Special Note Regarding Forward Looking Statements
Except for the historical information contained herein, this Quarterly Report on
Form 10-Q contains or may contain, among other things, certain forward-looking
statements, within the meaning of the Private Securities Litigation Reform Act
of 1995. These forward-looking statements include, but are not limited to,
statements concerning our strategy, future operations, future financial
position, future revenues, projected costs, prospects and plans and objectives
of management. When used in this report, the words "expects," "anticipates,"
"intends," "estimates," "plans," "may," "will," "believes," and similar
expressions are intended to identify forward-looking statements although not all
forward-looking statements contain these identifying words. These are statements
that relate to future periods and include statements about our expectation that,
for the foreseeable future, a significant amount of our revenues will be derived
from ResponseDX sales; our ability to maintain revenue from pharmaceutical
clients; the factors that may impact our financial results; the extent of our
net losses and our ability to achieve sustained profitability; our business
strategy and our ability to achieve our strategic goals; our expectations
regarding revenues from ResponseDX® products; the amount of future revenues that
we may derive from Medicare patients; the potential or intent to enter into
distribution arrangements; our ability to sustain or increase demand for our
tests; our sales forces' capacity to sell our tests; plans for the development
of additional tests; our expectation that our research and development, general
and administrative and sales and marketing expenses will increase and our
anticipated uses of those funds; our ability to comply with the requirements of
a public company; our ability to attract and retain qualified employees; our
compliance with federal and state regulatory requirements; the potential impact
resulting from the regulation of our tests by the U.S. Food and Drug
Administration; the impact of new or changing policies or regulation of our
business; our belief that we have filed adequate patent and trademark
applications to protect our intellectual property rights; the impact of
accounting pronouncements and our accounting policies, estimates, assumptions or
models on our financial results; and anticipated challenges to our business.
Forward-looking statements are subject to risks and uncertainties that could
cause actual results to differ materially from those expected. These risks and
uncertainties include, but are not limited to, our ability to develop and
commercialize new product without unanticipated delay; the risk that we may not
maintain reimbursement for our existing tests or any future tests; the risk that
reimbursement pricing may change; the risks and uncertainties associated with
the regulation of our tests; our ability to compete;; our ability to obtain
capital when needed; and our history of operating losses. These forward-looking
statements speak only as of the date hereof. We expressly disclaim any
obligation or undertaking to update any forward-looking statements contained
herein to reflect any change in our expectations with regard thereto or any
change in events, conditions or circumstances on which any such statement is
based.
The following discussion of our financial condition and results of operations
should be read in conjunction with our unaudited financial statements and
related notes to the financial statements included elsewhere in this Quarterly
Report on Form 10-Q as of June 30, 2012 and our audited financial statements for
the year ended December 31, 2011 included in our Annual Report on Form
10-K previously filed with the Securities and Exchange Commission. This
discussion contains forward-looking statements that relate to future events or
our future financial performance. These statements involve known and unknown
risks, uncertainties and other factors that may cause our actual results, levels
of activity, performance or achievements to be materially different from any
future results, levels of activity, performance or achievements expressed or
implied by these forward looking statements.
Overview
Response Genetics, Inc. was formed as a Delaware corporation in September 1999.
We are a life sciences company engaged in the research and development of
clinical diagnostic tests for cancer. Our mission is to provide personalized
genetic information that will help guide physicians and patients in choosing the
treatment from which a given patient is most likely to benefit. We currently
generate revenues primarily from sales of our ResponseDX®diagnostic tests, which
we launched in 2008, and by providing clinical trial testing services to
pharmaceutical companies.
Our proprietary technologies enable us to reliably and consistently extract the
nucleic acids RNA and DNA from tumor specimens that are stored as formalin-fixed
and paraffin-embedded, or FFPE, specimens and thereby to analyze genetic
information contained in these tissues. Our technologies also enable us to use
the FFPE patient biopsies for the development of diagnostic tests.
We file our annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and other information with the SEC. Copies of these reports
are also available through our website at www.responsegenetics.com. We also post
copies of our press releases on our corporate website.
