Biocept Inc.
BIOCEPT INC (Form: 10-Q, Received: 05/14/2014 16:36:34)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended March 31, 2014

OR

 

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

For the transition period from                      to                      .

Commission file number: 001-36284

 

 

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   x     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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   x     No   ¨

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

 

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

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

As of May 8, 2014, there were 4,449,594 shares of the Registrant’s common stock outstanding.

 

 

 


Table of Contents

BIOCEPT, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED

March 31, 2014

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, 2013 and March 31, 2014 (unaudited)

     4   
 

Condensed Statements of Operations and Comprehensive Loss for the three months ended March 31, 2013 and 2014 (unaudited)

     5   
 

Condensed Statements of Cash Flows for the three months ended March 31, 2013 and 2014 (unaudited)

     6   
 

Notes to Condensed Financial Statements (unaudited)

     8   
Item 2.  

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

     15   
Item 3.  

Quantitative and Qualitative Disclosures about Market Risk

     18   
Item 4.  

Controls and Procedures

     19   
PART II.  

OTHER INFORMATION

  
Item 1.  

Legal Proceedings

     20   
Item 1A  

Risk Factors

     20   
Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

     20   
Item 3.  

Defaults Upon Senior Securities

     20   
Item 4.  

Mine Safety Disclosures

     20   
Item 5.  

Other Information

     20   
Item 6.  

Exhibits

     20   

 

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IMPORTANT NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (this “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 (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.

 

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PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

Biocept, Inc.

Condensed Balance Sheets

 

     December 31,     March 31,  
     2013     2014  
           (unaudited)  

Current assets:

    

Cash and cash equivalents

   $ 69,178      $ 10,417,277   

Accounts receivable

     9,200        26,000   

Inventories, net

     92,823        96,904   

Prepaid expenses and other current assets

     799,131        447,596   
  

 

 

   

 

 

 

Total current assets

     970,332        10,987,777   

Fixed assets, net

     358,887        301,231   

Other non-current assets

     500        500   
  

 

 

   

 

 

 

Total assets

   $ 1,329,719      $ 11,289,508   
  

 

 

   

 

 

 

Current liabilities:

    

Accounts payable

   $ 1,540,618      $ 952,096   

Accrued liabilities

     2,242,058        480,559   

Line of credit

     1,981,000        —     

Notes payable

     5,200,599        —     

Warrant liability

     2,140,532        6,538   

Supplier financings

     218,925        20,457   
  

 

 

   

 

 

 

Total current liabilities

     13,323,732        1,459,650   

Deferred rent

     462,001        473,080   
  

 

 

   

 

 

 

Total liabilities

     13,785,733        1,932,730   

Commitments and contingencies (see Note 8)

    

Shareholders’ equity/(deficit):

    

Series A convertible preferred stock, $0.0001 par value, 100,000,000 authorized; 69,421,047 issued and outstanding at December 31, 2013; 5,000,000 shares authorized; no shares issued and outstanding at March 31, 2014; liquidation preference of $41,652,628 at December 31, 2013 (see Note 2).

     6,942        —     

Common stock, $0.0001 par value, 53,000,000 authorized; 185,550 issued and outstanding at December 31, 2013; 40,000,000 authorized; 4,449,594 issued and outstanding at March 31, 2014 (see Note 2).

     19        445   

Additional paid-in capital

     109,958,001        136,905,180   

Accumulated deficit

     (122,420,976     (127,548,847
  

 

 

   

 

 

 

Total shareholders’ equity/(deficit)

     (12,456,014     9,356,778   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity/(deficit)

   $ 1,329,719      $ 11,289,508   
  

 

 

   

 

 

 

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

 

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Biocept, Inc.

Condensed Statements of Operations and Comprehensive Loss

(Unaudited)

 

     For the quarter ended March 31,  
     2013     2014  

Revenues

   $ 35,154      $ 28,275   

Cost of revenues

     547,251        658,315   
  

 

 

   

 

 

 

Gross profit/(loss)

     (512,097     (630,040

Operating expenses

    

Research and development expenses

     710,206        1,008,929   

General and administrative expenses

     451,157        1,876,912   

Sales and marketing expenses

     96,404        11,142   
  

 

 

   

 

 

 

Loss from operations

     (1,769,864     (3,527,023

Other income/(expense)

    

Interest expense, net

     (467,564     (1,394,444

Change in fair value of warrant liability

     317,993        (206,404

Other income/(expense)

     (5,739     —     
  

 

 

   

 

 

 

Total other income/(expense)

     (155,310     (1,600,848
  

 

 

   

 

 

 

Loss before income taxes

     (1,925,174     (5,127,871

Income tax expense

     (800     —     
  

 

 

   

 

 

 

Net loss & comprehensive loss

   $ (1,925,974   $ (5,127,871
  

 

 

   

 

 

 

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

    

Basic

     180,540        2,617,275   
  

 

 

   

 

 

 

Diluted

     180,540        2,617,275   
  

 

 

   

 

 

 

Net loss per common share:

    

Basic

   $ (10.67   $ (1.96
  

 

 

   

 

 

 

Diluted

   $ (10.67   $ (1.96
  

 

 

   

 

 

 

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

 

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Biocept, Inc.

Condensed Statements of Cash Flows

(Unaudited)

 

     For the quarter ended March 31,  
     2013     2014  

Cash Flows From Operating Activities

    

Net loss

   $ (1,925,974   $ (5,127,871

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

    

Depreciation and amortization

     69,452        57,656   

Inventory reserve

     (29,856     (601

Stock-based compensation

     10,510        894,940   

Non-cash interest expense related to convertible debt and other financing activities

     465,799        1,382,777   

Change in fair value of warrant liabilities

     (317,993     206,404   

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

    

Accounts receivable

     (12,211     (16,800

Inventory

     1,274        (3,480

Prepaid expenses and other current assets

     125,156        (393,902

Accounts payable

     (151,547     (830,735

Accrued liabilities

     (16,271     (1,272,654

Deferred rent

     (2,850     11,079   
  

 

 

   

 

 

 

Net cash used in operating activities

     (1,784,511     (5,093,187

Cash Flows From Investing Activities

    

Purchases of fixed assets

     —          —     
  

 

 

   

 

 

 

Net cash used in investing activities

     —          —     

Cash Flows From Financing Activities

    

