bioc-10q_20200331.htm

 

UNITED STATES  

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended March 31, 2020

OR

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

For the transition period from                      to                     .

Commission file number: 001-36284

 

Biocept, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

80-0943522

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

5810 Nancy Ridge Drive, San Diego, California

(Address of principal executive offices)

92121

(Zip Code)

(858) 320-8200

(Registrant’s telephone number, including area code)

Not Applicable

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

 

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $.0001 per share

BIOC

The Nasdaq Stock Market LLC

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

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

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

  

Smaller reporting company

 

 

 

 

 

 

 

 

 

Emerging growth company

 


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

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

As of May 8, 2020, there were 131,100,876 shares of the Registrant’s common stock outstanding.

 

 

 

 

 


BIOCEPT, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED

March 31, 2020

INDEX

 

 

 

 

  

Page

 

 

IMPORTANT NOTE REGARDING FORWARD-LOOKING STATEMENTS

  

4

 

 

 

PART I.

 

FINANCIAL INFORMATION

  

 

 

 

 

Item 1.

 

Financial Statements

  

5

 

 

 

 

 

Condensed Balance Sheets as of December 31, 2019 and March 31, 2020 (unaudited)

  

5

 

 

 

 

 

Condensed Statements of Operations and Comprehensive Loss for the three months ended March 31, 2019 and 2020 (unaudited)

  

6

 

 

 

 

 

Condensed Statements of Shareholders’ Equity for the three months ended March 31, 2019 and 2020 (unaudited)

  

7

 

 

 

 

 

Condensed Statements of Cash Flows for the three months ended March 31, 2019 and 2020 (unaudited)

  

8

 

 

 

 

 

Notes to Condensed Financial Statements (unaudited)

  

10

 

 

 

Item 2.

 

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

  

23

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

  

33

 

 

 

Item 4.

 

Controls and Procedures

  

33

 

 

 

PART II.

 

OTHER INFORMATION

  

 

 

 

 

Item 1.

 

Legal Proceedings

  

34

 

 

 

 

 

Item 1A.

 

Risk Factors

  

34

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

  

60

 

 

 

Item 3.

 

Defaults Upon Senior Securities

  

61

 

 

 

Item 4.

 

Mine Safety Disclosures

  

61

 

 

 

Item 5.

 

Other Information

  

61

 

 

 

Item 6.

 

Exhibits

  

61

 

 

 

3


IMPORTANT NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in our other filings with the Securities and Exchange Commission, or the SEC. Moreover, we operate in an evolving environment. New risk factors and uncertainties emerge from time to time and it is not possible for us to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements. The forward-looking statements speak only as of the date on which they are made, and we undertake no obligation to update such statements to reflect events that occur or circumstances that exist after the date on which they are made except as required by law. Readers should, however, review the factors and risks we describe in the reports we file from time to time with the SEC. In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date the statement is made, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain, and you are cautioned not to unduly rely upon these statements.

 

 

 

 

4


PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

Biocept, Inc.

Condensed Balance Sheets

 

 

 

December 31,

 

 

March 31,

 

 

2019

 

 

2020

 

 

 

 

 

 

(unaudited)

 

Current assets:

 

 

 

 

 

 

 

Cash

$

9,301,406

 

 

$

21,493,192

 

Accounts receivable, net

 

3,527,078

 

 

 

3,418,897

 

Inventories, net

 

767,986

 

 

 

918,698

 

Prepaid expenses and other current assets

 

296,127

 

 

 

429,131

 

Total current assets

 

13,892,597

 

 

 

26,259,918

 

Fixed assets, net

 

1,504,330

 

 

 

1,463,128

 

Lease right-of-use assets - operating

 

729,330

 

 

 

419,461

 

Lease right-of-use assets - finance

 

1,606,387

 

 

 

1,669,823

 

Total assets

$

17,732,644

 

 

$

29,812,330

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

2,011,827

 

 

$

2,407,158

 

Accrued liabilities

 

1,980,204

 

 

 

2,365,988

 

Current portion of lease liabilities - operating

 

842,452

 

 

 

484,102

 

Current portion of lease liabilities - finance

 

724,329

 

 

 

718,480

 

Supplier financing

 

 

 

 

56,068

 

Total current liabilities

 

5,558,812

 

 

 

6,031,796

 

Non-current portion of lease liabilities - finance

 

973,189

 

 

 

1,050,429

 

Total liabilities

 

6,532,001

 

 

 

7,082,225

 

Commitments and contingencies (see Note 10)

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value, 5,000,000 authorized; 2,133 shares issued and outstanding at December 31, 2019 and March 31, 2020.

 

 

 

 

 

Common stock, $0.0001 par value, 150,000,000 authorized; 54,738,485 issued and outstanding at December 31, 2019; 108,707,392 issued and outstanding at March 31, 2020.

 

5,474

 

 

 

10,871

 

Additional paid-in capital

 

256,912,358

 

 

 

276,780,535

 

Accumulated deficit

 

(245,717,189

)

 

 

(254,061,301

)

Total shareholders’ equity

 

11,200,643

 

 

 

22,730,105

 

Total liabilities and shareholders’ equity

$

17,732,644

 

 

$

29,812,330

 

 

 

 

 

 

 

 

 

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

5


Biocept, Inc.

