bioc-10q_20180331.htm

 

UNITED STATES  

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2018

OR

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

For the transition period from                      to                     .

Commission file number: 001-36284

 

Biocept, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

80-0943522

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

5810 Nancy Ridge Drive, San Diego, California

(Address of principal executive offices)

92121

(Zip Code)

(858) 320-8200

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth 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)

  

Smaller reporting company

 

 

 

 

 

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

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

As of May 11, 2018, there were 68,213,349 shares of the Registrant’s common stock outstanding.

 

 

 

 

 


BIOCEPT, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED

March 31, 2018

INDEX

 

 

 

 

  

Page

 

 

IMPORTANT NOTE REGARDING FORWARD-LOOKING STATEMENTS

  

3

 

 

 

PART I.

 

FINANCIAL INFORMATION

  

 

 

 

 

Item 1.

 

Financial Statements

  

4

 

 

 

 

 

Condensed Balance Sheets as of December 31, 2017 and March 31, 2018 (unaudited)

  

4

 

 

 

 

 

Condensed Statements of Operations and Comprehensive Loss for the three months ended March 31, 2017 and 2018 (unaudited)

  

5

 

 

 

 

 

Condensed Statements of Cash Flows for the three months ended March 31, 2017 and 2018 (unaudited)

  

6

 

 

 

 

 

Notes to Condensed Financial Statements (unaudited)

  

8

 

 

 

Item 2.

 

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

  

22

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

  

32

 

 

 

Item 4.

 

Controls and Procedures

  

32

 

 

 

PART II.

 

OTHER INFORMATION

  

 

 

 

 

Item 1.

 

Legal Proceedings

  

33

 

 

 

 

 

Item 1A.

 

Risk Factors

  

33

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

  

59

 

 

 

Item 3.

 

Defaults Upon Senior Securities

  

59

 

 

 

Item 4.

 

Mine Safety Disclosures

  

59

 

 

 

Item 5.

 

Other Information

  

59

 

 

 

Item 6.

 

Exhibits

  

59

 

 

 

2


IMPORTANT NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, or Quarterly Report, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements included or incorporated by reference in this Quarterly Report other than statements of historical fact, are forward-looking statements. You can identify these and other forward-looking statements by the use of words such as “may,” “will,” “could,” “anticipate,” “expect,” “intend,” “believe,” “continue” or the negative of such terms, or other comparable terminology. Forward-looking statements also include the assumptions underlying or relating to such statements.

Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in our other filings with the Securities and Exchange Commission, or the SEC. Moreover, we operate in an evolving environment. New risk factors and uncertainties emerge from time to time and it is not possible for us to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements. The forward-looking statements speak only as of the date on which they are made, and we undertake no obligation to update such statements to reflect events that occur or circumstances that exist after the date on which they are made except as required by law. Readers should, however, review the factors and risks we describe in the reports and registration statements we file from time to time with the SEC.

 

 

 

3


PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

Biocept, Inc.

Condensed Balance Sheets

 

 

 

December 31,

 

 

March 31,

 

 

2017

 

 

2018

 

 

 

 

 

 

(unaudited)

 

Current assets:

 

 

 

 

 

 

 

Cash

$

2,146,611

 

 

$

9,272,420

 

Accounts receivable, net

 

1,193,426

 

 

 

1,329,701

 

Inventories, net

 

498,702

 

 

 

490,979

 

Prepaid expenses and other current assets

 

416,600

 

 

 

665,140

 

Total current assets

 

4,255,339

 

 

 

11,758,240

 

Fixed assets, net

 

3,123,567

 

 

 

2,989,587

 

Total assets

$

7,378,906

 

 

$

14,747,827

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

1,269,953

 

 

$

1,387,222

 

Accrued liabilities

 

1,752,363

 

 

 

2,271,269

 

Supplier financings

 

61,226

 

 

 

69,995

 

Current portion of equipment financings

 

408,992

 

 

 

475,507

 

Credit facility, net

 

1,168,811

 

 

 

678,927

 

Total current liabilities

 

4,661,345

 

 

 

4,882,920

 

Non-current portion of equipment financings

 

1,150,063

 

 

 

1,123,536

 

Non-current portion of deferred rent

 

271,464

 

 

 

233,657

 

Total liabilities

 

6,082,872

 

 

 

6,240,113

 

Commitments and contingencies (see Note 11)

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value, 5,000,000 authorized; no shares issued and outstanding at December 31, 2017 and March 31, 2018.

 

 

 

 

 

Common stock, $0.0001 par value, 150,000,000 authorized; 35,183,743 issued and outstanding at December 31, 2017; 68,038,349 issued and outstanding at March 31, 2018.

 

3,518

 

 

 

6,804

 

Additional paid-in capital

 

196,542,123

 

 

 

210,106,921

 

Accumulated deficit

 

(195,249,607

)

 

 

(201,606,011

)

Total shareholders’ equity

 

1,296,034

 

 

 

8,507,714

 

Total liabilities and shareholders’ equity

$

7,378,906

 

 

$

14,747,827

 

 

 

 

 

 

 

 

 

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

4


Biocept, Inc.

Condensed Statements of Operations and Comprehensive Loss

(Unaudited)

 

 

 

For the three months ended March 31,

 

 

2017

 

 

2018

 

Net revenues

$

1,683,065

 

 

$

806,943

 

Costs and expenses:

 

 

 

 

 

 

 

Cost of revenues

 

2,129,454

 

 

 

2,434,886

 

Research and development expenses

 

757,258

 

 

 

1,070,581

 

General and administrative expenses

 

1,906,635

 

 

 

1,938,664

 

Sales and marketing expenses

 

1,278,311

 

 

 

1,636,542

 

Total costs and expenses

 

6,071,658

 

 

 

7,080,673

 

Loss from operations

 

(4,388,593

)

 

 

(6,273,730

)

Other income/ (expense):

 

 

 

 

 

 

 

Interest expense

 

(82,526

)

 

 

(82,674

)

Other income

 

38,412

 

 

 

 

Total other income/ (expense):

 

(44,114

)

 

 

(82,674

)

Loss before income taxes

 

(4,432,707

)

 

 

(6,356,404

)

Income tax expense

 

 

 

 

 

Net loss and comprehensive loss

$

(4,432,707

)

 

$

(6,356,404

)

Weighted-average shares outstanding used in computing net loss per share attributable to common shareholders:

 

 

 

 

 

 

 

Basic

 

20,969,131

 

 

 

57,086,814

 

Diluted

 

20,969,131

 

 

 

57,086,814

 

Net loss per common share:

 

 

 

 

 

 

 

Basic

$

(0.21

)

 

$

(0.11

)

Diluted

$

(0.21

)

 

$

(0.11

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

 

 

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

 

5


Biocept, Inc.

Condensed Statements of Cash Flows

(Unaudited)

 

 

 

For the three months ended March 31,

 

 

2017

 

 

2018

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

Net loss

$

(4,432,707

)

 

$

(6,356,404

)

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

 

 

 

 

 

 

 

Depreciation and amortization

 

116,156

 

 

 

179,772

 

Inventory reserve

 

(29,833

)

 

 

(14,711

)

Stock-based compensation

 

373,222

 

 

 

225,263

 

Non-cash interest expense related to credit facility and other financing activities

 

3,443

 

 

 

18,214

 

Increase/(decrease) in cash resulting from changes in:

 

 

 

 

 

 

 

Accounts receivable, net

 

(705,925

)

 

 

(136,275

)

Inventory

 

53,364

 

 

 

22,434

 

Prepaid expenses and other current assets

 

97,732

 

 

 

(199,677

)

Accounts payable

 

335,972

 

 

 

204,171

 

Accrued liabilities

 

466,901

 

 

 

508,543

 

Deferred rent

 

(17,381

)

 

 

(27,444

)

Net cash used in operating activities

 

(3,739,056

)

 

 

(5,576,114

)

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

Purchases of fixed assets

 

(127,223

)

 

 

(53,980

)

Net cash used in investing activities

 

(127,223

)

 

 

(53,980

)

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

Net proceeds from issuance of common stock and warrants

 

8,559,958

 

 

 

13,342,821

 

Proceeds from exercise of common stock warrants

 

5,258,935

 

 

 

 

Payments on equipment financings

 

(12,534

)

 

 

(38,726

)

Payments on supplier and other third-party financings

 

(37,633

)

 

 

(40,094

)

Payments on credit facility

 

(469,391

)

 

 

(508,098

)

Net cash provided by financing activities

 

13,299,335

 

 

 

12,755,903

 

Net increase in Cash

 

9,433,056

 

 

 

7,125,809

 

Cash at Beginning of Period

 

4,609,332

 

 

 

2,146,611

 

Cash at End of Period

$

14,042,388

 

 

$

9,272,420

 

Supplemental Disclosures of Cash Flow Information:

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

         Interest

$

92,651

 

 

$

63,860

 

         Income taxes

$

-

 

 

$

-

 

Non-cash Investing and Financing Activities:

During the three months ended March 31, 2018, Biocept, Inc., or the Company, cancelled insurance premiums previously financed through third-parties with an aggregate remaining principal balance outstanding of approximately $31,000, and replaced them with insurance premiums financed through third-parties totaling approximately $80,000.

Fixed assets purchased totaling approximately $181,000 and $79,000 during the three months ended March 31, 2017 and 2018, respectively, were recorded as equipment financing obligations and were excluded from cash purchases in the Company’s statements of cash flows (see Note 7).

The amount of unpaid fixed asset purchases excluded from cash purchases in the Company’s statements of cash flows increased from approximately $58,000 at December 31, 2016 to approximately $203,000 at March 31, 2017 and decreased from approximately $31,000 at December 31, 2017 to approximately $19,000 at March 31, 2018.

6


An offering of the Company’s common stock and warrants to purchase its common stock occurred on March 31, 2017. In the offering, warrants were issued to purchase up to an aggregate of 2,160,000 shares of common stock at an exercise price of $2.50 per share with a term of five years and an estimated aggregate grant date fair value of approximately $2.8 million, which was recorded as an offset to additional paid-in capital. Additionally, approximately $728,000 of fees and costs directly associated with this offering were recorded as an offset to additional paid-in capital in accordance with applicable accounting guidance.

