Item 2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
The following discussion and analysis should be read together
with our financial statements and the related notes appearing elsewhere in this Quarterly Report on Form 10-Q. This discussion
contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. See “Cautionary
Note Regarding Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with these
statements. Actual results and the timing of events could differ materially from those discussed in our forward-looking statements
as a result of many factors, including those set forth under “Risk Factors” in our Annual Report on Form 10-K for the
year ended December 31, 2015 filed with the Securities and Exchange Commission (the “SEC”) on March 21, 2016.
Overview
We are a commercial stage, molecular genetics diagnostic company
focused on providing innovative diagnostic services that help physicians make better-informed decisions concerning the care of
their patients suffering from cancer. Our mission is to develop, validate and deliver innovative diagnostic services that enable
better patient-care decisions.
We were founded in January 2010 and hold an exclusive license to
the intellectual property stemming from the renowned research on multiple myeloma (“MM”) performed at UAMS. Our flagship
service offering is the MyPRS
®
test, which is a microarray-based Gene Expression Profiling (“GEP”) assay
that tests for the presence of specific groups of genes that can predict low or high level risk of early relapse in patients suffering
from MM. The information provided by our MyPRS
®
test aids physicians in selecting the optimal treatment regimen
for each patient’s unique MM condition.
To our knowledge, we are the only company marketing a GEP test for
assessing the status of MM in the United States. The MyPRS
®
test is protected by a substantial patent portfolio
of issued and pending patents.
Our growth strategy includes the following key elements:
|
•
|
Expanding the U.S. market penetration of our MyPRS
®
test by increasing the geographic coverage of our commercial
organization.
|
|
•
|
Broadening the base of health care insurance companies that have approved reimbursements for MyPRS
®
.
|
|
•
|
Expanding the diagnostic indications for MyPRS
®
to include asymptomatic monoclonal gammopathy (“AMG”),
the precursor conditions to MM.
|
|
•
|
Pursuing additional collaborations with pharmaceutical companies who focus on developing therapies to treat MM and its precursor
disease.
|
|
•
|
Expanding our information technology infrastructure to further improve our customer service experience.
|
|
•
|
Continuing to leverage our relationship with UAMS and other key academic centers.
|
|
•
|
Expanding our test offering with the addition of other molecular tests useful to physicians who care for MM patients.
|
|
•
|
Expanding and leveraging our capabilities into additional blood cancer indications.
|
|
•
|
Pursuing additional collaborations, mergers and acquisitions, and in-licensing to expand our service offering.
|
|
•
|
Continuing to reduce the costs associated with the development, manufacture and interpretation of our proprietary genomic tests
and services.
|
We believe a key challenge to achieving our growth strategy will
be our ability to become contracted with additional payors beyond Medicare and Arkansas Blue Cross Blue Shield (“AR-BCBS”).
In order to broaden our coverage policy approval to include a number of the major health care insurance providers in the United
States, we are currently presenting our clinical validity and utility dossier and health economic model to various non-contracted
third-party payors and accountable care organizations to support our request for their reimbursement approval. MyPRS
®
has been studied extensively and there are more than 30 peer-reviewed scientific publications that describe the validity and utility
of the test. MyPRS
®
is one of the most extensively validated genomic assays available today. Further, the MyPRS
®
assay has been validated on patient cohorts totaling over 4,500 patients and detailed in 17 peer-reviewed publications. Please
visit our website at www.signalgenetics.com in the “Publications” section under the “Physicians” tab for
a list of these publications. These publications were used to help create the aforementioned clinical utility dossier that justifies
reimbursement approval by the majority of health care payors.
Other challenges to our growth strategy include: (1) if medical
oncologists do not adopt the use of MyPRS
®
to evaluate the risk of developing MM in patients with AMG, our growth
strategy could be adversely affected, (2) if other tests that more accurately predict the severity of MM, the risk of progression
of AMG to MM or the likelihood of response to therapy, are developed, physicians could stop ordering MyPRS
®
, adversely
affecting our ability to generate revenue, and (3) if payors, including our currently contracted payors, decide to reduce payment
for MyPRS
®
.
We operate in only one segment and, currently, have no operations
outside of the United States.
