Attached files
| file | filename |
|---|---|
| EXCEL - IDEA: XBRL DOCUMENT - LIPOSCIENCE INC | Financial_Report.xls |
| EX-31.2 - EXHIBIT - LIPOSCIENCE INC | q22014exhibit312.htm |
| EX-31.1 - EXHIBIT - LIPOSCIENCE INC | q22014exhibit311.htm |
| EX-10.3 - EXHIBIT - LIPOSCIENCE INC | q22014exhibit103.htm |
| EX-10.2 - EXHIBIT - LIPOSCIENCE INC | q22014exhibit102.htm |
| EX-32 - EXHIBIT - LIPOSCIENCE INC | q22014exhibit32.htm |
| EX-10.1 - EXHIBIT - LIPOSCIENCE INC | q22014exhibit101.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended June 30, 2014
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 001-35792
LIPOSCIENCE, INC.
(Exact name of registrant as specified in its charter)
Delaware | 56-1879288 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
2500 Sumner Boulevard, Raleigh, North Carolina | 27616 | |
(Address of principal executive offices) | (Zip Code) | |
(919) 212-1999
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company þ | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
The number of outstanding shares of the registrant's common stock, par value $0.001 per share, as of the close of business on August 8, 2014 was 15,276,491.
1
LipoScience, Inc.
Form 10-Q
Table of Contents
Page | |
PART I - FINANCIAL INFORMATION | |
PART II - OTHER INFORMATION | |
2
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
LipoScience, Inc.
Balance Sheets
(in thousands, except share and per share data)
(Unaudited)
June 30, 2014 | December 31, 2013 | ||||||
Assets | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 42,789 | $ | 49,574 | |||
Accounts receivable, net | 4,352 | 5,821 | |||||
Inventories | 191 | 224 | |||||
Prepaid expenses and other | 1,095 | 972 | |||||
Total current assets | 48,427 | 56,591 | |||||
Property and equipment, net of accumulated depreciation of $12,706 and $12,608 at June 30, 2014 and December 31, 2013, respectively | 16,336 | 13,955 | |||||
Other noncurrent assets: | |||||||
Restricted cash | 502 | 502 | |||||
Intangible assets, net | 863 | 841 | |||||
Deferred financing costs | 53 | 64 | |||||
Other assets | 35 | 45 | |||||
Total other noncurrent assets | 1,453 | 1,452 | |||||
Total assets | $ | 66,216 | $ | 71,998 | |||
Liabilities and stockholders’ equity | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 1,437 | $ | 2,045 | |||
Accrued expenses | 3,939 | 3,744 | |||||
Current maturities of long-term debt | 2,411 | — | |||||
Long-term debt reclassified to current | — | 15,816 | |||||
Total current liabilities | 7,787 | 21,605 | |||||
Long-term liabilities: | |||||||
Long-term debt, less current maturities | 13,437 | — | |||||
Other long-term liabilities | 2,577 | 2,635 | |||||
Total liabilities | 23,801 | 24,240 | |||||
Stockholders’ equity: | |||||||
Common stock, $.001 par value; 75,000,000 shares authorized; 15,270,696 and 15,188,861 shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively | 15 | 15 | |||||
Preferred stock, $.001 par value; 5,000,000 shares authorized; issuable in series, no shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively | — | — | |||||
Additional paid-in capital | 109,027 | 108,271 | |||||
Accumulated deficit | (66,627 | ) | (60,528 | ) | |||
Total stockholders’ equity | 42,415 | 47,758 | |||||
Total liabilities and stockholders’ equity | $ | 66,216 | $ | 71,998 | |||
See accompanying notes to financial statements.
3
LipoScience, Inc.
Statements of Comprehensive Loss
(in thousands, except share and per share data)
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Revenues | $ | 9,045 | $ | 13,311 | $ | 21,053 | $ | 26,927 | |||||||
Cost of revenues | 2,461 | 2,616 | 5,075 | 5,466 | |||||||||||
Gross profit | 6,584 | 10,695 | 15,978 | 21,461 | |||||||||||
Operating expenses: | |||||||||||||||
Research and development | 2,057 | 3,118 | 4,617 | 6,250 | |||||||||||
Sales and marketing | 4,975 | 6,802 | 10,075 | 13,461 | |||||||||||
General and administrative | 3,177 | 2,770 | 6,524 | 6,077 | |||||||||||
Total operating expenses | 10,209 | 12,690 | 21,216 | 25,788 | |||||||||||
Loss from operations | (3,625 | ) | (1,995 | ) | (5,238 | ) | (4,327 | ) | |||||||
Other expense: | |||||||||||||||
Interest income | 6 | 26 | 11 | 47 | |||||||||||
Interest expense | (437 | ) | (468 | ) | (872 | ) | (998 | ) | |||||||
Other expense | — | (7 | ) | — | (14 | ) | |||||||||
Total other expense | (431 | ) | (449 | ) | (861 | ) | (965 | ) | |||||||
Net loss | $ | (4,056 | ) | $ | (2,444 | ) | $ | (6,099 | ) | $ | (5,292 | ) | |||
Net loss per share—basic and diluted | $ | (0.27 | ) | $ | (0.17 | ) | $ | (0.40 | ) | $ | (0.36 | ) | |||
Weighted average shares used to compute basic and diluted net loss per share | 15,250,060 | 14,670,779 | 15,232,251 | 14,670,779 | |||||||||||
Comprehensive loss | $ | (4,056 | ) | $ | (2,444 | ) | $ | (6,099 | ) | $ | (5,292 | ) | |||
See accompanying notes to financial statements.
4
LipoScience, Inc.
Statements of Cash Flows
(in thousands)
(Unaudited)
Six Months Ended June 30, | |||||||
2014 | 2013 | ||||||
Operating activities | |||||||
Net loss | $ | (6,099 | ) | $ | (5,292 | ) | |
Adjustments to reconcile net loss to net cash used in operating activities: | |||||||
Depreciation and amortization | 1,048 | 775 | |||||
Amortization of deferred financing costs | 11 | 18 | |||||
Amortization of debt discount | 32 | 52 | |||||
Stock-based compensation expense | 572 | 552 | |||||
Fair value remeasurement of preferred stock warrant liability | — | (2 | ) | ||||
Loss on sale or disposal of equipment | 31 | — | |||||
Changes in operating assets and liabilities: | |||||||
Accounts receivable, net | 1,469 | (1,700 | ) | ||||
Inventories | 33 | (125 | ) | ||||
Prepaid expenses and other | (198 | ) | (156 | ) | |||
Accounts payable and accrued expenses | (418 | ) | (1,057 | ) | |||
Other non-current assets | 10 | (36 | ) | ||||
Other long-term liabilities | (58 | ) | 126 | ||||
Net cash used in operating activities | (3,567 | ) | (6,845 | ) | |||
Investing activities | |||||||
Purchases of property and equipment | (3,462 | ) | (1,920 | ) | |||
Capitalized patent and trademark costs | (39 | ) | (80 | ) | |||
Proceeds from sale of equipment | 100 | — | |||||
Net cash used in investing activities | (3,401 | ) | (2,000 | ) | |||
Financing activities | |||||||
Payments on revolving line of credit | — | (5,000 | ) | ||||
Payments of Series F redeemable convertible preferred stock accrued dividends | — | (5,200 | ) | ||||
Changes in restricted cash | — | 1,004 | |||||
Changes in deferred financing costs | — | (6 | ) | ||||
Issuance cost of common stock | — | (4,443 | ) | ||||
Proceeds from issuance of common stock | — | 51,750 | |||||
Proceeds from exercise of stock options | 183 | 218 | |||||
Net cash provided by financing activities | 183 | 38,323 | |||||
Net (decrease) increase in cash and cash equivalents | (6,785 | ) | 29,478 | ||||
Cash and cash equivalents at beginning of period | 49,574 | 24,768 | |||||
Cash and cash equivalents at end of period | $ | 42,789 | $ | 54,246 | |||
See accompanying notes to financial statements.
