Biocept Inc.
BIOCEPT INC (Form: 10-Q, Received: 08/05/2016 17:07:45)

 

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 June 30, 2016

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 August 2, 2016, there were 25,189,414 shares of the Registrant’s common stock outstanding.

 

 

 

 

 


BIOCEPT, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED

June 30, 2016

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, 2015 and June 30, 2016 (unaudited)

  

4

 

 

 

 

 

Condensed Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2015 and 2016 (unaudited)

  

5

 

 

 

 

 

Condensed Statements of Cash Flows for the six months ended June 30, 2015 and 2016 (unaudited)

  

6

 

 

 

 

 

Notes to Condensed Financial Statements (unaudited)

  

8

 

 

 

Item 2.

 

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

  

19

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

  

25

 

 

 

Item 4.

 

Controls and Procedures

  

26

 

 

 

PART II.

 

OTHER INFORMATION

  

 

 

 

 

Item 1.

 

Legal Proceedings

  

27

 

 

 

 

 

Item 1A.

 

Risk Factors

  

27

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

  

27

 

 

 

Item 3.

 

Defaults Upon Senior Securities

  

27

 

 

 

Item 4.

 

Mine Safety Disclosures

  

27

 

 

 

Item 5.

 

Other Information

  

28

 

 

 

Item 6.

 

Exhibits

  

28

 

 

 

2


I MPORTANT NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

 

 

 

3


P ART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

Biocept, Inc.

Condensed Balance Sheets

 

 

 

December 31,

 

 

June 30,

 

 

2015

 

 

2016

 

 

 

 

 

 

(unaudited)

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

8,821,329

 

 

$

3,751,570

 

Accounts receivable

 

34,200

 

 

 

86,653

 

Inventories, net

 

349,271

 

 

 

496,047

 

Prepaid expenses and other current assets

 

435,938

 

 

 

606,342

 

Total current assets

 

9,640,738

 

 

 

4,940,612

 

Fixed assets, net

 

946,180

 

 

 

1,362,541

 

Total assets

$

10,586,918

 

 

$

6,303,153

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

632,538

 

 

$

946,328

 

Accrued liabilities

 

966,899

 

 

 

817,778

 

Supplier financings

 

42,369

 

 

 

194,607

 

Current portion of equipment financings

 

110,924

 

 

 

220,892

 

Current portion of credit facility

 

1,588,058

 

 

 

1,408,357

 

Total current liabilities

 

3,340,788

 

 

 

3,587,962

 

Non-current portion of equipment financings, net

 

291,189

 

 

 

452,627

 

Non-current portion of credit facility, net

 

2,638,487

 

 

 

2,053,629

 

Non-current portion of interest payable

 

153,547

 

 

 

192,928

 

Non-current portion of deferred rent

 

470,172

 

 

 

435,409

 

Total liabilities

 

6,894,183

 

 

 

6,722,555

 

Commitments and contingencies (see Note 10)

 

 

 

 

 

 

 

Shareholders’ equity/(deficit):

 

 

 

 

 

 

 

Common stock, $0.0001 par value, 40,000,000 authorized; 19,670,054 issued and outstanding at December 31, 2015; 24,969,975 issued and outstanding at June 30, 2016 (see Note 3)

 

1,967

 

 

 

2,497

 

Additional paid-in capital

 

158,927,316

 

 

 

164,284,021

 

Accumulated deficit

 

(155,236,548

)

 

 

(164,705,920

)

Total shareholders’ equity/(deficit)

 

3,692,735

 

 

 

(419,402

)

Total liabilities and shareholders’ equity/(deficit)

$

10,586,918

 

 

$

6,303,153

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

4


Biocept, Inc.

Condensed Statements of Operations and Comprehensive Loss

(Unaudited)

 

 

 

For the three months ended June 30,

 

 

For the six months ended June 30,

 

 

2015

 

 

2016

 

 

2015

 

 

2016

 

Revenues:

$

76,768

 

 

$

662,860

 

 

$

226,770

 

 

$

884,229

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

1,013,075

 

 

 

1,669,571

 

 

 

2,160,757

 

 

 

3,144,361

 

Research and development expenses

 

744,242

 

 

 

716,279

 

 

 

1,395,662

 

 

 

1,444,355

 

General and administrative expenses

 

1,359,226

 

 

 

1,517,664

 

 

 

2,651,275

 

 

 

3,004,888

 

Sales and marketing expenses

 

851,109

 

 

 

1,291,709

 

 

 

1,560,565

 

 

 

2,596,608

 

Total costs and expenses

 

3,967,652

 

 

 

5,195,223

 

 

 

7,768,259

 

 

 

10,190,212

 

Loss from operations

 

(3,890,884

)

 

 

(4,532,363

)

 

 

(7,541,489

)

 

 

(9,305,983

)

Other income/(expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

(169,474

)

 

 

(99,720

)

 

 

(318,673

)

 

 

(238,160

)

Other income

 

25,608

 

 

 

38,412

 

 

 

25,608

 

 

 

76,824

 

Total other income/(expense):

 

(143,866

)

 

 

(61,308

)

 

 

(293,065

)

 

 

(161,336

)

Loss before income taxes

 

(4,034,750

)

 

 

(4,593,671

)

 

 

(7,834,554

)

 

 

(9,467,319

)

Income tax expense

 

(355

)

 

 

(503

)

 

 

(1,279

)

 

 

(2,053

)

Net loss and comprehensive loss

$

(4,035,105

)

 

$

(4,594,174

)

 

$

(7,835,833

)

 

$

(9,469,372

)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

17,998,969

 

 

 

23,106,860

 

 

 

14,206,885

 

 

 

21,403,917

 

Diluted

 

17,998,969

 

 

 

23,106,860

 

 

 

14,206,885

 

 

 

21,403,917

 

Net loss per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

(0.22

)

 

$

(0.20

)

 

$

(0.55

)

 

$

(0.44

)

Diluted

$

(0.22

)

 

$

(0.20

)

 

$

(0.55

)

 

$

(0.44

)

 

 

 

 

 

 

 

 

 


 

 

 

 

 

 

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

 

5


Biocept, Inc.

