bioc-10q_20180630.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 June 30, 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 August 10, 2018, there were 2,273,778 shares of the Registrant’s common stock outstanding.

 

 

 

 

 


BIOCEPT, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED

JUNE 30, 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 June 30, 2018 (Unaudited)

  

4

 

 

 

 

 

Condensed Statements of Operations and Comprehensive Loss for the three and six-months ended June 30, 2017 and 2018 (Unaudited)

  

5

 

 

 

 

 

Condensed Statements of Cash Flows for the six-months ended June 30, 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

  

21

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

  

33

 

 

 

Item 4.

 

Controls and Procedures

  

33

 

 

 

PART II.

 

OTHER INFORMATION

  

 

 

 

 

Item 1.

 

Legal Proceedings

  

34

 

 

 

 

 

Item 1A.

 

Risk Factors

  

34

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

  

59

 

 

 

Item 3.

 

Defaults Upon Senior Securities

  

60

 

 

 

Item 4.

 

Mine Safety Disclosures

  

60

 

 

 

Item 5.

 

Other Information

  

60

 

 

 

Item 6.

 

Exhibits

  

60

 

 

 

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,

 

 

June 30,

 

 

2017

 

 

2018

 

 

 

 

 

 

(unaudited)

 

Current assets:

 

 

 

 

 

 

 

Cash

$

2,146,611

 

 

$

2,569,111

 

Accounts receivable, net

 

1,193,426

 

 

 

1,437,665

 

Inventories, net

 

498,702

 

 

 

537,037

 

Prepaid expenses and other current assets

 

416,600

 

 

 

854,921

 

Total current assets

 

4,255,339

 

 

 

5,398,734

 

Fixed assets, net

 

3,123,567

 

 

 

2,892,576

 

Total assets

$

7,378,906

 

 

$

8,291,310

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

1,269,953

 

 

$

1,655,832

 

Accrued liabilities

 

1,425,761

 

 

 

1,518,237

 

Supplier financings

 

61,226

 

 

 

329,684

 

Interest payable

 

326,602

 

 

 

337,427

 

Current portion of equipment financings

 

408,992

 

 

 

489,253

 

Credit facility, net

 

1,168,811

 

 

 

175,048

 

Total current liabilities

 

4,661,345

 

 

 

4,505,481

 

Non-current portion of equipment financings

 

1,150,063

 

 

 

1,062,410

 

Non-current portion of deferred rent

 

271,464

 

 

 

195,851

 

Total liabilities

 

6,082,872

 

 

 

5,763,742

 

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 June 30, 2018.

 

 

 

 

 

Common stock, $0.0001 par value, 150,000,000 authorized; 1,181,179 issued and outstanding at December 31, 2017; 2,282,166 issued and outstanding at June 30, 2018.

 

3,518

 

 

 

6,823

 

Additional paid-in capital

 

196,542,123

 

 

 

210,280,596

 

Accumulated deficit

 

(195,249,607

)

 

 

(207,759,851

)

Total shareholders’ equity

 

1,296,034

 

 

 

2,527,568

 

Total liabilities and shareholders’ equity

$

7,378,906

 

 

$

8,291,310

 

 

 

 

 

 

 

 

 

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 June 30,

 

 

For the six months ended June 30,

 

 

2017

 

 

2018

 

 

2017

 

 

2018

 

Net revenues

$

1,278,961

 

 

$

822,238

 

 

$

2,962,026

 

 

$

1,629,181

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

2,368,705

 

 

 

2,699,671

 

 

 

4,498,159

 

 

 

5,134,557

 

Research and development expenses

 

841,991

 

 

 

1,019,285

 

 

 

1,599,249

 

 

 

2,089,866

 

General and administrative expenses

 

1,798,026

 

 

 

1,708,970

 

 

 

3,704,661

 

 

 

3,647,634

 

Sales and marketing expenses

 

1,746,867

 

 

 

1,433,174

 

 

 

3,025,178

 

 

 

3,069,716

 

Total costs and expenses

 

6,755,589

 

 

 

6,861,100

 

 

 

12,827,247

 