Condensed Statements of Operations and Comprehensive Loss

(Unaudited)

 

 

 

For the three months ended March 31,

 

 

2019

 

 

2020

 

Net revenues

$

1,024,239

 

 

$

1,446,549

 

Costs and expenses:

 

 

 

 

 

 

 

Cost of revenues

 

2,599,364

 

 

 

2,946,858

 

Research and development expenses

 

1,223,291

 

 

 

1,312,676

 

General and administrative expenses

 

1,681,837

 

 

 

1,904,433

 

Sales and marketing expenses

 

1,374,560

 

 

 

1,465,115

 

Total costs and expenses

 

6,879,052

 

 

 

7,629,082

 

Loss from operations

 

(5,854,813

)

 

 

(6,182,533

)

Other expense:

 

 

 

 

 

 

 

Interest expense

 

(61,974

)

 

 

(56,696

)

Warrant inducement expense

 

 

 

 

(2,102,109

)

Total other expense

 

(61,974

)

 

 

(2,158,805

)

Loss before income taxes

 

(5,916,787

)

 

 

(8,341,338

)

Income tax expense

 

 

 

 

 

Net loss and comprehensive loss

$

(5,916,787

)

 

$

(8,341,338

)

Deemed dividend related to warrants down round provision

 

(99,743

)

 

 

(2,774

)

Net loss attributable to common shareholders

$

(6,016,530

)

 

$

(8,344,112

)

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

 

 

 

 

 

 

 

Basic

 

9,792,093

 

 

 

78,999,924

 

Diluted

 

9,792,093

 

 

 

78,999,924

 

Net loss per common share:

 

 

 

 

 

 

 

Basic

$

(0.61

)

 

$

(0.11

)

Diluted

$

(0.61

)

 

$

(0.11

)

 

 

 


 

 

 

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

 

6


Biocept, Inc.

Statement of Shareholders’ Equity

(Unaudited)

 

For the three months ended March 31, 2019

 

Common Stock

 

 

Series A

Convertible

Preferred Stock

 

 

Additional

 

 

Accumulated

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Paid-in Capital

 

 

Deficit

 

 

Total

 

Balance at December 31, 2018

 

 

4,629,174

 

 

$

463

 

 

 

4,417

 

 

$

 

 

$

223,499,634

 

 

$

(220,457,578

)

 

$

3,042,519

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

102,459

 

 

 

 

 

 

102,459

 

Shares issued upon exercise of common stock warrants

 

 

5,985

 

 

 

1

 

 

 

 

 

 

 

 

 

4,747

 

 

 

 

 

 

4,748

 

Deemed dividends related to warrants downround provision

 

 

 

 

 

 

 

 

 

 

 

 

 

 

99,743

 

 

 

(99,743

)

 

 

 

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

 

 

990,000

 

 

 

99

 

 

 

 

 

 

 

 

 

2,032,212

 

 

 

 

 

 

2,032,311

 

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

 

 

6,250,000

 

 

 

625

 

 

 

 

 

 

 

 

 

6,602,110

 

 

 

 

 

 

6,602,735

 

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

 

 

538,867

 

 

 

54

 

 

 

 

 

 

 

 

 

592,252

 

 

 

 

 

 

592,306

 

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

 

 

5,950,000

 

 

 

595

 

 

 

 

 

 

 

 

 

7,553,198

 

 

 

 

 

 

7,553,793

 

Shares issued upon conversion of preferred stock

 

 

503,438

 

 

 

50

 

 

 

(2,278

)

 

 

 

 

 

(50

)

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,916,787

)

 

 

(5,916,787

)

Balance at March 31, 2019

 

 

18,867,464

 

 

$

1,887

 

 

 

2,139

 

 

$

 

 

$

240,486,305

 

 

$

(226,474,108

)

 

$

14,014,084

 

 

 

For the three months ended March 31, 2020

 

Common Stock

 

 

Series A

Convertible

Preferred Stock

 

 

Additional

 

 

Accumulated

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Paid-in Capital

 

 

Deficit

 

 

Total

 

Balance at December 31, 2019

 

 

54,738,485

 

 

$

5,474

 

 

 

2,133

 

 

$

 

 

$

256,912,358

 

 

$

(245,717,189

)

 

$

11,200,643

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

142,964

 

 

 

 

 

 

142,964

 

Shares issued upon exercise of common stock warrants

 

 

6,961,407

 

 

 

696

 

 

 

 

 

 

 

 

 

2,306,012

 

 

 

 

 

 

2,306,708

 

Shares issued upon cashless exercise of common stock warrants

 

 

6,080,000

 

 

 

608

 

 

 

 

 

 

 

 

 

(608

)

 

 

 

 

 

 

Deemed dividends related to warrants downround provision

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

2,774

 

 

 

(2,774

)

 

 

 

Shares issued for March 2, 2020 financing transaction, net of issuance costs

 

 

23,000,000

 

 

 

2,300

 

 

 

 

 

 

 

 

 

8,563,200

 

 

 

 

