i) the waiver to the undersigned will be limited to the undersigned’s participation in such follow-on public offering and (ii) any shares released for any holder but not sold in such offering are subject to this Lock-Up Agreement immediately following such follow-on offering. In the event that, as a result of this paragraph, any shares of Common Stock held by the undersigned are released from the restrictions imposed by this Lock-Up Agreement, the Company shall use its commercially reasonable efforts to notify the undersigned within three business days that the same percentage of shares of Common Stock held by the undersigned has been released; provided that the failure to give such notice shall not give rise to any claim or liability against the Company, the Representatives or the Underwriters.]

Notwithstanding the foregoing, the undersigned may (a) transfer the Undersigned’s Shares (i) acquired in the Public Offering, (ii) acquired in open market transactions on or after the Public Offering Date, (iii) as a bona fide gift or gifts, provided that the donee or donees thereof agree to be bound in writing by the restrictions set forth herein, (iv) to any trust for the direct or indirect benefit of the undersigned or the immediate family of the undersigned, or if the undersigned is a trust, to any beneficiary (including such beneficiary’s estate) of the undersigned, provided that the trustee of the trust or such beneficiary agrees to be bound in writing by the restrictions set forth herein, and provided further that any such transfer shall not involve a disposition for value, (v) if the undersigned is a corporation, partnership, limited liability company, trust or other business entity (A) to another corporation, partnership, limited liability company, trust or other business entity that is an affiliate (as defined in Rule 405 promulgated under the Securities Act of 1933, as amended) of the undersigned (including, for the avoidance of doubt, a fund managed by the same manager or managing member or general partner or management company or by an entity controlling, controlled by, or under common control with such manager or managing member or general partner or management company as the undersigned or who shares a common investment advisor with the undersigned) or (B) as part of a distribution without consideration by the undersigned to its stockholders, partners, members or other equity holders, provided that in the case of any transfer contemplated in (A) or (B) above, it shall be a condition to the transfer that (x) each transferee executes an agreement stating that the transferee is receiving and holding such capital stock subject to the provisions of this Lock-Up Agreement, (y) there shall be no further

 

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transfer of such capital stock except in accordance with this Lock-Up Agreement and (z) such transfer shall not involve a disposition for value, (vi) by will or intestate succession upon the death of the undersigned, provided that the transferee agrees to be bound in writing by the restrictions set forth herein, (vii) in connection with the “net” or “cashless” exercise or settlement of stock options, restricted stock units or other equity awards (including any transfer for the payment of taxes due as a result of such vesting or exercise whether by means of a “net settlement” or otherwise) pursuant to an employee benefit plan disclosed in the final prospectus used for the Public Offering, provided that any such shares of Common Stock received upon such vesting or exercise shall be subject to the terms of this Lock-Up Agreement, (viii) (A) following the commencement of a tender or exchange offer made to all holders of the Company’s capital stock involving a change of control of the Company or (B) upon the consummation of a merger or sale of the Company, regardless of how such a transaction is structured (it being further understood that this agreement shall not restrict the undersigned from entering into any agreement or arrangement in connection therewith, including an agreement to vote in favor of, or tender the Undersigned’s Shares or other securities of the Company in, any such transaction or taking any other action in connection with any such transaction), (ix) in connection with the conversion of the outstanding preferred stock of the Company into shares of Common Stock, provided that any such shares of Common Stock received upon such conversion shall be subject to the terms of this Lock-Up Agreement, (x) by operation of law, such as pursuant to a qualified domestic order or in connection with a divorce settlement, provided that each such transferee executes an agreement stating that the transferee is receiving and holding such capital stock subject to the provisions of this Lock-Up Agreement, or (xi) with the prior written consent of each Representative on behalf of the Underwriters, or (b) enter into a written plan meeting the requirements of Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), relating to the sale of securities of the Company, provided that the securities subject to such plan may not be sold and no public disclosure of any such action shall be required or shall be voluntarily made by any person until after the expiration of the Lock-Up Period. In addition, with respect to clauses (a)(i) and (a)(iii) through (a)(vii) above, it shall be a condition to such transfer that no filing under Section 16(a) of the Exchange Act shall be required or voluntarily made during the Lock-Up Period. For purposes of this Lock-Up Agreement, “immediate family” shall mean any relationship by blood, marriage or adoption, not more remote than first cousin. The undersigned now has, and, except as contemplated by clause (a) above, for the duration of this Lock-Up Agreement will have, good and marketable title to the Undersigned’s Shares, free and clear of all liens, encumbrances, and claims whatsoever. The undersigned also agrees and consents to the entry of stop transfer instructions with the Company’s transfer agent and registrar against the transfer of the Undersigned’s Shares except in compliance with the foregoing restrictions.

Notwithstanding anything to the contrary contained herein, this Lock-Up Agreement will automatically terminate and the undersigned will be released from all of his, her or its obligations hereunder upon the earliest to occur, if any, of (i) [if either the] Company [advises][, on the one hand,] or the Representatives[, on the other hand, advises the other] in writing, that it has determined not to proceed with the Public Offering, (ii) the Company files

 

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an application with the SEC to withdraw the registration statement related to the Public Offering, (iii) the Underwriting Agreement is executed but is terminated (other than the provisions thereof which survive termination) prior to payment for and delivery of the shares of Common Stock to be sold thereunder, or (iv) December 31, 2013, in the event that the Underwriting Agreement has not been executed by such date.

The undersigned understands that the Company and the Underwriters are relying upon this Lock-Up Agreement in proceeding toward consummation of the Public Offering. The undersigned further understands that this Lock-Up Agreement is irrevocable and shall be binding upon the undersigned’s heirs, legal representatives, successors, and assigns.

 

Very truly yours,

 

Exact Name of Shareholder

 

Authorized Signature

 

Title

 

5

Exhibit 3.1

FIFTH AMENDED AND RESTATED CERTIFICATE OF INCORPORATION

OF

FOUNDATION MEDICINE, INC.

Foundation Medicine, Inc. (the “ Corporation ”), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the “ GCL ”), does hereby certify as follows:

 

  1. The name of this Corporation is Foundation Medicine, Inc. The original Certificate of Incorporation of the Corporation was filed with the Delaware Secretary of State on November 12, 2009 (the “ Certificate ”) under the name Foundation Genomics, Inc. The Certificate was amended and restated on March 29, 2010 (the “ Amended and Restated Certificate of Incorporation ”), as amended by a Certificate of Amendment dated October 28, 2010, and as further amended by a Certificate of Amendment dated May 5, 2011. The Amended and Restated Certificate of Incorporation was amended and restated on August 8, 2011 (the “ Second Amended and Restated Certificate of Incorporation ”). The Second Amended and Restated Certificate of Incorporation was amended and restated on August 23, 2011 (the “ Third Amended and Restated Certificate of Incorporation ”). The Third Amended and Restated Certificate of Incorporation was amended and restated on April 18, 2012 (the “ Fourth Amended and Restated Certificate of Incorporation ”).

 

  2. This Fifth Amended and Restated Certificate of Incorporation amends, restates and integrates the provisions of the Fourth Amended and Restated Certificate of Incorporation and has been duly adopted in accordance with the provisions of Sections 242 and 245 of the GCL.

 

  3. Pursuant to Section 228(a) of the GCL, the holders of outstanding shares of the Corporation, having not less than the minimum number of votes that would be necessary to authorize or take such actions at a meeting at which all shares entitled to vote thereon were present and voted, consented to the adoption of the aforesaid amendments without a meeting, without a vote and without prior notice and that written notice of the taking of such actions is being given in accordance with Section 228(e) of the GCL.

 

  4. The text of the Certificate of Incorporation of the Corporation is hereby amended and restated to read in its entirety as follows:


FIFTH AMENDED AND RESTATED CERTIFICATE OF INCORPORATION

OF

FOUNDATION MEDICINE, INC.

ARTICLE I

Name

The name of the Corporation is Foundation Medicine, Inc. (the “ Corporation ”).

ARTICLE II

Registered Agent

The address of the registered office of the Corporation in the State of Delaware is 2711 Centerville Road, Suite 400, Wilmington, New Castle County, Delaware 19808. The name of its registered agent at such address is Corporation Service Company.

ARTICLE III

Purpose

The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware.

ARTICLE IV

Capital Stock

A. Capital Stock .

1 Authorized Shares . The total number of shares of all classes of stock which the Corporation shall have authority to issue is:

(a) 90,000,000 shares of Common stock, par value of $0.0001 per share (“ Common Stock ”); and

(b) 62,755,304 shares of Preferred Stock of the Corporation, par value of $0.0001 per share (the “ Preferred Stock ”).

2 Stock Rights and Preferences . The Common Stock and Preferred Stock authorized hereunder shall have the voting powers, preferences and relative, participating, optional and other special rights, qualifications, limitations and restrictions as follows:

 

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B. Common Stock .

1 General . The voting, dividend and liquidation and other rights of the holders of the Common Stock are subject to and qualified by the rights, powers and preferences of the holders of Preferred Stock.

2 Voting . Except as provided in this Fifth Amended and Restated Certificate of Incorporation or by applicable law, holders of the Common Stock are entitled to one vote for each share held. There shall be no cumulative voting. The number of authorized shares of Common Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by (in addition to any vote of the holders of one or more series of Preferred Stock that may be required by the terms of this Fifth Amended and Restated Certificate of Incorporation) the affirmative vote of the holders of shares of capital stock of the Corporation representing a majority of the votes represented by all outstanding shares of capital stock of the Corporation entitled to vote, irrespective of the provisions of Section 242(b)(2) of the Delaware General Corporation Law.

3 Dividends . Dividends may be declared and paid on the Common Stock from funds lawfully available therefor if, as and when determined by the Board of Directors of the Corporation (the “ Board of Directors ”) in their sole discretion, subject to provisions of law, any provision of this Fifth Amended and Restated Certificate of Incorporation, as amended from time to time, and subject to the relative rights and preferences of any shares of Preferred Stock authorized and issued hereunder.

4 Liquidation . Upon the dissolution or liquidation or winding up of the Corporation, whether voluntary or involuntary, holders of Common Stock will be entitled to receive pro rata all assets of the Corporation available for distribution to its stockholders, subject, however, to the liquidation rights of the holders of Preferred Stock authorized and issued hereunder.

C. Preferred Stock .

43,950,000 shares of the authorized Preferred Stock of the Corporation are hereby designated Series A Convertible Preferred Stock (the “ Series A Preferred Stock ”) and 18,805,304 shares of the authorized Preferred Stock of the Corporation are hereby designated Series B Convertible Preferred Stock (the “ Series B Preferred Stock ”), in each case with the following rights, preferences, powers, privileges and restrictions, qualifications and limitations.

1 Dividends . The holders of Preferred Stock shall be entitled to dividends out of the Corporation’s assets legally available therefor only as, when and if declared by the Board of Directors. In addition, the Corporation shall not declare, pay or set aside any dividends on any shares of capital stock of the Corporation (other than dividends on shares of Common Stock payable in shares of Common Stock) unless (in addition to the obtaining of any consents required elsewhere in this Fifth Amended and Restated Certificate of Incorporation) the holders of Preferred Stock then outstanding shall first receive, or simultaneously receive, a dividend on each outstanding share of Preferred Stock in an amount at least equal to the sum of: (i) in the case of a dividend on shares of Preferred Stock, the aggregate amount of any dividend declared on such share of Preferred Stock and not previously paid plus (ii) (A) in the case of a dividend on Common Stock or any class or series that is convertible into Common Stock (including without limitation the

 

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Series A Preferred Stock and the Series B Preferred Stock), that dividend per share of Preferred Stock as would equal the product of (1) the dividend payable on each share of such class or series determined, if applicable, as if all such shares of such class or series had been converted into Common Stock and (2) the number of shares of Common Stock issuable upon conversion of a share of such series of Preferred Stock, in each case calculated on the record date for determination of holders entitled to receive such dividend or (B) in the case of a dividend on any class or series that is not convertible into Common Stock, at a rate per share of Preferred Stock determined by (1) dividing the amount of the dividend payable on each share of such class or series of capital stock by the original issuance price of such class or series of capital stock (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization affecting such series) and (2) multiplying such fraction by an amount equal to the applicable Original Issue Price (as defined below); provided that, if the Corporation declares, pays or sets aside, on the same date, a dividend on shares of more than one class or series of capital stock of the Corporation, the dividend payable to the holders of Preferred Stock pursuant to this Subsection 1 shall be calculated based upon the dividend on the class or series of capital stock that would result in the highest Preferred Stock dividend, for each of the Series A Preferred Stock and Series B Preferred Stock, respectively. The “ Series A Original Issue Price ” shall mean $1.00 per share, subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the Series A Preferred Stock. The “ Series B Original Issue Price ” shall mean $2.26 per share, subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the Series B Preferred Stock. The “ Original Issue Price ” shall mean the Series A Original Issue Price in the case of the Series A Preferred Stock and the Series B Original Issue Price in the case of the Series B Preferred Stock.

2 Liquidation, Dissolution or Winding Up; Certain Mergers, Consolidations and Asset Sales .

(a) Payments to Holders of Preferred Stock . In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the holders of shares of Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders, on a pari passu basis and before any payment shall be made to the holders of Common Stock or any other class or series of stock ranking on liquidation junior to the Preferred Stock by reason of their ownership thereof, an amount per share equal to the applicable Original Issue Price, plus any dividends declared but unpaid thereon. The aggregate amount of all preferential amounts required to be paid to the holders of Series A Preferred Stock pursuant to this subsection 2(a) shall be hereafter referred to as the “ Series A Liquidation Amount ”. The aggregate amount of all preferential amounts required to be paid to the holders of Series B Preferred Stock pursuant to this subsection 2(a) shall be hereafter referred to as the “ Series B Liquidation Amount ”. If upon any such liquidation, dissolution or winding up of the Corporation the assets of the Corporation available for distribution to its stockholders shall be insufficient to pay the holders of shares of Preferred Stock the full amount to which they shall be entitled under this Subsection 2(a) , the holders of shares of Preferred Stock shall share ratably in any distribution of the assets available for distribution in proportion to the respective amounts which would otherwise be payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full.

 

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(b) Remaining Assets . In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, after the payment of all preferential amounts required to be paid to the holders of Preferred Stock pursuant to subsection (a) above, any remaining assets of the Corporation shall be distributed with equal priority and pro rata among the holders of the Corporation’s Common Stock.

(c) Deemed Liquidation Events .

(i) Any of the following events shall be deemed to be a liquidation of the Corporation (a “ Deemed Liquidation Event ”), including for purposes of this Section 2 , unless the holders of at least two-thirds of the shares of Preferred Stock then outstanding voting or consenting together as a single class on an as converted to Common Stock basis (the “ Required Holders ”) elect otherwise by written notice given to the Corporation at least two (2) days prior to the effective date of any such event:

(A) a merger or consolidation in which

 

  (I) the Corporation is a constituent party or

 

  (II) a subsidiary of the Corporation is a constituent party and the Corporation issues shares of its capital stock pursuant to such merger or consolidation,

except any such merger or consolidation involving the Corporation or a subsidiary in which the shares of capital stock of the Corporation outstanding immediately prior to such merger or consolidation continue to represent, or are converted or exchanged for shares of capital stock which represent, immediately following such merger or consolidation a majority, by voting power, of the capital stock of (1) the surviving or resulting corporation or (2) if the surviving or resulting corporation is a wholly owned subsidiary of another corporation immediately following such merger or consolidation, the parent corporation of such surviving or resulting corporation ( provided that , for the purpose of this Subsection 2(c)(i) , all shares of Common Stock issuable upon exercise of Options (as defined below) outstanding immediately prior to such merger or consolidation or upon conversion of Convertible Securities (as defined below) outstanding immediately prior to such merger or consolidation shall be deemed to be outstanding immediately prior to such merger or consolidation and, if applicable, converted or exchanged in such merger or consolidation on the same terms as the actual outstanding shares of Common Stock are converted or exchanged);

(B) the sale, lease, transfer, exclusive license (without material field limitation) or other disposition, in a single transaction or series of related transactions, by the Corporation or any subsidiary of the Corporation of all or substantially all the assets of the Corporation and its subsidiaries taken as a whole or the sale or disposition (whether by merger or otherwise) of one or more subsidiaries of the Corporation if substantially all of the assets of the Corporation and its subsidiaries taken as a whole are held by such subsidiary or subsidiaries, except where such sale, lease, transfer, exclusive license or other disposition is to a wholly owned subsidiary of the Corporation; or

 

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(C) the sale, exchange, transfer or other disposition, in a single transaction or series of related transactions, by the stockholders of the Corporation of voting control of the Corporation.

(ii) The Corporation shall not have the power to effect any transaction constituting a Deemed Liquidation Event pursuant to Subsection 2(c)(i)(A)(I) above unless the agreement or plan of merger or consolidation for such transaction (the “ Merger Agreement ”) provides that the consideration payable to the stockholders of the Corporation shall be allocated among the holders of capital stock of the Corporation in accordance with Subsections 2(a) and 2(b) above.

(iii) In the event of a Deemed Liquidation Event pursuant to Subsection 2(c)(i)(A)(II), (B) or (C)  above, if the Corporation does not effect a dissolution of the Corporation under the Delaware General Corporation Law (the “ General Corporation Law ”) within thirty (30) days after such Deemed Liquidation Event, then (A) the Corporation shall deliver a written notice to each holder of Preferred Stock no later than the thirtieth (30 th ) day after the Deemed Liquidation Event advising such holders of their right (and the requirements to be met to secure such right) pursuant to the terms of the following clause (B)  to require the redemption of such shares of Preferred Stock (the “ Redemption Notification ”), and (B) if the holders of at least two-thirds of the shares of Preferred Stock then outstanding, determined on an as converted to Common Stock basis, so request in a written instrument delivered to the Corporation not later than forty-five (45) days after such Deemed Liquidation Event (the “ Redemption Request ”), the Corporation shall use the consideration received by the Corporation for such Deemed Liquidation Event (net of any retained liabilities associated with the assets sold or technology licensed, as determined in good faith by the Board of Directors), together with any other assets of the Corporation available for distribution to its stockholders (the “ Available Proceeds ”) to redeem, to the extent legally available therefor, on the sixtieth (60 th ) day after such Deemed Liquidation Event (the “ Liquidation Redemption Date ”), all outstanding shares of Preferred Stock at a price per share equal to the Series A Liquidation Amount in the case of the Series A Preferred Stock or the Series B Liquidation Amount in the case of the Series B Preferred Stock (the “ Liquidation Redemption Price ”). Notwithstanding the foregoing, in the event of a redemption pursuant to the preceding sentence, if the Available Proceeds are not sufficient to redeem all outstanding shares of Preferred Stock, the Corporation shall redeem a pro rata portion of each holder’s shares of Preferred Stock to the fullest extent of such Available Proceeds, based on the respective amounts which would otherwise be payable in respect of the shares to be redeemed if the Available Proceeds were sufficient to redeem all such shares, and shall redeem the remaining shares to have been redeemed as soon as practicable after the Corporation has funds legally available therefor. On or before the Liquidation Redemption Date, each holder of shares of Preferred Stock to be redeemed on such Liquidation Redemption Date, unless such holder has exercised his, her or its right to convert such shares as provided in Section 4 , shall surrender the certificate or certificates representing such shares (or, if such holder alleges that such certificate has been lost, stolen or destroyed, a lost certificate affidavit and agreement reasonably acceptable to the Corporation to indemnify the Corporation against any claim that may be made against the Corporation on account of the alleged loss, theft or destruction of such certificate) to the Corporation, in the manner and at the place designated in the Redemption Notification, and thereupon the Liquidation Redemption Price shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof. In the event less than all of the shares of Preferred Stock represented by a certificate

 

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are redeemed, a new certificate representing the unredeemed shares of Preferred Stock shall promptly be issued to such holder. If the Redemption Notification shall have been duly given by the Corporation and the Redemption Request duly received by the Corporation, and if on the Liquidation Redemption Date, the entire Liquidation Redemption Price payable upon redemption of the shares of Preferred Stock to be redeemed on such Liquidation Redemption Date is paid or tendered for payment or deposited with an independent payment agent so as to be available therefor in a timely manner, then notwithstanding that the certificates evidencing any of the shares of Preferred Stock so called for redemption shall not have been surrendered, dividends with respect to such shares of Preferred Stock shall cease to accrue after such Liquidation Redemption Date, and all rights with respect to such shares shall forthwith after the Liquidation Redemption Date terminate, except only the right of the holders to receive the Liquidation Redemption Price without interest upon surrender of their certificate or certificates therefor. Prior to the distribution or redemption provided for in this Subsection 2(c)(iii) , the Corporation shall not expend or dissipate the consideration received for such Deemed Liquidation Event, except to discharge expenses incurred in the ordinary course of business.

(iv) The amount deemed paid or distributed to the holders of capital stock of the Corporation upon any such merger, consolidation, sale, transfer, exclusive license, other disposition or redemption shall be the cash or the value of the property, rights or securities paid or distributed to such holders by the Corporation or the acquiring person, firm or other entity. The value of such property, rights or securities shall be determined in good faith by the Board of Directors.

(d) Allocation of Contingent Payments . In the event of a Deemed Liquidation Event, if any portion of the consideration payable to the stockholders of the Corporation is (i) placed into escrow (the “ Escrowed Initial Consideration ”) and/or (ii) subject to contingencies (the “ Contingent Consideration ,” which term, for clarity, excludes any Escrowed Initial Consideration), then the definitive agreement with respect to such Deemed Liquidation Event shall provide that (a) all consideration other than the Contingent Consideration (the “ Initial Consideration ,” which term, for clarity, includes any Escrowed Initial Consideration) shall be allocated among the holders of capital stock of the Corporation in accordance with Subsections 2(a) , 2(b) and 2(e) as if the Initial Consideration were the only consideration payable in connection with such Deemed Liquidation Event and (b) any Contingent Consideration which becomes payable to the stockholders of the Corporation shall be allocated among the holders of capital stock of the Corporation in accordance with Subsections 2(a) , 2(b) and 2(e) after taking into account the previous payment of the Initial Consideration and any previously paid Contingent Consideration as part of the same transaction.

(e) No Necessity to Convert . Notwithstanding the foregoing, upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, including any Deemed Liquidation Event, (a “ Liquidation Event ”), each holder of a series of Preferred Stock shall be entitled to receive, for each such share of Preferred Stock then held, out of the proceeds available for distribution, on a series-by-series basis, the greater of (i) the aggregate amount of cash, securities or other property to which such holder would be entitled to receive with respect to such shares in a Liquidation Event pursuant to Subsection 2(a) and, if applicable, Subsections 2(b) and (2)(d)  (but without giving effect to this Subsection 2(e) ) or (ii) the aggregate amount of cash, securities or other property to which such holder would be entitled to receive in a Liquidation

 

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Event with respect to such shares if such shares of Preferred Stock had actually been converted to Common Stock immediately prior to such Liquidation Event, giving effect to this Subsection 2(e) . For purposes of this Fifth Amended and Restated Certificate of Incorporation, the terms “Series A Liquidation Amount” and “Series B Liquidation Amount” shall encompass such greater amount.

3 Voting .

(a) On any matter presented to the stockholders of the Corporation for their action or consideration at any meeting of stockholders of the Corporation (or by written consent of stockholders in lieu of meeting), each holder of outstanding shares of Preferred Stock entitled to vote thereon shall be entitled to cast the number of votes equal to the number of whole shares of Common Stock into which the shares of Preferred Stock held by such holder are convertible as of the record date for determining stockholders entitled to vote on such matter. Except as provided by law or by the provisions of Subsections 3(b) , 3(c) , 3(d) or 3(e) below, holders of Preferred Stock shall vote together with the holders of Common Stock, and with the holders of any other series of Preferred Stock the terms of which so provide, as a single class.

(b) The holders of record of the shares of Series A Preferred Stock, exclusively and as a separate class, shall be entitled to elect up to three (3) directors of the Corporation (the “ Preferred Stock Directors ”). Any director elected as provided in the preceding sentence may be removed without cause by, and only by, the affirmative vote of the holders of the Series A Preferred Stock, given either at a special meeting of such stockholders duly called for that purpose or pursuant to a written consent of stockholders. If the holders of shares of Series A Preferred Stock fail, or pursuant to any agreement among the stockholders are ineligible, to elect a sufficient number of directors to fill all directorships for which they are entitled to elect directors, voting exclusively and as a separate class, pursuant to the first sentence of this Subsection 3(b) , then any directorship not so filled shall remain vacant until such time as the holders of the Series A Preferred Stock elect a person to fill such directorship by vote or written consent in lieu of a meeting; and no such directorship may be filled by stockholders of the Corporation other than by the holders of the Series A Preferred Stock, voting exclusively and as a separate class. At any meeting held for the purpose of electing a director, the presence in person or by proxy of the holders of a majority of the outstanding shares of the class or series entitled to elect such director shall constitute a quorum for the purpose of electing such director. The holders of record of the shares of Common Stock and of any other class or series of voting stock (including the Preferred Stock), exclusively and voting together as a single class, shall be entitled to elect the balance of the total number of directors of the Corporation. A vacancy in any directorship filled by the holders of any class or series shall be filled only by vote or written consent in lieu of a meeting of the holders of such class or series or by any remaining director or directors elected by the holders of such class or series pursuant to this Subsection 3(b) . The rights of the holders of the Series A Preferred Stock under the first sentence of this Subsection 3(b) shall terminate on the earlier to occur of: (i) the closing of a firm commitment underwritten initial public offering pursuant to an effective registration statement filed under the Securities Act of 1933, as amended, covering the offer and sale of Common Stock resulting in the automatic conversion of all outstanding shares of Series A Preferred Stock to Common Stock; or (ii) the closing of a Deemed Liquidation Event, provided that in the case of a sale of assets, such termination shall occur only upon completion of the distribution of all proceeds of such sale to the stockholders of the Corporation in accordance with this Fifth Amended and Restated Certificate of Incorporation.

 

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(c) At any time when at least nine hundred fifty thousand (950,000) shares of Preferred Stock (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the Preferred Stock) are outstanding, except where the vote or written consent of the holders of a greater number of shares of the Corporation is required by law or by this Fifth Amended and Restated Certificate of Incorporation, and in addition to any other vote required by law or this Fifth Amended and Restated Certificate of Incorporation, without the written consent or affirmative vote of the Required Holders, given in writing or by vote at a meeting, the Corporation shall not, either directly or indirectly or by amendment, merger, consolidation, capital reorganization or otherwise, and any such transaction entered into without such consent or vote shall be null and void ab initio and of no force or effect:

(i) Alter, amend, repeal or change the rights, preferences or privileges of the Series A Preferred Stock or the Series B Preferred Stock; or

(ii) Amend or repeal any provision of, or add any provision to or alter, the Corporation’s Certificate of Incorporation or By-laws; or

(iii) Create, or authorize the creation of, or issue or obligate itself to issue, shares of any additional class or series of capital stock, unless the same ranks junior to the Series A Preferred Stock and the Series B Preferred Stock with respect to the distribution of assets on the liquidation, dissolution or winding up of the Corporation and with respect to the payment of dividends and unless the same has no redemption rights, or increase or decrease the number of authorized shares of Series A Preferred Stock or Series B Preferred Stock or increase or decrease the number of authorized shares of any additional class or series of capital stock unless the same ranks junior to the Series A Preferred Stock and the Series B Preferred Stock with respect to the distribution of assets on the liquidation, dissolution or winding up of the Corporation and with respect to the payment of dividends and unless the same has no redemption rights, increase or decrease the par value of the Series A Preferred Stock or the Series B Preferred Stock, or create or authorize any obligation or security convertible into shares of any class or series of stock unless the same ranks junior to the Series A Preferred Stock and the Series B Preferred Stock with respect to the distribution of assets on the liquidation, dissolution or winding up of the Corporation and with respect to the payment of dividends and unless the same has no redemption rights; or

(iv) Pay or declare any dividend or make any distribution on any shares of the Corporation’s capital stock (except dividends payable solely in shares of Common Stock); or

(v) Effect a change of control, liquidation, dissolution, merger, reincorporation, recapitalization, reorganization, consolidation, or sale or other transfer of a substantial part of the Corporation’s assets, including without limitation, effect any Deemed Liquidation Event; or

(vi) (i) Reclassify, alter or amend any existing security of the Corporation that is pari passu with the Series A Preferred Stock or the Series B Preferred Stock in respect of the distribution of assets on the liquidation, dissolution or winding up of the Corporation or the payment of dividends, if such reclassification, alteration or amendment would render such other security senior to the Series A Preferred Stock or the Series B Preferred Stock in respect of any such right, preference or privilege or if the same would grant such security redemption rights, or

 

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(ii) reclassify, alter or amend any existing security of the Corporation that is junior to the Series A Preferred Stock or the Series B Preferred Stock in respect of the distribution of assets on the liquidation, dissolution or winding up of the Corporation or the payment of dividends, if such reclassification, alteration or amendment would render such other security senior to or pari passu with the Series A Preferred Stock or the Series B Preferred Stock in respect of any such right, preference or privilege or would grant such security redemption rights; or

(vii) Sell, abandon, transfer, lease, pledge, subject to a lien, encumber, grant a security interest in or otherwise dispose of all or any material portion of the properties or assets of the Corporation, including any exclusive license of intellectual property rights of the Corporation or any subsidiary; or

(viii) Change the authorized number of directors of the Corporation; or

(ix) Create or authorize the creation of any debt security issuable by the Corporation; or

(x) Effect any change to the principal business of the Corporation or any subsidiary or enter into new lines of business not primarily related to the business of the Corporation or any subsidiary on the filing date of this Fifth Amended and Restated Certificate of Incorporation; or

(xi) Create or hold capital stock in any subsidiary that is not a wholly-owned subsidiary or dispose of any capital stock of a subsidiary or all or substantially all of the assets of any subsidiary; or

(xii) Exchange, repurchase, redeem, retire or otherwise acquire (or pay into or set aside for a sinking fund for such purpose) any shares of capital stock of the Corporation; provided, however, that this restriction shall not apply to (A) redemption of the Series A Preferred Stock or the Series B Preferred Stock in connection with a Deemed Liquidation Event in accordance with Section 2 , (B) the repurchase of shares of Common Stock from employees, officers, directors, consultants or other persons performing services for the Corporation or any subsidiary pursuant to agreements approved by the Board of Directors under which the Corporation has the option to repurchase such shares at the lesser of cost or the fair market value upon the termination of employment or service, and (C) the redemption of any shares of Series A Preferred Stock or Series B Preferred Stock in accordance with Section 6 .

(d) At any time when at least seven hundred thousand (700,000) shares of Series A Preferred Stock (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the Series A Preferred Stock) are outstanding, except where the vote or written consent of the holders of a greater number of shares of the Corporation is required by law or by this Fifth Amended and Restated Certificate of Incorporation, and in addition to any other vote required by law or this Fifth Amended and Restated Certificate of Incorporation, without the written consent or affirmative vote of the holders of at least sixty percent (60%) of the shares of Series A Preferred Stock then outstanding, given in writing or by vote at a meeting, the Corporation shall not, either directly or indirectly or by amendment, merger, consolidation, capital reorganization or otherwise, and any such transaction entered into without such consent or vote shall be null and void ab initio and of no force or effect :

 

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(i) Alter, amend, repeal or change the rights, preferences or privileges of the Series A Preferred Stock set forth in this Article IV, provided, that the authorization, designation or issuance of a new series of capital stock with rights, preferences or privileges senior to or on parity with the Series A Preferred Stock, including without limitation any alteration, amendment, repeal or change in the rights or privileges of the Preferred Stock to vote, consent or otherwise act together, shall not be deemed to be an alteration, amendment, repeal or change requiring the written consent or affirmative vote pursuant to this Subsection 3(d) of the holders of at least sixty percent (60%) of the shares of Series A Preferred Stock then outstanding; or

(ii) Increase or decrease the number of authorized shares of Series A Preferred Stock.

(e) At any time when at least two hundred fifty thousand (250,000) shares of Series B Preferred Stock (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the Series B Preferred Stock) are outstanding, except where the vote or written consent of the holders of a greater number of shares of the Corporation is required by law or by this Fifth Amended and Restated Certificate of Incorporation, and in addition to any other vote required by law or this Fifth Amended and Restated Certificate of Incorporation, without the written consent or affirmative vote of the holders of at least a majority of the shares of Series B Preferred Stock then outstanding, given in writing or by vote at a meeting, the Corporation shall not, either directly or indirectly or by amendment, merger, consolidation, capital reorganization or otherwise, and any such transaction entered into without such consent or vote shall be null and void ab initio and of no force or effect:

(i) Alter, amend, repeal or change the rights, preferences or privileges of the Series B Preferred Stock set forth in this Article IV, provided, that the authorization, designation or issuance of a new series of capital stock with rights, preferences or privileges senior to or on parity with the Series B Preferred Stock, including without limitation any alteration, amendment, repeal or change in the rights or privileges of the Preferred Stock to vote, consent or otherwise act together, shall not be deemed to be an alteration, amendment, repeal or change requiring the written consent or affirmative vote pursuant to this Subsection 3(e) of the holders of at least a majority of the shares of Series B Preferred Stock then outstanding; or

(ii) Increase or decrease the number of authorized shares of Series B Preferred Stock.

4 Optional Conversion .

The holders of the Preferred Stock shall have conversion rights as follows (the “ Conversion Rights ”):

(a) Right to Convert . Each share of Preferred Stock shall be convertible, at the option of the holder thereof, at any time and from time to time, and without the payment of additional consideration by the holder thereof, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing (i) the applicable Original Issue Price by (ii)

 

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the applicable Conversion Price (as defined below) in effect at the time of conversion. The “ Series A Conversion Price ” shall be as of September 10, 2012 equal to the Series A Original Issue Price. The “ Series B Conversion Price ” shall be as of September 10, 2012 equal to the Series B Original Issue Price. Such initial Series A Conversion Price and Series B Conversion Price, and the rate at which shares of Preferred Stock may be converted into shares of Common Stock, shall be subject to adjustment as provided below. The “ Conversion Price ” shall mean the Series A Conversion Price, in the case of the Series A Preferred Stock, and the Series B Conversion Price, in the case of the Series B Preferred Stock.

In the event of a liquidation, dissolution or winding up of the Corporation, including any Deemed Liquidation Event, the Conversion Rights shall terminate at the close of business on the last full day preceding the date fixed for the payment of any such amounts distributable on such event to the holders of Preferred Stock.

(b) Fractional Shares . No fractional shares of Common Stock shall be issued upon conversion of the Preferred Stock. In lieu of any fractional shares to which the holder would otherwise be entitled, the Corporation shall pay cash equal to such fraction multiplied by the fair market value of a share of Common Stock as determined in good faith by the Board of Directors. Whether or not fractional shares would be issuable upon such conversion shall be determined on the basis of the total number of shares of Preferred Stock the holder is at the time converting into Common Stock and the aggregate number of shares of Common Stock issuable upon such conversion.

(c) Mechanics of Conversion .

(i) In order for a holder of Preferred Stock to voluntarily convert shares of Preferred Stock into shares of Common Stock, such holder shall surrender the certificate or certificates for such shares of Preferred Stock (or, if such registered holder alleges that such certificate has been lost, stolen or destroyed, a lost certificate affidavit and agreement reasonably acceptable to the Corporation to indemnify the Corporation against any claim that may be made against the Corporation on account of the alleged loss, theft or destruction of such certificate), at the office of the transfer agent for the Preferred Stock (or at the principal office of the Corporation if the Corporation serves as its own transfer agent), together with written notice that such holder elects to convert all or any number of the shares of the Preferred Stock represented by such certificate or certificates and, if applicable, any event on which such conversion is contingent. Such notice shall state such holder’s name or the names of the nominees in which such holder wishes the certificate or certificates for shares of Common Stock to be issued. If required by the Corporation, certificates surrendered for conversion shall be endorsed or accompanied by a written instrument or instruments of transfer, in form satisfactory to the Corporation, duly executed by the registered holder or his, her or its attorney duly authorized in writing. The close of business on the date of receipt by the transfer agent of such certificates (or lost certificate affidavit and agreement) and notice (or by the Corporation if the Corporation serves as its own transfer agent) shall be the time of conversion (the “ Conversion Time ”), and the shares of Common Stock issuable upon conversion of the shares represented by such certificate shall be deemed to be outstanding of record as of such date. The Corporation shall, as soon as practicable after the Conversion Time, issue and deliver at such office to such holder of Preferred Stock, or to his, her or its nominees, a certificate or certificates for the number of full shares of Common Stock to which such holder shall be entitled

 

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and a certificate for the number (if any) of shares of Preferred Stock represented by the surrendered certificate that were not converted into Common Stock, together with (i) cash in lieu of any fraction of a share of Common Stock otherwise issuable upon such conversion and (ii) cash equal to all declared but unpaid dividends on the shares of Preferred Stock converted.

(ii) The Corporation shall at all times when the Preferred Stock shall be outstanding, reserve and keep available out of its authorized but unissued capital stock, for the purpose of effecting the conversion of the Preferred Stock, such number of its duly authorized shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Preferred Stock, the Corporation shall take such corporate action as may be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes, including, without limitation, engaging in best efforts to obtain the requisite stockholder approval of any necessary amendment to this Fifth Amended and Restated Certificate of Incorporation. Before taking any action which would cause an adjustment reducing the applicable Conversion Price below the then par value of the shares of Common Stock issuable upon conversion of a series of Preferred Stock, the Corporation will take any corporate action which may, in the opinion of its counsel, be necessary in order that the Corporation may validly and legally issue fully paid and nonassessable shares of Common Stock at such adjusted applicable Conversion Price.

(iii) All shares of Preferred Stock which shall have been surrendered for conversion as herein provided shall no longer be deemed to be outstanding and all rights with respect to such shares, including the rights, if any, to receive notices and to vote, shall immediately cease and terminate at the Conversion Time, except only the right of the holders thereof to receive shares of Common Stock in exchange therefor and to receive payment in lieu of any fractional share otherwise issuable upon conversion in accordance with Subsection 4(b) above and to receive payment of any dividends declared but unpaid thereon. Any shares of Preferred Stock so converted shall be retired and cancelled and shall not be reissued as shares of such series, and the Corporation (without the need for stockholder action) may from time to time take such appropriate action as may be necessary to reduce the authorized number of shares of Preferred Stock accordingly.

(iv) Upon any such conversion, no adjustment to the applicable Conversion Price shall be made for any declared but unpaid dividends on a series of Preferred Stock surrendered for conversion or on the Common Stock delivered upon conversion.

(v) The Corporation shall pay any and all issue and other similar taxes that may be payable in respect of any issuance or delivery of shares of Common Stock upon conversion of shares of Preferred Stock pursuant to this Section 4 . The Corporation shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of shares of Common Stock in a name other than that in which the shares of Preferred Stock so converted were registered, and no such issuance or delivery shall be made unless and until the person or entity requesting such issuance has paid to the Corporation the amount of any such tax or has established, to the satisfaction of the Corporation, that such tax has been paid.

 

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(d) Adjustments to Applicable Conversion Price for Diluting Issues .

(i) Special Definitions . For purposes of this Section 4 , the following definitions shall apply:

(A) “ Option ” shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire Common Stock or Convertible Securities.

(B) “ Series B Original Issue Date ” shall mean the date on which the first share of Series B Preferred Stock was issued.

(C) “ Convertible Securities ” shall mean any evidences of indebtedness, shares or other securities directly or indirectly convertible into or exchangeable for Common Stock, but excluding Options.

(D) “ Additional Shares of Common Stock ” shall mean all shares of Common Stock issued (or, pursuant to Subsection 4(d)(iii) below, deemed to be issued) by the Corporation after the Series B Original Issue Date, other than the following (“ Exempted Securities ”):

 

  (I) shares of Common Stock issued or deemed issued as a dividend or distribution on Preferred Stock;

 

  (II) shares of Common Stock issued or issuable by reason of a dividend, stock split, split-up or other distribution on shares of Common Stock that is covered by Subsection 4(e) or 4(f) below;

 

  (III) up to 12,150,000 shares of Common Stock (subject to any increases provided below) (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the Common Stock) issued or deemed issued to employees or directors of, or consultants or advisors to, the Corporation or any of its subsidiaries (a) pursuant to that certain Company 2010 Stock Incentive Plan, as amended and/or restated from time to time (including to increase such number of shares of Common Stock) with the approval of the Board of Directors including the approval of at least seventy percent (70%) of the directors then in office (such approval of the Board of Directors, “Super Board Approval ) or (b) pursuant to any other plan, agreement or arrangement approved by Super Board Approval (which may increase such number of shares of Common Stock);

 

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  (IV) shares of Common Stock or Convertible Securities actually issued upon the exercise of Options or shares of Common Stock actually issued upon the conversion or exchange of Convertible Securities outstanding as of the filing date of this Fifth Amended and Restated Certificate of Incorporation, in each case provided such issuance is pursuant to the terms of such Option or Convertible Security;

 

  (V) shares of Common Stock issued or deemed issued to banks, equipment lessors or other financial institutions, or to real property lessors, pursuant to a debt financing, equipment leasing or real property leasing transaction approved by Super Board Approval (not to exceed 8,525,530 shares of Common Stock (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the Common Stock)); or

 

  (VI) shares of Common Stock issued or deemed issued in connection with sponsored research, collaboration, strategic alliance, license, joint venture, development, marketing or other similar agreements or strategic partnerships approved by Super Board Approval (not to exceed 8,525,530 shares of Common Stock (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the Common Stock)).

(ii) No Adjustment of Conversion Price . No adjustment in the Conversion Price of a series of Preferred Stock shall be made as the result of the issuance of Additional Shares of Common Stock if: (a) the consideration per share (determined pursuant to Subsection 4(d)(v )) for such Additional Shares of Common Stock issued or deemed to be issued by the Corporation is equal to or greater than the applicable Conversion Price in effect immediately prior to the issuance or deemed issuance of such Additional Shares of Common Stock, or (b) (1) with respect to the Series A Conversion Price, prior to such issuance or deemed issuance, the Corporation receives written notice from the holders of at least sixty percent (60%) of the shares of Series A Preferred Stock then outstanding agreeing that no such adjustment shall be made to the Series A Conversion Price as the result of the issuance or deemed issuance of such Additional Shares of Common Stock and (2) with respect to the Series B Conversion Price, prior to such issuance or deemed issuance, the Corporation receives written notice from the holders of a majority of the shares of Series B Preferred Stock then outstanding agreeing that no such adjustment shall be made to the Series B Conversion Price as the result of the issuance or deemed issuance of such Additional Shares of Common Stock.

 

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(iii) Deemed Issue of Additional Shares of Common Stock .

(A) If the Corporation at any time or from time to time after the Series B Original Issue Date shall issue any Options or Convertible Securities (excluding Options or Convertible Securities which, upon exercise, conversion or exchange thereof, would entitle the holder thereof to receive Exempted Securities pursuant to Subsections 4(d)(i)(D)(I), (II), (III), (IV), (V), or (VI) ) or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of shares of Common Stock (as set forth in the instrument relating thereto, assuming the satisfaction of any conditions to exercisability, convertibility or exchangeability but without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date.

(B) If the terms of any Option or Convertible Security, the issuance of which resulted in an adjustment to a Conversion Price pursuant to the terms of Subsection 4(d)(iv) below, are revised (either automatically pursuant to the provisions contained therein or as a result of an amendment to such terms) to provide for either (1) any increase or decrease in the number of shares of Common Stock issuable upon the exercise, conversion or exchange of any such Option or Convertible Security or (2) any increase or decrease in the consideration payable to the Corporation upon such exercise, conversion or exchange, then, effective upon such increase or decrease becoming effective, such Conversion Price computed upon the original issue of such Option or Convertible Security (or upon the occurrence of a record date with respect thereto) shall be readjusted to such Conversion Price as would have obtained had such revised terms been in effect upon the original date of issuance of such Option or Convertible Security. Notwithstanding the foregoing, no adjustment pursuant to this clause (B) shall have the effect of increasing the Conversion Price of a series of Preferred Stock to an amount which exceeds the lower of (i) the Conversion Price of such series of Preferred Stock in effect on the original adjustment date, or (ii) the Conversion Price that would have resulted from any issuances of Additional Shares of Common Stock between the original adjustment date and such readjustment date.

(C) If the terms of any Option or Convertible Security (excluding Options or Convertible Securities which, upon exercise, conversion or exchange thereof, would entitle the holder thereof to receive Exempted Securities pursuant to Subsections 4(d)(i)(D)(I), (II), (III), (IV), (V), or (VI) ), the issuance of which did not result in an adjustment to the Conversion Price of a series of Preferred Stock pursuant to the terms of Subsection 4(d)(iv) below (either because the consideration per share (determined pursuant to Subsection 4(d)(v) hereof) of the Additional Shares of Common Stock subject thereto was equal to or greater than the applicable Conversion Price then in effect, or because such Option or Convertible Security was issued before the Series B Original Issue Date), are revised after the Series B Original Issue Date (either automatically pursuant to the provisions contained therein or as a result of an amendment to such terms) to provide for either (1) any increase or decrease in the number of shares of Common Stock issuable upon the exercise, conversion or exchange of any such Option or Convertible Security or (2) any increase or decrease in the consideration payable to the Corporation upon such exercise,

 

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conversion or exchange, then such Option or Convertible Security, as so amended, and the Additional Shares of Common Stock subject thereto (determined in the manner provided in Subsection 4(d)(iii)(A) above) shall be deemed to have been issued effective upon such increase or decrease becoming effective. If the change in such Option or Convertible Security causes an adjustment pursuant to this provision and such Option or Convertible Security is then further changed as a result of the adjustments made pursuant to this provision, no further adjustment shall be made hereunder as a result of the further automatic change in such Option or Convertible Security.

(D) Upon the expiration or termination of any unexercised Option or unconverted or unexchanged Convertible Security which resulted (either upon its original issuance or upon a revision of its terms) in an adjustment to the Conversion Price of a series of Preferred Stock pursuant to the terms of Subsection 4(d)(iv) below, such Conversion Price shall be readjusted to such Conversion Price as would have obtained had such Option or Convertible Security never been issued.

(iv) Adjustment of Conversion Price of Preferred Stock Upon Issuance of Additional Shares of Common Stock . In the event the Corporation shall at any time after the Series B Original Issue Date issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Subsection 4(d)(iii) ), without consideration or for a consideration per share less than the Conversion Price of a series of Preferred Stock in effect immediately prior to such issue, then such Conversion Price shall be reduced, concurrently with such issue, to a price (calculated to the nearest one-hundredth of a cent) determined in accordance with the following formula:

CP 2 = CP 1 * (A + B) ÷ (A + C)

For purposes of the foregoing formula, the following definitions shall apply:

(A) “CP 2 ” shall mean the applicable Conversion Price in effect immediately after such issue of Additional Shares of Common Stock;

(B) “CP 1 ” shall mean the applicable Conversion Price in effect immediately prior to such issue of Additional Shares of Common Stock;

(C) “A” shall mean the number of shares of Common Stock outstanding (treating for this purpose all outstanding shares of Common Stock and all outstanding shares of Preferred Stock on an as-converted to Common Stock basis) immediately prior to such issue of Additional Shares of Common Stock;

(D) “B” shall mean the number of shares of Common Stock that would have been issued if such Additional Shares of Common Stock had been issued at a price per share equal to CP 1 (determined by dividing the aggregate consideration received by the Corporation in respect of such issue by CP 1 ); and

(E) “C” shall mean the number of such Additional Shares of Common Stock issued in such transaction.

 

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(v) Determination of Consideration . For purposes of this Subsection 4(d) , the consideration received by the Corporation for the issue of any Additional Shares of Common Stock shall be computed as follows:

(A) Cash and Property : Such consideration shall:

 

  (I) insofar as it consists of cash, be computed at the aggregate amount of cash received by the Corporation, excluding amounts paid or payable for accrued interest;

 

  (II) insofar as it consists of property other than cash, be computed at the fair market value thereof at the time of such issue, as determined in good faith by the Board of Directors; and

 

  (III) in the event Additional Shares of Common Stock are issued together with other shares or securities or other assets of the Corporation for consideration which covers both, be the proportion of such consideration so received, computed as provided in clauses (I) and (II) above, as determined in good faith by the Board of Directors.

(B) Options and Convertible Securities . The consideration per share received by the Corporation for Additional Shares of Common Stock deemed to have been issued pursuant to Subsection 4(d)(iii) , relating to Options and Convertible Securities, shall be determined by dividing

 

  (I) the total amount, if any, received or receivable by the Corporation as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Corporation upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities, by

 

  (II)

the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon

 

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  the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities.

(vi) Multiple Closing Dates . In the event the Corporation shall issue on more than one date Additional Shares of Common Stock that are a part of one transaction or a series of related transactions and that would result in an adjustment to the Conversion Price of a series of Preferred Stock pursuant to the terms of Subsection 4(d)(iv) above, and such issuance dates occur within a period of no more than ninety (90) days from the first such issuance to the final such issuance, then, upon the final such issuance, such Conversion Price shall be readjusted to give effect to all such issuances as if they occurred on the date of the first such issuance (and without giving effect to any additional adjustments as a result of any subsequent issuances within such period).

(e) Adjustment for Stock Splits and Combinations . If the Corporation shall at any time or from time to time after the Series B Original Issue Date effect a subdivision of the outstanding Common Stock without a comparable subdivision of the Preferred Stock, the Conversion Price of each series of Preferred Stock in effect immediately before that subdivision or combination shall be proportionately decreased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be increased in proportion to such increase in the aggregate number of shares of Common Stock outstanding. If the Corporation shall at any time or from time to time after the Series B Original Issue Date combine the outstanding shares of Common Stock without a comparable combination of the Preferred Stock, the Conversion Price of each series of Preferred Stock in effect immediately before the combination or subdivision shall be proportionately increased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be decreased in proportion to such decrease in the aggregate number of shares of Common Stock outstanding. Any adjustment under this subsection shall become effective at the close of business on the date the subdivision or combination becomes effective.

(f) Adjustment for Certain Dividends and Distributions . In the event the Corporation at any time or from time to time after the Series B Original Issue Date shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable on the Common Stock in additional shares of Common Stock, then and in each such event the applicable Conversion Price of each series of Preferred Stock in effect immediately before such event shall be decreased as of the time of such issuance or, in the event such a record date shall have been fixed, as of the close of business on such record date, by multiplying the applicable Conversion Price then in effect by a fraction:

(i) the numerator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, and

(ii) the denominator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares of Common Stock issuable in payment of such dividend or distribution;

 

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provided , however , that if such record date shall have been fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the applicable Conversion Price of each series of Preferred Stock shall be recomputed accordingly as of the close of business on such record date and thereafter such Conversion Price shall be adjusted pursuant to this subsection as of the time of actual payment of such dividends or distributions; and provided further , however , that no such adjustment shall be made to the applicable Conversion Price if the holders of such series of Preferred Stock simultaneously receive (i) a dividend or other distribution of shares of Common Stock in a number equal to the number of shares of Common Stock as they would have received if all outstanding shares of such series of Preferred Stock had been converted into Common Stock on the date of such event or (ii) a dividend or other distribution of shares of such series of Preferred Stock which are convertible, as of the date of such event, into such number of shares of Common Stock as is equal to the number of additional shares of Common Stock being issued with respect to each share of Common Stock in such dividend or distribution.

(g) Adjustments for Other Dividends and Distributions . In the event the Corporation at any time or from time to time after the Series B Original Issue Date shall make or issue, or fix a record date for the determination of holders of capital stock of the Corporation entitled to receive, a dividend or other distribution payable in securities of the Corporation (other than a distribution of shares of Common Stock in respect of outstanding shares of Common Stock) or in other property and the provisions of Section 1 do not apply to such dividend or distribution, then and in each such event the holders of Preferred Stock shall receive, simultaneously with the distribution to the holders of such capital stock, a dividend or other distribution of such securities or other property in an amount equal to the amount of such securities or other property as they would have received if all outstanding shares of Preferred Stock had been converted into Common Stock on the date of such event.

(h) Adjustment for Merger or Reorganization, etc . Subject to the provisions of Subsection 2(c) , if there shall occur any reorganization, recapitalization, reclassification, consolidation or merger involving the Corporation in which the Common Stock (but not a series of Preferred Stock) is converted into or exchanged for securities, cash or other property (other than a transaction covered by Subsections (d), (f) or (g)  of this Section 4 ), then, following any such reorganization, recapitalization, reclassification, consolidation or merger, each share of such series of Preferred Stock shall thereafter be convertible in lieu of the Common Stock into which it was convertible prior to such event into the kind and amount of securities, cash or other property which a holder of the number of shares of Common Stock of the Corporation issuable upon conversion of one share of such series of Preferred Stock immediately prior to such reorganization, recapitalization, reclassification, consolidation or merger would have been entitled to receive pursuant to such transaction; and, in such case, appropriate adjustment (as determined in good faith by the Board of Directors) shall be made in the application of the provisions in this Section 4 with respect to the rights and interests thereafter of the holders of such series of Preferred Stock, to the end that the provisions set forth in this Section 4 (including provisions with respect to changes in and other adjustments of the applicable Conversion Price) shall thereafter be applicable, as nearly as reasonably may be, in relation to any securities or other property thereafter deliverable upon the conversion of such series of Preferred Stock.

 

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(i) Certificate as to Adjustments . Upon the occurrence of each adjustment or readjustment of the applicable Conversion Price of a series of Preferred Stock pursuant to this Section 4 , the Corporation at its expense shall, as promptly as reasonably practicable but in any event not later than ten (10) days thereafter, compute such adjustment or readjustment in accordance with the terms hereof and furnish to each holder of Preferred Stock a certificate setting forth such adjustment or readjustment (including the kind and amount of securities, cash or other property into which the Preferred Stock is convertible) and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, as promptly as reasonably practicable after the written request at any time of any holder of Preferred Stock (but in any event not later than ten (10) days thereafter), furnish or cause to be furnished to such holder a certificate setting forth (i) the applicable Conversion Price of each series of Preferred Stock then in effect, and (ii) the number of shares of Common Stock and the amount, if any, of other securities, cash or property which then would be received upon the conversion of each series of Preferred Stock.

(j) Notice of Record Date . In the event:

(i) the Corporation shall take a record of the holders of its Common Stock (or other stock or securities at the time issuable upon conversion of the Preferred Stock) for the purpose of entitling or enabling them to receive any dividend or other distribution, or to receive any right to subscribe for or purchase any shares of stock of any class or any other securities, or to receive any other right; or

(ii) of any capital reorganization of the Corporation, any reclassification of the Common Stock; or

(iii) of the voluntary or involuntary dissolution, liquidation or winding-up of the Corporation, including any Deemed Liquidation Event,

then, and in each such case, the Corporation will send or cause to be sent to the holders of the Preferred Stock a notice specifying, as the case may be, (i) the record date for such dividend, distribution or right, and the amount and character of such dividend, distribution or right, or (ii) the effective date on which such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation or winding-up is proposed to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock (or such other stock or securities at the time issuable upon the conversion of the Preferred Stock) shall be entitled to exchange their shares of Common Stock (or such other stock or securities) for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation or winding-up, and the amount per share and character of such exchange applicable to the Preferred Stock and the Common Stock. Such notice shall be sent at least ten (10) days prior to the record date or effective date for the event specified in such notice. Any notice required by the provisions hereof to be given to a holder of shares of Preferred Stock shall be deemed sent to such holder if deposited in the United States mail, postage prepaid, and addressed to such holder at his, her or its address appearing on the books of the Corporation.

 

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5 Mandatory Conversion .

(a) Upon the earlier of (A) the closing of the sale of shares of Common Stock to the public, in a firm-commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, resulting in (1) at least $30 million of gross proceeds to the Corporation, (2) a price per share at least equal to $2.49 per share (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the Common Stock), and (3) the listing of the Common Stock on a nationally recognized securities exchange or trading system (any such offering, a “ Qualified Public Offering ”), or (B) a date specified by vote or written consent of the Required Holders, (i) all outstanding shares of Preferred Stock shall automatically be converted into shares of Common Stock, at the then effective conversion rate and (ii) such shares may not be reissued by the Corporation as shares of the applicable series. In addition, upon the date and time or the occurrence of an event specified by vote or written consent of the holders of at least sixty percent (60%) of the shares of Series A Preferred Stock then outstanding, (i) all outstanding shares of Series A Preferred Stock shall automatically be converted into shares of Common Stock, at the then effective conversion rate and (ii) such shares may not be reissued by the Corporation as shares of such series. The time of the event effecting conversion of a series of Preferred Stock pursuant to this Section 5(a) is referred to herein as a “ Mandatory Conversion Date ”.

