Note 2 – Liquidity and management’s plans
The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Since inception, the Company has incurred, and continues to incur, significant losses from operations.
The Company has funded its operations primarily through external investor
financing arrangements and significant actions taken by the Company to reduce costs
, including:
|
•
|
On October 22, 2018, the Company closed a public offering (the “October 2018 Public Offering”) of 2,220,000 shares of its common stock at a public offering price of $1.45 per share. The Company also granted to the underwriters a 45-day option to acquire an additional 330,751 shares to cover overallotments in connection with the offering. The offering raised
gross proceeds of approximately $3.2 million and net proceeds of approximately $2.8 million.
|
|
•
|
On June 11, 2018, the Company executed an Allonge (the “Allonge”) to its Second Amended and Restated Senior Secured Promissory Note, dated June 28, 2017, with a principal amount of $1,000,000 issued to Merck Global Health Innovation Fund, LLC (“MGHIF”). The Allonge provided that accrued and unpaid interest of $285,512 due as of July 14, 2018, the original maturity date, be paid through the issuance of shares of OpGen’s common stock in a private placement transaction. In addition, the Allonge revised and extended the maturity date for payment of the Note to six semi-annual payments of $166,667 plus accrued and unpaid interest beginning on January 2, 2019 and ending on July 1, 2021. On July 30, 2018, the Company issued 144,238 shares of common stock to MGHIF in a private placement transaction for $285,512 of accrued and unpaid interest due as of July 14, 2018 under the MGHIF Note.
|
7
|
•
|
On February
6
, 2018, the Company closed a public offering (the “February 2018 Public Offering”) of 2,841,152 units at $3.25 per unit, and 851,155 pre-funded units at
$3.24 per pre-funded unit, raising gross proceeds of approximately $12 million and net proceeds of approximately $10.7 million. Each unit included one share of common stock and one common warrant to purchase 0.5 share of common stock at an exercise price
of $3.25 per share. Each pre-funded unit included one pre-funded warrant to purchase one share of common stock for an exercise price of $0.01 per share, and one common warrant to purchase 0.5 share of common stock at an exercise price of $3.25 per share.
The common warrants are exercisable immediately and have a five-year term from the date of issuance.
As of April 19, 2018, all 851,155 pre-funded warrants issued in the February 2018 Public Offering have been exercised.
|
|
•
|
On July 18, 2017, the Company closed a public offering (the “July 2017 Public Offering”) of 18,164,195 units at $0.40 per unit, and 6,835,805 pre-funded units at $0.39 per pre-funded unit, raising gross proceeds of approximately $10 million and net proceeds of approximately $8.8 million.
jVen Capital, LLC (“jVen Capital”)
was one of the investors participating in the offering.
jVen Capital is an affiliate of Evan Jones, the Company’s Chairman of the Board and Chief Executive Officer.
Each unit included one twenty-fifth of a share of common stock and one common warrant to purchase one twenty-fifth of a share of common stock at an exercise price of $10.63 per share. Each pre-funded unit included one pre-funded warrant to purchase one twenty-fifth of a share of common stock for an exercise price of $0.25 per share, and one common warrant to purchase one twenty-fifth of a share of common stock at an exercise price of $10.63 per share. The common warrants are exercisable immediately and have a five-year term from the date of issuance. Approximately $1 million of the gross proceeds was used to repay the outstanding Bridge Financing Notes to jVen Capital in July 2017.
|
|
•
|
In early June 2017, the Company commenced a restructuring of its operations to improve efficiency and reduce its cost structure. Under the restructuring plan the Company is consolidating its operations, including manufacturing, for its FDA-cleared and CE marked
QuickFISH and PNA FISH families of
products
and research and development activities for the Acuitas AMR Gene Panel products and services, in Gaithersburg, Maryland, and reducing the size of its commercial organization while the Company works to complete the development of its Acuitas AMR Gene Panel and Acuitas Lighthouse Knowledgebase products and services in development.
|
|
•
|
On May 31, 2017, the Company entered into a Note Purchase Agreement with jVen Capital, under which jVen Capital agreed to provide bridge financing in an aggregate principal amount of up to $1,500,000 to the Company in up to three separate tranches of $500,000 (each, a “Bridge Financing Note” and collectively, the “Bridge Financing Notes”). The interest rate on each Bridge Financing Note was ten percent (10%) per annum (subject to increase upon an event of default). The Bridge Financing Notes were prepayable by the Company at any time without penalty, and had a maturity date of September 30, 2017, which could be accelerated upon the closing of a qualified financing (any equity or debt financing that raised net proceeds of $5 million or more). The Bridge Financing Notes were contingently convertible at the option of the holder upon an event of default into shares of the Company’s convertible Series B preferred stock. In connection with the issuance of Bridge Financing Notes, in June and July 2017, the Company issued jVen Capital stock purchase warrants to acquire 5,634 shares with an exercise price of $19.50 per share, and warrants to acquire 6,350 shares with an exercise price of $17.25 per share. The Company drew down on two of three Bridge Financing Notes during June and July 2017, and repaid such outstanding Bridge Financing Notes in full upon the closing of the July 2017 Public Offering.
