bioc-10q_20190331.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, 2019

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)

 

Securities registered pursuant to Section 12(b) of the Act:

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 every Interactive Data File required to be submitted 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 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

 

  

  

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 

Securities registered pursuant to Section 12(b) of the Act:


 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $.0001 per share

BIOC

The Nasdaq Stock Market LLC

As of May 10, 2019, there were 18,867,464 shares of the Registrant’s common stock outstanding.

 

 

 

 

 


BIOCEPT, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED

March 31, 2019

INDEX

 

 

 

 

  

Page

 

 

IMPORTANT NOTE REGARDING FORWARD-LOOKING STATEMENTS

  

4

 

 

 

PART I.

 

FINANCIAL INFORMATION

  

 

 

 

 

Item 1.

 

Financial Statements

  

5

 

 

 

 

 

Condensed Balance Sheets as of December 31, 2018 and March 31, 2019 (unaudited)

  

5

 

 

 

 

 

Condensed Statements of Operations and Comprehensive Loss for the three months ended March 31, 2018 and 2019 (unaudited)

  

6

 

 

 

 

 

Condensed Statements of Shareholders’ Equity for the three months ended March 31, 2018 and 2019 (unaudited)

  

7

 

 

 

 

 

Condensed Statements of Cash Flows for the three months ended March 31, 2018 and 2019 (unaudited)

  

8

 

 

 

 

 

Notes to Condensed Financial Statements (unaudited)

  

10

 

 

 

Item 2.

 

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

  

24

 

 

 

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

 

 

 

3


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.

 

 

 

4


PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

Biocept, Inc.

Condensed Balance Sheets

 

 

 

December 31,

 

 

March 31,

 

 

2018

 

 

2019

 

 

 

 

 

 

(unaudited)

 

Current assets:

 

 

 

 

 

 

 

Cash

$

3,423,373

 

 

$

14,762,198

 

Accounts receivable, net

 

1,574,325

 

 

 

1,877,861

 

Inventories, net

 

587,222

 

 

 

577,284

 

Prepaid expenses and other current assets

 

425,961

 

 

 

270,248

 

Total current assets

 

6,010,881

 

 

 

17,487,591

 

Fixed assets, net

 

2,739,422

 

 

 

1,292,061

 

Lease right-of-use assets

 

 

 

 

3,112,280

 

Total assets

$

8,750,303

 

 

$

21,891,932

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

2,039,718

 

 

$

2,262,214

 

Accrued liabilities

 

1,928,393

 

 

 

2,137,796

 

Current portion of equipment financings

 

641,536

 

 

 

 

Current portion of lease liabilities

 

 

 

 

2,025,594

 

Total current liabilities

 

4,609,647

 

 

 

6,425,604

 

Non-current portion of equipment financings

 

985,015

 

 

 

 

Non-current portion of lease liabilities

 

 

 

 

1,452,244

 

Non-current portion of deferred rent

 

113,122

 

 

 

 

Total liabilities

 

5,707,784

 

 

 

7,877,848

 

Commitments and contingencies (see Note 11)

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value, 5,000,000 authorized; 4,417 shares issued and outstanding at December 31, 2018; and 2,139 shares issued and outstanding at March 31, 2019.

 

 

 

 

 

Common stock, $0.0001 par value, 150,000,000 authorized; 4,629,174 issued and outstanding at December 31, 2018; 18,867,464 issued and outstanding at March 31, 2019.

 

463

 

 

 

1,887

 

Additional paid-in capital

 

223,499,634

 

 

 

240,486,305

 

Accumulated deficit

 

(220,457,578

)

 

 

(226,474,108

)

Total shareholders’ equity

 

3,042,519

 

 

 

14,014,084

 

Total liabilities and shareholders’ equity

$

8,750,303

 

 

$

21,891,932

 

 

 

 

 

 

 

 

 

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

5


Biocept, Inc.

Condensed Statements of Operations and Comprehensive Loss

(Unaudited)

 

 

 

For the three months ended March 31,

 

 

2018

 

 

2019

 

Net revenues

$

806,943

 

 

$

1,024,239

 

Costs and expenses:

 

 

 

 

 

 

 

Cost of revenues

 

2,434,886

 

 

 

2,599,364

 

Research and development expenses

 

1,070,581

 

 

 

1,223,291

 

General and administrative expenses

 

1,938,664

 

 

 

1,681,837

 

Sales and marketing expenses

 

1,636,542

 

 

 

1,374,560

 

Total costs and expenses

 

7,080,673

 

 

 

6,879,052

 

Loss from operations

 

(6,273,730

)

 

 

(5,854,813

)

Other income/ (expense):

 

 

 

 

 

 

 

Interest expense

 

(82,674

)

 