 

 

13,941,773

 

Loss from operations

 

(5,476,628

)

 

 

(6,038,862

)

 

 

(9,865,221

)

 

 

(12,312,592

)

Other income/ (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(214,377

)

 

 

(84,239

)

 

 

(296,903

)

 

 

(166,913

)

Other income

 

 

 

 

(30,000

)

 

 

38,412

 

 

 

(30,000

)

Total other income/ (expense):

 

(214,377

)

 

 

(114,239

)

 

 

(258,491

)

 

 

(196,913

)

Loss before income taxes

 

(5,691,005

)

 

 

(6,153,101

)

 

 

(10,123,712

)

 

 

(12,509,505

)

Income tax expense

 

(2,146

)

 

 

 

 

 

(2,146

)

 

 

(739

)

Net loss and comprehensive loss

$

(5,693,151

)

 

$

(6,153,101

)

 

$

(10,125,858

)

 

$

(12,510,244

)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

901,001

 

 

 

2,280,115

 

 

 

804,714

 

 

 

2,096,717

 

Diluted

 

901,001

 

 

 

2,280,115

 

 

 

804,714

 

 

 

2,096,717

 

Net loss per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

(6.32

)

 

$

(2.70

)

 

$

(12.58

)

 

$

(5.97

)

Diluted

$

(6.32

)

 

$

(2.70

)

 

$

(12.58

)

 

$

(5.97

)

 

 

 

 

 

 

 

 

 

 

 

 

 


 

 

 

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

 

5


Biocept, Inc.

Condensed Statements of Cash Flows

(Unaudited)

 

 

 

For the six months ended June 30,

 

 

2017

 

 

2018

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

Net loss

$

(10,125,858

)

 

$

(12,510,244

)

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

 

 

 

 

 

 

 

Depreciation and amortization

 

226,015

 

 

 

357,173

 

Inventory reserve

 

(28,997

)

 

 

(68,782

)

Stock-based compensation

 

756,461

 

 

 

398,957

 

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

 

6,886

 

 

 

31,454

 

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

 

 

 

 

 

 

 

Accounts receivable, net

 

(865,777

)

 

 

(244,239

)

Inventory

 

(53,168

)

 

 

30,447

 

Prepaid expenses and other current assets

 

219,444

 

 

 

59,545

 

Accounts payable

 

665,882

 

 

 

435,667

 

Accrued liabilities

 

204,760

 

 

 

71,749

 

Accrued Interest

 

81,960

 

 

 

10,825

 

Deferred rent

 

(34,762

)

 

 

(54,886

)

Net cash used in operating activities

 

(8,947,154

)

 

 

(11,482,334

)

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

Purchases of fixed assets

 

(527,431

)

 

 

(72,356

)

Net cash used in investing activities

 

(527,431

)

 

 

(72,356

)

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

 

7,493,035

 

 

 

 

Payments on equipment financings

 

(45,012

)

 

 

(111,006

)

Payments on supplier and other third-party financings

 

(194,400

)

 

 

(229,408

)

Payments on credit facility

 

(948,173

)

 

 

(1,025,217

)

Net cash provided by financing activities

 

14,865,408

 

 

 

11,977,190

 

Net increase in Cash

 

5,390,823

 

 

 

422,500

 

Cash at Beginning of Period

 

4,609,332

 

 

 

2,146,611

 

Cash at End of Period

$

10,000,155

 

 

$

2,569,111

 

Supplemental Disclosures of Cash Flow Information:

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

         Interest

$

225,207

 

 

$

134,604

 

         Income taxes

$

2,146

 

 

$

739

 

Non-cash Investing and Financing Activities:

During the six months ended June 30, 2017 and 2018, Biocept, Inc., or the Company, financed insurance premiums of approximately $360,000 and $488,000, respectively, through third-party financings. During the six months ended June 30, 2018, the Company cancelled insurance premiums previously financed through third-parties with an aggregate remaining principal balance outstanding of approximately $31,000.

