UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2015

OR

o	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: 001-36483

SIGNAL GENETICS, INC.

(Exact name of registrant as specified in its charter)

 

DELAWARE	47-1187261
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

 

5740 Fleet Street, Carlsbad, California	92008
(Address of principal executive offices)	(Zip Code)

Registrant's telephone number, including area code: (760) 537-4100

 

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.     x   Yes     o   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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     x   Yes     o   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.).

Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	o  (Do not check if a smaller reporting company)	Smaller reporting company filer	x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x

As of August 5, 2015, there were 7,868,096 shares of the issuer’s common stock, par value $0.01 per share, outstanding.

 

 

TABLE OF CONTENTS

 

		Page No.
PART I	FINANCIAL INFORMATION	4
ITEM 1.	UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	4
	Condensed Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014	4
	Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2015 and 2014	5
	Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014	6
	Notes to Unaudited Condensed Consolidated Financial Statements	7
ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	15
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	22
ITEM 4.	CONTROLS AND PROCEDURES	22
PART II	OTHER INFORMATION	23
ITEM 1.	LEGAL PROCEEDINGS	23
ITEM 1A.	RISK FACTORS	23
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	23
ITEM 6.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES	24
SIGNATURES		25

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements. Such forward-looking statements include those that express plans, anticipation, intent, contingency, goals, targets or future development and/or otherwise are not statements of historical fact. These forward-looking statements are based on our current expectations and projections about future events and they are subject to risks and uncertainties known and unknown that could cause actual results and developments to differ materially from those expressed or implied in such statements.

In some cases, you can identify forward-looking statements by terminology, such as “expects,” “anticipates,” “intends,” “estimates,” “plans,” “believes,” “seeks,” “may,” “should,” “continue,” “could” or the negative of such terms or other similar expressions. Accordingly, these statements involve estimates, assumptions and uncertainties that could cause actual results to differ materially from those expressed in them. Any forward-looking statements are qualified in their entirety by reference to the factors discussed throughout this Quarterly Report on Form 10-Q.

You should read this quarterly report and the documents that we reference herein and therein and have filed as exhibits to this report, completely and with the understanding that our actual future results may be materially different from what we expect. You should assume that the information appearing in this quarterly report is accurate as of the date of this report only. Because the risk factors referred to above could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us or on our behalf, you should not place undue reliance on any forward-looking statements. These risks and uncertainties, along with others, are described under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2014 filed with the Securities and Exchange Commission on March 27, 2015. Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. New risk factors may emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each risk factor 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 qualify all of the information presented in this Quarterly Report on Form 10-Q, and particularly our forward-looking statements, by these cautionary statements.

 

PART I—FINANCIAL INFORMATION

 

Item 1. Unaudited Condensed Consolidated Financial Statements.

 

SIGNAL GENETICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and par value data)

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

SIGNAL GENETICS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

 

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

SIGNAL GENETICS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

 

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

SIGNAL GENETICS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction

The following discussion and analysis should be read together with our consolidated financial statements and the related notes appearing elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. See “Cautionary Note Regarding Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with these statements. Actual results and the timing of events could differ materially from those discussed in our forward-looking statements as a result of many factors, including those set forth under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2014 filed with the Securities and Exchange Commission (the “SEC”) on March 27, 2015.

Overview

We are a commercial stage, molecular genetic diagnostic company focused on providing innovative diagnostic services that help physicians make better-informed decisions concerning the care of their patients suffering from cancer. Our mission is to develop, validate and deliver innovative diagnostic services that enable better patient-care decisions.

We were founded in January 2010 and hold an exclusive license to the intellectual property stemming from the renowned research on MM performed at UAMS. Our flagship service offering is the MyPRS^® test, which is a microarray-based Gene Expression Profiling (“GEP”) assay that tests for the presence of specific groups of genes that can predict low or high level risk of early relapse in patients suffering from MM. The information provided by our MyPRS^® test aids physicians in selecting the optimal treatment regimen for each patient’s unique MM condition.

