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RGDX > SEC Filings for RGDX > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for RESPONSE GENETICS INC

Form 10-Q for RESPONSE GENETICS INC


14-Nov-2012

Quarterly Report


Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations

Special Note Regarding Forward Looking Statements

Except for the historical information contained herein, this Quarterly Report on Form 10-Q contains or may contain, among other things, certain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements concerning our strategy, future operations, future financial position, future revenues, projected costs, prospects and plans and objectives of management. When used in this report, the words "expects," "anticipates," "intends," "estimates," "plans," "may," "will," "believes," and similar expressions are intended to identify forward-looking statements although not all forward-looking statements contain these identifying words. These are statements that relate to future periods and include statements about our expectation that, for the foreseeable future, a significant amount of our revenues will be derived from ResponseDX®sales; our ability to maintain revenue from pharmaceutical clients; the factors that may impact our financial results; the extent of our net losses and our ability to achieve sustained profitability; our business strategy and our ability to achieve our strategic goals; our expectations regarding revenues from ResponseDX® products; the amount of future revenues that we may derive from Medicare patients; the potential or intent to enter into distribution arrangements; our ability to sustain or increase demand for our tests; our sales forces' capacity to sell our tests; plans for the development of additional tests; our expectation that our research and development, general and administrative and sales and marketing expenses will increase and our anticipated uses of those funds; our ability to comply with the requirements of a public company; our ability to attract and retain qualified employees; our compliance with federal and state regulatory requirements; the potential impact resulting from the regulation of our tests by the U.S. Food and Drug Administration; the impact of new or changing policies or regulation of our business; our belief that we have filed adequate patent and trademark applications to protect our intellectual property rights; the impact of accounting pronouncements and our accounting policies, estimates, assumptions or models on our financial results; and anticipated challenges to our business.

Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expected. These risks and uncertainties include, but are not limited to, our ability to develop and commercialize new product without unanticipated delay; the risk that we may not maintain reimbursement for our existing tests or any future tests; the risk that reimbursement pricing may change; the risks and uncertainties associated with the regulation of our tests; our ability to compete;; our ability to obtain capital when needed; and our history of operating losses. These forward-looking statements speak only as of the date hereof. We expressly disclaim any obligation or undertaking to update any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

The following discussion of our financial condition and results of operations should be read in conjunction with our unaudited financial statements and related notes to the financial statements included elsewhere in this Quarterly Report on Form 10-Q as of September 30, 2012 and our audited financial statements for the year ended December 31, 2011 included in our Annual Report on Form 10-K previously filed with the Securities and Exchange Commission. This discussion contains forward-looking statements that relate to future events or our future financial performance. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward looking statements.

Overview

Response Genetics, Inc. was formed as a Delaware corporation in September 1999. We are a life sciences company engaged in the research and development and commercialization of clinical diagnostic tests for cancer. Our mission is to provide personalized genetic information that will help guide physicians and patients in choosing the treatment from which a given patient is most likely to benefit. We currently generate revenues primarily from sales of our ResponseDX® diagnostic tests, which we launched in 2008, and by providing clinical trial testing services to pharmaceutical companies.

Our proprietary technologies enable us to reliably and consistently extract the nucleic acids RNA and DNA from tumor specimens that are stored as formalin-fixed and paraffin-embedded, or FFPE, specimens and thereby to analyze genetic information contained in these tissues. Our technologies also enable us to use the FFPE patient biopsies for the development of diagnostic tests.

We file our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and other information with the SEC. Copies of these reports are also available through our website at www.responsegenetics.com. We also post copies of our press releases on our corporate website.

Our Approach

Clinical studies have shown that not all cancer therapy works effectively in every patient, and that a number of patients receive therapy that has no benefit to them and may potentially even be harmful. Our goal is to provide physicians and cancer patients with a means to make informed, individualized treatment decisions based on genetic analysis of tumor tissues through the utilization of our proprietary technology as well as through the use of non-proprietary technology that could also benefit patients.

Our approach to achieving this goal is to provide a range of oncology diagnostic testing services, focusing on solid tumors, which include technical laboratory services and professional interpretation of laboratory test results by licensed pathologists. In addition, we provide services to pharmaceutical companies and research organizations, including development of diagnostics and clinical trial testing services.

