Viridian Therapeutics, Inc.\DE - Quarter Report: 2016 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

Commission File Number: 001-36483

SIGNAL GENETICS, INC.

(Exact name of registrant as specified in its charter)

Registrant's telephone number, including area code: (760) 537-4100

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ☒   Yes    ☐   No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ☒   Yes    ☐   No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.).

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

As of August 12, 2016, there were 10,790,422 shares of the issuer’s common stock, par value $0.01 per share, outstanding.

TABLE OF CONTENTS

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements. Such forward-looking statements include those that express plans, anticipation, intent, contingency, goals, targets or future development and/or otherwise are not statements of historical fact. These forward-looking statements are based on our current expectations and projections about future events and they are subject to risks and uncertainties known and unknown that could cause actual results and developments to differ materially from those expressed or implied in such statements.

In some cases, you can identify forward-looking statements by terminology, such as “expects,” “anticipates,” “intends,” “estimates,” “plans,” “believes,” “seeks,” “may,” “should,” “continue,” “could” or the negative of such terms or other similar expressions. Accordingly, these statements involve estimates, assumptions and uncertainties that could cause actual results to differ materially from those expressed in them. Any forward-looking statements are qualified in their entirety by reference to the factors discussed throughout this Quarterly Report on Form 10-Q.

You should read this quarterly report and the documents that we reference herein and therein and have filed as exhibits to this report, completely and with the understanding that our actual future results may be materially different from what we expect. You should assume that the information appearing in this quarterly report is accurate as of the date of this report only. Because the risk factors referred to above could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us or on our behalf, you should not place undue reliance on any forward-looking statements. These risks and uncertainties, along with others, are described under the heading “Risk Factors” in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2015 filed with the Securities and Exchange Commission on March 21, 2016. Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. New risk factors may emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each risk factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We qualify all of the information presented in this Quarterly Report on Form 10-Q, and particularly our forward-looking statements, by these cautionary statements.

PART I—FINANCIAL INFORMATION

Item 1. Unaudited Condensed Financial Statements.

SIGNAL GENETICS, INC.

CONDENSED BALANCE SHEETS

(in thousands, except share and par value data)

See accompanying notes to unaudited condensed financial statements.

SIGNAL GENETICS, INC.

UNAUDITED CONDENSED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

See accompanying notes to unaudited condensed financial statements.

SIGNAL GENETICS, INC.

UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS

(in thousands)

See accompanying notes to unaudited condensed financial statements.

SIGNAL GENETICS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

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

Introduction

The following discussion and analysis should be read together with our financial statements and the related notes appearing elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. See “Cautionary Note Regarding Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with these statements. Actual results and the timing of events could differ materially from those discussed in our forward-looking statements as a result of many factors, including those set forth under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015 filed with the Securities and Exchange Commission (the “SEC”) on March 21, 2016.

Overview

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

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

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

Our growth strategy includes the following key elements:

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

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

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

Sources of Revenues and Expenses

Revenues

We generate revenues primarily from the completion of tests processed through our CAP-accredited and CLIA certified laboratory when test results are delivered to ordering physicians. During the first six months of 2016, we had three major customers, including UAMS. Revenue sourced either from or through UAMS as a percentage of net revenue during the first six months of 2016 and 2015 were 22% and 75%, respectively. Revenue sourced either from or through our other two major customers as a percentage of net revenue during the first six months of 2016 and 2015 were 26% and 0%, and 12% and 5%, respectively.

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

Cost of Revenue

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

Research and Development Expenses

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

Selling and Marketing Expenses

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

General and Administrative Expenses

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

Interest Expense

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

Critical Accounting Policies and Estimates

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

We believe the following critical accounting policies used in the preparation of our financial statements require significant judgments and estimates:

During the six months ended June 30, 2016, other than as discussed below, there were no significant changes in our critical accounting policies and estimates. Please refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2015 for a more complete discussion of our critical accounting policies.