Proceeds from exercise of stock options

     65        —     

Net proceeds from issuance of common stock

     —          17,390,240   

Payments on supplier and other third party financings

     (22,846     (142,954

Payments on line of credit

     —          (2,346,000

Proceeds from borrowings on line of credit

     —          365,000   

Proceeds from issuance of convertible notes and warrants

     1,640,000        175,000   
  

 

 

   

 

 

 

Net cash provided by financing activities

     1,617,219        15,441,286   
  

 

 

   

 

 

 

Net increase/(decrease) in Cash and Cash Equivalents

     (167,292     10,348,099   

Cash and Cash Equivalents at Beginning of Period

     185,256        69,178   
  

 

 

   

 

 

 

Cash and Cash Equivalents at End of Period

   $ 17,964      $ 10,417,277   
  

 

 

   

 

 

 

Supplemental Disclosures of Cash Flow Information:

    

Cash paid during the period for:

    

Interest

   $ 1,765      $ 152,507   
  

 

 

   

 

 

 

Taxes

   $ 800      $ —     
  

 

 

   

 

 

 

 

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Non-cash Investing and Financing Activities:

During the quarter ended March 31, 2013, 21,846 shares of common stock, with a par value of $0.0001, were issued for restricted stock units.

During the quarter ended March 31, 2014, the Company cancelled its private company directors and officers liability insurance policy. The previously financed premium balance of $44,559 was cancelled and a partial refund of $10,955 was received.

During the quarter ended March 31, 2014, common stock warrants with an estimated aggregate grant date fair value of $135,222 were issued in conjunction with guarantees on the Company’s additional borrowings under its Line of Credit and additional borrowings made under its 2013 Convertible Bridge Notes, and were recorded as a discount to outstanding debt at the date of issuance.

An initial public offering (“IPO”) of the Company’s common stock was effected on February 5, 2014, the closing of which occurred on February 10, 2014 (see Note 2). On February 4, 2014, as contemplated by the registration statement covering the IPO, 69,421,047 shares of outstanding Series A Preferred Stock were automatically converted into 1,652,851 shares of common stock. In connection with the closing of the IPO on February 10, 2014, (i) the underwriters of the IPO were granted a 45 day option from the closing date of the IPO to purchase up to 285,000 shares of common stock at $9.30 per share to cover overallotments with a grant date fair value of $202,143 (see Note 4), which was not exercised and is recorded as an offset to additional paid-in capital within common stock issuance costs at March 31, 2014, (ii) certain designees of the representative of the underwriters were issued warrants to buy (in the aggregate) up to 95,000 shares of common stock at $12.50 per share with a term of five years and a grant date fair value of $544,116 (see Note 4), and is recorded as an offset to additional paid-in capital within common stock issuance costs at March 31, 2014, (iii) underwriter IPO costs and discounts of $279,760 and $1,330,000, respectively, were netted against the proceeds from the IPO and are reflected as an offset to additional paid-in capital, (iv) the $1,400,000 principal amount and $233,982 of accrued interest related to the 2008 Convertible Note were converted at $10.00 per share into a total of 163,399 shares of common stock, (v) the $5,165,000 principal amount and $313,017 of accrued interest related to the 2013 Convertible Bridge Notes were converted at $10.00 per share into a total of 547,794 shares of common stock, (vi) derivative warrant liabilities of $2,475,620 associated with an aggregate of 387,152 common stock warrants related to the 2013 Convertible Bridge Notes and Line of Credit were reclassified to additional paid-in capital when their underlying exercise price was fixed at $10.00 per share, and (vii) additional costs associated with the IPO of $932,136 were reclassified from prepaid expenses and other current assets to additional paid-in capital (corresponding liabilities of $242,213 for associated unpaid invoices are recorded as a component of accounts payable at March 31, 2014).

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

 

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BIOCEPT, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

Basis of Presentation

The financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America.

The unaudited condensed financial statements included in this Form 10-Q have been prepared in accordance with the U.S. Securities and Exchange Commission (“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 U.S. Generally Accepted Accounting Principles (“GAAP”) to be included in a full set of financial statements. The unaudited condensed balance sheet at December 31, 2013 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, 2013, filed with the SEC with our Annual Report on Form 10-K on March 28, 2014 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.

The Company and Business Activities

Biocept, Inc. (“the Company”) was founded in California in May 1997 and is a commercial-stage cancer diagnostics company developing and commercializing proprietary circulating tumor cell (CTC) and circulating tumor DNA (ctDNA) tests utilizing a standard blood sample to improve the treatment that oncologists provide to their patients by providing better, more detailed information on the characteristics of their tumor.

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 CEE microfluidic channels, related equipment and certain reagents to perform the Company’s diagnostic tests 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 tests the Company offers are classified as laboratory developed tests (LDTs), under the CLIA regulations.

In July 2013, the Company effected a reincorporation to Delaware by merging itself with and into Biocept, Inc., a Delaware corporation, which had been formed to be and was a wholly-owned subsidiary of the Company since July 23, 2013.

Recent Accounting Pronouncements

In July 2013, the FASB issued authoritative guidance which requires netting unrecognized tax benefits against deferred tax assets for a loss or other carryforward that would apply in settlement of uncertain tax positions. This guidance is effective for annual reporting periods beginning after December 15, 2013, and was effective for the Company’s fiscal year beginning January 1, 2014. The adoption of this guidance did not have a material impact on the Company’s financial statements or disclosures.

2. Initial Public Offering

Pursuant to an underwriting agreement dated February 4, 2014 between the Company and Aegis Capital Corp. (“Aegis”), as representative of the several underwriters named therein, an IPO of 1,900,000 shares of common stock at $10.00 per share was effected on February 5, 2014. The closing of the sale of these shares to the underwriters occurred on February 10, 2014. The Company received, after deducting underwriting discounts and additional costs paid to the underwriters, approximately $17,390,000 of net cash proceeds from the sale of these 1,900,000 shares. The total increase in capital as a result of the sale of these shares was approximately $16,458,000 after deducting $932,136 of additional non-underwriter costs incurred that are netted against these proceeds under applicable accounting guidance. Additionally, the underwriters were granted a 45 day option from the closing date of the IPO to purchase up to 285,000 shares of common stock at $9.30 per share to cover overallotments with a grant date fair value of $202,143 (see Note 4), which was not exercised. In addition, designees of Aegis were issued warrants to buy (in the aggregate) up to 95,000 shares of common stock at $12.50 per share with a term of five years and a grant date fair value of $544,116 (see Note 4).

