11. Income Taxes
The Company uses an estimated annual effective tax rate, which is based on expected annual income, statutory tax rates, and tax planning opportunities available in the various jurisdictions in which the Company operates, to determine its quarterly provision for income taxes. Certain significant or unusual items are separately recognized in the quarter in which they occur and can be a source of variability in the effective tax rates from quarter to quarter.
The Company is subject to taxation in the United States and in various state and foreign jurisdictions. The Company's federal and state tax returns since inception are subject to examination due to the carryover of net operating losses. As of September 30, 2017, the Company’s tax years from 2011 through 2012 are subject to examination by the United Kingdom tax authorities related to its legacy operations. The statute of limitations for the assessment and collection of income taxes related to other foreign tax returns varies by country. In the foreign countries where the Company haswe have operations, these time periods generally range from three to five years after the year for which the tax return is due or the tax is assessed.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations should be read together with our unaudited condensed consolidated financial statements for the ninesix months ended SeptemberJune 30, 20172020 and the notes thereto included in Part I, Item 1 of this Quarterly Report, as well as the audited financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2016.2019.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These forward-looking statements regarding future events and our future results are based on current expectations, estimates, forecasts, and projections and the beliefs and assumptions of our management, including, without limitation, our expectations regarding our results of operations, sales and marketing expenses, general and administrative expenses, research and development expenses, and the sufficiency of our cash for future operations. Words such as “expect,” “anticipate,” “target,” “project,” “believe,” “goals,” “estimate,” “potential,” “predict,” “plan,” “may,” “will,” “might,” “could,” “intend,” variations of these terms or the negative of those terms and similar expressions are intended to identify these forward-looking statements. Readers are cautioned that these forward-looking statements are subject to risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in or implied by any forward-looking statements.
Among the important factors that could cause actual results to differ materially from those indicated by our forward-looking statements are those discussed under the heading “Risk Factors” in Part II, Item 1A of this Quarterly Report. We assume no obligation to update these forward looking statements to reflect future events or circumstances.
Since inception, we have incurred net losses from operations each year, and we expect to continue to incur losses for the foreseeable future. Our net losses for the ninesix months ended SeptemberJune 30, 20172020 and 20162019 were approximately $47,312,000$11.7 million and $37,923,000,$25.4 million, respectively. As of SeptemberJune 30, 2017,2020, we had an accumulated deficit of $402,584,000.$525.9 million. Our operations to date have been funded principally through sales of capital stock, borrowings, and cash from operations. We expect to incur increasing expenses over the next several years, principally to further expand our diagnostic test menu for our ePlex system, as well as to further increase our manufacturing capabilities and domestic and international commercial organization.
We offer four FDA-cleared diagnostic tests which run on our XT-8 instrument: our Respiratory Viral Panel; our Cystic Fibrosis Genotyping Test; our Warfarin Sensitivity Test; and our Thrombophilia Risk Test. We have also developedoffer a number of hepatitisHepatitis C virus, or HCV, genotyping tests(HCV) Genotyping Test and associated custom manufactured reagents, as well as other research-based and pharmacogenomics products, versionsa 2C19 Genotyping Test, each of which areis available for use with our XT-8 instrument for research use only (RUO).
Cost of revenues includes the cost of materials, direct labor, and manufacturing overhead costs used in the manufacture of our consumable tests, including royalties on product sales.tests. Cost of revenues also includes depreciation on revenue generating instruments that have been placed with our customers under a reagent rental agreement, cost of instruments sold to customers, amortization of licenses related to our products, and other costs such as warranty, royalty, and customer and product technical support. We manufacture our test cartridges in our facilities and have recently invested in significant capacity for expansion. Any potential underutilized capacity may result in a high cost of revenues relative to revenue, if manufacturing volumes are not able to fully absorb operating costs. Our instruments are procured from contract manufacturers. We expect our cost of revenues to increase as we place additional instruments and manufacture and sell additional diagnostic tests;panels; however, over time, we expect our gross margins relatedcost per unit to our product sales to increasedecrease as production volume increases, manufacturing efficiencies are realized, improvements to procurement practices are made, instrumentproduct reliability increases, and other improvements decrease costs as a percentage of sales.costs.
Sales and marketing expenses include costs associated with our direct sales force, sales management, marketing, technical support, and business development activities. These expenses primarily consist of salaries, commissions, benefits, stock-based compensation, travel, advertising, promotions, product samples, and trade show expenses. We expect sales and marketing expenses to continue to increase as we scale-up our domestic and international commercial efforts and expand our customer base.
Research and development expenses primarily include costs associated with the development and expansion of our ePlex system and its expandinginstrument's diagnostic test menu. These expenses also include certain clinical study expenses incurred in preparation for FDA clearance for these products, intellectual property prosecution and maintenance costs, and quality assurance expenses. The expenses primarily consist of salaries, benefits, stock-based compensation, outside design and consulting services, laboratory supplies, costs of consumables and materials used in product development, contract research organization costs,and clinical studies and facility costs. We expense all research and development costsexpenses in the periods in which they are incurred.
Our general and administrative expenses include costs associated with our executive, accounting and finance, compliance, information technology, legal, facilities, human resource,resources, administrative, and investor relations activities. These expenses consist primarily of salaries, benefits, stock-based compensation, costs, independent auditor costs, legal fees, consultants,consultant costs, insurance premiums, and public company expenses, such as stock transfer agent fees and listing fees for NASDAQ.
Interest income includes interest earned on our cash and cash equivalents and investments. Interest expense represents interest incurred on our loan payable and on other liabilities.
We make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes.
We assess the likelihood that we will be able to recover our deferred tax assets. We consider all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income, and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. If it is more likely than not that we will not recover our deferred tax assets, we will increase our provision for income taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be recoverable.
Our revenue consists primarily of revenue from the sale of test cartridges (which we refer to as consumables), with the remaining portion resulting from the sale of instruments, and other revenues.
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | $ Change | | % Change | | 2017 | | 2016 | | $ Change | | % Change |
| (dollars in thousands) | | | | | | (dollars in thousands) | | | | |
Research and Development | $ | 10,248 |
| | $ | 11,628 |
| | $ | (1,380 | ) | | (12 | )% | | $ | 34,297 |
| | $ | 37,100 |
| | $ | (2,803 | ) | | (8 | )% |
The decrease in research and development expense for the three months ended SeptemberJune 30, 2017,2020, compared to the same period of the prior year, was primarily driven by a decrease of $1.0 million in ePlex systemprototype materials used by our assay development expenses of $2,125,000 following the system's commercial launch,teams, partially offset by an increase of $900 thousand in supplies and prototype materials utilized by our assay development teams of $769,000.personnel expense.
The decrease in research and development expense for the ninesix months ended SeptemberJune 30, 2017,2020, compared to the same period of the prior year, was primarily driven by adecreases of $1.1 million in prototype materials used by our assay development teams. The decrease in ePlex systemresearch and development expenses of $7,421,000, a decrease in clinical trial expense of $211,000 due to the timing of trials, and a decrease in freight expense of $294,000,was partially offset by an increase of $689 thousand in supplies and prototype materials utilized by our assay development teams of $5,061,000 and increase in intellectual property prosecution and maintenance expenses of $237,000.personnel expense.
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | $ Change | | % Change | | 2017 | | 2016 | | $ Change | | % Change |
| (dollars in thousands) | | | | | | (dollars in thousands) | | | | |
Other Income (Expense) | $ | (686 | ) | | $ | (417 | ) | | $ | (269 | ) | | 65 | % | | $ | (1,690 | ) | | $ | (956 | ) | | $ | (734 | ) | | 77 | % |
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| Three Months Ended June 30, | | | | | | | | Six Months Ended June 30, | | | | | | |
| 2020 | | 2019 | | $ Change | | % Change | | 2020 | | 2019 | | $ Change | | % Change |
(dollars in thousands) | | | | | | | | | | | | | | | |
Other expense | $ | (1,928) | | | $ | (1,353) | | | $ | (575) | | | 42 | % | | $ | (3,916) | | | $ | (2,507) | | | $ | (1,409) | | | 56 | % |
Other income (expense)expense represents non-operating income and expense, including, but not limited to, earnings on cash, cash equivalents, restricted cash, marketable securities, foreign exchange gains and losses of foreign currency denominated balances, and interest expense related to debt.
The change in other income (expense)expense for the three and six months ended SeptemberJune 30, 2017,2020, compared to the same periodperiods of the prior year, waswere primarily due to an increase in nethigher interest expense of $329,000 on amounts due underfrom borrowings from our credit facility, partially offset by an increase in unrealized gains related to foreign currency remeasurement.loan and security agreement.
The change in other income (expense) for the nine months ended September 30, 2017, compared to the same period of the prior year, was primarily due to an increase in net interest expense of $955,000 on amounts due under our credit facility, partially offset by an increase in unrealized gains related to foreign currency remeasurement.
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| Three Months Ended June 30, | | | | | | | | Six Months Ended June 30, | | | | | | |
| 2020 | | 2019 | | $ Change | | % Change | | 2020 | | 2019 | | $ Change | | % Change |
(dollars in thousands) | | | | | | | | | | | | | | | |
Income tax expense | $ | 63 | | | $ | 45 | | | $ | 18 | | | 40 | % | | $ | 78 | | | $ | 61 | | | $ | 17 | | | 28 | % |
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | $ Change | | % Change | | 2017 | | 2016 | | $ Change | | % Change |
| (dollars in thousands) | | | | | | (dollars in thousands) | | | | |
Income tax expense (benefit) | $ | (9 | ) | | $ | 14 |
| | $ | (23 | ) | | (164 | )% | | $ | 68 |
| | $ | 45 |
| | $ | 23 |
| | 51 | % |
Due to net losses incurred, we have only recorded tax provisions related to minimum tax payments in the United States and tax liabilities generated by our foreign subsidiaries.subsidiaries, which have remained immaterial.
Liquidity and Capital Resources
To date, we have funded our operations primarily from the sale of our common stock, borrowings, and cash from operations. We have incurred net losses from continuing operations each year and have not yet achieved profitability. As of SeptemberJune 30, 2017,2020, we had $68,857,000$138.3 million of working capital, including $86,917,000$132.8 million in cash, cash equivalents, and marketable securities. We believe our existing cash, cash equivalents and marketable securities as of SeptemberJune 30, 20172020 will enable us to fund our operations for at least the next 12 months.