Condensed Statements of Cash Flows

(Unaudited)

 

 

 

For the six months ended June 30,

 

 

2015

 

 

2016

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

Net loss

$

(7,835,833

)

 

$

(9,469,372

)

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

 

 

 

 

 

 

 

Depreciation and amortization

 

114,765

 

 

 

157,979

 

Inventory reserve

 

(14,801

)

 

 

(37,662

)

Stock-based compensation

 

676,895

 

 

 

699,710

 

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

 

68,609

 

 

 

32,919

 

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

 

 

 

 

 

 

 

Accounts receivable

 

(21,460

)

 

 

(52,453

)

Inventories

 

(50,335

)

 

 

(109,114

)

Prepaid expenses and other current assets

 

(313,963

)

 

 

264,071

 

Accounts payable

 

(47,750

)

 

 

362,648

 

Accrued liabilities

 

184,479

 

 

 

(163,377

)

Accrued interest

 

50,728

 

 

 

36,087

 

Deferred rent

 

3,742

 

 

 

(15,226

)

Net cash used in operating activities

 

(7,184,924

)

 

 

(8,293,790

)

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

Purchases of fixed assets

 

(72,717

)

 

 

(323,923

)

Net cash used in investing activities

 

(72,717

)

 

 

(323,923

)

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

Net proceeds from issuance of common stock

 

8,825,058

 

 

 

4,657,525

 

Proceeds from exercise of common stock warrants

 

9,667,521

 

 

 

 

Payments on equipment financings

 

(41,871

)

 

 

(49,061

)

Payments on supplier and other third party financings

 

(33,674

)

 

 

(282,207

)

Payments on line of credit

 

 

 

 

(778,303

)

Net cash provided by financing activities

 

18,417,034

 

 

 

3,547,954

 

Net increase (decrease) in Cash and Cash Equivalents

 

11,159,393

 

 

 

(5,069,759

)

Cash and Cash Equivalents at Beginning of Period

 

5,364,582

 

 

 

8,821,329

 

Cash and Cash Equivalents at End of Period

$

16,523,975

 

 

$

3,751,570

 

Supplemental Disclosures of Cash Flow Information:

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

         Interest

$

206,289

 

 

$

187,319

 

         Taxes

$

1,855

 

 

$

2,053

 

 

Non-cash Investing and Financing Activities:

A public offering of the Company’s common stock and warrants to purchase its common stock was effected on February 9, 2015, the closing of which occurred on February 13, 2015 (see Note 3). In connection with the closing of this offering, (i) warrants were issued to buy (in the aggregate) up to 8,000,000 shares of common stock at an exercise price of $1.56 per share with a term of five years and an estimated grant date fair value of $7,690,395, which was recorded as an offset to additional paid-in capital within common stock issuance costs, (ii) the underwriters were granted a 45 day option from the closing date of this offering to purchase up to 1,200,000 additional shares of common stock at a price of $1.25 per share and/or additional warrants to purchase up to 1,200,000 shares of common stock at a price of $0.0001 per warrant, less underwriting discounts and commissions, to cover over-allotments, if any, with an aggregate estimated grant date fair value of $1,627,396 that was recorded to common stock issuance costs, and (iii) costs of $63,111 directly associated with this offering that were included in prepaid expenses and other current assets at December 31, 2014 were reclassified to common stock issuance costs.

6


A public offering of the Company’s common stock and warrants to purchase its common stock was effected on April 29, 2016, the closing of which occ urred on May 4, 2016 (see Note 3). In connection with the closing of this offering, warrants were issued to buy (in the aggregate) up to 3,490,601 shares of common stock at an exercise price of $1.30 per share with a term of five years and an estimated gra nt date fair value of $1,997,667, which was recorded as an offset to additional paid-in capital within common stock issuance costs (see Note 4).

Fixed assets purchased totaling $279,008 and $445,386 during the six months ended June 30, 2015 and 2016, respectively, were recorded as equipment financing obligations and were excluded from cash purchases in the Company’s unaudited condensed statements of cash flows. During the six months ended June 30, 2016, a financing agreement underlying a fixed asset with a remaining net book value of $126,811, which was previously recorded as an equipment financing obligation, was cancelled.

The amount of unpaid fixed asset purchases excluded from cash purchases in the Company’s unaudited condensed statements of cash flows increased from $19,546 at December 31, 2014 to $38,993 at June 30, 2015. The amount of unpaid fixed asset purchases excluded from cash purchases in the Company’s unaudited condensed statements of cash flows decreased from $64,300 at December 31, 2015 to $14,032 at June 30, 2016.

During the six months ended June 30, 2016, the Company financed insurance premiums of $434,475 through third party financings.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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


7


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, 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 U.S. Generally Accepted Accounting Principles, or GAAP, to be included in a full set of financial statements. The balance sheet at December 31, 2015 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, 2015, filed with the SEC with our Annual Report on Form 10-K on March 10, 2016 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 amounts have been reclassified to conform to the current period presentation. Additionally, a total of $27,856 and $318,565 of revenue-generating costs previously allocated to research and development expenses during the three and six months ended June 30, 2015, respectively, were reclassified to cost of revenues in the current period presentation of the unaudited condensed statements of operations and comprehensive loss.  

The Company and Business Activities

Biocept, Inc., or the Company, was founded in California in May 1997 and is an early stage cancer diagnostics company developing and commercializing proprietary circulating tumor cell, or CTC, and circulating tumor DNA, or ctDNA, assays 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 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.

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 May 2014, and as subsequently updated and amended from time to time, the Financial Accounting Standards Board, or FASB, issued authoritative guidance that requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. This proposed guidance has been deferred and would be effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Company is currently in the process of evaluating the impact of the adoption of this guidance on its financial statements and disclosures.

In June 2014, the FASB issued authoritative guidance requiring share-based payments with a performance target which affects vesting and that could be achieved after the requisite service period be treated as a performance condition. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. The Company adopted this guidance for the interim reporting period ended June 30, 2016. The adoption of this guidance did not have a material impact on the Company’s financial statements or disclosures.

8


In August 2014, the FASB issued authoritative guidance requiring management to evaluate whether th ere are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. Certain additional financial statement disclosures are required if such conditions or events are identified. This guidance is effective for the annual reporting period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early adoption is permitted. The Company is currently in the process of evaluating the impact of the adoption of this guidance on its financial statements and disclosures.

In July 2015, the FASB issued authoritative guidance requiring entities that do not measure inventory using the retail inventory method or on a last-in, first-out basis to record inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This guidance is effective on a prospective basis for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. The Company does not expect adoption of this guidance to have a material impact on its financial statements or disclosures.

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

In February 2016, the FASB issued authoritative guidance requiring, among other things, that entities recognize the assets and liabilities arising from leases on the balance sheet under revised criteria, while the classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria in the previous leases guidance. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently in the process of evaluating the impact of the adoption of this guidance on its financial statements and disclosures.

In March 2016, the FASB issued authoritative guidance clarifying that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument does not necessarily require dedesignation of that hedging relationship, provided that all other applicable hedge accounting criteria continue to be met. This guidance is effective on either a prospective basis or modified retrospective basis for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently in the process of evaluating the impact of the adoption of this guidance on its financial statements and disclosures.

In March 2016, the FASB issued authoritative guidance requiring entities to assess whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts, and clarifies what steps are required when assessing whether the economic characteristics and risks of call (put) options are clearly and closely related to the economic characteristics and risks of their debt hosts. This guidance is effective on a modified retrospective basis for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently in the process of evaluating the impact of the adoption of this guidance on its financial statements and disclosures.

In March 2016, the FASB issued authoritative guidance simplifying the accounting for stock compensation. This guidance, among other things, amends existing accounting and classification requirements primarily around income taxes, forfeitures, and cash payments associated with share-based payment awards to employees. This guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently in the process of evaluating the impact of the adoption of this guidance on its financial statements and disclosures.