|
|
•
|
On September 13, 2016, the Company entered into the Sales Agreement (the “Sales Agreement”) with Cowen and Company LLC (“Cowen”) pursuant to which the Company may offer and sell from time to time, up to an aggregate of $25 million of shares of its common stock through Cowen, as sales agent, with initial sales limited to an aggregate of $11.5 million. As of September 30, 2018, the Company sold an aggregate of 690,247 shares of its common stock under this at the market offering resulting in aggregate net proceeds to the Company of approximately $8.8 million, and gross proceeds of $9.4 million. During the three months ended September 30, 2018, the Company has sold 214,193 shares of its common stock under this at the market offering resulting in aggregate net proceeds to the Company of approximately $0.4 million, and gross proceeds of $0.4 million. During the nine months ended September 30, 2018, the Company has sold 318,236 shares of its common stock under this at the market offering resulting in aggregate net proceeds to the Company of approximately $0.6 million, and gross proceeds of $0.6 million. In connection with the October 2018 Public Offering, the Company terminated the at the market offering.
|
To meet its capital needs, the Company is considering multiple alternatives, including, but not limited to, strategic financings or other transactions, additional equity financings, debt financings and other funding transactions, licensing and/or partnering arrangements and business combination transactions. There can be no assurance that the Company will be able to complete any such transaction on acceptable terms or otherwise. The Company believes that current
cash, including the October 2018 Public Offering will be sufficient to fund operations into the second quarter of 2019
. This has led management to conclude that substantial doubt about the Company’s ability to continue as a going concern exists. In the event the Company is unable to successfully raise additional capital during or before the second quarter of 2019, the Company will not have sufficient cash flows and liquidity to finance its business operations as currently contemplated. Accordingly, in such circumstances the Company would be compelled to immediately reduce general and administrative expenses and delay research and development projects, including the purchase of scientific equipment and supplies, until it is able to obtain sufficient financing. If such sufficient financing is not received on a timely basis, the Company would then need to pursue a plan to license or sell its assets, seek to be acquired by another entity, cease operations and/or seek bankruptcy protection.
8
Note 3 – Summary of significant accounting policies
Basis of presentation and consolidation
The Company has prepared the accompanying unaudited condensed, consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and the standards of accounting measurement set forth in the Interim Reporting Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted, although the Company believes that the disclosures made are adequate to make the information not misleading. The Company recommends that the following unaudited condensed, consolidated financial statements be read in conjunction with the audited condensed, consolidated financial statements and the notes thereto included in the Company’s latest Annual Report on Form 10-K. In the opinion of management, all adjustments that are necessary for a fair presentation of the Company’s financial position for the periods presented have been reflected. All adjustments are of a normal, recurring nature, unless otherwise stated. The interim condensed consolidated results of operations are not necessarily indicative of the results that may occur for the full fiscal year. The December 31, 2017 consolidated balance sheet included herein was derived from the audited consolidated financial statements, but does not include all disclosures including notes required by GAAP for complete financial statements.
The accompanying unaudited condensed consolidated financial statements include the accounts of OpGen and its wholly-owned subsidiaries; all intercompany transactions and balances have been eliminated. The Company operates in one business segment.
Foreign currency
The Company has subsidiaries located in Copenhagen, Denmark, and Bogota, Colombia both which use currencies other than the U.S dollar as their functional currency. As a result, all assets and liabilities are translated into U.S. dollars based on exchange rates at the end of the reporting period. Income and expense items are translated at the average exchange rates prevailing during the reporting period. Translation adjustments are reported in accumulated other comprehensive loss, a component of stockholders’ equity. Foreign currency translation adjustments are the sole component of accumulated other comprehensive loss at September 30, 2018 and December 31, 2017.
Foreign currency transaction gains and losses, excluding gains and losses on intercompany balances where there is no current intent to settle such amounts in the foreseeable future, are included in the determination of net loss. Unless otherwise noted, all references to “$” or “dollar” refer to the U.S. dollar.