On February 4, 2014, as contemplated by the registration statement covering the IPO, 69,421,047 shares of outstanding Series A Preferred Stock were converted into 1,652,851 shares of common stock and the Company’s certificate of incorporation was amended to provide for an authorized capitalization of 40,000,000 shares of common stock and 5,000,000 shares of preferred stock.

In connection with the closing of the Company’s IPO on February 10, 2014, (i) the $1,400,000 principal amount and $233,982 of accrued interest related to the 2008 Convertible Note were converted at $10.00 per share into a total of 163,399 shares of common stock, (ii) the $5,165,000 principal amount and $313,017 of accrued interest related to the 2013 Convertible Bridge Notes were

 

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converted at $10.00 per share into a total of 547,794 shares of common stock, (iii) the exercise price of the warrants associated with the 2013 Bridge Notes was fixed at $10.00 per share for an aggregate 258,249 shares of common stock, (iv) the exercise price of the warrants associated with the $2,578,104 of collateral provided to secure the Company’s Line of Credit was fixed at $10.00 per share for an aggregate 128,903 shares of common stock, (v) 73,151 shares of common stock vested as settlement of certain restricted stock units (which were previously expressed in shares of preferred stock) and became issuable subsequent to the expiration of the 180 day lock-up period, (vi) the Company’s Executive Chairman ceased to be an employee and continues to serve as non-executive Chairman, (vii) the number of shares of common stock covered by the 2013 Equity Incentive Plan increased by 800,000, (viii) all but 1,587 of the preferred warrants previously outstanding were canceled due to early termination clauses associated with the IPO, (ix) derivative warrant liabilities of $2,475,620 associated with the aggregate of 387,152 common stock warrants related to the Company’s 2013 Convertible Bridge Notes and Line of Credit were reclassified to additional paid-in capital when their underlying exercise price was fixed, (x) unamortized discounts of $996,024 related to the warrants associated with the 2013 Convertible Bridge Notes and Line of Credit were reclassified to interest expense, and (xi) offering costs associated with the IPO of $932,136 were reclassified from prepaid expenses and other current assets to additional paid-in capital, while additional underwriter IPO costs and discounts of $279,760 and $1,330,000, respectively, were netted against the proceeds from the IPO and are reflected as an offset to additional paid-in capital.

Subsequent to December 31, 2013, the maximum amount of the Company’s Line of Credit was increased to approximately $2.6 million and common stock warrants were issued to four shareholders in conjunction with their guarantees on the Company’s additional borrowings under the line of credit. On February 10, 2014, the current outstanding balance under the line of credit of $2,346,000 plus accrued interest of $27,043 was paid in full using the net proceeds from the IPO.

On February 13, 2014, the Compensation Committee of the Company’s Board of Directors approved the payment of an aggregate $1,009,552 in deferred salary obligations, including contractual interest, to current and former named executive officers pursuant to previously existing agreements, which was fully disbursed by April 2014 using the net proceeds from the IPO. An additional $344,883 in deferred salary obligations and interest thereon was paid to former employees other than named executive officers. Also on February 13, 2014, in connection with the closing of the IPO and pursuant to a Board resolution for a director compensation policy adopted in 2013, the Company’s Board of Directors approved annual cash retainers to non-employee directors, and granted 238,500 stock options under the 2013 Equity Incentive Plan to non-employee directors. These option awards vest in equal annual installments over 3 years from the date of grant with a 10 year term, subject to continuing service requirements (see Note 6). Subsequently in February and March 2014, the Company’s Board of Directors approved grants of 97,298 stock options to employees and a non-employee director of the company, of which 54,298 stock options were granted as a result of the closing of the IPO pursuant to the terms of underlying employment agreements. Included in the stock options granted pursuant to the terms of underlying employment agreements are 53,108 option awards granted to the Company’s non-executive Chairman, which vested fully on the date of grant (see Note 6).

Under the terms of certain employment agreements with executive officers, the Company incurred additional cash compensation expense of $150,000 immediately, and $225,000 annually, upon the closing of its IPO. All payments required under these agreements as a result of the closing of the Company’s IPO on February 10, 2014 have been subsequently made in February and March 2014, using the net proceeds from the IPO.

During the quarter ended March 31, 2014, the Company repaid in full the remaining amounts outstanding of approximately $70,000 due for laboratory equipment under financing agreements with a supplier, which is a business owned by a member of the Company’s board of directors, using the net proceeds from the IPO.

3. Liquidity

At December 31, 2013 and March 31, 2014, the Company had accumulated deficits of approximately $122,421,000 and $127,549,000, respectively. For the quarters ended March 31, 2013 and 2014, the Company incurred net losses of approximately $1,926,000 and $5,128,000, respectively. 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 in 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 issuance of debt, and revenues from clinical laboratory testing through contracted partners. 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 net revenues to achieve and sustain income from operations.

As of March 31, 2014, cash and cash equivalents totaled approximately $10,417,000. On February 10, 2014, the Company received cash proceeds of approximately $17,390,000 as a result of the closing of its IPO, net of underwriting discounts and additional underwriting costs incurred (see Note 2). On April 30, 2014, the Company received net cash proceeds of approximately $4,927,000 pursuant to the execution of a term loan agreement with Oxford Finance LLC (see Note 9). Management believes that its cash resources should be sufficient to support currently forecasted operations through at least the next twelve months. However, the Company operates in a market that makes its prospects difficult to evaluate, and the possibility exists that the Company will need additional debt or equity financing in the future to execute on its current or future business strategies beyond the next twelve months. 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.

 

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4. Fair Value Measurement

The Company uses a three-tier fair value hierarchy to prioritize the inputs used in the Company’s fair value measurements. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets for identical assets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. The Company believes the carrying amount of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate their estimated fair values due to the short-term maturities of these financial instruments.

Warrant Liability Derivatives

The Company classified the fair value measurements of the Company’s warrant liability derivatives as Level 3 in all periods presented. The Company adjusted the carrying value of the warrants classified as liabilities until the completion of its IPO on February 10, 2014, at which time the exercise price was fixed at $10.00 per share and the fair value of the warrants was reclassified to shareholders’ deficit, except for a warrant for 1,587 preferred shares that remains outstanding at March 31, 2014 (see Note 2).