Our Approach
Clinical studies have shown that not all cancer chemotherapy works effectively
in every patient, and that a number of patients receive therapy that has no
benefit to them and may potentially even be harmful. Our goal is to provide
physicians and cancer patients with a means to make informed, individualized
treatment decisions based on genetic analysis of tumor tissues through the
utilization of our proprietary technology as well as through the use of
non-proprietary technology that could also benefit patients.
Our approach to achieving this goal is to provide a range of oncology diagnostic
testing services, focusing on solid tumors, which include technical laboratory
services and professional interpretation of laboratory test results by licensed
pathologists. In addition, we provide services to pharmaceutical companies and
research organizations, including development of diagnostics and clinical trial
testing services.
26
ResponseDX®
The outcome of cancer chemotherapy is highly variable due to genetic differences
among patients. Some patients respond well with tumor shrinkage and increase in
life span. Other patients do not obtain benefit from the same therapy but may
still experience toxic side effects as well as delay in effective treatment and
psychological trauma.
Many chemotherapy regimens are administered without any pre-selection of
patients on the basis of their particular genetics. However recent development
of very sensitive molecular technologies has enabled researchers to identify and
measure genetic factors in patients' tissues that can predict the probability of
success or failure of many currently used anti-cancer agents. In order to
increase the chances of a better chemotherapy outcome for cancer patients, we
have and continue to develop genetic tests that measure predictive factors for
tumor response in tumor tissue samples. We offer tests for non-small cell lung
cancer, colorectal cancer and gastric and gastroesophageal, and melanoma cancer
patients' tumor tissue specimens through our ResponseDX: Lung®, ResponseDX:
Colon® and ResponseDX: Gastric® and ResponseDX: Melanoma™ test suites. These
test results may help doctors and patients decide the best course of treatment
for patients.
Our ResponseDX® tests are commercially available through our laboratory located
in Los Angeles, California, which is certified under the Clinical Laboratory
Improvement Amendment of 1988.
Diagnostic Tests for Other Cancers
In addition to ResponseDX:Lung®, ResponseDX:Colon®, and ResponseDX: Gastric®and
ResponseDX: Melanoma™, we are developing and intend to commercialize tests for
other types of cancer that identify genetic profiles of tumors that are more
aggressive and recur rapidly after surgery. We also are identifying genetic
profiles of tumors that are more or less responsive to a particular
chemotherapy. Following the development of tests to predict the risk of
recurrence after surgery, we intend to develop tests to determine the most
active chemotherapy regimen for the individual patient at risk. Once developed
and after obtaining any necessary regulatory approvals, we intend to leverage
our relationships in the healthcare industry to market, sell or license these
tests as a means for physicians to determine the courses of cancer treatment.
Pursuit of Additional Collaborations and In-licensing to Expand Our Business
We intend to pursue additional collaborations with pharmaceutical companies or
in-licensing of products or technologies that will enable us to accelerate the
implementation of our plans to expand the services we provide to oncologists and
pathologists. We expect to implement this plan by way of licensing of technology
and know-how, investments in other companies, strategic collaborations, and
other similar transactions. We expect these collaborations to provide us with
early access to new technologies available for commercialization.
There are no assurances that we will be able to continue making our current
ResponseDX®tests available, or make additional ResponseDX®tests available; that
we will be able to develop and commercialize tests of other types of cancer; or
that we will be able to expand our testing service business.
We anticipate that over the next 12 months, a substantial portion of our capital
resources and efforts will be focused on research and development to expand our
series of diagnostic tests for cancer patients, sales and marketing activities
related to our ResponseDX®diagnostic tests, and for other general corporate
purposes.
Research and development expenses represented 3.3% and 10.7% of our total
operating expenses for the three months ended June 30, 2011 and 2012,
respectively and 3.0% and 9.3% for the six months ended June 30, 2011 and 2012,
respectively. Major components of the $221,546 and $699,791 in research and
development expenses for the three months ended June 30, 2011 and 2012, and
$385,888 and $1,269,746 for the six months ended June 30, 2011 and 2012,
respectively, include supplies and reagents for our research activities,
personnel costs, occupancy costs, equipment warranties and service, patent
fees, insurance, business consulting and sample procurement costs.