To our knowledge, we are the only company marketing a GEP test for assessing the status of MM in the United States. The MyPRS^® test is protected by a substantial patent portfolio of issued and pending patents.

Our growth strategy includes the following key elements:

·

Expanding the U.S. market penetration of our MyPRS® test by increasing the geographic coverage of our sales force.

·

Broadening the base of health care insurance companies that have approved reimbursements for MyPRS®.

·

Expanding the diagnostic indications for MyPRS® to include asymptomatic monoclonal gammopathy (“AMG”), the precursor conditions to MM.

·

Pursuing collaborations with pharmaceutical companies who focus on developing therapies to treat MM and its precursor disease.

·

Expanding our information technology infrastructure to further improve our customer service experience.

·

Continuing to leverage our relationship with UAMS via our exclusive license agreement.

·

Expanding our test offering with the addition of other molecular tests useful to physicians who care for MM patients.

·

Expanding and leverage our capabilities into additional blood cancer indications.

·

Pursuing additional collaborations and in-licensing to expand our service offering.

·

Continuing to reduce the costs associated with the development, manufacture and interpretation of our proprietary genomic tests and services.

We believe a key challenge to achieving our growth strategy will be our ability to become contracted with additional payors beyond Medicare and Arkansas Blue Cross Blue Shield (“AR-BCBS”). In order to broaden our coverage policy approval to include a majority of the major health care insurance providers in the United States, our Vice President of Managed Care and Payor Relations is leading the effort to gain contractual agreements with third-party payors. MyPRS^® has been studied extensively and there are more than 30 peer-reviewed scientific publications that describe the validity and utility of the test. MyPRS^® is one of the most extensively validated genomic assays available today. Further, the MyPRS^® assay has been validated on patient cohorts totaling over 4,500 patients, detailed in 17 peer-reviewed publications. Please visit our website at www.signalgenetics.com in the “Publications” section under the “Physician Resources” tab for a list of these publications. We intend to use these publications to create the clinical dossier that justifies reimbursement approval by the majority of health care payors.

Other challenges to our growth strategy include: (1) if medical oncologists do not adopt the use of MyPRS^® to evaluate the risk of developing MM in patients with AMG, our growth strategy could be adversely affected, (2) if other tests that more accurately predict the severity of MM, the risk of progression of AMG to MM or the likelihood of response to therapy, are developed, physicians could stop ordering MyPRS^®, adversely affecting our ability to generate revenue, and (3) if payors, including our currently contracted payors, decide to reduce payment for MyPRS^®.

We operate in only one segment and, currently, have no operations outside of the United States.

Recent Developments

In June 2015 we executed a Master Service Agreement (“MSA”) with a leading pharmaceutical company. Under the MSA, our proprietary MyPRS^® genetic test will be run across multiple clinical trials in connection with the development of novel treatments for patients with multiple myeloma. We have triggered the first of four studies as part of the MSA. Under the agreement, MyPRS^® will help inform patterns of response to novel therapy regimens with the aim of enabling physicians to better manage multiple myeloma patients based on their specific genetic profile. Developing a pipeline of pharmaceutical company relationships is a key objective for us, and we plan to pursue additional clinical trial service agreements with multiple companies as part of our overarching commercial strategy going forward.

In August 2015 we executed an agreement with America’s Choice Provider Network (ACPN). Under the terms of the agreement, our MyPRS^® assay will be offered through ACPN’s proprietary network which covers over 22 million patients across the United States. We expect increased reimbursement support for our assay through agreements such as this to have a positive impact on our revenue generation over the long term. As part of our overall growth strategy, we will continue to seek out these types of opportunities to ensure stable reimbursement as we work to make MyPRS^® available for physicians and patients across the United States.

Sources of Revenues and Expenses

Revenues

We generate revenues primarily from the completion of tests processed through our CAP-accredited and CLIA certified laboratory when test results are delivered to ordering physicians. During the first six months of 2015 and 2014, we had one major customer, UAMS. Revenue sourced either from or through UAMS accounted for 75% and 81%, respectively, of our net revenue.