Fixed assets purchased totaling approximately $166,000 and $104,000 during the six months ended June 30, 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 assets excluded from cash purchases in the Company’s statements of cash flows increased from approximately $58,000 at December 31, 2016 to approximately $209,000 at June 30, 2017 and increased from approximately $31,000 at December 31, 2017 to approximately $35,000 at June 30, 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 72,000 shares of common stock at an exercise price of $75.00 per share with a term of five years and an estimated aggregate grant date fair value of approximately $2.8 million. 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 1,095,153 shares of the Company’s common stock and warrants to purchase up to an aggregate of 1,095,153 shares of its common stock at a combined offering price of $13.50 per unit occurred on January 30, 2018. All warrants sold in this offering have an exercise price of $4.53 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 these warrants was approximately $9.7 million as of the closing of the Company’s January 30, 2018 offering (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.

On July 6, 2018, the Company’s stockholders approved, and the Company filed, an amendment to the Company’s Certificate of Amendment of Certificate of Incorporation to effect a one-for-thirty reverse stock split of the Company’s outstanding common stock. As such, all references to share and per share amounts in these unaudited condensed financial statements and accompanying notes have been retroactively restated to reflect the one-for-thirty reverse stock split, except for the authorized number of shares of the Company’s common stock of 150,000,000 shares, which was not affected by the one-for-thirty reverse stock split.

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

8


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 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

9


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.

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 and six-months ended June 30, 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 and six-months ended June 30, 2017 and 2018, disaggregated by source and nature, are as follows:

 

 

For the three months ended June 30,

 

 

For the six months ended June 30,

 

 

2017

 

 

2018

 

 

2017

 

 

2018

 

Net revenues from contracted payers*

$

571,507

 

 

$

356,000

 

 

$

1,233,151

 

 

$

694,760

 

Net revenues from non-contracted payers

 

623,901

 

 

 

414,742

 

 

 

1,584,533

 

 

 

838,291

 

Development services revenues

 

83,553

 

 

 

51,496

 

 

 

144,342

 

 

 

96,130

 

Total net revenues

$

1,278,961

 

 

$

822,238

 

 

$

2,962,026

 

 

$

1,629,181

 

 

10


*Includes Medicare and Medicare Advantage, as reimbursement amounts are fixed and miscellaneous income from CEE-Sure blood collection tubes.

 

 

For the three months ended June 30,

 

 

For the six months ended June 30,

 

 

2017

 

 

2018

 

 

2017

 

 

2018

 

Net commercial revenues recognized upon delivery

$

1,035,951

 

 

$

770,742

 

 

$

1,761,641

 

 

$

1,533,051

 

Development services revenues recognized upon delivery

 

83,553

 

 

 

51,496

 

 

 

144,342

 

 

 

96,130

 

Commercial revenues recognized upon cash collection

 

159,457

 

 

 

 

 

 

1,056,043

 

 

 

 

Total net revenues

$

1,278,961

 

 

$

822,238

 

 

$

2,962,026

 

 

$

1,629,181

 

The amount of nonrecurring net revenue recorded during the three and six-months ended June 30, 2017, had the Company commenced recognizing revenue for commercial diagnostic services upon delivery on or prior to December 31, 2016 instead of on March 31, 2017, was $134,915 and $1,012,242, respectively, and the corresponding decrease in net loss per common share was $0.15 and $1.25, respectively. The incremental net revenue and decrease in loss from operations 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 $191,193 and $916,883 during the three and six-months ended June 30, 2017, respectively, and the corresponding decrease in net loss per common share was $0.21 and $1.14, respectively.  For the six months ended June 30, 2018 all revenues were recognized on an accrual basis.

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 and six-months ended June 30, 2017 and 2018 were as follows:

 

 

For the three months ended June 30,

 

 

For the six months ended June 30,

 

 

2017

 

 

2018

 

 

2017

 

 

2018

 

Medicare and Medicare Advantage

 

45

%

 

 

38

%

 

 

39

%

 

 

39

%

Blue Cross Blue Shield

 

15

%

 

 

12

%

 

 

18

%

 

 

17

%

United Healthcare

 

9

%

 

 

15

%

 

 

11

%

 

 

19

%

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 June 30, 2018 were as follows:

 

 

December 31, 2017

 

 

June 30, 2018

 

Blue Cross Blue Shield

 

27

%

 

 

21

%

Medicare and Medicare Advantage

 

21

%

 

 

23

%

United Healthcare

 

15

%

 

 

17

%

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

11


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 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.