 

2. Liquidity and Going Concern Uncertainty

As of June 30, 2016, cash and cash equivalents totaled $3.8 million and the Company had an accumulated deficit of $164.7 million. For the year and six month periods ended December 31, 2015 and June 30, 2016, the Company incurred net losses of $16.9 million and $9.5 million, respectively. At June 30, 2016, the Company had aggregate gross interest-bearing indebtedness of approximately $5.0 million, of which approximately $1.9 million was due within one year in the absence of subjective acceleration of amounts due under a credit facility entered into in April 2014 with Oxford Finance LLC, or the April 2014 Credit Facility, in addition to approximately $2.2 million of other non-interest bearing liabilities. Additionally, in February 2016, the Company signed a firm,

9


noncancelable, and unconditional commitment in an aggregate amount of $1,062,500 with a vendor to purchase certain inventory items, payable in minimum quarterly installments of $62,500 through May 2020 (see Note 10). These fac tors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying unaudited condensed financial statements have been prepared assuming that the Company will continue as a going concern. The unaudited condensed financ ial statements 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.

Subsequent to the closing of a follow-on public offering on February 13, 2015, cash proceeds of approximately $9.8 million have been received by the Company from the exercise of warrants sold in such offering, while approximately $2.7 million in gross warrant proceeds remain outstanding and available to be exercised at $1.56 per share until their expiration in February 2020. On December 21, 2015, the Company entered into a common stock purchase agreement with Aspire Capital Fund LLC, or Aspire Capital, whereby the lesser of approximately $13.5 million, or up to 2,464,683 shares, may be issued to Aspire Capital under this agreement as of August 2, 2016, subject to certain contractual limitations that prohibit the Company’s ability to sell its common stock to Aspire Capital. In May 2015, the SEC declared effective a shelf registration statement filed by the Company. The shelf registration statement allows the Company to issue any combination of its common stock, preferred stock, debt securities and warrants from time to time for an aggregate initial offering price of up to $50 million, subject to certain limitations for so long as the Company’s public float is less than $75 million. A public offering of the Company’s common stock and warrants to purchase its common stock was effected under this shelf registration statement on April 29, 2016, the closing of which occurred on May 4, 2016, pursuant to which the Company received net cash proceeds of approximately $4.4 million (see Note 3). Subsequent to the closing of this public offering on May 4, 2016, no warrants sold in such offering have been exercised, with approximately $4.5 million in gross warrant proceeds remaining outstanding and available to be exercised at $1.30 per share until their expiration in May 2021. Following this offering and through the date that the Company’s June 30, 2016 unaudited condensed financial statements are available to be issued, given the limitations that apply for so long as the Company’s public float is less than $75 million, no additional common stock, preferred stock, debt securities or warrants may be sold by the Company under this shelf registration statement. In connection with its May 2016 public offering, the Company has agreed to certain contractual terms that limit its ability to issue variable rate securities for a period of one year. The specific terms of additional future offerings, if any, under this shelf registration statement would be established at the time of such offerings.

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, 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

Pursuant to an underwriting agreement dated February 9, 2015 between the Company, Aegis Capital Corp. and Feltl and Company, as underwriters named therein, a public offering of 8,000,000 shares of the Company’s common stock and warrants to purchase up to an aggregate of 8,000,000 shares of common stock was effected at a combined offering price of $1.25. The estimated grant date fair value of these warrants of $7.7 million was recorded as an offset to additional paid-in capital within common stock issuance upon the closing of this offering. Each of the members of the Company’s Board of Directors participated in this offering, purchasing an aggregate 142,000 shares of the Company’s common stock and warrants to purchase up to an aggregate of 142,000 shares of its common stock for a total purchase price of $ 177,500 . All warrants sold in this offering have a per share exercise price of $1.56, are exercisable immediately and expire five years from the date of issuance. The closing of the sale of these securities to the underwriters occurred on February 13, 2015, when the Company received, after deducting underwriting discounts and additional costs paid to the underwriters, $9.1 million of net cash proceeds. The total increase in capital as a result of the sale of these shares and warrants was $8.8 million after deducting $0.3 million of additional non-underwriter costs incurred. Additionally, the underwriters were granted a 45-day option to purchase up to 1,200,000 additional shares of common stock at a price of $1.25 per share and/or additional warrants

10


to purchase up to 1,200,000 shares of common stock at a price of $0.0001 per warrant, less underwriting discounts and commissions, to cover over-allotments , if any, which was not exercised. The estimated grant date fair value of the over-allotment options and warrants of $1.6 million was recorded as an offset to additional paid-in capital within common stock issuance costs upon the closing of this offering. Underwriter costs and discounts of $0.2 million and $0.7 million, respectively, as well as additional non-underwriter costs associated with this offering of $0.3 million, were also recorded to common stock issuance costs upon closing. Subsequent to the clo sing of this offering on February 13, 2015, additional cash proceeds of $9.8 million have been received from the exercise of warrants sold in such offering. As such, the aggregate total increase in capital related to this offering has been $18.6 million, a fter deducting $0.9 million of underwriter costs and discounts and $0.3 million of additional non-underwriter costs incurred, which were netted against these proceeds under applicable accounting guidance.

In May 2015, the SEC declared effective a shelf registration statement filed by the Company. The shelf registration statement allows the Company to issue any combination of its common stock, preferred stock, debt securities and warrants from time to time for an aggregate initial offering price of up to $50 million, subject to certain limitations for so long as the Company’s public float is less than $75 million. Pursuant to an exclusive placement agent agreement dated April 25, 2016 between the Company and H.C. Wainwright & Co., LLC, or Wainwright, and a securities purchase agreement dated April 29, 2016 between the Company and the purchasers signatory thereto, a public offering of 4,986,573 shares of the Company’s common stock and warrants to purchase up to an aggregate of 3,490,601 shares of common stock was effected under this registration statement at a combined offering price of $1.00. All warrants sold in this offering have a per share exercise price of $1.30, are exercisable immediately and expire five years from the date of issuance. The closing of the sale of these securities to the purchasers occurred on May 4, 2016, pursuant to which the Company received, after deducting the placement agent’s fees and non-accountable expense reimbursements paid to Wainwright, as well as advisory service fees paid to ROTH Capital Partners, LLC and certain other transactional fees paid to third parties, approximately $4.6 million of net cash proceeds. The total increase in capital as a result of the sale of these shares and warrants was approximately $4.4 million after deducting an estimated $0.2 million of additional third party costs incurred in connection with this offering. An aggregate balance of approximately $0.6 million related to placement agent’s fees, advisory service expenses and non-placement agent costs associated with this offering was recorded to common stock issuance costs upon closing under applicable accounting guidance. Subsequent to the closing of this public offering on May 4, 2016, no warrants sold in such offering have been exercised, with approximately $4.5 million in gross warrant proceeds remaining outstanding and available to be exercised at $1.30 per share until their expiration in May 2021. Following this offering and through the date that the Company’s June 30, 2016 unaudited condensed financial statements are available to be issued, given the limitations that apply for so long as the Company’s public float is less than $75 million, no additional common stock, preferred stock, debt securities or warrants may be sold by the Company under this shelf registration statement. In connection with its May 2016 public offering, the Company has agreed to certain contractual terms that limit its ability to issue variable rate securities for a period of one year. The specific terms of additional future offerings, if any, under this shelf registration statement would be established at the time of such offerings.