5
LipoScience, Inc.
Notes to Financial Statements
June 30, 2014
(Unaudited)
1. Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information, and the rules and regulations for the United States Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, certain information or footnote disclosures normally included in the annual financial statements prepared in accordance with U.S. GAAP have been condensed, or omitted, pursuant to the rules and regulations of the SEC. In the opinion of management, the interim financial statements include all normal recurring adjustments necessary to state fairly the Company's financial position as of June 30, 2014, results of operations for the three and six months ended June 30, 2014 and 2013 and cash flows for the six months ended June 30, 2014 and 2013. The December 31, 2013 balance sheet included herein was derived from audited financial statements, but does not include all disclosures including notes required by U.S. GAAP for complete annual financial statements.
These financial statements should be read in conjunction with the audited financial statements and the accompanying notes for the year ended December 31, 2013 contained in the Company's Annual Report on Form 10-K filed with the SEC on March 28, 2014 (the "Form 10-K"). Interim results are not necessarily indicative of results to be expected for the year ending December 31, 2014 or any other interim period or for any other future year.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and the disclosures of contingent assets and liabilities as of the date of the financial statements and reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates and assumptions used.
Significant Accounting Policies
The significant accounting policies used in preparation of these interim financial statements are disclosed in the Company's Form 10-K, and have not changed significantly since such filing.
2. Recent Accounting Pronouncements
In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The amendments in this update provide clarification, and are intended to reduce diversity in practice, on the financial statement presentation of unrecognized tax benefits. The guidance specifies that an unrecognized tax benefit (or a portion thereof) shall be presented in the financial statements as a reduction to a deferred tax asset when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. If such deferred tax asset is not available at the reporting date to settle additional income taxes resulting from the disallowance of a tax position, or the entity does not plan to use the deferred tax asset for such purpose given the option, the unrecognized tax benefit shall be presented in the financial statements as a liability and shall not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. For public companies, the amendments that are subject to this update are effective for interim and annual reporting periods beginning after December 15, 2013, with early adoption permitted. The Company adopted this guidance beginning in the first quarter of 2014. Adoption of this guidance had no material impact on the Company’s financial statements as the guidance is consistent with the Company’s practice.
In March 2014, the FASB issued ASU No. 2014-06, Technical Corrections and Improvements Related to Glossary Terms. The amendments in this update cover a wide range of topics in the Accounting Standards Codification and are limited to amendments related to the Master Glossary of the Accounting Standards Codification. The amendments include technical corrections related to glossary links, glossary term deletions and glossary term name changes. For public companies, the amendments of this update are effective upon the March 14, 2014 issuance date. Accordingly, the Company adopted this update upon issuance. Adoption of this new guidance had no material impact on the Company’s financial statements.
6
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 supersedes the revenue recognition requirements in Revenue Recognition (Topic 605) and most industry-specific guidance. The new standard affects any entity that either enters into contracts with customers to transfer goods or services, or enters into contracts for the transfer of nonfinancial assets. The core principle of ASU 2014-09 is for companies to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services. Companies will need to use more judgment and make more estimates than under current guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation.
For public companies, this standard is effective for interim and annual reporting periods beginning after December 15, 2016, and will be effective for the Company in the first quarter of fiscal year 2017. Early adoption is not permitted and companies can transition to the new standard under the full retrospective method or the modified retrospective method. The Company is currently evaluating the method and the impact of the adoption of this standard on its financial statements and disclosures.
3. Fair Value Measurement
As a basis for determining the fair value of certain of the Company's financial instruments, the Company utilizes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
• | Level I - Observable inputs such as quoted prices in active markets for identical assets or liabilities. |
• | Level II - Observable inputs, other than Level I prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
• | Level III - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. The Company did not elect to report any of its non-financial assets or non-financial liabilities at fair value.
The fair value of the Company's long-term debt was estimated using the discounted cash flow method, which is based on the future expected cash flows, discounted to their present values, using a discount rate that approximates market rates. This fair value measurement is categorized as Level II under the fair value hierarchy as of June 30, 2014 and December 31, 2013. The carrying value of the Company's long-term debt as of June 30, 2014 and December 31, 2013 approximated fair value because the interest rate under the obligation approximates market rates of interest available to the Company for similar instruments.
Recurring Fair Value Measurements
Cash and cash equivalents are the Company's only financial instruments that are measured at fair value on a recurring basis. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company's assessment of the significance of a particular input to the entire fair value measurement requires management to make judgments and consider factors specific to the asset or liability. All of the Company's cash equivalents, which consist of money market funds, are classified within Level I of the fair value hierarchy because they are valued using quoted market prices. At June 30, 2014 and December 31, 2013, the fair value of money market funds pledged as security for the Company's office and laboratory space operating lease was $0.5 million, which is included in restricted cash.
7
4. Long-Term Debt and Line of Credit
The Company had total debt with a carrying value of $15.8 million as of June 30, 2014 and December 31, 2013. Long-term debt consists of the following (in thousands):
June 30, 2014 | December 31, 2013 | ||||||
Long-term debt to financial institutions | $ | 16,000 | $ | 16,000 | |||
Less unamortized debt discount | (152 | ) | (184 | ) | |||
Less current maturities of long-term debt | (2,411 | ) | — | ||||
Long-term debt, less current maturities and unamortized debt discount | $ | 13,437 | $ | 15,816 | |||
On December 20, 2012, the Company entered into a credit facility with Square 1 and Oxford Finance and repaid the outstanding balance under a previous facility. The current credit facility consists of $16.0 million in term loans and a revolving line of credit of up to $6.0 million in borrowing capacity, subject to certain limitations relating to the Company's eligible accounts receivable. At June 30, 2014, total unamortized debt issuance costs incurred in connection with the current credit facility were $53,000.
As of June 30, 2014, under the credit facility, as amended, the term loans carry interest at a fixed annual rate of 9.5% and are payable in monthly installments of interest only through January 2015 and then principal and interest thereafter in monthly installments through July 2017. Advances under the revolving line of credit, which matures in February 2015, carry a variable interest rate equal to the greater of 6.25% or the institution's prime rate plus 3.0%.
As of June 30, 2014 and December 31, 2013, there was no amount outstanding under the revolving line of credit.
Borrowings under the credit facility are secured by substantially all of the Company's tangible assets. Effective June 29, 2014, the Company entered into a fourth amendment to the loan agreement. Under the loan agreement as amended, the Company must maintain a specified liquidity ratio of 1.25 and a quick ratio of 1.0, measured monthly over the term of the credit facility. The Company must also comply with certain monthly reporting covenants. The fourth amendment eliminated the minimum revenue level covenant. As of December 31, 2013, the full balance of the Company's $15.8 million of long-term debt was classified as current on the accompanying balance sheet, based on the Company's initial assessment of the likelihood of maintaining compliance with the minimum revenue level covenant in 2014 following the termination of its agreement with Health Diagnostic Laboratory, Inc. on March 28, 2014. Based on the Company's assessment of the likelihood of maintaining compliance with its remaining financial covenants, the Company reclassified $13.4 million of amounts outstanding under the loan agreement as long-term debt in the accompanying balance sheet as of June 30, 2014.
As of June 30, 2014 and December 31, 2013, the Company was in compliance with all financial and non-financial covenants under this credit facility, as modified.
