BIOCEPT INC Management report and analysis of the financial situation and operating results. (Form 10-K)
The following discussion of our financial condition and results of operations should be read together with our financial statements and related notes included elsewhere in the Annual Report. This discussion contains forward-looking statements based upon our current plans, estimates, beliefs and expectations that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under the sections entitled "Risk Factors," "Special Note Regarding Forward-Looking Statements" and elsewhere in this Annual Report. We are a molecular oncology diagnostics company that develops and commercializes proprietary clinical diagnostic laboratory assays designed to identify rare tumor cells and cell-free tumor DNA from blood and cerebrospinal fluid, or CSF. The identification of tumor cells and cell-free tumor DNA in CSF has become our principal development focus following our early commercial expansion into CSF in 2020. This product was branded and trademarked as CNSideTM in
April 2021. The identification of circulating tumor cells, or CTCs, and circulating cell-free tumor DNA and RNA, or ctDNA and ctRNA, deriving from solid tumors such as breast cancer or lung cancer using a standard blood sample has been described as a "liquid biopsy." This term reflects the ease with which peripheral blood can be drawn compared to performing a surgical biopsy, but this technology is not limited to a peripheral blood approach. In January 2020, we adapted and validated our proprietary blood-based liquid biopsy technology for commercial and clinical research use in CSF to identify tumor cells that have metastasized to the central nervous system, or CNS, in patients with advanced lung cancer or breast cancer. CNSide has been designed to improve the clinical management of patients with suspected metastatic cancer involving the CNS by enabling the quantitative analysis and molecular characterization of tumor cells and ctDNA and ctRNA in the CSF. Since then, we have worked extensively with leading neuro-oncologists and other cancer experts to further define and characterize the use of this unique assay. Our efforts have culminated in the presentation of our early clinical experience at several leading academic forums, including most recently the Society of Neuro-Oncology, or SNO, Brain Metastases meeting in August 2021, as well as the Annual Society of Neuro-Oncologymeeting in November 2021and the San AntonioBreast Cancer Symposium, or SABCS, in December 2021. We believe these presentations have illustrated the feasibility of this assay to inform three critical questions important for the care of patients with suspected or confirmed metastatic cancer involving the CNS: Is there tumor (diagnosis)? Is there target (presence of a biomarker to aid treatment selection)? Is there trend (a response to therapy)? The question "Is there tumor?" is essential for the diagnostic work-up of these patients. Tumor cells in the blood can shed from either primary or metastatic tumors. They can be rapidly removed in the capillary beds of the spleen, liver, kidneys, lungs and other organs, so they are rarely found. They are the defining feature of metastasis to the leptomeningeal space within the CNS and hence define the presence or absence of leptomeningeal metastasis, or LM. To distinguish tumor cells derived from CSF and blood we often refer to tumor cells in CSF as CSF Tumor Cells, or CSFTCs, rather than CTCs. Regarding the second clinical question, "Is there target?" our CNSide assay provides a vehicle for several different diagnostic assay profiles which combined with our molecular test menu can identify tumor cell biomarkers that are intended to help physicians make decisions related to the evolution or course of metastatic tumor that may inform treatment decisions. Cancer cells typically acquire genetic alterations which differ from that of normal cells. Metastatic cancers often acquire additional genetic alterations which distinguish them from the primary tumor site. This marked genetic variation between areas of tumor growth is termed "genetic heterogeneity," and findings related to this were featured in our SABCS presentation in December 2021illustrating the value of CNSide in identifying "genetic heterogeneity" of a targetable biomarker called HER2. Finally, regarding the third clinical question, "Is there trend?" over the past year we have gained considerable experience with cases that had been sampled multiple times over the course of a patient's treatment. The association of quantitative CSF tumor cell counts with response to treatment has been noted in both lung and breast cancer, as well as other tumors examined. In August 2021, at the SNO Brain Metastases meeting, we presented data obtained from a single institution experience showing how serial monitoring of CSFTCs by CNSide was used to determine the response to treatment in patients with Non-Small Cell Lung Cancerhaving LM. In addition, in November 2021at SNO, we presented the early findings of several patients with breast cancer having LM which had been followed with multiple CSF samples drawn at different time points on each patient. The downward progression of tumor cell counts has been noted by several treating physicians to correlate with response to treatment and resolution of symptoms. Serial monitoring of genetic alterations present in CSF tumor cells may create 74 -------------------------------------------------------------------------------- opportunities to change the therapy of certain patients throughout treatment. These observations presented in abstracts and poster presentations in 2021 have informed our clinical study strategy which is the basis for our 2022 efforts to further explore these observations in a prospective clinical trial.
Summary of the response to the COVID-19 pandemic
June 2020, to respond to a national public health emergency precipitated by the COVID-19 pandemic, we introduced molecular testing for SARS-CoV2, the virus responsible for COVID-19, using a United States Food and Drug Administration, Emergency Use Authorization, based "RT-PCR" method developed by Thermo-Fisher. In November 2021, we launched a combined COVID-19/Influenza A/Influenza B assay manufactured by Thermo-Fisher which broadened our assay menu to meet the rising demand related to winter testing with emergence of new COVID-19 variants such as Delta (summer 2021) and Omicron (fall/winter 2021-22). Since launch of our COVID-19 testing program, we have performed more than 800,000 assays for customers. We have primarily marketed our COVID-19 testing services to skilled nursing facilities in the western United Statesand also to certain community colleges within California. Our COVID-19 testing services were responsible for most of our revenues during 2020 and 2021. However, as a result of increased vaccination and immunization levels, as well as decreased COVID-19 hospitalizations, reported cases and mandatory COVID-19 testing, we are currently seeing reduced demand for our COVID-19 testing services and expect this trend to continue absent a negative and sustained turn in the course of the pandemic.
