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BIOC > SEC Filings for BIOC > Form 10-Q on 10-Nov-2016All Recent SEC Filings

Show all filings for BIOCEPT INC

Form 10-Q for BIOCEPT INC


10-Nov-2016

Quarterly Report


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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed financial statements and related notes included in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto as of and for the year ended December 31, 2015 and the related Management's Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K for the year ended December 31, 2015, filed with the Securities and Exchange Commission on March 10, 2016. Past operating results are not necessarily indicative of results that may occur in future periods. The share numbers in the following discussion reflect a one-for-three reverse common stock split that we effected on September 27, 2016.

We are an early stage molecular oncology diagnostics company that develops and commercializes proprietary circulating tumor cell, or CTC, and circulating tumor DNA, or ctDNA, assays utilizing a standard blood sample, or "liquid biopsy." Our assays provide, and our planned future assays would provide, information to oncologists and other physicians that enable them to select appropriate personalized treatment for their patients who have been diagnosed with cancer based on timelier and more contemporaneous data on the characteristics of their patients' tumors.

Our current assays and our planned future assays focus on key solid tumor indications utilizing our Target-SelectorTM CTC offering for the biomarker analysis of CTCs and ctDNA from a standard blood sample. The Target-Selector CTC offering is based on an internally developed and patented, microfluidics-based capture and analysis platform, with enabling features that change how CTC testing is used by clinicians. The Target-Selector platforms provide both biomarker detection as well as monitoring capabilities, and require only a blood sample. Our patent pending Target-Selector ctDNA technology enables mutation detection with enhanced sensitivity and specificity and is applicable to nucleic acid from CTCs or other sample types, such as blood, plasma, or cerebrospinal fluid. We believe the Target-Selector technology can someday be used as a stand-alone test for molecular biomarker screening, marked as in vitro diagnostics kits.

At our corporate headquarters facility located in San Diego, California, we operate a clinical laboratory that is certified under the Clinical Laboratory Improvement Amendments of 1988, or CLIA, and accredited by the College of American Pathologists. We manufacture our microfluidic channels, related equipment and certain reagents to perform our current assays and our planned future assays at this facility. CLIA certification 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. The assays we offer and intend to offer are classified as laboratory developed tests, or LDTs, under CLIA regulations.

We are commercializing our Target-Selector assays for a number of solid tumor indications such as: breast cancer, non-small cell lung cancer, or NSCLC, small cell lung cancer, or SCLC, gastric cancer, colorectal cancer, prostate cancer, and melanoma. These assays utilize our dual CTC and ctDNA technology platform and provide biomarker analysis from a standard blood sample.

In the case of our breast and gastric cancer offering, biomarker analysis involves fluorescence in situ hybridization, or FISH, for the detection and quantitation of the human epidermal growth factor receptor 2, or HER2, gene copy number as well as immunocytochemical analysis of estrogen receptor, or ER, protein, as well as androgen receptor, or AR, protein, which are currently commercially available. We plan to include immunocytochemical analysis of progesterone receptor, or PR, proteins as part of the Target-Selector CTC menu in 2017. A patient's HER2 status provides the physician with information about the appropriateness of therapies such as Herceptin® or Tykerb®. ER and PR status provides the physician with information about the appropriateness of endocrine therapies such as tamoxifen and aromatase inhibitors.

The lung cancer biomarker analyses currently include FISH testing for ALK, ROS1, RET, MET and FGFR1 gene rearrangements and mutation analysis of the T790M, Deletion 19, and L858R mutations of the epidermal growth factor receptor, or EGFR, gene as well as BRAF and KRAS using our Target-Selector ctDNA platform. The L858R mutation of the EGFR gene and Exon 19 deletions as activators of EGFR kinase activity are associated with the drugs Tarceva®, Gilotrif® and Iressa®. For lung cancer, we also offer a resistance panel assay consisting of the biomarkers MET, HER2 (both of which we perform using our technology for CTCs), KRAS, and T790M (both of which are performed using ctDNA in plasma). This assay could be used by physicians to identify the mechanism causing disease progression for patients with NSCLC who are being treated with TKI therapy and therefore could qualify for inclusion in a clinical trial. In November 2015, Tagrisso® was approved by the U.S. Food and Drug Administration, providing another biomarker based therapy for the treatment of patients with EGFR related lung cancer. Tagrisso® is indicated for the treatment of patients with metastatic EGFR T790M mutation-positive NSCLC, who have progressed on or after EGFR tyrosine kinase inhibitor therapy.

Fibroblast growth receptor 1, or FGFR1, amplification is offered using our CTC technology. FGFR1 is present in several tumor types, including both NSCLC and SCLC and has been shown to be a prognostic indicator of progression. FGFR1 is also a key target for many drugs which are in clinical development.


