Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
As used herein, the “Company,” “we,” “us,” “our” or similar terms, refer to Cancer Genetics, Inc. and its wholly owned subsidiaries: Cancer Genetics Italia, S.r.l., Gentris, LLC and BioServe Biotechnologies (India) Private Limited, except as expressly indicated or unless the context otherwise requires. The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help facilitate an understanding of our financial condition and our historical results of operations for the periods presented. This MD&A should be read in conjunction with the audited consolidated financial statements and notes thereto included in our annual report on Form 10-K filed with the SEC on March 23, 2017. This MD&A may contain forward-looking statements that involve risks and uncertainties. See “Cautionary Note Regarding Forward-Looking Statements” below.
Overview
We are an emerging leader in the field of precision medicine, enabling individualized therapies in the field of oncology through our diagnostic products and services and molecular markers. We develop, commercialize and provide molecular- and biomarker-based tests and services that enable physicians to personalize the clinical management of each individual patient by providing genomic information to better diagnose, monitor and inform cancer treatment and that enable biotech and pharmaceutical companies engaged in oncology trials to better select candidate populations and reduce adverse drug reactions by providing information regarding genomic factors influencing subject responses to therapeutics. We have a comprehensive, disease-focused oncology testing portfolio. Our tests and techniques target a wide range of cancers, covering nine of the top ten cancers in prevalence in the United States, with additional unique capabilities offered by our FDA-cleared Tissue of Origin® test for identifying difficult to diagnose tumor types or poorly differentiated metastatic disease.
Our vision is to become the oncology diagnostics partner for biopharmaceutical companies and clinicians by participating in the entire care continuum from bench to bedside. We believe the diagnostics industry is undergoing a rapid evolution in its approach to oncology testing, embracing precision medicine and individualized testing as a means to drive higher standards of patient treatment and disease management. Similarly, biopharmaceutical companies are increasingly engaging companies such as ours to provide information on clinical trial participants' molecular profiles in order to identify biomarker and genomic variations that may be responsible for differing responses to pharmaceuticals, and particularly to oncology drugs, thereby increasing the efficiency of trials while lowering related costs. We believe tailored therapeutics can revolutionize oncology medicine through molecular- and biomarker-based testing services, enabling physicians and researchers to target the factors that make each patient and disease unique.
Our services are performed at our state-of-the-art laboratories located in New Jersey, Pennsylvania, North Carolina, California, Shanghai (China), Victoria (Australia), and Hyderabad (India). Our laboratories comply with the highest regulatory standards
as appropriate for the services they deliver including CLIA, CAP, NY State, California State and NABL (India). Our services are built on a foundation of world-class scientific knowledge and intellectual property in solid and blood-borne cancers, as well as strong academic relationships with major cancer centers such as Memorial Sloan-Kettering, Mayo Clinic, and the National Cancer Institute.
Our clinical offerings include our portfolio of proprietary tests targeting hematological, urogenital and HPV-associated cancers, in conjunction with ancillary non-proprietary tests. Our proprietary tests target cancers that are difficult to prognose and predict treatment outcomes through currently available mainstream techniques. We provide our proprietary tests and services, along with a comprehensive range of non-proprietary oncology-focused tests and laboratory services, to oncologists and pathologists at hospitals, cancer centers, and physician offices, as well as biotech and pharmaceutical companies to support their clinical trials. Our proprietary tests are based principally on our expertise in specific cancer types, test development methodologies and proprietary algorithms correlating genetic events with disease specific information. Our portfolio primarily includes comparative genomic hybridization (CGH) microarrays and next generation sequencing (NGS) panels, and DNA fluorescent in situ hybridization (FISH) probes.
The non-proprietary testing services we offer are focused in part on specific oncology categories where we are developing our proprietary tests. We believe that there is significant synergy in developing and marketing a complete set of tests and services that are disease focused and delivering those tests and services in a comprehensive manner to help with treatment decisions.
The insight that we develop in delivering the non-proprietary services are often leveraged in the development of our proprietary programs and now increasingly in the validation of our proprietary programs, such as MatBA and Focus::NGS.
We expect to continue to incur significant losses for the near future. We incurred losses of $15.8 million and $20.2 million for fiscal years ended
December 31, 2016
and
2015
, respectively, and
$13.0 million
for the
nine months ended September 30, 2017
.
As of
September 30, 2017
, we had an accumulated deficit of
$126.9 million
.
Acquisitions
On August 15, 2017, we purchased all of the outstanding stock of vivoPharm, with its principal place of business in Victoria, Australia, in a transaction valued at approximately
$1.2 million
in cash,
$9.5 million
in the Company's common stock based on the closing price of the stock on August 15, 2017, plus an estimated accrued settlement of $345,000 for excess working capital. The Company has deposited in escrow
20%
of the stock consideration until the expiration of
twelve
months from the closing date to serve as the initial source for any indemnification claims and adjustments.
vivoPharm is a contract research organization (“CRO”) that specializes in planning and conducting unique, specialized studies to guide drug discovery and development programs with a concentration in oncology and immuno-oncology. These studies range from early compound selection to developing comprehensive sets of in vitro and in vivo data, as needed for FDA Investigational New Drug (“IND”) applications. vivoPharm has developed industry recognized capabilities in early phase development and discovery, especially in immuno-oncology models, tumor micro-environment studies, specialized pharmacology services, and PDx (patient derived xenograft) model studies that support basic discovery, preclinical and phase 1 clinical trials.
vivoPharm maintains three international locations, enabling the company to access global market opportunities. The headquarters in Victoria, Australia, specializes in safety and toxicology studies, including mammalian, genetic and in vitro, along with bioanalytical services including immune-analytical capabilities. vivoPharm’s U.S. based lab, located at the Hershey Center for Applied Research in Hershey, Pennsylvania, primarily focuses on screening and efficacy testing for a wide range of pharmaceutical and chemical products. The third location, in Munich, Germany, hosts project management and marketing personnel. Further, vivoPharm brings to CGI an additional 38 employees, 16 of which are located in the U.S. and 17 in Australia, with expertise in early stage discovery services and pre-clinical testing.
