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SGNL > SEC Filings for SGNL > Form 10-K on 21-Mar-2016All Recent SEC Filings

Show all filings for SIGNAL GENETICS, INC.

Form 10-K for SIGNAL GENETICS, INC.


21-Mar-2016

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Introduction

The following discussion and analysis should be read together with our financial statements and the related notes appearing elsewhere in this report. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. See "Forward-Looking Statements" for a discussion of the uncertainties, risks and assumptions associated with these statements. Actual results and the timing of events could differ materially from those discussed in our forward-looking statements as a result of many factors, including those set forth under "Risk Factors" and elsewhere in this report.

All references to 2015 and 2014 refer to our calendar years ended December 31, 2015 and 2014, respectively.

Overview

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

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

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

Our growth strategy includes the following key elements:

║ Expanding the U.S. market penetration of our MyPRS« test by increasing the geographic coverage of our commercial organization.
║ Broadening the base of health care insurance companies that have approved reimbursements for MyPRS«.
║ Expanding the diagnostic indications for MyPRS« to include asymptomatic monoclonal gammopathy ("AMG"), the precursor conditions to MM.
║ Pursuing additional collaborations with pharmaceutical companies who focus on developing therapies to treat MM and its precursor disease.
║ Expanding our information technology infrastructure to further improve our customer service experience.
║ Continuing to leverage our relationship with UAMS via our exclusive license agreement.
║ Expanding our test offering with the addition of other molecular tests useful to physicians who care for MM patients.
║ Expanding and leverage our capabilities into additional blood cancer indications.
║ Pursuing additional collaborations, mergers and acquisitions, and in-licensing to expand our service offering.
║ Continuing to reduce the costs associated with the development, manufacture and interpretation of our proprietary genomic tests and services.

We believe a key challenge to achieving our growth strategy will be our ability to become contracted with additional payors beyond Medicare and Arkansas Blue Cross Blue Shield ("AR-BCBS"). In order to broaden our coverage policy approval to include a number of the major health care insurance providers in the United States, we have developed a clinical validity and utility dossier and health economic model to present to third-party payors that supports their reimbursement approval. MyPRS« has been studied extensively and there are more than 30 peer-reviewed scientific publications that describe the validity and utility of the test. MyPRS« is one of the most extensively validated genomic assays available today. Further, the MyPRS« assay has been validated on patient cohorts totaling over 4,500 patients, detailed in 17 peer-reviewed publications. Please visit our website at www.signalgenetics.com in the "Publications" section under the "Physician Resources" tab for a list of these publications. These publications were used to help create the aforementioned clinical utility dossier that justifies reimbursement approval by the majority of health care payors.