The following table summarizes, for the periods indicated, selected items in our unaudited condensed consolidated statements of cash flows:
| | | | | | | | | | | |
| June 30, | | |
Six months ended (in thousands): | 2020 | | 2019 |
Net cash provided by (used in) operating activities | $ | 385 | | | $ | (15,616) | |
Net cash used in investing activities | (42,978) | | | (9,107) | |
Net cash provided by financing activities | 81,520 | | | 12,168 | |
Effect of exchange rate changes on cash, cash equivalents, and restricted cash | 22 | | | 2 | |
Net increase (decrease) in cash, cash equivalents, and restricted cash | $ | 38,949 | | | $ | (12,553) | |
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| | | | | | | |
| September 30, |
Nine months ended (in thousands): | 2017 | | 2016 |
Net cash used in operating activities | $ | (40,605 | ) | | $ | (25,159 | ) |
Net cash used in investing activities | (38,445 | ) | | (30,741 | ) |
Net cash provided by financing activities | 90,269 |
| | 39,806 |
|
Effect of exchange rate on cash | (17 | ) | | 2 |
|
Net increase (decrease) in cash and cash equivalents | $ | 11,202 |
| | $ | (16,092 | ) |
Cash flows used inprovided by (used in) operating activities
Net cash used inprovided by operating activities increased $15,446,000by $16 million for the ninesix months ended SeptemberJune 30, 20172020 compared to the same period of the prior year. The increase in cash used inprovided by operating activities was primarily due to a decrease of $13.7 million in net loss and an increase of $9,912,000$3.2 million in non-cash adjustments. The increase in cash provided by operating activities was partially offset by a decrease of $855 thousand from changes in operating assets and liabilities and a $9,389,000 increase in net loss, partially offset by non-cash adjustments of $3,855,000.liabilities. The main factors affecting the changechanges in operating assets and liabilities included an increase in inventory purchases and decreaseswas primarily a result of increases in accounts payables,payable, accrued compensation,liabilities, and other liabilities, partially offset by a decreaseincreases in accounts receivable and other assets.inventory.
Cash flows used in investing activities
Net cash used in investing activities increased by $7,704,000$33.9 million for the ninesix months ended SeptemberJune 30, 2017,2020, compared to the same period of the prior year, primarily due to an increaseincreases of $32.7 million in net purchases and sale of marketable securities of $9,743,000, partially offset by decreasesand $1.2 million in purchases of property plant, and equipment of $1,289,000, intellectual property milestone payments of $300,000, and the maturities of marketable securities of $450,000.equipment.
Cash flows provided by financing activities
Net cash provided by financing activities increased by $50,463,000$69.4 million for the ninesix months ended SeptemberJune 30, 2017,2020, compared to the same period of the prior year, primarily due to an increaseincreases of $77.6 million in net proceeds from salethe issuance of common stock of $56,387,000 and $3.1 million from stock option exercises. The increase in proceeds from debt issuance of $5,000,000,cash provided by financing activities was partially offset by an increase in the repayments of principal$11.4 million from net borrowings of $6,095,000under our loan and costs associated with our sale of common stock of $4,378,000.security agreement.
We have prepared cash flow forecasts which indicate, based on our current cash resources available, that we will have sufficient resources to fund our business for at least the next 12 months. We expect capital outlays and operating expenditures to increase over the next several years as we grow our customer base and revenues, and expand our research and development,
commercialization and manufacturing activities. Factors that could affect our capital requirements, in addition to those previously identified, include, but are not limited to:
• the level of revenues and the rate of our revenue growth;
• changechanges in demand from our customers;
• the level of cost of revenues and their impact to our gross margin;
• the level of expenses required to expand our commercial (sales and marketing) activities;
• the level of research and development investment required to develop our diagnostic systems and commercialize our ePlex system and maintain our XT-8 system;test menu;
• our need to acquire or license complementary technologies;
• the costs of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights;
• competing technological and market developments; and
• changes in regulatory policies or laws that affect our operations.
Loan and Security Agreement
In January 2015,On February 1, 2019, or the Effective Date, we entered into a Loan and Security Agreement, or the LSA, with Solar Capital Partners (as successor-in-interest to General Electric Capital Corporation),Ltd. and certain other financial institutions, party thereto, as lenders, pursuantor, collectively, the Lenders. Pursuant to which we obtained up to $35,000,000the LSA and certain subsequent amendments, the Lenders have provided us with $70 million in a series of term loans, of which $50 million was funded on the Effective Date and an additional $20 million was funded in December 2019 upon our achievement of a revolving loan in the maximumdesignated amount of $5,000,000. As of June 2017, we borrowed all $35,000,000product revenues on a trailing six-month basis.
The term loans under the terms loansLSA accrue interest at a floating per annum rate in effect from time-to-time equal to (a) the greater of 2.51% or the one-month Intercontinental Exchange Benchmark Administration, Ltd. rate then in effect as provided in the LSA. As of September 30, 2017, we had not borrowed any of the $5,000,000 availableapplicable payment date, plus (b) 5.90% per annum. We are only required to make interest payments on amounts borrowed pursuant to the term loans from the applicable funding date until February 28, 2022, or the Interest Only Period. Following the Interest Only Period, monthly installments of principal and interest under the revolving loan.term loans will be due until the original principal amount and applicable interest is fully repaid by February 1, 2023.
Pursuant to the terms of the LSA, the lendersLenders are granted a security interest in (a) all of our personal property, other than intellectual property (which is subject to a negative pledge), but including our rights to payment in respect of intellectual property, and (b) the stock of all of our domesticsubsidiaries; provided that if the pledge of 100% of the voting shares of our non-U.S. subsidiaries and (c)would result in adverse tax consequences, such pledge shall be limited to 65% of the voting stock and 100% of the non-voting stock of each of our non-U.S. subsidiaries.
The LSA contains customary affirmative and negative covenants, including, without limitation, delivering reports and notices relating to our financial condition and certain regulatory events and intellectual property matters, as well as limiting the creation of liens, the incurrence of indebtedness, and the making of certain investments, payments and acquisitions, other than as specifically permitted by the LSA. The LSA also contains customary events of default (subject, in certain instances, to specified cure periods), including, but not limited to, the failure to make payments of interest or premium when due, the failure to comply with certain covenants and agreements specified in the LSA, and the occurrence of a material adverse change, certain regulatory events, or certain insolvency events. Upon the occurrence of an event of default, the Lenders may declare all outstanding principal and accrued but unpaid interest under the LSA immediately due and payable and may exercise the other rights and remedies as set forth in the LSA.
Common Stock Equity OfferingDistribution Agreement
On August 5, 2019, we entered into an Equity Distribution Agreement, or the Distribution Agreement, with Canaccord Genuity LLC, or Canaccord, pursuant to which we may offer and sell, from time to time, shares of our common stock having an aggregate offering price of up to $35 million. Under the Distribution Agreement, Canaccord may sell shares by any method deemed to be an “at-the-market” offering as defined in Rule 415 under the U.S. Securities Act of 1933, as amended, or any other method permitted by law, including in privately negotiated transactions. We are not obligated to sell any shares under the Distribution Agreement.
Canaccord is entitled to a commission of 3% of the aggregate gross proceeds from each sale of shares occurring pursuant to the Distribution Agreement. During the six months ended June 13, 2017,30, 2020, we sold 363,120 shares of common stock under the Equity Distribution Agreement at a weighted average price per share of $6.13 resulting in aggregate gross proceeds of $2.2 million. We incurred $67 thousand in commissions paid to Canaccord in connection with such sales. As of June 30, 2020, the Company may issue up to an additional $19.7 million of its common stock under the Distribution Agreement.
Biomedical Advanced Research and Development Authority (BARDA) Funding
In March 2020, we were awarded up to $749 thousand from the Biomedical Advanced Research and Development Authority (BARDA), part of the Department of Health and Human Services Office of the Assistant Secretary for Preparedness and Response, to develop and pursue FDA Emergency Use Authorization (EUA) of a diagnostic panel that incorporates the new SARS-CoV-2 viral target into our existing ePlex RP Panel. In June 2020, we submitted our ePlex RP2 Panel to the FDA for EUA.
Underwriting Agreement
On May 6, 2020, the Company entered into an Underwriting Agreement, or the Underwriting Agreement, with J.P. Morgan SecuritiesCowen and Company, LLC and Merrill Lynch, Pierce, FennerWilliam Blair & Smith IncorporatedCompany, LLC acting as joint book-running managers and as representatives of the underwriters named therein, or collectively, the Underwriters, relating to the issuance and sale of 6,382,9787,253,886 shares of our common stock or the Offering. The price to the public in the Underwriting Agreement was $11.75 per share, before underwriting discounts and commissions. Under the terms of the Underwriting Agreement, we granted the Underwriters an option, exercisableexerciseable by the Underwriters for 30 days, to purchase up to an additional 957,4461,088,082 shares of our common stock.
The Company closed the Offering was completed on June 19, 2017, pursuant to which weMay 11, 2020 and sold a total of 7,340,4248,341,968 shares of our common stock, for grossincluding the full exercise of the Underwriters' option, at a public offering price of $9.65 per share before underwriting fees and discounts. The Company raised $75.4 million in net proceeds of $86,250,000. We incurred $5,175,000 in related transaction costs, comprised of underwritingfrom the Offering, after deducting underwriters discounts and commissions paid in accordance with the Underwriting Agreement, and approximately $338,000 in additional miscellaneous offering expenses.
Letter of Credit
In September 2012, weThe Company has provided a $758,000 letteran aggregate of $1.6 million in letters of credit issued by Banc of California to the landlordlandlords of our executive office facilitycertain of its leased facilities and maintains $42 thousand in Carlsbad, California. This letterrequired minimum account balances with the financial institutions issuing such letters of credit was secured with $758,000credit. As a result, the Company maintains $1.6 million of restricted cash at Septemberin connection with these lease agreements as of June 30, 2017.2020.
If we require additional capital, we cannot be certain that it will be available when needed or that our actual cash requirements will not be greater than anticipated. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders could be significantly diluted, and these newly issued securities may have rights, preferences or privileges senior to those of existing stockholders. If we raise additional funds through collaborations and licensing arrangements, we may be required to relinquish significant rights to our technologies or products, or grant licenses on terms that are not favorable to us.
