Attached files
| file | filename |
|---|---|
| EX-31.2 - EXHIBIT 31.2 - Sorrento Tech, Inc. | a201603ex-312.htm |
| EX-32.1 - EXHIBIT 32.1 - Sorrento Tech, Inc. | a201603ex-321.htm |
| EX-31.1 - EXHIBIT 31.1 - Sorrento Tech, Inc. | a201603ex-311.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q |
(Mark One)
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2016
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to
Commission file number: 001-36538
ROKA BIOSCIENCE, INC. (Exact name of registrant as specified in its charter) |
DELAWARE | 27-0881542 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
20 Independence Boulevard
Warren, NJ, 07059
(Address of principal executive offices)(Zip code)
(908) 605-4700
(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 ý No ¨
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 ý No ¨
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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ý | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
The number of shares outstanding of the registrant’s common stock, par value of $0.001 per share, as of May 2, 2016 was 17,884,201.
ROKA BIOSCIENCE, INC
REPORT ON FORM 10-Q
For the Quarterly Period Ended March 31, 2016
PAGE | |
2
PART I – FINANCIAL INFORMATION
ROKA BIOSCIENCE, INC.
Condensed Balance Sheets
(unaudited)
(amounts in thousands except share and per share data)
March 31, | December 31, | ||||||
2016 | 2015 | ||||||
ASSETS | |||||||
Current Assets: | |||||||
Cash and cash equivalents | $ | 5,644 | $ | 3,441 | |||
Short-term marketable securities | 17,543 | 28,809 | |||||
Trade accounts receivable, net of $0 allowance for doubtful accounts | 739 | 649 | |||||
Inventories | 3,868 | 3,939 | |||||
Prepaid expenses and other current assets | 5,211 | 5,271 | |||||
Total current assets | 33,005 | 42,109 | |||||
Property and equipment, net | 9,331 | 9,822 | |||||
Intangible assets, net | 21,469 | 22,408 | |||||
Other assets | 264 | 264 | |||||
Total assets | $ | 64,069 | $ | 74,603 | |||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
Current Liabilities: | |||||||
Accounts payable | $ | 610 | $ | 675 | |||
Short-term deferred payments | 1,569 | 1,343 | |||||
Notes payable, current | 8,887 | 9,851 | |||||
Accrued expenses and other current liabilities | 5,085 | 6,767 | |||||
Total current liabilities | 16,151 | 18,636 | |||||
Deferred payments | 10,478 | 10,737 | |||||
Other long-term liabilities | 313 | 317 | |||||
Total liabilities | 26,942 | 29,690 | |||||
Commitments and Contingencies (See Note 11) | |||||||
Common stock, $0.001 par value: | |||||||
500,000,000 shares of Common Stock authorized; 17,939,926 shares issued and 17,884,201 shares outstanding, respectively at March 31, 2016; 17,914,926 shares issued and 17,863,259 shares outstanding at December 31, 2015 | 18 | 18 | |||||
Additional paid-in capital | 214,973 | 214,578 | |||||
Treasury stock, at cost: 55,725 shares at March 31, 2016 and 51,667 shares at December 31, 2015 | (84 | ) | (79 | ) | |||
Accumulated deficit | (177,780 | ) | (169,604 | ) | |||
Total stockholders’ equity | 37,127 | 44,913 | |||||
Total liabilities and stockholders’ equity | $ | 64,069 | $ | 74,603 | |||
The accompanying notes are an integral part of these financial statements
3
ROKA BIOSCIENCE, INC.
Condensed Statements of Operations and Comprehensive Loss
(unaudited)
(amounts in thousands except share and per share data)
Three Months Ended March 31, | ||||||||
2016 | 2015 | |||||||
Revenue | $ | 1,626 | $ | 1,511 | ||||
Operating expenses: | ||||||||
Cost of revenue | 2,076 | 1,964 | ||||||
Research and development | 1,987 | 1,889 | ||||||
Selling, general and administrative | 4,385 | 5,113 | ||||||
Amortization of intangible assets | 939 | 937 | ||||||
Total operating expenses | 9,387 | 9,903 | ||||||
Loss from operations | (7,761 | ) | (8,392 | ) | ||||
Other income (expense): | ||||||||
Interest income (expense), net | (417 | ) | (466 | ) | ||||
Loss before income taxes | (8,178 | ) | (8,858 | ) | ||||
Income tax provision (benefit) | (2 | ) | 2 | |||||
Net loss and comprehensive loss | $ | (8,176 | ) | $ | (8,860 | ) | ||
Net Loss per Common Share: | ||||||||
Basic and diluted | $ | (0.47 | ) | $ | (0.51 | ) | ||
Weighted average common shares outstanding used in computing net loss per common share: | ||||||||
Basic and diluted | 17,526,419 | 17,221,041 | ||||||
The accompanying notes are an integral part of these financial statements
4
ROKA BIOSCIENCE, INC.
Condensed Statement of Stockholders’ Equity (Deficit)
(unaudited)
(amounts in thousands except share and per share data)
Common Stock | Treasury Stock | Additional Paid-in Capital | Accumulated Deficit | Total | ||||||||||||||||||
Shares | Amount | |||||||||||||||||||||
Balance at December 31, 2014 | 17,658,373 | $ | 18 | $ | (8 | ) | $ | 212,069 | $ | (133,004 | ) | $ | 79,075 | |||||||||
Issuance of restricted shares to employees, net of taxes withheld | 325,434 | — | (71 | ) | — | — | (71 | ) | ||||||||||||||
Forfeiture of unvested restricted shares | (162,893 | ) | — | — | — | — | — | |||||||||||||||
Issuance of Warrants for Common Stock | 100 | 100 | ||||||||||||||||||||
Exercise of options for Common Stock | 42,361 | — | — | 78 | — | 78 | ||||||||||||||||
Stock-based compensation expense | — | — | — | 2,331 | — | 2,331 | ||||||||||||||||
Net loss | — | — | — | — | (36,600 | ) | (36,600 | ) | ||||||||||||||
Balance at December 31, 2015 | 17,863,275 | $ | 18 | $ | (79 | ) | $ | 214,578 | $ | (169,604 | ) | $ | 44,913 | |||||||||
Issuance of restricted shares to employees, net of shares withheld for taxes | 25,000 | — | (5 | ) | — | — | (5 | ) | ||||||||||||||
Stock-based compensation expense | — | — | — | 395 | — | 395 | ||||||||||||||||
Net loss | — | — | — | — | (8,176 | ) | (8,176 | ) | ||||||||||||||
Balance at March 31, 2016 | 17,888,275 | 18 | (84 | ) | 214,973 | (177,780 | ) | 37,127 | ||||||||||||||
The accompanying notes are an integral part of these financial statements
5
ROKA BIOSCIENCE, INC.
Condensed Statements of Cash Flows
(unaudited)
(amounts in thousands)
Three Months Ended March 31, | |||||||
2016 | 2015 | ||||||
Cash flows from operating activities | |||||||
Net loss | (8,176 | ) | $ | (8,860 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | |||||||
Depreciation and amortization | 1,500 | 1,539 | |||||
Provisions for inventory | 301 | 20 | |||||
Share-based compensation expense | 395 | 503 | |||||
Non-cash interest expense | 276 | 325 | |||||
Changes in operating assets and liabilities: | |||||||
Accounts receivable | (90 | ) | (25 | ) | |||
Inventories | (229 | ) | 211 | ||||
Prepaid expenses and other assets | 141 | 196 | |||||
Accounts payable and accrued expenses | (1,726 | ) | (875 | ) | |||
Other liabilities | (5 | ) | (4 | ) | |||
Net cash used in operating activities | (7,613 | ) | (6,970 | ) | |||
Cash flows from investing activities | |||||||
Purchases of property and equipment | (99 | ) | (84 | ) | |||
Purchase of marketable securities | (2,991 | ) | (5,256 | ) | |||
Proceeds from maturities of marketable securities | 14,175 | 8,000 | |||||
Net cash provided by investing activities | 11,085 | 2,660 | |||||
Cash flows from financing activities | |||||||
Principal repayments | (1,000 | ) | — | ||||
Deferred payments | (264 | ) | — | ||||
Proceeds from exercise of stock options | — | 29 | |||||
Restricted shares withheld for taxes | (5 | ) | (6 | ) | |||
Net cash provided by financing activities | (1,269 | ) | 23 | ||||
Net change in cash and cash equivalents | 2,203 | (4,287 | ) | ||||
Cash and cash equivalents, beginning of period | 3,441 | 7,503 | |||||
Cash and cash equivalents, end of period | $ | 5,644 | $ | 3,216 | |||
The accompanying notes are an integral part of these financial statements
6
1. BUSINESS OVERVIEW
Business
Roka Bioscience, Inc. (“Roka” or “the Company”) is focused on the development and commercialization of molecular assay technologies for the detection of foodborne pathogens. The Company was established in September 2009 through the acquisition of industrial testing assets and technology from Gen-Probe Incorporated, which was subsequently acquired by Hologic, Inc. (herein referred to as “Gen-Probe”).
The Company has limited capital resources, has experienced negative cash flows from operations and has incurred net losses since inception. The Company expects to continue to experience negative cash flows from operations and incur net losses in the near term as it devotes substantially all of its efforts on commercialization of its products and continued product development. The Company’s business is subject to significant risks and its ability to successfully develop, manufacture and commercialize proprietary products is dependent upon many factors which include, but are not limited to, risks and uncertainties associated with the supply of molecular diagnostic instruments (“Atlas instruments”) and materials, product development, manufacturing scale-up, attracting and retaining key personnel, customer acceptance as well as competition.
