Notes to Unaudited Consolidated Financial Statements
Note 1. Description of Business, Basis of Presentation, Pending Acquisition, Public Offerings and Reverse Stock Splits
We are a diagnostics company focused on developing and commercializing proprietary genomic tests and services to improve the diagnosis,
prognosis and response to treatment of cancer (theranosis). Our proprietary tests target cancers where prognosis information is critical and where predicting treatment outcomes using currently available techniques is limited. These cancers include
hematological, urogenital and HPV-associated cancers. We seek to provide our tests and services to oncologists and pathologists at hospitals, cancer centers and physician offices, as well as to biopharmaceutical companies and clinical research
organizations for their clinical trials.
Pending Acquisition of Bioserve India
On May 12, 2014, we entered into two related agreements whereby we agreed to acquire BioServe BioTechnologies (India) Private Limited, an Indian corporation
(BioServe).
BioServe is a leading genomic service and next-generation sequencing company founded in 2002 serving both the research and
clinical markets and based in Hyderabad, India. It has approximately 26 employees, 19 working in its laboratory and 7 in sales. If the transaction is consummated, we believe we will be able to access the Indian healthcare market. The acquisition
provides the Company with an infrastructure in India for developing lower cost manufacturing of probes and kits including probes and kits used for our proprietary FHACT test, a center for remote genetic analysis of US cases at lower cost and
access to one of the fastest-growing molecular and clinical diagnostic markets in the world. BioServe will continue to serve biotechnology and biopharmaceutical companies, diagnostic companies and research hospitals, including those owned or
operated by the Indian government, as well as expand its customer base.
The parties to the first agreement (the India Agreement) are the
Company, Ramakishna V. Modali (the current general manager of BioServe, Modali), Ventureast Trustee Company Pvt Ltd and affiliates, its principal shareholder (Ventureast), and certain other shareholders residing in India all
of whom in the aggregate own approximately 74% of BioServe. The parties to the second share purchase agreement (the US Agreement) are the Company and BioServe Biotechnologies LTD, a Maryland corporation and an affiliate of BioServe which
owns approximately 15% of BioServe, with the majority of the other outstanding shares held by the BioServe Employee Stock Ownership Plan which will remain in place. The aggregate purchase price is approximately $1.9 million payable to the different
shareholders of BioServe as follows: (i) Ventureast will receive a payment equivalent to the cash value of 84,278 shares of the Companys common stock at the time of payment (currently approximately $1.2 million), payable in 30 months or
sooner if the Company effects a public offering of its common stock prior to that time, (ii) approximately $100,000 is payable in cash, and (iii) approximately 8,687 shares will be issued under the US Agreement. The Company will also
assume approximately $150,000 in indebtedness. The Company is in the process of forming a subsidiary in India to which it will assign its rights to purchase shares under the India Agreement. Certain payments to the BioServe shareholders will be
subject to set-off in the event of claims for indemnification for any breaches of any representations or warranties in the agreement.
As a condition of
closing Mr. Modali has agreed to be employed by the Company. To induce him enter into this agreement, he will receive a restricted stock grant of approximately 22,683 shares of the Companys common stock that will be fully vested upon
issuance. The shares will be subject to customary sales restrictions under United States Securities regulations and subject to set-off as a part of the warranties in the agreement.
The consummation of the transactions is subject to various conditions, including certain filings to be made and approvals received in India; the absence of
any material adverse effect with respect to BioServe; the absence of any order or law preventing consummation of the transactions; and other legal and regulatory requirements.
Either party may terminate the agreements and the transactions contemplated thereby if the Closing has not occurred by August 12, 2014. The Company
anticipates closing in the third quarter of 2014.
Public Offerings and Reverse Stock Splits
In April 2013, we sold shares of our common stock in an initial public offering (IPO). Additionally, we sold shares of our common stock in public
offerings in August 2013 and in October 2013. Refer to Note 6 for further discussion of these offerings.
On February 8, 2013, we filed a charter
amendment with the Secretary of State for the State of Delaware and effected a 1-for-2 reverse stock split of our common stock. On March 1, 2013, we filed another charter amendment with the Secretary of State for the State of Delaware and
effected a 1-for-2.5 reverse stock split of our common stock. All shares and per share information referenced throughout the consolidated financial statements reflect both reverse splits.
6
Note 2. Significant Accounting Policies
Basis of presentation
: The accompanying unaudited condensed financial statements of the Company have been prepared in accordance with
accounting principles generally accepted in the United States of America for interim financial information and with the instructions for interim reporting as they are prescribed by the Securities and Exchange Commission. Accordingly, they do not
include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary to make the financial statements not misleading have been included. As such, the information included in this quarterly report on Form 10-Q should be read in conjunction with the audited consolidated financial
statements as of and for the year ended December 31, 2013 that are included in our Form 10-K filed with the SEC on March 28, 2014. The consolidated balance sheet as of December 31, 2013, included herein was derived from the audited
financial statements as of that date, but does not include all disclosures including notes required by GAAP. Operating results for the three-month period ended March 31, 2014 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2014.
Segment Reporting
: Operating segments are defined as components of an enterprise about which separate
discrete information is used by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. We view our operations and manage our business in one operating segment, which is the
business of developing and selling diagnostic tests.
Liquidity
: Our primary sources of liquidity have been funds generated from our debt
financings and equity financings. In addition, we have generated funds from the following sources: (i) cash received from sales of state net operating loss carryforwards; (ii) grants from the National Institutes of Health, and;
(iii) cash collections from our customers.
Principles of consolidation
: The accompanying consolidated financial statements include the
accounts of Cancer Genetics, Inc. and our wholly owned subsidiary, Cancer Genetics Italia S.r.l (CGI Italia). CGI Italia manufactures DNA probes. CGI Italia had approximately $431,000 and $398,000 in total assets at March 31, 2014
and December 31, 2013, respectively, and approximately $28,000 and $44,000 in total revenue for the three months ended March 31, 2014 and 2013, respectively. All significant intercompany account balances and transactions have been
eliminated in consolidation.
Use of estimates and assumptions
: The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates made by management include, among others, realization of amounts billed, realization of long-lived assets, realization of
intangible assets, accruals for litigation and registration payments and assumptions used to value stock options and warrants. Actual results could differ from those estimates.