Sources of Revenues and Expenses
Revenues
We generate revenues primarily from the completion of tests processed
through our CAP-accredited and CLIA certified laboratory when test results are delivered to ordering physicians. During the first
six months of 2016, we had three major customers, including UAMS. Revenue sourced either from or through UAMS as a percentage of
net revenue during the first six months of 2016 and 2015 were 22% and 75%, respectively. Revenue sourced either from or through
our other two major customers as a percentage of net revenue during the first six months of 2016 and 2015 were 26% and 0%, and
12% and 5%, respectively.
A significant portion of our revenues consist of payments or reimbursements
received from various payors, including Medicare, contracted insurance companies, directly billed customers (UAMS, pharmaceutical
companies, reference laboratories and hospitals) and non-contracted insurance companies. We report revenues from contracted payors
and directly billed customers based on the contractual rate. Medicare reimburses MyPRS
®
based on the local coverage
determination at approximately $1,900 per test and AR-BCBS reimburses MyPRS
®
based on the contractual rate of approximately
$2,000 per test. Revenues from non-contracted payors are reported based on the amount expected to be collected, which is based
on the historical collection experience of each payor or payor group, as appropriate. Our estimates of net revenue are subject
to change based on the contractual status and payment policies of third-party payors with whom we deal as well as anticipated changes
in the healthcare industry and related legislation. We regularly refine our estimates in order to make our estimated revenue as
accurate as possible based on our most recent collection experience with each third-party payor.
Cost of Revenue
Our cost of revenue consists primarily of the cost of materials
and supplies, labor, and other costs associated with processing specimens including pathological review, quality control analyses,
delivery charges necessary to render an individualized test result, depreciation, amortization and royalty expense. Costs associated
with performing tests are recorded as the tests are processed.
Research and Development Expenses
Our research and development expenses primarily include personnel
costs, laboratory supplies, reagents, consulting costs associated with developing and validating new testing services and sponsored
research agreements with leading academic institutions for clinical trials and other studies to further validate the use of MyPRS
®
for MM and AMG.
Selling and Marketing Expenses
Our selling and marketing expenses consist primarily of sales commissions
and support costs, salaries and related employee benefits, travel, and marketing costs for our commercial, business development,
medical affairs and managed care functions.
General and Administrative Expenses
Our general and administrative expenses consist primarily of personnel
costs, professional service fees and other costs related to our being a publicly-traded company.
Interest Expense
Interest expense primarily reflects interest on our note payable
- related party.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S.
generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets
and liabilities, revenues and expenses, and related disclosures in the financial statements. Critical accounting policies are those
accounting policies that may be material due to the levels of subjectivity and judgment necessary to account for highly uncertain
matters or the susceptibility of such matters to change, and that have a material impact on financial condition or operating performance.
While we base our estimates and judgments on our experience and on various other factors that we believe to be reasonable under
the circumstances, actual results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies used in the
preparation of our financial statements require significant judgments and estimates:
|
•
|
Accounts Receivable, Contractual Allowance and Allowance for Doubtful Accounts
|
|
•
|
Stock-Based Compensation
|
|
•
|
Accounting for Income Taxes
|
During the six months ended June 30, 2016, other than as discussed
below, there were no significant changes in our critical accounting policies and estimates. Please refer to "Management's
Discussion and Analysis of Financial Condition and Results of Operations" contained in Part II, Item 7 of our Annual Report
on Form 10-K for the year ended December 31, 2015 for a more complete discussion of our critical accounting policies.
Revenue Recognition
We recognize revenue from testing services in accordance with the
Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”), 605, Revenue Recognition, which
requires that four basic criteria be met before revenue can be recognized: (1) persuasive evidence that an arrangement exists;
(2) delivery has occurred and title and the risks and rewards of ownership have been transferred to the client or services have
been rendered; (3) the price is fixed or determinable; and (4) collectability is reasonably assured.
Revenues are recorded on an accrual basis when the contractual obligations
are completed as tests are processed through our laboratory and test results are delivered to ordering physicians. Revenues are
billed to various payors, including Medicare, contracted insurance companies, directly billed customers (UAMS, pharmaceutical companies,
reference laboratories and hospitals) and non-contracted insurance companies. Revenues from Medicare, contracted insurance companies
and directly billed customers are reported based on the contractual rate. The difference between the amounts billed and the contractual
rates from Medicare and contracted insurance companies are recorded as contractual allowances at the same time the revenue is recognized,
to arrive at reported net revenue. The contractual rate is based on established agreed upon rates between us and the respective
payor. Directly billed customers are invoiced at the contractual rate by us. Revenues from non-contracted insurance companies are
reported based on the amount expected to be collected, which is based on the historical collection experience of each payor or
payor group, as appropriate, and anticipated effects of changes in the healthcare industry, if any. The difference between the
amount billed and the amount estimated to be collected from non-contracted insurance companies is recorded as a contractual allowance
at the same time the revenue is recognized, to arrive at reported net revenue. We do not record revenue from individuals for billings
until cash is collected; as collectability is not assured at the time services are provided, therefore there are no accounts receivable
from self-payors. Gross revenues from individuals have been immaterial to date.