vivoPharm’s studies have been utilized to support over 200 IND submissions to date across a range of therapeutic indications, including lymphomas, leukemia, GI-cancers, liver cancer, pancreatic cancer, non-small cell lung cancer, and other non-cancer rare diseases. vivoPharm is presently serving over forty biotechnology and pharmaceutical companies across five continents in over 55 studies and trials with highly specialized development, clinical and preclinical research. Over the past 10 years, vivoPharm has also generated an extensive library of human xenograft and syngeneic tumor models, including subcutaneous, orthotopic and metastatic models.
vivoPharm’s specialized tumor and disease models, toxicology and pharmacology services and animal imaging capabilities provide CGI opportunities to deepen its relationships with existing biopharma customers through additional discovery and downstream molecular work, while also furthering CGI’s previously announced initiative aimed at early-phase drug repurposing and drug rescue programs.
Key Factors Affecting our Results of Operations and Financial Condition
Our overall long-term growth plan is predicated on our ability to develop and commercialize our proprietary tests, penetrate the Biopharma community to achieve more revenue supporting clinical trials and develop and penetrate the Indian market. Our proprietary tests include CGH microarrays, NGS panels, and DNA FISH probes. We continue to develop additional proprietary tests. To facilitate market adoption of our proprietary tests, we anticipate having to successfully complete additional studies with clinical samples and publish our results in peer-reviewed scientific journals. Our ability to complete such studies is dependent upon our ability to leverage our collaborative relationships with leading institutions to facilitate our research and obtain data for our quality assurance and test validation efforts.
We believe that the factors discussed in the following paragraphs have had and are expected to continue to have a material impact on our results of operations and financial condition.
Revenues
Our revenue is primarily generated through our Clinical Services and Biopharma Services. Clinical Services can be billed to Medicare, another third party insurer or the referring community hospital or other healthcare facility or patients in accordance with state and federal law. Biopharma Services are billed to the customer directly. While we have agreements with our Biopharma clients, volumes from these clients are subject to the progression and continuation of the clinical trials which can impact testing volume. We also derive revenue from Discovery Services, which are services provided in the development of new testing assays and methods. Discovery Services are billed directly to the customer.
We have historically derived a significant portion of our revenue from a limited number of test ordering sites, although the test ordering sites that generate a significant portion of our revenue have changed from period to period. Test ordering sites account for all of our Clinical Services revenue along with a portion of the Biopharma Services revenue. Our test ordering sites are hospitals, cancer centers, reference laboratories, physician offices and biopharmaceutical companies. 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 September 30, 2017
and
2016
accounted for approximately
45%
and
39%
of our testing volumes, respectively. During the
three months ended September 30, 2017
,
one
Biopharma client accounted for approximately
11%
of our revenue. During the
three months ended September 30, 2016
,
one
Biopharma client accounted for approximately
18%
of our revenue.
The top five test ordering sites during the
nine months ended September 30, 2017
and
2016
accounted for approximately
40%
and
31%
of our testing volumes, respectively. During the
nine months ended September 30, 2017
, there was
one
biopharmaceutical company which accounted for approximately
11%
of our total revenue. During the
nine months ended September 30, 2016
, there was
one
biopharmaceutical company which accounted for approximately
10%
of our total revenue.
We receive revenue for our Clinical Services from Medicare, other insurance carriers and other healthcare facilities. Some of our customers choose, generally at the beginning of our relationship, to pay for laboratory services directly as opposed to having patients (or their insurers) pay for those services and providing us with the patients’ insurance information. A hospital may elect to be a direct bill customer and pay our bills directly, or may provide us with patient information so that their patients pay our bills, in which case we generally expect payment from their private insurance carrier or Medicare. In a few instances, we have arrangements where a hospital may have two accounts with us, so that certain tests are billed directly to the hospital, and certain tests are billed to and paid by a patient’s insurer. The billing arrangements generally are dictated by our customers and in accordance with state and federal law.
For the
three months ended September 30, 2017
, Medicare accounted for approximately
11%
of our total revenue, other insurance accounted for approximately
19%
of our total revenue and other healthcare facilities accounted for
6%
of our total revenue. For the
nine months ended September 30, 2017
, Medicare accounted for approximately
14%
of our total revenue, other insurance accounted for approximately
22%
of our total revenue and other healthcare facilities accounted for
5%
of our total revenue. On average, we generate less revenue per test from other healthcare facilities billed directly, than from other insurance payers.
Cost of Revenues
Our cost of revenues consists principally of internal personnel costs, including stock-based compensation, laboratory consumables, shipping costs, overhead and other direct expenses, such as specimen procurement and third party validation studies. We are pursuing various strategies to reduce and control our cost of revenues, including automating our processes through more efficient technology and attempting to negotiate improved terms with our suppliers. With our three acquisitions in 2014 and 2015, we have made significant progress with integrating our resources and services in an effort to reduce costs. With our acquisition of vivoPharm in the third quarter of 2017, we are working to integrate its business and reduce costs. We will continue to assess other possible advantages to help us improve our cost structure.
Operating Expenses
We classify our operating expenses into three categories: research and development, sales and marketing, and general and administrative. Our operating expenses principally consist of personnel costs, including stock-based compensation, facility costs, outside services, laboratory consumables and overhead, development costs, marketing program costs and legal and accounting fees.
Research and Development Expenses.
We incur research and development expenses principally in connection with our efforts to develop our proprietary tests. Our primary research and development expenses consist of direct personnel costs, laboratory equipment and consumables and overhead expenses. In 2013, we entered into a joint venture with the Mayo Foundation for Medical Education and Research, with a focus on developing oncology diagnostic services and tests utilizing next generation sequencing. These efforts have continued. All research and development expenses are charged to operations in the periods they are incurred.
General and Administrative Expenses.
General and administrative expenses consist principally of personnel-related expenses, professional fees, such as legal, accounting and business consultants, occupancy costs, bad debt and other general expenses. We have experienced decreases in our general and administrative expenses but anticipate increases as we expand our business operations.