Additional Oncology Testing Services
In addition to CNSide, our current blood-based testing includes our Target SelectorTM technologies which enable detection of specific gene mutations, such as EGFR, KRAS or BRAF, in cell-free ctDNA from blood samples, as well as specific protein and gene alterations, such as HER2 amplification, in CTCs isolated from blood. We believe our multi-modality combination of a proprietary cell capture and analysis method with a proprietary ctDNA approach provides both high-sensitivity and specificity and is applicable to a broad range of diagnostic applications in patients with metastatic carcinoma. In
January 2019, we began offering research use only, or RUO, liquid biopsy kits containing our patented and proprietary ctDNA Target Selector molecular (PCR-based) testing for certain specific cancer genes to laboratories and researchers worldwide. In March 2020, we released an update for our RUO EGFR Target Selector Kit which expanded the sample types validated to include both blood and CSF. In March 2020, we also released a RUO BRAF Target Selector assay validated for ctDNA. At our corporate headquarters facility located in San Diego, California, we operate a clinical laboratory that is CLIA-certified, CAP accredited and licensed by the California Department of Public Health. In this facility we also develop novel assays that are part of our project pipeline for future commercial launch and we manufacture our microfluidic channels and various assay reagents and products used in our testing processes. We also work closely with external manufacturers to outsource certain products such as collection tubes and to manufacture items that we intend to use in the near future to reduce costs and improve efficiency. The assays we offer and intend to offer are classified as CLIA laboratory developed tests, or LDTs, under CLIA regulations. CLIA certification and state licensure in Californiaand certain other states under the supervision of a qualified laboratory medical director is required before any clinical laboratory, including ours, may perform testing on human specimens for the purpose of obtaining information for the diagnosis, prevention, or treatment of disease or the assessment of health. In addition, we participate in and have received CAP accreditation, which includes rigorous bi-annual laboratory inspections and requires adherence to specific quality standards.
Our primary sales strategy is to engage neuro-oncologists, oncologists and other physicians in
the United Statesat private and group practices, hospitals, laboratories and cancer centers to educate them about our unique products and services. In addition, 75 -------------------------------------------------------------------------------- we market our clinical trial and research services to pharmaceutical and biopharmaceutical companies and clinical research organizations. We also market and sell molecular assay kits which enable laboratories other than Bioceptto perform our testing in house. Sales of these kits began in the first quarter of 2019. Further, sales to laboratory supply distributors of our proprietary specimen collection tubes, or SCTs, commenced in June 2018, which allow for the intact transport of liquid biopsy samples for research use only from regions around the world.
.Our revenue generation efforts are concentrated in the following areas:
• provide laboratory services to neuro-oncologists, oncologists and others
physicians or healthcare providers treating patients with cancer who use the biomarker information we provide in order to determine the best treatment plan for their patients;
• provide laboratory services using both our CTC and ctDNA and ctRNA
assays to help pharmaceutical and biopharmaceutical companies
run clinical studies establishing the use of novel drug therapies used to treat cancer; • licensing our proprietary technology and selling our distributed products, including our SCTs and assay kits, to partners in
the United Statesand abroad; and • Performing COVID-19 testing. We plan to grow our business by directly offering our CNSide and Target Selector liquid biopsy CTC and molecular assays to neuro-oncologists, oncologists and other physicians or heath care providers who treat patients with cancer. Based on our product development data, as well as discussions with our key collaborators, we believe that our planned future assays, particularly those related to CSF, should provide important information and clinical value to physicians. We believe our ability to rapidly translate insights about the utility of cytogenetic, immunocytochemical and molecular biomarkers to provide information to neuro-oncologists, oncologists and other physicians for treatment decisions in the clinical setting will improve patient treatment and management, and that these assays will become a key component of the standard of care for personalized cancer treatment.