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

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

2015 Highlights

║ In February 2015, we completed a follow-on offering of 3,696,427 shares of our common stock, including the underwriters' overallotment, at $2.80 per share, for net cash proceeds of $9.1 million, which is net of $1.3 million in underwriter commissions and estimated offering expenses.
║ During September 2015, we sold 2,734,983 shares of common stock pursuant to a shelf registration through an "at-the-market" equity offering program (the "ATM program") for total cash proceeds of $4.0 million, which is net of $429,000 in sales agent's commissions and offering expenses. Due to the size of our public float, the current ATM program has been completed, unless and until our public float increases.
║ In June 2015 we executed a Master Service Agreement ("MSA") with a leading pharmaceutical company. Under the MSA, our proprietary MyPRS« genetic test will be run across multiple clinical trials in connection with the development of novel treatments for patients with multiple myeloma. During 2015, we began the first of four studies as part of the MSA. Under the agreement, MyPRS« will help inform patterns of response to novel therapy regimens with the aim of enabling physicians to better manage multiple myeloma patients based on their specific genetic profile.
║ In August 2015, we announced that we executed an agreement with America's Choice Provider Network ("ACPN"). Under the terms of the agreement, our MyPRS« assay will be offered through ACPN's proprietary network which covers over 22 million patients across the United States. We expect increased reimbursement support for our assay through agreements such as this to have a positive impact on our revenue generation over the long term.
║ In September 2015, we announced that we executed a master services agreement ("MSA") with a leading biopharmaceutical company. The first two projects under this MSA, which commenced during 2015, will deploy our proprietary MyPRS« test to inform the customers' clinical stage development program of a novel treatment, including potential combination therapies with current drugs, for patients with multiple myeloma.
║ During the fourth quarter of 2015 we executed agreements with additional preferred provider organizations ("PPO"). Under the terms of the agreements, our MyPRS« assay will be offered through additional PPO networks including the Stratose, USA Managed Care Organization, and Evolutions Healthcare Systems PPO networks. Together with the PPO agreement we announced in August 2015 and our other payor relationships with Medicare and Blue Cross Blue Shield of Arkansas, the covered lives within our universe has increased to over 155 million patients in the United States.
║ In November 2015 a peer-reviewed paper highlighting the clinical utility of MyPRS« was published on-line in the journal Leukemia. In the paper, titled "The Clinical Value of Molecular Subtyping Multiple Myeloma Using Gene Expression Profiling", authored by N. Weinhold et al., researchers examined a dataset of 1,217 multiple myeloma patients treated at UAMS to gauge the impact of novel therapies on molecular and risk subgroups. As part of the research, MyPRS« (also known as the GEP70 test) was used to classify patients into risk categories and molecular subtypes. The outcome of this research demonstrates the importance of classifying the risk category and subtype of a patient's cancer in order to appropriately manage the course of treatment.

Sources of Revenues and Expenses

Revenues

We generate revenues primarily from the completion of tests processed through our CAP-accredited and CLIA certified laboratory when test results are delivered to ordering physicians. During 2015 and 2014, we had two major customers, UAMS and Moffitt. Revenue sourced either from or through UAMS accounted for 54% and 84% of our net revenue during 2015 and 2014, respectively. Revenue sourced through Moffitt accounted for approximately 10% and 9% of our net revenue during 2015 and 2014, respectively.

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

Cost of Revenue

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

Research and Development Expenses

Our research and development expenses primarily include personnel costs, laboratory supplies, reagents, consulting costs associated with developing and validating new testing services and sponsored research agreements with leading academic institutions for clinical trials and other studies to further validate the use of MyPRS«for MM and AMG.

Selling and Marketing Expenses

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

General and Administrative Expenses

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

Interest Expense

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

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures in the financial statements. Critical accounting policies are those accounting policies that may be material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and that have a material impact on financial condition or operating performance. While we base our estimates and judgments on our experience and on various other factors that we believe to be reasonable under the circumstances, actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies used in the preparation of our financial statements require significant judgments and estimates. For additional information relating to these and other accounting policies, see Note 2 to our audited financial statements, appearing elsewhere in this report.

Revenue Recognition

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

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

Our estimates of net revenue for non-contracted insurance companies are subject to change based on the contractual status and payment policies of the third-party payors with whom we deal. We regularly refine our estimates in order to make estimated revenue as accurate as possible based on its most recent collection experience with each third-party payor. We regularly review our historical collection experience for non-contracted payors and anticipated changes in the healthcare industry and adjust expected revenues for current and subsequent periods accordingly, including previously recorded revenues related to outstanding accounts receivable for such non-contracted payors. During 2015, net unfavorable changes in estimates were recorded to revenue related to non-contracted revenues recorded in the prior year of $193,000 and represented 32% of the total non-contracted revenues for 2014. Although we regularly refine our estimates to reflect recent historical collection experience, if we have a similar percentage reduction of 32% in our estimated amount to be collected from non-contracted payors on the uncollected accounts receivable from non-contracted payors at December 31, 2015 of $131,000, this could result in a $42,000 unfavorable change in our financial position and results of operations.