Use of estimates
In preparing financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In the accompanying unaudited condensed consolidated financial statements, estimates are used for, but not limited to, liquidity assumptions, revenue recognition, share-based compensation, allowances for doubtful accounts and inventory obsolescence, and valuation of derivative financial instruments measured at fair value on a recurring basis, deferred tax assets and liabilities and related valuation allowance, depreciation and amortization and estimated useful lives of long-lived assets. Actual results could differ from those estimates.
Fair value of financial instruments
Financial instruments classified as current assets and liabilities (including cash and cash equivalent, receivables, accounts payable, deferred revenue and short-term notes) are carried at cost, which approximates fair value, because of the short-term maturities of those instruments.
Cash, cash equivalents and restricted cash
The Company considers all highly liquid instruments with original maturities of three months or less to be cash equivalents. The Company has cash and cash equivalents deposited in financial institutions in which the balances occasionally exceed the federal government agency (“FDIC”) insured limit of $250,000. The Company has not experienced any losses in such accounts and management believes it is not exposed to any significant credit risk.
9
At September 30, 2018, the Company has funds totaling $185,380, which are required as collateral for letters of credit benefiting its landlords and for credit card processors. At December 31, 2017, the Company had funds totaling $243,380, which are
required as collateral for letters of credit benefiting its landlords and for credit card processors.
These funds are reflected in other noncurrent assets on the accompanying unaudited condensed consolidated balance sheets.
Accounts receivable
The Company’s accounts receivable result from revenues earned but not yet collected from customers. Credit is extended based on an evaluation of a customer’s financial condition and, generally, collateral is not required. Accounts receivable are due within 30 to 60 days and are stated at amounts due from customers. The Company evaluates if an allowance is necessary by considering a number of factors, including the length of time accounts receivable are past due, the Company’s previous loss history and the customer’s current ability to pay its obligation. If amounts become uncollectible, they are charged to operations when that determination is made. The allowance for doubtful accounts was $29,607 and $31,278 as of September 30, 2018 and December 31, 2017, respectively.
No individual customer represented in excess of 10% of revenues for the three months ended September 30, 2018 and 2017. One individual customer represented in excess of 10% of revenues for the nine months ended September 30, 2018.
No individual customer represented in excess of 10% of revenues for
the nine months ended September 30, 2017. At September 30, 2018, no individual customer represented in excess of 10% of total accounts receivable.
At December 31, 2017, one individual customer represented in excess of 10% of total accounts receivable.
Inventory
Inventories are valued using the first-in, first-out method and stated at the lower of cost or net realizable value and consist of the following:
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
Raw materials and supplies
|
|
$
|
321,651
|
|
|
$
|
360,134
|
|
Work-in process
|
|
|
101,835
|
|
|
|
51,233
|
|
Finished goods
|
|
|
106,329
|
|
|
|
122,058
|
|
Total
|
|
$
|
529,815
|
|
|
$
|
533,425
|
|
Inventory includes reagents and components for QuickFISH and PNA FISH kit products, and reagents and supplies used for the Company’s laboratory services. Inventory reserves for obsolescence and expirations were $116,173 and $155,507 at September 30, 2018 and December 31, 2017, respectively.
Long-lived assets
Property and equipment
Property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. Recoverability measurement and estimating of undiscounted cash flows is done at the lowest possible level for which we can identify assets. If such assets are considered to be impaired, impairment is recognized as the amount by which the carrying amount of assets exceeds the fair value of the assets. During the three and nine months ended September 30, 2018 and 2017, the Company determined that its property and equipment was not impaired.
Intangible assets and goodwill
Intangible assets and goodwill as of September 30, 2018 consist of finite-lived intangible assets and goodwill.
10
Finite-lived intangible assets
Finite-lived intangible assets include trademarks, developed technology and customer relationships and consisted of the following as of September 30, 2018 and December 31, 2017:
|
|
|
|
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
|
Net Balance
|
|
|
Accumulated
Amortization
|
|
|
Net Balance
|
|
Trademarks and tradenames
|
|
$
|
461,000
|
|
|
$
|
(148,257
|
)
|
|
$
|
312,743
|
|
|
$
|
(113,679
|
)
|
|
$
|
347,321
|
|
Developed technology
|
|
|
458,000
|
|
|
|
(210,390
|
)
|
|
|
247,610
|
|
|
|
(161,322
|
)
|
|
|
296,678
|
|
Customer relationships
|
|
|
1,094,000
|
|
|
|
(502,033
|
)
|
|
|
591,967
|
|
|
|
(384,817
|
)
|
|
|
709,183
|
|
|
|
$
|
2,013,000
|
|
|
$
|
(860,680
|
)
|
|
$
|
1,152,320
|
|
|
$
|
(659,818
|
)
|
|
$
|
1,353,182
|
|
Finite-lived intangible assets are amortized over their estimated useful lives. The estimated useful life of trademarks is 10 years, developed technology is 7 years, and customer relationships is 7 years.