An offering of 32,854,606 shares of the Company’s common stock and warrants to purchase up to an aggregate of 32,854,606 shares of its common stock at a combined offering price of $0.45 per unit occurred on January 30, 2018. All warrants sold in this offering have an exercise price of $0.50 per share, subject to down round adjustment, are exercisable immediately and expire five years from the date of issuance. The estimated aggregate grant date fair value of approximately $9.7 million associated with these warrants was recorded as an offset to additional paid-in capital (see Note 4). Additionally, approximately $1.4 million of fees and costs directly associated with this offering were recorded as an offset to additional paid-in capital in accordance with applicable accounting guidance.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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


7


BIOCEPT, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

1. The Company, Business Activities and Basis of Presentation

The Company and Business Activities

The Company was founded in California in May 1997, and effected a reincorporation to Delaware in July 2013. The Company is an early stage molecular oncology diagnostics company that develops and commercializes proprietary circulating tumor cell, or CTC, and circulating tumor DNA, or ctDNA, assays utilizing a standard blood sample, or liquid biopsy. The Company’s current and planned assays are intended to provide information to aid healthcare providers to identify specific oncogenic alterations that may qualify a subset of cancer patients for targeted therapy at diagnosis, progression or for monitoring in order to identify specific resistance mechanisms. Sometimes traditional procedures, such as surgical tissue biopsies, result in tumor tissue that is insufficient and/or unable to provide the molecular subtype information necessary for clinical decisions. The Company’s assays, performed on blood, have the potential to provide more contemporaneous information on the characteristics of a patient’s disease when compared with tissue biopsy and radiographic imaging. Additionally, commencing in October 2017, the Company’s pathology partnership program, branded as Empower TCTM, provides the unique ability for pathologists to participate in the interpretation of liquid biopsy results and is available to pathology practices and hospital systems throughout the United States. Further, sales to laboratory supply distributors of the Company’s proprietary blood collection tubes commenced during the three months ending June 30, 2018, which allow for the intact transport of liquid biopsy samples for research use only from regions around the world.

The Company operates a clinical laboratory that is CLIA-certified (under the Clinical Laboratory Improvement Amendment of 1988) and CAP-accredited (by the College of American Pathologists), and manufactures cell enrichment and extraction microfluidic channels, related equipment and certain reagents to perform the Company’s diagnostic assays in a facility located in San Diego, California. CLIA certification and accreditation are required before any clinical laboratory may perform testing on human specimens for the purpose of obtaining information for the diagnosis, prevention, treatment of disease, or assessment of health. The assays the Company offers are classified as laboratory developed tests under the CLIA regulations.

Basis of Presentation

The accompanying unaudited condensed financial statements and notes are prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, and on the basis that the Company will continue as a going concern (see Note 2). The accompanying unaudited condensed financial statements and notes do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.

The unaudited condensed financial statements included in this Form 10-Q have been prepared in accordance with the U.S. Securities and Exchange Commission, or SEC, instructions for Quarterly Reports on Form 10-Q. Accordingly, the condensed financial statements are unaudited and do not contain all the information required by GAAP to be included in a full set of financial statements. The balance sheet at December 31, 2017 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for a complete set of financial statements. The audited financial statements for the year ended December 31, 2017, filed with the U.S. Securities and Exchange Commission, or SEC, with our Annual Report on Form 10-K on March 28, 2018 include a summary of our significant accounting policies and should be read in conjunction with this Form 10-Q. In the opinion of management, all material adjustments necessary to present fairly the results of operations for such periods have been included in this Form 10-Q. All such adjustments are of a normal recurring nature. The results of operations for interim periods are not necessarily indicative of the results of operations for the entire year.

Certain prior period balances have been reclassified to conform to the current period presentation.

Revenue Recognition and Accounts Receivable

The Company's commercial revenues are generated from diagnostic services provided to patient’s physicians and billed to third-party insurance payers such as managed care organizations, Medicare and Medicaid and patients for any deductibles, coinsurance or copayments that may be due. Through December 31, 2017, the Company recognized revenue in accordance with the provisions of Accounting Standards Codification, or ASC, 954-605, Health Care Entities—Revenue Recognition, which required that four basic criteria must be met prior to recognition of revenue: (1) persuasive evidence of an arrangement existed; (2) delivery had occurred and title and the risks and rewards of ownership had been transferred to the client or services had been rendered; (3) the price was fixed or determinable; and (4) collectability was reasonably assured. Commencing on March 31, 2017, the Company recognized commercial revenue related to billings for assays delivered and billed to Medicare and other third-party payers on an accrual basis when amounts that will ultimately be realized can be estimated upon delivery, whereby prior to March 31, 2017, the Company recognized revenues

8


for its commercial diagnostic services on a cash basis as collected because the amounts ultimately expected to be received could not be estimated upon delivery due to insufficient collection history experience. Commencing on January 1, 2018, the Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers, or ASC 606, which requires that an entity recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The Company adopted the provisions of ASC 606 using the modified retrospective application method applied to all contracts, which did not impact amounts previously reported by the Company, nor did it require a cumulative effect adjustment upon adoption, as the Company’s method of recognizing revenue under ASC 606 was analogous to the method utilized immediately prior to adoption. Accordingly, there is no need for the Company to disclose the amount by which each financial statement line item was affected as a result of applying the new standard and an explanation of significant changes.

Contracts

For its commercial revenues, while the Company markets directly to physicians, its customer is the patient. Patients do not enter into direct agreements with the Company that commit either them to pay any portion of the cost of the tests if they have not met their annual deductible limit under their insurance policy, if any, or if their insurance otherwise declines to reimburse the Company. Accordingly, the Company establishes a contract with a commercial patient in accordance with other customary business practices, as follows:

 

 

 

 

Approval of a contract is established via the order and accession, which are submitted by the patient’s physician.

 

 

 

The Company is obligated to perform its diagnostic services upon receipt of a sample from a physician, and the patient and/or applicable payer are obligated to reimburse the Company for services rendered based on the patient’s insurance benefits.

 

 

 

 

Payment terms are a function of a patient’s existing insurance benefits, including the impact of coverage decisions with CMS and applicable reimbursement contracts established between the Company and payers, unless the patient is a self-pay patient, whereby the Company bills the patient directly after the services are provided.

 

 

 

Once the Company delivers a patient’s assay result to the ordering physician, the contract with a patient has commercial substance, as the Company is legally able to collect payment and bill an insurer and/or patient, regardless of payer contract status or patient insurance benefit status.

 

 

 

 

Consideration associated with commercial revenues is considered variable and constrained until fully adjudicated, with net revenues recorded to the extent that it is probable that a significant reversal will not occur.

The Company’s development services revenues are supported by contractual agreements and generated from assay development services provided to entities, as well as certain other diagnostic services provided to physicians, and revenues are recognized upon delivery of the performance obligations in the contract.

Performance Obligations

A performance obligation is a promise in a contract to transfer a distinct good or service, or a bundle of goods or services, to the customer. For its commercial and development services revenues, the Company’s contracts have a single performance obligation, which is satisfied upon rendering of services, which culminates in the delivery of a patient’s assay result(s) to the ordering physician or entity. The duration of time between accession receipt and delivery of a valid assay result to the ordering physician or entity is typically less than two weeks. Accordingly, the Company elected the practical expedient and therefore, does not disclose the value of unsatisfied performance obligations.

Transaction Price

The transaction price is the amount of consideration that the Company expects to collect in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties, such as sales taxes. The consideration expected from a contract with a customer may include fixed amounts, variable amounts, or both. The Company’s gross commercial revenues billed, and corresponding gross accounts receivable, are subject to estimated deductions for such allowances and reserves to arrive at reported net revenues, which relate to differences between amounts billed and corresponding amounts estimated to be subsequently collected, and is deemed to be variable although the variability is not explicitly stated in any contract. Rather, the implied variability is due to several factors, such as the payment history or lack thereof for third-party payers, reimbursement rate changes for contracted and non-contracted payers, any patient co-payments, deductibles or compliance incentives, the existence of secondary payers and claim denials. The Company estimates the amount of variable consideration using the most likely amount approach to estimating variable consideration for third-party payers, including direct patient bills, whereby the estimated reimbursement for services are established by payment histories on CPT codes for each payer, or similar payer types. When no payment history is available, the value of the account is estimated at Medicare rates, with additional other payer-specific reserves taken as appropriate. Collection periods for billings on commercial revenues range from less than 30 days to several months, depending on the contracted or non-contracted nature of the payer, among other variables. The estimates of amounts that will ultimately be realized from commercial diagnostic services for non-contracted payers require significant judgment by management.

9


The Company limits the amount of variable consideration included in the transaction price to the unconstrained portion of such consideration. Revenue is recognized up to the amount of variable consideration that is not subject to a significant reversal until additional information is obtained or the uncertainty associated with the additional payments or refunds is subsequently resolved. Differences between original estimates and subsequent revisions, including final settlements, represent changes in the estimate of variable consideration and are included in the period in which such revisions are made. The Company monitors its estimates of transaction price to depict conditions that exist at each reporting date. If the Company subsequently determines that it will collect more consideration than it originally estimated for a contract with a customer, it will account for the change as an increase in the estimate of the transaction price in the period identified as an increase to revenue. Similarly, if the Company subsequently determines that the amount it expects to collect from a customer is less than it originally estimated, it will generally account for the change as a decrease in the estimate of the transaction price as a decrease to revenue, provided that such downward adjustment does not result in a significant reversal of cumulative revenue recognized. Revenue recognized from changes in transaction prices was not significant during the three months ended March 31, 2018.

Allocate Transaction Price

For the Company’s commercial revenues, the entire transaction price is allocated to the single performance obligation contained in a contract with a customer. For the Company’s development services revenues, the contracted transaction price is allocated to each single performance obligation contained in a contract with a customer as performed.

Point-in-time Recognition

The Company’s single performance obligation is satisfied at a point in time, and that point in time is defined as the date a patient’s successful assay result is delivered to the patient’s ordering physician or entity. The Company considers this date to be the time at which the patient obtains control of the promised diagnostic assay service. 

Contract Balances

The timing of revenue recognition, billings and cash collections results in accounts receivable recorded in the Company’s condensed balance sheets. Generally, billing occurs subsequent to delivery of a patient’s test result to the ordering physician or entity, resulting in an account receivable.  

Practical Expedients

The Company does not adjust the transaction price for the effects of a significant financing component, as at contract inception, the Company expects the collection cycle to be one year or less.

The Company expenses sales commissions when incurred because the amortization period is one year or less, which are recorded within sales and marketing expenses.  

The Company incurs certain other costs that are incurred regardless of whether a contract is obtained. Such costs are primarily related to legal services and patient communications. These costs are expensed as incurred and recorded within general and administrative expenses. 

Disaggregation of Revenue and Concentration of Risk

The composition of the Company’s net revenues recognized during the three months ended March 31, 2017 and 2018 disaggregated by source and nature are as follows:

 

 

For the three months ended March 31,

 

 

2017

 

 

2018

 

Net revenues from contracted payers*

$

661,644

 

 

$

337,946

 

Net revenues from non-contracted payers

 

960,632

 

 

 

424,363

 

Development services revenues

 

60,789

 

 

 

44,634

 

Total net revenues

$

1,683,065

 

 

$

806,943

 

 

*Includes Medicare and Medicare Advantage, as reimbursement amounts are fixed.

 

10


 

For the three months ended March 31,

 

 

2017

 

 

2018

 

Net commercial revenues recognized upon delivery

$

725,690

 

 

$

762,309

 

Development services revenues recognized upon delivery

 

60,789

 

 

 

44,634

 

Commercial revenues recognized upon cash collection

 

896,586

 

 

 

 

Total net revenues

$

1,683,065

 

 

$

806,943

 

During the three months ended March 31, 2017, the Company recorded approximately $874,000 in nonrecurring net revenue as a result of recognizing revenue on an accrual basis commencing on March 31, 2017 associated with cases delivered on or prior to December 31, 2016, representing a corresponding decrease in net loss per common share of $0.04. The incremental net revenue as a result of recognizing revenue on an accrual basis commencing on March 31, 2017, or the total amount of net revenue recorded in excess of the amount of commercial cash collections, was approximately $726,000 and $139,000 during the three months ended March 31, 2017 and 2018, respectively, representing corresponding decreases in net loss per common share of $0.03 and zero, respectively.