Revenue Recognition

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

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

Our estimates of net revenue for non-contracted insurance companies are subject to change based on the contractual status and payment policies of the third-party payors with whom we deal. We regularly refine our estimates in order to make estimated revenue as accurate as possible based on its most recent collection experience with each third-party payor. We regularly review our historical collection experience for non-contracted payors and anticipated changes in the healthcare industry and adjust expected revenues for current and subsequent periods accordingly, including previously recorded revenues related to outstanding accounts receivable for such non-contracted payors.

Accounts Receivable, Contractual Allowances and Allowance for Doubtful Accounts

We record accounts receivable net of contractual allowances and an allowance for doubtful accounts. At June 30, 2016 and December 31, 2015, contractual allowances were $2.7 million and $2.1 million, respectively. We estimate an allowance for doubtful accounts based on the aging of the accounts receivable and the historical collection experience for each of our contracted payors. When the amounts are determined to be uncollectible, they are expensed as bad debt and subsequently charged-off against the allowance. During the second quarters of 2016 and 2015, we recognized $0 and $4,000, respectively, in bad debt expense. During first six months of 2016 and 2015, we recognized $2,000 and $28,000, respectively, in bad debt expense. At June 30, 2016 and December 31, 2015, there were no allowances for doubtful accounts. Uncollectability of accounts receivable for a non-contracted payor is typically a reflection of an estimate in excess of actual collections and is adjusted in the period of collection as a change in estimate resulting in an increase in contractual allowances and, therefore, a reduction in current period net revenue.

The following tables present our gross accounts receivable from customers outstanding by aging category reduced by total contractual allowances to arrive at the net accounts receivable balances at June 30, 2016 and December 31, 2015. Other than our direct bill customers, all of our receivables were pending approval by third-party payors as of the date that the receivables were recorded:

The day sales outstanding (“DSO”) at June 30, 2016 has increased to 71 days, compared to 53 days at December 31, 2015, attributable to the growth in net accounts receivable which was influenced by the increase in both test volume and average selling price for billings to non-contracted insurance payors. Since private non-contracted insurance payors are slower to pay, we expect our DSO’s to increase as net revenues from these payors increase.

Recently Adopted Accounting Pronouncements

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09, which simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The update is effective for fiscal years and the interim periods within those fiscal years beginning after December 15, 2016, with early adoption permitted. Amendments related to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements and forfeitures are applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. Amendments related to the presentation of employee taxes paid on the statement of cash flows when an employer withholds shares to meet the minimum statutory withholding requirement is applied retrospectively. Amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement are applied prospectively. We elected to early adopt this guidance effective January 1, 2016. The impact of adoption of this guidance had no effect on our financial position, statements of operations or statements of cash flows.

In May 2015, the FASB issued ASU No. 2015-07 that eliminates the requirement to categorize investments within the fair value hierarchy if their fair value is measured using the net asset value per share practical expedient in the FASB’s fair value measurement guidance. The amendments also limit certain disclosures to investments for which the entity has elected to measure at fair value using the net asset value per share practical expedient. The amendments were applied retrospectively by removing from the fair value hierarchy any investments for which fair value is measured using the net asset value per share practical expedient. Adoption of this guidance did not have an impact on the Company’s financial position or results of operations.

Recent Accounting Pronouncements

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

Future Accounting Pronouncements

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

Results of Operations

Second Quarter of 2016 Compared to the Second Quarter of 2015

Net Revenue

Our net revenue was $874,000 during the second quarter of 2016, an increase of $140,000, or 19%, compared to $734,000 during the second quarter of 2015. Net revenue and tests billed during the second quarters of 2016 and 2015 were as follows:

The number of tests we billed for clinical patients at U.S. hospitals and direct billed customers increased 70% during the second quarter of 2016 compared to the same period in 2015 due to an increase in new hospital customers and an increase in tests sourced from existing customers, a direct result of our increased marketing efforts. Net revenue recognized for such tests billed increased 135% during the second quarter of 2016 when compared to the same period in 2015. The increase in net revenue was driven primarily by the increased test volume and an increase in test average selling price estimates used to calculate revenue for billings to non-contracted insurance payors based on our positive collections experience with such payors. Additionally, net favorable changes in estimates of $82,000 were recorded in the second quarter of 2016, related to revenues recorded in prior years. Net revenue of $329,000 in the second quarter of 2015 was reduced by $43,000 of net unfavorable changes in estimates related to revenue recorded in 2014.