 

(61,974

)

Total other income/ (expense):

 

(82,674

)

 

 

(61,974

)

Loss before income taxes

 

(6,356,404

)

 

 

(5,916,787

)

Income tax expense

 

 

 

 

 

Net loss and comprehensive loss

$

(6,356,404

)

 

$

(5,916,787

)

Deemed dividend related to warrants down round provision

 

 

 

 

(99,743

)

Net loss attributable to common shareholders

$

(6,356,404

)

 

$

(6,016,530

)

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

 

 

 

 

 

 

 

Basic

 

1,911,282

 

 

 

9,792,093

 

Diluted

 

1,911,282

 

 

 

9,792,093

 

Net loss per common share:

 

 

 

 

 

 

 

Basic

$

(3.33

)

 

$

(0.61

)

Diluted

$

(3.33

)

 

$

(0.61

)

 

 

 


 

 

 

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

 

6


Biocept, Inc.

Statement of Shareholders’ Equity

(Unaudited)

 

For the three months ended March 31, 2018

 

Common Stock

 

 

Series A

Convertible

Preferred Stock

 

 

Additional

 

 

Accumulated

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Paid-in Capital

 

 

Deficit

 

 

Total

 

Balance at December 31, 2017

 

 

1,181,179

 

 

$

118

 

 

 

 

 

$

 

 

$

196,545,523

 

 

$

(195,249,607

)

 

$

1,296,034

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

225,263

 

 

 

 

 

 

225,263

 

Shares and warrants issued for January 2019 financing transaction, net of issuance costs

 

 

1,095,153

 

 

 

110

 

 

 

 

 

 

 

 

 

13,342,711

 

 

 

 

 

 

13,342,821

 

Adjustment for presentation after reverse stock split

 

 

 

 

 

6,576

 

 

 

 

 

 

 

 

 

(6,576

)

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,356,404

)

 

 

(6,356,404

)

Balance at March 31, 2018

 

 

2,276,332

 

 

$

6,804

 

 

 

 

 

$

 

 

$

210,106,921

 

 

$

(201,606,011

)

 

$

8,507,714

 

 

 

 

For the three months ended March 31, 2019

 

Common Stock

 

 

Series A

Convertible

Preferred Stock

 

 

Additional

 

 

Accumulated

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Paid-in Capital

 

 

Deficit

 

 

Total

 

Balance at December 31, 2018

 

 

4,629,174

 

 

$

463

 

 

 

4,417

 

 

$

 

 

$

223,499,634

 

 

$

(220,457,578

)

 

$

3,042,519

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

102,459

 

 

 

 

 

 

102,459

 

Shares issued upon exercise of common stock warrants

 

 

5,985

 

 

 

1

 

 

 

 

 

 

 

 

 

4,747

 

 

 

 

 

 

4,748

 

Deemed dividends related to warrants down round provision

 

 

 

 

 

 

 

 

 

 

 

 

 

 

99,743

 

 

 

(99,743

)

 

 

 

Shares issued for January 2019 financing transaction, net of issuance costs

 

 

990,000

 

 

 

99

 

 

 

 

 

 

 

 

 

2,032,212

 

 

 

 

 

 

2,032,311

 

Shares and warrants issued for February 2019 financing transaction, net of issuance costs

 

 

6,250,000

 

 

 

625

 

 

 

 

 

 

 

 

 

6,602,110

 

 

 

 

 

 

6,602,735

 

Shares issued for January 2019 financing transaction overallotment, net of issuance costs

 

 

538,867

 

 

 

54

 

 

 

 

 

 

 

 

 

592,252

 

 

 

 

 

 

592,306

 

Shares and warrants issued for March 2019 financing transaction, net of issuance costs

 

 

5,950,000

 

 

 

595

 

 

 

 

 

 

 

 

 

7,553,198

 

 

 

 

 

 

7,553,793

 

Shares issued upon conversion of preferred stock

 

 

503,438

 

 

 

50

 

 

 

(2,278

)

 

 

 

 

 

(50

)

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,916,787

)

 

 

(5,916,787

)

Balance at March 31, 2019

 

 

18,867,464

 

 

$

1,887

 

 

 

2,139

 

 

$

 

 

$

240,486,305

 

 

$

(226,474,108

)

 

$

14,014,084

 

7


Biocept, Inc.