Accounts Receivable, Contractual Allowances and Allowance for Doubtful Accounts

We record accounts receivable net of contractual allowances and an allowance for doubtful accounts. At December 31, 2015 and 2014, contractual allowances were $2.1 million and $1.5 million, respectively. We estimate an allowance for doubtful accounts based on the aging of the accounts receivable and the historical collection experience for each of our contracted payors. When the amounts are determined to be uncollectible, they are expensed as bad debt and subsequently charged-off against the allowance. During 2015 and 2014, we recognized $33,000 and $177,000 in bad debt expense, respectively. At December 31, 2015 and 2014, there were no allowances for doubtful accounts.
Uncollectability of accounts receivable for a non-contracted payor is typically a reflection of an estimate in excess of actual collections and is adjusted in the period of collection as a change in estimate resulting in an increase in contractual allowances and, therefore, a reduction in current period net revenue.

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

                                                                         December 31, 2015
(in thousands)                              0 - 30 Days     31 - 60 Days     61 - 90 Days     Over 90 Days      Total
Medicare                                   $       116     $        55      $        32      $         16     $    219
Contracted insurance companies                      13               -                9                16           38
Direct bill                                        101              12               24                14          151
Non-contracted insurance companies                 336             256              215             1,244        2,051
Accounts receivable, gross                         566             323              280             1,290        2,459
Less: contractual allowances                      (347 )          (245 )           (230 )          (1,243 )     (2,065 )
Accounts receivable, net                   $       219     $        78      $        50      $         47     $    394




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

The days sales outstanding ("DSO") was 53 days at December 31, 2015 compared to 84 days at December 31, 2014. The decrease in DSO is primarily due to improved collection of Medicare and non-contracted third party payors during 2015, reflective of improved collection procedures internally. Net revenues from private insurance payors was 19% and 7% of total net revenue during 2015 and 2014, respectively. Since these customers are slower to pay, we would expect our DSO's to increase as net revenues from these customers increase.

Stock-Based Compensation

We recognize compensation expense in an amount equal to the estimated fair value of each stock award over the estimated period of service and vesting. The estimation of the fair value of each stock-based grant or issuance involves numerous assumptions by management. The use of different values by management in connection with these assumptions could produce substantially different results.

Accounting for Income Taxes

Deferred income taxes result primarily from temporary differences between financial and tax reporting. Deferred tax assets and liabilities are determined based on the difference between the financial statement basis and tax basis of assets and liabilities using enacted tax rates. Future tax benefits are subject to a valuation allowance when management is unable to conclude that our deferred tax assets will more-likely-than-not be realized from the results of operations. Our estimate for the valuation allowance for deferred tax assets requires management to make significant estimates and judgments about projected future operating results. If actual results differ from these projections or if management's expectations of future results change, it may be necessary to adjust the valuation allowance.

Recent Accounting Pronouncements

We have reviewed all recently issued standards and have determined that other than as disclosed in Note 2 to the consolidated financial statements included herein, such standards will not have a material impact on our consolidated financial statements or do not otherwise apply to our operations.

Future Accounting Pronouncements

Section 107 of the JOBS Act provides that an emerging growth company, such as our company, can take advantage of an extended transition period for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. Although to date, we have not yet taken advantage of this delay, we have elected to avail ourselves of this extended transition period for adopting new or revised accounting standards in the future. Therefore, we will not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. As a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates. In the future, we may elect to opt out of the extended period for adopting new or revised accounting standards. If we do so, we will be required to disclose such decision, which will be irrevocable.