Risks and uncertainties
: We operate in an industry that is subject to intense competition, government regulation and rapid technological change. Our
operations are subject to significant risk and uncertainties including financial, operational, technological, regulatory and other risks, including the potential risk of business failure.
Cash and cash equivalents
: Highly liquid investments with original maturities of three months or less when purchased are considered to be cash
equivalents. Financial instruments which potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents. We maintain cash and cash equivalents with high-credit quality financial institutions. At times, such
amounts may exceed insured limits. We have not experienced any losses in such accounts and believe we are not exposed to any significant credit risk on our cash and cash equivalents.
Restricted cash
: Represents cash held at financial institutions which we may not withdraw and which collateralizes certain of our financial
commitments. All of our restricted cash is invested in interest bearing certificates of deposit. Our restricted cash collateralizes a fully-utilized $6.0 million line of credit with Wells Fargo Bank and a $300,000 letter of credit in favor of our
landlord, pursuant to the terms of the lease for our Rutherford facility.
Revenue recognition
: Revenue is recognized in accordance with
Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 605, Revenue Recognition, and ASC 954-605 Health Care Entities, Revenue Recognition which requires that four basic criteria must 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 customer or services have been rendered;
(3) the price is fixed or determinable; and (4) collectability is reasonably assured. In determining whether the price is fixed or determinable, we consider payment limits imposed by insurance carriers and Medicare and the amount of
revenue recorded takes into account the historical percentage of revenue we have collected for each type of test for each payor category. Periodically, an adjustment is made to revenue to record differences between our anticipated cash receipts from
insurance carriers and Medicare and actual receipts from such payors. For the periods presented, such adjustments were not significant. For direct bill customers (including
7
clinical trials customers), revenue is recorded based upon the contractually agreed upon fee schedule. When assessing collectability, we consider whether we have sufficient payment history to
reliably estimate a payors individual payment patterns. For new tests where there is no evidence of payment history at the time the tests are completed, we only recognize revenues once reimbursement experience can be established. We then
recognize revenue equal to the amount of cash received. Sales of probes are recorded on the shipping date. We do not bill customers for shipping and handling fees and do not collect any sales or other taxes.
Revenues from grants to support product development are recognized when costs and expenses under the terms of the grant have been incurred and payments under
the grants become contractually due.
Accounts receivable
: Accounts receivable are carried at original invoice amount less an estimate for
contractual adjustments and doubtful receivables, the amounts of which are determined by an analysis of individual accounts. Our policy for assessing the collectability of receivables is dependent upon the major payor source of the underlying
revenue. For direct bill clients, an assessment of credit worthiness is performed prior to initial engagement and is reassessed periodically. If deemed necessary, an allowance is established on receivables from direct bill clients. For insurance
carriers where there is not an established pattern of collection, revenue is not recorded until cash is received. For receivables where insurance carriers have made payments to patients instead of directing payments to the Company, an allowance is
established for a portion of such receivables. After reasonable collection efforts are exhausted, amounts deemed to be uncollectible are written off against the allowance for doubtful accounts. Since the Company only recognizes revenue to the extent
it expects to collect such amounts, bad debt expense related to receivables from patient service revenue is recorded in general and administrative expense in the consolidated statement of operations. Recoveries of accounts receivable previously
written off are recorded when received.
Deferred revenue:
Payments received in advance of services rendered are recorded as deferred revenue
and are subsequently recognized as revenue in the period in which the services are performed.
Fixed assets:
Fixed assets consist of
diagnostic equipment, furniture and fixtures and leasehold improvements. Fixed assets are carried at cost and are depreciated over the estimated useful lives of the assets, which generally range from five to seven years. Leasehold improvements are
amortized over the lesser of the lease term or the estimated useful lives of the improvements. The straight-line method is used for depreciation and amortization. Repairs and maintenance are charged to expense as incurred while improvements are
capitalized. Upon sale, retirement or disposal of fixed assets, the accounts are relieved of the cost and the related accumulated depreciation or amortization with any gain or loss recorded to the consolidated statement of operations.
Fixed assets are reviewed for impairment whenever changes in circumstances indicate that the carrying amount of an asset may not be recoverable. These
computations utilize judgments and assumptions inherent in our estimate of future cash flows to determine recoverability of these assets. If our assumptions about these assets were to change as a result of events or circumstances, we may be required
to record an impairment loss.
Loan guarantee and financing fees:
Loan guarantee fees are amortized on a straight-line basis over the term of
the guarantee. Financing fees are amortized using the effective interest method over the term of the related debt.
Warrant liability
: We have
issued certain warrants which contain an exercise price adjustment feature in the event we issue additional equity instruments at a price lower than the exercise price of the warrant. The warrants are described herein as derivative warrants. We
account for these derivative warrants as liabilities. These common stock purchase warrants do not trade in an active securities market, and as such, we estimate the fair value of these warrants using the binomial lattice valuation pricing model with
the assumptions as follows. The risk-free interest rate for periods within the contractual life of the warrant is based on the U.S. Treasury yield curve. The expected life of the warrants is based upon the contractual life of the warrants.
Volatility is estimated based on an average of the historical volatilities of the common stock of three entities with characteristics similar to those of the Company. Prior to our IPO, the measurement date fair value of the underlying common shares
was based upon an external valuation of our shares. (See Note 9). Following the IPO in April 2013 and until our shares listed on the NASDAQ Capital Market in August 2013, we used the closing price of our shares on the OTC Bulletin Board. Following
the listing of our shares on the NASDAQ Capital Market in August 2013, we used the closing price on the NASDAQ Capital Market.
We compute the fair value
of the warrant liability at each reporting period and the change in the fair value is recorded as non-cash expense or non-cash income. The key component in the value of the warrant liability is our stock price, which is subject to significant
fluctuation and is not under our control. The resulting effect on our net income (loss) is therefore subject to significant fluctuation and will continue to be so until the warrants are exercised, amended or expire. Assuming all other fair value
inputs remain constant, we will record non-cash expense when the stock price increases and non-cash income when the stock price decreases.
Income
taxes
: Income taxes are provided for the tax effects of transactions reported in the consolidated financial statements and consist of taxes currently due plus deferred income taxes. Deferred income taxes are recognized for temporary differences
between the
8
financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future. Deferred income taxes are also recognized for net operating loss
carryforwards that are available to offset future taxable income and research and development credits.
Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized. We have established a full valuation allowance on our deferred tax assets.