In February 2018, the FASB issued authoritative guidance concerning certain fair value option liabilities, equity securities without a readily determinable fair value, and certain equity investments. This guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years beginning after June 15, 2018. Public entities with fiscal years beginning between December 15, 2017 and June 15, 2018 are not required to adopt these amendments until the interim period beginning after June 15, 2018. The Company adopted this guidance for the interim period beginning on July 1, 2018, which did not have a material impact on its financial statements or disclosures because the Company did not hold any fair value option liabilities, equity securities without a readily determinable fair value, or equity investments.

 

12


2. Liquidity and Going Concern Uncertainty

As of June 30, 2018, cash totaled $2.6 million and the Company had an accumulated deficit of $207.8 million whereas as of June 30, 2017, cash totaled $10.0 million and the Company had an accumulated deficit of $183.8 million. For the six months ended June 30, 2017 and 2018, the Company incurred net losses of $10.1 million and $12.5 million, respectively. At June 30, 2018, the Company had aggregate net interest-bearing indebtedness of $2.4 million, of which $1.3 million was due within one year whereas at June 30, 2017, the Company had aggregate net interest-bearing indebtedness of $3.8 million, of which $2.6 million was due within one year in the absence of subjective acceleration of amounts due under a credit facility entered into in April 2014 with Oxford Finance LLC, or the April 2014 Credit Facility.  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 $466,000 remained outstanding at June 30, 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.

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.

 

On August 13, 2018, the Company completed its previously announced rights offering pursuant to its effective registration statement on Form S-1, as amended (Registration Statement No. 333-225147), previously filed with and declared effective by the Securities and Exchange Commission (the SEC), and a prospectus filed with the SEC (the Rights Offering). Pursuant to the Rights Offering, the Company sold an aggregate of 11,587 units consisting of an aggregate of 11,587 shares of Series A Convertible Preferred Stock and 2,549,140 warrants, with each warrant exercisable for one share of our common stock at an exercise price of $4.53 per share, resulting in net proceeds to the Company of approximately $10.4 million, after deducting expenses relating to the Rights Offering, including dealer-manager fees and expenses, and excluding any proceeds received upon exercise of any warrants.

In May 2018, the SEC declared effective a shelf registration statement filed by the Company, which expires in May 2021. 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.  The Company has not effected any offerings under this shelf registration statement through the date that these unaudited condensed financial statements were available to be issued.

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 1,095,153 shares of its common stock and warrants to purchase up to an aggregate of 1,095,153 shares of its common stock at a combined offering price of $13.50 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 $4.53 per share, which is subject to down round adjustment, until their expiration in January 2023.

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 $45.00 per share until their expiration in August 2022.

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 20,904 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 $33.00 per share until their expiration in October 2021.

13


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.

 

3. Sales of Equity Securities

In May 2015, the SEC declared effective a shelf registration statement filed by the Company, which expired on May 21, 2018. The shelf registration statement allowed 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 was less than $75 million. 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 144,000 shares of the Company’s common stock was effected under this registration statement at a per share price of $64.50, which closed on March 31, 2017. In a concurrent private placement, the Company sold unregistered warrants to purchase up to an aggregate of 72,000 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. The warrants sold in this offering have a per share exercise price of $75.00, expire on October 1, 2022, and had an aggregate estimated fair value of approximately $2.8 million. 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 164,166 shares of the Company’s common stock was effected under this registration statement at a per share price of $20.40. The placement agent was issued a warrant to purchase 8,208 shares of common stock at an exercise price of $25.50 per share with an estimated grant date fair value of approximately $0.1 million, which 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 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.