On December 21, 2015, the Company entered into a common stock purchase agreement with Aspire Capital, which committed to purchase up to an aggregate of $15.0 million of shares of the Company’s common stock over the 30-month term of the common stock purchase agreement. Upon execution of the common stock purchase agreement, the Company sold to Aspire Capital 625,000 shares of common stock at $1.60 per share for proceeds of $1,000,000, and concurrently also entered into a registration rights agreement with Aspire Capital, pursuant to which the Company filed a registration statement registering the sale of the shares of the Company’s common stock that have been and may be issued to Aspire Capital under the common stock purchase agreement. Under the common stock purchase agreement, on any trading day selected by the Company, the Company has the right, in its sole discretion, to present a purchase notice directing Aspire Capital to purchase up to 100,000 shares of the Company’s common stock per business day, up to $15.0 million of common stock in the aggregate at a per share price equal to the lesser of either i) the lowest sale price of the Company’s common stock on the purchase date, or ii) the arithmetic average of the three lowest closing sale prices for the Company’s common stock during the 10 consecutive trading days ending on the trading day immediately preceding the purchase date. In addition, on any date on which the Company submits a purchase notice to Aspire Capital in an amount equal to 100,000 shares and the Company’s stock price is not less than $0.50 per share, the Company also has the right, in its sole discretion, to present Aspire Capital with a volume-weighted average price purchase notice directing Aspire Capital to purchase an amount of stock equal to up to 30% of the aggregate shares of the Company’s common stock traded on the its principal market on the next trading day, subject to a maximum number of shares the Company may determine. The purchase price per share pursuant to such volume-weighted average price purchase notice is generally 97% of the volume-weighted average price for the Company’s common stock traded on its principal market on the volume-weighted average purchase date. The purchase price will be adjusted for any reorganization, recapitalization, non-cash dividend, stock split, or other similar transaction occurring during the period(s) used to compute the purchase price. The Company may deliver multiple purchase notices and volume-weighted average price purchase notices to Aspire Capital from time to time during the term of the common stock purchase agreement, so long as the most recent purchase has been completed. The common stock purchase agreement provides that the Company and Aspire Capital shall not effect any sales on any purchase date where the closing sale price of the Company’s common stock is less than $0.50. There are no trading volume requirements or restrictions under the common stock purchase agreement, and the Company will control the timing and amount of sales of its common stock to Aspire Capital. Aspire Capital has no right to require any sales by the Company, but is obligated to make purchases from the Company as directed by the Company in accordance with the common stock purchase agreement. There are no limitations on use of proceeds, financial or business covenants, restrictions on future fundings, rights of first refusal, participation rights, penalties or liquidated

11


damages in the common stock purchase agreement. In consideration for entering into, and concurrently with the execution of, the common stock purchase agreement, the Company issued to Aspire Capital 165,000 shares of its common stock. The common st ock purchase agreement may be terminated by the Company at any time, at its discretion, without any cost to the Company. Aspire Capital has agreed that neither it nor any of its agents, representatives and affiliates shall engage in any direct or indirect short-selling or hedging of the Company’s common stock during any time prior to the termination of the common stock purchase agreement. Any proceeds the Company receives under the common stock purchase agreement are expected to be used for working capital and general corporate purposes. During the six months ended June 30, 2016, the Company submitted purchase notices to Aspire Capital for an aggregate of 300,000 shares of common stock for gross proceeds of $403,000. Subsequent to June 30, 2016, the Company submitted purchase notices to Aspire Capital for an aggregate of 219,439 shares of common stock for gross proceeds of $141,051. Costs associated with this offering of approximately $42,000 and $83,000 during the year ended December 31, 2015 and six months ended June 30, 2016, respectively, were also recorded to common stock issuance costs under applicable accounting guidance, and as such, the aggregate total increase in capital related to this transaction has been approximately $1.4 million. The lesser of a pproximately $13.5 million, or up to 2,464,683 shares, may be issued to Aspire Capital under this agreement as of August 2, 2016, subject to certain contractual limitations that prohibit the Company’s ability to sell its common stock to Aspire Capital.

 

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.

Other Fair Value Measurements

As of the closing of the Company’s May 2016 public offering, the estimated aggregate grant date fair value of $1,997,667 associated with the warrants to purchase 3,490,601 shares of common stock issued in such offering was recorded as an offset to additional paid-in capital within common stock issuance costs, and was estimated using a Black-Scholes valuation model with the following assumptions:

 

Stock price

$

0.90

 

Exercise price

$

1.30

 

Expected dividend yield

 

0.00

%

Discount rate-bond equivalent yield

 

1.23

%

Expected life (in years)

 

5.00

 

Expected volatility

 

90.0

%

The estimated fair value of the April 2014 Credit Facility at June 30, 2016 approximated carrying value, which was determined using a discounted cash flow analysis. The analysis considered interest rates of instruments with similar maturity dates, which involved the use of significant unobservable Level 3 inputs.

 

12


5. Balance Sheet Details

The following provides certain balance sheet details:

 

 

December 31,

 

 

June 30,

 

 

2015

 

 

2016

 

Fixed Assets

 

 

Machinery and equipment

$

2,518,158

 

 

$

2,705,632

 

Furniture and office equipment

 

143,726

 

 

 

143,726

 

Computer equipment and software

 

577,898

 

 

 

614,077

 

Leasehold improvements

 

514,614

 

 

 

514,614

 

Financed equipment

 

914,179

 

 

 

1,271,531

 

Construction in process

 

70,815

 

 

 

64,150

 

 

 

4,739,390

 

 

 

5,313,730

 

Less accumulated depreciation and amortization

 

3,793,210

 

 

 

3,951,189

 

Total fixed assets, net

$

946,180

 

 

$

1,362,541

 

Accrued Liabilities

 

 

 

 

 

 

 

Accrued interest

$

28,981

 

 

$

23,825

 

Accrued payroll

 

128,753

 

 

 

101,509

 

Accrued vacation

 

307,845

 

 

 

338,794

 

Accrued bonuses

 

376,100

 

 

 

188,076

 

Accrued sales commissions

 

76,574

 

 

 

85,552

 

Current portion of deferred rent

 

31,170

 

 

 

50,701

 

Accrued other

 

17,476

 

 

 

29,321

 

Total accrued liabilities

$

966,899

 

 

$

817,778

 

 

 

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 with Oxford Finance LLC. 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 is secured by substantially all of the Company’s personal property other than its intellectual property. Amounts due to Oxford Finance LLC under the April 2014 Credit Facility are callable before maturity by the lender under certain subjective acceleration clauses of the underlying agreement, including changes deemed to be materially adverse by the lender. The term loan under the April 2014 Credit Facility bears interest at an annual rate 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 term loan, plus (b) 7.71%. The term loan bears interest at an annual rate of 7.95%. The Company was required to make interest-only payments on the term loan through August 1, 2015. The outstanding term loan under the April 2014 Credit Facility began amortizing at the end of the applicable interest-only period, with monthly payments of principal and interest being made by the Company to the lender in consecutive monthly installments following such interest-only period. The term loan under the April 2014 Credit Facility matures on July 1, 2018. Under the original terms of the underlying agreement, the Company is also required to make a final payment to the lender equal to 5.5% of the original principal amount of the term loan funded. At its option, the Company may prepay the outstanding principal balance of the term loan in whole but not in part, subject to a prepayment fee of 1% of any amount prepaid.