Mutations of the BRAF gene are associated with Zelboraf® and Tafinlar®, which are both approved for treating patients with melanoma and are in clinical trials for lung cancer. We offer testing for BRAF on blood using our ctDNA offering.

We recently analytically validated PD-L1 testing utilizing our CTC technology. PD-L1 is a biomarker that is informative for immuno-oncology therapies currently marketed today for lung cancer and melanoma, as well as in development for multiple tumor types. We collaborated with David Rimm, M.D., Ph.D., a pathologist at Yale Medical School, on the analytical development of this assay.

We plan to add other biomarker analyses, such as ESR1 and NRAS, on blood samples to our current assays and our planned future Target-Selector CTC assays as their relevance is demonstrated in clinical trials and/or included in guidelines used by physicians to make treatment decisions.

We continue to execute on our strategies of expanding our business globally as well as engaging with pharmaceutical companies on clinical trials and assay development. We have executed distribution agreements in Mexico with Quest Diagnostics to support testing for a large pharmaceutical partner, as well as an agreement with Progenetics to market our assays in Israel for clinical testing.

We announced three additional pharmaceutical collaborations during 2016. The first agreement is to provide testing for a clinical trial that includes patients who have leptomeningeal disease or metastatic lung cancer to the brain. In this exploratory trial, we are testing both cerebral spinal fluid and blood for molecular alterations that could be impacted by treatment. The second agreement is a large milestone-based multi-project assay development collaboration focused on hepatocellular carcinoma, or liver cancer, whereby we will develop assays utilizing both our CTC and ctDNA technologies for clinical trials. The third collaboration involves a study presented at the European Society for Medical Oncology, or ESMO, Annual Congress in October 2016, whereby collaborators from a large pharmaceutical company, as well as academic investigators, demonstrated a high concordance between our Target-Selector liquid biopsy and tissue biopsy. Subsequent to this study, we have earned business in both Mexico and Columbia for EGFR testing in blood to qualify patients for the pharmaceutical company's targeted therapy.

Our revenue generating efforts are focused in three areas:

• providing clinical testing that oncologists use in order to determine the best treatment plan for their patients;

• providing clinical trial, research and development services to biopharma companies developing cancer therapies; and

• licensing our proprietary testing and/or technologies to partners in the United States and abroad.

The following tables set forth certain information concerning our commercial cases accessioned for the periods shown:

Three Months Ended September 30, Change 2015 2016 # % Commercial cases accessioned 443 1,023 580 131 %

Nine Months Ended September 30, Change 2015 2016 # % Commercial cases accessioned 1,024 2,727 1,703 166 %

Revenues from commercial cases are recognized as collected, and the expected collection period for a commercial case often extends beyond the end of the quarter in which accessioned, with multiple payments received per case. For commercial accessions received during the nine months ended September 30, 2015 and 2016, the average number of tests performed increased from 2.4 tests per accession to 3.8 tests per accession, respectively. For commercial accessions received from January 1, 2016 through September 30, 2016, the expected price to be collected at 2016 Medicare schedule rates ranged from less than $200 per accession to over $5,000 per accession, and the weighted-average expected price to be collected is approximately $1,185 per accession, although such reimbursement experience has not yet been achieved. Relatively higher reimbursement rates are expected to be achieved for cases billed to certain private payors where we have agreements. Approximately 47% of the number of commercial accessions billed from January 1, 2016 through September 30, 2016 were subject to Medicare reimbursement rates, and approximately 50% and 45% of commercial revenues and total revenues, respectively, during the nine months ended September 30, 2016 were associated with Medicare reimbursement. We have not historically been reimbursed at these average rates for a variety of reasons, including billing challenges related to changes in Medicare CPT codes for our FISH assays in 2015, establishing our associated internal processes, and also managing an external "out-sourced" billing company. Additionally, a significant amount of our non-Medicare business (private payors) has historically not been contracted, and reimbursement for this business has historically not been at "in network" rates and has therefore been inconsistent. We did begin to contract private payor networks in 2015 and continue to do so in 2016, and our number of accessions treated as "in network" increased and reimbursement is improving. We are currently contracted with eight Preferred Provider Organization networks, one large health plan, and three regional Independent Physician Associations, and expect to continue to gain contracts in order to be considered as an "in-network" provider with additional plans.