The aggregate fair value of the Company’s warrant liability at the closing of the IPO on February 10, 2014 was estimated using a Black-Scholes valuation model with the following assumptions for the five-year term and two-year term common stock warrants, respectively:

 

     Five-year term     Two-year term  

Stock price

   $ 8.91      $ 8.91   

Exercise price

   $ 10.00      $ 10.00   

Expected dividend yield

     0.00     0.00

Discount rate-bond equivalent yield

     1.48     0.32

Expected life (in years)

     5.00        2.00   

Expected volatility

     90.0     90.0

The fair value attributed to such warrants as of December 31, 2013 and March 31, 2014 is as follows:

 

     Fair Value Measurements Using  
     Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Liabilities

        

Warrant Liability at December 31, 2013

     —           —         $ 2,140,532   

Warrant Liability at March 31, 2014

     —           —         $ 6,538   

The following table includes a summary of changes in the fair value of the warrants for the quarter ended March 31, 2014:

 

     Fair Value Measurements
at Reporting Date Using
Significant Unobservable
Inputs (Level 3)
 

Balance at December 31, 2013

   $ 2,140,532   

Warrant liability incurred in 2014

     135,222   

Change in fair value in 2014

     206,404   

Warrant liability reclassified to additional paid-in capital in 2014

     (2,475,620
  

 

 

 

Balance at March 31, 2014

   $ 6,538   
  

 

 

 

The change in the estimated fair value of the total warrant liability of approximately $318,000 and $(206,000) was recognized as a non-cash gain/(loss) and included in total other income/(expense) in the Company’s unaudited condensed statement of operations and comprehensive loss for the quarters ended March 31, 2013 and 2014, respectively.

 

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Other Fair Value Measurements

In connection with the closing of the Company’s IPO on February 10, 2014, the IPO’s underwriters were granted a 45 day option to purchase up to 285,000 shares of common stock to cover overallotments with a grant date fair value of $202,143, which was not exercised. Additionally, certain designees of the representative of the underwriters were issued warrants to buy (in the aggregate) up to 95,000 shares of common stock with a grant date fair value of $544,116. The fair values of these stock option and common stock warrants were estimated using probability weighted Black-Scholes valuation models with the following assumptions:

 

     Options     Warrants  

Stock price

   $ 8.91      $ 8.91   

Exercise price

   $ 9.30      $ 12.50   

Expected dividend yield

     0.00     0.00

Discount rate-bond equivalent yield

     0.07     1.46

Expected life (in years)

     0.12        5.00   

Expected volatility

     70.0     90.0

The estimated grant date fair values of these non-cash equity classified instruments are recorded as an offset to additional paid-in capital within common stock issuance costs in the Company’s unaudited condensed balance sheet at March 31, 2014.

5. Balance Sheet Details

The following provides certain balance sheet details:

 

     December 31,      March 31,  
     2013      2014  

Accrued Liabilities

  

Accrued interest

   $ 524,885       $ —     

Accrued payroll

     125,299         77,727   

Deferred wages

     1,377,987         167,533   

Accrued vacation

     213,601         235,086   

Other

     286         213   
  

 

 

    

 

 

 

Total accrued liabilities

   $ 2,242,058       $ 480,559   
  

 

 

    

 

 

 

As of December 31, 2013, the Company incurred $538,318 in costs directly associated with its IPO, which are reflected on the balance sheet as a component of prepaid expenses and other current assets. As of March 31, 2014, a balance of $1,211,896 of such costs, in addition to underwriting discounts of $1,330,000 and an aggregate $746,259 of associated stock option and restricted stock awards, are offset against additional paid-in capital as a result of the closing of the IPO on February 10, 2014 (see Note 2).

6. Stock-based Compensation

A summary of stock option activity for option awards granted under the Company’s 2007 Equity Incentive Plan and 2013 Equity Incentive Plan for the quarter ended March 31, 2014 is as follows:

 

     Number of
Shares
    Weighted
Average Exercise
Price Per Share
     Average
Remaining
Contractual
Term in Years
 

Vested and unvested expected to vest, December 31, 2013

     331,540      $ 5.14         9.3   
  

 

 

      

Outstanding at December 31, 2013

     333,106      $ 5.14         9.3   
  

 

 

      

Granted

     335,798      $ 8.74      

Exercised

     —          —        

Cancelled/forfeited/expired

     (2,691     5.17      
  

 

 

      

Outstanding at March 31, 2014

     666,213      $ 6.96         9.4   
  

 

 

      

Vested and unvested expected to vest, March 31, 2014

     664,254      $ 6.96         9.4   
  

 

 

      

 

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The intrinsic value of options outstanding at December 31, 2013 and March 31, 2014 was $8,204 and $726,735, respectively. The intrinsic value of options vested and unvested expected to vest at December 31, 2013 and March 31, 2014 was $8,192 and $722,479, respectively.

The fair values of option awards granted during the quarter ended March 31, 2014 were estimated using a Black-Scholes pricing model with the following assumptions:

 

Stock and exercise prices

   $ 7.50 – $ 9.11

Expected dividend yield

   0.00%

Discount rate-bond equivalent yield

   1.56% – 1.98%

Expected life (in years)

   5.00 – 6.02

Expected volatility

   90.0% – 100.0%

Expected forfeiture rate

   0.00%

Using the assumptions described above, with stock and exercise prices being equal on date of grant, the weighted-average estimated fair value of options granted in the quarter ended March 31, 2014 was approximately $6.78 per share.

Further information about the options outstanding and exercisable at December 31, 2013 and March 31, 2014 is as follows:

 

Options Outstanding and Exercisable at December 31, 2013

 

Weighted Average Exercise Price

     Total Shares
Outstanding
     Weighted
Average
Contractual
Life (in years)
     Total Shares
Exercisable
 
  $ 4.62         20,208         7.3         13,731   
  $ 5.04         12,460         5.5         12,455   
  $ 5.18         300,438         9.6         110,825   
  

 

 

       

 

 

 
     333,106            137,011   
  

 

 

       

 

 

 

 

Options Outstanding and Exercisable at March 31, 2014

 

Weighted Average Exercise Price

     Total Shares
Outstanding
     Weighted
Average
Contractual
Life (in years)
     Total Shares
Exercisable
 
  $ 4.62         20,208         7.0         14,994   
  $ 5.04         12,298         3.7         12,100   
  $ 5.18         297,909         9.2         129,453   
  $ 7.50         43,000         10.0         —     
  $ 8.88         238,500         9.9         —     
  $ 9.11         54,298         9.9         53,133   
  

 

 

       

 

 

 
     666,213            209,680   
  

 

 

       

 

 

 

The intrinsic value of options exercisable at December 31, 2013 and March 31, 2014 was $5,575 and $348,232, respectively.