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 144,000 shares of the Company’s common stock was effected under this registration statement at per share price of $64.50, which closed on March 31, 2017. In a concurrent private placement, the Company sold unregistered warrants to purchase up to an aggregate of 72,000 shares of the Company’s common stock that closed concurrently with the March 2017 offering of common stock sold pursuant the shelf registration statement. All warrants sold in this offering have a per share exercise price of $75.00, are exercisable beginning on the six-month anniversary of the date of issuance and expire five years from the date first exercisable. 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 (see Note 4). At the closing of these sales on March 31, 2017, the Company received, 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, approximately $8.6 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.

Pursuant to a common stock and warrant purchase agreement dated August 9, 2017 between the Company and Ally Bridge, an offering of 48,888 shares of the Company’s common stock and a warrant to purchase up to an aggregate of 47,821 shares of common stock was effected at a combined offering price of $45.00 per unit for total gross proceeds to the Company of $2.2 million. The warrant sold in this offering has an exercise price of $45.00 per share, an estimated grant date fair value of approximately $1.5 million, and expires five years from the date of issuance. Subsequent to the closing of this offering, no additional cash proceeds have been received from the exercise of the warrant sold in this offering. As such, the total increase in capital from the sale of the common stock and warrant 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 1,095,153 shares of its common stock and warrants to purchase up to an aggregate of 1,095,153 shares of its common stock at a combined offering price of $13.50 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. The warrants sold in this offering have an exercise price of $4.53 per share, which is subject to down round adjustment, an aggregate estimated grant date fair value of $9.7 million (see Note 4) and expire five years from the date of issuance. 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 $104,000 during the six months ended June 30, 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 June 30, 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 grant date fair value of the warrants issued to purchase up to 1,095,153 shares of common stock were estimated to be approximately $8.82 per share, or a total of approximately $9.7 million. The warrants sold in this offering have an exercise price of $4.53 per share, which is subject to down round adjustment, 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

$

10.17

 

Exercise price

$

4.53

 

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,

 

 

June 30,

 

 

2017

 

 

2018

 

Fixed Assets

 

 

Machinery and equipment

$

2,841,388

 

 

$

2,802,680

 

Furniture and office equipment

 

147,976

 

 

 

157,391

 

Computer equipment and software

 

1,637,034

 

 

 

1,430,669

 

Leasehold improvements

 

553,529

 

 

 

570,174

 

Financed equipment

 

2,294,762

 

 

 

2,355,647

 

Construction in process

 

2,975

 

 

 

74,745

 

Total fixed assets, gross

 

7,477,664

 

 

 

7,391,306

 

Less accumulated depreciation and amortization

 

(4,354,097

)

 

 

(4,498,730

)

Total fixed assets, net

$

3,123,567

 

 

$

2,892,576

 

Accrued Liabilities

 

 

 

 

 

 

 

Accrued payroll

 

224,813

 

 

 

198,150

 

Accrued vacation

 

474,953

 

 

 

477,507

 

Accrued bonuses

 

375,000

 

 

 

508,325

 

Accrued sales commissions

 

104,509

 

 

 

95,621

 

Current portion of deferred rent

 

116,681

 

 

 

137,408

 

Accrued other

 

129,805

 

 

 

101,226

 

Total accrued liabilities

$

1,425,761

 

 

$

1,518,237

 

15


Non-financed equipment fixed assets with aggregate gross book values and corresponding accumulated depreciation amounts of approximately $209,000 were disposed of during the six months ended June 30, 2018.  Depreciation expense for the six-month period ended June 30, 2017 was $226,015 and for the six-month period ended June 30, 2018 was $357,173.  Depreciation expense for the three-month period ended June 30, 2017 was $109,859 and for the three-month period ended June 30, 2018 was $177,401.

 

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 entering into the April 2014 Credit Facility, the Company was required to pay the lender a facility fee of $50,000 in conjunction with the funding of the term loan. The April 2014 Credit Facility was secured by substantially all of the Company’s personal property other than its intellectual property. The term loan under the April 2014 Credit Facility bore 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 matured on July 1, 2018. Under the original terms of the underlying agreement, the Company was also required to make a final payment to the lender equal to 5.5% of the original principal amount of the term loan funded.