Condensed Statements of Cash Flows

(Unaudited)

 

 

For the three months ended March 31,

 

 

2018

 

 

2019

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

Net loss

$

(6,356,404

)

 

$

(5,916,787

)

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

 

 

 

 

 

 

 

Depreciation and amortization

 

179,772

 

 

 

222,128

 

Amortization of right-of-use assets

 

 

 

 

(37,806

)

Inventory reserve

 

(14,711

)

 

 

531

 

Stock-based compensation

 

225,263

 

 

 

102,459

 

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

 

18,214

 

 

 

 

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

 

 

 

 

 

 

 

Accounts receivable, net

 

(136,275

)

 

 

(303,536

)

Inventory

 

22,434

 

 

 

9,407

 

Prepaid expenses and other current assets

 

(199,677

)

 

 

155,713

 

Accounts payable

 

204,171

 

 

 

152,635

 

Accrued liabilities

 

508,543

 

 

 

367,744

 

Deferred rent

 

(27,444

)

 

 

 

Net cash used in operating activities

 

(5,576,114

)

 

 

(5,247,512

)

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

Purchases of fixed assets

 

(53,980

)

 

 

(32,898

)

Net cash used in investing activities

 

(53,980

)

 

 

(32,898

)

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

Net proceeds from issuance of common stock and warrants

 

13,342,821

 

 

 

16,781,145

 

Proceeds from exercise of common stock warrants

 

 

 

 

4,748

 

Payments on finance leases

 

(38,726

)

 

 

(166,658

)

Payments on supplier and other third-party financings

 

(40,094

)

 

 

 

Payments on credit facility

 

(508,098

)

 

 

 

Net cash provided by financing activities

 

12,755,903

 

 

 

16,619,235

 

Net increase in Cash

 

7,125,809

 

 

 

11,338,825

 

Cash at Beginning of Period

 

2,146,611

 

 

 

3,423,373

 

Cash at End of Period

$

9,272,420

 

 

$

14,762,198

 

Supplemental Disclosures of Cash Flow Information:

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

         Interest

$

63,860

 

 

$

61,974

 

         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 $79,000 and $149,000 during the three months ended March 31, 2018 and 2019, respectively, were recorded as finance leases 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 decreased from approximately $31,000 at December 31, 2017 to approximately $19,000 at March 31, 2018 and increased from approximately $25,000 at December 31, 2018 to approximately $86,000 at March 31, 2019.

     

8


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 $1.20 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 on a relative fair value basis 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.

On February 12, 2019, the Company received net cash proceeds of approximately $6.6 million as a result of the closing of a follow-on public offering of 6,250,000 shares of its common stock and warrants to purchase up to an aggregate of 6,250,000 shares of its common stock at a combined offering price of $1.20 per unit. All warrants sold in this offering have an exercise price of $1.20 per share, are exercisable immediately and expire five years from the date of issuance. In addition, the Company sold warrants to purchase up to an aggregate of 937,500 shares of the Company’s common stock in connection with the partial exercise of the over-allotment option granted to the underwriters. Upon closing of the transaction, warrants to purchase 915,000 shares were issued pursuant to the placement agents’ partial exercise of their overallotment.

Pursuant to the down round adjustment feature of the January 2018 warrants, the exercise price of these warrants was adjusted to the $1.20 offering price per share in the February 2019 financing transaction and it resulted in recording a deemed dividend of $99,000.

On March 19, 2019, the Company received net cash proceeds of approximately $7.5 million as a result of completing a registered direct offering of 5,950,000 shares at a negotiated purchase price of $1.37 per share. In addition, in a concurrent private placement, the Company issued to purchasers a warrant to purchase one share of the Company’s common stock for each share purchased for cash in the offering.  All warrants issued in this offering have an exercise price of $1.25 per share, are exercisable immediately upon issuance and expire 5.5 years following the date of issuance.

On January 1, 2019, the company adopted the accounting rules in ASC Topic 842, Leases (ASC 842), and as a result, recorded net lease right-of-use assets of $1.9 million related to its operating lease, and recorded operating lease liabilities of $2.2 million.  In addition, in accordance with the guidance, $1.4 million of assets under capital leases previously classified in the property, plant, and equipment section of the balance sheet were reclassified to lease right-of-use assets.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

9


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 our proprietary blood collection tubes, or BCTs, commenced in June 2018, which allow for the intact transport of liquid biopsy samples for research use only, or RUO, 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.

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 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.

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, 2018 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, 2018, filed with the U.S. Securities and Exchange Commission, or SEC, with our Annual Report on Form 10-K on March 29, 2019 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.  Such reclassifications had no effect on net loss.

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

10


copayments that may be due. 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.

11


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 and 2019.

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, 2018 and 2019 disaggregated by source and nature are as follows:

 

 

For the three months ended March 31,

 

 

2018

 

 

2019

 

Net revenues from contracted payers*

$

337,946

 

 

$

481,420

 

Net revenues from non-contracted payers

 

424,363

 

 

 

500,321

 

Development services revenues

 

44,634

 

 

 

42,498

 

Total net revenues

$

806,943

 

 

$

1,024,239

 

 

*Includes Medicare and Medicare Advantage, as reimbursement amounts are fixed.  Also includes other income from sales of CEE-Sure blood collection tubes and research-use-only (RUO) test kits.