5. Net Loss Per Share
The Company computes basic net loss per share by dividing net loss by the weighted average number of shares of common stock outstanding for the period, without consideration for common share equivalents. Diluted net loss per share is computed on the basis of the weighted average number of shares of common stock plus dilutive potential common share equivalents during the period, consisting of incremental common shares deemed outstanding from the assumed exercise of common stock options, warrants and restricted stock units. The dilutive effect of common share equivalents is reflected in diluted earnings per shares by application of treasury stock method. Under the treasury stock method, earnings per share data is computed as if the common share equivalents were outstanding at the beginning of the period (or at the time of issuance, if later) and as if the funds obtained from exercise of the common share equivalents were used to purchase common stock at the average market price during the period.
8
Because of their anti-dilutive effect, the following common stock equivalents, consisting of common stock options, warrants and restricted stock units, have been excluded from the diluted loss per share calculations for the respective periods presented:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||
Anti-Dilutive Common Share Equivalents: | 2014 | 2013 | 2014 | 2013 | |||||||
Common Stock Options and Warrants | 1,822,674 | 2,329,988 | 1,822,674 | 2,329,988 | |||||||
Restricted Stock Units | 681,633 | 56,398 | 681,633 | 56,398 | |||||||
Total | 2,504,307 | 2,386,386 | 2,504,307 | 2,386,386 | |||||||
6. Equity Transactions and Share-Based Compensation
2012 Equity Incentive Plan
As of June 30, 2014, the Company had one active share-based compensation plan, the 2012 Equity Incentive Plan (the "2012 Plan"), under which it has granted stock options and restricted stock units. The Company estimates the fair value of its share-based payment awards on the grant date. The fair value is then amortized on a straight-line basis over the requisite service period of the awards, based on the total number of awards expected to vest. The 2012 Plan will terminate on May 24, 2022, unless sooner terminated by the Company's Board of Directors.
Restricted Stock Units
During the six months ended June 30, 2014, the Company's Board of Directors approved and granted 634,866 restricted stock units ("RSUs") to certain of the Company's employees and directors at a weighted average grant-date fair value of $3.30 per share. During the six months ended June 30, 2014, the Company issued approximately 5,400 shares of outstanding common stock upon the vesting and settlement of RSUs, with a total fair value of $17,600.
Each RSU represents the contingent right to receive one share of common stock of the Company. The RSUs granted to the Company's employees generally vest over a three year period from the date of grant, or sooner based on the achievement of certain performance vesting criteria. The RSUs granted to non-employee directors generally vest quarterly over a one-year period from the date of grant.
Stock Options
During the six months ended June 30, 2014, the Company's Board of Directors granted stock options under the 2012 Plan to purchase an aggregate of 317,306 shares to the CEO at a weighted average exercise price of $4.16 per share and a weighted average grant-date fair value of $1.57 per share. The stock options granted to the CEO vest in equal quarterly installments over a four year period. During the six months ended June 30, 2014, the Company issued approximately 76,000 shares of outstanding common stock upon the exercise of stock options, at a weighted average exercise price of $2.40 a share.
The Company recognized non-cash stock-based compensation expense, for both RSUs and stock options, to employees in its research and development, sales and marketing and general and administrative functions as follows (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Cost of revenues | $ | 12 | $ | 11 | $ | 20 | $ | 18 | |||||||
Research and development | 12 | 138 | 120 | 240 | |||||||||||
Sales and marketing | 63 | 47 | 101 | 90 | |||||||||||
General and administrative | 182 | 105 | 331 | 204 | |||||||||||
Total: | $ | 269 | $ | 301 | $ | 572 | $ | 552 | |||||||
9
7. Income Taxes
The Company computes its provision for income taxes by applying the estimated annual effective tax rate, adjusted for any material items. For each of the six months ended June 30, 2014 and 2013, no provision or benefits for income taxes have been recorded. The Company has recorded a full valuation allowance against its net deferred tax assets based on the Company's assessment regarding the realizability of these net deferred tax assets in future periods. At June 30, 2014, the Company had no unrecognized tax benefits that would affect the Company's effective tax rate. The Company's effective tax rate for each of the six months ended June 30, 2014 and 2013 was 0%.
8. Commitments and Contingencies
Leases
The Company leases an aggregate of approximately 83,000 square feet of office and laboratory space under a long-term lease agreement that expires on September 30, 2022. The lease contains fixed scheduled rent escalations, $0.9 million of rent concession and $1.8 million of leasehold improvement incentives. In connection with the lease, the Company obtained a $1.5 million letter of credit secured by restricted cash. In June 2013, the required amount for the letter of credit secured by restricted cash was reduced to $0.5 million. The Company also leases office equipment and software licenses through operating leases. Rent expense is calculated on a straight-line basis over the term of the lease.
Legal Contingencies
The Company is subject to claims and assessments from time to time in the ordinary course of business. The Company's management does not believe that any such matters, individually or in the aggregate, will have a material adverse effect on the Company's business, financial condition, results of operations or cash flows.
Indemnification
In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties and provide for general indemnification. The Company's exposure under these agreements is unknown because it involves claims that may be made against the Company in the future, but that have not yet been made. To date, the Company has not paid any claims or been required to defend any action related to its indemnification obligations. The Company may, however, record charges in the future as a result of these indemnification obligations.
In accordance with its Certificate of Incorporation and Bylaws, the Company has indemnification obligations to its directors, and has the authority to indemnify its officers and employees, for certain events or occurrences, subject to certain limits, while they are serving at the Company's request in such capacity. There have been no claims to date, and the Company has director and officer insurance that enables it to recover a portion of any amounts paid for future potential claims.
In addition to the indemnification provided for in its Certificate of Incorporation and Bylaws, the Company has also entered into separate indemnification agreements with each of its directors, which agreements provide such directors with indemnification rights under certain circumstances.
9. Workforce Reductions
In January 2014, the Company implemented a workforce reduction to reduce approximately 24 positions throughout the Company, impacting primarily positions in corporate headquarters and field sales. The workforce reduction related to its plan to realign the Company’s cost structure in light of its current revenue performance. The Company recorded total charges for severance, related benefits and other costs of approximately $0.4 million during the first quarter of 2014. The charges incurred are classified in general and administrative expenses on the accompanying statement of comprehensive loss. All charges related to the January workforce reduction were paid during the first six months of 2014.
In May 2014, the Company implemented a second workforce reduction to reduce approximately 22 positions throughout the Company. The workforce reduction impacted positions in operations, research and development and administration and is related to its plan to improve operational efficiencies and other cost-cutting measures. The Company recorded total charges for severance, related benefits and other costs of approximately $1.0 million during the second quarter of 2014. The charges incurred are classified in general and administrative expenses on the accompanying statement of comprehensive loss. The Company paid $0.3 million related to the workforce reduction during the second quarter of 2014, and the remaining $0.7 million of liability is included in accrued expenses at June 30, 2014. The Company expects to make the remaining payments to employees impacted by this workforce reduction through April 2015.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of the financial condition and results of operations of LipoScience, Inc. (“we,” “us”, “our” or the “Company”) should be read in conjunction with our unaudited financial statements and related notes that appear elsewhere in this Quarterly Report on Form 10-Q, and with our audited financial statements and related notes for the fiscal year ended December 31, 2013 appearing in our Annual Report on Form 10-K filed with the SEC on March 28, 2014, (our "2013 Form 10-K".)
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are intended to be covered by the "safe harbor" created by those sections. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, can generally be identified by the use of forward-looking terms such as "believe," "expect," "may," "will," "should," "could," "seek," "intend," "plan," "estimate," "anticipate" or other comparable terms. Forward-looking statements in this Quarterly Report on Form 10-Q may address the following subjects among others: our industry, business strategy, goals and expectations concerning our future operations, performance or results, profitability, capital expenditures, liquidity and capital resources, timing or anticipated results of our FDA submissions and other financial and operating information. Forward-looking statements involve inherent risks and uncertainties which could cause actual results to differ materially from those in the forward-looking statements, as a result of various factors including those risks and uncertainties described in the Risk Factors and in Management's Discussion and Analysis of Financial Condition and Results of Operations sections of our 2013 Form 10-K and our subsequently filed Quarterly Reports on Form 10-Q. We urge you to consider those risks and uncertainties in evaluating our forward-looking statements. We caution readers not to place undue reliance upon any such forward -looking statements, which speak only as of the date made. Except as otherwise required by the federal securities laws, we disclaim any obligation or undertaking to publicly release any updates or revisions to any forward-looking statement contained herein (or elsewhere) 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.