(b) All holders of record of shares of the applicable series of Preferred Stock shall be given written notice of the applicable Mandatory Conversion Date and the place designated for mandatory conversion of all such shares of such series of Preferred Stock pursuant to this Section 5 . Such notice need not be given in advance of the occurrence of the applicable Mandatory Conversion Date. Such notice shall be sent by first class or registered mail, postage prepaid, to each record holder of the applicable series of Preferred Stock. Upon receipt of such notice, each holder of shares of such series of Preferred Stock shall surrender his, her or its certificate or certificates for all such shares (or, if such holder alleges that such certificate has been lost, stolen or destroyed, a lost certificate affidavit and agreement reasonably acceptable to the Corporation to indemnify the Corporation against any claim that may be made against the Corporation on account of the alleged loss, theft or destruction of such certificate) to the Corporation at the place designated in such notice, and shall thereafter receive certificates for the number of shares of Common Stock to which such holder is entitled pursuant to this Section 5 . On the applicable Mandatory Conversion Date, all outstanding shares of the applicable series of Preferred Stock shall be deemed to have been converted into shares of Common Stock, which shall be deemed to be outstanding of record, and all rights with respect to the shares of Preferred Stock so converted, including the rights, if any, to receive notices and vote (other than as a holder of Common Stock), will terminate, except only the rights of the holders thereof, upon surrender of their certificate or certificates (or lost certificate affidavit and agreement) therefor, to receive certificates for the number of shares of Common Stock into which such series of Preferred Stock has been converted, and payment of any declared but unpaid dividends thereon. If so required by the Corporation, certificates surrendered for conversion shall be endorsed or accompanied by written instrument or instruments of transfer, in form satisfactory to the Corporation, duly executed by the registered holder or by his, her or its attorney duly authorized in writing. As soon as practicable after the applicable Mandatory Conversion Date and the surrender of the certificate or certificates (or lost certificate affidavit and agreement) for the shares of Preferred Stock so converted, the Corporation shall cause to be issued and delivered to such holder, or on his, her or its written order, a certificate or certificates for the number of full shares of Common Stock issuable on such conversion in accordance with the provisions hereof and cash as provided in Subsection 4(b) in respect of any fraction of a share of Common Stock otherwise issuable upon such conversion.

 

22


(c) All certificates evidencing shares of Preferred Stock which are required to be surrendered for conversion in accordance with the provisions hereof shall, from and after the applicable Mandatory Conversion Date, be deemed to have been retired and cancelled and the shares of Preferred Stock represented thereby converted into Common Stock for all purposes, notwithstanding the failure of the holder or holders thereof to surrender such certificates on or prior to such date. Such converted Preferred Stock may not be reissued as shares of such series, and the Corporation may thereafter take such appropriate action (without the need for stockholder action) as may be necessary to reduce the authorized number of shares of Preferred Stock accordingly.

6 Redemption .

(a) At any time on or after the fifth (5 th ) anniversary of the Series B Original Issue Date, upon the receipt by the Corporation of a written request from the holders of at least two-thirds of the shares of Preferred Stock then outstanding, determined on an as converted to Common Stock basis, that all of the then outstanding shares of Preferred Stock be redeemed, the Corporation shall, to the extent it may lawfully do so, redeem (such payment date being referred to herein as the “ Redemption Date ” and the Redemption Date being no later than sixty (60) days after the receipt by the Corporation of the written request referred to in the first sentence of this Section 6(a)) all of the then outstanding shares of Preferred Stock by paying in cash therefor a sum per share equal to the greater of (i) the applicable Original Issue Price (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization affecting such shares) plus all declared but unpaid dividends on such shares, or (ii) the fair market value of a share of the applicable series of Preferred Stock, as determined by an independent accounting firm selected within fifteen (15) days of such written request by mutual agreement of the Corporation and such requesting holders, delivering a written report of such fair market value within forty-five (45) days of such written request, and with the cost of such appraisal to be borne by the Corporation (the “ Redemption Price ”). Any redemption of Preferred Stock effected pursuant to this Subsection 6(a) shall be made on a pro rata basis among the holders of Preferred Stock in proportion to the aggregate Redemption Price that each such holder of Preferred Stock would otherwise be entitled to receive on the applicable Redemption Date.

(b) At least fifteen (15) days prior to the Redemption Date, and following the Corporation’s receipt of a notice pursuant to Section 6(a) hereof, written notice shall be mailed, first class postage prepaid, to each holder of record (at the close of business on the business day next preceding the day on which notice is given) of Preferred Stock, at the address last shown on the records of the Corporation for such holder, notifying such holder of the redemption to be effected on the Redemption Date, specifying the number and series of the shares of Preferred Stock to be redeemed from such holder, the Redemption Price for each series of Preferred Stock and the place at which payment may be obtained and calling upon such holder to surrender to the Corporation, in the manner and at the place designated, his, her or its certificate or certificates representing the shares to be redeemed (the “ Redemption Notice ”); provided, however, that the Corporation’s failure to give such Redemption Notice shall in no way affect is obligation to redeem the shares of Preferred Stock as provided in Subsection 6(a) hereof. Except as provided in

 

23


Subsection 6(c) , on or after the Redemption Date, each holder of Preferred Stock on the Redemption Date shall surrender to the Corporation the certificate or certificates representing such shares, in the manner and at the place designated in the Redemption Notice, and thereupon the Redemption Price of such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be cancelled. In the event less than all the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares.

(c) From and after the Redemption Date, unless there shall have been a default in payment of the Redemption Price, all rights of the holders of shares of Preferred Stock designated for redemption on the Redemption Date in the Redemption Notice as holders of Preferred Stock (except the right to receive the Redemption Price without interest upon surrender of their certificate or certificates) shall cease with respect to such shares, and such shares shall not thereafter be transferred on the books of the Corporation or be deemed to be outstanding for any purpose whatsoever. If the funds of the Corporation legally available for redemption of shares of Preferred Stock on the Redemption Date are insufficient to redeem the total number of shares of Preferred Stock to be redeemed, those funds that are legally available will be used to redeem the maximum possible number of such shares ratably among the holders of such shares to be redeemed in proportion to the aggregate Redemption Price that each such holder would be entitled to receive pursuant to Subsection 6(a) . The shares of Preferred Stock not redeemed shall remain outstanding and entitled to all the rights and preferences provided herein; provided, however, that the unpaid balance required to redeem such shares shall accrue interest at twelve percent (12%) per annum, payable quarterly in arrears. In the event the Corporation fails to redeem any such shares for greater than sixty (60) days after the Redemption Date, the Required Holders shall have the right to elect all of the members of the Board of Directors, notwithstanding the provisions of Subsection 3(b) above. At any time thereafter when additional funds of the Corporation are legally available for the redemption of shares of Preferred Stock, such funds will immediately be used to redeem the balance of the shares that the Corporation has become obliged to redeem on any Redemption Date but that it has not redeemed.

(d) Unless waived by the Required Holders, on or prior to the Redemption Date, the Corporation shall deposit the Redemption Price of all shares of Preferred Stock designated for redemption on the Redemption Date in the Redemption Notice, and not yet redeemed or converted, with a bank or trust corporation having aggregate capital and surplus in excess of $1,000,000,000 as a trust fund for the benefit of the respective holders of the shares designated for redemption and not yet redeemed, with irrevocable instructions and authority to the bank or trust corporation to publish the notice of redemption thereof and pay the Redemption Price for such shares to their respective holders on or after the Redemption Date, upon receipt of notification from the Corporation that such holder has surrendered his, her or its share certificate to the Corporation pursuant to Subsection 6(b) . As of the date of such deposit (even if prior to the Redemption Date), the deposit shall constitute full payment of such shares to their holders, and from and after the date of the deposit, the shares so called for redemption shall be redeemed and shall be deemed to be no longer outstanding, and the holders thereof shall cease to be stockholders with respect to such shares and shall have no rights with respect thereto except the rights to receive from the bank or trust corporation payment of the Redemption Price for the shares, without interest, upon surrender of their certificates therefor. Such instructions shall also provide that any monies deposited by the Corporation pursuant to this Subsection 6(d) for the redemption of shares converted into shares of

 

24


the Corporation’s Common Stock pursuant to Section 4 prior to the Redemption Date shall be returned to the Corporation forthwith upon such conversion. The balance of any monies deposited by the Corporation pursuant to this Subsection 6(d) remaining unclaimed at the expiration of two (2) years following the Redemption Date shall thereafter be returned to the Corporation upon its request expressed in a resolution of its Board of Directors.

7 Corporate Opportunity . The Corporation renounces any interest or expectancy of the Corporation in, or in being offered an opportunity to participate in, any Excluded Opportunity. An “ Excluded Opportunity ” is any matter, transaction or interest that is presented to, or acquired, created or developed by, or which otherwise comes into the possession of, (i) any director of the Corporation who is not an employee of the Corporation or any of its subsidiaries, or (ii) any holder of Preferred Stock or any partner, member, director, stockholder, employee, agent or investment advisor of any such holder, other than someone who is an employee of the Corporation or any of its subsidiaries (collectively, “ Covered Persons ”), unless such matter, transaction or interest is presented to, or acquired, created or developed by, or otherwise comes into the possession of, a Covered Person expressly and solely in such Covered Person’s capacity as a director of the Corporation.

8 Waiver . Any of the rights, powers or preferences of the holders of Series A Preferred Stock, as a separate class, set forth herein may be defeased by the affirmative consent or vote of holders of at least sixty percent (60%) of the Series A Preferred Stock then outstanding, consenting or voting as a separate class. Any of the rights, powers or preferences of the holders of Series B Preferred Stock, as a separate class, set forth herein may be defeased by the affirmative consent or vote of holders of a majority of the Series B Preferred Stock then outstanding, consenting or voting as a separate class. Any of the rights, powers or preferences of the holders of Preferred Stock, together as a single class, set forth herein may be defeased by the affirmative consent or vote of the Required Holders.

ARTICLE V

Perpetual Existence

The Corporation is to have perpetual existence.

ARTICLE VI

By-laws

In furtherance and not in limitation of the powers conferred by the laws of the State of Delaware:

A. The Board of Directors of the Corporation is expressly authorized to adopt, amend or repeal the By-Laws of the Corporation.

B. Elections of directors need not be by written ballot unless the By-Laws of the Corporation shall so provide.

 

25


C. The books of the Corporation may be kept at such place within or without the State of Delaware as the By-Laws of the Corporation may provide or as may be designated from time to time by the Board of Directors of the Corporation.

ARTICLE VII

Indemnification

The Corporation eliminates the personal liability of each member or its Board of Directors to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided, however, that, to the extent provided by applicable law, the foregoing shall not eliminate the liability of a director (i) for any breach of such director’s duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of Title 8 of the Delaware Code or (iv) for any transaction from which such director derived an improper personal benefit. No amendment to or repeal of this provision shall apply to or have any effect on the liability or alleged liability of any director for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal.

ARTICLE VIII

Amendments and Repeal

The Corporation reserves the right to amend or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon a stockholder herein are granted subject to this reservation.

[rest of page intentionally blank]

 

26


IN WITNESS WHEREOF, the undersigned has executed this Fifth Amended and Restated Certificate of Incorporation as of the 10th day of September, 2012.

 

FOUNDATION MEDICINE, INC.
By:   /s/ Michael Pellini
  Michael Pellini, M.D.
  President and Chief Executive Officer


CERTIFICATE OF AMENDMENT TO

FIFTH AMENDED AND RESTATED CERTIFICATE OF INCORPORATION

OF

FOUNDATION MEDICINE, INC.

Foundation Medicine, Inc. (the “ Corporation ”), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the “ DGCL ”), does hereby certify:

1. Pursuant to Section 242 of the DGCL, this Certificate of Amendment to Fifth Amended and Restated Certificate of Incorporation (this “ Amendment ”) amends the provisions of the Fifth Amended and Restated Certificate of Incorporation of the Corporation (the “ Certificate ”).

2. Pursuant to Section 228(a) of the DGCL, the holders of outstanding shares of the Corporation, having not less than the minimum number of votes that would be necessary to authorize or take such actions at a meeting at which all shares entitled to vote thereon were present and voted, consented to the adoption of the amendments without a meeting, without a vote and without prior notice and that written notice of the taking of such actions is being given in accordance with Section 228(e) of the DGCL.

3. The Certificate is hereby amended as follows:

(a) The first paragraph of Section A of Article IV is hereby amended and restated in its entirety to read as set forth below:

“1. Authorized Shares . The total number of shares of all classes of stock which the Corporation shall have authority to issue is:

(a) 96,000,000 shares of Common stock, par value of $0.0001 per share (“ Common Stock ”); and

(b) 68,712,134 shares of Preferred Stock of the Corporation, par value of $0.0001 per share (the “ Preferred Stock ”).”

(b) The first sentence of the first paragraph of Section C of Article IV is hereby amended and restated in its entirety to read as set forth below:

“43,950,000 shares of the authorized Preferred Stock of the Corporation are hereby designated Series A Convertible Preferred Stock (the “ Series A Preferred Stock ”) and 24,762,134 shares of the authorized Preferred Stock of the Corporation are hereby designated Series B Convertible Preferred Stock (the “ Series B Preferred Stock ”), in each case with the following rights, preferences, powers, privileges and restrictions, qualifications and limitations.”

* - * - * - *

 

28


IN WITNESS WHEREOF, the undersigned authorized officer of the Corporation, has executed this Certificate of Amendment to Fifth Amended and Restated Certificate of Incorporation as of December 28, 2012.

 

FOUNDATION MEDICINE, INC.
By:   /s/ Michael Pellini
  Michael Pellini
  President and Chief Executive Officer


CERTIFICATE OF AMENDMENT TO

FIFTH AMENDED AND RESTATED CERTIFICATE OF INCORPORATION

OF

FOUNDATION MEDICINE, INC.

Foundation Medicine, Inc. (the “ Corporation ”), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the “ DGCL ”), does hereby certify:

1. Pursuant to Section 242 of the DGCL, this Certificate of Amendment to Fifth Amended and Restated Certificate of Incorporation amends the provisions of the Fifth Amended and Restated Certificate of Incorporation of the Corporation, as amended (the “ Certificate ”).

2. Pursuant to Section 228(a) of the DGCL, the holders of outstanding shares of the Corporation, having not less than the minimum number of votes that would be necessary to authorize or take such actions at a meeting at which all shares entitled to vote thereon were present and voted, consented to the adoption of the amendments without a meeting, without a vote and without prior notice and that written notice of the taking of such actions is being given in accordance with Section 228(e) of the DGCL.

3. The Certificate is hereby amended as follows:

A. Section A.1. of Article IV of the Certificate is hereby amended and restated in its entirety to read as set forth below:

Authorized Shares . Effective immediately upon the filing of this Certificate of Amendment to Fifth Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware (the “ Effective Time ”), every four (4) shares of Common Stock then issued and outstanding or held in the treasury of the Corporation immediately prior to the Effective Time shall automatically be combined into one (1) share of Common Stock, without any further action by the holders of such shares (the “ Reverse Stock Split ”). The Reverse Stock Split will be effected on a certificate-by-certificate basis. No fractional shares shall be issued in connection with the Reverse Stock Split. In lieu of any fractional shares to which a holder would otherwise be entitled, the Corporation shall pay cash equal to such fraction multiplied by the fair market value of a share of Common Stock as determined in good faith by the Corporation’s Board of Directors.”

The total number of shares of all classes of stock which the Corporation shall have authority to issue is:

(a) 96,000,000 shares of Common Stock, par value $0.0001 per share (“ Common Stock ”); and

(b) 68,712,134 shares of Preferred Stock, par value of $0.0001 per share (the “ Preferred Stock ”).”


B. The first paragraph of Section C.4(a) of Article IV of the Certificate is hereby amended and restated in its entirety to read as set forth below:

“Each share of Preferred Stock shall be convertible, at the option of the holder thereof, at any time and from time to time, and without the payment of additional consideration by the holder thereof, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing (i) the applicable Original Issue Price by (ii) the applicable Conversion Price (as defined below) in effect at the time of conversion. Upon the Effective Time, after taking into account the Reverse Stock Split, the “ Series A Conversion Price ” shall be equal to $4.00 per share. Upon the Effective Time, after taking into account the Reverse Stock Split, the “ Series B Conversion Price ” shall be equal to $9.04 per share. Such Series A Conversion Price and Series B Conversion Price, and the rate at which shares of Preferred Stock may be converted into shares of Common Stock, shall be subject to adjustment as provided below. All references to the Series A Conversion Price and the Series B Conversion Price herein shall mean the Series A Conversion Price or the Series B Conversion Price as so adjusted. The “ Conversion Price ” shall mean the Series A Conversion Price, in the case of the Series A Preferred Stock, and the Series B Conversion Price, in the case of the Series B Preferred Stock.”

*—*—*—*


IN WITNESS WHEREOF, the undersigned authorized officer of the Corporation, has executed this Certificate of Amendment to Fifth Amended and Restated Certificate of Incorporation as of September 12, 2013.

 

FOUNDATION MEDICINE, INC.
By:   /s/ Michael J. Pellini, M.D.
 

Michael J. Pellini, M.D.

President and Chief Executive Officer

Exhibit 4.1

 

LOGO


The Corporation will furnish without charge to each stockholder who so requests a statement of the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights.

The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations:

 

TEN COM     as tenants in common      UNIF GIFT MIN ACT —                                  Custodian                           
TEN ENT     as tenants by the entireties        

(Cust)

 

           (Minor)

JT TEN     as joint tenants with right of survivorship and not as tenants in common        

under Uniform Gifts to Minors

Act                      

    (State)

Additional abbreviations may also be used though not in the above list.

 

For value received,               hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER      
IDENTIFYING NUMBER OF ASSIGNEE      
          

 

 

 

 
  (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)  
 

 

 
 

 

 
 

 

 
  shares of the capital stock represented by the within Certificate, and do hereby irrevocably constitute and appoint  
 

 

 
  Attorney to transfer the said stock on the books of the within named Corporation with fully power of substitution in the premises.  

 

  Dated  

 

 

  

 

  
NOTICE:    THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.   

Exhibit 5.1

September 12, 2013                                    

Foundation Medicine, Inc.

One Kendall Square

Suite B3501

Cambridge, MA 02139

 

  Re: Securities Registered under Registration Statement on Form S-1

Ladies and Gentlemen:

We have acted as counsel to you in connection with your filing of a Registration Statement on Form S-1 (File No. 333-190226) (as amended or supplemented, the “Registration Statement”) pursuant to the Securities Act of 1933, as amended (the “Securities Act”), relating to the registration of the offering by Foundation Medicine, Inc., a Delaware corporation (the “Company”) of up to 5,750,000 shares (the “Shares”) of the Company’s Common Stock, $0.0001 par value per share, including Shares purchasable by the underwriters upon their exercise of an over-allotment option granted to the underwriters by the Company. The Shares are being sold to the several underwriters named in, and pursuant to, an underwriting agreement among the Company and such underwriters (the “Underwriting Agreement”).

We have reviewed such documents and made such examination of law as we have deemed appropriate to give the opinions set forth below. We have relied, without independent verification, on certificates of public officials and, as to matters of fact material to the opinions set forth below, on certificates of officers of the Company.

The opinion set forth below is limited to the Delaware General Corporation Law (which includes reported judicial decisions interpreting the Delaware General Corporation Law).

Based on the foregoing, we are of the opinion that the Shares have been duly authorized and, when the price and other terms upon which the Shares are to be sold have been approved by the Board of Directors of the Company (or a duly authorized committee of the Board of Directors) and the Shares have been issued and delivered against payment in accordance with such terms, the Shares will be validly issued, fully paid and non-assessable.

We hereby consent to the inclusion of this opinion as Exhibit 5.1 to the Registration Statement and to the references to our firm under the caption “Legal Matters” in the Registration Statement. In giving our consent, we do not admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act or the rules and regulations thereunder.

 

Very truly yours,

/s/ GOODWIN PROCTER LLP

GOODWIN PROCTER LLP

Exhibit 10.2

FOUNDATION MEDICINE, INC.

 

 

2013 STOCK OPTION AND INCENTIVE PLAN

 

Section 1.  General Purpose of the Plan; Definitions

The name of the plan is the Foundation Medicine, Inc. 2013 Stock Option and Incentive Plan (the “Plan”). The purpose of the Plan is to encourage and enable the officers, employees, Non-Employee Directors and other key persons (including Consultants) of Foundation Medicine, Inc. (the “Company”) and its Subsidiaries upon whose judgment, initiative and efforts the Company largely depends for the successful conduct of its business to acquire a proprietary interest in the Company. It is anticipated that providing such persons with a direct stake in the Company’s welfare will assure a closer identification of their interests with those of the Company and its stockholders, thereby stimulating their efforts on the Company’s behalf and strengthening their desire to remain with the Company.

The following terms shall be defined as set forth below:

Act means the Securities Act of 1933, as amended, and the rules and regulations thereunder.

Administrator means either the Board or the compensation committee of the Board or a similar committee performing the functions of the compensation committee and which is comprised of not less than two Non-Employee Directors who are independent.

Award or Awards ,” except where referring to a particular category of grant under the Plan, shall include Incentive Stock Options, Non-Qualified Stock Options, Stock Appreciation Rights, Restricted Stock Units, Restricted Stock Awards, Unrestricted Stock Awards, Cash-Based Awards, Performance Share Awards and Dividend Equivalent Rights.

Award Certificate means a written or electronic document setting forth the terms and provisions applicable to an Award granted under the Plan. Each Award Certificate is subject to the terms and conditions of the Plan.

Board means the Board of Directors of the Company.

Cash-Based Award ” means an Award entitling the recipient to receive a cash-denominated payment.

Code means the Internal Revenue Code of 1986, as amended, and any successor Code, and related rules, regulations and interpretations.

Consultant means any natural person that provides bona fide services to the Company, and such services are not in connection with the offer or sale of securities in a capital-raising transaction and do not directly or indirectly promote or maintain a market for the Company’s securities.


“Covered Employee” means an employee who is a “Covered Employee” within the meaning of Section 162(m) of the Code.

“Dividend Equivalent Right” means an Award entitling the grantee to receive credits based on cash dividends that would have been paid on the shares of Stock specified in the Dividend Equivalent Right (or other award to which it relates) if such shares had been issued to and held by the grantee.

“Effective Date” means the date on which the Plan is approved by stockholders as set forth in Section 21.

“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder.

“Fair Market Value” of the Stock on any given date means the fair market value of the Stock determined in good faith by the Administrator; provided, however, that if the Stock is admitted to quotation on the National Association of Securities Dealers Automated Quotation System (“NASDAQ”), NASDAQ Global Market or another national securities exchange, the determination shall be made by reference to market quotations. If there are no market quotations for such date, the determination shall be made by reference to the last date preceding such date for which there are market quotations; provided further, however, that if the date for which Fair Market Value is determined is the first day when trading prices for the Stock are reported on a national securities exchange, the Fair Market Value shall be the “Price to the Public” (or equivalent) set forth on the cover page for the final prospectus relating to the Company’s Initial Public Offering.

“Incentive Stock Option” means any Stock Option designated and qualified as an “incentive stock option” as defined in Section 422 of the Code.

“Initial Public Offering” means the consummation of the first underwritten, firm commitment public offering pursuant to an effective registration statement under the Act covering the offer and sale by the Company of its equity securities, or such other event as a result of or following which the Stock shall be publicly held.

“Non-Employee Director” means a member of the Board who is not also an employee of the Company or any Subsidiary.

“Non-Qualified Stock Option” means any Stock Option that is not an Incentive Stock Option.

“Option” or “Stock Option” means any option to purchase shares of Stock granted pursuant to Section 5.

“Performance-Based Award” means any Restricted Stock Award, Restricted Stock Units, Performance Share Award or Cash-Based Award granted to a Covered Employee that is intended to qualify as “performance-based compensation” under Section 162(m) of the Code and the regulations promulgated thereunder.

 

2


“Performance Criteria” means the criteria that the Administrator selects for purposes of establishing the Performance Goal or Performance Goals for an individual for a Performance Cycle. The Performance Criteria (which shall be applicable to the organizational level specified by the Administrator, including, but not limited to, the Company or a unit, division, group, or Subsidiary of the Company) that will be used to establish Performance Goals are limited to the following: total shareholder return, earnings before interest, taxes, depreciation and amortization, net income (loss) (either before or after interest, taxes, depreciation and/or amortization), changes in the market price of the Stock, economic value-added, funds from operations or similar measure, sales or revenue, development, clinical or regulatory milestones, acquisitions or strategic transactions, operating income (loss), cash flow (including, but not limited to, operating cash flow and free cash flow), return on capital, assets, equity, or investment, stockholder returns, return on sales, gross or net profit levels, productivity, expense, margins, operating efficiency, customer satisfaction, working capital, earnings (loss) per share of Stock, sales or market shares and number of customers, any of which may be measured either in absolute terms or as compared to any incremental increase or as compared to results of a peer group.

“Performance Cycle” means one or more periods of time, which may be of varying and overlapping durations, as the Administrator may select, over which the attainment of one or more Performance Criteria will be measured for the purpose of determining a grantee’s right to and the payment of a Restricted Stock Award, Restricted Stock Units, Performance Share Award or Cash-Based Award, the vesting and/or payment of which is subject to the attainment of one or more Performance Goals. Each such period shall not be less than 12 months.

“Performance Goals” means, for a Performance Cycle, the specific goals established in writing by the Administrator for a Performance Cycle based upon the Performance Criteria.

“Performance Share Award” means an Award entitling the recipient to acquire shares of Stock upon the attainment of specified Performance Goals.

“Restricted Stock Award” means an Award of shares of Stock subject to such restrictions and conditions as the Administrator may determine at the time of grant.

“Restricted Stock Units” means an Award of phantom stock units to a grantee.

“Sale Event” shall mean (i) the sale of all or substantially all of the assets of the Company on a consolidated basis to an unrelated person or entity, (ii) a merger, reorganization or consolidation pursuant to which the holders of the Company’s outstanding voting power and outstanding stock immediately prior to such transaction do not own a majority of the outstanding voting power and outstanding stock or other equity interests of the resulting or successor entity (or its ultimate parent, if applicable) immediately upon completion of such transaction, (iii) the sale of all of the Stock of the Company to an unrelated person, entity or group thereof acting in concert, or (iv) any other transaction in which the owners of the Company’s outstanding voting power immediately prior to such transaction do not own at least a majority of the outstanding voting power of the Company or any successor entity immediately upon completion of the transaction other than as a result of the acquisition of securities directly from the Company.

 

3


Sale Price means the value as determined by the Administrator of the consideration payable, or otherwise to be received by stockholders, per share of Stock pursuant to a Sale Event.

“Section 409A” means Section 409A of the Code and the regulations and other guidance promulgated thereunder.

“Stock” means the Common Stock, par value $0.0001 per share, of the Company, subject to adjustments pursuant to Section 3.

“Stock Appreciation Right” means an Award entitling the recipient to receive shares of Stock having a value equal to the excess of the Fair Market Value of the Stock on the date of exercise over the exercise price of the Stock Appreciation Right multiplied by the number of shares of Stock with respect to which the Stock Appreciation Right shall have been exercised.

“Subsidiary” means any corporation or other entity (other than the Company) in which the Company has at least a 50 percent interest, either directly or indirectly.

“Ten Percent Owner” means an employee who owns or is deemed to own (by reason of the attribution rules of Section 424(d) of the Code) more than 10 percent of the combined voting power of all classes of stock of the Company or any parent or subsidiary corporation.

“Unrestricted Stock Award” means an Award of shares of Stock free of any restrictions.

 

Section 2.  Administration of Plan; Administrator Authority to Select Grantees and Determine Awards

(a) Administration of Plan . The Plan shall be administered by the Administrator.

(b) Powers of Administrator . The Administrator shall have the power and authority to grant Awards consistent with the terms of the Plan, including the power and authority:

(i) to select the individuals to whom Awards may from time to time be granted;

(ii) to determine the time or times of grant, and the extent, if any, of Incentive Stock Options, Non-Qualified Stock Options, Stock Appreciation Rights, Restricted Stock Awards, Restricted Stock Units, Unrestricted Stock Awards, Cash-Based Awards, Performance Share Awards and Dividend Equivalent Rights, or any combination of the foregoing, granted to any one or more grantees;

(iii) to determine the number of shares of Stock to be covered by any Award;

(iv) to determine and modify from time to time the terms and conditions, including restrictions, not inconsistent with the terms of the Plan, of any Award, which terms and conditions may differ among individual Awards and grantees, and to approve the forms of Award Certificates;

 

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(v) to accelerate at any time the exercisability or vesting of all or any portion of any Award;

(vi) subject to the provisions of Section 5(b), to extend at any time the period in which Stock Options may be exercised; and

(vii) at any time to adopt, alter and repeal such rules, guidelines and practices for administration of the Plan and for its own acts and proceedings as it shall deem advisable; to interpret the terms and provisions of the Plan and any Award (including related written instruments); to make all determinations it deems advisable for the administration of the Plan; to decide all disputes arising in connection with the Plan; and to otherwise supervise the administration of the Plan.

All decisions and interpretations of the Administrator shall be binding on all persons, including the Company and Plan grantees.

(c) Delegation of Authority to Grant Awards . Subject to applicable law, the Administrator, in its discretion, may delegate to the Chief Executive Officer of the Company all or part of the Administrator’s authority and duties with respect to the granting of Awards to individuals who are (i) not subject to the reporting and other provisions of Section 16 of the Exchange Act and (ii) not Covered Employees. Any such delegation by the Administrator shall include a limitation as to the amounts of Awards that may be granted under such delegation and shall contain guidelines as to the determination of the exercise price and the vesting criteria. The Administrator may revoke or amend the terms of a delegation at any time but such action shall not invalidate any prior actions of the Administrator’s delegate or delegates that were consistent with the terms of the Plan.

(d) Award Certificate . Awards under the Plan shall be evidenced by Award Certificates that set forth the terms, conditions and limitations for each Award which may include, without limitation, the term of an Award and the provisions applicable in the event employment or service terminates.

(e) Indemnification . Neither the Board nor the Administrator, nor any member of either or any delegate thereof, shall be liable for any act, omission, interpretation, construction or determination made in good faith in connection with the Plan, and the members of the Board and the Administrator (and any delegate thereof) shall be entitled in all cases to indemnification and reimbursement by the Company in respect of any claim, loss, damage or expense (including, without limitation, reasonable attorneys’ fees) arising or resulting therefrom to the fullest extent permitted by law and/or under the Company’s articles or bylaws or any directors’ and officers’ liability insurance coverage which may be in effect from time to time and/or any indemnification agreement between such individual and the Company.

 

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(f) Foreign Award Recipients . Notwithstanding any provision of the Plan to the contrary, in order to comply with the laws in other countries in which the Company and its Subsidiaries operate or have employees or other individuals eligible for Awards, the Administrator, in its sole discretion, shall have the power and authority to: (i) determine which Subsidiaries shall be covered by the Plan; (ii) determine which individuals outside the United States are eligible to participate in the Plan; (iii) modify the terms and conditions of any Award granted to individuals outside the United States to comply with applicable foreign laws; (iv) establish subplans and modify exercise procedures and other terms and procedures, to the extent the Administrator determines such actions to be necessary or advisable (and such subplans and/or modifications shall be attached to this Plan as appendices); provided, however, that no such subplans and/or modifications shall increase the share limitations contained in Section 3(a) hereof; and (v) take any action, before or after an Award is made, that the Administrator determines to be necessary or advisable to obtain approval or comply with any local governmental regulatory exemptions or approvals. Notwithstanding the foregoing, the Administrator may not take any actions hereunder, and no Awards shall be granted, that would violate the Exchange Act or any other applicable United States securities law, the Code, or any other applicable United States governing statute or law.

 

Section 3.  Stock Issuable Under the Plan; Mergers; Substitution

(a) Stock Issuable . The maximum number of shares of Stock reserved and available for issuance under the Plan shall be the sum of (i) 1,355,171 shares (the “Initial Limit”) plus (ii) on January 1, 2014 and each January 1 thereafter, the number of shares of Stock reserved and available for issuance under the Plan shall be cumulatively increased by four percent of the number of shares of Stock issued and outstanding on the immediately preceding December 31 or such lesser number of shares of Stock as determined by the Administrator (the “Annual Increase”) plus (iii) the shares underlying any Awards granted under the Company’s Amended and Restated 2010 Stock Incentive Plan that are unissued, forfeited, canceled, held back upon the exercise of an Option or settlement of an Award to cover the exercise price or tax withholding, reacquired by the Company prior to vesting, satisfied without the issuance of stock or otherwise terminated (other than by exercise). Subject to such overall limitation, the maximum aggregate number of shares of Stock that may be issued in the form of Incentive Stock Options under the Plan shall not exceed the Initial Limit as cumulatively increased on January 1, 2014 and on each January 1 thereafter by the lesser of (i) the Annual Increase for such year and (ii) 2,102,676 shares of Stock per year. For purposes of this limitation, the shares of Stock underlying any Awards that are forfeited, canceled, held back upon exercise of an Option or settlement of an Award to cover the exercise price or tax withholding, reacquired by the Company prior to vesting, satisfied without the issuance of Stock or otherwise terminated (other than by exercise) shall be added back to the shares of Stock available for issuance under the Plan. In the event the Company repurchases shares of Stock on the open market, such shares shall not be added to the shares of Stock available for issuance under the Plan. Subject to such overall limitations, shares of Stock may be issued up to such maximum number pursuant to any type or types of Award; provided, however, that Stock Options or Stock Appreciation Rights with respect to no more than the Initial Limit may be granted to any one individual grantee during any one calendar year period. The shares available for issuance under the Plan may be authorized but unissued shares of Stock or shares of Stock reacquired by the Company.

 

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(b) Changes in Stock . Subject to Section 3(d) hereof, if, as a result of any reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split or other similar change in the Company’s capital stock, the outstanding shares of Stock are increased or decreased or are exchanged for a different number or kind of shares or other securities of the Company, or additional shares or new or different shares or other securities of the Company or other non-cash assets are distributed with respect to such shares of Stock or other securities, or, if, as a result of any merger or consolidation, sale of all or substantially all of the assets of the Company, the outstanding shares of Stock are converted into or exchanged for securities of the Company or any successor entity (or a parent or subsidiary thereof), the Administrator shall make an appropriate or proportionate adjustment in (i) the maximum number of shares reserved for issuance under the Plan, including the maximum number of shares that may be issued in the form of Incentive Stock Options, (ii) the number of Stock Options or Stock Appreciation Rights that can be granted to any one individual grantee and the maximum number of shares that may be granted under a Performance-Based Award, (iii) the number and kind of shares or other securities subject to any then outstanding Awards under the Plan, (iv) the repurchase price, if any, per share subject to each outstanding Restricted Stock Award, and (v) the exercise price for each share subject to any then outstanding Stock Options and Stock Appreciation Rights under the Plan, without changing the aggregate exercise price (i.e., the exercise price multiplied by the number of Stock Options and Stock Appreciation Rights) as to which such Stock Options and Stock Appreciation Rights remain exercisable. The Administrator shall also make equitable or proportionate adjustments in the number of shares subject to outstanding Awards and the exercise price and the terms of outstanding Awards to take into consideration cash dividends paid other than in the ordinary course or any other extraordinary corporate event. The adjustment by the Administrator shall be final, binding and conclusive. No fractional shares of Stock shall be issued under the Plan resulting from any such adjustment, but the Administrator in its discretion may make a cash payment in lieu of fractional shares.

(c) Mergers and Other Transactions . Except as the Administrator may otherwise specify with respect to particular Awards in the relevant Award Certificate, in the case of and subject to the consummation of a Sale Event, the parties thereto may cause the assumption or continuation of Awards theretofore granted by the successor entity, or the substitution of such Awards with new Awards of the successor entity or parent thereof, with appropriate adjustment as to the number and kind of shares and, if appropriate, the per share exercise prices, as such parties shall agree. Upon the effective time of the Sale Event, the Plan and all outstanding Awards granted hereunder shall terminate. In the event of such termination, (i) the Company shall have the option (in its sole discretion) to make or provide for a cash payment to the grantees holding Options and Stock Appreciation Rights, in exchange for the cancellation thereof, in an amount equal to the difference between (A) the Sale Price multiplied by the number of shares of Stock subject to outstanding Options and Stock Appreciation Rights (to the extent then exercisable at prices not in excess of the Sale Price) and (B) the aggregate exercise price of all such outstanding Options and Stock Appreciation Rights; or (ii) each grantee shall be permitted, within a specified period of time prior to the consummation of the Sale Event as determined by the Administrator, to exercise all outstanding Options and Stock Appreciation Rights (to the extent then exercisable) held by such grantee.

 

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(d) Substitute Awards . The Administrator may grant Awards under the Plan in substitution for stock and stock based awards held by employees, directors or other key persons of another corporation in connection with the merger or consolidation of the employing corporation with the Company or a Subsidiary or the acquisition by the Company or a Subsidiary of property or stock of the employing corporation. The Administrator may direct that the substitute awards be granted on such terms and conditions as the Administrator considers appropriate in the circumstances. Any substitute Awards granted under the Plan shall not count against the share limitation set forth in Section 3(a).

 

Section 4.  Eligibility

Grantees under the Plan will be such full or part-time officers and other employees, Non-Employee Directors and key persons (including Consultants) of the Company and its Subsidiaries as are selected from time to time by the Administrator in its sole discretion.

 

Section 5.  Stock Options

Any Stock Option granted under the Plan shall be in such form as the Administrator may from time to time approve.

Stock Options granted under the Plan may be either Incentive Stock Options or Non-Qualified Stock Options. Incentive Stock Options may be granted only to employees of the Company or any Subsidiary that is a “subsidiary corporation” within the meaning of Section 424(f) of the Code. To the extent that any Option does not qualify as an Incentive Stock Option, it shall be deemed a Non-Qualified Stock Option.

Stock Options granted pursuant to this Section 5 shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Administrator shall deem desirable. If the Administrator so determines, Stock Options may be granted in lieu of cash compensation at the optionee’s election, subject to such terms and conditions as the Administrator may establish.

(a) Exercise Price . The exercise price per share for the Stock covered by a Stock Option granted pursuant to this Section 5 shall be determined by the Administrator at the time of grant but shall not be less than 100 percent of the Fair Market Value on the date of grant. In the case of an Incentive Stock Option that is granted to a Ten Percent Owner, the option price of such Incentive Stock Option shall be not less than 110 percent of the Fair Market Value on the grant date.

(b) Option Term . The term of each Stock Option shall be fixed by the Administrator, but no Stock Option shall be exercisable more than ten years after the date the Stock Option is granted. In the case of an Incentive Stock Option that is granted to a Ten Percent Owner, the term of such Stock Option shall be no more than five years from the date of grant.

 

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(c) Exercisability; Rights of a Stockholder . Stock Options shall become exercisable at such time or times, whether or not in installments, as shall be determined by the Administrator at or after the grant date. The Administrator may at any time accelerate the exercisability of all or any portion of any Stock Option. An optionee shall have the rights of a stockholder only as to shares acquired upon the exercise of a Stock Option and not as to unexercised Stock Options.

(d) Method of Exercise . Stock Options may be exercised in whole or in part, by giving written or electronic notice of exercise to the Company, specifying the number of shares to be purchased. Payment of the purchase price may be made by one or more of the following methods to the extent provided in the Option Award Certificate:

(i) In cash, by certified or bank check or other instrument acceptable to the Administrator;

(ii) Through the delivery (or attestation to the ownership) of shares of Stock that are not then subject to restrictions under any Company plan. Such surrendered shares shall be valued at Fair Market Value on the exercise date;

(iii) By the optionee delivering to the Company a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company cash or a check payable and acceptable to the Company for the purchase price; provided that in the event the optionee chooses to pay the purchase price as so provided, the optionee and the broker shall comply with such procedures and enter into such agreements of indemnity and other agreements as the Administrator shall prescribe as a condition of such payment procedure; or

(iv) With respect to Stock Options that are not Incentive Stock Options, by a “net exercise” arrangement pursuant to which the Company will reduce the number of shares of Stock issuable upon exercise by the largest whole number of shares with a Fair Market Value that does not exceed the aggregate exercise price.

Payment instruments will be received subject to collection. The transfer to the optionee on the records of the Company or of the transfer agent of the shares of Stock to be purchased pursuant to the exercise of a Stock Option will be contingent upon receipt from the optionee (or a purchaser acting in his stead in accordance with the provisions of the Stock Option) by the Company of the full purchase price for such shares and the fulfillment of any other requirements contained in the Option Award Certificate or applicable provisions of laws (including the satisfaction of any withholding taxes that the Company is obligated to withhold with respect to the optionee). In the event an optionee chooses to pay the purchase price by previously-owned shares of Stock through the attestation method, the number of shares of Stock transferred to the optionee upon the exercise of the Stock Option shall be net of the number of attested shares. In the event that the Company establishes, for itself or using the services of a third party, an automated system for the exercise of Stock Options, such as a system using an internet website or interactive voice response, then the paperless exercise of Stock Options may be permitted through the use of such an automated system.

 

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(e) Annual Limit on Incentive Stock Options . To the extent required for “incentive stock option” treatment under Section 422 of the Code, the aggregate Fair Market Value (determined as of the time of grant) of the shares of Stock with respect to which Incentive Stock Options granted under this Plan and any other plan of the Company or its parent and subsidiary corporations become exercisable for the first time by an optionee during any calendar year shall not exceed $100,000. To the extent that any Stock Option exceeds this limit, it shall constitute a Non-Qualified Stock Option.

 

Section 6.  Stock Appreciation Rights

(a) Exercise Price of Stock Appreciation Rights . The exercise price of a Stock Appreciation Right shall not be less than 100 percent of the Fair Market Value of the Stock on the date of grant.

(b) Grant and Exercise of Stock Appreciation Rights . Stock Appreciation Rights may be granted by the Administrator independently of any Stock Option granted pursuant to Section 5 of the Plan.

(c) Terms and Conditions of Stock Appreciation Rights . Stock Appreciation Rights shall be subject to such terms and conditions as shall be determined from time to time by the Administrator. The term of a Stock Appreciation Right may not exceed ten years.

 

Section 7.  Restricted Stock Awards

(a) Nature of Restricted Stock Awards . The Administrator shall determine the restrictions and conditions applicable to each Restricted Stock Award at the time of grant. Conditions may be based on continuing employment (or other service relationship) and/or achievement of pre-established performance goals and objectives. The terms and conditions of each such Award Certificate shall be determined by the Administrator, and such terms and conditions may differ among individual Awards and grantees.

(b) Rights as a Stockholder . Upon the grant of the Restricted Stock Award and payment of any applicable purchase price, a grantee shall have the rights of a stockholder with respect to the voting of the Restricted Stock and receipt of dividends; provided that if the lapse of restrictions with respect to the Restricted Stock Award is tied to the attainment of performance goals, any dividends paid by the Company during the performance period shall accrue and shall not be paid to the grantee until and to the extent the performance goals are met with respect to the Restricted Stock Award. Unless the Administrator shall otherwise determine, (i) uncertificated Restricted Stock shall be accompanied by a notation on the records of the Company or the transfer agent to the effect that they are subject to forfeiture until such Restricted Stock are vested as provided in Section 7(d) below, and (ii) certificated Restricted Stock shall remain in the possession of the Company until such Restricted Stock is vested as provided in Section 7(d) below, and the grantee shall be required, as a condition of the grant, to deliver to the Company such instruments of transfer as the Administrator may prescribe.

(c) Restrictions . Restricted Stock may not be sold, assigned, transferred, pledged or otherwise encumbered or disposed of except as specifically provided herein or in the Restricted Stock Award Certificate. Except as may otherwise be provided by the Administrator either in the Award Certificate or, subject to Section 18 below, in writing after the Award is issued, if a grantee’s employment (or other service relationship) with the Company and its Subsidiaries

 

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terminates for any reason, any Restricted Stock that has not vested at the time of termination shall automatically and without any requirement of notice to such grantee from or other action by or on behalf of, the Company be deemed to have been reacquired by the Company at its original purchase price (if any) from such grantee or such grantee’s legal representative simultaneously with such termination of employment (or other service relationship), and thereafter shall cease to represent any ownership of the Company by the grantee or rights of the grantee as a stockholder. Following such deemed reacquisition of unvested Restricted Stock that are represented by physical certificates, a grantee shall surrender such certificates to the Company upon request without consideration.

(d) Vesting of Restricted Stock . The Administrator at the time of grant shall specify the date or dates and/or the attainment of pre-established performance goals, objectives and other conditions on which the non-transferability of the Restricted Stock and the Company’s right of repurchase or forfeiture shall lapse. Subsequent to such date or dates and/or the attainment of such pre-established performance goals, objectives and other conditions, the shares on which all restrictions have lapsed shall no longer be Restricted Stock and shall be deemed “vested.” Except as may otherwise be provided by the Administrator either in the Award Certificate or, subject to Section 18 below, in writing after the Award is issued, a grantee’s rights in any shares of Restricted Stock that have not vested shall automatically terminate upon the grantee’s termination of employment (or other service relationship) with the Company and its Subsidiaries and such shares shall be subject to the provisions of Section 7(c) above.

 

Section 8.  Restricted Stock Units

(a) Nature of Restricted Stock Units . The Administrator shall determine the restrictions and conditions applicable to each Restricted Stock Unit at the time of grant. Conditions may be based on continuing employment (or other service relationship) and/or achievement of pre-established performance goals and objectives. The terms and conditions of each such Award Certificate shall be determined by the Administrator, and such terms and conditions may differ among individual Awards and grantees. At the end of the deferral period, the Restricted Stock Units, to the extent vested, shall be settled in the form of shares of Stock. To the extent that an award of Restricted Stock Units is subject to Section 409A, it may contain such additional terms and conditions as the Administrator shall determine in its sole discretion in order for such Award to comply with the requirements of Section 409A.

(b) Election to Receive Restricted Stock Units in Lieu of Compensation . The Administrator may, in its sole discretion, permit a grantee to elect to receive a portion of future cash compensation otherwise due to such grantee in the form of an award of Restricted Stock Units. Any such election shall be made in writing and shall be delivered to the Company no later than the date specified by the Administrator and in accordance with Section 409A and such other rules and procedures established by the Administrator. Any such future cash compensation that the grantee elects to defer shall be converted to a fixed number of Restricted Stock Units based on the Fair Market Value of Stock on the date the compensation would otherwise have been paid to the grantee if such payment had not been deferred as provided herein. The Administrator shall have the sole right to determine whether and under what circumstances to permit such elections and to impose such limitations and other terms and conditions thereon as the Administrator deems appropriate. Any Restricted Stock Units that are elected to be received in lieu of cash compensation shall be fully vested, unless otherwise provided in the Award Certificate.

 

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(c) Rights as a Stockholder . A grantee shall have the rights as a stockholder only as to shares of Stock acquired by the grantee upon settlement of Restricted Stock Units; provided, however, that the grantee may be credited with Dividend Equivalent Rights with respect to the phantom stock units underlying his Restricted Stock Units, subject to such terms and conditions as the Administrator may determine.

(d) Termination . Except as may otherwise be provided by the Administrator either in the Award Certificate or, subject to Section 18 below, in writing after the Award is issued, a grantee’s right in all Restricted Stock Units that have not vested shall automatically terminate upon the grantee’s termination of employment (or cessation of service relationship) with the Company and its Subsidiaries for any reason.

 

Section 9.  Unrestricted Stock Awards

Grant or Sale of Unrestricted Stock . The Administrator may, in its sole discretion, grant (or sell at par value or such higher purchase price determined by the Administrator) an Unrestricted Stock Award under the Plan. Unrestricted Stock Awards may be granted in respect of past services or other valid consideration, or in lieu of cash compensation due to such grantee.

 

Section 10.  Cash-Based Awards

Grant of Cash-Based Awards . The Administrator may, in its sole discretion, grant Cash-Based Awards to any grantee in such number or amount and upon such terms, and subject to such conditions, as the Administrator shall determine at the time of grant. The Administrator shall determine the maximum duration of the Cash-Based Award, the amount of cash to which the Cash-Based Award pertains, the conditions upon which the Cash-Based Award shall become vested or payable, and such other provisions as the Administrator shall determine. Each Cash-Based Award shall specify a cash-denominated payment amount, formula or payment ranges as determined by the Administrator. Payment, if any, with respect to a Cash-Based Award shall be made in accordance with the terms of the Award and may be made in cash or in shares of Stock, as the Administrator determines.

 

Section 11.  Performance Share Awards

(a) Nature of Performance Share Awards . The Administrator may, in its sole discretion, grant Performance Share Awards independent of, or in connection with, the granting of any other Award under the Plan. The Administrator shall determine whether and to whom Performance Share Awards shall be granted, the Performance Goals, the periods during which performance is to be measured, which may not be less than one year except in the case of a Sale Event, and such other limitations and conditions as the Administrator shall determine.

(b) Rights as a Stockholder . A grantee receiving a Performance Share Award shall have the rights of a stockholder only as to shares actually received by the grantee under the Plan and not with respect to shares subject to the Award but not actually received by the grantee. A grantee shall be entitled to receive shares of Stock under a Performance Share Award only upon satisfaction of all conditions specified in the Performance Share Award Certificate (or in a performance plan adopted by the Administrator).

 

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(c) Termination . Except as may otherwise be provided by the Administrator either in the Award agreement or, subject to Section 18 below, in writing after the Award is issued, a grantee’s rights in all Performance Share Awards shall automatically terminate upon the grantee’s termination of employment (or cessation of service relationship) with the Company and its Subsidiaries for any reason.

 

Section 12.  Performance-Based Awards to Covered Employees

(a) Performance-Based Awards . Any employee or other key person providing services to the Company and who is selected by the Administrator may be granted one or more Performance-Based Awards in the form of a Restricted Stock Award, Restricted Stock Units, Performance Share Awards or Cash-Based Award payable upon the attainment of Performance Goals that are established by the Administrator and relate to one or more of the Performance Criteria, in each case on a specified date or dates or over any period or periods determined by the Administrator. The Administrator shall define in an objective fashion the manner of calculating the Performance Criteria it selects to use for any Performance Cycle. Depending on the Performance Criteria used to establish such Performance Goals, the Performance Goals may be expressed in terms of overall Company performance or the performance of a division, business unit, or an individual. The Administrator, in its discretion, may adjust or modify the calculation of Performance Goals for such Performance Cycle in order to prevent the dilution or enlargement of the rights of an individual (i) in the event of, or in anticipation of, any unusual or extraordinary corporate item, transaction, event or development, (ii) in recognition of, or in anticipation of, any other unusual or nonrecurring events affecting the Company, or the financial statements of the Company, or (iii) in response to, or in anticipation of, changes in applicable laws, regulations, accounting principles, or business conditions provided however, that the Administrator may not exercise such discretion in a manner that would increase the Performance-Based Award granted to a Covered Employee. Each Performance-Based Award shall comply with the provisions set forth below.

(b) Grant of Performance-Based Awards . With respect to each Performance-Based Award granted to a Covered Employee, the Administrator shall select, within the first 90 days of a Performance Cycle (or, if shorter, within the maximum period allowed under Section 162(m) of the Code) the Performance Criteria for such grant, and the Performance Goals with respect to each Performance Criterion (including a threshold level of performance below which no amount will become payable with respect to such Award). Each Performance-Based Award will specify the amount payable, or the formula for determining the amount payable, upon achievement of the various applicable performance targets. The Performance Criteria established by the Administrator may be (but need not be) different for each Performance Cycle and different Performance Goals may be applicable to Performance-Based Awards to different Covered Employees.

 

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(c) Payment of Performance-Based Awards . Following the completion of a Performance Cycle, the Administrator shall meet to review and certify in writing whether, and to what extent, the Performance Goals for the Performance Cycle have been achieved and, if so, to also calculate and certify in writing the amount of the Performance-Based Awards earned for the Performance Cycle. The Administrator shall then determine the actual size of each Covered Employee’s Performance-Based Award, and, in doing so, may reduce or eliminate the amount of the Performance-Based Award for a Covered Employee if, in its sole judgment, such reduction or elimination is appropriate.

(d) Maximum Award Payable . The maximum Performance-Based Award payable to any one Covered Employee under the Plan for a Performance Cycle is 1,100,000 shares of Stock (subject to adjustment as provided in Section 3(c) hereof) or $2,000,000 in the case of a Performance-Based Award that is a Cash-Based Award.

 

Section 13.  Dividend Equivalent Rights

(a) Dividend Equivalent Rights . A Dividend Equivalent Right may be granted hereunder to any grantee as a component of an award of Restricted Stock Units, Restricted Stock Award or Performance Share Award or as a freestanding award. The terms and conditions of Dividend Equivalent Rights shall be specified in the Award Certificate. Dividend equivalents credited to the holder of a Dividend Equivalent Right may be paid currently or may be deemed to be reinvested in additional shares of Stock, which may thereafter accrue additional equivalents. Any such reinvestment shall be at Fair Market Value on the date of reinvestment or such other price as may then apply under a dividend reinvestment plan sponsored by the Company, if any. Dividend Equivalent Rights may be settled in cash or shares of Stock or a combination thereof, in a single installment or installments. A Dividend Equivalent Right granted as a component of an award of Restricted Stock Units or Restricted Stock Award with performance vesting or Performance Share Award shall provide that such Dividend Equivalent Right shall be settled only upon settlement or payment of, or lapse of restrictions on, such other Award, and that such Dividend Equivalent Right shall expire or be forfeited or annulled under the same conditions as such other Award.

(b) Interest Equivalents . Any Award under this Plan that is settled in whole or in part in cash on a deferred basis may provide in the grant for interest equivalents to be credited with respect to such cash payment. Interest equivalents may be compounded and shall be paid upon such terms and conditions as may be specified by the grant.

(c) Termination . Except as may otherwise be provided by the Administrator either in the Award Certificate or, subject to Section 18 below, in writing after the Award is issued, a grantee’s rights in all Dividend Equivalent Rights or interest equivalents granted as a component of an award of Restricted Stock Units, Restricted Stock Award or Performance Share Award that has not vested shall automatically terminate upon the grantee’s termination of employment (or cessation of service relationship) with the Company and its Subsidiaries for any reason.

 

Section 14.  Transferability of Awards

(a) Transferability . Except as provided in Section 14(b) below, during a grantee’s lifetime, his or her Awards shall be exercisable only by the grantee, or by the grantee’s legal representative or guardian in the event of the grantee’s incapacity. No Awards shall be sold, assigned, transferred or otherwise encumbered or disposed of by a grantee other than by will or by the laws of descent and distribution or pursuant to a domestic relations order. No Awards shall be subject, in whole or in part, to attachment, execution, or levy of any kind, and any purported transfer in violation hereof shall be null and void.

 

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(b) Administrator Action . Notwithstanding Section 14(a), the Administrator, in its discretion, may provide either in the Award Certificate regarding a given Award or by subsequent written approval that the grantee (who is an employee or director) may transfer his or her Non-Qualified Options to his or her immediate family members, to trusts for the benefit of such family members, or to partnerships in which such family members are the only partners, provided that the transferee agrees in writing with the Company to be bound by all of the terms and conditions of this Plan and the applicable Award. In no event may an Award be transferred by a grantee for value.

(c) Family Member . For purposes of Section 14(b), “family member” shall mean a grantee’s child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, including adoptive relationships, any person sharing the grantee’s household (other than a tenant of the grantee), a trust in which these persons (or the grantee) have more than 50 percent of the beneficial interest, a foundation in which these persons (or the grantee) control the management of assets, and any other entity in which these persons (or the grantee) own more than 50 percent of the voting interests.

(d) Designation of Beneficiary . Each grantee to whom an Award has been made under the Plan may designate a beneficiary or beneficiaries to exercise any Award or receive any payment under any Award payable on or after the grantee’s death. Any such designation shall be on a form provided for that purpose by the Administrator and shall not be effective until received by the Administrator. If no beneficiary has been designated by a deceased grantee, or if the designated beneficiaries have predeceased the grantee, the beneficiary shall be the grantee’s estate.

 

Section 15.  Tax Withholding

(a) Payment by Grantee . Each grantee shall, no later than the date as of which the value of an Award or of any Stock or other amounts received thereunder first becomes includable in the gross income of the grantee for Federal income tax purposes, pay to the Company, or make arrangements satisfactory to the Administrator regarding payment of, any Federal, state, or local taxes of any kind required by law to be withheld by the Company with respect to such income. The Company and its Subsidiaries shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the grantee. The Company’s obligation to deliver evidence of book entry (or stock certificates) to any grantee is subject to and conditioned on tax withholding obligations being satisfied by the grantee.

(b) Payment in Stock . Subject to approval by the Administrator, a grantee may elect to have the Company’s minimum required tax withholding obligation satisfied, in whole or in part, by authorizing the Company to withhold from shares of Stock to be issued pursuant to any Award a number of shares with an aggregate Fair Market Value (as of the date the withholding is effected) that would satisfy the withholding amount due.

 

15


Section 16.  Section 409A Awards

To the extent that any Award is determined to constitute “nonqualified deferred compensation” within the meaning of Section 409A (a “409A Award”), the Award shall be subject to such additional rules and requirements as specified by the Administrator from time to time in order to comply with Section 409A. In this regard, if any amount under a 409A Award is payable upon a “separation from service” (within the meaning of Section 409A) to a grantee who is then considered a “specified employee” (within the meaning of Section 409A), then no such payment shall be made prior to the date that is the earlier of (i) six months and one day after the grantee’s separation from service, or (ii) the grantee’s death, but only to the extent such delay is necessary to prevent such payment from being subject to interest, penalties and/or additional tax imposed pursuant to Section 409A. Further, the settlement of any such Award may not be accelerated except to the extent permitted by Section 409A.