12


 

For the three months ended March 31,

 

 

2018

 

 

2019

 

Net commercial revenues recognized upon delivery

$

762,309

 

 

$

893,938

 

Development services revenues recognized upon delivery

 

44,634

 

 

 

42,498

 

Commercial revenues recognized upon cash collection

 

 

 

 

87,803

 

Total net revenues

$

806,943

 

 

$

1,024,239

 

                             

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, 2018 and 2019 were as follows:

 

 

For the three months ended March 31,

 

 

2018

 

 

2019

 

Medicare and Medicare Advantage

 

39

%

 

 

45

%

Blue Cross Blue Shield

 

22

%

 

 

14

%

United Healthcare

 

22

%

 

 

12

%

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, 2018 and March 31, 2019 were as follows:

 

 

December 31, 2018

 

 

March 31, 2019

 

Blue Cross Blue Shield

 

22

%

 

 

22

%

Medicare and Medicare Advantage

 

17

%

 

 

19

%

United Healthcare

 

15

%

 

 

16

%

Recent Accounting Pronouncements

In February 2016, the FASB issued authoritative guidance, which changes several aspects of the accounting for leases, including the requirement that all leases with durations greater than twelve months be recognized on the balance sheet. The guidance is effective for annual and interim reporting periods in fiscal years beginning after December 15, 2018. Effective January 1, 2019, the Company adopted the guidance and elected the optional transition method to account for the impact of the adoption with a cumulative-effect adjustment in the period of adoption and did not restate prior periods. The Company also elected the practical expedient package as permitted under the transition guidance. As of January 1, 2019, the Company recorded a right-of-use asset and liability upon adoption of the guidance (See Note 7).

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 adopted this guidance for the fiscal year beginning on January 1, 2019 and determined that the adoption of this guidance does not 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 adopted this guidance for the fiscal year beginning on January 1, 2019 which did not 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 June 2018, the FASB issued authoritative guidance simplifying the accounting for nonemployee stock-based compensation and largely aligning such compensation with the accounting requirements for employee stock-based awards. For public companies, this guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The

13


Company adopted this guidance for the fiscal year beginning on January 1, 2019 and determined that the adoption of this guidance does not have a material impact on its financial statements or disclosures.

In November 2018, the FASB issued authoritative guidance clarifying the interaction between Collaborative Arrangements (Topic 808) and Revenue from Contracts with Customers (Topic 606) to address diversity in practice related to how companies account for collaborative arrangements. For public companies, this guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year. Early adoption is permitted, but no earlier than an entity’s adoption date of Revenue from Contracts with Customers (Topic 606).  The Company currently intends to adopt this guidance upon the effective date and does not anticipate that the adoption of this guidance will have a material impact on its financial statements or disclosures.

 

2. Liquidity and Going Concern Uncertainty

As of March 31, 2019, cash totaled $14.8 million and the Company had an accumulated deficit of $226.5 million. For the year ended December 31, 2018 and the three months ended March 31, 2019, the Company incurred net losses of $24.6 million and $5.9 million, respectively. At March 31, 2019, the Company had aggregate net interest-bearing indebtedness of $1.6 million, of which $640,000 was due within one year, in addition to $4.4 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 $278,000 remained outstanding at March 31, 2019 (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 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 $1.3 million in gross warrant proceeds remaining outstanding and available to be exercised at $1.20 per share, subject to down round adjustment, until their expiration in January 2023.  Pursuant to the down round adjustment feature of the January 2018 warrants, the exercise price of these warrants was adjusted to the $1.20 offering price per share in the February 2019 financing transaction.

On May 24, 2018, the SEC declared effective a shelf registration statement filed by us, which expires in May 2021. The shelf registration statement allows us to issue any combination of our 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 our public float is less than $75 million.

On August 13, 2018, the Company completed a rights offering pursuant to an effective registration statement. 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 Preferred Stock and 2,549,140 warrants, with each warrant exercisable for one share of its common stock at an exercise price of $4.53 per share, resulting in net proceeds to the Company of approximately $10.1 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.

On September 20, 2018, the Company completed an offering of 642,438 shares of the Company’s common stock and pre-funded warrants to purchase up to an aggregate of 120,000 shares of its common stock. The shares were sold at a purchase price of $3.285 per share and the pre-funded warrants were sold at a purchase price of $3.275 per pre-funded warrant which represents the per share purchase price for the shares less the $0.01 per share exercise price for each such pre-funded warrant. The net proceeds to the Company from the offering were approximately $2.2 million, after deducting expenses related to the offering including dealer-

14


manager fees and expenses, and excluding any proceeds received upon exercise of any warrants. In addition, in a concurrent private placement, the Company issued to purchasers a warrant to purchase one share of the Company’s common stock for each share and pre-funded warrant purchased for cash in the offering. All warrants issued in this offering initially had an exercise price of $3.16 per share, are exercisable upon the six-month anniversary of issuance and expire five years from such date.