Key Factors Affecting Our Results of Operations and Financial Condition
Our overall long-term growth plan depends on our ability to continue to develop and commercialize products and assays through our CLIA-certified, CAP-accredited, and state-licensed laboratory. We have commercialized our Target Selector assays for breast cancer, non-small cell lung cancer, or NSCLC, gastric cancer, colorectal cancer, prostate cancer, pancreaticobiliary cancer, and ovarian cancer, and plan to continue to launch a series of cancer diagnostic assays for different predictive biomarkers assays in
the United Statesas LDTs performed in our laboratory and enhance revenue for these products through the efforts of our sales and marketing organization. Our sales strategy is to engage medical oncologists, neuro-oncologists, surgical oncologists, urologists, pulmonologists, pathologists and other physicians in the United Statesat private and group practices, hospitals and cancer centers. We also plan to continue to evaluate potential opportunities for the commercialization of our products and assays in other countries. Additionally, sales of our proprietary SCTs which allow for the intact transport of liquid biopsy samples for research use only, or RUO, from regions around the world, commenced during 2018. In addition to testing for physicians and their patients, we offer clinical trials testing and research services to help increase the efficiency and economic viability of clinical trials for pharmaceutical and biopharmaceutical companies and clinical research organizations both within and outside of the United States. We are currently exploring the possibility of introducing ctDNA technology outside the United Statesas part of IVD test kits and/or testing systems utilizing our Target Selector technologies. We plan to continue to cooperate with partners on accessing markets internationally either through partnerships with local groups and distributors or through the development of IVDs and/or test systems, including instrumentation. We also have a research and development program focused on technology enhancements, novel platform development, and evaluating clinical applications for our cancer diagnostic tests in different cancer types and clinical settings. To facilitate market adoption of our products and assays, we anticipate having to successfully complete additional clinical utility studies with clinical samples to generate clinical utility data and then publish our results in peer-reviewed scientific journals. Our ability to complete such clinical studies is dependent upon our ability to leverage our collaborative relationships with leading institutions to facilitate our research, to conduct the appropriate clinical studies and to obtain favorable clinical data. We currently collaborate with key thought leaders, physicians and clinical researchers across the country, including those at Sarah Cannon Research Institute, University of Colorado, Northwestern University Lurie Cancer Center, Stanford76 -------------------------------------------------------------------------------- University, Penn State University, University of California, San Diego, St John's Cancer Instituteat Santa Monica(formerly John Wayne Cancer Institute), Columbia University, Emory University, Johns Hopkins Medical Institute, University of Texas Southwestern Medical Center, Yale University, Ohio State University, Vanderbilt University, Georgetown Universityand many others and plan to expand our collaborative relationships to include other key thought leaders at other institutions for the cancer types we target with our Target Selector commercialized assays and our planned future assays, as well as for our current and planned future products. Such relationships help us develop and validate the effectiveness and utility of our products, commercialized assays and our planned future assays in specific, clinical settings and provide us access to patient samples and data. We believe that the factors discussed in the following paragraphs have had and are expected to continue to have a material impact on our results of operations and financial condition. Revenues The Company's commercial revenues are generated from diagnostic services provided to patient's physicians and billed to third-party insurance payers such as managed care organizations, Medicare and Medicaid and patients for any deductibles, coinsurance or copayments that may be due. The Company recognizes revenue in accordance with Accounting Standards Code 606, Revenue from Contracts with Customers, or ASC 606, which requires that an entity recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. We bill third-party payers on a fee-for-service basis at our list price and third-party commercial revenue is recorded net of contractual discounts, payer-specific allowances and other reserves. Our development services revenues are supported by contractual agreements and generated from assay development services provided to entities, as well as certain other diagnostic services provided to physicians. Diagnostic services are completed upon the delivery of assay results to the prescribing physician, at which time we bill for the service. Our gross commercial revenues billed are subject to estimated deductions for such contractual discounts, payer-specific allowances and other reserves to arrive at reported net revenues, which relate to differences between amounts billed and corresponding amounts estimated to be subsequently collected. These third-party payer discounts and sales allowances are estimated based on a number of assumptions and factors, including historical payment trends, seasonality associated with the annual reset of patient deductible limits on January 1of each year, and current and estimated future payments. The estimates of amounts that will ultimately be realized from commercial diagnostic services require significant judgment by us. Patients do not enter into direct agreements with us that commit them to pay any portion of the cost of the tests in the event that they have not met their annual deductible limit under their insurance policy, if any, or if their insurance otherwise declines to reimburse us. Adjustments to the estimated payment amounts are recorded at the time of final collection and settlement of each transaction as an adjustment to commercial revenue.
Costs and expenses
We classify our costs and expenses into four categories: cost of revenues, research and development, sales and marketing, and general and administrative. Our costs and expenses principally consist of facility costs and overhead, personnel costs, outside services and consulting costs, laboratory consumables, development costs, and legal fees. Cost of Revenues. Our cost of revenues consists principally of facility costs and overhead, personnel costs, and laboratory and manufacturing supplies and materials. We are pursuing various strategies to reduce and control our cost of revenues, including automating aspects of our processes, developing more efficient technology and methods, and attempting to negotiate improved terms and volume discounts with our suppliers. Research and Development Expenses. We incur research and development expenses principally in connection with our efforts to develop and improve our tests. Our primary research and development expenses consist of direct personnel costs, laboratory equipment and consumables, and overhead expenses. We anticipate that research and development expenses will increase in the near-term, principally to develop and validate tests in our pipeline and to perform work associated with clinical utility studies and development collaborations. In addition, we expect that our costs related to collaborations with research and academic institutions will increase. All research and development expenses are charged to operations in the periods in which they are incurred. 77 -------------------------------------------------------------------------------- Sales and Marketing Expenses. Our sales and marketing expenses consist principally of personnel and related overhead costs for our sales team and their support personnel, travel and entertainment expenses, and other selling costs including sales collaterals and trade shows. We anticipate sales and marketing expenses to increase as we work on generating higher revenues and marketing additional offerings. General and Administrative Expenses. General and administrative expenses consist principally of personnel-related expenses, professional fees, such as legal, accounting and business consultants, insurance costs, and other general expenses. We expect that our general and administrative expenses will increase as we expand our business operations. We further expect that general and administrative expenses will increase due to increased information technology, legal, insurance, accounting and financial reporting expenses associated with expanded commercial activities.
Critical Accounting Policies and Significant Judgments and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in
the United States of Americarequires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods. While we believe these estimates are reasonable and consistent, they are by their very nature estimates of amounts that will depend on future events. Accordingly, actual results could differ from these estimates. Our Audit Committee periodically reviews our significant accounting policies. Our critical accounting policies arise in conjunction with the following: • revenue recognition;
• stock-based compensation; and
• going concern. Revenue Recognition We initiate a revenue transaction when we receive a requisition order to perform a diagnostic test. The information provided on the requisition form is used to determine the party that will be billed for the testing performed and the expected reimbursement. We recognize revenue and satisfy our performance obligation for services rendered when the testing process is complete, and associated results are reported. Revenues flow from clients, patients, Medicare and Medicaid and other third-party payers. We consider negotiated discounts and anticipated adjustments, including historical collection experience for the payer portfolio, when revenues are recorded.