Sales and Marketing Expenses
. Our sales and marketing expenses consist principally of personnel and related overhead costs for our sales team and their support personnel, travel and entertainment expenses, and other selling costs including sales collaterals and trade shows. We expect our sales and marketing expenses to increase as we expand into new geographies and add new clinical tests and services.
Seasonality
Our business experiences decreased demand during spring vacation season, summer months and the December holiday season when patients are less likely to visit their health care providers. We expect this trend in seasonality to continue for the foreseeable future.
Results of Operations
Three Months Ended September 30, 2017
and
2016
The following table sets forth certain information concerning our results of operations for the periods shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Change
|
(dollars in thousands)
|
2017
|
|
2016
|
|
$
|
|
%
|
Revenue
|
$
|
8,028
|
|
|
$
|
6,750
|
|
|
$
|
1,278
|
|
|
19
|
%
|
Cost of revenues
|
4,588
|
|
|
4,444
|
|
|
144
|
|
|
3
|
%
|
Research and development expenses
|
981
|
|
|
1,594
|
|
|
(613
|
)
|
|
(38
|
)%
|
General and administrative expenses
|
4,346
|
|
|
3,701
|
|
|
645
|
|
|
17
|
%
|
Sales and marketing expenses
|
1,301
|
|
|
1,054
|
|
|
247
|
|
|
23
|
%
|
Loss from operations
|
(3,188
|
)
|
|
(4,043
|
)
|
|
855
|
|
|
(21
|
)%
|
Interest income (expense)
|
(340
|
)
|
|
(107
|
)
|
|
(233
|
)
|
|
218
|
%
|
Change in fair value of acquisition note payable
|
105
|
|
|
18
|
|
|
87
|
|
|
483
|
%
|
Change in fair value of warrant liability
|
2,790
|
|
|
712
|
|
|
2,078
|
|
|
292
|
%
|
Other expense
|
—
|
|
|
(325
|
)
|
|
325
|
|
|
(100
|
)%
|
Net (loss)
|
$
|
(633
|
)
|
|
$
|
(3,745
|
)
|
|
$
|
3,112
|
|
|
(83
|
)%
|
Non-GAAP Financial Information
In addition to disclosing financial results in accordance with United States generally accepted accounting principles (“GAAP”), the table below contains non-GAAP financial measures that we believe are helpful in understanding and comparing our past financial performance and our future results. The non-GAAP financial measures disclosed by the Company exclude the non- operating changes in the fair value of derivative instruments. These non-GAAP financial measures should not be considered a substitute for, or superior to, financial measures calculated in accordance with GAAP, and the financial results calculated in accordance with GAAP and reconciliations from these results should be carefully evaluated. Management believes that these non-GAAP measures provide useful information about the Company’s core operating results and thus are appropriate to enhance the overall understanding of the Company’s past financial performance and its prospects for the future. The non-GAAP financial measures in the table below include adjusted net (loss) and the related adjusted basic and diluted net (loss) per share amounts.
Reconciliation from GAAP to Non-GAAP Results (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
2017
|
|
2016
|
Reconciliation of net (loss):
|
|
|
|
|
Net (loss)
|
|
$
|
(633
|
)
|
|
$
|
(3,745
|
)
|
Adjustments:
|
|
|
|
|
Change in fair value of acquisition note payable
|
|
(105
|
)
|
|
(18
|
)
|
Change in fair value of warrant liability
|
|
(2,790
|
)
|
|
(712
|
)
|
Adjusted net (loss)
|
|
$
|
(3,528
|
)
|
|
$
|
(4,475
|
)
|
Reconciliation of basic net (loss) per share:
|
|
|
|
|
Basic net (loss) per share
|
|
$
|
(0.03
|
)
|
|
$
|
(0.23
|
)
|
Adjustments to net (loss)
|
|
(0.13
|
)
|
|
(0.04
|
)
|
Adjusted basic net (loss) per share
|
|
$
|
(0.16
|
)
|
|
$
|
(0.27
|
)
|
Basic weighted-average shares outstanding
|
|
21,577
|
|
|
16,519
|
|
Reconciliation of diluted net (loss) per share:
|
|
|
|
|
Diluted net (loss) per share
|
|
$
|
(0.15
|
)
|
|
$
|
(0.23
|
)
|
Adjustments to net (loss)
|
|
(0.01
|
)
|
|
(0.04
|
)
|
Adjusted diluted net (loss) per share
|
|
$
|
(0.16
|
)
|
|
$
|
(0.27
|
)
|
Diluted weighted-average shares outstanding
|
|
22,359
|
|
|
16,519
|
|
Adjusted net (loss) decreased 21% to
$3.5 million
during the
three months ended September 30, 2017
, down from an adjusted net (loss) of
$4.5 million
during the
three months ended September 30, 2016
. Adjusted basic net (loss) per share decreased 41% to
$0.16
during the
three months ended September 30, 2017
, down from
$0.27
during the
three months ended September 30,
2016
. Adjusted diluted net (loss) per share decreased 41% to
$0.16
during the
three months ended September 30, 2017
, down from
$0.27
during the
three months ended September 30, 2016
.
Revenue
The breakdown of our revenue is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Change
|
|
2017
|
|
2016
|
|
|
|
|
(dollars in thousands)
|
$
|
|
%
|
|
$
|
|
%
|
|
$
|
|
%
|
Biopharma Services
|
$
|
4,168
|
|
|
52
|
%
|
|
$
|
3,805
|
|
|
56
|
%
|
|
$
|
363
|
|
|
10
|
%
|
Clinical Services
|
2,880
|
|
|
36
|
%
|
|
2,687
|
|
|
40
|
%
|
|
193
|
|
|
7
|
%
|
Discovery Services
|
980
|
|
|
12
|
%
|
|
258
|
|
|
4
|
%
|
|
722
|
|
|
280
|
%
|
Total Revenue
|
$
|
8,028
|
|
|
100
|
%
|
|
$
|
6,750
|
|
|
100
|
%
|
|
$
|
1,278
|
|
|
19
|
%
|
Revenue increased
19%
, or
$1.3 million
, to
$8.0 million
for the
three months ended September 30, 2017
, from
$6.8 million
for the
three months ended September 30, 2016
, principally due to an increase in Discovery Services of
$0.7 million
and an increase in our Biopharma Services of
$0.4 million
. Our average revenue per test decreased to $376 per test for the
three months ended September 30, 2017
from $397 per test for the
three months ended September 30, 2016
, principally due to the additional Clinical Services volume from our Los Angeles facility, which yields lower average revenue per test. Test volume increased by 11% from 12,348 tests for the
three months ended September 30, 2016
to 13,726 tests for the
three months ended September 30, 2017
.