Concentrations of credit risk with respect to revenues are primarily limited to geographies to which the Company provides a significant volume of its services, and to specific third-party payers of the Company’s services such as Medicare, insurance companies, and other third-party payers. The Company’s client base consists of many geographically dispersed clients diversified across various customer types.

The Company's third-party payers that represent more than 10% of total net revenues in any period presented, as well as their related net revenue amount as a percentage of total net revenues, during the three months ended March 31, 2017 and 2018 were as follows:

 

 

For the three months ended March 31,

 

 

2017

 

 

2018

 

Medicare and Medicare Advantage

 

35

%

 

 

39

%

Blue Cross Blue Shield

 

20

%

 

 

22

%

United Healthcare

 

12

%

 

 

22

%

The Company's third-party payers that represent more than 10% of total net accounts receivable, and their related net accounts receivable balance as a percentage of total net accounts receivable, at December 31, 2017 and March 31, 2018 were as follows:

 

 

December 31, 2017

 

 

March 31, 2018

 

Blue Cross Blue Shield

 

27

%

 

 

25

%

Medicare and Medicare Advantage

 

21

%

 

 

19

%

United Healthcare

 

15

%

 

 

18

%

Recent Accounting Pronouncements

In May 2014, and as subsequently updated and amended from time to time, the Financial Accounting Standards Board, or FASB, issued authoritative guidance that requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. This guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The Company adopted the new standard for the fiscal year beginning January 1, 2018 using the modified retrospective application method, which did not have a material impact on its financial statements or disclosures.

In January 2016, the FASB issued authoritative guidance requiring, among other things, that certain equity investments be measured at fair value with changes in fair value recognized in net income, that financial assets and financial liabilities be presented separately by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements, that the prior requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet be eliminated, and that a reporting organization is to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company adopted this guidance for the fiscal year beginning on January 1, 2018, which did not have a material impact on its financial statements or disclosures.

In February 2016, the FASB issued authoritative guidance requiring, among other things, that entities recognize the assets and liabilities arising from leases on the balance sheet under revised criteria, while the classification criteria for distinguishing between

11


finance leases and operating leases are substantially similar to the classification criteria in the previous leases guidance. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company anticipates that the adoption of this guidance will materially affect its statement of financial position and will require changes to its processes. The Company expects to adopt this guidance for the reporting period beginning on January 1, 2019 and has not yet made a decision on the method of adoption with respect to the optional practical expedients.

In August 2016, the FASB issued authoritative guidance clarifying the classification of certain cash receipts and cash payments in the statement of cash flows. This guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, on a retrospective transition method to each period presented. The Company adopted this guidance for the reporting period beginning January 1, 2018, which did not have a material impact on its financial statements or disclosures.

In January 2017, the FASB issued authoritative guidance clarifying the definition of a business when evaluating transactions involving acquisitions or disposals of assets or businesses. This guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted this guidance for the reporting period beginning January 1, 2018, which did not have a material impact on its financial statements or disclosures.

In July 2017, the FASB issued authoritative guidance changing the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features, whereby a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock, and also clarifying existing disclosure requirements for equity-classified instruments. This guidance is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted. The Company early adopted this guidance for the fiscal year beginning on January 1, 2018, which did not have a material impact on its financial statements or disclosures upon adoption, but did result in equity classification for the warrants issued on January 30, 2018, whereby liability classification may have occurred in the absence of the adoption of this guidance due to the existence of a down round feature associated with the exercise price of the warrants, which would have resulted in material impacts to the Company’s financial statements and disclosures.

In August 2017, the FASB issued authoritative guidance that expands and refines hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. This guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early application is permitted. The Company currently intends to adopt this guidance for the fiscal year beginning on January 1, 2019 and does not anticipate that the adoption of this guidance will have a material impact on its financial statements or disclosures because the Company does not currently hold any financial instruments accounted for as a hedging activity.

In February 2018, the FASB issued authoritative guidance allowing a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from a tax bill, “H.R.1, An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018,” or the Tax Cuts and Jobs Act, enacted on December 22, 2017. These amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act. However, because these amendments only relate to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. This guidance also requires certain disclosures about stranded tax effects. This guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Company currently intends to adopt this guidance for the fiscal year beginning on January 1, 2019 and does not anticipate that the adoption of this guidance will have a material impact on its financial statements or disclosures because the Company does not currently maintain any stranded tax effects in accumulated other comprehensive income.

 

2. Liquidity and Going Concern Uncertainty

As of March 31, 2018, cash totaled $9.3 million and the Company had an accumulated deficit of $201.6 million. For the year ended December 31, 2017 and the three months ended March 31, 2018, the Company incurred net losses of $21.6 million and $6.4 million, respectively. At March 31, 2018, the Company had aggregate net interest-bearing indebtedness of $2.7 million, of which $1.6 million was due within one year, in addition to $3.3 million of other non-interest bearing current liabilities. Additionally, in February 2016, the Company signed a firm, non-cancelable, and unconditional commitment in an aggregate amount of $1,062,500 with a vendor to purchase certain inventory items, payable in minimum quarterly amounts of $62,500 through May 2020, under which approximately $500,000 remained outstanding at March 31, 2018 (see Note 11). These factors raise substantial doubt about the Company’s ability to continue as a going concern for the one-year period following the date that these financial statements were issued. The accompanying financial statements and notes have been prepared assuming that the Company will continue as a going concern. The accompanying financial statements and notes do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.

12


While the Company is currently in the commercialization stage of operations, the Company has not yet achieved profitability and anticipates that it will continue to incur net losses for the foreseeable future. Historically, the Company’s principal sources of cash have included proceeds from the issuance of common and preferred stock, proceeds from the exercise of warrants to purchase common stock, proceeds from the issuance of debt, and revenues from laboratory services. The Company’s principal uses of cash have included cash used in operations, payments relating to purchases of property and equipment and repayments of borrowings. The Company expects that the principal uses of cash in the future will be for continuing operations, hiring of sales and marketing personnel and increased sales and marketing activities, funding of research and development, capital expenditures, and general working capital requirements. The Company expects that, as revenues grow, sales and marketing and research and development expenses will continue to grow, albeit at a slower rate and, as a result, the Company will need to generate significant growth in net revenues to achieve and sustain income from operations.

In May 2015, the SEC declared effective a shelf registration statement filed by the Company, which expires on May 21, 2018. The shelf registration statement allows the Company to issue any combination of its common stock, preferred stock, debt securities and warrants from time to time for an aggregate initial offering price of up to $50 million, subject to certain limitations for so long as its public float is less than $75 million. Pursuant to an exclusive placement agent agreement dated April 25, 2016 between the Company and H.C. Wainwright & Co., LLC, or Wainwright, and a securities purchase agreement dated April 29, 2016 between the Company and the purchasers signatory thereto, the Company received approximately $4.3 million of net cash proceeds upon the sale of its common stock and warrants to purchase its common stock. Subsequent to the closing of this offering on May 4, 2016, no warrants sold in this offering have been exercised, with approximately $4.5 million in gross warrant proceeds remaining outstanding and available to be exercised at $3.90 per share until their expiration in May 2021. Pursuant to an exclusive placement agent agreement dated March 28, 2017 between the Company and Roth Capital Partners, LLC as lead placement agent, and WestPark Capital and Chardan Capital as co-placement agents, a securities purchase agreement for an offering of 4,320,000 shares of the Company’s common stock was effected under this registration statement at a per share price of $2.15. In a concurrent private placement, the Company sold unregistered warrants to purchase up to an aggregate of 2,160,000 shares of its common stock that closed concurrently with the offering of common stock sold pursuant to this shelf registration statement, of which none have been subsequently exercised. All warrants sold in this offering have a per share exercise price of $2.50 and expire on October 1, 2022. The closing of the sale of these securities to the purchasers occurred on March 31, 2017, when the Company received approximately $8.6 million of net cash proceeds. Pursuant to an exclusive placement agent agreement dated December 5, 2017 between the Company and Dawson James Securities, Inc. as lead placement agent, and WestPark Capital as co-placement agent, a securities purchase agreement for a registered direct offering of 4,925,000 shares of the Company’s common stock was effected under this registration statement at a per share price of $0.68. The placement agent was issued a warrant to purchase 246,250 shares of common stock at an exercise price of $0.85 per share, which is first exercisable on June 5, 2018 and expires on December 5, 2022. The closing of the sale of these securities occurred on December 8, 2017, when the Company received approximately $2.9 million of net cash proceeds. The specific terms of additional future offerings, if any, under this shelf registration statement would be established at the time of such offerings.

On October 19, 2016, the Company received net cash proceeds of approximately $9.0 million from of the closing of a follow-on public offering. Subsequent to the closing of this offering on October 19, 2016, the offering’s underwriters exercised their overallotment option to purchase 627,131 option warrants for total proceeds of $564. Subsequent to the closing of this offering, approximately $7.5 million of additional cash proceeds had been received from the exercise of warrants sold in this offering, with approximately $3.2 million in gross warrant proceeds remaining outstanding and available to be exercised at $1.10 per share until their expiration in October 2021.

Pursuant to a common stock and warrant purchase agreement dated August 9, 2017 between the Company and Ally Bridge LB Healthcare Master Fund Limited, or Ally Bridge, the Company received net cash proceeds of approximately $2.0 million from the sale of its common stock and warrants. Subsequent to the closing of this offering, no additional cash proceeds had been received from the exercise of warrants sold in this offering, with approximately $2.2 million in gross warrant proceeds remaining outstanding and available to be exercised at $1.50 per share until their expiration in August 2022.

On January 30, 2018, the Company received net cash proceeds of approximately $13.3 million from the closing of a follow-on public offering of 32,854,606 shares of its common stock and warrants to purchase up to an aggregate of 32,854,606 shares of its common stock at a combined offering price of $0.45 per unit. Subsequent to the closing of this offering, no additional cash proceeds have been received from the exercise of warrants sold in this offering, with approximately $16.4 million in gross warrant proceeds remaining outstanding and available to be exercised at $0.50 per share, subject to down round adjustment, until their expiration in January 2023.

Management’s Plan to Continue as a Going Concern

In order to continue as a going concern, the Company will need, among other things, additional capital resources. Until the Company can generate significant cash from operations, including assay revenues, management’s plans to obtain such resources for the Company include proceeds from offerings of the Company’s equity securities or debt, cash received from the exercise of outstanding common stock warrants, or transactions involving product development, technology licensing or collaboration. Management can provide no assurances that any sources of a sufficient amount of financing will be available to the Company on favorable terms, if at all.