On July 22, 2014, the Company completed an initial public offering ("IPO") in which it sold 5,000,000 shares of common stock at $12.00 per share, before underwriting discounts. The Company received $53.2 million of net proceeds from the offering after deducting underwriting discounts, commissions and offering expenses.
The Company will need to raise additional capital through the sale of equity and/or debt securities in the future. There is no assurance that the Company will be able to raise needed capital under acceptable terms, if at all. The sale of additional equity may dilute existing shareholders and newly issued shares may contain senior rights and preferences compared to currently outstanding common stock. Issued debt securities may contain covenants and limit the Company’s ability to pay dividends or make other distributions to stockholders. In addition, the Company’s debt agreement contains certain clauses which allow the lenders to require repayment of the debt based on subjective factors regarding the Company’s business and performance if considered a material adverse change by the lender.
Concentration of Suppliers
The Company relies on single source suppliers, including Gen-Probe, for certain components and materials used in its products, including its Atlas Detection Assays. Since the Company’s contracts with these suppliers, including Gen-Probe, do not commit the suppliers to carry inventory or to make available any minimum quantities, the Company may be unable to obtain adequate supplies in a timely manner or on commercially reasonable terms. If the Company loses such suppliers, or its suppliers encounter financial hardships, the Company may not be able to identify or enter into agreements with alternative suppliers on a timely basis on acceptable terms, if at all. Transitioning to a new supplier could be time consuming, may be expensive, may result in an interruption in the Company’s operations and could affect the performance specifications of the Company’s products. If the Company should encounter delays or difficulties in securing the quality and quantity of materials required for its products, the Company’s ability to manufacture its products would be interrupted which could adversely affect sales.
7
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed financial statements of Roka Bioscience, Inc. have been prepared by the Company in accordance with United States generally accepted accounting principles (“U.S. GAAP”) for interim financial reporting, which do not conform in all respects to the requirements of U.S. GAAP for annual financial statements. The information included in this quarterly report on Form 10-Q should be read in conjunction with the Company’s audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC on March 27, 2016 (the “2015 Form 10-K”). Accordingly, these condensed notes to the unaudited financial statements should be read in conjunction with the 2015 audited financial statements and notes thereto prepared in accordance with U.S. GAAP. The unaudited financial statements have been prepared using accounting policies that are consistent with the policies used in preparing the Company’s audited financial statements for the year ended December 31, 2015. The condensed Balance Sheet as of December 31, 2015 was derived from the Company’s audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. The unaudited financial statements reflect all normal and recurring adjustments necessary, if any, for a fair statement of the Company’s financial position and results of operations for the interim periods presented. The results of operations for the three months ended March 31, 2016 are not necessarily indicative of the results to be expected for the year ending December 31, 2016 or for any other future annual or interim period. There have been no changes in the significant accounting policies from those included in the 2015 Form 10-K. However, in order to further clarify the Company's policy with respect to impairment of long-lived assets, below please find a description of such policy.
Impairment of Long-Lived Assets
The Company’s long-lived assets are primarily comprised of intangible assets and property, plant and equipment. The Company evaluates its finite-lived intangible assets and property, plant and equipment, for impairment whenever events or changes in circumstances indicate the carrying value of an asset or group of assets is not recoverable. If these circumstances exist, recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset group to future undiscounted cash flows expected to be generated by the asset group. If the Company’s estimated undiscounted future cash flows are below the asset group’s carrying value, the Company may recognize an impairment charge measured by its fair value.
New Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) or other standard setting bodies and adopted by the Company as of the specified effective date.
In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing. This standard clarifies the following two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance. The standard will become effective as of the effective date of ASU 2014-09 discussed below.
In March 2016, the FASB issued ASU 2016-09, Stock Compensation: Improvements to Employee Share-Based Payment Accounting. This standard simplifies the accounting for share-based payment award transactions including: income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The standard is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently in the process of evaluating the impact this new guidance will have on its financial statements.
In February 2016, the FASB issued ASU 2016-02, creating Topic 842, Leases which supersedes the guidance in former ASC 840, Leases, to increase transparency and comparability among organizations by requiring recognition of lease assets and lease liabilities on the balance sheet and disclosure of key information about leasing arrangements. The standard will become effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. The guidance is required to be adopted at the earliest period presented using a modified retrospective approach. The Company is currently in the process of evaluating the impact this new guidance will have on its financial statements.
In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory. This standard amends existing guidance and requires entities to measure most inventory at the lower of cost and net realizable value. This standard is effective for annual reporting periods beginning after December 15, 2016, and early adoption is permitted. This standard is to be applied on a prospective basis and upon adoption, entities must disclose the nature of and reason for the accounting change. The Company is currently in the process of evaluating the impact this new guidance will have on its financial statements.
8
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which is intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. This ASU provides guidance to an organization’s management, with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that are commonly provided by organizations today in the financial statement footnotes. The amendments are effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016, and early adoption is permitted. The Company does not believe this new guidance will have a material impact on its financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. This standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. ASU 2014-09 provides companies with two implementation methods. Companies can choose to apply the standard retrospectively to each prior reporting period presented (full retrospective application) or retrospectively with the cumulative effect of initially applying the standard as an adjustment to the opening balance of retained earnings of the annual reporting period that includes the date of initial application (modified retrospective application). This ASU is effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers - Deferral of the Effective Date. This ASU defers the effective date of Update 2014-09 for all entities by one year, requiring the guidance in ASU 2014-09 to be applied for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Additionally, this ASU permits earlier application only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently in the process of evaluating the impact this new guidance will have on its financial statements.
3. CASH AND CASH EQUIVALENTS
The Company’s entire balance of Cash and cash equivalents as of March 31, 2016 was held in demand accounts with one financial institution, which subjects the Company to significant concentrations of credit risk.
4. MARKETABLE SECURITIES
As of March 31, 2016 and December 31, 2015, the fair value of held-to-maturity marketable securities by type of security was as follows (amounts in thousands):
Amortized Cost | Gross Unrealized Holding Gains | Gross Unrealized Holding Losses | Aggregate Fair Value | |||||||||
March 31, 2016 | ||||||||||||
Short-term marketable securities | ||||||||||||
Debt securities | $ | 17,543 | $ | 4 | $ | (7 | ) | $ | 17,540 | |||
December 31, 2015 | ||||||||||||
Short-term marketable securities | ||||||||||||
Debt securities | $ | 28,809 | $ | — | $ | (37 | ) | $ | 28,772 | |||
Marketable securities held by the Company consist of United States treasury bills, commercial paper, U.S. government-related debt, and corporate debt securities. All short-term marketable securities held by the Company mature within one year and all long-term marketable securities mature after one year but in less than five years from the respective balance sheet date.
5. INVENTORIES
9
The following table provides details of the Company’s net inventories (amounts in thousands):
As of March 31, | As of December 31, | ||||||
2016 | 2015 | ||||||
Raw materials | $ | 1,064 | $ | 1,244 | |||
Work in process | 33 | 4 | |||||
Finished goods | 2,771 | 2,691 | |||||
$ | 3,868 | $ | 3,939 | ||||
6. PROPERTY AND EQUIPMENT
The following table provides details of the Company’s property and equipment (amounts in thousands):
As of March 31, | As of December 31, | ||||||
2016 | 2015 | ||||||
Atlas instruments placed with customers | $ | 4,959 | $ | 4,730 | |||
Atlas instruments intended for placement(1) | 4,944 | 5,173 | |||||
Manufacturing equipment | 2,779 | 2,779 | |||||
Laboratory equipment | 3,048 | 3,026 | |||||
Computer and office equipment | 1,486 | 1,479 | |||||
Leasehold improvements | 1,476 | 1,435 | |||||
Software | 1,142 | 1,142 | |||||
Total property and equipment | $ | 19,834 | $ | 19,764 | |||
Less: Accumulated depreciation | (10,503 | ) | (9,942 | ) | |||
Total | $ | 9,331 | $ | 9,822 | |||
(1) The Company does not depreciate Atlas instruments prior to the instruments being placed with customers.
As of March 31, 2016 and December 31, 2015, the cost of Atlas instruments, which represents equipment on lease or held for lease, was $7.5 million and $7.7 million, respectively, net of accumulated depreciation of $2.4 million and $2.2 million, respectively.
Expenses for depreciation of property and equipment were incurred as follows (amounts in thousands):
For the Three Months Ended March 31, | ||||||||
2016 | 2015 | |||||||
Depreciation expense | $ | 560 | $ | 602 | ||||
7. INTANGIBLE ASSETS
In June 2014, the Company entered into an amendment to its license agreement with Gen-Probe. Under the amendment, the Company obtained a two-year option to reduce the royalty rate it pays to Gen-Probe in exchange for an option payment of $2.5 million. Upon completion of its IPO in July 2014, the Company exercised its option and issued to Gen-Probe 865,063 shares of common stock valued at $10.51 per share on the issuance date and made a cash payment of $8.0 million. The Company is required to make additional cash payments of $5.0 million on January 1, 2018 and $5.0 million on January 1, 2020.
The aggregate cash and stock payments made to Gen-Probe along with the present value of the two $5.0 million payments described above were recorded as a $26.6 million addition to the Company's intangible technology asset in Intangible assets on the Balance Sheet and will be amortized on a straight-line basis through December 31, 2021, the end of the estimated remaining life of the technology asset. See Note 9 for further details on the additional required future cash payments described above.
Pursuant to the terms of the license agreement amendment, the Company committed to additional future contingent payments, as described in Note 11 below. If made, such additional payments will further reduce the royalty rate the Company pays to Gen-Probe, and will be recorded as additions to the Company's intangible technology asset upon payment and amortized over the estimated remaining life of the technology asset.