 

 

8,565,500

 

Shares issued for March 4, 2020 financing transaction, net of issuance costs

 

 

16,000,000

 

 

 

1,600

 

 

 

 

 

 

 

 

 

6,091,961

 

 

 

 

 

 

6,093,561

 

Shares issued for exercise of December 2019 overallotment warrants, net of issuance costs

 

 

1,927,500

 

 

 

193

 

 

 

 

 

 

 

 

 

659,765

 

 

 

 

 

 

659,958

 

Warrant inducement expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,102,109

 

 

 

 

 

 

2,102,109

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,341,338

)

 

 

(8,341,338

)

Balance at March 31, 2020

 

 

108,707,392

 

 

$

10,871

 

 

 

2,133

 

 

$

 

 

$

276,780,535

 

 

$

(254,061,301

)

 

$

22,730,105

 

 

 

 

 

 

 

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

7


Biocept, Inc.

Condensed Statements of Cash Flows

(Unaudited)

 

 

For the three months ended March 31,

 

 

2019

 

 

2020

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

Net loss

$

(5,916,787

)

 

$

(8,341,338

)

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

 

 

 

 

 

 

 

Depreciation and amortization

 

222,128

 

 

 

242,758

 

Amortization of right-of-use assets

 

(37,806

)

 

 

(48,481

)

Inventory reserve

 

531

 

 

 

25,240

 

Stock-based compensation

 

102,459

 

 

 

142,964

 

Warrant inducement expense

 

 

 

 

2,102,109

 

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

 

 

 

 

 

 

 

Accounts receivable, net

 

(303,536

)

 

 

108,181

 

Inventory

 

9,407

 

 

 

(175,952

)

Prepaid expenses and other current assets

 

155,713

 

 

 

(133,004

)

Accounts payable

 

152,635

 

 

 

412,879

 

Accrued liabilities

 

367,744

 

 

 

385,784

 

Net cash used in operating activities

 

(5,247,512

)

 

 

(5,278,860

)

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

Purchases of fixed assets

 

(32,898

)

 

 

(18,507

)

Net cash used in investing activities

 

(32,898

)

 

 

(18,507

)

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

Net proceeds from issuance of common stock and warrants

 

16,781,145

 

 

 

14,659,061

 

Proceeds from exercise of common stock warrants

 

4,748

 

 

 

2,306,708

 

Payments on finance leases

 

(166,658

)

 

 

(136,574

)

Proceeds from exercise of overallotment warrants

 

 

 

 

659,958

 

Net cash provided by financing activities

 

16,619,235

 

 

 

17,489,153

 

Net increase in Cash

 

11,338,825

 

 

 

12,191,786

 

Cash at Beginning of Period

 

3,423,373

 

 

 

9,301,406

 

Cash at End of Period

$

14,762,198

 

 

$

21,493,192

 

Supplemental Disclosures of Cash Flow Information:

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

         Interest

$

61,974

 

 

$

56,696

 

Non-cash Investing and Financing Activities:

Fixed assets purchased totaling approximately $149,000 and $208,000 during the three months ended March 31, 2019 and 2020, respectively, were recorded as finance leases and were excluded from cash purchases in the Company’s statements of cash flows (see Note 6).

The amount of unpaid fixed asset purchases excluded from cash purchases in the Company’s statements of cash flows increased from approximately $25,000 at December 31, 2018 to approximately $86,000 at March 31, 2019 and decreased from approximately $32,000 at December 31, 2019 to approximately $17,000 at March 31, 2020.

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

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

8


On February 12, 2019, the Company received net cash proceeds of approximately $6.6 million as a result of the closing of a follow-on public offering of 6,250,000 shares of its common stock and warrants to purchase up to an aggregate of 6,250,000 shares of its common stock at a combined offering price of $1.20 per unit. All warrants sold in this offering have an exercise price of $1.20 per share, are exercisable immediately and expire five years from the date of issuance. In addition, the Company sold warrants to purchase up to an aggregate of 937,500 shares of the Company’s common stock in connection with the partial exercise of the over-allotment option granted to the underwriters. Upon closing of the transaction, warrants to purchase 915,000 shares were issued pursuant to the placement agents’ partial exercise of their overallotment. The estimated aggregate grant date fair value on a relative fair value basis of approximately $6.8 million associated with these warrants was recorded as an offset to additional paid-in capital (see Note 4).

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

On March 19, 2019, the Company received net cash proceeds of approximately $7.6 million as a result of completing a registered direct offering of 5,950,000 shares at a negotiated purchase price of $1.37 per share. In addition, in a concurrent private placement, the Company issued to purchasers a warrant to purchase one share of the Company’s common stock for each share purchased for cash in the offering.  All warrants issued in this offering have an exercise price of $1.25 per share, are exercisable immediately upon issuance and expire 5.5 years following the date of issuance. The estimated aggregate grant date fair value on a relative fair value basis of approximately $6.0 million associated with these warrants was recorded as an offset to additional paid-in capital (see Note 4).