Contractual Obligations
As of SeptemberJune 30, 2017,2020, there were no material changes to our contractual obligations from those disclosed within the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.2019.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make certain estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We evaluate our estimates on an ongoing basis, including those related to doubtful accounts, inventories, valuation of intangible assets and other long-term assets, income taxes, and stock-based compensation. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities not readily apparent from other sources. Actual results may differ from these estimates. Our critical accounting policies and estimates are discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.2019. There have been no material changes to our critical accounting policies and estimates during the ninesix months ended SeptemberJune 30, 2017.2020.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements. We haveThe Company has provided a $758,000 standby letter$1.6 million in letters of credit to our landlord as security for future rent in connection the leaselandlords of our executive office facility in Carlsbad, California,certain of its leased facilities, which is recorded as restricted cash on our unaudited condensed consolidated balance sheets.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ThereAt June 30, 2020, there have been no material changes in our market risks during the nine months ended September 30, 2017.described at December 31, 2019.
Our exposure to market risk is currently limited to our cash and cash equivalents, all of which have maturities of less than three months, and marketable securities, which have maturities of greater than three months. The goals of our investment policy are preservation of capital, fulfillment of liquidity needs, and fiduciary control of cash and investments. We also seek to maximize income from our investments without assuming significant risk. To achieve our goals, we may in the future maintain a portfolio of cash equivalents and investments in a variety of securities that management believes to be of high credit quality. We currently do not hedge interest rate exposure. Because of the short-term nature of our cash equivalents and investments, we do not believe that an increase in market rates would have a material negative impact on the value of our portfolio.
Interest Rate Risk
As of SeptemberJune 30, 2017,2020, based on current interest rates and total borrowings outstanding, a hypothetical 100 basis point increase or decrease in interest rates would have an immaterialinsignificant pre-tax impact on our results of operations.
Foreign Currency Exchange Risks
We are a U.S. entity and our functional currency is the U.S. dollar. Substantially all of our revenues were derived from sales in the United States. We have business transactions in foreign currencies, however, we believe we do not have significant exposure to risk from changes in foreign currency exchange rates at this time. We do not currently engage in hedging or similar transactions to reduce our foreign currency risks. We will continue to monitor and evaluate our internal processes relating to foreign currency exchange, including the potential use of hedging strategies.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports we file under the Exchange Act is recorded, processed, summarized and reported within the specified time periods and accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The design of any system of controls is based, in part, upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer, with the participation of management, concluded that, as of SeptemberJune 30, 2017,2020, our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There has been no change in our internal controls over financial reporting that occurred in the quarterly period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are from time to time subject to various claims and legal actions in the ordinary course of our business. We believe that there are currently no legal actions that would reasonably be expected to have a material adverse effect on our results of operations or financial condition.
ITEM 1A.RISK FACTORS
ITEM 1A.RISK FACTORS
You should consider the risks described below and all of the other information set forth in this Quarterly Report on Form 10-Q, including our unaudited condensed consolidated financial statements and the related notes and “Management's Discussion and Analysis of Financial Condition and Results of Operations,” in evaluating our business and prospects. If any of the risks described below occurs, our business, financial condition or results of operations could be negatively affected. In that case, the market price of our common stock could decline.
We have marked with an asterisk (*) those risks described below that reflect new risks or substantive changes from the risks described under Part I, Item 1A “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2016.2019.
We may not successfully commercialize our ePlex system at the levels we anticipate.*
Our current plan for achieving positive cash flow and our future growth projections relies upon the successful international and domestic commercialization of our ePlex system at the levels we project. Our ePlex system integrates automated nucleic acid extraction and amplification with our eSensor technology to allow operators to place raw or minimally prepared patient samples directly into our test cartridges and obtain clinically relevant results. We believe that our ePlex system offers certain advantages over competitive systems, including superior multiplexing capability, reduced hands-on processing time, and testing capacity and flexibility, andamong other attributes. However, the commercial success of ePlex will depend on a number of factors, including, but not limited to:
our ability to manage the risks associated with scaling our manufacturing operations;
our and our supplier's•Our ability to consistently manufacture highly complex products that deliver valid and accurate results at the level required for large-scale market adoption;
•product reliability;
•overall market acceptance;
•our ability to offer a broad and clinically relevant test menu at a competitive price;
•our ability to overcome technical limitations in connection with the effective managementdevelopment of purchasenew products;
•our ability to effectively sell our products into integrated delivery networks and supply commitmentsgroup purchasing organizations;
•adequate reimbursement for our products; and inventory levels in line with anticipated product demand;
•the availabilitydevelopment of products in appropriate quantitiesclinical utility and at expected costshealth economic evidence to meet anticipated demand and drive market adoption; andsupport adoption of our products.
increased repair or re-engineering costs due to product returns or warranty claims.
If we are unsuccessful in effectively commercializing our ePlex system at the levels we project within our expected time frame, or at all, our investment in anticipation of growth that does not materialize, or which develops more slowly than we expect, may harm our financial results, reduce our cash balances, and result in overcapacity, which may adversely affect our business and future prospects.
Our business is subject to risks associated with widespread public health crises, including the current COVID-19 pandemic.*
Our business could be adversely affected by the widespread outbreak of a contagious disease, such as the recent outbreak of respiratory illness caused by the novel coronavirus (COVID-19). In March 2020, we received Emergency Use Authorization (EUA) from the FDA for our ePlex SARS-CoV-2 test. We have also experienced a recent increase in demand for our respiratory products, including our ePlex Respiratory Pathogen (RP) Panel and SARS-CoV-2 test due to the COVID-19 pandemic. In addition, we were recently awarded up to $749,000 from the Biomedical Advanced Research and Development Authority (BARDA), part of the Department of Health and Human Services (HHS) Office of the Assistant Secretary for Preparedness and Response (ASPR), to develop and pursue an EUA of a diagnostic panel (ePlex RP2 Panel) that incorporates the novel SARS-CoV-2 viral target into our existing ePlex RP Panel. We submitted our ePlex RP2 Panel to the FDA for EUA in June 2020. If the FDA were to revoke the EUA for our ePlex SARS-CoV-2 Test, or if the FDA determines that an EUA is no longer an appropriate regulatory pathway for or ePlex SARS-CoV-2 Test or RP2 Panel, it may be more complex, time-consuming, and costly to obtain regulatory approval for such products and our business results and financial performance may be adversely affected.
We are monitoring the global pandemic of COVID-19 and have implemented mitigation measures for potential risks to our employees. It is critical that we keep our employees safe and informed in order to maintain our ongoing business operations and employee safety. We have taken precautions related to employee screening, social distancing, and facility hygiene, as well as imposed certain travel limitations on our employees and encouraged our employees to work remotely, if possible. Nevertheless, an outbreak of COVID-19 or any other contagious disease among our critical employee population, or travel restrictions or other actions imposed by governmental authorities as a result of the pandemic, could materially and adversely disrupt our ability to manufacture and distribute our products, develop additional products, and/or service and support our customers.
We are also evaluating the potential impacts of the current pandemic on our global supply chain and are working closely with our suppliers and governmental authorities to ensure continued access to key raw materials, supplies, and personal protective equipment needed to manufacture our products. This is a rapidly evolving situation, and we will continue to monitor developments affecting our customers, employees and suppliers and take additional precautions we believe are warranted. The extent of the impact of COVID-19 on our business, financial condition, and results of operations remains uncertain.
If our essential employees who are unable to telework become ill or otherwise incapacitated, our operations may be adversely impacted.*
Consistent with rapidly changing federal, state and local governmental orders and recommendations, we have implemented telework policies wherever possible for appropriate categories of our employees. Employees that are unable to telework continue to work at our facilities, and we have implemented appropriate safety measures, including social distancing, face covering, temperature checking, and increased sanitation standards in an attempt to maintain the health and safety of our workforce. We are following guidance from the Center for Disease Control (CDC) and the Occupational Safety and Health Administration (OSHA) regarding suspension of nonessential travel, self-isolation recommendations for employees returning from certain geographic areas, confirmed reports of any COVID-19 diagnosis among our employees, and the return of such employees to our workplace. Pursuant to updated guidance from the Equal Employment Opportunity Commission, we are engaging in limited and appropriate inquiries of employees regarding potential COVID-19 exposure, based on the direct threat that such exposure may present to our workforce. We continue to address other unique situations that arise among its workforce due to the COVID-19 pandemic on a case-by-case basis. While we believe that we have taken appropriate measures to ensure the health and wellbeing of our employees, there can be no assurances that our measures will be sufficient to protect our employees in our workplace or that they may not otherwise be exposed to COVID-19 outside of our workplace. If a number of our essential employees become ill, incapacitated or are otherwise unable to continue working during the current or any future epidemic, our operations may be adversely impacted.
Our financial results will depend on the acceptance and increased demand among our target customers and the medical community of our molecular diagnostic technologies and products.
Our future success depends on the belief by our target customers and the medical community that our molecular diagnostic products, including our ePlex instrument and its panel test menu, are a reliable, medically-relevant, accurate and cost-effective replacement for other diagnostic testing methods. Our business success depends on our ability to convince our target customers to perform these tests internally with our products if they have historically outsourced their testing needs or have historically used non-molecular methods to perform such testing, or to replace their current molecular testing platforms with our system and its related test panel offerings.
Many other factors may affect the market acceptance and commercial success of our molecular diagnostic technology and products, including:
•the relative convenience, ease of use, accuracy, reliability, validity, scalability, cost, and time-to-result of our diagnostic products over competing products;
•the introduction of new technologies and competing products that may make our technologies and products a less attractive solution for our target customers;
•the breadth and relevance of our menu of available diagnostic teststest panels relative to our competitors;
•our success in training our customers in the proper use of our products;
•the acceptance in the medical community and key opinion leaders of our molecular diagnostic technology and products;
•the extent and success of our marketing and sales efforts; and
•general economic conditions.
Professional societies, government agencies, practice management groups, private health/science foundations and organizations involved in healthcare issues may publish guidelines, recommendations, or studies for the healthcare and patient communities. Recommendations of government agencies or these other organizations may relate to such matters as cost-effectiveness and use of related products. Organizations like these have in the past made recommendations about our competitors’ products, such as the need for less frequent screening tests, which could result in reduced product sales. Moreover, the perception by the investment community or stockholders that recommendations, guidelines, or studies will result in decreased use of our products could adversely affect the prevailing market price for our common stock.