10
The Company assesses its intangible and other long-lived assets for impairment whenever events or other changes in circumstances suggest that the carrying value of an asset group may not be recoverable based on its undiscounted future cash flows. If the Company’s estimated undiscounted future cash flows are below the asset group’s carrying value, the Company may recognize an impairment charge measured by its fair value.
During the third quarter of 2015, the Company prepared revised projections for revenue and expenses, which indicated continued cash flow losses for the Company, and as a result, the Company determined a triggering event had occurred. The Company completed an assessment of the asset group including the intangible asset for recoverability. The recoverability assessment was based upon probability-weighted cash flow estimates resulting from updated revenue and expense projections and an appropriate terminal value. Based on the impairment assessment, the Company determined that the asset group including the intangible asset was not impaired.
The following table summarizes the Company's intangible asset as of the periods presented (amounts in thousands):
March 31, 2016 | December 31, 2015 | ||||||
Intangible asset, gross | $ | 28,259 | $ | 28,259 | |||
Accumulated amortization | (6,790 | ) | (5,851 | ) | |||
Intangible asset, net | $ | 21,469 | $ | 22,408 | |||
8. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
The following table provides details of the Company’s accrued expenses (amounts in thousands):
As of March 31, | As of December 31, | ||||||
2016 | 2015 | ||||||
Employee related | $ | 1,381 | $ | 2,501 | |||
Professional services | 76 | 527 | |||||
Other | 3,628 | 3,739 | |||||
Total accrued expenses and other current liabilities | $ | 5,085 | $ | 6,767 | |||
Included in 'Other' is $3.3 million related to the pending litigation settlement discussed in Note 11. If a settlement agreement is reached, the Company expects to recover the settlement amount in full from its insurance providers and accordingly has a corresponding receivable recorded in Other current assets on the Balance Sheet.
9. DEFERRED PAYMENTS
Gen-Probe supply agreement
In May 2011, the Company entered into a supply agreement with Gen-Probe to purchase Atlas instruments. Pursuant to the terms of the agreement, the Company can defer up to one half of the purchase price for up to 54 months from the date of delivery. The deferred amounts do not bear interest, and the Company has recorded the imputed interest component as a reduction of the deferred payment and as a reduction of the asset cost. The supply agreement provides for variable repayment terms based on a percentage of net sales as defined in the agreement, and the Company has estimated its net sales in determining amounts due for the 54 month term. The following table summarizes the amounts deferred under this agreement (amounts in thousands):
11
As of March 31, | As of December 31, | ||||||
2016 | 2015 | ||||||
Current | |||||||
Deferred payments, gross | $ | 1,840 | $ | 1,645 | |||
Imputed interest | (271 | ) | (302 | ) | |||
Deferred payments, net | $ | 1,569 | $ | 1,343 | |||
Long-term | |||||||
Deferred payments, gross | $ | 2,587 | $ | 3,059 | |||
Imputed interest | (105 | ) | (162 | ) | |||
Deferred payments, net | $ | 2,482 | $ | 2,897 | |||
The Company estimated the interest rate implicit in the extended payment terms by considering the rate at which it could obtain financing of a similar nature from other sources at the date of each transaction, as well as prevailing rates for similar debt instruments of issuers with similar credit ratings. The estimated effective interest rate used ranges from 9.9% to 11.2%.
In each of the three months ended March 31, 2016 and the three months ended March 31, 2015, the Company recorded approximately $0.1 million as non-cash interest expense related to the deferred payments pursuant to the supply agreement with Gen-Probe.
Gen-Probe license amendment
The amendment to the license agreement with Gen-Probe detailed in Note 7 includes a $5.0 million payment due on January 1, 2018 and a $5.0 million payment due on January 1, 2020. Under the terms of the amendment, no interest payments are required and no interest rate is stated. The Company determined that imputed interest should be calculated and recognized in accordance with ASC-835, and the payments are recorded in Deferred payments on the Balance Sheet at their present value based upon a 7.6% interest rate for the payment due on January 1, 2018 and a 9.0% interest rate for the payment due on January 1, 2020. The difference between the present value and the amount payable is accreted to Deferred payments over the respective term with a corresponding charge to Interest expense.
10. NOTES PAYABLE
In November 2013, the Company entered into two loan and security agreements. One agreement was entered into with Comerica Bank (“Comerica”) and another agreement was entered into with TriplePoint Capital LLC (“TriplePoint”). Upon closing of the two agreements, the Company borrowed $5.0 million under the loan and security agreement with Comerica (the “Comerica Loan”). In March 2014, the Company borrowed $5.0 million under the loan and security agreement with TriplePoint (the “TriplePoint Loan”).
In May 2015, the Company paid off the remaining amounts outstanding and due under the TriplePoint Loan, which consisted of $4.6 million in principal and a $0.4 million final payment fee, and simultaneously amended the Comerica Loan (the “Comerica Amendment”). The Comerica Amendment increased the borrowing under the Comerica Loan to $10.0 million and extended the interest-only period until December 31, 2015. Beginning January 1, 2016, the Company will make monthly payments which will consist of accrued interest and equal principal payments in accordance with a 30-month amortization schedule. The interest rate under the Comerica Amendment remains the same as under the original Comerica Loan, which accrues interest at Comerica’s Prime Referenced Rate (as defined in the loan agreement with Comerica) plus 3.15%, subject to a floor of the daily adjusting LIBOR rate plus 2.5%. As of March 31, 2016, the rate was 6.65%.
In connection with the Comerica Loan and the Comerica Amendment, the Company recorded a liability for the note of $9.8 million, net of expenses paid to Comerica, the value of the warrants issued to Comerica and the incremental value due to the amendment of the original Comerica warrant at the time of the repricing. The difference between the liability recorded and the face value of the note will be accreted to Notes payable over the term of the loan with a corresponding charge to Interest expense.
Pursuant to the Comerica Amendment, the Company is required to maintain at least $5.0 million of unrestricted cash and/or marketable securities with Comerica at all times. As of March 31, 2016 and during the period since the Company entered into the Comerica Amendment, the Company has been in compliance with this requirement. Additionally, the Comerica Loan contains various covenants that limit the Company’s ability to engage in specified types of transactions, including limiting the Company’s
12
ability to; sell, transfer, lease or dispose of certain assets; engage in certain mergers and consolidations; incur debt or encumber or permit liens on certain assets, make certain restricted payments, including paying dividends on, or repurchasing or making distributions with respect to, the Company’s Common Stock; and enter into certain transactions with affiliates.
In connection with the closing of the loan and security agreements in November 2013, the Company issued warrants to Comerica and TriplePoint, see Note 15 for further details. In connection with the Comerica Amendment, the Company issued an additional warrant to Comerica to purchase up to an aggregate of 52,265 shares of Common Stock at $2.87 per share and modified the exercise price of the original warrant granted to Comerica under the Comerica Loan from $14.08 per share to $2.87 per share. The value of the new warrant and the incremental value due to the amendment of the original Comerica warrant were recorded as a reduction to Notes payable with a corresponding offset to Additional paid-in capital.
In connection with the repayment of the TriplePoint Loan, the Company recorded approximately $0.2 million of Interest expense as the difference between the amount recorded in the Company's financial records and the amount paid.
As of March 31, 2016, the entire balance of $8.9 million has been classified as Notes payable, current on the Balance Sheet, although only $4.0 million is due within one year. The remaining $4.9 million has also been classified as Notes payable, current because the Comerica Loan agreement contains a material adverse change clause which allows Comerica to require repayment of the debt based on subjective factors regarding the Company’s business and performance.
11. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company has not entered into any new operating leases or amended any existing operating leases during the three months ended March 31, 2016.
Commitments
During the three months ended March 31, 2016, there have been no significant changes to the Company’s commitments as disclosed in the Company’s most recent audited financial statements.
Contingent liabilities
In addition to the commitments disclosed in the Company’s most recent audited financial statements, the amendment to the license agreement with Gen-Probe detailed in Note 9 provides for additional milestone payments of up to $6.0 million which will further reduce the royalty rate paid. Such payments are required to be made upon meeting certain revenue milestones or may be made at the election of the Company prior to meeting the revenue milestones.
Legal Matters
The Company may periodically become subject to legal proceedings and claims arising in connection with its business. Except as set forth below, the Company is not currently involved in any legal proceedings, nor are any claims pending against the Company.
A putative securities class action originally captioned Ding v. Roka Bioscience, Inc., Case No. 3:14-cv-8020, was filed against the Company and certain of its officers and directors in the United States District Court for the District of New Jersey on December 24, 2014, on behalf of a putative class of persons and entities who had purchased or otherwise acquired securities pursuant or traceable to the Registration Statement for the Company’s IPO. The original putative class period ran from July 17 through November 6, 2014. The original complaint asserted claims under the Securities Act of 1933 and contended that the IPO Registration Statement was false and misleading, or omitted allegedly material information, in connection with the Company’s statements about its placement of Atlas instruments and its expectations of future growth and increased market share, and the Company’s alleged failure to disclose “known trends and uncertainties about the Company’s sales.” The alleged misrepresentations and omissions purportedly came to light when the Company issued its third-quarter 2014 earnings release on November 6, 2014.