In January 2020, the Company issued an aggregate of 6,927,258 shares of its common stock pursuant to the exercise of certain warrants issued by the Company in February 2019 and March 2019, as part of a warrant repricing and exchange transaction. As part of the warrant repricing and exchange transaction, the Company issued an aggregate of 6,927,258 new warrants in exchange for the exercise of the February 2019 and March 2019 warrants and received net proceeds of approximately $2.3 million. As a result of the warrant repricing, the exercise price of warrants to purchase an aggregate of 896,578 shares of common stock issued by the Company in January 2018 was adjusted from $0.405 to $0.3495 per share.

In January 2020, the Company issued 1,927,500 shares of common stock pursuant to the partial exercise of the underwriters’ overallotment option from the Company’s December 2019 public offering. The net proceeds to the Company from the overallotment closing, was approximately $700,000.

On March 2, 2020, the Company received net cash proceeds of approximately $8.6 million from a registered direct offering to certain institutional investors of 23,000,000 shares of common stock at a negotiated purchase price of $0.40 per share.

On March 4, 2020, the Company received net cash proceeds of approximately $6.1 million from a registered direct offering to certain institutional investors of 16,000,000 shares of common stock at a negotiated purchase price of $0.41 per share.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

9


BIOCEPT, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

1. The Company, Business Activities and Basis of Presentation

The Company and Business Activities

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

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

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.

Basis of Presentation

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

The unaudited condensed financial statements included in this Form 10-Q have been prepared in accordance with the U.S. Securities and Exchange Commission, or SEC, instructions for Quarterly Reports on Form 10-Q. Accordingly, the condensed financial statements are unaudited and do not contain all the information required by GAAP to be included in a full set of financial statements. The balance sheet at December 31, 2019 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, 2019, filed with the U.S. Securities and Exchange Commission, or SEC, with our Annual Report on Form 10-K on March 27, 2020 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.

Significant Accounting Policies

During the three months ended March 31, 2020, there were no changes to our significant accounting policies as described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, except as described in Recent Accounting Pronouncements below.

Revenue Recognition and Accounts Receivable

The Company's commercial revenues are generated from diagnostic services provided to patient’s physicians and billed to third-party insurance payers such as managed care organizations, Medicare and Medicaid and patients for any deductibles, coinsurance or copayments that may be due. Commencing on January 1, 2018, the Company recognizes revenue in accordance with ASC 606,

10


Revenue from Contracts with Customers, or ASC 606, which requires that an entity recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The Company adopted the provisions of ASC 606 using the modified retrospective application method applied to all contracts, which did not impact amounts previously reported by the Company, nor did it require a cumulative effect adjustment upon adoption, as the Company’s method of recognizing revenue under ASC 606 was analogous to the method utilized immediately prior to adoption. Accordingly, there is no need for the Company to disclose the amount by which each financial statement line item was affected as a result of applying the new standard and an explanation of significant changes.

Contracts

For its commercial revenues, while the Company markets directly to physicians, its customer is the patient. Patients do not enter into direct agreements with the Company, however, a patient’s insurance coverage requirements would dictate whether or not any portion of the cost of the tests would be patient responsibility. Accordingly, the Company establishes contracts with commercial insurers in accordance with customary business practices, as follows:

 

 

 

 

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

 

 

 

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

 

 

 

 

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

 

 

 

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

 

 

 

 

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

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

Performance Obligations

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

Transaction Price

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

The Company limits the amount of variable consideration included in the transaction price to the unconstrained portion of such consideration. Revenue is recognized up to the amount of variable consideration that is not subject to a significant reversal until additional information is obtained or the uncertainty associated with the additional payments or refunds is subsequently

11


resolved. Differences between original estimates and subsequent revisions, including final settlements, represent changes in the estimate of variable consideration and are included in the period in which such revisions are made. The Company monitors its estimates of transaction price to depict conditions that exist at each reporting date. If the Company subsequently determines that it will collect more consideration than it originally estimated for a contract with a customer, it will account for the change as an increase in the estimate of the transaction price in the period identified as an increase to revenue. Similarly, if the Company subsequently determines that the amount it expects to collect from a customer is less than it originally estimated, it will generally account for the change as a decrease in the estimate of the transaction price as a decrease to revenue, provided that such downward adjustment does not result in a significant reversal of cumulative revenue recognized. Revenue recognized from changes in transaction prices was not significant during the three months ended March 31, 2019 and 2020.

Allocate Transaction Price

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

Point-in-time Recognition

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

Contract Balances

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

Practical Expedients

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

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

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

Disaggregation of Revenue and Concentration of Risk

The composition of the Company’s net revenues recognized during the three months ended March 31, 2019 and 2020 disaggregated by source and nature are as follows:

 

 

For the three months ended March 31,

 

 

2019

 

 

2020

 

Net revenues from contracted payers*

$

481,420

 

 

$

500,188

 

Net revenues from non-contracted payers

 

495,009

 

 

 

817,413

 

Development services revenues

 

42,498

 

 

 

60,329

 

Kits and Blood Collection Tubes (BCT)

 

5,312

 

 

 

68,619

 

Total net revenues

$

1,024,239

 

 

$

1,446,549

 

 

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

 

 

For the three months ended March 31,

 

 

2019

 

 

2020

 