 

Section 17.  Transfer, Leave of Absence, Etc.

For purposes of the Plan, the following events shall not be deemed a termination of employment:

(a) a transfer to the employment of the Company from a Subsidiary or from the Company to a Subsidiary, or from one Subsidiary to another; or

(b) an approved leave of absence for military service or sickness, or for any other purpose approved by the Company, if the employee’s right to re-employment is guaranteed either by a statute or by contract or under the policy pursuant to which the leave of absence was granted or if the Administrator otherwise so provides in writing.

 

Section 18.  Amendments and Termination

The Board may, at any time, amend or discontinue the Plan and the Administrator may, at any time, amend or cancel any outstanding Award for the purpose of satisfying changes in law or for any other lawful purpose, but no such action shall adversely affect rights under any outstanding Award without the holder’s consent. Except as provided in Section 3(c) or 3(d), without prior stockholder approval, in no event may the Administrator exercise its discretion to reduce the exercise price of outstanding Stock Options or Stock Appreciation Rights or effect repricing through cancellation and re-grants or cancellation of Stock Options or Stock Appreciation Rights in exchange for cash. To the extent required under the rules of any securities exchange or market system on which the Stock is listed, to the extent determined by the Administrator to be required by the Code to ensure that Incentive Stock Options granted under the Plan are qualified under Section 422 of the Code, or to ensure that compensation earned under Awards qualifies as performance-based compensation under Section 162(m) of the Code, Plan amendments shall be subject to approval by the Company stockholders entitled to vote at a meeting of stockholders. Nothing in this Section 18 shall limit the Administrator’s authority to take any action permitted pursuant to Section 3(c) or 3(d).

 

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Section 19.  Status of Plan

With respect to the portion of any Award that has not been exercised and any payments in cash, Stock or other consideration not received by a grantee, a grantee shall have no rights greater than those of a general creditor of the Company unless the Administrator shall otherwise expressly determine in connection with any Award or Awards. In its sole discretion, the Administrator may authorize the creation of trusts or other arrangements to meet the Company’s obligations to deliver Stock or make payments with respect to Awards hereunder, provided that the existence of such trusts or other arrangements is consistent with the foregoing sentence.

 

Section 20.  General Provisions

(a) No Distribution . The Administrator may require each person acquiring Stock pursuant to an Award to represent to and agree with the Company in writing that such person is acquiring the shares without a view to distribution thereof.

(b) Delivery of Stock Certificates . Stock certificates to grantees under this Plan shall be deemed delivered for all purposes when the Company or a stock transfer agent of the Company shall have mailed such certificates in the United States mail, addressed to the grantee, at the grantee’s last known address on file with the Company. Uncertificated Stock shall be deemed delivered for all purposes when the Company or a Stock transfer agent of the Company shall have given to the grantee by electronic mail (with proof of receipt) or by United States mail, addressed to the grantee, at the grantee’s last known address on file with the Company, notice of issuance and recorded the issuance in its records (which may include electronic “book entry” records). Notwithstanding anything herein to the contrary, the Company shall not be required to issue or deliver any certificates evidencing shares of Stock pursuant to the exercise of any Award, unless and until the Administrator has determined, with advice of counsel (to the extent the Administrator deems such advice necessary or advisable), that the issuance and delivery of such certificates is in compliance with all applicable laws, regulations of governmental authorities and, if applicable, the requirements of any exchange on which the shares of Stock are listed, quoted or traded. All Stock certificates delivered pursuant to the Plan shall be subject to any stop-transfer orders and other restrictions as the Administrator deems necessary or advisable to comply with federal, state or foreign jurisdiction, securities or other laws, rules and quotation system on which the Stock is listed, quoted or traded. The Administrator may place legends on any Stock certificate to reference restrictions applicable to the Stock. In addition to the terms and conditions provided herein, the Administrator may require that an individual make such reasonable covenants, agreements, and representations as the Administrator, in its discretion, deems necessary or advisable in order to comply with any such laws, regulations, or requirements. The Administrator shall have the right to require any individual to comply with any timing or other restrictions with respect to the settlement or exercise of any Award, including a window-period limitation, as may be imposed in the discretion of the Administrator.

(c) Stockholder Rights . Until Stock is deemed delivered in accordance with Section 20(b), no right to vote or receive dividends or any other rights of a stockholder will exist with respect to shares of Stock to be issued in connection with an Award, notwithstanding the exercise of a Stock Option or any other action by the grantee with respect to an Award.

 

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(d) Other Compensation Arrangements; No Employment Rights . Nothing contained in this Plan shall prevent the Board from adopting other or additional compensation arrangements, including trusts, and such arrangements may be either generally applicable or applicable only in specific cases. The adoption of this Plan and the grant of Awards do not confer upon any employee any right to continued employment with the Company or any Subsidiary.

(e) Trading Policy Restrictions . Option exercises and other Awards under the Plan shall be subject to the Company’s insider trading policies and procedures, as in effect from time to time.

(f) Forfeiture of Awards under Sarbanes-Oxley Act . If the Company is required to prepare an accounting restatement due to the material noncompliance of the Company, as a result of misconduct, with any financial reporting requirement under the securities laws, then any grantee who is one of the individuals subject to automatic forfeiture under Section 304 of the Sarbanes-Oxley Act of 2002 shall reimburse the Company for the amount of any Award received by such individual under the Plan during the 12-month period following the first public issuance or filing with the United States Securities and Exchange Commission, as the case may be, of the financial document embodying such financial reporting requirement.

 

Section 21.  Effective Date of Plan

This Plan shall become effective immediately prior to the Company’s Initial Public Offering, following stockholder approval of the Plan in accordance with applicable state law, the Company’s bylaws and articles of incorporation, and applicable stock exchange rules or pursuant to written consent. No grants of Stock Options and other Awards may be made hereunder after the tenth anniversary of the Effective Date and no grants of Incentive Stock Options may be made hereunder after the tenth anniversary of the date the Plan is approved by the Board.

 

Section 22.  Governing Law

This Plan and all Awards and actions taken thereunder shall be governed by, and construed in accordance with, the laws of the State of Delaware, applied without regard to conflict of law principles.

DATE APPROVED BY BOARD OF DIRECTORS: September 6, 2013

DATE APPROVED BY STOCKHOLDERS: September 10, 2013

 

18


INCENTIVE STOCK OPTION AGREEMENT

UNDER THE FOUNDATION MEDICINE, INC.

2013 STOCK OPTION AND INCENTIVE PLAN

 

Name of Optionee:

  

 

  

No. of Option Shares:

                                                                                           

Option Exercise Price per Share:

                                                                                       
   [FMV on Grant Date (110% of FMV if a 10% owner)]

Grant Date:

                                                                                           

Expiration Date:

                                                                                           
   [up to 10 years (5 if a 10% owner)]      

Pursuant to the Foundation Medicine, Inc. 2013 Stock Option and Incentive Plan as amended through the date hereof (the “Plan”), Foundation Medicine, Inc. (the “Company”) hereby grants to the Optionee named above an option (the “Stock Option”) to purchase on or prior to the Expiration Date specified above all or part of the number of shares of Common Stock, par value $0.0001 per share (the “Stock”), of the Company specified above at the Option Exercise Price per Share specified above subject to the terms and conditions set forth herein and in the Plan.

1. Exercisability Schedule . No portion of this Stock Option may be exercised until such portion shall have become exercisable. Except as set forth below, and subject to the discretion of the Administrator (as defined in Section 2 of the Plan) to accelerate the exercisability schedule hereunder, this Stock Option shall be exercisable with respect to the following number of Option Shares on the dates indicated so long as the Optionee remains an employee of the Company or a Subsidiary on such dates:

 

    Incremental Number of
Option Shares Exercisable*

   Exercisability Date

                     (              %)

  
  

 

                     (              %)

  
  

 

                     (              %)

  
  

 

                     (              %)

  
  

 

                     (              %)

  
  

 

 

* Max. of $100,000 per yr.

Once exercisable, this Stock Option shall continue to be exercisable at any time or times prior to the close of business on the Expiration Date, subject to the provisions hereof and of the Plan.


2. Manner of Exercise .

(a) The Optionee may exercise this Stock Option only in the following manner: from time to time on or prior to the Expiration Date of this Stock Option, the Optionee may give written notice to the Administrator of his or her election to purchase some or all of the Option Shares purchasable at the time of such notice. This notice shall specify the number of Option Shares to be purchased.

Payment of the purchase price for the Option Shares may be made by one or more of the following methods: (i) in cash, by certified or bank check or other instrument acceptable to the Administrator; (ii) through the delivery (or attestation to the ownership) of shares of Stock that have been purchased by the Optionee on the open market or that are beneficially owned by the Optionee and are not then subject to any restrictions under any Company plan and that otherwise satisfy any holding periods as may be required by the Administrator; or (iii) by the Optionee delivering to the Company a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company cash or a check payable and acceptable to the Company to pay the option purchase price, provided that in the event the Optionee chooses to pay the option purchase price as so provided, the Optionee and the broker shall comply with such procedures and enter into such agreements of indemnity and other agreements as the Administrator shall prescribe as a condition of such payment procedure; or (iv) a combination of (i), (ii) and (iii) above. Payment instruments will be received subject to collection.

The transfer to the Optionee on the records of the Company or of the transfer agent of the Option Shares will be contingent upon (i) the Company’s receipt from the Optionee of the full purchase price for the Option Shares, as set forth above, (ii) the fulfillment of any other requirements contained herein or in the Plan or in any other agreement or provision of laws, and (iii) the receipt by the Company of any agreement, statement or other evidence that the Company may require to satisfy itself that the issuance of Stock to be purchased pursuant to the exercise of Stock Options under the Plan and any subsequent resale of the shares of Stock will be in compliance with applicable laws and regulations. In the event the Optionee chooses to pay the purchase price by previously-owned shares of Stock through the attestation method, the number of shares of Stock transferred to the Optionee upon the exercise of the Stock Option shall be net of the Shares attested to.

(b) The shares of Stock purchased upon exercise of this Stock Option shall be transferred to the Optionee on the records of the Company or of the transfer agent upon compliance to the satisfaction of the Administrator with all requirements under applicable laws or regulations in connection with such transfer and with the requirements hereof and of the Plan. The determination of the Administrator as to such compliance shall be final and binding on the Optionee. The Optionee shall not be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares of Stock subject to this Stock Option unless and until this Stock Option shall have been exercised pursuant to the terms hereof, the Company or the transfer agent shall have transferred the shares to the Optionee, and the Optionee’s name shall have been entered as the stockholder of record on the books of the Company. Thereupon, the Optionee shall have full voting, dividend and other ownership rights with respect to such shares of Stock.

 

2


(c) The minimum number of shares with respect to which this Stock Option may be exercised at any one time shall be 100 shares, unless the number of shares with respect to which this Stock Option is being exercised is the total number of shares subject to exercise under this Stock Option at the time.

(d) Notwithstanding any other provision hereof or of the Plan, no portion of this Stock Option shall be exercisable after the Expiration Date hereof.

3. Termination of Employment . If the Optionee’s employment by the Company or a Subsidiary (as defined in the Plan) is terminated, the period within which to exercise the Stock Option may be subject to earlier termination as set forth below.

(a) Termination Due to Death . If the Optionee’s employment terminates by reason of the Optionee’s death, any portion of this Stock Option outstanding on such date, to the extent exercisable on the date of death, may thereafter be exercised by the Optionee’s legal representative or legatee for a period of 12 months from the date of death or until the Expiration Date, if earlier. Any portion of this Stock Option that is not exercisable on the date of death shall terminate immediately and be of no further force or effect.

(b) Termination Due to Disability . If the Optionee’s employment terminates by reason of the Optionee’s disability (as determined by the Administrator), any portion of this Stock Option outstanding on such date, to the extent exercisable on the date of such disability, may thereafter be exercised by the Optionee for a period of 12 months from the date of disability or until the Expiration Date, if earlier. Any portion of this Stock Option that is not exercisable on the date of disability shall terminate immediately and be of no further force or effect.

(c) Termination for Cause . If the Optionee’s employment terminates for Cause, any portion of this Stock Option outstanding on such date shall terminate immediately and be of no further force and effect. For purposes hereof, “Cause” shall mean, unless otherwise provided in an employment agreement between the Company and the Optionee, a determination by the Administrator that the Optionee shall be dismissed as a result of (i) any material breach by the Optionee of any agreement between the Optionee and the Company; (ii) the conviction of, indictment for or plea of nolo contendere by the Optionee to a felony or a crime involving moral turpitude; or (iii) any material misconduct or willful and deliberate non-performance (other than by reason of disability) by the Optionee of the Optionee’s duties to the Company.

(d) Other Termination . If the Optionee’s employment terminates for any reason other than the Optionee’s death, the Optionee’s disability, or Cause, and unless otherwise determined by the Administrator, any portion of this Stock Option outstanding on such date may be exercised, to the extent exercisable on the date of termination, for a period of three months from the date of termination or until the Expiration Date, if earlier. Any portion of this Stock Option that is not exercisable on the date of termination shall terminate immediately and be of no further force or effect.

The Administrator’s determination of the reason for termination of the Optionee’s employment shall be conclusive and binding on the Optionee and his or her representatives or legatees.

 

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4. Incorporation of Plan . Notwithstanding anything herein to the contrary, this Stock Option shall be subject to and governed by all the terms and conditions of the Plan, including the powers of the Administrator set forth in Section 2(b) of the Plan. Capitalized terms in this Agreement shall have the meaning specified in the Plan, unless a different meaning is specified herein.

5. Transferability . This Agreement is personal to the Optionee, is non-assignable and is not transferable in any manner, by operation of law or otherwise, other than by will or the laws of descent and distribution. This Stock Option is exercisable, during the Optionee’s lifetime, only by the Optionee, and thereafter, only by the Optionee’s legal representative or legatee.

6. Status of the Stock Option . This Stock Option is intended to qualify as an “incentive stock option” under Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”), but the Company does not represent or warrant that this Stock Option qualifies as such. The Optionee should consult with his or her own tax advisors regarding the tax effects of this Stock Option and the requirements necessary to obtain favorable income tax treatment under Section 422 of the Code, including, but not limited to, holding period requirements. To the extent any portion of this Stock Option does not so qualify as an “incentive stock option,” such portion shall be deemed to be a non-qualified stock option. If the Optionee intends to dispose or does dispose (whether by sale, gift, transfer or otherwise) of any Option Shares within the one-year period beginning on the date after the transfer of such shares to him or her, or within the two-year period beginning on the day after the grant of this Stock Option, he or she will so notify the Company within 30 days after such disposition.

7. Tax Withholding . The Optionee shall, not later than the date as of which the exercise of this Stock Option becomes a taxable event for Federal income tax purposes, pay to the Company or make arrangements satisfactory to the Administrator for payment of any Federal, state, and local taxes required by law to be withheld on account of such taxable event. The Company shall have the authority to cause the minimum required tax withholding obligation to be satisfied, in whole or in part, by withholding from shares of Stock to be issued to the Optionee a number of shares of Stock with an aggregate Fair Market Value that would satisfy the minimum withholding amount due.

8. No Obligation to Continue Employment . Neither the Company nor any Subsidiary is obligated by or as a result of the Plan or this Agreement to continue the Optionee in employment and neither the Plan nor this Agreement shall interfere in any way with the right of the Company or any Subsidiary to terminate the employment of the Optionee at any time.

9. Integration . This Agreement constitutes the entire agreement between the parties with respect to this Stock Option and supersedes all prior agreements and discussions between the parties concerning such subject matter.

10. Data Privacy Consent . In order to administer the Plan and this Agreement and to implement or structure future equity grants, the Company, its subsidiaries and affiliates and certain agents thereof (together, the “Relevant Companies”) may process any and all personal or professional data, including but not limited to Social Security or other identification number,

 

4


home address and telephone number, date of birth and other information that is necessary or desirable for the administration of the Plan and/or this Agreement (the “Relevant Information”). By entering into this Agreement, the Grantee (i) authorizes the Company to collect, process, register and transfer to the Relevant Companies all Relevant Information; (ii) waives any privacy rights the Grantee may have with respect to the Relevant Information; (iii) authorizes the Relevant Companies to store and transmit such information in electronic form; and (iv) authorizes the transfer of the Relevant Information to any jurisdiction in which the Relevant Companies consider appropriate. The Grantee shall have access to, and the right to change, the Relevant Information. Relevant Information will only be used in accordance with applicable law.

11. Notices . Notices hereunder shall be mailed or delivered to the Company at its principal place of business and shall be mailed or delivered to the Optionee at the address on file with the Company or, in either case, at such other address as one party may subsequently furnish to the other party in writing.

 

FOUNDATION MEDICINE, INC.

By:

 

 

  Title:

The foregoing Agreement is hereby accepted and the terms and conditions thereof hereby agreed to by the undersigned. Electronic acceptance of this Agreement pursuant to the Company’s instructions to the Grantee (including through an online acceptance process) is acceptable.

 

Dated:                                                   

 

   Optionee’s Signature
   Optionee’s name and address:
  

 

  

 

  

 

 

5


NON-QUALIFIED STOCK OPTION AGREEMENT

FOR COMPANY EMPLOYEES

UNDER THE FOUNDATION MEDICINE, INC.

2013 STOCK OPTION AND INCENTIVE PLAN

 

Name of Optionee:

  

 

  

No. of Option Shares:

                                                                                           

Option Exercise Price per Share:

                                                                                       
   [FMV on Grant Date]

Grant Date:

                                                                                           

Expiration Date:

                                                                                           
   [No more than 10 years]      

Pursuant to the Foundation Medicine, Inc. 2013 Stock Option and Incentive Plan as amended through the date hereof (the “Plan”), Foundation Medicine, Inc. (the “Company”) hereby grants to the Optionee named above an option (the “Stock Option”) to purchase on or prior to the Expiration Date specified above all or part of the number of shares of Common Stock, par value $0.0001 per share (the “Stock”) of the Company specified above at the Option Exercise Price per Share specified above subject to the terms and conditions set forth herein and in the Plan. This Stock Option is not intended to be an “incentive stock option” under Section 422 of the Internal Revenue Code of 1986, as amended.

1. Exercisability Schedule . No portion of this Stock Option may be exercised until such portion shall have become exercisable. Except as set forth below, and subject to the discretion of the Administrator (as defined in Section 2 of the Plan) to accelerate the exercisability schedule hereunder, this Stock Option shall be exercisable with respect to the following number of Option Shares on the dates indicated so long as Optionee remains an employee of the Company or a Subsidiary on such dates:

 

    Incremental Number of
Option Shares Exercisable

   Exercisability Date

                     (              %)

  
  

 

                     (              %)

  
  

 

                     (              %)

  
  

 

                     (              %)

  
  

 

                     (              %)

  
  

 


Once exercisable, this Stock Option shall continue to be exercisable at any time or times prior to the close of business on the Expiration Date, subject to the provisions hereof and of the Plan.

2. Manner of Exercise .

(a) The Optionee may exercise this Stock Option only in the following manner: from time to time on or prior to the Expiration Date of this Stock Option, the Optionee may give written notice to the Administrator of his or her election to purchase some or all of the Option Shares purchasable at the time of such notice. This notice shall specify the number of Option Shares to be purchased.

Payment of the purchase price for the Option Shares may be made by one or more of the following methods: (i) in cash, by certified or bank check or other instrument acceptable to the Administrator; (ii) through the delivery (or attestation to the ownership) of shares of Stock that have been purchased by the Optionee on the open market or that are beneficially owned by the Optionee and are not then subject to any restrictions under any Company plan and that otherwise satisfy any holding periods as may be required by the Administrator; (iii) by the Optionee delivering to the Company a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company cash or a check payable and acceptable to the Company to pay the option purchase price, provided that in the event the Optionee chooses to pay the option purchase price as so provided, the Optionee and the broker shall comply with such procedures and enter into such agreements of indemnity and other agreements as the Administrator shall prescribe as a condition of such payment procedure; (iv) by a “net exercise” arrangement pursuant to which the Company will reduce the number of shares of Stock issuable upon exercise by the largest whole number of shares with a Fair Market Value that does not exceed the aggregate exercise price; or (v) a combination of (i), (ii), (iii) and (iv) above. Payment instruments will be received subject to collection.

The transfer to the Optionee on the records of the Company or of the transfer agent of the Option Shares will be contingent upon (i) the Company’s receipt from the Optionee of the full purchase price for the Option Shares, as set forth above, (ii) the fulfillment of any other requirements contained herein or in the Plan or in any other agreement or provision of laws, and (iii) the receipt by the Company of any agreement, statement or other evidence that the Company may require to satisfy itself that the issuance of Stock to be purchased pursuant to the exercise of Stock Options under the Plan and any subsequent resale of the shares of Stock will be in compliance with applicable laws and regulations. In the event the Optionee chooses to pay the purchase price by previously-owned shares of Stock through the attestation method, the number of shares of Stock transferred to the Optionee upon the exercise of the Stock Option shall be net of the Shares attested to.

(b) The shares of Stock purchased upon exercise of this Stock Option shall be transferred to the Optionee on the records of the Company or of the transfer agent upon compliance to the satisfaction of the Administrator with all requirements under applicable laws or regulations in connection with such transfer and with the requirements hereof and of the Plan. The determination of the Administrator as to such compliance shall be final and binding on the Optionee. The Optionee shall not be deemed to be the holder of, or to have any of the rights of a

 

2


holder with respect to, any shares of Stock subject to this Stock Option unless and until this Stock Option shall have been exercised pursuant to the terms hereof, the Company or the transfer agent shall have transferred the shares to the Optionee, and the Optionee’s name shall have been entered as the stockholder of record on the books of the Company. Thereupon, the Optionee shall have full voting, dividend and other ownership rights with respect to such shares of Stock.

(c) The minimum number of shares with respect to which this Stock Option may be exercised at any one time shall be 100 shares, unless the number of shares with respect to which this Stock Option is being exercised is the total number of shares subject to exercise under this Stock Option at the time.

(d) Notwithstanding any other provision hereof or of the Plan, no portion of this Stock Option shall be exercisable after the Expiration Date hereof.

3. Termination of Employment . If the Optionee’s employment by the Company or a Subsidiary (as defined in the Plan) is terminated, the period within which to exercise the Stock Option may be subject to earlier termination as set forth below.

(a) Termination Due to Death . If the Optionee’s employment terminates by reason of the Optionee’s death, any portion of this Stock Option outstanding on such date, to the extent exercisable on the date of death, may thereafter be exercised by the Optionee’s legal representative or legatee for a period of 12 months from the date of death or until the Expiration Date, if earlier. Any portion of this Stock Option that is not exercisable on the date of death shall terminate immediately and be of no further force or effect.

(b) Termination Due to Disability . If the Optionee’s employment terminates by reason of the Optionee’s disability (as determined by the Administrator), any portion of this Stock Option outstanding on such date, to the extent exercisable on the date of such disability, may thereafter be exercised by the Optionee for a period of 12 months from the date of disability or until the Expiration Date, if earlier. Any portion of this Stock Option that is not exercisable on the date of disability shall terminate immediately and be of no further force or effect.

(c) Termination for Cause . If the Optionee’s employment terminates for Cause, any portion of this Stock Option outstanding on such date shall terminate immediately and be of no further force and effect. For purposes hereof, “Cause” shall mean, unless otherwise provided in an employment agreement between the Company and the Optionee, a determination by the Administrator that the Optionee shall be dismissed as a result of (i) any material breach by the Optionee of any agreement between the Optionee and the Company; (ii) the conviction of, indictment for or plea of nolo contendere by the Optionee to a felony or a crime involving moral turpitude; or (iii) any material misconduct or willful and deliberate non-performance (other than by reason of disability) by the Optionee of the Optionee’s duties to the Company.

(d) Other Termination . If the Optionee’s employment terminates for any reason other than the Optionee’s death, the Optionee’s disability or Cause, and unless otherwise determined by the Administrator, any portion of this Stock Option outstanding on such date may be exercised, to the extent exercisable on the date of termination, for a period of three months from the date of termination or until the Expiration Date, if earlier. Any portion of this Stock Option that is not exercisable on the date of termination shall terminate immediately and be of no further force or effect.

 

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The Administrator’s determination of the reason for termination of the Optionee’s employment shall be conclusive and binding on the Optionee and his or her representatives or legatees.

4. Incorporation of Plan . Notwithstanding anything herein to the contrary, this Stock Option shall be subject to and governed by all the terms and conditions of the Plan, including the powers of the Administrator set forth in Section 2(b) of the Plan. Capitalized terms in this Agreement shall have the meaning specified in the Plan, unless a different meaning is specified herein.

5. Transferability . This Agreement is personal to the Optionee, is non-assignable and is not transferable in any manner, by operation of law or otherwise, other than by will or the laws of descent and distribution. This Stock Option is exercisable, during the Optionee’s lifetime, only by the Optionee, and thereafter, only by the Optionee’s legal representative or legatee.

6. Tax Withholding . The Optionee shall, not later than the date as of which the exercise of this Stock Option becomes a taxable event for Federal income tax purposes, pay to the Company or make arrangements satisfactory to the Administrator for payment of any Federal, state, and local taxes required by law to be withheld on account of such taxable event. The Company shall have the authority to cause the minimum required tax withholding obligation to be satisfied, in whole or in part, by withholding from shares of Stock to be issued to the Optionee a number of shares of Stock with an aggregate Fair Market Value that would satisfy the minimum withholding amount due.

7. No Obligation to Continue Employment . Neither the Company nor any Subsidiary is obligated by or as a result of the Plan or this Agreement to continue the Optionee in employment and neither the Plan nor this Agreement shall interfere in any way with the right of the Company or any Subsidiary to terminate the employment of the Optionee at any time.

8. Integration . This Agreement constitutes the entire agreement between the parties with respect to this Stock Option and supersedes all prior agreements and discussions between the parties concerning such subject matter.

9. Data Privacy Consent . In order to administer the Plan and this Agreement and to implement or structure future equity grants, the Company, its subsidiaries and affiliates and certain agents thereof (together, the “Relevant Companies”) may process any and all personal or professional data, including but not limited to Social Security or other identification number, home address and telephone number, date of birth and other information that is necessary or desirable for the administration of the Plan and/or this Agreement (the “Relevant Information”). By entering into this Agreement, the Grantee (i) authorizes the Company to collect, process, register and transfer to the Relevant Companies all Relevant Information; (ii) waives any privacy rights the Grantee may have with respect to the Relevant Information; (iii) authorizes the Relevant Companies to store and transmit such information in electronic form; and (iv)

 

4


authorizes the transfer of the Relevant Information to any jurisdiction in which the Relevant Companies consider appropriate. The Grantee shall have access to, and the right to change, the Relevant Information. Relevant Information will only be used in accordance with applicable law.

10. Notices . Notices hereunder shall be mailed or delivered to the Company at its principal place of business and shall be mailed or delivered to the Optionee at the address on file with the Company or, in either case, at such other address as one party may subsequently furnish to the other party in writing.

 

FOUNDATION MEDICINE, INC.
By:  

 

  Title:

The foregoing Agreement is hereby accepted and the terms and conditions thereof hereby agreed to by the undersigned. Electronic acceptance of this Agreement pursuant to the Company’s instructions to the Grantee (including through an online acceptance process) is acceptable.

 

Dated:                                                   

 

   Optionee’s Signature
   Optionee’s name and address:
  

 

  

 

  

 

 

5


NON-QUALIFIED STOCK OPTION AGREEMENT

FOR CONSULTANTS

UNDER THE FOUNDATION MEDICINE, INC.

2013 STOCK OPTION AND INCENTIVE PLAN

 

Name of Optionee:

  

 

  

No. of Option Shares:

                                                                                           

Option Exercise Price per Share:

                                                                                       
   [FMV on Grant Date]

Grant Date:

                                                                                           

Expiration Date:

                                                                                           
   [No more than 10 years]      

Pursuant to the Foundation Medicine, Inc. 2013 Stock Option and Incentive Plan as amended through the date hereof (the “Plan”), Foundation Medicine, Inc. (the “Company”) hereby grants to the Optionee named above, who is a Consultant of the Company, an option (the “Stock Option”) to purchase on or prior to the Expiration Date specified above all or part of the number of shares of Common Stock, par value $0.0001 per share (the “Stock”) of the Company specified above at the Option Exercise Price per Share specified above subject to the terms and conditions set forth herein and in the Plan. This Stock Option is not intended to be an “incentive stock option” under Section 422 of the Internal Revenue Code of 1986, as amended.

1. Exercisability Schedule . No portion of this Stock Option may be exercised until such portion shall have become exercisable. Except as set forth below, and subject to the discretion of the Administrator (as defined in Section 2 of the Plan) to accelerate the exercisability schedule hereunder, this Stock Option shall be exercisable with respect to the following number of Option Shares on the dates indicated so long as the Optionee remains in service to the Company or a Subsidiary as a Consultant on such dates:

 

    Incremental Number of
Option Shares Exercisable

   Exercisability Date

                     (              %)

  
  

 

                     (              %)

  
  

 

                     (              %)

  
  

 

                     (              %)

  
  

 

                     (              %)

  
  

 


Once exercisable, this Stock Option shall continue to be exercisable at any time or times prior to the close of business on the Expiration Date, subject to the provisions hereof and of the Plan.

2. Manner of Exercise .

(a) The Optionee may exercise this Stock Option only in the following manner: from time to time on or prior to the Expiration Date of this Stock Option, the Optionee may give written notice to the Administrator of his or her election to purchase some or all of the Option Shares purchasable at the time of such notice. This notice shall specify the number of Option Shares to be purchased.

Payment of the purchase price for the Option Shares may be made by one or more of the following methods: (i) in cash, by certified or bank check or other instrument acceptable to the Administrator; (ii) through the delivery (or attestation to the ownership) of shares of Stock that have been purchased by the Optionee on the open market or that are beneficially owned by the Optionee and are not then subject to any restrictions under any Company plan and that otherwise satisfy any holding periods as may be required by the Administrator; (iii) by the Optionee delivering to the Company a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company cash or a check payable and acceptable to the Company to pay the option purchase price, provided that in the event the Optionee chooses to pay the option purchase price as so provided, the Optionee and the broker shall comply with such procedures and enter into such agreements of indemnity and other agreements as the Administrator shall prescribe as a condition of such payment procedure; (iv) by a “net exercise” arrangement pursuant to which the Company will reduce the number of shares of Stock issuable upon exercise by the largest whole number of shares with a Fair Market Value that does not exceed the aggregate exercise price; or (v) a combination of (i), (ii), (iii) and (iv) above. Payment instruments will be received subject to collection.

The transfer to the Optionee on the records of the Company or of the transfer agent of the Option Shares will be contingent upon (i) the Company’s receipt from the Optionee of the full purchase price for the Option Shares, as set forth above, (ii) the fulfillment of any other requirements contained herein or in the Plan or in any other agreement or provision of laws, and (iii) the receipt by the Company of any agreement, statement or other evidence that the Company may require to satisfy itself that the issuance of Stock to be purchased pursuant to the exercise of Stock Options under the Plan and any subsequent resale of the shares of Stock will be in compliance with applicable laws and regulations. In the event the Optionee chooses to pay the purchase price by previously-owned shares of Stock through the attestation method, the number of shares of Stock transferred to the Optionee upon the exercise of the Stock Option shall be net of the Shares attested to.

(b) The shares of Stock purchased upon exercise of this Stock Option shall be transferred to the Optionee on the records of the Company or of the transfer agent upon compliance to the satisfaction of the Administrator with all requirements under applicable laws or regulations in connection with such transfer and with the requirements hereof and of the Plan. The determination of the Administrator as to such compliance shall be final and binding on the Optionee. The Optionee shall not be deemed to be the holder of, or to have any of the rights of a

 

2


holder with respect to, any shares of Stock subject to this Stock Option unless and until this Stock Option shall have been exercised pursuant to the terms hereof, the Company or the transfer agent shall have transferred the shares to the Optionee, and the Optionee’s name shall have been entered as the stockholder of record on the books of the Company. Thereupon, the Optionee shall have full voting, dividend and other ownership rights with respect to such shares of Stock.

(c) The minimum number of shares with respect to which this Stock Option may be exercised at any one time shall be 100 shares, unless the number of shares with respect to which this Stock Option is being exercised is the total number of shares subject to exercise under this Stock Option at the time.

(d) Notwithstanding any other provision hereof or of the Plan, no portion of this Stock Option shall be exercisable after the Expiration Date hereof.

3. Termination as Consultant . If the Optionee ceases to be a Consultant to the Company or a Subsidiary for any reason, any portion of this Stock Option outstanding on such date may be exercised, to the extent exercisable on the date the Optionee ceased to provide services, for a period of three months from the date the Optionee ceased to provide services or until the Expiration Date, if earlier. Any portion of this Stock Option that is not exercisable on the date the Optionee ceases to be a Consultant to the Company or a Subsidiary shall terminate immediately and be of no further force or effect.

4. Incorporation of Plan . Notwithstanding anything herein to the contrary, this Stock Option shall be subject to and governed by all the terms and conditions of the Plan, including the powers of the Administrator set forth in Section 2(b) of the Plan. Capitalized terms in this Agreement shall have the meaning specified in the Plan, unless a different meaning is specified herein.

5. Transferability . This Agreement is personal to the Optionee, is non-assignable and is not transferable in any manner, by operation of law or otherwise, other than by will or the laws of descent and distribution. This Stock Option is exercisable, during the Optionee’s lifetime, only by the Optionee, and thereafter, only by the Optionee’s legal representative or legatee.

6. No Obligation to Continue as a Consultant or Service Provider . Neither the Plan nor this Stock Option confers upon the Optionee any rights with respect to continuance as a Consultant or other service provider to the Company or a Subsidiary.

7. Integration . This Agreement constitutes the entire agreement between the parties with respect to this Stock Option and supersedes all prior agreements and discussions between the parties concerning such subject matter.

8. Data Privacy Consent . In order to administer the Plan and this Agreement and to implement or structure future equity grants, the Company, its subsidiaries and affiliates and certain agents thereof (together, the “Relevant Companies”) may process any and all personal or professional data, including but not limited to Social Security or other identification number, home address and telephone number, date of birth and other information that is necessary or desirable for the administration of the Plan and/or this Agreement (the “Relevant Information”).

 

3


By entering into this Agreement, the Optionee (i) authorizes the Company to collect, process, register and transfer to the Relevant Companies all Relevant Information; (ii) waives any privacy rights the Optionee may have with respect to the Relevant Information; (iii) authorizes the Relevant Companies to store and transmit such information in electronic form; and (iv) authorizes the transfer of the Relevant Information to any jurisdiction in which the Relevant Companies consider appropriate. The Optionee shall have access to, and the right to change, the Relevant Information. Relevant Information will only be used in accordance with applicable law.

9. Notices . Notices hereunder shall be mailed or delivered to the Company at its principal place of business and shall be mailed or delivered to the Optionee at the address on file with the Company or, in either case, at such other address as one party may subsequently furnish to the other party in writing.

 

FOUNDATION MEDICINE, INC.

By:

 

 

  Title:

The foregoing Agreement is hereby accepted and the terms and conditions thereof hereby agreed to by the undersigned. Electronic acceptance of this Agreement pursuant to the Company’s instructions to the Optionee (including through an online acceptance process) is acceptable.

 

Dated:                                                   

 

   Optionee’s Signature
   Optionee’s name and address:
  

 

  

 

  

 

 

4


NON-QUALIFIED STOCK OPTION AGREEMENT

FOR NON-EMPLOYEE DIRECTORS

UNDER THE FOUNDATION MEDICINE, INC.

2013 STOCK OPTION AND INCENTIVE PLAN

 

Name of Optionee:

  

 

  

No. of Option Shares:

                                                                                           

Option Exercise Price per Share:

                                                                                       
   [FMV on Grant Date]

Grant Date:

                                                                                           

Expiration Date:

                                                                                           
   [No more than 10 years]      

Pursuant to the Foundation Medicine, Inc. 2013 Stock Option and Incentive Plan as amended through the date hereof (the “Plan”), Foundation Medicine, Inc. (the “Company”) hereby grants to the Optionee named above, who is a Director of the Company but is not an employee of the Company, an option (the “Stock Option”) to purchase on or prior to the Expiration Date specified above all or part of the number of shares of Common Stock, par value $0.0001 per share (the “Stock”), of the Company specified above at the Option Exercise Price per Share specified above subject to the terms and conditions set forth herein and in the Plan. This Stock Option is not intended to be an “incentive stock option” under Section 422 of the Internal Revenue Code of 1986, as amended.

1. Exercisability Schedule . No portion of this Stock Option may be exercised until such portion shall have become exercisable. Except as set forth below, and subject to the discretion of the Administrator (as defined in Section 2 of the Plan) to accelerate the exercisability schedule hereunder, this Stock Option shall be exercisable with respect to the following number of Option Shares on the dates indicated so long as the Optionee remains in service as a member of the Board on such dates:

 

    Incremental Number of
Option Shares Exercisable

   Exercisability Date

                     (              %)

  
  

 

                     (              %)

  
  

 

                     (              %)

  
  

 

                     (              %)

  
  

 

                     (              %)

  
  

 


Once exercisable, this Stock Option shall continue to be exercisable at any time or times prior to the close of business on the Expiration Date, subject to the provisions hereof and of the Plan.

2. Manner of Exercise .

(a) The Optionee may exercise this Stock Option only in the following manner: from time to time on or prior to the Expiration Date of this Stock Option, the Optionee may give written notice to the Administrator of his or her election to purchase some or all of the Option Shares purchasable at the time of such notice. This notice shall specify the number of Option Shares to be purchased.

Payment of the purchase price for the Option Shares may be made by one or more of the following methods: (i) in cash, by certified or bank check or other instrument acceptable to the Administrator; (ii) through the delivery (or attestation to the ownership) of shares of Stock that have been purchased by the Optionee on the open market or that are beneficially owned by the Optionee and are not then subject to any restrictions under any Company plan and that otherwise satisfy any holding periods as may be required by the Administrator; (iii) by the Optionee delivering to the Company a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company cash or a check payable and acceptable to the Company to pay the option purchase price, provided that in the event the Optionee chooses to pay the option purchase price as so provided, the Optionee and the broker shall comply with such procedures and enter into such agreements of indemnity and other agreements as the Administrator shall prescribe as a condition of such payment procedure; (iv) by a “net exercise” arrangement pursuant to which the Company will reduce the number of shares of Stock issuable upon exercise by the largest whole number of shares with a Fair Market Value that does not exceed the aggregate exercise price; or (v) a combination of (i), (ii), (iii) and (iv) above. Payment instruments will be received subject to collection.

The transfer to the Optionee on the records of the Company or of the transfer agent of the Option Shares will be contingent upon (i) the Company’s receipt from the Optionee of the full purchase price for the Option Shares, as set forth above, (ii) the fulfillment of any other requirements contained herein or in the Plan or in any other agreement or provision of laws, and (iii) the receipt by the Company of any agreement, statement or other evidence that the Company may require to satisfy itself that the issuance of Stock to be purchased pursuant to the exercise of Stock Options under the Plan and any subsequent resale of the shares of Stock will be in compliance with applicable laws and regulations. In the event the Optionee chooses to pay the purchase price by previously-owned shares of Stock through the attestation method, the number of shares of Stock transferred to the Optionee upon the exercise of the Stock Option shall be net of the Shares attested to.

(b) The shares of Stock purchased upon exercise of this Stock Option shall be transferred to the Optionee on the records of the Company or of the transfer agent upon compliance to the satisfaction of the Administrator with all requirements under applicable laws or regulations in connection with such transfer and with the requirements hereof and of the Plan. The determination of the Administrator as to such compliance shall be final and binding on the Optionee. The Optionee shall not be deemed to be the holder of, or to have any of the rights of a

 

2


holder with respect to, any shares of Stock subject to this Stock Option unless and until this Stock Option shall have been exercised pursuant to the terms hereof, the Company or the transfer agent shall have transferred the shares to the Optionee, and the Optionee’s name shall have been entered as the stockholder of record on the books of the Company. Thereupon, the Optionee shall have full voting, dividend and other ownership rights with respect to such shares of Stock.

(c) The minimum number of shares with respect to which this Stock Option may be exercised at any one time shall be 100 shares, unless the number of shares with respect to which this Stock Option is being exercised is the total number of shares subject to exercise under this Stock Option at the time.

(d) Notwithstanding any other provision hereof or of the Plan, no portion of this Stock Option shall be exercisable after the Expiration Date hereof.

3. Termination as Director . If the Optionee ceases to be a Director of the Company, the period within which to exercise the Stock Option may be subject to earlier termination as set forth below.

(a) Termination Due to Death . If the Optionee’s service as a Director terminates by reason of the Optionee’s death, any portion of this Stock Option outstanding on such date, to the extent exercisable on the date of death, may thereafter be exercised by the Optionee’s legal representative or legatee for a period of 12 months from the date of death or until the Expiration Date, if earlier. Any portion of this Stock Option that is not exercisable on the date of death shall terminate immediately and be of no further force or effect.

(b) Other Termination . If the Optionee ceases to be a Director for any reason other than the Optionee’s death, any portion of this Stock Option outstanding on such date may be exercised, to the extent exercisable on the date the Optionee ceased to be a Director, for a period of 12 months from the date the Optionee ceased to be a Director or until the Expiration Date, if earlier. Any portion of this Stock Option that is not exercisable on the date the Optionee ceases to be a Director shall terminate immediately and be of no further force or effect.

4. Incorporation of Plan . Notwithstanding anything herein to the contrary, this Stock Option shall be subject to and governed by all the terms and conditions of the Plan, including the powers of the Administrator set forth in Section 2(b) of the Plan. Capitalized terms in this Agreement shall have the meaning specified in the Plan, unless a different meaning is specified herein.

5. Transferability . This Agreement is personal to the Optionee, is non-assignable and is not transferable in any manner, by operation of law or otherwise, other than by will or the laws of descent and distribution. This Stock Option is exercisable, during the Optionee’s lifetime, only by the Optionee, and thereafter, only by the Optionee’s legal representative or legatee.

6. No Obligation to Continue as a Director . Neither the Plan nor this Stock Option confers upon the Optionee any rights with respect to continuance as a Director.

 

3


7. Integration . This Agreement constitutes the entire agreement between the parties with respect to this Stock Option and supersedes all prior agreements and discussions between the parties concerning such subject matter.

8. Data Privacy Consent . In order to administer the Plan and this Agreement and to implement or structure future equity grants, the Company, its subsidiaries and affiliates and certain agents thereof (together, the “Relevant Companies”) may process any and all personal or professional data, including but not limited to Social Security or other identification number, home address and telephone number, date of birth and other information that is necessary or desirable for the administration of the Plan and/or this Agreement (the “Relevant Information”). By entering into this Agreement, the Grantee (i) authorizes the Company to collect, process, register and transfer to the Relevant Companies all Relevant Information; (ii) waives any privacy rights the Grantee may have with respect to the Relevant Information; (iii) authorizes the Relevant Companies to store and transmit such information in electronic form; and (iv) authorizes the transfer of the Relevant Information to any jurisdiction in which the Relevant Companies consider appropriate. The Grantee shall have access to, and the right to change, the Relevant Information. Relevant Information will only be used in accordance with applicable law.

 

4


9. Notices . Notices hereunder shall be mailed or delivered to the Company at its principal place of business and shall be mailed or delivered to the Optionee at the address on file with the Company or, in either case, at such other address as one party may subsequently furnish to the other party in writing.

 

FOUNDATION MEDICINE, INC.

By:

 

 

  Title:

The foregoing Agreement is hereby accepted and the terms and conditions thereof hereby agreed to by the undersigned. Electronic acceptance of this Agreement pursuant to the Company’s instructions to the Grantee (including through an online acceptance process) is acceptable.

 

Dated:                                                   

 

   Optionee’s Signature
   Optionee’s name and address:
  

 

  

 

  

 

 

5


RESTRICTED STOCK AWARD AGREEMENT

UNDER THE FOUNDATION MEDICINE, INC.

2013 STOCK OPTION AND INCENTIVE PLAN

 

Name of Grantee:

 

 

No. of Shares:

 

                                      

 

Grant Date:

 

 

 

Pursuant to the Foundation Medicine, Inc. 2013 Stock Option and Incentive Plan (the “Plan”) as amended through the date hereof, Foundation Medicine, Inc. (the “Company”) hereby grants a Restricted Stock Award (an “Award”) to the Grantee named above. Upon acceptance of this Award, the Grantee shall receive the number of shares of Common Stock, par value $0.0001 per share (the “Stock”) of the Company specified above, subject to the restrictions and conditions set forth herein and in the Plan. The Company acknowledges the receipt from the Grantee of consideration with respect to the par value of the Stock in the form of cash, past or future services rendered to the Company by the Grantee or such other form of consideration as is acceptable to the Administrator.

1. Award . The shares of Restricted Stock awarded hereunder shall be issued and held by the Company’s transfer agent in book entry form, and the Grantee’s name shall be entered as the stockholder of record on the books of the Company. Thereupon, the Grantee shall have all the rights of a stockholder with respect to such shares, including voting and dividend rights, subject, however, to the restrictions and conditions specified in Paragraph 2 below. The Grantee shall (i) sign and deliver to the Company a copy of this Award Agreement and (ii) deliver to the Company a stock power endorsed in blank.

2. Restrictions and Conditions .

(a) Any book entries for the shares of Restricted Stock granted herein shall bear an appropriate legend, as determined by the Administrator in its sole discretion, to the effect that such shares are subject to restrictions as set forth herein and in the Plan.

(b) Shares of Restricted Stock granted herein may not be sold, assigned, transferred, pledged or otherwise encumbered or disposed of by the Grantee prior to vesting.

(c) If the Grantee’s employment with the Company and its Subsidiaries is voluntarily or involuntarily terminated for any reason (including death) prior to vesting of shares of Restricted Stock granted herein, all shares of Restricted Stock shall immediately and automatically be forfeited and returned to the Company.

3. Vesting of Restricted Stock . The restrictions and conditions in Paragraph 2 of this Agreement shall lapse on the Vesting Date or Dates specified in the following schedule so long as the Grantee remains an employee of the Company or a Subsidiary on such Dates. If a series of Vesting Dates is specified, then the restrictions and conditions in Paragraph 2 shall lapse only with respect to the number of shares of Restricted Stock specified as vested on such date.


      Incremental Number
        of Shares Vested        

   Vesting Date

                     (              %)

  
  

 

                     (              %)

  
  

 

                     (              %)

  
  

 

                     (              %)

  
  

 

                     (              %)

  
  

 

Subsequent to such Vesting Date or Dates, the shares of Stock on which all restrictions and conditions have lapsed shall no longer be deemed Restricted Stock. The Administrator may at any time accelerate the vesting schedule specified in this Paragraph 3.

4. Dividends . Dividends on shares of Restricted Stock shall be paid currently to the Grantee.

5. Incorporation of Plan . Notwithstanding anything herein to the contrary, this Award shall be subject to and governed by all the terms and conditions of the Plan, including the powers of the Administrator set forth in Section 2(b) of the Plan. Capitalized terms in this Agreement shall have the meaning specified in the Plan, unless a different meaning is specified herein.

6. Transferability . This Agreement is personal to the Grantee, is non-assignable and is not transferable in any manner, by operation of law or otherwise, other than by will or the laws of descent and distribution.

7. Tax Withholding . The Grantee shall, not later than the date as of which the receipt of this Award becomes a taxable event for Federal income tax purposes, pay to the Company or make arrangements satisfactory to the Administrator for payment of any Federal, state, and local taxes required by law to be withheld on account of such taxable event. Except in the case where an election is made pursuant to Paragraph 8 below, the Company shall have the authority to cause the required minimum tax withholding obligation to be satisfied, in whole or in part, by withholding from shares of Stock to be issued or released by the transfer agent a number of shares of Stock with an aggregate Fair Market Value that would satisfy the minimum withholding amount due.

8. Election Under Section 83(b) . The Grantee and the Company hereby agree that the Grantee may, within 30 days following the Grant Date of this Award, file with the Internal Revenue Service and the Company an election under Section 83(b) of the Internal Revenue Code. In the event the Grantee makes such an election, he or she agrees to provide a copy of the election to the Company. The Grantee acknowledges that he or she is responsible for obtaining the advice of his or her tax advisors with regard to the Section 83(b) election and that he or she is relying solely on such advisors and not on any statements or representations of the Company or any of its agents with regard to such election.

 

2


9. No Obligation to Continue Employment . Neither the Company nor any Subsidiary is obligated by or as a result of the Plan or this Agreement to continue the Grantee in employment and neither the Plan nor this Agreement shall interfere in any way with the right of the Company or any Subsidiary to terminate the employment of the Grantee at any time.

10. Integration . This Agreement constitutes the entire agreement between the parties with respect to this Award and supersedes all prior agreements and discussions between the parties concerning such subject matter.

11. Data Privacy Consent . In order to administer the Plan and this Agreement and to implement or structure future equity grants, the Company, its subsidiaries and affiliates and certain agents thereof (together, the “Relevant Companies”) may process any and all personal or professional data, including but not limited to Social Security or other identification number, home address and telephone number, date of birth and other information that is necessary or desirable for the administration of the Plan and/or this Agreement (the “Relevant Information”). By entering into this Agreement, the Grantee (i) authorizes the Company to collect, process, register and transfer to the Relevant Companies all Relevant Information; (ii) waives any privacy rights the Grantee may have with respect to the Relevant Information; (iii) authorizes the Relevant Companies to store and transmit such information in electronic form; and (iv) authorizes the transfer of the Relevant Information to any jurisdiction in which the Relevant Companies consider appropriate. The Grantee shall have access to, and the right to change, the Relevant Information. Relevant Information will only be used in accordance with applicable law.

 

3


12. Notices . Notices hereunder shall be mailed or delivered to the Company at its principal place of business and shall be mailed or delivered to the Grantee at the address on file with the Company or, in either case, at such other address as one party may subsequently furnish to the other party in writing.

 

FOUNDATION MEDICINE, INC.
By:  

 

  Title:

The foregoing Agreement is hereby accepted and the terms and conditions thereof hereby agreed to by the undersigned. Electronic acceptance of this Agreement pursuant to the Company’s instructions to the Grantee (including through an online acceptance process) is acceptable.

 

Dated:                                                   

 

  

Grantee’s Signature

  

Grantee’s name and address:

  

 

  

 

  

 

 

4


RESTRICTED STOCK UNIT AWARD AGREEMENT

FOR COMPANY EMPLOYEES

UNDER THE FOUNDATION MEDICINE, INC.

2013 STOCK OPTION AND INCENTIVE PLAN

 

Name of Grantee:

 

 

No. of Restricted Stock Units:  

 

                                      

 

Grant Date:

 

 

 

Pursuant to the Foundation Medicine, Inc. 2013 Stock Option and Incentive Plan as amended through the date hereof (the “Plan”), Foundation Medicine, Inc. (the “Company”) hereby grants an award of the number of Restricted Stock Units listed above (an “Award”) to the Grantee named above. Each Restricted Stock Unit shall relate to one share of Common Stock, par value $0.0001 per share (the “Stock”) of the Company.

1. Restrictions on Transfer of Award . This Award may not be sold, transferred, pledged, assigned or otherwise encumbered or disposed of by the Grantee, and any shares of Stock issuable with respect to the Award may not be sold, transferred, pledged, assigned or otherwise encumbered or disposed of until (i) the Restricted Stock Units have vested as provided in Paragraph 2 of this Agreement and (ii) shares of Stock have been issued to the Grantee in accordance with the terms of the Plan and this Agreement.

2. Vesting of Restricted Stock Units . The restrictions and conditions of Paragraph 1 of this Agreement shall lapse on the Vesting Date or Dates specified in the following schedule so long as the Grantee remains an employee of the Company or a Subsidiary on such Dates. If a series of Vesting Dates is specified, then the restrictions and conditions in Paragraph 1 shall lapse only with respect to the number of Restricted Stock Units specified as vested on such date.

 

    Incremental Number of

Restricted Stock Units Vested

   Vesting Date

                    (              %)

  
  

 

                    (              %)

  
  

 

                    (              %)

  
  

 

                    (              %)

  
  

 

The Administrator may at any time accelerate the vesting schedule specified in this Paragraph 2.

3. Termination of Employment . If the Grantee’s employment with the Company and its Subsidiaries terminates for any reason (including death or disability) prior to the satisfaction of the vesting conditions set forth in Paragraph 2 above, any Restricted Stock Units that have not vested as of such date shall automatically and without notice terminate and be forfeited, and neither the Grantee nor any of his or her successors, heirs, assigns, or personal representatives will thereafter have any further rights or interests in such unvested Restricted Stock Units.


4. Issuance of Shares of Stock . As soon as practicable following each Vesting Date (but in no event later than two and one-half months after the end of the year in which the Vesting Date occurs), the Company shall issue to the Grantee the number of shares of Stock equal to the aggregate number of Restricted Stock Units that have vested pursuant to Paragraph 2 of this Agreement on such date and the Grantee shall thereafter have all the rights of a stockholder of the Company with respect to such shares.

5. Incorporation of Plan . Notwithstanding anything herein to the contrary, this Agreement shall be subject to and governed by all the terms and conditions of the Plan, including the powers of the Administrator set forth in Section 2(b) of the Plan. Capitalized terms in this Agreement shall have the meaning specified in the Plan, unless a different meaning is specified herein.

6. Tax Withholding . The Grantee shall, not later than the date as of which the receipt of this Award becomes a taxable event for Federal income tax purposes, pay to the Company or make arrangements satisfactory to the Administrator for payment of any Federal, state, and local taxes required by law to be withheld on account of such taxable event. The Company shall have the authority to cause the required minimum tax withholding obligation to be satisfied, in whole or in part, by withholding from shares of Stock to be issued to the Grantee a number of shares of Stock with an aggregate Fair Market Value that would satisfy the withholding amount due.

7. Section 409A of the Code . This Agreement shall be interpreted in such a manner that all provisions relating to the settlement of the Award are exempt from the requirements of Section 409A of the Code as “short-term deferrals” as described in Section 409A of the Code.

8. No Obligation to Continue Employment . Neither the Company nor any Subsidiary is obligated by or as a result of the Plan or this Agreement to continue the Grantee in employment and neither the Plan nor this Agreement shall interfere in any way with the right of the Company or any Subsidiary to terminate the employment of the Grantee at any time.

9. Integration . This Agreement constitutes the entire agreement between the parties with respect to this Award and supersedes all prior agreements and discussions between the parties concerning such subject matter.

10. Data Privacy Consent . In order to administer the Plan and this Agreement and to implement or structure future equity grants, the Company, its subsidiaries and affiliates and certain agents thereof (together, the “Relevant Companies”) may process any and all personal or professional data, including but not limited to Social Security or other identification number, home address and telephone number, date of birth and other information that is necessary or desirable for the administration of the Plan and/or this Agreement (the “Relevant Information”). By entering into this Agreement, the Grantee (i) authorizes the Company to collect, process, register and transfer to the Relevant Companies all Relevant Information; (ii) waives any privacy rights the Grantee may have with respect to the Relevant Information; (iii) authorizes the Relevant Companies to store and transmit such information in electronic form; and (iv)

 

2


authorizes the transfer of the Relevant Information to any jurisdiction in which the Relevant Companies consider appropriate. The Grantee shall have access to, and the right to change, the Relevant Information. Relevant Information will only be used in accordance with applicable law.

11. Notices . Notices hereunder shall be mailed or delivered to the Company at its principal place of business and shall be mailed or delivered to the Grantee at the address on file with the Company or, in either case, at such other address as one party may subsequently furnish to the other party in writing.

 

FOUNDATION MEDICINE, INC.

By:

   
  Title:

The foregoing Agreement is hereby accepted and the terms and conditions thereof hereby agreed to by the undersigned. Electronic acceptance of this Agreement pursuant to the Company’s instructions to the Grantee (including through an online acceptance process) is acceptable.

 

Dated:                                                   

 

   Grantee’s Signature
   Grantee’s name and address:
  

 

  

 

  

 

 

3


RESTRICTED STOCK UNIT AWARD AGREEMENT

FOR NON-EMPLOYEE DIRECTORS

UNDER THE FOUNDATION MEDICINE, INC.

2013 STOCK OPTION AND INCENTIVE PLAN

 

Name of Grantee:        
No. of Restricted Stock Units:             
Grant Date:           

Pursuant to the Foundation Medicine, Inc. 2013 Stock Option and Incentive Plan as amended through the date hereof (the “Plan”), Foundation Medicine, Inc. (the “Company”) hereby grants an award of the number of Restricted Stock Units listed above (an “Award”) to the Grantee named above. Each Restricted Stock Unit shall relate to one share of Common Stock, par value $0.0001 per share (the “Stock”) of the Company.