A warrant to purchase up to 588 shares of the Company’s common stock at an exercise price of $424.80 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 were amortized to interest expense utilizing the effective interest method over the underlying term of the loan, with a total unamortized discount of approximately $33,000 at December 31, 2017. The effective annual interest rate associated with the April 2014 Credit Facility was 13.87% at both December 31, 2017 and June 30, 2018.  A principal payment of approximately $175,000 remained outstanding at June 30, 2018 and was paid on July 1, 2018.

  

 

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 $2,356,000 at December 31, 2017 and June 30, 2018, respectively. Total accumulated depreciation related to financed equipment was approximately $759,000 and $915,000 at December 31, 2017 and June 30, 2018, respectively. Total depreciation expense related to financed equipment during the three months ended June 30, 2017 and 2018 was approximately $52,000 and $89,000, respectively, and was approximately $108,000 and $156,000 during the six months ended June 30, 2017 and 2018, respectively.

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 June 30, 2018:

 

 

 

 

 

 

Maintenance

 

 

Minimum

 

 

and Sales Tax

 

 

Lease

 

 

Obligation

 

 

Payments

 

 

Payments

 

2018

$

279,700

 

 

$

35,201

 

2019

 

519,507

 

 

 

81,319

 

2020

 

428,178

 

 

 

64,965

 

2021

 

303,228

 

 

 

53,252

 

2022

 

261,743

 

 

 

54,724

 

Thereafter

 

262,950

 

 

 

40,641

 

Total payments

 

2,055,306

 

 

 

330,102

 

Less amount representing interest

 

(503,643

)

 

 

 

Present value of payments

$

1,551,663

 

 

$

330,102

 

16


The aggregate weighted average effective annual interest rate associated with equipment financings was 13.51% and 12.53% at December 31, 2017 and June 30, 2018, respectively, and the maturity dates on such outstanding arrangements range from February 2019 to September 2024. During the three months ended June 30, 2017 and 2018, total interest expense related to equipment financings of approximately $38,000 and $52,000, respectively, was recorded to the Company’s unaudited condensed statements of operations and comprehensive loss, and approximately $77,000 and $98,000 was recorded during the six months ended June 30, 2017 and 2018, respectively. At June 30, 2018, the present value of minimum lease payments due within one year was approximately $489,000.

 

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. At the Company’s annual meeting of stockholders held on June 28, 2018, the Company’s stockholders approved amendments to the 2013 Plan, which included an increase in the number of non-inducement shares of common stock authorized for issuance under the 2013 Plan by 146,666 shares. As of June 30, 2018, 11,111 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 June 30, 2018, under all plans, a total of 264,098 non-inducement shares were authorized for issuance, 69,449 shares had been issued with 57,863 non-inducement stock options and restricted stock units, or RSUs, underlying outstanding awards, and 194,649 non-inducement shares were available for grant. As of June 30, 2018, 5,268 inducement shares had been issued under the 2013 Plan, with 4,434 inducement stock options and RSUs underlying outstanding awards and 5,844 inducement shares available for grant.

Stock Options

A summary of stock option activity for the six months ended June 30, 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

 

81,482

 

 

$

113.68

 

 

 

8.80

 

Granted

 

3,678

 

 

$

5.97

 

 

 

9.98

 

Exercised

 

 

 

 

 

 

 

 

 

Cancelled/forfeited/expired

 

(22,896

)

 

$

47.87

 

 

 

8.68

 

Outstanding at June 30, 2018

 

62,264

 

 

$

132.60

 

 

 

8.14

 

Vested and unvested expected to vest at June 30, 2018

 

61,111

 

 

$

134.28

 

 

 

8.13

 

The intrinsic values of options outstanding, options exercisable, and options vested and unvested expected to vest at December 31, 2017 and June 30, 2018 were each approximately zero.