27
Critical Accounting Policies and Significant Judgments and Estimates
This discussion and analysis of our financial condition and results of
operations is based on our consolidated financial statements, which have been
prepared in accordance with U.S. generally accepted accounting principles. The
preparation of these financial statements requires management to make estimates
and judgments that affect the reported amounts of assets, liabilities and
expenses and the disclosure of contingent assets and liabilities at the date of
the financial statements, as well as revenues and expenses during the reporting
periods. We evaluate our estimates and judgments on an ongoing basis. We base
our estimates on historical experience and on various other factors we believe
are reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results could therefore differ
materially from those estimates under different assumptions or conditions. We
believe the following critical accounting policies reflect our more significant
estimates and assumptions used in the preparation of our financial statements.
Revenue Recognition
Pharmaceutical Revenue
Revenues that are derived from testing services provided to pharmaceutical
companies are recognized on a contract specific basis pursuant to the terms of
the related agreements. Revenue is recognized in accordance with ASC 605,
Revenue Recognition, which requires that four basic criteria must be met before
revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2)
delivery has occurred and title and the risks and rewards of ownership have been
transferred to the client or services have been rendered; (3) the price is fixed
or determinable; and (4) collectability is reasonably assured.
Revenues are recorded on an accrual basis as the contractual obligations are met
and as a set of assays is processed through the Company's laboratory under a
specified contractual protocol and are recorded on the date the tests are
resulted. Certain contracts have minimum assay requirements that, if not met,
result in payments that are due upon the completion of the designated period. In
these cases, revenues are recognized when the end of the specified contract
period is reached, if the minimum assay requirements are not met.
ResponseDX®Revenue
Net revenue for the Company's diagnostic services is recognized on an accrual
basis at the time discreet diagnostic tests are completed. Each test performed
relates to a specimen encounter derived from a patient, and received by the
Company on a specific date (such encounter is commonly referred to as an
"accession"). The Company's services are billed to various payors, including
Medicare, private health insurance companies, healthcare institutions, and
self-pay patients. The Company reports net revenue from contracted payors,
including certain private health insurance companies, and healthcare
institutions based on the contracted rate, or in certain instances, the
Company's estimate of the amount expected to be collected for the services
provided. For billing to Medicare, the Company uses the published fee schedules,
net of standard discounts (commonly referred to as "contractual allowances").
The Company reports net revenue from non-contracted payors, including certain
private health insurance companies, based on the amount expected to be collected
for the services provided.
The Company has its Medicare provider number which allows it to invoice and
collect from Medicare. Invoicing to Medicare is primarily based on amounts
allowed by Medicare for the service provided as defined by Common Procedural
Terminology codes.
License Fees
We have licensed technology for the extraction of RNA and DNA from FFPE tumor
specimens from USC in exchange for royalty fees on revenue generated by use of
this technology. These royalties are calculated as a fixed percentage of revenue
that we generate from use of the technology licensed from USC. Total license
fees expensed in cost of revenue under the royalty agreement to USC were
$132,913 and $75,938 for the three months ended June 30, 2011 and 2012,
respectively and $258,811 and $132,440 for the six months ended June 30, 2011
and 2012, respectively. We also maintain a non-exclusive license to use Roche's
PCR processes. We pay Roche a fixed percentage royalty fee for revenue that we
generate through use of this technology. Royalties expensed in cost of revenue
under this agreement totaled $177,821 and $80,418 for the three months ended
June 30, 2011 and 2012, respectively and $308,364 and $143,887 for the six
months ended June 30, 2011 and 2012, respectively.