A significant portion of our revenues consist of payments or reimbursements received from various payors, including Medicare, contracted insurance companies, directly billed customers (UAMS, pharmaceutical companies, reference laboratories and hospitals) and non-contracted insurance companies. We report revenues from contracted payors and directly billed customers based on the contractual rate. Medicare reimburses MyPRS^® based on the local coverage determination at approximately $1,900 per test and AR-BCBS reimburses MyPRS^® based on the contractual rate of approximately $2,000 per test. Revenues from non-contracted payors are reported based on the amount expected to be collected, which is based on the historical collection experience of each payor or payor group, as appropriate. Our estimates of net revenue are subject to change based on the contractual status and payment policies of third-party payors with whom we deal as well as anticipated changes in the healthcare industry and related legislation. We regularly refine our estimates in order to make our estimated revenue as accurate as possible based on our most recent collection experience with each third-party payor.

Cost of Revenue

Our cost of revenue consists primarily of the cost of materials and supplies, labor, and other costs associated with processing specimens including pathological review, quality control analyses, delivery charges necessary to render an individualized test result, depreciation, amortization and royalty expense. Costs associated with performing tests are recorded as the tests are processed.

Research and Development Expenses

Our research and development expenses primarily include personnel costs, laboratory supplies, reagents, and consulting costs associated with developing and validating new testing services.

Selling and Marketing Expenses

Our selling and marketing expenses consist primarily of sales commissions and support costs, salaries and related employee benefits, travel, and marketing costs for our commercial, business development and managed care functions.

General and Administrative Expenses

Our general and administrative expenses consist primarily of personnel costs, professional service fees and other costs related to our being a publicly-traded company.

Interest Expense

Interest expense primarily reflects interest on our notes payable - related party.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures in the financial statements. Critical accounting policies are those accounting policies that may be material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and that have a material impact on financial condition or operating performance. While we base our estimates and judgments on our experience and on various other factors that we believe to be reasonable under the circumstances, actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies used in the preparation of our financial statements require significant judgments and estimates:

·

Revenue Recognition

·

Accounts Receivable and Allowance for Doubtful Accounts

·

Stock-Based Compensation

·

Impairment of Long-Lived Assets

·

Accounting for Income Taxes

During the six months ended June 30, 2015, other than as discussed below, there were no significant changes in our critical accounting policies and estimates. Please refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2014 for a more complete discussion of our critical accounting policies.

Revenue Recognition

We recognize revenue from testing services in accordance with the Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”), 605, Revenue Recognition, which requires that four basic criteria be met before revenue can be recognized: (1) persuasive evidence that an arrangement exists; (2) delivery has occurred and title and the risks and rewards of ownership have been transferred to the client or services have been rendered; (3) the price is fixed or determinable; and (4) collectability is reasonably assured.

Revenues are recorded on an accrual basis when the contractual obligations are completed as tests are processed through the Company’s laboratory and test results are delivered to ordering physicians. Revenues are billed to various payors, including Medicare, contracted insurance companies, directly billed customers (UAMS, pharmaceutical companies, reference laboratories and hospitals) and non-contracted insurance companies. Revenues from Medicare, contracted insurance companies and directly billed customers are reported based on the contractual rate. The difference between the amounts billed and the contractual rates from Medicare and contracted insurance companies are recorded as contractual allowances at the same time the revenue is recognized, to arrive at reported net revenue. The contractual rate is based on established agreed upon rates between the Company and the respective payor. Directly billed customers are invoiced at the contractual rate by the Company. Revenues from non-contracted insurance companies are reported based on the amount expected to be collected, which is based on the historical collection experience of each payor or payor group, as appropriate, and anticipated effects of changes in the healthcare industry, if any. The difference between the amount billed and the amount estimated to be collected from non-contracted insurance companies is recorded as a contractual allowance at the same time the revenue is recognized, to arrive at reported net revenue. The Company does not record revenue from individuals for billings until cash is collected; as collectability is not assured at the time services are provided, therefore there are no accounts receivable from self-payors. Gross revenues from individuals have been immaterial to date.