Pursuant to the Private Securities Litigation Reform Act of 1995, the court appointed Stanley Yedlowski as lead plaintiff and The Rosen Law Firm as lead counsel on April 21, 2015. The lead plaintiff then filed an amended complaint, captioned Stanley Yedlowski v. Roka Bioscience, Inc., Case No. 14-cv-8020, on June 23, 2015. The amended complaint pleads Securities Act claims
13
on behalf of persons and entities who purchased or otherwise acquired Roka securities pursuant or traceable to the IPO Registration Statement during an extended putative class period, running from July 17, 2014 through March 26, 2015. The amended complaint alleges that the Registration Statement was false or misleading in that it failed to disclose that the Company’s customers purportedly were experiencing false positives and other usage issues with the Company’s Listeria assays apparently arising from the customers’ employees’ inability to follow the Company’s Listeria assay workflow. The amended complaint alleges that the full extent of the purported misstatements and omissions was not revealed until March 26, 2015. Defendants filed a motion on August 25, 2015 to dismiss the amended complaint, and plaintiffs filed an opposition to that motion on October 9, 2015. The parties agreed to attempt to resolve the case through mediation and that process is continuing. The Company is currently in settlement discussions and currently estimates a potential settlement amount of approximately $3.3 million. Accordingly, the Company has recorded a liability in Accrued expenses on its Balance Sheet. Additionally, the Company has recorded a corresponding receivable in Prepaid expenses and other current assets on its Balance Sheet for the expected reimbursement under its insurance policies.
The Company believes that the claims in the securities class action are without merit, and, if the case cannot be settled, the Company intends to defend the litigation vigorously, and expects to incur costs associated with defending the securities class action. The Company has various insurance policies related to the risks associated with its business, including directors’ and officers’ liability insurance policies. However, there is no assurance that the Company would be successful in its defense of the securities class action if the case cannot be settled, and there is no assurance that the insurance coverage would be sufficient or that the insurance carriers would cover all claims or litigation costs.
The Company sells its products in various jurisdictions and is subject to federal, state and local taxes including, where applicable, sales and use tax. While the Company believes that it has properly paid or accrued for all such taxes based on its interpretation of applicable law, tax laws are complex and interpretations differ. Periodically, the Company may be audited by taxing authorities, and it is possible that additional assessments may be made in the future.
12. FAIR VALUE MEASUREMENTS
The Company’s financial instruments consist of cash and cash equivalents, marketable securities, trade accounts receivable, accounts payable, short-term deferred payments, deferred payments, notes payable, accrued expenses and Convertible Preferred Stock Warrants. The carrying amounts of cash and cash equivalents, trade accounts receivable, accounts payable, short-term deferred payments and accrued expenses approximate their fair values because of the short-term nature of the instruments, or, in the case of the deferred payments and notes payable, because the interest rates the Company believes it could obtain for similar borrowings is similar to its existing interest rates. The carrying amount of the Company's marketable securities is the amortized cost basis based upon their held-to-maturity classification.
The following table summarizes the fair value information for the Company’s cash held in money market deposit accounts and its marketable securities at March 31, 2016 and December 31, 2015 (amounts in thousands):
Fair value measurements using: | |||||||||||||
Carrying Value | Quoted Prices in Active Markets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||
Financial Assets and Liabilities Carried at Fair Value | |||||||||||||
As of March 31, 2016 | |||||||||||||
Financial Assets: | |||||||||||||
Money market deposit accounts | $ | 5,047 | $ | 5,047 | — | — | |||||||
As of December 31, 2015 | |||||||||||||
Financial Assets: | |||||||||||||
Money market deposit accounts | $ | 2,732 | $ | 2,732 | — | — | |||||||
Financial Assets Carried at Amortized Cost | |||||||||||||
As of March 31, 2016 | |||||||||||||
Short-term marketable securities | $ | 17,543 | $ | 11,104 | 6,437 | — | |||||||
As of December 31, 2015 | |||||||||||||
Short-term marketable securities | $ | 28,809 | $ | 2,000 | 26,772 | — | |||||||
14
A portion of the Company’s cash and cash equivalents are held in money market deposit accounts and a portion of the Company's short-term marketable securities are United States treasury bills, each of which are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices.
The Company's short-term marketable securities and long-term marketable securities not classified within Level 1 of the fair value hierarchy are comprised of commercial paper, U.S. government-related debt, and corporate debt securities, all of which are classified as Level 2 within the fair value hierarchy. The Company estimates the fair values of these marketable securities by taking into consideration valuations obtained from its investment manager, which utilizes industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. There have been no transfers between levels during the reporting period.
13. STOCKHOLDERS’ EQUITY
Registration rights
Holders of approximately 8.3 million shares of the Company's outstanding Common Stock have rights, subject to certain conditions, to require that the Company file a registration statement under the Securities Act covering the registration of such shares of Common Stock, as well as piggyback registration rights. These rights are provided under the terms of an investor rights agreement between the Company and the holders of the registerable securities, which will expire upon the earlier of (i) five years after the Company's IPO and (ii) as to a holder, at such time as all registrable securities held by such holder may be sold without restriction under Rule 144.
Authorized stock
In connection with the seventh amended and restated certificate of incorporation effective on July 22, 2014, the total authorized shares of stock was changed to 520,000,000 of which 500,000,000 shares are designated as common stock with a par value of $0.001 per share and 20,000,000 shares are designated as "blank check" preferred stock with a par value of $0.001 per share.
14. STOCK-BASED COMPENSATION
Effective upon the closing of the IPO, the Company adopted the Roka Bioscience, Inc. 2014 Equity Incentive Plan (the "2014 Plan"). The 2014 Plan initially made available 1,086,956 shares to be granted to employees, officers, directors, consultants, advisors or other individual service providers of the Company. The number of shares of Common Stock available for issuance under the 2014 Plan shall automatically increase on January 1st of each year for a period of ten years commencing on January 1, 2015 and ending on (and including) January 1, 2024, in an amount equal to 3% of the total number of shares of Common Stock outstanding on December 31st of the preceding calendar year.
Under the Roka Bioscience, Inc. 2009 Equity Incentive Plan (the “2009 Plan”), as amended on June 13, 2013, incentive and non-qualified stock options and restricted stock may be granted for up to a maximum of 2,028,850 shares to employees, consultants and directors of the Company. Effective upon adoption of the 2014 Plan, the Company has not and does not intend to issue additional shares under the 2009 Plan.
Stock options and shares of restricted stock granted under the 2009 Plan and the 2014 Plan have a maximum contractual term of ten years from the date of grant and generally vest over four years. For stock options, the exercise price may not be less than the fair value of the stock on the grant date.
The Company recognized stock compensation expense as follows (amounts in thousands):
For the Three Months Ended March 31, | |||||||
2016 | 2015 | ||||||
Stock options | $ | 210 | $ | 172 | |||
Restricted stock | $ | 185 | $ | 331 | |||
15
The Company granted approximately 585,000 stock options and 25,000 shares of restricted stock during the three months ended March 31, 2016, valued at approximately $0.4 million and $0.01 million, respectively. The Company granted approximately 671,000 stock options valued at approximately $2.2 million and 375,000 shares of restricted stock, valued at $1.6 million during the three months ended March 31, 2015.
The Company determines the fair value of stock option awards at the date of grant using a Black-Scholes valuation model. This model requires the Company to make assumptions and judgments on the expected volatility, dividend yield, the risk-free interest rate and the expected term of the stock options. The following ranges of assumptions were utilized for stock options granted during the periods indicated:
For the Three Months Ended March 31, | ||||
2016 | 2015 | |||
Expected life in years | 5.8-6.2 | 6.3 | ||
Interest rate | 1.36%-1.92% | 1.49%-1.80% | ||
Volatility | 80% | 90% | ||
Dividend yield | — | — | ||
The Company estimates the expected life of its employee stock options using the “simplified” method, whereby the expected life equals the arithmetic average of the vesting term and the original contractual term of the option due to its lack of sufficient historical data. The risk-free interest rates are based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option. The expected stock price volatility rates are based on average historical volatilities of the common stock of the Company and a group of public companies in similar industries. The Company has no history or expectations of paying dividends on its Common Stock and therefore uses a zero percent dividend yield in the Black-Scholes option pricing model.
15. WARRANTS
As of March 31, 2016, there were 323,078 warrant shares outstanding with a weighted average exercise price of $9.78 per share.
Warrants Issued prior to IPO
Immediately prior to the Company's IPO, the Company had Series B Warrants outstanding which allowed their holders to purchase 2,480,000 shares of Series B at an exercise price of $1.00 per share. In connection with the IPO, the warrants converted into warrants to purchase Common Stock at their conversion rate of approximately 0.0906 common warrant shares to one Series B warrant share. Such warrants expire in September 2016, whereupon any warrants that remain unexercised will be exercised automatically in whole in a cashless exercise resulting in an issuance, to the holders of the warrants, the number of shares with a value equal to the intrinsic value of the warrants at the time of expiry.
In connection with the closing of the loan and security agreements in November 2013 discussed in Note 10, the Company issued warrants to Comerica and TriplePoint to purchase up to an aggregate of 352,941 shares of Series E with an exercise price of $1.28. Upon issuance, the Company recorded liabilities of approximately $0.03 million and $0.06 million for the warrants issued to Comerica and TriplePoint, respectively. The initial fair value of the warrant issued to Comerica of approximately $0.03 million was deemed a discount on the debt issued by Comerica and is being accreted to interest expense over the term of the Comerica Loan. The initial fair value of the warrants issued to TriplePoint of approximately $0.06 million were capitalized in Other assets on the Balance Sheet as part of debt issuance costs and were amortized to Interest expense. In connection with the borrowings made under the TriplePoint Loan in March 2014, one of the TriplePoint warrants became exercisable for an additional 156,863 shares of Series E. The related fair value of approximately $0.1 million was deemed a discount on the debt issued by TriplePoint and was accreted to interest expense over the term of the TriplePoint Loan through the early payoff in May 2015, at which time the remaining discount was charged to interest expense. In connection with the IPO, the Series E warrants converted into warrants to purchase common stock at their conversion rate of approximately 0.0906 common warrant shares to one Series E warrant share and as a result became exercisable for 46,176 shares of Common Stock with an exercise price of $14.08.