On January 18, 2019, the Company completed an offering of 990,000 shares of the Company’s common stock. The shares were sold at a purchase price of $2.25 per share and the net proceeds to the Company from this offering were approximately $2.0 million, after deducting expenses related to the offering including dealer-manager fees and expenses.

On February 12, 2019, the Company received net cash proceeds of approximately $6.6 million from the closing of a follow-on public offering of 6,250,000 shares of its common stock and warrants to purchase up to an aggregate of 6,250,000 shares of its common stock at a combined offering price of $1.20 per unit. In addition, the Company sold warrants to purchase up to an aggregate of 937,500 shares of the Company’s common stock in connection with the partial exercise of the over-allotment option granted to the underwriters. Upon closing of the transaction, warrants to purchase 915,000 shares were issued pursuant to the placement agents’ partial exercise of their overallotment. Subsequent to the closing of this offering, no additional cash proceeds have been received from the exercise of warrants sold in this offering.  On March 11, 2019, the underwriters exercised their overallotment option for 538,867 shares of the Company’s common stock related to the February 12, 2019 follow-on offering, purchasing shares at $1.20 per share for net cash proceeds of approximately $592,000.

On March 19, 2019, the Company received net cash proceeds of approximately $7.5 million as a result of completing a registered direct offering of 5,950,000 shares at a negotiated purchase price of $1.37 per share.

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

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. All warrants sold in this offering have an exercise price of $1.20 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.

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 our 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 our public float is less than $75 million.

On August 13, 2018, the Company completed a 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 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 $10.1 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. Each share of Series A Preferred Stock will be convertible, at the Company’s option at any time on or after the first anniversary of the closing of the Rights Offering or at the option of the holder at any time, into the number of shares of the Company’s common stock, par value $0.0001 per share determined by dividing the $1,000 stated value per share of the Series A Preferred Stock by a conversion price of $4.53 per share. In addition, the conversion price per share is subject to adjustment for stock dividends, distributions, subdivisions, combinations or reclassifications.  Holders of Series A Preferred Stock shall be entitled to receive dividends (on an as-if-converted-to-common-stock basis) in the same form as dividends actually paid on shares of the Common Stock when, as and if such dividends are paid on shares of Common Stock. The Series A Preferred Stock have no voting rights. Upon the Company’s liquidation, dissolution or winding-up, whether voluntary or involuntary, holders of Series A Preferred Stock will be entitled to receive out of the assets, whether capital or surplus, of the Company the same

15


amount that a holder of Common Stock would receive if the Series A Preferred Stock were fully converted (disregarding for such purpose any conversion limitations thereunder) to Common Stock, which amounts shall be paid pari passu with all holders of Common Stock. The Company is not obligated to redeem or repurchase any shares of Series A Preferred Stock.

On September 20, 2018, the Company completed an offering of 642,438 shares of the Company’s common stock and prefunded warrants to purchase up to an aggregate of 120,000 shares of its common stock. The shares were sold at a purchase price of $3.285 per share and the pre-funded warrants were sold at a purchase price of $3.275 per pre-funded warrant which represents the per share purchase price for the shares less the $0.01 per share exercise price for each such pre-funded warrant. The net proceeds to the Company from this offering were approximately $2.2 million, after deducting expenses related to the offering including dealer-manager fees and expenses, and excluding any proceeds received upon exercise of any warrants. In addition, in a concurrent private placement, the Company issued to purchasers a warrant to purchase one share of the Company’s common stock for each share and pre-funded warrant purchased for cash in the offering. All warrants issued in this offering have an exercise price of $3.16 per share, are exercisable upon the six-month anniversary of issuance and expire five years from such date.

 

On January 18, 2019, the Company completed an offering of 990,000 shares of the Company’s common stock. The shares were sold at a purchase price of $2.25 per share and the net proceeds to the Company from this offering were approximately $2.0 million, after deducting expenses related to the offering including dealer-manager fees and expenses.