The Company’s estimates of net revenue for non-contracted insurance companies are subject to change based on the contractual status and payment policies of the third-party payors with whom the Company deals. The Company regularly refines its estimates in order to make estimated revenue as accurate as possible based on its most recent collection experience with each third-party payor. The Company regularly reviews its historical collection experience for non-contracted payors and anticipated changes in the healthcare industry and adjusts expected revenues for current and subsequent periods accordingly, including previously recorded revenues related to outstanding accounts receivable for such non-contracted payors. During the three and six months ended June 30, 2015, net unfavorable changes in estimates were recorded to revenue related to non-contracted revenues recorded in the prior year of $43,000 and $73,000, respectively, and represented 15.9% and 26.9%, respectively, of the total non-contracted revenues for 2014. Although we regularly refine our estimates to reflect recent historical collection experience, if we have a similar cumulative percentage reduction of 26.9% in our estimated amount to be collected from non-contracted payors on the uncollected accounts receivable from non-contracted payors at June 30, 2015 of $210,000, this could result in a $57,000 unfavorable change in our financial position and results of operations.

Accounts Receivable and Allowance for Doubtful Accounts

We record accounts receivable net of an allowance for doubtful accounts. The Company estimates an allowance for doubtful accounts based on the aging of the accounts receivable and the historical collection experience for each of our contracted payors. When the amounts are determined to be uncollectible, they are expensed as bad debt and subsequently charged-off against the allowance. During the second quarters of 2015 and 2014, the Company recognized $4,000 and $0 in bad debt expense, respectively. During the first six months of 2015 and 2014, the Company recognized $28,000 and $0 in bad debt expense, respectively. At June 30, 2015 and December 31, 2014, the allowances for doubtful accounts were $7,000 and $0, respectively.

The following tables present our gross accounts receivable from customers outstanding by aging category reduced by total contractual allowances to arrive at the net accounts receivable balance at June 30, 2015 and December 31, 2014. Other than our direct bill customers, all of our receivables were pending approval by third-party payors as of the date that the receivables were recorded:

		June 30, 2015
(in thousands)		0 - 30 Days				31 - 60 Days				61 - 90 Days				Over 90 Days				Total
Medicare		$	75			$	31			$	16			$	24			$	146
Contracted insurance companies			20				4				4				42				70
Direct bill			172				15				46				-				233
Non-contracted insurance companies			190				180				192				1,075				1,637
Accounts receivable, gross			457				230				258				1,141				2,086
Less: contractual and doubtful account allowances			(224	)			(187	)			(187	)			(907	)			(1,505	)
Accounts receivable, net		$	233			$	43			$	71			$	234			$	581

 

		December 31, 2014
(in thousands)		0 - 30 Days				31 - 60 Days				61 - 90 Days				Over 90 Days				Total
Medicare		$	79			$	44			$	51			$	82			$	256
Contracted insurance companies			12				4				4				52				72
Direct bill			161				282				67				-				510
Non-contracted insurance companies			182				142				160				1,216				1,700
Accounts receivable, gross			434				472				282				1,350				2,538
Less: contractual allowances			(162	)			(113	)			(127	)			(1,048	)			(1,450	)
Accounts receivable, net		$	272			$	359			$	155			$	302			$	1,088

 

The days sales outstanding (“DSO”) was 72 days at June 30, 2015 compared to 84 days at December 31, 2014. The decrease in DSO is primarily due to improved collection of Medicare and our direct bill customers during the first six months of 2015 primarily as a result of improved collection procedures internally. Net revenues from private insurance payors was 11% and 18% of total net revenue during the first six months of 2015 and 2014, respectively. Since these customer are slower to pay, our accounts receivable over 90 days will increase if net revenues from these customers increase.