We are subject to potentially significant variations in royalties recorded in
any period. While the amount paid is based on a fixed percentage from revenues
of specific tests pursuant to terms set forth in the agreements with USC and
Roche, the amount due is calculated based on the revenue we recognize using the
respective licensed technology. As discussed above, this revenue can vary from
period to period as it is dependent on the timing of the specimens submitted by
our clients for testing.
28
Accounts Receivable and Allowance for Doubtful Accounts
We invoice our pharmaceutical clients as specimens are processed and any other
contractual obligations are met. Our contracts with pharmaceutical clients
typically require payment within 45 days of the date of invoice. We maintain
allowances for doubtful accounts for estimated losses resulting from the
inability of our clients to make required payments. We specifically analyze
accounts receivable and historical bad debts, client credit, current economic
trends and changes in client payment trends when evaluating the adequacy of the
allowance for doubtful accounts. Account balances are charged-off against the
allowance when it is probable the receivable will not be recovered. To date, our
pharmaceutical clients have primarily been large pharmaceutical companies. As a
result, bad debts to date have been minimal and there is no allowance for
doubtful accounts for our pharmaceutical revenue at June 30, 2011 and 2012.
We bill Medicare and Private Payors for ResponseDX®upon completion of the
required testing services. As such, we take assignment of benefits and the risk
of collection with Medicare and Private Payors. We continue to monitor the
collection history for Medicare and Private Payors. Based on the historical
experience for our Medicare and Private Payor accounts, we have determined that
related accounts receivable associated with billings over one year old are
unlikely to be collected.
An allowance for doubtful accounts is recorded for estimated uncollectible
amounts due from the Company's various payor groups. The process for estimating
the allowance for doubtful accounts involves significant assumptions and
judgments. Specifically, the allowance for doubtful accounts is adjusted
periodically, and is principally based upon an evaluation of historical
collection experience of accounts receivable for the Company's various payor
classes. After appropriate collection efforts, accounts receivable are written
off and deducted from the allowance for doubtful accounts. Additions to the
allowance for doubtful accounts are charged to bad debt expense. The payment
realization cycle for certain governmental and managed care payors can be
lengthy involving denial, appeal, and adjudication processes, and is subject to
periodic adjustments that may be significant. Therefore, we have recorded an
allowance for doubtful accounts of $838,750 as of December 31, 2011 and $607,858
as of June 30, 2012.
We cannot guarantee that we will continue to experience the same credit loss
rates that we have in the past. Measurement of such losses requires
consideration of historical loss experience, including the need to adjust for
current conditions, and judgments about the probable effects of relevant
observable data, including present economic conditions such as delinquency rates
and financial health of specific customers. We consider all available
information in our assessments of the adequacy of the reserves for uncollectible
accounts.
Income Taxes
We estimate our tax liability through calculations we perform for the
determination of our current tax liability, together with assessing temporary
differences resulting from the different treatment of items for tax and
accounting purposes. These differences result in deferred tax assets and
liabilities, which are recorded in our balance sheets. Our management then
assesses the likelihood that deferred tax assets will be recovered in future
periods through future operating results. To the extent that we cannot conclude
that it is more likely than not that the benefit of such assets will be
realized, we establish a valuation allowance to adjust the net carrying value of
such assets. The carrying value of our net deferred tax assets assumes that we
will be able to generate sufficient future taxable income, based on management's
estimates and assumptions. These estimates and assumptions take into
consideration future taxable income and ongoing feasible tax strategies in
determining recoverability of such assets. Our valuation allowance is subject to
significant change based on management's estimates of future profitability and
the ultimate realization of the deferred tax assets. The Company has established
a full valuation allowance against its net deferred tax assets due to the
uncertainty surrounding the realization of such assets.
Results of Operations
Quarters Ended June 30, 2012 and June 30, 2011
Revenues: Revenues were $3,835,006 for the quarter ended June 30, 2012, as
compared to $6,702,561 for the quarter ended June 30, 2011, a decrease of
$2,867,555. The decrease was primarily due to a decrease in pharmaceutical
revenues of $2,748,655 and a decrease in ResponseDX® revenue of $150,653.