Here are the descriptions of our payers:
Client payers represent the portion of revenue related to physicians, hospitals, health systems, accountable care organizations, employers and other entities where payment is received exclusively from the entity ordering the testing service.
Patient revenues include revenue from uninsured patients and member cost-share for insured patients (e.g., coinsurance, deductibles and non-covered services). Uninsured patients are billed based upon our fee schedules. We bill insured patients as directed by their health plan and after consideration of the fees and terms associated with an established health plan contract.
Medicare and Medicaid
Medicare and Medicaid revenues are received from traditional Medicare and Medicaid programs. Net revenue from these programs is based on the fee schedule established by the related government authority. In addition, other adjustments including anticipated payer denials are considered when determining net revenue. Any remaining adjustments to revenue are recorded at the time of final collection and settlement. These adjustments are not material to our results of operations in any period presented. 78
Third Party Third party includes revenue related to insurance companies. Most of our third-party revenue is reimbursed on a fee-for-service basis. These payers are billed based on our established list price and revenue is recorded net of contractual discounts. Revenues are recorded based upon contractually negotiated fee schedules, with revenues for non-contracted managed care organizations recorded based on historical reimbursement experience.
Revenue recognition and associated reserves
Our commercial revenues are generated from diagnostic services provided to patient's physicians and billed to third-party insurance payers such as managed care organizations, Medicare and Medicaid and patients for any deductibles, coinsurance or copayments that may be due. We recognize revenue in accordance with ASC 606, Revenue from Contracts with Customers, or ASC 606, which requires that an entity recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services.
For our commercial revenues, while we market directly to physicians, our customer is the patient. Patients do not enter into direct agreements with us, however, a patient's insurance coverage requirements would dictate whether or not any portion of the cost of the tests would be patient responsibility. Accordingly, we establish a contract with a commercial patient in accordance with other customary business practices, as follows:
• Approval of a contract is established by the order and membership, which are
submitted by the patient’s physician.
• We are obligated to perform our diagnostic services upon receipt of a sample
of a physician, and the patient and/or applicable payor are required to
reimburse us for services rendered based on the patient’s insurance benefits.
• Payment terms are based on the patient’s existing insurance benefits,
including the impact of hedging decisions with CMS and applicable
the reimbursement contracts between us and the payers, unless the patient
is a self-paid patient, we bill the patient directly after the
services are provided.
• Once we have provided a patient’s test result to the prescribing physician, the
contract with a patient has commercial substance, as we are legally able to
collect payment and bill an insurer and/or a patient, regardless of the payer
contract status or health insurance benefit status.
• The consideration associated with commercial income is considered variable and
constrained until fully auctioned, with net revenues recorded to the extent that
that it is likely that a significant reversal will not occur.
Our development services revenue is supported by contractual agreements and generated from assay development services provided to entities, as well as certain other diagnostic services provided to physicians, and revenue is recognized upon delivery of performance obligations in the contract.
A performance obligation is a promise in a contract to transfer a distinct good or service, or a bundle of goods or services, to the customer. For commercial and development services revenues, our contracts have a single performance obligation, which is satisfied upon rendering of services, which culminates in the delivery of a patient's assay result(s) to the ordering physician or entity. The duration of time between test order receipt and delivery of a valid assay result to the ordering physician or entity is typically less than two weeks, and for our RT-PCR COVID-19 testing, typically 48 hours or less. Accordingly, we elected the practical expedient and therefore, we do not disclose the value of unsatisfied performance obligations.
The transaction price is the amount of consideration that we expect to collect in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties, such as sales taxes. The consideration expected from a contract with a customer may include fixed amounts, variable amounts, or both. Our gross commercial revenues billed, and corresponding gross accounts receivable, are subject to estimated deductions for such allowances and reserves to arrive at reported net revenues, which relate to differences between amounts billed and corresponding amounts estimated to be subsequently collected and is deemed to be variable although the variability is not explicitly stated in any contract. Rather, the implied variability is due to several factors, such as the payment history or lack thereof for third-party payers, reimbursement rate changes for contracted and non-contracted payers, any patient co-payments, deductibles or compliance incentives, the 79 -------------------------------------------------------------------------------- existence of secondary payers and claim denials. We estimate the amount of variable consideration using the most likely amount approach to estimating variable consideration for third-party payers, including direct patient bills, whereby the estimated reimbursement for services are established by payment histories on CPT codes for each payer, or similar payer types. When no payment history is available, the value of the account is estimated at Medicare rates, with additional other payer-specific reserves taken as appropriate. Collection periods for billings on commercial revenues range from less than 30 days to several months, depending on the contracted or non-contracted nature of the payer, among other variables. The estimates of amounts that will ultimately be realized from commercial diagnostic services for non-contracted payers require significant judgment by management. We limit the amount of variable consideration included in the transaction price to the unconstrained portion of such consideration. Revenue is recognized up to the amount of variable consideration that is not subject to a significant reversal until additional information is obtained or the uncertainty associated with the additional payments or refunds is subsequently resolved. Differences between original estimates and subsequent revisions, including final settlements, represent changes in the estimate of variable consideration and are included in the period in which such revisions are made. We monitor our estimates of transaction price to depict conditions that exist at each reporting date. If we subsequently determine that we will collect more than we originally estimated for a contract with a customer, we will account for the change as an increase in the estimate of the transaction price in the period identified as an increase to revenue. Similarly, if we subsequently determine that the amount we expect to collect from a customer is less than originally estimated, we will generally account for the change as a decrease in the estimate of the transaction price in the period identified as a decrease to revenue, provided that such downward adjustment does not result in a significant reversal of cumulative revenue recognized. Revenue recognized from changes in transaction prices was not significant during the year ended
December 31, 2020, however, transaction prices decreased 18% for the year ended December 31, 2021due to a decline in COVID-19 reimbursement rates. Further, although the Company believes that its estimate for contractual allowances and other reserves is appropriate, it is possible that the Company will experience an impact on cash collections as a result of the impact of the COVID-19 pandemic.