1. Restrictions on Transfer of Award . This Award may not be sold, transferred, pledged, assigned or otherwise encumbered or disposed of by the Grantee, and any shares of Stock issuable with respect to the Award may not be sold, transferred, pledged, assigned or otherwise encumbered or disposed of until (i) the Restricted Stock Units have vested as provided in Paragraph 2 of this Agreement and (ii) shares of Stock have been issued to the Grantee in accordance with the terms of the Plan and this Agreement.

2. Vesting of Restricted Stock Units . The restrictions and conditions of Paragraph 1 of this Agreement shall lapse on the Vesting Date or Dates specified in the following schedule so long as the Grantee remains in service as a member of the Board on such Dates. If a series of Vesting Dates is specified, then the restrictions and conditions in Paragraph 1 shall lapse only with respect to the number of Restricted Stock Units specified as vested on such date.

 

    Incremental Number of

Restricted Stock Units Vested

   Vesting Date

                    (              %)

  
  

 

                    (              %)

  
  

 

                    (              %)

  
  

 

                    (              %)

  
  

 

The Administrator may at any time accelerate the vesting schedule specified in this Paragraph 2.

3. Termination of Service . If the Grantee’s service with the Company and its Subsidiaries terminates for any reason (including death or disability) prior to the satisfaction of the vesting conditions set forth in Paragraph 2 above, any Restricted Stock Units that have not vested as of such date shall automatically and without notice terminate and be forfeited, and neither the Grantee nor any of his or her successors, heirs, assigns, or personal representatives will thereafter have any further rights or interests in such unvested Restricted Stock Units.


4. Issuance of Shares of Stock . As soon as practicable following each Vesting Date (but in no event later than two and one-half months after the end of the year in which the Vesting Date occurs), the Company shall issue to the Grantee the number of shares of Stock equal to the aggregate number of Restricted Stock Units that have vested pursuant to Paragraph 2 of this Agreement on such date and the Grantee shall thereafter have all the rights of a stockholder of the Company with respect to such shares.

5. Incorporation of Plan . Notwithstanding anything herein to the contrary, this Agreement shall be subject to and governed by all the terms and conditions of the Plan, including the powers of the Administrator set forth in Section 2(b) of the Plan. Capitalized terms in this Agreement shall have the meaning specified in the Plan, unless a different meaning is specified herein.

6. Section 409A of the Code . This Agreement shall be interpreted in such a manner that all provisions relating to the settlement of the Award are exempt from the requirements of Section 409A of the Code as “short-term deferrals” as described in Section 409A of the Code.

7. No Obligation to Continue as a Director . Neither the Plan nor this Award confers upon the Grantee any rights with respect to continuance as a Director.

8. Integration . This Agreement constitutes the entire agreement between the parties with respect to this Award and supersedes all prior agreements and discussions between the parties concerning such subject matter.

9. Data Privacy Consent . In order to administer the Plan and this Agreement and to implement or structure future equity grants, the Company, its subsidiaries and affiliates and certain agents thereof (together, the “Relevant Companies”) may process any and all personal or professional data, including but not limited to Social Security or other identification number, home address and telephone number, date of birth and other information that is necessary or desirable for the administration of the Plan and/or this Agreement (the “Relevant Information”). By entering into this Agreement, the Grantee (i) authorizes the Company to collect, process, register and transfer to the Relevant Companies all Relevant Information; (ii) waives any privacy rights the Grantee may have with respect to the Relevant Information; (iii) authorizes the Relevant Companies to store and transmit such information in electronic form; and (iv) authorizes the transfer of the Relevant Information to any jurisdiction in which the Relevant Companies consider appropriate. The Grantee shall have access to, and the right to change, the Relevant Information. Relevant Information will only be used in accordance with applicable law.

 

2


10. Notices . Notices hereunder shall be mailed or delivered to the Company at its principal place of business and shall be mailed or delivered to the Grantee at the address on file with the Company or, in either case, at such other address as one party may subsequently furnish to the other party in writing.

 

FOUNDATION MEDICINE, INC.
By:    
  Title:

The foregoing Agreement is hereby accepted and the terms and conditions thereof hereby agreed to by the undersigned. Electronic acceptance of this Agreement pursuant to the Company’s instructions to the Grantee (including through an online acceptance process) is acceptable.

 

Dated:                                              

 

  Grantee’s Signature
  Grantee’s name and address:
 

 

 

 

 

 

 

3

Exhibit 10.3

 

LOGO

One Kendall Square, Suite B3501

Cambridge Massachusetts 02139

 

  TEL    617.418.2200
  FAX    617.418.2201

September 9, 2013

Michael Pellini

One Kendall Square, Suite B3501

Cambridge, MA 02139

Dear Dr. Pellini:

This Amended and Restated Offer of Employment (the “ Offer Letter ”) by and between you and Foundation Medicine, Inc. (“ Foundation Medicine ” or the “ Company ”) amends and restates your offer letter dated as of March 14, 2011.

It is with great pleasure that I confirm the terms of your employment with Foundation Medicine as President and Chief Executive Officer, with all authority commensurate with such position, and subject to the supervision of, and any conditions or restrictions on such authority as determined from time to time by, the Board of Directors (the “ Board ”). In addition, (i) prior to an initial public offering by the Company, you will be appointed by the Board to serve as a member of the Board for so long as you serve as the Company’s Chief Executive Officer, and (ii) following an initial public offering by the Company, you will be nominated by the Board, or a committee thereof, for election to the Board by the Company’s stockholders for so long as you serve as the Company’s Chief Executive Officer. Your effective date of hire as a regular, full-time employee was May 9, 2011 (the “ Start Date ”).

You agree to perform the duties and responsibilities inherent in such position, and such other duties and responsibilities as shall from time to time be mutually agreed upon between you and the Board, including, but not limited to, (i) leadership regarding efforts to create value for the Company, (ii) guiding the Company’s effort to identify and diligence business development opportunities that are consistent with the strategic goals of the Company, and to negotiating such opportunities as are approved by the Board, (iii) leading the effort to develop and achieve the annual financial and business plan goals for the Company and (iv) development and ongoing maintenance of the Company’s values and positive culture, reinforcing the Company’s mission to be a highly productive organization that aspires to become one of the leading companies in the industry. You also agree that while employed by the Company you will devote your full business time and your best efforts, business judgment, skill and knowledge exclusively to the advancement of the business and interests of the Company and to the discharge of your duties and responsibilities for it, provided you may serve on other boards of directors or engage in religious, charitable or other community activities as long as such services and activities do not materially interfere with your performance of your duties to the Company. You agree to abide by the rules, regulations, instructions, personnel practices and policies of the Company, as adopted and amended from time to time by the Company, from and after the date that they are disclosed to you.

 

www.foundationmedicine.com


Offer Letter – Michael J. Pellini, MD

September 9, 2013

Page 2

 

Salary and Expense Reimbursement . Your current salary is an annual rate of $406,850, payable twice per month in accordance with Foundation Medicine’s standard payroll practices and subject to customary deductions and withholdings as required by law. Your performance will be reviewed by the Board on an annual basis in conjunction with an annual salary review, and may be increased by the Board as a result of such review (but not decreased except for across-the-board salary reductions based on the Company’s financial performance similarly affecting all or substantially all senior management employees of the Company). Also, the Company will reimburse your reasonable out-of-pocket travel expenses and other expenses related to your work based on the Company’s expense reimbursement policy.

Bonus . You will be eligible to receive an annual incentive bonus, potentially consisting of both cash and options, in accordance with the Company’s bonus program and at the discretion of the Board. During your employment with the Company, you shall be eligible to receive an annual incentive bonus as part of such annual bonus program no later than 90 days after the end of each calendar year with a target of up to forty percent (40%) of your annual base salary paid for such year, as determined by the Board (or its Compensation Committee) based on the Board’s assessment (or its Compensation Committee’s assessment) of performance goal targets mutually agreed upon at the beginning of the applicable calendar year by the Board and you.

Living Expense Assistance and Relocation Assistance . The Company acknowledges that you live in California and as a condition of your employment you will be commuting to the Company’s offices in Massachusetts. In the absence of relocation, the Company will reimburse or directly pay you for living expenses in Boston, Massachusetts, including executive apartment rental, utilities, internet, telephone, television, cleaning and other customary costs associated with the executive apartment rental, and food expenses (to the extent such food expenses are not otherwise reimbursable as a business expense under the Company’s business expense policy), in each instance as incurred in the metropolitan Boston, Massachusetts area (“ Living Expenses ”) up to $50,000 annually (the “ Living Expenses Cap ”). Any unused portion of the Living Expenses Cap, or any Living Expenses in excess of the Living Expenses Cap shall not affect the amount of Living Expenses eligible for reimbursement in any subsequent calendar year. The Company will also reimburse or directly pay for your reasonable travel expenses incurred annually commuting between California and Boston, Massachusetts (“ Commuting Expenses ”).

The Company will determine in its reasonable judgment what, if any, of your Commuting Expenses and Living Expenses paid for or reimbursed by the Company are taxable to you in accordance with applicable law and will comply with associated withholding and tax reporting obligations. To the extent certain of these Commuting Expenses and Living Expenses are deemed taxable by the IRS in a given year, the Company will provide you with a tax gross-up payment such that after payment of taxes (federal, state and employment) on such amount, there remains a balance sufficient to pay the taxes (federal, state and employment) on the amount of your taxable reimbursable Commuting Expenses and Living Expenses. The Company will make such tax gross-up payment promptly but in no event later than the end of the calendar year in which you remit the related taxes.

 

www.foundationmedicine.com


Offer Letter – Michael J. Pellini, MD

September 9, 2013

Page 3

 

Options to Purchase Stock . As an incentive for you to share in the long-term growth of Foundation Medicine, the Board granted to you a stock option, effective on your Start Date, to purchase 2,200,000 shares of Foundation Medicine’s common stock (the “ Option ”) at an exercise price per share equal to the fair market value of Foundation Medicine’s common stock on the date of the grant (which fair market value was most recently determined to be $0.02 per share), as determined by the Board. The Option is a non-statutory stock option.

This grant represented approximately 5.5% ownership of the Company on a fully-diluted basis, as set forth in the attached Annex, and assuming the full investment of all remaining tranches of the Company’s current Series A Financing. The Series A Financing was increased in size prior to the first anniversary of the Start Date and, as a result, the Board granted to you an additional stock option, with an exercise price per share equal to the fair market value of a share of the Company’s common stock on the date such option was granted, to maintain your ownership of the Company on a similar fully-diluted and fully-invested basis at no less than 5.5% (on substantially the same terms as the Option and with a vesting schedule matching the Option and running from the Start Date).

The Option is governed by a stock option agreement (in the standard form approved by the Board), and is subject to the provisions of Foundation Medicine’s then-current stock incentive plan. The stock option agreement describes in detail the Early Exercise Provision, which effectively offers you the ability to exercise the option to purchase shares of common stock at any time after the effective date of its grant and in advance of vesting (in which case there shall be a Company right of repurchase that shall lapse at the same rate of vesting of the Option), and also describes the vesting of the Option, which will be as follows: vesting over a four-year period, with 25% vesting on the first anniversary of the Start Date, and an additional 6.25% vesting on the last business day of each calendar quarter for the next twelve successive quarters of employment, until 100% of the Option has become vested, provided that you are still employed by Foundation Medicine on each such vesting date. In addition, vesting (a) will accelerate with regard to 25% of the Option (that is, such 25% of the original 2,200,000 shares and allocated equally from the remaining unvested portion across each of the future scheduled vesting dates of the Option) upon an initial public offering of the Company’s securities, and (b) will accelerate with regard to 25% of the 592,634 shares covered under an option granted on January 11, 2012 (the “ Maintenance Option ”) (that is 25% of the 592,634 shares and allocated equally from the remaining unvested portion of the Maintenance Option across each of the future scheduled vesting dates of the Maintenance Option) upon an initial public offering of the Company’s securities, and (c) will accelerate with regard to the entire remaining portion of the Option, the Maintenance Option and any Equity Award that has been granted acceleration rights and is designated as an Acceleration Equity Award (each as defined below) upon a “Change of Control” (as defined below).

A list of all Equity Awards (as defined below) granted to you by the Company as of the date of this Offer Letter is attached as Exhibit A (the “ Equity Schedule ”). The Equity Awards are subject to the terms and conditions of the Company’s incentive equity plan(s), as may be amended from time to time, and associated award agreements (collectively, and together with the Equity Schedule, the “ Equity Documents ”).

 

www.foundationmedicine.com


Offer Letter – Michael J. Pellini, MD

September 9, 2013

Page 4

 

Certain Equity Awards have been granted acceleration rights described below and are designated as Acceleration Equity Awards on the Equity Schedule (the “ Acceleration Equity Awards ”). Equity Awards not granted Acceleration Rights by the Company are designated as Non-Acceleration Equity Awards on the Equity Schedule (the “ Non-Acceleration Equity Awards ”). Any Equity Awards granted to you by the Company that are not listed on the Equity Schedule shall be considered Non-Acceleration Equity Awards, unless and until they are granted Acceleration Equity Award status by the Board. Consistent with the Equity Documents, the Equity Schedule may be amended from time to time by the Company to add Acceleration Equity Awards or to add Non-Acceleration Equity Awards, and to convert Non-Acceleration Equity Awards to Acceleration Equity Awards. Each amendment to the Equity Schedule shall be consecutively numbered and dated, shall make express reference to this Offer Letter, shall supersede the immediately preceding Equity Schedule, and following issuance shall be incorporated into this Offer Letter and shall constitute one of the Equity Documents.

Subject to the further provisions of this Offer Letter and the Equity Documents, vesting of the Acceleration Equity Awards shall accelerate with regard to the entire remaining unvested portion of such Acceleration Equity Awards in the event of a Change in Control.

For purposes of this Offer Letter:

Change in Control ” shall mean:

 

  (i) prior to the completion of an initial public offering by the Company, an event that (a) is a Deemed Liquidation Event within the meaning of such term as set forth in the Company’s Fifth Amended and Restated Certificate of Incorporation, as amended, as amended and/or restated from time to time and (b) results in the payment of proceeds to the stockholders of the Company; and

 

  (ii) following the completion of an initial public offering by the Company, any of the following:

 

  a. any “person,” as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “Act”) (other than the Company, any of its subsidiaries, or any trustee, fiduciary or other person or entity holding securities under any employee benefit plan or trust of the Company or any of its subsidiaries), together with all “affiliates” and “associates” (as such terms are defined in Rule 12b-2 under the Act) of such person, shall become the “beneficial owner” (as such term is defined in Rule 13d-3 under the Act), directly or indirectly, of securities of the Company representing 50 percent or more of the combined voting power of the Company’s then outstanding securities having the right to vote in an election of the Board (“ Voting Securities ”) (in such case other than as a result of an acquisition of securities directly from the Company); or

 

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Offer Letter – Michael J. Pellini, MD

September 9, 2013

Page 5

 

  b. the date when a majority of the members of the Board of Directors of the Company is replaced during any consecutive twenty-four month period by individuals who, prior to their election, or nomination for election by the Company’s shareholders, were not approved by a majority of the members of the Board of Directors in existence on the date immediately prior to such election, appointment or nomination; or

 

  c. the consummation of (A) any consolidation or merger of the Company where the stockholders of the Company, immediately prior to the consolidation or merger, would not, immediately after the consolidation or merger, beneficially own (as such term is defined in Rule 13d-3 under the Act), directly or indirectly, shares representing in the aggregate more than 50 percent of the voting shares of the Company issuing cash or securities in the consolidation or merger (or of its ultimate parent corporation, if any), or (B) any sale or other transfer (in one transaction or a series of transactions contemplated or arranged by any party as a single plan) of all or substantially all of the assets of the Company.

Notwithstanding the foregoing, a “Change in Control” shall not include (1) an initial public offering and (2) shall not be deemed to have occurred for purposes of the foregoing clause (ii)(a) solely as the result of an acquisition of securities by the Company which, by reducing the number of shares of Voting Securities outstanding, increases the proportionate number of Voting Securities beneficially owned by any person to 50 percent or more of the combined voting power of all of the then outstanding Voting Securities; provided, however, that if any person referred to in this sentence shall thereafter become the beneficial owner of any additional shares of Voting Securities (other than pursuant to a stock split, stock dividend, or similar transaction or as a result of an acquisition of securities directly from the Company) and immediately thereafter beneficially owns 50 percent or more of the combined voting power of all of the then outstanding Voting Securities, then a “Change in Control” shall be deemed to have occurred for purposes of the foregoing clause (ii)(a).

Equity Award ” shall mean all incentive stock options, non-statutory stock options, shares of restricted stock, restricted stock units or other incentive equity awards in respect of shares of the Company’s equity securities that have been or will be granted to you by the Company.

Benefits . As a regular, full-time employee, you will be eligible to participate in the employee benefit plans that Foundation Medicine offers to members of its management team. Descriptions of the Company’s benefit plans will be available upon request. These plans may be amended or terminated from time-to-time with or without prior notice. In particular, we note that the Company currently provides group long-term disability insurance, and that it is our intention to recommend to the Board the adoption of a group life insurance benefit that is competitive with that offered by similar companies. In addition, you will be entitled to take up to twenty (20) days of vacation each calendar year and to such other holidays as Foundation Medicine recognizes for members of its management team, and you may accrue and carry-forward

 

www.foundationmedicine.com


Offer Letter – Michael J. Pellini, MD

September 9, 2013

Page 6

 

up to five (5) days of unused vacation from a calendar year into the following year (but, for clarity, such accrual may not be carried forward cumulatively over multiple years). For any calendar year in which you are employed with the Company for only a portion of such year, your vacation allowance will be pro-rated.

Terms of Employment . It is important for you to understand that Massachusetts is an “at will” employment state. This means that you will have the right to terminate your employment relationship with Foundation Medicine at any time for any reason. Similarly, Foundation Medicine will have the right to terminate its employment relationship with you at any time for any reason. Your employment and this letter will be governed by the laws of Massachusetts.

Severance . Without otherwise limiting the “at will” nature of your employment, in the event your employment is terminated at any time by the Company without Cause (as defined below) or by you for Good Reason (within three (3) months of the initial existence of the condition or event that constitutes Good Reason), the Company will (i) continue to pay you your base salary rate in effect on the date of termination for a period of 18 months following termination plus accrued but unused vacation, (ii) pay Company-paid COBRA continuation medical benefits for you (and your eligible dependents) for a period of 18 months following termination, and pay for a period of 18 months following termination for all other Company benefits in effect as of your termination, with regard to group benefit plans if and to the extent that you can continue to be covered during such period under the terms of such plans, (iii) pay any unreimbursed expenses incurred through the date of termination and reimbursable under the terms of this letter, (iv) make any other payments, benefits or fringe benefits to which you may be entitled under the terms of any applicable compensation arrangement or benefit, equity or fringe benefit plan or program or grant or this letter (including, but not limited to, any of the agreements you have relating to the Option or other equity of Foundation Medicine), and (v) if such termination occurs after March 1,2012, will also pay you, during the 60 days after the end of the calendar year in which such termination occurs, an amount equal to your target annual incentive bonus for such calendar year pro-rated for the portion of such calendar year during which you remained employed by the Company. Further, any unvested portion of any stock options and any unvested shares of common stock (that is, shares of common stock that are subject to a lapsing right of repurchase of the Company) that, but for your termination, would have vested during the period of 12 months following termination, will become vested on the effective date of such termination and shall no longer be subject to the Company’s repurchase right. The severance benefits in (i) and (ii) above shall commence within 60 days after the date your employment terminates, provided that if such 60 day period begins in one calendar year and ends in a second calendar year, such severance benefits shall commence in the second calendar year and, provided, further that if such severance benefits do not begin immediately on the date you employment terminates, the first payment thereof shall contain a “catch up” payment including all amounts that would have been paid had such severance benefits commenced on the date your employment terminated. In order to receive any and all of these severance benefits (other than under COBRA), you will be required to execute and not revoke a separation agreement with the Company that includes a general release of all known and unknown claims that you may then have against the Company or persons affiliated with the Company substantially in the form attached to this letter as Exhibit B , but with such changes as may be

 

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Offer Letter – Michael J. Pellini, MD

September 9, 2013

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necessary to make such release enforceable under applicable law to the fullest extent contemplated by the language in that form. Such separation agreement shall also provide that for three (3) years following your termination of employment that: (i) you covenant and agree that you will not make any disparaging comments, statements or communications about the Company, its affiliates, stockholders, directors, officers, employees or agents, or its management or business practices, and (ii) the Company will not (and the Company will instruct the Board of Directors and the senior executive officers of the Company to not) make any disparaging comments, statements or communications about you, provided, that these provisions shall not prohibit any party (A) from disclosing that you are no longer employed by the Company; (B) from responding truthfully to any governmental investigation, legal process or related inquiry; (C) from making reasonable competitive statements in the course of promoting a competing business, so long as any statements described in this clause (C) do not violate the Employee Non-Competition, Non-Solicitation, Confidentiality and Assignment Agreement described below; or (D) making a good faith rebuttal of the other party’s untrue or misleading statement. As used in this paragraph, the term “disparage” means any statements, whether orally, in writing or through any medium (including, but not limited to, the press or other media, computer networks or bulletin boards, or any other form of communication), that intentionally disparage, defame, or otherwise damage or assail the reputation, integrity or professionalism of the other party.

For the purposes of this letter, “ Cause ” means that one or more of the following events has occurred:

 

  (i) conviction of a felony;

 

  (ii) willful failure to substantially perform (other than by reason of disability) your duties and responsibilities as set forth in, or determined in accordance with, this letter that results in material harm to the Company, which failure continues, or which harm remains unremedied, after ten (10) days’ notice setting forth in reasonable detail the nature of such failure;

 

  (iii) material breach by you of any provision of this letter that results in material harm to the Company, which breach continues or remains uncured after ten (10) days’ notice setting forth in reasonable detail the nature of such breach; or

 

  (iv) material fraudulent conduct by you with respect to the Company.

For purposes of this letter, “ Good Reason ” means the occurrence of one or more of the following without your written consent, provided that you have complied with the Good Reason Process (as defined below):

 

  (i) a material diminution in your responsibilities, authority or duties as President and Chief Executive Officer;

 

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Offer Letter – Michael J. Pellini, MD

September 9, 2013

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  (ii) a material diminution in your base salary, except for across-the-board salary reductions based on the Company’s financial performance similarly affecting all or substantially all senior management employees of the Company; or\

 

  (iii) a material breach by the Company of this letter or any of the agreements you have with the Company relating to the Option or other equity of Foundation Medicine.

For purposes of this letter, the “ Good Reason Process ” means that (a) you reasonably determine that a Good Reason condition has occurred, (b) you notify the Company in writing of the first occurrence of the Good Reason condition within sixty (60) days of the first occurrence of such condition, (c) you cooperates in good faith with the Company’s efforts, for a period of not less than thirty (30) days following such notice (the “Cure Period”), to remedy the Good Reason condition, (d) notwithstanding such efforts the Good Reason condition continues to exist, and (e) you terminate your employment within sixty (60) days after the end of the Cure Period. If the Company cures the Good Reason condition during the Cure Period, Good Reason shall be deemed not to have occurred.

In the event that your employment is terminated by the Company for Cause or by you other than for Good Reason (as provided above), you shall be entitled to receive within ten (10) days of termination only (i) any base salary earned through the date of termination, plus accrued but unused vacation, (ii) payment of any unreimbursed expenses incurred through the date of termination and reimbursable under the terms of this letter, and (iii) any other payments, benefits or fringe benefits to which you may be entitled under the terms of any applicable compensation arrangement or benefit, equity or fringe benefit plan or program or grant or this letter (including, but not limited to, any of the agreements you have with the Company relating to the Option or other equity of Foundation Medicine, but, for clarity, the Company shall have no obligation to pay any bonus as contemplated above). However, if your employment is terminated as a result of your death or disability, the Company will pay Company-paid COBRA continuation medical benefits for you (and your eligible dependents) for a period of 18 months following termination.

No provision of this letter will be deemed to waive any of your rights under the Family and Medical Leave Act of 1993, 29 U.S.C. § 2601 et seq. and the Americans with Disabilities Act, 42 U.S.C. § 12101 et seq . and any other applicable federal, state or local anti-discrimination laws. You will not be required to mitigate the amount of any payment provided for in this letter by seeking other employment or otherwise, nor will the amount of any payment provided for herein be reduced by any compensation earned by you as a result of employment by another employer or consulting for another company or by retirement benefits after the date of termination of your employment. Upon any termination of you employment hereunder, you will be entitled to participate in the Company’s group health plan to the extent authorized by 29 U.S.C. § 1161 et seq. (“COBRA”), with such participation at your expense to commence on the later of termination of employment or termination of the period in which post-termination benefits are provided hereunder.

Section 409A Compliance . Any severance payments to you pursuant to the Severance section above (and the corresponding provisions in any stock option agreement and/or restricted stock

 

www.foundationmedicine.com


Offer Letter – Michael J. Pellini, MD

September 9, 2013

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agreement between the Company and you, if applicable) shall begin only after the date of your “separation from service” (within the meaning of Section 409A of the Internal Revenue Code of 1986 (as amended or replaced) (the “Code”), which may occur on or after the date of the termination of your employment, and shall be subject to the following provisions:

 

  (i) It is intended that each installment of the severance payments (and the corresponding provisions in any stock option agreement and/or restricted stock agreement between the Company and you, if applicable) shall be treated as a separate “payment” for purposes of Section 409A of the Code. Neither the Company nor you shall have the right to accelerate or defer the delivery of any such payments except to the extent specifically permitted or required by Section 409A.

 

  (ii) If, as of the date of your “separation from service” from the Company, you are not a “specified employee” (within the meaning of Section 409A), then each installment of the severance payments shall be made on the dates and terms set forth in this letter (and any corresponding provisions in any stock option agreement and/or restricted stock agreement between the Company and you, if applicable).

 

  (iii) If, as of the date of your “separation from service” from the Company, you are a “specified employee” (within the meaning of Section 409A), then:

A. Each installment of the severance payments that, in accordance with the dates and terms set forth in this letter, will in all circumstances, regardless of when the “separation from service” occurs, be paid within the Short-Term Deferral Period (as defined below) shall be treated as a “short-term deferral” within the meaning of Treasury Regulation Section 1.409A-I(b)(4) to the maximum extent permissible under Section 409A. “Short-Term Deferral Period” means the period ending on the later of the 15th day of the third month following the end of your tax year in which the “separation from service” occurs and the 15th day of the third month following the end of the Company’s tax year in which the “separation from service” occurs; and

B. Each installment of the severance payments that is not described in clause (iii)(A) above and that would, absent this clause (B), be paid within the six-month period following your “separation from service” from the Company shall not be paid until the date that is six months and one day after such “separation from service” (or, if earlier, your death), with any such installments that are required to be delayed being accumulated during the six-month period and paid in a lump sum on the date that is six months and one day following your “separation from service” and any subsequent installments, if any, being paid in accordance with the dates and terms set forth in this letter; provided, however, that the preceding provisions of this clause (B) shall not apply to any installment of severance payments and

 

www.foundationmedicine.com


Offer Letter – Michael J. Pellini, MD

September 9, 2013

Page 10

 

benefits if and to the maximum extent that that such installment is deemed to be paid under a separation pay plan that does not provide for a deferral of compensation by reason of the application of Treasury Regulation 1.409A-1(b)(9)(iii) (relating to separation pay upon an involuntary separation from service). Any installments that qualify for the exception under Treasury Regulation Section 1.409A-1(b)(9)(iii) must be paid no later than the last day of your second taxable year following the taxable year in which the “separation from service” occurs.

 

  (iv) The determination of whether and when your “separation from service” from the Company has occurred shall be made in a manner consistent with, and based on the presumptions set forth in, Treasury Regulation Section 1.409A-l(h). Solely for purposes of this paragraph (iv), “Company” shall include all persons with whom the Company would be considered a single employer under Sections 414(b) and 414(c) of the Code.

 

  (v) All reimbursements and in-kind benefits provided under this letter shall be made or provided in accordance with the requirements of Section 409A to the extent that such reimbursements or in-kind benefits are subject to Section 409A.

 

  (vi) Notwithstanding any other provision of this letter (or in any stock option agreement and/or restricted stock agreement between the Company and you, if applicable), the Company shall have no liability to you or to any other person if any provisions of this letter that are intended to be exempt from or compliant with Section 409A are not so exempt or compliant.

Section 280G Treatment - Pre-IPO . This paragraph shall apply at all time prior to an initial public offering of the Company’s securities. If any payments made, benefits provided or equity awards accelerated to or with regard to you, either separately or in conjunction with other payments, benefits and entitlements, would constitute an “excess parachute payment” within the meaning of Section 280G of the Code, and thereby is subject to the excise tax imposed by Section 4999 of the Code (the “Excise Tax”), then in such event at your request the Company will submit for approval or disapproval of the stockholders of the Company, in accordance with the procedures set forth in Section 280G(b)(5) of the Code and the Treasury Regulations promulgated thereunder, your right to receive such payments, benefits and/or equity awards, provided however that you agree to first execute a customary waiver with regard to the portion of such payments, benefits and/or equity awards subject to the Excise Tax (to enable effective stockholder approval vote for exemption in situations where exemption is available).

Section 280G Treatment - Post-IPO . This paragraph shall apply at all time after an initial public offering of the Company’s securities. If any payments made, benefits provided or equity awards accelerated to or with regard to you, either separately or in conjunction with other payments, benefits and entitlements, would constitute an “excess parachute payment” within the meaning of Section 280G of the Code, and thereby is subject to the excise tax imposed by Section 4999 of the Code (the “Excise Tax”), then in such event the Company also will pay to

 

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Offer Letter – Michael J. Pellini, MD

September 9, 2013

Page 11

 

you a “gross-up” payment in an amount equal to 100% of the amount of the Excise Tax (with regard to all payments, benefits and equity award acceleration) plus 100% of all U.S. federal, state and local income tax or any additional excise tax with respect to any such gross-up payment. Accountants, selected by the Company and that are reasonably acceptable to you, will make, in writing and in good faith, any calculation required under this paragraph unless the Company and you otherwise agree in writing. The accountants may make reasonable assumptions and approximations in applying applicable tax law to make their calculations. The Company and you will furnish to the accountants any information and documents that the accountants may reasonably request. Any gross-up payment shall be paid within sixty (60) days following the determination of the Excise Tax as determined by the accountants but in no event later than the end of the calendar year next following the calendar year in which the related tax is paid by you. Any adjustments made by the Internal Revenue Service shall be treated similarly as provided in this paragraph.

Non-Competition, Non-Solicitation, Confidentiality and Assignment Agreement . As part of your employment with Foundation Medicine, you will be exposed to, and provided with, valuable confidential and/or trade secret information concerning Foundation Medicine and its present and future business plans and operations. As a result, in order to protect Foundation Medicine’s legitimate business interests you agree, as a condition of your employment, to sign the Company’s Employee Non-Competition, Non-Solicitation, Confidentiality and Assignment Agreement , a copy of which is attached to this letter as Exhibit C .

D&O Insurance . The Company will include you within the coverage of any directors and officers’ liability insurance policy to the full extent that any other director or other executive officer of the Company, as applicable, is so covered. This paragraph will survive the termination of your employment with the Company and while potential liability exists.

No Conflicting Agreements . We understand that you currently are not subject to any agreements that restrict your activities for Foundation Medicine. By accepting this offer, you represent that you are not subject to any agreements which might restrict your conduct at Foundation Medicine; and that you understand that if you become aware at any time during your employment with Foundation Medicine that you are subject to any agreements which might restrict your conduct at Foundation Medicine, you are required to immediately inform Foundation Medicine of the existence of such agreements or your employment by Foundation Medicine could be subject to termination.

I-9 Employment Verification Form . In addition, the Immigration Reform and Control Act requires employers to verify employment eligibility and identity of new employees. This offer of employment is contingent on your signing an I-9 Employment Verification Form no later than your first day of employment, and you must provide us with appropriate documents to establish your eligibility to work in the United States (for example, Social Security Card, Drivers’ License, U.S. Passport). We will not be able to employ you if you fail to comply with this requirement.

Entire Agreement . This letter, together with Exhibits A, B, C and the Annex (which are incorporated into this letter by reference), will constitute the entire agreement as to your employment relationship with Foundation Medicine and will supersede any prior agreements or understandings, whether in writing or oral.

 

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Offer Letter – Michael J. Pellini, MD

September 9, 2013

Page 12

 

You reaffirm the effectiveness of your existing Employee Non-Competition, Non-Solicitation, Confidentiality and Assignment Agreement, a copy of which is attached to this Amended and Restated Offer of Employment as Exhibit C . The interpretation of this Offer Letter will be governed by the laws of Massachusetts, without regard to the conflicts of laws principles thereof.

 

www.foundationmedicine.com


Offer Letter – Michael J. Pellini, MD

September 9, 2013

Page 13

 

Please indicate your agreement to the terms herein by countersigning in the place indicated below.

 

FOUNDATION MEDICINE, INC.
Name  

/s/ Alexis Borisy

Title  

Chairman

Date  

September 9, 2013

Accepted and agreed by:

 

/s/ Michael J. Pellini

Michael J. Pellini

 

www.foundationmedicine.com


LOGO

EXHIBIT A

Equity Schedule

The table below contains information regarding stock option awards. Except for information regarding the designation of a stock option award as an Acceleration Equity Award or Non-Acceleration Equity Award, the information furnished is for reference purposes only. In the event of a conflict between the information furnished in this table and the Stock Option Agreement for such stock option award, the terms and conditions of the Stock Option Agreement shall govern. You should refer to each Stock Option Agreement for the individual terms and conditions of such stock option award.

 

Grant    

Grant Date

   Acceleration Rights
     IPO   

Change of Control

  2,200,000      May 9, 2011    Yes    Acceleration Equity Award
  592,634      January 11, 2012    Yes    Acceleration Equity Award
  390,995      March 27, 2012    No    Acceleration Equity Award
  350,000      March 7, 2013    No    Acceleration Equity Award
  350,000   May 21, 2013    No    Acceleration Equity Award

 

* grant is subject to conditional vesting terms which are defined in the option agreement

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EXHIBIT B

Form of General Release

You hereby acknowledge and agree that by signing this letter agreement and accepting the [Severance Benefits], you are waiving your right to assert any form of legal claim, charge, complaint or any other form of action against the Foundation Medicine Releasees (as defined below) of any kind whatsoever, seeking any Relief against the Foundation Medicine Releasees, from the beginning of time up through and including the later of the [Effective Date] or the [Separation Date], arising from or related to, in whole or in part, the Subject Matter (as defined below) (collectively referred to as “ Claims ”). You understand that there could be unknown or unanticipated Claims arising from or related to the Subject Matter, and agree that such Claims are intended to be, and are, included in this waiver and release, provided, however, that nothing in this release shall prevent you from asserting (a) any future claim for indemnification that you may have at law or pursuant to (i) the Company’s certificate of incorporation and/or by-laws, (ii) the employment offer letter between you and Foundation Medicine, Inc. dated as of March     , 2011, and any other written agreement to which you and one or more of the Foundation Medicine Entities (as defined below) are party, and (iii) any governing document concerning a group benefit plan provided by or sponsored by the Foundation Medicine Entities and in which you are a participant, administrator or fiduciary, (b) any rights you may have as the holder of securities of Foundation Medicine, Inc. or under any agreements to which you are a party as a holder of the Company’s securities, or (c) any claim for insurance coverage or costs of defense available to you under any policy maintained by the Foundation Medicine Entities.

Foundation Medicine Entities ” means Foundation Medicine, Inc. and any and all of its affiliates and subsidiaries. “ Foundation Medicine Releasees ” means the Foundation Medicine Entities, and each of their stockholders, directors, officers, employees, agents, successors and assigns. “Relief” means any and all form of relief including, without limitation, equitable relief (whether declaratory, injunctive or otherwise), the recovery of any damages or any other form of monetary recovery whatsoever (including, without limitation, back pay, front pay, benefits under any bonus or equity compensation plan, compensatory damages, emotional distress damages, punitive damages, attorneys’ fees and any other costs). “ Subject Matter ” means your employment with, service to, or engagement or interaction in any capacity with the Foundation Medicine Entities, and the termination of any such employment, service, engagement or interaction, including but not limited to any agreements, grant forms, plan documents, or other documents having legal significance to which you and one or more of the Foundation Medicine Entities are a party or are subject.

Without limiting the foregoing general waiver and release, you specifically waive and release the Foundation Medicine Releasees from any Claims arising from or related to your employment relationship with the Foundation Medicine Entities or the termination thereof, including without limitation: (i) Claims under any state (including, without limitation, Massachusetts, California or any other state where you worked for the Foundation Medicine Entities) or federal discrimination (including but not limited to the Age Discrimination in Employment Act and Title VII of the Civil Rights Act of 1964), fair employment practices, “whistleblower” or other employment related statute, regulation or executive order (as they may have been amended through the date on which you sign this letter agreement); (ii) Claims under


any other state (including, without limitation, Massachusetts, California or any other state where you worked for the Foundation Medicine Entities) or federal employment related statute, regulation or executive order (as they may have been amended through the date on which you sign this letter agreement) relating to wages hours or any other terms and conditions of employment; (iii) Claims under any state (including, without limitation, Massachusetts, California or any other state where you worked for the Foundation Medicine Entities) or federal common law theory; and (iv) any other Claims arising under other state or federal law.

In addition to the foregoing, you hereby agree that you are waiving all rights under Paragraph 1542 of the Civil Code of the State of California. Paragraph 1542 provides that:

“A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor.”

Pursuant to Paragraph 1542, you acknowledge that you may hereafter discover facts different from or in addition to facts which you now know or believe to be true with regard to the released claims, and further agree that this letter agreement shall remain effective in all respects not withstanding such discovery of new or different facts, including any such facts which may give rise to currently unknown claims including but not limited to any claims or rights which you may have under Paragraph 1542 of the California Civil Code or any similar law or doctrine of any other state.

Notwithstanding the foregoing, this [Section     ] will not release Foundation Medicine from its obligation to provide the Severance Benefits or with respect to distributions not yet made to you under the terms of Foundation Medicine, Inc.’s 401(k) plan.

You acknowledge and agree that, but for providing this waiver and release, you would not be receiving the Severance Benefits.

Because you are over 40 years of age, you are granted specific rights under the Older Workers Benefit Protection Act (OWBPA), which prohibits discrimination on the basis of age. The release set forth in this [Section     ] is intended to release any rights you may have against the Foundation Medicine Releasees alleging discrimination on the basis of age. The provisions of OWBPA require that you be given 21 days to consider this letter agreement. However, we are providing you with 45 days (or until                     ) to consider and accept the provisions of this letter agreement. In addition, you may rescind your assent to this letter agreement if, within seven days after the date you sign this letter agreement you deliver a written notice of rescission to me. To be effective, such notice of rescission must be postmarked, and sent by certified mail, return receipt requested, or delivered in-hand within the seven-day period to me at Foundation Medicine, Inc., [address]. On the eighth day following your execution of this letter agreement, it will become final and binding on all parties.

Consistent with federal discrimination laws, nothing in this release shall be deemed to prohibit you from challenging the validity of this release under federal discrimination laws or from filing a charge or complaint of age or other employment related discrimination with the Equal Employment Opportunity Commission (“EEOC”), or from participating in any investigation or proceeding conducted by the EEOC. Further, nothing in this release or letter agreement shall be deemed to limit the Foundation Medicine Entities’ right to seek immediate dismissal of such charge or complaint on the basis that your signing of this letter agreement


constitutes a full release of any individual rights under federal discrimination laws or the Foundation Medicine Entities’ right to seek restitution or other legal remedies to the extent permitted by law of the economic benefits provided to you under this letter agreement in the event that you successfully challenge the validity of this release and prevail in any claim under federal discrimination laws.


EXHIBIT C

Employee Non-Competition, Non-Solicitation, Confidentiality and Assignment Agreement

(ATTACHED)


Standard Foundation Medicine Form

New Employee Agreement

Revisions Approved November 29, 2010

MODIFIED FOR MICHAEL J. PELLINI, MD

Employee Non-Competition, Non-Solicitation,

Confidentiality and Assignment Agreement

In consideration and as a condition of my employment or continued employment by Foundation Medicine, Inc. (the “Company”), I hereby agree as follows:

 

1. Proprietary Information . I agree that all information, whether or not in writing, whether or not disclosed before or after I was first employed by the Company, concerning the Company’s business, technology, business relationships or financial affairs that the Company has not released to the general public (collectively, “Proprietary Information”), and all tangible embodiments thereof, are and will be the exclusive property of the Company. By way of illustration, Proprietary Information may include information or material that has not been made generally available to the public, such as: (a)  corporate information , including plans, strategies, methods, policies, resolutions, notes, email correspondence, negotiations or litigation; (b)  marketing information , including strategies, methods, customer identities or other information about customers, prospect identities or other information about prospects, or market analyses or projections; (c)  financial information , including cost and performance data, debt arrangements, equity structure, investors and holdings, purchasing and sales data and price lists; and (d)  operational and technological information , including plans, specifications, manuals, forms, templates, software, designs, methods, procedures, formulas, discoveries, inventions, improvements, biological or chemical materials, concepts and ideas; and (e)  personnel information , including personnel lists, reporting or organizational structure, resumes, personnel data, compensation structure, performance evaluations and termination arrangements or documents. Proprietary Information includes, without limitation, (1) information received in confidence by the Company from its customers or suppliers or other third parties, and (2) all biological or chemical materials and other tangible embodiments of the Proprietary Information.

2. Recognition of Company’s Rights . I will not, at any time, without the Company’s prior written permission, either during or after my employment, disclose or transfer any Proprietary Information to anyone outside of the Company, or use or permit to be used any Proprietary Information for any purpose other than the performance of my duties as an

employee of the Company. I will cooperate with the Company and use my best efforts to prevent the unauthorized disclosure of all Proprietary Information. I will deliver to the Company all copies and other tangible embodiments of Proprietary Information in my possession or control upon the earlier of a request by the Company or termination of my employment.

3. Rights of Others . I understand that the Company is now and may hereafter be subject to non-disclosure or confidentiality agreements with third persons that require the Company to protect or refrain from use of proprietary information. I agree to be bound by the terms of such agreements in the event I have access to such proprietary information.

4. Commitment to Company; Avoidance of Conflict of Interest . While an employee of the Company, I will devote my full-time efforts to the Company’s business and I will not engage in any other business activity that conflicts with my duties to the Company. I will advise the President of the Company or his or her nominee at such time as any activity of either the Company or another business presents me with a conflict of interest or the appearance of a conflict of interest as an employee of the Company. I will take whatever action is requested of me by the Company to resolve any conflict or appearance of conflict that it finds to exist.

5. Developments . I hereby assign and transfer and, to the extent any such assignment cannot be made at present, will assign and transfer, to the Company and its successors and assigns, all my right, title and interest in and to all Developments (as defined below) that: (a) are created, developed, made, conceived or reduced to practice by me (alone or jointly with others) or under my direction (collectively, “conceived”) during the period of my employment and six (6) months thereafter and that relate to the business of the Company or to products, methods or services being researched, developed, manufactured or sold by the Company; or (b) result from tasks assigned to me by the Company; or (c) result from the use of premises, Proprietary

 


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Information or personal property (whether tangible or intangible) owned, licensed or leased by the Company (collectively, “Company-Related Developments”), and all patent rights, trademarks, copyrights and other intellectual property rights in all countries and territories worldwide claiming, covering or otherwise arising from or pertaining to Company-Related Developments (collectively, “Intellectual Property Rights”). I further agree that “Company-Related Developments” include, without limitation, all Developments that (i) were conceived by me before my employment, (ii) relate to the business of the Company or to products, methods or services being researched, developed, manufactured or sold by the Company, and (iii) were not subject to an obligation to assign to another entity when conceived. I will make full and prompt disclosure to the Company of all Company-Related Developments, as well as all other Developments conceived by me during the period of my employment and six (6) months thereafter. I acknowledge that all work performed by me as an employee of the Company is on a “work for hire” basis. I hereby waive all claims to any moral rights or other special rights that I may have or accrue in any Company-Related Developments.

“Developments” mean inventions, discoveries, designs, developments, methods, modifications, improvements, processes, biological or chemical materials, algorithms, databases, computer programs, formulae, techniques, trade secrets, graphics or images, audio or visual works, and other works of authorship.

If, in the course of my employment with the Company, I incorporate a Development conceived by me before my employment that are not Company-Related Developments (“Prior Inventions”) into a Company product, process or research or development program or other work done for the Company, I hereby grant to the Company a nonexclusive, royalty-free, fully paid-up, irrevocable, perpetual, worldwide license (with the full right to sublicense through multiple tiers) to make, have made, modify, use, offer for sale, import and sell such Prior Invention. Notwithstanding the foregoing, I will not incorporate, or permit to be incorporated, Prior Inventions in any Company-Related Development without the Company’s prior written consent.

I understand that to the extent this Agreement is required to be construed in accordance with the laws

of any state which precludes a requirement in an employee agreement to assign certain classes of inventions made by an employee, this Section will be interpreted not to apply to any invention which a court rules and/or the Company agrees falls within such classes.

6. Documents and Other Materials . I will keep and maintain adequate and current records of all Proprietary Information and Company-Related Developments conceived by me, which records will be available to and remain the sole property of the Company at all times. All files, letters, notes, memoranda, reports, records, data, sketches, drawings, notebooks, layouts, charts, quotations and proposals, specification sheets, program listings, blueprints, models, prototypes, materials or other written, photographic or other tangible material containing or embodying Proprietary Information, whether created by me or others, which come into my custody or possession, are the exclusive property of the Company to be used by me only in the performance of my duties for the Company. In the event of the termination of my employment for any reason, I will deliver to the Company all of the foregoing, and all other materials of any nature pertaining to the Proprietary Information of the Company and to my work, and will not take or keep in my possession any of the foregoing or any copies. Any property situated on the Company’s premises and owned by the Company, including laboratory space, computers, disks and other storage media, filing cabinets or other work areas, is subject to inspection by the Company at any time with or without notice.

7. Enforcement of Intellectual Property Rights . I will cooperate fully with the Company, both during and after my employment with the Company, with respect to the procurement, maintenance and enforcement of Intellectual Property Rights, as well as all other patent rights, trademarks, copyrights and other intellectual property rights in all countries and territories worldwide owned by or licensed to the Company. I will sign, both during and after the term of this Agreement, all papers, including copyright applications, patent applications, declarations, oaths, assignments of priority rights, and powers of attorney, which the Company may deem necessary or desirable in order to protect its rights and interests in any Company-Related Development or Intellectual Property Rights. If the Company is unable, after reasonable effort, to secure my signature on any such papers, I hereby

 


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irrevocably designate and appoint each officer of the Company as my agent and attorney-in-fact to execute any such papers on my behalf, and to take any and all actions as the Company may deem necessary or desirable in order to protect its rights and interests in the same.

8. Non-Competition and Non-Solicitation . In order to protect the Company’s Proprietary Information and good will, during my employment and for a period of one (1) year following the termination of my employment for any reason (the “Restricted Period”), I will not directly or indirectly, whether as owner, partner, shareholder, director, consultant, agent, employee, co-venturer or otherwise, engage, participate or invest in any business activity anywhere in the world that develops, manufactures or markets any products, or performs any services, that are otherwise directly competitive with the products or services of the Company, or products or services that the Company has under development or that are the subject of active planning at any time during my employment; provided that this will not prohibit any possible investment in publicly traded stock of a company representing less than one percent of the stock of such company. In addition, during the Restricted Period, I will not, directly or indirectly, in any manner, other than for the benefit of the Company, (a) call upon, solicit, divert or take away any of the customers, business or prospective customers of the Company or any of its suppliers, and/or (b) solicit, entice or attempt to persuade any other employee or consultant of the Company to leave the services of the Company for any reason. I acknowledge and agree that if I violate any of the provisions of this Section, the running of the Restricted Period will be extended by the time during which I engage in such violation(s).

9. Government Contracts . I acknowledge that the Company may have from time to time agreements with other persons or with the United States Government or its agencies that impose obligations or restrictions on the Company regarding inventions made during the course of work under such agreements or regarding the confidential nature of such work. I agree to comply with any such obligations or restrictions upon the direction of the Company. In addition to the rights assigned under Section 5, I also assign to the Company (or any of its nominees) all rights which I have or acquired in any Developments, full title to which is required to be in the United States under any contract between the

Company and the United States or any of its agencies.

10. Prior Agreements . I hereby represent that, except as I have fully disclosed previously in writing to the Company, I am not bound by the terms of any agreement with any previous employer or other party to refrain from using or disclosing any trade secret or confidential or proprietary information in the course of my employment with the Company or to refrain from competing, directly or indirectly, with the business of such previous employer or any other party. I further represent that my performance of all the terms of this Agreement as an employee of the Company does not and will not breach any agreement to keep in confidence proprietary information, knowledge or data acquired by me in confidence or in trust prior to my employment with the Company. I will not disclose to the Company or induce the Company to use any confidential or proprietary information or material belonging to any previous employer or others.

11. Remedies Upon Breach . I understand that the restrictions contained in this Agreement are necessary for the protection of the business and goodwill of the Company and I consider them to be reasonable for such purpose. Any breach of this Agreement is likely to cause the Company substantial and irrevocable damage and therefore, in the event of such breach, the Company, in addition to such other remedies that may be available, will be entitled to specific performance and other injunctive relief.

12. Publications and Public Statements . I will obtain the Company’s written approval before publishing or submitting for publication any material that relates to my work at the Company and/or incorporates any Proprietary Information. To ensure that the Company delivers a consistent message about its products, services and operations to the public, and further in recognition that even positive statements may have a detrimental effect on the Company in certain securities transactions and other contexts, any statement about the Company which I create, publish or post during my period of employment and for six (6) months thereafter, on any media accessible by the public, including but not limited to electronic bulletin boards and Internet-based chat rooms, must first be reviewed and approved by an officer of the Company before it is released in the public domain.

 


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13. No Employment Obligation . I understand that this Agreement does not create an obligation on the Company or any other person to continue my employment. I acknowledge that, unless otherwise agreed in a formal written employment agreement signed on behalf of the Company by an authorized officer, my employment with the Company is at will and therefore may be terminated by the Company or me at any time and for any reason.

14. Survival and Assignment by the Company . I understand that my obligations under this Agreement will continue in accordance with its express terms regardless of any changes in my title, position, duties, salary, compensation or benefits or other terms and conditions of employment. I further understand that my obligations under this Agreement will continue following the termination of my employment regardless of the manner of such termination and will be binding upon my heirs, executors and administrators. The Company will have the right to assign this Agreement to its affiliates, successors and assigns. I expressly consent to be bound by the provisions of this Agreement for the benefit of the Company or any parent, subsidiary or affiliate to whose employ I may be transferred without the necessity that this Agreement be resigned at the time of such transfer.

15. Disclosure to Future Employers . I will provide a copy of this Agreement to any prospective employer, partner or co-venturer prior to entering into an employment, partnership or other business relationship with such person or entity.

16. Exit Interview . If and when I depart from the Company, I may be required to attend an exit interview and sign an “Employee Exit Acknowledgement” to reaffirm my acceptance and acknowledgement of the obligations set forth in this Agreement. During the Restricted Period following termination of my employment, I will notify the Company of any change in my address and of each subsequent employment or business activity, including the name and address of my employer or other post-Company employment plans and the nature of my activities.

17. Severability . In case any provisions (or portions thereof) contained in this Agreement will, for any reason, be held invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability will not affect the other provisions of this Agreement, and this Agreement will be construed as if such invalid, illegal or unenforceable provision had never been contained herein. If, moreover, any one or more of the provisions contained in this Agreement

will for any reason be held to be excessively broad as to duration, geographical scope, activity or subject, it will be construed by limiting and reducing it, so as to be enforceable to the extent compatible with the applicable law as it will then appear.

18. Entire Agreement . This Agreement constitutes the entire and only agreement between the Company and me respecting the subject matter hereof, and supersedes all prior agreements and understandings, oral or written, between us concerning such subject matter. No modification, amendment, waiver or termination of this Agreement or of any provision hereof will be binding unless made in writing and signed by an authorized officer of the Company. Failure of the Company to insist upon strict compliance with any of the terms, covenants or conditions hereof will not be deemed a waiver of such terms, covenants or conditions. In the event of any inconsistency between this Agreement and any other contract between the Company and me, the provisions of this Agreement will prevail.

19. Interpretation . This Agreement will be deemed to be made and entered into in the Commonwealth of Massachusetts, and will in all respects be interpreted, enforced and governed under the laws of the Commonwealth of Massachusetts. I hereby agree to consent to personal jurisdiction of the state and federal courts situated within Suffolk County, Massachusetts for purposes of enforcing this Agreement, and waive any objection that I might have to personal jurisdiction or venue in those courts. As used in this Agreement, “including” means “including but not limited to.”

BY SIGNING BELOW, I CERTIFY THAT I HAVE READ THIS AGREEMENT CAREFULLY AND AM SATISFIED THAT I UNDERSTAND IT COMPLETELY.

IN WITNESS WHEREOF , the undersigned has executed this agreement as a sealed instrument as of the date set forth below.

 

Signed:  

/s/ Michael J. Pellini

  (Employee’s full name)
 


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Type or print name:   

Michael J. Pellini

 

Date:   

5/9/11

 


EXHIBIT A

 

TO:   Foundation Medicine, Inc.
FROM:   Michael J. Pellini
DATE:   5/9/11
SUBJECT:   Prior Inventions
     The following is a complete list of all inventions or improvements relevant to the subject matter of my employment by the Company that have been made or conceived or first reduced to practice by me alone or jointly with others prior to my engagement by the Company:
  x    No inventions or improvements
  ¨    See below:
    

 

    

 

    

 

    

 

  ¨    Additional sheets attached
     The following is a list of all patents, patent applications and other patent rights that I have invented:
  x    None
  ¨    See below:
    

 

    

 

    

 

    

 

EXHIBIT 10.7

 

  

LOGO

 

One Kendall Square, Suite B3501 Cambridge Massachusetts 02139

TEL 617.418.2200

FAX 617.418.2201

 

May 21, 2013

Steven Kafka, Ph.D.

 

Re: Employment with Foundation Medicine, Inc.

Dear Steve:

This letter agreement (this “Agreement”) sets forth the terms and conditions of your continued employment with Foundation Medicine, Inc. (“Foundation Medicine” or “the Company”). Upon your execution of this Agreement, this Agreement shall be effective as of the date set forth above. This Agreement shall fully supersede all prior agreements between you and the Company relating to the subject matter herein including, without limitation, any prior offer letter or agreement, plan or arrangement relating to severance pay or benefits. Defined terms used in this Agreement may be found generally within the provisions of this Agreement or specifically in the section of this Agreement entitled “Definitions.”

Your position will continue to be Chief Operating Officer, reporting to Mike Pellini, CEO. You will also continue to be a member of the Company’s Executive Management Team. In addition to performing duties and responsibilities associated with the position above, from time-to-time the Company may assign you other duties and responsibilities consistent with such position.

Salary, Annual Cash Bonus Opportunity and Expense Reimbursement. You will be paid on a salary basis at an annual rate of $320,000.00, payable twice per month in accordance with Foundation Medicine’s standard payroll practices, subject to customary deductions and withholdings and subject to adjustment by the Company in its discretion. You will be eligible for annual merit salary reviews in accordance with the Company’s compensation practices.

Additionally, as a member of the Company’s Executive Management Team, you will be eligible for participation in the Company’s bonus program. At the discretion of the Company’s Board of Directors (the “Board”) and in accordance with the terms and conditions of the bonus program,


Steven Kafka, Ph.D.

May 21, 2013

Page 2

 

you will be considered for a bonus payment under the Company’s bonus program. If participation in a bonus program is provided, you shall be eligible to participate with a target of up to 40% of your then annual base salary, such target to be subject to adjustment by the Company in its discretion. You must be employed by the Company at the time a bonus is paid to earn any part of a bonus. Also, the Company will reimburse your reasonable out-of-pocket travel expenses and other expenses related to your work in accordance with the Company’s expense reimbursement policy.

Equity Awards . A list of all Equity Awards granted to you by the Company as of the date of this Agreement is attached as Exhibit A (the “Equity Schedule”). The Equity Awards are subject to the terms and conditions of the Company’s incentive equity plan(s), as may be amended from time to time, and associated award agreements (collectively, and together with the Equity Schedule, the “Equity Documents”).

Certain Equity Awards have been granted acceleration rights described below and are designated as Acceleration Equity Awards on the Equity Schedule (the “Acceleration Equity Awards”). Equity Awards not granted Acceleration Rights by the Company are designated as Non-Acceleration Equity Awards on the Equity Schedule (the “Non-Acceleration Equity Awards”). Any Equity Awards granted to you by the Company that are not listed on the Equity Schedule shall be considered Non-Acceleration Equity Awards, unless and until they are granted Acceleration Equity Award status by the Board. Consistent with the Equity Documents, the Equity Schedule may be amended from time to time by the Company to add Acceleration Equity Awards or to add Non-Acceleration Equity Awards, and to convert Non-Acceleration Equity Awards to Acceleration Equity Awards. Each amendment to the Equity Schedule shall be consecutively numbered and dated, shall make express reference to this Agreement, shall supersede the immediately preceding Equity Schedule, and following issuance shall be incorporated into this Agreement and shall constitute one of the Equity Documents.