Warrants Issued Subsequent to IPO
16
In connection with the Comerica Amendment on May 29, 2015, the Company issued an additional warrant to Comerica to purchase up to an aggregate of 52,265 shares of Common Stock at $2.87 per share and modified the exercise price of the original warrant granted to Comerica to purchase up to an aggregate of 10,656 shares of common stock from $14.08 per share to $2.87 per share.
16. NET LOSS PER SHARE
Basic net loss per share is calculated by dividing net loss applicable to common stockholders by the weighted-average shares outstanding during the period, without consideration for common stock equivalents. The weighted-average common shares outstanding excludes unvested restricted stock which although such shares are legally issued and outstanding, are not required to share in losses of the Company and are therefore excluded from the net loss per share calculation. Diluted net loss per share is calculated by adjusting the weighted-average shares outstanding for the dilutive effect of common stock equivalents outstanding for the period, determined using the treasury-stock method. For purposes of the diluted net loss per share calculation, stock options and warrants are considered to be common stock equivalents but are excluded from the calculation of diluted net loss per share because their effect would be anti-dilutive. Therefore, basic and diluted net loss per share applicable to common stockholders were the same for all periods presented.
For the Three Months Ended March 31, | ||||||||
2016 | 2015 | |||||||
Net loss applicable to common shareholders (thousands) | $ | (8,176 | ) | $ | (8,860 | ) | ||
Basic and diluted weighted average common shares outstanding | 17,526,419 | 17,221,041 | ||||||
Basic and diluted loss per share | $ | (0.47 | ) | $ | (0.51 | ) | ||
As the Company incurred a loss for the three months ended March 31, 2016 and 2015, all unvested restricted stock awards were excluded from the calculation of basic net loss per share and all potential Common Stock shares issuable for stock options and warrants were excluded from the calculation of diluted net loss per share, as the effect of including them would have been anti-dilutive. Had the Company not incurred a loss, the dilutive effect of the unvested restricted stock awards on basic weighted average common shares outstanding and the dilutive effect of potential Common Stock shares issuable for stock options and warrants on the weighted-average number of Common Stock shares outstanding would have been as follows:
For the Three Months Ended March 31, | ||||||
2016 | 2015 | |||||
Basic weighted average shares outstanding | 17,526,419 | 17,221,041 | ||||
Dilutive effect of unvested restricted stock | — | 215,581 | ||||
Basic weighted average shares outstanding had the Company not incurred a loss | 17,526,419 | 17,436,622 | ||||
Dilutive effect of Convertible Preferred Stock | — | — | ||||
Dilutive effect of warrants | — | — | ||||
Dilutive effect of stock options | 359 | 125,915 | ||||
Diluted weighted average shares outstanding had the Company not incurred a loss | 17,526,778 | 17,562,537 | ||||
17. SEGMENT INFORMATION
The Company operates in a single reportable segment. During each of the three months ended March 31, 2016, and the three months ended March 31, 2015, the Company had multiple customers which each generated more than 10% of the Company’s revenues. These customers accounted for revenues as follows (amounts in thousands):
17
Three Months Ended March 31, | |||||||
2016 | 2015 | ||||||
Customer A | $ | 528 | $ | 334 | |||
Customer B | $ | 386 | $ | 291 | |||
Customer C | $ | 171 | * | ||||
Customer D | * | $ | 256 | ||||
Customer E | * | $ | 210 | ||||
*Customer revenues below 10% in period.
18
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In this Quarterly Report on Form 10-Q, the words “Roka”, the “Company”, “our”, “we” and “us” refer to Roka Bioscience, Inc.
The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the audited Financial Statements and Notes thereto included in the Company's Annual Report on Form 10-K.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains a number of forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 under Section 27A of the Securities Act of 1933, as amended, (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Any statements contained herein (including, without limitation, statements to the effect that we “believe”, “expect”, “anticipate”, “plan” and similar expressions) that are not statements of historical fact should be considered forward-looking statements. These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industry and markets in which we operate and management’s current beliefs and assumptions.
These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including, but not limited to:
• | the ability of our Atlas Detection Assays and Atlas instrument to gain market acceptance, particularly from key thought leaders in the industry, major food companies and third-party food safety testing laboratories; |
• | the ability of our Atlas solution to provide our customers with accurate, timely test results and improved laboratory efficiencies; |
• | our ability to increase our revenue, instrument placements and average revenue per instrument; |
• | our relationship with Gen-Probe under our license and supply agreements; |
• | our relationships with key suppliers, including certain single source suppliers such as Gen-Probe, from whom we obtain our Atlas instrument and supplies for Atlas Detection Assays and certain components and materials used in our assays; |
• | our ability to manufacture our complex assays in accordance with precise technological specifications and in sufficient quantities, on a timely basis; |
• | our ability to enhance existing products and to develop, introduce and commercialize new products; |
• | our ability to protect our intellectual property rights, including the patent rights we license from Gen-Probe; |
• | our ability to defend against any future claims that our Atlas Detection Assays and Atlas instrument infringe the patent rights of any third parties; |
• | our ability to manage lengthy and variable sales cycles and to forecast revenue and operating expenses; |
• | our ability to defend against the securities class action lawsuit, the resolution of which in a manner adverse to us could have an adverse effect on our financial condition and business; |
• | our anticipated cash needs and our estimates regarding our capital requirements and our needs for additional financing; |
• | anticipated trends and challenges in our business and the markets in which we operate; and |
• | the factors listed under the heading “Risk Factors” in the Company’s annual report on Form 10-K for the year ended December 31, 2015 and other reports that we file with the Securities and Exchange Commission. |
Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, except as required by law, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this report to conform these statements to actual results or to changes in our expectations.
Overview
19
Background
We are a molecular diagnostics company initially focused on providing advanced testing solutions for the detection of foodborne pathogens. The proprietary molecular technology used in our assays enables us to offer accurate and rapid testing solutions while our fully automated instrument helps our customers reduce labor costs and minimize operator error. In late 2012, we launched our proprietary Atlas Detection Assays and Atlas instrument in the North American food safety testing market and have worldwide rights to develop and commercialize our advanced molecular testing solutions for a wide range of other industrial applications.
Our company was founded in 2009 through the acquisition of the industrial application market assets of Gen-Probe. The acquisition included a worldwide license for Gen-Probe’s molecular assay technologies in the industrial application markets, access to certain instrument platforms as well as certain key development personnel. Our advanced molecular assays and automated instruments are derived from Gen-Probe technologies, which Gen-Probe uses in the highly regulated clinical diagnostics and blood screening markets.
We are focused on the commercialization of a comprehensive menu of molecular diagnostic products for the detection of foodborne pathogens under the Atlas brand name. We believe that other available pathogen test methods have significant performance gaps with respect to accuracy, time to results and automation, which are areas of critical importance to food processors, third-party contract testing laboratories and the government agencies that regulate food safety. Our Atlas solution is designed to provide our customers with accurate and rapid test results with reduced labor costs and improved laboratory efficiencies.
Our commercial success is dependent upon our ability to successfully market our Atlas Detection Assays and Atlas instrument. Our sales cycle is lengthy, often lasting longer than 12 months, which makes it difficult for us to accurately forecast revenue and other operating results. Additionally, this lengthy sales cycle may cause revenue and operating results to vary significantly from period to period. Through March 31, 2016, we have installed 44 Atlas instruments pursuant to commercial agreements, and for the three months ended March 31, 2016, we generated approximately $1.6 million in revenue, which was derived from a small number of customers. Since our inception in 2009, we have devoted substantially all of our resources to the development and commercialization of our advanced molecular testing solutions. We have incurred significant losses since our inception, and as of March 31, 2016, our accumulated deficit was $177.8 million. We expect to continue to incur operating losses over the near term as we pursue our commercial strategy, operate as a public company and continue development of products and technology. In order to achieve and sustain profitability, we will need to significantly increase our revenue and the number of customers that are using our products.
Financial Operations Overview
Revenue
Our revenue is derived primarily from the sale of our Atlas Detection Assays and consumable supplies for our Atlas instruments. Our Atlas Detection Assays and our consumable supplies are designed to be used only on our Atlas instruments and our Atlas instruments will only accept our Atlas Detection Assays and our consumable supplies. This closed system model enables us to generate recurring revenue from the sale of our Atlas Detection Assays and other consumable supplies for use with each Atlas instrument we place. We mostly place our Atlas instruments with customers through reagent rental agreements, and recover the cost of providing the Atlas instruments, including services related to instrument maintenance, repairs, installation and training to our customers, in the amount charged for our Atlas Detection Assays. The reagent rental agreements are typically for a one-year initial period with automatic renewal provisions and have no minimum purchase obligations.
Shipping and handling costs incurred by us are included in our billings to customers. Revenue is generally recognized when our Atlas Detection Assays and other consumable supplies are shipped to the customer.
In addition to sales of our Atlas Detection Assays, we generate limited revenue from instrument rental and service and maintenance contracts. Revenue from instrument rental and service and maintenance contracts is recognized ratably over the term of the contract. We also offer our Atlas instruments for sale, however during the three months ended March 31, 2016, we did not sell any Atlas instruments.