Assign the transaction price
For our commercial revenues, the entire transaction price is allocated to the single performance obligation contained in a contract with a customer. For our development services revenues, the contracted transaction price is allocated to each single performance obligation contained in a contract with a customer as performed. Point-in-time Recognition Our single performance obligation is satisfied at a point in time, and that point in time is defined as the date a patient's successful assay result is delivered to the patient's ordering physician or entity. We consider this date to be the time at which the patient obtains control of the promised diagnostic assay service. Contract Balances The timing of revenue recognition, billings and cash collections results in accounts receivable recorded in our balance sheets. Generally, billing occurs subsequent to delivery of a patient's test result to the ordering physician or entity, resulting in an account receivable.
We do not adjust the transaction price for the effects of a large financing component because at the start of the contract we expect the collection cycle to be one year or less.
We expense sales commissions when incurred because the amortization period is one year or less, which are recorded in selling and marketing expenses.
We incur certain other costs that are incurred regardless of whether a contract is obtained. Such costs are primarily related to legal services and patient communications. These costs are expensed as incurred and recorded within general and administrative expenses. 80
We account for stock-based compensation under the provisions of ASC 718, Compensation-Stock Compensation, which requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors based on estimated fair values on the grant date. We estimate the fair value of stock option awards on the date of grant using the Black-Scholes option pricing model, or Black-Scholes valuation model. The fair value of RSUs is determined by the price of our common stock on the date of grant. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods using the straight-line method. We estimate forfeitures at the time of grant and revise our estimates in subsequent periods if actual forfeitures differ from those estimates.
Continuity of exploitation
We assess and determine our ability to continue as a going concern under the provisions of ASC Topic 205-40, Presentation of Financial Statements-Going Concern, which requires us to evaluate whether there are conditions or events that raise substantial doubt about our ability to continue as a going concern within one year after the date that our annual and interim financial statements are issued. Certain additional financial statement disclosures are required if such conditions or events are identified. If and when an entity's liquidation becomes imminent, financial statements should be prepared under the liquidation basis of accounting. Determining the extent, if any, to which conditions or events raise substantial doubt about our ability to continue as a going concern, or the extent to which mitigating plans sufficiently alleviate any such substantial doubt, as well as whether or not liquidation is imminent, requires significant judgment by us. We have determined that it is not probable based on projected cash flows that substantial doubt about the Company's ability to continue as a going concern exists for the one-year period following the date that the financial statements for the year ended
December 31, 2021were issued.
The COVID-19 pandemic continues to evolve, and the extent to which COVID-19 may impact our business will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the ultimate geographic spread of the disease, the duration of any outbreaks, travel restrictions and social distancing in
the United Statesand other countries, government-funding for COVID-19 testing, business closures or business disruptions, and the effectiveness of actions taken in the United Statesand other countries to contain and treat the disease. We estimate that the COVID-19 pandemic led to an approximate 15% to 25% decline in commercial volume from current customers for the year ended December 31, 2020, and also impacted opportunities for us to gain new customers with the closing of many physician offices and labs. For the year ended December 31, 2021, the volume of our oncology business was reduced by approximately 3% from the previous year. We are continuing to vigilantly monitor the situation with our primary focus on the health and safety of our employees and clients. In April 2020, we announced that we validated a COVID-19 molecular diagnostic test and that we would begin accepting physician-ordered testing requests. The testing volume was initially limited by the national shortage of specimen collection kits. In June 2020, we announced the availability of 10,000 specimen collection kits for COVID-19 testing for physician ordering. Collected specimens are shipped to our high-complexity, CLIA-certified, CAP-accredited and BSL-2 safety level laboratory in San Diegowith results returned to ordering physicians in an estimated 24 to 48 hours. We have received more than 800,000 samples for processing through our RT-PCR technology at our laboratory to date. We are currently seeing reduced demand for our COVID-19 testing services and expect this trend to continue absent a negative and sustained turn in the course of the pandemic. 81
The following table sets forth certain information regarding our results of operations for the periods indicated (in thousands):
For the years ended Change December 31, 2020 2021 $ % Net revenues
$ 27,461 $ 61,249 $ 33,788123% Costs and expenses: Cost of revenues 21,337 37,764 16,427 77% Research and development expenses 5,220 4,960 (260 ) (5%) General and administrative expenses 9,973 12,614 2,641 26% Sales and marketing expenses 6,400 8,320 1,920 30% Total costs and expenses 42,930 63,658 20,728 48% Loss from operations (15,469 ) (2,409 ) 13,060 (84%) Other income/(expense): Interest expense, net (236 ) (290 ) (54 ) 23% Warrant inducement expense (2,102 ) - 2,102 * Total other income/(expense): (2,338 ) (290 ) 2,048 (88%) Loss before income taxes (17,807 ) (2,699 ) 15,108 (85%) Income tax expense - (125 ) (125 ) * Net loss and comprehensive loss (17,807 ) (2,824 ) 14,983 (84%) Deemed dividend related to warrants down (3 ) 0 3 * round provision Net loss attributable to common $ (17,810 ) $ (2,824 ) $ 14,986(84%) shareholders __________ * Not meaningful. 82
Net revenues were approximately
$61.2 millionfor the year ended December 31, 2021, compared with approximately $27.5 millionfor the year ended December 31, 2020. The composition of our net revenues recognized during the years ended December 31, 2021and 2020, disaggregated by source and upon delivery, are as follows (in thousands): For the year ended December 31, 2020 2021 Change %
Net income from non-contract payers
35,260 21,190 151%
Net commercial revenues 26,863 60,931 34,068 127% Development services revenues 177 147 (30 ) (17%) Kits and Specimen Collection Tubes (SCTs) 421 171 (250 ) (59%) Total net revenues
$ 27,461 $ 61,249 $ 33,788123%
*Includes Medicare and Medicare Advantage as reimbursements are fixed.