The Company reviews the useful lives of intangible assets when events or changes in circumstances occur which may potentially impact the estimated useful life of the intangible assets.
Total amortization expense of intangible assets was $66,954 for each of the three months ended September 30, 2018 and 2017. Total amortization expense of intangible assets was $200,862 for each of the nine months ended September 30, 2018 and 2017.
Finite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If any indicators were present, the Company would test for recoverability by comparing the carrying amount of the asset to the net undiscounted cash flows expected to be generated from the asset. If those net undiscounted cash flows do not exceed the carrying amount (i.e., the asset is not recoverable), the Company would perform the next step, which is to determine the fair value of the asset and record an impairment loss, if any. During the three and nine months ended September 30, 2018 and 2017, the Company determined that its finite-lived intangible assets were not impaired.
In accordance with ASC 360-10,
Property, Plant and Equipment
, the Company records impairment losses on long-lived assets used in operations when events and circumstances indicate that long-lived assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. During the fourth quarter of 2017, events and circumstances indicated the Company’s intangible assets might be impaired. However, management’s estimate of undiscounted cash flows indicated that such carrying amounts were expected to be recovered. Nonetheless, it is reasonably possible that the estimate of undiscounted cash flows may change in the near term resulting in the need to write down those assets to fair value. Management’s estimate of cash flows might change if there is an unfavorable development of sales trends.
Goodwill
Goodwill represents the excess of the purchase price paid in a July 2015 merger transaction in which the Company acquired AdvanDx, Inc. and its subsidiary (the “Merger”) over the fair values of the acquired tangible or intangible assets and assumed liabilities. Goodwill is not tax deductible in any relevant jurisdictions. The Company’s goodwill balance as of September 30, 2018 and December 31, 2017 was $600,814.
The Company conducts an impairment test of goodwill on an annual basis as of October 1 of each year, and will also conduct tests if events occur or circumstances change that would, more likely than not, reduce the Company’s fair value below its net equity value. During the three and nine months ended September 30, 2018 and 2017, the Company determined that its goodwill was not impaired.
Revenue recognition
Subsequent to the Adoption of Accounting Standards Codification Revenue from Contracts with Customers (“ASC 606”) on January 1, 2018
The Company derives revenues from (i) the sale of QuickFISH and PNA FISH diagnostic test products and Acuitas AMR Gene Panel u5.47 RUO test products, (ii) providing laboratory services, and (iii) providing collaboration services including funded software arrangements, and license arrangements.
The Company analyzes contracts to determine the appropriate revenue recognition using the following steps: (i) identification of contracts with customers, (ii) identification of distinct performance obligations in the contract, (iii) determination of contract transaction price, (iv) allocation of contract transaction price to the performance obligations and (v) determination of revenue recognition based on timing of satisfaction of the performance obligation.
11
The Company recognizes revenues upon the satisfaction of its performance obligation (upon transfer of control of promised goods
or services to our customers) in an amount that refl
ects the consideration to which it expects to be entitled in exchange for those
goods or services.
The Company defers incremental costs of obtaining a customer contract and amortizes the deferred costs over the period that the goods and services are transferred to the customer. The Company had no material incremental costs to obtain customer contracts in any period presented.
Deferred revenue results from amounts billed in advance to customers or cash received from customers in advance of services being provided.
For details about the Company’s revenue recognition policy prior to the adoption of ASC 606, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
Research and development costs
Research and development costs are expensed as incurred. Research and development costs primarily consist of salaries and related expenses for personnel, other resources, laboratory supplies, and fees paid to consultants and outside service partners.
Share-based compensation
Share-based compensation expense is recognized at fair value. The fair value of share-based compensation to employees and directors is estimated, on the date of grant, using the Black-Scholes model. The resulting fair value is recognized ratably over the requisite service period, which is generally the vesting period of the option. For all time-vesting awards granted, expense is amortized using the straight-line attribution method. The Company accounts for forfeitures as they occur.
Option valuation models, including the Black-Scholes model, require the input of highly subjective assumptions, and changes in the assumptions used can materially affect the grant-date fair value of an award. These assumptions include the risk-free rate of interest, expected dividend yield, expected volatility and the expected life of the award.
