Note 3 - Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements are prepared in accordance with generally accepted accounting standards in the United States (“U.S. GAAP”). The consolidated financial statements consolidate the operations of all controlled subsidiaries; all intercompany activity is eliminated. Certain prior period information has been reclassified to conform to the current period presentation.
Foreign Currency
AdvanDx A/S is located in Copenhagen, Denmark and uses the Danish Kroner as its functional currency. As a result, all assets and liabilities are translated into U.S. dollars based on exchange rates at the end of the reporting period. Income and expense items are translated at the average exchange rates prevailing during the reporting period. Translation adjustments are reported in accumulated other comprehensive income/(loss), a component of stockholders' equity. Foreign currency translation adjustments are the sole component of accumulated other comprehensive loss at December 31, 2016 and 2015.
Foreign currency transaction gains and losses, excluding gains and losses on intercompany balances where there is no current intent to settle such amounts in the foreseeable future, are included in the determination of net loss. Unless otherwise noted, all references to "$" or "dollar" refer to the United States dollar.
Use of Estimates
In preparing financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In the accompanying consolidated financial statements, estimates are used for, but not limited to, share-based compensation, allowances for doubtful accounts and inventory obsolescence, valuation of derivative financial instruments, beneficial conversion features of convertible debt, deferred tax assets and liabilities and related valuation allowance, and depreciation and amortization and estimated useful lives of long-lived assets. Actual results could differ from those estimates.
Fair value of financial instruments
All financial instruments classified as current assets and liabilities are carried at cost, which approximates fair value, because of the short-term maturities of those instruments.
For additional fair value disclosures, see Note 13.
Cash and cash equivalents and restricted cash
The Company considers all highly liquid instruments with original maturities of three months or less to be cash equivalents. The Company has cash and cash equivalents deposited in financial institutions in which the balances occasionally exceed the federal government agency (FDIC) insured limits of $250,000. The Company has not experienced any losses in such accounts and management believes it is not exposed to any significant credit risk.
As of December 31, 2016 and 2015, the Company has funds totaling $243,380, which are required as collateral for letters of credit benefiting its landlords and for credit card processors. These funds are reflected in other noncurrent assets on the accompanying consolidated balance sheets.
Accounts Receivable
The Company's accounts receivable result from revenues earned but not collected from customers. Credit is extended based on an evaluation of a customer's financial condition and, generally, collateral is not required. Accounts receivable are due within 30 to 60 days and are stated at amounts due from customers. The Company evaluates if an allowance is necessary by considering a number of factors, including the length of time accounts receivable are past due, the Company's previous loss history and the customer's current ability to pay its obligation. If amounts become uncollectible, they are charged to operations when that determination is made. The allowance for doubtful accounts was $26,716 and $15,596 as of December 31, 2016 and 2015, respectively.
At December 31, 2016, the Company had accounts receivable from one customer, a related party, which individually represented 25% of total accounts receivable. At December 31, 2015, the Company had accounts receivable from one customer which individually represent 25% of total accounts receivable.
No individual customer represented in excess of 10% of revenues for year ended
December 31, 2016. For the year ended December 31, 2015, revenue earned from Hitachi High-Technologies Corporation ("Hitachi") represented 11% of total revenues.
Inventory
Inventories are valued using the first-in, first-out method and stated at the lower of cost or market and consist of the following:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Raw materials and supplies
|
|
$
|
479,479
|
|
|
$
|
362,526
|
|
Work-in process
|
|
|
27,422
|
|
|
|
150,369
|
|
Finished goods
|
|
|
185,467
|
|
|
|
313,117
|
|
Total
|
|
$
|
692,368
|
|
|
$
|
826,012
|
|
Inventory includes reagents and components for QuickFISH and PNA FISH kit products, Argus Whole Genome Mapping
Systems
, reagents and supplies used for Argus consumable kits, and reagents and supplies used for the Company's laboratory services.
Inventory reserves for obsolescence and expirations were $704,516 and $591,051 at December 31, 2016 and 2015, respectively.
Long-lived assets
Property and equipment
Property and equipment is stated at cost and depreciated on a straight-line basis over the estimated useful lives of the related assets. The estimated service lives approximate three to five years. Depreciation expense was $388,231 and $500,467 for the years ended December 31, 2016 and 2015, respectively. Property and equipment consisted of the following at December 31, 2016 and 2015:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Laboratory and manufacturing equipment
|
|
$
|
3,785,133
|
|
|
$
|
3,734,044
|
|
Office furniture and equipment
|
|
|
688,952
|
|
|
|
701,557
|
|
Computers and network equipment
|
|
|
1,472,144
|
|
|
|
1,563,177
|
|
Leasehold improvements
|
|
|
662,506
|
|
|
|
659,949
|
|
|
|
|
6,608,735
|
|
|
|
6,658,727
|
|
Less accumulated depreciation
|
|
|
(5,808,012
|
)
|
|
|
(5,584,017
|
)
|
Property and equipment, net
|
|
$
|
800,723
|
|
|
$
|
1,074,710
|
|
In 2012, the Company began to provide Argus™ Whole Genome Systems under its Argus Reagent Rental Program to customers, in which the Company retains title without requiring customers to purchase the equipment or enter into an equipment lease or rental contract. The costs associated with these instruments are capitalized and charged to sales and marketing on a straight-line basis over the estimated useful life of the instrument, which is approximately four years. During the years ended December 31, 2016 and 2015, sales and marketing expenses related to these costs were $0 and approximately $175,000, respectively. The costs to maintain these systems are charged to operations as incurred.
Property and equipment is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. Recoverability measurement and estimating of undiscounted cash flows is done at the lowest possible level for which we can identify assets. If such assets are considered to be impaired, impairment is recognized as the amount by which the carrying amount of assets exceeds the fair value of the assets. During the years ended December 31, 2016 and 2015, the Company determined that its property and equipment was not impaired.
Intangible assets and goodwill
Intangible assets and goodwill as of December 31, 2016 were acquired as part of the Merger, and consist of finite-lived intangible assets and goodwill.
Finite-lived intangible assets
Finite-lived intangible assets include trademarks, developed technology and customer relationships, and consisted of the following as of December 31, 2016 and 2015:
|
|
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
|
Net Balance
|
|
|
Accumulated
Amortization
|
|
|
Net Balance
|
|
Trademarks and tradenames
|
|
$
|
461,000
|
|
|
$
|
(67,575
|
)
|
|
$
|
393,425
|
|
|
$
|
(21,471
|
)
|
|
$
|
439,529
|
|
Developed technology
|
|
|
458,000
|
|
|
|
(95,898
|
)
|
|
|
362,102
|
|
|
|
(30,474
|
)
|
|
|
427,526
|
|
Customer relationships
|
|
|
1,094,000
|
|
|
|
(228,529
|
)
|
|
|
865,471
|
|
|
|
(72,241
|
)
|
|
|
1,021,759
|
|
|
|
$
|
2,013,000
|
|
|
$
|
(392,002
|
)
|
|
$
|
1,620,998
|
|
|
$
|
(124,186
|
)
|
|
$
|
1,888,814
|
|
Finite-lived intangible assets are amortized over their estimated useful lives. The estimated useful life of trademarks was 10 years, developed technology was 7 years, and customer relationships was 7 years.
The Company reviews the useful lives of intangible assets when events or changes in circumstances occur which may potentially impact the estimated useful life of the intangible assets.
Total amortization expense of intangible assets was $267,816 and $124,186 for the years ended December 31, 2016 and 2015, respectively. Amortization of intangible assets is expected to be approximately $268,000 per year for the next five years.
Finite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If any indicators were present, the Company would test for recoverability by comparing the carrying amount of the asset to the net undiscounted cash flows expected to be generated from the asset. If those net undiscounted cash flows do not exceed the carrying amount (i.e., the asset is not recoverable), the Company would perform the next step, which is to determine the fair value of the asset and record an impairment loss, if any. During years ended December 31, 2016 and 2015, the Company determined that its finite-lived intangible assets were not impaired.
In accordance with ASC 360-10, the Company records impairment losses on long-lived assets used in operations when events and circumstances indicate that long-lived assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. During the fourth quarter of 2016, events and circumstances indicated the Company's intangible assets might be impaired. However, management's estimate of undiscounted cash flows indicated that such carrying amounts were expected to be recovered. Nonetheless, it is reasonably possible that the estimate of undiscounted cash flows may change in the near term resulting in the need to write down those assets to fair value. Management's estimate of cash flows might change if the development of the Company's automated rapid pathogen identification product technological advances does not progress as planned, the timeline of development is delayed, there are changes to the estimates of the future marketability of this product or if the Company cannot obtain sufficient funding to pay for its development.
Goodwill
Goodwill represents the excess of the purchase price for AdvanDx over the fair values of the acquired tangible or intangible assets and assumed liabilities. Goodwill is not tax deductible in any relevant jurisdictions.
The Company conducts an impairment test of goodwill on an annual basis as of October 1 of each year, and will also conduct tests if events occur or circumstances change that would, more likely than not, reduce the Company's fair value below its net equity value. As of December 31, 2016, the Company determined that its goodwill was not impaired.
Deferred rent
Deferred rent is recorded and amortized to the extent the total minimum rental payments allocated to the current period on a straight-line basis exceed or are less than the cash payments required.
Revenue recognition
The Company recognizes revenue primarily from sales of its products and services when the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred; the selling price is fixed or determinable; and collectability is reasonably assured. At times, the Company sells products and services, or performs software development, under multiple-element arrangements with separate units of accounting; in these situations, total consideration is allocated to the identified units of accounting based on their relative fair value and revenue is then recognized for each unit based on its specific characteristics.
Amounts billed to customers for shipping and handling are included in revenue when the related product or service revenue is recognized. Shipping and handling costs are included in cost of products sold.
Revenue from sales of QuickFISH, PNA FISH and XpressFISH diagnostic test products
Revenue is recognized upon shipment to the customer.
Revenue from providing laboratory services
The Company recognizes revenue associated with laboratory services contracts when the service has been performed and reports are made available to the customer.
Revenue from funded software development arrangements
The Company's funded software development arrangements generally consist of multiple elements. Total arrangement consideration is allocated to the identified units of accounting based on their relative selling prices and revenue is then recognized for each unit based on its specific characteristics. When funded software development arrangements include substantive research and development milestones, revenue is recognized for each such milestone when the milestone is achieved and is due and collectible. Milestones are considered substantive if all of the following conditions are met: (1) the milestone is nonrefundable; (2) achievement of the milestone was not reasonably assured at the inception of the arrangement; (3) substantive effort is involved to achieve the milestone; and (4) the amount of the milestone appears reasonable in relation to the effort expended, the other milestones in the arrangement and the related risk associated with achievement of the milestone.
Revenue from license arrangements
The Company recognizes revenue from licenses of its technologies over the applicable license term.
Revenue from sales of the Argus System
When an Argus System is sold without the Genome Builder software, total arrangement consideration is recognized as revenue when the system is delivered to the customer. Ancillary performance obligations, including installation, limited customer training and limited consumables, are considered inconsequential and are combined with the Argus System as one unit of accounting.
When an Argus System is sold with the Genome Builder software in a multiple-element arrangement, total arrangement consideration is allocated to the Argus System and to the Genome Builder software based on their relative selling prices. Selling prices are determined based on sales of similar systems to similar customers and, where no sales have occurred, on management's best estimate of the expected selling price relative to similar products. Revenue related to the Argus System is recognized when it is delivered to the customer; revenue for the Genome Builder software is recognized when it is delivered to the customer.
Revenue from sales of Genome Builder Software and consumables (on a stand-alone basis)
Revenue is recognized for Genome Builder Software and for consumables, when sold on a standalone basis, upon delivery to the customer.
Revenue from extended warranty service contracts
The Company recognizes revenue associated with extended warranty service contracts over the service period in proportion to the costs expected to be incurred over that same period.
Research and development costs
Research and development costs are expensed as incurred. Research and development costs primarily consist of salaries and related expenses for personnel, other resources, laboratory supplies, fees paid to consultants and outside service partners.
Share-based compensation
Share-based compensation expense is recognized at fair value. The fair value of share-based compensation to employees and directors is estimated, on the date of grant, using the Black-Scholes model. The resulting fair value is recognized ratably over the requisite service period, which is generally the vesting period of the option. For all time-vesting awards granted, expense is amortized using the straight-line attribution method.
The Company accounts for forfeitures as they occur.
Option valuation models, including the Black-Scholes model, require the input of highly subjective assumptions, and changes in the assumptions used can materially affect the grant-date fair value of an award. These assumptions include the risk-free rate of interest, expected dividend yield, expected volatility and the expected life of the award. A discussion of management's methodology for developing each of the assumptions used in the Black-Scholes model is as follows:
Fair value of common stock
For periods prior to the Company's IPO, given the lack of an active public market for the common stock, the Company's board of directors determined the fair value of the common stock. In the absence of a public market, and as an emerging company with no significant revenues, the Company believed that it was appropriate to consider a range of factors to determine the fair market value of the common stock at each grant date. The factors included: (1) the achievement of clinical and operational milestones by the Company; (2) the status of strategic relationships with collaborators; (3) the significant risks associated with the Company's stage of development; (4) capital market conditions for life science and medical diagnostic companies, particularly similarly situated, privately held, early stage companies; (5) the Company's available cash, financial condition and results of operations; (6) the most recent sales of the Company's preferred stock; and (7) the preferential rights of the outstanding preferred stock. Since the IPO, the Company uses the quoted market price of its common stock as its fair value.