On June 30, 2016, the Company entered into an amendment of the April 2014 Credit Facility. This amendment requires the Company to make interest-only payments on the term loan from July 1, 2016 through September 30, 2016, and also requires an additional final payment of $50,000 to the lender. If on or before September 30, 2016 the Company receives unrestricted net cash proceeds of at least $7.0 million from the issuance and sale its equity securities, or the Company receives a signed letter of intent relating to a sale or merger of the Company, in form and substance satisfactory to the lender, the Company will be required to make interest-only payments on the term loan through December 31, 2016, and the amount of the additional final payment to the lender upon repayment will increase to $75,000. The terms of the amendment require the amortization of the outstanding amount due under the term loan to commence at the end of the applicable interest-only period, with monthly payments of principal and interest, in arrears, being made by the Company to the lender in consecutive monthly installments following such interest-only period. Additionally, pursuant to the amendment the aggregate outstanding principal amount of the Company’s permitted indebtedness, consisting of capitalized lease obligations and purchase money indebtedness outstanding at any time, was increased to $1.2 million. The June 30, 2016 amendment of the Company’s 2014 Credit Facility was accounted for as a modification of debt under applicable accounting guidance.  

The April 2014 Credit Facility includes affirmative and negative covenants applicable to the Company and any subsidiaries created in the future. The affirmative covenants include, among others, covenants requiring the Company to maintain its legal existence and governmental approvals, deliver certain financial reports and maintain insurance coverage. The negative covenants include, among others, restrictions on transferring collateral, incurring additional indebtedness, engaging in mergers or acquisitions, paying dividends

13


or making other distributions, making investments, creating liens, selling assets, and suffering a change in control , in each case subject to certain exceptions. The April 2014 Credit Facility also includes events of default, the occurrence and continuation of which provide Oxford Finance LLC, as collateral agent, with the right to exercise remedies against the Company and the collateral securing the term loan under the April 2014 Credit Facility, including foreclosure against the Company’s properties securing the April 2014 Credit Facility, including its cash. These events of default include, among other things, the Com pany’s failure to pay any amounts due under the April 2014 Credit Facility, a breach of covenants under the April 2014 Credit Facility, insolvency, a material adverse change, the occurrence of any default under certain other indebtedness in an amount great er than $250,000, and a final judgment against the Company in an amount greater than $250,000.

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 Finance LLC on April 30, 2014. Issuance costs of $102,498 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 $4,897,502. The estimated fair value of the warrant issued of $233,107 was recorded as a discount to outstanding debt as of the closing date. The discounts and other issuance costs are amortized to interest expense utilizing the effective interest method over the underlying term of the loan. The effective annual interest rate associated with the April 2014 Credit Facility was 11.50% and 13.87% at December 31, 2015 and June 30, 2016, respectively.

 

7. Stock-based Compensation

Equity Incentive Plans

The Company maintains two equity incentive plans: The Amended and Restated 2013 Equity Incentive Plan, or the 2013 Plan, and the 2007 Equity Incentive Plan, or the 2007 Plan. The 2013 Plan includes a provision that shares available for grant under the Company’s 2007 Plan become available for issuance under the 2013 Plan and are no longer available for issuance under the 2007 Plan. As of June 30, 2016, under all plans, a total of 3,068,865 shares were authorized for issuance, 2,454,470 stock options and restricted stock units, or RSUs, had been issued and were outstanding, and 489,961 shares were available for grant.

Stock Options

A summary of stock option activity for option awards granted under the 2013 Plan and 2007 Plan for the six months ended June 30, 2016 is as follows:

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

Weighted

 

 

Remaining

 

 

Number of

 

 

Average Exercise

 

 

Contractual

 

 

Shares

 

 

Price Per Share

 

 

Term in Years

 

Vested and unvested expected to vest, December 31, 2015

 

1,940,701

 

 

$

5.16

 

 

 

9.0

 

Outstanding at December 31, 2015

 

2,141,141

 

 

$

3.71

 

 

9.1

 

Granted

 

329,823

 

 

$

1.21

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

 

 

Cancelled/forfeited/expired

 

(276,763

)

 

$

2.65

 

 

 

 

 

Outstanding at June 30, 2016

 

2,194,201

 

 

$

3.47

 

 

 

8.6

 

Vested and unvested expected to vest, June 30, 2016

 

2,021,149

 

 

$

3.61

 

 

 

8.5

 

 

The intrinsic values of options outstanding and options vested and unvested expected to vest at June 30, 2016 were both zero. The intrinsic value of options exercisable at June 30, 2016 was zero.

The fair values of option awards granted during the six months ended June 30, 2016 were estimated using a Black-Scholes pricing model with the following assumptions:

 

Stock and exercise prices

$0.67 - $1.34

 

Expected dividend yield

 

0.00

%

Discount rate-bond equivalent yield

1.24% – 1.39%

 

Expected life (in years)

5.42 – 6.08

 

Expected volatility

 

90.00

%

14


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 six months ended June 30, 2016 was $0.88 per share.