Overview
We are a clinical diagnostic company focused on developing diagnostic tests based on nuclear magnetic resonance, NMR, technology to improve the quality of patient care in cardiovascular, metabolic and other diseases. Our first diagnostic test, the NMR LipoProfile® test, directly measures the number of low density lipoprotein, or LDL, particles, also known as LDL-P, in a blood sample and provides physicians and their patients with actionable information to personalize management of risk for heart disease.
Our strategy is to continue to advance patient care by converting clinicians, and the clinical diagnostic laboratories they use, from traditional cholesterol testing to our NMR LipoProfile test for the management of patients at risk for cardiovascular disease, with the goal of ultimately becoming the preferred choice by physicians for the management of patients with cardiovascular disease. We believe increasing utilization of our test in key markets, increasing market awareness including pursuing inclusion in treatment guidelines, expanding relationships with clinical diagnostic laboratories and our geographic presence, broadening payor coverage of our test, decentralizing our technology where appropriate and expanding our menu of personalized diagnostic tests to address a broad range of cardiovascular, metabolic and other diseases and are key steps toward achieving this goal.
11
We currently perform the vast majority of the NMR LipoProfile tests at our certified and accredited laboratory facilities in Raleigh, North Carolina. We intend to accelerate clinician and clinical diagnostic laboratory adoption of the NMR LipoProfile test and future clinical diagnostic tests by increasing access to our technology platform through strategic placement of our FDA approved automated clinical analyzer, the Vantera system, in third party clinical diagnostic laboratories. The Vantera system requires no previous knowledge of NMR technology to operate and has been designed to significantly simplify complex technology through ease of use and walk-away automation. We started placing the Vantera system on-site with certain selected clinical diagnostic laboratories as well as leading medical centers and hospital outreach laboratories during the second quarter of 2013, which we believe will facilitate their ability to offer our NMR LipoProfile test and other diagnostic tests that we may develop. To date, we have placed the Vantera system in a leading medical center as well as certain selected clinical diagnostic laboratories. We are also in discussions with additional laboratory customers that have indicated a similar interest in the placement of the Vantera system in their laboratories. In addition, we have placed the Vantera system in academic and medical research centers that are collaborating with us to further validate the efficacy of our NMR LipoProfile test, and to develop additional high-value diagnostic assays based on NMR technology. We retain full ownership of any Vantera system placed in third-party clinical diagnostic laboratories and remain responsible for support and maintenance obligations. In general, we expect that the number of Vantera system that will be placed in our clinical diagnostic laboratory customers' facilities will depend on their demonstrated annual production volume for the NMR LipoProfile test and their ability to increase demand for our tests.
We believe that the inherent analytical advantages of NMR technology will also allow us to expand our diagnostic test menu. We are currently developing NMR-based diagnostic tests for use in the prediction of diabetes, including the assessment of insulin resistance, and we are investigating opportunities to develop new diagnostic tests for other diseases.
We have incurred significant losses since our inception. As of June 30, 2014, our accumulated deficit was $66.6 million. We expect to incur operating losses for the next few years.
Critical Accounting Policies and Significant Judgments and Estimates
Our management's discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States, or U.S. GAAP. The preparation of these financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reported period. In accordance with U.S. GAAP, we base our estimates on historical experience and on various other factors that 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 these estimates under different assumptions or conditions.
A critical accounting policy is one that is both material to the preparation of our financial statements and requires us to make difficult, subjective or complex judgments for uncertain matters that could have a material effect on our financial condition and results of operations. We believe that of our significant accounting policies, the following accounting policies involve a greater degree of judgment and complexity and are the most critical to aid in fully understanding and evaluating our financial condition and results of operations:
• | revenue recognition; |
• | accounts receivable and allowance for uncollectible accounts receivable; |
• | stock-based compensation expense; and |
• | income taxes. |
For additional information regarding our critical accounting policies, please refer to our Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2013 Form 10-K. See Note 1 to our financial statements in our 2013 Form 10-K for a description of our other significant accounting policies. During the six months ended June 30, 2014, there were no significant changes in our critical accounting policies or estimates from those set forth in our 2013 Form 10-K.
12
Results of Operations
Comparison of Three and Six Months Ended June 30, 2014 and 2013
Revenues
Substantially all of our revenues are currently derived from sales of our NMR LipoProfile test to clinical diagnostic laboratories, clinicians and other healthcare professionals for use in patient care. For each of the three month and six month periods ended June 30, 2014 and 2013, sales of the NMR LipoProfile test represented approximately 96% of our total revenues. The remainder of our revenues is derived from contract research arrangements as well as sales of standard analytical chemistry tests, which we refer to as ancillary tests, requested by clinicians in conjunction with our NMR LipoProfile test. Ancillary tests are FDA-approved blood tests that most clinical laboratories can process but that may be ordered from us at the same time as the NMR LipoProfile test for convenience. These tests are not run on our NMR technology platform, but instead are run on a traditional chemistry analyzer.
In mid-March 2014, Health Diagnostic Laboratory, Inc. ("HDL Inc."), which accounted for 33%, 32% and 21% of our revenues for the years ended December 31, 2013, 2012 and 2011, respectively, announced its own LDL-P test and began making the test available to its customers. We believe our NMR LipoProfile test has significant advantages over HDL Inc.'s non-FDA cleared test and that it is critical that physicians are able to differentiate with certainty which test result they are receiving. We plan to aggressively market to physicians the advantages of our NMR LipoProfile test, the only FDA-cleared test that quantifies the number of LDL-P, versus the HDL Inc. laboratory-developed test (LDT) that has not demonstrated clinical efficacy nor undergone the rigor of an FDA-clearance process. Accordingly, on March 28, 2014, we notified HDL Inc. that we were terminating our agreement with HDL Inc. effective June 26, 2014. Over time, we believe that we will be able to mitigate the effects of loss of revenues from HDL Inc. through our relationships with other national, regional and local labs and by alerting physicians to use clinical laboratory customers that offer the FDA-cleared NMR LipoProfile test. However, in the short and medium term, we expect our revenues to be impacted negatively, potentially significantly so.
The following table presents our revenues by service offering and source (in thousands except for percentages):
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Revenues: | |||||||||||||||
NMR LipoProfile tests | $ | 8,654 | $ | 12,796 | $ | 20,243 | $ | 25,886 | |||||||
Ancillary tests | 154 | 202 | 310 | 510 | |||||||||||
Research contracts | 237 | 313 | 500 | 531 | |||||||||||
Total revenues | $ | 9,045 | $ | 13,311 | $ | 21,053 | $ | 26,927 | |||||||
Overall period over period percentage change | (32.1 | )% | (21.8 | )% | |||||||||||
Total revenues decreased by 32.1% to $9.0 million for the three months ended June 30, 2014 from $13.3 million for the three months ended June 30, 2013. Revenues from sales of our NMR LipoProfile test decreased to $8.7 million for the three months ended June 30, 2014 from $12.8 million for the three months ended June 30, 2013. Total revenues decreased by 21.8% to $21.1 million for the six months ended June 30, 2014 from $26.9 million for the six months ended June 30, 2013. Revenues from sales of our NMR LipoProfile test decreased to $20.2 million for the six months ended June 30, 2014 from $25.9 million for the six months ended June 30, 2013. The decrease in revenue in both the three and six month periods primarily resulted from a reduction in the number of NMR LipoProfile tests sold through our wholesale distribution channels.