Our estimates of net revenue for non-contracted insurance companies
are subject to change based on the contractual status and payment policies of the third-party payors with whom we deal. We regularly
refine our estimates in order to make estimated revenue as accurate as possible based on its most recent collection experience
with each third-party payor. We regularly review our historical collection experience for non-contracted payors and anticipated
changes in the healthcare industry and adjust expected revenues for current and subsequent periods accordingly, including previously
recorded revenues related to outstanding accounts receivable for such non-contracted payors.
Accounts Receivable, Contractual Allowances and Allowance for Doubtful Accounts
We record accounts receivable net of contractual allowances and
an allowance for doubtful accounts. At June 30, 2016 and December 31, 2015, contractual allowances were $2.7 million and $2.1 million,
respectively. We estimate an allowance for doubtful accounts based on the aging of the accounts receivable and the historical collection
experience for each of our contracted payors. When the amounts are determined to be uncollectible, they are expensed as bad debt
and subsequently charged-off against the allowance. During the second quarters of 2016 and 2015, we recognized $0 and $4,000, respectively,
in bad debt expense. During first six months of 2016 and 2015, we recognized $2,000 and $28,000, respectively, in bad debt expense.
At June 30, 2016 and December 31, 2015, there were no allowances for doubtful accounts. Uncollectability of accounts receivable
for a non-contracted payor is typically a reflection of an estimate in excess of actual collections and is adjusted in the period
of collection as a change in estimate resulting in an increase in contractual allowances and, therefore, a reduction in current
period net revenue.
The following tables present our gross accounts receivable from
customers outstanding by aging category reduced by total contractual allowances to arrive at the net accounts receivable balances
at June 30, 2016 and December 31, 2015. Other than our direct bill customers, all of our receivables were pending approval by third-party
payors as of the date that the receivables were recorded:
|
|
June 30, 2016
|
(in thousands)
|
|
0 - 30 Days
|
|
31 - 60 Days
|
|
61 - 90 Days
|
|
Over 90 Days
|
|
Total
|
Medicare
|
|
$
|
177
|
|
|
$
|
18
|
|
|
$
|
22
|
|
|
$
|
17
|
|
|
$
|
234
|
|
Contracted insurance companies
|
|
|
18
|
|
|
|
—
|
|
|
|
4
|
|
|
|
10
|
|
|
|
32
|
|
Direct bill
|
|
|
163
|
|
|
|
10
|
|
|
|
—
|
|
|
|
—
|
|
|
|
173
|
|
Non-contracted insurance companies
|
|
|
314
|
|
|
|
317
|
|
|
|
341
|
|
|
|
1,991
|
|
|
|
2,963
|
|
Accounts receivable, gross
|
|
|
672
|
|
|
|
345
|
|
|
|
367
|
|
|
|
2,018
|
|
|
|
3,402
|
|
Less: contractual allowances
|
|
|
(366
|
)
|
|
|
(272
|
)
|
|
|
(299
|
)
|
|
|
(1,807
|
)
|
|
|
(2,744
|
)
|
Accounts receivable, net
|
|
$
|
306
|
|
|
$
|
73
|
|
|
$
|
68
|
|
|
$
|
211
|
|
|
$
|
658
|
|
|
|
December 31, 2015
|
(in thousands)
|
|
0 - 30 Days
|
|
31 - 60 Days
|
|
61 - 90 Days
|
|
Over 90 Days
|
|
Total
|
Medicare
|
|
$
|
116
|
|
|
$
|
55
|
|
|
$
|
32
|
|
|
$
|
16
|
|
|
$
|
219
|
|
Contracted insurance companies
|
|
|
13
|
|
|
|
—
|
|
|
|
9
|
|
|
|
16
|
|
|
|
38
|
|
Direct bill
|
|
|
101
|
|
|
|
12
|
|
|
|
24
|
|
|
|
14
|
|
|
|
151
|
|
Non-contracted insurance companies
|
|
|
336
|
|
|
|
256
|
|
|
|
215
|
|
|
|
1,244
|
|
|
|
2,051
|
|
Accounts receivable, gross
|
|
|
566
|
|
|
|
323
|
|
|
|
280
|
|
|
|
1,290
|
|
|
|
2,459
|
|
Less: contractual allowances
|
|
|
(347
|
)
|
|
|
(245
|
)
|
|
|
(230
|
)
|
|
|
(1,243
|
)
|
|
|
(2,065
|
)
|
Accounts receivable, net
|
|
$
|
219
|
|
|
$
|
78
|
|
|
$
|
50
|
|
|
$
|
47
|
|
|
$
|
394
|
|
The day sales outstanding (“DSO”) at June 30, 2016 has
increased to 71 days, compared to 53 days at December 31, 2015, attributable to the growth in net accounts receivable which was
influenced by the increase in both test volume and average selling price for billings to non-contracted insurance payors. Since
private non-contracted insurance payors are slower to pay, we expect our DSO’s to increase as net revenues from these payors
increase.