The 127% increase in net commercial revenues was attributable to overall accession volumes related to significant RT-PCR COVID-19 testing that was launched during the second quarter of 2020 and continued through 2021. Total commercial accessions delivered for the years ended
December 31, 2021and 2020 were 532,520 and 191,461, respectively, of which 528,917 and 187,764, respectively, were related to RT-PCR COVID-19 testing. Estimated revenue per commercial accession delivered during the year ended December 31, 2021was $115per commercial accession delivered while during the year ended December 31, 2020it was approximately $140per commercial accession delivered. The decrease in revenue per commercial accession delivered, as compared to the prior year, is primarily the result of lower reimbursement rates related to our RT-PCR COVID-19 testing. Approximately 57% of our contracted payers reduced their reimbursement rates and we increased our accounts receivable reserves by approximately $7.2 millionfor the year ended December 31, 2021.
The following table presents certain information concerning commercial accession files and development services delivered during the financial years ended
2020 2021 # / $ %
# Commercial inputs delivered 191,461,532,520,341,059 $178% Estimated value per salesperson
(25 ) (18%) accession delivered Year ended Change December 31, 2020 2021 # / $ % # Development services cases delivered 459 468 9 2% $ Value estimated per development $ 386
$ 314(19%) accession delivered $ (72 )Development revenues remained relatively flat as the development services cases delivered only increased by 9 cases for the year ended December 31, 2021and the revenue per development services accession did not increase compared to the same period in the prior year. Kits and SCT revenues decreased by approximately $0.3 millionfor the year ended December 31, 2021, which includes product distribution of Target Selector RUO kits, CEE-Sure® SCTs and research and development reimbursement revenues. Approximately $0.1 millionof the decrease is due to our completing a co-development contract with Aegea which was focused on developing a highly sensitive PCR-based assay designed by Aegea for detecting the COVID-19 virus and the remaining variance is due to a decrease in the Target Selector RUO and molecular assay kits to research and development customers as a result of the customers completing their research and development projects. 83
Costs and expenses
Cost of Revenues. Cost of revenues was approximately
$37.8 millionfor the year ended December 31, 2021, compared with approximately $21.3 millionfor the year ended December 31, 2020, representing an increase of approximately $16.4 millionor 77% primarily resulting from increased revenues related to our RT-PCR COVID-19 testing business. Although we continue to leverage the fixed components of our costs, our cost of revenue as a percentage of net revenues decreased by approximately 21% for the year ended December 31, 2021as compared to the same period in the prior year. The overall increase was primarily due to the following increases: a $7.8 millionincrease in COVID-19 related materials and supplies, a $5.5 millionincrease in personnel related costs, a $1.5 millionincrease in temporary labor costs, a $1.0 millionincrease in facility expenses, a $0.4 millionincrease in sample cost allocations, a $0.2 millionincrease in preventive equipment maintenance and a $0.1 millionincrease in miscellaneous indirect costs. Cost of revenues are comprised of, but not limited to, expenses related to personnel costs, materials, shipping and other direct costs, as well as equipment depreciation and software amortization expenses. Research and Development Expenses. Research and development expenses were approximately $5.0 millionfor the year ended December 31, 2021, compared with approximately $5.2 millionfor the year ended December 31, 2020, a decrease of approximately $0.3 millionor 5%. The decrease was primarily attributable to a decrease in research and development materials of approximately $0.3 million, a decrease of temporary labor of approximately $0.2 million, and a decrease in facility costs of approximately $0.1 million, partially offset by an increase in personnel costs of approximately $0.3 million. The decrease in materials and facility costs is due to refocusing our genomic assay development in areas of development that were not as expensive and decreasing the activities in our translational lab due to relocating our facilities which delayed ongoing research by a couple of months. The decrease in temporary labor was offset with the increase in personnel costs due to hiring additional full-time employees. Research and development expenses are comprised of, but not limited to, personnel costs, material, shipping, other direct costs, computer and laboratory equipment maintenance and facility related costs. General and Administrative Expenses. General and administrative expenses were approximately $12.6 millionfor the year ended December 31, 2021, compared with approximately $10.0 millionfor the year ended December 31, 2020, an increase of approximately $2.6 million, or 26%. The overall increase is due to the following: a $1.5 millionincrease in personnel costs, a $0.8 millionincrease in billing and insurance software expenses, a $0.7 millionincrease in office expenses, which are directly related to support COVID-19 testing, and a $0.3 millionincrease in legal and patent expenses, a $0.1 millionincrease in directors and officer's liability insurance and $0.1 millionincrease in audit fees. These expenses were offset by: a $0.7 milliondecrease related to a reduction in proxy support services, a $0.1 milliondecrease in outside services expenses and a $0.1 milliondecrease in facility expenses. General and administrative expenses are comprised of, but not limited to, personnel costs, facilities, depreciation, repairs and maintenance costs, stock-based compensation expenses, patent and legal costs, accounting and audit fees, as well as insurance, office and other expenses. Sales and Marketing Expenses. Sales and marketing expenses were approximately $8.3 millionfor the year ended December 31, 2021, compared with approximately $6.4 millionfor the year ended December 31, 2020, an increase of approximately $1.9 million, or 30%. The increase was primarily attributable to higher sales commissions of approximately $1.2 million, due to higher revenues during the period, an increase of approximately $0.4 millionin personnel costs, due to an increase in headcount, an increase in tradeshow expenses of approximately $0.2 millionand an increase in office expenses of approximately $0.1 million. Sales and marketing expenses are comprised of, but not limited to, personnel costs, trade show and other marketing related expenses, as well as office supplies and other costs. Interest Expenses. Interest expenses were approximately $0.3 millionfor the year ended December 31, 2021, compared to approximately $0.2 millionfor the year ended December 31, 2020, representing an increase of less than $0.1 million, or 22%. Interest expenses are comprised of interest incurred related to finance leases used to obtain equipment. For the year ended December 31, 2021, the Company entered seven additional financed equipment leases. Warrant Inducement and Other Expenses. There were no warrant inducement and other expenses for the year ended December 31, 2021compared with approximately $2.1 millionfor the same period in 2020, a decrease of $2.1 million, as there were no inducement warrants issued for the period ending December 31, 2021. 84