13
The overall number of NMR LipoProfile tests decreased by 34.6% to approximately 346,000 tests for the three months ended June 30, 2014 from approximately 529,000 tests for the three months ended June 30, 2013. The overall number of NMR LipoProfile tests decreased by 20.7% to approximately 831,000 tests for the six months ended June 30, 2014 from approximately 1,047,000 tests for the six months ended June 30, 2013. This volume reduction is primarily attributable to the termination of the HDL Inc. agreement. The overall average selling price of NMR LipoProfile tests increased 3.4%, for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013. The overall average selling price of NMR LipoProfile tests decreased 1.4% for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013. The increase in average selling price in the three months ended June 30, 2014 compared to 2013 primarily resulted from the termination of the HDL Inc. agreement, as HDL Inc. had lower contracted pricing than certain other wholesale lab customers. The decrease in average selling price in the six months ended June 30, 2014 compared to 2013 was primarily the result of lower contracted pricing for some clinical laboratory customers. The percentage of our total NMR LipoProfile tests sold through direct distribution channels remained relatively consistent at approximately 3% for each of the three and six months ended June 30, 2014 and 2013.
Our revenues are driven by both test volume and the average selling price of our NMR LipoProfile test. For the three and six months ended June 30, 2014, we generated 89% and 91% of our total revenues from clinical diagnostic laboratory customers, respectively. We expect to continue to see the majority of NMR LipoProfile tests performed through clinical diagnostic laboratories, both under Vantera system placement arrangements and arrangements under which we perform the test for them at our own facility, as compared to our direct distribution channel in which clinicians order the test directly from us. While we believe the average selling price of our tests will continue to decline in the future as more of our tests are performed through clinical diagnostic laboratories, we do not expect the average selling price of our tests to erode substantially in the near term. For direct sales, the price we ultimately receive depends upon the level of reimbursement we receive from Medicare or commercial insurance carriers. Clinical diagnostic laboratories purchase our test at prices that we negotiate with them, which will continue to be the case for NMR LipoProfile tests performed using the Vantera system, whether the analyzer is located on-site at the customer's laboratory or at our own facility. Our clinical diagnostic laboratory customers are responsible for obtaining reimbursement from third-party payors or directly from patients.
Revenues from sales of ancillary tests remained relatively consistent at approximately $0.2 million for each of the three months ended June 30, 2014 and 2013. Revenues from sales of ancillary tests decreased to $0.3 million for the six months ended June 30, 2014 from $0.5 million for the six months ended June 30, 2013. The decrease in revenues from ancillary tests during the six months period was due to lower test volumes. Our revenues from ancillary tests, while a diminishing portion of our business, are similarly dependent upon our rates of reimbursement from various payor sources. For example, Medicare reimbursement rates are adjusted annually. Changes in Medicare reimbursement rates are dependent on a number of factors that we cannot predict. Reductions in reimbursement rates for these ancillary tests would reduce our overall revenues from these tests.
Revenues from our clinical research clients were $0.2 million and $0.3 million for the three months ended June 30, 2014 and 2013, respectively. Revenues from our clinical research clients remained relatively consistent at approximately $0.5 million for each of the six months ended June 30, 2014 and 2013.
Over the next 12 to 24 months, we expect that additional Vantera system placements may be with our existing clinical diagnostic laboratory customers. As a result, we may see some decrease in the proportion of NMR LipoProfile tests we performed at our existing laboratory facility for these laboratory customers as compared to tests performed at our customers' facilities using the Vantera system. We expect that any reduced volume in the number of tests performed at our facility for customers with a Vantera clinical analyzer on-site may be partially offset by growth in NMR LipoProfile tests orders from new clinical diagnostic laboratory customers who may not initially meet our test volume criteria for the Vantera system placement or who may choose to continue to send the test to our existing laboratory facility.
Cost of Revenues and Gross Margin
Cost of revenues consists of direct labor expenses, including employee benefits and stock-based compensation expenses, cost of laboratory supplies, freight costs, depreciation of laboratory equipment, leasehold improvements, royalties paid under license agreements and certain allocated overhead expenses. Since the Vantera system became commercially available in December 2012, our placement costs and associated service and maintenance support have been included in cost of revenues. Our gross profit represents total revenues less the cost of revenues, and gross margin is gross profit expressed as a percentage of total revenues.
14
The following table presents our cost of revenues and gross margin for the periods presented (in thousands except for percentages):
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
2014 | 2013 | Change | 2014 | 2013 | Change | ||||||||||||||||||
Cost of revenue | $ | 2,461 | $ | 2,616 | $ | (155 | ) | $ | 5,075 | $ | 5,466 | $ | (391 | ) | |||||||||
Cost of revenue as a % of revenue | 27.2 | % | 19.7 | % | (6.0 | )% | 24.1 | % | 20.3 | % | (7.2 | )% | |||||||||||
Gross profit | $ | 6,584 | $ | 10,695 | $ | (4,111 | ) | $ | 15,978 | $ | 21,461 | $ | (5,483 | ) | |||||||||
Gross margin | 72.8 | % | 80.3 | % | (38.4 | )% | 75.9 | % | 79.7 | % | (25.5 | )% | |||||||||||
Cost of revenues decreased by 6.0% to $2.5 million for the three months ended June 30, 2014 from $2.6 million for the three months ended June 30, 2013. This decrease primarily related to lower salaries and benefits costs as a result of our May 2014 workforce reduction coupled with lower materials and freight costs due to decreased unit volumes sold during the quarter and lower negotiated vendor pricing. Our cost of revenues represented approximately 27% and 20% during the three months ended June 30, 2014 and 2013, respectively, of our total revenues.
Cost of revenues decreased by 7.2%, to $5.1 million for the six months ended June 30, 2014 from $5.5 million for the six months ended June 30, 2013. This decrease primarily related to $0.3 million in lower materials and freight costs due to decreased unit volumes sold during the period coupled with lower negotiated vendor pricing, and fewer ancillary tests performed. We also experienced $0.1 million less in salaries and benefits costs as a result of lower staffing levels. Our cost of revenues represented approximately 24% and 20% during the six months ended June 30, 2014 and 2013, respectively, of our total revenues.
Gross margin decreased to 72.8% for the three months ended June 30, 2014 from 80.3% for the three months ended June 30, 2013. The decrease we experienced in gross margin was largely attributable to lower revenues for the three months ended June 30, 2014. We expect our gross margin to decline to mid 70% range in fiscal year 2014 as compared to the high 70% range for fiscal year 2013.
Gross margin decreased to 75.9% for the six months ended June 30, 2014 from 79.7% for the six months ended June 30, 2013. The decrease we experienced in gross margin was largely attributable to lower revenues for the six month period ended June 30, 2014.