ASC 740, Income Taxes, clarifies the accounting for uncertainty in income taxes recognized in the financial statements. ASC 740 provides that a tax benefit
from uncertain tax positions may be recognized when it is more-likely-than-not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits of the position.
Income tax positions must meet a more-likely-than-not recognition threshold to be recognized. ASC 740 also provides guidance on measurement, de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and
transition.
Our policy is to recognize interest and/or penalties related to income tax matters in income tax expense. There is no accrual for interest or
penalties on our consolidated balance sheets and we have not recognized interest and/or penalties in the consolidated statements of operations.
Patents
: We account for intangible assets under ASC 350-30. Patents consist of legal fees incurred and are recorded at cost and amortized over the
useful lives of the assets, using the straight-line method. Certain patents are in the legal application process and therefore are not currently being amortized. We review the carrying value of patents at the end of each reporting period. Based upon
our review, there were no intangible asset impairments during the periods reported. Accumulated amortization of patents as of March 31, 2014 and December 31, 2013 was approximately $63,000 and $56,000, respectively.
Research and development
: Research and development costs associated with service and product development include direct costs of payroll, employee
benefits, stock-based compensation and supplies and an allocation of indirect costs including rent, utilities, depreciation and repairs and maintenance. All research and development costs are expensed as they are incurred.
Registration payment arrangements
: We account for our obligations under registration payment arrangements in accordance with ASC 825-20,
Registration Payment Arrangements
. ASC 825-20 requires us to record a liability if we determine a registration payment is probable and if it can reasonably be estimated. As of March 31, 2014 and December 31, 2013, we have an accrued
liability of $300,000 related to the issuance of Series B preferred stock.
Stock-based compensation
: Stock-based compensation is accounted for in
accordance with the provisions of ASC 718,
Compensation-Stock Compensation
, which requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors based on estimated fair values on
the grant date. We estimate the fair value of stock-based awards on the date of grant using the Black-Scholes option pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite
service periods using the straight-line method. See additional information in Note 7.
All issuances of stock options or other issuances of equity
instruments to employees as the consideration for services received by us are accounted for based on the fair value of the equity instrument issued.
We
account for stock-based compensation awards to non-employees in accordance with ASC 505-50,
Equity Based Payments to Non-Employees
. Under ASC 505-50, we determine the fair value of the warrants or stock-based compensation awards granted as
either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. Stock-based compensation awards issued to non-employees are recorded in expense and additional paid-in
capital in stockholders equity over the applicable service periods based on the fair value of the awards or consideration received at the vesting date.
Fair value of financial instruments
: The carrying amount of cash and cash equivalents, restricted cash, accounts receivable, accounts payable and
accrued expenses, approximate their estimated fair values due to the short term maturities of those financial instruments. These financial instruments are considered Level 1 measurements under the fair value hierarchy. The fair values of our notes
payable, line of credit and capital leases approximate carrying value under Level 2 of the fair value hierarchy. The fair value of warrants recorded as derivative liabilities is described in Note 9.
Joint venture accounted for under the equity method
: The Company records its joint venture investment following the equity method of accounting,
reflecting its initial investment in the joint venture and its share of the joint ventures net earnings or losses and distributions. The Companys share of the joint ventures net loss was approximately $12,000 and $0 for the
quarterly periods ended March 31, 2014 and 2013, respectively, and is included in Research and development expense on the Consolidated Statement of Operations. The Company has a net receivable due from the joint venture of approximately $30,000
and $24,000 at March 31, 2014 and December 31, 2013, respectively, which is included in other assets in the Consolidated Balance Sheet. See additional information in Note 11.
9
Subsequent events
: We have evaluated potential subsequent events through the date the financial statements
were issued.
Earnings (loss) per share
: Basic earnings (loss) per share is computed by dividing net income (loss) available to common stockholders
by the weighted average number of common shares assumed to be outstanding during the period of computation. Diluted earnings per share is computed similar to basic earnings per share except that the numerator is adjusted for the change in fair value
of the warrant liability (only if dilutive) and the denominator is increased to include the number of dilutive potential common shares outstanding during the period using the treasury stock method.
Basic net income (loss) and diluted net loss per share data were computed as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2014
|
|
|
2013
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income (loss) for basic earnings per share
|
|
$
|
(2,485,893
|
)
|
|
$
|
2,360,408
|
|
Change in fair value of warrant liability
|
|
|
|
|
|
|
5,299,000
|
|
|
|
|
|
|
|
|
|
|
Net (loss) for diluted earnings per share
|
|
$
|
(2,485,893
|
)
|
|
$
|
(2,938,592
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average basic common shares outstanding
|
|
|
9,276,643
|
|
|
|
1,349,936
|
|
Assumed conversion of dilutive securities:
|
|
|
|
|
|
|
|
|
Common stock purchase warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potentially dilutive common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per share adjusted weighted-average shares
|
|
|
9,276,643
|
|
|
|
1,349,936
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
(0.27
|
)
|
|
$
|
1.75
|
|
|
|
|
|
|
|
|
|
|
Diluted net loss per share
|
|
$
|
(0.27
|
)
|
|
$
|
(2.18
|
)
|
|
|
|
|
|
|
|
|
|
The following table summarizes potentially dilutive adjustments to the weighted average number of common shares which were
excluded from the calculation:
|
|
|
|
|
|
|
|
|
|
|
At March 31,
|
|
|
|
2014
|
|
|
2013
|
|
Common stock purchase warrants
|
|
|
1,781,199
|
|
|
|
1,111,588
|
|
Stock options
|
|
|
848,092
|
|
|
|
548,007
|
|
Restricted shares of common stock
|
|
|
5,000
|
|
|
|
|
|
Common shares issuable upon conversion of Series A Preferred Stock