income tax expense
Except as disclosed below, over the past several years we have generated operating losses in all jurisdictions in which we may be subject to income taxes. As a result, we have accumulated significant net operating losses and other deferred tax assets. Because of our history of losses and the uncertainty as to the realization of those deferred tax assets, a full valuation allowance has been recognized. Due to the suspension of
California'snet operation loss utilization for 2021, we have accrued as of December 31, 2021a current income tax provision of $0.1 million. We have not completed a study to assess whether an ownership change has occurred or whether there have been multiple ownership changes since our formation, due to the complexity and cost associated with such a study, and the fact that there may be additional ownership changes in the future, however, we believe multiple ownership changes likely occurred. As a result, we have estimated that the use of our net operating loss is limited and the remaining net operating loss carryforwards and research and development credits we estimate can be used in the future remain fully offset by a valuation allowance to reduce the net asset to zero. Inflation
We do not believe that inflation has had a material adverse effect on our business or results of operations during the periods presented.
Cash and capital resources
We are actively working to improve our financial position and enable the growth of our business, by raising new capital and generating revenues. As the year 2021 progressed, we experienced significant growth in our COVID-19 testing volumes and related revenues (as noted above, the commercial accessions delivered for the years ended
December 31, 2021and 2020 were 532,520 and 191,461, respectively, of which 528,917 and 187,764 respectively, were related to RT-PCR COVID-19 testing), which allowed us to generate positive cash flow from operations in 2021, and accumulate $28.9 millionof cash on hand as of December 31, 2021. While we contemplate a reduction of COVID testing revenue in 2022 going forward, our projections indicate sufficient capital to carry the business through the first quarter of 2023. In May 2020, the SECdeclared effective a shelf registration statement filed by us. This shelf registration statement allows us to issue any combination of our common stock, preferred stock, debt securities and warrants from time to time for an aggregate initial offering price of up to $100.0 million. In May 2021, we entered into a Controlled Equity OfferingSM Sales Agreement, or the Sales Agreement, with Cantor Fitzgerald & Co., or the Sales Agent, under which we may issue and sell from time to time up to $25.0 millionof our common stock through or to the Sales Agent, as sales agent or principal. Any sale of shares of our common stock under the Sales Agreement will be made under our shelf registration statement on Form S-3. Sales of our common stock under the Sales Agreement are made at market prices by any method that is deemed to be an "at the market offering" as defined in Rule 415(a)(4) under the Securities Act of 1933, as amended. As of December 31, 2021, $10.2 millionof our common stock remained available for sale under the Sales Agreement.
Our net cash flows from operating, investing and financing activities for the periods below were as follows (in thousands):
For the year ended December 31, 2020 2021 Cash provided by/(used in): Operating activities
$ (19,786 ) $ 3,690Investing activities (867 ) (1,572 ) Financing activities 25,720 12,378 Net increase in cash $ 5,067 $ 14,496Cash Used/Provided by Operating Activities. Net cash provided by operating activities was approximately $3.7 millionfor the year ended December 31, 2021, compared to net cash used in operating activities of approximately $19.8 millionfor the year ended December 31, 2020. The increase in the cash provided by operating activities of approximately $23.5 millionwas primarily due to the decrease in our net loss of approximately $15.0 millionfor the period ended December 31, 2021. 85 -------------------------------------------------------------------------------- Furthermore, cash provided by operations increased due to an increase from the prior year for the following expenses: Depreciation and amortization of approximately $1.6 million, and stock-based compensation of approximately $2.5 millionwhich was offset by a decrease in accrued liabilities of $0.1 millionand warrant inducement expense of approximately $2.1 millionas there were no warrant inducements issued for the period ending December 31, 2021. Cash Used in Investing Activities. Net cash used in investing activities was approximately $1.6 millionfor the year ended December 31, 2021, compared to net cash used in investing activities of approximately $0.9 millionfor the year ended December 31, 2020which is predominately related to an increase in lab equipment purchases. Cash Provided by Financing Activities. Net cash provided by financing activities was $12.4 millionfor the year ended December 31, 2021, compared to net cash provided by financing activities of $25.7 millionfor the year ended December 31, 2020. Our primary sources of cash from financing activities during the year ended December 31, 2021consisted of net proceeds of $14.1 millionfrom the sale of our common stock pursuant to the Sales Agreement. Net proceeds from financing transactions during the year ended December 31, 2021were partially offset by approximately $1.8 millionof principal payments made on financed leases and supplier indebtedness. Our primary sources of cash from financing activities during the year ended December 31, 2020consisted of the sale of our common stock in three financing transactions in March and April 2020, as well as the exercise of common stock warrants. Net proceeds from financing transactions during the year ended December 31, 2020were partially offset by $1.5 millionof principal payments made on finance leases and indebtedness.