Results of Operations

Second Quarter of 2015 Compared to the Second Quarter of 2014

Net Revenue

Net revenue was $734,000 during the second quarter of 2015, a decrease of $540,000, or 42%, compared to $1.3 million during the second quarter of 2014. Net revenue and tests billed during the second quarters of 2015 and 2014 were as follows:

		Three Months Ended June 30,
		Net Revenue (in 000s)																Tests Billed
										Increase (Decrease)																Increase (Decrease)
		2015				2014				$				%				2015				2014				#				%
UAMS-sourced:
Research programs		$	405			$	805			$	(400	)			(50	)%			486				767				(281	)			(37	)%
Clinical patient revenue			125				249				(124	)			(50	)%			97				130				(33	)			(25	)%
Other US hospitals and direct billed customers			204				220				(16	)			(7	)%			187				115				72				63	%
Total		$	734			$	1,274			$	(540	)			(42	)%			770				1,012				(242	)			(24	)%

The net revenue recognized and number of tests reported and billed under the UAMS research programs decreased during the second quarter of 2015 compared to the same period for 2014, primarily due to the decrease in funds available at UAMS for such programs. We expect continued declining revenue from the UAMS research programs.

The number of tests we reported and billed for UAMS clinical patients decreased 25% during the second quarter of 2015 when compared to 2014 due to the normal fluctuation in patient census. The number of tests we billed for other U.S. hospitals and direct billed customers increased 63% during the second quarter of 2015 when compared to 2014 due to the expansion of our sales force and our increased marketing efforts. Included in the increase in other U.S. hospitals and direct billed customer tests reported is a 70% increase in tests sourced from other U.S. hospitals.

The net revenue recognized for UAMS clinical patients and other U.S. hospitals and direct billed customers during the second quarter of 2015 decreased 50% and 7%, respectively, from the net revenue recognized during the second quarter of 2014. The decrease is primarily attributable to a reduction in estimates used to calculate revenue for billings to non-contracted insurance payors in anticipation of the potential impact of the Affordable Care Act on utilization and review of our historical collection trends which includes non-contracted payors for whom we do not have collection experience, and $43,000 of unfavorable prior year adjustments in excess of amounts previously recorded. Due to the expanding salesforce and the consequent increase in new hospital customers from additional regions of the U.S., we expect the number of new payors to continue to increase for the remainder of 2015 which may affect our collection trends used to estimate revenue for billings to non-contracted insurance payors.

Cost of Revenue

Cost of revenue was $678,000, or 92% of net revenues, during the second quarter of 2015, a decrease of $276,000, or 29%, compared to $954,000, or 75% of net revenues, during the second quarter of 2014. The decrease was attributable to $248,000 in decreased personnel costs, primarily related to stock-based compensation expense and $53,000 in decreased material and supply costs due to a decrease in the total tests performed, partially offset by a $25,000 increase in other laboratory related expenses, including depreciation expense.

Selling and Marketing Expenses

Selling and marketing expenses were $574,000 during the second quarter of 2015, an increase of $508,000, or 770%, when compared to $66,000 during the second quarter of 2014. The increase was primarily attributed to a $329,000 increase in personnel costs related to expanding our sales and marketing function and establishing our managed care, commercial and business development functions, $48,000 in additional costs for an incentive plan, $12,000 in additional stock-based compensation expense, $30,000 for managed care consulting and $89,000 of expense for new marketing projects.

We plan to further expand our sales force and marketing expenditures in the future.

Research and Development Expenses

Research and development expenses were $194,000 during the second quarter of 2015, an increase of $66,000, or 52%, when compared to $128,000 during the second quarter of 2014. The increase was due to $130,000 in our increased usage of labor, materials and supplies for internal research projects, offset by a $64,000 decrease in stock-based compensation expense.

In the future, we expect research and development expenses to increase as we work to develop additional diagnostic tests and add indications to our MyPRS^® test. We cannot estimate the amounts we will need to invest in order to achieve the new indications or new tests, nor do we know if we will be successful in these endeavors.

General and Administrative Expenses

General and administrative expenses were $1.8 million during the second quarter of 2015, a decrease of $1.2 million, or 39%, when compared to $2.9 million during the second quarter of 2014. The decrease was primarily due to a $1.9 million decrease in stock-based compensation expense which was partially offset by $409,000 in increased personnel costs related to hiring our chief financial and information officers, and accounting, internal billing, information technology and administrative staff, $61,000 in additional costs for an incentive plan, $237,000 in higher legal, accounting and insurance expenses related to our being a publicly-traded company and $46,000 in higher information technology and administrative costs related to the operations of our new headquarters in Carlsbad, California established in October of 2014.