Results of Operations

Three Months Ended September 30, 2015 and 2016

The following table sets forth certain information concerning our results of
operations for the periods shown:



                                       Three Months Ended September 30,                 Change
                                          2015                  2016               $              %
(dollars in thousands)
Revenues                             $           165       $         1,047     $      882            535 %
Cost of revenues                               1,160                 1,876            716             62 %
Research and development expenses                678                   601            (77 )          (11 %)
General and administrative expenses            1,630                 1,920            290             18 %
Sales and marketing expenses                   1,056                 1,278            222             21 %
Loss from operations                          (4,359 )              (4,628 )         (269 )            6 %
Interest expense, net                           (175 )                (154 )           21            (12 %)
Other income                                      38                    38              -              -
Gain on sale of fixed assets                       -                     1              1              -
Loss before income taxes                      (4,496 )              (4,743 )         (247 )            5 %
Income tax expense                                 -                     -              -              -
Net loss                             $        (4,496 )     $        (4,743 )   $     (247 )            5 %

Revenues

Revenues were approximately $1,047,000 for the three months ended September 30, 2016, compared with approximately $165,000 for the same period in 2015, an increase of $882,000, or 535%. The increase was due to an increase of approximately $840,000 in commercial assay revenues resulting primarily from increases in both commercial accession volume and collections made thereon, as well as an increase of approximately $42,000 in development services revenues with 156 development services accessions received during the three months ended September 30, 2016 as compared to 88 accessions received during the same period in 2015.

Costs and Expenses

Cost of Revenues. Cost of revenues was approximately $1,876,000 for the three months ended September 30, 2016, compared with approximately $1,160,000 for the three months ended September 30, 2015, an increase of $716,000, or 62%. The increase was primarily attributable to an increase of approximately $645,000 in personnel, materials, and other direct costs mainly related to higher assay volume, an increase of approximately $49,000 in third party consulting fees, as well as an increase of approximately $22,000 related to fewer laboratory costs charged to research and development.

Research and Development Expenses. Research and development expenses were approximately $601,000 for the three months ended September 30, 2016, compared with approximately $678,000 for the three months ended September 30, 2015, a decrease of $77,000, or 11%. The decrease was primarily attributable to a decrease of approximately $43,000 in materials and supplies consumed in performing research and development activities, as well as a decrease of approximately $22,000 in laboratory costs charged to research and development.

General and Administrative Expenses. General and administrative expenses were approximately $1,920,000 for the three months ended September 30, 2016, compared with approximately $1,630,000 for the three months ended September 30, 2015, an increase of $290,000, or 18%. The increase was primarily due to an increase of approximately $144,000 in consulting and other third party service provider costs mainly related to expanded commercial activities, an increase of $74,000 in third party billing fees associated with increased cash collections on commercial revenues, and an increase of approximately $60,000 in legal fees primarily associated with patents.

Sales and Marketing Expenses. Sales and marketing expenses were approximately $1,278,000 for the three months ended September 30, 2016, compared with approximately $1,056,000 for the three months ended September 30, 2015, an increase of $222,000, or 21%. The increase was due to approximately $223,000 in additional personnel costs and travel expenses associated with an increase in the average number of employees included in the sales and marketing function from 12 employees during the three months ended September 30, 2015 to 15 employees during the same period in 2016.


Income Taxes

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. We do not expect to report a provision for income taxes until we have a history of earnings, if ever, that would support the realization of our deferred tax assets.

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 ownership changes likely occurred in both 2015 and 2016. 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.

Nine Months Ended September 30, 2015 and 2016

The following table sets forth certain information concerning our results of
operations for the periods shown:



                                         Nine Months Ended September 30,                  Change
                                           2015                   2016               $              %
(dollars in thousands)
Revenues                             $            392       $          1,932     $    1,540            393 %
Cost of revenues                                3,321                  5,021          1,700             51 %
Research and development expenses               2,073                  2,045            (28 )           (1 %)
General and administrative expenses             4,282                  4,925            643             15 %
Sales and marketing expenses                    2,616                  3,875          1,259             48 %
Loss from operations                          (11,900 )              (13,934 )       (2,034 )           17 %
Interest expense, net                            (495 )                 (393 )          102            (21 %)
Other income                                       64                    116             52             81 %
Gain on sale of fixed assets                        -                      1              1              -
Loss before income taxes                      (12,331 )              (14,210 )       (1,879 )           15 %
Income tax expense                                 (1 )                   (2 )           (1 )          100 %
Net loss                             $        (12,332 )     $        (14,212 )   $   (1,880 )           15 %

Revenues

Revenues were approximately $1,932,000 for the nine months ended September 30, 2016, compared with approximately $392,000 for the same period in 2015, an increase of $1,540,000, or 393%. The increase was due to an increase of approximately $1,428,000 in commercial assay revenues resulting primarily from increases in both commercial accession volume and collections made thereon, as well as an increase of approximately $112,000 in development services revenues with 382 development services accessions received during the nine months ended September 30, 2016 as compared to 182 accessions received during the same period in 2015.

Costs and Expenses

Cost of Revenues. Cost of revenues was approximately $5,021,000 for the nine months ended September 30, 2016, compared with approximately $3,321,000 for the nine months ended September 30, 2015, an increase of $1,700,000, or 51%. The increase was primarily attributable to an increase of approximately $1,531,000 in personnel, materials, and other direct costs mainly related to higher assay volume, an increase of approximately $78,000 related to fewer laboratory costs charged to research and development, as well as an increase of approximately $72,000 in third party consulting fees.