Expected volatility
Volatility is a measure of the amount by which a financial variable such as a share price has fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period. Until a significant trading history for its common stock develops, the Company has identified several public entities of similar size, complexity and stage of development; accordingly, historical volatility has been calculated using the volatility of this peer group.
Expected dividend yield
The Company has never declared or paid dividends on its common stock and has no plans to do so in the foreseeable future.
Risk-free interest rate
This is the U.S. Treasury rate for the day of each option grant during the year, having a term that most closely resembles the expected term of the option.
Expected term
This is the period of time that the options granted are expected to remain unexercised. Options granted have a maximum term of 10 years. The Company estimates the expected term of the option to be 6.25 years for options with a standard four-year vesting period, using the simplified method. Over time, management will track actual terms of the options and adjust their estimate accordingly so that estimates will approximate actual behavior for similar options.
Income taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to temporary differences between financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established when necessary to reduce deferred income tax assets to the amount expected to be realized.
Tax benefits are initially recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions are initially, and subsequently, measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the tax authority, assuming full knowledge of the position and all relevant facts.
The Company had federal net operating loss ("NOL") carryforwards of $150,950,436 and $132,359,334 at December 31, 2016 and 2015, respectively. Despite the NOL carryforwards, which begin to expire in 2022, the Company may have future tax liability due to alternative minimum tax or state tax requirements. Also, use of the NOL carryforwards may be subject to an annual limitation as provided by Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"). To date, the Company has not performed a formal study to determine if any of its remaining NOL and credit attributes might be further limited due to the ownership change rules of Section 382 or Section 383 of the Code. The Company will continue to monitor this matter going forward. There can be no assurance that the NOL carryforwards will ever be fully utilized.
Loss per share
Basic loss per share is computed by dividing net loss available to common stockholders by the weighted average number of shares of common stock outstanding during the period.
For periods of net income, and when the effects are not anti-dilutive, diluted earnings per share is computed by dividing net income available to common stockholders by the weighted-average number of shares outstanding plus the impact of all potential dilutive common shares, consisting primarily of common stock options and stock purchase warrants using the treasury stock method, and convertible preferred stock and convertible debt using the if-converted method.
For periods of net loss, diluted loss per share is calculated similarly to basic loss per share because the impact of all dilutive potential common shares is anti-dilutive. The number of anti-dilutive shares, consisting of (i) common stock options,
(ii) stock purchase warrants, and (iii) restricted stock units representing the right to acquire shares of common stock which have been excluded from the computation of diluted loss per share, was 13.5 million shares and 6.0 million shares as of December 31, 2016 and 2015, respectively
. The Company's convertible preferred stock, prior to its conversion, contained non-forfeitable rights to dividends, and therefore was considered to be a participating security; the calculation of basic and diluted income (loss) per share excludes net income (but not net loss) attributable to the convertible preferred stock from the numerator and excludes the impact of those shares from the denominator in periods prior to the IPO.
Recent accounting pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued guidance for revenue recognition for contracts, superseding the previous revenue recognition requirements, along with most existing industry-specific guidance. The guidance requires an entity to review contracts in five steps: 1) identify the contract, 2) identify performance obligations, 3) determine the transaction price, 4) allocate the transaction price, and 5) recognize revenue. The new standard will result in enhanced disclosures regarding the nature, amount, timing, and uncertainty of revenue arising from contracts with customers. In August 2015, the FASB issued guidance approving a one-year deferral, making the standard effective for reporting periods beginning after December 15, 2017, with early adoption permitted only for reporting periods beginning after December 15, 2016. In March 2016, the FASB issued guidance to clarify the implementation guidance on principal versus agent considerations for reporting revenue gross rather than net, with the same deferred effective date. In April 2016, the FASB issued guidance to clarify the identification of performance obligations and licensing arrangements. In May 2016, the FASB issued guidance addressing the presentation of sales and other similar taxes collected from customers, providing clarification of the collectability criterion assessment, as well as clarifying certain transition requirements. The Company is currently evaluating the impact, if any, that this guidance will have on its consolidated financial statements.
In August 2014, the FASB issued guidance requiring management to evaluate on a regular basis whether any conditions or events have arisen that could raise substantial doubt about the entity's ability to continue as a going concern. The guidance 1) provides a definition for the term "substantial doubt," 2) requires an evaluation every reporting period, interim periods included, 3) provides principles for considering the mitigating effect of management's plans to alleviate the substantial doubt, 4) requires certain disclosures if the substantial doubt is alleviated as a result of management's plans, 5) requires an express statement, as well as other disclosures, if the substantial doubt is not alleviated, and 6) requires an assessment period of one year from the date the financial statements are issued.
This guidance is effective for the annual periods ending after December 15, 2016 and for annual and interim reporting periods thereafter.
The Company has made the appropriate disclosures required by this guidance. The adoption of this guidance has had no financial statement impact.
In April 2015, the FASB issued accounting guidance requiring that debt issuance costs related to a recognized liability be presented on the balance sheet as a direct reduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected. The standard is effective for reporting periods beginning after December 15, 2015. The Company adopted this guidance effective January 1, 2016 on a retrospective basis, and all periods are presented under this guidance.
In April 2015, the FASB issued guidance as to whether a cloud computing arrangement (e.g., software as a service, platform as a service, infrastructure as a service, and other similar hosting arrangements) includes a software license and, based on that determination, how to account for such arrangements. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The guidance is effective for reporting periods beginning after December 15, 2015, and can be adopted on either a prospective or retrospective basis. The Company adopted this guidance for the year ended December 31, 2016, on a prospective basis. The adoption of this new guidance did not have a material impact on the Company's consolidated financial statements.
In July 2015, the FASB issued accounting guidance for inventory. Under the guidance, an entity should measure inventory within the scope of this guidance at the lower of cost and net realizable value, except when inventory is measured using LIFO or the retail inventory method. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. In addition, the FASB has amended some of the other inventory guidance to more clearly articulate the requirements for the measurement and disclosure of inventory. The standard is effective for reporting periods beginning after December 15, 2016. The amendments in this pronouncement should be applied prospectively, with earlier application permitted. The Company is currently evaluating the impact, if any, that this new accounting pronouncement will have on its consolidated financial statements.
In February 2016, the FASB issued guidance for the accounting for leases. The guidance requires lessees to recognize assets and liabilities related to long-term leases on the consolidated balance sheets and expands disclosure requirements regarding leasing arrangements. The guidance is effective for reporting periods beginning after December 15, 2018 and early adoption is permitted. The guidance must be adopted on a modified retrospective basis and provides for certain practical expedients. The Company is currently evaluating the impact, if any, that this new accounting pronouncement will have on its consolidated financial statements.
In March 2016, the FASB issued guidance simplifying the accounting for and financial statement disclosure of stock-based compensation awards. Under the guidance, all excess tax benefits and tax deficiencies related to stock-based compensation awards are to be recognized as income tax expenses or benefits in the income statement and excess tax benefits should be classified along with other income tax cash flows in the operating activities section of the statement of cash flows. Under the guidance, companies can also elect to either estimate the number of awards that are expected to vest or account for forfeitures as they occur. In addition, the guidance amends some of the other stock-based compensation awards guidance to more clearly articulate the requirements and cash flow presentation for withholding shares for tax-withholding purposes. The guidance is effective for reporting periods beginning after December 15, 2016 and early adoption is permitted, though all amendments of the guidance must be adopted in the same period. The Company elected to adopt the guidance effective for the fiscal year ended December 31, 2016 and apply it retrospectively for all periods presented.
This has not materially impacted the Company's consolidated results of operations, financial position or cash flows.
The Company has evaluated all other issued and unadopted Accounting Standards Updates and believes the adoption of these standards will not have a material impact on its results of operations, financial position, or cash flows.
Note 4 – Business Combination
On July 14, 2015, the Company acquired 100% of the capital stock of AdvanDx in the Merger in a taxable transaction. AdvanDx researches, develops and markets advanced IVD kits for the diagnosis and prevention of infectious diseases, and sells its products principally to hospitals and clinical laboratories in the United States and Europe. The Company acquired AdvanDx principally to use AdvanDx's diagnostic capabilities with respect to
MDROs
and leverage AdvanDx's relationships with hospitals and clinical laboratories to accelerate the sales of OpGen's products and services.
Pursuant to an Agreement and Plan of Merger (the "Merger Agreement"), Velox Acquisition Corp. merged with and into AdvanDx, Inc. with AdvanDx, Inc. surviving as a wholly owned subsidiary of the Company in accordance with the General Corporation Law of the State of Delaware. Under the terms of the Merger Agreement, the merger consideration consisted of an aggregate 681,818 shares of the Company's common stock with a value of $2.6 million (the "Merger Consideration"), which Merger Consideration was distributed in accordance with the liquidation preferences set forth in the AdvanDx, Inc. Restated Certificate of Incorporation, as amended.
The Company accounted for its acquisition of AdvanDx by recording all tangible and intangible assets acquired and liabilities assumed at their estimated fair values on the acquisition date, with the remaining unallocated purchase price recorded as goodwill.
The fair value assigned to identifiable intangible assets acquired was determined using an income approach for trade names and customer relationships, and a cost approach for technology. The Company received carryover tax basis in the acquired assets and liabilities and no tax basis in the intangible assets (including goodwill) established on the acquisition date. As a result, the Company recognized deferred tax assets related to foreign taxing jurisdictions of $4.3 million (fully offset by a corresponding valuation allowance) and net deferred tax liabilities of $0.1 million in the U.S. taxing jurisdiction. The net deferred tax liability in the U.S. taxing jurisdiction resulted in an income tax benefit related to a reduction in the Company's previously established valuation allowance (which reduction is accounted for outside of purchase accounting). The following represents the allocation of the purchase price (as adjusted for measurement period adjustments):
Total purchase price - fair value of common stock issued
|
|
$
|
2,584,090
|
|
Fair value of tangible assets acquired:
|
|
|
|
|
Cash
|
|
$
|
1,367,211
|
|
Receivables
|
|
|
536,406
|
|
Inventory
|
|
|
881,273
|
|
Property and equipment
|
|
|
245,479
|
|
Other assets
|
|
|
359,587
|
|
Fair value of identifiable intangible assets acquired:
|
|
|
|
|
Customer relationships
|
|
|
1,094,000
|
|
Developed technology
|
|
|
458,000
|
|
Trademarks and tradenames
|
|
|
461,000
|
|
Fair value of goodwill
|
|
|
600,814
|
|
Deferred tax liabilities, net
|
|
|
129,095
|
|
Fair value of liabilities assumed
|
|
|
3,290,585
|
|
|
|
$
|
2,584,090
|
|
The total consideration paid in the acquisition exceeded the estimated fair value of the tangible and identifiable intangible
assets
acquired and liabilities assumed, resulting in approximately $0.6 million of goodwill. Goodwill, primarily related to expected synergies gained from combining operations, sales growth from future product offerings and customers, together with certain intangible assets that do not qualify for separate recognition, including assembled workforce, is not tax deductible.
Adjustments to goodwill
In the fourth quarter of 2015, the Company adopted new accounting guidance with respect to the accounting for measurement period adjustments resulting from business combinations. Under the new guidance, the Company is required to recognize adjustments to provisional amounts identified during the measurement period in the reporting period in which the adjustments are determined and disclose the portion of the amount recorded in current-period losses by line item that would have been recorded in previous reporting periods if the adjustment had been recognized as of the acquisition date.
During the fourth quarter of 2015, as a result of obtaining new information about facts and circumstances that existed as of the acquisition date, the Company adjusted the provisional estimated fair values of certain acquired assets and liabilities acquired in the Merger, resulting in an increase in goodwill recognized of $345,781. During the first quarter of 2016, the Company identified an additional adjustment to the provisional estimated fair values, resulting in a decrease in goodwill recognized of $36,714
.
Pro Forma Disclosures (unaudited)
The following unaudited pro forma financial information summarizes the results of operations for the year ended December 31, 2015 as if the Merger had been completed as of January 1, 2015. Pro forma information primarily reflects
adjustments
relating to (i) elimination of the interest on AdvanDx's outstanding debt, and (ii) the amortization
of
intangibles acquired. The pro forma amounts do not purport to be indicative of the results that would have actually been obtained if the acquisition occurred as of January 1, 2014 or that may be obtained in the future:
|
December 31,
|
|
Unaudited pro forma results
|
2015
|
|
Revenues
|
|
$
|
5,231,844
|
|
Net loss
|
|
$
|
(20,751,552
|
)
|
Net loss per share
|
|
$
|
(2.52
|
)
|
Note 5 – Merck GHI Financing
On July 14, 2015, as a condition of the Merger, the Company entered into the Purchase Agreement with Merck GHI, pursuant to which Merck GHI purchased 1,136,364 shares of common stock of the Company at $4.40 per share for gross proceeds of $5.0 million. Pursuant to the Purchase Agreement, the Company also issued to Merck GHI a 8% Senior Secured Promissory Note (the "Merck Note") in the principal amount of $1.0 million with a two-year maturity date from the date of issuance. The Company's obligations under the Merck Note are secured by a lien on all of the Company's assets. Under the Purchase Agreement, Merck GHI has the right to participate in future securities offerings made by the Company. Also in July 2015, the Company entered into a Registration Rights Agreement with Merck GHI and the AdvanDx stockholders who received shares of the Company's common stock in the Merger, which will require the Company to register for resale by such holders in the future, such shares of Company common stock that cannot be sold under an exemption from such registration.