13


 

3. Sales of Equity Securities

In May 2015, the SEC declared effective a shelf registration statement filed by the Company, which expires on May 21, 2018. The shelf registration statement allows the Company to issue any combination of its common stock, preferred stock, debt securities and warrants from time to time for an aggregate initial offering price of up to $50 million, subject to certain limitations for so long as the Company’s public float is less than $75 million. Pursuant to an exclusive placement agent agreement dated April 25, 2016 between the Company and Wainwright, and a securities purchase agreement dated April 29, 2016 between the Company and the purchasers signatory thereto, a public offering of 1,662,191 shares of the Company’s common stock and warrants to purchase up to an aggregate of 1,163,526 shares of common stock was effected under this registration statement at a combined offering price of $3.00. All warrants sold in this offering have a per share exercise price of $3.90, are exercisable immediately and expire five years from the date of issuance. The estimated grant date fair value of these warrants of approximately $2.0 million was recorded as an offset to additional paid-in capital upon the closing of this offering. The closing of the sale of these securities to the purchasers occurred on May 4, 2016, pursuant to which the Company received approximately $4.3 million of net cash proceeds after deducting $0.7 million of costs directly associated with the offering that were recorded as an offset to additional paid-in capital under applicable accounting guidance. Subsequent to the closing of this offering on May 4, 2016, no warrants sold in this offering have been exercised, with approximately $4.5 million in gross warrant proceeds remaining outstanding and available to be exercised at $3.90 per share until their expiration in May 2021. Pursuant to an exclusive placement agent agreement dated March 28, 2017 between the Company and Roth Capital Partners, LLC as lead placement agent, and WestPark Capital and Chardan Capital as co-placement agents, a securities purchase agreement for a second offering of 4,320,000 shares of the Company’s common stock was effected under this registration statement at a per share price of $2.15, which closed on March 31, 2017. In a concurrent private placement, the Company sold unregistered warrants to purchase up to an aggregate of 2,160,000 shares of the Company’s common stock that closed concurrently with the March 2017 offering of common stock sold pursuant the shelf registration statement, of which none have been subsequently exercised. All warrants sold in this offering have a per share exercise price of $2.50 and expire on October 1, 2022. The estimated grant date fair value of these warrants of approximately $2.8 million was recorded as an offset to additional paid-in capital upon the closing of this offering. At the closing of these sales on March 31, 2017, the Company received approximately $8.6 million of net cash proceeds after deducting $0.7 million of costs directly associated with the offering that were recorded as an offset to additional paid-in capital under applicable accounting guidance. Pursuant to an exclusive placement agent agreement dated December 5, 2017 between the Company and Dawson James Securities, Inc. as lead placement agent, and WestPark Capital as co-placement agent, a securities purchase agreement for a registered direct offering of 4,925,000 shares of the Company’s common stock was effected under this registration statement at a per share price of $0.68. The placement agent was issued a warrant to purchase 246,250 shares of common stock at an exercise price of $0.85 per share, which is first exercisable on June 5, 2018 and expires on December 5, 2022. The estimated grant date fair value of this warrant of approximately $0.1 million was recorded as an offset to additional paid-in capital upon the closing of this offering. The closing of the sale of these securities occurred on December 8, 2017, when the Company received approximately $2.9 million of net cash proceeds after deducting $0.4 million of costs directly associated with the offering that were recorded as an offset to additional paid-in capital under applicable accounting guidance. The specific terms of additional future offerings, if any, under this shelf registration statement would be established at the time of such offerings.

Pursuant to a common stock and warrant purchase agreement dated August 9, 2017 between the Company and Ally Bridge, an offering of 1,466,667 shares of the Company’s common stock and warrants to purchase up to an aggregate of 1,434,639 shares of common stock was effected at a combined offering price of $1.50 per unit for total gross proceeds to the Company of $2.2 million. All warrants sold in this offering have a per share exercise price of $1.50, are exercisable immediately and expire five years from the date of issuance. The estimated grant date fair value of this warrant of approximately $1.5 million was recorded as an offset to additional paid-in capital upon the closing of this offering. Subsequent to the closing of this offering, no additional cash proceeds had been received from the exercise of warrants sold in this offering. As such, the total increase in capital from the sale of the common stock and warrants has been approximately $2.0 million after deducting $0.2 million of associated costs incurred, which were offset against these proceeds under applicable accounting guidance.

On January 30, 2018, the Company received net cash proceeds of approximately $13.3 million from the closing of a follow-on public offering of 32,854,606 shares of its common stock and warrants to purchase up to an aggregate of 32,854,606 shares of its common stock at a combined offering price of $0.45 per unit, with $1.4 million of costs directly associated with the offering recorded as an offset to additional paid-in capital under applicable accounting guidance. All warrants sold in this offering have an exercise price of $0.50 per share, subject to down round adjustment, are exercisable immediately and expire five years from the date of issuance. The estimated grant date fair value of these warrants of approximately $9.7 million was recorded as an offset to additional paid-in capital upon the closing of this offering (see Note 4). Subsequent to the closing of this offering, no additional cash proceeds have been received from the exercise of warrants sold in this offering.

 

14


4. Fair Value Measurement

The estimated nonrecurring fair value measurements associated with fixed asset purchases recorded as equipment financing obligations totaling approximately $79,000 during the three months ended March 31, 2018 were based on information provided by vendors, which involved the use of significant unobservable Level 3 inputs.

The estimated fair value of the credit facility entered into with Oxford Finance LLC in April 2014, or the April 2014 Credit Facility, at March 31, 2018 approximated its carrying value, which was determined using a discounted cash flow analysis. The analysis considered interest rates of instruments with similar maturity dates, which involved the use of significant unobservable Level 3 inputs.

Other Fair Value Measurements

As of the closing of the Company’s January 30, 2018 offering, the estimated grant date fair value of approximately $0.29 per share associated with the warrants to purchase up to 32,854,606 shares of common stock issued in this offering, or a total of approximately $9.7 million, was recorded as an offset to additional paid-in capital. All warrants sold in this offering have an exercise price of $0.50 per share, subject to down round adjustment, are exercisable immediately and expire five years from the date of issuance. The fair value of the warrants was estimated using a Monte Carlo simulation valuation model using Geometric Brownian Motion, incorporating anticipated future financing events, with the following assumptions:

 

Beginning stock price

$

0.339

 

Exercise price

$

0.50

 

Expected dividend yield

 

0.00

%

Discount rate-bond equivalent yield

 

2.48

%

Expected life (in years)

 

5.00

 

Expected volatility

 

99.0

%

 

5. Balance Sheet Details

The following provides certain balance sheet details:

 

 

December 31,

 

 

March 31,

 

 

2017

 

 

2018

 

Fixed Assets

 

 

Machinery and equipment

$

2,841,388

 

 

$

2,763,108

 

Furniture and office equipment

 

147,976

 

 

 

152,964

 

Computer equipment and software

 

1,637,034

 

 

 

1,430,669

 

Leasehold improvements

 

553,529

 

 

 

557,020

 

Financed equipment

 

2,294,762

 

 

 

2,373,475

 

Construction in process

 

2,975

 

 

 

28,563

 

Total fixed assets, gross

 

7,477,664

 

 

 

7,305,799

 

Less accumulated depreciation and amortization

 

(4,354,097

)

 

 

(4,316,212

)

Total fixed assets, net

$

3,123,567

 

 

$

2,989,587

 

Accrued Liabilities

 

 

 

 

 

 

 

Accrued interest

$

326,602

 

 

$

327,203

 

Accrued payroll

 

224,813

 

 

 

438,460

 

Accrued vacation

 

474,953

 

 

 

544,614

 

Accrued bonuses

 

375,000

 

 

 

675,254

 

Accrued sales commissions

 

104,509

 

 

 

65,717

 

Current portion of deferred rent

 

116,681

 

 

 

127,044

 

Accrued other

 

129,805

 

 

 

92,977

 

Total accrued liabilities

$

1,752,363

 

 

$

2,271,269

 

During the three months ended March 31, 2018, non-financed equipment fixed assets with aggregate gross book values and corresponding accumulated depreciation amounts of approximately $209,000 were disposed of.

 

6. April 2014 Credit Facility

On April 30, 2014, the Company received net cash proceeds of approximately $4,898,000 pursuant to the execution of the April 2014 Credit Facility. Upon the entry into the April 2014 Credit Facility, the Company was required to pay the lender a facility fee of

15


$50,000 in conjunction with the funding of the term loan. The April 2014 Credit Facility is secured by substantially all of the Company’s personal property other than its intellectual property. Amounts due to Oxford Finance LLC under the April 2014 Credit Facility are callable before maturity by the lender under certain subjective acceleration clauses of the underlying agreement, including changes deemed to be materially adverse by the lender. The term loan under the April 2014 Credit Facility bears interest at an annual rate of 7.95%. The Company was required to make interest-only payments on the term loan through August 1, 2015. The outstanding term loan under the April 2014 Credit Facility began amortizing at the end of the applicable interest-only period, with monthly payments of principal and interest being made by the Company to the lender in consecutive monthly installments following such interest-only period. The term loan under the April 2014 Credit Facility matures on July 1, 2018. Under the original terms of the underlying agreement, the Company is also required to make a final payment to the lender equal to 5.5% of the original principal amount of the term loan funded. At its option, the Company may prepay the outstanding principal balance of the term loan in whole but not in part, subject to a prepayment fee of 1% of any amount prepaid.

On June 30, 2016, the Company entered into an amendment of the April 2014 Credit Facility. This amendment required the Company to make interest-only payments on the term loan from July 1, 2016 through September 30, 2016, and also requires an additional final payment of $50,000 to the lender. The terms of the amendment require the amortization of the outstanding amount due under the term loan to commence at the end of the applicable interest-only period, with monthly payments of principal and interest, in arrears, being made by the Company to the lender in consecutive monthly installments following such interest-only period. Additionally, pursuant to the amendment the aggregate outstanding principal amount of the Company’s permitted indebtedness, consisting of capitalized lease obligations and purchase money indebtedness outstanding at any time, was increased to $1.2 million. The June 30, 2016 amendment of the April 2014 Credit Facility was accounted for as a modification of debt under applicable accounting guidance. On June 28, 2017, the Company entered into an amendment of the April 2014 Credit Facility whereby the aggregate outstanding principal amount of the Company’s permitted indebtedness was increased to $3.0 million.

The April 2014 Credit Facility includes affirmative and negative covenants applicable to the Company and any subsidiaries created in the future. The affirmative covenants include, among others, covenants requiring the Company to maintain its legal existence and governmental approvals, deliver certain financial reports and maintain insurance coverage. The negative covenants include, among others, restrictions on transferring collateral, incurring additional indebtedness, engaging in mergers or acquisitions, paying dividends or making other distributions, making investments, creating liens, selling assets, and suffering a change in control, in each case subject to certain exceptions. The April 2014 Credit Facility also includes events of default, the occurrence and continuation of which provide Oxford Finance LLC, as collateral agent, with the right to exercise remedies against the Company and the collateral securing the term loan under the April 2014 Credit Facility, including foreclosure against the Company’s properties securing the April 2014 Credit Facility, including its cash. These events of default include, among other things, the Company’s failure to pay any amounts due under the April 2014 Credit Facility, a breach of covenants under the April 2014 Credit Facility, insolvency, a material adverse change, the occurrence of any default under certain other indebtedness in an amount greater than $250,000, and a final judgment against the Company in an amount greater than $250,000.