On February 12, 2019, the Company received net cash proceeds of approximately $6.6 million as a result of the closing of a follow-on public offering of 6,250,000 shares of its common stock and warrants to purchase up to an aggregate of 6,250,000 shares of its common stock at a combined offering price of $1.20 per unit. All warrants sold in this offering have an exercise price of $1.20 per share, are exercisable immediately and expire five years from the date of issuance. In addition, the Company sold warrants to purchase up to an aggregate of 937,500 shares of the Company’s common stock in connection with the partial exercise of the over-allotment option granted to the underwriters. Upon closing of the transaction, warrants to purchase 915,000 shares were issued pursuant to the placement agents’ partial exercise of their overallotment. Subsequent to the closing of this offering, no additional cash proceeds have been received from the exercise of warrants sold in this offering.  On March 11, 2019, the underwriters exercised their overallotment option for 538,867 shares of the Company’s common stock related to the February 12, 2019 follow-on offering, purchasing shares at $1.20 per share for net cash proceeds of approximately $592,000.

Pursuant to the down round adjustment feature of the January 2018 warrants, the exercise price of these warrants was adjusted to the $1.20 price per share offering price in the February 2019 financing transaction.

On March 19, 2019, the Company received net cash proceeds of approximately $7.5 million as a result of completing a registered direct offering of 5,950,000 shares at a negotiated purchase price of $1.37 per share. In addition, in a concurrent private placement, the Company issued to purchasers a warrant to purchase one share of the Company’s common stock for each share purchased for cash in the offering.  All warrants issued in this offering have an exercise price of $1.25 per share, are exercisable immediately upon issuance and expire 5.5 years following the date of issuance.

 

4. Fair Value Measurement

The estimated nonrecurring fair value measurements associated with fixed asset purchases recorded as right-of-use asset finance lease obligations totaling approximately $149,000 during the three months ended March 31, 2019 were calculated as the present value of the lease payments based on contractual payment amounts and estimated market rates.  Upon adoption of guidance in ASC Topic 842 Leases, the estimates fair value of the right-of-use operating lease asset was recorded based on present value of future lease payments based contractual payment amounts and estimated market rates in effect.

Other Fair Value Measurements

As of the closing of the Company’s January 30, 2018 offering, the estimated grant date fair value of approximately $8.82 per share associated with the warrants to purchase up to 1,095,153 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 on a relative fair value basis. All warrants sold in this offering had an exercise price of $1.20 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:

 

16


Beginning stock price

$

10.17

 

Exercise price

$

15.00

 

Expected dividend yield

 

0.00

%

Discount rate-bond equivalent yield

 

2.48

%

Expected life (in years)

 

5.00

 

Expected volatility

 

99.0

%

As of the closing of the Company’s February 12, 2019 offering, the estimated grant date fair value of approximately $0.95 per share associated with the warrants to purchase up to 7,165,000 shares of common stock issued in this offering, or a total of approximately $6.8 million, was recorded as an offset to additional paid-in capital on a relative fair value basis. All warrants sold in this offering have an exercise price of $1.20 per share, are exercisable immediately and expire five years from the date of issuance. The fair value of the warrants was estimated using a Black-Scholes model with the following assumptions:

 

Beginning stock price

$

1.05

 

Exercise price

$

1.20

 

Expected dividend yield

 

0.00

%

Discount rate-bond equivalent yield

 

2.49

%

Expected life (in years)

 

5.00

 

Expected volatility

 

147.7

%

As of the closing of the Company’s March 19, 2019 offering, the estimated grant date fair value of approximately $1.01 per share associated with the warrants to purchase up to 5,950,000 shares of common stock issued in this offering, or a total of approximately $6.0 million, was recorded as an offset to additional paid-in capital on a relative fair value basis. All warrants sold in this offering have an exercise price of $1.25 per share, are exercisable immediately and expire 5.5 years from the date of issuance. The fair value of the warrants was estimated using a Black-Scholes model with the following assumptions:

 

Beginning stock price

$

1.12

 

Exercise price

$

1.25

 

Expected dividend yield

 

0.00

%

Discount rate-bond equivalent yield

 

2.44

%

Expected life (in years)

 

5.50

 

Expected volatility

 

140.0

%

 

5. Balance Sheet Details

The following provides certain balance sheet details:

 

 

December 31,

 

 

March 31,

 

 

2018

 

 

2019

 

Fixed Assets

 

 

Machinery and equipment

$

2,818,583

 

 

$

2,818,583

 

Furniture and office equipment

 

157,391

 

 

 

157,391

 

Computer equipment and software

 

1,437,408

 

 

 

1,552,891

 

Leasehold improvements

 

570,173

 

 

 

570,173

 

Financed equipment

 

2,573,955

 

 

 

 

Construction in process

 

116,640

 

 

 

103,915

 

Total fixed assets, gross

 

7,674,150

 

 

 

5,202,953

 

Less accumulated depreciation and amortization

 

(4,934,728

)

 

 

(3,910,892

)

Total fixed assets, net

$

2,739,422

 

 

$

1,292,061

 

Accrued Liabilities

 

 