We face intense competition from established and new companies in the molecular diagnostics field and expect to face increased competition in the future.*
The markets for our technologies and products are highly competitive and we expect the competitive intensity of competition to increase. We compete with companies engaged in the development, commercialization and distribution of similar products intended for clinical molecular diagnostic applications. Categories of our competitors include:
•companies developing and marketing multiplex molecular diagnostics systems, including: Luminex;Luminex (which acquired Nanosphere, Inc. (which was acquired by Luminex in June 2016)); bioMerieux (which acquired BioFire Diagnostics, Inc.); Abbott Molecular Diagnostics; Qiagen NV (which acquired Stat-Dx); Siemens (which acquired Fast Track Diagnostics); T2 BioSystems; Accelerate Diagnostics; Hologic, Inc.; SeegeneSeegene; and CepheidDanaher Corporation (which was acquired by Danaher Corporation)Cepheid);
•large hospital-based laboratories and reference laboratories who provide large-scale testing using their own proprietary testing methods, including Quest Diagnostics Incorporated and Laboratory Corporation of America; and
•companies that manufacture laboratory-based tests and analyzers, including: Cepheid;Danaher; Siemens; Hologic, Inc.; Qiagen NV;Qiagen; bioMérieux; Roche Diagnostics; and Abbott Molecular Diagnostics.
Our diagnostic teststest panels also face competition from laboratory developed tests, or LDTs developed by national and regional reference laboratories and hospitals. LDTs may not currently be subject to the same regulatory requirements, including those requiring clinical trialsstudies and FDA review and clearance or approval that may apply to our diagnostic products. In addition, our ePlex SARS-CoV-2 Test and our ePlex RP2 Panel are and/or will face significant competition by numerous companies that have received or are expected to receive EUA from the FDA for tests or multiplex panels that are designed to detect the virus which leads to COVID-19.
We anticipate that we will face increased competition in the future as new companies enter the market with new technologies, our competitors improve their current products and expand their menu of diagnostic tests, and as we expand our operations internationally. Many of our current and potential competitors have greater name recognition, more substantial intellectual property portfolios, longer operating histories, additional test menu, significantly greater resources to invest in new technologies, more substantial experience in new product development, greater regulatory expertise, and more extensive manufacturing and distribution capabilities. It is critical to our success that we anticipate changes in technology and customer requirements and successfully introduce enhanced and competitive technology to meet our customers’ and prospective customers’ needs on a timely basis.
In addition, we have limited marketing, sales and distribution experience and capabilities. Our ability to achieve profitability depends on attracting customers for our products and building brand loyalty. To successfully perform sales, marketing, distribution, and customer support functions ourselves, we face a number of risks, including:
•our ability to attract and retain the skilled support team, marketing staff and sales force necessary to commercialize and gain market acceptance for our technology and our products;
•the ability of our sales and marketing team to identify and penetrate the potential customer base, including hospitals, and national and regional reference laboratories;laboratories, group purchasing organizations, and integrated delivery networks; and
•the difficulty of establishing brand recognition and loyalty for our products.
Some hospital-based and reference laboratories may not consider adopting our instrument systems unless we offer a broader menu of diagnostic teststest panels or may choose not to convert from competitive products. In addition, in order to commercialize our products, we are required to undertake time consuming and costly development activities, including clinical studies for which the outcome is uncertain. Products that appear promising during early development and preclinical studies may, nonetheless, fail to demonstrate the results needed to support regulatory approval or, if approved, may not generate the demand we expect. If we are unable to effectively compete, our revenues and our ability to achieve profitability will be significantly impaired.
We may not expand sales of our ePlex system outside the United States at the levels or within the time frame we anticipate.*
In June 2016, we obtained CE Mark under the European In-Vitro Diagnostic Devices Directive (98/79/EC) for our ePlex instrument and ePlex RP Panel; in April 2017, weWe have obtained CE Mark for our ePlex BCID-FP Panel;Instrument and in June 2017, we obtained CE Mark for ourthe following ePlex assays: the ePlex RP Panel, the ePlex BCID-GP Panel, the ePlex BCID-GN Panel, and BCID-GNthe ePlex BCID-FP Panel. We are commercializing our ePlex system in Europe utilizinginternationally via a network of distribution partners, which is augmented by a limited set of direct sales and technical support teampersonnel based in certain key European countries, which we have augmented with a third party logistics provider that is responsible for managing the international delivery of our products and providing certain other related services. We have also engaged a number of distributors in certain European countries and intend to further expand internationally over time.Europe. If we are unable to establish the infrastructure or recruit highly qualified personnel to support our international direct sales and support organization, if we fail to adequately plan for or integrate our direct sales activities with those of our third party logistics provider,identify new distribution partners, or if we are unsuccessful in developing awareness and acceptance of our products and technology internationally, our anticipated revenue growth internationally may not materialize at the levels or within the time frame we expect, our customers may not receive the level of service or product dependability they expect from us, and our future financial performance may be adversely affected. Furthermore, anythe distributors we establish in particular geographic regions may not commit the necessary resources to market and sell our products to meet our expectations. If our distributors do not perform adequately or in compliance with applicable laws and regulations in particular geographic areas, or if we are unable to locate distributors in particular geographic areas, our ability to realize revenue growth based on sales outside the
United States would be harmed. We also must comply with applicable foreign regulatory agency post-market requirements, including routine Notified Body conformity assessments to quality system standards (e.g. ISO 13485). Any failure to maintain post-market compliance with foreign regulatory requirements could harm our business, operations, and/or financial condition.
If our customers are not adequately reimbursed or compensated for the use of our products, we may have difficulty selling our products.*products.
Our ability to sell our products depends in part on the extent to which reimbursement related to performing tests using our products is available from governmental authorities, such as Medicare and other domestic and foreign governmental programs, private insurance plans, managed care organizations, and other organizations. There are ongoing efforts by governmental and third-party payorsthird party-payors to contain or reduce the costs of healthcare coverage. For example, certaina number of Medicare Administrative Contractors (MACs) recently issued draftfinal local coverage determinations proposing to limitlimiting or eliminateeliminating Medicare reimbursementcoverage for the use of certain multiplex molecular respiratory tests on certain patient populations, which, if ultimately implemented, couldsuch as our ePlex RP Panel and XT-8 Respiratory Viral Panel (RVP) in an outpatient setting. As a result, this determination may negatively impact the use of our and certain of our competitors’ multiplex respiratory tests within the geographic regions covered by these MACs. In addition, if other MACs and private payors take a similar approach, this potential negative impact could affect the available market for our ePlex RP Panel and XT-8 RVP Panel in additional geographic regions and patient populations. Furthermore, if our competitors are able to obtain product-specific reimbursement levels higher than those particular situations. for our similarly situated products, or if the scope of coverage applicable to our competitors’ products exceeds the scope of coverage applicable to our products, the overall demand for our products or the prices at which we are able to sell our products may be negatively impacted.
In addition, efforts to reform the healthcare delivery system in the United States and Europe hashave increased pressure on healthcare providers to reduce costs, which has,costs. For example, implementation of certain provisions of the Protecting Access to Medicare Act (PAMA) in turn, increased pressurethe United States had a negative impact on medical device manufacturersreimbursement payments from the Centers for Medicare and Medicaid Services (CMS) for our diagnostics test panels paid under the Clinical Laboratory Fee Schedule (CLFS). Under these provisions of PAMA, payments under the CLFS are likely to decrease prices chargedbe reduced annually for their products.the next several years. If purchasers or users of our products are not able to obtain adequate reimbursement for the cost of using our products, either directly or indirectly, they may forego or reduce their purchase and use of our products.products or the price we may be able to charge for our products could be reduced.
Obtaining coverage and reimbursement approval for a product from each government or third-party payor is a time consuming and costly process that could require us to provide supporting scientific, clinical, and cost-effectiveness data for the use of our productproducts to each government or third-party payor. We may not be able to provide data sufficient to gain acceptance with respect to coverage and reimbursement. In addition, eligibility for coverage does not imply that any product will be covered and reimbursed in all cases or reimbursed at a rate that allows our potential customers to make a profit or even cover their costs. Further, third-party payors may choose to reimburse our customers per test based on individual biomarker detection, rather than on the basis of the number of results given by the test.test panel. This may result in our customers electing to use separate tests to screen for each disease or condition so that they can receive reimbursement for each test they conduct. In that event, these entities may purchase separate tests for each disease, rather than products, such as ours, that can be used to return highly multiplexed test panel results.
From time to time we and our key suppliers experience, and may in the future experience, difficulties scaling manufacturing operations to the levels required to support our anticipated growth.growth in a timely and cost effective manner.*
To date, we have produced our products in limited quantities relative to the quantities necessary to achieve our desired revenue growth. In addition, we have experienced a significant increase in demand for our ePlex RP Panel, ePlex SARS-CoV-2 Test, and our ePlex RP2 Panel as a result of the current COVID-19 pandemic. Developing the necessary manufacturing and quality procedures internally and in conjunction with our key suppliers for a significant number of our newly developed, highly complex products and product components is a challenging process. From time to time we and our suppliers experience, and may in the future experience, manufacturing variability and may
not be able to consistently produce sufficient quantities of high quality products and product components at the levels necessary to achieve our revenue growth expectations or to support customer demand or our product development timelines. IfWe recently leased a new 73,000 square foot facility, which we are currently in the process of building out to significantly increase our production capacity. Nevertheless, if we or our key suppliers continue to encounter difficulties in producing sufficient yields of high quality products or product components, or scaling manufacturing operations as a result of, among other things, process and manufacturing transfer complexities, quality control and quality assurance issues, rapid increases in demand, and/or availability or the quality of subcomponents, equipment, and raw material supplies, our reputation may be harmed and we may not achieve our anticipated financial results or product development goals within the time frame we expect, or at all. In addition, findingwe may encounter difficulties managing our supply chain and ensuring timely delivery of sufficient quantities of our products. If we are unable to manage such difficulties, we may be unable to meet our product commitments and/or customer expectations, which would adversely impact our financial results and our reputation may suffer.
Finding solutions to product quality, reliability, variability, and variabilityraw material sourcing issues is time consuming and expensive, and we may incur significant additional costs or lose revenue as a result of, among other things, delayed product introduction, product recalls, shipment holds, scrapped material, manufacturing delays or inefficiencies, and warranty and service obligations. In
addition, we are implementing a number of measures to reduce the cost of manufacturing our ePlex products. If these efforts are unsuccessful, or if these efforts prove less successful than we anticipate or do not deliver the results within the timeframes we expect, we may not achieve our profitability targets in a timely manner, or at all.