|
|
|
|
|
|
|
352,614
|
|
Common shares issuable upon conversion of Series B Preferred Stock
|
|
|
|
|
|
|
364,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,634,291
|
|
|
|
2,376,529
|
|
|
|
|
|
|
|
|
|
|
Note 3. Revenue and Accounts Receivable
Revenue by payor type for the three months ended March 31, 2014 and 2013 is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
Medicare
|
|
$
|
250,120
|
|
|
$
|
257,063
|
|
Direct bill (including clinical trials)
|
|
|
869,260
|
|
|
|
511,347
|
|
Insurance carrier and all others
|
|
|
310,995
|
|
|
|
450,257
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,430,375
|
|
|
$
|
1,218,667
|
|
|
|
|
|
|
|
|
|
|
10
Accounts receivable by payor type at March 31, 2014 and December 31, 2013 consists of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
2014
|
|
|
December 31,
2013
|
|
|
|
|
Medicare
|
|
$
|
486,778
|
|
|
$
|
408,856
|
|
Direct bill (including clinical trials)
|
|
|
794,020
|
|
|
|
628,830
|
|
Insurance carrier and all others
|
|
|
573,298
|
|
|
|
565,353
|
|
Allowance for doubtful accounts
|
|
|
(36,000
|
)
|
|
|
(36,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,818,096
|
|
|
$
|
1,567,039
|
|
|
|
|
|
|
|
|
|
|
We have historically derived a significant portion of our revenue from a limited number of test ordering sites. The test
ordering sites are largely hospitals, cancer centers, reference laboratories, physician offices and clinical trial clients. Oncologists and pathologists at these sites order the tests on behalf of the needs of their oncology patients or as part of a
clinical trial sponsored by a biopharmaceutical company in which the patient is being enrolled. The top five test ordering sites during the three months ended March 31, 2014 and 2013 accounted for 63% and 58% respectively, of our clinical
testing volumes, with 32 % and 30% respectively, of the volume coming from community hospitals. During the three months ended March 31, 2014, there was one site which accounted for approximately 10% or more of our revenue. A clinical trial
client accounted for approximately 33% of our revenue. During the three months ended March 31, 2013, there were three sites which each accounted for approximately 10% or more of our revenue. A clinical trial client accounted for approximately
21%, a university teaching center accounted for approximately 12%, and a community oncology practice accounted for approximately 12% of our revenue. While we have agreements with our clinical trials clients, volumes from these clients is subject to
the progression and continuation of the trials as determined by the client which can impact testing volume. We generally do not have formal written agreements with other testing sites and, as a result, we may lose these significant test ordering
sites at any time.
Note 4. Notes Payable and Line of Credit
Below is a summary of our short-term and long-term debt obligations as of March 31, 2014 and December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
March 31,
2014
|
|
|
December 31,
2013
|
|
|
|
|
Secured Note Payable, short-term
|
|
$
|
|
|
|
$
|
22,298
|
|
|
|
|
|
|
|
|
|
|
Notes Payable, Current Portion
|
|
$
|
|
|
|
$
|
22,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Line of Credit, Principal Balance
|
|
$
|
|
|
|
$
|
6,000,000
|
|
|
|
|
|
|
|
|
|
|
Line of Credit, Current Portion
|
|
$
|
|
|
|
$
|
6,000,000
|
|
|
|
|
|
|
|
|
|
|
Lines of Credit, Long-Term
|
|
$
|
6,000,000
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Business Line of Credit Wells Fargo
At December 31, 2013 and March 31, 2014, we had fully utilized a line of credit (Line) with Wells Fargo Bank which provided for maximum
borrowings of $6 million. Interest on the Line was due monthly equal to 1.75% above the Daily One Month LIBOR rate (2.0% at March 31, 2014). The Line required the repayment of principal, and any unpaid interest, in a single payment due upon
maturity. The Line matured April 1, 2014, was guaranteed by John Pappajohn, our Chairman of the Board of Directors and significant shareholder, and was collateralized by a first lien on all of our assets including the assignment of our
approved and pending patent applications.
Subsequent Event
On April 1, 2014 we entered into a credit agreement (the Credit Agreement) and re-negotiated the terms of the Line with Wells Fargo Bank.
Under the terms of the Credit Agreement we maintain the Line with maximum borrowings of $6 million which have been fully drawn. The Line has been extended through April 1, 2016 at a rate of interest equal to LIBOR plus 1.75% (2.0% at
April 1, 2014). The facility requires monthly interest payments. The pledge of all of our assets and intellectual property, as well as the guarantee by Mr. Pappajohn, was released and instead we restricted $6.0 million in cash, which is
invested in an interest bearing certificate of deposit, as collateral. Additionally, we are required to maintain limits on capital spending and are restricted as to the amount we may pledge as collateral for additional borrowings from any source.
The Credit Agreement requires the repayment of principal, and any unpaid interest, in a single payment due upon maturity. As result of the extension of the maturity date and the transfer of cash to Wells Fargo as collateral, we have presented the
line of credit as a long-term liability and the cash collateral as restricted cash at March 31, 2014. The cash will remain restricted until such time as the Line is repaid.
11
Secured Note Payable
On September 25, 2012, we entered into a note payable secured by lab equipment due March 25, 2014. The note required monthly payments of principal
and interest at 18% per annum. At December 31, 2013, $22,298 was outstanding under the note. On February 21, 2014, the note was paid off prior to its contractual due date.
Note 5. Letter of Credit
During 2013 we restricted an additional $50,000 in cash and secured a $300,000 letter of credit in favor of our landlord pursuant to the
terms of the lease for our Rutherford facility. At March 31, 2014 the letter of credit was fully secured by the restricted cash disclosed on our Consolidated Balance Sheet.
Note 6. Capital Stock
IPO
On April 10, 2013, we
completed our IPO in which we issued and sold 690,000 shares of common stock (including the underwriters overallotment of 90,000 shares) at a public offering price of $10.00 per share, resulting in gross proceeds of $6.9 million (net proceeds
of $5 million). Upon closing of the IPO, all outstanding shares of Series A preferred stock were converted into 376,525 shares of common stock, and all outstanding shares of Series B preferred stock were converted into 910,800 shares of common
stock. Also upon closing of the IPO, $9.6 million of debt converted into 963,430 shares of common stock. Concurrent with the IPO, certain derivative warrants with a fair value of $7.2 million were reclassified into equity due to the lapsing of
anti-dilution provisions in the warrants. Also concurrent with the IPO, we issued 2,000 shares of common stock to Cleveland Clinic pursuant to our license agreement with Cleveland Clinic.