Significant liquidity, capital resources and cash requirements
We expect to continue to incur substantial operating losses in the future. We expect that we will use the net proceeds from our sale of equity securities, if any, cash received from the licensing of our technology, if any, and our revenues from operations to hire sales and marketing personnel, support increased sales and marketing activities, fund further research and development, clinical utility studies and future enhancements of our assays, acquire equipment, implement automation and scale our capabilities to prepare for significant assay volume, for general corporate purposes and to fund ongoing operations and the expansion of our business, including the increased costs associated with expanded commercial activities. We may also use the net proceeds from our sale of equity securities, if any, cash received from the licensing of our technology, if any, and our revenues from operations to acquire or invest in businesses, technologies, services or products, although we do not have any current plans to do so. In
May 2020, the SECdeclared effective a shelf registration statement filed by us. The shelf registration statement allows us to issue any combination of our common stock, preferred stock, debt securities and warrants from time to time for an aggregate initial offering price of up to $100.0 million. In May 2021, we entered into the Sales Agreement with the Sales Agent, under which we may issue and sell from time to time up to $25,000,000of our common stock through or to the Sales Agent, as sales agent or principal. Sales of our common stock under the Sales Agreement are made at market prices by any method that is deemed to be an "at the market offering" as defined in Rule 415(a)(4) under the Securities Act of 1933, as amended. During 2021, we received net proceeds of $14.1 millionfrom the sale of our common stock pursuant to the Sales Agreement. As of December 31, 2021, $10.2 millionof our common stock remained available for sale under the Sales Agreement. As of December 31, 2021, our cash totaled $28.9 million. The COVID-19 testing revenue during 2020 and 2021 has provided us with increased levels of cash inflows from operations. However, we are currently seeing reduced demand for our COVID-19 testing services and expect this trend to continue absent a negative and sustained turn in the course of the pandemic. As a result, we believe that based on our current and planned cash usage, along with current COVID-19 testing revenues, our cash balances will support our operations for at least the next 12 months. As such, we determined that it is not probable based on projected cash flows that substantial doubt about our ability to continue as a going concern exists for the one-year period following the date that the financial statements for the year ended December 31, 2021were issued. The COVID-19 pandemic continues to evolve, and the extent to which COVID-19 may impact the Company's business will depend on future developments, including whether the number of cases continues to decrease, the potential emergence of new variants, and testing policies of governments, businesses and schools. While the Company experienced increased revenue levels in 2020 and 2021 related to its COVID-19 testing business and attained net income in the fourth quarter in 2020 and in the first quarter of 2021, these results are not expected to be indicative of future results as the COVID-19 pandemic subsides. 86 -------------------------------------------------------------------------------- We expect that we will need additional financing to execute on our current or future business strategies beyond the next 12 months. Until we can generate significant cash from operations, including assay revenues, we expect to continue to fund operations with the proceeds from offerings of our equity securities or debt, or transactions involving product development, technology licensing or collaboration. For example, we have an effective shelf registration statement on file with the SECwhich allows us to issue any combination of our common stock, preferred stock, debt securities and warrants from time to time until expiration in May 2023. The specific terms of additional future offerings, if any, under this shelf registration statement would be established at the time of such offerings. We can provide no assurances that any sources of a sufficient amount of financing will be available to us on favorable terms, if at all. If we are unable to raise a sufficient amount of financing in a timely manner, we would likely need to scale back our general and administrative activities and certain of our research and development activities. Our forecast pertaining to our current financial resources and the costs to support our general and administrative and research and development activities are forward-looking statements and involve risks and uncertainties. Actual results could vary materially and negatively as a result of a number of factors, including: • the impact of the COVID-19 pandemic on our business; • our ability to secure financing and the amount thereof; • the costs of operating and enhancing our laboratory facilities;
• the costs of developing our internal sales and marketing forecasts
• the scope, progress and results of our research and development programs,
including clinical utility studies;
• the scope, progress, results, costs, schedule and results of the clinical study
utility studies for our diagnostic tests;
• our ability to control the manufacturing costs of our microfluidic channels;
• the costs of maintaining, expanding and protecting our intellectual assets
real estate portfolio, including potential litigation costs and liabilities;
• our ability to obtain adequate reimbursement from governments and other
third-party payers for our tests and services;
• additional general and administrative staff costs, including
accounting and finance, legal and human resources, by becoming
a public company; • our ability to collect revenues; and • other risks discussed in our other filings with the
SEC. We may raise additional capital to fund our current operations and to fund expansion of our business to meet our long-term business objectives through public or private equity offerings, debt financings, borrowings or strategic partnerships coupled with an investment in our company or a combination thereof. If we raise additional funds through the issuance of convertible debt securities, or other debt securities, these securities could be secured and could have rights senior to those of our common stock. In addition, any new debt incurred by us could impose covenants that restrict our operations. The issuance of any new equity securities will also dilute the interest of our current stockholders. Given the risks associated with our business, including our unprofitable operating history and our ability or inability to develop additional assays, additional capital may not be available when needed on acceptable terms, or at all. If adequate funds are not available, we will need to curb our expansion plans or limit our research and development activities, which would have a material adverse impact on our business prospects and results of operations.
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