A warrant to purchase up to 17,655 shares of the Company’s common stock at an exercise price of $14.16 per share with a term of 10 years was issued to Oxford Finance LLC on April 30, 2014. Issuance costs of approximately $102,000 associated with the term loan under the April 2014 Credit Facility were recorded as a discount to outstanding debt as of the closing date, resulting in net proceeds of approximately $4,898,000. The estimated fair value of the warrant issued of approximately $233,000 was also recorded as a discount to outstanding debt as of the closing date. The discounts and other issuance costs are amortized to interest expense utilizing the effective interest method over the underlying term of the loan, with total unamortized discounts of approximately $33,000 and $14,000 remaining at December 31, 2017 and March 31, 2018, respectively. The effective annual interest rate associated with the April 2014 Credit Facility was 13.87% at both December 31, 2017 and March 31, 2018. As of March 31, 2018, total remaining principal payments of $693,000 were due under the April 2014 Credit Facility.

 

7. Equipment Financings

The Company leases certain laboratory equipment under arrangements accounted for as capital leases and classified as equipment financings. The financed equipment is depreciated on a straight-line basis over periods ranging from approximately 3 to 7 years. The total gross value of fixed assets capitalized under such financing arrangements was approximately $2,295,000 and $2,374,000 at December 31, 2017 and March 31, 2018, respectively. Total accumulated depreciation related to financed equipment was approximately $759,000 and $826,000 at December 31, 2017 and March 31, 2018, respectively, and total depreciation expense related to financed equipment during the three months ended March 31, 2017 and 2018 was approximately $55,000 and $67,000, respectively.

On January 26, 2018, the Company executed an agreement with a third-party lender to finance $240,000 of planned fixed asset purchases and an anticipated $10,000 of corresponding maintenance obligations. Under the terms of the lease agreement, upon lease commencement and repayment, which occurs once the Company has financed $240,000 of equipment purchases under the lease agreement, the Company is required to make 22 payments of $11,081 per month thereafter, subject to adjustment in the event of an increase in the three-year Treasury note rates prior to lease commencement and repayment. Until lease commencement and repayment,

16


the Company is required to pay pro-rated equipment rental charges of any equipment financed under this agreement. The Company expects lease commencement and repayment to occur by June 30, 2018. Through the date that these financial statements were available to be issued, approximately $98,000 of equipment purchases and $5,000 of corresponding maintenance obligations had been financed under this agreement.

The following schedule sets forth the remaining future minimum lease payments outstanding under financed equipment arrangements, as well as corresponding remaining sales tax and maintenance obligation payments that are expensed as incurred and due within each respective year ending December 31, as well as the present value of the total amount of the remaining minimum lease payments as of March 31, 2018:

 

 

 

 

 

 

Maintenance

 

 

Minimum

 

 

and Sales Tax

 

 

Lease

 

 

Obligation

 

 

Payments

 

 

Payments

 

2018

$

394,959

 

 

$

66,456

 

2019

 

505,077

 

 

 

80,200

 

2020

 

419,817

 

 

 

64,163

 

2021

 

303,228

 

 

 

53,252

 

2022

 

260,462

 

 

 

56,005

 

Thereafter

 

262,950

 

 

 

40,641

 

Total payments

 

2,146,493

 

 

 

360,717

 

Less amount representing interest

 

(547,450

)

 

 

 

Present value of payments

$

1,599,043

 

 

$

360,717

 

The aggregate weighted average effective annual interest rate associated with equipment financings was 13.51% and 12.38% at December 31, 2017 and March 31, 2018, respectively, and the maturity dates on such outstanding arrangements range from June 2018 to September 2024. During the three months ended March 31, 2017 and 2018, total interest expense related to equipment financings of $38,000 and $43,000, respectively, was recorded to the Company’s unaudited condensed statement of operations and comprehensive loss. At March 31, 2018, the present value of minimum lease payments due within one year was approximately $476,000.

 

8. Stock-Based Compensation

Equity Incentive Plans

The Company maintains two equity incentive plans: the Amended and Restated 2013 Equity Incentive Plan, or the 2013 Plan, and the 2007 Equity Incentive Plan, or the 2007 Plan. The 2013 Plan includes a provision that shares available for grant under the Company’s 2007 Plan become available for issuance under the 2013 Plan and are no longer available for issuance under the 2007 Plan. As of March 31, 2018, 333,333 shares of the Company’s common stock were authorized exclusively for the issuance of stock awards to employees who have not previously been an employee or director of the Company, except following a bona fide period of non-employment, as an inducement material to the individual’s entering into employment with the Company, as defined under applicable Nasdaq Listing Rules. As of March 31, 2018, under all plans, a total of 3,522,955 non-inducement shares were authorized for issuance, 2,033,009 shares had been issued with 1,860,698 non-inducement stock options and restricted stock units, or RSUs, underlying outstanding awards, and 1,489,946 non-inducement shares were available for grant. As of March 31, 2018, a total of 333,333 inducement shares were authorized for issuance, 158,049 inducement shares had been issued with 133,049 inducement stock options and RSUs underlying outstanding awards, and 175,284 inducement shares were available for grant under the 2013 Plan.

17


Stock Options

A summary of stock option activity for the three months ended March 31, 2018 is as follows:

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

Weighted

 

 

Remaining

 

 

Number of

 

 

Average Exercise

 

 

Contractual

 

 

Shares

 

 

Price Per Share

 

 

Term in Years

 

Outstanding at December 31, 2017

 

2,449,284

 

 

$

3.79

 

 

 

8.8

 

Granted

 

 

 

 

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

 

Cancelled/forfeited/expired

 

(641,457

)

 

$

1.60

 

 

 

 

 

Outstanding at March 31, 2018

 

1,807,827

 

 

$

4.57

 

 

 

8.4

 

Vested and unvested expected to vest at March 31, 2018

 

1,763,848

 

 

$

4.65

 

 

 

8.3

 

The intrinsic values of options outstanding, options exercisable, and options vested and unvested expected to vest at December 31, 2017 and March 31, 2018 were each zero.

On May 2, 2017, the Company’s Board of Directors approved the issuance of an aggregate of 550,000 performance stock options to be granted on May 31, 2017 to certain of the Company’s employees and all of its executive officers pursuant to the 2013 Plan, of which 200,000 performance stock options were granted to the Company’s CEO, 100,000 performance stock options were granted to its CFO, and 75,000 performance stock options were granted to each of its Chief Scientific Officer and Senior Medical Director. Each performance stock option granted on May 31, 2017 had an exercise price of $1.50 per share and an estimated grant date fair value of $0.99 per share. On July 6, 2017, the Company’s Compensation Committee of the Board of Directors approved the issuance of an aggregate of 75,000 performance stock options to be granted on July 31, 2017 to certain of the Company’s employees pursuant to the 2013 Plan, of which 2,500 performance stock options were forfeited by December 31, 2017. Each performance stock option granted on July 31, 2017 had an exercise price of $1.39 per share and an estimated grant date fair value of $0.83 per share. The vesting of each of the performance stock options granted during the year ended December 31, 2017 was to be determined by the Company’s Board of Directors or Compensation Committee of the Board of Directors upon the Company’s achievement of specified corporate goals for 2017. During the three months ended March 31, 2018, none of the performance option awards granted during the year ended December 31, 2017 were declared vested by the Company’s Compensation Committee of the Board of Directors, and the 622,500 shares underlying the remaining outstanding performance stock option awards at December 31, 2017 were forfeited.

Restricted Stock

A summary of RSU activity for the three months ended March 31, 2018 is as follows:

 

 

 

 

 

 

Weighted

 

 

Number of

 

 

Average Grant

 

 

Shares

 

 

Date Fair Value

 

Outstanding at December 31, 2017

 

360,920

 

 

$

1.87

 

Granted

 

 

 

 

 

Vested and issued

 

 

 

 

 

Forfeited

 

(175,000

)

 

$

1.50

 

Outstanding at March 31, 2018

 

185,920

 

 

$

2.23

 

Vested and unvested expected to vest at March 31, 2018

 

185,920

 

 

$

2.23

 

At March 31, 2018, the intrinsic values of RSUs outstanding and RSUs unvested and expected to vest were each approximately $55,000. Of the 185,920 RSUs outstanding at March 31, 2018, 10,920 were fully vested.

On May 2, 2017, the Company’s Board of Directors approved the issuance of an aggregate of 175,000 time-based RSUs and 175,000 performance RSUs to be granted on May 31, 2017 to certain of the Company’s employees and all of its executive officers pursuant to the 2013 Plan, of which 50,000 time-based RSUs and 25,000 performance RSUs were granted to its CEO, and 25,000 time-based RSUs and 25,000 performance RSUs were granted to each of its CFO, Chief Scientific Officer, and Senior Medical Director. Each RSU granted on May 31, 2017 had a grant date fair value of $1.50 per share. Vesting of the time-based RSUs granted on May 31, 2017 occurred on the one-year anniversary of the vesting commencement date, or May 2, 2018, while vesting of the performance RSUs was to be determined by the Company’s Board of Directors or its Compensation Committee of the Board of Directors upon the achievement of specified corporate goals for 2017. During the three months ended March 31, 2018, none of the performance RSUs

18


granted on May 31, 2017 were declared vested by the Company’s Compensation Committee of the Board of Directors, and the 175,000 shares underlying these awards were forfeited.

Stock-based Compensation Expense

The following table presents the effects of stock-based compensation related to equity awards to employees and nonemployees on the unaudited condensed statements of operations and comprehensive loss during the periods presented:

 

 

For the three months ended

 

 

March 31,

 

 

2017

 

 

2018

 

Stock Options

 

 

 

 

 

 

 

Cost of revenues

$

31,770

 

 

$

17,579

 

Research and development expenses

 

29,256

 

 

 

37,147

 

General and administrative expenses

 

192,053

 

 

 

105,175

 

Sales and marketing expenses

 

40,540

 

 

 

23,265

 

Total expenses related to stock options

 

293,619

 

 

 

183,166

 

RSUs

 

 

 

 

 

 

 

Cost of revenues

 

15,167

 

 

 

(17,250

)

Research and development expenses

 

14,358

 

 

 

10,015

 

General and administrative expenses

 

29,933

 

 

 

40,059

 

Sales and marketing expenses

 

20,145

 

 

 

9,273

 

Total stock-based compensation

$

373,222

 

 

$

225,263

 

Stock-based compensation expense was recorded net of estimated forfeitures of 0% - 8% per annum during each of the three months ended March 31, 2017 and 2018. As of March 31, 2018, total unrecognized share-based compensation expense related to unvested stock options and RSUs, adjusted for estimated forfeitures, was approximately $1,197,000 and is expected to be recognized over a weighted-average period of approximately 2.4 years.