Both the net revenue recognized and number of tests reported and billed for UAMS research testing services decreased 90% during the second quarter of 2016 compared to the second quarter of 2015 primarily due to the decrease in funds available at UAMS for such services. As previously reported, we expect continued declining revenue sourced from UAMS testing services.

In our pharmaceutical services business, MyPRS^® will be run across multiple clinical trials in connection with the development of novel treatments for patients with multiple myeloma. We recognized net revenue of $60,000 for services rendered during the second quarter of 2016. We are pursuing additional projects for our pharmaceutical services business.

Cost of Revenue

Cost of revenue was $628,000, or 72% of net revenues, during the second quarter of 2016, a decrease of $50,000, or 7%, compared to $678,000, or 92% of net revenues, during the second quarter of 2015. The decrease in cost of revenue is primarily attributable to an $86,000 decrease in laboratory supply costs, a reflection of lower test volumes from UAMS, offset by a $27,000 increase in royalty expense, related to an increase in revenues, and a $9,000 increase in labor related to re- assignment of laboratory personnel from internal research projects.

Research and Development Expenses

Research and development expenses were $334,000 during the second quarter of 2016, an increase of $140,000, or 72%, when compared to $194,000 during the second quarter of 2015. The increase is primarily attributable to $195,000 increase in sponsored research programs related to research to further validate the use of MyPRS^® in MM and AMG, offset by a $55,000 decrease in our usage of labor, materials and supplies for internal research projects compared to the second quarter of 2015.

Selling and Marketing Expenses

Selling and marketing expenses were $555,000 during the second quarter of 2016, a decrease of $19,000, or 3%, when compared to $574,000 during the second quarter of 2015. The decrease is primarily attributed to a $51,000 decrease in marketing projects and conference expenses, offset by a $32,000 increase in personnel costs related to establishing our medical affairs function.

General and Administrative Expenses

General and administrative expenses were $1.8 million during the second quarter of 2016, an increase of $63,000, or 4%, when compared to the second quarter of 2015. The increase was primarily attributable to: $44,000 in increased personnel costs related to hiring of accounting, internal billing and IT staff; $72,000 in increased expenses related to investor relations and board of directors compensation; and $21,000 in increased expenses related to facility costs and other administrative costs; offset by a $58,000 decrease in stock-based compensation expense and $16,000 in reduced spending related to professional services.

Interest Expense

Interest expense was $23,000 during the second quarter of 2016, compared to $72,000 during the second quarter of 2015. The decrease was primarily due to interest expense recorded in the second quarter of 2015 related to the increase in the principal amount of an unsecured note payable due to a related party. The increase in the principal amount of the note was deferred and was amortized to interest expense over the initial term of the note to June 30, 2015.

First Six Months of 2016 Compared to the First Six Months of 2015

Net Revenue

Our net revenue was $1.7 million during the first six months of 2016, an increase of $314,000, or 23%, compared to $1.4 million during the first six months of 2015. Net revenue and tests billed during the first six months of 2016 and 2015 were as follows:

The number of tests we billed for clinical patients at U.S. hospitals and direct billed customers increased 80% during the first six months of 2016 compared to the same period in 2015 due to an increase in new hospital customers and an increase in tests sourced from existing customers, a direct result of our increased marketing efforts. Net revenue recognized for such tests billed increased 180% during the first six months of 2016 when compared to the same period in 2015. The increase in net revenue was driven primarily by the increased test volume and an increase in test average selling price estimates used to calculate revenue for billings to non-contracted insurance payors based on our positive collections experience with such payors. Additionally, net favorable changes in estimates of $224,000 were recorded in the first six months of 2016, related to revenues recorded in prior years. Net revenue of $553,000 in the first six months of 2015 was reduced by $73,000 of net unfavorable changes in estimates related to revenue recorded in 2014.