Potential customers for our products typically need to commit significant time and resources to evaluate our products, due to the nature and cost of our products and their impact on the potential customers’ businesses. To date, it has been difficult for us to accurately project revenues and other operating results due to these and other factors. In addition, the revenue generated from sales of our Atlas Detection Assays may fluctuate from time to time due to changes in the testing volumes of our customers. As a result, our financial results may fluctuate on a quarterly or annual basis.
20
Our future revenue growth is dependent on our ability to place additional commercial instruments with customers and increase usage of our Atlas Detection Assays. During the three months ended March 31, 2016, we increased the number of instruments placed with customers by three. We do not expect our revenue to increase significantly in the near term until we place additional instruments and drive adoption of our assays, including our new Atlas Listeria Environmental Detection Assay which we made available to customers late in the fourth quarter of 2015.
Operating Expenses
Cost of revenue
Cost of revenue primarily consists of the cost of materials, direct labor and manufacturing overhead costs associated with the production and distribution of our Atlas Detection Assays and consumable supplies for our Atlas instruments. Cost of revenue also includes depreciation on Atlas instruments installed with our customers under reagent rental or rental agreements, expenses related to service and maintenance of instruments, and royalties payable under a technology license agreement with Gen-Probe.
We manufacture our Atlas Detection Assays and consumable supplies in our San Diego facility, which has significant capacity for expansion. To date, the underutilized capacity in this facility has contributed to a high cost of revenue relative to revenue.
We expect our cost of revenue to increase as we place additional Atlas instruments and manufacture and sell an increasing number of our Atlas Detection Assays and consumable supplies. We believe cost of revenue as a percentage of revenue will decrease in future periods as our manufacturing and sales volumes of Atlas Detection Assays increase.
Research and development
Our research and development expenses are primarily associated with costs incurred for development, improvements and support activities for our Atlas instruments and Atlas Detection Assays, such as our assays for Salmonella, Listeria, E. coli O157:H7, Shiga toxin-producing E. coli and Listeria monocytogenes, as well as other technology platforms and instruments. These expenses consist principally of payroll, employee benefits, as well as fees for contract research, consulting services and laboratory supplies. We expense all research and development costs as incurred.
We expect to remain focused on improving our existing Atlas Detection Assays as well as developing additional assays and instrument platforms in the near term. We expect our research and development expenses to remain at approximately their current levels during the remainder of 2016.
Selling, general and administrative
Our selling, general and administrative expenses include costs associated with our sales organization as well as our executive, accounting, information technology and human resources functions. These expenses consist principally of payroll, employee benefits, travel, and stock-based compensation, as well as professional services fees such as consulting, audit, tax and legal fees, and general corporate costs. We expense all general and administrative expenses as incurred.
We expect our selling, general and administrative expenses to remain at approximately their current level during the remainder of 2016.
Amortization of Intangible Assets
In connection with the acquisition of the industrial application market assets of Gen-Probe, we acquired certain in-process research and development projects that were recorded as an intangible asset with an indefinite life. Upon completion of the development of our first Atlas Detection Assay in January 2012, this asset was transferred from in-process research and development to a definite life intangible asset and we initiated amortization of the asset over its estimated useful life of 10 years. In June 2014, we entered into an amendment to our license agreement with Gen-Probe. Under the amendment, we obtained a two-year option to reduce the royalty rate we pay to Gen-Probe in exchange for an option payment of $2.5 million. Upon completion of our IPO we exercised our option and issued to Gen-Probe 865,063 shares of common stock and made a cash payment of $8.0 million. We are required to make additional cash payments of $5.0 million on January 1, 2018 and $5.0 million on January 1, 2020. The aggregate cash and stock payments made to Gen-Probe along with the present value of the two $5.0 million payments described above were recorded as a $26.6 million addition to our intangible technology asset in Intangible assets on the Balance Sheet and will be amortized through December 31, 2021, the end of the estimated remaining life of the technology asset. In addition to the payments outlined above, the amendment to the license agreement provides for additional milestone payments of up to $6.0 million to further reduce the royalty rate paid. As a result, we anticipate amortization expenses for these intangible assets to increase in future periods if these additional milestone payments are made.
21
Other Income (Expenses)
Interest Income (Expense), net
Interest income is derived from cash and cash equivalents held with our banking institution as well as our short-term and long-term marketable securities. Interest income fluctuates based on the current interest rate available from our banking institution and the amount of funds held in cash accounts and marketable securities. Interest expense during the periods presented is associated with the $10.0 million of debt outstanding under the two loan and security agreements we entered into in November 2013, the repayment of the TriplePoint loan and the amendment to the Comerica loan in the three months ended June 30, 2015, the two individual $5.0 million payments due to Gen-Probe on January 1, 2018 and January 1, 2020, respectively, under the terms of the royalty reduction option exercised under the terms of the amendment to our license agreement, as well as the extended payment terms provided to us by Gen-Probe on the purchase of Atlas instruments. See “—Liquidity and Capital Resources” below for further details.
We expect our interest expense to remain at approximately the current level for the remainder of 2016.
22
Results Of Operations
Comparison of the Three Months Ended March 31, 2016 to the Three Months Ended March 31, 2015
Three Months Ended March 31, | Change | |||||||||||||
2016 | 2015 | $ | % | |||||||||||
(amounts in thousands, except percentages) | ||||||||||||||
Statement of Operations Data: | ||||||||||||||
Revenue | $ | 1,626 | $ | 1,511 | $ | 115 | 8 | % | ||||||
Operating Expenses | ||||||||||||||
Cost of revenue | 2,076 | 1,964 | 112 | 6 | % | |||||||||
Research and development | 1,987 | 1,889 | 98 | 5 | % | |||||||||
Selling, general and administrative | 4,385 | 5,113 | (728 | ) | (14 | )% | ||||||||
Amortization of intangible asset | 939 | 937 | 2 | — | % | |||||||||
Total operating expenses | 9,387 | 9,903 | (516 | ) | (5 | )% | ||||||||
Loss from operations | (7,761 | ) | (8,392 | ) | 631 | (8 | )% | |||||||
Other (expense) income: | ||||||||||||||
Interest income (expense), net | (417 | ) | (466 | ) | 49 | (11 | )% | |||||||
Net loss | $ | (8,176 | ) | $ | (8,860 | ) | $ | 684 | (8 | )% | ||||
Revenue
Revenue increased by $0.1 million for the three months ended March 31, 2016, compared to the three months ended March 31, 2015. During the three months ended March 31, 2016, we sold 197,000 Atlas Detection Assays compared to 160,000 during the three months ended March 31, 2015.
As of March 31, 2016, we had 44 instruments placed with customers under commercial agreements, compared to 41 instruments as of March 31, 2015. For the three months ended March 31, 2016, the average revenue per instrument placed under commercial agreements was approximately $38,000, compared to $36,000 for the three months ended March 31, 2015. During the three months ended March 31, 2016, three customers each accounted for more than 10% of revenues and generated approximately $1.1 million of revenue compared to four customers who generated $1.1 million of revenue in the three months ended March 31, 2015.
Operating Expenses
Cost of Revenue
Cost of revenue increased by $0.1 million, to $2.1 million for the three months ended March 31, 2016, from $2.0 million for the three months ended March 31, 2015.
Research and Development
Research and development expense increased by $0.1 million to $2.0 million for the three months ended March 31, 2016, from $1.9 million for the three months ended March 31, 2015. The increase was primarily due to an increase in external development services of approximately $0.3 million, which was partially offset by a decrease of $0.1 million in payroll related expenses and a $0.1 million decrease in depreciation.
Selling, General and Administrative
Selling, general and administrative expense decreased by $0.7 million, to $4.4 million for the three months ended March 31, 2016, from $5.1 million for the three months ended March 31, 2015. Payroll related expenses decreased by approximately $0.5 million, primarily driven by a decrease in headcount affected in the fourth quarter of 2015, and consulting services decreased by approximately $0.2 million.
Amortization of intangible assets
Amortization of intangibles was consistent for the three months ended March 31, 2016 compared to the three months ended March 31, 2015.
23
Other (Expense) Income
Interest Income (Expense), net
Net interest expense decreased by $0.1 million to $0.4 million for the three months ended March 31, 2016, from net interest expense of $0.5 million for the three months ended March 31, 2015. The decrease was primarily due to higher interest expense on the TriplePoint loan in 2014 which was replaced by the amendment to the Comerica Loan in 2015 as well as the decreased principal outstanding on our debt.
Liquidity and Capital Resources
Prior to our IPO in July 2014, our operations were primarily financed through private sales of shares of our preferred stock and debt. Upon closing of our IPO on July 22, 2014 we received approximately $53.2 million of net proceeds, after deduction of underwriting discounts, commissions and expenses. In October 2015, we filed a shelf registration statement with the Securities and Exchange Commission to register for sale any combination of the types of securities described in the filing up to an amount of $100 million. The shelf registration went effective on October 7, 2015. No securities have been sold by us under this shelf registration.
We have incurred negative cash flows from operating and investment activities since our inception in 2009 and we expect to continue to incur negative cash flows from operating activities until we achieve a significant increase in our revenue. Since inception, we have devoted our resources to funding research and development and to commercializing the assets and technology acquired from Gen-Probe. At March 31, 2016, we had cash and cash equivalents of $5.6 million and marketable securities of $17.5 million an accumulated deficit of $177.8 million.