 

9. Common Stock Warrants Outstanding

A summary of equity-classified common stock warrant activity for the three months ended March 31, 2018 is as follows:

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

Weighted

 

 

Remaining

 

 

Number of

 

 

Average Exercise

 

 

Contractual

 

 

Shares

 

 

Price Per Share

 

 

Term in Years

 

Outstanding at December 31, 2017

 

8,647,996

 

 

$

2.63

 

 

 

4.0

 

Issued

 

32,854,606

 

 

$

0.50

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

 

Expired

 

 

 

 

 

 

 

 

 

Outstanding at March 31, 2018

 

41,502,602

 

 

$

0.94

 

 

 

4.6

 

Further information about equity-classified common stock warrants outstanding at March 31, 2018 is as follows:

 

 

 

 

 

 

 

 

 

Weighted

 

Weighted

 

 

 

 

 

 

Average

 

Average

 

 

Total Shares

 

 

Contractual

 

Exercise Price

 

 

Outstanding

 

 

Life (in years)

 

$

0.50

 

 

 

32,854,606

 

 

 

4.8

 

$

0.85

 

 

 

246,250

 

 

 

4.7

 

$

1.10

 

 

 

2,910,281

 

 

 

3.6

 

$

1.50

 

 

 

1,434,639

 

 

 

4.4

 

$

2.50

 

 

 

2,160,000

 

 

 

4.5

 

$

3.90

 

 

 

1,163,526

 

 

 

3.1

 

$

4.68

 

 

 

581,153

 

 

 

1.9

 

$

29.72

 

 

 

152,147

 

 

 

1.5

 

 

 

 

 

 

41,502,602

 

 

 

 

 

19


All warrants outstanding at March 31, 2018 are exercisable, except for the 246,250 warrants issued on December 8, 2017, which first become exercisable on June 5, 2018 and expire on December 5, 2022. The exercise price of $0.50 per share associated with the 32,854,606 warrants issued on January 30, 2018 is subject to down round adjustment. The intrinsic value of equity-classified common stock warrants outstanding at March 31, 2018 was zero.

 

10. Net Loss per Common Share

Basic and diluted net loss per common share is determined by dividing net loss applicable to common shareholders by the weighted-average common shares outstanding during the period. Because there is a net loss attributable to common shareholders for the three months ended March 31, 2017 and 2018, the outstanding RSUs, warrants, and common stock options have been excluded from the calculation of diluted loss per common share because their effect would be anti-dilutive. Therefore, the weighted-average shares used to calculate both basic and diluted loss per share are the same.

The following potentially dilutive securities have been excluded from the computations of diluted weighted-average shares outstanding for the periods presented, as they would be anti-dilutive:

 

 

For the three months ended

 

 

March 31,

 

 

2017

 

 

2018

 

Preferred warrants outstanding (number of common stock equivalents)

 

529

 

 

 

529

 

Common warrants outstanding

 

9,003,137

 

 

 

41,502,602

 

RSUs outstanding

 

174,249

 

 

 

185,920

 

Common options outstanding

 

931,504

 

 

 

1,807,827

 

Total anti-dilutive common share equivalents

 

10,109,419

 

 

 

43,496,878

 

 

11. Commitments and Contingencies

In the normal course of business, the Company may be involved in legal proceedings or threatened legal proceedings. The Company is not party to any legal proceedings or aware of any threatened legal proceedings that are expected to have a material adverse effect on its financial condition, results of operations or liquidity.

In February 2016, the Company signed a firm, non-cancelable, and unconditional commitment in an aggregate amount of $1,062,500 with a vendor to purchase certain inventory items, payable in minimum quarterly amounts of $62,500 through May 2020. At March 31, 2018, a balance of $500,000 remained outstanding under this purchase commitment.

During the three months ended March 31, 2017 and 2018, total expense recorded in the Company’s unaudited condensed statements of operations and comprehensive loss for sales tax and maintenance obligations associated with equipment financing arrangements was approximately $18,000 and $29,000, respectively. At December 31, 2017 and March 31, 2018, approximately $46,000 and $64,000, respectively, of such sales tax and maintenance obligations incurred but not paid were recorded in accrued other liabilities in the Company’s balance sheet (see Note 5). Future payments totaling approximately $361,000 for sales tax and maintenance obligations associated with financed equipment were due under equipment financing arrangements at March 31, 2018, which will be expensed as incurred (see Note 7).

 

12. Related Party Transactions

A member of the Company’s management is the controlling person of Aegea Biotechnologies, Inc., or Aegea. On September 2, 2012, the Company entered into an Assignment and Exclusive Cross-License Agreement, or the Cross-License Agreement, with Aegea. The Company received a payment of approximately $15,000 during the year ended December 31, 2017, as well as a payment of approximately $19,000 subsequent to March 31, 2018, from Aegea as reimbursements for shared patent costs under the Cross-License Agreement (see Note 13).

Pursuant to a sublease agreement dated March 30, 2015, the Company subleased 9,849 square feet, plus free use of an additional area, of its San Diego facility to an entity affiliated with the Company’s non-executive Chairman for $12,804 per month, with a refundable security deposit of $12,804 received from the subtenant. The initial term of the sublease expired on July 31, 2015 and was subject to renewal on a month-to-month basis thereafter. On February 1, 2017, the Company received notice from the subtenant terminating the sublease effective March 31, 2017. During the year ended December 31, 2017, the total amount of the $12,804 security deposit previously received from the subtenant was applied against approximately $16,000 in additional rents owed as a result of the subtenant continuing to occupy the subleased areas beyond March 31, 2017, and the balance of approximately $3,200 due to the Company was waived. A total of approximately $38,000 and $51,000 in rental income was recorded to other income/(expense) in the Company’s

20


statement of operations and comprehensive loss during the three months ended March 31, 2017 and the year ended December 31, 2017, respectively.

 

13. Subsequent Events

The Company received a payment of approximately $19,000 subsequent to March 31, 2018 from Aegea as reimbursement for shared patent costs under the Cross-License Agreement (see Note 12).

Subsequent to the three months ended March 31, 2018, the Company financed certain business insurance premiums totaling approximately $387,000 through third-parties.


21


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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed financial statements and related notes included in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto as of and for the year ended December 31, 2017 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K for the year ended December 31, 2017, filed with the Securities and Exchange Commission on March 28, 2018. Past operating results are not necessarily indicative of results that may occur in future periods.

Company Overview

We are an early stage molecular oncology diagnostics company that develops and commercializes proprietary circulating tumor cell, or CTC, and circulating tumor DNA, or ctDNA, assays utilizing a standard blood sample, or “liquid biopsy.” Our current and planned assays are intended to provide information to aid healthcare providers to identify specific oncogenic alterations that may qualify a subset of cancer patients for targeted therapy at diagnosis, progression or for monitoring in order to identify specific resistance mechanisms. Sometimes traditional procedures, such as surgical tissue biopsies, result in tumor tissue that is insufficient and/or unable to provide the molecular subtype information necessary for clinical decisions. Our assays, performed on blood, have the potential to provide more contemporaneous information on the characteristics of a patient’s disease when compared with tissue biopsy and radiographic imaging.

Our current assays and our planned future assays focus on key solid tumor indications utilizing our Target-SelectorTM liquid biopsy technology platform for the biomarker analysis of CTCs and ctDNA from a standard blood sample. Our patented Target-Selector CTC offering is based on an internally developed microfluidics-based cell capture and analysis platform, with enabling features that change how information provided by CTC testing is used by clinicians. Our CTC technology could also be validated on cerebral spinal fluid in order to provide information for patients with leptomeningeal disease. Our patented Target-Selector ctDNA technology enables detection of mutations and genome alterations with enhanced sensitivity and specificity, and is applicable to nucleic acid from ctDNA, and could potentially be validated for other sample types such as bone marrow, tissue or cerebrospinal fluid. Our Target-Selector CTC and ctDNA platforms provide both biomarker detection as well as monitoring capabilities and require only a patient blood sample. We believe that our Target-Selector platform technology has the potential to be developed and commercialized as in vitro diagnostic (IVD) test kits, and we are currently pursuing this strategy.

At our corporate headquarters facility located in San Diego, California, we operate a clinical laboratory that is certified under the Clinical Laboratory Improvement Amendments of 1988, or CLIA, and accredited by the College of American Pathologists, or CAP. We also performed research and development that led to our current assays, and continue to perform research and development for our planned assays, at this same facility. In addition, we manufacture our microfluidic channels, related equipment and certain reagents. The assays we offer and intend to offer are classified as laboratory developed tests, or LDTs, under CLIA regulations. CLIA certification is required before any clinical laboratory, including ours, may perform testing on human specimens for the purpose of obtaining information for the diagnosis, prevention, or treatment of disease or the assessment of health. In addition, we participate in and have received CAP accreditation, which includes rigorous bi-annual laboratory inspections and adherence to specific quality standards.

Our primary sales strategy is to engage medical oncologists and other physicians in the United States at private and group practices, hospitals and cancer centers. In addition, we market our clinical trial and research services to pharmaceutical and biopharmaceutical companies and clinical research organizations. Additionally, commencing in October 2017, our pathology partnership program, branded as Empower TCTM, provides the unique ability for pathologists to participate in the interpretation of liquid biopsy results and is available to pathology practices and hospital systems throughout the United States. Further, sales to laboratory supply distributors of our proprietary blood collection tubes, or BCTs, commenced during the three months ending June 30, 2018, which allow for the intact transport of liquid biopsy samples for research use only, or RUO, from regions around the world.

Our revenue generating efforts are focused in three areas:

 

medical oncologists, surgical oncologists, pulmonologists, pathologists and other physicians who use the biomarker information we provide in order to determine the best treatment plan for their patients;

 

providing laboratory services utilizing both our CTC and ctDNA testing in order to help pharmaceutical and biopharmaceutical companies developing drug candidate therapies to treat cancer; and

 

licensing and/or selling our proprietary testing and/or technologies, including our BCTs, to partners in the United States and abroad.

22


Assays, Products and Services

We have commercialized our Target-Selector assays for a number of solid tumor indications such as: breast cancer, non-small cell lung cancer, or NSCLC, gastric cancer, colorectal cancer, prostate cancer, melanoma, pancreaticobiliary cancer, and ovarian cancer. These assays utilize our dual CTC and ctDNA technology platforms and provide biomarker analysis from a patient’s blood sample.

In the case of our breast and gastric cancer offerings, biomarker analysis involves fluorescence in situ hybridization, or FISH, for the detection and quantitation of the human epidermal growth factor receptor 2, or HER2, gene copy number as well as immunocytochemical, or ICC, analysis of estrogen receptor, or ER, protein, progesterone receptor, or PR, protein, and androgen receptor, or AR, protein, which are currently commercially available. A patient’s HER2 status provides the physician with information about the appropriateness of therapies such as Herceptin® or Tykerb®. ER and PR status provides the physician with information about the appropriateness of endocrine therapies such as tamoxifen and aromatase inhibitors.