Both the net revenue recognized and number of tests reported and billed for UAMS research testing services decreased 90% during the first six months of 2016 compared to the first six months of 2015 primarily due to the decrease in funds available at UAMS for such services. As previously reported, we expect continued declining revenue sourced from UAMS testing services.

In our pharmaceutical services business, MyPRS^® will be run across multiple clinical trials in connection with the development of novel treatments for patients with multiple myeloma. We recognized net revenue of $65,000 for services rendered during the first six months of 2016. We are pursuing additional projects for our pharmaceutical services business.

Cost of Revenue

Cost of revenue was $1.3 million, or 74% of net revenues, during the first six months of 2016, a decrease of $182,000, or 13%, compared to $1.4 million, or 104% of net revenues, during the first six months of 2015. The decrease in cost of revenue is primarily attributable to a decrease of $57,000 of assigned laboratory personnel and $167,000 decrease in laboratory supply costs, a reflection of lower test volumes from UAMS, offset by a $42,000 increase in royalty expense, related to an increase in revenues.

Research and Development Expenses

Research and development expenses were $641,000 during the first six months of 2016, an increase of $348,000, or 119%, when compared to $293,000 during the first six months of 2015. The increase is primarily attributable to a $381,000 increase in sponsored research programs related to research to further validate the use of MyPRS^® in MM and AMG, offset by a $33,000 decrease in our usage of labor, materials and supplies for internal research projects compared to the first six months of 2015.

Selling and Marketing Expenses

Selling and marketing expenses were $1.1 million during the first six months of 2016, an increase of $57,000, or 6%, when compared to $1.0 million during the first six months of 2015. The increase is primarily attributed to a $74,000 increase in personnel costs related to the establishment of our medical affairs function, offset by a $17,000 decrease in marketing projects and conferences expenses.

General and Administrative Expenses

General and administrative expenses were $3.9 million during the first six months of 2016, an increase of $208,000, or 6%, when compared to $3.7 million during the first six months of 2015. The increase was primarily attributable to: $202,000 in increased personnel costs related to hiring of accounting, internal billing and IT staff; $118,000 in increased expenses related to investor relations and board of directors; and $18,000 in expenses related to facility costs and other administrative costs; partially offset by $130,000 in reduced spending related to professional services.

Interest Expense

Interest expense was $46,000 during the first six months of 2016, compared to $94,000 during the first six months of 2015. The decrease was primarily due to interest expense recorded in the second quarter of 2015 related to the increase in the principal amount of an unsecured note payable due to a related party. The increase in the principal amount of the note was deferred and was amortized to interest expense over the initial term of the note to June 30, 2015.

Liquidity and Capital Resources

We had cash and cash equivalents of $6.5 million at June 30, 2016 compared to $10.8 million at December 31, 2015. At June 30, 2016, we had working capital of $5.4 million.

Our existing cash resources will not be sufficient to meet our operating plan for the full 12-month period after the date of this filing. Based on our current plans and available resources, we believe we can maintain our current operations through June 2017. As a result, to continue to fund our ongoing operations beyond June 2017, we would need to (1) raise additional capital through the issuance of equity, debt or other securities, (2) convert our existing debt into equity, (3) enter into strategic partnerships, alliances, collaborations or other similar transactions or (4) a combination thereof.

Due to current market conditions, our current liquidity position and our depressed stock price, we believe it is unlikely that we will be able to obtain additional equity or debt financing on terms acceptable to us, if at all, and raise substantial doubt about our ability to continue as a going concern. If we are unable to raise additional capital or successfully complete a strategic partnership, alliance, collaboration or other similar transaction, we will need to delay or reduce expenses or limit or curtail operations, any of which would have a material adverse effect on our business. Further, if we are unable to raise additional capital or successfully complete a strategic partnership, alliance, collaboration or other similar transaction on a timely basis and on terms that are acceptable to us, we would also be required to sell or license our assets, sell the Company or otherwise liquidate all or a portion of our assets and/or cease our operations altogether.

We have no material commitments for capital expenditures at this time.

Our financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern. If we cannot continue as a viable entity, our stockholders might lose some or all of their investment in us.