ResponseDX®revenue accounted for 73.9% of total revenue for the quarter ended
June 30, 2012 compared to 44.5% for the quarter ended June 30, 2011.
ResponseDX®revenues decreased 5.0% for the quarter ended June 30, 2012, as
compared to the quarter ended June 30, 2011. For the quarter ended June 30,
2012, our two most significant pharmaceutical customers accounted for
approximately 13.7% of our revenue, as compared to approximately 46% of our
revenue for the quarter ended June 30, 2011.
Cost of Revenues: Cost of revenue for the quarter ended June 30, 2012 was
$2,426,118 as compared to $2,800,904 for the quarter ended June 30, 2011, a
decrease of $374,786 or 13.4%. This decrease resulted primarily from decreases
in lab supplies and reagent costs of $140,426, royalties of $131,601, business
consulting of $87,862, legal fees of $133,095, travel costs of $29,798, offset
in part by an increase in personnel costs of $162,142. Cost of revenues as a
percentage of revenues was 63.3% for the quarter ended June 30, 2012, as
compared to 41.8% for the quarter ended June 30, 2011, an increase of 21.5%.
29
Research and Development Expenses: Research and development expenses were
$699,791 for the quarter ended June 30, 2012, as compared to $221,546 for the
quarter ended June 30, 2011, an increase of $478,245 or 215.9%. This increase
resulted primarily from increases in lab supplies of $276,873, personnel costs
of $148,099, legal services of $71,432 and business consulting of $24,821. We
expect research and development expenses to increase as we continue work to
develop additional aspects of our technology and to study diagnostic indicators
for various forms of cancer.
General and Administrative Expenses: General and administrative expenses were
$1,920,563 for the quarter ended June 30, 2012, as compared to $2,347,217 for
the quarter ended June 30, 2011, a decrease of $426,654 or 18.2%. This decrease
resulted primarily from decreases in personnel costs of $7,568, legal fees of
$58,054, billing fees of $102,958, business taxes of $118,398, bad debt expense
of $108,373, travel costs of $41,085 and audit fees of $35,983, offset in part
by an increase in foreign currency loss of $75,631.
Sales and Marketing Expenses: Sales and marketing expenses were $1,495,321 for
the quarter ended June 30, 2012, as compared to $1,417,460 for the quarter ended
June 30, 2011, an increase of $77,861 or 5.5%. The increase primarily resulted
from increased sales and marketing activities for ResponseDX®, which included
increases in consulting costs of $73,351, business travel costs of $16,977, and
meeting expenses of $25,827, offset in part by decreases of expense for
advertising of $12,505 and personnel costs of $40,821. We expect that sales and
marketing costs will continue to increase as we expand our sales and marketing
activities in order to gain clinical acceptance of our ResponseDX®assays.
Income Taxes: As of June 30, 2012 and 2011, since we have incurred substantial
losses and have generated no taxable income, a full valuation allowance has been
recorded for the deferred tax assets since we do not believe the recoverability
of the deferred income tax assets in the near future is more likely than not.
30
Six Months Ended June 30, 2012 and June 30, 2011
Revenues: Revenues were $7,816,651 for the six months ended June 30, 2012, as
compared to $12,630,136 for the six months ended June 30, 2011, a decrease of
$4,813,485. The decrease was primarily due to a decrease in pharmaceutical
revenue of $4,514,347 and a decrease in ResponseDX®revenue of $299,123. For the
six months ended June 30, 2012, our two most significant pharmaceutical
customers accounted for approximately 19.1% of our revenue, as compared to
approximately 45% of our revenue for the six months ended June 30, 2011.
Cost of Revenues: Cost of revenues for the six months ended June 30, 2012 were
$5,126,976 as compared to $5,501,826 for the six months ended June 30, 2011, a
decrease of $374,850 or 6.8%. This decrease resulted primarily from decreases in
lab supplies and reagent costs of $75,916, royalties of $253,415, legal services
of $208,470 and relocation costs of $25,324, offset in part by an increase in
personnel costs of $309,581 and facility rent of $87,483. Cost of revenues as a
percentage of revenues was 65.6% for the six months ended June 30, 2012, as
compared to 43.6% for the six months ended June 30, 2011, an increase of 22%.