Secondary Offering
On August 19, 2013, we sold
1,500,000 shares of common stock at a public offering price of $10.00 per share resulting in gross proceeds of $15.0 million ($13.3 million of net proceeds after offering expenses and underwriting discounts). We used $3.5 million of the proceeds to
repay certain indebtedness which was due on August 15, 2013. On September 5, 2013, we sold 105,000 additional common shares pursuant to the underwriters partial exercise of the over-allotment option which resulted in gross proceeds
of $1.1 million ($947,000 of net proceeds after offering expenses and underwriting discounts). All references to the sales of common stock mentioned in this paragraph are referred to as the Secondary Offering.
Follow-On Offering
On October 28, 2013, we sold
3,286,700 shares of common stock (including the underwriters overallotment of 428,700 shares), at a public offering price of $14.00 per share resulting in gross proceeds of $46.0 million (net proceeds of $42.3 million). All references to the
sales of common stock mentioned in this paragraph are referred to as the Follow-On Offering.
Preferred Stock
We are currently authorized to issue up to 9,764,000 shares of preferred stock.
Note 7. Stock Option Plans
We have two equity incentive plans: the 2008 Stock Option Plan (the 2008 Plan) and the 2011 Equity Incentive Plan (the
2011 Plan, and together with the 2008 Plan, the Stock Option Plans). The 2011 Plan was approved by the Board of Directors on June 30, 2011 and was subsequently ratified by stockholders. The 2011 Plan authorizes the
issuance of up to 350,000 shares of common stock under several types of equity awards including stock options, stock appreciation rights, restricted stock awards and other awards defined in the 2011 Plan.
The Board of Directors adopted the 2008 Plan on April 29, 2008 and reserved 251,475 shares of common stock for issuance under the plan. On April 1,
2010, the stockholders voted to increase the number of shares reserved by the plan to 550,000. The 2008 Plan is meant to provide additional incentive to officers, employees and consultants to remain in our employment. We are authorized to issue
incentive stock options or non-statutory stock options to eligible participants. Options granted are generally exercisable for up to 10 years.
We have
also issued 48,000 options outside of the Stock Option Plans.
At March 31, 2014, 26,688 shares remain available for future awards under the 2011
Plan and 27,154 shares remain available for future awards under the 2008 Plan.
As of March 31, 2014, no stock appreciation rights and 7,500 shares
of restricted stock have been awarded under the Stock Option Plans.
12
Prior to our IPO in April 2013, the Board of Directors authorized an offer to certain employee and non-employee
options holders on the following terms: those holding stock options with a strike price of $25.00 or more had the opportunity to exchange their options for 60% of the number of options currently held with an exercise price equal to the IPO price,
which was $10.00 per share, and those holding stock options with a strike price of $12.50 had the opportunity to exchange their options for 80% of the number of options currently held with an exercise price equal to the IPO price which was $10.00
per share. On April 5, 2013, our initial public offering became effective and 336,300 options with exercise prices ranging from $12.50 to $33.80 were exchanged for 242,070 options with an exercise price of $10.00. The exchange of the options
did not result in the recognition of incremental compensation cost. In addition, 53,500 options which were approved to be issued and priced at the IPO price were issued to employees with an exercise price of $10.00 per share.
A summary of employee and nonemployee stock option activity for year ended December 31, 2013 and the three months ended March 31, 2014 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Weighted-
Average
Remaining
Contractual
Term (in years)
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
Number of
Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
|
Outstanding January 1, 2013
|
|
|
553,340
|
|
|
$
|
12.76
|
|
|
|
7.13
|
|
|
$
|
1,142,432
|
|
Granted
|
|
|
426,762
|
|
|
|
14.57
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(164
|
)
|
|
|
10.00
|
|
|
|
|
|
|
|
|
|
Cancelled or expired
|
|
|
(106,396
|
)
|
|
|
20.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2013
|
|
|
873,542
|
|
|
$
|
10.83
|
|
|
|
7.75
|
|
|
$
|
3,138,539
|
|
Exercised
|
|
|
(202
|
)
|
|
|
10.00
|
|
|
|
|
|
|
|
|
|
Cancelled or expired
|
|
|
(25,248
|
)
|
|
|
8.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding March 31, 2014
|
|
|
848,092
|
|
|
$
|
10.90
|
|
|
|
7.01
|
|
|
$
|
3,654,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, March 31, 2014
|
|
|
447,152
|
|
|
$
|
7.86
|
|
|
|
5.11
|
|
|
$
|
3,242,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate intrinsic value represents the difference between the estimated fair value of our common stock and the exercise
price of outstanding, in-the-money options. The fair value of our common stock was $15.09 at March 31, 2014 and $13.78 at December 31, 2013, based on the closing price on the NASDAQ Capital Market.
As of March 31, 2014, total unrecognized compensation cost related to non-vested stock options granted to employees was $3,519,701 which we expect to
recognize over the next 3.86 years.
As of March 31, 2014, total unrecognized compensation cost related to non-vested stock options granted to
non-employees was $77,767 which we expect to recognize over the next 1.53 years. The estimate of unrecognized nonemployee compensation is based on the fair value of the non-vested options as of March 31, 2014.
The following table summarizes information about outstanding and vested stock options granted to employees and non-employees as of March 31, 2014 as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Vested and Exercisable
|
|
Exercise Price
|
|
Number of
Shares
Outstanding
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contract
Life (in
Years)
|
|
|
Number of
Shares
|
|
|
Weighted-
Average
Exercise Price
|
|
4.00
|
|
|
160,000
|
|
|
$
|
4.00
|
|
|
|
4.56
|
|
|
|
160,000
|
|
|
$
|
4.00
|
|
4.80
|
|
|
33,340
|
|
|
|
4.80
|
|
|
|
5.81
|
|
|
|
28,410
|
|
|
|
4.80
|
|
10.00
|
|
|
291,540
|
|
|
|
10.00
|
|
|
|
5.69
|
|
|
|
230,726
|
|
|
|
10.00
|
|
11.75
|
|
|
5,600
|
|
|
|
11.75
|
|
|
|
9.05
|
|
|
|
|
|
|
|
11.75
|
|
12.50
|
|
|
200
|
|
|
|
12.50
|
|
|
|
6.70
|
|
|
|
130
|
|
|
|
12.50
|
|
12.55
|
|
|
10,000
|
|
|
|
12.55
|
|
|
|
9.72
|
|
|
|
500
|
|
|
|
12.55
|
|
13.81
|
|
|
3,000
|
|
|
|
13.81
|
|
|
|
9.66
|
|
|
|
|
|
|
|
13.81
|
|
14.18
|
|
|
5,500
|
|
|
|
14.18
|
|
|
|
9.64
|
|
|
|
|
|
|
|
14.18
|
|
15.39
|
|
|
338,912
|
|
|
|
15.39
|
|
|
|
9.27
|
|
|
|
27,386
|
|
|
|
15.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
848,092
|
|
|
$
|
10.90
|
|
|
|
7.01
|
|
|
|
447,152
|
|
|
$
|
7.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
The fair value of options granted to employees is estimated on the grant date using the Black-Scholes option
valuation model. This valuation model for stock-based compensation expense requires us to make assumptions and judgments about the variables used in the calculation, including the fair value of our common stock prior to our IPO (see Note 9), the
expected term (the period of time that the options granted are expected to be outstanding), the volatility of our common stock, a risk-free interest rate, and expected dividends. We also estimate forfeitures of unvested stock options. To the extent
actual forfeitures differ from the estimates, the difference will be recorded as a cumulative adjustment in the period estimates are revised. No compensation cost is recorded for options that do not vest. We use the simplified calculation of
expected life described in the SECs Staff Accounting Bulletin No. 107,
Share-Based Payment
, and volatility is based on an average of the historical volatilities of the common stock of three entities with characteristics similar to
those of the Company. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option. We use an expected dividend yield of zero, as we do not anticipate
paying any dividends in the foreseeable future. Expected forfeitures are assumed to be zero due to the small number of plan participants and the plan design which has monthly vesting after an initial cliff vesting period.