Interest Expense

Interest expense was $72,000 during the second quarter of 2015, compared to $478,000 during the second quarter of 2014. The decrease was primarily attributable to the Debt Conversion that occurred in June 2014.

 

First Six Months of 2015 Compared to the First Six Months of 2014

Net Revenue

Net revenue was $1.4 million during the first six months of 2015, a decrease of $986,000, or 42%, compared to $2.4 million during the first six months of 2014. Net revenue and tests billed during the first six months of 2015 and 2014 were as follows:

		Six Months Ended June 30,
		Net Revenue (in 000s)																Tests Billed
										Increase (Decrease)																Increase (Decrease)
		2015				2014				$				%				2015				2014				#				%
UAMS-sourced:
Research programs		$	825			$	1,470			$	(645	)			(44	)%			1,012				1,401				(389	)			(28	)%
Clinical patient revenue			204				445				(241	)			(54	)%			185				238				(53	)			(22	)%
Other US hospitals and direct billed customers			349				449				(100	)			(22	)%			350				240				110				46	%
Total		$	1,378			$	2,364			$	(986	)			(42	)%			1,547				1,879				(332	)			(18	)%

 

The net revenue recognized and number of tests reported and billed under the UAMS research programs decreased during the first six months of 2015 compared to first six months of 2014 primarily due to the decrease in funds available at UAMS for such programs. We expect continued declining revenue from the UAMS research programs.

The number of tests we reported and billed for UAMS clinical patients decreased 22% during the first six months of 2015 when compared to the first six months of 2014 due to the fluctuation in patient census. The number of tests we billed for other U.S. hospitals and direct billed customers increased 46% during the first six months of 2015 when compared to the first six months of 2014 due to the expansion of our sales force and our increased marketing efforts. Included in the increase in other U.S. hospitals and direct billed customer tests reported is a 54% increase in tests sourced from other U.S. hospitals.

The net revenue recognized for UAMS clinical patients and other U.S. hospitals and direct billed customers during the first six months of 2015 decreased 54% and 22%, respectively, from the net revenue recognized during the first six months of 2014. The decrease is primarily attributable to a reduction in estimates used to calculate revenue for billings to non-contracted insurance payors in anticipation of the potential impact of the Affordable Care Act on utilization and review of our historical collection trends which includes non-contracted payors for whom we do not have collection experience, and $73,000 of unfavorable prior year adjustments in excess of amounts previously recorded. Due to the expanding salesforce and the consequent increase in new hospital customers from additional regions of the U.S., we expect the number of new payors to continue to increase for the remainder of 2015 which may affect our collection trends used to estimate revenue for billings to non-contracted insurance payors.

Cost of Revenue

Cost of revenue was $1.4 million or 104% of net revenues, during the first six months of 2015, a decrease of $246,000, or 15%, compared to $1.7 million, or 71% of net revenues, during the first six months of 2014. The decrease was attributable to $176,000 in decreased stock-based compensation expense and $83,000 in decreased material and supply costs due to a decrease in the total tests performed, partially offset by a $13,000 increase in personnel and other laboratory related expenses, including depreciation expense.

Selling and Marketing Expenses

Selling and marketing expenses were $1.0 million during the first six months of 2015, an increase of $876,000, or 664%, when compared to $132,000 during the first six months of 2014. The increase was primarily attributed to a $600,000 increase in personnel costs related to expanding our sales and marketing function and establishing our managed care, commercial and business development functions, $109,000 in additional costs for an incentive plan, $23,000 in additional stock-based compensation expense, $55,000 for managed care consulting and $89,000 of expense for new marketing projects.

Research and Development Expenses

Research and development expenses were $293,000 during the first six months of 2015, an increase of $131,000, or 81%, when compared to $162,000 during the first six months of 2014. The increase is due to $179,000 in our increased usage of labor, materials and supplies for internal research projects, partially offset by a $48,000 decrease in stock-based compensation expense.