Research and Development Expenses: Research and development expenses were
$1,269,746 for the six months ended June 30, 2012, as compared to $385,888 for
the six months ended June 30, 2011, an increase of $883,858 or 229%. This
increase resulted primarily from increases in personal costs of $308,247,
consulting costs of $35,870 lab supplies and reagent costs of $429,026, and
legal costs of $179,995. We expect research and development expenses to increase
as we continue to work to develop additional aspects of our technology and to
study diagnostic indicators for various forms of cancer.
General and Administrative Expenses: General and administrative expenses were
$4,279,013 for the six months ended June 30, 2012, as compared to $4,224,562 for
the six months ended June 30, 2011, an increase of $54,451 or 1.3%. This
increase resulted primarily from increases in personnel costs of $158,311,
business consulting $87,447, equipment maintenance of $40,416 and foreign
currency translation of $80,803 offset by decreases in business taxes of
$224,910 and billing services of $157,238.
Sales and Marketing Expenses: Sales and marketing expenses were $2,949,128 for
the six months ended June 30, 2012, as compared to $2,856,586 for the six months
ended June 30, 2011, an increase of $92,542 or 3.2%. This increase primarily
resulted from increased sales and marketing activities for ResponseDX®, which
included increases in business travel of $43,336 and business consulting of
$73,351, offset by decreases in personnel costs of $6,838. We expect that sales
and marketing costs will continue to increase as we expand our sales and
marketing activities in order to gain clinical acceptance of our
ResponseDX®assays.
Income Taxes: As of June 30, 2012 and 2011, since we have incurred substantial
losses and have generated no taxable income, a full valuation allowance has been
recorded for the deferred tax assets since we do not believe the recoverability
of the deferred income tax assets in the near future is more likely than not.
Liquidity and Capital Resources
We incurred net losses of $87,344 and $2,729,661 during the three months ended
June 30, 2011 and 2012, respectively. Since our inception in September 1999, we
have incurred cumulative losses and as of June 30, 2012, we had an accumulated
deficit of $55,373,835. We have not yet achieved profitability and anticipate
that we will likely incur additional losses for the next year. We cannot provide
assurance as to when we will achieve profitability. As of June 30, 2012, we had
$2,562,262 in cash and cash equivalents and working capital of $2,952,690. In
the six months ended June 30, 2012, we used cash flows in operating activities
of $6,353,530. We expect that our cash and cash equivalents will continue to be
used to fund our selling and marketing activities primarily related to our
ResponseDX® tests, research and development, and general corporate purposes. As
a result, we will need to generate significant revenues to achieve
profitability.
The Company's current operating plan includes various assumptions concerning the
level and timing of cash receipts from product sales and cash outlays for
operating expenses and capital expenditures. The Company's ability to
successfully carry out its business plan is primarily dependent upon its ability
to (1) obtain sufficient additional capital at acceptable costs, (2) attract and
retain knowledgeable workers, and (3) generate significant revenues. At this
time, the Company expects to satisfy its future cash needs primarily through
additional financing and/or strategic investments. The Company is currently
seeking such additional financing and/or strategic investments; however, there
can be no assurance that any additional financing or strategic investments will
be available on acceptable terms, if at all. If the Company is unable to timely
and successfully raise additional capital and/or achieve profitability, it will
not have sufficient capital resources to implement its business plan or continue
its operations.
31
Sales of Common Stock
Under the Company's Articles of Incorporation, the Company has one class of
common stock and its holders have no preemptive, subscription, redemption or
conversion rights. As described below and in Note 11 in the notes to
Consolidated Financial Statements, the Company sold shares of its common stock
during 2011 and during the first quarter of 2012. In connection with certain of
these offerings, the Company entered into registration rights agreements with
the purchasers of the common shares which give such purchasers certain
registration rights.