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

 

     For the quarter ended
March 31,
 
     2013      2014  

Stock Options

     

Research and development expenses

   $ 3,758       $ 70,034   

General and administrative expenses

     6,752         464,484   

Sales and marketing expenses

     —           1,214   
  

 

 

    

 

 

 

Total expenses related to stock options

     10,510         535,732   

Restricted Stock Units (“RSUs”)

     

Research and development expenses

             7,500   

General and administrative expenses

             351,708   
  

 

 

    

 

 

 

Total stock-based compensation

   $ 10,510       $ 894,940   
  

 

 

    

 

 

 

 

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As of March 31, 2014, total unrecognized stock-based compensation expense related to unvested stock option and RSU awards, adjusted for estimated forfeitures, was approximately $2,630,000 and $113,000, respectively, and is expected to be recognized over a weighted-average period of approximately 2.9 years and 1.3 years, respectively.

7. 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 quarters ended March 31, 2013 and 2014, the outstanding shares of Series A preferred stock, RSUs, convertible debt, 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.

In November 2013, the Company effected a 1:14 reverse stock split of all common shares outstanding. The calculation of weighted-average shares outstanding has been adjusted for this reverse split as if it had occurred on January 1, 2013.

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 quarters ended March 31,  
     2013      2014  

Series A preferred (number of common stock equivalents)

     647,007         —     

Preferred warrants outstanding (number of common stock equivalents)

     192,262         1,587   

Notes payable convertible into preferred shares (number of common stock equivalents)

     614,077         —     

Preferred share RSUs (number of common stock equivalents)

     33,158         73,151   

Common warrants outstanding

     —           556,221   

Notes payable convertible into common shares

     467,011         —     

Common share RSUs

     54,615         133,971   

Common options outstanding

     59,011         666,213   
  

 

 

    

 

 

 

Total anti-dilutive common share equivalents

     2,067,141         1,431,143   
  

 

 

    

 

 

 

8. 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 which are expected to have a material adverse effect on its financial condition, results of operations or liquidity.

The Company’s former Vice President of Operations filed an administrative proceeding against the Company with the California Labor Commissioner in April 2013, seeking damages for alleged unpaid wages and penalties. A hearing was held on August 19, 2013 which resulted in a finding against the Company for approximately $65,000, of which $40,000 was paid during the year ended December 31, 2013 and $25,000 was accrued as of December 31, 2013. On February 25, 2014, the aforementioned administrative proceeding filed with the California Labor Commissioner by the Company’s former Vice President of Operations was settled in full following payment of the remaining $25,000 due.

 

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9. Subsequent Events

Effective as of April 30, 2014, the Company entered into a loan and security agreement (the “Credit Facility”) in an aggregate principal amount of up to $10.0 million with Oxford Finance LLC (“Oxford”) for working capital and general business purposes. The first term loan under the Credit Facility was funded on April 30, 2014 in a principal amount of $5.0 million. A second term loan of up to a principal amount of $5.0 million will be funded at the Company’s request prior to December 31, 2015, subject to the achievement of product and services revenues of at least $9.0 million for the trailing six month period by November 30, 2015. In connection with the first term loan under the Credit Facility, a facility fee of $50,000 was charged and an additional $50,000 facility fee will be due upon execution of the second term loan under the Credit Facility. The Credit Facility is secured by substantially all of the Company’s assets other than its intellectual property. Each term loan under the credit facility bears interest at an annual rate equal to the greater of (i) 7.95% or (ii) the sum of (a) the three-month U.S. LIBOR rate reported in the Wall Street Journal three business days prior to the funding date of the applicable term loan, plus (b) 7.71%. The Company is required to make interest-only payments on the first term loan through February 1, 2016 if the funding date of the second term loan occurs before June 30, 2015, or through August 1, 2015 otherwise. If executed, interest-only payments are required to be made on the second term loan through February 1, 2016 if the funding date of the second term loan occurs before June 30, 2015, or through the seventh month following the funding date of the second term loan otherwise. The first term loan under the credit facility matures on July 1, 2018, and the second term loan matures on the first day of the 29th month following the end of the applicable interest-only period. Upon repayment of each term loan, the Company is also required to make a final payment equal to 5.50% of the original principal amount(s) funded. At the Company’s option, the outstanding principal balance of the term loans may be repaid in whole but not in part, subject to a prepayment fee of 3% of any amount prepaid if the prepayment occurs on or prior to April 30, 2015, 2% of the amount prepaid if the prepayment occurs after April 30, 2015 but on or prior to April 30, 2016, and 1% of any amount prepaid after April 30, 2016. Additionally, a warrant to purchase up to 52,966 shares of the Company’s common stock at an exercise price of $4.72 per share with a term of 10 years was issued to Oxford on April 30, 2014. Additional warrants for shares of the Company’s common stock will be issued upon execution of the second term loan under the Credit Facility in an amount equal to 5.0% of the funded amount divided by the exercise price, which will be equal to the lower of (i) the closing price per share of the Company’s common stock on the NASDAQ on the date prior to the funding date of the second term loan or (ii) the ten-day average closing price per share prior to the funding date of the second term loan. Issuance costs associated with the initial Term Loan borrowing on April 30, 2014 consisting of the common stock warrants and other costs deducted from the gross proceeds by the lender are recorded as a discount to outstanding debt and are amortized to interest expense utilizing the effective interest rate method.

 

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

An investment in our common stock involves a high degree of risk. You should consider carefully the risks described below, together with all of the other information included in this Quarterly Report, as well as in our other filings with the SEC, in evaluating our business. If any of the following risks actually occur, our business, financial condition, operating results and future prospects could be materially and adversely affected. In that case, the trading price of our common stock may decline and you might lose all or part of your investment. The risks described below are not the only ones we face. Additional risks that we currently do not know about or that we currently believe to be immaterial may also impair our business, financial condition, operating results and prospects. Certain statements below are forward-looking statements. For additional information, see the information included under the heading “Important Note Regarding Forward-Looking Statements.”

We are an early-stage cancer diagnostics company that develops and commercializes proprietary circulating tumor cell, or CTC, and circulating tumor DNA, or ctDNA, tests utilizing a standard blood sample. Our current CTC breast cancer test provides, and our planned future tests would provide, information to oncologists that enable them to select appropriate personalized treatment for their patients based on better, timelier and more-detailed data on the characteristics of their patients’ tumors.