ResponseDX®

The outcome of cancer chemotherapy is highly variable due to genetic differences among patients. Some patients respond well with tumor shrinkage and increase in life span. Other patients do not obtain benefit from the same therapy but may still experience toxic side effects as well as delay in effective treatment and psychological trauma.

Many therapy regimens are administered without any pre-selection of patients on the basis of their particular genetics. However, recent development of very sensitive molecular technologies has enabled researchers to identify and measure genetic factors in patients' tissues that can predict the probability of success or failure of many currently used anti-cancer agents. In order to increase the chances of a better therapy outcome for cancer patients, we have and continue to develop genetic tests that measure predictive factors for tumor response in tumor tissue samples. We offer tests for non-small cell lung cancer, colorectal cancer and gastric and gastroesophageal, and melanoma cancer patients' tumor tissue specimens through our ResponseDX: Lung®, ResponseDX: Colon® and ResponseDX: Gastric® and ResponseDX: Melanoma® test suites. These test results may help doctors and patients decide the best course of treatment for patients.

Our ResponseDX® tests are commercially available through our laboratory located in Los Angeles, California, which is certified under the Clinical Laboratory Improvement Amendment of 1988.

Diagnostic Tests for Other Cancers

In addition to ResponseDX:Lung®, ResponseDX:Colon®, and ResponseDX: Gastric® and ResponseDX: Melanoma®, we are developing and intend to commercialize tests for other types of cancer that identify genetic profiles of tumors that are more aggressive and recur rapidly after surgery. We also are identifying genetic profiles of tumors that are more or less responsive to a particular therapy. Following the development of tests to predict the risk of recurrence after surgery, we intend to develop tests to determine the most active therapy regimen for the individual patient at risk. Once developed and after obtaining any necessary regulatory approvals, we intend to leverage our relationships in the healthcare industry to market, sell or license these tests as a means for physicians to determine the courses of cancer treatment.

Pursuit of Additional Collaborations and In-licensing to Expand Our Business

We intend to pursue additional collaborations with pharmaceutical companies or in-licensing of products or technologies that will enable us to accelerate the implementation of our plans to expand the services we provide to oncologists and pathologists. We expect to implement this plan by way of licensing of technology and know-how, investments in other companies, strategic collaborations, and other similar transactions. We expect these collaborations to provide us with early access to new technologies available for commercialization.

There are no assurances that we will be able to continue making our current ResponseDX® tests available, or make additional ResponseDX® tests available; that we will be able to develop and commercialize tests of other types of cancer; or that we will be able to expand our testing service business.

We anticipate that over the next 12 months, a substantial portion of our capital resources and efforts will be focused on research and development to expand our series of diagnostic tests for cancer patients, sales and marketing activities related to our ResponseDX® diagnostic tests, and for other general corporate purposes.

Research and development expenses represented 7.0% and 6.2% of our total operating expenses for the three months ended September 30, 2011 and 2012, respectively and 4.3% and 8.3% for the nine months ended September 30, 2011 and 2012, respectively. Major components of the $452,734 and $426,105 in research and development expenses for the three months ended September 30, 2011 and 2012, and $838,622 and $1,695,851 for the nine months ended September 30, 2011 and 2012, respectively, include supplies and reagents for our research activities, personnel costs, occupancy costs, equipment warranties and service, patent fees, insurance, business consulting and sample procurement costs.

Critical Accounting Policies and Significant Judgments and Estimates

This discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as revenues and expenses during the reporting periods. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could therefore differ materially from those estimates under different assumptions or conditions. We believe the following critical accounting policies reflect our more significant estimates and assumptions used in the preparation of our financial statements.

Revenue Recognition

Pharmaceutical Revenue

Revenues that are derived from testing services provided to pharmaceutical companies are recognized on a contract specific basis pursuant to the terms of the related agreements. Revenue is recognized in accordance with ASC 605, Revenue Recognition, which requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred and title and the risks and rewards of ownership have been transferred to the client or services have been rendered; (3) the price is fixed or determinable; and (4) collectability is reasonably assured.