In 2010, we issued an aggregate of 80,000 options to non-employees with an exercise price of $25.00. As described above, on April 5, 2013, these options
were exchanged for 48,000 options with an exercise price of $10.00. In October 2013, we issued 10,000 options to a non-employee with an exercise price of $15.39. The following table presents the weighted-average assumptions used to estimate the fair
value of options reaching their measurement date for non-employees during the periods presented:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
Volatility
|
|
|
72.66
|
%
|
|
|
75.86
|
%
|
Risk free interest rate
|
|
|
2.73
|
%
|
|
|
1.25
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Term (years)
|
|
|
9.53
|
|
|
|
7.71
|
|
The following table presents the effects of stock-based compensation related to stock option awards to employees and
nonemployees on our Statement of Operations during the periods presented:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2014
|
|
|
2013
|
|
Cost of revenues
|
|
$
|
20,412
|
|
|
$
|
2,212
|
|
Research and development
|
|
|
14,102
|
|
|
|
34,836
|
|
General and administrative
|
|
|
468,855
|
|
|
|
58,153
|
|
Sales and marketing
|
|
|
26,753
|
|
|
|
1,932
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$
|
530,122
|
|
|
$
|
97,133
|
|
|
|
|
|
|
|
|
|
|
Note 8. Warrants
We have issued certain warrants which contain an exercise price adjustment feature in the event we issue additional equity instruments at a
price lower than the exercise price of the warrant. The warrants are described herein as derivative warrants. For all derivative warrants, in the event equity instruments are issued at a price lower than the exercise price of the warrant, the
exercise price is adjusted to the price of the new equity instruments issued (price adjustment feature). For certain of these warrants, the number of shares underlying the warrant was also adjusted to an amount computed by dividing the proceeds of
the warrant under its original terms by the revised exercise price (share adjustment feature). These warrants are initially recorded as a warrant liability at fair value with a corresponding entry to the loan guarantee fee asset, debt discount,
additional paid-in capital or expense dependent upon the service provided in exchange for the warrant grant. Subsequently, any change in fair value is recognized in earnings until such time as the warrants are exercised, amended or expire. As of
March 31, 2014 all warrants with a share adjustment feature have either expired or have been exercised.
In January 2014, the Company received $950
from a warrant holder who exercised warrants to purchase 95 shares of common stock at $10.00 per share. In February 2014 a warrant holder exercised warrants to purchase 3,320 shares of common stock at an exercise price of $10.00 per share using the
net issuance exercise method whereby 1,661 shares were surrendered in payment in full of the exercise price resulting in a net issuance of 1,659 shares. In March 2014 a warrant holder exercised warrants to purchase 12,500 shares of common stock at
an exercise price of $10.00 per share using the net issuance exercise method whereby 7,230 shares were surrendered in payment in full of the exercise price resulting in a net issuance of 5,270 shares.
14
The following table summarizes the warrant activity for the three months ended March 31, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued With / For
|
|
Exercise
Price
|
|
|
Warrants
Outstanding
January 1,
2014
|
|
|
2014
Warrants
Exercised
|
|
|
Warrants
Outstanding
March 31,
2014
|
|
Non-Derivative Warrants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
|
|
$
|
10.00
|
|
|
|
243,334
|
|
|
|
|
|
|
|
243,334
|
|
Financing
|
|
|
15.00
|
|
|
|
436,079
|
|
|
|
|
|
|
|
436,079
|
|
Debt Guarantee
|
|
|
4.00
|
|
|
|
174,288
|
|
|
|
|
|
|
|
174,288
|
|
Debt Guarantee
|
|
|
10.00
|
|
|
|
237,500
|
|
|
|
|
|
|
|
237,500
|
|
Debt Guarantee
|
|
|
15.00
|
|
|
|
585,645
|
|
|
|
|
|
|
|
585,645
|
|
Consulting
|
|
|
10.00
|
|
|
|
29,138
|
|
|
|
|
|
|
|
29,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12.38
|
C
|
|
|
1,705,984
|
|
|
|
|
|
|
|
1,705,984
|
|
Derivative Warrants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
|
|
|
10.00
|
B
|
|
|
60,000
|
|
|
|
|
|
|
|
60,000
|
|
Debt Guarantee
|
|
|
10.00
|
A
|
|
|
12,500
|
|
|
|
(12,500
|
)
|
|
|
|
|
Series B Pref. Stock
|
|
|
10.00
|
B
|
|
|
18,430
|
|
|
|
(3,415
|
)
|
|
|
15,015
|
|
Consulting
|
|
|
10.00
|
B
|
|
|
200
|
|
|
|
|
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.00
|
C
|
|
|
91,130
|
|
|
|
(15,915
|
)
|
|
|
75,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12.28
|
C
|
|
|
1,797,114
|
|
|
|
(15,915
|
)
|
|
|
1,781,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A
|
These warrants are subject to fair value accounting and contain exercise price and number of share adjustment features. See Note 9.