Subject to the further provisions of this Agreement and the Equity Documents, vesting of the Acceleration Equity Awards shall accelerate with regard to the entire remaining unvested portion of such Acceleration Equity Awards in the event that within 18 months following a Change in Control (i) your employment is terminated by the Company without Cause, or (ii) you terminate your employment with the Company for Good Reason in accordance with the Good Reason Process.

Severance Payments . Without otherwise limiting the “at will” nature of your employment if:

 

  (i) your employment is terminated by the Company without Cause at any time, or

 

  (ii) within 18 months following a Change in Control you terminate your employment with the Company for Good Reason in accordance with the Good Reason Process,

and, in either event, you enter into and comply with a Release, the Company shall pay or provide you:

 

  (y) Salary Continuation, subject to the mitigation described below, and

 

  (z) Health Care Continuation (collectively, the “Severance Payments”) for a period of nine (9) months following your termination date (the “Salary Continuation Period”).


Steven Kafka, Ph.D.

May 21, 2013

Page 3

 

Mitigation and Compliance. Notwithstanding the foregoing, if you are entitled to Salary Continuation as set forth above and you commence any employment or self-employment during the Salary Continuation Period on terms and conditions in the aggregate that are comparable to the terms and conditions of your employment at the Company immediately prior to your termination date, the amount of your Salary Continuation after you commence such employment or self-employment shall be decreased by the amount received pursuant to such employment or self-employment from and following the date you commence such employment. You shall give prompt notice to the Company if you commence such employment or self-employment during the Salary Continuation Period and you shall respond promptly to any reasonable inquiries from the Company concerning such employment or self-employment during such Salary Continuation Period. In addition, if you breach the terms of the Release, the Company shall have the right to terminate or cease payment of the Salary Continuation. Notwithstanding the foregoing, this mitigation provision shall not be construed to affect your right to receive Health Care Continuation during the Salary Continuation Period so long as you are not eligible for health benefits through another employer.

Non-Eligibility for Severance Payments or Equity Award Acceleration . For the avoidance of doubt, you and the Company acknowledge that if your employment is terminated: (i) by the Company for Cause, (ii) by you without Good Reason, (iii) by you with Good Reason following a Change in Control but without complying with the Good Reason Process, or (iv) as a result of your death or disability, then, as a result of such termination, (w) you shall not be entitled to Severance Payments, (x) you shall be entitled to receive only base salary earned plus accrued but unused vacation pay through the date of termination, (y) the unvested portion of your Equity Awards will not accelerate and (z) your Equity Awards shall expire or be forfeited in accordance with the terms of the Equity Documents.

Section 409A Compliance. To the extent that any Severance Payments or other benefits to you constitute “non-qualified deferred compensation” under Section 409A of the Internal Revenue Code of 1986 (as amended or replaced) (the “Code”), then such Severance Payments or benefits shall begin only upon or after the date of your “separation from service” (within the meaning of Section 409A of the Code), which may occur on or after the date of the termination of your employment. Neither the Company nor you shall have the right to accelerate or defer the delivery of any such payments except to the extent specifically permitted or required by Section 409A.

Anything to the contrary notwithstanding, if at the time of the your separation from service within the meaning of Section 409A of the Code, the Company determines that you are a “specified employee” within the meaning of Section 409A(a)(2)(B)(i) of the Code, then to the extent any payment or benefit that you become entitled to under this Agreement on account of your separation from service would be considered deferred compensation otherwise subject to the 20% additional tax imposed pursuant to Section 409A(a) of the Code as a result of the application of Section 409A(a)(2)(B)(i) of the Code, such payment shall not be payable and such


Steven Kafka, Ph.D.

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benefit shall not be provided until the date that is the earlier of (i) six months and one day after your separation from service, or (ii) the your death. If any such delayed cash payment is otherwise payable on an installment basis, the first payment shall include a catch-up payment covering amounts that would otherwise have been paid during the six-month period but for the application of this provision, and the balance of the installments shall be payable in accordance with their original schedule.

The determination of whether and when your “separation from service” from the Company has occurred shall be made in a manner consistent with, and based on the presumptions set forth in, Treasury Regulation Section 1.409A-l(h). Solely for purposes of this Section, “Company” shall include all persons with whom the Company would be considered a single employer under Sections 414(b) and 414(c) of the Code. All reimbursements and in-kind benefits provided under this Agreement shall be made or provided in accordance with the requirements of Section 409A to the extent that such reimbursements or in-kind benefits are subject to Section 409A. The parties intend that this Agreement will be administered in accordance with Section 409A. To the extent that any provision of this Agreement is ambiguous as to its compliance with Section 409A, the provision shall be read in such a manner so that all payments hereunder comply with Section 409A. Each payment pursuant to this Agreement is intended to constitute a separate payment for purposes of Treasury Regulation Section 1.409A-2(b)(2).

The parties agree that this Agreement may be amended, as reasonably requested by either party, and as may be necessary to fully comply with Section 409A and all related rules and regulations in order to preserve the payments and benefits provided hereunder without additional cost to either party. The Company shall have no liability to you or to any other person if any provisions of this Agreement that are intended to be exempt from or compliant with Section 409A are not so exempt or compliant.

Notice of Termination. Your employment at all times shall remain “at will,” meaning that either you or the Company may terminate the employment relationship at any time, for any lawful reason, with or without cause. However, you agree to provide the Company with fourteen (14) days’ written notice if you decide to terminate the employment relationship (except in the event of a Good Reason termination, in which case the Good Reason Process shall apply).

Non-Competition, Non-Solicitation, Confidentiality and Assignment Agreement. You hereby reaffirm the effectiveness of, and your obligations pursuant to, your Employee Non-Competition, Non-Solicitation, Confidentiality and Assignment Agreement (the “Employee Agreement”), a copy of which is attached to this Agreement as Exhibit B. You and the Company agree that the terms of the Employee Agreement are incorporated into this Agreement.

No Conflicting Agreements. You represent that you are not subject to any agreements which might restrict your conduct at the Company, and that you understand that if you become aware at any time during your employment with the Company that you are subject to any agreements which might restrict your activities at Foundation Medicine, you are required to immediately inform the Company’s Vice President, Human Resources and/or its General Counsel of the existence of such agreements. In the event of an irresolvable conflict, your employment by Foundation Medicine could be subject to termination and such termination would be deemed a for “Cause” termination for purposes of this Agreement and the Equity Documents.


Steven Kafka, Ph.D.

May 21, 2013

Page 5

 

Governing Law. The interpretation of this Agreement will be governed by the laws of Massachusetts, without regard to the conflicts of laws principles thereof.

Definitions. For purposes of this Agreement, the following terms shall have the following meanings:

Company ” means Foundation Medicine, Inc., and its successors and assigns.

Cause ” means one or more of the following events: (i) your conviction of, or the entry of a pleading of guilty or nolo contendere to, any crime involving (a) fraud or embezzlement, or (b) any felony; (ii) your willful failure to perform (other than by reason of disability), or gross negligence in the performance of, your duties and responsibilities as set forth in your job description; (iii) a material breach by you of any provision of this Agreement, the Employee Agreement, or any of the other agreements you have with the Company, which breach continues or remains uncured after thirty (30) days’ notice setting forth in reasonable detail the nature of such breach; or (iv) material fraudulent conduct by you with respect to the Company.

Change in Control ” means:

(i) prior to the completion of an initial public offering by the Company, an event that (a) is a Deemed Liquidation Event within the meaning of such term as set forth in the Company’s Amended and Restated Certificate of Incorporation, as amended, as amended and/or restated from time to time and (b) results in the payment of proceeds to the stockholders of the Company; and

(ii) following the completion of an initial public offering by the Company, any of the following:

(a) any “person,” as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “Act”) (other than the Company, any of its subsidiaries, or any trustee, fiduciary or other person or entity holding securities under any employee benefit plan or trust of the Company or any of its subsidiaries), together with all “affiliates” and “associates” (as such terms are defined in Rule 12b-2 under the Act) of such person, shall become the “beneficial owner” (as such term is defined in Rule 13d-3 under the Act), directly or indirectly, of securities of the Company representing 50 percent or more of the combined voting power of the Company’s then outstanding securities having the right to vote in an election of the Board (“Voting Securities”) (in such case other than as a result of an acquisition of securities directly from the Company); or

(b) the date when a majority of the members of the Board of Directors of the Company is replaced during any consecutive twenty-four month period by


Steven Kafka, Ph.D.

May 21, 2013

Page 6

 

individuals who, prior to their election, or nomination for election by the Company’s shareholders, were not approved by a majority of the members of the Board of Directors in existence on the date immediately prior to such election, appointment or nomination; or

(c) the consummation of (A) any consolidation or merger of the Company where the stockholders of the Company, immediately prior to the consolidation or merger, would not, immediately after the consolidation or merger, beneficially own (as such term is defined in Rule 13d-3 under the Act), directly or indirectly, shares representing in the aggregate more than 50 percent of the voting shares of the Company issuing cash or securities in the consolidation or merger (or of its ultimate parent corporation, if any), or (B) any sale or other transfer (in one transaction or a series of transactions contemplated or arranged by any party as a single plan) of all or substantially all of the assets of the Company.

Notwithstanding the foregoing, a “Change in Control” shall not include (1) an initial public offering and (2) shall not be deemed to have occurred for purposes of the foregoing clause (ii)(a) solely as the result of an acquisition of securities by the Company which, by reducing the number of shares of Voting Securities outstanding, increases the proportionate number of Voting Securities beneficially owned by any person to 50 percent or more of the combined voting power of all of the then outstanding Voting Securities; provided, however, that if any person referred to in this sentence shall thereafter become the beneficial owner of any additional shares of Voting Securities (other than pursuant to a stock split, stock dividend, or similar transaction or as a result of an acquisition of securities directly from the Company) and immediately thereafter beneficially owns 50 percent or more of the combined voting power of all of the then outstanding Voting Securities, then a “Change in Control” shall be deemed to have occurred for purposes of the foregoing clause (ii)(a).

Equity Award ” means all incentive stock options, non-statutory stock options, shares of restricted stock, restricted stock units or other incentive equity awards in respect of shares of the Company’s equity securities that have been or will be granted to you by the Company.

Good Reason ” means the occurrence of one or more of the following events or circumstances within 18 months following a Change in Control without your written consent; provided, that you have complied with the Good Reason Process:

(i) a change in title, responsibility and authority to a position less than executive level (with such change measured by reference to your title within your business unit post-Change in Control, and not necessarily the applicable company as a whole);

(ii) your work location is located more than fifty (50) miles from the Company’s office location at which you were principally working as of the effective date of the Change in Control; or

(iii) a material breach by the Company of this Agreement or any of the agreements you have with the Company relating to the Equity Awards or other equity of the Company, which breach continues or remains uncured after thirty (30) days’ notice setting forth in reasonable detail the nature of such breach.


Steven Kafka, Ph.D.

May 21, 2013

Page 7

 

Good Reason Process ” means:

(i) you reasonably determine that a Good Reason condition has occurred within 18 months following a Change in Control;

(ii) you notify the Company in writing of the first occurrence of the Good Reason condition within sixty (60) days of the first occurrence of such condition;

(iii) you cooperate in good faith with the Company’s efforts, for a period of not less than thirty (30) days following such notice (the “Cure Period”), to remedy the Good Reason condition;

(iv) notwithstanding such efforts a material element of at least one Good Reason condition continues to exist; and

(v) you terminate your employment within sixty (60) days after the end of the Cure Period. If the Company fully cures the Good Reason condition during the Cure Period, Good Reason shall be deemed not to have occurred.

The Company’s success at curing a Good Reason condition shall not bar or preclude your right to notify the Company of the occurrence within 18 months following a Change in Control of another Good Reason condition and to proceed with the Good Reason Process.

Health Care Continuation” means that if you are participating in the Company’s group health plan immediately prior to the date of your termination, then subject to your election and eligibility for benefits under the law known as COBRA, and any law that is the successor to COBRA, the Company shall continue to pay the employer portion of your health benefits until the earlier of the end of the Salary Continuation Period and the date you become re-employed or otherwise ineligible for COBRA.

Release ” means a separation agreement in a form prescribed by the Company that includes, without limitation, (i) a general release of claims and non-disparagement covenant, both in favor of the Company and related persons and entities, (ii) reaffirmation of your obligations under the Employee Agreement, the terms of which will be incorporated by reference into the Release, and (iii) a provision stating that, if you breach any of the material provisions of Release, in addition to all other rights and remedies, the Company shall have the right to receive reimbursement for, or to terminate or cease payment of, Severance Payments paid or payable to you.

Salary Continuation ” means that the Company shall continue to pay you your base salary at the rate in effect on the date of termination, subject to mitigation, during the


Steven Kafka, Ph.D.

May 21, 2013

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Salary Continuation Period. The first payment of Salary Continuation shall be paid within 60 days after the date of termination and shall be made on the Company’s regular payroll dates; provided, however, that if the 60day period begins in one calendar year and ends in a second calendar year, the first payment of Salary Continuation shall be paid in the second calendar year. In the event you miss one or more regular payroll periods between the date of termination and the first Salary Continuation payment, the first Salary Continuation payment shall include a “catch up” payment of accrued but unpaid Salary Continuation payments.

Survival. This Agreement shall remain in effect if you are transferred, promoted, or reassigned to work in functions other than your current functions at the Company. Your obligations under this Agreement shall survive the termination of your employment with the Company regardless of the manner or the reasons for such termination. This Agreement shall inure to the benefit of, and be binding upon, the Company and you, and our respective heirs, legal representatives, successors and assigns. This Agreement may be assigned by the Company without your consent to any successor entity in the event of a merger, acquisition, change of control, or sale of all or substantially all of the business or assets of the Company. “Foundation Medicine” and “Company” shall also mean any such successor entity as the context requires.

[Remainder of Page Intentionally Left Blank]


Steven Kafka, Ph.D.

May 21, 2013

Page 9

 

Entire Agreement. Upon execution, this Agreement, including Exhibits A and B, and the Equity Documents, as amended from time to time, will constitute the entire agreement as to your employment relationship with Foundation Medicine and will supersede any prior agreements or understandings, whether in writing or oral.

We are looking forward to your continued contributions as a member of the Foundation Medicine team.

Sincerely,

 

FOUNDATION MEDICINE, INC.

/s/ Sarah Larson

By:   Sarah Larson
Title:   Vice President, Human Resources

YOU ACKNOWLEDGE THAT YOU HAVE CAREFULLY READ THIS LETTER, INCLUDING EXHIBIT A AND EXHIBIT B, AND UNDERSTAND AND AGREE TO ALL OF THE PROVISIONS IN THIS LETTER AND ITS EXHIBITS. FACIMILE AND PDF SIGNATURES SHALL HAVE THE SAME LEGAL EFFECT AS ORIGINALS.

Accepted and agreed by:

 

/s/ Steven J. Kafka

Employee Signature

Steven J. Kafka

Print Employee’s Name
Date:  

June 20, 2013


EXHIBIT A

Equity Schedule

The table below contains information regarding stock option awards. Except for information regarding the designation of a stock option award as an Acceleration Equity Award or Non-Acceleration Equity Award, the information furnished is for reference purposes only. In the event of a conflict between the information furnished in this table and the Stock Option Agreement for such stock option award, the terms and conditions of the Stock Option Agreement shall govern. You should refer to each Stock Option Agreement for the individual terms and conditions of such stock option award.

 

Grant

    

Grant Date

  

Acceleration

Rights

  550,000       March 7, 2013    Yes
  50,000       March 7, 2013    Yes
  250,000       May 22, 2013    Yes


EXHIBIT B

Employee Non-Competition, Non-Solicitation, Confidentiality and Assignment Agreement


Standard Foundation Medicine Form

New Employee Agreement

Revisions Approved November 29, 2010

 

LOGO

Non-Competition, Non-Solicitation,

Confidentiality and Assignment Agreement

In consideration and as a condition of my employment or continued employment by Foundation Medicine, Inc. (the “Company”), I hereby agree as follows:

 

1. Proprietary Information . I agree that all information, whether or not in writing, whether or not disclosed before or after I was first employed by the Company, concerning the Company’s business, technology, business relationships or financial affairs that the Company has not released to the general public (collectively, “Proprietary Information”), and all tangible embodiments thereof, are and will be the exclusive property of the Company. By way of illustration, Proprietary Information may include information or material that has not been made generally available to the public, such as: (a)  corporate information , including plans, strategies, methods, policies, resolutions, notes, email correspondence, negotiations or litigation; (b)  marketing information , including strategies, methods, customer identities or other information about customers, prospect identities or other information about prospects, or market analyses or projections; (c)  financial information , including cost and performance data, debt arrangements, equity structure, investors and holdings, purchasing and sales data and price lists; and (d)  operational and technological information , including plans, specifications, manuals, forms, templates, software, designs, methods, procedures, formulas, discoveries, inventions, improvements, biological or chemical materials, concepts and ideas; and (e)  personnel information , including personnel lists, reporting or organizational structure, resumes, personnel data, compensation structure, performance evaluations and termination arrangements or documents. Proprietary Information includes, without limitation, (1) information received in confidence by the Company from its customers or suppliers or other third parties, and (2) all biological or chemical materials and other tangible embodiments of the Proprietary Information.

2. Recognition of Company’s Rights . I will not, at any time, without the Company’s prior written permission, either during or after my employment,

disclose or transfer any Proprietary Information to anyone outside of the Company, or use or permit to be used any Proprietary Information for any purpose other than the performance of my duties as an employee of the Company. I will cooperate with the Company and use my best efforts to prevent the unauthorized disclosure of all Proprietary Information. I will deliver to the Company all copies and other tangible embodiments of Proprietary Information in my possession or control upon the earlier of a request by the Company or termination of my employment.

3. Rights of Others . I understand that the Company is now and may hereafter be subject to non-disclosure or confidentiality agreements with third persons that require the Company to protect or refrain from use of proprietary information. I agree to be bound by the terms of such agreements in the event I have access to such proprietary information.

4. Commitment to Company; Avoidance of Conflict of Interest . While an employee of the Company, I will devote my full-time efforts to the Company’s business and I will not engage in any other business activity that conflicts with my duties to the Company. I will advise the President of the Company or his or her nominee at such time as any activity of either the Company or another business presents me with a conflict of interest or the appearance of a conflict of interest as an employee of the Company. I will take whatever action is requested of me by the Company to resolve any conflict or appearance of conflict that it finds to exist.

5. Developments . I hereby assign and transfer and, to the extent any such assignment cannot be made at present, will assign and transfer, to the Company and its successors and assigns, all my right, title and interest in and to all Developments (as defined below) that: (a) are created, developed, made, conceived or reduced to practice by me (alone or jointly with others) or under my direction

 


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(collectively, “conceived”) during the period of my employment and six (6) months thereafter and that relate to the business of the Company or to products, methods or services being researched, developed, manufactured or sold by the Company; or (b) result from tasks assigned to me by the Company; or (c) result from the use of premises, Proprietary Information or personal property (whether tangible or intangible) owned, licensed or leased by the Company (collectively, “Company-Related Developments”), and all patent rights, trademarks, copyrights and other intellectual property rights in all countries and territories worldwide claiming, covering or otherwise arising from or pertaining to Company-Related Developments (collectively, “Intellectual Property Rights”). I further agree that “Company-Related Developments” include, without limitation, all Developments that (i) were conceived by me before my employment, (ii) relate to the business of the Company or to products, methods or services being researched, developed, manufactured or sold by the Company, and (iii) were not subject to an obligation to assign to another entity when conceived. I will make full and prompt disclosure to the Company of all Company-Related Developments, as well as all other Developments conceived by me during the period of my employment and six (6) months thereafter. I acknowledge that all work performed by me as an employee of the Company is on a “work for hire” basis. I hereby waive all claims to any moral rights or other special rights that I may have or accrue in any Company-Related Developments.

“Developments” mean inventions, discoveries, designs, developments, methods, modifications, improvements, processes, biological or chemical materials, algorithms, databases, computer programs, formulae, techniques, trade secrets, graphics or images, audio or visual works, and other works of authorship.

If, in the course of my employment with the Company, I incorporate a Development conceived by me before my employment that are not Company-Related Developments (“Prior Inventions”) into a Company product, process or research or development program or other work done for the Company, I hereby grant to the Company a nonexclusive, royalty-free, fully paid-up, irrevocable, perpetual, worldwide license (with the full right to sublicense through multiple tiers) to make, have made, modify, use, offer for sale, import and sell such Prior Invention. Notwithstanding the foregoing, I will not incorporate, or permit to be incorporated, Prior Inventions in any Company-Related

Development without the Company’s prior written consent.

I understand that to the extent this Agreement is required to be construed in accordance with the laws of any state which precludes a requirement in an employee agreement to assign certain classes of inventions made by an employee, this Section will be interpreted not to apply to any invention which a court rules and/or the Company agrees falls within such classes.

6. Documents and Other Materials . I will keep and maintain adequate and current records of all Proprietary Information and Company-Related Developments conceived by me, which records will be available to and remain the sole property of the Company at all times. All files, letters, notes, memoranda, reports, records, data, sketches, drawings, notebooks, layouts, charts, quotations and proposals, specification sheets, program listings, blueprints, models, prototypes, materials or other written, photographic or other tangible material containing or embodying Proprietary Information, whether created by me or others, which come into my custody or possession, are the exclusive property of the Company to be used by me only in the performance of my duties for the Company. In the event of the termination of my employment for any reason, I will deliver to the Company all of the foregoing, and all other materials of any nature pertaining to the Proprietary Information of the Company and to my work, and will not take or keep in my possession any of the foregoing or any copies. Any property situated on the Company’s premises and owned by the Company, including laboratory space, computers, disks and other storage media, filing cabinets or other work areas, is subject to inspection by the Company at any time with or without notice.

7. Enforcement of Intellectual Property Rights . I will cooperate fully with the Company, both during and after my employment with the Company, with respect to the procurement, maintenance and enforcement of Intellectual Property Rights, as well as all other patent rights, trademarks, copyrights and other intellectual property rights in all countries and territories worldwide owned by or licensed to the Company. I will sign, both during and after the term of this Agreement, all papers, including copyright applications, patent applications, declarations, oaths, assignments of priority rights, and powers of attorney, which the Company may deem necessary or desirable in order to protect its rights and interests in any Company-Related Development or Intellectual Property Rights. If the

 


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Company is unable, after reasonable effort, to secure my signature on any such papers, I hereby irrevocably designate and appoint each officer of the Company as my agent and attorney-in-fact to execute any such papers on my behalf, and to take any and all actions as the Company may deem necessary or desirable in order to protect its rights and interests in the same.

8. Non-Competition and Non-Solicitation . In order to protect the Company’s Proprietary Information and good will, during my employment and for a period of one (1) year following the termination of my employment for any reason (the “Restricted Period”), I will not directly or indirectly, whether as owner, partner, shareholder, director, consultant, agent, employee, co-venturer or otherwise, engage, participate or invest in any business activity anywhere in the world that develops, manufactures or markets any products, or performs any services, that are otherwise competitive with or similar to the products or services of the Company, or products or services that the Company has under development or that are the subject of active planning at any time during my employment; provided that this will not prohibit any possible investment in publicly traded stock of a company representing less than one percent of the stock of such company. In addition, during the Restricted Period, I will not, directly or indirectly, in any manner, other than for the benefit of the Company, (a) call upon, solicit, divert or take away any of the customers, business or prospective customers of the Company or any of its suppliers, and/or (b) solicit, entice or attempt to persuade any other employee or consultant of the Company to leave the services of the Company for any reason. I acknowledge and agree that if I violate any of the provisions of this Section, the running of the Restricted Period will be extended by the time during which I engage in such violation(s).

9. Government Contracts . I acknowledge that the Company may have from time to time agreements with other persons or with the United States Government or its agencies that impose obligations or restrictions on the Company regarding inventions made during the course of work under such agreements or regarding the confidential nature of such work. I agree to comply with any such obligations or restrictions upon the direction of the Company. In addition to the rights assigned under Section 5, I also assign to the Company (or any of its nominees) all rights which I have or acquired in any Developments, full title to which is required to be in the United States under any contract between the

Company and the United States or any of its agencies.

10. Prior Agreements . I hereby represent that, except as I have fully disclosed previously in writing to the Company, I am not bound by the terms of any agreement with any previous employer or other party to refrain from using or disclosing any trade secret or confidential or proprietary information in the course of my employment with the Company or to refrain from competing, directly or indirectly, with the business of such previous employer or any other party. I further represent that my performance of all the terms of this Agreement as an employee of the Company does not and will not breach any agreement to keep in confidence proprietary information, knowledge or data acquired by me in confidence or in trust prior to my employment with the Company. I will not disclose to the Company or induce the Company to use any confidential or proprietary information or material belonging to any previous employer or others.

11. Remedies Upon Breach . I understand that the restrictions contained in this Agreement are necessary for the protection of the business and goodwill of the Company and I consider them to be reasonable for such purpose. Any breach of this Agreement is likely to cause the Company substantial and irrevocable damage and therefore, in the event of such breach, the Company, in addition to such other remedies that may be available, will be entitled to specific performance and other injunctive relief.

12. Publications and Public Statements . I will obtain the Company’s written approval before publishing or submitting for publication any material that relates to my work at the Company and/or incorporates any Proprietary Information. To ensure that the Company delivers a consistent message about its products, services and operations to the public, and further in recognition that even positive statements may have a detrimental effect on the Company in certain securities transactions and other contexts, any statement about the Company which I create, publish or post during my period of employment and for six (6) months thereafter, on any media accessible by the public, including but not limited to electronic bulletin boards and Internet- based chat rooms, must first be reviewed and approved by an officer of the Company before it is released in the public domain.

13. No Employment Obligation . I understand that this Agreement does not create an obligation on the Company or any other person to continue my employment. I acknowledge that, unless otherwise agreed in a formal written employment agreement

 


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signed on behalf of the Company by an authorized officer, my employment with the Company is at will and therefore may be terminated by the Company or me at any time and for any reason.

14. Survival and Assignment by the Company . I understand that my obligations under this Agreement will continue in accordance with its express terms regardless of any changes in my title, position, duties, salary, compensation or benefits or other terms and conditions of employment. I further understand that my obligations under this Agreement will continue following the termination of my employment regardless of the manner of such termination and will be binding upon my heirs, executors and administrators. The Company will have the right to assign this Agreement to its affiliates, successors and assigns. I expressly consent to be bound by the provisions of this Agreement for the benefit of the Company or any parent, subsidiary or affiliate to whose employ I may be transferred without the necessity that this Agreement be resigned at the time of such transfer.

15. Disclosure to Future Employers . I will provide a copy of this Agreement to any prospective employer, partner or co-venturer prior to entering into an employment, partnership or other business relationship with such person or entity.

16. Exit Interview . If and when I depart from the Company, I may be required to attend an exit interview and sign an “Employee Exit Acknowledgement” to reaffirm my acceptance and acknowledgement of the obligations set forth in this Agreement. During the Restricted Period following termination of my employment, I will notify the Company of any change in my address and of each subsequent employment or business activity, including the name and address of my employer or other post-Company employment plans and the nature of my activities.

17. Severability . In case any provisions (or portions thereof) contained in this Agreement will, for any reason, be held invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability will not affect the other provisions of this Agreement, and this Agreement will be construed as if such invalid, illegal or unenforceable provision had never been contained herein. If, moreover, any one or more of the provisions contained in this Agreement will for any reason be held to be excessively broad as to duration, geographical scope, activity or subject, it will be construed by limiting and reducing it, so as to be enforceable to the extent compatible with the applicable law as it will then appear.

18. Entire Agreement . This Agreement constitutes the entire and only agreement between the Company and me respecting the subject matter hereof, and supersedes all prior agreements and understandings, oral or written, between us concerning such subject matter. No modification, amendment, waiver or termination of this Agreement or of any provision hereof will be binding unless made in writing and signed by an authorized officer of the Company. Failure of the Company to insist upon strict compliance with any of the terms, covenants or conditions hereof will not be deemed a waiver of such terms, covenants or conditions. In the event of any inconsistency between this Agreement and any other contract between the Company and me, the provisions of this Agreement will prevail.

19. Interpretation . This Agreement will be deemed to be made and entered into in the Commonwealth of Massachusetts, and will in all respects be interpreted, enforced and governed under the laws of the Commonwealth of Massachusetts. I hereby agree to consent to personal jurisdiction of the state and federal courts situated within Suffolk County, Massachusetts for purposes of enforcing this Agreement, and waive any objection that I might have to personal jurisdiction or venue in those courts. As used in this Agreement, “including” means “including but not limited to.”

BY SIGNING BELOW, I CERTIFY THAT I HAVE READ THIS AGREEMENT CAREFULLY AND AM SATISFIED THAT I UNDERSTAND IT COMPLETELY.

IN WITNESS WHEREOF , the undersigned has executed this agreement as a sealed instrument as of the date set forth below.

 

Signed:  

Steven J. Kafka

  (Employee’s full name)

 

Type or print name:  

Steven J. Kafka

 

Date:  

12/10/2012

 


LOGO   

 

EXHIBIT A

 

TO:    Foundation Medicine, Inc.
FROM:    Steven J. Kafka
DATE:    12/10/2012
SUBJECT:    Prior Inventions

 

      The following is a complete list of all inventions or improvements relevant to the subject matter of my employment by the Company that have been made or conceived or first reduced to practice by me alone or jointly with others prior to my engagement by the Company:
   x    No inventions or improvements
   ¨    See below:
     

 

     

 

     

 

     

 

   ¨    Additional sheets attached
      The following is a list of all patents, patent applications and other patent rights that I have invented:
   x    None
   ¨    See below:
     

 

     

 

     

 

     

 


September 10, 2013

Steven Kafka

Dear Steve:

This letter constitutes the first amendment (this “ First Amendment ”) to the employment letter by and between you and Foundation Medicine, Inc. (the “ Company ”) dated as of May 21, 2013 (the “ Offer Letter ”). All capitalized terms used, but not defined, herein shall have the meanings ascribed to them in the Offer Letter.

 

  (1) The first sentence of the first paragraph of the section entitled “Salary, Annual Cash Bonus Opportunity and Expense Reimbursement” shall be amended and restated in its entirety to read as follows:

“Effective as of May 21, 2013, you will be paid on a salary basis at an annual rate of $350,000, payable twice per month in accordance with Foundation Medicine’s standard payroll practices, subject to customary deductions and withholdings and subject to adjustment by the Company in its discretion.”

 

  (2) Clause (z) of the section of the Offer Letter entitled “Severance Payments” shall be amended and restated in its entirety as follows:

“(z) Health Care Continuation (collectively, the “Severance Payments”) for a period of twelve (12) months following your termination date (the “Salary Continuation Period”).”

This First Amendment shall be treated as amending the Offer Letter, which Offer Letter shall otherwise remain in full force and effect in accordance with its terms. You reaffirm the effectiveness of your existing Employee Non-Competition, Non-Solicitation, Confidentiality and Assignment Agreement, a copy of which is attached to this First Amendment as Exhibit A . The interpretation of this First Amendment will be governed by the laws of the Commonwealth of Massachusetts, without regard to the conflicts of laws principles thereof.


Please indicate your agreement to the terms herein by countersigning in the place indicated below.

 

FOUNDATION MEDICINE, INC.
Name  

/s/ Sarah Larson

Title  

Vice President, Human Resources

Date  

September 10, 2013

Accepted and agreed by:

 

/s/ Steven Kafka

Steven Kafka


EXHIBIT A

Employee Non-Competition, Non-Solicitation, Confidentiality and Assignment Agreement


Standard Foundation Medicine Form

New Employee Agreement

Revisions Approved November 29, 2010

 

LOGO

Non-Competition, Non-Solicitation,

Confidentiality and Assignment Agreement

In consideration and as a condition of my employment or continued employment by Foundation Medicine, Inc. (the “Company”), I hereby agree as follows:

 

1. Proprietary Information . I agree that all information, whether or not in writing, whether or not disclosed before or after I was first employed by the Company, concerning the Company’s business, technology, business relationships or financial affairs that the Company has not released to the general public (collectively, “Proprietary Information”), and all tangible embodiments thereof, are and will be the exclusive property of the Company. By way of illustration, Proprietary Information may include information or material that has not been made generally available to the public, such as: (a)  corporate information , including plans, strategies, methods, policies, resolutions, notes, email correspondence, negotiations or litigation; (b)  marketing information , including strategies, methods, customer identities or other information about customers, prospect identities or other information about prospects, or market analyses or projections; (c)  financial information , including cost and performance data, debt arrangements, equity structure, investors and holdings, purchasing and sales data and price lists; and (d)  operational and technological information , including plans, specifications, manuals, forms, templates, software, designs, methods, procedures, formulas, discoveries, inventions, improvements, biological or chemical materials, concepts and ideas; and (e)  personnel information , including personnel lists, reporting or organizational structure, resumes, personnel data, compensation structure, performance evaluations and termination arrangements or documents. Proprietary Information includes, without limitation, (1) information received in confidence by the Company from its customers or suppliers or other third parties, and (2) all biological or chemical materials and other tangible embodiments of the Proprietary Information.

2. Recognition of Company’s Rights . I will not, at any time, without the Company’s prior written permission, either during or after my employment,

disclose or transfer any Proprietary Information to anyone outside of the Company, or use or permit to be used any Proprietary Information for any purpose other than the performance of my duties as an employee of the Company. I will cooperate with the Company and use my best efforts to prevent the unauthorized disclosure of all Proprietary Information. I will deliver to the Company all copies and other tangible embodiments of Proprietary Information in my possession or control upon the earlier of a request by the Company or termination of my employment.

3. Rights of Others . I understand that the Company is now and may hereafter be subject to non-disclosure or confidentiality agreements with third persons that require the Company to protect or refrain from use of proprietary information. I agree to be bound by the terms of such agreements in the event I have access to such proprietary information.

4. Commitment to Company; Avoidance of Conflict of Interest . While an employee of the Company, I will devote my full-time efforts to the Company’s business and I will not engage in any other business activity that conflicts with my duties to the Company. I will advise the President of the Company or his or her nominee at such time as any activity of either the Company or another business presents me with a conflict of interest or the appearance of a conflict of interest as an employee of the Company. I will take whatever action is requested of me by the Company to resolve any conflict or appearance of conflict that it finds to exist.

5. Developments . I hereby assign and transfer and, to the extent any such assignment cannot be made at present, will assign and transfer, to the Company and its successors and assigns, all my right, title and interest in and to all Developments (as defined below) that: (a) are created, developed, made, conceived or reduced to practice by me (alone or jointly with others) or under my direction

 


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(collectively, “conceived”) during the period of my employment and six (6) months thereafter and that relate to the business of the Company or to products, methods or services being researched, developed, manufactured or sold by the Company; or (b) result from tasks assigned to me by the Company; or (c) result from the use of premises, Proprietary Information or personal property (whether tangible or intangible) owned, licensed or leased by the Company (collectively, “Company-Related Developments”), and all patent rights, trademarks, copyrights and other intellectual property rights in all countries and territories worldwide claiming, covering or otherwise arising from or pertaining to Company-Related Developments (collectively, “Intellectual Property Rights”). I further agree that “Company-Related Developments” include, without limitation, all Developments that (i) were conceived by me before my employment, (ii) relate to the business of the Company or to products, methods or services being researched, developed, manufactured or sold by the Company, and (iii) were not subject to an obligation to assign to another entity when conceived. I will make full and prompt disclosure to the Company of all Company-Related Developments, as well as all other Developments conceived by me during the period of my employment and six (6) months thereafter. I acknowledge that all work performed by me as an employee of the Company is on a “work for hire” basis. I hereby waive all claims to any moral rights or other special rights that I may have or accrue in any Company-Related Developments.

“Developments” mean inventions, discoveries, designs, developments, methods, modifications, improvements, processes, biological or chemical materials, algorithms, databases, computer programs, formulae, techniques, trade secrets, graphics or images, audio or visual works, and other works of authorship.

If, in the course of my employment with the Company, I incorporate a Development conceived by me before my employment that are not Company-Related Developments (“Prior Inventions”) into a Company product, process or research or development program or other work done for the Company, I hereby grant to the Company a nonexclusive, royalty-free, fully paid-up, irrevocable, perpetual, worldwide license (with the full right to sublicense through multiple tiers) to make, have made, modify, use, offer for sale, import and sell such Prior Invention. Notwithstanding the foregoing, I will not incorporate, or permit to be incorporated, Prior Inventions in any Company-Related

Development without the Company’s prior written consent.

I understand that to the extent this Agreement is required to be construed in accordance with the laws of any state which precludes a requirement in an employee agreement to assign certain classes of inventions made by an employee, this Section will be interpreted not to apply to any invention which a court rules and/or the Company agrees falls within such classes.

6. Documents and Other Materials . I will keep and maintain adequate and current records of all Proprietary Information and Company-Related Developments conceived by me, which records will be available to and remain the sole property of the Company at all times. All files, letters, notes, memoranda, reports, records, data, sketches, drawings, notebooks, layouts, charts, quotations and proposals, specification sheets, program listings, blueprints, models, prototypes, materials or other written, photographic or other tangible material containing or embodying Proprietary Information, whether created by me or others, which come into my custody or possession, are the exclusive property of the Company to be used by me only in the performance of my duties for the Company. In the event of the termination of my employment for any reason, I will deliver to the Company all of the foregoing, and all other materials of any nature pertaining to the Proprietary Information of the Company and to my work, and will not take or keep in my possession any of the foregoing or any copies. Any property situated on the Company’s premises and owned by the Company, including laboratory space, computers, disks and other storage media, filing cabinets or other work areas, is subject to inspection by the Company at any time with or without notice.

7. Enforcement of Intellectual Property Rights . I will cooperate fully with the Company, both during and after my employment with the Company, with respect to the procurement, maintenance and enforcement of Intellectual Property Rights, as well as all other patent rights, trademarks, copyrights and other intellectual property rights in all countries and territories worldwide owned by or licensed to the Company. I will sign, both during and after the term of this Agreement, all papers, including copyright applications, patent applications, declarations, oaths, assignments of priority rights, and powers of attorney, which the Company may deem necessary or desirable in order to protect its rights and interests in any Company-Related Development or Intellectual Property Rights. If the

 


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Company is unable, after reasonable effort, to secure my signature on any such papers, I hereby irrevocably designate and appoint each officer of the Company as my agent and attorney-in-fact to execute any such papers on my behalf, and to take any and all actions as the Company may deem necessary or desirable in order to protect its rights and interests in the same.

8. Non-Competition and Non-Solicitation . In order to protect the Company’s Proprietary Information and good will, during my employment and for a period of one (1) year following the termination of my employment for any reason (the “Restricted Period”), I will not directly or indirectly, whether as owner, partner, shareholder, director, consultant, agent, employee, co-venturer or otherwise, engage, participate or invest in any business activity anywhere in the world that develops, manufactures or markets any products, or performs any services, that are otherwise competitive with or similar to the products or services of the Company, or products or services that the Company has under development or that are the subject of active planning at any time during my employment; provided that this will not prohibit any possible investment in publicly traded stock of a company representing less than one percent of the stock of such company. In addition, during the Restricted Period, I will not, directly or indirectly, in any manner, other than for the benefit of the Company, (a) call upon, solicit, divert or take away any of the customers, business or prospective customers of the Company or any of its suppliers, and/or (b) solicit, entice or attempt to persuade any other employee or consultant of the Company to leave the services of the Company for any reason. I acknowledge and agree that if I violate any of the provisions of this Section, the running of the Restricted Period will be extended by the time during which I engage in such violation(s).

9. Government Contracts . I acknowledge that the Company may have from time to time agreements with other persons or with the United States Government or its agencies that impose obligations or restrictions on the Company regarding inventions made during the course of work under such agreements or regarding the confidential nature of such work. I agree to comply with any such obligations or restrictions upon the direction of the Company. In addition to the rights assigned under Section 5, I also assign to the Company (or any of its nominees) all rights which I have or acquired in any Developments, full title to which is required to be in the United States under any contract between the

Company and the United States or any of its agencies.

10. Prior Agreements . I hereby represent that, except as I have fully disclosed previously in writing to the Company, I am not bound by the terms of any agreement with any previous employer or other party to refrain from using or disclosing any trade secret or confidential or proprietary information in the course of my employment with the Company or to refrain from competing, directly or indirectly, with the business of such previous employer or any other party. I further represent that my performance of all the terms of this Agreement as an employee of the Company does not and will not breach any agreement to keep in confidence proprietary information, knowledge or data acquired by me in confidence or in trust prior to my employment with the Company. I will not disclose to the Company or induce the Company to use any confidential or proprietary information or material belonging to any previous employer or others.

11. Remedies Upon Breach . I understand that the restrictions contained in this Agreement are necessary for the protection of the business and goodwill of the Company and I consider them to be reasonable for such purpose. Any breach of this Agreement is likely to cause the Company substantial and irrevocable damage and therefore, in the event of such breach, the Company, in addition to such other remedies that may be available, will be entitled to specific performance and other injunctive relief.

12. Publications and Public Statements . I will obtain the Company’s written approval before publishing or submitting for publication any material that relates to my work at the Company and/or incorporates any Proprietary Information. To ensure that the Company delivers a consistent message about its products, services and operations to the public, and further in recognition that even positive statements may have a detrimental effect on the Company in certain securities transactions and other contexts, any statement about the Company which I create, publish or post during my period of employment and for six (6) months thereafter, on any media accessible by the public, including but not limited to electronic bulletin boards and Internet- based chat rooms, must first be reviewed and approved by an officer of the Company before it is released in the public domain.

13. No Employment Obligation . I understand that this Agreement does not create an obligation on the Company or any other person to continue my employment. I acknowledge that, unless otherwise agreed in a formal written employment agreement

 


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signed on behalf of the Company by an authorized officer, my employment with the Company is at will and therefore may be terminated by the Company or me at any time and for any reason.

14. Survival and Assignment by the Company . I understand that my obligations under this Agreement will continue in accordance with its express terms regardless of any changes in my title, position, duties, salary, compensation or benefits or other terms and conditions of employment. I further understand that my obligations under this Agreement will continue following the termination of my employment regardless of the manner of such termination and will be binding upon my heirs, executors and administrators. The Company will have the right to assign this Agreement to its affiliates, successors and assigns. I expressly consent to be bound by the provisions of this Agreement for the benefit of the Company or any parent, subsidiary or affiliate to whose employ I may be transferred without the necessity that this Agreement be resigned at the time of such transfer.

15. Disclosure to Future Employers . I will provide a copy of this Agreement to any prospective employer, partner or co-venturer prior to entering into an employment, partnership or other business relationship with such person or entity.

16. Exit Interview . If and when I depart from the Company, I may be required to attend an exit interview and sign an “Employee Exit Acknowledgement” to reaffirm my acceptance and acknowledgement of the obligations set forth in this Agreement. During the Restricted Period following termination of my employment, I will notify the Company of any change in my address and of each subsequent employment or business activity, including the name and address of my employer or other post-Company employment plans and the nature of my activities.

17. Severability . In case any provisions (or portions thereof) contained in this Agreement will, for any reason, be held invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability will not affect the other provisions of this Agreement, and this Agreement will be construed as if such invalid, illegal or unenforceable provision had never been contained herein. If, moreover, any one or more of the provisions contained in this Agreement will for any reason be held to be excessively broad as to duration, geographical scope, activity or subject, it will be construed by limiting and reducing it, so as to be enforceable to the extent compatible with the applicable law as it will then appear.

18. Entire Agreement . This Agreement constitutes the entire and only agreement between the Company and me respecting the subject matter hereof, and supersedes all prior agreements and understandings, oral or written, between us concerning such subject matter. No modification, amendment, waiver or termination of this Agreement or of any provision hereof will be binding unless made in writing and signed by an authorized officer of the Company. Failure of the Company to insist upon strict compliance with any of the terms, covenants or conditions hereof will not be deemed a waiver of such terms, covenants or conditions. In the event of any inconsistency between this Agreement and any other contract between the Company and me, the provisions of this Agreement will prevail.

19. Interpretation . This Agreement will be deemed to be made and entered into in the Commonwealth of Massachusetts, and will in all respects be interpreted, enforced and governed under the laws of the Commonwealth of Massachusetts. I hereby agree to consent to personal jurisdiction of the state and federal courts situated within Suffolk County, Massachusetts for purposes of enforcing this Agreement, and waive any objection that I might have to personal jurisdiction or venue in those courts. As used in this Agreement, “including” means “including but not limited to.”

BY SIGNING BELOW, I CERTIFY THAT I HAVE READ THIS AGREEMENT CAREFULLY AND AM SATISFIED THAT I UNDERSTAND IT COMPLETELY.

IN WITNESS WHEREOF , the undersigned has executed this agreement as a sealed instrument as of the date set forth below.

 

Signed:  

Steven J. Kafka

  (Employee’s full name)

 

Type or print name:  

Steven J. Kafka

 

Date:  

12/10/2012

 


LOGO   

 

EXHIBIT A

 

TO:    Foundation Medicine, Inc.
FROM:    Steven J. Kafka
DATE:    12/10/2012
SUBJECT:    Prior Inventions

 

      The following is a complete list of all inventions or improvements relevant to the subject matter of my employment by the Company that have been made or conceived or first reduced to practice by me alone or jointly with others prior to my engagement by the Company:
   x    No inventions or improvements
   ¨    See below:
     

 

     

 

     

 

     

 

   ¨    Additional sheets attached
      The following is a list of all patents, patent applications and other patent rights that I have invented:
   x    None
   ¨    See below:
     

 

     

 

     

 

     

 

Exhibit 10.13

***Text Omitted and Filed Separately with the Securities and Exchange Commission.

Confidential Treatment Requested Under

17 C.F.R. Sections 200.80(b)(4) and 230.406

SUPPLY, SERVICE, AND SUPPORT AGREEMENT

This Supply, Service, and Support Agreement (the “ Agreement ”) is effective as of the date of last signature found below (the “ Effective Date ”) between Illumina, Inc., a Delaware corporation having a place of business at 5200 Illumina Way, San Diego, CA 92122 (“ Illumina ”) and Foundation Medicine Inc. , having a place of business at One Kendall Square, Suite B3501, Cambridge, MA, 02139 (“ Customer ”). Customer and Illumina may be referred to herein as “ Party ” or “ Parties .”

The Parties agree as follows:

1. Definitions . The following terms have these meanings.

Affiliate(s) ” means with respect to a Party, any entity that, directly or indirectly, controls, is controlled by or is under common control with such Party for so long as such control exists. For purposes of this definition, an entity has control of another entity if it has the direct or indirect ability or power to direct or cause the direction of management policies of such other entity or otherwise direct the affairs of such other entity, whether through ownership of the voting securities of such other entity, by contract or otherwise.

Affiliate Application Specific IP ” means the Intellectual Property Rights of an Affiliate of Illumina that pertain to the Product (and use thereof) only with regard to specific field(s) or specific application(s). Affiliate Application Specific IP excludes all Core IP. By way of non-limiting example, Intellectual Property Rights for NIPT, for specific diagnostic methods, for specific forensic methods, or for specific nucleic acid biomarkers, sequences, or combinations of biomarkers or sequences are examples of Affiliate Application Specific IP. Affiliate Application Specific IP is a subset of Application Specific IP.

Application Specific IP ” means the Illumina Intellectual Property Rights, inclusive of Affiliate Application Specific IP, that pertain to the Product (and use thereof) only with regard to specific field(s) or specific application(s). Application Specific IP excludes all Core IP. By way of non-limiting example, Illumina Intellectual Property Rights for NIPT, for specific diagnostic methods, for specific forensic methods, or for specific nucleic acid biomarkers, sequences, or combinations of biomarkers or sequences are examples of Application Specific IP.

“Base Price” means, with respect to (x) any […***…], (i) for […***…] of the Term, Illumina’s […***…] for such […***…] in effect as of the Effective Date, and (ii) for […***…] of the Term thereafter, the lesser of (A) […***…], and (B) […***…], and (y) any […***…], Illumina’s […***…]. For the avoidance of doubt, Illumina’s […***…].

Consumable(s) ” means Illumina-Branded reagents and consumable items that are intended by Illumina for use with, and are to be consumed through the use of Illumina Hardware. Consumables are either TG Consumables or Non-TG Consumables (including Temporary Consumables). TG Consumables are designated with the pre-fix “TG” in their part number, which prefix indicates that they have the attributes detailed in Sections 10-12. “ Non-TG Consumables ” are all Consumables other than TG Consumables. All references in this Agreement to Consumables means both TG Consumables and Non-TG Consumables unless specified otherwise in this Agreement.

Core IP ” means Illumina Intellectual Property Rights that pertain to or cover aspects or features of the Product (or use thereof) that are common to the Products in all applications and all fields of use. To avoid any doubt, and without limitation, Core IP specifically excludes any and all Intellectual Property Rights relating to NIPT.

Customer Use ” means use in the Field, specifically excluding any use that (i) is not in accordance with the Product’s Specifications or Documentation, (ii) requires grants of rights or a license to Application Specific IP or Affiliate Application Specific IP, (iii) is a re-use of a previously used Consumable, (iv) is the disassembling, reverse-engineering, reverse-compiling, or reverse-assembling of the Product, (v) is the separation, extraction, or isolation of components of Consumables or other unauthorized analysis of the Consumables, (vi) gains access to or determines the methods of operation of the Product, (vii) is the use of a non-Illumina reagent/consumable with Illumina Hardware (unless the Specifications or Documentation state otherwise), or (viii) is the transfer to a third-party of, or sub-licensing of, Software or third-party software.

Country ” or “ Countries ” means the United States of America including its territories and possessions.

 

***Confidential Treatment Requested***

 


Documentation ” means Illumina’s user manual, package insert, and similar documentation, for the Product in effect on the date that the Product ships. Documentation may be provided (including by reference to a website) with the Product at the time of shipment or provided electronically from Illumina.

Existing Instruments ” means Illumina Hardware that was purchased by Customer from Illumina or provided by Illumina prior to the Effective Date and that Customer intends to use with the Consumables purchased under this Agreement.

Facility ” or “ Facilities ” means laboratories in the Country(ies) that are either owned by or leased by Customer.

Field ” means Oncology […***…].

Illumina Branded ” means products that bear Illumina branding or the branding of any Affiliate of Illumina.

Illumina Hardware ” means Illumina-Branded instruments, accessories, and peripherals sold by Illumina or its Affiliates.

Illumina Intellectual Property Rights ” means all Intellectual Property Rights owned or controlled by Illumina or Affiliates of Illumina as of the date of shipment of the Product from Illumina. Application Specific IP, inclusive of Affiliate Application Specific IP, and Core IP are separate, non-overlapping, subsets within the Illumina Intellectual Property Rights.

Intellectual Property Right(s) ” means all rights in patent, copyrights, trade secrets, know-how, trademark, service mark and trade dress rights and other industrial or intellectual property rights under the laws of any jurisdiction, together with all applications therefor and registrations thereto.

Net Price ” means […***…].

NIPT ” means non-invasive pre-natal testing.

“Third Party IP” means the Intellectual Property Rights of third parties wherein third parties for purposes of this definition specifically exclude Affiliates of Illumina.

Product(s) ” means the Consumables, Illumina Hardware, and Software that are offered for sale under, purchased under or otherwise governed by the terms and conditions of this Agreement.

“[…***…] Agreement ” means the document to be entered into by and between Illumina and Customer that will define the responsibilities of each Party with respect […***…].

Research ” means (i) internal research, and (ii) research services provided to third-parties.. Research Use includes […***…].

Research Use ” means use for Research, specifically excluding any use that (i) is not in accordance with the Product’s Specifications or Documentation, (ii) requires grant of rights or a license to Application Specific IP or Affiliate Application Specific IP, (iii) is a re-use of a previously used Consumable, (iv) is the disassembling, reverse-engineering, reverse-compiling, or reverse-assembling of the Product, (v) is the separation, extraction, or isolation of components of Consumables or other unauthorized analysis of the Consumables, (vi) gains access to or determines the methods of operation of the Product, (vii) is the use of a non-Illumina reagent/consumable with Illumina Hardware (unless the Specifications or Documentation state otherwise), or (viii) is the transfer to a third-party of, or sub-licensing of, Software or third-party software.

Sample […***…]” means […***…]. For clarity, Sample […***…] includes at least the following steps: […***…].

Service Contracts ” means the Product maintenance, support, and technical services products that Customer may purchase as set forth in Appendix I. Service Contracts are subject to their separate conditions, limitations, and terms and conditions that are hereby incorporated herein by reference.

 

***Confidential Treatment Requested***

 

ILLUMINA CONFIDENTIAL

2


Software ” means Illumina-Branded software (e.g., Hardware operating software, data analysis software), regardless of whether it is embedded in or installed on Illumina Hardware or provided separately.

Specifications ” means Illumina’s written specifications for a Product in effect for that Product on the date that the Product ships.

Temporary Consumable(s) ” means Non-TG Consumables purchased under this Agreement that Customer intends to use for Customer Use and for which a TG version of such Consumable is not available from Illumina. Temporary Consumables are set forth in Exhibit A, as may be amended from time to time by the Parties; provided, however, that Non-TG Consumables purchased by Customer (i) after the Effective Date for Customer Use, but prior to the date Illumina can supply the first TG Consumable under this Agreement are deemed to fall within the definition of Temporary Consumable, and (ii) that Illumina agrees in writing may be used for Customer Use as a result of Illumina’s inability to supply TG Consumables, such written authorization not to be unreasonably withheld, are deemed to fall within the definition of Temporary Consumable.

Term ” or “ term of this Agreement ” means the term of the Agreement as defined in Section 19.a.

2. Applicability of Terms and Conditions.

 

  a. Exclusive Terms . This Agreement exclusively governs the ordering, purchase, supply, and use of Product, and its terms shall override any conflicting, amending and/or additional terms contained in any purchase orders, invoices or similar documents, which are hereby rejected and shall be null and void. Failure of Illumina or Customer to object to any such conflicting, amending and/or additional terms shall not constitute a waiver by Illumina or Customer, nor constitute acceptance by Illumina or Customer of such terms. The conditions and restrictions on use and other activities set forth in this Agreement are bargained for conditions of sale and, therefore, control the sale of such Product and the rights in and to Products provided to Customer at purchase. This Agreement may be amended in writing only. For clarity, written amendments to this Agreement must be executed by officers of the Parties.

 

  b. Consumables . The Consumables that may be purchased by Customer under this Agreement are set forth in Exhibit A, as may be amended in writing by the Parties; provided that, Illumina will not unreasonably refuse to amend Exhibit A to add additional Consumables or remove existing Consumables.

 

  c. Instruments . The Illumina Hardware that may be purchased by Customer under this Agreement is set forth in Exhibit A. Unless otherwise set forth in Exhibit A, the purchase price for Illumina Hardware will be agreed to in writing at the time of purchase. Unless expressly set forth otherwise in this Agreement, (i) notification of changes to Hardware and Software are not provided, and (ii) only Illumina Hardware listed in Exhibit A, as may be amended from time-to-time in writing by the Parties, may be purchased under this Agreement; provided that, Illumina will not unreasonably refuse to amend Exhibit A to add additional Illumina Hardware or remove existing Illumina Hardware.

 

  d. Temporary Consumables . This provision only applies to Temporary Consumables. In the event Illumina makes commercially available during the Term a TG version of a Temporary Consumable (“ TG Version ”), Customer must, within […***…] months after the commercial availability of the TG Version and receipt of notice from Illumina, cease ordering the Temporary Consumable for Customer Use. No later than at expiration of the […***…] month period, and only with respect to Consumables purchased for Customer Use, Illumina will supply Customer with only the TG Version of the applicable Consumable under the terms of this Agreement. The Temporary Consumables shall, solely for the purposes of the Customer Use rights granted to Customer under Section 3, be considered to be TG Consumables until the expiration of the […***…] month period described in the preceding sentence. For the avoidance of doubt, after expiration of the […***…] month period, Customer may use Non-TG Consumables (including former Temporary Consumables) only for Research Use. Except as expressly set forth otherwise in writing by Illumina, notification of changes is not provided for Non-TG Consumables. The […***…] for such new TG Version […***…] for such TG Version.

 

  e. […***…] Business Review s. Customer and Illumina agree to have […***…] business review meetings at mutually agreed upon times to discuss […***…] and anything else mutually agreed upon. The outcome of such business review meetings will not be binding unless documented in an amendment to this Agreement.

 

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  f. Minimum TG Consumable Purchases . Subject to the terms and conditions of this Agreement, Customer shall, purchase a minimum quantity of TG Consumables every […***…] calendar months during the Term beginning […***…]. The minimum quantity of TG Consumables shall be the greater of (i) […***…]% of the quantity of TG Consumables forecasted for such […***…] calendar month period as determined by Forecasts submitted by Customer that cover that time period, and (ii) $[…***…]. (x) If Customer does not meet its minimum purchase obligation, (A) […***…] shall immediately become null and void and of no further effect, and (B) all Product prices revert to the Base Price, regardless Customer’s volume of purchases. (y) In addition, if Customer does not meet its minimum purchase obligation (A) at any time prior to the third anniversary of the Effective Date, the Term of this Agreement (Section 19.a) shall automatically convert to […***…] years, and (B) at any time after the third anniversary of this Agreement, Illumina may in its sole discretion terminate this Agreement early by providing […***…] days prior written notice.