 

 

 

 

 

Accrued interest

$

 

 

$

 

Accrued payroll

 

255,426

 

 

 

419,259

 

Accrued vacation

 

535,682

 

 

 

561,340

 

Accrued bonuses

 

712,574

 

 

 

971,918

 

Accrued sales commissions

 

62,767

 

 

 

89,671

 

Current portion of deferred rent

 

158,342

 

 

 

 

Accrued other

 

203,602

 

 

 

95,608

 

Total accrued liabilities

$

1,928,393

 

 

$

2,137,796

 

17


During the three months ended March 31, 2019, there were no disposals and $149,000 of fixed assets were acquired. Upon adoption of the lease guidance in ASC Topic 842, Leases (ASC 842), equipment with a total cost of $2,574,000 and accumulated depreciation of $1,135,000 were reclassified to leases right-of-use assets on the Company’s balance sheet (see Note 7).

 

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 $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. Upon maturity of the April 2014 Credit Facility on July 1, 2018, security interest in the Company’s personal property was released by the lender.

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.

 

7. Leases

Effective January 1, 2019, the Company adopted US GAAP accounting rules in ASC Topic 842, Leases (ASC 842), using the modified retrospective method.  The Company elected to follow the package of practical expedients provided under the transition guidance within ASC 842, and accordingly, did not reassess whether any expired or existing contracts are or contain leases, did not reassess expired or existing leases, and did not reassess initial direct costs for any existing leases.  Upon adoption, the Company recorded an operating lease right-of-use asset and an operating lease liability on the balance sheet.  In addition, assets under equipment leases previously classified as capital leases within Property, Plant and Equipment on the Company’s balance sheet were reclassified to finance lease right-of-use assets upon adoption of the guidance.  Right-of-use assets and obligations were recognized based on the present value of remaining lease payments over the lease term.  As the Company’s operating lease does not provide an implicit rate, an estimated incremental borrowing rate was used based on the information available at the adoption date in determining the present value of lease payments.  Operating lease expense is recognized on a straight-line basis over the lease term.  Variable lease costs such as common area costs and other operating costs are expensed as incurred.  Leases with an initial term of 12 months or less are not recorded on the balance sheet.

Finance Leases

The Company leases certain laboratory equipment under arrangements previously accounted for as capital leases, classified on the Company’s balance sheet as fixed assets and related lease liabilities and depreciated on a straight line basis over the lease term.  Upon adoption of ASC 842, leased equipment previously classified as fixed assets totaling $1.4 million in net book value were reclassified to lease right-of-use assets in accordance with the guidance. The equipment under finance leases is depreciated on a straight-line basis over periods ranging from approximately 3 to 7 years. The total gross value of equipment capitalized under such lease arrangements was approximately $2,574,000 and $2,723,000 at December 31, 2018 and March 31, 2019, respectively. Total accumulated depreciation related to financed equipment was approximately $1,135,000 and $1,246,000 at December 31, 2018 and March 31, 2019, respectively, and total depreciation expense related to financed equipment during the three months ended March 31, 2018 and 2019 was approximately $67,000 and $110,000, respectively.

On January 31, 2019, the Company executed an equipment financing commitment with a third-party lender for total proceeds of approximately $149,000, which was funded by the lender on February 1, 2019. Under the terms of the equipment financing agreement, which was accounted for as a finance lease transaction, the principal balance plus interest for the equipment are to be repaid in full after 36 monthly installments of $5,013 totaling approximately $180,000 through February 2022.

Operating Lease

The Company leases its primary laboratory and office facilities in San Diego, California.  This lease is classified as an operating lease in accordance with the ASC 842 guidance.  The average monthly cash payment for the operating lease is approximately $120,000 per month, and the lease term ends on July 31, 2020.  The Company recorded a lease right-of-use asset and lease liability of $1,930,000 and $2,201,000, respectively, as of January 1, 2019, based on present value of payments and an incremental borrowing rate of 4.5%.

18


In addition, the Company reviews agreements at inception to determine if they include a lease, and when they do, uses its incremental borrowing rate or implicit interest rate to determine the present value of the future lease payments.