The assumptions used in the Black-Scholes pricing model for stock options granted during the three and six months ended June 30, 2018 were as follows:

 

Stock and exercise prices

$5.70 - $6.00

 

Expected dividend yield

 

0.00%

 

Discount rate-bond equivalent yield

2.73% – 2.84%

 

Expected life (in years)

5.0 – 5.95

 

Expected volatility

100% - 110%

 

 

On May 2, 2017, the Company’s Board of Directors approved the issuance of an aggregate of 18,333 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 6,666 performance stock options were granted to the Company’s CEO, 3,333 performance stock options were granted to its CFO, and 2,500 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 $45.00 per share and an estimated grant date fair value of $29.70 per share. On July 6, 2017, the Company’s Compensation Committee of the Board of Directors approved the issuance of an aggregate of

17


2,500 performance stock options to be granted on July 31, 2017 to certain of the Company’s employees pursuant to the 2013 Plan, of which 83 performance stock options were forfeited by December 31, 2017. Each performance stock option granted on July 31, 2017 had an exercise price of $41.70 per share and an estimated grant date fair value of $24.90 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 six months ended June 30, 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 20,750 shares underlying the remaining outstanding performance stock option awards at December 31, 2017 were forfeited.

Restricted Stock

A summary of RSU activity for the six months ended June 30, 2018 is as follows:

 

 

 

 

 

 

Weighted

 

 

Number of

 

 

Average Grant

 

 

Shares

 

 

Date Fair Value

 

Outstanding at December 31, 2017

 

12,026

 

 

$

56.10

 

Granted

 

 

 

 

 

Vested and issued

 

(5,833

)

 

$

45.00

 

Forfeited

 

(5,833

)

 

$

45.00

 

Outstanding at June 30, 2018

 

360

 

 

$

415.80

 

Vested and unvested expected to vest at June 30, 2018

 

360

 

 

$

415.80

 

At June 30, 2018, the intrinsic values of RSUs outstanding and RSUs unvested and expected to vest were each approximately $2,000. Of the 360 RSUs outstanding at June 30, 2018, all were fully vested.

On May 2, 2017, the Company’s Board of Directors approved the issuance of an aggregate of 5,833 time-based RSUs and 5,833 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 1,666 time-based RSUs and 833 performance RSUs were granted to its CEO, and 833 time-based RSUs and 833 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 $45.00 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 six months ended June 30, 2018, none of the performance RSUs granted on May 31, 2017 were declared vested by the Company’s Compensation Committee of the Board of Directors, and the 1,666 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

 

 

For the six months ended

 

 

June 30,

 

 

June 30,

 

 

2017

 

 

2018

 

 

2017

 

 

2018

 

Stock Options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

$

41,615

 

 

$

9,421

 

 

$

73,385

 

 

$

27,000

 

Research and development expenses

 

39,172

 

 

 

35,873

 

 

 

68,428

 

 

 

73,020

 

General and administrative expenses

 

157,683

 

 

 

81,284

 

 

 

349,736

 

 

 

186,458

 

Sales and marketing expenses

 

19,606

 

 

 

24,788

 

 

 

60,146

 

 

 

48,054

 

Total expenses related to stock options

 

258,076

 

 

 

151,366

 

 

 

551,695

 

 

 

334,532

 

RSUs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

23,133

 

 

 

(1,552

)

 

 

38,300

 

 

 

(18,802

)

Research and development expenses

 

22,714

 

 

 

3,561

 

 

 

37,072

 

 

 

13,576

 

General and administrative expenses

 

56,473

 

 

 

14,243

 

 

 

86,406

 

 

 

54,303

 

Sales and marketing expenses

 

22,843

 

 

 

6,076

 

 

 

42,988

 

 

 

15,348

 

Total stock-based compensation

$

383,239

 

 

$

173,694

 

 

$

756,461

 

 

$

398,957

 

18


Stock-based compensation expense was recorded net of estimated forfeitures of 0% - 8% per annum during each of the three and six-months ended June 30, 2017 and 2018. As of June 30, 2018, total unrecognized share-based compensation expense related to unvested stock options and RSUs, adjusted for estimated forfeitures, was approximately $984,000 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 six months ended June 30, 2018 is as follows:

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

Weighted

 

 

Remaining

 

 

Number of

 

 

Average Exercise

 

 

Contractual

 

 

Shares

 

 

Price Per Share

 

 

Term in Years

 