The Company incurred issuance costs of approximately $50,000 related to the financing. Approximately $8,000 of the issuance costs were deferred as debt issuance costs and netted against notes payable in the accompanying consolidated balance sheets as a result of the Company's adoption of the new accounting guidance in 2016 (see Note 3), and are being amortized as interest expense over the life of the Merck Note. The remaining $42,000 of issuance costs were charged to additional paid-in capital.
Note 6 - Redeemable Convertible Preferred Stock
All shares of Series A Preferred Stock (including those shares issued in connection with the conversion of the 2014 and 2015
convertible
debt) were converted into 7,374,852 shares of common stock in connection with the Company's IPO (see Notes 7 and 8). Before such conversion, the Series A Preferred Stock was redeemable at the option of the holders of 70% of the outstanding shares of Series A Preferred Stock, subject to certain additional requirements. The Company's redeemable convertible preferred stock was classified as temporary equity due to redemption provisions outside of the Company's control.
The Company issued 1,999,864 shares of Series A Preferred Stock in December 2013 at $1.00 per share in exchange for $1,999,864 in
convertible
promissory notes. In February 2014, the Company sold 1,405,096 shares of Series A redeemable convertible preferred stock for gross proceeds of $1,405,096. In April 2014, the Company sold an additional 594,904 shares of Series A Preferred Stock for gross proceeds of $594,904. The Company incurred issuance costs of $62,098 related to the 2014 Series A Preferred Stock sales.
The
following
table presents the changes in the Series A Preferred Stock during 2015:
|
|
Shares
|
|
|
Amount
|
|
Balance at December 31, 2014
|
|
|
3,999,864
|
|
|
$
|
4,564,899
|
|
2015 Accretion
|
|
|
—
|
|
|
|
243,762
|
|
2015 Conversions
|
|
|
(3,999,864
|
)
|
|
|
(4,808,661
|
)
|
Balance at December 31, 2015
|
|
|
—
|
|
|
$
|
—
|
|
The Series A Preferred Stock had the right to receive non-cumulative dividends, at a rate of 8% per annum, when and if
declared
by the board of directors. The Series A Preferred Stock had preference of payment over all other classes and series of capital stock of the Company with respect to dividends, payment on liquidation and payment on redemption. The liquidation and redemption preferences were at two times the Series A Preferred Stock purchase price. The Series A preferred stockholders were entitled to vote on all matters that come to stockholders on an as-converted basis with holders of the common stock. In addition, the Series A Preferred Stock had broad based anti-dilution rights.
The holders of Series A Preferred Stock had the right to convert such shares, at their option and at any time, into shares of common stock at the then-applicable conversion rate, as defined. The initial conversion rate was one common share for each preferred share, which may be adjusted for specified dilutive transactions. Beginning in
December
2019, the Company may have been obligated to redeem shares of Series A Preferred Stock, if requested, by holders of at least 70% of the then-outstanding shares of preferred stock. The redemption, if requested, would have taken place in three equal annual installments. Series A Preferred Stock would have been redeemed at two times the original issue price per share plus all accrued and unpaid dividends. The redemptions were subject to certain equity adjustments for specified anti-dilution transactions, as defined.
Note 7 – Debt
As of December 31, 2016, the Company's outstanding debt consisted of the $1.0 million Merck Note that is due in July 2017 (see Note 5). As of December 31, 2015, debt outstanding consisted of the $1.0 million Merck Note.
Demand notes
In the fourth quarter of 2014 and first quarter of 2015, the Company raised a total of $2.3 million through the issuance of short-term demand notes. In the first quarter of 2015, $0.3 million of demand notes, held by an entity controlled by our chief executive officer, were settled as partial payment for a 2015 convertible note. All then-outstanding demand notes were tendered as payment for 350,000 units in the Company's IPO (see Note 8). Prior to settlement, the demand notes bore interest at 8% per annum, had a first priority security interest in the assets of the Company, and a term of approximately four months.
2014 convertible debt
In July, August and September 2014, the Company raised $1.5 million through the issuance of convertible debt. All outstanding 2014 convertible debt was converted into Series A redeemable convertible preferred stock and then into 1,500,000 shares of common stock in connection with the Company's IPO (see Note 8). Prior to its conversion, the debt was convertible, at the option of the holders or in certain cases at the Company's option, into shares of Series A redeemable convertible preferred stock or other potential equity securities, bore interest at 8% and was due in full on July 11, 2015.
2015 convertible debt
In February and March 2015, the Company raised $1.5 million in capital through the issuance of 8% secured convertible notes with detachable stock purchase warrants. All outstanding 2015 convertible debt was converted into Series A redeemable convertible preferred stock and then into 1,875,000 shares of common stock in connection with the Company's IPO (see Note 8). Prior to its conversion, the 2015 convertible notes were prepayable by the Company without penalty at any time following the three-month anniversary of the closing of the IPO (provided that before the six-month anniversary of the closing of an IPO, the 2015 convertible notes could only be prepaid out of newly issued capital subsequent to the IPO), and were puttable by the holder to the Company in the event of a defined default. The 2015 convertible notes were each convertible, at the election of the holder, into (i) shares of Series A redeemable convertible preferred stock, at a conversion rate of 1.25 shares of Series A redeemable convertible preferred stock for each $1.00 converted if the conversion occurs prior to closing of an IPO, or (ii) shares of common stock at a conversion rate of one share of common stock for each $1.00 converted if the conversion occurs after the closing of an IPO.
The conversion option embedded in the convertible notes was determined to contain beneficial conversion features, resulting in the bifurcation of those features as an equity instrument (resulting in an additional debt discount) at issuance. After allocation of the gross proceeds to the detachable stock purchase warrants (discussed below) and beneficial conversion feature, the total debt discount recognized was equal to the face value of the 2015 convertible notes. Upon conversion in May 2015, the remaining unamortized beneficial conversion feature of approximately $1.5 million was charged to interest expense in the accompanying condensed consolidated statements of operations and comprehensive loss. Remaining unamortized deferred financing costs of $71,421 were also charged to interest expense upon conversion.
The 2015 convertible note holders also received detachable stock purchase warrants exercisable for 225,011 shares of common stock at 110% of the IPO price and exercisable only if the IPO occurred, and then exercisable beginning on the six-month anniversary of the closing of the IPO. Prior to the IPO, as a result of net settlement features, the stock purchase warrants were considered derivative liabilities, were initially recorded at fair value (resulting in a debt discount) and were marked-to-market at each balance sheet date through earnings. As a result of the elimination of the net settlement features in the IPO, the stock purchase warrants were marked to fair value of $0.7 million on May 8, 2015 and then reclassified to equity.
Total interest expense on all debt instruments was $143,347 for the year ended December 31, 2016. Total interest expense on all debt instruments was $1,801,320 for year ended December 31, 2015.
Note 8 - Stockholders' Equity
As of December 31, 2016, the Company has 200,000,000 shares of authorized common shares and 25,304,270 issued and outstanding, and 10,000,000 of authorized preferred shares, none of which were issued or outstanding.
On September 13, 2016, the Company entered into the Sales Agreement with Cowen pursuant to which the Company may offer and sell from time to time, up to an aggregate of $25 million of shares of its common stock through Cowen, as sales agent, with initial sales limited to an aggregate of $11.5 million. Pursuant to the Sales Agreement, Cowen may sell the shares of common stock by any method permitted by law deemed to be an "at the market" offering as defined in Rule 415 of the Securities Act, including, without limitation, sales made by means of ordinary brokers' transactions on The NASDAQ Capital Market or otherwise at market prices prevailing at the time of sale, in block transactions, or as otherwise directed by the Company. The Company pays Cowen compensation equal to 3.0% of the gross proceeds from the sales of common stock pursuant to the terms of the Sales Agreement. As of December 31, 2016,
the Company has sold an aggregate of approximately 3.6 million shares of its common stock under this at the market offering resulting in aggregate net proceeds to the Company of approximately $4.4 million, and gross proceeds of $4.7 million
. As of December 31, 2016, remaining availability under the at the market offering is $6.8 million. Subsequent to December 31, 2016, the Company has sold an aggregate of approximately 2.1 million shares of its common stock under this at the market offering resulting in aggregate net proceeds to the Company of approximately $2.1 million, and gross proceeds of $2.2 million. Under the initial sales agreement, remaining availability under the at the market offering is $4.6 million.
On May 19, 2016 and June 27, 2016, the Company offered and sold units in a private offering to members of management and employees and to accredited investors, including Merck GHI and jVen Capital, each unit consisting of either (i) one share of common stock and a detachable stock purchase warrant to purchase an additional 0.75 shares of common stock, or (ii) one share of non-voting convertible preferred stock and a detachable stock purchase warrant to purchase an additional 0.75 shares of common stock, at a price of $1.14 per unit. The total net proceeds to the Company, after deducting offering commissions and expenses was $9.5 million. Pursuant to the private placement the Company issued 6,744,127 shares of common stock, 2,309,428 of Series A non-voting convertible preferred stock and stock purchase warrants to acquire an additional 6,790,169 shares of common stock. Under the purchase agreement, the Company granted registration rights to the investors in the private financing.
Each share of Series A non-voting convertible preferred stock was convertible at the option of the holder in whole or in part and from time to time into one share of common stock, was entitled to dividends on as "as converted basis" when and if dividends are issued to common stockholders, and participates in liquidation on a
pari passu
basis with common stockholders. The preferred stock was classified as permanent equity. The stock purchase warrants issued as part of the units are exercisable $1.3125 per share beginning 90 days after closing for five years, expiring on May 18, 2021. The warrants are classified as permanent equity at December 31, 2016. In connection with the issuance of Series A non-voting convertible preferred stock, the Company recognized a beneficial conversion feature of $332,550 as a deemed dividend to the preferred stockholders. Holders of the Series A non-voting convertible preferred stock subsequently converted all 2,309,428 shares of preferred stock into 2,309,428 shares of common stock in July 2016. The shares of preferred stock were retired and are no longer available for future issuance.
The Company filed a registration statement on Form S-3 on June 13, 2016 to register for resale by the investors, from time to time, of the shares of common stock acquired, or underlying the warrants issued, in the private offering. On July 20, 2016, the registration statement was declared effective by the SEC.
In July 2015, the Company issued 1,136,364 shares of common stock to Merck GHI for cash consideration of $5.0 million (see Note 5).
On May 8, 2015, the Company completed its IPO pursuant to which the Company offered and sold 2,850,000 units, each unit consisting of one share of common stock and a detachable stock purchase warrant to purchase an additional share of common stock, at an initial offering price of $6.00 per unit. Of the total gross proceeds of $17.1 million, approximately $2.1 million was used to satisfy outstanding demand notes by exchanging such notes for 350,000 units in the IPO. After considering the demand notes, and underwriting discounts, commissions and offering expenses of $2.9 million (which were charged to additional paid-in capital), the total net cash proceeds to the Company was $12.1 million. On the IPO closing date, the underwriters exercised a portion of their over-allotment option to acquire an additional 422,500 stock purchase warrants for cash of $4,225.
In connection with the IPO, all of the Company's outstanding Series A redeemable convertible preferred stock, 2014 convertible notes and 2015 convertible notes were converted into 7,374,852 shares of common stock. Prior to the IPO, the carrying value of the Series A redeemable convertible preferred stock was increased by the accretion of related discounts, issuance costs and accrued but unpaid dividends so that the carrying amount would equal the redemption amount at the dates the stock becomes redeemable.
The stock purchase warrants issued as part of the units (including over-allotment option) are exercisable for 3,272,500 shares of common stock at $6.60 per share beginning six months after the closing of the IPO for five years, expiring on May 8, 2020. Additionally, the Company issued additional warrants to its investment bankers to purchase 185,250 shares of common stock, on the same terms as the warrants issued with the units. The warrants were valued using the Black-Scholes option pricing model and are classified as equity.
Stock options
In 2008, the Board adopted, and the stockholders approved, the 2008 Stock Option and Restricted Stock Plan (the "2008 Plan"), pursuant to which the Company's Board of Directors may grant either incentive or non-qualified stock options or shares of restricted stock to directors, key employees, consultants and advisors.
In April 2015, the Board adopted, and the Company's stockholders approved, the 2015 Equity Incentive Plan (the "2015 Plan"); the 2015 Plan became effective upon the execution and delivery of the underwriting agreement for the Company's IPO. Following the effectiveness of the 2015 Plan, no further grants have been made under the 2008 Plan. The 2015 Plan provides for the granting of incentive stock options within the meaning of Section 422 of the Code to employees and the granting of non-qualified stock options to employees, non-employee directors and consultants. The 2015 Plan also provides for the grants of restricted stock, restricted stock units, stock appreciation rights, dividend equivalents and stock payments to employees, non-employee directors and consultants.