Income taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to temporary differences between financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established when necessary to reduce deferred income tax assets to the amount expected to be realized.
Tax benefits are initially recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions are initially, and subsequently, measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the tax authority, assuming full knowledge of the position and all relevant facts.
The Company had federal net operating loss (“NOL”) carryforwards of $165.5 million at December 31, 2017. Despite the NOL carryforwards, which begin to expire in 2022, the Company may have future tax liability due to alternative minimum tax or state tax requirements. Also, use of the NOL carryforwards may be subject to an annual limitation as provided by Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). To date, the Company has not performed a formal study to determine if any of its remaining NOL and credit attributes might be further limited due to the ownership change rules of Section 382 or Section 383 of the Code. The Company will continue to monitor this matter going forward. There can be no assurance that the NOL carryforwards will ever be fully utilized.
On December 22, 2017, the Tax Cuts and Jobs Act (“Tax Legislation”) was enacted into law, which reduced the US federal corporate income tax rate to 21% for tax years beginning after December 31, 2017. As a result of the newly enacted tax rate, the Company adjusted its U.S. deferred tax assets as of December 31, 2017, by applying the new 21% rate, which resulted in a decrease to the deferred tax assets and a corresponding decrease to the valuation allowance of approximately $14.6 million.
12
The Tax Legislation also implements a territorial tax system. Under the territorial tax system, in general, the Company
’
s foreign earnings will no longer be subject to tax in the U.S. As part of
the
transition to the territorial tax system the Tax Legislation includes a mandatory deemed repatriation of all undistributed foreign earnings that are subject to a U.S. income tax. The Company estimates that the deemed repatriation will not result in any add
itional U.S. income tax liability as it estimates it currently has no undistributed foreign earnings.
Loss per share
Basic loss per share is computed by dividing net loss available to common stockholders by the weighted average number of shares of common stock outstanding during the period.
For periods of net income, and when the effects are not anti-dilutive, diluted earnings per share is computed by dividing net income available to common stockholders by the weighted-average number of shares outstanding plus the impact of all potential dilutive common shares, consisting primarily of common stock options and stock purchase warrants using the treasury stock method, and convertible preferred stock and convertible debt using the if-converted method.
For periods of net loss, diluted loss per share is calculated similarly to basic loss per share because the impact of all dilutive potential common shares is anti-dilutive. The number of anti-dilutive shares, consisting of (i) common stock options, (ii) stock purchase warrants, and (iii) restricted stock units representing the right to acquire shares of common stock which have been excluded from the computation of diluted loss per share, was 3.7 million shares and 1.8 million shares as of September 30, 2018 and 2017, respectively.
Recent accounting pronouncements
There have been no developments to the Recent Accounting Pronouncements discussion included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, including the expected dates of adoption and estimated effects on the Company’s condensed consolidated financial statements, except for the following:
In May 2014, the Financial Accounting Standards Board (“FASB”) and International Accounting Standards Board (“IASB”) jointly issued a new revenue recognition standard, Accounting Standards Update (“ASU”) 2014-09,
Revenue from Contracts with Customers
(“ASC 606”) that is designed to improve financial reporting by creating common recognition guidance for GAAP and International Financial Reporting Standards (“IFRS”). This guidance provides a robust framework for addressing revenue issues, improves the comparability of revenue recognition practices across industries, provides useful information to users of financial statements through improved disclosure requirements and simplifies the presentation of financial statements. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. From March to December 2016, amendments to the new revenue recognition standard were issued to clarify numerous accounting topics, including, but not limited to (i) the implementation guidance on principal versus agent considerations, (ii) the identification of performance obligations, (iii) the licensing implementation guidance, (iv) the objective of the collectability criterion, (v) the application of the variable consideration guidance and modified retrospective transition method, (vi) the way in which impairment testing is performed and (vii) the disclosure requirements for revenue recognized from performance obligations. This guidance permits the use of either a full retrospective method or a modified retrospective approach. The modified retrospective approach is applied only to the most current period presented along with a cumulative-effect adjustment at the date of adoption. This guidance is effective for annual reporting periods beginning after December 15, 2017.