Outstanding at December 31, 2017

 

288,196

 

 

$

78.86

 

 

 

4.0

 

Issued

 

1,095,153

 

 

$

4.53

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

 

Expired

 

 

 

 

 

 

 

 

 

Outstanding at June 30, 2018

 

1,383,349

 

 

$

28.30

 

 

 

4.4

 

Further information about equity-classified common stock warrants outstanding at June 30, 2018 is as follows:

 

 

 

 

 

 

 

 

 

Weighted

 

Weighted

 

 

 

 

 

 

Average

 

Average

 

 

Total Shares

 

 

Contractual

 

Exercise Price

 

 

Outstanding

 

 

Life (in years)

 

$

4.53

 

 

 

1,095,153

 

 

 

4.6

 

$

25.50

 

 

 

8,208

 

 

 

4.4

 

$

33.00

 

 

 

96,999

 

 

 

3.3

 

$

45.00

 

 

 

47,821

 

 

 

4.1

 

$

75.00

 

 

 

71,995

 

 

 

4.3

 

$

117.00

 

 

 

38,772

 

 

 

2.8

 

$

140.40

 

 

 

19,339

 

 

 

1.6

 

$

891.69

 

 

 

5,062

 

 

 

1.2

 

 

 

 

 

 

1,383,349

 

 

 

 

 

All warrants outstanding at June 30, 2018 are exercisable, with an intrinsic value of zero. The exercise price of $4.53 per share associated with the 1,095,153 warrants issued on January 30, 2018 is subject to down round adjustment.

 

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 and six-months ended June 30, 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 and six-months ended

 

 

June 30,

 

 

2017

 

 

2018

 

Preferred warrants outstanding (number of common stock equivalents)

 

17

 

 

 

17

 

Common warrants outstanding

 

232,333

 

 

 

1,383,349

 

RSUs outstanding

 

15,020

 

 

 

360

 

Common options outstanding

 

79,281

 

 

 

62,264

 

Total anti-dilutive common share equivalents

 

326,651

 

 

 

1,445,990

 

19


 

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 June 30, 2018, a balance of approximately $466,000 remained outstanding under this purchase commitment.

During the three months ended June 30, 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 $21,000 and $27,000, respectively, with approximately $41,000 and $50,000 recorded during the six months ended June 30, 2017 and 2018, respectively. At December 31, 2017 and June 30, 2018, approximately $46,000 and $60,000, 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 amounts totaling approximately $330,000 for sales tax and maintenance obligations associated with financed equipment were due under equipment financing arrangements at June 30, 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 during the three-months ended June 30, 2018, from Aegea as reimbursements for shared patent costs under the Cross-License Agreement.

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 statement of operations and comprehensive loss during the six months ended June 30, 2017 and the year ended December 31, 2017, respectively.

 

13. Subsequent Events

On July 6, 2018, the Company’s stockholders approved, and the Company filed, an amendment to the Company’s Certificate of Amendment of Certificate of Incorporation to effect a one-for-thirty reverse stock split of the Company’s outstanding common stock. As such, all references to share and per share amounts in these unaudited condensed financial statements and accompanying notes have been retroactively restated to reflect the one-for-thirty reverse stock split, except for the authorized number of shares of the Company’s common stock of 150,000,000 shares, which was not affected by the one-for-thirty reverse stock split.

 

On August 13, 2018, the Company completed its previously announced rights offering pursuant to its effective registration statement on Form S-1, as amended (Registration Statement No. 333-225147), previously filed with and declared effective by the Securities and Exchange Commission (the SEC), and a prospectus filed with the SEC (the Rights Offering). Pursuant to the Rights Offering, the Company sold an aggregate of 11,587 units consisting of an aggregate of 11,587 shares of Series A Convertible Preferred Stock and 2,549,140 warrants, with each warrant exercisable for one share of our common stock at an exercise price of $4.53 per share, resulting in net proceeds to the Company of approximately $10.4 million, after deducting expenses relating to the Rights Offering, including dealer-manager fees and expenses, and excluding any proceeds received upon exercise of any warrants.

 

 

 


20


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