Under the 2015 Plan, the aggregate number of shares of the common stock authorized for issuance may not exceed (1) 1,355,000 plus (2) the sum of the number of shares subject to outstanding awards under the 2008 Plan as of the 2015 Plan's effective date, that are subsequently forfeited or terminated for any reason before being exercised or settled, plus (3) the number of shares subject to vesting restrictions under the 2008 Plan as of the 2015 Plan's effective date that are subsequently forfeited. In addition, the number of shares that have been authorized for issuance under the 2015 Plan will be automatically increased on the first day of each fiscal year beginning on January 1, 2016 and ending on (and including) January 1, 2025, in an amount equal to the lesser of (1) 4% of the outstanding shares of common stock on the last day of the immediately preceding fiscal year, or (2) another lesser amount determined by the Company's Board of Directors. Shares subject to awards granted under the 2015 Plan that are forfeited or terminated before being exercised or settled, or are not delivered to the participant because such award is settled in cash, will again become available for issuance under the 2015 Plan. However, shares that have actually been issued shall not again become available unless forfeited.
As of December 31, 2016, 669,651 shares remain available for issuance under the 2015 Plan.
For the years ended December 31, 2016 and 2015, the Company recognized stock compensation expense as follows:
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Cost of services
|
|
$
|
6,003
|
|
|
$
|
—
|
|
Research and development
|
|
|
236,341
|
|
|
|
240,739
|
|
General and administrative
|
|
|
599,550
|
|
|
|
619,899
|
|
Sales and marketing
|
|
|
103,567
|
|
|
|
584,450
|
|
|
|
$
|
945,461
|
|
|
$
|
1,445,088
|
|
No income tax benefit for stock-based compensation arrangements was recognized in the consolidated statements of operations due to the
Company's
net loss position.
As of December 31, 2016, the Company had unrecognized expense related to its stock options of $2.2 million, which will be recognized over a weighted average period of 1.17 years.
A summary of the status of options granted is presented below as of and for the years ended December 31, 2016 and 2015:
|
|
Number of
Options
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Life (in years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at January 1, 2015
|
|
|
404,272
|
|
|
|
|
|
|
9.3
|
|
|
$
|
—
|
|
Granted
|
|
|
1,961,637
|
|
|
$
|
2.68
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(11,472
|
)
|
|
$
|
0.20
|
|
|
|
|
|
|
$
|
19,519
|
|
Forfeited
|
|
|
(193,657
|
)
|
|
$
|
0.55
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
|
2,160,780
|
|
|
$
|
2.60
|
|
|
|
9.1
|
|
|
$
|
1,575,646
|
|
Granted
|
|
|
1,463,650
|
|
|
$
|
1.41
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(66,502
|
)
|
|
$
|
0.36
|
|
|
|
|
|
|
$
|
79,406
|
|
Forfeited
|
|
|
(571,687
|
)
|
|
$
|
3.99
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(8,581
|
)
|
|
$
|
8.49
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
2,977,660
|
|
|
$
|
1.76
|
|
|
|
8.6
|
|
|
$
|
663,298
|
|
Vested and expected to vest
|
|
|
2,977,660
|
|
|
$
|
1.76
|
|
|
|
8.6
|
|
|
$
|
663,298
|
|
Exercisable at December 31, 2016
|
|
|
1,098,504
|
|
|
$
|
0.22
|
|
|
|
8.0
|
|
|
$
|
421,621
|
|
The total fair value of options vested in the years ended December 31, 2016 and 2015, was $1,088,978 and $1,140,079, respectively. The fair value of each option grant was estimated at the date of grant using the Black-Scholes option pricing model based on the assumptions below:
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Annual dividend
|
|
|
—
|
|
|
|
—
|
|
Expected life (in years)
|
|
5.25 - 6.25
|
|
|
5.5 - 6.25
|
|
Risk free interest rate
|
|
1.2 - 2.2%
|
|
|
1.5 - 1.9%
|
|
Expected volatility
|
|
42.0 - 49.8%
|
|
|
47.7 - 65.0%
|
|
The
Company
issued an annual grant on February 22, 2017 of 723,300 options to employees at an exercise price of $1.03 per share.
Restricted stock units
In the fourth quarter of 2015, the Company granted restricted stock units to acquire 75,000 shares of common stock, with a weighted average grant date fair value of $1.70 per share, 18,750 shares of which remain outstanding as of December 31, 2016. 16,666 restricted stock units vested and 39,584 restricted stock units were forfeited during the year ended December 31, 2016 at a weighted average grant date fair value of $1.70 per share.
Stock purchase warrants
At
December
31, 2016 and 2015, the following warrants to purchase shares of common stock were outstanding:
|
|
|
|
|
|
|
|
Outstanding at December 31,
|
|
Issuance
|
|
Exercise
Price
|
|
|
Expiration
|
|
2016
|
|
|
2015
|
|
August 2007
|
|
$
|
7.91
|
|
|
August 2017
|
|
|
8,921
|
|
|
|
8,921
|
|
March 2008
|
|
$
|
790.54
|
|
|
March 2018
|
|
|
46
|
|
|
|
46
|
|
November 2009
|
|
$
|
7.91
|
|
|
November 2019
|
|
|
6,674
|
|
|
|
6,674
|
|
January 2010
|
|
$
|
7.91
|
|
|
January 2020
|
|
|
6,674
|
|
|
|
6,674
|
|
March 2010
|
|
$
|
7.91
|
|
|
March 2020
|
|
|
1,277
|
|
|
|
1,277
|
|
November 2011
|
|
$
|
7.91
|
|
|
November 2021
|
|
|
5,213
|
|
|
|
5,213
|
|
December 2011
|
|
$
|
7.91
|
|
|
December 2021
|
|
|
664
|
|
|
|
664
|
|
March 2012
|
|
$
|
109.90
|
|
|
March 2019
|
|
|
4,125
|
|
|
|
4,125
|
|
February 2015
|
|
$
|
6.60
|
|
|
February 2025
|
|
|
225,011
|
|
|
|
225,011
|
|
May 2015
|
|
$
|
6.60
|
|
|
May 2020
|
|
|
3,457,750
|
|
|
|
3,457,750
|
|
May 2016
|
|
$
|
1.31
|
|
|
May 2021
|
|
|
4,739,348
|
|
|
|
—
|
|
June 2016
|
|
$
|
1.31
|
|
|
May 2021
|
|
|
2,050,821
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
10,506,524
|
|
|
|
3,716,355
|
|
The warrants listed above were issued in connection with various equity, debt, preferred stock or development contract agreements. The
warrants
issued in February 2015 were initially classified as a liability since the exercise price was variable. The exercise price became fixed as a result of the Company's IPO and, as such, the warrant liability was marked to fair value at that time and reclassified to equity (see Note 13).
Note 9 - Income Taxes
At December 31, 2016 and 2015, the Company had net deferred tax assets of $63,520,548 and $41,554,045, respectively, primarily consisting of NOL carry forwards, research and experimental ("R&E") credits, and differences between depreciation and amortization recorded for financial statement and tax purposes. The Company's net deferred tax assets at December 31, 2016 and 2015 have been offset by a valuation allowance of $63,520,548 and $41,554,045, respectively. The valuation allowance has been recorded due to the uncertainty of realization of the deferred tax assets. The Company's deferred tax assets and liabilities as of December 31, 2016 and 2015 are as follows:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Deferred tax assets:
|
|
|
|
|
|
|
NOL carryforward
|
|
$
|
60,357,220
|
|
|
$
|
38,797,762
|
|
R&E credit carryforward
|
|
|
2,559,479
|
|
|
|
1,994,478
|
|
Share-based compensation
|
|
|
448,534
|
|
|
|
383,153
|
|
Inventory reserve
|
|
|
269,708
|
|
|
|
226,299
|
|
Depreciation
|
|
|
117,629
|
|
|
|
313,714
|
|
Accruals and other
|
|
|
333,126
|
|
|
|
495,640
|
|
Total deferred tax assets
|
|
|
64,085,696
|
|
|
|
42,211,046
|
|
Valuation allowance
|
|
|
(63,520,548
|
)
|
|
|
(41,554,045
|
)
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
(565,148
|
)
|
|
|
(657,001
|
)
|
Fixed assets
|
|
|
—
|
|
|
|
—
|
|
Net deferred tax liability
|
|
$
|
—
|
|
|
$
|
—
|
|
The difference between the Company's expected income tax provision (benefit) from applying federal statutory tax rates to the pre-tax loss
and
actual income tax provision (benefit) relates to the effect of the following:
|
|
2016
|
|
|
2015
|
|
Federal income tax benefit at statutory rates
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State income tax benefit, net of Federal benefit
|
|
|
6.5
|
%
|
|
|
3.3
|
%
|
Change in valuation allowance
|
|
|
(37.3
|
)%
|
|
|
(32.1
|
)%
|
Change in state tax rates and other
|
|
|
(3.2
|
)%
|
|
|
(4.5
|
)%
|
|
|
|
0.0
|
%
|
|
|
0.7
|
%
|
Additionally, despite the
NOL
carryforwards, the Company may have future tax liability due to alternative minimum tax or state tax requirements. The Company has federal NOL carryforwards of $150,950,436 and $132,359,334 at December 31, 2016 and 2015, respectively. The NOL carry forwards begin to expire in 2022. Utilization of the NOL carryforward may be subject to an annual limitation as provided by Section 382 of the Internal Revenue Code. There can be no assurance that the NOL carryforward will ever be fully utilized. To date, the Company has not performed a formal study to determine if any of its remaining NOL and credit attributes might be further limited due to the ownership change rules of Section 382 or Section 383 of the Internal Revenue Code of 1986, as amended. The Company will continue to monitor this matter going forward. There can be no assurance that the NOL carryforwards will ever be fully utilized.
Note 10 - Commitments
Operating leases
The Company leases a facility in Woburn, Massachusetts under an operating lease that expires January 30, 2022.
During the second quarter of 2015, the Company extended the term of its Gaithersburg, Maryland office lease, effective May 7, 2015, through January 31, 2021, with one additional five-year renewal at the Company's election. The Company is responsible for all utilities, repairs, insurance, and taxes under this operating lease. Effective July 1, 2015, the Company further modified its lease agreement to add additional leased space to its headquarters. Additionally, the Company leases office space in Denmark; this lease is currently on a month-to-month basis.
Rent expense under the Company's facility operating leases for the year ended December 31, 2016 and 2015 was $1,000,726 and $683,519, respectively.
Capital leases
The Company leases computer equipment, office furniture, and equipment under various capital leases. The leases expire at various
dates
through 2021. The leases require monthly principal and interest payments. Following is a schedule by year of the estimated future minimum payments under all operating and capital leases as of December 31, 2016:
Year ending December 31,
|
|
Capital
Leases
|
|
|
Operating
Leases
|
|
|
Total
|
|
2017
|
|
$
|
204,354
|
|
|
$
|
1,072,448
|
|
|
$
|
1,276,802
|
|
2018
|
|
|
113,337
|
|
|
|
1,205,263
|
|
|
|
1,318,600
|
|
2019
|
|
|
21,266
|
|
|
|
427,769
|
|
|
|
449,035
|
|
2020
|
|
|
21,266
|
|
|
|
427,769
|
|
|
|
449,035
|
|
2021 and thereafter
|
|
|
1,773
|
|
|
|
463,416
|
|
|
|
465,189
|
|
Total
|
|
$
|
361,996
|
|
|
$
|
3,596,665
|
|
|
$
|
3,958,661
|
|
Less: amount representing interest
|
|
|
(31,054
|
)
|
|
|
|
|
|
|
|
|
Net present value of future minimum lease payments
|
|
$
|
330,942
|
|
|
|
|
|
|
|
|
|
Current maturities
|
|
|
(184,399
|
)
|
|
|
|
|
|
|
|
|
Long-term maturities
|
|
$
|
146,543
|
|
|
|
|
|
|
|
|
|
Assets under capital
leases
were included in the following balance sheet categories as of December 31:
|
|
2016
|
|
|
2015
|
|
Laboratory and manufacturing equipment
|
|
$
|
560,829
|
|
|
$
|
803,500
|
|
Office furniture and equipment
|
|
|
64,790
|
|
|
|
89,140
|
|
Computers and network equipment
|
|
|
24,350
|
|
|
|
153,693
|
|
Less accumulated amortization
|
|
|
(270,808
|
)
|
|
|
(402,066
|
)
|
Capital lease assets, net
|
|
$
|
379,161
|
|
|
$
|
644,267
|
|
Amortization expense associated with equipment under capital leases for the years ended December 31, 2016 and 2015 was $161,606 and $157,036, respectively, and is included within depreciation and amortization expense in the consolidated
statements
of operations.
Registration and other stockholder rights
In connection with the various investment transactions, the Company entered into registration rights agreements with stockholders, pursuant to which the investors were granted certain demand registration rights and/or piggyback and/or resale registration rights in connection with subsequent registered offerings of the Company's common stock.
Note 11 - License Agreements, Research Collaborations and Development Agreements
The Company is a party to five license agreements to acquire certain patent rights and technologies; two related to the FISH product line and three related to the Argus and MapIt product lines. Royalties are incurred upon the sale of a product or service which utilizes the licensed technology. Certain of the agreements require the Company to pay minimum royalties or license maintenance fees. The Company recognized net royalty expense of $290,491 and $205,147 for the years ended December 31, 2016 and 2015, respectively. Annual future minimum royalty fees are $250,000 under these agreements.
In September 2013, the Company entered into a technology development agreement with Hitachi High-Technologies Corporation ("Hitachi") that included fixed milestone payments for meeting development milestones under the agreement. Since the milestones were substantive, the Company recognized revenue in the periods in which the substantive milestones were achieved. In addition, the Company received an upfront payment which was recognized on a straight-line basis over the term of the technology development agreement, which ended on December 31, 2015. The
Company recognized total revenue of $336,102 for the year ended December 31, 2015 (none in 2016), relating to this arrangement.