General and Administrative Expenses

General and administrative expenses were $3.7 million during the first six months of 2015, an increase of $377,000, or 11%, when compared to $3.4 million during the first six months of 2014. The increase was primarily attributable to $687,000 in increased personnel costs related to hiring our chief financial and information officers, and accounting, internal billing, information technology and administrative staff, $250,000 in additional costs for an incentive plan, $604,000 of increased legal, accounting and insurance expenses related to our being a publicly-traded company, $89,000 in increased information technology and administrative costs related to the operations of our new headquarters in Carlsbad, California established in October of 2014, partially offset by $1.3 million in decreased stock-based compensation expense.

Interest Expense

Interest expense was $94,000 during the first six months of 2015, compared to $1.0 million during the first six months of 2014. The decrease was primarily attributable to the Debt Conversion that occurred in June 2014.

Liquidity and Capital Resources

We had cash of $10.4 million at June 30, 2015 compared to $5.1 million at December 31, 2014. At June 30, 2015, we had working capital of $9.8 million.

On July 10, 2015, the Company filed a prospectus for the offering, issuance and sale of securities from time to time in one or more offerings (“Shelf Registration”) which was declared effective by the SEC on July 28, 2015. The amount of securities to be sold pursuant to the Shelf Registration is limited by our market capitalization. Concurrently with filing the Shelf Registration, we entered into a sales agreement with Cantor Fitzgerald & Co., to sell shares of our common stock, with aggregate gross sales proceeds of up to $4.45 million, from time to time, through an “at the market” equity offering program (the “ATM program”),

 

On February 20, 2015, we completed a public offering of 3,214,285 shares of our common stock, at $2.80 per share, for total cash proceeds of $7.8 million, which is net of $1.2 million in underwriter commissions and estimated offering expenses. On February 26, 2015, the underwriters exercised their overallotment option for 482,142 additional shares of our common stock, for total cash proceeds of $1.3 million, which is net of $95,000 in underwriter commissions.

Prior to our initial public offering (“IPO”) in June of 2014, our principal sources of cash consisted primarily of borrowings on our note payable to a related party. We received total cash proceeds of $6.1 million from our IPO, which is net of $2.4 million in underwriter commissions and offering expenses.

We expect that as our revenues grow, our operating expenses will grow and, as a result, we will need to generate significant additional net revenues to achieve profitability.

We have no material commitments for capital expenditures at this time.

Although we are forecasting continued losses and negative cash flows as we continue to fund our selling and marketing activities and research and development programs, we expect that we will have sufficient cash on hand to support operations for at least one year following the date of this report. Going forward, as we continue our expansion, we may seek additional financing and/or strategic investments. However, there can be no assurance that any additional financing or strategic investments will be available on acceptable terms, if at all. If events or circumstances occur such that we do not obtain additional funding, we will most likely be required to reduce our plans and/or certain discretionary spending, which could have a material adverse effect on our ability to achieve our intended business objectives. Our financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern. If we cannot continue as a viable entity, our stockholders may lose some or all of their investment in us.

Operating activities

Cash used by operations during the first six months of 2015 was $3.3 million, compared to $385,000 during the first six months of 2014. Our use of cash during the first six months of 2015 was primarily a result of our higher net loss during the first six months of 2015, when compared to 2014, and a reflection of our investment in all areas of the Company.

Investing activities

Net cash used by investing activities during the first six months of 2015 and 2014 of $68,000 and $4,000, respectively, was for the purchase of property and equipment.

As of this time, we plan to focus on our growth strategies and do not plan to use a material amount of our cash resources in investing activities for the remainder of 2015.

Financing activities

Net cash provided by financing activities during the first six months of 2015 of $8.7 million consisted primarily of the net proceeds from our public offering of common stock in February 2015 of $9.1 million, partially offset by $346,000 used to repurchase shares from employees to satisfy tax withholding obligations for restricted stock awards.