The following schedule sets forth the components of right-of-use lease assets as of December 31, 2018 and March 31, 2019 as follows:

 

December 31,

 

 

March 31,

 

 

2018

 

 

2019

 

Lease right-of-use assets:

 

 

 

 

 

 

 

Operating

$

 

 

$

1,635,476

 

Finance

 

 

 

 

1,476,804

 

Total

$

 

 

$

3,112,280

 

 

The following schedule sets forth the current portion of operating and finance lease liabilities as of December 31, 2018 and March 31, 2019:

 

December 31,

 

 

March 31,

 

 

2018

 

 

2019

 

Current portion of lease liabilities:

 

 

 

 

 

 

 

Operating

$

 

 

$

1,385,031

 

Finance

 

 

 

 

640,563

 

Total

$

 

 

$

2,025,594

 

 

The following schedule sets forth the long-term portion of operating and finance lease liabilities as of December 31, 2018 and March 31, 2019:

 

December 31,

 

 

March 31,

 

 

2018

 

 

2019

 

Long-term portion of lease liability:

 

 

 

 

 

 

 

Operating

$

 

 

$

484,102

 

Finance

 

 

 

 

968,142

 

Total

$

 

 

$

1,452,244

 

The following schedule represents the components of lease expense for the three months ended March 31, 2019:

 

 

 

 

For the three months ended

 

 

 

 

March 31, 2019

 

Lease cost

 

 

 

 

 

Finance lease cost

 

 

 

 

 

Amortization of right-of-use assets

 

 

$

110,330

 

Interest on lease liabilities

 

 

 

61,974

 

Operating lease cost

 

 

 

318,005

 

Total

 

 

$

490,309

 

The following schedule sets forth the remaining future minimum lease payments outstanding under finance and operating leases, 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, 2019:

 

19


 

Finance

 

 

Operating

 

 

Minimum

 

 

Maintenance and

 

 

Minimum

 

 

Lease

 

 

Sales Tax Obligation

 

 

Lease

 

 

Payments

 

 

Payments

 

 

Payments

 

2019

$

522,417

 

 

$

69,861

 

 

$

1,074,553

 

2020

 

611,772

 

 

 

77,298

 

 

 

855,136

 

2021

 

365,168

 

 

 

56,136

 

 

 

 

2022

 

268,056

 

 

 

62,778

 

 

 

 

Thereafter

 

286,746

 

 

 

45,710

 

 

 

 

Total payments

 

2,054,159

 

 

 

311,783

 

 

 

1,929,689

 

Less amount representing interest

 

(445,454

)

 

 

 

 

 

(60,556

)

Present value of payments

$

1,608,705

 

 

$

311,783

 

 

$

1,869,133

 

 

The following schedule sets forth supplemental cash flow information related to operating and finance leases as of March 31, 2019:

 

 

 

 

For the three months ended

 

 

 

 

March 31, 2019

 

Other information

 

 

 

 

 

Operating cash flows from finance leases

 

 

$

61,974

 

Operating cash flows from operating leases

 

 

$

355,812

 

Financing cash flows from finance leases

 

 

$

166,658

 

 

The aggregate weighted average remaining lease term was 3.37 years on finance leases and 1.34 years on operating leases as of March 31, 2019. The aggregate weighted average discount rate was 19.65% on finance leases and 4.5% on operating leases as of March 31, 2019.  During the three months ended March 31, 2019, the Company added $149,000 of right of use assets in exchange for finance lease liabilities.  In addition, upon adoption of the accounting guidance in ASC 842, $1.4 million of net machinery and equipment was reclassified to lease right-of-use assets related to assets under finance leases and $1.9 million of right-of-use facility lease was recorded under operating lease.

 

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 March 31, 2019, 124,211 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, 2019, under all plans, a total of 264,098 non-inducement shares were authorized for issuance, 103,358 shares had been issued with 84,547 non-inducement stock options and restricted stock units, or RSUs, underlying outstanding awards, and 160,740 non-inducement shares were available for grant. As of March 31, 2019, a total of 118,368 inducement shares were authorized for issuance, 118,368 inducement shares had been issued with 117,534 inducement stock options and RSUs underlying outstanding awards, and no inducement shares were available for grant under the 2013 Plan.

20


Stock Options

A summary of stock option activity for the three months ended March 31, 2019 is as follows:

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

Weighted

 

 

Remaining

 

 

Number of

 

 

Average Exercise

 

 

Contractual

 

 

Shares

 

 

Price Per Share

 

 

Term in Years

 

Outstanding at December 31, 2018

 

195,820

 

 

$

41.41

 

 

 

9.2

 

Granted

 

8,100

 

 

$

1.03

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

 

Cancelled/forfeited/expired

 

(1,839

)

 

$

104.08

 

 

 

 

 

Outstanding at March 31, 2019

 

202,081

 

 

$

39.14

 

 

 

9.0

 

Vested and unvested expected to vest at March 31, 2019

 

189,738

 

 

$

41.48

 

 

 

8.9

 

The intrinsic values of options outstanding, options exercisable, and options vested and unvested expected to vest at December 31, 2018 and March 31, 2019 were each zero.

Restricted Stock

A summary of RSU activity for the three months ended March 31, 2019 is as follows:

 

 

 

 

 

 

Weighted

 

 

Number of

 

 

Average Grant

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