Operating Expenses
The following table presents our operating expenses for the periods presented (in thousands except for percentages):
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
2014 | 2013 | Change | 2014 | 2013 | Change | ||||||||||||||||||
Operating expenses: | |||||||||||||||||||||||
Research and development | $ | 2,057 | $ | 3,118 | $ | (1,061 | ) | $ | 4,617 | $ | 6,250 | $ | (1,633 | ) | |||||||||
Sales and marketing | 4,975 | 6,802 | (1,827 | ) | 10,075 | 13,461 | (3,386 | ) | |||||||||||||||
General and administrative | 3,177 | 2,770 | 407 | 6,524 | 6,077 | 447 | |||||||||||||||||
Total operating expenses | $ | 10,209 | $ | 12,690 | $ | (2,481 | ) | $ | 21,216 | $ | 25,788 | $ | (4,572 | ) | |||||||||
Operating expenses as a % of revenue: | |||||||||||||||||||||||
Research and development | 22.8 | % | 23.4 | % | (34.0 | )% | 21.9 | % | 23.2 | % | (26.1 | )% | |||||||||||
Sales and marketing | 55.0 | % | 51.1 | % | (26.9 | )% | 47.9 | % | 50.0 | % | (25.2 | )% | |||||||||||
General and administrative | 35.1 | % | 20.8 | % | 14.7 | % | 31.0 | % | 22.6 | % | 7.4 | % | |||||||||||
Total operating expenses | 112.9 | % | 95.3 | % | (19.6 | )% | 100.8 | % | 95.8 | % | (17.7 | )% | |||||||||||
15
Research and Development Expenses
Our research and development expenses include those costs associated with performing research and development activities, such as personnel-related expenses, including stock-based compensation, fees for contractual and consulting services, travel costs, laboratory supplies, fees associated with collaboration agreements and allocated overhead expenses. We expense all research and development costs as incurred.
Research and development expenses decreased by 34.0% to $2.1 million for the three months ended June 30, 2014 from $3.1 million for the three months ended June 30, 2013. This decrease was primarily the result of $0.7 million lower salaries and benefits costs related to lower staffing levels, as well as $0.3 million lower consulting fees related to conducting external research and development studies in support of our publication efforts and other engineering projects that were completed in 2013. As a percentage of total revenues, research and development expenses decreased to 22.8% for the three months ended June 30, 2014, as compared to 23.4% for the three months ended June 30, 2013.
Research and development expenses decreased by 26.1% to $4.6 million for the six months ended June 30, 2014 from $6.3 million for the six months ended June 30, 2013. This decrease was primarily the result of $0.8 million lower salaries and benefits costs related to our lower staffing levels, as well as $0.8 million lower consulting fees related to conducting external research and development studies in support of our publication efforts and other engineering projects that were completed in 2013. As a percentage of total revenues, research and development expenses decreased to 21.9% for the six months ended June 30, 2014, as compared to 23.2% for the six months ended June 30, 2013.
Sales and Marketing Expenses
Our sales and marketing expenses include costs associated with our sales organization, including our direct sales force and sales management, and our marketing and managed care personnel. These expenses consist principally of salaries, commissions, bonuses and employee benefits for these personnel, including stock-based compensation, as well as travel costs related to sales and marketing activities, marketing and medical education activities and allocated overhead expenses. We expense all sales and marketing costs as incurred.
Sales and marketing expenses decreased by 26.9%, to $5.0 million for the three months ended June 30, 2014 from $6.8 million for the three months ended June 30, 2013. This decrease was primarily due to a $1.2 million reduction in compensation and benefit costs, training, and travel and entertainment-related expenses as a result of lower staffing levels. We also experienced $0.6 million in lower marketing expenses including consulting services, associated with various marketing programs, medical education and campaign efforts. As a percentage of total revenues, sales and marketing expenses increased to 55.0% for the three months ended June 30, 2014 from 51.1% for the three months ended June 30, 2013.
Sales and marketing expenses decreased by 25.2%, to $10.1 million for the six months ended June 30, 2014 from $13.5 million for the six months ended June 30, 2013. This decrease was primarily due to a $2.2 million reduction in compensation and benefit costs, training, and travel and entertainment-related expenses as a result of our lower staffing levels. We also experienced $1.0 million in lower marketing expenses including consulting services, associated with various marketing programs, medical education and campaign efforts. As a percentage of total revenues, sales and marketing expenses decreased to 47.9% for the six months ended June 30, 2014 from 50.0% for the six months ended June 30, 2013.
General and Administrative Expenses
Our general and administrative expenses include costs for our executive, accounting and finance, legal, and human resources functions. These expenses consist principally of salaries, bonuses and employee benefits for the personnel included in these functions, including stock-based compensation and professional services fees, such as consulting, audit, tax and legal fees, medical device excise tax, general corporate costs and allocated overhead expenses, and bad debt expense. We expense all general and administrative expenses as incurred.
General and administrative expenses increased by 14.7%, to $3.2 million for the three months ended June 30, 2014 from $2.8 million for the three months ended June 30, 2013. The increase was primarily attributable to $1.0 million in severance, related benefits and other costs in connection with the workforce reduction completed in May 2014. This increase was partially offset by a $0.5 million decrease in bad debt expense. The decrease in bad debt expense resulted primarily from a reduction in the allowance provision due to changes in reserve assumptions and the impact from lower revenues. As a percentage of total revenues, general and administrative expenses increased to 35.1% for the three months ended June 30, 2014, compared to 20.8% for the three months ended June 30, 2013.
16
General and administrative expenses increased by 7.4%, to $6.5 million for the six months ended June 30, 2014 from $6.1 million for the six months ended June 30, 2013. The increase was primarily attributable to $1.4 million in severance related benefits and costs in connection with the workforce reductions completed in January and May 2014. This increase was partially offset by a $0.6 million decrease in bad debt expense. The decrease in bad debt expense resulted primarily from a reduction in the allowance provision due to changes in reserve assumptions and the impact from lower revenues. As a percentage of total revenues, general and administrative expenses increased to 31.0% for the six months ended June 30, 2014, compared to 22.6% for the six months ended June 30, 2013.
Other Expense
Other expense consists primarily of interest expense on our loan balances and the amortization of debt discounts and debt issuance costs. We amortize both debt discounts and debt issuance costs over the life of the loan and report them as interest expense in our statements of comprehensive loss.
Other expense remained relatively consistent at $0.4 million for the three months ended June 30, 2014 compared to $0.4 million for the three months ended June 30, 2013.
Other expense decreased to $0.9 million for the six months ended June 30, 2014 from $1.0 million for the six months ended June 30, 2013. The decrease was primarily attributable to a $0.1 million decrease in interest expense compared to the prior year period.
Seasonality
Our financial results may vary significantly from quarter to quarter as a result of many factors, many of which are outside our control. For example, we expect that the volume of the NMR LipoProfile tests ordered will generally decline due to adverse weather conditions, and during the summer months as well as holiday periods, when patients are less likely to visit their healthcare providers. As a result, comparison of our results of operations for successive quarters may not accurately reflect trends or results for the full year. Our historical results should not be considered a reliable indicator of our future results of operations.
Inflation
We do not believe that inflation has had a material effect on our business, financial condition or results of operations. We continue to monitor the impact of inflation in order to minimize its effect through pricing strategies, productivity improvements and cost reductions. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.
Workforce Reductions
In January 2014, we implemented a workforce reduction to reduce approximately 24 positions throughout the Company, impacting primarily positions in corporate headquarters and field sales. The workforce reduction is related to our plan to realign the Company’s cost structure in light of our current revenue performance. The Company recorded total charges for severance, related benefits and other costs of approximately $0.4 million during the first quarter of 2014.
In May 2014, we implemented a second workforce reduction to reduce approximately 22 positions throughout the Company, impacting positions in operations, research and development and administration. The workforce reduction is related to our plan to improve operational efficiencies and other cost-cutting measures. We recorded total charges for severance, related benefits and other costs of approximately $1.0 million during the second quarter of 2014.
17
Liquidity and Capital Resources
Sources of Liquidity
On January 30, 2013, we completed our initial public offering (our "IPO"), in which we sold 5,750,000 shares of common stock and received net proceeds of $44.4 million, after deducting underwriting discounts and offering-related expenses paid by us. Prior to our IPO, we funded our operations principally through private placements of our capital stock, bank borrowings and, since 2009, cash flows from operations.