Recently Adopted Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASU”) No. 2016-09, which simplifies several aspects of the accounting for share-based
payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification
on the statement of cash flows. The update is effective for fiscal years and the interim periods within those fiscal years beginning
after December 15, 2016, with early adoption permitted. Amendments related to the timing of when excess tax benefits are recognized,
minimum statutory withholding requirements and forfeitures are applied using a modified retrospective transition method by means
of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. Amendments related
to the presentation of employee taxes paid on the statement of cash flows when an employer withholds shares to meet the minimum
statutory withholding requirement is applied retrospectively. Amendments requiring recognition of excess tax benefits and tax deficiencies
in the income statement are applied prospectively. We elected to early adopt this guidance effective January 1, 2016. The impact
of adoption of this guidance had no effect on our financial position, statements of operations or statements of cash flows.
In May 2015, the FASB issued ASU No. 2015-07 that eliminates the
requirement to categorize investments within the fair value hierarchy if their fair value is measured using the net asset value
per share practical expedient in the FASB’s fair value measurement guidance. The amendments also limit certain disclosures
to investments for which the entity has elected to measure at fair value using the net asset value per share practical expedient.
The amendments were applied retrospectively by removing from the fair value hierarchy any investments for which fair value is measured
using the net asset value per share practical expedient. Adoption of this guidance did not have an impact on the Company’s
financial position or results of operations.
Recent Accounting Pronouncements
We have reviewed all recently issued standards and have determined
that other than as disclosed above and in Note 2 to the financial statements included herein, such standards will not have a material
impact on our financial statements or do not otherwise apply to our operations.
Future Accounting Pronouncements
Section 107 of the JOBS Act provides that an emerging growth company,
such as our company, can take advantage of an extended transition period for complying with new or revised accounting standards.
Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply
to private companies. Although to date, we have not yet taken advantage of this delay, we have elected to avail ourselves of this
extended transition period for adopting new or revised accounting standards in the future. Therefore, we will not be subject to
the same new or revised accounting standards as other public companies that are not emerging growth companies. As a result of this
election, our financial statements may not be comparable to companies that comply with public company effective dates. In the future,
we may elect to opt out of the extended period for adopting new or revised accounting standards. If we do so, we will be required
to disclose such decision, which will be irrevocable.