May 2011 Registered Offering of Common Stock
On May 6, 2011, the Company issued 1,175,512 shares of its common stock at a
price of $1.99 per share in a registered direct public offering to certain
institutional investors and received net proceeds of approximately $2.2 million
from the sales, after deducting its estimated offering expenses. The securities
issued with this financing were registered under the Securities Act of 1933, as
amended. The shares were issued pursuant to a prospectus supplement dated May 4,
2011 and an accompanying prospectus dated January 6, 2011, pursuant to the
Company's existing effective shelf registration statement on Form S-3 (File No.
333-171266), which was filed with the SEC on December 17, 2010 and declared
effective by the SEC on January 6, 2011.
Common stock classified outside of stockholders' equity (deficit)
March 2010 Private Placement
On March 5, 2010, we entered into a purchase agreement with certain affiliates
of and funds managed by Lansdowne ("Lansdowne"), Greenway Capital Partners and
Paragon Associates for the private placement of 3,005,349 newly-issued shares of
our common stock at a per share price of $1.31. The closing of the sale of the
shares occurred on March 5, 2010. In connection with the acquisition of the
shares, the purchasers were granted certain preemptive rights permitting them to
maintain their percentage ownership interests in connection with future
issuances of our capital stock, subject to various exceptions and limitations.
Lansdowne participated in the private placement by electing to exercise the
preemptive rights granted to it pursuant to the purchase agreement by and
between the Company and Lansdowne, dated July 22, 2009. Net proceeds received
from this financing were approximately $3,879,403.
In connection with the private placement, we also entered into a registration
rights agreement, dated March 5, 2010, with the purchasers pursuant to which it
agreed to file, within 45 days of the closing of the private placement, a
registration statement with the SEC to register the shares for resale, which
registration statement was required to become effective within 120 days
following the closing. We also granted certain "piggyback" registration rights
to the purchasers which are triggered if we propose to file a registration
statement for its own account or the account of one or more shareholders until
the earlier of the sale of all of the shares or the shares becoming eligible for
sale under Rule 144(b)(1) without restriction.
Pursuant to the registration rights agreement dated March 5, 2010, the Company
filed a registration statement with the SEC to register the 3,005,349 shares
sold to Lansdowne, Greenway and Paragon for resale, which became effective on
May 19, 2010 and which registration statement remained effective as of June 30,
2012.
Under the registration rights agreements dated March 5, 2010, the Company is
obligated to use commercially reasonable efforts to (i) cause the registration
statement described above to remain continuously effective and (ii) to maintain
the listing of Company's common stock on NASDAQ or other exchanges, as defined,
for a period that will terminate on the earlier of March 5, 2013 or the date on
which the purchasers have sold all shares of common stock. The Company is also
required to file with the SEC in a timely manner all reports and other documents
required of the Company under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). In the event the Company fails to satisfy its obligations
under the registration rights agreements, the Company would be in breach of said
agreements, in which event, the purchasers would be entitled to pursue all
rights and remedies at law or equity including an injunction or other equitable
relief. These registration rights agreements do not provide an explicitly stated
or defined penalty due upon a breach. Because (i) the potential penalty for any
breach of these registration rights agreement is not explicitly stated or
defined, which prohibits the Company from applying the guidance of ASC
825-20-15, Registration Payment Arrangements and (ii) complying with all filing
requirements under the Exchange Act as described above is not solely within the
Company's control, the Company is required to present the investment of
$3,879,403 in the Company's common stock as common stock outside of
stockholders' equity in the accompanying consolidated balance sheet under ASC
480-10-S99-3, Classification and Measurement of Redeemable Securities.
On January 18, 2012, the restrictions were removed on 3,658,676 shares purchased
by Lansdowne, including all of the shares purchased by Lansdowne in the March
2010 private placement, and these shares were reclassified to common stock from
common stock classified outside of equity (deficit).
32
February 2012 Private Placement
On February 2, 2012, the Company entered into purchase agreements with various
investors (collectively, the "Investors") for the private placement of an
aggregate of 5,257,267 newly-issued shares of the Company's common stock (the
"Shares") at a purchase price of $1.50 per share (the "2012 Private Placement").