Operating activities

Cash used by operations during the first six months of 2016 was $4.2 million, compared to $3.3 million during the first six months of 2015.

During the first six months of 2016, the use of cash from changes in operating assets and liabilities of $452,000 includes a $264,000 increase in accounts receivable, which primarily reflects an increase in our net revenue during the first six months of 2016 when compared to the fourth quarter of 2015, an increase in inventory of $26,000 and an increase in prepaid expenses and other current assets of $273,000, partially offset by an increase in accounts payable and accrued liabilities of $111,000.

During the first six months of 2015, the provision of cash from changes in operating assets and liabilities of $303,000 includes a $507,000 decrease in accounts receivable, a $233,000 increase in accounts payable and accrued liabilities, primarily due to higher accrued compensation and offering costs, and a $105,000 reduction in our prepaid expenses and other current assets, partially offset by an increase in inventory of $357,000 and a reduction in our lease termination/abandonment payable of $185,000.

Investing activities

Net cash used by investing activities during the first six months of 2016 and 2015 of $3,000 and $68,000, respectively, were for the purchase of property and equipment.

As of this time, we plan to focus on our growth strategies and do not plan to use a material amount of our cash resources for the purchase of property and equipment during the remainder of 2016.

Financing activities

Net cash used by financing activities during the first six months of 2016 of $98,000 consisted of $56,000 used to repurchase shares from employees to satisfy tax withholding obligations for restricted stock awards and $42,000 for repayment of our capital lease obligation.

Net cash provided by financing activities during the first six months of 2015 of $8.7 million consisted primarily of the net proceeds from our public offering of common stock in February 2015 of $9.1 million, partially offset by $346,000 used to repurchase shares from employees to satisfy tax withholding obligations for restricted stock awards and $36,000 for repayment of our capital lease obligation.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable to smaller reporting companies.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

In evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective, at the reasonable assurance level, as of the end of the period covered by this report to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934, as amended, (1) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (2) is accumulated and communicated to management, including our Chief Executive Officer and our Chief Financial Officer as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1A. Risk Factors

We operate in a rapidly changing environment that involves a number of risks, some of which are beyond our control. In addition to the additional risk factor set forth below and other information set forth in this report, you should carefully consider the factors discussed in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015, filed with the SEC on March 21, 2016, which could have a material effect on our business, results of operations, financial condition and/or liquidity and that could cause operating results to vary significantly from period to period. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results.

Risks Related to our Financial Condition

We will require, and may not be able to obtain, substantial additional financial resources in order to carry out our planned activities and to continue as a going concern beyond June 2017.

As of June 30, 2016, we had cash and cash equivalents totaling $6.5 million. Our existing cash resources will not be sufficient to meet our operating plan for the full 12-month period after the date of this filing. Based on our current plans and available resources, we believe we can maintain our current operations through June 2017. As a result, to continue to fund our ongoing operations beyond June 2017, we would need to (1) raise additional capital through the issuance of equity, debt or other securities, (2) convert our existing debt into equity, (3) enter into strategic partnerships, alliances, collaborations or other similar transactions or (4) a combination thereof. Due to current market conditions, our current liquidity position and our depressed stock price, we believe it is unlikely that we will be able to obtain additional equity or debt financing on terms acceptable to us, if at all. If we are unable to raise additional capital or successfully complete a strategic partnership, alliance, collaboration or other similar transaction, we will need to delay or reduce expenses or limit or curtail operations, any of which would have a material adverse effect on our business. Further, if we are unable to raise additional capital or successfully complete a strategic partnership, alliance, collaboration or other similar transaction on a timely basis and on terms that are acceptable to us, we would also be required to sell or license our assets, sell the Company or otherwise liquidate all or a portion of our assets and/or cease our operations altogether. Our financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern. If we cannot continue as a viable entity, our stockholders might lose some or all of their investment in us.

Item 6. Exhibits

The exhibits listed below are required by Item 601 of Regulation S-K. Each management contract or compensatory plan or arrangement required to be filed as an exhibit to this report has been identified.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.