3. Rights Accompanying Purchase .

 

  a. Consumables . Subject to the terms and conditions of this Agreement (including without limitation the restrictions in Section 5), Customer’s purchase of TG Consumables, Temporary Consumables, and Non-TG Consumables under this Agreement confers upon Customer […***…]. The Parties agree that the first sentence of this Section 3(a) is designed to and does alter the effect of the exhaustion of patent rights that would otherwise result if the sale was made without restriction. Except as expressly stated in this Section 3(a) with respect to Core IP, no right or license under any Illumina Intellectual Property Rights is or are granted, expressly, by implication, or by estoppel, to Customer under this Agreement. Any use of the Consumables recited in subparts (i) and (ii) herein outside the scope of rights expressly granted to Customer in this Section 3(a) is a prohibited use and is a breach of this Agreement. Customer agrees that it will not use any such Consumable for a prohibited use. Product recited in subparts (i) and (ii) herein may be covered by one or more U.S. or foreign patents.

 

  b. Illumina Hardware and Software . Subject to the terms and conditions of this Agreement (including without limitation the restrictions in Section 5), Customer’s purchase of Illumina Hardware and Software under this Agreement confers upon Customer […***…]. The Parties agree that the first sentence of this Section 3(b) is designed to and does alter the effect of the exhaustion of patent rights that would otherwise result if the sale was made without restriction. Except as expressly stated in this Section with respect to Core IP, no right or license under any Illumina Intellectual Property Rights is or are granted, expressly, by implication, or by estoppel, to Customer under this Agreement. Any use of the Illumina Hardware or Software outside the scope of the rights expressly granted to Customer in this Section 3(b) is a prohibited use and is a breach of this Agreement. Customer agrees that it will not use any such Hardware for a prohibited use. Hardware may be covered by one or more U.S. or foreign patents.

 

  c. Existing Instruments . Subject to the terms and conditions of this Agreement, including without limitation, all restrictions and all Customer representations and warranties hereunder with respect to Products, Customer (i), during the Term, has the right to use Existing Instruments for Customer Use, and (ii) during the Term and thereafter, has the right to use Existing Instruments for Research Use in accordance with the scope of rights in Section 3b (Illumina Hardware). Customer agrees that Customer’s use of and disposition of the Existing Instruments is subject to the terms and conditions of this Agreement in addition to the original terms and conditions under which the Existing Instruments were purchased from Illumina (the “ Instrument Terms ”). In the event of any conflict between the Instrument Terms and the terms and conditions of this Agreement with respect to the Existing Instruments, the terms and conditions of this Agreement shall supersede and govern Customer’s use of and disposition of the Existing Instruments. Any use of the Existing Instruments outside of the scope of the rights expressly granted to Customer in Section 3(b) is a prohibited use and is a breach of this Agreement. Customer agrees that it will not use any such Existing Instrument for a prohibited use. Existing Instruments may be covered by one or more U.S. or foreign patents

 

  d. Software . All Software is licensed, not sold, to Customer, is non-transferable, non-sublicensable, and may be subject to additional terms found in the Software’s end user license agreement (“ EULA ”). Subject to the terms and conditions of the EULA and the terms and conditions of this Agreement (including without limitation, all restrictions in Section 5 and all Customer representations and warranties hereunder with respect to Products) Customer is expressly authorized to use Software provided by Illumina under this Agreement and provided by Illumina with Existing Instruments, as applicable, for Customer Use and Research Use, as applicable, when used with the Consumables and Illumina Hardware. For clarity, Software may be used for Customer Use and Research Use when used with Consumables and Illumina Hardware for Customer Use and Research Use as authorized by this Agreement.

 

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  e. […***…] Agreement. Within […***…] of the Effective Date, the Parties shall negotiate and execute a […***…] Agreement. Subject to the terms and conditions of this Agreement, Customer and Illumina agree to comply with the terms of the […***…] Agreement during the Term (as defined herein). The Parties agree that the terms and conditions of the […***…] Agreement may be amended from time-to-time by representatives of the Parties’ respective […***…] departments; provided that, such amendments are done in writing and signed by such representatives.

 

  f. Service Contract . During the Term, Illumina shall offer and Customer shall purchase and maintain a Service Contract for all Illumina Hardware that Customer owns or uses. Existing service contracts that Customer has will terminate on the Effective Date and Illumina shall issue Customer a credit for any unused portion. Subject to the terms of the Service Contract and the terms and conditions of this Agreement, Illumina will, […***…]:

 

  i. […***…] Spare Parts. Illumina will, […***…] spare parts for the Illumina Hardware used at […***…]. Such spare parts to be kept in stock shall include […***…] for […***…] HiSeq and other Illumina Hardware and Software. […***…] Customer and Illumina agree […***…] the terms and conditions of Illumina’s spare parts contract (Appendix II) will solely govern all matters pertaining to such spare parts.

 

  ii. […***…].

 

  iii. Qualification Services . Installation Qualification, Operational Qualification and Instrument Performance Verification are available upon the Customer’s request at any time during the term of the Agreement. The Base Price for such services, as of the Effective Date, are set forth in Exhibit A-1. The descriptions of these services are listed below:

 

   

Installation Qualification: documentation that facilities in which the instrument has been installed are in accordance with requirements and safety regulations of the original manufacturer.

 

   

Operational Qualification: evaluates the correct functionality of the equipment under test by examining and quantifying the specifications after installation.

 

   

Instrument Performance Verification: ensures the accuracy of the instrument after a major service event or replacement of specific modules.

 

   

Feedback from the Customer on any of these procedures will be considered and may be incorporated into future releases. Customer and Illumina will agree upon the format for such feedback.

4. Additional Rights; Application Specific IP.

 

  a. Additional Rights . (a) Customer’s intended use of Products for Customer Use or Research Use during the Term may require that it obtain from third parties or from Illumina (or its Affiliates) additional rights or licenses above and beyond the rights under Core IP conferred in Section 3, including without limitation, rights to Application Specific IP, Affiliate Application Specific IP, and Third Party IP. Illumina does not guarantee or warrant that Customer’s intended use of Product will not infringe Application Specific IP, Affiliate Application Specific IP, or Third Party IP.

(b) Customer, not Illumina, is responsible for identifying and ensuring that it has rights or licenses to all Intellectual Property, including without limitation, Application Specific IP, Third Party IP, and Affiliate Application Specific IP that are required for Customer to use the Products as intended by Customer for Customer Use and Research Use without infringing such third party and Illumina Intellectual Property Rights, including the Intellectual Property Rights of Illumina’s Affiliates. Customer will obtain required rights to Third Party IP from a third party or required rights to Application Specific IP from Illumina or Affiliate Application Specific IP from Illumina’s Affiliate, or Customer will discontinue use of Products in a manner that infringes Third Party IP, Affiliate Application Specific IP, or Application Specific IP, as applicable. .

(c) Notwithstanding the foregoing, any future grant by Illumina to Customer of rights to Application Specific IP or Affiliate Application Specific IP will be […***…] granted, if at all, under a separate written agreement.

(d) Customer’s breach of any term or condition of this Section 4(a) is a breach of the Agreement.

 

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5. Limitations on Use.

 

  a. Limitations on Use .

 

  i. Customer agrees: (1) to use each Consumable only one time, (2) not to use non-Illumina reagents with Illumina Hardware, (3) to use the Products only within the scope of the rights expressly granted to Customer in Section 3 (Rights Accompanying Purchase), (4) to use the TG Consumables and Temporary Consumables only for Customer Use and Research Use, (5) to use the Non-TG Consumables only for Research Use, (6) to use Hardware and Software only for Customer Use when Hardware and Software is used with TG Consumables and Temporary Consumables, and (7) to only use Products in Customer’s Facilities. The limitations in (1)-(2) do not apply if the Specifications or Documentation for the applicable Consumable expressly states otherwise. […***…].

 

  ii. Customer agrees it will not, and it will not authorize any third party to, engage in any of the following activities: (1) disassemble, reverse-engineer, reverse-compile, or reverse-assemble the Product, (2) separate, extract, or isolate components of Product or subject Product or components thereof to any analysis not authorized in the Specifications or Documentation, (3) gain access to or attempt to determine the methods of operation of the Product, (4) grant a sub-license to any rights received hereunder, including to grant a sublicense to any Software or to any third-party software, or (5) transfer any Software to a third-party (including a Customer Affiliate). […***…].

 

  iii. Customer agrees it will not (1) use the Products for any use outside of Customer Use or Research Use, (2) use the Products in any manner that infringes, or is within the scope of, Application Specific IP including Affiliate Application Specific IP, unless it has received prior express written permission from Illumina under a separate written agreement or amendment to this Agreement to use the Products in a manner addressed in (1) or (2).

 

  b. Illumina Proprietary Information . Customer agrees that it shall only use the Illumina proprietary sequences (e.g., IllumiCode/Universal Sequences, Oligonucleotide Capture Sequences, adapter sequences, and such other proprietary sequences as Illumina may identify from time to time) with the Products. Customer agrees that the contents of and methods of operation of the Products are proprietary to Illumina and/or its Affiliates and contain or embody trade secrets of Illumina and/or its Affiliates.

 

  c. Unauthorized Uses . Customer agrees that (i) the activities described in Section 5a.i and Section 5a.ii (Limitations on Use) (A) are, without limitation, part of the bargained for conditions of sale of the Products, (B) are not included within the Customer Use or the Research Use or otherwise within the rights expressly provided to Customer pursuant to Section 3 (Rights Accompanying Purchase), and (C) each, including restrictions against the use of the Product to perform any of those activities, is an unauthorized use, may infringe Illumina Intellectual Property Rights, and is part of the bargained for conditions of sale of the Products; and (ii) any violation of or breach of any provision of this Section 5 or any use of the Products outside the scope of the rights expressly granted to Customer in Section 3 (Rights Accompanying Purchase) is a breach of this Agreement.

6. Forecasts for TG Consumables; Initial Shipment Date . Please refer to the example in Exhibit B when reading this Section.

 

  a. Forecast . Customer shall, […***…] being a “ Forecast Due Date ”), provide a written forecast detailing the quantity of TG Consumables, on a TG Consumable-by-TG Consumable basis, that Customer requires during […***…] following that Forecast Due Date (each a “ Forecast ”). For clarity, each Forecast starts with the […***…] Forecast Due Date. The general form of the Forecast along with an example of how forecasting works and when Purchase Orders (defined below) are to be provided is found in Exhibit B . The first Forecast is attached to this Agreement as Attachment I . For the avoidance of doubt, Illumina has no obligation to provide TG Consumables during any Forecast period ([…***…]) if Customer has not provided a Forecast for that period as required by the terms of this Agreement, including by Forecast Due Date.

 

  i. One Forecast per Calendar Month Only . Customer may only provide one Forecast per […***…]. If Customer provides more than one Forecast in any […***…] Illumina may elect to use any of the Forecasts provided in that […***…] and the one used by Illumina shall be binding on the Customer. Customer must provide a […***…] Forecast. If Customer does not provide a Forecast by the Forecast Due Date then Illumina, in its sole discretion, may consider the previously provided Forecast as the Forecast that is then due.

 

  ii. Initial Shipment Date . Notwithstanding anything in this Agreement to the contrary, Illumina makes no guarantee that it can ship TG Consumables earlier than […***…] from the Effective Date. For clarity, each Product has a unique catalog number (e.g., TG Consumables have a different catalog number than its corresponding Non-TG Consumable) and therefore Customer will only be required to pay the price associated with the TG Consumable when Customer is purchasing a TG Consumable.

 

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  b. Binding Commitments; Flexibility. The […***…] provided under this Agreement is a binding commitment by Customer to take receipt of and pay for that quantity and type of TG Consumables found in such […***…] (the “ Binding Consumable […***…]”); provided that, the quantity of each TG Consumable (on a TG Consumable-by-TG Consumable basis) to be delivered in such […***…] may vary from the quantity of each TG Consumable (on a TG Consumable-by-TG Consumable basis) that were forecasted to be required in the same […***…] as found in prior Forecast ([…***…] of that prior Forecast) only by up to […***…]%.

 

  c. New TG Consumables . Any TG Consumables that are newly added to this Agreement shall initially be forecasted so that the quantities for purchase and delivery in the first […***…] are […***…].

 

  d. Temporary Consumables Forecast ( […***…] ) . Customer may, in its discretion, provide a forecast of its expected requirements for Temporary Consumables during […***…] of the Agreement.

 

7. Pricing; Purchase Orders.

 

  a. Pricing. Customer shall pay the Net Price for Product. Unless expressly stated otherwise in this Agreement, (i) all prices are in USD, (ii) all payments must be made in USD.

 

  b. Purchase Orders .

 

  i. Purchase Orders and Acceptance . Customer shall order Product using written purchase orders (“ Purchase Order(s) ”). Purchase Orders shall state, at a minimum, the Illumina part number, the Illumina provided quote number (or other reference provided by Illumina), the quantity ordered, price, requested delivery date, and address for delivery. All Purchase Orders shall be sent to the attention of Illumina Customer Solutions or to any other person or department designated by Illumina in writing. Acceptance of a Purchase Order occurs when Illumina provides Customer a Sales Order Confirmation (“ Order Confirmation ”). Purchase Orders submitted in accordance with this Agreement will not be unreasonably rejected by Illumina.

 

  ii. TG Consumable Purchase Orders . The first Purchase Order for TG Consumables must be provided with the first Forecast. Subsequent Purchase Orders for TG Consumables must be provided on the Forecast Due Date and must be for a quantity of and type of TG-Consumables as found in the Binding Consumable […***…]. For the avoidance of doubt, Illumina has no obligation to provide TG Consumables found in the Binding Consumable […***…] if Customer has not provided a Purchase Order by the Forecast Due Date and the failure to provide a Purchase Order will not relieve Customer of any of its obligations arising from Forecasts and such failure may, among other things, result in a delay in delivery of Products to Customer. Each Purchase Order for TG Consumables must include a ship schedule, to be agreed to between Illumina and Customer, that details the quantity of and type of TG Consumables (on a TG Consumable-by-TG Consumable basis) that Customer requires in each calendar month that is covered by the Purchase Order (“ Ship Schedule ”). Illumina has no obligation to accept Purchase Orders that contain TG Consumables or quantities of TG Consumables that exceed what was forecasted by Customer (“ Excess Orders ”); provided that, Illumina […***…] reject such Excess Orders that do not […***…]% of the quantity forecasted unless Illumina agreeing to supply such excess quantity of TG Consumables (i) requires Illumina exercising anything […***…], or (ii) would impair Illumina’s ability to honor supply commitments to other customers. Such additional quantities of TG Consumables must be ordered by using Additional Purchase Orders (set forth below).

 

  iii. Additional Purchase Orders for TG Consumables . Illumina will, in its reasonable discretion, accept additional Purchase Orders for additional quantities of TG Consumables that were not within a given Forecast (“ Additional Purchase Orders ”). Ship dates and quantities of TG Consumables on any Additional Purchase Orders will be mutually agreed to in writing.

 

  c. Payment Instead of Taking TG Consumable . Illumina reserves the right to invoice Customer for […***…]% of the purchase price of any TG Consumables that Customer has a binding commitment to purchase under this Agreement (whether under a Forecast or a Purchase Order), but that Customer has not provided a Purchase Order for, or for which Customer is attempting to cancel the order or delivery for. If there is no applicable Purchase Order, the purchase price shall be the purchase price that would have applied under this Agreement had Customer placed a Purchase Order for such Consumables. […***…] failure to purchase Consumables under a binding commitment under this Agreement (whether under Forecast or a Purchase Order).

 

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  d. Inability to Supply due to Force Majeure; […***…].

 

  i. Inability to Supply due to Force Majeure . Subject to the terms and conditions of this Agreement, in the event Illumina is unable to perform its obligations under this Agreement due to a Force Majeure Event (defined in Section 22.j), […***…].

 

  ii. […***…]. Subject to the terms and conditions of this Agreement, Illumina shall promptly notify Customer if Illumina reasonably believes that Illumina will not have sufficient capacity to supply Customer with the quantity of Products set forth in Customer’s most recent Forecast. In the event such capacity constraint exists, Illumina shall […***…].

 

  e. On Time Deliveries (Applicable to TG Consumables Only) . The “ Promised Delivery Date ” for a TG Consumable shipped from Illumina’s facilities located in (i) the same country as Customer’s Facility shall be the date that is […***…], and (ii) a different country than Customer’s Facility shall be the date that is […***…] after the shipment date for such TG Consumable stated in the Order Confirmation; provided that, Customer and Illumina agree that the shipment date found in the Order Confirmation may be adjusted by mutual agreement of representatives of the Parties, such mutual agreement may be made via email, fax, or in a written and signed agreement. “[…***…]” means […***…] and no later than […***…] after the […***…]. Customer shall earn a credit in an amount equal to […***…]% of the Net Price for each […***…] that does not meet […***…]; provided that, […***…]. This Section 7e provides Customer’s […***…] in a timely manner under this Agreement. For the avoidance of doubt […***…]. Illumina shall provide Customer with […***…].

 

  i. Reporting Late Deliveries. Within […***…] of the end of each calendar quarter of this Agreement and within […***…] of termination or expiration of this Agreement (the “ Due Date ”), Customer will submit a written report to Illumina detailing […***…], and in the case of termination or expiration of this Agreement since the end of the last reporting period, for which Customer is seeking […***…] pursuant to Section 7e (the “Late Delivery Report”). The Late Delivery Report shall be sent in writing to: customerservice@illumina.com. The Late Delivery Report must include the following: […***…].

 

  f. […***…]. Illumina will review the Late Delivery Report. In the event of any discrepancies the Parties will negotiate in good-faith to resolve the matter. Illumina will […***…] within […***…] of the Late Delivery Report; provided that, […***…].

8. Invoices; Payment; Taxes.

 

  a. Invoices and Payment . Illumina shall issue invoices upon shipment of Products. Invoices shall be sent to Customer’s accounts payable department, or any other address designated by Customer in writing. All payments by Customer on such invoices are due within […***…] after the date of the invoice. Any amounts not paid when due under this Agreement (other than amounts disputed by Customer in good-faith) will accrue interest at the rate of […***…]% per month, or the maximum amount allowed by law, if lower. In the event that any payment is not made within […***…] after receiving notice of the delinquency, Customer will be in breach of this Agreement and Illumina shall have the right to take any action allowed in law and in equity in addition to any rights under this Agreement, including without limitation, revoke the rights conferred and/or licenses given hereunder and suspend performance, including shipment, until all payments are made current. Customer shall pay for all costs (including reasonable attorneys’ fees) incurred by Illumina in connection with the collection of late payments. Each Purchase Order is a separate, independent transaction under this Agreement, and Customer has no right of set-off against other Purchase Orders or other transactions with Illumina. Customer agrees to pay for Products supplied hereunder in accordance with the terms and conditions of this Agreement. […***…] Upon such Illumina Hardware meeting such testing criteria, Customer shall sign a document indicating […***…] of such Illumina Hardware. Customer’s failure to sign such document when such Illumina Hardware meets […***…] shall be a material breach of this Agreement by Customer. Payments made by Customer on invoices for Illumina Hardware that are installed by Illumina are due the earlier of (i) […***…] or (ii) […***…]

 

  b. Taxes . All prices and other amounts payable to Illumina hereunder are exclusive of and are payable without deduction for taxes, GST, VAT, customs duties, tariffs or charges now or hereafter claimed or imposed by any governmental authority upon the sale of the Product, all of which will be added to the purchase price or subsequently invoiced to the Customer. With respect to New Zealand Customers only, Customer and Illumina agree that subsection 8(4) Goods and Services Tax Act 1985 does not apply.

 

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9. Shipping Terms; Title and Risk of Loss . Illumina agrees that Customer may choose the carrier for shipments. Unless otherwise agreed upon in writing, all shipments are made DAP (Incoterms 2010) at Customer’s address on the Purchase Order and Customer is responsible for freight and insurance which will be added to the invoice and paid by Customer, except that all shipments to member countries of the E.U. are made DDP (Incoterms 2010) at Customer’s address on the Purchase Order. In all cases title (except for Software and third-party software) and risk of loss transfers to Customer when Product is delivered to such address.

10. Consumable Shelf-life for TG Consumables. The TG Consumables shall have no less than […***…] shelf life at the time of shipment. Shelf-life will be pre-printed on the TG Consumable packaging.

11. Single Lot Shipments/ Kit Lot Testing for TG Consumables.

 

  a. Single Lot Shipments . Illumina shall ensure (i) each shipment of a given TG Consumable includes only such TG Consumable manufactured from the same lot, (ii) each lot of TG Consumables and lot of kits containing TG Consumables is assigned a unique manufacturing lot number, which is displayed on each component, and (iii) each kit in a kit lot is comprised of component of TG Consumables manufactured from the same lots.

 

  b. Kit Lot Testing . Illumina shall test each component reagent that comprises a given TG Consumable together with the other component reagents of that TG Consumable to ensure their functionality, unless sufficient data are available to demonstrate that a given component reagent, or component reagents, if quality tested independently, does not affect performance of the TG Consumable.

 

  c. Certificates of Analysis . Illumina shall, once made available for all TG Consumables as part of Illumina’s standard commercial offering for TG Consumables, provide a Certificate of Analysis for each lot of TG Consumables sold to Customer under this Agreement.

12. Changes to Certain Product; Discontinuations

 

  a. […***…]. In cases where […***…] purchased under this Agreement is being […***…] out or there is a […***…] of such […***…] that results in a change to […***…], Illumina shall make […***…] to provide Customer with a […***…] advance notice […***…] to the […***…]. Illumina will notify Customer of the […***…] options available should Customer desire to replace such […***…]. This change notice will not apply to changes necessitated by causes beyond Illumina’s control or for changes necessary for safety which changes shall be communicated to Customer as soon as practicable after Illumina learns of the need for the changes through Illumina’s normal communication channels for changes.

 

  b. Discontinued/Changed TG Consumables . TG Consumables will not be manufactured in their current configurations indefinitely as a result of product life cycle or other business considerations. Accordingly, a given TG Consumable may be phased out of production and no longer available and/or there may be a new, reconfigured, or repackaged version of a TG Consumable that embodies a material change to form, fit or function of such TG Consumable (such discontinued or materially changed Consumable is referred to as a “ Discontinued Consumable ”). Any product or combination of products that is intended by Illumina to replace such Discontinued Consumable shall be referred to as a “ Substitute Consumable .” In some instances a Substitute Consumable may differ from the Discontinued Consumable through changes in one or more components that comprised the Discontinued Consumable (“ Changed Components ”). In other instances the Substitute Consumable may represent a complete change from the Discontinued Consumable (“ Complete Change ”). In the case of a Discontinued Consumable that will have Changed Components, Illumina will use […***…] but no later than […***…] prior to the date that the Discontinued Consumable will no longer be available for purchase. Illumina will provide […***…]. In the case of a Discontinued Consumable that will have a Complete Change, Illumina will make the Substitute Consumable available for purchase by Customer […***…] no later than […***…] prior to the date that the Discontinued Consumable will no longer be available for purchase. Illumina will provide […***…] free of charge […***…]. Once a Discontinued Consumable is no longer available for purchase (either in the instance of a Complete Change or Changed Component), the Substitute Consumable will automatically be added to this Agreement as a Consumable and the Discontinued Consumable will be removed. The price for a Substitute Consumable will be […***…] for the Substitute Consumable. Use of Substitute Consumables shall be subject to the terms and conditions of this Agreement. Notwithstanding anything to the contrary in this Agreement, if Illumina offers a product or combination of products that, […***…] Illumina may require Customer to begin purchasing such product in lieu of the Product and the Parties will work together […***…] to coordinate such transition and to modify the terms of this Agreement to reflect such change.

 

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13. Regulatory; Quality Audits.

 

  a. Research Use . Customer acknowledges that, unless expressly stated otherwise in writing by Illumina, the Products have not been subjected to regulatory review or approved or cleared by the United States Food and Drug Administration or any other regulatory entity whether foreign or domestic, or otherwise reviewed, cleared or approved under any statute, law, rule or regulation for any purpose, whether research, commercial, diagnostic or otherwise. The Products are labeled For Research Use Only. Illumina does not make any representation, warranty or covenant that pertains in any way to the regulatory status of the Products and Customer’s intended use for Customer Use.

 

  b. Regulatory Approvals . Customer, and not Illumina, is responsible for obtaining any and all regulatory approvals, licenses, and/or certifications necessary for Customer to use the Products as intended by Customer, including without limitation, for Customer Use or Research Use (“ Regulatory Approvals ”). Customer will ensure it has any regulatory approvals that are necessary for Customer’s intended use of the Products. Accordingly, Customer agrees to (i) diligently investigate and identify which Regulatory Approvals apply to Customer’s use of the Products, (ii) obtain and maintain all Regulatory Approvals throughout the time that Customer uses the Products, and (iii) use the Products in compliance with all applicable laws and regulations. Customer agrees to promptly disclose to Illumina any communication that it receives from a government body, agency, or other regulatory or accrediting body pertaining to the Products or Customer’s use of the Products.

 

  c. Quality Audits . Illumina agrees to allow Customer to audit Illumina’s operations that pertain to TG Consumables, upon […***…] prior written notice, during normal business hours, no more often than […***…], and at […***…], in order to satisfy its obligations under applicable law. The locations, times, dates, scope, and goals for such audits will be mutually agreed upon in writing between the Parties. Customer shall sign Illumina’s confidentiality agreement, if requested by Illumina, prior to conducting such audit.

14. Limitation of Liability.

EXCEPT WITH RESPECT TO ANY CLAIM OR LIABILITY ARISING OUT OF A PARTY’S BREACH OF ITS CONFIDENTIALITY OBLIGATIONS HEREUNDER, TO THE EXTENT PERMITTED BY LAW, IN NO EVENT SHALL EITHER PARTY OR THEIR RESPECTIVE AFFILIATES BE LIABLE TO THE OTHER PARTY OR ANY THIRD PARTY FOR COSTS OF PROCUREMENT OF SUBSTITUTE PRODUCTS OR SERVICES, LOST PROFITS, DATA OR BUSINESS, OR FOR ANY INDIRECT, SPECIAL, INCIDENTAL, EXEMPLARY, CONSEQUENTIAL, OR PUNITIVE DAMAGES OF ANY KIND ARISING OUT OF OR IN CONNECTION WITH, WITHOUT LIMITATION, THE PURCHASE OR SALE OF THE PRODUCTS, THEIR USE, SUCH PARTY’S PERFORMANCE HEREUNDER OR ANY OF THESE TERMS AND CONDITIONS, HOWEVER ARISING OR CAUSED AND ON ANY THEORY OF LIABILITY (WHETHER IN CONTRACT, TORT (INCLUDING NEGLIGENCE), STRICT LIABILITY OR OTHERWISE).

EXCEPT WITH RESPECT TO THE PARTY’S INDEMNIFICATION OBLIGATIONS AND ANY CLAIM OR LIABILITY ARISING OUT OF A PARTY’S BREACH OF ITS CONFIDENTIALITY OBLIGATIONS HEREUNDER, EACH PARTY’S TOTAL AND CUMULATIVE LIABILITY ARISING UNDER OR IN CONNECTION WITH THIS AGREEMENT, WHETHER IN CONTRACT, TORT (INCLUDING NEGLIGENCE), STRICT LIABILITY OR OTHERWISE, SHALL IN NO EVENT EXCEED AN AMOUNT EQUAL TO [...***...].

THE LIMITATION OF LIABILITY IN THIS SECTION SHALL APPLY EVEN IF A PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, AND NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY.

NOTWITHSTANDING ANYTHING IN THIS AGREEMENT, INCLUDING, WITHOUT LIMITATION, THIS SECTION 14, TO THE CONTRARY, NOTHING IN THIS AGREEMENT SHALL LIMIT EITHER PARTY’S LIABILITY TO THE OTHER PARTY OR ITS AFFILIATES FOR […***…].

15. Limited Warranties . TO THE EXTENT PERMITTED BY LAW AND EXCEPT FOR THE EXPRESS LIMITED PRODUCT WARRANTIES SET FORTH IN SECTION 18 OF THIS AGREEMENT, ILLUMINA MAKES NO (AND EXPRESSLY DISCLAIMS ALL) WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, WITH RESPECT TO THE PRODUCTS OR ANY SERVICES PROVIDED IN CONNECTION WITH THIS AGREEMENT, INCLUDING WITHOUT LIMITATION ANY IMPLIED WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NONINFRINGEMENT, OR ARISING FROM COURSE OF PERFORMANCE, DEALING, USAGE OR TRADE. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, ILLUMINA MAKES NO CLAIM, REPRESENTATION, OR WARRANTY OF ANY KIND AS TO THE UTILITY OF THE PRODUCTS FOR CUSTOMER’S INTENDED USES.

 

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16. Confidentiality .

 

  a. Confidential Information . The Parties acknowledge that a Party (the “ Recipient Party ”) may have access to confidential or proprietary information (“ Confidential Information ”) of the other Party (the “ Disclosing Party ”) under this Agreement. In order to be protected as Confidential Information, information must be disclosed with a confidential or other similar proprietary legend and in the case of orally or visually disclosed Confidential Information, the Disclosing Party shall notify the Recipient Party of its confidential nature at the time of disclosure and provide a written summary that is marked with a confidential or other similar proprietary legend to the Recipient Party within […***…] (email acceptable). Confidential Information may include, but shall not be limited to, inventions, designs, formulas, algorithms, trade secrets, know-how, customer lists, demand forecasts, cost and pricing information, business and marketing plans, and other business, regulatory, manufacturing and financial information. This Agreement, including its terms and conditions is Confidential Information. During the term of this Agreement or […***…], whichever is longer, the Recipient Party shall hold the Disclosing Party’s Confidential Information in confidence using at least the degree of care that is used by the Recipient Party with respect to its own Confidential Information, but no less than reasonable care. The Recipient Party shall disclose the Confidential Information of the Disclosing Party solely on a need to know basis to its employees, contractors, officers, directors, representatives, and Affiliates under written nondisclosure and restricted use terms consistent with this Agreement. The Recipient Party shall not use the Disclosing Party’s Confidential Information for any purpose other than exercising its rights and fulfilling its obligations under this Agreement. The Confidential Information shall at all times remains the property of the Disclosing Party. Upon the termination or expiration of this Agreement, the Recipient Party shall, upon written request of the Disclosing Party, return to the Disclosing Party or destroy the Confidential Information of the Disclosing Party. Notwithstanding the foregoing, the Recipient Party may maintain one copy of the Disclosing Party’s Confidential Information to be retained by the Recipient Party’s Legal Department for archival purposes only.

 

  b. Exceptions . Notwithstanding any provision contained in this Agreement to the contrary, neither Party shall be required to maintain in confidence or be restricted in its use of any of the following: (i) information that, at the time of disclosure to the Recipient Party, is in the public domain through no breach of this Agreement or another obligation of confidentiality owed to the Disclosing Party or its Affiliates by the Receiving Party; (ii) information that, after disclosure hereunder, becomes part of the public domain by publication or otherwise, except by breach of this Agreement or breach of another obligation of confidentiality owed to the Disclosing Party or Affiliate by the Receiving Party; (iii) information that was in the Recipient Party’s or its Affiliate’s possession at the time of disclosure hereunder by the Disclosing Party unless subject to an obligation of confidentiality or restricted use owed to the Disclosing Party or its Affiliate; (iv) information that is independently developed by or for the Recipient Party or its Affiliates without use of or reliance on Confidential Information of the Disclosing Party; or (v) information that the Recipient Party receives from a third party where Recipient Party reasonably believes such third party was under no obligation of confidentiality to the Disclosing Party or its Affiliate with respect to such information.

 

  c. Disclosures Required by Law. The Recipient Party may disclose Confidential Information of the Disclosing Party as required by court order, operation of law, or government regulation, including in connection with submissions to regulatory authorities with respect to the Products; provided that, the Recipient Party promptly notifies the Disclosing Party of the specifics of such requirement prior to the actual disclosure, or promptly thereafter if prior disclosure is impractical under the circumstances, uses diligent efforts to limit the scope of such disclosure or obtain confidential treatment of the Confidential Information if available, and allows the Disclosing Party to participate in the process undertaken to protect the confidentiality of the Disclosing Party’s Confidential Information including, without limitation, cooperating with the Disclosing Party in order to comply with the requirements of such order, law, or regulation in a manner that discloses the least amount necessary, if any, of the Confidential Information of the Disclosing Party.

 

  d. Injunctive Relief . Each Party acknowledges that any use or disclosure of the other Party’s Confidential Information other than in accordance with this Agreement may cause irreparable damage to the other Party. Therefore, in the event of any such use or disclosure or threatened use or threatened disclosure of the Confidential Information of either Party hereto, the non-breaching Party shall be entitled, in addition to all other rights and remedies available at law or in equity, to seek injunctive relief against the breach or threatened breach of any obligations under this Section.

 

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  e. Disclosure of Agreement . Except as expressly provided otherwise in this Agreement, neither Party may disclose this Agreement, the terms of this Agreement, including any financial terms thereof, and the subject matter of this Agreement to any third party without the prior written consent of the other Party, which consent shall not be unreasonably withheld. Notwithstanding anything in this Agreement to the contrary, each Party acknowledges and agrees that either Party may, to the extent required by applicable healthcare disclosure law, disclose this Agreement, its terms, its subject matter, including financial terms (e.g, Illumina’s compliance with the Sunshine Act).

 

17. Indemnity; Insurance .

 

  a. Infringement . Subject to the terms and conditions of this Agreement, including without limitation, the Exclusions to Indemnification Obligation (Section 17(b) below), Indemnification by Customer (Section 17(c) below), Conditions of Indemnification Obligation (Section 17(e) below), and Customer’s obligations to obtain rights to Third Party IP pursuant to Section 4 (Additional Rights), Illumina shall (i) defend, indemnify and hold harmless Customer, its Affiliates, and their respective officers, directors, representatives and employees (each a “ Customer Indemnitee ”), against any claim or action brought by a third-party (who is not an Affiliate of Customer or an Affiliate of Illumina) as a result of the (A) Products when used for Research Use, and (B) Illumina Hardware, Software, TG Consumables, and Temporary Consumables when used for Customer Use, in accordance with the terms and conditions of this Agreement, infringing the valid and enforceable Intellectual Property Rights of a third party (who is not an Affiliate of Customer or an Affiliate of Illumina) (“ Illumina Infringement Claim ”), and (ii) pay all settlements entered into, and all final judgments and costs (including reasonable attorneys’ fees) awarded against such Customer Indemnitee in connection with such Illumina Infringement Claim. If the Products or any part thereof, become, or in Illumina’s opinion may become, the subject of an Illumina Infringement Claim against Illumina (including its Affiliates) or Customer, Illumina shall have the right, at its option, to (A) procure for Customer the right to continue using such Products, (B) modify or replace such Products with substantially equivalent noninfringing substitutes, or (C) require the return of such Products that are or may become the subject of an Illumina Infringement Claim and terminate the rights, license, and any other permissions given hereunder with respect thereto and refund to Customer the depreciated value (as shown in Customer’s official records) of the returned Product at the time of such required return; provided that, no refund will be given for used-up or expired Consumables. This Section states the entire liability of Illumina for any infringement of third party Intellectual Property Rights.

 

  b. Exclusions to Indemnification Obligation . Illumina shall have no obligation under Section 17(a), including to defend, indemnify or hold harmless Customer or pay any settlements with respect to any Illumina Infringement Claim, to the extent such Illumina Infringement Claim arises from: (i) the use of the Products in any manner or for any purpose outside the scope of the rights, license(s), or permissions granted by Illumina to Customer with respect to the Products under Section 3 (Rights Accompanying Purchase), (ii) the use of the Products in any manner or for any purpose not in accordance with the Specifications or Documentation, (iii) the use of the Products in combination with any other products, materials, or services not supplied by Illumina, (iv) the use of the Products to perform any assay or other process not supplied by Illumina, (v) Illumina’s compliance with specifications or instructions for such Products furnished to Illumina by Customer or by a third party on behalf of Customer (e.g., custom goods), (vi) the use of the Products in any manner or for any purpose that requires rights to Application Specific IP, Affiliate Application Specific IP […***…] or (vii) Customer’s breach of any term or condition, including breach of a representation or warranty, made hereunder or included in this Agreement, wherein any use specified in (i), (ii), (iii) (iv) or (vi) is a use performed by Customer, its Affiliate, or a party to whom Customer or its Affiliate transfers Product (regardless of whether transfer is permitted under this Agreement) (each of (i) – (vii), are referred to as an “ Excluded Claim ”).

 

  c.

Indemnification by Customer . Subject to the terms and conditions of this Agreement, including without limitation the Conditions of Indemnification provision below (Section 17e), Customer shall defend, indemnify and hold harmless Illumina, its Affiliates, their collaborators and development partners that contributed to the development of the Products, and their respective officers, directors, representatives and employees (“ Illumina Indemnitee (s)”), against any third party claims, causes of action, and all liabilities, damages, fines, penalties, causes of action, and losses of any and every kind (“ Claim ”), including without limitation, claims relating to or arising out of personal injury or death, and claims relating to or arising out of infringement of a third party’s Intellectual Property Rights, to the extent a Claim results from, relates to, or arises out of (i) Customer’s breach of any term or condition, including breach of a representation or warranty made hereunder or included in this Agreement, (ii) Customer’s use of the

 

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  Product outside of the scope of the rights, license(s), and permissions expressly granted to Customer with respect to such Product pursuant to Section 3 (Rights Accompanying Purchase), (iii) Customer’s use of a Product not in accordance with its Documentation or Specifications, (iv) any of the activities in (i) through (vii) of Excluded Claim, (v) Customer’s failure to obtain and maintain Regulatory Approvals, or (vi) any unauthorized use of the Products in any manner, or for any purpose that requires rights to Affiliate Application Specific IP, Application Specific IP, or Third Party IP.

 

  d. Further Indemnification by Illumina . In addition to and without limiting the obligations set forth under Section 17a and subject to the terms and conditions of this Agreement, including without limitation, the Conditions of Indemnification provision below (Section 17e), Illumina shall defend, indemnify and hold harmless each Customer Indemnitee against any Claims relating to or arising out of personal injury or death that results from Customer’s use of a defective Product purchased by Customer under this Agreement (“ Personal Injuries ”), specifically excluding any Personal Injuries (i) arising from or in any way relating to any actions (or inactions) taken by individuals or healthcare providers (e.g., persons, patients, physicians, healthcare providers) who receive results from Customer’s use of Products and (ii) that could have been avoided by Customer using reasonable measures..

 

  e. Conditions of Indemnification . The Parties’ indemnification obligations under this Section 17 are subject to the Party seeking indemnification (i) notifying the other, indemnifying Party promptly in writing of an Illumina Infringement Claim or Third Party Claim, as the case may be, (provided that a delay in providing shall not relieve the other Party of its indemnification obligations except to the extent it is prejudiced by such delay) (ii) giving indemnifying Party exclusive control and authority over the defense of such Claim, (iii) not admitting infringement of any Intellectual Property Right without prior written consent of the indemnifying Party, (iv) not entering into any settlement or compromise of any such action without the indemnifying Party’s prior written consent not to be unreasonably withheld, conditioned, or delayed, and (v) providing all reasonable assistance to the indemnifying Party that the indemnifying Party requests and ensuring that its officers, directors, representatives and employees and other indemnitees likewise provide assistance (provided that indemnifying Party reimburses the indemnified Party(ies) for its/their reasonable out-of-pocket expenses incurred in providing such assistance). An indemnifying Party will not enter into or otherwise consent to an adverse judgment or order, or make any admission as to liability or fault that would adversely affect the indemnified Party, or settle a dispute without the prior written consent of the indemnified Party, which consent not to be unreasonably withheld, conditioned, or delayed.

 

  f. Third-Party Goods . Notwithstanding anything in this Agreement to the contrary, Illumina shall have no indemnification obligations with respect to any goods or software originating from a third party and supplied to Customer under this Agreement. Third-party goods are those that are labeled or branded with a third-party’s name. Customer’s sole right to indemnification with respect to such third party goods or software shall be pursuant to the original manufacturer’s or licensor’s indemnity, if any, to Customer, to the extent provided by the original manufacturer or licensor.

 

  g. Insurance . Customer shall obtain and maintain insurance coverage as follows: (i) a policy for liability (including professional and errors & omissions) in the amount of no less than […***…] per occurrence, and (ii) separately a policy for commercial general liability and public liability insurance (that excludes product liability) in the amount of no less than […***…], in the case of each of (i) and (ii) to protect the Illumina Indemnitees under the indemnification provided hereunder. Illumina shall be an additional insured on Customer’s insurance policy or policies and, upon request, Illumina shall be provided appropriate certificates of insurance. Such policies shall provide a waiver of subrogation against Illumina as an additional insured and contain no cross-liability exclusion. Customer agrees that the Parties intend that Customer’s insurance coverage will be primary over any other potentially applicable insurance. Customer shall ensure that any umbrella or excess liability coverage shall not treat the naming of Illumina as an additional insured as a coverage change that voids or terminates such coverage. The policies may not be cancelled or amended without […***…] prior written notice to Illumina, and the policies should so state. Customer shall maintain such insurance at all times during the Agreement and for a period of […***…].

18. Warranty for Products . All warranties are personal to Customer and may not be transferred or assigned to a third-party, including an Affiliate of Customer. All warranties for Products are Facility specific and do not transfer if the Product is moved to another Facility of Customer, unless Illumina conducts such move. These warranties only apply to Products purchased under this Agreement.

 

  a.

Warranty for Consumables . Illumina warrants that TG Consumables, other than custom TG Consumables, will have no less than […***…] shelf-life at the time of shipment from Illumina and conform to their Specifications until the later of (i) […***…] from the date of shipment from Illumina, and (ii) […***…] by Illumina, but in no event later than […***…] from the date of shipment. Illumina warrants that Non- TG Consumables, other than custom

 

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  Non-TG Consumables, will conform to their Specifications until the later of (i) […***…] from Illumina, and (ii) any expiration date or the end of the shelf-life pre-printed on such Non-TG Consumable by Illumina, but in no event later than […***…]. With respect to custom Consumables (i.e., Consumables, whether they are TG Consumables or Non-TG Consumables) made to specifications or designs made by Customer or provided to Illumina by, or on behalf of, Customer, Illumina only warrants that the custom Consumables will be made and tested in accordance with Illumina’s standard manufacturing and quality control processes. Illumina makes no warranty that custom Consumables will work as intended by Customer or for Customer’s intended uses.

 

  b. Warranty for Hardware . Illumina warrants that Illumina Hardware, other than Upgraded Components, will conform to its Specifications for a period of […***…] from Illumina unless the Illumina Hardware includes Illumina-provided installation in which case the warranty period begins on the date of installation or […***…], whichever occurs first (such warranty to be known as the “ Base Hardware Warranty ”); provided that, the Base Hardware Warranty period for Illumina Hardware that requires Customer’s signature of document after passing certain testing criteria starts on the date that the Illumina Hardware passed such testing criteria. “ Upgraded Components ” means Illumina-provided components, modifications, or enhancements to Hardware that was acquired by Customer prior to the date Illumina provides these Upgraded Components. Illumina warrants that Upgraded Components will conform to their Specifications for a period of […***…]. Upgraded Components do not extend the warranty for the Hardware unless the upgrade was conducted by Illumina at Illumina’s facilities in which case the upgraded Hardware shipped to Customer comes with a Base Hardware Warranty.

 

  c. Exclusions from Warranty Coverage . The foregoing warranties in Section 18(a) and (b) shall not apply to the extent a non-conformance is due to (i) abuse, misuse, neglect, negligence, accident, improper storage, or use contrary to the Documentation (misuse includes use of a Consumable more than one time), (ii) improper handling, installation, maintenance, or repair (other than by Illumina personnel), (iii) unauthorized alteration, (iv) acts of God, including without limitation, fire, flood, tornado, earthquake, hurricane, lightning, threat of or actual acts of terrorism or war, or (v) use with a third party’s good not provided by Illumina (unless its Documentation or Specifications expressly state such third party’s good is for use with it).

 

  d. Sole Remedy . In the event Product does not conform to warranty, Illumina will repair or replace the Product, the choice being in its discretion. The following states Customer’s sole remedy and Illumina’s sole obligations under the foregoing warranties.

 

  i. Consumables . Illumina will repair or replace the Consumable in its discretion. Repaired Consumables come with a warranty that is […***…] or the […***…], whichever is longer, and replaced Consumables come with the same warranty as a new Consumable. With respect to replaced TG Consumables, Illumina will use commercially reasonable efforts to provide replacement TG Consumables in Customer’s next scheduled shipment where single lot per shipment can be maintained.

 

  ii. Hardware . Illumina will repair or replace the Hardware its discretion. Illumina Hardware may be repaired or replaced with functionally equivalent, reconditioned, or new Illumina Hardware or components (if only a component of Illumina Hardware is non-conforming). If the Illumina Hardware is replaced in its entirety, the warranty period for the replacement is […***…], whichever is later. If only a component is being repaired or replaced, the warranty period for such component is […***…], whichever is longer.

 

  e. Procedure . In order to be eligible for repair or replacement under this warranty Customer must (i) promptly contact Illumina’s customer support department to report the non-conformance, (ii) cooperate with Illumina in the diagnosis of the non-conformance, and (iii) return the Product, transportation charges prepaid, to Illumina following Illumina’s instructions or, if agreed by Illumina, grant Illumina’s authorized repair personnel access to this Product in order to confirm the non-conformance and make repairs.

 

  f. Third-Party Goods . Illumina has no warranty obligations with respect to any goods or software originating from a third party and supplied to Customer under this Agreement. Third-party goods or software are those that are labeled or branded with a third-party’s name. The warranty for third-party goods or software, if any, are provided by the original manufacturer. Illumina will cooperate with Customer in filing any warranty claims with such third-parties.

 

19. Term; Cancellation; Termination .

 

  a. Term . This Agreement shall commence on the Effective Date and terminate 5 years thereafter (the “ Term ”) unless otherwise terminated early as provided hereunder.

 

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  b. Cancellation of Orders . All Purchase Orders accepted by Illumina are non-cancelable by Customer and may not be modified without the prior written consent of Illumina.

 

  c. Termination . Without limiting any other rights to terminate expressly provided in this Agreement or under law, this Agreement may be terminated early as follows:

 

  i. Breach of Agreement . If either Party materially breaches this Agreement and fails to cure such breach within […***…] after receiving written notice of the breach, the non-breaching Party shall have the right to terminate this Agreement by providing written notice to the other Party. The Parties agree that a material breach of Section 3.a (Rights Accompanying Purchase – Consumables), 3.b (Rights Accompanying Purchase – Illumina Hardware and Software), 3.c (Existing Instruments), 5 (Limitation on Use), 17.g (Insurance), 22.g (Assignment) or 22.h (Export) is a material breach of this Agreement.

 

  ii. Bankruptcy . Either Party may terminate this Agreement, effective immediately upon written notice, if the other Party becomes the subject of a voluntary or involuntary petition in bankruptcy or any proceeding relating to insolvency, receivership, liquidation or composition for the benefit of creditors that is not dismissed within […***…]. In the event of any bankruptcy or insolvency proceeding commenced by or against Customer, Illumina shall be entitled to cancel any Purchase Order then outstanding and not accept any further Purchase Order until bankruptcy or insolvency proceeding is resolved.

 

  iii. Continuous Supply Failure. Subject to the terms and conditions of this Agreement, Customer may terminate this Agreement early by providing […***…] prior written notice in the event Illumina does not provide TG Consumables or Temporary Consumables for valid Purchase Orders accepted by Illumina for a period of […***…].

 

  d. Right to Cease Delivery . In addition to any other remedies available to Illumina under this Agreement, in equity, or at law, Illumina reserves the right to cease shipping Product to Customer immediately if Customer (1) uses the Product outside the scope of the rights expressly conferred to Customer pursuant to Section 3 (Rights Accompanying Purchase) of this Agreement, (2) fails to pay undisputed invoices that are […***…] past due, (3) materially breaches any provision of Section 5, or (4) materially breaches any Customer representation or warranty made hereunder.

20. Survival of Obligations All provisions of this Agreement that by their nature should survive termination or expiration of the Agreement shall survive termination or expiration, including without limitation, Sections 1 (Definitions), 2.a (Applicability of Terms and Conditions – Exclusive Terms), 3.a (Rights Accompanying Purchase – Consumables), 3.b (Rights Accompanying Purchase – Illumina Hardware and Software), 3.d (Rights Accompanying Purchase – Software), 4.a. (Additional Rights), 5 (Limitations on Use), 7.a (Pricing; Purchase Orders – Pricing), 7.c (Pricing; Purchase Orders – Payment Instead of Taking TG Consumable), 7.e,( (Pricing; Purchase Orders – On Time Deliveries) 8 (Invoices; Payment; Taxes), 9 (Shipping Terms; Title and Risk Loss), 13.a (Regulatory; Quality Audits – Research Use), 13.b (Regulatory; Quality Audits – Regulatory Approvals), 14 (Limitation of Liability), 15 (Limited Warranties), 16 (Confidentiality) , 17 (Indemnity; Insurance), 18 (Warranty for Products), 19 (Term; Cancellation; Termination), 20 (Survival of Obligations), 21 (Governing Law), and 22 (Miscellaneous), and all payment obligations incurred hereunder. Termination or expiration of this Agreement shall not relieve the Parties of any liability or obligation which accrued hereunder prior to the effective date of such termination or expiration nor preclude either Party from pursuing all rights and remedies it may have hereunder or at law or in equity with respect to any breach of this Agreement, nor prejudice either Party’s right to obtain performance of any obligation.

21. Governing Law. This Agreement and performance by the Parties hereunder shall be construed in accordance with the laws of the State of New York, U.S.A., without regard to provisions on the conflicts of laws.

 

22. Miscellaneous .

 

  a. Representations and Warranties .

 

  i. Customer . Customer represents and warrants that (i) it owns or leases the Facilities; (ii) it has the right and authority to enter into this Agreement; (ii) it has all rights and licenses necessary to purchase and use the Products; (iii) it does not require a license to any Illumina Application Specific IP, including without limitation, any Affiliate Application Specific IP in order to use the Products; (iv) when performing Customer Use, it will only use the TG Consumables and Temporary Consumables; (v) it will use the Non-TG Consumables only for Research Use; and (vi) the person(s) signing this Agreement on its behalf has the right and authority to bind Customer to the terms and conditions of this Agreement.

 

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  ii. Illumina. Illumina represents and warrants that (i) it has the right and authority to enter into this Agreement, (ii) it has all rights and licenses necessary to sell the Products in accordance with the terms and conditions of this Agreement, and (iii) the person signing this Agreement on its behalf has the right and authority to bind Illumina to the terms and conditions of this Agreement.

 

  b. Customer Inventory of Spare Parts . If Customer and Illumina agree to house spare parts for Illumina Hardware at Customer’s Facility the terms and conditions of Appendix II shall govern such spare parts. In the event of any conflict between the terms and conditions of Appendix II and the terms and conditions of this Agreement, the terms and conditions of Appendix II shall supersede.

 

  c. Illumina Affiliates . Customer agrees that Illumina may delegate its performance under this Agreement to one or more of its Affiliates. Illumina invoices and other documentation may come from an Illumina Affiliate and Customer shall honor those just as if they came directly from Illumina.

 

  d. Legal Compliance . Nothing in this Agreement is intended, or should be interpreted, to prevent either Party from complying with all applicable laws, regulations, or governmental orders.

 

  e. Documentation; Hierarchy of Documents . Customer agrees that it shall use the Documentation in accordance with the restrictions set forth therein (e.g., restrictions against altering, modifying or copying, or removing the Documentation from Customer’s facility), and further agrees that it will use Products in accordance with the Product Documentation. Notwithstanding anything to the contrary in the Documentation, Specifications, or EULA in the event of inconsistency between the terms and conditions of this Agreement and the term of such documents, the terms and conditions of this Agreement shall supersede and control. In no event will any such documents […***…] when such use otherwise complies with this Agreement. Permitted copies of the Documentation shall include Illumina’s copyright and other proprietary notices.

 

  f. Severability; No Waiver . If any provision of this Agreement is held invalid or unenforceable, such provision shall be enforced to the maximum extent permissible so as to effect the intent of the Parties, and the remainder of this Agreement will continue in full force and effect. The failure of either Party to exercise any right granted herein or to require any performance of any term of this Agreement or the waiver by either Party of any breach of this Agreement shall not prevent a subsequent exercise or enforcement of, or be deemed a waiver of any subsequent breach of, the same or any other term of this Agreement.

 

  g. Assignment . Neither Party may assign or transfer this Agreement or any rights or obligations under this Agreement, whether voluntary, by operation of law or otherwise, without the prior written consent of the other Party; provided, however, that no consent shall be required for any assignment in connection with any merger, acquisition or the sale of all or substantially all of the stock or assets of a Party to a party that agrees in writing to be bound by the terms and conditions of this Agreement, and […***…], and (ii) Illumina may assign this Agreement to any Affiliate without Customer’s written consent. Any assignment or transfer of this Agreement made in contravention of the terms hereof shall be null and void. Subject to the foregoing, this Agreement shall be binding on and inure to the benefit of the Parties’ respective successors and permitted assigns.

 

  h. Export . Customer agrees that the Consumables, or any related technology provided under this Agreement may be subject to restrictions and controls imposed by the United States Export Administration Act and the regulations thereunder (or the regulations and laws of another country). Customer agrees not to export or re-export the Consumables, or any related technology into any country in violation of such controls or any other laws, rules or regulations of any country, state or jurisdiction.

 

  i. Notices . All notices required or permitted under this Agreement shall be in writing and shall be deemed received when (i) delivered personally; (ii) 5 days after having been sent by registered or certified mail, return receipt requested, postage prepaid (or 10 days for international mail); or (iii) 1 day after deposit with a commercial express courier specifying next day delivery or, for international courier packages, 2 days after deposit with a commercial express courier specifying 2-day delivery, with written verification of receipt. All notices shall be sent to the following or any other address designated by a party using the procedures set forth in this Sub-Section:

 

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If to Illumina:

 

Illumina, Inc.

5200 Illumina Way

San Diego, CA 92122

Attn: Sr. VP. Translational Consumer Genomics

  

If to Customer

Foundation Medicine Inc

One Kendall Square, B3501

Cambridge MA 02139

Attn: Chief Business Officer

With a copy to:    With a copy to:

Illumina, Inc.

5200 Illumina Way

San Diego, CA 92122

Attn: General Counsel

  

Foundation Medicine Inc

One Kendall Square, B3501

Cambridge MA 02139

Attn: General Counsel

 

  j. Force Majeure . Neither Party shall be responsible for any failure to perform or delay in the performance of this Agreement attributable in whole or in part to any cause beyond its reasonable control, including but not limited to acts of God, fire, flood, tornado, earthquake, hurricane, lightning, government actions, actual or threatened acts of war, terrorism, civil disturbance or insurrection, sabotage, labor shortages or disputes […***…], failure or delay in delivery by Illumina’s suppliers or subcontractors, transportation difficulties, shortage of energy, raw materials or equipment, or the other Party’s fault or negligence (a “ Force Majeure Event ”). In the event of any delay caused by a Force Majeure Event, the delivery date for performance shall be deferred for a period equal to the time lost by reason of the delay. Notwithstanding anything in this Agreement to the contrary, Customer’s payment obligations are not affected by this provision.

 

  k. Entire Agreement; Amendment; Waiver . This Agreement represents the entire agreement between the Parties regarding the subject matter hereof and supersedes all prior discussions, communications, agreements, and understandings of any kind and nature between the Parties. No amendment to this Agreement will be effective unless in writing and signed by both Parties. No waiver of any right, condition, or breach of this Agreement will be effective unless in writing and signed by the Party who has the right to waive the right, condition or breach and delivered to the other Party. Customer agrees that (i) actual knowledge by Illumina, Illumina’s Affiliates, or their respective directors, officers, employees, or agents that Customer is using Product in any manner or for any purpose outside the scope of the rights expressly granted to Customer in Section 3 (Rights Accompanying Purchase) does not (A) waive or otherwise limit any rights that Illumina, or Illumina’s Affiliates, may have as a result of such use of the Product, including without limitation, any rights or remedies available under the terms and conditions of this Agreement, and any rights or remedies available at law or in equity, (B) grant Customer a license to any intellectual property owned or controlled by Customer or Customer’s Affiliates whether by implication, estoppel, or otherwise with respect to such use of the Product, and (ii) any trade usage, and any course of performance or course of dealing between Illumina and Customer, will not be used to interpret the terms and conditions of this Agreement, including without limitation, the scope of the rights for Product conferred under Section 3 (Rights Accompanying Purchase).