Revenue from Biopharma Services increased
10%
, or
$0.4 million
, to
$4.2 million
for the
three months ended September 30, 2017
, from
$3.8 million
for the
three months ended September 30, 2016
due to completing more studies from its top ten customers. Revenue from Clinical Services customers increased by
$0.2 million
, or
7%
, compared to the
three months ended September 30, 2016
, due to increased clinical test volume. Revenue from Discovery Services increased
280%
, or
$0.7 million
, during the
three months ended September 30, 2017
due to the acquisition of vivoPharm, which accounted for $0.8 million of the increase.
Cost of Revenues
Cost of revenues increased
3%
, or
$0.1 million
, for the
three months ended September 30, 2017
, principally due to increased payroll and benefit costs of $0.2 million offset by reduced costs of supplies used in our testing facilities of $0.1 million. Gross margin improved to
43%
during the
three months ended September 30, 2017
up from
34%
for the
three months ended September 30, 2016
.
Operating Expenses
Research and development expenses decreased
38%
, or
$0.6 million
, to
$1.0 million
for the
three months ended September 30, 2017
, from
$1.6 million
for the
three months ended September 30, 2016
, principally due to a $0.3 million decrease in payroll and benefit costs and a $0.3 million decrease in lab supplies used to validate new diagnostic tests and perform certain research and development projects.
General and administrative expenses increased
17%
, or
$0.6 million
, to
$4.3 million
for the
three months ended September 30, 2017
, from
$3.7 million
for the
three months ended September 30, 2016
, principally due to an increase in our bad debt reserve of $0.7 million and an increase in payroll and other benefits of $0.3 million, offset by a $0.2 million decrease in facility costs resulting from the elimination of building management fees at our North Carolina location and decreased professional fees and taxes of $0.1 million each.
Sales and marketing expenses increased
23%
, or
$0.2 million
, to
$1.3 million
for the
three months ended September 30, 2017
, from
$1.1 million
for the
three months ended September 30, 2016
, principally due to increased compensation costs of $0.3 million and offset by decreased facility costs of $0.1 million.
Interest Income (Expense)
Net interest expense increased
218%
, or
$0.2 million
, to
$0.3 million
during the
three months ended September 30, 2017
due to the higher effective interest rate on our refinanced debt.
Change in Fair Value of Acquisition Note Payable
The change in fair value of note payable resulted in approximately
$105,000
and
$18,000
of non-cash income for the
three months ended September 30, 2017
and 2016, respectively. The fair value of the note representing part of the purchase price for BioServe decreased during the
three months ended September 30, 2017
and 2016 as a consequence of a decrease in our stock price.
Change in Fair Value of Warrant Liability
Changes in fair value of some of our common stock warrants may impact our quarterly results. Accounting rules require us to record certain of our warrants as a liability, measure the fair value of these warrants each quarter and record changes in that value in earnings. As a result of a decrease in our stock price, we recognized non-cash income of
$2.8 million
and
$0.7 million
for the
three months ended September 30, 2017
and 2016, respectively. In the future, if our stock price increases, with all other factors being equal, we would record a non-cash charge as a result of changes in the fair value of our common stock warrants. Alternatively, if the stock price decreases, with all other factors being equal, we may record non-cash income.
Other Expense
During the
three months ended September 30, 2016
, we expensed
$0.3 million
of offering costs associated with the derivative warrants issued in the 2016 Offerings.
Nine Months Ended September 30, 2017
and
2016
The following table sets forth certain information concerning our results of operations for the periods shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
Change
|
(dollars in thousands)
|
2017
|
|
2016
|
|
$
|
|
%
|
Revenue
|
$
|
21,598
|
|
|
$
|
19,819
|
|
|
$
|
1,779
|
|
|
9
|
%
|
Cost of revenues
|
12,831
|
|
|
12,832
|
|
|
(1
|
)
|
|
—
|
%
|
Research and development expenses
|
3,080
|
|
|
4,806
|
|
|
(1,726
|
)
|
|
(36
|
)%
|
General and administrative expenses
|
11,352
|
|
|
11,677
|
|
|
(325
|
)
|
|
(3
|
)%
|
Sales and marketing expenses
|
3,437
|
|
|
3,731
|
|
|
(294
|
)
|
|
(8
|
)%
|
Loss from operations
|
(9,102
|
)
|
|
(13,227
|
)
|
|
4,125
|
|
|
(31
|
)%
|
Interest income (expense)
|
(760
|
)
|
|
(323
|
)
|
|
(437
|
)
|
|
135
|
%
|
Change in fair value of acquisition note payable
|
(114
|
)
|
|
119
|
|
|
(233
|
)
|
|
(196
|
)%
|
Change in fair value of warrant liability
|
(3,927
|
)
|
|
729
|
|
|
(4,656
|
)
|
|
(639
|
)%
|
Other income
|
(46
|
)
|
|
(325
|
)
|
|
279
|
|
|
(86
|
)%
|
Loss before income taxes
|
(13,949
|
)
|
|
(13,027
|
)
|
|
(922
|
)
|
|
7
|
%
|
Income tax provision (benefit)
|
(970
|
)
|
|
—
|
|
|
(970
|
)
|
|
n/a
|
|
Net (loss)
|
$
|
(12,979
|
)
|
|
$
|
(13,027
|
)
|
|
$
|
48
|
|
|
—
|
%
|
Non-GAAP Financial Information
In addition to disclosing financial results in accordance with United States generally accepted accounting principles (“GAAP”), the table below contains non-GAAP financial measures that we believe are helpful in understanding and comparing our past financial performance and our future results. The non-GAAP financial measures disclosed by the Company exclude the non- operating changes in the fair value of derivative instruments. These non-GAAP financial measures should not be considered a substitute for, or superior to, financial measures calculated in accordance with GAAP, and the financial results calculated in accordance with GAAP and reconciliations from these results should be carefully evaluated. Management believes that these non-GAAP measures provide useful information about the Company’s core operating results and thus are appropriate to enhance the overall understanding of the Company’s past financial performance and its prospects for the future. The non-GAAP financial measures in the table below include adjusted net (loss) and the related adjusted basic and diluted net (loss) per share amounts.