To manage our anticipated future growth effectively, we must enhance our manufacturing and supply chain capabilities, infrastructure and operations, information technology infrastructure, and financial and accounting systems and controls. Organizational growth and scale-up of operations could strain our existing managerial, operational, financial, and other resources. If our management is unable to effectively prepare for our expected future growth, our expenses may increase more than anticipated, our revenue could grow more slowly than expected, and we may not be able to achieve our commercialization, profitability, or product development goals. Our failure to effectively implement the necessary processes and procedures and otherwise prepare for our anticipated growth could have a material adverse effect on our future financial condition and prospects.
Disruptions in the supply of raw materials, consumable goods, or other key product components, or issues associated with their cost or quality from our single source suppliers, could result in delays or difficulties successfully commercializing our ePlex system or a significant disruption in sales and profitability.
We must manufacture or engage third parties to manufacture components of our products in sufficient quantities and on a timely basis, while maintaining product quality and acceptable manufacturing costs and complying with regulatory requirements. Our instrument systems and certain critical components are custom-made by only a few outside suppliers. In certain instances, we and our customerssuppliers have a sole source supply for certain key products, product components, and ancillary items, and raw materials used to run our tests. If we are unable to satisfy our forecasted demand from existing suppliers for our products, or we or our customerssuppliers are unable to find alternative suppliers for key product components, or ancillary items or raw materials at reasonably comparable prices, it could have a material adverse effect on our financial condition and results of operations. Additionally, although we have entered into supply agreements with most of our suppliers of strategic reagents and parts to help ensure component availability and flexible purchasing terms with respect to the purchase of such components, if our suppliers discontinue production of a key component for one or more of our products, we may be unable to identify or secure a viable, cost-effective alternative on reasonable terms, or at all, which could limit our ability to manufacture our products.
In determining the required quantities of our products and the manufacturing schedule, we must make significant judgments and estimates based on seasonality, inventory levels, current market trends, product development timelines, overall capacity, and other related factors. Because of the inherent nature of estimates and our limited experience in marketing our products, there could be significant differences between our estimates and the actual amounts of products we require. This can result in shortages if we fail to anticipate demand, or excess inventory and write-offs if we order more than we need.
Reliance on third-party manufacturers entails risksrisk to which we would not be subject if we manufactured these components ourselves, including:
•reliance on third parties for regulatory compliance and quality assurance;
•possible breaches of manufacturing agreements by the third parties because of factors beyond our control;
•possible regulatory violations or manufacturing problems experienced by our suppliers;
•possible termination or non-renewal of agreements by third parties, based on their own business priorities, at times that are costly or inconvenient for us;
•the potential obsolescence and/or inability of our suppliers to obtain required components;
•the potential delays and expenses of seeking alternate sources of supply or manufacturing services;
•the inability to qualify alternate sources without impacting performance claims of our products;
•reduced control over pricing, quality and timely delivery due to the difficulties in switching to alternate suppliers or assemblers;
•the imposition of tariffs on certain product components based on our suppliers' location;
•the potential for financial hardship or other detrimental circumstances at key suppliers that may impact our ability to source key materials or services required for the manufacturing of our products; and
•increases in prices of raw materials and key components.
The manufacturing operations for our test panel cartridges use highly technical processes involving unique, proprietary techniques. In addition, the manufacturing equipment we use would be costly and time consuming to repair or replace. Any
interruption in our operations or decrease in the production capacity of our manufacturing facilityfacilities or the facilities of any of our key suppliers because of equipment failure, natural disasters such as earthquakes, tornadoes and fires, global health pandemics or otherwise, would limit our ability to meet customer demand for our products and would have a material adverse effect on our business, financial condition, and results of operations. In the event of a disruption, we may lose customers and we may be unable to regain those customers thereafter. Our insurance may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms, or at all.
If our products do not perform as expected or the reliability of the technology on which our products are based is questioned, our operating results and business would suffer.
Our success depends on the market’s confidence that we can provide reliable, high quality, molecular diagnostic products. We believe that customers in our target markets are likely to be particularly sensitive to product defects and errors. As a result, our reputation and the public image of our products and technologies will be significantly impaired if our products fail to perform as expected. Although our diagnostic systems are designed to be user friendly, the functions they perform are complex and our products may develop or contain undetected defects or errors.
We currently manufacture our proprietary test cartridges at our Carlsbad, California manufacturing facilities. We outsource manufacturing of our instruments and much of the disposable component molding for our test cartridges. Leica, the contract manufacturer of our XT-8 instruments, and Plexus Corp., the contract manufacturermanufacture of our ePlex instrument both specializeto Plexus, which specializes in the manufacturing of electronic and electro-mechanical devices. We currently maintain an inventory of XT-8 instruments and related components to satisfy the expected demand for our XT-8 system for the foreseeable future, as well as to service XT-8 instruments installed at customer locations. While we work closely with Plexus and Leica to ensure continuity of supply while maintaining high quality and reliability, and we believe our current stock of XT-8 instruments and related components will be sufficient for our and our customers’ anticipated needs, we cannot guarantee that these efforts will be successful.
If we experience a material defect or error in any of our current or future products, it could result in the loss or delay of revenues, increased costs, delayed or reduced market acceptance, damaged reputation, diversion of development and management resources, legal and/or regulatory claims, recalls, increased insurance costs, or increased service and warranty costs, any of which could materially harm our business, financial condition, and results of operations.
We also face the risk of product liability exposure related to the sale of our products. We currently carry product liability insurance that covers us against specific product liability claims. We also carry a separate general liability and umbrella policy that covers us against certain claims but excludes coverage for product liability. Any claim in excess of our insurance coverage, or for which we do not have insurance coverage, would need to be paid out of our cash reserves, which would harm our financial condition. We cannot assure you that we have obtained sufficient insurance or broad enough coverage to cover potential claims. Also, we cannot assure you that we can or will maintain our insurance policies on commercially acceptable terms, or at all. A product liability claim could significantly harm our business, financial condition, and results of operations.
We may need to raise additional funds in the future, and such funds may not be available on a timely basis, or at all.
Until such time, if ever, as we can generate positive cash flows from operations, we will be required to finance our operations with our cash resources and amounts made available under our credit facility and pursuant to our ongoing at-the-market (ATM) equity offering. We may need to raise additional funds in the future to support our operations. We cannot be certain that additional capital will be available as needed, on acceptable terms, or at all. If we require additional capital at a time when investment in our company, in molecular diagnostics companies, or the marketplace in general is limited, we may not be able to raise such funds at the time that we desire, or at all. If we do raise additional funds through the issuance of equity or convertible securities, the percentage ownership of holders of our common stock could be significantly diluted. In addition, newly issued securities may have rights, preferences or privileges senior to those of holders of our common stock. If we raise additional funds through collaborations and licensing arrangements, we could be required to relinquish significant rights to our technologies and products, or grant licenses on terms that are not favorable to us.
Our quarterly revenue and operating results may vary significantly and we may experience constraints or inefficiencies caused by unanticipated acceleration and deceleration of customer demand.*
Revenue from our infectious disease products fluctuates based upon the occurrence of related outbreaks and changes in testing recommendations and available therapies. For example, the recent COVID-19 pandemic has significantly increased the demand for our ePlex RP Panel, ePlex SARS-CoV-2 Test, and ePlex RP2 Panel. Influenza and other respiratory-related outbreaks are usually more concentrated in the first and fourth quarters of the year.year within the Northern hemisphere. New information or the introduction of advanced treatment options with respect to a particular disease may also affect the rate of related diagnostic testing. Although certain infectious disease outbreaks tend to occur each year, the timing, severity, and length of these incidents varies from one year to another and can vary across different patient populations. In addition, we may not accurately predict the impact of new therapies or vaccines on disease prevalence or changes to infectious disease testing recommendations affecting our products. As a result of one or more of these factors, we may not be able to accurately forecast sales from our infectious disease products.
Also, unanticipated changes in customer demand for our products may result in constraints or inefficiencies related to our manufacturing, sales force, customer service and administrative infrastructure. These constraints or inefficiencies may adversely affect us as a result of delays, lost potential product sales or loss of current or potential customers due to their dissatisfaction.
Our revenue, results of operations, and cash flows would suffer upon the loss of a significant customer.
Our largest customer, Laboratory Corporation of America, Inc., accounted for approximately 27%14% and 16% of our total revenue for the fiscal yearyears ended December 31, 2016.2019 and 2018. The loss of a significant customer or a significant reduction in the amount of product ordered by our significant customers may adversely affect our revenue, results of operations, and cash flows.
We may not be able to correctly estimate or control our future operating expenses, which could lead to cash shortfalls.
Our operating expenses may fluctuate significantly in the future as a result of a variety of factors, many of which may be outside of our control. These factors include, but are not limited to:
•the time and resources required to develop, and conduct clinical studies and obtain regulatory clearances for, our diagnostic tests;panels;
•the expenses we incur to increase our manufacturing capabilities, including costs to lease new facilities and expenses to purchase capital equipment and increase our manufacturing capacity and yield;
•the expenses we incur for research and development required to maintain and improve our technology, including developing ournew ePlex test menu;
•the costs of preparing, filing, prosecuting, defending and enforcing patent claims and other patent related costs, including litigation costs and the results of such litigation;
•the expenses we incur in connection with commercialization activities, including product marketing, sales, and distribution expenses;
•the expenses we incur in licensing technologies or securing rights to new products from third parties to expand the menu of diagnostics testsproducts and services we plan to offer;
•our sales strategy and whether the revenues from sales of our test cartridges or systems will be sufficient to offset our expenses;
•the costs to attract and retain personnel with the skills required for effective operations; and
•the costs associated with being a public company.
Our budgeted expense levels are based in part on our expectations concerning manufacturing costs and yield and future revenues from sales of our products, as well as our assessment of the future investments needed to expand our commercial organization and manufacturing capabilities to support our anticipated revenue growth and research and development activities in connection with our ePlex system.activities. We may be unable to reduce our expenditures in a timely manner, to compensatewe may incur expenses for any unexpected events, or we may experience a shortfall in revenue. Accordingly, a shortfall in demand for our products or other unexpected costs or events could have an immediate and material impact on our business and financial condition.