Research and Development Expenses. Research and development expenses were approximately $2,045,000 for the nine months ended September 30, 2016, compared with approximately $2,073,000 for the nine months ended September 30, 2015, a decrease of $28,000, or 1%. The decrease was primarily attributable to a decrease of approximately $78,000 related to fewer laboratory costs charged to research and development, a decrease of approximately $42,000 in third party consulting fees, and a decrease of approximately $21,000 in materials and supplies consumed in performing research and development activities, partially offset by an increase of approximately $120,000 related to an increase in the average number of employees included in the research and development function from 8 employees during the nine months ended September 30, 2015 to 11 employees during the same period in 2016.


General and Administrative Expenses. General and administrative expenses were approximately $4,925,000 for the nine months ended September 30, 2016, compared with approximately $4,282,000 for the nine months ended September 30, 2015, an increase of $643,000, or 15%. The increase was primarily due to an increase of approximately $204,000 in consulting and other third party service provider costs mainly related to expanded commercial activities, an increase of $156,000 in third party billing fees associated with increased cash collections on commercial revenues, an increase of approximately $114,000 related to an increase in the average number of employees included in the general and administrative function from 7 employees during the nine months ended September 30, 2015 to 9 employees during the same period in 2016, an increase of approximately $100,000 due to increased allocated facility costs and depreciation, as well as an increase of approximately $82,000 in legal fees.

Sales and Marketing Expenses. Sales and marketing expenses were approximately $3,875,000 for the nine months ended September 30, 2016, compared with approximately $2,616,000 for the nine months ended September 30, 2015, an increase of $1,259,000, or 48%. The increase was primarily due to an increase of approximately $1,021,000 in personnel costs and travel expenses associated with an increase in the average number of employees included in the sales and marketing function from 12 employees during the nine months ended September 30, 2015 to 15 employees during the same period in 2016, as well as an increase of approximately $193,000 in consulting and other third party service provider costs associated with expanded commercial activities.

Income Taxes

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. We do not expect to report a provision for income taxes until we have a history of earnings, if ever, that would support the realization of our deferred tax assets.

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 ownership changes likely occurred in both 2015 and 2016. 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.

Liquidity and Capital Resources

Cash Flows

Our net cash flow from operating, investing and financing activities for the
periods below were as follows:



                                                            Nine Months Ended
                                                              September 30,
                                                           2015          2016
    (dollars in thousands)
    Cash provided by (used in):
    Operating activities                                 $ (10,896 )   $ (11,257 )
    Investing activities                                      (119 )        (391 )
    Financing activities                                    18,192         3,506
    Net increase (decrease) in cash and cash equivalents $   7,177     $  (8,142 )

Cash Used in Operating Activities. Net cash used in operating activities was $11.3 million for the nine months ended September 30, 2016, compared to net cash used in operating activities of $10.9 million for the nine months ended September 30, 2015. The net increase of $0.4 million of cash used in operating activities for the nine months ended September 30, 2016 as compared to the same period in 2015 was primarily related to an increase of $1.9 million in cash used to fund our net loss, partially offset by an increase of approximately $1.3 million of cash provided by operating assets and liabilities, as well as an increase of $0.2 million in adjustments to reconcile net loss to net cash used in operating activities primarily related to stock compensation and depreciation expenses.

Cash Used in Investing Activities. Cash used in investing activities of approximately $391,000 and $119,000 during the nine months ended September 30, 2016 and 2015, respectively, was related to the acquisition of fixed assets.

Cash Provided by Financing Activities. Net cash provided by financing activities was $3.5 million for the nine months ended September 30, 2016, compared to net cash provided by financing activities of $18.2 million for the nine months ended September 30, 2015. Our primary sources of cash from financing during the nine months ended September 30, 2015 consisted of proceeds from our public offering in February 2015 and the exercise of common stock warrants sold in that offering. Our primary sources of cash from


financing during the nine months ended September 30, 2016 consisted of $4.3 million in net proceeds from our public offering in May 2016 and $0.5 million in proceeds from the sale of common stock to Aspire Capital under our then-existing common stock purchase agreement, which was partially offset by $1.3 million of principal payments made on indebtedness.

Capital Resources and Expenditure Requirements

We expect to continue to incur substantial operating losses in the future. It may take several years to achieve positive operational cash flow or we may not ever achieve positive operational cash flow. We expect that we will use a portion of the net proceeds from our follow-on public offerings 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 a portion of the net proceeds from our follow-on public offerings to acquire or invest in businesses, technologies, services or products, although we do not have any current plans to do so.

. . .

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