The following table shows a summary of our cash flows for the three months ended March 31, 2016 and 2015, respectively (amounts in thousands):
Three Months Ended March 31, | |||||||
2016 | 2015 | ||||||
Net cash used in operating activities | $ | (7,613 | ) | $ | (6,970 | ) | |
Net cash provided by (used in) investing activities | 11,085 | 2,660 | |||||
Net cash provided by (used in) financing activities | (1,269 | ) | 23 | ||||
Net decrease in cash and cash equivalents | $ | 2,203 | $ | (4,287 | ) | ||
Operating Activities
Net cash used in operating activities was $7.6 million for the three months ended March 31, 2016 and resulted from an $8.2 million net loss and $1.9 million net changes in operating assets and liabilities, partially offset by $2.5 million in non-cash items, principally depreciation and amortization, share-based compensation expense, provisions for inventory and non-cash interest expense. Net cash used in operating activities was $7.0 million for the three months ended March 31, 2015 and resulted from an $8.9 million net loss and $0.5 million net changes in operating assets and liabilities, partially offset by $2.4 million in non-cash items, principally depreciation and amortization, share-based compensation expense and non-cash interest expense.
Investing Activities
Net cash provided by investing activities was $11.1 million for the three months ended March 31, 2016 and was primarily the result of maturities of marketable securities that were not reinvested. Net cash provided by investing activities was $2.7 million during the three months ended March 31, 2015 and was primarily the result of maturities of marketable securities that were not reinvested.
Financing Activities
Net cash used in financing activities was $1.3 million for the three months ended March 31, 2016 and consisted primarily of principal payments under our loan and security agreement with Comerica Bank of $1.0 million and payments to Gen-Probe for amounts deferred under our supply agreement of $0.3 million. Net cash provided by financing activities for the three months ended March 31, 2015 was immaterial.
Operating Capital Requirements
24
We have limited capital resources and have experienced negative cash flows from operations and have incurred net losses since inception. We expect to continue to experience negative cash flows from operations and incur net losses in the near term as we devote substantially all of our efforts on commercialization of our products and continued product development. We expect future operating, investment and financing activities to be funded by our product revenue, our existing cash and cash equivalents, and from cash raised through debt or equity offerings, if any, in the future. Based on our current business plan, we currently anticipate that we will have sufficient capital to fund our existing operations through the end of 2016. Our liquidity requirements may be negatively impacted by changes to our business plan, a lengthier sales cycle, lower demand for our products or other risks described elsewhere in this quarterly report and in our annual report on Form 10-K for the year ended December 31, 2015, and therefore we may need to raise capital sooner than currently anticipated. These factors create a substantial doubt about our ability to continue as a going concern. Our liquidity requirements have and will continue to consist of research and development expenses, sales and marketing expenses, capital expenditures, working capital and general corporate expenses. Our future liquidity requirements will also include interest and principal payments on our debt and future payments to Gen-Probe of $5.0 million on January 1, 2018 and $5.0 million on January 1, 2020 as well as general and administrative expenses, such as insurance costs and professional fees associated with being a public company. As demand for our products increases, we expect that our capital requirements will also increase in order to purchase additional Atlas instruments for placement with customers and fund working capital requirements such as inventory and accounts receivable.
Our present and future funding requirements will depend on many factors, including our revenue growth and ability to generate cash flows from operating activities; the level of our sales and marketing and research and development activities; the effect of competing technological and market developments; the cost of and potential delays in product development; any change in regulatory oversight applicable to our products; and potential costs related to international expansion.
We need to raise additional capital to fund our existing operations and commercialize our products. Additional capital may not be available on reasonable terms, if at all. We may seek to sell common or preferred equity or convertible debt securities, enter into an additional credit facility or another form of third-party funding, or seek other debt financing. In addition, we may raise additional capital, to expand our business, to pursue strategic investments, to take advantage of financing opportunities, or for other reasons. 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 shares. 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. Any other third-party funding arrangement could require us to relinquish valuable rights.
These statements regarding our future liquidity requirements 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 the section “Risk Factors” of our most recent Annual Report on Form 10-K. We have based our estimates regarding our future liquidity requirements on assumptions that may prove to be wrong and we could utilize our available capital resources sooner than we currently expect. If we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, financial condition, and results of operations could be materially adversely affected.
Term Loan and Security Agreements
In November 2013, we entered into loan and security agreements with each of Comerica Bank, or Comerica, and with TriplePoint Capital LLC, or TriplePoint.
Under the terms of our loan agreement with Comerica, we borrowed $5.0 million in November 2013. The Comerica loan bears interest at Comerica’s Prime Referenced Rate (as defined in the loan agreement with Comerica) plus 3.15 %, subject to a floor of the daily adjusting LIBOR rate plus 2.5%, which was 6.65% as of March 31, 2016.
Pursuant to the terms of our loan agreement with TriplePoint, we borrowed $5.0 million in March 2014. The borrowings under the TriplePoint loan accrued interest at the Prime Rate plus 6.25%, but not less than 9.5% and were repayable over 36 months from the borrowing date with an interest-only period of 12 months, and equal monthly installments of principal and interest over the remaining term of the loan after the interest only period.
In May 2015, we paid off the remaining amounts due under the TriplePoint Loan, which consisted of $4.6 million in principal and a $350,000 final payment fee and simultaneously amended the Comerica Loan (the “Comerica Amendment”). The Comerica Amendment increased the borrowing under the Comerica Loan to $10.0 million, extended the interest-only period from June 1, 2015 until December 31, 2015 and extended the overall term by 12 months. In January 2016, we began making monthly payments which consist of accrued interest and equal principal payments in accordance with a 30-month amortization schedule.
Pursuant to the Comerica Amendment we are required to maintain at least $5,000,000 of unrestricted cash and/or marketable securities with Comerica at all times. As of March 31, 2016 and during the period since we entered into the Comerica Amendment, we have been in compliance with this requirement. Additionally, the Comerica Loan contains various covenants that
25
limit our ability to engage in specified types of transactions, including limiting our ability to; sell, transfer, lease or dispose of certain assets; engage in certain mergers and consolidations; incur debt or encumber or permit liens on certain assets, make certain restricted payments, including paying dividends on, or repurchasing or making distributions with respect to, our Common Stock; and enter into certain transactions with affiliates.
As of March 31, 2016, we had $9.0 million outstanding under the amended Comerica Loan. We may prepay the loan to Comerica, in full or in part at any time, provided that no event of default has occurred and is continuing.
In connection with entering into the loan and security agreements in November 2013, we issued to Comerica a ten-year warrant to purchase an aggregate of 117,647 shares of our Series E preferred stock at an exercise price of $1.28 per share, and we issued to TriplePoint ten-year warrants to purchase an aggregate of 235,294 shares of our Series E preferred stock at an exercise price of $1.28 per share. In connection with the borrowings in March 2014, the TriplePoint warrants became exercisable for an additional 156,863 shares. The warrants issued to TriplePoint contain net issuance exercise provisions. The Comerica and TriplePoint warrants contain anti-dilution adjustment provisions for stock splits, dividends, combinations, reclassifications or exchanges and as such in connection with the IPO, these warrants converted into warrants to purchase common stock at their conversion rate of approximately 0.0906 common warrant shares to one Series E warrant share and as a result became exercisable for 46,176 shares of Common Stock with an exercise price of $14.08.
In connection with the Comerica Amendment in May 2015, we issued an additional warrant to Comerica to purchase up to an aggregate of 52,265 shares of Common Stock at $2.87 per share and modified the exercise price of the original warrant granted to Comerica to purchase up to an aggregate of 10,656 shares of common stock from $14.08 per share to $2.87 per share.
As of March 31, 2016, there are 323,078 warrant shares outstanding with a weighted average exercise price of $9.78 per share. The Comerica and TriplePoint warrants have the same “piggyback” registration rights as holders of registrable securities under the investors' rights agreement. Such rights will expire upon the earlier of (i) five years after our IPO and (ii) as to any holder, at such time as all registrable securities held by such holder may be sold without restriction under Rule 144.
Controlled Equity OfferingSM Sales Agreement
We entered into a Controlled Equity OfferingSM Sales Agreement, dated October 30, 2015, with Cantor Fitzgerald & Co., as sales agent, pursuant to which we may offer and sell, from time to time, through Cantor Fitzgerald shares of our common stock for an aggregate offering price of up to $6,750,000. We are not obligated to sell any shares under the Sales Agreement. Subject to the terms and conditions of the Sales Agreement, Cantor Fitzgerald will use commercially reasonable efforts consistent with its normal trading and sales practices, applicable state and federal law, rules and regulations and the rules of The NASDAQ Global Market to sell shares from time to time based upon our instructions, including any price, time or size limits specified by us. We will pay Cantor Fitzgerald a commission of 3.0% of the aggregate gross proceeds from each sale of shares and to reimburse Cantor Fitzgerald for certain specified expenses. As of May 2, 2016, we had not sold any shares under this Sales Agreement.
Contractual Obligations and Commitments
For the three months ended March 31, 2016, there were no significant changes to our contractual obligations from those disclosed in our audited financial statements as of December 31, 2015. The following is a summary of our contractual obligations as of March 31, 2016 (in thousands):
Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||||||
Deferred payment obligations(1) | $ | 14,427 | $ | 1,840 | $ | 7,587 | $ | 5,000 | $ | — | |||||||||
Operating lease obligations(2) | 3,691 | 1,079 | 1,819 | 793 | — | ||||||||||||||
Purchase obligations(3) | 1,363 | 1,363 | — | — | — | ||||||||||||||
Notes payable(4) | 9,040 | 9,040 | — | — | — | ||||||||||||||
Total contractual obligations | $ | 28,521 | $ | 13,322 | $ | 9,406 | $ | 5,793 | $ | — | |||||||||
(1) | The deferred payment obligations are based upon the gross deferred amounts outstanding for instruments purchased from Gen-Probe as of March 31, 2016 as disclosed in the notes to our unaudited financial statements included elsewhere in this Form 10-Q. Such amounts are recorded at their aggregate present value of $4.1 million on the Balance Sheet as of March 31, 2016. The timing of when these payments are due reflects our current estimates of repayment. We do not believe that future revisions of estimates will have a significant impact on |
26
the timing of payments. Additionally, amounts due beyond one year represent the two separate $5.0 million lump-sum payments payable to Gen-Probe in accordance with the amendment to our licensing agreement discussed in "Results of Operations". Such amounts are recorded at their aggregate present value of $8.0 million on the Balance Sheet as of March 31, 2016.