In June 2016, the Company entered into a license agreement with Hitachi, pursuant to which it resolved various matters with respect to previously delivered milestones under the technology development agreement and provided a development license and commercial products license to certain technology. The license agreement contains non-contingent multiple elements (the licenses) that the Company determined did not have stand alone value, and a contingent substantive milestone. The licenses are treated as a single unit of accounting and the Company will recognize the revenue associated with that unit of accounting over the applicable license period. During the year ended December 31, 2016, the Company recognized $137,603 of revenue related to the license agreement.
Note 12 – Related Party Transactions
In March 2014, the Company entered into a supply agreement with Fluidigm Corporation ("Fluidigm") under which Fluidigm supplies the Company with its microfluidic test platform for use in manufacturing the Acuitas MDRO Gene Test. The Company's CEO and Chairman of the Board of Directors is a director of Fluidigm. On July 12, 2015, the Company entered into a letter agreement (the "Fluidigm Agreement") with Fluidigm to expand the companies' existing relationship to include collaborating on the development of test kits and custom analytic instruments for identification, screening and surveillance testing of MDROs. The Fluidigm Agreement also expands the existing Supply Agreement between the Company and Fluidigm, and provides for expansion of the gene targets and organisms to be tested on the Company's existing CLIA lab-based tests, the Acuitas MDRO Gene Test and the Acuitas Resistome Test, using Fluidigm technologies and products. Additionally, Fluidigm has agreed not to develop or directly collaborate with any third party to develop an FDA approved or CE marked diagnostic test for the purpose of detecting resistance genes for identified MDROs if the Company meets certain minimum purchase commitments and other requirements. The initial term of the Fluidigm Agreement is five years. Both parties have the ability to extend the term for an additional five years. Under the expanded Supply Agreement, the term was extended until March 17, 2018, and the Company has the right to extend the term of the Supply Agreement for up to two additional three-year terms. The Company paid $183,713 related to these agreements in the year ended December 31, 2016. The Company paid $295,442 related to these agreements in the year ended December 31, 2015.
Under the agreements with Fluidigm, the Company had purchases of $91,399 in the year ended December 31, 2016. The Company had purchases of $370,539 related to these agreements in the year ended December 31, 2015.
In addition, the Company has several capital lease arrangements for laboratory equipment manufactured by Fluidigm. The Company paid $175,475 related to the leased equipment in the year ended December 31, 2016. The Company paid $119,919 related to the leased equipment in the year ended December 31, 2015.
In October 2016, the Company entered into an agreement with Merck Sharp & Dohme Corp., a wholly owned subsidiary of
Merck
Co. & Inc. ("Merck"), an affiliate of Merck Global Health Innovation Fund ("Merck GHI"), a principal stockholder of the Company and a related party to the Company. Under the agreement, Merck will provide access to its archive of over 200,000 bacterial pathogens. OpGen will initially perform molecular analyses on up to 10,000 pathogens to identify markers of resistance to support rapid decision making using the Acuitas Lighthouse, and to speed development of OpGen's rapid diagnostic products. Merck will gain access to the high-resolution genotype data for the isolates as well as access to OpGen's Acuitas Lighthouse informatics to support internal research and development programs. OpGen is required to expend up to
$175,000
for the procurement of materials related to the activities contemplated by the agreement. As of December 31, 2016, the Company has incurred
$32,270
of procurement costs which have been recognized as research and development expense.
In December 2016, the Company entered into an agreement with Healthcare Services & Solutions LLC, an affiliate of Merck GHI, in which the Company will provide research analysis and reports to the third party. The agreement is worth up to $150,000, of which $135,000 has been recognized as of December 31, 2016.
At December 31, 2016, the Company had accounts receivable from this customer of $135,000, which individually represented 25% of total accounts receivable.
Note 13 – Fair Value Measurements
The Company
classifies
its financial instruments using a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:
|
·
|
Level 1 - defined as observable inputs such as quoted prices in active markets;
|
|
·
|
Level 2 - defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and
|
|
·
|
Level 3 - defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions such as expected revenue growth and discount factors applied to cash flow projections.
|
Financial assets and liabilities measured at fair value on a recurring basis
The Company evaluates financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level at which to classify them each reporting period. This determination requires the Company to make subjective judgments as to the significance of inputs used in determining fair value and where such inputs lie within the hierarchy.
Prior to its IPO, certain stock purchase warrants contained cash settlement features and, accordingly, the Company considered them to be derivative financial instruments and accounted for them at fair value using level 3 inputs. As a result of the Company's
IPO
and elimination of the cash settlement features pursuant to their terms, those stock purchase warrants were reclassified to equity. For periods prior to the IPO, the Company determined the fair value of these derivative liabilities using a hybrid valuation method that consisted of a probability weighted expected return method that values the Company's equity securities assuming various possible future economic outcomes while using an option pricing method (that treated all equity linked instruments as call options on the Company's equity value with exercise prices based on the liquidation preference of the Series A Preferred Stock ) to estimate the allocation of value within one or more of the scenarios. Using this hybrid method, unobservable inputs included the Company's equity value, the exercise price for each option value, expected timing of possible economic outcomes such as initial public offering, risk free interest rates and stock price volatility. The following tables set forth a summary of changes in the fair value of Level 3 liabilities measured at fair value on a recurring basis for the year ended December 31, 2015 (there has been no activity for the year ended December 31, 2016):
Description
|
Balance at
December 31,
2014
|
|
Established
in 2015
|
|
Change in
Fair Value
|
|
Reclassified
to Equity
|
|
Balance at
December 31,
2015
|
|
Derivative warrant liability
|
|
$
|
—
|
|
|
$
|
72,333
|
|
|
$
|
647,342
|
|
|
$
|
(719,675
|
)
|
|
$
|
—
|
|
Financial assets and liabilities carried at fair value on a non-recurring basis
The Company does not have any financial assets and liabilities measured at fair value on a non-recurring basis.
Non-financial assets and liabilities carried at fair value on a recurring basis
The Company does
not
have any non-financial assets and liabilities measured at fair value on a recurring basis.
Non-financial assets and liabilities carried at fair value on a non-recurring basis
The Company measures its long-lived assets, including property and equipment and intangible assets (including goodwill), at fair value on a non-recurring basis when they are deemed to be impaired. No such fair value impairment was recognized in 2016 and 2015.
See Note 4 for a discussion of the fair value of assets acquired and liabilities assumed in the Merger.
OPGEN, INC.
Index to Unaudited Consolidated Interim Condensed Financial Statements
Three Months Ended March 31, 2017 and 2016
OpGen, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(unaudited)
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Assets
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,670,311
|
|
|
$
|
4,117,324
|
|
Accounts receivable, net
|
|
|
379,246
|
|
|
|
542,420
|
|
Inventory, net
|
|
|
642,961
|
|
|
|
692,368
|
|
Prepaid expenses and other current assets
|
|
|
267,971
|
|
|
|
329,646
|
|
Total current assets
|
|
|
2,960,489
|
|
|
|
5,681,758
|
|
Property and equipment, net
|
|
|
743,521
|
|
|
|
800,723
|
|
Goodwill
|
|
|
600,814
|
|
|
|
600,814
|
|
Intangible assets, net
|
|
|
1,554,044
|
|
|
|
1,620,998
|
|
Other noncurrent assets
|
|
|
298,081
|
|
|
|
279,752
|
|
Total assets
|
|
$
|
6,156,949
|
|
|
$
|
8,984,045
|
|
Liabilities and Stockholders' Equity
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,017,202
|
|
|
$
|
2,232,563
|
|
Accrued compensation and benefits
|
|
|
1,019,962
|
|
|
|
578,480
|
|
Accrued liabilities
|
|
|
883,105
|
|
|
|
1,215,283
|
|
Deferred revenue
|
|
|
31,233
|
|
|
|
37,397
|
|
Short-term notes payable
|
|
|
998,958
|
|
|
|
1,023,815
|
|
Current maturities of long-term capital lease obligation
|
|
|
170,297
|
|
|
|
184,399
|
|
Total current liabilities
|
|
|
5,120,757
|
|
|
|
5,271,937
|
|
Deferred rent
|
|
|
374,194
|
|
|
|
398,084
|
|
Long-term capital lease obligation and other noncurrent liabilities
|
|
|
107,940
|
|
|
|
146,543
|
|
Total liabilities
|
|
|
5,602,891
|
|
|
|
5,816,564
|
|
Commitments (Note 8)
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; 200,000,000 shares authorized; 27,377,490 and
25,304,270 shares issued and outstanding at March 31, 2017 and
December 31, 2016, respectively
|
|
|
273,775
|
|
|
|
253,042
|
|
Preferred stock, $0.01 par value; 10,000,000 shares authorized; none issued and outstanding at March 31, 2017 and December 31, 2016, respectively
|
|
|
—
|
|
|
|
—
|
|
Additional paid-in capital
|
|
|
138,546,915
|
|
|
|
136,199,382
|
|
Accumulated other comprehensive income
|
|
|
2,419
|
|
|
|
6,176
|
|
Accumulated deficit
|
|
|
(138,269,051
|
)
|
|
|
(133,291,119
|
)
|
Total stockholders' equity
|
|
|
554,058
|
|
|
|
3,167,481
|
|
Total liabilities and stockholders' equity
|
|
$
|
6,156,949
|
|
|
$
|
8,984,045
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
OpGen, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations and Comprehensive Loss
(unaudited)
|
|
Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Revenue
|
|
|
|
|
|
|
Product sales
|
|
$
|
734,502
|
|
|
$
|
947,219
|
|
Laboratory services
|
|
|
16,105
|
|
|
|
129,420
|
|
Collaboration revenue
|
|
|
21,164
|
|
|
|
—
|
|
Total revenue
|
|
|
771,771
|
|
|
|
1,076,639
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Cost of products sold
|
|
|
424,950
|
|
|
|
345,967
|
|
Cost of services
|
|
|
100,233
|
|
|
|
315,709
|
|
Research and development
|
|
|
2,122,515
|
|
|
|
1,953,429
|
|
General and administrative
|
|
|
1,969,216
|
|
|
|
1,538,046
|
|
Sales and marketing
|
|
|
1,105,586
|
|
|
|
1,399,435
|
|
Total operating expenses
|
|
|
5,722,500
|
|
|
|
5,552,586
|
|
Operating loss
|
|
|
(4,950,729
|
)
|
|
|
(4,475,947
|
)
|
Other expense
|
|
|
|
|
|
|
|
|
Interest and other income
|
|
|
21
|
|
|
|
173
|
|
Interest expense
|
|
|
(29,844
|
)
|
|
|
(41,734
|
)
|
Foreign currency transaction gains
|
|
|
2,620
|
|
|
|
11,328
|
|
Total other expense
|
|
|
(27,203
|
)
|
|
|
(30,233
|
)
|
Loss before income taxes
|
|
|
(4,977,932
|
)
|
|
|
(4,506,180
|
)
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
—
|
|
|
|
—
|
|
Net loss
|
|
|
(4,977,932
|
)
|
|
|
(4,506,180
|
)
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends and beneficial conversion
|
|
|
—
|
|
|
|
—
|
|
Net loss available to common stockholders
|
|
$
|
(4,977,932
|
)
|
|
$
|
(4,506,180
|
)
|
Net loss per common share - basic and diluted
|
|
$
|
(0.19
|
)
|
|
$
|
(0.36
|
)
|
Weighted average shares outstanding - basic and diluted
|
|
|
26,079,461
|
|
|
|
12,568,941
|
|
Net loss
|
|
$
|
(4,977,932
|
)
|
|
$
|
(4,506,180
|
)
|
Other comprehensive loss - foreign currency translation
|
|
|
(3,757
|
)
|
|
|
(1,112
|
)
|
Comprehensive loss
|
|
$
|
(4,981,689
|
)
|
|
$
|
(4,507,292
|
)
|
See accompanying notes to unaudited condensed consolidated financial statements.