 

  l. Relationship of the Parties; No Third-Party Beneficiaries . The Parties are independent contractors under this Agreement and nothing contained in this Agreement shall be construed as creating a partnership, joint venture or agency relationship between the Parties or, as granting either Party the authority to bind or contract any obligation in the name of the other Party, or to make any statements, representations, warranties or commitments on behalf of the other Party.

 

  m.

Publicity; Use of Names or Trademarks; Disclosure of Agreement . Each Party shall obtain the prior written consent of the other on all press releases or other public announcements relating to this Agreement, including its existence or its terms; provided that, Customer may issue a press release relating to the execution of this Agreement promptly following the Effective Date, the form and substance of which shall be mutually agreed upon by the Parties. Notwithstanding any of the foregoing, if required by law, including without limitation by the U.S. Securities and Exchange Commission or any stock exchange or Nasdaq, then a Party may issue a press release or other public statement regarding this Agreement or file a copy of this Agreement as an exhibit to a public filing; provided that, the other Party has received prior written notice of such intended press release, public statement or disclosure and an opportunity to seek a protective order or confidentiality treatment if practicable under the circumstances and the right to propose redactions to this Agreement if it is to be filed as an exhibit to a public filing and such proposals not to be

 

***Confidential Treatment Requested***

 

ILLUMINA CONFIDENTIAL

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  unreasonably refused, and the Party subject to the requirement cooperates with the other Party to limit the disclosure and includes in such press release, public statement or disclosure only to the minimum amount of information relating to this Agreement as is required by such law. Except as required by applicable law or regulations, neither Party shall use the name or trademarks of the other Party without the express prior written consent of the other Party.

 

  n.

Headings; Interpretation; Miscellaneous . Sections, titles and headings in this Agreement are for convenience only and are not intended to affect the meaning or interpretation hereof. This Agreement has been negotiated in the English language. Any translation is for convenience only. Only the English language version shall control. Whenever required by the context, the singular term shall include the plural, the plural term shall include the singular, and the gender of any pronoun shall include all genders. As used in this Agreement except as the context may otherwise require, “include”, “includes”, “including”, and “such as” are deemed to be followed by “without limitation”, whether or not they are in fact followed by such words or words of like import, and “will” and “shall” are used synonymously. Except as expressly stated, any reference to “days” shall be to calendar days, and “business day” shall mean all days other than Saturdays, Sundays or a national or local holiday recognized in the United States, and any reference to “calendar month” shall be to the month and not a 30 day period, and any reference to “calendar quarter” shall mean the first 3 calendar months of the year, the 4-6 th calendar months of the year, the 7-9 th calendar months of the year, and the last 3 calendar months of the year. Whenever the last day for the exercise of any privilege or the discharge of any duty hereunder shall fall on a Saturday, Sunday, or national holiday, the Party having such privilege or duty shall have until 5:00 pm PST on the next succeeding business day to exercise such privilege or to discharge such duty. It is further agreed that no usage of trade or other regular practice between the Parties hereto shall be used to interpret or alter the terms of this Agreement. Ambiguities, if any, in this Agreement shall not be construed against any particular Party, irrespective of which Party may be deemed to have authored the ambiguous provision. Illumina is constantly innovating and developing new products or new versions of products. If specific products are listed in this Agreement, Illumina is not guaranteeing that the specific products will be manufactured throughout the Term.

 

  o. Counterparts . This Agreement may be executed in one or more counterparts, and each of which shall be deemed to be an original, and all of which shall constitute one and the same instrument.

IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be executed by their respective duly authorized representatives.

 

Customer:     Illumina:
By:   /s/ Steven J. Kafka     By:   /s/ Nicholas Naclerio
Name:   Steven J. Kafka, Ph.D.     Name:   Nicholas Naclerio
Title:   Chief Operating Officer     Title:   SVP Corporate & Venture Development
Date:   24 July 2013     Date:   7/25/2013

 

ILLUMINA CONFIDENTIAL

18


Exhibit A

Products

Product Prices […***…].

All Product prices in the tables below are at the List Price in effect on the Effective Date. List prices […***…]. Discounts are calculated as set forth in Exhibit A-1.

Only those Products listed in this Exhibit, as may be amended from time-to-time in writing by the Parties, may be purchased under this Agreement.

Consumables

TG Consumables Parts and Prices

 

TG Part Number

  

Description        

       

List Price    

[…***…]

   […***…]       […***…]

[…***…]

   […***…]       […***…]

[…***…]

   […***…]       […***…]

[…***…]

   […***…]       […***…]

[…***…]

   […***…]       […***…]

[…***…]

   […***…]       […***…]

Non-TG Consumables (solely for Research Uses) Parts and Prices

[…***…] provided that, any purchases of Non-TG Consumables shall be subject to the terms and conditions of this Agreement.

Temporary Consumables

 

Part Number

  

Description    

         

List Price    

[...***...]

   […***…]       […***…]

[...***...]

   […***…]       […***…]

 

* Temporary Consumables […***…] pursuant to the terms and conditions of this Agreement.

 

***Confidential Treatment Requested***

 

ILLUMINA CONFIDENTIAL

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Illumina Hardware

 

Part Number

  

Description    

       

List Price    

[...***...]

   […***…]       […***…]

[...***...]

   […***…]       […***…]

Service Contract Pricing

 

Part Number

  

Description    

       

List Price    

[…***…]

   […***…]       […***…]

[…***…]

   […***…]       […***…]

[…***…]

   […***…]       […***…]

[…***…]

   […***…]       […***…]

[…***…]

   […***…]       […***…]

[…***…]

   […***…]       […***…]

 

***Confidential Treatment Requested***

 

ILLUMINA CONFIDENTIAL

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Exhibit A-1

Product Discounts

Quotes

First Quote . As used herein, price refers to Net Price. Illumina will provide Customer a quotation referencing this Agreement and specifying the price for each Consumable (the “ First Quote ”). The First Quote and pricing found therein expires at the end of the […***…] (e.g., […***…]) of the Agreement and sets forth the pricing that will be used on all Purchase Orders that are provided by Customer prior to the end of such period. The Purchase Orders placed against the First Quote must reference the First Quote and this Agreement to be valid. The pricing for the First Quote will be determined using the Consumable pricing formula set forth below. Subject to the terms and conditions of this Agreement, if Customer desires to purchase additional Consumables that are available for purchase under this Agreement Customer may request a quote for those additional Consumables and Illumina shall provide an updated First Quote to Customer.

[…***…] Quotes for Consumables . As used herein, price refers to Net Price. No later than […***…] prior to the start of each […***…] (i.e., […***…]) of this Agreement (each a “[…***…]”), Illumina will issue a quotation referencing this Agreement and […***…] (the “[…***…] Quote ”). Each […***…] Quote and pricing found therein expires at the end of the […***…] that starts following the date the […***…] Quote is due and sets forth the pricing that will be used on all Purchase Orders that are provided by Customer prior to the end of such […***…]. The Purchase Orders placed against each […***…] Quote must reference the […***…] Quote and this Agreement to be valid. The pricing for […***…] Quotes will be determined using the Consumable pricing formula set forth below. Subject to the terms and conditions of this Agreement, if Customer desires to purchase additional Consumables that are available for purchase under this Agreement Customer may request a quote for those additional Consumables and Illumina shall provide an updated […***…] Quote to Customer.

Consumable Pricing Formula

Customer’s purchase price for Consumables will be […***…] the amount calculated using Discount Formula A and Discount Formula B.

 

Discount Formula

A*        The purchase price equals […***…].
B    The purchase price equals […***…].

 

* This discount formula will terminate and no longer be available as of […***…]

 

Consumable Discount

Consumable Spend

  

Discount off of Base Price    

[…***…]    […***…]
[…***…]    […***…]
[…***…]    […***…]
[…***…]    […***…]
[…***…]    […***…]

Illumina Hardware Discount

Customer’s […***…].

 

***Confidential Treatment Requested***

 

ILLUMINA CONFIDENTIAL

21


Illumina Hardware and Service Contract Discount

 

Tier

  

Hardware    

  

Qty.    

  

Discount off of Base Price    

[…***…]

   […***…]    […***…]    […***…]

[…***…]

   […***…]    […***…]    […***…]

[…***…]

   […***…]    […***…]    […***…]

[…***…]

   […***…]    […***…]    […***…]

[…***…]

   […***…]    […***…]    […***…]

[…***…]

   […***…]    […***…]    […***…]

Illumina Qualification Services Price Table

 

Instrument

   Single Certification per
Instrument (IQ, OQ or IPV)
   Bundled Certification per
Instrument (IQ/OQ only)

[...***...]

   […***…]    […***…]

[...***...]

   […***…]    […***…]

[...***...]

   […***…]    […***…]

Illumina Service Contract Discount

[…***…]

 

Instrument Number

  

Discount off [ *** ] Price

[…***…]

   […***…]

[…***…]

   […***…]

[…***…]

   […***…]

[…***…]

   […***…]

[…***…]

   […***…]

[…***…]

   […***…]

 

***Confidential Treatment Requested***

 

ILLUMINA CONFIDENTIAL

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Exhibit B

Form of Forecast

Example Only

 

[…***…]    […***…]    […***…]   
[…***…]    […***…]    […***…]   
[…***…]    […***…]    […***…]   
[…***…]    […***…]    […***…]   
[…***…]   

[…***…]

[…***…]

[…***…]

[…***…]

  

 

***A Table One-Page in Length is being Omitted Pursuant to the Confidential Treatment Requested***

 

ILLUMINA CONFIDENTIAL

23


Attachment 1

First Forecast

TG Consumables Only

 

[…***…]   […***…]   […***…]   […***…]   […***…]   […***…]   […***…]   […***…]   […***…]   […***…]   […***…]   […***…]   […***…]   […***…]   […***…]
[…***…]   […***…]   […***…]   […***…]   […***…]   […***…]   […***…]   […***…]   […***…]   […***…]   […***…]   […***…]   […***…]   […***…]   […***…]
[…***…]   […***…]   […***…]   […***…]   […***…]   […***…]   […***…]   […***…]   […***…]   […***…]   […***…]   […***…]   […***…]   […***…]   […***…]
[…***…]   […***…]   […***…]   […***…]   […***…]   […***…]   […***…]   […***…]   […***…]   […***…]   […***…]   […***…]   […***…]   […***…]   […***…]

 

***Confidential Treatment Requested***

 

ILLUMINA CONFIDENTIAL

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Appendix I

Service Contract

The following section outlines the components of Gold Platinum and Decided On-Site Service levels. Gold and Platinum Service Contracts are for a period of 12 months and must be renewed prior to their expiration by placing a Purchase Order with Illumina. The […***…] Service level requires […***…], as well as the purchase of a Parts-Only contract per instrument.

 

1. Gold, Platinum and Dedicated On-Site Service Levels.

 

  1.1. Technical Support Coverage

The technical support hours available to the Customer are outlined in the table below. As services or times change going forward, the customer will be notified.

 

Time (EST)   Method of Contact    Contact Information    Location of Support Group
8 AM – 10 AM   E-mail with call back    […***…]   

East Coast

10 AM – 8 PM   Direct Phone    […***…]   

WestCoast

Weekday holiday coverage is available via email and limited phone replies. Currently there is no […***…] Technical Support available over […***…]. Additional coverage options are […***…], and Illumina […***…] the Customer […***…] of any changes made in the future.

 

  1.2. Gold Level. The Gold Service level provides the Customer with full coverage on all service parts and labor as well as 5 x 24 e-mail support and 5 x 18 telephone support (instrument, applications, and bioinformatics). This service level also includes a two business day average on-site response time from Technical Support dispatch, hardware and software critical and non-critical updates, applications support, access to online training modules, and discounts on optional advanced training programs; provided that, Illumina’s technical support group is notified of the dispatch request prior to […***…]. The Gold Service Level also includes […***…].

 

  1.3. Platinum Level. This Platinum Service level provides the Customer with full coverage on all service parts and labor as well as 5 x 24 e-mail support and 5 x 18 telephone support (instrument, applications, and bioinformatics). This service level also includes one business day average on-site response time from Technical Support dispatch, hardware and software critical and non-critical updates, applications support, access to online training modules, and discounts on optional advanced training programs; provided that, Illumina’s technical support group is notified of the dispatch request prior to […***…]. This Platinum Service contract includes […***…].

 

  1.4 Dedicated On-Site Service Level. Customer may upgrade its desired Service Level at any time during the Term to the Dedicated On-Site Service Level as described below upon providing written notice to Illumina, in which event Customer will be obligated to (i) pay Illumina […***…]. At Customer’s request prior to upgrading its Service Level to the Dedicated On-Site Service Level, Illumina will provide Customer with information regarding the quantity and cost of spare parts used by Customer historically to enable Customer to evaluate whether it desires to upgrade to the Dedicated On-Site Service Level.

Dedicated On-Site Service Contract which supplies the Customer with a qualified dedicated Field Service Engineer that will be staffed at the Customer Facility on a full time basis. This level of support requires a Parts-Only contract agreement for each instrument placed under this level of support and a […***…]. After […***…] Customer may cancel the Dedicated On-Site Service and revert to Gold or Platinum Service with […***…] days prior written notice to Illumina. This Service Level includes hardware and software critical and non-critical updates, applications support, access to online training modules, and discounts on optional advanced training programs. The Dedicated On-Site Service Level also includes […***…] preventative maintenance services a year. The standard hours of the Dedicated On-Site Field Representative will be determined jointly by the Customer and Illumina at the start of the Dedicated On-Site Service.

 

  1.5 If Customer is a Gold Service Level customer, […***…]. Under these Service Terms Customer will receive a response from the appropriate Field Service Engineer, Customer Solutions representative or Technical Support staff (as applicable) within 4 hours of notification by Customer, provided that Customer provides such notification within the hours specified in Section 1.1. above.

 

***Confidential Treatment Requested***

 

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  1.6. In the event of an instrument that has seen […***…] and continues to be […***…] after […***…] attempts, the decision to remedy the issue by replacing the instrument will be at the discretion of the Director of Service Business, Director of Field Service and Regional Manager of Field Service.

 

  1.7. All service events will be logged and documented in Field Visit Reports that will be provided to the Customer by the Field Representative upon conclusion of each service event and will also be made available to Customer in electronic format. These reports will outline (i) the diagnostic testing performed on each instrument to determine the underlying issue (ii) all repairs done on the instrument and any parts replaced and (iii) all verification performed during the service to ensure sufficient repair and functionality of the instrument. .

 

  1.8. The Customer will be notified of any new updates or major changes to instrumentation and a basic explanation of the changes will be provided upon request. If additional Customer on-site training is requested, the Customer is able to purchase FAS visits on an hourly basis. In addition, training services that are available to the Customer can be found at www.illumina.com under the Support > Training > Course Catalog link. Illumina will work closely to ensure these needs are met.

 

  1.9. Site Installed Base Description

 

Asset Name

   Asset Description   Installation Date   Service Level   Expiration Date
[…***…]    […***…]   […***…]   […***…]   […***…]
[…***…]    […***…]   […***…]   […***…]   […***…]
[…***…]    […***…]   […***…]   […***…]   […***…]
[…***…]    […***…]   […***…]   […***…]   […***…]
[…***…]    […***…]   […***…]   […***…]   […***…]
[…***…]    […***…]   […***…]   […***…]   […***…]
[…***…]    […***…]   […***…]   […***…]   […***…]

Illumina’s Service Contracts are subject to the following terms, conditions, and limitations.

 

  1. Definitions . “ Covered Hardware ” means those portions of the Hardware that are covered by a Service Contract purchased by Purchaser hereunder. “ Current Specifications ” means Seller’s written specifications for the Covered Hardware that apply to such Covered Hardware as provided in the Service Contract that is purchased hereunder, but only if the purchased Service Contract provides that the Covered Hardware will conform to current specifications rather than the Original Specifications. “ Purchaser ” means the person or entity acquiring the Service Contract from Seller. “ Documentation ” means Seller’s user manual, package insert, and similar documentation, for the Covered Hardware in effect on the date that such Covered Hardware shipped from Seller. Documentation may have contained additional terms and conditions that are hereby incorporated herein by reference. Documentation may have been provided (including by reference to a website) with the Covered Hardware at time of shipment or provided electronically from Seller. “ EULA ” means the end user license agreement for Software. “ Facility ” means the physical address where Covered Hardware is located. “ Hardware ” means Seller branded instruments, accessories, or peripherals. “ Original Specifications ” means Seller’s written specifications for the Covered Hardware in effect on the date that such Covered Hardware shipped from Seller. “ Original Terms ” means the Seller terms and conditions of sale in effect on the date the Covered Hardware was shipped from Seller setting forth the terms and conditions of Purchaser’s purchase and use of such Covered Hardware, components thereof, and Software. “ Quotation ” means a written quotation provided by Seller to Purchaser for the Service Contract. “ Seller ” means Illumina. The Selling entity is identified on the quotation, order acknowledgment or similar communication, or Seller website if the order is being placed electronically at Seller’s website. “ Specifications ” means the Current Specifications or the Original Specifications, as applicable; provided that, Specifications shall in all cases refer to the Original Specifications unless otherwise set forth in the Service Contract. “ Site ” means the smallest definable room that contains the Covered Hardware. “ Software ” means Seller branded software provided by Seller with the Covered Hardware. All Software is licensed and not sold and may be subject to additional terms found in the Software’s end user license agreement. “ Term ” means the length of the term of the Service Contract.

 

  2. Term . All Service Contracts are for a period of 12 months, unless otherwise agreed to in writing by Seller or as set forth in the relevant Quotation.

 

  3.

Response Time and On-site Support. Seller will use commercially reasonable efforts to respond to Purchaser’s requests for service within the time period specified in the Service Contract. All requests for service must be made through Seller’s customer support organization (“ Purchaser Solutions ”). Please refer to Seller’s website for

 

***Confidential Treatment Requested***

 

ILLUMINA CONFIDENTIAL

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  Purchaser Solutions contact information. Seller reserves the right to provide service and support by any method in its sole discretion, including but not limited to, remote instruction via telephone, Internet or email, mailing to Purchaser replacement parts or test equipment, exchanging Purchaser’s component equipment with loaner equipment while repairs are being made, and deploying service or applications personnel for on-site services. Other than installation and preventative maintenance visits, Seller shall determine in its sole discretion whether and when any personnel or replacement parts or equipment are to be sent to Purchaser’s site. Seller shall respond to Purchaser’s request for support in accordance with the average response time specified in the Service Contract. Seller will provide a minimum number of on-site support visits as specified in the Service Contract if the Purchaser has identified a specific need that can be fulfilled by the visit and if the Purchaser has made reasonable accommodation for scheduling the visit. If no need is identified and the timing of any visit cannot be scheduled at a mutually-agreeable date and time, Seller may provide fewer visits than prescribed in the Service Contract.

 

  4. Software Support . During the Term, Seller shall use commercially reasonable efforts to provide all Software updates and qualified Software upgrades in accordance with the terms of the Service Contract as such materials become commercially available for distribution. Purchaser’s use of all Software, updates, and upgrades of Software shall be subject to this Agreement, the Original Terms, and the applicable EULA.

 

  5. Hardware Support . During the Term, Seller shall use commercially reasonable efforts to install mandatory Hardware updates in accordance with the terms of the Service Contract as such materials become available for distribution. Whether a Hardware update is mandatory shall be determined by Seller in its sole discretion. Seller shall reschedule Hardware updates to coincide with preventive maintenance visits. If Purchaser requests that such Hardware updates occur at a time or date other than during preventive maintenance visits, Seller may, at its sole discretion, charge Purchaser for any costs and expenses incurred in connection with such Hardware update visit. All updated Hardware and components thereof and Purchaser’s use of the same shall be subject to this Agreement and the Original Terms.

 

  6. Hardware Repairs . Seller shall use commercially reasonable efforts to repair Covered Hardware reported by Purchaser and deemed inoperable by Seller’s Purchaser Solutions personnel. Seller’s sole obligation hereunder is to provide parts and labor according to the terms of the Service Contract and is limited to only repair or replacement of Seller branded parts originally provided by Seller to Purchaser. All repaired or replaced items and Purchaser’s use of the Covered Hardware including the repaired or replaced components shall be subject to this Agreement and the Original Terms. For clarity, repaired or replaced items will be warranted to conform to the Specifications for 90 days from the date of installation or repair of such repaired or replaced item.

 

  7. Documentation Updates . Seller shall use commercially reasonable efforts to provide updates to Documentation according to the terms of the Service Contract as they become available for distribution. Whether a Documentation update is mandatory shall be determined by Seller in its sole discretion. All updates to Documentation and Purchaser’s use of the Documentation shall be subject to this Agreement and the Original Terms.

 

  8. Replacement Parts. All replacement parts and components provided by Seller will be new or refurbished, in Seller’s sole discretion, and shall be furnished on an exchange basis. All Hardware or components thereof or other parts removed for replacement shall become the property of Seller. All replaced parts and components and Purchaser’s use of the Covered Hardware including the replaced parts and components shall be subject to this Agreement and the Original Terms. For clarity, repaired or replaced items will be warranted to conform to the Specifications for […***…] from the date of installation or repair of such repaired or replaced item.

 

  9. Loaner Hardware. Seller may choose to provide, in its sole discretion, loaner hardware or components to Purchaser to substitute for the Covered Hardware or a component thereof, while service is being provided. Seller will be responsible for all costs associated with the shipment of such loaner hardware or components to Purchaser’s Site, exclusive of any taxes or duties, which are the sole responsibility of Purchaser. Loaner hardware or components shall be certified by Seller’s Purchaser Solutions using the same criteria as used for new hardware or components. Loaner hardware or components shall remain the sole property of Seller, and must be returned within 30 days of Seller’s request. Purchaser’s use of loaner hardware or components shall be subject to Seller’s current terms and conditions of sale that apply to such loaner hardware or component.

 

  10.

Preventative Maintenance Visits. Seller will provide a preventative maintenance on-site visit according to the terms of the Service Contract, which may result in two to three days of system down time to Purchaser. Seller shall cooperate with Purchaser to schedule such preventative maintenance visits at a time that is mutually convenient for both parties. All such preventative maintenance services will be provided by Seller designated service personnel. All travel, labor and parts/materials expenses associated with prescribed preventative maintenance visits, visits to service, repair or replace covered items, and applications support visits as provided for in the Service Contract are included in the price set forth for such Service Contract. Preventative maintenance services include testing and adjusting the Covered Hardware to the Specifications. If any preventative maintenance visit within the Term is precluded due to Purchaser’s inability to provide a sufficient time period for such services and down time, Seller

 

***Confidential Treatment Requested***

 

ILLUMINA CONFIDENTIAL

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  shall not be obligated to provide a substitute preventative maintenance visit. Seller shall not be liable for any economic, consequential, incidental, special or other damages or losses of any kind resulting from the down time during such preventative maintenance visits.

 

  11. Purchaser Responsibilities .

 

  a. Proper Use: The performance of Covered Hardware when operated in corrosive environments, or in conditions, or in a manner, outside of the Specifications including Seller’s site requirements found in the Documentation or not in accordance with its Documentation may have their performance adversely affected, and are therefore not guaranteed hereunder. The Purchaser agrees to use the Covered Hardware in a safe and reasonable manner pursuant to the Documentation and the Original Terms.

 

  b. Access: The Purchaser will provide Seller with access to the Covered Hardware along with adequate working space and facilities within a reasonable distance of the Covered Hardware. Access will also be provided to all information and facilities that are reasonably necessary for Seller to service the Covered Hardware.

 

  c. Data Back-up and Security: The Purchaser is responsible for maintaining a procedure to reconstruct any lost or altered files, data, or programs, as well as for the security of all confidential, proprietary, and classified information.

 

  d. Networking: The Purchaser is responsible for maintaining all computer networking as it relates to the integration of any components of the Covered Hardware outside of such system and within the Purchaser’s network.

 

  e. Representative: A representative of Purchaser will be present on-site at all times service is being performed by Seller’s designated service personnel.

 

  f. Toxic/BioHazardous Substances: The Purchaser will notify Seller in writing if any Covered Hardware is used for analysis of toxic, hazardous or dangerous substances. Such Covered Hardware must be decontaminated by Purchaser in accordance with Seller’s decontamination procedures and Purchaser shall fax a completed and executed Decontamination Certificate to Purchaser Solutions before any service may be performed on the Covered Hardware.

 

  g. Environment: The Purchaser agrees to provide Seller’s designated service personnel with a safe environment for their work.

 

  h. Disposal of Waste Products: The Purchaser is responsible for the proper disposal of waste products that result from maintenance and service work on the Covered Hardware.

 

  i. Facilities: The Purchaser is responsible for ensuring that the Site will adhere to Seller’s site requirements found in the Documentation or Specifications. Any material deviation from Seller’s site requirements affecting the proper functioning of the Covered Hardware shall relieve Seller of its obligations under this Agreement, including without limitation, under the Service Contract.

 

  12. Exclusions and Restrictions . The terms of this Agreement cover maintenance and repair for conditions that result from normal use and operation as described in the Documentation for the Covered Hardware. Seller will not be obligated to perform maintenance or repair on any Covered Hardware which, in its reasonable judgment:

 

  a. Has been subjected to abuse, misuse, neglect, negligence, accident, improper testing, improper installation other than installation performed by Seller authorized personnel, improper storage, improper handling, or use contrary to any instructions issued by Seller or has been used in any manner inconsistent with its Documentation:

 

  b. Has been repaired, altered, disassembled, reassembled, or damaged as a result of modifications made to the Covered Hardware that were not authorized in writing by Seller;

 

  c. Has been damaged by environmental conditions at the Site;

 

  d. Has not been installed, operated, repaired and maintained in accordance with its Documentation or has been damaged due to operators failing to perform standard operating procedures or routine maintenance as prescribed in the applicable Documentation;

 

  e. Has been moved from the Site by persons not expressly authorized in writing by Seller;

 

  f. Has been used with any third party software, hardware, or item including, without limitation, reagent which has not been previously approved in writing by Seller;

 

  g. Has been exposed to Bio-safety Level 3 or 4 agents (as defined by The Occupational Safety and Health Administration);

 

  h. Has been exposed to radioactivity, and has not been decontaminated to below exempt levels; or

 

  i. Has been damaged due to an act of Force Majeure as defined herein.

 

  13. Services by Third Parties on Seller’ Behalf . Seller reserves the right to retain or contract outside vendors of its choosing to provide service and support hereunder. In any instance where the terms and conditions of such vendor’s service, support, and warranty agreement conflicts with the terms and conditions of this Agreement, the terms and conditions of this Agreement shall govern; provided, however that any exclusions on coverage contained in an OEM vendor’s terms and conditions shall remain in full force and effect.

 

ILLUMINA CONFIDENTIAL

28


  14. Relocation of Hardware . All Service Contracts terminate automatically with immediate effect and without the need for notice to Purchaser if Covered Hardware is moved to a different Facility. Upon such termination, Seller will credit Purchaser’s account with Seller an amount equal to the unused portion of the Service Contract; provided that, Purchaser pre-paid for the Service Contract in full. If Seller conducts the move of the Covered Hardware on Purchaser’s behalf then Seller and Purchaser will enter into a new Service Contract for such Covered Hardware at the new Facility.

 

  15. Export of Hardware . Purchaser agrees not to move or relocate Covered Hardware outside of the country to which Seller originally shipped it without the expressly written authorization of an officer of Seller.

 

  16. Recertification Requirement . Hardware not under an existing Service Contract is only eligible for a Service Contract if Seller has inspected the Hardware and its ancillary equipment and provided a written notice to Purchaser that the Hardware is eligible for a Service Contract (“ Recertification Requirement ”). Purchaser acknowledges that Hardware may have to be repaired, at Purchaser’s sole expense, prior to being eligible for a Service Contract. Accordingly, Seller recommends that Purchaser renew its existing Service Contracts prior to their expiration.

 

  17. Renewal of Service Contract . If Purchaser renews the Service Contract on a piece of Covered Hardware prior to the expiration of the Service Contract Seller will waive the Recertification Requirement.

 

  18. Early Termination of Service Contract . Purchaser or Seller may, in their sole discretion, terminate the Service Contract early by providing 30 days prior written notice to the other. Upon such termination, Seller will credit Purchaser’s account with Seller an amount equal to the unused portion of the Service Contract; provided that, Purchaser pre-paid for the Service Contract in full; and provided further that, the amount of such credit will be reduced by the amount of any discount Seller provided Purchaser as a result of Seller purchasing a multi-year Service Contract (“ Unearned Discount ”). In the event Purchaser’s Unearned Discount exceeds the amount of credit that Seller would provide under this provision, Seller will invoice Purchaser the difference and such invoice shall be paid within 30 days.

 

  19. Non - Transferable . All Service Contracts are personal to the original Purchaser of the Covered Hardware and may not be transferred or assigned to any third party.

 

  20. Force Majeure . Seller is not responsible for any failure to perform or delay attributable in whole or in part to any cause beyond its reasonable control, including but not limited to acts of God, fire, flood, tornado, earthquake, hurricane, lightning, government actions, actual or threatened acts of war, terrorism, civil disturbance or insurrection, sabotage, labor shortages or disputes, failure or delay in delivery by Seller’s suppliers or subcontractors, transportation difficulties, shortage of energy, raw materials or equipment, or Purchaser’s fault or negligence. In the event of any such delay the delivery date shall be deferred for a period equal to the time lost by reason of the delay.

 

  21. Unauthorized Activities . Purchaser agrees not to, nor authorize any third party to, engage in any of the following activities: (i) disassemble, reverse-engineer, reverse-compile, or reverse-assemble the Covered Hardware or an items provided hereunder (collectively “ Materials ”), (ii) separate, extract, or isolate components of the Materials or subject the Materials or components thereof to any analysis not expressly authorized in the Documentation, (iii) gain access to or attempt to determine the methods of operation of the Materials, or (iv) transfer to a third-party, or grant a sublicense to, any Software or any third-party software provided hereunder. Purchaser further agrees that the contents of and methods of operation of the Materials are proprietary to Seller and the Materials contains or embodies trade secrets of Seller.

 

  22. Limited Liability . TO THE EXTENT PERMITTED BY LAW, IN NO EVENT SHALL SELLER OR ITS SUPPLIERS BE LIABLE TO PURCHASER OR ANY THIRD PARTY FOR COSTS OF PROCUREMENT OF SUBSTITUTE PRODUCTS OR SERVICES, LOST PROFITS, DATA OR BUSINESS, OR FOR ANY INDIRECT, SPECIAL, INCIDENTAL, EXEMPLARY, CONSEQUENTIAL, OR PUNITIVE DAMAGES OF ANY KIND ARISING OUT OF OR IN CONNECTION WITH, WITHOUT LIMITATION, THE SALE OF THE COVERED HARDWARE OR SERVICE CONTRACT, THE USE OF THE COVERED HARDWARE, THE ITEMS AND SERVICES PROVIDED HEREUNDER, SELLER’S PERFORMANCE HEREUNDER OR ANY OF THESE TERMS AND CONDITIONS, HOWEVER ARISING OR CAUSED AND ON ANY THEORY OF LIABILITY (WHETHER IN CONTRACT, TORT (INCLUDING NEGLIGENCE), STRICT LIABILITY OR OTHERWISE).

TO THE EXTENT PERMITTED BY LAW, SELLER’S TOTAL AND CUMULATIVE LIABILITY TO PURCHASER OR ANY THIRD PARTY ARISING OUT OF OR IN CONNECTION WITH THESE TERMS AND CONDITIONS, INCLUDING WITHOUT LIMITATION, THE COVERED HARDWARE OR ITEMS PROVIDED HEREUNDER (INCLUDING USE THEREOF), THE SERVICE CONTRACT, THE

 

ILLUMINA CONFIDENTIAL

29


SERVICES PROVIDED HEREUNDER, AND SELLER’S PERFORMANCE HEREUNDER, WHETHER IN CONTRACT, TORT (INCLUDING NEGLIGENCE), STRICT LIABILITY OR OTHERWISE, SHALL IN NO EVENT EXCEED […***…].

 

  23. Limitations on Warranties . TO THE EXTENT PERMITTED BY LAW AND SUBJECT TO THE EXPRESS WARRANTIES MADE IN THESE TERMS AND CONDITIONS SELLER MAKES NO (AND EXPRESSLY DISCLAIMS ALL) WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, WITH RESPECT TO THE COVERED HARDWARE, THE ITEMS PROVIDED HEREUNDER, THE SERVICE CONTRACTS, AND THE SERVICES PROVIDED HEREUNDER, INCLUDING WITHOUT LIMITATION, ANY IMPLIED WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NONINFRINGEMENT, OR ARISING FROM COURSE OF PERFORMANCE, DEALING, USAGE OR TRADE.

 

 

***Confidential Treatment Requested***

 

ILLUMINA CONFIDENTIAL

30


Appendix II

Customer Inventory of Spare Parts

 

  1. Target Inventory . Illumina and Customer will mutually agree in writing upon the quantity of and type of Parts to be held by Customer at Customer’s Facility (“ Target Inventory ”). Illumina will ship Customer the Target Inventory […***…] of the Effective Date.

 

  2. Shipping; Title and Risk of Loss . Customer is responsible for all costs associated with the shipping and transportation of Parts to the Facility. Title to the Parts remains with Illumina until the Parts are used in Equipment. Risk of loss for the Parts transfers to Customer upon delivery of the Parts to the Facility.

 

  3. Incoming Inspection; Inventory . Customer will inspect the Parts for damage upon receipt and record the amount and type of Parts received, the date and time of receipt, and serial numbers (if applicable). Customer will provide Illumina with written notice of any damaged Parts within 5 business days of their receipt. All Parts not identified as damaged within such 5 business day time period shall be considered the consigned inventory (“Inventory”). Customer shall, unless otherwise specified by Illumina, send any damaged Parts back to Illumina at Illumina’s expense […***…] of receipt by Customer.

 

  4. Consignment Fee . Customer will pay Illumina an amount equal to […***…] for the Target Inventory once per calendar year as a consignment fee (“Consignment Fee”). The Consignment fee is non-refundable. Illumina will invoice Customer the Consignment Fee promptly after the Effective Date.

 

  5. Authorized Personnel Only . Only Illumina authorized personnel (“Service Personnel”) may withdraw Parts from the Inventory and/or install such Parts on the Equipment.

 

  6. Storage and Possession . Customer will use reasonable care and best industry practices to maintain and store the Parts at the Facility. Customer will store the Parts separate from other parts at the Facility so that Parts are only accessible to Service Personnel (preferably in a locker with a key). Illumina may take possession of any Parts at any time up to the point of installation of the Parts by providing reasonable notice to Customer. Customer will cooperate and provide reasonable assistance to Illumina to regain possession of the Parts. Customer will not cause or permit any liens or encumbrances to attach to the Parts or any other property of Illumina at the Facility.

 

  7. […***…] Usage and Count . Customer will perform a count of all Parts in Inventory […***…] and provide Illumina a written reporting containing the Part numbers, quantities of Parts in Inventory, Part description, and Part serial number (if applicable) (“[…***…] Count”). If the […***…] Count is below the Target Inventory, Illumina will replenish the Inventory and Illumina will issue an invoice to Customer for such usage unless such Part(s) is covered under a then-current and valid Illumina service contract that covers the full cost of such Part. In the event of discrepancies, Customer will be invoiced for Parts that are missing from Inventory and have not already been paid for by Customer already.

 

  8. Final Inventory Reconciliation; Disposition . Illumina will conduct a final count of Inventory during the last […***…] of this Agreement (“Final Inventory Count”) Customer will either purchase from Illumina all Parts remaining in Inventory (or otherwise received by Customer and not yet paid for) as of the Inventory count date, return the unused Parts to Illumina, or renew this Agreement for a mutually agreed upon subsequent term. Illumina shall be responsible for packaging and shipping such Parts back to Illumina if the Parts are returned to Illumina pursuant to this Section. If any Parts returned to Illumina are used or damaged (not due to shipment back to Illumina) at the time of Illumina’s receipt, Illumina will invoice the Customer for such Parts.

 

  9. Payment . Customer will make full payment of all invoices within […***…] of the date of invoice. Any amounts not paid when due will accrue interest at the rate of […***…], or the maximum amount allowed by law, if lower. Customer shall pay for all costs (including reasonable attorneys’ fees) incurred by Illumina in connection with the collection of payments. All prices for Parts are the price in effect on the date of Illumina’s invoice.

 

  10. Audits . Customer will keep accurate books and records related to the Parts. Illumina has the right to audit, at Illumina’s expense, such Customer books and records in connection with this Agreement and the Parts supplied hereunder.

 

  11. Compliance with Laws . Each Party agrees to comply with all applicable laws, regulations, and guidelines in connection with the management of Inventory under this Agreement. Customer will provide Illumina reasonable access to the Facility to inspect the Parts upon prior written notice.

 

  12. Representations and Warranties . Customer represents and warrants that (i) the Facility will be maintained in good condition, (ii) the Parts will only be used with Illumina Equipment and for no other purposes, and (iii) it will not install and will not allow a third party to install the Parts (other than Service Personnel) on Equipment, unless otherwise authorized in writing by Illumina, and (iv) it will not sell, lease, or otherwise transfer the Parts to a third party without Illumina’s prior written consent.

 

***Confidential Treatment Requested***

 

ILLUMINA CONFIDENTIAL

31


  13. No Reverse Engineering . Customer agrees that Customer shall not, nor will Customer use or permit any third party to, engage in any of the following activities without the express prior written permission of an officer of Illumina: (i) disassemble, reverse-engineer, reverse-compile, or reverse-assemble the Parts or the Equipment, (ii) separate, extract, or isolate components of the Parts or the Equipment or subject the Parts and/or Equipment or components thereof to any analysis not expressly authorized in writing by Illumina, or (iii) otherwise gain access to or determine the methods of operation of the Parts or the Equipment.

 

  14. Proprietary Information . Customer agrees that the contents, design, materials, properties, formulation, methods and techniques of operation and manufacture of the Parts and Equipment are the proprietary and trade secret information of Illumina and may not be disclosed to any third party and may not be used in any manner except as expressly authorized in writing by an officer of Illumina.

 

ILLUMINA CONFIDENTIAL

32

EXHIBIT 10.15

 

LOGO

August 1, 2011

Vincent Miller, MD

 

Re: Offer of Employment with Foundation Medicine, Inc.

Dear Vince:

It is with great pleasure that I offer you employment with Foundation Medicine, Inc. (“Foundation Medicine” or “the Company”). Your initial position will be Senior Vice President, Clinical Development, reporting to Michael Pellini, MD, President and Chief Executive Officer. You will be a member of the Company’s Executive Management Team. In addition to performing duties and responsibilities associated with the position above, from time-to-time the Company may assign you other duties and responsibilities consistent with such position. Your effective date of hire as a regular, full-time employee is preferred to be October 15, 2011.

Salary and Expense Reimbursement . You will be paid on a salary basis at an annual rate of $335,000.00, payable twice per month in accordance with Foundation Medicine’s standard payroll practices and subject to customary deductions and withholdings as required by law. You will be eligible for annual merit salary reviews in accordance with the Company’s compensation practices. Also, the Company will reimburse your reasonable out-of-pocket travel expenses and other expenses related to your work based on the Company’s expense reimbursement policy.

Sign-on Bonus . You will be paid a sign-on bonus in the amount of $100,000. This sign-on bonus will be paid in two installments. The first installment of $50,000 will be paid to you on the Company’s first regular pay date following your actual start date, provided such date is not less than 5 days after your actual start date, and will be subject to customary deductions and withholdings as required by law. The second payment of $50,000 will be paid to you on March 31, 2012 (or if such date is not one of the Company’s regular pay dates, then on the Company’s first regular pay date thereafter) if you remain employed by the Company at such time, or promptly following your termination of employment for Good Reason (as defined below) within three (3) months of the initial existence of the condition or event that constitutes Good Reason, and will be subject to customary deductions and withholdings as required by law. Should you voluntarily leave the Company, other than for Good Reason within three (3) months of the initial existence of the condition or event that constitutes Good Reason, within one year of receiving payment of either installment (or both installments) of the sign-on bonus, you will be obligated to return the gross amount of such installment(s) to the Company within 30 days of your departure date.


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V. Miller Offer Letter

August 1, 2011

Page 2

 

Living Assistance . Foundation Medicine acknowledges that you live in New Jersey and as a condition of your employment you will be commuting to the Company’s offices in Massachusetts. In the absence of relocation, the Company will provide you with annual Living Expense Assistance of up to $35,000 annually. This allowance will be paid to you directly in the form of expense reimbursements in accordance with the Company’s expense reimbursement plan, and may be subject to customary deductions and withholdings as required by law.

Possible Annual Bonus Opportunity . At the time of this offer, the Company has not established an annual bonus program, and the establishment of an annual bonus program (and terms and conditions of an annual bonus program) would be subject to the discretion of the Board (or its Compensation Committee). However, if and when the Company adopts an annual bonus program generally covering senior management of the Company (which would start applying no earlier than January 1, 2012), during your employment with the Company during each period when an annual bonus program is applicable, you shall be eligible to receive an annual incentive bonus as part of such annual bonus program with a target of up to thirty five percent (35%) of your annual base salary paid for such year, as determined by the Board (or its Compensation Committee) based on the terms and conditions of such annual bonus program.

Restricted Stock Grant; Options to Purchase Stock . As an incentive for you to share in the long-term growth of Foundation Medicine, it is our intention to recommend to the Board of Directors that you be issued 550,000 shares of Foundation Medicine’s common stock (the “Restricted Stock”) upon your payment of a purchase price of $0.02 per share. The Restricted Stock will be governed by a stock restriction agreement (in the standard form approved by Foundation Medicine’s Board of Directors), and will be subject to the provisions of Foundation Medicine’s then-current stock incentive plan. The stock restriction agreement will also describe the vesting of the Restricted Stock (through the mechanism of a lapsing repurchase right in favor of the Company), which will be as follows: the Restricted Stock will vest over a four-year period, with 25% vesting on the first anniversary of the actual start date, and an additional 6.25% vesting on the last business day of each calendar quarter for the next twelve successive quarters of employment, until 100% of the shares of Restricted Stock have become vested, provided that you are still employed by Foundation Medicine on each such vesting date.

Further, it is our intention also to recommend to the Board of Directors that you be granted two additional stock options (collectively, the “Subsequent Options”) promptly after your actual start date as follows:

 

   

an option to purchase 100,000 shares of Foundation Medicine’s common stock, with an exercise price per share equal to the fair market value per share of such common stock on the date of grant, and with vesting over a four-year period, with 6.25% vesting on [December 31, 2012], and an additional 6.25% vesting on

 

www.foundationmedicine.com


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V. Miller Offer Letter

August 1, 2011

Page 3

 

 

the last business day of each calendar quarter for the next fifteen successive quarters of employment, until 100% of the shares underlying such option have become vested, provided that you are still employed by Foundation Medicine on each such vesting date; and

 

   

an option to purchase 100,000 shares of Foundation Medicine’s common stock, with an exercise price per share equal to the fair market value per share of such common stock on the date of grant, and with vesting over a four-year period, with 6.25% vesting on [December 31, 2013], and an additional 6.25% vesting on the last business day of each calendar quarter for the next fifteen successive quarters of employment, until 100% of the shares underlying such option have become vested, provided that you are still employed by Foundation Medicine on each such vesting date.

Each of the Subsequent Options will be governed by a stock option agreement (in the standard form approved by Foundation Medicine’s Board of Directors), and will be subject to the provisions of Foundation Medicine’s then-current stock incentive plan.

Subject to the further provisions of this letter, vesting of the Restricted Stock and the Subsequent Options (if any) will accelerate with regard to the entire remaining unvested portion of the Restricted Stock and the Subsequent Options (if any) after (a) a “Deemed Liquidation Event” (as defined in the Company’s Amended and Restated Certificate of Incorporation, as amended) and (b) any one of the following events: (i) the Company subsequently electing to terminate your employment with the Company without “Cause” (as defined below), (ii) you subsequently terminating your employment with the Company for “Good Reason” within three (3) months of the initial existence of the condition or event that constitutes Good Reason, or (iii) you continuing employment with the Company (or its successor) for twelve (12) months following such Deemed Liquidation Event.

Severance . Without otherwise limiting the “at will” nature of your employment, in the event that the Company elects to terminate your employment without Cause (as defined below), or if you terminate your employment for Good Reason within three (3) months of the initial existence of the condition or event that constitutes Good Reason, for a period of 12 months following termination, the Company will continue to pay you your base salary rate in effect on the date of termination, and pay Company-paid COBRA continuation medical and dental benefits for you (and your eligible dependents). These severance benefits shall commence within 60 days after the date your employment terminates, provided that if such 60 day period begins in one calendar year and ends in a second calendar year, such severance benefits shall commence in the second calendar year and, provided, further that if such severance benefits do not begin immediately on the date your employment terminates, the first payment thereof shall contain a “catch up” payment including all amounts that would have been paid had such severance benefits commenced on the date your employment terminated. In order to receive these severance benefits and/or the acceleration of vesting contemplated in the preceding paragraph (under “Restricted Stock Grant; Options to Purchase Stock”) if such acceleration occurs as a result of a termination of your employment with the Company, you will be required

 

www.foundationmedicine.com


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V. Miller Offer Letter

August 1, 2011

Page 4

 

to execute and not revoke a separation agreement with the Company that includes a general release of all known and unknown claims that you may then have against the Company or persons affiliated with the Company in a form provided by the Company. Such separation agreement shall also provide that for three (3) years following your termination of employment that: (i) you covenant and agree that you will not make any disparaging comments, statements or communications about the Company, its affiliates, stockholders, directors, officers, employees or agents, or its management or business practices, and (ii) the Company will not (and the Company will instruct the Board of Directors and the senior executive officers of the Company to not) make any disparaging comments, statements or communications about you, provided, that these provisions shall not prohibit any party (A) from disclosing that you are no longer employed by the Company; (B) from responding truthfully to any governmental investigation, legal process or related inquiry; (C) from making reasonable competitive statements in the course of promoting a competing business, so long as any statements described in this clause (C) do not violate the Employee Non-Competition, Non-Solicitation, Confidentiality and Assignment Agreement described below; or (D) making a good faith rebuttal of the other party’s untrue or misleading statement. As used in this paragraph, the term “disparage” means any statements, whether orally, in writing or through any medium (including, but not limited to, the press or other media, computer networks or bulletin boards, or any other form of communication), that intentionally disparage, defame, or otherwise damage or assail the reputation, integrity or professionalism of the other party.

For the purposes of this Agreement, “Cause” means that one or more of the following events has occurred:

 

  (i) conviction of a felony;

 

  (ii) willful failure to substantially perform (other than by reason of disability) your duties and responsibilities as set forth in, or determined in accordance with, this letter that results in material harm to the Company, which failure continues, or which harm remains unremedied, after ten (10) days’ notice setting forth in reasonable detail the nature of such failure;

 

  (iii) material breach by you of any provision of this letter that results in material harm to the Company, which breach continues or remains uncured after ten (1 0) days’ notice setting forth in reasonable detail the nature of such breach; or

 

  (iv) material fraudulent conduct by you with respect to the Company.

For purposes of this letter, “Good Reason” means the occurrence of one or more of the following without your written consent, provided that you have complied with the Good Reason Process (as defined below):

 

  (i) a material diminution in your responsibilities, authority or duties as Senior Vice President, Clinical Development;

 

  (ii) a material diminution in your base salary, except for across-the-board salary reductions based on the Company’s financial performance similarly affecting all or substantially all senior management employees of the Company; or

 

  (iii) a material breach by the Company of this letter or any of the agreements you have with the Company relating to the Restricted Stock, the Subsequent Options, or other equity of Foundation Medicine.

 

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V. Miller Offer Letter

August 1, 2011

Page 5

 

For purposes of this letter, the “Good Reason Process” means that (a) you reasonably determine that a Good Reason condition has occurred, (b) you notify the Company in writing of the first occurrence of the Good Reason condition within sixty (60) days of the first occurrence of such condition, (c) you cooperate in good faith with the Company’s efforts, for a period of not less than thirty (30) days following such notice (the “Cure Period”), to remedy the Good Reason condition, (d) notwithstanding such efforts the Good Reason condition continues to exist, and (e) you terminate your employment within sixty (60) days after the end of the Cure Period. If the Company cures the Good Reason condition during the Cure Period, Good Reason shall be deemed not to have occurred.

In the event that your employment is terminated by the Company for Cause, or by you without Good Reason (or with Good Reason but not within three (3) months of the initial existence of the condition or event that constitutes Good Reason), you shall be entitled to receive only any base pay earned through the date of termination.

Section 409A Compliance . Any severance payments to you pursuant to the Severance section above, for clarity including the acceleration of vesting contemplated in the Restricted Stock Grant; Options to Purchase Stock section above (and the corresponding provisions in any stock restriction agreement and/or stock option agreement between the Company and you, if applicable) if such acceleration occurs as a result of a termination of your employment with the Company shall begin only after the date of your “separation from service” (within the meaning of Section 409A of the Internal Revenue Code of 1986 (as amended or replaced) (the “Code”),which may occur on or after the date of the termination of your employment, and shall be subject to the following provisions:

 

  (i) It is intended that each installment of the severance payments (and the corresponding provisions in any stock restriction agreement and/or stock option agreement between the Company and you, if applicable) shall be treated as a separate “payment” for purposes of Section 409A of the Code. Neither the Company nor you shall have the right to accelerate or defer the delivery of any such payments except to the extent specifically permitted or required by Section 409A.

 

  (ii) If, as of the date of your “separation from service” from the Company, you are not a “specified employee” (within the meaning of Section 409A), then each installment of the severance payments shall be made on the dates and terms set forth in this letter (and the corresponding provisions in any stock restriction agreement and/or stock option agreement between the Company and you, if applicable).

 

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August 1, 2011

Page 6

 

  (iii) If, as of the date of your “separation from service” from the Company, you are a “specified employee” (within the meaning of Section 409A), then:

 

  A. Each installment of the severance payments that, in accordance with the dates and terms set forth in this letter, will in all circumstances, regardless of when the “separation from service” occurs, be paid within the Short-Term Deferral Period (as defined below) shall be treated as a “short-term deferral” within the meaning of Treasury Regulation Section 1.409A-1(b)(4) to the maximum extent permissible under Section 409A. “Short-Term Deferral Period” means the period ending on the later of the 15th day of the third month following the end of your tax year in which the “separation from service” occurs and the 15th day of the third month following the end of the Company’s tax year in which the “separation from service” occurs; and

 

  B. Each installment of the severance payments that is not described in clause (iii)(A) above and that would, absent this clause (B), be paid within the six-month period following your “separation from service” from the Company shall not be paid until the date that is six months and one day after such “separation from service” (or, if earlier, your death), with any such installments that are required to be delayed being accumulated during the six-month period and paid in a lump sum on the date that is six months and one day following your “separation from service” and any subsequent installments, if any, being paid in accordance with the dates and terms set forth in this letter; provided, however, that the preceding provisions of this clause (B) shall not apply to any installment of severance payments and benefits if and to the maximum extent that that such installment is deemed to be paid under a separation pay plan that does not provide for a deferral of compensation by reason of the application of Treasury Regulation 1.409A-1(b)(9)(iii) (relating to separation pay upon an involuntary separation from service). Any installments that qualify for the exception under Treasury Regulation Section 1.409A-l(b)(9)(iii) must be paid no later than the last day of your second taxable year following the taxable year in which the “separation from service” occurs.

 

  (iv) The determination of whether and when your “separation from service” from the Company has occurred shall be made in a manner consistent with, and based on the presumptions set forth in, Treasury Regulation Section 1.409A-l(h). Solely for purposes of this paragraph (iv), “Company” shall include all persons with whom the Company would be considered a single employer under Sections 414(b) and 414(c) of the Code.

 

  (v) All reimbursements and in-kind benefits provided under this letter shall be made or provided in accordance with the requirements of Section 409A to the extent that such reimbursements or in-kind benefits are subject to Section 409A.

 

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V. Miller Offer Letter

August 1, 2011

Page 7

 

  (vi) Notwithstanding any other provision of this letter (or in any stock restriction agreement and/or stock option agreement between the Company and you, if applicable), the Company shall have no liability to you or to any other person if any provisions of this letter that are intended to be exempt from or compliant with Section 409A are not so exempt or compliant.

Benefits . As a regular, full-time employee, you will be eligible to participate in the employee benefit plans that Foundation Medicine offers to its employees in comparable positions. Descriptions of the Company’s benefit plans will be available upon request. These plans may be amended or terminated from time-to-time with or without prior notice. In addition, you will be entitled to up to fifteen (15) days of vacation each calendar year and to such other holidays as Foundation Medicine recognizes for employees having comparable responsibilities and duties. For any calendar year in which you are employed with the Company for only a portion of such year, your vacation allowance will be pro-rated.

Terms of Employment . Your employment at all times will be “at will,” meaning that you are not being offered employment for a definite period and that either you or Foundation Medicine may terminate the employment relationship at any time, for any lawful reason, with or without cause. However, you agree to give us fourteen (14) days’ written notice if you decide to terminate the employment relationship, and we agree to give you fourteen (14) days’ written notice if we decide to terminate the employment relationship (except in situations where we reasonably believe our business will be harmed by our continued employment of you for such period, in which case we may terminate you immediately). The substantive law of the Commonwealth of Massachusetts will govern your employment with Foundation Medicine.

Non-Competition, Non-Solicitation, Confidentiality and Assignment Agreement . As part of your employment with Foundation Medicine, you will be exposed to, and provided with, valuable confidential and/or trade secret information concerning Foundation Medicine and its present and future business plans and operations. As a result, in order to protect Foundation Medicine’s legitimate business interests, you agree, as a condition of your employment, to sign the Company’s Employee Non-Competition, Non-Solicitation, Confidentiality and Assignment Agreement, a copy of which is attached to this letter as Exhibit A .

No Conflicting Agreements . We understand that you currently are not subject to any agreements that restrict your activities for Foundation Medicine. By accepting this offer, you represent that you are not subject to any agreements which might restrict your conduct at Foundation Medicine; and that you understand that if you become aware at any time during your employment with Foundation Medicine that you are subject to any agreements which might restrict your conduct at Foundation Medicine, you are required to immediately inform Foundation Medicine of the existence of such agreements or your employment by Foundation Medicine could be subject to termination.

 

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V. Miller Offer Letter

August 1, 2011

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I-9 Employment Verification Form . In addition, the Immigration Reform and Control Act requires employers to verify employment eligibility and identity of new employees. This offer of employment is contingent on your signing an I-9 Employment Verification Form no later than your first day of employment, and you must provide us with appropriate documents to establish your eligibility to work in the United States (for example, Social Security Card, Drivers’ License, U.S. Passport). We will not be able to employ you if you fail to comply with this requirement.

Entire Agreement . This letter, together with Exhibit A (which is incorporated into this letter by reference), will constitute the entire agreement as to your employment relationship with Foundation Medicine and will supersede any prior agreements or understandings, whether in writing or oral.

Offer Expiration . This offer will expire at 5:00PM, Eastern Time, on Friday, August 5, 2011. Please indicate your acceptance of this offer and the terms and conditions thereof by signing both this letter and Exhibit A , and returning fully signed copies to me at Foundation Medicine.

We are looking forward to your joining the Foundation Medicine team! We are confident that you will find a great deal of challenge, satisfaction, and opportunity for personal and professional growth at Foundation Medicine.

 

Sincerely,
FOUNDATION MEDICINE, INC.
By:  

/s/ Michael J. Pellini

  Michael J. Pellini, MD
  President and Chief Executive Officer

YOU ACKNOWLEDGE THAT YOU HAVE CAREFULLY READ THIS LETTER, INCLUDING EXHIBIT A, AND UNDERSTAND AND AGREE TO ALL OF THE PROVISIONS IN THIS LETTER AND ITS EXHIBITS.

 

Accepted and agreed by:

/s/ Vincent A. Miller

Employee Signature

Vincent A. Miller

Print Employee’s Name
Date:  

3 August 2011

 

www.foundationmedicine.com


EXHIBIT A

Employee Non-Competition, Non-Solicitation, Confidentiality and Assignment Agreement

 

www.foundationmedicine.com


Standard Foundation Medicine Form

New Employee Agreement

Revisions Approved November 29, 2010

MODIFIED FOR VINCENT MILLER, MD

 

LOGO

Non-Competition, Non-Solicitation,

Confidentiality and Assignment Agreement

In consideration and as a condition of my employment or continued employment by Foundation Medicine, Inc. (the “Company”), I hereby agree as follows:

 

1. Proprietary Information . I agree that all information, whether or not in writing, whether or not disclosed before or after I was first employed by the Company, concerning the Company’s business, technology, business relationships or financial affairs that the Company has not released to the general public (collectively, “Proprietary Information”), and all tangible embodiments thereof, are and will be the exclusive property of the Company. By way of illustration, Proprietary Information may include information or material that has not been made generally available to the public, such as: (a)  corporate information , including plans, strategies, methods, policies, resolutions, notes, email correspondence, negotiations or litigation; (b)  marketing information , including strategies, methods, customer identities or other information about customers, prospect identities or other information about prospects, or market analyses or projections; (c)  financial information , including cost and performance data, debt arrangements, equity structure, investors and holdings, purchasing and sales data and price lists; and (d)  operational and technological information , including plans, specifications, manuals, forms, templates, software, designs, methods, procedures, formulas, discoveries, inventions, improvements, biological or chemical materials, concepts and ideas; and (e)  personnel information , including personnel lists, reporting or organizational structure, resumes, personnel data, compensation structure, performance evaluations and termination arrangements or documents. Proprietary Information includes, without limitation, (1) information received in confidence by the Company from its customers or suppliers or other third parties, and (2) all biological or chemical materials and other tangible embodiments of the Proprietary Information.