Revenues are recorded on an accrual basis as the contractual obligations are met and as a set of assays is processed through the Company's laboratory under a specified contractual protocol and are recorded on the date the tests are resulted. Certain contracts have minimum assay requirements that, if not met, result in payments that are due upon the completion of the designated period. In these cases, revenues are recognized when the end of the specified contract period is reached, if the minimum assay requirements are not met.

ResponseDX®Revenue

Net revenue for the Company's diagnostic services is recognized on an accrual basis at the time discreet diagnostic tests are completed. Each test performed relates to a specimen encounter derived from a patient, and received by the Company on a specific date (such encounter is commonly referred to as an "accession"). The Company's services are billed to various payors, including Medicare, private health insurance companies, healthcare institutions, and self-pay patients. The Company reports net revenue from contracted payors, including certain private health insurance companies, and healthcare institutions based on the contracted rate, or in certain instances, the Company's estimate of the amount expected to be collected for the services provided. For billing to Medicare, the Company uses the published fee schedules, net of standard discounts (commonly referred to as "contractual allowances"). The Company reports net revenue from non-contracted payors, including certain private health insurance companies, based on the amount expected to be collected for the services provided.

The Company has its Medicare provider number which allows it to invoice and collect from Medicare. Invoicing to Medicare is primarily based on amounts allowed by Medicare for the service provided as defined by Common Procedural Terminology codes.

License Fees

We have licensed technology for the extraction of RNA and DNA from FFPE tumor specimens from USC in exchange for royalty fees on revenue generated by use of this technology. These royalties are calculated as a fixed percentage of revenue that we generate from use of the technology licensed from USC. Total license fees expensed in cost of revenue under the royalty agreement to USC were $123,873 and $98,740 for the three months ended September 30, 2011 and 2012, respectively and $382,685 and $231,180 for the nine months ended September 30, 2011 and 2012, respectively. We also maintain a non-exclusive license to use Roche's PCR processes. We pay Roche a fixed percentage royalty fee for revenue that we generate through use of this technology. Royalties expensed in cost of revenue under this agreement totaled $116,867 and $105,170 for the three months ended September 30, 2011 and 2012, respectively and $425,232 and $249,057 for the nine months ended September 30, 2011 and 2012, respectively.

We are subject to potentially significant variations in royalties recorded in any period. While the amount paid is based on a fixed percentage from revenues of specific tests pursuant to terms set forth in the agreements with USC and Roche, the amount due is calculated based on the revenue we recognize using the respective licensed technology. As discussed above, this revenue can vary from period to period as it is dependent on the timing of the specimens submitted by our clients for testing.

Accounts Receivable and Allowance for Doubtful Accounts

We invoice our pharmaceutical clients as specimens are processed and any other contractual obligations are met. Our contracts with pharmaceutical clients typically require payment within 45 days of the date of invoice. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our clients to make required payments. We specifically analyze accounts receivable and historical bad debts, client credit, current economic trends and changes in client payment trends when evaluating the adequacy of the allowance for doubtful accounts. Account balances are charged-off against the allowance when it is probable the receivable will not be recovered. To date, our pharmaceutical clients have primarily been large pharmaceutical companies. As a result, bad debts to date have been minimal and there is no allowance for doubtful accounts for our pharmaceutical revenue at September 30, 2011 and 2012.

We bill Medicare and Private Payors for ResponseDX® upon completion of the required testing services. As such, we take assignment of benefits and the risk of collection with Medicare and Private Payors. We continue to monitor the collection history for Medicare and Private Payors. Based on the historical experience for our Medicare and Private Payor accounts, we have determined that related accounts receivable associated with billings over one year old are unlikely to be collected.

An allowance for doubtful accounts is recorded for estimated uncollectible amounts due from the Company's various payor groups. The process for estimating the allowance for doubtful accounts involves significant assumptions and judgments. Specifically, the allowance for doubtful accounts is adjusted periodically, and is principally based upon an evaluation of historical collection experience of accounts receivable for the Company's various payor classes. After appropriate collection efforts, accounts receivable are written off and deducted from the allowance for doubtful accounts. Additions to the allowance for doubtful accounts are charged to bad debt expense. The payment realization cycle for certain governmental and managed care payors can be lengthy involving denial, appeal, and adjudication processes, and is subject to periodic adjustments that may be significant. Therefore, we have recorded an allowance for doubtful accounts of $838,750 as of December 31, 2011 and $864,419 as of September 30, 2012.

We cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. Measurement of such losses requires consideration of historical loss experience, including the need to adjust for current conditions, and judgments about the probable effects of relevant observable data, including present economic conditions such as delinquency rates and financial health of specific customers. We consider all available information in our assessments of the adequacy of the reserves for uncollectible accounts.

Income Taxes

We estimate our tax liability through calculations we perform for the determination of our current tax liability, together with assessing temporary differences resulting from the different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are recorded in our balance sheets. Our management then assesses the likelihood that deferred tax assets will be recovered in future periods through future operating results. To the extent that we cannot conclude that it is more likely than not that the benefit of such assets will be realized, we establish a valuation allowance to adjust the net carrying value of such assets. The carrying value of our net deferred tax assets assumes that we will be able to generate sufficient future taxable income, based on management's estimates and assumptions. These estimates and assumptions take into consideration future taxable income and ongoing feasible tax strategies in determining recoverability of such assets. Our valuation allowance is subject to significant change based on management's estimates of future profitability and the ultimate realization of the deferred tax assets. The Company has established a full valuation allowance against its net deferred tax assets due to the uncertainty surrounding the realization of such assets.

Results of Operations

Quarters Ended September 30, 2012 and September 30, 2011

Revenues: Revenues were $5,403,537 for the quarter ended September 30, 2012, as compared to $5,100,649 for the quarter ended September 30, 2011, an increase of $302,888. The increase was primarily due to an increase in pharmaceutical revenues of $619,909 offset by a decrease in ResponseDX® revenue of $317,021. ResponseDX® revenue accounted for 56.0% of total revenue for the quarter ended September 30, 2012 compared to 65.5% for the quarter ended September 30, 2011. For the quarter ended September 30, 2012, our two most significant pharmaceutical customers accounted for approximately 31% of our revenue, as compared to approximately 29% of our revenue for the quarter ended September 30, 2011.

Cost of Revenues: Cost of revenue for the quarter ended September 30, 2012 was $2,768,894 as compared to $2,538,176 for the quarter ended September 30, 2011, an increase of $230,718 or 9.1%. This increase resulted primarily from increases in lab supplies and reagent costs of $134,842, fees to Hitachi and Shanghai Bio of $101,193, personnel costs of $145,895, and rent of $51,081 offset in part by decreases in legal fees of $89,389, royalties of $36,830, consulting of $91,822, and travel expense of $16,888. Cost of revenues as a percentage of revenues was 51.2% for the quarter ended September 30, 2012, as compared to 49.8% for the quarter ended September 30, 2011, an increase of 1.4%.

Research and Development Expenses: Research and development expenses were $426,105 for the quarter ended September 30, 2012, as compared to $452,734 for the quarter ended September 30, 2011, a decrease of $26,629 or 5.9%. This decrease resulted primarily from a decrease in lab supplies of $114,773, offset by an increase in personnel costs of $98,306. We expect research and development expenses to increase as we continue work to develop additional aspects of our technology and to study diagnostic indicators for various forms of cancer.

General and Administrative Expenses: General and administrative expenses were $2,407,544 for the quarter ended September 30, 2012, as compared to $2,268,517 for the quarter ended September 30, 2011, an increase of $139,027 or 6.1%. This increase resulted primarily from increases in personnel costs of $121,562, legal fees of $41,467, bad debt expense of $428,965, and audit fees of $99,453, offset in part by decreases in travel of $100,738, billing fees of $123,881, foreign currency loss of $71,626, and a 2011 asset impairment charge of $157,241.

Sales and Marketing Expenses: Sales and marketing expenses were $1,195,988 for the quarter ended September 30, 2012, as compared to $1,251,054 for the quarter ended September 30, 2011, a decrease of $55,066 or 4.4%. The decrease primarily resulted from decreased sales activities for ResponseDX® in the form of lower personnel costs of $64,483. We expect that sales and marketing costs will increase as we expand our sales and marketing activities in order to gain clinical acceptance of our ResponseDX ® assays.