Net commercial revenues recognized upon delivery

$

976,429

 

 

$

1,317,601

 

Development services revenues recognized upon delivery

 

42,498

 

 

 

60,329

 

Kits and Blood Collection Tubes (BCT)

 

5,312

 

 

 

68,619

 

Total net revenues

$

1,024,239

 

 

$

1,446,549

 

12


                             

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

The Company's third-party payers that represent more than 10% of total net revenues in any period presented, as well as their related net revenue amount as a percentage of total net revenues, during the three months ended March 31, 2019 and 2020 were as follows:

 

 

For the three months ended March 31,

 

 

2019

 

 

2020

 

Medicare and Medicare Advantage

 

45

%

 

 

37

%

Blue Cross Blue Shield

 

14

%

 

 

29

%

United Healthcare

 

12

%

 

 

6

%

The Company's third-party payers that represent more than 10% of total net accounts receivable, and their related net accounts receivable balance as a percentage of total net accounts receivable, at December 31, 2019 and March 31, 2020 were as follows:

 

 

December 31, 2019

 

 

March 31, 2020

 

Blue Cross Blue Shield

 

26

%

 

 

27

%

Medicare and Medicare Advantage

 

17

%

 

 

13

%

United Healthcare

 

12

%

 

 

10

%

Aetna

 

7

%

 

 

10

%

Recent Accounting Pronouncements

In November 2018, the FASB issued authoritative guidance clarifying the interaction between Collaborative Arrangements (Topic 808) and Revenue from Contracts with Customers (Topic 606) to address diversity in practice related to how companies account for collaborative arrangements. For public companies, this guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year. Early adoption is permitted, but no earlier than an entity’s adoption date of Revenue from Contracts with Customers (Topic 606).  The Company adopted this guidance for the fiscal year beginning on January 1, 2020, and determined that the adoption of this guidance does not have a material impact on its financial statements or disclosures.

 

2. Liquidity and Going Concern Uncertainty

As of March 31, 2020, cash totaled $21.5 million and the Company had an accumulated deficit of $254.1 million. For the year ended December 31, 2019 and the three months ended March 31, 2020, the Company incurred net losses of $25.1 million and $8.3 million, respectively, and had negative cash flows from operations of $5.2 million and $5.3 million, respectively. At March 31, 2020, the Company had aggregate net interest-bearing indebtedness of $1.8 million, of which $718,000 was due within one year, in addition to $2.9 million of other non-interest-bearing current liabilities. While Management believes that, absent the COVID-19 pandemic, based on historical and planned cash usage the Company’s current cash would have supported its operations through most of 2021, due to the uncertainty introduced by the impact of COVID-19 on revenues and cash usage, there is uncertainty as to the period of time for which existing cash can support the Company’s ongoing operations.  These factors raise substantial doubt about the Company’s ability to continue as a going concern for the one-year period following the date that these financial statements were issued. The accompanying financial statements and notes have been prepared assuming that the Company will continue as a going concern. The accompanying financial statements and notes do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.

While the Company is currently in the commercialization stage of operations, the Company has not yet achieved profitability and anticipates that it will continue to incur net losses and negative cash flows from operations 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. These factors raise substantial doubt about the Company’s ability to continue as a going concern for the one-year period following the date that these financial statements were

13


issued. The accompanying financial statements and notes have been prepared assuming that the Company will continue as a going concern. The accompanying financial statements and notes do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.

On March 11, 2020 the World Health Organization declared the disease caused by the novel strain of coronavirus (COVID-19) a global pandemic and recommended containment and mitigation measures worldwide.  In addition, as we are located in California, we are currently under a shelter in place mandate and many of our clients worldwide are similarly impacted.  As a healthcare provider, we are allowed to remain open in compliance with the shelter in place mandate and continue to provide critical information for patients diagnosed with cancer. However, the global outbreak of the COVID-19 coronavirus continues to rapidly evolve, and the extent to which the COVID-19 coronavirus may impact our business will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the ultimate geographic spread of the disease, the duration of the outbreak, travel restrictions and social distancing in the United States and other countries, business closures or business disruptions, and the effectiveness of actions taken in the United States and other countries to contain and treat the disease. We estimate that the COVID-19 pandemic led to an approximate 15 to 25% decline in commercial volume from current customers, and also impacted opportunities for us to gain new customers with the closing of many physician offices and labs.  We are continuing to vigilantly monitor the situation with our primary focus on the health and safety of our employees and clients.    

In January 2020, the Company issued an aggregate of 6,927,258 shares of its common stock pursuant to the exercise of certain warrants issued by the Company in February 2019 and March 2019, as part of a warrant repricing and exchange transaction. As part of the warrant repricing and exchange transaction, the Company issued an aggregate of 6,927,258 new warrants in exchange for the exercise of the February 2019 and March 2019 warrants and received net proceeds of approximately $2.3 million. As a result of the warrant repricing, the exercise price of warrants to purchase an aggregate of 896,578 shares of common stock issued by the Company in January 2018 was adjusted from $0.405 to $0.3495 per share.