OpGen, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(unaudited)
|
|
Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,977,932
|
)
|
|
$
|
(4,506,180
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
159,863
|
|
|
|
168,440
|
|
Loss on disposal of property and equipment
|
|
|
—
|
|
|
|
6,068
|
|
Noncash interest expense
|
|
|
2,087
|
|
|
|
1,042
|
|
Share-based compensation
|
|
|
245,405
|
|
|
|
261,497
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
163,174
|
|
|
|
39,411
|
|
Inventory
|
|
|
49,407
|
|
|
|
(97,849
|
)
|
Other assets
|
|
|
43,346
|
|
|
|
199,182
|
|
Accounts payable
|
|
|
(215,361
|
)
|
|
|
(80,276
|
)
|
Accrued compensation and other liabilities
|
|
|
75,683
|
|
|
|
211,979
|
|
Deferred revenue
|
|
|
(6,164
|
)
|
|
|
869
|
|
Net cash used in operating activities
|
|
|
(4,460,492
|
)
|
|
|
(3,795,817
|
)
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Purchases of property and equipment (net of proceeds on disposals)
|
|
|
(27,022
|
)
|
|
|
(1,644
|
)
|
Net cash used in investing activities
|
|
|
(27,022
|
)
|
|
|
(1,644
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock, net of issuance costs
|
|
|
2,122,861
|
|
|
|
—
|
|
Proceeds from exercise of stock options and warrants
|
|
|
—
|
|
|
|
9,271
|
|
Payments on debt
|
|
|
(25,898
|
)
|
|
|
—
|
|
Payments on capital lease obligations
|
|
|
(52,706
|
)
|
|
|
(63,327
|
)
|
Net cash provided by/(used in) financing activities
|
|
|
2,044,257
|
|
|
|
(54,056
|
)
|
Effects of exchange rates on cash
|
|
|
(3,756
|
)
|
|
|
5,254
|
|
Net decrease in cash and cash equivalents
|
|
|
(2,447,013
|
)
|
|
|
(3,846,263
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
4,117,324
|
|
|
|
7,814,220
|
|
Cash and cash equivalents at end of period
|
|
$
|
1,670,311
|
|
|
$
|
3,967,957
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
10,702
|
|
|
$
|
13,021
|
|
Supplemental disclosures of noncash investing and financing activities:
|
|
|
|
|
|
|
|
|
Property and equipment purchased on credit
|
|
$
|
8,685
|
|
|
$
|
27,767
|
|
Deferred and accrued financing costs
|
|
$
|
—
|
|
|
$
|
52,210
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
OpGen, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2017
Note 1 – Organization
OpGen, Inc. ("OpGen" or the "Company") was incorporated in Delaware in 2001. References in this report to the "Company" include OpGen and its wholly-owned subsidiaries. The Company's headquarters are in Gaithersburg, Maryland, and its principal operations are in Gaithersburg, Maryland and Woburn, Massachusetts. The Company also has operations in Copenhagen, Denmark. The Company operates in one business segment.
OpGen is a precision medicine company using molecular diagnostics and bioinformatics to help combat infectious disease. The Company is developing molecular information products and services to combat infectious disease in global healthcare settings, helping to guide clinicians with more rapid information about life threatening infections, improve patient outcomes, and decrease the spread of infections caused by multidrug-resistant microorganisms ("MDROs"). Its proprietary DNA tests and bioinformatics address the rising threat of antibiotic resistance by helping physicians and other healthcare providers optimize patient care decisions and protect the hospital biome through customized screening and surveillance products and services.
The Company's molecular diagnostics and bioinformatics offerings combine its Acuitas DNA tests, Acuitas Lighthouse bioinformatics services, and CLIA lab services for MDRO surveillance. The Company is working to deliver its products and services, some in development, to a global network of customers and partners. These include:
|
·
|
Its Acuitas DNA tests, which provide rapid microbial identification, and antibiotic resistance gene information. These products include (i) the QuickFISH family of FDA-cleared and CE-marked diagnostics used to rapidly detect pathogens in positive blood cultures, (ii) the Acuitas MDRO Gene Test to detect, type, track, and trend antibiotic resistant organisms in real-time and (iii) the Acuitas Rapid Test in development. The Company is working to provide actionable, precise diagnostic information powered by pathogen surveillance data collected through hospital screening programs and a network of hospital and public health laboratories globally.
|
|
·
|
Its Acuitas Lighthouse bioinformatics systems, which are cloud-based HIPAA compliant bioinformatics offerings that combine clinical lab test results with patient and hospital information and provide analytics to help manage MDROs in the hospital and patient care environment. These include its Acuitas Lighthouse informatics, which can be specific to a healthcare facility, public health department or collaborator, such as a pharmaceutical company, and its Acuitas Lighthouse Knowledgebase, a proprietary data warehouse in development to include genomic data matched with antibiotic susceptibility information for microbes and patient information from healthcare providers, in which the Company is beginning to collect and store MDRO information from a variety of sources for use with its Acuitas Rapid Test in development.
|
The Company's operations are subject to certain risks and uncertainties. The risks include rapid technology changes, the need to manage growth, the need to retain key personnel, the need to protect intellectual property and the need to raise additional capital financing on terms acceptable to the Company. The Company's success depends, in part, on its ability to develop and commercialize its proprietary technology as well as raise additional capital.
Note 2 – Liquidity and manageme
n
t's plans
The accompanying unaudited condensed consolidated financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Since inception, the Company has incurred, and continues to incur, significant losses from operations. The Company has funded its operations primarily through external investor financing arrangements and has raised funds in 2017 and 2016, including:
In September 2016, the Company entered into a Sales Agreement (the "Sales Agreement") with Cowen and Company LLC ("Cowen") pursuant to which the Company may offer and sell from time to time, up to an aggregate of $25 million of shares of its common stock through Cowen, as sales agent, with initial sales limited to an aggregate of $11.5 million. Pursuant to the Sales Agreement, Cowen may sell the shares of the Company's common stock by any method permitted by law deemed to be an "at the market" offering as defined in Rule 415 of the Securities Act of 1933, as amended (the "Securities Act"), including, without limitation, sales made by means of ordinary brokers' transactions on The NASDAQ Capital Market or otherwise at market prices prevailing at the time of sale, in block transactions, or as otherwise directed by the Company. The Company pays Cowen compensation equal to
3.0
% of the gross proceeds from the sales of common stock pursuant to the terms of the Sales Agreement. As of March 31, 2017, the Company has sold an aggregate of approximately 5.7 million shares of its common stock under this at the market offering resulting in aggregate net proceeds to the Company of approximately $6.5 million, and gross proceeds of $6.9 million. As of March 31, 2017, remaining availability under the at the market offering is $4.6 million. For the three months ended March 31, 2017, the Company has sold approximately 2.1 million shares of its common stock under this at the market offering resulting in aggregate net proceeds to the Company of approximately $2.1 million, and gross proceeds of $2.2 million.
In May and June 2016, the Company offered and sold units in a private offering to members of management and employees and to accredited investors, including Merck Global Health Innovation Fund, LLC ("Merck GHI") and
jVen Capital, LLC ("
jVen Capital"), each unit consisting of either (i) one share of common stock and a detachable stock purchase warrant to purchase an additional 0.75 shares of common stock, or (ii) one share of non-voting convertible preferred stock and a detachable stock purchase warrant to purchase an additional 0.75 shares of common stock, at a price of $1.14 per unit. The total net proceeds to the Company, after deducting offering commissions and expenses were $9.5 million. The Company used the proceeds for working capital and general corporate purposes. Pursuant to the private placement, the Company issued 6,744,127 shares of common stock, 2,309,428 shares of non-voting convertible preferred stock and stock purchase warrants to acquire an additional 6,790,169 shares of common stock.
To meet its capital needs, the Company is considering multiple alternatives, including, but not limited to, additional equity financings, debt financings and other funding transactions, licensing and/or partnering arrangements and business combination transactions. There can be no assurance that the Company will be able to complete any such transaction on acceptable terms or otherwise. The Company believes that current cash on hand will be sufficient to fund operations through a portion of the second quarter of 2017. This has led management to conclude that substantial doubt about the Company's ability to continue as a going concern exists. In the event the Company is unable to successfully raise additional capital during the second quarter of 2017, the Company will not have sufficient cash flows and liquidity to finance its business operations as currently contemplated. Accordingly, in such circumstances the Company would be compelled to immediately reduce general and administrative expenses and delay research and development projects, including the purchase of scientific equipment and supplies, until it is able to obtain sufficient financing. If such sufficient financing is not received timely, the Company would then need to pursue a plan to license or sell its assets, seek to be acquired by another entity, cease operations and/or seek bankruptcy protection. Furthermore, the $1.0 million Merck Note (see Note 4) matures in July 2017. If the Company is unable to repay the note, negotiate its conversion or extend its term, the assets of the Company may be seized, as the note is secured by a lien on all the Company's assets.
Note 3 - Summary of significant accounting policies
Basis of presentation and consolidation
The Company has prepared the following unaudited condensed, consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission and the standards of accounting measurement set forth in the Interim Reporting Topic of the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC"). Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP") have been condensed or omitted, although the Company believes that the disclosures made are adequate to make the information not misleading. The Company recommends that the following condensed, consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's latest Annual Report on Form 10-K. In the opinion of management, all adjustments that are necessary for a fair presentation of the Company's financial position for the periods presented have been reflected. All adjustments are of a normal, recurring nature, unless otherwise stated. The interim condensed consolidated results of operations are not necessarily indicative of the results that may occur for the full fiscal year. The December 31, 2016 consolidated balance sheet included herein was derived from the audited consolidated financial statements, but do not include all disclosures including notes required by GAAP for complete financial statements.
The accompanying unaudited interim condensed consolidated financial statements include the accounts of OpGen and its wholly-owned subsidiaries; all intercompany transactions and balances have been eliminated. The Company operates in one business segment.
Foreign currency
One of the Company's subsidiaries is located in Copenhagen, Denmark and uses the Danish Krone as its functional currency. As a result, all assets and liabilities are translated into U.S. dollars based on exchange rates at the end of the reporting period. Income and expense items are translated at the average exchange rates prevailing during the reporting period. Translation adjustments are reported in accumulated other comprehensive income, a component of stockholders' equity. Foreign currency translation adjustments are the sole component of accumulated other comprehensive loss at March 31, 2017 and December 31, 2016.
Foreign currency transaction gains and losses, excluding gains and losses on intercompany balances where there is no current intent to settle such amounts in the foreseeable future, are included in the determination of net loss. Unless otherwise noted, all references to "$" or "dollar" refer to the U.S. dollar.
Use of estimates
In preparing financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In the accompanying condensed consolidated financial statements, estimates are used for, but not limited to, share-based compensation, allowances for doubtful accounts and inventory obsolescence, valuation of derivative financial instruments, beneficial conversion features of convertible debt, deferred tax assets and liabilities and related valuation allowance, depreciation and amortization and estimated useful lives of long-lived assets. Actual results could differ from those estimates.
Fair value of financial instruments
All financial instruments classified as current assets and liabilities are carried at cost, which approximates fair value, because of the short-term maturities of those instruments.
Cash and cash equivalents
The Company considers all highly liquid instruments with original maturities of three months or less to be cash equivalents. The Company has cash and cash equivalents deposited in financial institutions in which the balances occasionally exceed the federal government agency ("FDIC") insured limits of $250,000. The Company has not experienced any losses in such accounts and management believes it is not exposed to any significant credit risk.
At March 31, 2017 and December 31, 2016, the Company has funds totaling $243,380, which are required as collateral for letters of credit benefiting its landlords and for credit card processors. These funds are reflected in other noncurrent assets on the accompanying condensed consolidated balance sheets.
Accounts receivable
The Company's accounts receivable result from revenues earned but not collected from customers. Credit is extended based on an evaluation of a customer's financial condition and, generally, collateral is not required. Accounts receivable are due within 30 to 60 days and are stated at amounts due from customers. The Company evaluates if an allowance is necessary by considering a number of factors, including the length of time accounts receivable are past due, the Company's previous loss history and the customer's current ability to pay its obligation. If amounts become uncollectible, they are charged to operations when that determination is made. The allowance for doubtful accounts was $31,118 and $26,716 as of March 31, 2017 and December 31, 2016, respectively.
No individual customer represented in excess of 10% of revenues for the three months ended March 31, 2017 and 2016. At March 31, 2017, no individual customer represented in excess of 10% of total accounts receivable.
Inventory
Inventories are valued using the first-in, first-out method and stated at the lower of cost or market and consist of the following:
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Raw materials and supplies
|
|
$
|
410,945
|
|
|
$
|
479,479
|
|
Work-in process
|
|
|
68,031
|
|
|
|
27,422
|
|
Finished goods
|
|
|
163,985
|
|
|
|
185,467
|
|
Total
|
|
$
|
642,961
|
|
|
$
|
692,368
|
|
Inventory now includes reagents and components for QuickFISH and PNA FISH kit products, and reagents and supplies used for the Company's laboratory services. Inventory reserves for obsolescence and expirations were $134,679 and $704,516 at March 31, 2017 and December 31, 2016, respectively. The primary driver of the decrease in the inventory reserves for obsolescence and expirations is the scrapping of legacy Argus Whole Genome Mapping Systems and the portion of the reagents and supplies used for Argus consumable kits. All items scrapped in the three months ended March 31, 2017 were fully reserved for as of December 31, 2016.
Long-lived assets
Property and equipment
Property and equipment is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. Recoverability measurement and estimating of undiscounted cash flows is done at the lowest possible level for which we can identify assets. If such assets are considered to be impaired, impairment is recognized as the amount by which the carrying amount of assets exceeds the fair value of the assets. During the three months ended March 31, 2017 and 2016, the Company determined that its property and equipment was not impaired.
Intangible assets and goodwill
Intangible assets and goodwill as of March 31, 2017 consist of finite-lived intangible assets and goodwill.
Finite-lived intangible assets
Finite-lived intangible assets include trademarks, developed technology and customer relationships and consisted of the following as of March 31, 2017 and December 31, 2016:
|
|
|
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
|
Net Balance
|
|
|
Accumulated
Amortization
|
|
|
Net Balance
|
|
Trademarks and tradenames
|
|
$
|
461,000
|
|
|
$
|
(79,101
|
)
|
|
$
|
381,899
|
|
|
$
|
(67,575
|
)
|
|
$
|
393,425
|
|
Developed technology
|
|
|
458,000
|
|
|
|
(112,254
|
)
|
|
|
345,746
|
|
|
|
(95,898
|
)
|
|
|
362,102
|
|
Customer relationships
|
|
|
1,094,000
|
|
|
|
(267,601
|
)
|
|
|
826,399
|
|
|
|
(228,529
|
)
|
|
|
865,471
|
|
|
|
$
|
2,013,000
|
|
|
$
|
(458,956
|
)
|
|
$
|
1,554,044
|
|
|
$
|
(392,002
|
)
|
|
$
|
1,620,998
|
|
Finite-lived intangible assets are amortized over their estimated useful lives. The estimated useful life of trademarks was 10 years, developed technology was 7 years, and customer relationships was 7 years.