The regulatory clearance or approval process for certain products is expensive, time consuming and uncertain, and the failure to obtain and maintain required clearances or approvals could prevent us from commercializing our products.*
We obtained 510(k) clearance from the FDA for our ePlex Instrument and the following ePlex assays: the ePlex RP Panel; the ePlex BCID-GP Panel; the ePlex BCID-GN Panel; and the ePlex BCID-FP Panel. We are also commercializing our ePlex SARS-CoV-2 Test and ePlex RP2 Panel under EUA. We are investing significantly in the development of new ePlex molecular diagnostic tests to expand our future product offerings. Our newly developedofferings, including our ePlex testsGastrointestinal Pathogen Panels, which will require clinical studies and subsequent 510(k) clearance, or pre-market approval, or EUA by the FDA prior to marketing those tests for commercial use in the United States. There are a number of potential risks associated with conducting clinical studies and obtaining regulatory clearance. For example, we may have difficulty maintaining the level of reliability and clinical accuracy required to timely complete clinical studies and obtain FDA clearance or approval. In addition, the FDA may require that we conduct additional studies that could impact the cost associated with product clearance and could potentially delay commercial launch of newly developednew ePlex molecular diagnostic tests in the United States. We may be unsuccessful in obtaining FDA clearance for our expanding ePlex test menu within our expected timeframe,time frame, or at all, which could adversely impact our future financial performance and cause our stock price to decline.
The regulatory environment is constantly evolving. For example, the FDA conducted a review of the pre-market clearance process in response to internal and external concerns regarding the 510(k) program and, in January 2011, announced 25 action items designed to make the process more rigorous and transparent. Some of these proposals, if enacted, could impose additional regulatory requirements for device manufacturers which could delay our ability to obtain new 510(k) clearances, increase the costs of compliance, or restrict our ability to maintain our current clearances. Similarly, the European Union, or EU, is transitioning from the existing European Directive 98/79/EC on in vitro diagnostic medical devices, or IVD Directive (IVDD), to the In Vitro Diagnostic Device Regulation, or IVDR. Specifically, the IVDR repeals and replaces the IVDD. Unlike the directive, which must be implemented into the national laws of the European Economic Area, or EEA, Member States, the IVDR is directly applicable in all EEA Member States and is intended to eliminate current differences in regulation of IVDs among EEA Member States. Under the IVDR, the classificationclassifications of our molecular diagnostic products are impacted, and will result in additional regulatory requirements, which could delay our ability to CE Mark our products. Delays in receipt of, or failure to obtain, clearances or approvals for future products would result in delayed, or no, realization of revenues from such products and in substantial additional costs, which could decrease our profitability.
We must also comply with the applicable FDA and foreign regulatory agency post-market requirements.requirements, including routine Notified Body conformity assessments to quality system standards (e.g., ISO 13485). Any failure to maintain post-market compliance with FDA or foreign regulatory requirements could harm our business, operations, and/or financial condition.
We derive revenues from the sale of research use only or RUO,(RUO) tests and custom manufactured reagents, which are not intended for diagnostic purposes. Clinical laboratories are regulated under CLIA and may validate the clinical diagnostic use of an LDT specifically for use in their laboratory using any labeled products. TheWhile the FDA has traditionally practiced enforcement discretion regarding the use of the LDTs for clinical diagnostic purposes. However,purposes, there have been regulatory actions indicating a potential change in enforcement practices (e.g., the FDA has promulgated draft guidance which outlines stringent regulatory requirements for CLIA labs in order to use LDTs for clinical diagnostic application.application and the FDA has issued warning letters to labs marketing the clinical utility of LDTs). These proposed
requirements, if implemented, may result in a significant reduction in the sale of our RUO or custom manufactured products, which could reduce our revenues and adversely affect our operations and/or financial condition.
We are subject to various federal and state laws pertaining to health care fraud and abuse, including anti-kickback, self-referral, false claims and fraud laws, and any violations by us of such laws could result in fines or other penalties.
Our commercial, research, and other financial relationships with healthcare providers and institutions are subject to various federal and state laws intended to prevent health care fraud and abuse. The federal anti-kickback statute prohibits the knowing offer, receipt, or payment of remuneration in exchange for or to induce the referral of patients or the use of products or services that would be paid for in whole or part by Medicare, Medicaid, or other federal health care programs. Remuneration has been broadly defined to include anything of value, including cash, improper discounts, and free or reduced price items and services. Many states have similar laws that apply to their state health care programs as well as private payors. Violations of the anti-kickback laws can result in exclusion from federal health care programs and substantial civil and criminal penalties.
The FCAFalse Claims Act (FCA) imposes liability on persons who, among other things, present or cause to be presented false or fraudulent claims for payment by a federal health care program. The FCA has been used to prosecute persons submitting claims for payment that are inaccurate or fraudulent, that are for services not provided as claimed, or for services that are not medically necessary. We have implemented procedures designed to ensure our compliance with relevant legal requirements. Nevertheless, if our marketing, sales, or other arrangements, including our reagent rental arrangements, were determined to violate anti-kickback or related laws, including the FCA, then our revenues could be adversely affected, which would likely harm our business, financial condition, and results of operations.
The Health Care Act also imposes reporting and disclosure requirements on device manufacturers for payments to healthcare providers and ownership of their stock by healthcare providers. In February 2013, the Centers for Medicare and Medicaid Services, or, CMS, released the final rule implementing the federal Physician Payments Sunshine Act, or the Sunshine Act. The law requires certain pharmaceutical, biologic, and medical device manufacturers to annually report to CMS payments or other transfers of value they furnish to physicians and teaching hospitals. These reporting requirements took effect on August 1, 2013. Failure to submit required information may result in significant civil monetary penalties. We expect compliance with the Sunshine Act to impose significant administrative and financial burdens on us.
In addition, there has been a recent trend of increased federal and state regulation of payments made to physicians for marketing. Some states, such as California, Massachusetts, and Vermont, mandate implementation of corporate compliance programs, along with the tracking and reporting of gifts, compensation, and other remuneration to physicians. The shifting commercial compliance environment and the need to build and maintain robust and expandable systems to comply with different compliance and/or reporting requirements in multiple jurisdictions increaseincreases the possibility that a healthcare company may run afoul of one or more of the requirements.
We are also subject to the U.S. Foreign Corrupt Practices Act, or the FCPA, and other countries’ anti-corruption/anti-bribery regimes, such as the U.K. Bribery Act. The FCPA prohibits improper payments or offers of payments to foreign governments and their officials for the purpose of obtaining or retaining business. Safeguards we implement to discourage improper payments or offers of payments by our employees, consultants, sales agents, or distributors may be ineffective, and violations of the FCPA and similar laws may result in severe criminal or civil sanctions, or other liabilities or proceedings against us, any of which would likely harm our reputation, business, financial condition, and results of operations.
Legislative or regulatory healthcare reforms may have a material adverse effect on our business and results of operations.
Federal and state governments in the United States are undertaking efforts to control growing health care costs through legislation, regulation, and voluntary agreements with medical care providers and third-party payors. In March 2010, Congress enacted the Patient Protection and Affordable Care Act, or the PPACA. While the PPACA involves expanding coverage to more individuals, it includes regulatory mandates and other measures designed to constrain medical costs. Among other requirements, the PPACA imposes a 2.3% excise tax on sales of medical devices by manufacturers. In December 2015, the excise tax was suspended for 2016 and 2017.2017, and, in January 2018, the excise tax was further suspended until 2020. Taxable devices include certain medical devices intended for use by humans, with limited exclusions for retail devices purchased by the general public at retail for individual use. There is no exemption for small companies, and we paid the tax from 2013 through 2015. Recently, Congress and the new administration have proposed and taken various steps to revise, repeal, or delay implementation of various aspects of PPACA. If the PPACA is significantly revised, repealed, or if implementation of various aspects are delayed, such modification, repeal, or delay may impact our business, financial condition, results of operations, cash flows, and the trading price of our securities.
Complying with PPACA may significantly increase our tax liabilities and costs, which could adversely affect our business and financial condition.
In August 2011, President Obama signed into law theThe Budget Control Act of 2011 whichprovided, among other things, created automaticaggregate reductions to several government programs, including aggregate reductions of Medicare payments to providers of up to 2% per fiscal year. In Aprilyear, which began in 2013 the 2% Medicare payment reductions went into effect.and will remain in effect through 2025 unless additional Congressional action is taken. In addition to the potential impacts to PPACA under the newcurrent administration, there could be sweeping changes to the Budget Control Act and other healthcare reforms. For example, the Tax Cuts and Jobs Act enacted in December 2017 eliminated the shared responsibility payment for individuals who fail to maintain minimum essential coverage under section 5000A of the Internal Revenue Code of 1986, commonly referred to as the individual mandate, beginning in 2019. Additional changes to the PPACA remain possible. We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for our products or additional pricing pressure.
Both within and outside the United States, we are impacted by privacy and data security requirements at the international, national, and regional level, and on an industry-specific basis. More privacy and security laws and regulations are being adopted, and more are being enforced, with the potential for significant financial penalties. In the European Union (EU), increasingly stringent data protection and privacy rules have been enacted. The EU General Data Protection Regulation (GDPR) applies uniformly across the EU and includes, among other things, a requirement for prompt notice of data breaches to data subjects and supervisory authorities in certain circumstances. The GDPR also requires companies processing personal data of individuals residing in the EU to comply with EU privacy and data protection rules. The State of California has also enacted a consumer privacy law which imposes similar data privacy and security requirements. Our failure to maintain the confidentiality and security of sensitive personal information in accordance with applicable regulatory requirements could subject us to financial penalties and breach of contract claims and could damage our reputation.
Our products could infringe patent rights of others, which may require costly litigation and, if we are not successful, could cause us to pay substantial damages or limit our ability to commercialize our products.
Our commercial success depends on our ability to develop, manufacture, and market our systems and tests and use our proprietary technology without infringing the patents and other proprietary rights of third parties. As the molecular diagnostics industry expands and more patents are issued, the risk increases that there may be patents issued to third parties that relate to our products and technology of which we are not aware or that we must challenge to continue our operations as currently contemplated. Our products may infringe or may be alleged to infringe these patents.