Results of Operations
Second Quarter of 2016 Compared to the Second Quarter of 2015
Net Revenue
Our net revenue was $874,000 during the second quarter of 2016,
an increase of $140,000, or 19%, compared to $734,000 during the second quarter of 2015. Net revenue and tests billed during the
second quarters of 2016 and 2015 were as follows:
|
|
Three Months Ended June 30,
|
|
|
Net Revenue (in 000s)
|
|
Tests Billed
|
|
|
|
|
Increase (Decrease)
|
|
|
|
Increase (Decrease)
|
|
|
2016
|
|
2015
|
|
$
|
|
%
|
|
2016
|
|
2015
|
|
#
|
|
%
|
Clinical patients at U.S. hospitals and direct billed customers
|
|
$
|
774
|
|
|
$
|
329
|
|
|
$
|
445
|
|
|
|
135
|
%
|
|
|
481
|
|
|
|
283
|
|
|
|
198
|
|
|
|
70
|
%
|
Research testing services
|
|
|
40
|
|
|
|
405
|
|
|
|
(365
|
)
|
|
|
(90
|
)%
|
|
|
47
|
|
|
|
486
|
|
|
|
(439
|
)
|
|
|
(90
|
)%
|
Pharmaceutical services
|
|
|
60
|
|
|
|
—
|
|
|
|
60
|
|
|
|
100
|
%
|
|
|
12
|
|
|
|
—
|
|
|
|
12
|
|
|
|
100
|
%
|
Total
|
|
$
|
874
|
|
|
$
|
734
|
|
|
$
|
140
|
|
|
|
19
|
%
|
|
|
540
|
|
|
|
769
|
|
|
|
(229
|
)
|
|
|
(30
|
)%
|
The number of tests we billed for clinical patients at U.S. hospitals
and direct billed customers increased 70% during the second quarter of 2016 compared to the same period in 2015 due to an increase
in new hospital customers and an increase in tests sourced from existing customers, a direct result of our increased marketing
efforts. Net revenue recognized for such tests billed increased 135% during the second quarter of 2016 when compared to the same
period in 2015. The increase in net revenue was driven primarily by the increased test volume and an increase in test average selling
price estimates used to calculate revenue for billings to non-contracted insurance payors based on our positive collections experience
with such payors. Additionally, net favorable changes in estimates of $82,000 were recorded in the second quarter of 2016, related
to revenues recorded in prior years. Net revenue of $329,000 in the second quarter of 2015 was reduced by $43,000 of net unfavorable
changes in estimates related to revenue recorded in 2014.
Both the net revenue recognized and number of tests reported and
billed for UAMS research testing services decreased 90% during the second quarter of 2016 compared to the second quarter of 2015
primarily due to the decrease in funds available at UAMS for such services. As previously reported, we expect continued declining
revenue sourced from UAMS testing services.
In our pharmaceutical services business, MyPRS
®
will
be run across multiple clinical trials in connection with the development of novel treatments for patients with multiple myeloma.
We recognized net revenue of $60,000 for services rendered during the second quarter of 2016. We are pursuing additional projects
for our pharmaceutical services business.
Cost of Revenue
Cost of revenue was $628,000, or 72% of net revenues, during the
second quarter of 2016, a decrease of $50,000, or 7%, compared to $678,000, or 92% of net revenues, during the second quarter of
2015. The decrease in cost of revenue is primarily attributable to an $86,000 decrease in laboratory supply costs, a reflection
of lower test volumes from UAMS, offset by a $27,000 increase in royalty expense, related to an increase in revenues, and a $9,000
increase in labor related to re- assignment of laboratory personnel from internal research projects.
Research and Development Expenses
Research and development expenses were $334,000 during the second
quarter of 2016, an increase of $140,000, or 72%, when compared to $194,000 during the second quarter of 2015. The increase is
primarily attributable to $195,000 increase in sponsored research programs related to research to further validate the use of MyPRS
®
in MM and AMG, offset by a $55,000 decrease in our usage of labor, materials and supplies for internal research projects compared
to the second quarter of 2015.
Selling and Marketing Expenses
Selling and marketing expenses were $555,000 during the second quarter
of 2016, a decrease of $19,000, or 3%, when compared to $574,000 during the second quarter of 2015. The decrease is primarily attributed
to a $51,000 decrease in marketing projects and conference expenses, offset by a $32,000 increase in personnel costs related to
establishing our medical affairs function.
General and Administrative Expenses
General and administrative expenses were $1.8 million during the
second quarter of 2016, an increase of $63,000, or 4%, when compared to the second quarter of 2015. The increase was primarily
attributable to: $44,000 in increased personnel costs related to hiring of accounting, internal billing and IT staff; $72,000 in
increased expenses related to investor relations and board of directors compensation; and $21,000 in increased expenses related
to facility costs and other administrative costs; offset by a $58,000 decrease in stock-based compensation expense and $16,000
in reduced spending related to professional services.
Interest Expense
Interest expense was $23,000 during the second quarter of 2016,
compared to $72,000 during the second quarter of 2015. The decrease was primarily due to interest expense recorded in the second
quarter of 2015 related to the increase in the principal amount of an unsecured note payable due to a related party. The increase
in the principal amount of the note was deferred and was amortized to interest expense over the initial term of the note to June
30, 2015.