Reconciliation from GAAP to Non-GAAP Results (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2017
|
|
2016
|
Reconciliation of net (loss):
|
|
|
|
|
Net (loss)
|
|
$
|
(12,979
|
)
|
|
$
|
(13,027
|
)
|
Adjustments:
|
|
|
|
|
Change in fair value of acquisition note payable
|
|
114
|
|
|
(119
|
)
|
Change in fair value of warrant liability
|
|
3,927
|
|
|
(729
|
)
|
Adjusted net (loss)
|
|
$
|
(8,938
|
)
|
|
$
|
(13,875
|
)
|
Reconciliation of basic and diluted net (loss) per share:
|
|
|
|
|
Basic and diluted net (loss) per share
|
|
$
|
(0.65
|
)
|
|
$
|
(0.88
|
)
|
Adjustments to net (loss)
|
|
0.20
|
|
|
(0.05
|
)
|
Adjusted basic and diluted net (loss) per share
|
|
$
|
(0.45
|
)
|
|
$
|
(0.93
|
)
|
Basic and diluted weighted-average shares outstanding
|
|
20,059
|
|
|
14,868
|
|
Adjusted net (loss) decreased 36% to
$8.9 million
during the
nine months ended September 30, 2017
, down from an adjusted net (loss) of
$13.9 million
during the
nine months ended September 30, 2016
. Adjusted basic and diluted net (loss) per share decreased 52% to
$0.45
during the
nine months ended September 30, 2017
, down from
$0.93
during the
nine months ended September 30, 2016
.
The breakdown of our revenue is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
Change
|
|
2017
|
|
2016
|
|
|
|
|
(dollars in thousands)
|
$
|
|
%
|
|
$
|
|
%
|
|
$
|
|
%
|
Biopharma Services
|
11,175
|
|
|
52
|
%
|
|
$
|
11,374
|
|
|
57
|
%
|
|
$
|
(199
|
)
|
|
(2
|
)%
|
Clinical Services
|
8,887
|
|
|
41
|
%
|
|
7,685
|
|
|
39
|
%
|
|
1,202
|
|
|
16
|
%
|
Discovery Services
|
1,536
|
|
|
7
|
%
|
|
760
|
|
|
4
|
%
|
|
776
|
|
|
102
|
%
|
Total Revenue
|
$
|
21,598
|
|
|
100
|
%
|
|
$
|
19,819
|
|
|
100
|
%
|
|
$
|
1,779
|
|
|
9
|
%
|
Revenue increased
9%
, or
$1.8 million
, to
$21.6 million
for the
nine months ended September 30, 2017
, from
$19.8 million
for the
nine months ended September 30, 2016
, principally due to an increase of
$1.2 million
in our Clinical Services and an increase in Discovery Services of
$0.8 million
, offset by a decrease of
$0.2 million
in our Biopharma Services. Our average revenue per test decreased to $378 per test for the
nine months ended September 30, 2017
from $408 per test for the
nine months ended September 30, 2016
, principally due to the additional Clinical Services volume from our Los Angeles facility, which yields lower average revenue per test. Test volume increased by 12% from 36,156 tests for the
nine months ended September 30, 2016
to 40,451 tests for the
nine months ended September 30, 2017
.
Revenue from Biopharma Services decreased
2%
, or
$0.2 million
, to
$11.2 million
for the
nine months ended September 30, 2017
, from
$11.4 million
for the
nine months ended September 30, 2016
due to completing fewer studies for its top ten customers. Revenue from Clinical Services customers increased by
$1.2 million
, or
16%
, for the
nine months ended September 30, 2017
due to increased volume in our clinical services laboratory operations in Los Angeles. Revenue from Discovery Services increased
102%
, or
$0.8 million
, during the
nine months ended September 30, 2017
due to our acquisition of vivoPharm, which accounted for all of the increase.
Cost of Revenues
Cost of revenues remained steady for the
nine months ended September 30, 2017
and 2016. While lab supplies and facility costs both increased by $0.2 million during the
nine months ended September 30, 2017
, depreciation of equipment and outsourced labor decreased by $0.1 million and $0.2 million, respectively, during the
nine months ended September 30, 2017
. In addition, our shipping costs declined by $0.1 million during the
nine months ended September 30, 2017
. Gross margin improved to
41%
during the
nine months ended September 30, 2017
from
35%
during the
nine months ended September 30, 2016
, as we continue to rationalize our cost structure from prior acquisitions and introduce greater efficiency in our laboratory operations.
Operating Expenses
Research and development expenses decreased
36%
, or
$1.7 million
, to
$3.1 million
for the
nine months ended September 30, 2017
, from
$4.8 million
for the
nine months ended September 30, 2016
, principally due to reduced payroll and benefit costs of $0.7 million, decreased lab supplies of $0.7 million and reduced facility costs of $0.2 million.
General and administrative expenses decreased
3%
, or
$0.3 million
, to
$11.4 million
for the
nine months ended September 30, 2017
, from
$11.7 million
for the
nine months ended September 30, 2016
, principally due to decreased facility costs of $0.6 million, decreased professional fess of $0.2 million, decreased miscellaneous expenses of $0.2 million and decreased franchise and property taxes of $0.2 million, partially offset by an increase in our bad debt reserve of $0.9 million.