On January 1, 2018, the Company adopted ASC 606, using the modified retrospective method. Results for reporting periods beginning subsequent to December 31, 2017 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historical accounting policies prior to adoption. In adopting the guidance, the Company applied the guidance to all contracts and used available practical expedients including assessing contracts with similar terms and conditions on a “portfolio” basis. The adoption of this new guidance did not have a material impact on the Company’s unaudited condensed consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows: Restricted Cash,
which addresses classification and presentation of changes in restricted cash on the statement of cash flows. The standard requires that restricted cash and restricted cash equivalents be included as components of total cash and cash equivalents as presented on the statement of cash flows. The Company adopted ASU 2016-18 using a retrospective transition method effective January 1, 2018 and applied to the periods presented on the condensed consolidated statements of cash flows. Restricted cash includes cash and cash equivalents that is restricted through legal contracts, regulations or the Company’s intention to use the cash for a specific purpose. The Company’s restricted cash primarily related to funds held as collateral for letters of credit.
13
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the unaudited condensed consolidated balance sheets that sum to the to
tal of the same amounts shown in the unaudited statements of cash flows:
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Cash and cash equivalents
|
|
$
|
4,735,506
|
|
|
$
|
1,847,171
|
|
|
$
|
4,854,031
|
|
|
$
|
4,117,324
|
|
Restricted cash
|
|
|
185,380
|
|
|
|
243,380
|
|
|
|
243,380
|
|
|
|
243,380
|
|
Total cash, cash equivalents and restricted cash in the condensed consolidated statement of cash flows
|
|
$
|
4,920,886
|
|
|
$
|
2,090,551
|
|
|
$
|
5,097,411
|
|
|
$
|
4,360,704
|
|
In February 2016, the FASB issued ASU 2016-02,
Leases
. This guidance requires lessees to recognize assets and liabilities related to long-term leases on the consolidated balance sheets and expands disclosure requirements regarding leasing arrangements. The guidance is effective for reporting periods beginning after December 15, 2018 and early adoption is permitted. The guidance must be adopted on a modified retrospective basis and provides for certain practical expedients. The Company has hired an external consultant to assist in evaluating the impact, if any, that this new accounting pronouncement will have on its unaudited condensed consolidated financial statements.
In June 2018, the FASB issued ASU 2018-07:
Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting
. This ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees, and as a result, the accounting for share-based payments to non-employees will be substantially aligned. ASU 2018-07 is effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year, early adoption is permitted but no earlier than an entity’s adoption date of ASC 606. The Company is currently evaluating the impact this new guidance will have on its financial statements and related disclosures.
In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532,
Disclosure Update and Simplification
, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders' equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders' equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. This final rule is effective on November 5, 2018 for filings beginning in 2019. The Company is currently evaluating the changes it will make under such final rule.
The Company has evaluated all other issued and unadopted ASUs and believes the adoption of these standards will not have a material impact on its results of operations, financial position or cash flows.
Note 4 – Revenue from Contracts with Customers
Disaggregated Revenue
The Company provides diagnostic test products, laboratory services to
hospitals, clinical laboratories and other healthcare provider customers, and enters into collaboration agreements with government agencies and healthcare providers
. The revenues by type of service consist of the following:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Product sales
|
|
$
|
539,856
|
|
|
$
|
729,742
|
|
|
$
|
1,805,877
|
|
|
$
|
2,145,371
|
|
Laboratory services
|
|
|
12,365
|
|
|
|
9,070
|
|
|
|
22,155
|
|
|
|
41,025
|
|
Collaboration revenue
|
|
|
—
|
|
|
|
6,302
|
|
|
|
359,316
|
|
|
|
33,699
|
|
Total revenue
|
|
$
|
552,221
|
|
|
$
|
745,114
|
|
|
$
|
2,187,348
|
|
|
$
|
2,220,095
|
|
14
Deferred Revenue
Changes in deferred revenue for the period were as follows:
Balance at December 31, 2017
|
|
|
|
|
|
|
|
$
|
24,442
|
|
Revenue recognized in the current period from the amounts in the beginning balance
|
|
|
|
|
|
|
|
|
(14,119
|
)
|
New deferrals, net of amounts recognized in the current period
|
|
|
|
|
|
|
|
|
—
|
|
Balance at September 30, 2018
|
|
|
|
|
|
|
|
$
|
10,323
|
|
Contract Assets
The Company had contract assets of $51,575 as of September 30, 2018, which are generated when contractual billing schedules differ from revenue recognition timing. Contract assets represent a conditional right to consideration for satisfied performance obligations that becomes a billed receivable when the conditions are satisfied.
Unsatisfied Performance Obligations
Remaining contract consideration
for which revenue has not been recognized due to unsatisfied performance obligations was $156,700 at September 30, 2018, which the Company expects to recognize over the next three months.