On August 31, 2015, the Company’s Board of Directors approved the issuance of 100,000 stock options with an estimated grant date fair value of $1.47 per share to its Chief Executive Officer pursuant to the 2013 Plan. On February 29, 2016, the Company’s Board of Directors approved the issuance of 100,000 stock options with an estimated grant date fair value of $0.96 per share to its Chief Executive Officer pursuant to the 2013 Plan. Vesting of these stock options may occur based on the Company’s achievement of specified objectives by December 31, 2016 as determined by the Company’s Board of Directors, or a committee of the Company’s Board of Directors, in its sole discretion, as follows:

 

 

Percentage of

 

 

Overall Stock

 

 

Option Grants

 

 

Subject to Vesting

 

Target

 

 

 

Minimum number of accessions processed, billed and collected

 

13

%

Minimum revenues from contracts with pharmaceutical

   companies

 

10

%

Attainment of a sustainable positive GAAP gross  margin

 

12

%

Minimum operating cash on-hand with no more than one interim

   dilutive equity financing event

 

15

%

Achievement of the Company's 2016 corporate goals

 

25

%

Completion of a Board-approved strategic transaction

 

25

%

Total

 

100

%

Restricted Stock

 

A summary of RSU activity for awards granted under the 2013 Plan and 2007 Plan for the six months ended June 30, 2016 is as follows:

 

 

 

 

 

 

Weighted

 

 

Number of

 

 

Average Grant

 

 

Shares

 

 

Date Fair Value

 

Vested and unvested expected to vest, December 31, 2015

 

46,117

 

 

$

4.83

 

Outstanding at December 31, 2015

 

77,265

 

 

$

5.04

 

Granted

 

227,500

 

 

$

0.70

 

Vested and issued

 

(13,348

)

 

$

5.35

 

Forfeited

 

(31,148

)

 

$

5.35

 

Outstanding at June 30, 2016

 

260,269

 

 

$

1.19

 

Vested and unvested expected to vest, June 30, 2016

 

251,169

 

 

$

1.21

 

The RSUs granted during the six months ended June 30, 2016 vest fully on the one year anniversary of the date of grant, subject to continuing service by the holders of such RSUs. At June 30, 2016, the intrinsic values of RSUs outstanding and RSUs unvested and expected to vest were $173,079 and $167,027, respectively.

On June 12, 2014, the Company’s Board of Directors granted an RSU award for 44,496 shares with a grant date fair value of $5.35 per share to its Chief Executive Officer pursuant to the 2013 Plan. Vesting of these RSUs was based on the Company’s achievement of specified objectives by December 31, 2015 as determined by the Company’s Board of Directors or the Compensation Committee of the Board of Directors, as follows:

 

15


 

Percentage of

 

 

Overall RSU

 

 

Grant Subject to

 

 

Vesting

 

Target

 

 

 

Minimum revenue

 

25

%

Maximum EBITDA loss

 

15

%

Attainment of financial plan for fiscal 2015

 

20

%

Minimum value of strategic agreements

 

20

%

Implementation of four new diagnostic test panels

 

20

%

Total

 

100

%

During the six months ended June 30, 2016, a total of 13,348 RSUs were declared vested by the Company’s Board of Directors and issued to its Chief Executive Officer in satisfaction of this award and the remaining 31,148 shares underlying this RSU were forfeited.

Stock-based Compensation Expense

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

 

 

For the three months ended

 

 

For the six months ended

 

 

June 30,

 

 

June 30,

 

 

2015

 

 

2016

 

 

2015

 

 

2016

 

Stock Options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

$

17,674

 

 

$

29,412

 

 

$

33,810

 

 

$

55,487

 

Research and development expenses

 

24,505

 

 

 

25,961

 

 

 

44,925

 

 

 

58,964

 

General and administrative expenses

 

229,561

 

 

 

264,566

 

 

 

448,622

 

 

 

537,135

 

Sales and marketing expenses

 

31,089

 

 

 

1,897

 

 

 

62,101

 

 

 

39,240

 

Total expenses related to stock options

 

302,829

 

 

 

321,836

 

 

 

589,458

 

 

 

690,826

 

RSUs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

 

 

 

1,916

 

 

 

 

 

 

1,916

 

Research and development expenses

 

1,599

 

 

 

1,452

 

 

 

9,099

 

 

 

1,452

 

General and administrative expenses

 

38,402

 

 

 

1,008

 

 

 

78,338

 

 

 

1,008

 

Sales and marketing expenses

 

 

 

 

4,508

 

 

 

 

 

 

4,508

 

Total stock-based compensation

$

342,830

 

 

$

330,720

 

 

$

676,895

 

 

$

699,710

 

Stock-based compensation expense was recorded net of estimated forfeitures of 0% - 4% per annum during the six months ended June 30, 2015 and 2016. As of June 30, 2016 total unrecognized stock-based compensation expense related to unvested stock options and RSUs, adjusted for estimated forfeitures, was approximately $2,025,000 and is expected to be recognized over a weighted-average period of 2.2 years.

 

8. Common Stock Warrants Outstanding

A summary of equity-classified common stock warrant activity for the six months ended June 30, 2016 is as follows:

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

Weighted

 

 

Remaining

 

 

Number of

 

 

Average Exercise

 

 

Contractual

 

 

Shares

 

 

Price Per Share

 

 

Term in Years

 

Outstanding at December 31, 2015

 

2,352,738

 

 

$

3.73

 

 

 

3.8

 

Issued

 

3,490,601

 

 

$

1.30

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

 

 

Expired

 

(152,712

)

 

$

10.00

 

 

 

 

 

Outstanding at June 30, 2016

 

5,690,627

 

 

$

2.07

 

 

 

4.3

 

 

The intrinsic value of equity-classified common stock warrants outstanding and exercisable at June 30, 2016 was $0.

16


 

9. 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 six months ended June 30, 2015 and 2016, the outstanding RSUs, warrants, and common stock options have been excluded from the calculation of diluted loss per common share because their effect would be anti-dilutive. Therefore, the weighted-average shares used to calculate both basic and diluted loss per share are the same.

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

 

 

 

For the three and six months ended

 

 

June 30,

 

 

2015

 

 

2016

 

Preferred warrants outstanding (number of common stock equivalents)

 

1,587

 

 

 

1,587

 

Preferred share RSUs (number of common stock equivalents)

 

73,151

 

 

 

 

Common warrants outstanding

 

2,412,058

 

 

 

5,690,627

 

Common share RSUs

 

178,118

 

 

 

260,269

 

Common options outstanding

 

917,316

 

 

 

2,194,201

 

Total anti-dilutive common share equivalents

 

3,582,230

 

 

 

8,146,684

 

 

10. Commitments and Contingencies

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

In February 2016, the Company signed a firm, noncancelable, and unconditional commitment in an aggregate amount of $1,062,500 with a vendor to purchase certain inventory items, payable in quarterly installments of $62,500 through May 2020.

 

11. Related Party Transactions

All of the members of the Company’s Board of Directors participated in its public offering in February 2015, purchasing an aggregate of 142,000 shares of the Company’s common stock and warrants to purchase up to an aggregate of 142,000 shares of its common stock for total proceeds of $177,500.

A member of the Company’s management is the controlling person of Aegea Biotechnologies, Inc., or Aegea. On September 2, 2012, the Company entered into an Assignment and Exclusive Cross-License Agreement, or the Cross-License Agreement, with Aegea. The Company received a payment of $19,047 during the six months ended June 30, 2016 from Aegea as reimbursement for shared patent costs under the Cross-License Agreement.

Pursuant to a sublease agreement dated March 30, 2015, the Company subleased 9,849 square feet, plus free use of an additional area, of its San Diego facility to an entity affiliated with the Company’s non-executive Chairman for $12,804 per month, with a refundable security deposit of $12,804 due from the subtenant. The initial term of the sublease expired on July 31, 2015, and is subject to renewal on a month-to-month basis thereafter. A total of $25,608 and $76,824 in rental income was recorded to other income/(expense) in the Company’s unaudited condensed statements of operations and comprehensive loss during the six months ended June 30, 2015 and 2016, respectively.