The Company reviews the useful lives of intangible assets when events or changes in circumstances occur which may potentially impact the estimated useful life of the intangible assets.
Total amortization expense of intangible assets was $66,954 for each of the three months ended March 31, 2017 and 2016, respectively. The Company estimates amortization expense related to intangible assets will be $268,000 per year for each of the next five years.
Finite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If any indicators were present, the Company would test for recoverability by comparing the carrying amount of the asset to the net undiscounted cash flows expected to be generated from the asset. If those net undiscounted cash flows do not exceed the carrying amount (i.e., the asset is not recoverable), the Company would perform the next step, which is to determine the fair value of the asset and record an impairment loss, if any. During the three months ended March 31, 2017 and 2016, the Company determined that its finite-lived intangible assets were not impaired.
In accordance with ASC 360-10, the Company records impairment losses on long-lived assets used in operations when events and circumstances indicate that long-lived assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. During the fourth quarter of 2016, events and circumstances indicated the Company's intangible assets might be impaired. However, management's estimate of undiscounted cash flows indicated that such carrying amounts were expected to be recovered. Nonetheless, it is reasonably possible that the estimate of undiscounted cash flows may change in the near term resulting in the need to write down those assets to fair value. Management's estimate of cash flows might change if the development of the Company's automated rapid pathogen identification product technological advances does not progress as planned, the timeline of development is delayed, there are changes to the estimates of the future marketability of this product or if the Company cannot obtain sufficient funding to pay for its development.
Goodwill
Goodwill represents the excess of the purchase price paid in a July 2015 merger transaction in which the Company acquired AdvanDx, Inc. and its subsidiary (the "Merger") over the fair values of the acquired tangible or intangible assets and assumed liabilities. Goodwill is not tax deductible in any relevant jurisdictions. The Company's goodwill balance as of March 31, 2017 and December 31, 2016 was $600,814.
The Company conducts an impairment test of goodwill on an annual basis as of October 1 of each year, and will also conduct tests if events occur or circumstances change that would, more likely than not, reduce the Company's fair value below its net equity value.
Revenue recognition
The Company recognizes revenue primarily from sales of its products and services when the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred; the selling price is fixed or determinable; and collectability is reasonably assured. At times, the Company sells products and services, or performs software development, under multiple-element arrangements with separate units of accounting; in these situations, total consideration is allocated to the identified units of accounting based on their relative selling prices and revenue is then recognized for each unit based on its specific characteristics.
Amounts billed to customers for shipping and handling are included in revenue when the related product or service revenue is recognized. Shipping and handling costs are included in cost of products sold.
Revenue from sales of QuickFISH, PNA FISH and XpressFISH diagnostic test products
Revenue is recognized upon shipment to the customer.
Revenue from providing laboratory services
The Company recognizes revenue associated with laboratory services contracts when the service has been performed and reports are made available to the customer.
Revenue from funded software development arrangements
The Company's funded software development arrangements generally consist of multiple elements. Total arrangement consideration is allocated to the identified units of accounting based on their relative selling prices and revenue is then recognized for each unit based on its specific characteristics. When funded software development arrangements include substantive research and development milestones, revenue is recognized for each such milestone when the milestone is achieved and is due and collectible. Milestones are considered substantive if all of the following conditions are met: (1) the milestone is nonrefundable; (2) achievement of the milestone was not reasonably assured at the inception of the arrangement; (3) substantive effort is involved to achieve the milestone; and (4) the amount of the milestone appears reasonable in relation to the effort expended, the other milestones in the arrangement and the related risk associated with achievement of the milestone.
Revenue from license arrangements
The Company recognizes revenue from licenses of its technologies over the applicable license term.
Revenue from sales of the reagents and supplies used for Argus consumable kits
Revenue is recognized for sales of the reagents and supplies used for Argus consumable kits upon shipment to the customer.
Share-based compensation
Share-based compensation expense is recognized at fair value. The fair value of share-based compensation to employees and directors is estimated, on the date of grant, using the Black-Scholes model. The resulting fair value is recognized ratably over the requisite service period, which is generally the vesting period of the option. For all time-vesting awards granted, expense is amortized using the straight-line attribution method. The Company accounts for forfeitures as they occur.
Option valuation models, including the Black-Scholes model, require the input of highly subjective assumptions, and changes in the assumptions used can materially affect the grant-date fair value of an award. These assumptions include the risk-free rate of interest, expected dividend yield, expected volatility and the expected life of the award.
Income taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to temporary differences between financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established when necessary to reduce deferred income tax assets to the amount expected to be realized.
Tax benefits are initially recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions are initially, and subsequently, measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the tax authority, assuming full knowledge of the position and all relevant facts.
The Company had federal net operating loss ("NOL") carryforwards of $151.0 million at December 31, 2016. Despite the NOL carryforwards, which begin to expire in 2022, the Company may have future tax liability due to alternative minimum tax or state tax requirements. Also, use of the NOL carryforwards may be subject to an annual limitation as provided by Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"). To date, the Company has not performed a formal study to determine if any of its remaining NOL and credit attributes might be further limited due to the ownership change rules of Section 382 or Section 383 of the Code. The Company will continue to monitor this matter going forward. There can be no assurance that the NOL carryforwards will ever be fully utilized.
Loss per share
Basic loss per share is computed by dividing net loss available to common stockholders by the weighted average number of shares of common stock outstanding during the period.
For periods of net income, and when the effects are not anti-dilutive, diluted earnings per share is computed by dividing net income available to common stockholders by the weighted-average number of shares outstanding plus the impact of all potential dilutive common shares, consisting primarily of common stock options and stock purchase warrants using the treasury stock method, and convertible preferred stock and convertible debt using the if-converted method.
For periods of net loss, diluted loss per share is calculated similarly to basic loss per share because the impact of all dilutive potential common shares is anti-dilutive. The number of anti-dilutive shares, consisting of (i) common stock options, (ii) stock purchase warrants, and (iii) restricted stock units representing the right to acquire shares of common stock which have been excluded from the computation of diluted loss per share, was 14.0 million shares and 5.9 million shares as of March 31, 2017 and 2016, respectively.
Recent accounting pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued guidance for revenue recognition for contracts, superseding the previous revenue recognition requirements, along with most existing industry-specific guidance. The guidance requires an entity to review contracts in five steps: 1) identify the contract, 2) identify performance obligations, 3) determine the transaction price, 4) allocate the transaction price, and 5) recognize revenue. The new standard will result in enhanced disclosures regarding the nature, amount, timing, and uncertainty of revenue arising from contracts with customers. In August 2015, the FASB issued guidance approving a one-year deferral, making the standard effective for reporting periods beginning after December 15, 2017, with early adoption permitted only for reporting periods beginning after December 15, 2016. In March 2016, the FASB issued guidance to clarify the implementation guidance on principal versus agent considerations for reporting revenue gross rather than net, with the same deferred effective date. In April 2016, the FASB issued guidance to clarify the identification of performance obligations and licensing arrangements. In May 2016, the FASB issued guidance addressing the presentation of sales and other similar taxes collected from customers, providing clarification of the collectability criterion assessment, as well as clarifying certain transition requirements. The Company has identified its major revenue streams and it plans on completing formal contract reviews in the second half of 2017. While the Company continues to assess all of the potential impacts of these ASUs, the Company does not expect the implementation of these ASUs to have a significant impact on the Company's consolidated results of operations, financial position and cash flows. The Company will assess the disclosure requirements prescribed by these ASUs in the second half of 2017 and it may be required to expand its disclosures. The Company will assess the method of adoption in the second half of 2017.
In July 2015, the FASB issued accounting guidance for inventory. Under the guidance, an entity should measure inventory within the scope of this guidance at the lower of cost and net realizable value, except when inventory is measured using LIFO or the retail inventory method. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. In addition, the FASB has amended some of the other inventory guidance to more clearly articulate the requirements for the measurement and disclosure of inventory. The standard is effective for reporting periods beginning after December 15, 2016. The amendments in this pronouncement should be applied prospectively, with earlier application permitted. The Company adopted this guidance effective January 1, 2017, on a prospective basis. The adoption of this new guidance did not have a material impact on the Company's consolidated financial statements.
In February 2016, the FASB issued guidance for the accounting for leases. The guidance requires lessees to recognize assets and liabilities related to long-term leases on the consolidated balance sheets and expands disclosure requirements regarding leasing arrangements. The guidance is effective for reporting periods beginning after December 15, 2018 and early adoption is permitted. The guidance must be adopted on a modified retrospective basis and provides for certain practical expedients. The Company is currently evaluating the impact, if any, that this new accounting pronouncement will have on its consolidated financial statements.
The Company has evaluated all other issued and unadopted Accounting Standards Updates and believes the adoption of these standards will not have a material impact on its results of operations, financial position, or cash flows.
Note 4 – 2015 Merck GHI financing
In July 2015, in connection with the Merger, the Company entered into a Purchase Agreement with Merck GHI, pursuant to which Merck GHI purchased 1,136,364 shares of common stock of the Company at $4.40 per share for gross proceeds of $5.0 million. Pursuant to the Purchase Agreement, the Company also issued to Merck GHI a 8% Senior Secured Promissory Note (the "Merck Note") in the principal amount of $1.0 million with a two-year maturity date from the date of issuance. The Company's obligations under the Merck Note are secured by a lien on all of the Company's assets. Under the Purchase Agreement, Merck GHI has the right to participate in future securities offerings made by the Company. Also in July 2015, the Company entered into a Registration Rights Agreement with Merck GHI and certain stockholders, which will require the Company to register for resale by such holders in the future, such shares of Company common stock that cannot be sold under an exemption from such registration.
The Company incurred issuance costs of approximately $50,000 related to the financing. Approximately $8,000 of the issuance costs were deferred as debt issuance costs and netted against notes payable in the accompanying condensed consolidated balance sheets as a result of the Company's adoption of the new accounting guidance in 2016, and are being amortized as interest expense over the life of the Merck Note. The remaining $42,000 of issuance costs were charged to additional paid-in capital.
Note 5 - Fair value measurements
The Company classifies its financial instruments using a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:
|
·
|
Level 1 - defined as observable inputs such as quoted prices in active markets;
|
|
·
|
Level 2 - defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and
|
|
·
|
Level 3 - defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions such as expected revenue growth and discount factors applied to cash flow projections.
|
For the three months ended March 31, 2017, the Company has not transferred any assets between fair value measurement levels.
Financial assets and liabilities measured at fair value on a recurring basis
The Company evaluates financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level at which to classify them each reporting period. This determination requires the Company to make subjective judgments as to the significance of inputs used in determining fair value and where such inputs lie within the hierarchy. The Company has no financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2017.
Financial assets and liabilities carried at fair value on a non-recurring basis
The Company does not have any financial assets and liabilities measured at fair value on a non-recurring basis.
Non-financial assets and liabilities carried at fair value on a recurring basis
The Company does not have any non-financial assets and liabilities measured at fair value on a recurring basis.
Non-financial assets and liabilities carried at fair value on a non-recurring basis
The Company measures its long-lived assets, including property and equipment and intangible assets (including goodwill), at fair value on a non-recurring basis when they are deemed to be impaired. No such fair value impairment was recognized in the three months ended March 31, 2017 and 2016.
Note 6 - Debt
As of March 31, 2017 and December 31, 2016, the Company's outstanding debt consisted of the $1.0 million Merck Note that is due in July 2017 (see Note 4).
Total interest expense on all debt instruments was $29,844 and $41,734 for the three months ended March 31, 2017 and 2016, respectively.
Note 7 - Stockholders' equity
As of March 31, 2017, the Company has 200,000,000 shares of authorized common shares and 27,377,490 issued and outstanding, and 10,000,000 of authorized preferred shares, of which none were issued or outstanding.
In September 2016, the Company entered into the Sales Agreement with Cowen pursuant to which the Company may offer and sell from time to time, up to an aggregate of $25 million of shares of its common stock through Cowen, as sales agent, with initial sales limited to an aggregate of $11.5 million. Pursuant to the Sales Agreement, Cowen may sell the shares of common stock by any method permitted by law deemed to be an "at the market" offering as defined in Rule 415 of the Securities Act, including, without limitation, sales made by means of ordinary brokers' transactions on The NASDAQ Capital Market or otherwise at market prices prevailing at the time of sale, in block transactions, or as otherwise directed by the Company. The Company pays Cowen compensation equal to
3.0
% of the gross proceeds from the sales of common stock pursuant to the terms of the Sales Agreement. As of March 31, 2017, the Company has sold an aggregate of approximately 5.7 million shares of its common stock under this at the market offering resulting in aggregate net proceeds to the Company of approximately $6.5 million, and gross proceeds of $6.9 million. As of March 31, 2017, remaining availability under the at the market offering is $4.6 million. For the three months ended March 31, 2017, the Company has sold approximately 2.1 million shares of its common stock under this at the market offering resulting in aggregate net proceeds to the Company of approximately $2.1 million, and gross proceeds of $2.2 million.