The patent positions of medical device companies can be highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved. No consistent policy regarding the breadth of claims allowed in patents in these fields has emerged to date in the United States or in many foreign jurisdictions. Both the U.S. Supreme Court and the Court of Appeals for the Federal Circuit have made, and will likely continue to make, changes in how the patent laws of the United States are interpreted. For example, three Supreme Court cases, Association for Molecular Pathology et al. v. Myriad Genetics, Inc., et al., Mayo Collaborative Services v. Prometheus Laboratories, and Alice v. CLS Bank, have introduced additional questions regarding the patentability of isolated naturally occurring genes and gene fragments, proteins, peptides, natural products, and related diagnostic and therapeutic methods, which are likely to be resolved only through continued litigation. The overall impact of these decisions and others on the molecular diagnostics industry remains uncertain and our interpretation of the scope of these rulings on existing or future patents may be inaccurate.
There is a significant amount of uncertainty regarding the extent of patent protection and infringement. Companies may have filed pending patent applications that cover technologies we incorporate in our products. As a result, we could be subjected to substantial damages for past infringement or be required to modify our products or stop selling them if it is ultimately determined that our products infringe a third party’s proprietary rights. Even if we are successful in defending against potential intellectual property infringement claims, we could incur substantial costs in doing so. Any litigation related to such claims could consume our resources and lead to significant damages, royalty payments, or an injunction on the sale of certain products. Any additional licenses to patented technology could obligate us to pay substantial additional royalties, which could adversely impact our product costs and harm our business.
If we are unable to obtain, maintain, and enforce intellectual property protection covering our products, others may be able to make, use, or sell products substantially the same as ours, which could adversely affect our ability to compete in the market.
Our commercial success is dependent in part on obtaining, maintaining, and enforcing intellectual property rights, including our patents, key licenses, and other intellectual property rights. If we are unable to obtain, maintain and enforce intellectual property protection covering our products, others may be able to make, use or sell products that are substantially the same as ours without incurring the sizeablesizable development and licensing costs that we have incurred, which would adversely affect our ability to compete in the market.
We seek to obtain and maintain patents and other intellectual property rights to restrict the ability of others to market products that compete with our products. Currently, our patent portfolio is comprised on a worldwide basis of more than 100 owned and exclusively licensed patents and approximately 3025 additional pending patent applications. In general, patents have a term of at least 20 years from the application filing date or earlier claimed priority date. A majority of our issued and exclusively licensed patents are scheduled to expire by 2021, with approximately one half of the patents expiring by 2018. Several of our pending applications have the potential to mature into patents that may expire between 2028 and 2034.2039. However, not all of the pending or future patent applications owned by or licensed to us are guaranteed to mature into patents, and, moreover, issued patents owned by or licensed to us now or in the future may be found by a court to be invalid or otherwise unenforceable. Also, even if our patents are determined by a court to be valid and enforceable, they may not be sufficiently broad to prevent others from marketing products similar to ours or designing around our patents, despite our patent rights, nor provide us with freedom to operate unimpeded by the patent rights of others.
We also rely on trade-secret protection to protect our interests in proprietary know-how and for processes for which patents are difficult to obtain or enforce. We may not be able to protect our trade secrets adequately. We have limited control over the
protection of trade secrets used by our licensors, collaborators, and suppliers. Although we use reasonable efforts to protect our trade secrets, our employees, consultants, contractors, outside scientific collaborators, and other advisors may unintentionally or willfully disclose our information to competitors. Enforcing a claim that a third party illegally obtained and is using any of our trade secrets is difficult, expensive, and time consuming, and the outcome is unpredictable. We rely, in part, on non-disclosure and confidentiality agreements with our employees, consultants, and other parties to protect our trade secrets and other proprietary technology. These agreements may be breached and we may not have adequate remedies for any breach. Moreover, others may independently develop equivalent proprietary information, and third parties may otherwise gain access to our trade secrets and proprietary knowledge. Any disclosure of confidential data into the public domain or to third parties could allow our competitors to learn our trade secrets and use the information in competition against us.
We and our suppliers, contract manufacturers, and customers are subject to various governmental regulations, and we may incur significant expenses to comply with, and experience delays in our product commercialization as a result of, these regulations.
Our manufacturing processes and facilities and those of some of our contract manufacturers must comply with the federal Quality System Regulation, or QSR and certain foreign regulatory requirements, which coverscover the procedures and documentation of the design, testing, production, control, quality assurance, labeling, packaging, storage, and shipping of our devices. The FDA enforcesand other foreign regulatory bodies enforce the QSR and similar foreign regulatory requirements through periodic announced and/or unannounced inspections of manufacturing facilities. We and our contract manufacturers have been, and anticipate in the future being, subject to such inspections, as well as to inspections by other federal and state regulatory agencies.
We must also file reports of device corrections and removals and adhere to the FDA’sdomestic and foreign rules on labeling and promotion. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to significant liability, including substantial monetary penalties and criminal prosecution.
Failure to comply with applicable FDAregulatory requirements, or later discovery of previously unknown problems with our products or manufacturing processes, including our failure or the failure of one of our contract manufacturers to take satisfactory corrective action in response to an adverse QSRregulatory inspection, can result in, among other things:
•administrative or judicially imposed sanctions;
•injunctions or the imposition of civil penalties;
•recall or seizure of our products;
•total or partial suspension of production or distribution;
•withdrawal or suspension of marketing clearances or approvals;
•clinical holds;
•warning letters;
•refusal to permit the import or export of our products; and
•criminal prosecution.
Any of these actions, in combination or alone, could prevent us from marketing, distributing, or selling our products and would likely harm our business.
In addition, a product defect or regulatory violation could lead to a government-mandated or voluntary recall by us. We believe that the FDA would request that we initiate a voluntary recall if a product was defective or presented a reasonable risk of injury or gross deception. Regulatory agencies in other countries have similar authority to recall devices because of material deficiencies or defects in design or manufacture that could endanger health. Any recall would divert management attention and financial resources, could cause the price of our common stock to decline and expose us to product liability or other claims, including contractual claims from parties to whom we sold products, and harm our reputation with customers.
The use of our diagnostic products by our customers is also affected by CLIA and related federal and state regulations that provide for regulation of laboratory testing. CLIA is intended to ensure the quality and reliability of clinical laboratories in the United States by mandating specific standards in the areas of personnel qualifications, administration, participation in proficiency testing, patient test management, quality assurance, quality control, and inspections. Current or future CLIA requirements or the promulgation of additional regulations affecting laboratory testing may prevent some laboratories from using some or all of our diagnostic products.
Our credit facility contains restrictions that limit our flexibility in operating our business.*
We must comply with certain affirmative and negative covenants under our credit facility, including covenants that limit or restrict our ability to, among other things:
•incur additional indebtedness or issue certain preferred shares;
•pay dividends on, repurchase or make distributions in respect of, our capital stock or make other restricted payments;
•make certain investments or acquisitions;
•sell certain assets;
•create liens; or
•enter into certain transactions with our affiliates.
If we default under the agreement, because of a covenant breach or otherwise, the outstanding amounts thereunder could become immediately due and payable, and the lenders could terminate all commitments to extend further financing.
We may need to raise additional funds in the future, and such funds may not be available on a timely basis, or at all.
Until such time, if ever, as we can generate positive cash flows from operations, we will be required to finance our operations with our cash resources and amounts made available under our credit facility. We may need to raise additional funds in the future to support our operations. We cannot be certain that additional capital will be available as needed, on acceptable terms, or at all. If we require additional capital at a time when investment in our company, in molecular diagnostics companies, or the marketplace in general is limited, we may not be able to raise such funds at the time that we desire, or at all. If we do raise additional funds through the issuance of equity or convertible securities, the percentage ownership of holders of our common stock could be significantly diluted. In addition, newly issued securities may have rights, preferences or privileges senior to those of holders of our common stock. If we raise additional funds through collaborations and licensing arrangements, we could be required to relinquish significant rights to our technologies and products, or grant licenses on terms that are not favorable to us.
We have a history of net losses, and we may never achieve or maintain profitability.
We have a history of significant net losses and a limited history commercializing our molecular diagnostic products. Our net losses were approximately $50.6$47.4 million, $50.5 million and $42.2$61.9 million for the years ended December 31, 20162019, 2018, and 2015,2017, respectively. As of September 30, 2017,December 31, 2019, we had an accumulated deficit of $402.6$514.2 million. We expect to continue to incur significant expenses for the foreseeable future in connection with our ongoing operations, primarily related to expanding our commercial organization (sales and marketing), research and development, manufacturing clinical and regulatory activities related to our ePlex system, maintaining our existing intellectual property portfolio, obtaining additional intellectual property rights, and investing in corporate infrastructure. We cannot provide any assurance that we will achieve profitability and, even if we achieve profitability, that we will be able to sustain or increase profitability on a quarterly or annual basis. Further, because of our limited commercialization history and the rapidly evolving nature of our target market, we have limited insight into the trends that may emerge and affect our business. We may make errors in predicting and reacting to relevant business trends, which could harm our business and financial condition.
We incur costs and demands upon management as a result of complying with the laws and regulations affecting public companies in the United States, and failure to comply with these laws could harm our business and the price of our common stock.
As a public company listed in the United States, we incur significant legal, accounting, and other expenses. In addition, changing laws, regulations, and standards relating to corporate governance and public disclosure, including regulations implemented by the SEC, the Public Company Accounting Oversight Board (PCAOB), and The NASDAQ Global Market, may increase our legal and financial compliance costs and make some activities more time consuming. These laws, regulations, and standards are subject to varying interpretations and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. We intend to invest resources to comply with evolving laws, regulations, and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If we nevertheless fail to comply with new laws, regulations, and standards, regulatory authorities may initiate legal proceedings against us and our business may be harmed.
Economic conditions and an uncertain economic outlook may adversely impact our business, results of operations, financial condition or liquidity.*
Global economic conditions may remain challenging and uncertain for the foreseeable future.future, particularly in light of the recent COVID-19 pandemic. These conditions may not only limit our access to capital but also make it extremely difficult for our customers, our vendors, and us to accurately forecast and plan future business activities, and they could cause U.S. and foreign businesses and consumers to experience operating disruptions or slow spending on our products
and services, which would delay and lengthen sales cycles. Some of our customers rely on government research grants to fund technology purchases. If negative trends in the economy affect the government’s allocation of funds to research, there may be less grant funding available for certain of our customers to purchase technologies from us. Certain of our customers may face challenges gaining timely access to sufficient credit or may otherwise be faced with budget constraints, which could result in decreased purchases of our products or in an impairment of their ability to make timely payments to us. If our customers do not make timely payments to us, we may be required to assume greater credit risk relating to those customers, increase our allowance for doubtful accounts, and our days sales outstanding would be negatively impacted. Although we maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments, we may not continue to experience the same loss rates that we have in the past. Additionally, these economic conditions and market turbulence may also impact our suppliers, causing them to be unable to supply sufficient quantities of customized components in a timely manner, thereby impairing our ability to manufacture on schedule and at commercially reasonable costs.