Three members of the Company’s Board of Directors participated in its public offering in May 2016, purchasing an aggregate of 175,000 shares of the Company’s common stock and warrants to purchase up to an aggregate of 122,500 shares of its common stock for total proceeds to the Company of $175,000 (see Note 3).

The Company believes that these transactions were on terms at least as favorable to the Company as could have been obtained from unrelated third parties.

 

12. Subsequent Events

On July 6, 2016, the Compensation Committee of the Company’s Board of Directors approved retention RSUs for an aggregate of 175,000 shares of common stock to three of the Company’s executive officers pursuant to the 2013 Plan, including retention RSUs for 100,000 shares of common stock to its Chief Executive Officer. Each of these retention RSUs has a grant date fair value of $0.62 per

17


share for a grant date fair value of $108,990 to all three o fficers, in aggregate. These retention RSUs vest fully on the one year anniversary of the date of grant, subject to continuing service by the holders of such RSUs.

On July 25, 2016, the Company’s Board of Directors approved an amendment to the 2013 Plan to reserve 1,000,000 shares of the Company’s common stock exclusively for the grant 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.

On July 25, 2016, the Company entered into an employment agreement with its new Chief Financial Officer, Senior Vice President of Operations and Secretary, or CFO. Pursuant to the terms of this employment agreement, the CFO was granted the following inducement awards under the 2013 Plan: (i) a stock option to purchase up to 200,000 shares of the Company’s common stock, 25% of which will vest on the one-year anniversary of the commencement of the CFO’s employment with the Company, and remainder of which will vest in equal monthly installments over the following three years, (ii) a stock option to purchase up to 100,000 shares of the Company’s common stock, which vest upon the Company’s achievement of corporate goals for 2016 and the consummation of a specified financing transaction, and (iii) an RSU covering 75,000 shares of the Company’s common stock, 100% of which will vest on the one-year anniversary of the commencement of the CFO’s employment with the Company.   

Subsequent to June 30, 2016, the Company submitted purchase notices to Aspire Capital for an aggregate of 219,439 shares of common stock for gross proceeds of $141,051.


18


 

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed financial statements and related notes included in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto as of and for the year ended December 31, 2015 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K for the year ended December 31, 2015, filed with the Securities and Exchange Commission on March 10, 2016. Past operating results are not necessarily indicative of results that may occur in future periods.

We are an early stage molecular oncology diagnostics company that develops and commercializes proprietary circulating tumor cell, or CTC, and circulating tumor DNA, or ctDNA, assays utilizing a standard blood sample, or “liquid biopsy.” Our assays provide, and our planned future assays would provide, information to oncologists and other physicians that enable them to select appropriate personalized treatment for their patients who have been diagnosed with cancer based on timelier and more-detailed data on the characteristics of their patients’ tumors.

Our current assays and our planned future assays focus on key solid tumor indications utilizing our Target-Selector TM CTC offering for the biomarker analysis of CTCs and ctDNA from a standard blood sample. The Target-Selector CTC offering is based on an internally developed and patented, microfluidics-based capture and analysis platform, with enabling features that change how CTC testing is used by clinicians. The Target-Selector platforms provide both biomarker detection as well as monitoring, and require only a blood sample. Our patent pending Target-Selector ctDNA technology enables mutation detection with enhanced sensitivity and specificity and is applicable to nucleic acid from CTCs or other sample types, such as blood plasma. We believe the Target-Selector technology can someday be used as a stand-alone test for molecular biomarker screening, marked as in vitro diagnostics kits.

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. We manufacture our microfluidic channels, related equipment and certain reagents to perform our current assays and our planned future assays at this facility. CLIA certification is required before any clinical laboratory, including ours, may perform testing on human specimens for the purpose of obtaining information for the diagnosis, prevention, or treatment of disease or the assessment of health. The assays we offer and intend to offer are classified as laboratory developed tests, or LDTs, under CLIA regulations.

We are commercializing our Target-Selector assays for a number of solid tumor indications such as: breast cancer, non-small cell lung cancer, or NSCLC, small cell lung cancer, or SCLC, gastric cancer, colorectal cancer, prostate cancer, and melanoma. These assays utilize our dual CTC and ctDNA technology platform and provide biomarker analysis from a standard blood sample.

In the case of our breast and gastric cancer offering, 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, or ER, protein, as well as androgen receptor, or AR, protein, which are currently commercially available. We plan to include immunocytochemical analysis of progesterone receptor, or PR, proteins as part of the Target-Selector CTC menu in 2016. A patient’s HER2 status provides the physician with information about the appropriateness of therapies such as Herceptin® or Tykerb®. ER and PR status provides the physician with information about the appropriateness of endocrine therapies such as tamoxifen and aromatase inhibitors.

The lung cancer biomarker analyses currently include FISH testing for ALK, ROS1 and RET gene rearrangements and mutation analysis of the T790M, Deletion 19, and L858R mutations of the epidermal growth factor receptor, or EGFR, gene as well as B-RAF using our Target-Selector CtDNA platform. The L858R mutation of the EGFR gene and Exon 19 deletions as activators of EGFR kinase activity are associated with the drugs Tarceva®, Gilotrif® and Iressa®. For lung cancer, we also offer a resistance panel assay consisting of the biomarkers MET, HER2 (both of which we perform using our technology for CTCs), K-RAS, and T790M (both of which are performed using ctDNA in plasma). This assay could be used by physicians to identify the mechanism causing disease progression for patients with NSCLC who are being treated with TKI therapy and therefore could qualify for inclusion in a clinical trial. In November 2015, Tagrisso® was approved by the U.S. Food and Drug Administration, providing another biomarker based therapy for the treatment of patients with EGFR related lung cancer.  Tagrisso® is indicated for the treatment of patients with metastatic EGFR T790M mutation-positive NSCLC, who have progressed on or after EGFR tyrosine kinase inhibitor therapy.

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

Mutations of the B-RAF gene are associated with Zelboraf® and Tafinlar®, which are both approved for treating patients with melanoma and are in clinical trials for lung cancer. We offer testing for B-RAF on blood using our ctDNA offering.

19


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

We plan to add other biomarker analyses, such as ESR1 and NRAS, on blood samples to our current assays and our planned future Target-Selector CTC assays as their relevance is demonstrated in clinical trials and/or included in guidelines used by physicians to make treatment decisions.

We continue to execute on our strategies of expanding our business globally as well as engaging with pharmaceutical companies on clinical trials and assay development. We have executed distribution agreements in Mexico with Quest Diagnostics to support testing for a large pharmaceutical partner, as well as an agreement with Progenetics to market our assays in Israel for clinical testing.