In January 2020, the Company issued 1,927,500 shares of common stock pursuant to the partial exercise of the underwriters’ overallotment option from the Company’s December 2019 public offering. The net proceeds to the Company from the overallotment closing, was approximately $700,000.

On March 2, 2020, the Company received net cash proceeds of approximately $8.6 million from a registered direct offering to certain institutional investors of 23,000,000 shares of common stock at a negotiated purchase price of $0.40 per share.

On March 4, 2020, the Company received net cash proceeds of approximately $6.1 million from a registered direct offering to certain institutional investors of 16,000,000 shares of common stock at a negotiated purchase price of $0.41 per share.

On April 16, 2020, the Company received net cash proceeds of approximately $9.6 million from a registered direct offering to certain institutional investors of 22,300,000 shares of common stock at a negotiated purchase price of $0.46 per share.

Management’s Plan to Continue as a Going Concern

In order to continue as a going concern, the Company will need, among other things, additional capital resources. Until the Company can generate significant cash from operations, including assay revenues, management’s plans to obtain such resources for the Company include proceeds from offerings of the Company’s equity securities or debt, cash received from the exercise of outstanding common stock warrants, or transactions involving product development, technology licensing or collaboration. Management can provide no assurances that any sources of a sufficient amount of financing will be available to the Company on favorable terms, if at all.  Based on the above, the Company’s management concluded that the going concern uncertainty has not been alleviated and as such , there is substantial doubt about the Company’s ability to continue as a going concern as of March 31, 2020.

 

3. Sales of Equity Securities

 

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

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

14


option for 538,867 shares of the Company’s common stock related to the February 12, 2019 follow-on offering, purchasing shares at $1.20 per share for net cash proceeds of approximately $592,000.

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

On March 19, 2019, the Company received net cash proceeds of approximately $7.6 million as a result of completing a registered direct offering of 5,950,000 shares at a negotiated purchase price of $1.37 per share. In addition, in a concurrent private placement, the Company issued to purchasers a warrant to purchase one share of the Company’s common stock for each share purchased for cash in the offering.  All warrants issued in this offering have an exercise price of $1.25 per share, are exercisable immediately upon issuance and expire 5.5 years following the date of issuance.

In January 2020, the Company issued an aggregate of 6,927,258 shares of its common stock pursuant to the exercise of certain warrants issued by the Company in February 2019 and March 2019, as part of a warrant repricing and exchange transaction. As part of the warrant repricing and exchange transaction, the Company issued an aggregate of 6,927,258 new warrants in exchange for the exercise of the February 2019 and March 2019 warrants and received net proceeds of approximately $2.3 million. As a result of the warrant repricing, the exercise price of warrants to purchase an aggregate of 896,578 shares of common stock issued by the Company in January 2018 was adjusted from $0.405 to $0.3495 per share. In January 2020, the Company issued 1,927,500 shares of common stock pursuant to the partial exercise of the underwriters’ overallotment option from the Company’s December 2019 public offering. The net proceeds to the Company from the overallotment closing, was approximately $700,000. The warrants issued in connection with the warrant repricing and exchange transaction were considered inducement warrants and are classified in equity. In addition, the modification expense associated with the change in fair value due to the repricing of February and March 2019 warrants is recorded as inducement expense, which was approximately $191,000. The fair value of the warrants issued was approximately $1.9 million. The fair value of the inducement warrants and warrant modification of $2.1 million was expensed as warrant inducement expense in the accompanying consolidated statements of operations for the three months ended March 31, 2020.   

On March 2, 2020, the Company received net cash proceeds of approximately $8.6 million from a registered direct offering to certain institutional investors of 23,000,000 shares of common stock at a negotiated purchase price of $0.40 per share.

On March 4, 2020, the Company received net cash proceeds of approximately $6.1 million from a registered direct offering to certain institutional investors of 16,000,000 shares of common stock at a negotiated purchase price of $0.41 per share.

 

4. Fair Value Measurement

The estimated nonrecurring fair value measurements associated with fixed asset purchases recorded as right-of-use asset finance lease obligations totaling approximately $208,000 during the three months ended March 31, 2020 were calculated as the present value of the lease payments based on contractual payment amounts and estimated market rates.  Upon adoption of guidance in ASC Topic 842 Leases, the estimated fair value of the right-of-use operating lease asset was recorded based on present value of future lease payments based contractual payment amounts and estimated market rates in effect.

Other Fair Value Measurements

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

 

Beginning stock price

$

1.05

 

Exercise price

$

1.20

 

Expected dividend yield

 

0.00

%

Discount rate-bond equivalent yield

 

2.49

%

Expected life (in years)

 

5.00

 

Expected volatility

 

147.7

%

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

 

15


Beginning stock price

$

1.12

 

Exercise price

$

1.25

 

Expected dividend yield

 

0.00

%

Discount rate-bond equivalent yield

 

2.44

%

Expected life (in years)

 

5.50

 

Expected volatility

 

140.0

%

As of the closing of the Company’s January 2020 warrant repricing and exchange transaction, the estimated grant date fair value of approximately $0.28 per share associated with the warrants to purchase up to 6,927,258 shares of common stock issued in the transaction, or a total of approximately $1.9 million, was recorded as a warrant inducement expense with an offset to additional paid-in capital. All warrants issued in this warrant inducement transaction have an exercise price of $0.3495 per share, are exercisable beginning 6 months from issuance and expire 5.5 years from the date of issuance. The fair value of the warrants was estimated using a Black-Scholes model with the following assumptions:

Beginning stock price

$

0.30

 

Exercise price

$

0.3495

 

Expected dividend yield

 

0.00

%

Discount rate-bond equivalent yield

 

1.66

%

Expected life (in years)

 

5.50

 

Expected volatility

 

150.33

%

In addition to the inducement warrants issued in the Company’s January 2020 warrant repricing and exchange transaction, the Company adjusted the exercise prices of the February 2019 and March 2019 warrants from $1.20 and $1.25, respectively, to $0.3495 to induce exercise of these warrants. This price modification triggered the requirement for modification accounting of these warrants.  Based on the applicable guidance, the modification required the Company to value the modified February 2019 and March 2019 warrants immediately prior to the modification of the exercise price and immediately following the modification and record the difference between the resulting two values as warrant inducement expense.

The estimated fair value prior to modification of the February 2019 and March 2019 warrants was approximately $0.27 per share, whereas the estimated fair value of the February 2019 warrants increased to $0.29 due to the adjustment of the exercise price, and the estimated fair value of the March 2019 warrants increased to $0.30 per share.  There were 2,167,258 February 2019 warrants and 4,760,000 March 2019 warrants eligible for this price modification and the resulting modification expense recorded as warrant inducement expenses were $60,000 and $130,000, respectively.

5. Balance Sheet Details

The following provides certain balance sheet details:

 

 

December 31,

 

 

March 31,

 

 

2019

 

 

2020

 

Fixed Assets

 

 

Machinery and equipment

$

2,857,538

 

 

$

2,932,112

 

Furniture and office equipment

 

156,987

 

 

 

156,987

 

Computer equipment and software

 

1,552,891

 

 

 

1,552,891

 

Leasehold improvements

 

570,173

 

 

 

570,173

 

Construction in process

 

625,038

 

 

 

607,490

 

Total fixed assets, gross

 

5,762,627

 

 

 

5,819,653

 

Less accumulated depreciation and amortization

 

(4,258,297

)

 

 

(4,356,525

)

Total fixed assets, net

$

1,504,330

 

 

$

1,463,128

 

Accrued Liabilities

 

 

 

 

 

 

 

Accrued payroll

$

298,855

 

 

$

523,552

 

Accrued vacation

 

622,792

 

 

 

693,389

 

Accrued bonuses

 

748,742

 

 

 

970,159

 

Accrued sales commissions

 

89,562

 

 

 

75,150

 

Accrued other

 

220,253

 

 

 

103,738

 

Total accrued liabilities

$

1,980,204

 

 

$

2,365,988

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

16


During the three months ended March 31, 2020, there were no disposals and $283,000 of fixed assets were acquired.   

 

6. Leases

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

Finance Leases

The Company leases certain laboratory equipment under arrangements previously accounted for as capital leases, classified on the Company’s balance sheet as fixed assets and related lease liabilities and depreciated on a straight-line basis over the lease term.  Upon adoption of ASC 842, leased equipment previously classified as fixed assets totaling $1.4 million in net book value were reclassified to lease right-of-use assets in accordance with the guidance. The equipment under finance leases is depreciated on a straight-line basis over periods ranging from approximately 3 to 7 years. The total gross value of equipment capitalized under such lease arrangements was approximately $3,125,000 and $3,422,000 at December 31, 2019 and March 31, 2020, respectively. Total accumulated depreciation related to financed equipment was approximately $1,606,000 and $1,752,000 at December 31, 2019 and March 31, 2020, respectively, and total depreciation expense related to financed equipment during the three months ended March 31, 2019 and 2020 was approximately $110,000 and $146,000, respectively.

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

In February 2020, the Company entered into finance leases for a total capitalized amount of $197,000 for three pieces of equipment. Under the terms of the equipment financing agreement, which was accounted for as a finance lease transaction, the principal balance plus interest for the equipment are to be repaid in full in installments ranging from 48 to 60 monthly installments of $4,532 totaling approximately $265,000 through January 2025.  In addition, in March 2020, the Company entered into a finance lease for a capitalized amount of $11,000 for an additional piece of equipment.  Under the term of the equipment financing agreement, the principal amount plus interest are to be repaid in 48 monthly installments of $288 totaling approximately $14,000 through February 2024.

Operating Lease

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

The Company is in good standing with its landlord and is negotiating terms associated with extending its lease for its current facility until a new facility becomes available to move into.  Such terms have not yet been finalized.