We are exposed to risks associated with long-lived and intangible assets that may become impaired and result in an impairment charge.
The carrying amounts of long-lived and intangible assets are affected whenever events or changes in circumstances indicate that the carrying amount of any asset may not be recoverable. These events or changes might include an inability to successfully deliver an instrument to the marketplace and attain customer acceptance, a change in the rights or use of licensed intellectual property, adjustments to our depreciation assumptions, or other matters. Adverse events or changes in circumstances may affect the estimated discounted future cash flows expected to be derived from long-lived and intangible assets. If at any time we determine that an impairment has occurred, we will be required to reflect the impaired value as a charge, resulting in a reduction in earnings in the quarter such impairment is identified and a corresponding reduction in our net asset value. In the past we have incurred, and in the future we may incur, impairment charges. A material reduction in earnings resulting from such a charge could cause us to fail to meet the expectations of investors and securities analysts, which could cause the price of our stock to decline.
Providing instrument systems to our customers through reagent rental agreements may harm our liquidity.liquidity.
Many of our systems are provided to customers via “reagent rental” agreements, under which customers are generally afforded the right to use the instrument in return for a commitment to purchase minimum quantities of reagents and test cartridges over a period of time. Accordingly, we must either incur the expense of manufacturing instruments well in advance of receiving sufficient revenues from test cartridges to recover our expenses or obtain third party financing sources for the purchase of our instrument. The amount of capital required to provide instrument systems to customers depends on the number of systems placed. Our ability to generate capital to cover these costs depends on the amount of our revenues from sales of reagents and test cartridges sold through our reagent rental agreements. We do not currently sell enough reagents and test cartridges to recover all of our fixed expenses, and therefore we currently have a net loss. If we cannot sell a sufficient number of reagents and test cartridges to offset our fixed expenses, our liquidity will continue to be adversely affected.
We use hazardous chemicals, biological materials and infectious agents in our business. Any claims relating to improper handling, storage or disposal of these materials could be time consuming and costly.
Our research, product development and manufacturing processes involve the controlled use of hazardous materials, including chemicals, biological materials and infectious disease agents. Our operations produce hazardous waste products. We cannot eliminate the risk of accidental contamination or discharge and any resulting injury from these materials. We may be sued for any injury or contamination that results from our use or the use by third parties of these materials, and our liability may exceed our insurance coverage and our total assets. Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of these hazardous materials and specified waste products, as well as the discharge of pollutants into the environment and human health and safety matters. Our operations are regulated and may require that environmental permits and approvals be issued by applicable government agencies. Compliance with environmental laws and regulations may be expensive and may impair our research, development and production efforts. If we fail to comply with these requirements, we could incur substantial costs, including civil or criminal fines and penalties, clean-up costs or capital expenditures for control equipment or operational changes necessary to achieve and maintain compliance. In addition, we cannot predict the impact on our business of new or amended environmental laws or regulations or any changes in the way existing and future laws and regulations are interpreted and enforced.
If we are unable to retain key employees or hire additional skilled employees, we may be unable to achieve our goals.
Our performance is substantially dependent on the performance of our senior management. Competition for top management personnel is intense and we may not be able to recruit and retain the personnel we need. Our senior managers can terminate their relationship with us at any time. The loss of services of any of these key personnel could significantly reduce our
operational effectiveness and investor confidence and our stock price could decline. We do not maintain key-man life insurance on any of our employees.
In addition, our product development and marketing efforts could be delayed or curtailed if we are unable to attract, train and retain highly skilled technical employees and scientific advisors. To expand our research, product development and commercial efforts, we will need to retain additional people skilled in areas such as electrochemical and molecular science, information technology, manufacturing, sales, marketing and technical support. Because of the complex and technical nature of our systems and the dynamic market in which we compete, any failure to attract and retain a sufficient number of qualified employees could materially harm our ability to develop and commercialize our technology. We may not be successful in hiring or retaining qualified personnel, and any failure to do so could have a material adverse effect on our business, financial condition and results of operations.
Cyberattacks and other security breaches could compromise our proprietary information which could harm our business and reputation.
In the ordinary course of our business, we generate, collect and store proprietary information, including intellectual property and business information. The secure storage, maintenance, and transmission of and access to this information is critical to our operations, business strategy, and reputation. Computer hackers may attempt to penetrate our computer systems or our third party IT service providers' systems and, if successful, misappropriate our proprietary information. In addition, an employee, contractor, or other third-party with whom we do business may attempt to circumvent our security measures in order to obtain such information, and may purposefully or inadvertently cause a breach involving such information. While we will continue to implement additional protective measures to reduce the risk of and detect cyber-attacks,cyberattacks, these incidents are becoming more sophisticated and frequent, and the techniques used in such attacks evolve rapidly and are difficult to detect. Despite our cybersecurity measures, our information technology networks and infrastructure may still be vulnerable to unpermitted access by hackers or other breaches, or employee error or malfeasance. Any such compromise of our, or our third party IT service providers' data security and access to, or public disclosure or loss of, confidential business or proprietary intellectual property information could disrupt our operations, damage our reputation, provide our competitors with valuable information, and subject us to additional costs which could adversely affect our business.
Information technology systems implementation issues could disrupt our internal operations and adversely affect our financial results.
Portions of our information technology infrastructure may experience interruptions, delays, or cessations of service or produce errors in connection with ongoing systems implementation work. In particular, we have implemented an enterprise resource planning software system. To more fully realize the potential of this system, we are continually reassessing and upgrading processes and this may be more expensive, time consuming, and resource intensive than planned. Any disruptions that may occur in the operation of this system or any future systems could increase our expenses and adversely affect our ability to report in an accurate and timely manner the results of our consolidated operations, our financial position, and cash flows and to otherwise operate our business in a secure environment, all of which could adversely affect our financial results, stock price, and reputation.reputation.
Our ability to use our net operating loss carryforwards may be limited.
As of December 31, 2016,2019, we had pre-2018 net operating loss, or NOL, carryforwards available of approximately $206.9$264.6 million for U.S. federal income tax purposes. These lossThe federal NOL carryforwards generated prior to 2018 will begin to expire in varying amounts through 2035. 2025. The NOL generated in 2018 and 2019 of $78,190,000 will carry forward indefinitely and be available to offset up to 80% of future taxable income each year.
Section 382 of the U.S. Internal Revenue Code of 1986, as amended, or the Code, generally imposes an annual limitation on the amount of NOL carryforwards that may be used to offset taxable income when a corporation has undergone significant changes in stock ownership. We have determined that we have experienced multiple ownership changes under Section 382 of the Code. Our ability to use the current federal and state NOL carryforwards may also be limited by the issuance of common stock in the future. To the extent our use of federal and state NOL carryforwards is limited, our income may be subject to corporate income tax earlier than it would if we were able to use the state or federal NOL carryforwards. We have recorded a full valuation allowance against our federal and state net deferred tax assets.
We also had state NOL carryforwards of approximately $249.7 million as of December 31, 2019. We have recorded a full valuation allowance against our net deferred tax assets.
We also had state NOL carryforwards
Provisions of our certificate of incorporation, our bylaws, and Delaware law could make an acquisition of our Company, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove the current members of our board and management.
Certain provisions of our certificate of incorporation and bylaws could discourage, delay, or prevent a merger, acquisition, or other change of control that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. Furthermore, these provisions could prevent or frustrate attempts by our stockholders to replace or remove members of our Board of Directors. These provisions also could limit the price that investors might be willing to pay in the future for our common stock, thereby depressing the market price of our common stock. Stockholders who wish to participate in these transactions may not have the opportunity to do so. These provisions:
•allow the authorized number of directors to be changed only by resolution of our Board of Directors;
•provide that our stockholders may remove our directors only for cause;
•establish a classified board of directors, such that not all members of the Board of Directors may be elected at one time;
•authorize our Board of Directors to issue without stockholder approval up to 100,000,000 shares of common stock, that, if issued, would dilute our stock ownership and could operate as a “poison pill” to dilute the stock ownership of a potential hostile acquirer to prevent an acquisition that is not approved by our Board of Directors;
•authorize our Board of Directors to issue without stockholder approval up to 5,000,000 shares of preferred stock, the rights of which will be determined at the discretion of the Board of Directors that, if issued, could operate as a “poison pill” to dilute the stock ownership of a potential hostile acquirer to prevent an acquisition that is not approved by our Board of Directors;
•require that stockholder actions must be effected at a duly called stockholder meeting or by unanimous written consent;
•establish advance notice requirements for stockholder nominations to our Board of Directors or for stockholder proposals that can be acted on at stockholder meetings;
•limit who may call stockholder meetings; and
•require the approval of the holders of 80% of the outstanding shares of our capital stock entitled to vote in order to amend certain provisions of our certificate of incorporation and bylaws.
In addition, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which may, unless certain criteria are met, prohibit large stockholders, in particular those owning 15% or more of the voting rights on our common stock, from merging or combining with us for a prescribed period of time.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
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Exhibit | Description |
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101.INS | XBRL Instance Document. |
101.SCH | XBRL Taxonomy Extension Schema Document. |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document. |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
* Indicates a management contract or compensatory plan or arrangement in which any director or named executive officer participates.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | | GENMARK DIAGNOSTICS, INC. |
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Date: | August 4, 2020 | By: | GENMARK DIAGNOSTICS, INC./s/ SCOTT MENDEL |
| | | Scott Mendel |
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Date: | 11/2/2017 | By: | /s/ HANY MASSARANY |
| | | Hany Massarany |
| | | President and Chief Executive Officer |
| | | (Principal Executive Officer) |
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Date: | 11/2/2017August 4, 2020 | By: | /s/ SCOTT MENDELJOHNNY EK |
| | | Scott MendelJohnny Ek |
| | | Chief Financial Officer |
| | | (Principal Financial and Accounting Officer) |
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