First Six Months of 2016 Compared to the First Six Months of 2015
Net Revenue
Our net revenue was $1.7 million during the first six months of
2016, an increase of $314,000, or 23%, compared to $1.4 million during the first six months of 2015. Net revenue and tests billed
during the first six months of 2016 and 2015 were as follows:
|
|
Six Months Ended June 30,
|
|
|
Net Revenue (in 000s)
|
|
Tests Billed
|
|
|
|
|
Increase (Decrease)
|
|
|
|
Increase (Decrease)
|
|
|
2016
|
|
2015
|
|
$
|
|
%
|
|
2016
|
|
2015
|
|
#
|
|
%
|
Clinical patients at U.S. hospitals and direct billed customers
|
|
$
|
1,547
|
|
|
$
|
553
|
|
|
$
|
994
|
|
|
|
180
|
%
|
|
|
965
|
|
|
|
535
|
|
|
|
430
|
|
|
|
80
|
%
|
Research testing services
|
|
|
80
|
|
|
|
825
|
|
|
|
(745
|
)
|
|
|
(90
|
)%
|
|
|
98
|
|
|
|
1,012
|
|
|
|
(914
|
)
|
|
|
(90
|
)%
|
Pharmaceutical services
|
|
|
65
|
|
|
|
—
|
|
|
|
65
|
|
|
|
100
|
%
|
|
|
12
|
|
|
|
—
|
|
|
|
12
|
|
|
|
100
|
%
|
Total
|
|
$
|
1,692
|
|
|
$
|
1,378
|
|
|
$
|
314
|
|
|
|
23
|
%
|
|
|
1,075
|
|
|
|
1,547
|
|
|
|
(472
|
)
|
|
|
(31
|
)%
|
The number of tests we billed for clinical patients at U.S. hospitals
and direct billed customers increased 80% during the first six months of 2016 compared to the same period in 2015 due to an increase
in new hospital customers and an increase in tests sourced from existing customers, a direct result of our increased marketing
efforts. Net revenue recognized for such tests billed increased 180% during the first six months of 2016 when compared to the same
period in 2015. The increase in net revenue was driven primarily by the increased test volume and an increase in test average selling
price estimates used to calculate revenue for billings to non-contracted insurance payors based on our positive collections experience
with such payors. Additionally, net favorable changes in estimates of $224,000 were recorded in the first six months of 2016, related
to revenues recorded in prior years. Net revenue of $553,000 in the first six months of 2015 was reduced by $73,000 of net unfavorable
changes in estimates related to revenue recorded in 2014.
Both the net revenue recognized and number of tests reported and
billed for UAMS research testing services decreased 90% during the first six months of 2016 compared to the first six months of
2015 primarily due to the decrease in funds available at UAMS for such services. As previously reported, we expect continued declining
revenue sourced from UAMS testing services.
In our pharmaceutical services business, MyPRS
®
will
be run across multiple clinical trials in connection with the development of novel treatments for patients with multiple myeloma.
We recognized net revenue of $65,000 for services rendered during the first six months of 2016. We are pursuing additional projects
for our pharmaceutical services business.
Cost of Revenue
Cost of revenue was $1.3 million, or 74% of net revenues, during
the first six months of 2016, a decrease of $182,000, or 13%, compared to $1.4 million, or 104% of net revenues, during the first
six months of 2015. The decrease in cost of revenue is primarily attributable to a decrease of $57,000 of assigned laboratory personnel
and $167,000 decrease in laboratory supply costs, a reflection of lower test volumes from UAMS, offset by a $42,000 increase in
royalty expense, related to an increase in revenues.
Research and Development Expenses
Research and development expenses were $641,000 during the first
six months of 2016, an increase of $348,000, or 119%, when compared to $293,000 during the first six months of 2015. The increase
is primarily attributable to a $381,000 increase in sponsored research programs related to research to further validate the use
of MyPRS
®
in MM and AMG, offset by a $33,000 decrease in our usage of labor, materials and supplies for internal
research projects compared to the first six months of 2015.
Selling and Marketing Expenses
Selling and marketing expenses were $1.1 million during the first
six months of 2016, an increase of $57,000, or 6%, when compared to $1.0 million during the first six months of 2015. The increase
is primarily attributed to a $74,000 increase in personnel costs related to the establishment of our medical affairs function,
offset by a $17,000 decrease in marketing projects and conferences expenses.