|
B
|
These warrants are subject to fair value accounting and contain an exercise price adjustment feature. See Note 9.
|
C
|
Weighted average exercise prices are as of March 31, 2014.
|
Note 9. Fair Value of Warrants
The following tables summarize the assumptions used in computing the fair value of derivative warrants subject to fair value accounting at
the date of issue during the three months ended March 31, 2014 and 2013 and at March 31, 2014 and December 31, 2013. In computing the fair value of the warrants, if the stated exercise price of the warrants exceeded the assumed value
of the Company stock at the date the fair value was being computed, the exercise price and number of shares (if applicable) underlying the warrants were adjusted to reflect an assumed trigger of the price and/or share adjustment features related to
the applicable warrants. Such adjustments were only applicable to the three months ended March 31, 2013 due to the relative price of the warrants and the assumed Company stock price.
|
|
|
|
|
|
|
|
|
Issued with Debt Guarantee
|
|
Exercised During
the Three
Months Ended
March 31, 2014
|
|
|
As of
December 31, 2013
|
|
|
|
|
Exercise Price
|
|
$
|
10.00
|
|
|
$
|
10.00
|
|
Expected life (years)
|
|
|
0.60
|
|
|
|
0.83
|
|
Expected volatility
|
|
|
49.01
|
%
|
|
|
57.33
|
%
|
Risk-free interest rate
|
|
|
0.08
|
%
|
|
|
0.13
|
%
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued with Series B Preferred Shares
|
|
Exercised During
the Three
Months Ended
March 31, 2014
|
|
|
As of
March 31, 2014
|
|
|
As of
December 31, 2013
|
|
|
|
|
|
Exercise Price
|
|
$
|
10.00
|
|
|
$
|
10.00
|
|
|
$
|
10.00
|
|
Expected life (years)
|
|
|
1.72
|
|
|
|
1.67
|
|
|
|
1.92
|
|
Expected volatility
|
|
|
46.60
|
%
|
|
|
46.97
|
%
|
|
|
59.26
|
%
|
Risk-free interest rate
|
|
|
0.33
|
%
|
|
|
0.44
|
%
|
|
|
0.38
|
%
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
15
|
|
|
|
|
|
|
|
|
Issued for Consulting
|
|
As of
March 31, 2014
|
|
|
As of
December 31, 2013
|
|
|
|
|
Exercise Price
|
|
$
|
10.00
|
|
|
$
|
10.00
|
|
Expected life (years)
|
|
|
1.90
|
|
|
|
2.14
|
|
Expected volatility
|
|
|
47.04
|
%
|
|
|
63.63
|
%
|
Risk-free interest rate
|
|
|
0.44
|
%
|
|
|
0.38
|
%
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued with Financing
|
|
Issued During
the Three Months
Ended
March 31, 2013
|
|
|
As of
March 31, 2014
|
|
|
As of
December 31, 2013
|
|
|
|
|
|
Exercise Price
|
|
$
|
13.34
|
|
|
$
|
10.00
|
|
|
$
|
10.00
|
|
Expected life (years)
|
|
|
9.78
|
|
|
|
2.00
|
|
|
|
2.25
|
|
Expected volatility
|
|
|
74.70
|
%
|
|
|
47.05
|
%
|
|
|
64.40
|
%
|
Risk-free interest rate
|
|
|
1.95
|
%
|
|
|
0.44
|
%
|
|
|
0.38
|
%
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
The range of Company stock prices used in computing the fair value of warrants exercised during the three months ended
March 31, 2014 was $15.20 $19.86 and for the fair value of warrants issued during the three months ended March 31, 2013, the assumed range of Company stock prices used was $9.60 $9.70. In determining the fair value of
warrants issued at each reporting date, the Company stock price was $15.09 at March 31, 2014 and $13.78 at December 31, 2013 based on the closing price on the NASDAQ Capital Market.
The following table summarizes the derivative warrant activity subject to fair value accounting for the three months ended March 31, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued with/for
|
|
Fair value of
warrants
outstanding as of
December 31, 2013
|
|
|
Fair value
of warrants
exercised
|
|
|
Change in
fair value
of warrants
|
|
|
Fair value of
warrants
outstanding as of
March 31, 2014
|
|
Series B Preferred Stock
|
|
$
|
117,000
|
|
|
$
|
(38,000
|
)
|
|
$
|
22,000
|
|
|
$
|
101,000
|
|
Debt Guarantee
|
|
|
64,000
|
|
|
|
(87,000
|
)
|
|
|
23,000
|
|
|
|
|
|
Consulting
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
1,000
|
|
Financing
|
|
|
412,000
|
|
|
|
|
|
|
|
(1,000
|
)
|
|
|
411,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
594,000
|
|
|
$
|
(125,000
|
)
|
|
$
|
44,000
|
|
|
$
|
513,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 10. Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants. The Fair Value Measurements and Disclosures Topic of the FASB Accounting Standards Codification requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach.
Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or
liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect our own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the
best information available in the circumstances. In that regard, the Topic establishes a fair value hierarchy for valuation inputs that give the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest
priority to unobservable inputs. The fair value hierarchy is as follows:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in
active markets that we have the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such
as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
16
Level 3: Significant unobservable inputs that reflect our own assumptions about the assumptions that market
participants would use in pricing an asset or liability.
The following table summarizes the financial liabilities measured at fair value on a recurring
basis segregated by the level of valuation inputs within the fair value hierarchy utilized to measure fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2014
|
|
|
|
Total
|
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Warrant liability
|
|
$
|
513,000
|
|
|
|
|
|
|
|
|
|
|
$
|
513,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
|
Total
|
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Warrant liability
|
|
$
|
594,000
|
|
|
|
|
|
|
|
|
|
|
$
|
594,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The warrant liability consists of stock warrants we issued that contain an exercise price adjustment feature. In accordance
with derivative accounting for warrants, we calculated the fair value of warrants and the assumptions used are described in Note 9, Fair Value of Warrants. Realized and unrealized gains and losses related to the change in fair value of
the warrant liability are included in Other income (expense) on the Statement of Operations.
A table summarizing the activity for the derivative warrant
liability which is measured at fair value using Level 3 inputs is presented in Note 9.