Income Taxes: As of September 30, 2012 and 2011, since we have incurred substantial losses and have generated no taxable income, a full valuation allowance has been recorded for the deferred tax assets since we do not believe the recoverability of the deferred income tax assets in the near future is more likely than not.

Nine Months Ended September 30, 2012 and September 30, 2011

Revenues: Revenues were $13,220,188 for the nine months ended September 30, 2012, as compared to $17,730,785 for the nine months ended September 30, 2011, a decrease of $4,510,597. This decrease was primarily due to a decrease in pharmaceutical revenue of $3,894,438 resulting from decreased sample volume from one of our largest customers during the first half of 2012 relative to 2011, and a decrease from prior year in ResponseDX® revenues of $616,159. ResponseDX® revenue accounted for 67% of total revenue for the nine months ended September 30, 2012 compared to 53% for the nine months ended September 30, 2011.For the nine months ended September 30, 2012, our two most significant pharmaceutical customers accounted for approximately 19.8% of our revenue, as compared to approximately 39.7% of our revenue for the nine months ended September 30, 2011.

Cost of Revenues: Cost of revenues for the nine months ended September 30, 2012 were $7,895,870 as compared to $8,040,003 for the nine months ended September 30, 2011, a decrease of $144,133 or 1.8%. This decrease resulted primarily from decreases in royalties of $327,679, fees to third party processors of $188,616, travel of $57,201, consulting of $56,202 and legal services of $296,234, offset in part by an increase in lab supplies and reagent costs of $70,171, personnel costs of $469,570, depreciation and amortization of $75,960, and facility expense of $167,029. Cost of revenues as a percentage of revenues was 59.7% for the nine months ended September 30, 2012, as compared to 45.3% for the nine months ended September 30, 2011, an increase of 14.4%.

Research and Development Expenses: Research and development expenses were $1,695,851 for the nine months ended September 30, 2012, as compared to $838,622 for the nine months ended September 30, 2011, an increase of $857,229 or 102%. This increase resulted primarily from increases in lab supplies and reagent costs of $409,694, personnel costs of $368,172, consulting costs of $40,448, and legal costs of $189,523. We expect research and development expenses to increase as we continue to work to develop additional aspects of our technology and to study diagnostic indicators for various forms of cancer.

General and Administrative Expenses: General and administrative expenses were $6,686,559 for the nine months ended September 30, 2012, as compared to $6,493,079 for the nine months ended September 30, 2011, an increase of $193,480 or 3.0%. This increase resulted primarily from increases in personnel costs of $207,566, audit fees of $101,901, legal costs of $59,178, business consulting $62,155, and bad debt expense of $436,299, offset by decreases in travel of $116,623, business taxes of $217,335, billing services of $281,119 and a 2011 asset impairment charge of $157,241.

Sales and Marketing Expenses: Sales and marketing expenses were $4,145,115 for the nine months ended September 30, 2012, as compared to $4,107,639 for the nine months ended September 30, 2011, an increase of $37,476 or 0.9%. This increase primarily resulted from increased sales and marketing activities for ResponseDX®, which included increases in business travel of $46,988 and business consulting of $73,351, offset by decreases in personnel costs of $71,321. We expect that sales and marketing costs will continue to increase as we expand our sales and marketing activities in order to gain clinical acceptance of our ResponseDX®assays.

Income Taxes: As of September 30, 2012 and 2011, since we have incurred substantial losses and have generated no taxable income, a full valuation allowance has been recorded for the deferred tax assets since we do not believe the recoverability of the deferred income tax assets in the near future is more likely than not.

Liquidity and Capital Resources

We incurred net losses of $1,415,540 and $1,415,488 during the three months ended September 30, 2011 and 2012, respectively. Since our inception in September 1999, we have incurred cumulative losses and as of September 30, 2012, we had an accumulated deficit of $56,789,324. We have not yet achieved profitability and anticipate that we will likely incur additional losses for the next year. We cannot provide assurance as to when we will achieve profitability. We expect that our cash and cash equivalents will continue to be used to fund our selling and marketing activities primarily related to our ResponseDX® tests, research and development, and general corporate purposes. As a result, we will need to generate significant revenues to achieve profitability or raise additional financing in the future, as needed. However, there can be no assurance that any additional financing will be available on acceptable terms, if at all.

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