 

Our lung cancer biomarker analysis offering currently includes FISH testing for ALK, ROS1, RET, MET and FGFR1 gene rearrangements, as well as analysis for the T790M, Deletion 19, and L858R mutations of the epidermal growth factor receptor, or EGFR gene, as well as BRAF, KRAS and NRAS. The L858R mutation of the EGFR gene and Exon 19 deletions as activators of EGFR kinase activity are associated with the use of the drugs Tarceva®, Gilotrif® and Iressa®. For lung cancer, we also offer a resistance profile assay consisting of the biomarkers MET, HER2 (both of which we perform using our technology for CTCs), KRAS, and T790M (both of which are performed using ctDNA in plasma). These assays can be used by physicians to identify the mechanism causing disease progression for patients with NSCLC who are being treated with tyrosine kinase inhibitor, or TKI, therapy and therefore may qualify patients for inclusion in a clinical trial. In November 2015, Tagrisso® was approved by the U.S. Food and Drug Administration, or FDA, providing another biomarker-based therapy for the treatment of patients with EGFR-related lung cancer. Tagrisso® is indicated for the treatment of patients with metastatic disease, who have progressed on or after EGFR TKI therapy, and who have acquired a T790M resistance mutation. Recently, the FDA approved the combination of Novartis’ Tafinlar® (dabrafenib) and Mekinist® (trametinib) for the treatment of patients with metastatic NSCLC whose tumors express the BRAF V600E mutation, an FDA “breakthrough therapy” designation for patients who have received prior chemotherapy. This combination was approved in Europe for the same indication in March 2017. BRAF mutations, which appear in approximately 1-3% of NSCLC cases globally, are associated with Zelboraf® and Tafinlar® treatment, as these BRAF inhibitors are both approved for the treatment of patients with melanoma.

In September 2017, we launched our assay for mutations of the NRAS oncogene, which can be used to detect and monitor an actionable biomarker associated with multiple cancer types such as metastatic melanoma, colorectal and lung cancer. As a result, we now offer 15 CLIA-certified liquid biopsy tests utilizing our Target-Selector platform to determine the status of key cancer biomarkers listed in the National Comprehensive Cancer Network Guidelines®. Our NRAS assay combines our proprietary switch blocker technology for improved mutation detection with next generation sequencing, resulting in ultra-high sensitivity.

Fibroblast growth receptor 1, or FGFR1, amplification is offered using our CTC technology. FGFR1 is present in several tumor types, including both NSCLC and small cell lung cancer, or SCLC, and has been shown to be a prognostic indicator of progression. FGFR1 is also a key target for several drugs undergoing clinical development.

We analytically validated PD-L1 testing utilizing our CTC technology in 2016. PD-L1 is a biomarker that is informative for immuno-oncology therapies currently marketed for lung cancer and melanoma, as well as therapies in development for multiple tumor types. We collaborated with David Rimm, M.D., Ph.D., a pathologist at Yale Medical School and a scientific advisor to us, on the analytical development of this assay.

We plan to release additional blood-based biomarker assays, such as those that test for ESR1, to our current menu of liquid biopsy assays using blood samples. In addition, we plan to complete the development and offer multiplexed biomarker tests, which will allow the detection and quantitative monitoring of multiple biomarkers in a single assay.

In August 2017, we announced that we had executed a distribution agreement for our proprietary blood collection tubes with VWR International, LLC which can preserve intact cells (such as CTCs) for up to 96 hours and ctDNA for up to 8 days, allowing for the intact transport of RUO liquid biopsy samples from regions around the world.

In October 2017, we launched our pathology partnership initiative, branded as Empower TC, expanding access of our proprietary liquid biopsy testing to community pathologists and hospitals throughout the United States. The aim of this program is to incorporate community pathologists into the review of biomarkers found in liquid biopsy for patients diagnosed with cancer. Pathologists are now enabled to interpret our liquid biopsy results locally, while patient specimens will continue to be sent to us for processing in our CLIA-certified, CAP-accredited high complexity laboratory.

Pharmaceutical and Research Collaborations

We continue to execute on our strategies intended to expand our business globally, as well as to engage with pharmaceutical companies on clinical trials and assay development. We have preferred provider agreements in place in Mexico with Quest

23


Diagnostics to support testing for Astra Zeneca. In addition, we have distribution agreements in place in Mexico, Uruguay, Turkey, the Czech Republic, the Philippines, Lebanon, Columbia, Israel and Canada.

We completed a study, published in Cancer Medicine in March 2013, utilizing our assay, and a version of this assay adapted for use with bone marrow samples, with a group at The University of Texas MD Anderson Cancer Center comprised of breast cancer surgeons, pathologists and basic researchers. In this study, we demonstrated the ability to identify HER2 positive CTCs and disseminated tumor cells, or DTCs, seen in bone marrow in patients that had been previously classified as HER2 negative by analysis of their tumor tissue. A HER2 positive result in a patient with breast cancer provides an indication to the physician that there is likely to be a survival benefit from treatment with Herceptin®, which has been demonstrated in a number of large clinical studies.

We were involved in a clinical study led by investigators at the Dana-Farber Cancer Institute following up on the study findings, published in Cancer Medicine regarding CTCs. This study has completed enrolling patients. In the screening phase of this study, we tested in our CLIA-certified, CAP accredited, and state-licensed laboratory blood samples from HER2 negative patients based on standard tumor tissue analysis, to identify those patients that have HER2 positive CTCs. These patients were then assigned to chemotherapy plus Herceptin®, and followed for a period of time, with additional CTC assays, including biomarker analysis for HER2 using FISH, performed at subsequent time points. In December 2014, we announced findings that were presented at the San Antonio Breast Conference that 22% of 311 patients tested, who were previously HER2 negative according to a solid tumor biopsy, were found, upon disease progression, to be HER2 positive by CTC analysis, making them potential candidates for anti-HER2 therapy as the cancer evolves. Moreover, our multi-antibody CTC capture method identified a substantial subset of patients who would not likely be detected with commonly used CTC capture technologies. This added 10% (included in the 22%) to the number of women who were candidates for this highly specific targeted therapy.

With our cooperation, researchers at Columbia published a study in the journal Clinical and Translational Oncology in January 2015. The study demonstrated the high correlation (79%) of circulating tumor cells, primary tumor tissue biopsy and metastatic tumor tissue biopsy for determination of hormone receptor status (ER/PR) in breast cancer patients. The investigators also found that this high correlation was strongest when comparing metastatic tissue biopsy to CTCs (83%). The conclusion of the study was that determining ER/PR status in CTCs using our platform is feasible, with high concordance in ER/PR between tumor tissue (as determined with immunohistochemistry, or IHC) and CTCs (as determined with immunocytochemistry, or ICC). The authors suggest a larger trial to determine the prognostic significance of these findings.

In collaboration with the University of California, San Diego, in June 2015 we presented the clinical validation data of our ctDNA assay demonstrating a very high level of concordance to tissue results (88%), and with our >95% analytical sensitivity and 99% analytical specificity, that we offer a validated, robust non-invasive solution for mutation identification and monitoring in patients with lung cancer. The FDA approval of Tagrisso®, a third-generation tyrosine kinase inhibitor, presents an opportunity for patients to be monitored using a ctDNA assay.

During 2016, we announced a pharmaceutical collaboration agreement that provides testing for a clinical trial, which includes metastatic lung cancer patients with leptomeningeal or brain metastases. In this exploratory trial, we are testing both cerebrospinal fluid and blood for molecular alterations that could be impacted by treatment. In April 2016, we announced a collaboration involving a study conducted with Dr. Giuseppe Giaccone at the MedStar Georgetown University Hospital to assess resistance biomarkers in NSCLC patients treated with EGFR inhibitors or chemotherapy. We announced another collaboration involving a study presented at the European Society for Medical Oncology, or ESMO, Annual Congress in October 2016, evaluating the detection of EGFR alterations (del19, L858R and T790M) by our Target-Selector liquid biopsy. Subsequent to this study, we have earned business in both Mexico and Columbia for EGFR testing in blood to qualify patients for a pharmaceutical company’s targeted therapy. The relationship also resulted in a 2017 study that includes peripheral blood CTC assessment of PD-L1 protein expression in patients undergoing chemotherapy as a monotherapy or in combination with a checkpoint inhibitor. In December 2016, we announced a clinical study agreement with Columbia University Medical Center to evaluate the clinical utility of our Target-Selector platform to diagnose leptomeningeal metastases, or LM, in breast cancer patients. Dr. Kevin Kalinsky leads the study to test CTCs in cerebrospinal fluid and blood, where CTC analysis will be compared to standard methods for confirming LM diagnosis.

In April 2017, we announced our entry into a preferred provider collaboration and services agreement with Oregon Health & Sciences University on behalf of the OHSU Knight Cancer Institute, or collectively OHSU. The multiphase agreement grants OHSU the rights to commercially offer our Target-Selector liquid biopsy testing services exclusively throughout the state of Oregon. Additionally, we and OHSU plan to engage in technology transfer, whereby OHSU will have the ability to use Target-Selector assays in-house, and act as a secondary laboratory for our research and testing activities. We and OHSU also plan to co-develop additional liquid biopsy assay technologies and platform capabilities including highly sensitive, multiplexed assay panels for molecular biomarker detection and assessment. Additional research and development and commercial pilot projects are anticipated under the agreement.

In May 2017, we announced jointly with the Addario Lung Cancer Medical Institute, or ALCMI, entry into a clinical collaboration and initiation of the ALCMI-009 liquid biopsy clinical trial. This large-scale trial was developed and will be conducted by ALCMI with its consortium of leading U.S. and international oncology centers. The prospective, multi-center study, which plans to enroll 400

24


patients, will utilize our Target-Selector testing platform and services to detect and assess cancer biomarkers found in both CTCs and ctDNA from the blood of patients with lung cancer. We expect this study to commence in the first half of 2018.

In May 2017, we entered into a clinical study agreement with the University of Texas Southwestern Medical Center. Led by recognized oncologist and ALK alteration researcher, Dr. Saad Khan, the study is designed to evaluate the clinical utility of our Target-Selector platform for patients diagnosed with ALK-positive NSCLC and treated with ALK-inhibitor therapy. A second arm of the study will evaluate patients with rare cancers such as anaplastic thyroid cancer to determine if driver mutations such as ALK rearrangements can be identified and treated with targeted therapy to improve patient outcomes.

In October 2017, we entered into a promotion and marketing agreement with Miraca Life Sciences, Inc., or Miraca Life Sciences, to market our Target-Selector liquid biopsy tests and services to community-based oncologists and hematologists in specified sales territories in the United States. Based on the agreement, Miraca Life Sciences’ sales professionals will promote our liquid biopsy tests to both their existing and new clinician clients in designated sales territories, with the potential to expand the agreement to additional territories in the future. All tests will be performed in our CLIA-certified CAP-accredited laboratory.

In November 2017, we announced a collaboration involving 100 patients in a clinical study with the University of California, San Diego. The study entails clinical validation of the PD-L1 antibody clones 28-8 and 22C3 on our Target-Selector CTC platform. Concordance of PD-L1 protein expression in tissue biopsy versus liquid biopsy, as well as correlation of therapeutic response with PD-L1 liquid biopsy status, are the study objectives.  

In November 2017, we submitted a scientific abstract in collaboration with Dr. Shilpa Gupta from the Masonic Cancer Center at the University of Minnesota. The abstract was accepted as a poster presentation for the April 2018 American Association for Cancer Research annual meeting. The results demonstrate proof-of-concept use of our Target-Selector CTC platform to correlate CTC count with clinical responses in refractory testicular cancer patients undergoing therapy. This work is part of a Phase 2 clinical trial of brentuximab vedontin (an anti-CD-30 antibody) with bevacizumab in refractory CD-30 + germ cell tumors. The capability for our Target-Selector CTC platform to monitor this rare cancer type presents the potential for a precision medicine-based approach to guide treatment decisions for these patients.