Note 5 – MGHIF Financing
In July 2015, in connection with the Merger, the Company entered into a Purchase Agreement with MGHIF, pursuant to which MGHIF purchased 45,454 shares of common stock of the Company at $110.00 per share for gross proceeds of $5.0 million. Pursuant to the Purchase Agreement, the Company also issued to MGHIF an 8% Senior Secured Promissory Note (the “MGHIF Note”) in the principal amount of $1.0 million with a two-year maturity date from the date of issuance. Also in July 2015, the Company entered into a Registration Rights Agreement with MGHIF and certain stockholders, which will require the Company to register for resale by such holders in the future, such shares of Company common stock that cannot be sold under an exemption from such registration.
On June 28, 2017, the MGHIF Note was amended and restated, and the maturity date of the MGHIF Note was extended by one year to July 14, 2018. As consideration for the agreement to extend the maturity date, the Company issued an amended and restated secured promissory note to MGHIF that (1) increased the interest rate to ten percent (10%) per annum and (2) provided for the issuance of common stock warrants to purchase 13,120 shares of its common stock to MGHIF.
On June 11, 2018, the Company executed an Allonge to the MGHIF Note.
The Allonge provided that accrued and unpaid interest of $285,512 due as of July 14, 2018, the original maturity date, be paid through the issuance of shares of OpGen’s common stock in a private placement transaction. In addition, the Allonge revised and extended the maturity date for payment of the Note to six semi-annual payments of $166,667 plus accrued and unpaid interest beginning on January 2, 2019 and ending on July 1, 2021.
On July 30, 2018, the
Company issued 144,238 shares of common stock to MGHIF in a private placement transaction for $285,512 of accrued and unpaid interest due as of July 14, 2018 under the MGHIF Note.
The Allonge to the MGHIF Note, was treated as a debt modification and as such the unamortized issuance costs of approximately $7 thousand as of June 11, 2018 is deferred and amortized as incremental expense over the term of the MGHIF Note.
Note 6 – Fair value measurements
The Company classifies its financial instruments using a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:
|
•
|
Level 1 - defined as observable inputs such as quoted prices in active markets;
|
|
•
|
Level 2 - defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and
|
|
•
|
Level 3 - defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions such as expected revenue growth and discount factors applied to cash flow projections.
|
For the nine months ended September 30, 2018, the Company has not transferred any assets between fair value measurement levels.
15
Financial assets and liabilities measured at fair value on a recurring basis
The Company evaluates financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level at which to classify them each reporting period. This determination requires the Company to make subjective judgments as to the significance of inputs used in determining fair value and where such inputs lie within the hierarchy.
As part of the Company’s bridge financing and amendment to the MGHIF Note, the Company issued stock purchase warrants that the Company considers to be mark-to-market liabilities due to certain put features that allow the holder to put the warrant back to the Company for cash equal to the Black-Scholes value of the warrant upon a change of control or fundamental transaction. The Company determines the fair value of the warrant liabilities using the Black-Scholes option pricing model. Using this model, level 3 unobservable inputs include the estimated volatility of the Company’s common stock, estimated terms of the instruments, and estimated risk-free interest rates.
The following table sets forth a summary of changes in the fair value of level 3 liabilities measured at fair value on a recurring basis for the nine months ended September 30, 2018:
Description
|
|
Balance at
December 31,
2017
|
|
|
Change in
Fair Value
|
|
|
Balance at
September 30,
2018
|
|
Warrant liability
|
|
$
|
8,453
|
|
|
$
|
(8,070
|
)
|
|
$
|
383
|
|
Financial assets and liabilities carried at fair value on a non-recurring basis
The Company does not have any financial assets and liabilities measured at fair value on a non-recurring basis.
Non-financial assets and liabilities carried at fair value on a recurring basis
The Company does not have any non-financial assets and liabilities measured at fair value on a recurring basis.
Non-financial assets and liabilities carried at fair value on a non-recurring basis
The Company measures its long-lived assets, including property and equipment and intangible assets (including goodwill), at fair value on a non-recurring basis when they are deemed to be impaired. No such fair value impairment was recognized in the three and nine months ended September 30, 2018 and 2017.
Note 7 – Debt
As of September 30, 2018, the Company’s outstanding short-term debt consisted of approximately $333 thousand due under the MGHIF Note, as well as, the f
inancing arrangements for the Company’s insurance with note balances of approximately $
138 thousand with a final payment scheduled for December 2018. The Company’s outstanding long-term debt as of September 30, 2018 consisted of approximately $660 thousand due under the MGHIF Note, net of discounts and financing costs (see Note 5 “MGHIF Financing”).
As of December 31, 2017, the Company’s outstanding short-term debt consisted of the $1.0 million MGHIF Note, net of discounts and financing costs, as well as the financing arrangements for the Company’s insurance with note balances of approximately $56 thousand
. The Company did not have any long-term debt as of December 31, 2017.