Results of Operations

Year Ended December 31, 2015 Compared to the Year Ended December 31, 2014



Net Revenue



Net revenue was $2.5 million during 2015, a decrease of $1.8 million, or 41%,
compared to $4.3 million during 2014. Net revenue and tests billed during 2015
and 2014 were as follows:



                                            Net Revenue                                          Tests Billed
                                                    Increase (Decrease)                                  Increase (Decrease)
(dollars in thousands)     2015        2014            $              %         2015        2014            #              %
UAMS-sourced:
Research programs        $   954     $ 3,114     $    (2,160 )       (69 )%     1,170       3,225          (2,055 )       (64 )%
Clinical patient
revenue                      412         504             (92 )       (18 %        346         448            (102 )       (23 )%
Other US hospitals and
direct billed
customers                  1,052         668             384          57 %        921         511             410          80 %
Pharmaceutical
services                     120          34              86         253 %         59          12              47         392 %
Total                    $ 2,538     $ 4,320          (1,782 )       (41 )%     2,496       4,196          (1,700 )       (41 )%

The net revenue recognized and number of tests reported and billed under the UAMS research programs decreased 69% and 64% respectively, in 2015 compared to 2014 primarily due to the decrease in funds available at UAMS for such programs. We expect continued declining revenue from the UAMS research programs.

The number of tests we reported and billed for UAMS-sourced clinical patients decreased 23% in 2015 when compared to 2014 due to the normal fluctuation in patient census. Net revenue recognized for such tests billed decreased 18% in 2015 when compared to 2014. The decrease in net revenue related to the decreased test volume, offset by $73,000 of net unfavorable prior year adjustments, booked in 2015, related to revenues recorded in the prior year.

The number of tests we billed for other U.S. hospitals and direct billed customers increased 80% in 2015 when compared to 2014 due to an increase in new hospital customers, a direct result of the ongoing expansion of our commercial organization and our increased marketing efforts. Net revenue recognized for such tests increased 57% in 2015 when compared to 2014. The increase in net revenue was driven by the increased test volume offset by a reduction in test average selling price estimates used to calculate revenue for billings to non-contracted insurance payors. Additionally, a net unfavorable prior year adjustment of $120,000 was booked in 2015, relating to revenues recorded in the prior year. The reduction in current year pricing estimates for these non-contracted payors was in anticipation of the potential impact of the Affordable Care Act on utilization, coupled with a review of our historical collection trends, including non-contracted payors for whom we do not have collection experience. We expect the number of new payors to continue to increase, which may affect our collection trends and, therefore, revenue estimates for billings to non-contracted insurance payors.

The net revenue recognized and number of tests reported and billed under service agreements with pharmaceutical customers increased 253% and 392%, respectively, in 2015 compared to 2014 due to the master laboratory service agreements executed with two pharmaceutical companies during 2015. We expect revenue from our pharmaceutical services business to grow as testing volume from these two agreements increase. We are pursuing additional agreements with other pharmaceutical companies as well as additional projects with our two current collaborators.

Cost of Revenue

Cost of revenue was $2.5 million or 97% of net revenues, during 2015, a decrease of $894,000, or 27%, compared to $3.4 million, or 78% of net revenues, during 2014. The decrease was attributable to 1) $526,000 in decreased personnel costs, primarily related to $200,000 in decreased stock-based compensation expense, $100,000 in one-time bonuses paid in 2014, $156,000 in labor costs allocated to research and development projects and $109,000 in reduced employee health insurance costs related to changing insurers, and 2) $424,000 in decreased material and supply costs due to a decrease in the total tests performed. These decreases were partially offset by a $56,000 increase in other laboratory related expenses, including depreciation expense.

Research and Development Expenses

Research and development expenses were $1.0 million during 2015, an increase of $655,000, or 189%, when compared to $347,000 during 2014. The increase is due to $470,000 in our increased usage of labor, materials and supplies for research projects, $15,000 in increased consulting services and $170,000 in sponsored research programs related to research to further validate the use of MyPRS« in MM and AMG.

Selling and Marketing Expenses

Selling and marketing expenses were $2.6 million during 2015, an increase of $1.8 million, or 257%, when compared to $717,000 during 2014. The increase was . . .

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