Sales and marketing expenses decreased
8%
, or
$0.3 million
, to
$3.4 million
for the
nine months ended September 30, 2017
, from
$3.7 million
for the
nine months ended September 30, 2016
, principally due to reduced travel and entertainment expenses of $0.2 million and decreased facility costs of $0.2 million.
Interest Income (Expense)
Net interest expense increased
135%
, or
$0.4 million
, principally due to recognizing a loss on extinguishment of debt of $0.1 million in March 2017 and the higher effective interest rate on our refinanced debt.
Change in Fair Value of Acquisition Note Payable
The change in fair value of note payable resulted in
$0.1 million
in non-cash expense for the
nine months ended September 30, 2017
, as compared to non-cash income of
$0.1 million
for the
nine months ended September 30, 2016
. The fair value of the note representing part of the purchase price for BioServe increased during the
nine months ended September 30, 2017
as a consequence of a increase in our stock price.
Change in Fair Value of Warrant Liability
Changes in fair value of some of our common stock warrants may impact our quarterly results. Accounting rules require us to record certain of our warrants as a liability, measure the fair value of these warrants each quarter and record changes in that value in earnings. As a result of an increase in our stock price, we recognized non-cash expense of
$3.9 million
for the
nine months ended September 30, 2017
. In the future, if our stock price increases, we would record a non-cash charge as a result of changes in the fair value of our common stock warrants. Consequently, we may be exposed to non-cash charges, or we may record non-cash income, as a result of this warrant exposure in future periods.
We recognized non-cash income of
$0.7 million
during the
nine months ended September 30, 2016
due to changes in the fair value of the warrants issued in the 2016 Offerings and the expiration of other unexercised warrants.
Other Expense
During the
nine months ended September 30, 2017
and 2016, we expensed
$46,000
and
$0.3 million
of issuance costs associated with the derivative warrants issued as part of the 2017 debt refinancing and the 2016 Offerings, respectively.
Liquidity and Capital Resources
Sources of 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 collections from customers and (ii) cash received from sale of state NOL’s.
In general, our primary uses of cash are providing for operating expenses, working capital purposes and servicing debt. As of
September 30, 2017
, we have up to $4.0 million of available borrowings from our line of credit with Silicon Valley Bank, and we are able to sell shares to Aspire Capital.
Aspire Capital
On August 14, 2017, we entered into a Common Stock Purchase Agreement (the “Purchase Agreement”) with Aspire Capital Fund, LLC, an Illinois limited liability company (“Aspire Capital”), which provides that Aspire Capital is committed to purchase up to an aggregate of
$16.0 million
of our common stock (the “Purchase Shares”) from time to time over the term of the Purchase Agreement. Aspire Capital made an initial purchase of
1,000,000
Purchase Shares (the “Initial Purchase”) at a purchase price of
$3.00
per share on the commencement date of the agreement.
After the commencement date, on any business day over the
24
-month term of the Purchase Agreement, we have the right, in our sole discretion, to present Aspire Capital with a purchase notice (each, a “Purchase Notice”) directing Aspire Capital to purchase up to
33,333
Purchase Shares per business day, provided that Aspire Capital will not be required to buy Purchase Shares pursuant to a Purchase Notice that was received by Aspire Capital on any business day on which the last closing trade price of our common stock on the NASDAQ Capital Market is below
$3.00
. The Company and Aspire Capital also may mutually agree to increase the number of shares that may be sold to as much as an additional
2,000,000
Purchase Shares per business day. The purchase price per Purchase Share will be
$3.00
. As consideration for entering into the Purchase Agreement, we issued
320,000
shares of our common stock to Aspire Capital (“Commitment Shares”).
The number of Purchase Shares covered by and timing of each Purchase Notice are determined by us, at our sole discretion. The aggregate number of shares that we can sell to Aspire Capital under the Purchase Agreement may in no case exceed
3,938,213
shares of our common stock (which is equal to approximately
19.9%
of the common stock outstanding on the date of the Purchase Agreement), including the
320,000
Commitment Shares and the
1,000,000
Initial Purchase Shares, unless shareholder approval is obtained to issue additional shares.
Our net proceeds will depend on several factors, including the frequency of our sales of Purchase Shares to Aspire Capital and the frequency at which the last closing trade price of our common stock is below
$3.00
, subject to a maximum of
$16.0 million
in gross proceeds, including the Initial Purchase. Our delivery of Purchase Notices will be made subject to market conditions, in light of our capital needs from time to time and under the limitations contained in the Purchase Agreement. We currently intend to use the net proceeds from sales of Purchase Shares for general corporate purposes and working capital requirements.
As of
September 30, 2017
, the Company has sold
1,000,000
shares under this agreement at
$3.00
per share, resulting in proceeds of approximately
$2,965,000
, net of offering costs of approximately
$35,000
. The Company has also issued
320,000
shares as consideration for entering into the Purchase Agreement. The Company has not deferred any offering costs associated with this agreement.
Cash Flows
Our net cash flow from operating, investing and financing activities for the periods below were as follows:
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
(in thousands)
|
2017
|
|
2016
|
Cash provided by (used in):
|
|
|
|
Operating activities
|
$
|
(10,249
|
)
|
|
$
|
(17,299
|
)
|
Investing activities
|
(2,121
|
)
|
|
(472
|
)
|
Financing activities
|
7,675
|
|
|
9,028
|
|
Net (decrease) in cash and cash equivalents
|
$
|
(4,695
|
)
|
|
$
|
(8,743
|
)
|
We had cash and cash equivalents of
$4.8 million
at
September 30, 2017
, and
$9.5 million
at
December 31, 2016
.