Our current breast cancer test and our planned future tests utilize our Cell Enrichment and Extraction (CEE) technology for the enumeration and analysis of CTCs, and our CEE-Selector technology for the detection and analysis of ctDNA, each performed on a standard blood sample. The CEE technology is an internally developed, microfluidics-based CTC capture and analysis platform, with enabling features that change how CTC testing can be used by clinicians by providing real-time biomarker monitoring with only a standard blood sample. The CEE-Selector technology enables mutation detection with enhanced sensitivity and specificity and is applicable to nucleic acid from CTCs or other samples types, such as blood plasma for ctDNA. We believe the CEE-Selector technology is an important part of certain of our pipeline CTC tests and will be a stand-alone test for molecular analysis of biomarkers.

At our corporate headquarters facility located in San Diego, California, we operate a clinical laboratory that is certified under the Clinical Laboratory Improvement Amendments of 1988, or CLIA, and accredited by the College of American Pathologists, or CAP. We manufacture our CEE microfluidic channels, related equipment and certain reagents to perform our current breast cancer test and our planned future tests at this facility. CLIA certification and CAP accreditation are required before any clinical laboratory, including ours, may perform testing on human specimens for the purpose of obtaining information for the diagnosis, prevention, or treatment of disease or the assessment of health. The tests we offer and intend to offer are classified as laboratory developed tests, or LDTs, under CLIA regulations.

We are in the process of commercializing our first test, OncoCEE-BR, for breast cancer, and anticipate launching an OncoCEE-LU test for non-small cell lung cancer, or NSCLC, in the second half of 2014. These tests utilize our CEE technology platform and provide CTC enumeration as well as biomarker analysis from a standard blood sample. In the case of the OncoCEE-BR test, biomarker analysis involves fluorescence in situ hybridization, or FISH, for the detection and quantitation of the human epidermal growth factor receptor 2, or HER2, gene copy number as well as immunocytochemical analysis of estrogen receptor protein, which is now launched. We plan to include progesterone receptor protein in the OncoCEE-BR test within the next year. A patient’s HER2 status provides the physician with information about the appropriateness of therapies such as Herceptin ® or lapatinib. Estrogen receptor (ER) and progesterone receptor (PR) status provides the physician with information about the appropriateness of endocrine therapies.

The OncoCEE-LU test’s biomarker analysis would include FISH for EML4/ALK and ROS1 gene fusions, as well as mutation analysis for the epidermal growth factor receptor, or EGFR, gene, the K-ras gene and the B-raf gene. The L858R mutation of the EGFR gene and Exon 19 deletions as activators of EGFR kinase activity are linked to the drugs Tarceva ® and Iressa ® (AstraZeneca). The T790M mutation of the EGFR gene as a resistance marker for EGFR tyrosine kinase inhibitors is linked to drugs in clinical development that address this resistance such as Gilotrif ® (Boehringer-Ingelheim) and dacomitinib (Pfizer). The codon 12 and 13 mutations of the K-ras gene are linked to non-responsiveness to the EGFR kinase inhibitors, and the codon 600 mutations of the B-raf gene are linked to Zelboraf ® and Tafinlar ® , which are both approved for melanoma and are in clinical trials for lung cancer. Our OncoCEE-LU test would be performed on a standard blood sample.

We plan to add other biomarker analyses on blood samples to our current breast cancer test and our planned future OncoCEE tests as their relevance is demonstrated in clinical trials, for example, ret proto-oncogene gene fusions in NSCLC, which may indicate a particular course of therapy, and NRAS for melanoma, which may predict therapy resistance. In addition, we are developing a series of other CTC and ctDNA tests for different solid tumor types, including colorectal cancer, prostate cancer, gastric cancer and melanoma, each incorporating treatment-associated biomarker analyses specific to that cancer, planned to be launched over the next two to three years.

Our revenue generating efforts are focused in three areas:

 

    Providing clinical testing that oncologists use in order to determine the best treatment plan for their patients;

 

    Providing clinical trial, research and development services to biopharma companies developing cancer therapies; and

 

    Licensing our proprietary testing and/or technologies to partners in the United States and abroad.

 

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Results of Operations

Quarters Ended March 31, 2013 and 2014

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

 

     Quarter Ended December 31,     Change  
     2013     2014     $     %  
(dollars in thousands)                         

Revenue

   $ 35      $ 28      $ (7     (20 %) 

Cost of revenues

     547        658        111        20 %

Research and development expenses

     710        1,010        300        42 %

General and administrative expenses

     451        1,877        1,426        316 %

Sales and marketing expenses

     97        11        (86     (89 %) 
  

 

 

   

 

 

   

 

 

   

Loss from operations

     (1,770     (3,528     (1,758     (99 %) 

Interest income/(expense), net

     (467     (1,394     (927     199 %

Change in fair value of warrant liability

     318        (206     (524     (165 %) 

Other income/(expense)

     (6     —          6        (100 %) 
  

 

 

   

 

 

   

 

 

   

Loss before income taxes

     (1,925     (5,128     (3,203     166 %

Income tax expense

     (1     —          1        (100 %) 
  

 

 

   

 

 

   

 

 

   

Net loss

   $ (1,926   $ (5,128   $ (3,202     166 %

Revenue

Revenues were approximately $28,000 for the three months ended March 31, 2014, compared with approximately $35,000 for the three months ended March 31, 2013, a decrease of approximately $7,000, or 20%. The decrease was primarily related to a shift in revenue mix from commercial revenues to clinical trials revenues. The average price per commercial test increased from $610 for the three months ended March 31, 2013 to an average of $758 for the three months ended March 31, 2014, and the average price per clinical trials test was $400 for the three months ended March 31, 2013 and 2014.

Cost of Revenues

Cost of revenues was approximately $658,000 for the three months ended March 31, 2014, compared with approximately $547,000 for the three months ended March 31, 2013, an increase of approximately $111,000, or 20%. The increase was primarily due to an increase in personnel expense primarily related to non-recurring compensation triggered by our initial public offering.

Operating Expenses

Research and Development Expenses . Research and development expenses were approximately $1,010,000 for the three months ended March 31, 2014, compared with approximately $710,000 for the three months ended March 31, 2013, an increase of approximately $300,000, or 42%. The increase was primarily due to an increase of $236,000 in personnel expense primarily related to non-recurring compensation triggered by our initial public offering, and an increase of $74,000 in stock-based compensation expense.