Net cash provided by financing activities during the first six months of 2014 of $7.9 million consisted primarily of the net proceeds from our initial public offering of common stock in June 2014 of $7.1 million and $795,000 in proceeds from our note payable-related party.

The JOBS Act

In April 2012, the JOBS Act was enacted. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. The Company has elected to avail itself of the extended transition period for adopting new or revised accounting standards. As a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable to smaller reporting companies.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

In 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, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective, at the reasonable assurance level, as of the end of the period covered by this report to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934, as amended, (1) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (2) is accumulated and communicated to management, including our Chief Executive Officer and our Chief Financial Officer as appropriate to allow timely decisions regarding required disclosure.

Internal Control Over Financial Reporting

We are not required to comply with Section 404 of the Sarbanes-Oxley Act under applicable rules for newly public companies and are therefore not required to make an assessment of the effectiveness of our internal control over financial reporting. As a result, our management has not yet performed an evaluation of our internal control over financial reporting. Further, our independent registered public accounting firm is not yet required to, nor have they been engaged to express, nor have they expressed, an opinion on the effectiveness of our internal control over financial reporting.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during the period covered by this Quarterly Report on Form 10-Q.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

We are not currently a party to any legal proceedings.

 

Item 1A. Risk Factors

There have been no material changes to our Risk Factors, as disclosed in our Annual Report on Form 10-K filed with the SEC on March 27, 2015.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Unregistered Sales of Equity Securities

None.

Use of Proceeds

On June 23, 2014, we completed our IPO pursuant to which we offered and sold 850,000 shares of our common stock at a public offering price of $10.00 per share (for an aggregate offering price of $8,500,000), pursuant to the Company’s Registration Statement on Form S-1 (File No. 333-194668), which was declared effective by the Securities and Exchange Commission (“SEC”) on June 17, 2014. After deducting underwriting discounts and commissions of approximately $595,000, and other offering expenses payable by us of approximately $1,761,000, the Company received approximately $6,144,000 in net cash proceeds. Aegis Capital Corp. acted as the sole book-running manager for the offering.

From the closing date of our IPO through June 30, 2015, we used $291,000 to purchase property and equipment, and $5.5 million to fund our cash losses from operations. No payments were made by us to directors, officers or persons owning ten percent or more of our common stock or to their associates, or to our affiliates, other than payments in the ordinary course of business to officers for salaries and directors for board of directors’ fees.

There has been no material change in the planned use of proceeds from our IPO as described in our final prospectus filed with the SEC on June 19, 2014 pursuant to Rule 424(b). Pending the uses described, we have invested the remaining net proceeds in our operating cash account.

Item 6. Exhibits

The exhibits listed below are required by Item 601 of Regulation S-K. Each management contract or compensatory plan or arrangement required to be filed as an exhibit to this report has been identified.

Exhibit Number		Description of Exhibit
31.1		Certification of Principal Executive Officer pursuant to Rule13a-14(a) and Rule 15d-14(a) of the Securities and Exchange Act, as amended.
31.2		Certification of Principal Financial Officer pursuant to Rule13a-14(a) and Rule 15d-14(a) of the Securities and Exchange Act, as amended.
32*		Section 1350 Certification.
101.INS**		XBRL Instance Document
101.SCH**		XBRL Taxonomy Extension Schema
101.CAL**		XBRL Taxonomy Extension Calculation Linkbase
101.DEF**		XBRL Taxonomy Extension Definition Linkbase
101.LAB**		XBRL Taxonomy Extension Label Linkbase
101.PRE**		XBRL Taxonomy Extension Presentation Linkbase

__________________

*

This certification is being furnished pursuant to 18 U.S.C. Section 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Registrant, whether made before or after the date hereof.

**

In accordance with Rule 406T of Regulation S-T, the Interactive Data Files in Exhibit 101 are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Exchange Act of 1934, as amended, and otherwise are not subject to liability under these sections.

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: August 14, 2015		SIGNAL GENETICS, INC.
		By:	/S/    Samuel D. Riccitelli
			Samuel D. Riccitelli, President and Chief Executive Officer

 

 

 

 

 

 

 

 

 

25