Net cash proceeds raised in the 2012 Private Placement were approximately
$7,822,000. The Investors participating in the 2012 Private Placement were
various institutions and all officers and directors of the Company. The final
closing of the 2012 Private Placement (the "Closing") occurred on February 2,
2012.
In connection withthe 2012 Private Placement, the Company also entered into
registration rights agreements, each dated February 2, 2012, with the Investors
pursuant to which the Company agreed to file, within 90 days of the Closing, a
registration statement with the SEC to register the Shares for resale, which
registration statement was required to become effective within 180 days
following the Closing. The Company also granted the Investors certain
"piggyback" registration rights, which are triggered if the Company proposes to
file a registration statement for its own account or the account of one or more
shareholders until the earlier of the sale of all of the Shares or the Shares
becoming eligible for sale under Rule 144(b)(1) without restriction.
Pursuant to the registration rights agreements dated February 2, 2012, the
Company filed a registration statement with the SEC on April 30, 2012, to
register the Shares for resale. This registration statement became effective on
May 17, 2012 and remained effective as of June 30, 2012.
Under the registration rights agreements dated February 2, 2012, the Company is
obligated to use commercially reasonable efforts to (i) cause the registration
statements described above to remain continuously effective and (ii) to maintain
the listing of Company's common stock on NASDAQ or other exchanges, as defined,
for a period that will terminate on the earlier of February 2, 2013, or the date
on which the Investors have sold all shares of common stock. The Company is
also required to file with the SEC in a timely manner all reports and other
documents required of the Company required of the Company under the Exchange
Act. In the event the Company fails to satisfy its obligations under the
registration rights agreements, the Company would be in breach of said
agreements, in which event, the Investors would be entitled to pursue all rights
and remedies at law or equity including an injunction or other equitable relief.
These registration rights agreements do not provide an explicitly stated or
defined penalty due upon a breach. Because (i) the potential penalty for any
breach of these registration rights agreement is not explicitly stated or
defined, which prohibits the Company from applying the guidance of ASC
825-20-15, Registration Payment Arrangements and (ii) complying with all filing
requirements under the Exchange Act as described above is not solely within the
Company's control, the Company is required to present the investment of
approximately $7,884,400 in the Company's common stock as common stock outside
of stockholders' equity in the accompanying consolidated balance sheet under ASC
480-10-S99-3, Classification and Measurement of Redeemable Securities.
33
Comparison of Cash Flows for the Six Months Ended June 30, 2012 and 2011
As of June 30, 2012, we had $2,562,262 in cash and cash equivalents, working
capital of $2,952,690 and an accumulated deficit of $55,373,835. As of June 30,
2011, we had $3,321,937 in cash and cash equivalents, working capital of
$5,603,105 and an accumulated deficit of $44,161,397.
Cash flows provided by operating activities
During the six months ended June 30, 2012, the Company used cash flows in
operating activities of $6,353,530 compared to $2,263,236 used in the six months
ended June 30, 2011. The primary reason for the increase in cash used in
operating activities of $4,090,294 was the increase in net loss the Company
incurred for the six-month period ended June 30, 2012 compared to the six-month
period ended June 30, 2011. The net loss for the Company was primarily driven by
a decrease in pharmaceutical revenue of $4,514,347 and a decrease in ResponseDX®
revenue of $299,123.
Cash flows used in investing activities
Net cash used in investing activities was $375,163 for the six months ended June
30, 2012 compared to $681,410 for the six months ended June 30, 2011. This
decrease was primarily attributable to a reduced need for property and equipment
purchases in our laboratory and facility.
Cash flows used in financing activities
Cash flows from financing activities for the six months ended June 30, 2012
provided net cash of $7,592,966 relating to the sale of common stock. Cash flows
from financing activities for the six months ended June 30, 2011 provided net
cash of $2,184,946 relating to the sale of common stock and a capital
contribution.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
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