General and Administrative Expenses . General and administrative expenses were approximately $1,877,000 for the three months ended March 31, 2014, compared with approximately $451,000 for the three months ended March 31, 2013, an increase of approximately $1,426,000, or 316%. The increase was primarily due to an increase of $809,000 in stock-based compensation expense, an increase of $223,000 in payroll expense primarily related to non-recurring compensation triggered by our initial public offering, and an increase of $339,000 in insurance costs and legal, accounting, and consulting fees as a result of becoming a publicly traded company during the quarter ended March 31, 2014.

Sales and Marketing Expenses . Sales and marketing expenses were approximately $11,000 for the three months ended March 31, 2014, compared with approximately $97,000 for the three months ended March 31, 2013, a decrease of approximately $86,000, or 89%. The decrease was primarily due to a decrease in personnel-related expenses resulting from a reduction in sales and marketing headcount from an average of 2 for the three months ended March 31, 2013 to an average of zero for the same period in 2014.

Interest Income and Expense

Interest expense was approximately $1,394,000 for the three months ended March 31, 2014, compared with approximately $467,000 for the three months ended March 31, 2013, with the $927,000 increase related to an increase of $1,325,000 in amortization and write-offs of discounts to notes payable for the three months ended March 31, 2014 as compared to the same period in 2013, partially offset by lower average debt balances.

Change in Fair Value of Warrant Liability

The non-cash loss resulting from the change in the fair value of warrant liability of approximately $206,000 for the three months ended March 31, 2014 compared with the non-cash gain of approximately $318,000 for the three months ended March 31, 2013 represents an increase in non-cash loss of approximately $524,000, or 165%. The increase is due to an increase in the price of the shares underlying warrants, as well as a greater number of estimated warrants outstanding, during the three months ended March 31, 2014 as compared to the three months ended March 31, 2013.

 

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Income Taxes

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

We have not completed a study to assess whether an ownership change has occurred or whether there have been multiple ownership changes since our formation, due to the complexity and cost associated with such a study, and the fact that there may be additional ownership changes in the future. We estimate that if such a change did occur, the federal and state net operating loss carryforwards and research and development credits that can be utilized in the future will be significantly limited.

Liquidity and Capital Resources

Cash Flows

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

 

     Quarter Ended  
     March 31,  
     2013     2014  
(dollars in thousands)             

Cash provided by (used in):

    

Operating activities

   $ (1,785   $ (5,093

Investing activities

     —          —     

Financing activities

     1,617        15,441   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

   $ (168   $ 10,348   
  

 

 

   

 

 

 

Cash Used in Operating Activities . Net cash used in operating activities was approximately $5,093,000 for the three months ended March 31, 2014, compared to net cash used in operating activities of approximately $1,785,000 for the three months ended March 31, 2013. In all periods the primary use of cash was to fund our net loss. Additionally, an increase of $2,450,000 in cash used to fund operating assets and liabilities, primarily related to the payment of deferred salaries, interest and taxes thereon as well as initial public offering costs, was partially offset by an increase of $2,343,000 in non-cash operating expenses during the three months ended March 31, 2014 as compared to the same period in 2013.

Cash Provided by Financing Activities . Net cash provided by financing activities was approximately $15,441,000 for the three months ended March 31, 2014, compared to net cash provided by financing activities of approximately $1,617,000 for the three months ended March 31, 2013. Our primary source of financing in the three months ended March 31, 2013 consisted of loans received from our major shareholder and members of our board of directors and their affiliates in exchange for convertible promissory notes and warrants, and our primary source of financing in the three months ended March 31, 2014 consisted of proceeds from our initial public offering.

Capital Resources and Expenditure Requirements

We expect to continue to incur substantial operating losses in the future. It may take several years to achieve positive operational cash flow or we may not ever achieve positive operational cash flow. We expect that we will use a portion of the net proceeds from our initial public offering and our revenues from operations to hire sales and marketing personnel, support increased sales and marketing

 

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activities, fund further research and development, clinical utility studies and future enhancements of our tests, acquire equipment, implement automation and scale our capabilities to prepare for significant test volume, for general corporate purposes and to fund ongoing operations and the expansion of our business, including the increased costs associated with being a public company. We may also use a portion of the net proceeds of our initial public offering to acquire or invest in businesses, technologies, services or products, although we do not have any current plans to do so.

As of March 31, 2014, our cash and cash equivalents totaled approximately $10,417,000. While we currently are in the commercialization stage of operations, we have not yet achieved profitability and anticipate that we will continue to incur net losses for the foreseeable future. On February 10, 2014, we received net cash proceeds of approximately $17,390,000 as a result of the closing of our initial public offering, after deducting approximately $1,610,000 of underwriting discounts and additional underwriting costs incurred. On April 30, 2014, we received net cash proceeds of approximately $4,927,000 pursuant to the execution of a term loan agreement with Oxford Finance LLC. We believe that our cash resources should be sufficient to support currently forecasted operations through at least the next twelve months. However, we operate in a market that makes its prospects difficult to evaluate, and the possibility exists that we will need additional debt or equity financing in the future to execute on our current or future business strategies beyond the next twelve months. We can provide no assurances that any sources of a sufficient amount of financing will be available to us on favorable terms, if at all. If we are unable to raise a sufficient amount of financing in a timely manner, we would likely need to scale back our general and administrative activities and certain of our research and development activities. Our forecast pertaining to our current financial resources and the costs to support our general and administrative and research and development activities are forward-looking statements and involve risks and uncertainties. Actual results could vary materially and negatively as a result of a number of factors, including:

 

    our ability to secure financing and the amount thereof;

 

    the costs of operating and enhancing our laboratory facilities;

 

    the costs of developing our anticipated internal sales and marketing capabilities;

 

    the scope, progress and results of our research and development programs, including clinical utility studies;

 

    the scope, progress, results, costs, timing and outcomes of the clinical utility studies for our cancer diagnostic tests;

 

    our ability to manage the costs for manufacturing our microfluidic channels;

 

    the costs of maintaining, expanding and protecting our intellectual property portfolio, including potential litigation costs and liabilities;

 

    our ability to obtain adequate reimbursement from governmental and other third-party payors for our tests and services;

 

    the costs of additional general and administrative personnel, including accounting and finance, legal and human resources, as a result of becoming a public company;

 

    our ability to collect revenues; and

 

    other risks discussed in our other filings with the SEC.