In May and June 2016, the Company offered and sold units in a private offering to members of management and employees and to accredited investors, including Merck GHI and jVen Capital, each unit consisting of either (i) one share of common stock and a detachable stock purchase warrant to purchase an additional 0.75 shares of common stock, or (ii) one share of non-voting convertible preferred stock and a detachable stock purchase warrant to purchase an additional 0.75 shares of common stock, at a price of $1.14 per unit. The total net proceeds to the Company, after deducting offering commissions and expenses was $9.5 million. Pursuant to the private placement the Company issued 6,744,127 shares of common stock, 2,309,428 of Series A non-voting convertible preferred stock and stock purchase warrants to acquire an additional 6,790,169 shares of common stock. Under the purchase agreement, the Company granted registration rights to the investors in the private financing.
Each share of Series A non-voting convertible preferred stock was convertible at the option of the holder in whole or in part and from time to time into one share of common stock, was entitled to dividends on an "as converted basis" when and if dividends are issued to common stockholders, and would have participated in liquidation on a
pari passu
basis with common stockholders. The preferred stock was classified as permanent equity. The stock purchase warrants issued as part of the units are exercisable at $1.3125 per share beginning 90 days after closing for five years, expiring on May 18, 2021. The warrants are classified as permanent equity at March 31, 2017. In connection with the issuance of Series A non-voting convertible preferred stock, the Company recognized a beneficial conversion feature of $332,550 as a deemed dividend to the preferred shareholders. Holders of the Series A non-voting convertible preferred stock subsequently converted all 2,309,428 shares of preferred stock into 2,309,428 shares of common stock.
The Company filed a registration statement on Form S-3 on June 13, 2016 to register for resale by the investors, from time to time, of the shares of common stock acquired, or underlying the warrants issued, in the private offering. On July 20, 2016, the registration statement was declared effective by the SEC.
Stock options
In 2008, the Company adopted the 2008 Stock Option and Restricted Stock Plan (the "2008 Plan"), pursuant to which the Company's Board of Directors could grant either incentive or non-qualified stock options or shares of restricted stock to directors, key employees, consultants and advisors.
In April 2015, the Company adopted, and the Company's stockholders approved, the 2015 Equity Incentive Plan (the "2015 Plan"); the 2015 Plan became effective upon the execution and delivery of the underwriting agreement for the Company's initial public offering in May 2015. Following the effectiveness of the 2015 Plan, no further grants will be made under the 2008 Plan. The 2015 Plan provides for the granting of incentive stock options within the meaning of Section 422 of the Code to employees and the granting of non-qualified stock options to employees, non-employee directors and consultants. The 2015 Plan also provides for the grants of restricted stock, restricted stock units, stock appreciation rights, dividend equivalents and stock payments to employees, non-employee directors and consultants.
Under the 2015 Plan, the aggregate number of shares of the common stock authorized for issuance may not exceed (1) 1,355,000 plus (2) the sum of the number of shares subject to outstanding awards under the 2008 Plan as of the 2015 Plan's effective date, that are subsequently forfeited or terminated for any reason before being exercised or settled, plus (3) the number of shares subject to vesting restrictions under the 2008 Plan as of the 2015 Plan's effective date that are subsequently forfeited. In addition, the number of shares that have been authorized for issuance under the 2015 Plan will be automatically increased on the first day of each fiscal year beginning on January 1, 2016 and ending on (and including) January 1, 2025, in an amount equal to the lesser of (1) 4% of the outstanding shares of common stock on the last day of the immediately preceding fiscal year, or (2) another lesser amount determined by the Company's Board of Directors. Shares subject to awards granted under the 2015 Plan that are forfeited or terminated before being exercised or settled, or are not delivered to the participant because such award is settled in cash, will again become available for issuance under the 2015 Plan. However, shares that have actually been issued shall not again become available unless forfeited. As of March 31, 2017, 1,145,402 shares remain available for issuance under the 2015 Plan, which includes 1,012,171 shares automatically added to the 2015 Plan on January 1, 2017.
On April 28, 2016, the Board of Directors of the Company made a stock option award to Evan Jones, the Company's Chief Executive Officer ("CEO") and Chairman of the Board. The non-qualified stock option award to acquire 766,500 shares of common stock represented approximately 6% of outstanding shares of common stock as of the date of the award. The stock option grant has an exercise price of $1.35 per share, a ten-year term and a vesting schedule of 25% vesting of the award on the first annual anniversary of the date of grant and then 6.25% vesting each quarter thereafter over three additional years. The plan under which the award was made incorporates by reference the provisions of the Company's 2015 Plan applicable to stock option awards. The stock option award was contingent on receipt of stockholder approval, as the award was made outside of the Company's stockholder-approved incentive plans. The stockholders approved the stock option award at the Company's Annual Meeting of Stockholders held on June 22, 2016.
For the three months ended March 31, 2017 and 2016, the Company recognized stock compensation expense as follows:
|
|
Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Cost of services
|
|
$
|
1,823
|
|
|
$
|
4,312
|
|
Research and development
|
|
|
57,778
|
|
|
|
62,218
|
|
General and administrative
|
|
|
152,476
|
|
|
|
172,103
|
|
Sales and marketing
|
|
|
33,328
|
|
|
|
22,864
|
|
|
|
$
|
245,405
|
|
|
$
|
261,497
|
|
No income tax benefit for stock-based compensation arrangements was recognized in the condensed consolidated statements of operations and comprehensive loss due to the Company's net loss position.
During the three months ended March 31, 2017, the Company granted stock options to acquire 723,600 shares of common stock at a weighted average exercise price of $1.03 per share and a weighted average grant date fair value of $0.54 per share. 4,863 options were forfeited during the three months ended March 31, 2017 at a weighted average exercise price of $1.82 per share. The Company had total stock options to acquire 3,514,071 shares of common stock outstanding at March 31, 2017.
Restricted stock units
In the fourth quarter of 2015, the Company granted restricted stock units to acquire 75,000 shares of common stock, with a weighted average grant date fair value of $1.70 per share, 18,750 shares of which remain outstanding as of March 31, 2017. No restricted stock units vested and no restricted stock units were forfeited during the three months ended March 31, 2017.
Stock purchase warrants
At March 31, 2017 and December 31, 2016, the following warrants to purchase shares of common stock were outstanding:
|
|
|
|
|
|
|
|
Outstanding at
|
|
Issuance
|
|
Exercise
Price
|
|
|
Expiration
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
August 2007
|
|
$
|
7.91
|
|
|
August 2017
|
|
|
8,921
|
|
|
|
8,921
|
|
March 2008
|
|
$
|
790.54
|
|
|
March 2018
|
|
|
46
|
|
|
|
46
|
|
November 2009
|
|
$
|
7.91
|
|
|
November 2019
|
|
|
6,674
|
|
|
|
6,674
|
|
January 2010
|
|
$
|
7.91
|
|
|
January 2020
|
|
|
6,674
|
|
|
|
6,674
|
|
March 2010
|
|
$
|
7.91
|
|
|
March 2020
|
|
|
1,277
|
|
|
|
1,277
|
|
November 2011
|
|
$
|
7.91
|
|
|
November 2021
|
|
|
5,213
|
|
|
|
5,213
|
|
December 2011
|
|
$
|
7.91
|
|
|
December 2021
|
|
|
664
|
|
|
|
664
|
|
March 2012
|
|
$
|
109.90
|
|
|
March 2019
|
|
|
4,125
|
|
|
|
4,125
|
|
February 2015
|
|
$
|
6.60
|
|
|
February 2025
|
|
|
225,011
|
|
|
|
225,011
|
|
May 2015
|
|
$
|
6.60
|
|
|
May 2020
|
|
|
3,457,750
|
|
|
|
3,457,750
|
|
May 2016
|
|
$
|
1.31
|
|
|
May 2021
|
|
|
4,739,348
|
|
|
|
4,739,348
|
|
June 2016
|
|
$
|
1.31
|
|
|
May 2021
|
|
|
2,050,821
|
|
|
|
2,050,821
|
|
|
|
|
|
|
|
|
|
|
10,506,524
|
|
|
|
10,506,524
|
|
The warrants listed above were issued in connection with various debt, equity or development contract agreements.
Note 8 - Commitments
Operating leases
The Company leases a facility in Woburn, Massachusetts under an operating lease that expires January 30, 2022. The Company also leases a facility in Gaithersburg, Maryland under an operating lease that expires January 31, 2021, with one additional five-year renewal at the Company's election. Additionally, the Company leases office space in Denmark; this lease is currently on a month-to-month basis.
Rent expense under the Company's facility operating leases for the three months ended March 31, 2017 and 2016 was $232,836 and $254,044, respectively.
Capital leases
The Company leases computer equipment, office furniture, and equipment under various capital leases. The leases expire at various dates through 2021. The leases require monthly principal and interest payments.
Registration and other stockholder rights
In connection with the various investment transactions, the Company entered into registration rights agreements with stockholders, pursuant to which the investors were granted certain demand registration rights and/or piggyback and/or resale registration rights in connection with subsequent registered offerings of the Company's common stock.
Note 9 - License agreements, research collaborations and development agreements
The Company is a party to five license agreements to acquire certain patent rights and technologies; two related to the FISH product line and three related to the Argus and MapIt product lines. Royalties are incurred upon the sale of a product or service which utilizes the licensed technology. Certain of the agreements require the Company to pay minimum royalties or license maintenance fees. The Company recognized net royalty expense of $69,245 and $69,854 for the three months ended March 31, 2017 and 2016, respectively. Annual future minimum royalty fees are $250,000 under these agreements.
In June 2016, the Company entered into a license agreement with Hitachi High-Technologies Corporation ("Hitachi"), pursuant to which it resolved various matters with respect to previously delivered milestones under the technology development agreement and provided a development license and commercial products license to certain technology. The license agreement contains non-contingent multiple elements (the licenses) that the Company determined did not have stand alone value, and a contingent substantive milestone. The licenses are treated as a single unit of accounting and the Company will recognize the revenue associated with that unit of accounting over the applicable license period. During the three months ended March 31, 2017, the Company recognized $6,164 of revenue related to the license agreement.
Note 10 - Related party transactions
In March 2014, the Company entered into a supply agreement with Fluidigm Corporation ("Fluidigm") under which Fluidigm supplies the Company with its microfluidic test platform for use in manufacturing the Acuitas MDRO Gene Test. The Company's CEO and Chairman of the Board of Directors is a director of Fluidigm. On July 12, 2015, the Company entered into a letter agreement (the "Fluidigm Agreement") with Fluidigm to expand the companies' existing relationship to include collaborating on the development of test kits and custom analytic instruments for identification, screening and surveillance testing of MDROs. The Fluidigm Agreement also expands the existing Supply Agreement between the Company and Fluidigm, and provides for expansion of the gene targets and organisms to be tested on the Company's existing CLIA lab-based tests, the Acuitas MDRO Gene Test and the Acuitas Resistome Test, using Fluidigm technologies and products. Additionally, Fluidigm has agreed not to develop or directly collaborate with any third party to develop an FDA approved or CE-marked diagnostic test for the purpose of detecting resistance genes for identified MDROs if the Company meets certain minimum purchase commitments and other requirements. The initial term of the Fluidigm Agreement is five years. Both parties have the ability to extend the term for an additional five years. Under the expanded Supply Agreement, the term was extended until March 17, 2018, and the Company has the right to extend the term of the Supply Agreement for up to two additional three-year terms. The Company paid $44,721 and $93,224 related to these agreements in the three months ended March 31, 2017 and 2016, respectively.
Under the Supply Agreement with Fluidigm, the Company had inventory purchases of $44,721 and $67,775 in the three months ended March 31, 2017 and 2016, respectively.
In addition, the Company has several capital lease arrangements for laboratory equipment manufactured by Fluidigm. The Company paid $30,254 and $45,106 related to the leased equipment in the three months ended March 31, 2017 and 2016, respectively.
In October 2016, the Company entered into an agreement with Merck Sharp & Dohme Corp., a wholly-owned subsidiary of Merck Co. & Inc. ("Merck"), an affiliate of Merck GHI, a principal stockholder of the Company and a related party to the Company. Under the agreement, Merck will provide access to its archive of over 200,000 bacterial pathogens. OpGen will initially perform molecular analyses on up to 10,000 pathogens to identify markers of resistance to support rapid decision making using the Acuitas Lighthouse, and to speed development of OpGen's rapid diagnostic products. Merck will gain access to the high-resolution genotype data for the isolates as well as access to OpGen's Acuitas Lighthouse informatics to support internal research and development programs. The Company is
required to expend up to $175,000 for the procurement of materials related to the activities contemplated by the agreement. Contract life-to-date, the Company has incurred $91,403 of procurement costs which have been recognized as research and development expense, including $59,133 in the three months ended March 31, 2017.
18,164,195 Units (each Unit contains 1 Share of Common Stock and 1 Common Warrant to purchase 1 Share of Common Stock)
or
6,835,805 Pre-funded Units (each Pre-funded Unit contains 1 Pre-funded Warrant to Purchase 1 Share of Common Stock and
1 Common Warrant to purchase 1 Share of Common Stock)
(6,835,805 Shares of Common Stock Underlying the Pre-funded Warrants) and
(25,000,000 Shares of Common Stock Underlying the Common Warrants)
PROSPECTUS
H.C. Wainwright & Co.
July 12, 2017