Provider Agreements

In January 2017, we announced that we had secured an in-network provider agreement with Blue Cross Blue Shield of Texas, the largest provider of health benefits in Texas. In addition, we entered into a national master business agreement with the Blue Cross Blue Shield Association, a not-for-profit trade association that provides multiple services for its 38-member Blue Cross and Blue Shield health plan companies across the U.S., including forming national strategic vendor partnerships. We were selected by the Blue Cross Blue Shield Association based on a rigorous request-for-proposal progress. This agreement establishes pricing for our Target-Selector liquid biopsy testing service through the Blue Cross Blue Shield Association’s group purchasing organization, CareSourcing Workgroup. The pricing offered by the CareSourcing Workgroup group purchasing organization is available to those Blue Cross and Blue Shield member health plans that have, or may seek, in-network agreements with us.

In June 2017, we entered into a participating provider agreement with MediNcrease Health Plans, LLC and a preferred provider agreement with Scripps Health Plan Services, Inc., both establishing pricing for our Target-Selector liquid biopsy testing service.

In December 2017, we signed an agreement with Wellmark, Inc., the largest health insurer in Iowa and South Dakota. The agreement marks our third Blue Cross Blue Shield contract and enables patients diagnosed with cancer the ability to access our proprietary testing services in-network under their Wellmark health plan.

We are currently contracted with nine preferred provider organization networks, three large health plans, and five regional independent physician associations, and expect to continue to gain contracts in order to be considered as an “in-network” provider with additional plans.

Patents and Technology

We have issued patents with broad claims covering our blood collection tube, antibody cocktail approach, microchannel, CTC detection methodologies, and ctDNA analysis. In addition to issued patents in the U.S., we have patents for our proprietary microchannel in China, Korea, Europe, Hong Kong, and Japan, and for our antibody cocktail in Australia, Europe, and Japan. Our patent estate continues to evolve, and in addition to the broad patent estate around our CTC platform, we also have issued patents in the U.S., Australia, and China for our novel switch blocker technology, solidifying our proprietary enrichment methodology for detecting ctDNA with very high sensitivity. Our CTC platform patents were filed from 2005 through 2012, and we expect to have patent protection into the 2030s. Our CTC patents and applications cover not only cancer as a target, but also prenatal and other rare cells of interest. Recently allowed patents in the U.S. cover the capture of “any target of interest on any solid surface” using our

25


antibody capture approach. The patent for our proprietary specimen collection tubes expire in 2031, and the patents for our ctDNA technology expire in the early 2030’s.

As of March 31, 2018, we owned 26 issued patents and 23 patents pending related to our current technologies. Of these, 8 were issued and 5 were pending patents in the U.S., while 18 were issued and 18 were pending patents in non-U.S. territories. Separately, we also owned 7 issued patents related to our earlier microarray and cell analysis technology.

Results of Operations

Three Months Ended March 31, 2017 and 2018

The following table sets forth certain information concerning our results of operations for the periods shown:

 

 

Three months ended March 31,

 

 

Change

 

 

2017

 

 

2018

 

 

$

 

 

%

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

$

1,683

 

 

$

807

 

 

$

(876

)

 

 

(52

%)

Cost of revenues

 

2,130

 

 

 

2,434

 

 

 

304

 

 

 

14

%

Research and development expenses

 

757

 

 

 

1,071

 

 

 

314

 

 

 

41

%

General and administrative expenses

 

1,907

 

 

 

1,939

 

 

 

32

 

 

 

2

%

Sales and marketing expenses

 

1,278

 

 

 

1,637

 

 

 

359

 

 

 

28

%

Loss from operations

 

(4,389

)

 

 

(6,274

)

 

 

(1,885

)

 

 

43

%

Interest expense

 

(82

)

 

 

(82

)

 

 

 

 

 

 

Other income

 

38

 

 

 

 

 

 

(38

)

 

 

(100

%)

Loss before income taxes

 

(4,433

)

 

 

(6,356

)

 

 

(1,923

)

 

 

43

%

Income tax expense

 

 

 

 

 

 

 

 

 

 

 

Net loss

$

(4,433

)

 

$

(6,356

)

 

$

(1,923

)

 

 

43

%

Net Revenues

Net revenues were approximately $807,000 for the three months ended March 31, 2018, compared with approximately $1,683,000 for the same period in 2017, a decrease of $876,000, or 52%, which is primarily due to the conversion from cash-based revenue recognition for our commercial revenues to accrual-based revenue recognition during the three months ended March 31, 2017. As a result of the change to accrual-based revenue recognition, we recognized total nonrecurring net revenue of $874,000 during the three months ended March 31, 2017, which represents the estimated value of net accounts receivable at December 31, 2016 that was recognized as revenue during the three months ended March 31, 2017, and the incremental net revenue recorded as a result of the change was $726,000, which represents the total amount of net revenue recorded in excess of the amount of commercial cash collections during the three months ended March 31, 2017. The amount of incremental net revenue recorded during the three months ended March 31, 2018 was $139,000. Of the $1,683,000 of net revenues recognized during the three months ended March 31, 2017, $786,000 related to revenues recognized on an accrual basis, while $897,000 related to revenues recognized upon the receipt of cash, as compared to the same period in 2018 when $807,000 of revenues were recognized on an accrual basis and no revenues were recognized upon the receipt of cash.

The net estimated revenue per commercial accession delivered during the three months ended March 31, 2018 was approximately $922, based on 875 commercial accessions delivered and approximately $807,000 in corresponding commercial net revenues. The following table sets forth certain information regarding commercial accessions received during the three months ended March 31, 2017 and 2018:

 

 

Three months ended March 31,

 

 

Change

 

 

2017

 

 

2018

 

 

# / $

 

 

%

 

# Commercial accessions received

 

933

 

 

 

912

 

 

 

(21

)

 

 

(2

%)

$ Value estimated per commercial accession received

$

1,029

 

 

$

1,088

 

 

$

59

 

 

 

6

%

Additionally, there was a $16,000 decrease in development services revenues during the three months ended March 31, 2018 as compared to the same period in 2017, which was primarily related to a decrease in the value per development services accession delivered, which was partially offset by an increase in the number of development services accessions delivered, as follows:

 

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Three months ended March 31,

 

 

Change

 

 

2017

 

 

2018

 

 

#

 

 

%

 

# Development services accessions delivered

 

164

 

 

 

169

 

 

 

5

 

 

 

3

%

$ Value per development services accession delivered

$

371

 

 

$

264

 

 

$

(107

)

 

 

(29

%)

Costs and Expenses

Cost of Revenues. Cost of revenues was approximately $2,434,000 for the three months ended March 31, 2018, compared with approximately $2,130,000 for the same period in 2017, an increase of $304,000, or 14%. The increase was primarily attributable to an increase of $195,000 in computer equipment, software amortization, depreciation expense, and allocated information technology and facility charges as we implemented our pathology partnership initiative, invested in upgrading our laboratory equipment and information system and maintained our facility. Additionally, there was an increase of $116,000 in materials, shipping and other direct costs, as well as an increase of $77,000 in personnel costs as the average number of full-time laboratory and manufacturing employees increased from 36 full-time employees during the three months ended March 31, 2017 to 41 full-time employees during the same period in 2018, as we created excess laboratory accession throughput capacity of approximately 30% as of March 31, 2018 in advance of an anticipated increase in accession volumes resulting from our planned expanded sales force and pathology partnership initiative. Further, there was an increase of approximately $66,000 in consulting costs primarily associated with the increased use of non-employee pathologists. These increases were partially offset by a decrease of $150,000 resulting from greater laboratory costs charged to research and development expenses associated with increased research and development activities.

Research and Development Expenses. Research and development expenses were approximately $1,071,000 for the three months ended March 31, 2018, compared with approximately $757,000 for the same period in 2017, an increase of $314,000, or 41%. The increase was primarily attributable to an increase of $181,000 in higher personnel costs as the average headcount in our research and development function increased to 14 full-time employees during the three months ended March 31, 2018 from 10 full-time employees during the same period in 2017, as we focus on the development and deployment of next generation sequencing, support and implementation of data-intensive laboratory processes, and new product validations. Additionally, there was an increase of $150,000 in laboratory costs allocated from cost of revenues, which was partially offset by a decrease of $17,000 in materials and other costs associated with increased research and development activities during the three months ended March 31, 2018 as compared to the same period in 2017.

General and Administrative Expenses. General and administrative expenses were approximately $1,939,000 for the three months ended March 31, 2018, compared with approximately $1,907,000 during the same period in 2017, an increase of $32,000, or 2%. The increase was primarily due to an increase of $191,000 in non-stock-based compensation personnel costs and travel expenses as the average headcount included in the general and administrative function rose from 11 full-time employees during the three months ended March 31, 2017 to 15 full-time employees during the same period in 2018, primarily resulting from bringing our billing function in-house in April 2017. Additionally, there was an increase of $67,000 in directors and officers insurance costs. These increases were partially offset by decreases of $79,000 in allocated facilities costs, $77,000 in stock-based compensation expense, and $70,000 in third-party service provider and other costs primarily associated with bringing our billing function in-house in April 2017.

Sales and Marketing Expenses. Sales and marketing expenses were approximately $1,637,000 for the three months ended March 31, 2018 compared with approximately $1,278,000 for the same period in 2017, an increase of $359,000, or 28%. The increase was primarily attributable to an increase of $340,000 in personnel and travel costs as the average headcount included in the sales and marketing function rose from 18 full-time employees during the three months ended March 31, 2017 to 24 full-time employees during the same period in 2018 as we expanded our sales force, as well as increases of $32,000 in computer equipment, allocated information technology costs, shipping and other office expenses and $25,000 in marketing materials, trade show and conference costs associated with our expanded sales force and commercial activities, which were partially offset by a decrease of $38,000 in third-party service provider and consulting fees.

Income Tax Expense

Over the past several years we have generated operating losses in all jurisdictions in which we may be subject to income taxes. As a result, we have accumulated significant net operating losses and other deferred tax assets. Because of our history of losses and the uncertainty as to the realization of those deferred tax assets, a full valuation allowance has been recognized. We do not expect to report a provision for income taxes until we have a history of earnings, if ever, that would support the realization of our deferred tax assets.

We have not completed a study to assess whether an ownership change has occurred or whether there have been multiple ownership changes since our formation, due to the complexity and cost associated with such a study, and the fact that there may be additional ownership changes in the future, however, we believe ownership changes likely occurred in each year from 2015 through 2018. As a result, we have estimated that the use of our net operating loss is limited and the remaining net operating loss carryforwards and

27


research and development credits we estimate can be used in the future remain fully offset by a valuation allowance to reduce the net asset to zero.

Liquidity and Capital Resources

Cash Flows

Our net cash flow from operating, investing and financing activities for the periods below were as follows:

 

 

Three months ended March 31,