2. Recognition of Company’s Rights . I will not, at any time, without the Company’s prior written permission, either during or after my employment,

disclose or transfer any Proprietary Information to anyone outside of the Company, or use or permit to be used any Proprietary Information for any purpose other than the performance of my duties as an employee of the Company. I will cooperate with the Company and use my best efforts to prevent the unauthorized disclosure of all Proprietary Information. I will deliver to the Company all copies and other tangible embodiments of Proprietary Information in my possession or control upon the earlier of a request by the Company or termination of my employment.

3. Rights of Others . I understand that the Company is now and may hereafter be subject to non-disclosure or confidentiality agreements with third persons that require the Company to protect or refrain from use of proprietary information. I agree to be bound by the terms of such agreements in the event I have access to such proprietary information.

4. Commitment to Company; Avoidance of Conflict of Interest . While an employee of the Company, I will devote my full-time efforts to the Company’s business and I will not engage in any other business activity that conflicts with my duties to the Company. I will advise the President of the Company or his or her nominee at such time as any activity of either the Company or another business presents me with a conflict of interest or the appearance of a conflict of interest as an employee of the Company. I will take whatever action is requested of me by the Company to resolve any conflict or appearance of conflict that it finds to exist.

5. Developments . I hereby assign and transfer and, to the extent any such assignment cannot be made at present, will assign and transfer, to the Company and its successors and assigns, all my right, title and interest in and to all Developments (as defined below) that: (a) are created, developed, made, conceived or reduced to practice by me (alone or jointly with others) or under my direction

 


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(collectively, “conceived”) during the period of my employment and six (6) months thereafter and that relate to the business of the Company or to products, methods or services being researched, developed, manufactured or sold by the Company; or (b) result from tasks assigned to me by the Company; or (c) result from the use of premises, Proprietary Information or personal property (whether tangible or intangible) owned, licensed or leased by the Company (collectively, “Company-Related Developments”), and all patent rights, trademarks, copyrights and other intellectual property rights in all countries and territories worldwide claiming, covering or otherwise arising from or pertaining to Company-Related Developments (collectively, “Intellectual Property Rights”). I further agree that “Company-Related Developments” include, without limitation, all Developments that (i) were conceived by me before my employment, (ii) relate to the business of the Company or to products, methods or services being researched, developed, manufactured or sold by the Company, and (iii) were not subject to an obligation to assign to another entity when conceived. I will make full and prompt disclosure to the Company of all Company-Related Developments, as well as all other Developments conceived by me during the period of my employment and six (6) months thereafter. I acknowledge that all work performed by me as an employee of the Company is on a “work for hire” basis. I hereby waive all claims to any moral rights or other special rights that I may have or accrue in any Company-Related Developments.

“Developments” mean inventions, discoveries, designs, developments, methods, modifications, improvements, processes, biological or chemical materials, algorithms, databases, computer programs, formulae, techniques, trade secrets, graphics or images, audio or visual works, and other works of authorship.

If, in the course of my employment with the Company, I incorporate a Development conceived by me before my employment that are not Company-Related Developments (“Prior Inventions”) into a Company product, process or research or development program or other work done for the Company, I hereby grant to the Company a nonexclusive, royalty-free, fully paid-up, irrevocable, perpetual, worldwide license (with the full right to sublicense through multiple tiers) to make, have made, modify, use, offer for sale, import and sell such Prior Invention. Notwithstanding the foregoing, I will not incorporate, or permit to be incorporated, Prior Inventions in any Company-Related

Development without the Company’s prior written consent.

I understand that to the extent this Agreement is required to be construed in accordance with the laws of any state which precludes a requirement in an employee agreement to assign certain classes of inventions made by an employee, this Section will be interpreted not to apply to any invention which a court rules and/or the Company agrees falls within such classes.

6. Documents and Other Materials . I will keep and maintain adequate and current records of all Proprietary Information and Company-Related Developments conceived by me, which records will be available to and remain the sole property of the Company at all times. All files, letters, notes, memoranda, reports, records, data, sketches, drawings, notebooks, layouts, charts, quotations and proposals, specification sheets, program listings, blueprints, models, prototypes, materials or other written, photographic or other tangible material containing or embodying Proprietary Information, whether created by me or others, which come into my custody or possession, are the exclusive property of the Company to be used by me only in the performance of my duties for the Company. In the event of the termination of my employment for any reason, I will deliver to the Company all of the foregoing, and all other materials of any nature pertaining to the Proprietary Information of the Company and to my work, and will not take or keep in my possession any of the foregoing or any copies. Any property situated on the Company’s premises and owned by the Company, including laboratory space, computers, disks and other storage media, filing cabinets or other work areas, is subject to inspection by the Company at any time with or without notice.

7. Enforcement of Intellectual Property Rights . I will cooperate fully with the Company, both during and after my employment with the Company, with respect to the procurement, maintenance and enforcement of Intellectual Property Rights, as well as all other patent rights, trademarks, copyrights and other intellectual property rights in all countries and territories worldwide owned by or licensed to the Company. I will sign, both during and after the term of this Agreement, all papers, including copyright applications, patent applications, declarations, oaths, assignments of priority rights, and powers of attorney, which the Company may deem necessary or desirable in order to protect its rights and interests in any Company-Related Development or Intellectual Property Rights. If the

 


LOGO    Page 3 of 5

 

Company is unable, after reasonable effort, to secure my signature on any such papers, I hereby irrevocably designate and appoint each officer of the Company as my agent and attorney-in-fact to execute any such papers on my behalf, and to take any and all actions as the Company may deem necessary or desirable in order to protect its rights and interests in the same.

8. Non-Competition and Non-Solicitation . In order to protect the Company’s Proprietary Information and good will, during my employment and for a period of one (1) year following the termination of my employment for any reason (the “Restricted Period”), I will not directly or indirectly, whether as owner, partner, shareholder, director, consultant, agent, employee, co-venturer or otherwise, engage, participate or invest in any business activity anywhere in the world that develops, manufactures or markets any products, or performs any services, that are otherwise competitive with the products or services of the Company, or products or services that the Company has under development or that are the subject of active planning at any time during my employment; provided that this will not prohibit any possible investment in publicly traded stock of a company representing less than one percent of the stock of such company. In addition, during the Restricted Period, I will not, directly or indirectly, in any manner, other than for the benefit of the Company, (a) call upon, solicit, divert or take away any of the customers, business or prospective customers of the Company or any of its suppliers, and/or (b) solicit, entice or attempt to persuade any other employee or consultant of the Company to leave the services of the Company for any reason. I acknowledge and agree that if I violate any of the provisions of this Section, the running of the Restricted Period will be extended by the time during which I engage in such violation(s).

9. Government Contracts . I acknowledge that the Company may have from time to time agreements with other persons or with the United States Government or its agencies that impose obligations or restrictions on the Company regarding inventions made during the course of work under such agreements or regarding the confidential nature of such work. I agree to comply with any such obligations or restrictions upon the direction of the Company. In addition to the rights assigned under Section 5, I also assign to the Company (or any of its nominees) all rights which I have or acquired in any Developments, full title to which is required to be in the United States under any contract between the

Company and the United States or any of its agencies.

10. Prior Agreements . I hereby represent that, except as I have fully disclosed previously in writing to the Company, I am not bound by the terms of any agreement with any previous employer or other party to refrain from using or disclosing any trade secret or confidential or proprietary information in the course of my employment with the Company or to refrain from competing, directly or indirectly, with the business of such previous employer or any other party. I further represent that my performance of all the terms of this Agreement as an employee of the Company does not and will not breach any agreement to keep in confidence proprietary information, knowledge or data acquired by me in confidence or in trust prior to my employment with the Company. I will not disclose to the Company or induce the Company to use any confidential or proprietary information or material belonging to any previous employer or others.

11. Remedies Upon Breach . I understand that the restrictions contained in this Agreement are necessary for the protection of the business and goodwill of the Company and I consider them to be reasonable for such purpose. Any breach of this Agreement is likely to cause the Company substantial and irrevocable damage and therefore, in the event of such breach, the Company, in addition to such other remedies that may be available, will be entitled to specific performance and other injunctive relief.

12. Publications and Public Statements . I will obtain the Company’s written approval before publishing or submitting for publication any material that relates to my work at the Company and/or incorporates any Proprietary Information. To ensure that the Company delivers a consistent message about its products, services and operations to the public, and further in recognition that even positive statements may have a detrimental effect on the Company in certain securities transactions and other contexts, any statement about the Company which I create, publish or post during my period of employment and for six (6) months thereafter, on any media accessible by the public, including but not limited to electronic bulletin boards and Internet- based chat rooms, must first be reviewed and approved by an officer of the Company before it is released in the public domain.

13. No Employment Obligation . I understand that this Agreement does not create an obligation on the Company or any other person to continue my employment. I acknowledge that, unless otherwise agreed in a formal written employment agreement

 


LOGO    Page 4 of 5

 

signed on behalf of the Company by an authorized officer, my employment with the Company is at will and therefore may be terminated by the Company or me at any time and for any reason.

14. Survival and Assignment by the Company . I understand that my obligations under this Agreement will continue in accordance with its express terms regardless of any changes in my title, position, duties, salary, compensation or benefits or other terms and conditions of employment. I further understand that my obligations under this Agreement will continue following the termination of my employment regardless of the manner of such termination and will be binding upon my heirs, executors and administrators. The Company will have the right to assign this Agreement to its affiliates, successors and assigns. I expressly consent to be bound by the provisions of this Agreement for the benefit of the Company or any parent, subsidiary or affiliate to whose employ I may be transferred without the necessity that this Agreement be resigned at the time of such transfer.

15. Disclosure to Future Employers . I will provide a copy of this Agreement to any prospective employer, partner or co-venturer prior to entering into an employment, partnership or other business relationship with such person or entity.

16. Exit Interview . If and when I depart from the Company, I may be required to attend an exit interview and sign an “Employee Exit Acknowledgement” to reaffirm my acceptance and acknowledgement of the obligations set forth in this Agreement. During the Restricted Period following termination of my employment, I will notify the Company of any change in my address and of each subsequent employment or business activity, including the name and address of my employer or other post-Company employment plans and the nature of my activities.

17. Severability . In case any provisions (or portions thereof) contained in this Agreement will, for any reason, be held invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability will not affect the other provisions of this Agreement, and this Agreement will be construed as if such invalid, illegal or unenforceable provision had never been contained herein. If, moreover, any one or more of the provisions contained in this Agreement will for any reason be held to be excessively broad as to duration, geographical scope, activity or subject, it will be construed by limiting and reducing it, so as to be enforceable to the extent compatible with the applicable law as it will then appear.

18. Entire Agreement . This Agreement constitutes the entire and only agreement between the Company and me respecting the subject matter hereof, and supersedes all prior agreements and understandings, oral or written, between us concerning such subject matter. No modification, amendment, waiver or termination of this Agreement or of any provision hereof will be binding unless made in writing and signed by an authorized officer of the Company. Failure of the Company to insist upon strict compliance with any of the terms, covenants or conditions hereof will not be deemed a waiver of such terms, covenants or conditions. In the event of any inconsistency between this Agreement and any other contract between the Company and me, the provisions of this Agreement will prevail.

19. Interpretation . This Agreement will be deemed to be made and entered into in the Commonwealth of Massachusetts, and will in all respects be interpreted, enforced and governed under the laws of the Commonwealth of Massachusetts. I hereby agree to consent to personal jurisdiction of the state and federal courts situated within Suffolk County, Massachusetts for purposes of enforcing this Agreement, and waive any objection that I might have to personal jurisdiction or venue in those courts. As used in this Agreement, “including” means “including but not limited to.”

BY SIGNING BELOW, I CERTIFY THAT I HAVE READ THIS AGREEMENT CAREFULLY AND AM SATISFIED THAT I UNDERSTAND IT COMPLETELY.

IN WITNESS WHEREOF , the undersigned has executed this agreement as a sealed instrument as of the date set forth below.

 

Signed:  

/s/ Vincent A. Miller

  (Employee’s full name)

 

Type or print name:  

Vincent A. Miller

 

Date:  

3 August 2011

 


LOGO    Page 1 of 5

 

EXHIBIT A

 

TO:    Foundation Medicine, Inc.
FROM:   
DATE:   
SUBJECT:    Prior Inventions

 

      The following is a complete list of all inventions or improvements relevant to the subject matter of my employment by the Company that have been made or conceived or first reduced to practice by me alone or jointly with others prior to my engagement by the Company:
   ¨    No inventions or improvements
   ¨    See below:
     

 

     

 

     

 

     

 

   ¨    Additional sheets attached
      The following is a list of all patents, patent applications and other patent rights that I have invented:
   ¨    None
   ¨    See below:
     

 

     

 

     

 

     

 


LOGO

March 7, 2013

Vincent Miller, M.D.

Re: Amendment to Offer of Employment with Foundation Medicine, Inc. dated August 1, 2011

Dear Vince:

Reference is made to the letter, dated August 1, 2011 (the “Agreement”), between you and Foundation Medicine, Inc. (“Foundation”). This letter constitutes an amendment to the Agreement (this “Amendment”). Capitalized terms used herein and not otherwise defined shall have the meaning set forth in the Agreement.

 

1. The last paragraph in the “Restricted Stock Grant; Options to Purchase Stock” section is hereby deleted in its entirety and replaced with the following:

“In addition to the Restricted Stock and Subsequent Options, from time to time, you have received, and you may receive, other incentive stock options, non-statutory stock options, shares of restricted stock, restricted stock units or other incentive equity awards in respect of shares of the Company’s equity securities (each an “Equity Award” and collectively, the “Equity Awards”).

A list of all Equity Awards granted to you by the Company as of the date of this Agreement is attached as Exhibit B (the “Equity Schedule”). The Equity Awards are subject to the terms and conditions of the Company’s incentive equity plan(s), as may be amended from time to time, and associated award agreements (collectively, and together with the Equity Schedule, the “Equity Documents”).

Certain Equity Awards have been granted acceleration rights described below and are designated as Acceleration Equity Awards on the Equity Schedule (the “Acceleration Equity Awards”). Equity Awards not granted Acceleration Rights by the Company are designated as Non-Acceleration Equity Awards on the Equity Schedule (the “Non-Acceleration Equity Awards”). Any Equity Awards granted to you by the Company that are not listed on the Equity Schedule shall be considered Non-Acceleration Equity Awards, unless and until they are granted Acceleration Equity Award status by the Board. Consistent with the Equity Documents, the Equity Schedule may be amended from time to time by the Company to add Acceleration Equity Awards or to add Non-Acceleration Equity Awards, and to convert Non-Acceleration Equity Awards to Acceleration Equity Awards. Each amendment to the Equity Schedule shall be consecutively numbered and dated, shall make express reference to this Agreement, shall supersede the immediately preceding Equity Schedule, and following issuance shall be incorporated into this Agreement and shall constitute one of the Equity Documents.


Subject to the further provisions of this letter, the Restricted Stock and the Subsequent Options (if any) shall be designated as Acceleration Equity Awards on the Equity Schedule. Vesting of the Restricted Stock and the Subsequent Options (if any) shall accelerate with regard to the entire remaining unvested portion of the Restricted Stock or the Subsequent Options (if any), as the case may be, after (a) a “Change in Control” (as defined below) and (b) any one of the following events: (i) the Company subsequently electing to terminate your employment with the Company without “Cause” (as defined below), (ii) you subsequently terminating your employment with the Company for “Good Reason” within three (3) months of the initial existence of the condition or event that constitutes Good Reason, or (iii) your continued employment with the Company (or its successor) for twelve (12) months following such Change in Control.

Subject to the further provisions of this Agreement and the Equity Documents, vesting of any Acceleration Equity Awards (other than the Restricted Stock and the Subsequent Options (if any), which shall be governed by the preceding paragraph) shall accelerate with regard to the entire remaining unvested portion of such Acceleration Equity Awards in the event that within eighteen (18) months following a Change in Control (i) your employment is terminated by the Company without Cause, or (ii) you terminate your employment with the Company for Good Reason in accordance with the Good Reason Process.”

 

2. The definition of “Cause” in the “ Severance ” section is hereby deleted in its entirety and replaced with the following:

“For the purposes of this Agreement “ Cause ” means one or more of the following events has occurred:

 

  (i) your conviction of, or the entry of a pleading of guilty or nolo contendere to, any crime involving (a) fraud or embezzlement, or (b) any felony;

 

  (ii) your willful failure to perform (other than by reason of disability), or gross negligence in the performance of, your duties and responsibilities as set forth in your job description;

 

  (iii) a material breach by you of any provision of this Agreement, the Employee Agreement, or any of the other agreements you have with the Company, which breach continues or remains uncured after thirty (30) days’ notice setting forth in reasonable detail the nature of such breach; or

 

  (iv) material fraudulent conduct by you with respect to the Company.”

 

3. The definition of “Good Reason” in the “ Severance ” section is hereby deleted in its entirety and replaced with the following:

“For the purposes of this Agreement “Good Reason” means the occurrence of one or more of the following without your written consent, provided that you have complied with the Good Reason Process (as defined below):

 

  (i) a material diminution in your responsibilities, authority or duties as Senior Vice President, Clinical Development;

 

  (ii) a material diminution in your base salary, except for across-the-board salary reductions based on the Company’s financial performance similarly affecting all or substantially all senior management employees of the Company;


  (iii) a material breach by the Company of this letter or any of the agreements you have with the Company relating to the Restricted Stock, the Subsequent Options, or other equity of Foundation Medicine; or

 

  (iv) your work location is located more than fifty (50) miles from the Company’s office location at which you were principally working as of the effective date of the Change in Control.

For the purposes of this Agreement, the “Good Reason Process” means that (a) you reasonably determine that Good Reason condition has occurred, (b) you notify the Company in writing of the first occurrence of the Good Reason Condition within sixty (60) day of the first occurrence of such condition, (c) you cooperate in good faith with the Company’s efforts, for a period of not less than thirty (30) days following such notice (the “Cure Period”), to remedy the Good Reason condition, (d) notwithstanding such efforts the Good Reason condition continues to exist, and (e) you terminate your employment within sixty ( 60) days after the end of the Cure Period. If the Company cures the Good Reason condition during the Cure Period, Good Reason shall be deemed not to have occurred.

 

4. The following definition is inserted as a new paragraph immediately before the last paragraph in the “ Severance ” section:

“For the purposes of this Agreement “ Change in Control ” means the following:

(a) prior to the completion of an initial public offering by the Company, an event that (i) is a Deemed Liquidation Event within the meaning of such term as set forth in the Company’s Amended and Restated Certificate of Incorporation, as amended, as amended and/or restated from time to time and (ii) results in the payment of proceeds to the stockholders of the Company and

(b) following the completion of an initial public offering by the Company, any of the following:

(i) any “person,” as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “Act”) (other than the Company, any of its subsidiaries, or any trustee, fiduciary or other person or entity holding securities under any employee benefit plan or trust of the Company or any of its subsidiaries), together with all “affiliates” and “associates” (as such terms are defined in Rule 12b-2 under the Act) of such person, shall become the “beneficial owner” (as such term is defined in Rule 13d-3 under the Act), directly or indirectly, of securities of the Company representing 50 percent or more of the combined voting power of the Company’s then outstanding securities having the right to vote in an election of the Board (“Voting Securities”) (in such case other than as a result of an acquisition of securities directly from the Company); or

(ii) the date when a majority of the members of the Board of Directors of the Company is replaced during any consecutive twenty-four month period by individuals who, prior to their election, or nomination for election by the Company’s shareholders, were not approved by a majority of the members of the Board of Directors in existence on the date immediately prior to such election, appointment or nomination; or

(iii) the consummation of (A) any consolidation or merger of the Company where the stockholders of the Company, immediately prior to the consolidation or merger, would not, immediately after the consolidation or merger, beneficially own (as such term is defined in Rule 13d-3 under the Act), directly or indirectly, shares representing in the aggregate more than 50 percent of the voting shares of the Company issuing cash or securities in the consolidation or merger (or of its ultimate parent corporation, if any), or (B) any sale or other transfer (in one transaction or a series of transactions contemplated or arranged by any party as a single plan) of all or substantially all of the assets of the Company.


Notwithstanding the foregoing, a “Change in Control” shall not include (x) an initial public offering and (y) shall not be deemed to have occurred for purposes of the foregoing clause (b)(i) solely as the result of an acquisition of securities by the Company which, by reducing the number of shares of Voting Securities outstanding, increases the proportionate number of Voting Securities beneficially owned by any person to 50 percent or more of the combined voting power of all of the then outstanding Voting Securities; provided, however, that if any person referred to in this sentence shall thereafter become the beneficial owner of any additional shares of Voting Securities (other than pursuant to a stock split, stock dividend, or similar transaction or as a result of an acquisition of securities directly from the Company) and immediately thereafter beneficially owns 50 percent or more of the combined voting power of all of the then outstanding Voting Securities, then a “Change in Control” shall be deemed to have occurred for purposes of the foregoing clause (b)(i).”

 

5. The last paragraph in the “ Severance ” section is hereby deleted in its entirety and replaced with the following:

“For the avoidance of doubt, you and the Company acknowledge that if your employment is terminated: (i) by the Company for Cause, (ii) by you without Good Reason, (iii) by you with Good Reason but not within three (3) months of the initial existence of the condition or event that constitutes Good Reason), or (iv) as a result of your death or disability, then, as a result of such termination, (w) you shall be entitled to receive only any base pay earned through the date of termination plus accrued but unused vacation pay through the date of termination, (y) the unvested portion of your Equity Awards will not accelerate and (z) your Equity Awards shall expire or be forfeited in accordance with the terms of the Equity Documents.”

 

6. This Agreement shall remain in effect if you are transferred, promoted, or reassigned to work in functions other than your current functions at Foundation. Your obligations under this Agreement shall survive the termination of your employment with Foundation regardless of the manner or the reasons for such termination. This Amendment and the Agreement shall inure to the benefit of, and be binding upon, Foundation and you, and our respective heirs, legal representatives, successors and assigns. This Amendment and the Agreement may be assigned by Foundation without your consent to any successor entity in the event of a merger, acquisition, change of control, or sale of all or substantially all of the business or assets of the Company. “Foundation Medicine”, “Foundation” and “Company” shall also mean any such successor entity as the context requires.

 

7. Upon execution, this Amendment and the Agreement, together with Exhibits A and B, and the Equity Documents, each as amended from time to time, will constitute the entire agreement as to your employment relationship with Foundation and will supersede any prior agreements or understandings, whether in writing or oral.


We are looking forward to your continued contributions as a member of the Foundation Medicine team.

 

Sincerely,
FOUNDATION MEDICINE, INC.

/s/ Sarah Larson

By:   Sarah Larson
Title:   Vice President, Human Resources

YOU ACKNOWLEDGE THAT YOU HAVE CAREFULLY READ THIS LETTER DATED AUGUST 1, 2011, THE AMENDMENT DATED MARCH 7, 2013, AND EXHIBIT A AND EXHIBIT B TO THIS LETTER, AND UNDERSTAND AND AGREE TO ALL OF THE PROVISIONS IN THIS LETTER AND ITS EXHIBITS. FACSIMILE AND PDF SIGNATURES SHALL HAVE THE SAME LEGAL EFFECT AS ORIGINALS.

 

Accepted and agreed by :

/s/ Vincent Miller

Employee Signature

Vincent A. Miller

Print Employee’s Name
Date:  

20 Jun 2013


EXHIBIT B

Equity Schedule

The table below contains information regarding stock option awards. Except for information regarding the designation of a stock option award as an Acceleration Equity Award or Non-Acceleration Equity Award, the information furnished is for reference purposes only. In the event of a conflict between the information furnished in this table and the Stock Option Agreement for such stock option award, the terms and conditions of the Stock Option Agreement shall govern. You should refer to each Stock Option Agreement for the individual terms and conditions of such stock option award.

 

Grant

    

Grant Date

  

Acceleration
Rights

  550,000       August 3, 2011    Yes
  100,000       January 11, 2012    Yes
  100,000       January 11, 2012    Yes
  50,000       March 7, 2013    Yes
  *50,000       May 21, 2013    Yes

 

* Grant is subject to condition vesting terms which are defined m the option agreement


September 10, 2013

Vincent Miller, M.D.

 

Re: Second Amendment to Offer of Employment with Foundation Medicine, Inc.

Dear Vince:

Reference is made to the employment offer letter, dated August 1, 2011 (the “ Agreement ”), between you and Foundation Medicine, Inc. (“ Foundation ”) and the First Amendment to the Agreement, dated March 7, 2013 (the “ First Amendment ”), between you and Foundation. This letter constitutes a second amendment to the Agreement and First Amendment (the “ Second Amendment ”). All capitalized terms used, but not defined, herein shall have the meanings ascribed to them in the Agreement.

 

  (1) The first paragraph of the Agreement is hereby deleted in its entirety and replaced with the following:

“Your current position with Foundation Medicine, Inc. (“Foundation Medicine” or the “Company”) is Chief Medical Officer, effective July 31, 2013, reporting to Michael Pellini, M.D., President and Chief Executive Officer. You are also a member of the Company’s Executive Management Team. In addition to performing duties and responsibilities associated with the positive described above, from time to time, the Company may assign you other duties and responsibilities consistent with such position.”

 

  (2) The paragraph of the section of the Agreement entitled “Living Assistance”, shall be amended and restated in its entirety to read as follows:

“The Company acknowledges that you live in New Jersey and as a condition of your employment you will be commuting to the Company’s offices in Massachusetts. In the absence of relocation, the Company will reimburse or directly pay you for living expenses in Boston, Massachusetts, including executive apartment rental, utilities, internet, telephone, television, cleaning and other customary costs associated with the executive apartment rental, and food expenses (to the extent such food expenses are not otherwise reimbursable as a business expense under the Company’s business expense policy), in each instance as incurred in the metropolitan Boston, Massachusetts area (“Living Expenses”) up to $35,000 annually (the “Living Expenses Cap”). Any unused portion of the Living Expenses Cap, or any Living Expenses in excess of the Living Expenses Cap shall not affect the amount of Living Expenses eligible for reimbursement in any subsequent calendar year. The Company will also reimburse or directly pay for your reasonable travel expenses incurred annually commuting between New Jersey and Cambridge, Massachusetts (“Commuting Expenses”).


The Company will determine in its reasonable judgment what, if any, of your Commuting Expenses and Living Expenses paid for or reimbursed by the Company are taxable to you in accordance with applicable law and will comply with associated withholding and tax reporting obligations. To the extent certain of these Commuting Expenses and Living Expenses are deemed taxable by the IRS in a given year, the Company will provide you with a tax gross-up payment such that after payment of taxes (federal, state and employment) on such amount, there remains a balance sufficient to pay the taxes (federal, state and employment) on the amount of your taxable reimbursable Commuting Expenses and Living Expenses. The Company will make such tax gross-up payment promptly but in no event later than the end of the calendar year in which you remit the related taxes.”

This Second Amendment shall be treated as amending the Agreement and First Amendment. Except as set forth herein, the Agreement and First Amendment shall otherwise remain in full force and effect in accordance with their terms. You reaffirm the effectiveness of your existing Employee Non-Competition, Non-Solicitation, Confidentiality and Assignment Agreement, a copy of which is attached to this Second Amendment as Exhibit A . The interpretation of this Second Amendment will be governed by the laws of the Commonwealth of Massachusetts, without regard to the conflicts of laws principles thereof.


Please indicate your agreement to the terms herein by countersigning in the place indicated below.

 

FOUNDATION MEDICINE, INC.
Name  

/s/ Sarah Larson

Title  

Vice President, Human Resources

Date  

September 10, 2013

 

Accepted and agreed by:

/s/ Vincent Miller

Vincent Miller, M.D.


EXHIBIT A

Employee Non-Competition, Non-Solicitation, Confidentiality and Assignment Agreement


Standard Foundation Medicine Form

New Employee Agreement

Revisions Approved November 29, 2010

MODIFIED FOR VINCENT MILLER, MD

 

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Non-Competition, Non-Solicitation,

Confidentiality and Assignment Agreement

In consideration and as a condition of my employment or continued employment by Foundation Medicine, Inc. (the “Company”), I hereby agree as follows:

 

1. Proprietary Information . I agree that all information, whether or not in writing, whether or not disclosed before or after I was first employed by the Company, concerning the Company’s business, technology, business relationships or financial affairs that the Company has not released to the general public (collectively, “Proprietary Information”), and all tangible embodiments thereof, are and will be the exclusive property of the Company. By way of illustration, Proprietary Information may include information or material that has not been made generally available to the public, such as: (a)  corporate information , including plans, strategies, methods, policies, resolutions, notes, email correspondence, negotiations or litigation; (b)  marketing information , including strategies, methods, customer identities or other information about customers, prospect identities or other information about prospects, or market analyses or projections; (c)  financial information , including cost and performance data, debt arrangements, equity structure, investors and holdings, purchasing and sales data and price lists; and (d)  operational and technological information , including plans, specifications, manuals, forms, templates, software, designs, methods, procedures, formulas, discoveries, inventions, improvements, biological or chemical materials, concepts and ideas; and (e)  personnel information , including personnel lists, reporting or organizational structure, resumes, personnel data, compensation structure, performance evaluations and termination arrangements or documents. Proprietary Information includes, without limitation, (1) information received in confidence by the Company from its customers or suppliers or other third parties, and (2) all biological or chemical materials and other tangible embodiments of the Proprietary Information.

2. Recognition of Company’s Rights . I will not, at any time, without the Company’s prior written permission, either during or after my employment,

disclose or transfer any Proprietary Information to anyone outside of the Company, or use or permit to be used any Proprietary Information for any purpose other than the performance of my duties as an employee of the Company. I will cooperate with the Company and use my best efforts to prevent the unauthorized disclosure of all Proprietary Information. I will deliver to the Company all copies and other tangible embodiments of Proprietary Information in my possession or control upon the earlier of a request by the Company or termination of my employment.

3. Rights of Others . I understand that the Company is now and may hereafter be subject to non-disclosure or confidentiality agreements with third persons that require the Company to protect or refrain from use of proprietary information. I agree to be bound by the terms of such agreements in the event I have access to such proprietary information.

4. Commitment to Company; Avoidance of Conflict of Interest . While an employee of the Company, I will devote my full-time efforts to the Company’s business and I will not engage in any other business activity that conflicts with my duties to the Company. I will advise the President of the Company or his or her nominee at such time as any activity of either the Company or another business presents me with a conflict of interest or the appearance of a conflict of interest as an employee of the Company. I will take whatever action is requested of me by the Company to resolve any conflict or appearance of conflict that it finds to exist.

5. Developments . I hereby assign and transfer and, to the extent any such assignment cannot be made at present, will assign and transfer, to the Company and its successors and assigns, all my right, title and interest in and to all Developments (as defined below) that: (a) are created, developed, made, conceived or reduced to practice by me (alone or jointly with others) or under my direction

 


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(collectively, “conceived”) during the period of my employment and six (6) months thereafter and that relate to the business of the Company or to products, methods or services being researched, developed, manufactured or sold by the Company; or (b) result from tasks assigned to me by the Company; or (c) result from the use of premises, Proprietary Information or personal property (whether tangible or intangible) owned, licensed or leased by the Company (collectively, “Company-Related Developments”), and all patent rights, trademarks, copyrights and other intellectual property rights in all countries and territories worldwide claiming, covering or otherwise arising from or pertaining to Company-Related Developments (collectively, “Intellectual Property Rights”). I further agree that “Company-Related Developments” include, without limitation, all Developments that (i) were conceived by me before my employment, (ii) relate to the business of the Company or to products, methods or services being researched, developed, manufactured or sold by the Company, and (iii) were not subject to an obligation to assign to another entity when conceived. I will make full and prompt disclosure to the Company of all Company-Related Developments, as well as all other Developments conceived by me during the period of my employment and six (6) months thereafter. I acknowledge that all work performed by me as an employee of the Company is on a “work for hire” basis. I hereby waive all claims to any moral rights or other special rights that I may have or accrue in any Company-Related Developments.

“Developments” mean inventions, discoveries, designs, developments, methods, modifications, improvements, processes, biological or chemical materials, algorithms, databases, computer programs, formulae, techniques, trade secrets, graphics or images, audio or visual works, and other works of authorship.

If, in the course of my employment with the Company, I incorporate a Development conceived by me before my employment that are not Company-Related Developments (“Prior Inventions”) into a Company product, process or research or development program or other work done for the Company, I hereby grant to the Company a nonexclusive, royalty-free, fully paid-up, irrevocable, perpetual, worldwide license (with the full right to sublicense through multiple tiers) to make, have made, modify, use, offer for sale, import and sell such Prior Invention. Notwithstanding the foregoing, I will not incorporate, or permit to be incorporated, Prior Inventions in any Company-Related

Development without the Company’s prior written consent.

I understand that to the extent this Agreement is required to be construed in accordance with the laws of any state which precludes a requirement in an employee agreement to assign certain classes of inventions made by an employee, this Section will be interpreted not to apply to any invention which a court rules and/or the Company agrees falls within such classes.

6. Documents and Other Materials . I will keep and maintain adequate and current records of all Proprietary Information and Company-Related Developments conceived by me, which records will be available to and remain the sole property of the Company at all times. All files, letters, notes, memoranda, reports, records, data, sketches, drawings, notebooks, layouts, charts, quotations and proposals, specification sheets, program listings, blueprints, models, prototypes, materials or other written, photographic or other tangible material containing or embodying Proprietary Information, whether created by me or others, which come into my custody or possession, are the exclusive property of the Company to be used by me only in the performance of my duties for the Company. In the event of the termination of my employment for any reason, I will deliver to the Company all of the foregoing, and all other materials of any nature pertaining to the Proprietary Information of the Company and to my work, and will not take or keep in my possession any of the foregoing or any copies. Any property situated on the Company’s premises and owned by the Company, including laboratory space, computers, disks and other storage media, filing cabinets or other work areas, is subject to inspection by the Company at any time with or without notice.

7. Enforcement of Intellectual Property Rights . I will cooperate fully with the Company, both during and after my employment with the Company, with respect to the procurement, maintenance and enforcement of Intellectual Property Rights, as well as all other patent rights, trademarks, copyrights and other intellectual property rights in all countries and territories worldwide owned by or licensed to the Company. I will sign, both during and after the term of this Agreement, all papers, including copyright applications, patent applications, declarations, oaths, assignments of priority rights, and powers of attorney, which the Company may deem necessary or desirable in order to protect its rights and interests in any Company-Related Development or Intellectual Property Rights. If the

 


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Company is unable, after reasonable effort, to secure my signature on any such papers, I hereby irrevocably designate and appoint each officer of the Company as my agent and attorney-in-fact to execute any such papers on my behalf, and to take any and all actions as the Company may deem necessary or desirable in order to protect its rights and interests in the same.

8. Non-Competition and Non-Solicitation . In order to protect the Company’s Proprietary Information and good will, during my employment and for a period of one (1) year following the termination of my employment for any reason (the “Restricted Period”), I will not directly or indirectly, whether as owner, partner, shareholder, director, consultant, agent, employee, co-venturer or otherwise, engage, participate or invest in any business activity anywhere in the world that develops, manufactures or markets any products, or performs any services, that are otherwise competitive with the products or services of the Company, or products or services that the Company has under development or that are the subject of active planning at any time during my employment; provided that this will not prohibit any possible investment in publicly traded stock of a company representing less than one percent of the stock of such company. In addition, during the Restricted Period, I will not, directly or indirectly, in any manner, other than for the benefit of the Company, (a) call upon, solicit, divert or take away any of the customers, business or prospective customers of the Company or any of its suppliers, and/or (b) solicit, entice or attempt to persuade any other employee or consultant of the Company to leave the services of the Company for any reason. I acknowledge and agree that if I violate any of the provisions of this Section, the running of the Restricted Period will be extended by the time during which I engage in such violation(s).

9. Government Contracts . I acknowledge that the Company may have from time to time agreements with other persons or with the United States Government or its agencies that impose obligations or restrictions on the Company regarding inventions made during the course of work under such agreements or regarding the confidential nature of such work. I agree to comply with any such obligations or restrictions upon the direction of the Company. In addition to the rights assigned under Section 5, I also assign to the Company (or any of its nominees) all rights which I have or acquired in any Developments, full title to which is required to be in the United States under any contract between the

Company and the United States or any of its agencies.

10. Prior Agreements . I hereby represent that, except as I have fully disclosed previously in writing to the Company, I am not bound by the terms of any agreement with any previous employer or other party to refrain from using or disclosing any trade secret or confidential or proprietary information in the course of my employment with the Company or to refrain from competing, directly or indirectly, with the business of such previous employer or any other party. I further represent that my performance of all the terms of this Agreement as an employee of the Company does not and will not breach any agreement to keep in confidence proprietary information, knowledge or data acquired by me in confidence or in trust prior to my employment with the Company. I will not disclose to the Company or induce the Company to use any confidential or proprietary information or material belonging to any previous employer or others.

11. Remedies Upon Breach . I understand that the restrictions contained in this Agreement are necessary for the protection of the business and goodwill of the Company and I consider them to be reasonable for such purpose. Any breach of this Agreement is likely to cause the Company substantial and irrevocable damage and therefore, in the event of such breach, the Company, in addition to such other remedies that may be available, will be entitled to specific performance and other injunctive relief.

12. Publications and Public Statements . I will obtain the Company’s written approval before publishing or submitting for publication any material that relates to my work at the Company and/or incorporates any Proprietary Information. To ensure that the Company delivers a consistent message about its products, services and operations to the public, and further in recognition that even positive statements may have a detrimental effect on the Company in certain securities transactions and other contexts, any statement about the Company which I create, publish or post during my period of employment and for six (6) months thereafter, on any media accessible by the public, including but not limited to electronic bulletin boards and Internet- based chat rooms, must first be reviewed and approved by an officer of the Company before it is released in the public domain.

13. No Employment Obligation . I understand that this Agreement does not create an obligation on the Company or any other person to continue my employment. I acknowledge that, unless otherwise agreed in a formal written employment agreement

 


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signed on behalf of the Company by an authorized officer, my employment with the Company is at will and therefore may be terminated by the Company or me at any time and for any reason.

14. Survival and Assignment by the Company . I understand that my obligations under this Agreement will continue in accordance with its express terms regardless of any changes in my title, position, duties, salary, compensation or benefits or other terms and conditions of employment. I further understand that my obligations under this Agreement will continue following the termination of my employment regardless of the manner of such termination and will be binding upon my heirs, executors and administrators. The Company will have the right to assign this Agreement to its affiliates, successors and assigns. I expressly consent to be bound by the provisions of this Agreement for the benefit of the Company or any parent, subsidiary or affiliate to whose employ I may be transferred without the necessity that this Agreement be resigned at the time of such transfer.

15. Disclosure to Future Employers . I will provide a copy of this Agreement to any prospective employer, partner or co-venturer prior to entering into an employment, partnership or other business relationship with such person or entity.

16. Exit Interview . If and when I depart from the Company, I may be required to attend an exit interview and sign an “Employee Exit Acknowledgement” to reaffirm my acceptance and acknowledgement of the obligations set forth in this Agreement. During the Restricted Period following termination of my employment, I will notify the Company of any change in my address and of each subsequent employment or business activity, including the name and address of my employer or other post-Company employment plans and the nature of my activities.

17. Severability . In case any provisions (or portions thereof) contained in this Agreement will, for any reason, be held invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability will not affect the other provisions of this Agreement, and this Agreement will be construed as if such invalid, illegal or unenforceable provision had never been contained herein. If, moreover, any one or more of the provisions contained in this Agreement will for any reason be held to be excessively broad as to duration, geographical scope, activity or subject, it will be construed by limiting and reducing it, so as to be enforceable to the extent compatible with the applicable law as it will then appear.

18. Entire Agreement . This Agreement constitutes the entire and only agreement between the Company and me respecting the subject matter hereof, and supersedes all prior agreements and understandings, oral or written, between us concerning such subject matter. No modification, amendment, waiver or termination of this Agreement or of any provision hereof will be binding unless made in writing and signed by an authorized officer of the Company. Failure of the Company to insist upon strict compliance with any of the terms, covenants or conditions hereof will not be deemed a waiver of such terms, covenants or conditions. In the event of any inconsistency between this Agreement and any other contract between the Company and me, the provisions of this Agreement will prevail.

19. Interpretation . This Agreement will be deemed to be made and entered into in the Commonwealth of Massachusetts, and will in all respects be interpreted, enforced and governed under the laws of the Commonwealth of Massachusetts. I hereby agree to consent to personal jurisdiction of the state and federal courts situated within Suffolk County, Massachusetts for purposes of enforcing this Agreement, and waive any objection that I might have to personal jurisdiction or venue in those courts. As used in this Agreement, “including” means “including but not limited to.”

BY SIGNING BELOW, I CERTIFY THAT I HAVE READ THIS AGREEMENT CAREFULLY AND AM SATISFIED THAT I UNDERSTAND IT COMPLETELY.

IN WITNESS WHEREOF , the undersigned has executed this agreement as a sealed instrument as of the date set forth below.

 

Signed:  

/s/ Vincent A. Miller

  (Employee’s full name)

 

Type or print name:  

Vincent A. Miller

 

Date:  

3 August 2011

 


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EXHIBIT A

 

TO:    Foundation Medicine, Inc.
FROM:   
DATE:   
SUBJECT:    Prior Inventions

 

      The following is a complete list of all inventions or improvements relevant to the subject matter of my employment by the Company that have been made or conceived or first reduced to practice by me alone or jointly with others prior to my engagement by the Company:
   ¨    No inventions or improvements
   ¨    See below:
     

 

     

 

     

 

     

 

   ¨    Additional sheets attached
      The following is a list of all patents, patent applications and other patent rights that I have invented:
   ¨    None
   ¨    See below:
     

 

     

 

     

 

     

 

Exhibit 10.16

FOUNDATION MEDICINE, INC.

2013 EMPLOYEE STOCK PURCHASE PLAN

The purpose of the Foundation Medicine, Inc. 2013 Employee Stock Purchase Plan (“the Plan”) is to provide eligible employees of Foundation Medicine, Inc. (the “Company”) and each Designated Subsidiary (as defined in Section 11) with opportunities to purchase shares of the Company’s common stock, par value $0.0001 per share (the “Common Stock”). 788,503 shares of Common Stock in the aggregate have been approved and reserved for this purpose. The Plan is intended to constitute an “employee stock purchase plan” within the meaning of Section 423(b) of the Internal Revenue Code of 1986, as amended (the “Code”), and shall be interpreted in accordance with that intent.

1. Administration . The Plan will be administered by the person or persons (the “Administrator”) appointed by the Company’s Board of Directors (the “Board”) for such purpose. The Administrator has authority at any time to: (i) adopt, alter and repeal such rules, guidelines and practices for the administration of the Plan and for its own acts and proceedings as it shall deem advisable; (ii) interpret the terms and provisions of the Plan; (iii) make all determinations it deems advisable for the administration of the Plan; (iv) decide all disputes arising in connection with the Plan; and (v) otherwise supervise the administration of the Plan. All interpretations and decisions of the Administrator shall be binding on all persons, including the Company and the Participants. No member of the Board or individual exercising administrative authority with respect to the Plan shall be liable for any action or determination made in good faith with respect to the Plan or any option granted hereunder.


2. Offerings . The Company will make one or more offerings to eligible employees to purchase Common Stock under the Plan (“Offerings”). Unless otherwise determined by the Administrator, the initial Offering will begin on either January 1 st or July 1 st of the year designated by the Administrator and will end on the following June 30 th or December 31 st , respectively (such period, the “Initial Offering”). Thereafter, unless otherwise determined by the Administrator, an Offering will begin on the first business day occurring on or after each January 1 st and July 1 st and will end on the last business day occurring on or before the following June 30 th and December 31 st , respectively. The Administrator may, in its discretion, designate a different period for any Offering, provided that no Offering shall exceed six months in duration or overlap any other Offering.

3. Eligibility . All individuals classified as employees on the payroll records of the Company and each Designated Subsidiary are eligible to participate in any one or more of the Offerings under the Plan, provided that as of the first day of the applicable Offering (the “Offering Date”) they are customarily employed by the Company or a Designated Subsidiary for more than 20 hours a week and have completed at least six weeks of employment. Notwithstanding any other provision herein, individuals who are not contemporaneously classified as employees of the Company or a Designated Subsidiary for purposes of the Company’s or applicable Designated Subsidiary’s payroll system are not considered to be eligible employees of the Company or any Designated Subsidiary and shall not be eligible to participate in the Plan. In the event any such individuals are reclassified as employees of the Company or a Designated Subsidiary for any purpose, including, without limitation, common law or statutory employees, by any action of any third party, including, without limitation, any government agency, or as a result of any private lawsuit, action or administrative proceeding,

 

2


such individuals shall, notwithstanding such reclassification, remain ineligible for participation. Notwithstanding the foregoing, the exclusive means for individuals who are not contemporaneously classified as employees of the Company or a Designated Subsidiary on the Company’s or Designated Subsidiary’s payroll system to become eligible to participate in this Plan is through an amendment to this Plan, duly executed by the Company, which specifically renders such individuals eligible to participate herein.

4. Participation .

(a) Participants in Initial Offering . Each eligible employee employed immediately before the Initial Offering may participate in such offering by submitting an enrollment form to his or her appropriate payroll location at least 15 business days before the Initial Offering (or by such other deadline as shall be established by the Administrator prior to the Initial Offering).

(b) Participants in Subsequent Offerings . An eligible employee who is not a Participant on any Offering Date may participate in such Offering by submitting an enrollment form to his or her appropriate payroll location at least 15 business days before the Offering Date (or by such other deadline as shall be established by the Administrator for the Offering).

(c) Enrollment . The enrollment form will (a) state a whole percentage to be deducted from an eligible employee’s Compensation (as defined in Section 11) per pay period, (b) authorize the purchase of Common Stock in each Offering in accordance with the terms of the Plan and (c) specify the exact name or names in which shares of Common Stock purchased for such individual are to be issued pursuant to Section 10. An employee who does not enroll in accordance with these procedures will be deemed to have waived the right to participate. Unless a Participant files a new enrollment form or withdraws from the Plan, such Participant’s deductions and purchases will continue at the same percentage of Compensation for future Offerings, provided he or she remains eligible.

 

3


(d) Notwithstanding the foregoing, participation in the Plan will neither be permitted nor be denied contrary to the requirements of the Code.

5. Employee Contributions . Each eligible employee may authorize payroll deductions up to a maximum of ten percent (10%) of such employee’s Compensation for each pay period. The Company will maintain book accounts showing the amount of payroll deductions made by each Participant for each Offering. No interest will accrue or be paid on payroll deductions.

6. Deduction Changes . Except as may be determined by the Administrator in advance of an Offering, a Participant may not increase or decrease his or her payroll deduction during any Offering, but may increase or decrease his or her payroll deduction with respect to the next Offering (subject to the limitations of Section 5) by filing a new enrollment form at least 15 business days before the next Offering Date (or by such other deadline as shall be established by the Administrator for the Offering). The Administrator may, in advance of any Offering, establish rules permitting a Participant to increase, decrease or terminate his or her payroll deduction during an Offering.

7. Withdrawal . A Participant may withdraw from participation in the Plan by delivering a written notice of withdrawal to his or her appropriate payroll location. The Participant’s withdrawal will be effective as of the next business day. Following a Participant’s withdrawal, the Company will promptly refund such individual’s entire account balance under the Plan to him or her (after payment for any Common Stock purchased before the effective date of withdrawal). Partial withdrawals are not permitted. Such an employee may not begin participation again during the remainder of the Offering, but may enroll in a subsequent Offering in accordance with Section 4.

 

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8. Grant of Options . On each Offering Date, the Company will grant to each eligible employee who is then a Participant in the Plan an option (“Option”) to purchase on the last day of such Offering (the “Exercise Date”), at the Option Price hereinafter provided for, the lowest of (a) a number of shares of Common Stock determined by dividing such Participant’s accumulated payroll deductions on such Exercise Date by the lower of (i) 85 percent of the Fair Market Value of the Common Stock on the Offering Date or (ii) 85 percent of the Fair Market Value of the Common Stock on the Exercise Date, (b) a number of shares of Common Stock determined by dividing $12,500 by the Fair Market Value of the Common Stock on the Offering Date; or (c) such other lesser maximum number of shares as shall have been established by the Administrator in advance of the Offering; provided, however, that such Option shall be subject to the limitations set forth below. Each Participant’s Option shall be exercisable only to the extent of such Participant’s accumulated payroll deductions on the Exercise Date. The purchase price for each share purchased under each Option (the “Option Price”) will be 85 percent of the Fair Market Value of the Common Stock on the Offering Date or the Exercise Date, whichever is less.

Notwithstanding the foregoing, no Participant may be granted an Option hereunder if such Participant, immediately after the Option was granted, would be treated as owning stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or any Parent or Subsidiary (as defined in Section 11). For purposes of the preceding sentence, the attribution rules of Section 424(d) of the Code shall apply in determining the stock ownership of a Participant, and all stock which the Participant has a

 

5


contractual right to purchase shall be treated as stock owned by the Participant. In addition, no Participant may be granted an Option which permits his or her rights to purchase stock under the Plan, and any other employee stock purchase plan of the Company and its Parents and Subsidiaries, to accrue at a rate which exceeds $25,000 of the fair market value of such stock (determined on the Option grant date or dates) for each calendar year in which the Option is outstanding at any time. The purpose of the limitation in the preceding sentence is to comply with Section 423(b)(8) of the Code and shall be applied taking Options into account in the order in which they were granted.

9. Exercise of Option and Purchase of Shares . Each employee who continues to be a Participant in the Plan on the Exercise Date shall be deemed to have exercised his or her Option on such date and shall acquire from the Company such number of whole shares of Common Stock reserved for the purpose of the Plan as his or her accumulated payroll deductions on such date will purchase at the Option Price, subject to any other limitations contained in the Plan. Any amount remaining in a Participant’s account at the end of an Offering solely by reason of the inability to purchase a fractional share will be carried forward to the next Offering; any other balance remaining in a Participant’s account at the end of an Offering will be refunded to the Participant promptly.

10. Issuance of Certificates . An electronic book entry with the Company’s transfer agent representing shares of Common Stock purchased under the Plan may be issued only in the name of the employee, in the name of the employee and another person of legal age as joint tenants with rights of survivorship, or in the name of a broker authorized by the employee to be his, her or their, nominee for such purpose.

 

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11. Definitions .

The term “Compensation” means the amount of base pay, prior to salary reduction pursuant to Sections 125, 132(f) or 401(k) of the Code, but excluding overtime, commissions, incentive or bonus awards, allowances and reimbursements for expenses such as relocation allowances or travel expenses, income or gains on the exercise of Company stock options, and similar items.

The term “Designated Subsidiary” means any present or future Subsidiary (as defined below) that has been designated by the Board to participate in the Plan. The Board may so designate any Subsidiary, or revoke any such designation, at any time and from time to time, either before or after the Plan is approved by the stockholders.

The term “Fair Market Value of the Common Stock” on any given date means the fair market value of the Common Stock determined in good faith by the Administrator; provided , however , that if the Common Stock is admitted to quotation on the National Association of Securities Dealers Automated Quotation System (“NASDAQ”), NASDAQ Global Market or another national securities exchange, the determination shall be made by reference to the closing price on such date. If there is no closing price for such date, the determination shall be made by reference to the last date preceding such date for which there is a closing price.

The term “Initial Public Offering” means the consummation of the first underwritten, firm commitment public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale by the Company of its Common Stock.

The term “Parent” means a “parent corporation” with respect to the Company, as defined in Section 424(e) of the Code.

 

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The term “Participant” means an individual who is eligible as determined in Section 3 and who has complied with the provisions of Section 4.

The term “Subsidiary” means a “subsidiary corporation” with respect to the Company, as defined in Section 424(f) of the Code.

12. Rights on Termination of Employment . If a Participant’s employment terminates for any reason before the Exercise Date for any Offering, no payroll deduction will be taken from any pay due and owing to the Participant and the balance in the Participant’s account will be paid to such Participant or, in the case of such Participant’s death, to his or her designated beneficiary as if such Participant had withdrawn from the Plan under Section 7. An employee will be deemed to have terminated employment, for this purpose, if the corporation that employs him or her, having been a Designated Subsidiary, ceases to be a Subsidiary, or if the employee is transferred to any corporation other than the Company or a Designated Subsidiary. An employee will not be deemed to have terminated employment for this purpose, if the employee is on an approved leave of absence for military service or sickness or for any other purpose approved by the Company, if the employee’s right to reemployment is guaranteed either by a statute or by contract or under the policy pursuant to which the leave of absence was granted or if the Administrator otherwise provides in writing.

13. Special Rules . Notwithstanding anything herein to the contrary, the Administrator may adopt special rules applicable to the employees of a particular Designated Subsidiary, whenever the Administrator determines that such rules are necessary or appropriate for the implementation of the Plan in a jurisdiction where such Designated Subsidiary has employees; provided that such rules are consistent with the requirements of Section 423(b) of the Code. Any special rules established pursuant to this Section 13 shall, to the extent possible, result in the employees subject to such rules having substantially the same rights as other Participants in the Plan.

 

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14. Optionees Not Stockholders . Neither the granting of an Option to a Participant nor the deductions from his or her pay shall constitute such Participant a holder of the shares of Common Stock covered by an Option under the Plan until such shares have been purchased by and issued to him or her.

15. Rights Not Transferable . Rights under the Plan are not transferable by a Participant other than by will or the laws of descent and distribution, and are exercisable during the Participant’s lifetime only by the Participant.

16. Application of Funds . All funds received or held by the Company under the Plan may be combined with other corporate funds and may be used for any corporate purpose.

17. Adjustment in Case of Changes Affecting Common Stock . In the event of a subdivision of outstanding shares of Common Stock, the payment of a dividend in Common Stock or any other change affecting the Common Stock, the number of shares approved for the Plan and the share limitation set forth in Section 8 shall be equitably or proportionately adjusted to give proper effect to such event.

18. Amendment of the Plan . The Board may at any time and from time to time amend the Plan in any respect, except that without the approval within 12 months of such Board action by the stockholders, no amendment shall be made increasing the number of shares approved for the Plan or making any other change that would require stockholder approval in order for the Plan, as amended, to qualify as an “employee stock purchase plan” under Section 423(b) of the Code.

 

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19. Insufficient Shares . If the total number of shares of Common Stock that would otherwise be purchased on any Exercise Date plus the number of shares purchased under previous Offerings under the Plan exceeds the maximum number of shares issuable under the Plan, the shares then available shall be apportioned among Participants in proportion to the amount of payroll deductions accumulated on behalf of each Participant that would otherwise be used to purchase Common Stock on such Exercise Date.

20. Termination of the Plan . The Plan may be terminated at any time by the Board. Upon termination of the Plan, all amounts in the accounts of Participants shall be promptly refunded.

21. Governmental Regulations . The Company’s obligation to sell and deliver Common Stock under the Plan is subject to obtaining all governmental approvals required in connection with the authorization, issuance, or sale of such stock.

22. Governing Law . This Plan and all Options and actions taken thereunder shall be governed by, and construed in accordance with, the laws of the State of Delaware, applied without regard to conflict of law principles.

23. Issuance of Shares . Shares may be issued upon exercise of an Option from authorized but unissued Common Stock, from shares held in the treasury of the Company, or from any other proper source.

24. Tax Withholding . Participation in the Plan is subject to any minimum required tax withholding on income of the Participant in connection with the Plan. Each Participant agrees, by entering the Plan, that the Company and its Subsidiaries shall have the right to deduct any such taxes from any payment of any kind otherwise due to the Participant, including shares issuable under the Plan.

 

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25. Notification Upon Sale of Shares . Each Participant agrees, by entering the Plan, to give the Company prompt notice of any disposition of shares purchased under the Plan where such disposition occurs within two years after the date of grant of the Option pursuant to which such shares were purchased.

26. Effective Date and Approval of Stockholders . The Plan shall take effect on a date to be determined by the Administrator at any time following the date of the Company’s Initial Public Offering, subject to approval by the holders of a majority of the votes cast at a meeting of stockholders at which a quorum is present or by written consent of the stockholders.

 

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Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

We consent to the reference to our firm under the caption “Experts” and to the use of our report dated June 24, 2013, (except for Note 14, as to which the date is September 12, 2013), in Amendment No. 4 to the Registration Statement (Form S-1 No. 333-190226) and related Prospectus of Foundation Medicine, Inc. dated September 12, 2013.

 

/s/ Ernst & Young LLP

Boston, Massachusetts

September 12, 2013