The
$4.7 million
decrease in cash and cash equivalents for the
nine months ended September 30, 2017
, principally resulted from net cash used in operations of
$10.2 million
, principal payments made on the Silicon Valley Bank term note of $4.7 million and fixed asset additions of $1.2 million, partially offset by proceeds from the exercise of warrants of $1.8 million, net proceeds from the sale of stock to Aspire Capital of $3.0 million, proceeds from refinancing our debt of $6.0 million and borrowings on our line of credit of $2.0 million.
The
$8.7 million
decrease in cash and cash equivalents for the
nine months ended September 30, 2016
, principally resulted from
$17.3 million
of net cash used in operations, partially offset by $10.0 million of net proceeds from the 2016 Offerings.
At
September 30, 2017
, we had total indebtedness of $8.0 million, excluding capital lease obligations.
Cash Used in Operating Activities
Net cash used in operating activities was
$10.2 million
for the
nine months ended September 30, 2017
. We used $4.7 million in net cash to fund our core operations, which included $0.6 million in cash paid for interest. We incurred additional uses of cash when adjusting for working capital items as follows: a net increase in accounts receivable of $4.0 million, an increase in other current assets of $0.6 million, a net decrease in accounts payable, accrued expenses and deferred revenue of $1.1 million and a decrease in deferred rent payable and other of $0.1 million, offset by a decrease in other assets of $0.3 million.
For the
nine months ended September 30, 2016
, we used
$17.3 million
in operating activities. We used $10.5 million in net cash to fund our core operations, which included $0.3 million in cash paid for interest. We incurred additional uses of cash when adjusting for working capital items as follows: a net increase in accounts receivable of $7.1 million and an increase in other current assets of $0.1 million, offset by a net increase in accounts payable, accrued expenses and deferred revenue of $0.4 million.
Cash Used in Investing Activities
Net cash used in investing activities was
$2.1 million
for the
nine months ended September 30, 2017
and resulted from the purchase of fixed assets of $1.2 million, patent costs of $0.1 million, net cash paid to acquire vivoPharm of $0.7 million and investing $0.2 million in a cost method investment.
Net cash used in investing activities was
$0.5 million
for the
nine months ended September 30, 2016
and resulted from the purchase of fixed assets of $0.3 million and patent costs of $0.1 million.
Cash Provided by Financing Activities
Net cash provided by financing activities was
$7.7 million
for the
nine months ended September 30, 2017
and principally resulted from proceeds received from warrants exercised of $1.8 million, proceeds from the sale of stock to Aspire Capital of $3.0 million net of certain offering costs, proceeds from refinancing our debt of $6.0 million and proceeds from borrowing $2.0 million on our line of credit, offset by principal payments made on our Silicon Valley Bank term note of $4.7 million, capital lease payments of $0.2 million and debt issuance costs and loan fees of $0.3 million related to our refinanced debt.
Net cash provided by financing activities was
$9.0 million
for the
nine months ended September 30, 2016
and principally resulted from proceeds received in the 2016 Offerings of $10.0 million, offset by principal payments made on the bank term note of $0.8 million and capital lease payments of $0.1 million.
Capital Resources and Expenditure Requirements
We expect to continue to incur material operating losses in the near future. It may take several years, if ever, to achieve positive operational cash flow. We may need to raise additional capital to fund our current operations, to repay certain outstanding indebtedness and to fund expansion of our business to meet our long-term business objectives through public or private equity offerings, debt financings, borrowings or strategic partnerships coupled with an investment in our company or a combination thereof. If we raise additional funds through the issuance of convertible debt securities, or other debt securities, these securities could be secured and could have rights senior to those of our common stock. In addition, any new debt incurred by the Company could impose covenants that restrict our operations and increase our interest expense. The issuance of any new equity securities will also dilute the interest of our current stockholders. Given the risks associated with our business, including our unprofitable operating history and our ability to develop additional proprietary tests, additional capital may not be available when needed on acceptable terms, or at all. If adequate funds are not available, we will need to curb our expansion plans or limit our research and development activities, which would have a material adverse impact on our business prospects and results of operations.
We believe that our current cash, taken together with the borrowings available from the Silicon Valley Bank line of credit and the common stock purchase agreement with Aspire Capital Fund, LLC, will support operations for at least the next 12 months from the date of this report. We continue to explore opportunities for additional equity or debt financing, and we are taking steps to improve our operating cash flow. We can provide no assurances that our current actions will be successful or that any additional sources of financing will be available to us on favorable terms, if at all, when needed. Our forecast of the period of time through which our current financial resources will be adequate to support our operations and the costs to support our general and administrative, sales and marketing and research and development activities are forward-looking statements and involve risks and uncertainties.
We expect our sales and marketing, research and development and other general and administrative expenses to increase as we continue to expand our business.
Our forecast of the period of time through which our current financial resources will be adequate to support our operations and our expected operating expenses are forward-looking statements and involve risks and uncertainties. Actual results could vary materially and negatively as a result of a number of factors, including:
|
|
•
|
our ability to achieve revenue growth and profitability;
|
|
|
•
|
our ability to improve efficiency of billing and collection processes;
|
|
|
•
|
our ability to obtain approvals for our new diagnostic tests;
|
|
|
•
|
our ability to execute on our marketing and sales strategy for our tests and CRO services and gain acceptance of our tests and CRO services in the market;
|
|
|
•
|
our ability to obtain adequate reimbursement from governmental and other third-party payors for our tests and services;
|
|
|
•
|
the costs, scope, progress, results, timing and outcomes of the clinical trials of our tests;
|
|
|
•
|
the costs of operating and enhancing our laboratory facilities;
|
|
|
•
|
our ability to succeed with our cost control initiative;
|
|
|
•
|
the timing of and the costs involved in regulatory compliance, particularly if the regulations change;
|
|
|
•
|
the costs of maintaining, expanding and protecting our intellectual property portfolio, including potential litigation costs and liabilities;
|
|
|
•
|
our ability to manage the costs of manufacturing our tests;
|
|
|
•
|
our rate of progress in, and cost of research and development activities associated with, products in research and early development;
|
|
|
•
|
the effect of competing technological and market developments;
|
|
|
•
|
costs related to expansion;
|
|
|
•
|
our ability to secure financing and the amount thereof; and
|
|
|
•
|
other risks and uncertainties discussed in our annual report on Form 10-K for the year ended December 31, 2016, as updated in this quarterly report on Form 10-Q and other reports, as applicable, we file with the Securities and Exchange Commission.