(2) | Our operating lease obligations represent the contractual payments due for the lease of our corporate office in Warren, NJ, our laboratory in Warren, NJ and our facility in San Diego, CA. |
(3) | Our purchase obligations represent the total cost of instruments and supplies which we are committed to purchase from Gen-Probe as well as additional obligations due under other agreements entered into in the normal course of business. In accordance with the supply agreement with Gen-Probe, our purchases of Atlas instruments are defined in rolling quarterly forecasts, and these forecasts become binding commitments for approximately nine months of Atlas instrument purchases at any given time. Our obligation to purchase supplies from Gen-Probe is defined in an annual purchase order submitted in the third quarter of each year. |
(4) | Such amounts include the total principal outstanding at March 31, 2016 of $9.0 million and final payment fees of $0.04 million, of which approximately $4.0 million is due within one year from the Balance Sheet date. The remaining amounts are shown as being due in less than one year as our loan agreement contains a material adverse change clause which allows the lender to call the debt based on subjective factors regarding our business and performance. Amounts which are or may become payable as interest are excluded from the table, but are estimated to be approximately $0.4 million during the remainder of 2016. |
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under the rules and regulations of the Securities and Exchange Commission.
27
Critical Accounting Policies and Significant Estimates
We have prepared our financial statements in accordance with U.S. generally accepted accounting principles. Our preparation of these financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, expenses and related disclosures at the date of the financial statements, as well as revenue and expenses recorded 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 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.
There have been no material changes to our critical accounting policies from those described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K.
28
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
As of March 31, 2016, our cash and cash equivalents of $5.6 million were primarily held in money market deposit accounts. Our primary exposure to market risk for our cash and cash equivalents is interest income sensitivity, which is affected by changes in the general level of U.S interest rates. However, because of the short-term nature of the instruments in our portfolio, a sudden change in the interest rates associated with these instruments is not expected to have a material impact on our financial condition or results of operations.
As of March 31, 2016, we had $17.5 million of marketable securities classified as held-to-maturity on our balance sheet which had a fair value of $17.5 million. As our intention is to hold these investments through maturity, any interest rate fluctuation changing the fair value of such marketable securities would only be realized if the Company sold the investments prior to maturity.
As of March 31, 2016, we had $9.0 million of variable interest-rate debt outstanding under the Amendment to the loan and security agreement with Comerica. Considering the amounts outstanding and the term of the loan and security agreement, we do not believe a 1.0% increase in the interest rate would have a material impact on our financial condition or results of operations.
We do not have any foreign currency or other derivative financial instruments.
ITEM 4. | CONTROLS AND PROCEDURES |
a) Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures.
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and (2) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
We continue the process of reviewing and documenting our disclosure controls and procedures, including our internal controls and procedures for financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.
Our management, with the participation of the principal executive officer and principal financial officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this quarterly report. Based on this evaluation, the principal executive officer and principal financial officer concluded that these disclosure controls and procedures are effective at the reasonable assurance level.
b) Changes in Internal Control Over Financial Reporting.
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) identified in connection with the evaluation of our internal control performed during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
We may periodically become subject to legal proceedings and claims arising in connection with our business. Except as set forth below, we are not currently involved in any legal proceedings, nor are any claims pending against us.
A putative securities class action originally captioned Ding v. Roka Bioscience, Inc., Case No. 3:14-cv-8020, was filed against the Company and certain of its officers and directors in the United States District Court for the District of New Jersey on
29
December 24, 2014, on behalf of a putative class of persons and entities who had purchased or otherwise acquired securities pursuant or traceable to the Registration Statement for the Company’s IPO. The original putative class period ran from July 17 through November 6, 2014. The original complaint asserted claims under the Securities Act of 1933 and contended that the IPO Registration Statement was false and misleading, or omitted allegedly material information, in connection with the Company’s statements about its placement of Atlas instruments and its expectations of future growth and increased market share, and the Company’s alleged failure to disclose “known trends and uncertainties about the Company’s sales.” The alleged misrepresentations and omissions purportedly came to light when the Company issued its third-quarter 2014 earnings release on November 6, 2014.
Pursuant to the Private Securities Litigation Reform Act of 1995, the court appointed Stanley Yedlowski as lead plaintiff and The Rosen Law Firm as lead counsel on April 21, 2015. The lead plaintiff then filed an amended complaint, captioned Stanley Yedlowski v. Roka Bioscience, Inc., Case No. 14-cv-8020, on June 23, 2015. The amended complaint pleads Securities Act claims on behalf of persons and entities who purchased or otherwise acquired Roka securities pursuant or traceable to the IPO Registration Statement during an extended putative class period, running from July 17, 2014 through March 26, 2015. The amended complaint alleges that the Registration Statement was false or misleading in that it failed to disclose that our customers purportedly were experiencing false positives and other usage issues with our Listeria assays apparently arising from the customers’ employees’ inability to follow tour Listeria assay workflow. The amended complaint alleges that the full extent of the purported misstatements and omissions was not revealed until March 26, 2015. Defendants filed a motion on August 25, 2015 to dismiss the amended complaint, and plaintiffs filed an opposition to that motion on October 9, 2015. The parties agreed to attempt to resolve the case through mediation, and that process is continuing. We are currently in settlement discussions and estimate a potential settlement amount of approximately $3.3 million. Accordingly, we have recorded a liability on our Balance Sheet. Additionally, we have recorded a corresponding receivable on our Balance Sheet for the expected reimbursement under our insurance policies.
We believe that the claims in the securities class action are without merit, and, if the case cannot be settled through the mediation, intend to defend the litigation vigorously and we expect to incur costs associated with defending the securities class action. In addition, we have various insurance policies related to the risk associated with our business, including directors’ and officers’ liability insurance policies. However, there is no assurance that we would be successful in our defense of the securities class action if the case cannot be settled, and there is no assurance that our insurance coverage would be sufficient or that our insurance carriers would cover all claims or litigation costs.
Item 1A. RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K may not be the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition and/or operating results.
There were no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 9, 2016.
30
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
Unregistered Sale of Equity Securities
Not applicable.
Use of Proceeds
On July 16, 2014, our registration statement on Form S-1 (File No. 333-196135) was declared effective by the Securities and Exchange Commission for our initial public offering pursuant to which we sold an aggregate of 5,000,000 shares of our common stock at a price to the public of $12.00 per share. BofA Merrill Lynch and Leerink Partners acted as joint book-running managers for the offering. Cowen and Company and Wedbush PacGrow Life Sciences acted as co-managers. On July 22, 2014, we closed the sale of 5,000,000 shares, resulting in net proceeds to us of $53.2 million after deducting underwriting discounts and commissions and other offering expenses of $2.6 million. 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. As of March 31, 2016, we have used $31.2 million of the net proceeds from our initial public offering, of which $8.0 million was paid to Gen-Probe pursuant to the terms of the second amendment to our license agreement with Gen-Probe and the remaining $23.2 million was used in operating activities including the commercialization of our Atlas Detection Assays and ongoing research and development activities. We have invested the balance of the net proceeds from the offering in cash equivalents and marketable securities in accordance with our investment policy. There has been no material change in the planned use of proceeds from our initial public offering as described in our final prospectus filed with the Securities and Exchange Commission on July 17, 2014 pursuant to Rule 424(b).
Issuer Repurchases of Equity Securities
In connection with the vesting of restricted stock in the three months ended March 31, 2016, certain of our employees elected to have shares withheld and transferred back to us in order to cover their income taxes payable as allowed under our equity compensation plans.
Shares of common stock so withheld and transferred back to the Company during the three months ended March 31, 2016 were as follows:
Issuer Purchases of Equity Securities | ||||||||||
Period: | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | (a) Maximum Dollar Value of Shares that May Yet be Purchased Under the Program ($ in thousands) | ||||||
January 1-January 31 | 4,058 | $ | 1.23 | — | — | |||||
February 1-February 29 | — | $ | — | — | — | |||||
March 1-March 31 | — | $ | — | — | — | |||||
ITEM 6. | EXHIBITS |
The exhibits filed as part of this Quarterly Report on Form 10-Q are set forth on the Exhibit Index, which is incorporated herein by reference.
31
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 on the date set forth below by the undersigned thereunto duly authorized.
ROKA BIOSCIENCE, INC. | ||||||
Date: | May 6, 2016 | By: /s/ Paul G. Thomas | ||||
Paul G. Thomas | ||||||
President and Chief Executive Officer (Principal Executive Officer) | ||||||
Date: | May 6, 2016 | By: /s/ Lars Boesgaard | ||||
Lars Boesgaard | ||||||
Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) | ||||||
32
Exhibit Index
Exhibit No. | ||
31.1* | Certification of Principal Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2* | Certification of Principal Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1** | Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101* | Interactive Data Files regarding (a) our Condensed Balance Sheets as of March 31, 2016 and December 31, 2015 (b) our Condensed Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2016 and 2015, (c) our Condensed Statements of Cash Flows for the Three Months Ended March 31, 2016 and 2015 and (d) the Notes to such Condensed Financial Statements. | |
* | Filed herewith |
** | Furnished herewith |
33