We announced two additional pharmaceutical collaborations during 2016. The first agreement is to provide testing for a clinical trial that includes patients who have leptomeningeal disease, or metastatic lung cancer to the brain.  In this exploratory trial, we are testing both cerebral spinal fluid and blood for molecular alterations that could be impacted by treatment. The second agreement is a large milestone-based multi-project assay development collaboration focused on hepatocellular carcinoma, or liver cancer, whereby we will develop assays utilizing both our CTC and ctDNA technologies for clinical trials.

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.

The following tables set forth certain information concerning our commercial cases accessioned for the periods shown:

 

 

Three Months Ended June 30,

 

 

Change

 

 

2015

 

 

2016

 

 

#

 

 

%

 

Commercial cases accessioned

 

334

 

 

 

981

 

 

 

647

 

 

 

194

%

 

 

Six Months Ended June 30,

 

 

Change

 

 

2015

 

 

2016

 

 

#

 

 

%

 

Commercial cases accessioned

 

581

 

 

 

1,704

 

 

 

1,123

 

 

 

193

%

Revenues from commercial cases are recognized as collected, and the expected collection period for a commercial case often extends beyond the end of the quarter in which accessioned, with multiple payments received per case. For commercial accessions received during the six months ended June 30, 2015 and 2016, the average number of tests performed increased from 2.3 tests per accession to 3.7 tests per accession, respectively. For commercial accessions received from January 1, 2016 through June 30, 2016, the expected price to be collected at 2016 Medicare schedule rates ranged from less than $200 per accession to over $4,900 per accession, and the weighted-average expected price to be collected is approximately $1,200 per accession, although such reimbursement experience has not yet been achieved. Relatively higher reimbursement rates are expected to be achieved for cases billed to certain private payors where we have agreements. Approximately 44% of the number of commercial accessions billed from January 1, 2016 through June 30, 2016 were subject to Medicare reimbursement rates, and approximately 50% and 45% of commercial revenues and total revenues, respectively, during the six months ended June 30, 2016 were associated with Medicare reimbursement. We have not historically been reimbursed at these average rates for a variety of reasons, including billing challenges related to changes in Medicare CPT codes for our FISH assays in 2015, establishing our associated internal processes, and also managing an external “out-sourced” billing company. Additionally, a significant amount of our non-Medicare business (private payors) has historically not been contracted, and reimbursement for this business has historically not been at “in network” rates and has therefore been inconsistent. We did begin to contract private payor networks in 2015 and continue to do so in 2016, and our number of accessions treated as “in network” increased and reimbursement is improving. We are currently contracted with eight Preferred Provider Organization networks and one large health plan and expect to continue to gain contracts in order to be considered as an “in-network” provider with additional plans.

20


Results of Operations

Three Months Ended June 30, 2015 and 2016

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

 

 

Three Months Ended June 30,

 

 

Change

 

 

2015

 

 

2016

 

 

$

 

 

%

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

$

77

 

 

$

663

 

 

$

586

 

 

 

761

%

Cost of revenues

 

1,013

 

 

 

1,670

 

 

 

657

 

 

 

65

%

Research and development expenses

 

744

 

 

 

716

 

 

 

(28

)

 

 

(4

%)

General and administrative expenses

 

1,360

 

 

 

1,518

 

 

 

158

 

 

 

12

%

Sales and marketing expenses

 

851

 

 

 

1,292

 

 

 

441

 

 

 

52

%

Loss from operations

 

(3,891

)

 

 

(4,533

)

 

 

(642

)

 

 

16

%

Interest expense, net

 

(169

)

 

 

(100

)

 

 

69

 

 

 

(41

%)

Other income

 

25

 

 

 

38

 

 

 

13

 

 

 

52

%

Loss before income taxes

 

(4,035

)

 

 

(4,595

)

 

 

(560

)

 

 

14

%

Income tax expense

 

 

 

 

 

 

 

 

 

 

 

Net loss

$

(4,035

)

 

$

(4,595

)

 

$

(560

)

 

 

14

%

Revenues

Revenues were approximately $663,000 for the three months ended June 30, 2016, compared with approximately $77,000 for the same period in 2015, an increase of $586,000, or 761%. The increase was due to an increase of approximately $537,000 in commercial assay revenues resulting primarily from increases in both commercial accession volume and collections made thereon, as well as an increase of approximately $49,000 in development services revenues with 155 development services accessions received during the three months ended June 30, 2016 as compared to 52 accessions received during the same period in 2015.

Costs and Expenses

Cost of Revenues. Cost of revenues was approximately $1,669,000 for the three months ended June 30, 2016, compared with approximately $1,013,000 for the three months ended June 30, 2015, an increase of $656,000, or 65%. The increase was primarily attributable to an increase of approximately $493,000 in personnel, materials and other direct costs mainly related to higher assay volume, an increase of approximately $77,000 related to fewer laboratory costs charged to research and development , as well as an increase of approximately $53,000 in allocated facilities costs.

Research and Development Expenses. Research and development expenses were approximately $716,000 for the three months ended June 30, 2016, compared with approximately $744,000 for the three months ended June 30, 2015, a decrease of $28,000, or 4%. The decrease was primarily attributable to a decrease of approximately $77,000 in laboratory costs charged to research and development, partially offset by an increase of approximately $42,000 in personnel costs due to an increase in the average number of employees in the research and development function from 8 employees during the three months ended June 30, 2015 to 9 employees during the same period in 2016.

General and Administrative Expenses. General and administrative expenses were approximately $1,518,000 for the three months ended June 30, 2016, compared with approximately $1,360,000 for the three months ended June 30, 2015, an increase of $158,000, or 12%. The increase was primarily due to an increase of approximately $82,000 in legal fees primarily associated with patents, an increase of approximately $32,000 in consulting, billing, and other third party service provider costs mainly associated with expanded commercial activities, as well as an increase of approximately $25,000 in personnel costs .

Sales and Marketing Expenses. Sales and marketing expenses were approximately $1,292,000 for the three months ended June 30, 2016, compared with approximately $851,000 for the three months ended June 30, 2015, an increase of $441,000, or 52%. The increase was primarily due to an increase of approximately $362,000 in personnel costs and travel expenses associated with an increase in the average number of employees included in the sales and marketing function from 11 employees during the three months ended June 30, 2015 to 15 employees during the same period in 2016, as well as an increase of approximately $72,000 in consulting and other third party service provider costs associated with expanded commercial activities .

21


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, however, we believe an ownership change likely occurred during 2015. As a result, we have estimated that the use of our net operating loss is limited and the remaining net operating loss carryforwards and research and development credits we estimate can be used in the future remain fully offset by a valuation allowance to reduce the net asset to zero.

Six Months Ended June 30, 2015 and 2016

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

 

 

Six Months Ended June 30,

 

 

Change

 

 

2015

 

 

2016

 

 

$

 

 

%

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

$

227

 

 

$

884

 

 

$

657

 

 

 

289

%

Cost of revenues

 

2,161

 

 

 

3,144

 

 

 

983

 

 

 

45

%

Research and development expenses

 

1,396

 

 

 

1,444

 

 

 

48