We may raise additional capital to fund our current operations and to fund expansion of our business to meet our long-term business objectives through public or private equity offerings, debt financings, borrowings or strategic partnerships coupled with an investment in our company or a combination thereof. If we raise additional funds through the issuance of convertible debt securities, or other debt securities, these securities could be secured and could have rights senior to those of our common stock. In addition, any new debt incurred by us could impose covenants that restrict our operations. The issuance of any new equity securities will also dilute the interest of our current stockholders. Given the risks associated with our business, including our unprofitable operating history and our ability or inability to develop additional tests, additional capital may not be available when needed on acceptable terms, or at all. If adequate funds are not available, we will need to curb our expansion plans or limit our research and development activities, which would have a material adverse impact on our business prospects and results of operations.

Off-Balance Sheet Arrangements

We have not engaged in any off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.

Critical Accounting Policies and Significant Judgments and Estimates

For a discussion of accounting policies that we consider critical to our business operations and understanding of our results of operations, and that affect the more significant judgments and estimates used in the preparation of our financial statements, see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Significant Judgments and Estimates” contained in our Annual Report.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

 

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Item 4. Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic and current reports that we file with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable and not absolute assurance of achieving the desired control objectives. In reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, the design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

As of March 31, 2014, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of March 31, 2014.

 

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

Reference is made to our Annual Report on Form 10-K for the year ended December 31, 2013 (the “Form 10-K”) for a description of our legal proceedings. There have been no material changes to the Company’s legal proceedings as disclosed in the Form 10-K.

 

Item 1A. Risk Factors

For a discussion of our potential risks and uncertainties, please see the information listed in the item captioned “Risk Factors” in the Form 10-K. There have been no material changes to the risk factors as disclosed in the Form 10-K.

 

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

Unregistered Sales of Equity Securities

None.

Use of Proceeds

Our initial public offering of common stock was effected through a Registration Statement on Form S-1 (File No. 333-191323), which was declared effective by the Securities and Exchange Commission on February 4, 2014. On February 4, 2014, additional shares of our common stock were registered through a Registration Statement on Form S-1 (File No. 333-193760) filed pursuant to Rule 462(b) under the Securities Act. On February 10, 2014, a total of 1,900,000 shares of common stock were sold on our behalf at an initial public offering price of $10.00 per share, for aggregate gross offering proceeds of $19 million, managed by Aegis Capital Corp. We paid to the underwriters underwriting discounts totaling approximately $1.3 million in connection with the offering. In addition, we incurred additional costs of approximately $1.2 million in connection with the offering, which when added to the underwriting discounts paid by us, amounts to total costs of approximately $2.5 million. Thus, the net offering proceeds to us, after deducting underwriting discounts and offering expenses, were approximately $16.5 million. No offering expenses were paid directly or indirectly to any of our directors or officers (or their associates) or persons owning ten percent or more of any class of our equity securities or to any other affiliates.

There has been no material change in the expected use of the net proceeds from our initial public offering as described in our registration statement on Form S-1.

 

Item 3. Defaults Upon Senior Securities

Not applicable.

 

Item 4. Mine Safety Disclosures

Not applicable.

 

Item 5. Other Information

Not applicable.

 

Item 6. Exhibits

The exhibits listed on the accompanying index to exhibits immediately preceding the exhibits are filed as part of, or hereby incorporated by reference into, this Quarterly Report.

 

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SIGNATURES

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

 

   

BIOCEPT, INC.

(Registrant)

Date: May 14, 2014     By:  

/s/    Michael W. Nall        

      Michael W. Nall
      President, Chief Executive Officer and Director
      (Principal Executive Officer)
Date: May 14, 2014     By:  

/s/    William G. Kachioff        

     

William G. Kachioff

Chief Financial Officer and Senior Vice President of Finance

      (Principal Financial and Accounting Officer)

 

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Exhibit Index

The exhibits listed below are hereby filed with the SEC as part of this Quarterly Report on Form 10-Q.

EXHIBITS

 

Exhibit
No.

 

Description of Exhibit

31.1   Certification of Michael Nall, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2   Certification of William Kachioff, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*   Certification of Michael Nall, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*   Certification of William Kachioff, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS**   XBRL Instance Document
101.SCH**   XBRL Taxonomy Extension Schema Document
101.CAL**   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF**   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB**   XBRL Taxonomy Extension Label Linkbase Document
101.PRE**   XBRL Taxonomy Extension Presentation Linkbase Document

 

* This certification is not deemed “filed” for purposes of Section 18 of the Securities Exchange Act, or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the registrant specifically incorporates it by reference.

 

** Users of this data are advised that pursuant to Rule 406T of Regulation S-T, this XBRL information is being furnished and not filed herewith for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and Sections 11 or 12 of the Securities Act of 1933, as amended, and is not to be incorporated by reference into any filing, or part of any registration statement or prospectus, of the Registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

 

22

EXHIBIT 31.1

CERTIFICATION

I, Michael W. Nall, certify that:

 

1. I have reviewed this Quarterly Report on Form 10-Q of Biocept, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: May 14, 2014  

/s/ Michael W. Nall

 
Michael W. Nall  

President and Chief Executive Officer

(Principal Executive Officer)

 

EXHIBIT 31.2

CERTIFICATION

I, William G. Kachioff, certify that:

 

1. I have reviewed this Quarterly Report on Form 10-Q of Biocept, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: May 14, 2014  

/s/ William G. Kachioff

 
William G. Kachioff  

Senior Vice-President of Finance and Chief Financial Officer

(Principal Financial and Accounting Officer)

 

EXHIBIT 32.1

CERTIFICATION

I, Michael W. Nall, hereby certify pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, that, to my knowledge, the Quarterly Report on Form 10-Q of Biocept, Inc. for the period ended March 31, 2014 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Biocept, Inc.

 

Date: May 14, 2014      

/s/ Michael W. Nall

      Michael W. Nall
      President and Chief Executive Officer
      (Principal Executive Officer)

This certification accompanies the Report pursuant to Rule 13a-14(b) or Rule 15d-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934.

EXHIBIT 32.2

CERTIFICATION

I, William G. Kachioff, hereby certify pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, that, to my knowledge, the Quarterly Report on Form 10-Q of Biocept, Inc. for the period ended March 31, 2014 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Biocept, Inc.

 

Date: May 14, 2014      

/s/ William G. Kachioff

      William G. Kachioff
     

Senior Vice-President of Finance and Chief Financial

Officer

      (Principal Financial and Accounting Officer)

This certification accompanies the Report pursuant to Rule 13a-14(b) or Rule 15d-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934.