Note 11. Joint Venture Agreement
In November 2011, we entered into an affiliation agreement with the Mayo Foundation for Medical Education and Research (Mayo),
subsequently amended. Under the agreement, we formed a joint venture with Mayo in May 2013 to focus on developing oncology diagnostic services and tests utilizing next generation sequencing. The joint venture is a limited liability company, with
each party initially holding fifty percent of the issued and outstanding membership interests of the new entity (the JV). In exchange for our membership interest in the JV, we made an initial capital contribution of $1.0 million in
October 2013 (the Closing Date). In addition, we issued 10,000 shares of our common stock to Mayo pursuant to our affiliation agreement and recorded an expense of approximately $175,000. We also recorded additional expense of
approximately $231,000 during the fourth quarter of 2013 related to shares issued to Mayo in November of 2011 as the JV achieved certain performance milestones
The agreement also requires aggregate total capital contributions by us of up to an additional $5.0 million over the next two and a half years. We currently
anticipate that we will make capital contributions of $1.0 million in the second quarter of 2014 and $2.0 million each on the first and second anniversaries of the closing date, respectively, with the latter two installments subject to the
JVs achievement of certain operational milestones agreed upon by the board of governors of the JV. In exchange for its membership interest, Mayos capital contribution will take the form of cash, staff, services, hardware and software
resources, laboratory space and instrumentation, the fair market value of which will be approximately equal to $6 million. Mayos continued contribution will also be conditioned upon the JVs achievement of certain milestones. The
operation of the joint venture may divert management time from operating our business. No assurances can be given that we will be able to fully fund the joint venture agreement, or that, even if funded, the joint venture will ever achieve the
research, development and commercial objectives currently contemplated by the parties, such as the discovery and commercialization of new diagnostic tests utilizing next-generation sequencing. If the development efforts of the joint venture do not
result in commercially successful tests or services, it will have an adverse effect on our business, financial condition and results of operations.
Note 12. Related Party Transactions
John Pappajohn, a member of the Board of Directors and stockholder, had personally guaranteed our revolving line of credit with Wells Fargo
Bank through March 31, 2014. As consideration for his guarantee, as well as each of the eight extensions of this facility through March 31, 2014, Mr. Pappajohn received warrants to purchase an aggregate of 1,051,506 shares of common
stock of which Mr. Pappajohn assigned warrants to purchase 284,000 shares of common stock to certain third parties. Warrants to purchase 395,825 shares of common stock have been exercised by Mr. Pappajohn through March 31, 2014. After
adjustment pursuant to the terms of the warrants in conjunction with our IPO, the number of these warrants outstanding retained by Mr. Pappajohn was 585,645 at $15.00 per share and 44,288 at $4.00 per share.
17
In addition, John Pappajohn also had loaned us an aggregate of $6,750,000 (all of which was converted into
675,000 shares of common stock at the IPO price of $10.00 per share). In connection with these loans, Mr. Pappajohn received warrants to purchase an aggregate of 202,630 shares of common stock. After adjustment pursuant to the terms of the
warrants in conjunction with our IPO, the number of warrants outstanding was 436,079 at $15.00 per share at March 31, 2014.
On January 3, 2014,
the board of directors appointed John Pappajohn to serve as the Chairman of the Board, a position previously held by Dr. Raju S.K. Chaganti, effective January 6, 2014. As compensation for serving as the Chairman of the Board, the Company
will pay Mr. Pappajohn $100,000 per year and will grant to Mr. Pappajohn, subject to the approval by the Companys stockholders of a new equity incentive plan or the amendment of the Companys existing equity incentive plan,
25,000 restricted shares of the Companys common stock, and options to purchase an aggregate of 100,000 shares of the Companys common stock. The options will have a term of ten years from the date on which they are granted. The restricted
stock and the options will each vest in two equal installments on the one year anniversary and the two year anniversary of the date on which Mr. Pappajohn becomes the Chairman of the Board.
On May 19, 2006, we issued a convertible promissory note in favor of our then Chairman and founder, Dr. Chaganti, the holder, which obligated us to
pay the holder the sum of $100,000, together with interest at the rate of 8.5% per annum, due April 1, 2014. Interest expense totaled $2,100 for the quarter ended March 31, 2013. On April 10, 2013 the note and accrued interest
converted into 13,430 shares of common stock at the IPO price of $10.00 per share. Pursuant to a consulting and advisory agreement, Dr. Chaganti also received options to purchase a total of 36,000 shares of common stock at a price of $10.00 per
share which vested over a two year period. Total non-cash stock-based compensation recognized under the consulting agreement for each of the quarterly periods ended March 31, 2014 and 2013 were $0 and $27,350, respectively. Additionally, on
September 15, 2010, we entered into a three-year consulting agreement with Dr. Chaganti which was subsequently renewed through December 31, 2016 pursuant to which Dr. Chaganti receives $5,000 per month for providing consulting
and technical support services. Total expenses for each of the quarterly periods ended March 31, 2014 and 2013 were $15,000. Pursuant to the terms of the renewed consulting agreement, Dr. Chaganti will receive, subject to the adoption of a
new equity plan or amendment to increase the shares available for issuance under the 2011 Equity Plan, an option to purchase 200,000 shares of our common stock at a purchase price of $15.89 per share. Also pursuant to the consulting agreement,
Dr. Chaganti assigned to us all rights to any inventions which he may invent during the course of rendering consulting services to us. In exchange for this assignment, if the USPTO issues a patent for an invention on which Dr. Chaganti is
listed as an inventor, we are required to pay Dr. Chaganti (i) a one-time payment of $50,000 and (ii) 1% of any net revenues we receive from any licensed sales of the invention. During the quarter ended March 31, 2014, we paid
Dr. Chaganti $150,000 which was recognized as an expense in fiscal 2013 when three patents were issued.
In August 2010, we entered into a consulting
agreement with Equity Dynamics, Inc., an entity controlled by John Pappajohn, pursuant to which Equity Dynamics, Inc. receives a monthly fee of $10,000 plus reimbursement of expenses. Total expenses for the three months ended March 31, 2014 and
2013 were $30,000. As of March 31, 2014, we owed Equity Dynamics, Inc. $0.
Note 13. Contingencies
In the normal course of business, the Company may become involved in various claims and legal proceedings. In the opinion of management, the
ultimate liability or disposition thereof is not expected to have a material adverse effect on our financial condition, results of operations, or liquidity.
18