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

The following schedule sets forth the components of right-of-use lease assets as of December 31, 2019 and March 31, 2020 as follows:

 

December 31,

 

 

March 31,

 

 

2019

 

 

2020

 

Lease right-of-use assets:

 

 

 

 

 

 

 

Operating

$

729,330

 

 

$

419,461

 

Finance

 

1,606,387

 

 

 

1,669,823

 

Total

$

2,335,717

 

 

$

2,089,284

 

 

17


The following schedule sets forth the current portion of operating and finance lease liabilities as of December 31, 2019 and March 31, 2020:

 

December 31,

 

 

March 31,

 

 

2019

 

 

2020

 

Current portion of lease liabilities:

 

 

 

 

 

 

 

Operating

$

842,452

 

 

$

484,102

 

Finance

 

724,329

 

 

 

718,480

 

Total

$

1,566,781

 

 

$

1,202,582

 

 

The following schedule sets forth the long-term portion of operating and finance lease liabilities as of December 31, 2019 and March 31, 2020:

 

December 31,

 

 

March 31,

 

 

2019

 

 

2020

 

Long-term portion of lease liability:

 

 

 

 

 

 

 

Operating

$

 

 

$

 

Finance

 

973,189

 

 

 

1,050,429

 

Total

$

973,189

 

 

$

1,050,429

 

The following schedule represents the components of lease expense for the three months ended March 31, 2019 and March 31, 2020:

 

 

For the three months ended

 

 

March 31, 2019

 

 

March 31, 2020

 

Lease cost

 

 

 

 

 

 

 

Finance lease cost

 

 

 

 

 

 

 

Amortization of right-of-use assets

$

110,330

 

 

$

144,530

 

Interest on lease liabilities

 

61,974

 

 

 

56,701

 

Operating lease cost

 

318,005

 

 

 

318,005

 

Total

$

490,309

 

 

$

519,236

 

The following schedule sets forth the remaining future minimum lease payments outstanding under finance and operating leases, as well as corresponding remaining sales tax and maintenance obligation payments that are expensed as incurred and due within each respective year ending December 31, as well as the present value of the total amount of the remaining minimum lease payments as of March 31, 2020:

 

 

Finance

 

 

Operating

 

 

Minimum

 

 

Maintenance and

 

 

Minimum

 

 

Lease

 

 

Sales Tax Obligation

 

 

Lease

 

 

Payments

 

 

Payments

 

 

Payments

 

2020

$

610,882

 

 

$

67,647

 

 

$

488,649

 

2021

 

593,225

 

 

 

72,933

 

 

 

 

2022

 

469,775

 

 

 

61,379

 

 

 

 

2023

 

345,759

 

 

 

61,978

 

 

 

 

Thereafter

 

120,050

 

 

 

12,656

 

 

 

 

Total payments

 

2,139,691

 

 

 

276,593

 

 

 

488,649

 

Less amount representing interest

 

(370,782

)

 

 

 

 

 

(4,547

)

Present value of payments

$

1,768,909

 

 

$

276,593

 

 

$

484,102

 

 

The following schedule sets forth supplemental cash flow information related to operating and finance leases as of March 31, 2019 and March 31, 2020:

 

18


 

For the three months ended

 

 

March 31, 2019

 

 

March 31, 2020

 

Other information

 

 

 

 

 

 

 

Operating cash flows from finance leases

$

61,974

 

 

$

56,701

 

Operating cash flows from operating leases

$

355,812

 

 

$

366,487

 

Financing cash flows from finance leases

$

166,658

 

 

$

136,574

 

 

The aggregate weighted average remaining lease term was 3.18 years on finance leases and 0.34 years on operating leases as of March 31, 2020. The aggregate weighted average discount rate was 20.98% on finance leases and 4.5% on operating leases as of March 31, 2020.  During the three months ended March 31, 2020, the Company added $208,000 of right of use assets in exchange for finance lease liabilities.  In the three months ended March 31, 2019, upon adoption of the accounting guidance in ASC 842, $1.4 million of net machinery and equipment was reclassified to lease right-of-use assets related to assets under finance leases and $1.9 million of right-of-use facility lease was recorded under operating lease.

 

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.

At the Company’s annual meeting of stockholders held on June 28, 2018, the Company’s stockholders approved amendments to the 2013 Plan, which included an increase in the number of non-inducement shares of common stock authorized for issuance under the 2013 Plan by 146,666 shares.  At the Company’s annual meeting of stockholders held on June 17, 2019, the Company’s stockholders approved additional amendments to the 2013 Plan including the increase in the number of non-inducement shares of common stock authorized for issuance under the 2013 Plan by 2,800,000 shares.  As of March 31, 2020, 124,211 shares of the Company’s common stock were authorized exclusively for the issuance of stock awards to employees who have not previously been an employee or director of the Company, except following a bona fide period of non-employment, as an inducement material to the individual’s entering into employment with the Company, as defined under applicable Nasdaq Listing Rules.

As of March 31, 2020, under all plans, a total of 3,064,098 non-inducement shares were authorized for issuance, 2,569,437 shares had been issued with 2,451,332 non-inducement stock options and restricted stock units, or RSUs, underlying outstanding awards, and 636,655 non-inducement shares were available for grant. As of March 31, 2020, a total of 118,368 inducement shares were authorized for issuance, 118,368 inducement shares had been issued with 117,534 inducement stock options and RSUs underlying outstanding awards, and no inducement shares were available for grant under the 2013 Plan.

Stock Options

A summary of stock option activity for the three months ended March 31, 2020 is as follows:

 

 

 

 

 

 

 

 

 

 

Weighted