|
We expect that our operating expenses may slightly increase as a result of our purchase of vivoPharm, but at a lesser rate than the expected increase in revenue. We expect our capital expenditures will slightly increase in the future as we expand our business. We plan to increase our sales and marketing headcount to promote our new clinical tests and services and to expand into new geographies and to continue our research and development expenditures associated with performing work with research collaborators, to expand our pipeline and to perform work associated with our research collaborations. For example, in 2011 we entered into an affiliation agreement to form a joint venture with the Mayo Foundation for Medical Education and Research pursuant to which we made an initial $1.0 million capital contribution in October 2013 and $1.0 million in the third quarter of 2014. We may make additional capital contributions of up to $4.0 million, subject to the joint venture entity’s achievement of certain operational milestones. Until we can generate a sufficient amount of revenues to finance our cash requirements, which we may never do, we will need to raise additional capital to fund our operations.
Subject to the availability of financing, we may use significant cash to fund acquisitions.
In March 2017, we entered into a new line of credit with Silicon Valley Bank and refinanced our term note with a new lender, Partners for Growth. See Note 6 of Notes to Unaudited Consolidated Financial Statements included in Item 1 of this quarterly report on Form 10-Q. In August 2017, we entered into a common stock purchase agreement with Aspire Capital Fund, LLC. See Note 3 of Notes to Unaudited Consolidated Financial Statements included in Item 1 of this quarterly report on Form 10-Q.
Income Taxes
Over the past several years, we have generated operating losses in all jurisdictions in which we may be subject to income taxes. As a result, we have accumulated significant net operating losses and other deferred tax assets. Because of our history of losses and the uncertainty as to the realization of those deferred tax assets, a full valuation allowance has been recognized. We do not expect to report a benefit related to the deferred tax assets until we have a history of earnings, if ever, that would support the realization of our deferred tax assets. Utilization of these net operating loss carryforwards is subject to limitation due to ownership changes that may delay the utilization of a portion of the carryforwards.
Off-Balance Sheet Arrangements
Since inception, we have not engaged in any off-balance sheet activities as defined in Item 303(a)(4) of Regulation S-K.
Critical Accounting Policies and Significant Judgment and Estimates
Our management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates based on historical experience and make various assumptions, which management believes to be reasonable under the circumstances, which form the basis for judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Section 107 of the JOBS Act provides that an “emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we have chosen to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.
The notes to our audited consolidated financial statements in our annual report on Form 10-K for the year ended December 31, 2016 contain a summary of our significant accounting policies. We consider the following accounting policies critical to the understanding of the results of our operations:
|
|
•
|
Accounts receivable and bad debts;
|
|
|
•
|
Stock-based compensation; and
|
Cautionary Note Regarding Forward-Looking Statements
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
This report on Form 10-Q contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include all statements that are not historical facts. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “potential,” or the negative of those terms, and similar expressions and comparable terminology intended to identify forward-looking statements. These statements reflect our current views with respect to future events. There are a number of important factors that could cause the actual results to differ materially from those expressed in any forward-looking statement made by us. These factors include, but are not limited to:
|
|
•
|
our ability to achieve profitability by increasing sales of our laboratory tests and services and to continually develop and commercialize novel and innovative diagnostic tests and services for cancer patients;
|
|
|
•
|
our ability to improve efficiency of billing and collection processes;
|
|
|
•
|
with respect to our Clinical Services, our ability to obtain reimbursement from governmental and other third-party payors for our tests and services;
|
|
|
•
|
our ability clinically validate our pipeline of tests currently in development;
|
|
|
•
|
our ability to execute on our marketing and sales strategy for our tests and CRO services and gain acceptance of our tests and CRO services in the market;
|
|
|
•
|
our ability to keep pace with rapidly advancing market and scientific developments;
|
|
|
•
|
our ability to satisfy U.S. (including FDA) and international regulatory requirements with respect to our tests and services, many of which are new and still evolving;
|
|
|
•
|
our ability to raise additional capital to meet our liquidity needs;
|
|
|
•
|
competition from clinical laboratory services companies, tests currently available or new tests that may emerge;
|
|
|
•
|
our ability to maintain our clinical collaborations and enter into new collaboration agreements with highly regarded organizations in the cancer field so that, among other things, we have access to thought leaders in the field and to a robust number of samples to validate our tests;
|
|
|
•
|
our ability to maintain our present customer base and obtain new customers;
|
|
|
•
|
potential product liability or intellectual property infringement claims;
|
|
|
•
|
our dependency on third-party manufacturers to supply or manufacture our products;
|
|
|
•
|
our ability to attract and retain a sufficient number of scientists, clinicians, sales personnel and other key personnel with extensive experience in oncology, who are in short supply;
|
|
|
•
|
our ability to obtain or maintain patents or other appropriate protection for the intellectual property in our proprietary tests and services;
|
|
|
•
|
our dependency on the intellectual property licensed to us or possessed by third parties;
|
|
|
•
|
our ability to expand internationally and launch our tests in emerging markets, such as India and Brazil;
|
|
|
•
|
our ability to adequately support future growth; and
|
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the risk factors discussed in our annual report on Form 10-K for the year ended December 31, 2016, as updated in this quarterly report on Form 10-Q and other reports, as applicable, that we file with the Securities and Exchange Commission.
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Given these uncertainties, you should not place undue reliance on these forward-looking statements. These forward-looking statements represent our estimates and assumptions only as of the date of this quarterly report on Form 10-Q and, except as required by law, we undertake no obligation to update or review publicly any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this quarterly report on Form 10-Q. You should read this quarterly report on Form 10-Q and the documents referenced herein and filed as exhibits completely and with the understanding that our actual future results may be materially different from what we expect.