General and Administrative Expenses
General and administrative expenses were $3.9 million during the
first six months of 2016, an increase of $208,000, or 6%, when compared to $3.7 million during the first six months of 2015. The
increase was primarily attributable to: $202,000 in increased personnel costs related to hiring of accounting, internal billing
and IT staff; $118,000 in increased expenses related to investor relations and board of directors; and $18,000 in expenses related
to facility costs and other administrative costs; partially offset by $130,000 in reduced spending related to professional services.
Interest Expense
Interest expense was $46,000 during the first six months of 2016,
compared to $94,000 during the first six months of 2015. The decrease was primarily due to interest expense recorded in the second
quarter of 2015 related to the increase in the principal amount of an unsecured note payable due to a related party. The increase
in the principal amount of the note was deferred and was amortized to interest expense over the initial term of the note to June
30, 2015.
Liquidity and Capital Resources
We had cash and cash equivalents of $6.5 million at June 30, 2016
compared to $10.8 million at December 31, 2015. At June 30, 2016, we had working capital of $5.4 million.
Our existing cash resources will not be sufficient to meet our operating
plan for the full 12-month period after the date of this filing. Based on our current plans and available resources, we believe
we can maintain our current operations through June 2017. As a result, to continue to fund our ongoing operations beyond June 2017,
we would need to (1) raise additional capital through the issuance of equity, debt or other securities, (2) convert our existing
debt into equity, (3) enter into strategic partnerships, alliances, collaborations or other similar transactions or (4) a combination
thereof.
Due to current market conditions, our current liquidity position
and our depressed stock price, we believe it is unlikely that we will be able to obtain additional equity or debt financing on
terms acceptable to us, if at all, and raise substantial doubt about our ability to continue as a going concern. If we are unable
to raise additional capital or successfully complete a strategic partnership, alliance, collaboration or other similar transaction,
we will need to delay or reduce expenses or limit or curtail operations, any of which would have a material adverse effect on our
business. Further, if we are unable to raise additional capital or successfully complete a strategic partnership, alliance, collaboration
or other similar transaction on a timely basis and on terms that are acceptable to us, we would also be required to sell or license
our assets, sell the Company or otherwise liquidate all or a portion of our assets and/or cease our operations altogether.
We have no material commitments for capital expenditures at this
time.
Our financial statements do not include any adjustments that might
be necessary if we are unable to continue as a going concern. If we cannot continue as a viable entity, our stockholders might
lose some or all of their investment in us.
Operating activities
Cash used by operations during the first six months of 2016 was
$4.2 million, compared to $3.3 million during the first six months of 2015.
During the first six months of 2016, the use of cash from changes
in operating assets and liabilities of $452,000 includes a $264,000 increase in accounts receivable, which primarily reflects an
increase in our net revenue during the first six months of 2016 when compared to the fourth quarter of 2015, an increase in inventory
of $26,000 and an increase in prepaid expenses and other current assets of $273,000, partially offset by an increase in accounts
payable and accrued liabilities of $111,000.
During the first six months of 2015, the provision of cash from
changes in operating assets and liabilities of $303,000 includes a $507,000 decrease in accounts receivable, a $233,000 increase
in accounts payable and accrued liabilities, primarily due to higher accrued compensation and offering costs, and a $105,000 reduction
in our prepaid expenses and other current assets, partially offset by an increase in inventory of $357,000 and a reduction in our
lease termination/abandonment payable of $185,000.
Investing activities
Net cash used by investing activities during the first six months
of 2016 and 2015 of $3,000 and $68,000, respectively, were for the purchase of property and equipment.
As of this time, we plan to focus on our growth strategies and do
not plan to use a material amount of our cash resources for the purchase of property and equipment during the remainder of 2016.
Financing activities
Net cash used by financing activities during the first six months
of 2016 of $98,000 consisted of $56,000 used to repurchase shares from employees to satisfy tax withholding obligations for restricted
stock awards and $42,000 for repayment of our capital lease obligation.
Net cash provided by financing activities during the first six months
of 2015 of $8.7 million consisted primarily of the net proceeds from our public offering of common stock in February 2015 of $9.1
million, partially offset by $346,000 used to repurchase shares from employees to satisfy tax withholding obligations for restricted
stock awards and $36,000 for repayment of our capital lease obligation.