In December 2012, we entered into a credit facility with Square 1 and Oxford Finance and repaid the outstanding balance under a previous facility. The current credit facility provides for term loans from Oxford Finance of $10.0 million, a term loan from Square 1 of $6.0 million and a revolving line of credit with Square 1 of up to $6.0 million. Our borrowing capacity under the line of credit is subject to borrowing base limitations related to our eligible accounts receivable. Interest on the term loans accrues at a fixed annual rate of 9.5%, while advances under the line of credit continue to carry a variable interest rate equal to the greater of 6.25% or the prime rate plus 3.0%. We are required only to make interest payments on the term loans, as amended, through January 2015, and then repayments of principal and interest amounts due under the term loans will continue in monthly installments through July 2017. The revolving line of credit matures in February 2015.
As of June 30, 2014, the term loans from Oxford Finance had an outstanding balance of $9.8 million, net of debt discount in the amount of $0.1 million, and the term loan from Square 1 had an outstanding balance of $6.0 million, net of debt discount in the amount of $43,000. As of June 30, 2014, we did not have any outstanding borrowings under the revolving line of credit and therefore had up to $6.0 million in available borrowing capacity.
Borrowings under the credit facility are secured by substantially all of our assets other than our intellectual property. The covenants set forth in the loan and security agreement require, among other things, that we maintain a specified liquidity ratio of 1.25 and a quick ratio of 1.0, measured monthly over the term of the facility. Our liquidity ratio and quick ratio were approximately 2.8 and 5.9, respectively, as of June 30, 2014. We are currently in compliance with all covenants under this credit facility, as modified in June 2014. However, if we fail to maintain compliance with the covenants and our other obligations under the credit facility, the lenders would be able to accelerate the required repayment of amounts due under the loan and security agreement and, if they are not repaid, could foreclose upon our assets securing our obligations under the credit facility.
Cash and Cash Equivalents
The following table summarizes our cash and cash equivalents, accounts receivable and cash flows for the periods indicated:
As of and for the Six Months Ended June 30, | |||||||
2014 | 2013 | ||||||
(in thousands) | |||||||
Cash and cash equivalents | $ | 42,789 | $ | 54,246 | |||
Accounts receivable, net | 4,352 | 6,849 | |||||
Operating activities | $ | (3,567 | ) | $ | (6,845 | ) | |
Investing activities | (3,401 | ) | (2,000 | ) | |||
Financing activities | 183 | 38,323 | |||||
Net (decrease) increase in cash and cash equivalents | $ | (6,785 | ) | $ | 29,478 | ||
Our cash and cash equivalents at June 30, 2014 and 2013 were held for working capital purposes. We do not enter into investments for trading or speculative purposes. Our policy is to invest any cash in excess of our immediate requirements in investments designed to preserve the principal balance and provide liquidity. Accordingly, our cash and cash equivalents are invested primarily in demand deposit accounts and money market funds that are currently providing only a minimal return.
Restricted cash, which totaled $0.5 million at June 30, 2014 and 2013, is not included in cash and cash equivalents. Restricted cash consists primarily of money market funds that secure letters of credit related to operating leases for our office and laboratory space.
18
Cash Flows for the Six Months Ended June 30, 2014 and 2013
Operating Activities
Net cash used in operating activities was $3.6 million during the six months ended June 30, 2014, which included a net loss of $6.1 million partially offset by net non-cash items of $1.7 million. Non-cash items for the six months ended June 30, 2014 consisted primarily of depreciation and amortization expense of $1.0 million and stock-based compensation expense of $0.6 million. We also had a net cash inflow from changes in operating assets and liabilities of $0.8 million during the period. The significant items in the changes in operating assets and liabilities included a decrease of $1.5 million in accounts receivable, partially offset by a decrease in accounts payable and accrued expenses of $0.4 million and an increase of $0.2 million in prepaid expenses and other assets. The decrease in accounts receivable primarily relates to lower revenues. The decrease in accounts payable and accrued expenses is primarily due to lower operating expenses and timing of disbursements. The increase in prepaid expenses and other assets is due to higher prepaid insurance premium payments.
Net cash used in operating activities was $6.8 million during the six months ended June 30, 2013, which included a net loss of $5.3 million partially offset by net non-cash items of $1.4 million. Non-cash items for the six months ended June 30, 2013 consisted primarily of depreciation and amortization expense of $0.8 million and stock-based compensation expense of $0.6 million. We also had a net cash outflow from changes in operating assets and liabilities of $2.9 million during the period. The significant items in the changes in operating assets and liabilities included an increase of $1.7 million in accounts receivable, an increase of $0.1 million in inventories, an increase of $0.2 million in prepaid expenses and a decrease of $1.1 million in accounts payable and accrued expenses. The increase in accounts receivable was due primarily to the timing of collections. The decrease in accounts payable and accrued expenses was due primarily to the timing of disbursements.
Investing Activities
Net cash used in investing activities was $3.4 million and $2.0 million for the six months ended June 30, 2014 and 2013, respectively. The amounts related primarily to purchases of property and equipment and costs associated with maintaining our patent and trademark portfolio. The purchases of property and equipment during the six months ended June 30, 2014 consist primarily of hardware component purchases and associated installation costs from third-party manufacturers for the Vantera system. The purchases of property and equipment during the six months ended June 30, 2013 were primarily for leasehold improvements related to our facilities, computer and furniture for general office use due to increased headcount as well as IT equipment used in test production. The capitalized patent and trademark costs during the each of six months ended June 30, 2014 and 2013 were primarily for pending domestic and international patent applications and prosecution.
Financing Activities
Net cash provided by financing activities was $0.2 million during the six months ended June 30, 2014, consisting of net proceeds from exercise of stock options.
Net cash provided by financing activities was $38.3 million during the six months ended June 30, 2013, consisting primarily of net proceeds from issuance of common stock in connection with our IPO of $47.3 million, net of $4.4 million of underwriting discounts and commissions, and net proceeds from exercises of stock options of $0.2 million, partially offset by Series F accrued dividend payments of $5.2 million and repayment in full of our revolving line of credit in the amount of $5.0 million.
Operating and Capital Expenditure Requirements
We expect our operating expenses to decrease in the near term as a result of our cost reduction efforts in light of our current performance. However, we expect to incur operating losses over the next few years and expect that our operating expenses will increase once we establish consistent and sustainable revenue growth. Our liquidity requirements have historically consisted, and we expect that they will continue to consist, of sales and marketing expenses, research and development expenses, capital expenditures, working capital, debt service and general corporate expenses.
We believe our current cash and cash equivalents balances, which include the net proceeds from our IPO, together with the available borrowing capacity under our credit facilities, will be sufficient to meet our anticipated cash requirements through at least the next 12 months. In the future, we expect our operating and capital expenditures to increase as we continue to execute on our strategy to broaden medical policy coverage, expand our geographic presence and grow our customer base.
19
If our cash balances are insufficient to satisfy our liquidity requirements, we may seek to sell common or preferred equity or convertible debt securities or enter into additional credit facilities or seek other debt financing. The sale of equity and convertible debt securities may result in dilution to our stockholders, and those securities may have rights senior to those of our common stock. If we raise additional funds through the issuance of preferred stock, convertible debt securities or other debt financing, these securities or other debt could contain covenants that would restrict our operations. We may require additional capital beyond our currently anticipated amounts. Additional capital may not be available on reasonable terms, or at all.
Our estimates of the period of time through which our financial resources will be adequate to support our operations and the costs to support research and development and our sales and marketing activities are forward-looking statements and involve risks and uncertainties and actual results could vary materially and negatively as a result of a number of factors, including the factors discussed in discussed in Part I, Item 1A., “Risk Factors” in our 2013 Form 10-K and our subsequently filed Quarterly Reports on Form 10-Q. We have based our estimates on assumptions that may prove to be wrong and we could utilize our available capital resources sooner than we currently expect.
Our short- and long-term capital requirements will depend on many factors, including the following:
• | the cost of our selling and marketing efforts; |
• | the rate of adoption of the NMR LipoProfile test in the marketplace; |
• | our ability to generate cash from operations; |
• | the rate of our progress in establishing additional coverage and reimbursement with third-party payors; |
• | our ability to control our costs and implement operating efficiencies; |
• | demand from clinical diagnostic laboratories for placements of our Vantera system at their facilities; |
• | the emergence of competing or complementary technological developments; |
• | the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights or participating in litigation-related activities; |
• | the economic and other terms and timing of any collaborations, licensing or other arrangements into which we may enter; and |
• | the acquisition of complementary tests or technologies that we may undertake. |
20
Off-Balance Sheet Arrangements
As of June 30, 2014, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K, such as the use of unconsolidated subsidiaries, structured finance, special purpose entities or variable interest entities.
Contractual Obligations
Our contractual obligations primarily consist of long-term debt obligations, operating lease obligations and purchase obligations. No material changes outside the ordinary course of business have occurred in our commitments under contractual obligations, as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013, which was filed with the Securities and Exchange Commission on March 28, 2014.
Recent Accounting Pronouncements
In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The amendments in this update provide clarification, and are intended to reduce diversity in practice, on the financial statement presentation of unrecognized tax benefits. The guidance specifies that an unrecognized tax benefit (or a portion thereof) shall be presented in the financial statements as a reduction to a deferred tax asset when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. If such deferred tax asset is not available at the reporting date to settle additional income taxes resulting from the disallowance of a tax position, or the entity does not plan to use the deferred tax asset for such purpose given the option, the unrecognized tax benefit shall be presented in the financial statements as a liability and shall not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. For public companies, the amendments that are subject to this update are effective for interim and annual reporting periods beginning after December 15, 2013, with early adoption permitted. Accordingly, we adopted this guidance beginning in the first quarter of 2014. The adoption of this guidance had no material impact on our financial position, results of operations or cash flows.
In March 2014, the FASB issued ASU No. 2014-06, Technical Corrections and Improvements Related to Glossary Terms. The amendments in this update cover a wide range of topics in the Accounting Standards Codification and are limited to amendments related to the Master Glossary of the Accounting Standards Codification. The amendments include technical corrections related to glossary links, glossary term deletions and glossary term name changes. For public companies, the amendments of this update are effective upon the March 14, 2014 issuance date. Accordingly, we adopted this update upon issuance. The adoption of this new guidance had no material impact to our financial position, results of operations or cash flows.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 supersedes the revenue recognition requirements in Revenue Recognition (Topic 605) and most industry-specific guidance. The new standard affects any entity that either enters into contracts with customers to transfer goods or services, or enters into contracts for the transfer of nonfinancial assets. The core principle of ASU 2014-09 is for companies to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services. Companies will need to use more judgment and make more estimates than under current guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation.
For public companies, this standard is effective for interim and annual reporting periods beginning after December 15, 2016, and will be effective for the Company in the first quarter of fiscal year 2017. Early adoption is not permitted and companies can transition to the new standard under the full retrospective method or the modified retrospective method. We are currently evaluating the method and the impact of the adoption of this standard on our financial statements and disclosures.
21
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We do not utilize financial instruments for trading or other speculative purposes, nor do we utilize leveraged financial instruments. Our exposure to market risks results primarily from changes in interest rates and there have been no material changes regarding our market risk position from the information provided under Part II, Item 7A., "Quantitative and Qualitative Disclosures about Market Risk" in our Annual Report on Form 10-K for the year ended December 31, 2013.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision of and with the participation of our management, including our chief executive officer, who is our principal executive officer, and our chief financial officer, who is our principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of June 30, 2014, the end of the period covered by this Quarterly Report on Form 10-Q. The term “disclosure controls and procedures,” as set forth in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to provide reasonable assurance that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of June 30, 2014, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
On May 14, 2013, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) issued an updated version of its Internal Control - Integrated Framework (2013 Framework). Originally issued in 1992 (1992 Framework), the framework helps organizations design, implement and evaluate the effectiveness of internal control concepts and simplify their use and application. The 1992 Framework remains available during the transition period, which extends to December 15, 2014, after which time COSO will consider it as superseded by the 2013 Framework. During the second quarter of 2014, we began migrating to the 2013 Framework. We expect that management’s assessment of the overall effectiveness of our internal controls over financial reporting for the year ending December 31, 2014 will be based on the 2013 COSO framework and that the change will not be significant to our overall internal control structure over financial reporting.
22
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
We are not currently a party to any pending legal proceedings that we believe will have a material adverse effect on our business or financial condition. We may, however, be subject to various claims and legal actions arising in the ordinary course of business from time to time.
Item 1A. Risk Factors
In addition to the other information set forth in this report and in our other reports and statements that we file with the SEC, including our quarterly reports on Form 10-Q, careful consideration should be given to the factors discussed in Part I, Item 1A., “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. There have been no material changes from the risk factors disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2013.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) Sales of Unregistered Securities
None.
(b) Use of Proceeds from Initial Public Offering of Common Stock
On January 24, 2013, our Registration Statement on Form S-1, as amended (Reg. No. 333-175102) was declared effective in connection with the IPO of our common stock, pursuant to which we sold 5,750,000 shares at a price to the public of $9.00 per share, including the full exercise of the underwriters' option to purchase additional shares. The offering closed on January 30, 2013, as a result of which we received net proceeds of approximately $44.4 million after underwriting discounts of approximately $3.4 million and offering-related expenses paid by us of approximately $4.0 million. We did not receive any proceeds from the shares sold by the selling stockholders. The joint managing underwriters of the offering were Barclays Capital Inc., UBS Securities LLC and Piper Jaffray & Co. No payments were made by us to directors, officers or persons owning ten percent or more of our common stock or to their associates, or to our affiliates, other than (i) payments of an aggregate of $3.9 million in respect of accrued dividends on shares of convertible preferred stock held by investors affiliated with our directors, which shares were converted into shares of common stock upon the closing of the IPO, and (ii) payments in the ordinary course of business to officers for salaries and to non-employee directors as compensation for board or board committee service.
There has been no material change in the planned use of proceeds from our initial public offering as described in our final prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act of 1933, as amended, on January 25, 2013.
23
Item 6. Exhibits
The following is a list of Exhibits filed as part of this Quarterly Report on Form 10-Q:
Exhibit No. | Description of Exhibit |
10.1+ | Amended and Restated Non-Employee Director Compensation Policy. |
10.2+ | Amended and Restated Executive Severance Benefit Plan. |
10.3 | Fourth Amendment to Loan and Security Agreement, dated as of June 29, 2014, by and among the Registrant, Oxford Finance LLC and Square 1 Bank. |
31.1 | Certification of Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 | Certification of Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002. |
32 | Certification of Principal Executive Officer and Principal Financial Officer pursuant to Rules 13a-14(b) and 15d-14(b) promulgated under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to section 906 of The Sarbanes-Oxley Act of 2002. |
101.INS** | XBRL Instance Document |
101.SCH** | XBRL Taxonomy Extension Schema |
101.CAL** | XBRL Taxonomy Extension Calculation Linkbase |
101.DEF** | XBRL Taxonomy Extension Definition Linkbase |
101.LAB** | XBRL Taxonomy Extension Label Linkbase |
101.PRE** | XBRL Taxonomy Extension Presentation Linkbase |
_______________________
** | Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files included in Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those Sections. |
+ | Indicates management contract or compensatory plan. |
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
LIPOSCIENCE, INC. | ||
(Registrant) | ||
By: | /s/ LUCY G. MARTINDALE | |
Lucy G. Martindale Executive Vice President and Chief Financial Officer (On Behalf of the Registrant and as Principal Financial Officer) | ||
Date: August 13, 2014
25