Total principal payments of approximately $
333
thousand are due annually in 2019, 2020, and 2021.
The Company drew down on two of three Bridge Financing Notes (see discussion in Note 2 “Liquidity and management’s plans”) during June and July of 2017.
The outstanding Bridge Financing Notes were repaid in full subsequent to the closing of the July 2017 Public Offering.
The Company accounted for the embedded conversion option granted to jVen Capital in the Bridge Financing Notes as a mark-to-market derivative financial instrument carried at fair value. Changes in fair value of the embedded conversion option were reflected in earnings during the period of change.
The embedded conversion option was expensed along with the remaining unamortized discount at the date of the Bridge Financing Notes repayment.
The warrants issued to jVen Capital and MGHIF are classified as mark-to-market liabilities under ASC 480 due to certain put features that allow the holder to put the warrant back to the Company for cash equal to the Black-Scholes value of the warrant upon a change of control or fundamental transaction.
16
Total interest expense (inc
luding amortization of debt discounts and financing fees) on all debt instruments was $
28,074
and $
90,317
for the
three months ended September 30, 2018 and 2017
, respectively.
Total interest expense (including amortization of debt discounts and financing f
ees) on all debt instruments was
$
140,453
and
$
173,974
for the
nine months ended September 30, 2018 and 2017
, respectively.
Note 8 – Stockholders’ equity
As of September 30, 2018, the Company has 50,000,000 shares of authorized common stock and 6,425,470 shares issued and outstanding, and 10,000,000 authorized preferred shares, of which none were issued or outstanding.
In September 2016, the Company entered into the Sales Agreement with Cowen pursuant to which the Company may offer and sell from time to time, up to an aggregate of $25 million of shares of its common stock through Cowen, as sales agent, with initial sales limited to an aggregate of $11.5 million. Pursuant to the Sales Agreement, Cowen may sell the shares of common stock by any method permitted by law deemed to be an “at the market” offering as defined in Rule 415 of the Securities Act, including, without limitation, sales made by means of ordinary brokers’ transactions on The Nasdaq Capital Market or otherwise at market prices prevailing at the time of sale, in block transactions, or as otherwise directed by the Company. The Company pays Cowen compensation equal to
3.0
% of the gross proceeds from the sales of common stock pursuant to the terms of the Sales Agreement. As of September 30, 2018, the Company has sold an aggregate of 690,247 shares of its common stock under this at the market offering resulting in aggregate net proceeds to the Company of approximately $8.8 million, and gross proceeds of $9.4 million.
During the three months ended September 30, 2018, the Company has sold 214,193 shares of its common stock under this at the market offering resulting in aggregate net proceeds to the Company of approximately $0.4 million, and gross proceeds of $0.4 million. During the nine months ended September 30, 2018, the Company has sold 318,236 shares of its common stock under this at the market offering resulting in aggregate net proceeds to the Company of approximately $0.6 million, and gross proceeds of $0.6 million. In connection with the October 2018 Public Offering (see Note 12 “Subsequent events”), the Company terminated the at the market offering, leaving $2,075,318 unsold under such terminated at the market offering.
In the July 2017 Public Offering, the Company issued 18,164,195 units at $0.40 per unit, and 6,835,805 pre-funded units at $0.39 per pre-funded unit, raising gross proceeds of approximately $10 million and net proceeds of approximately $8.8 million. jVen Capital was one of the investors participating in the offering. Each unit included one twenty-fifth of a share of common stock and one common warrant to purchase one twenty-fifth of a share of common stock at an exercise price of $10.63 per share. Each pre-funded unit included one pre-funded warrant to purchase one twenty-fifth of a share of common stock for an exercise price of $0.25 per share, and one common warrant to purchase one twenty-fifth of a share of common stock at an exercise price of $10.63 per share. The common warrants are exercisable immediately and have a five-year term from the date of issuance. At closing, the outstanding Bridge Financing Notes issued to jVen Capital, were repaid in the principal amount of $1 million plus accrued interest of $6,438. All pre-funded warrants issued in the July 2017 Public Offering were exercised during the year ended December 31, 2017.
In connection with the July 2017 Public Offering, the Company issued to its placement agent warrants to purchase 50,000 shares of common stock. The warrants issued to the Placement Agent have an exercise price of $12.50 per share and are exercisable for five years.
In September 2017, the Company issued 15,842 shares of its common stock with an aggregate value of $110,000 to settle a dispute related to pre-Merger AdvanDx activities. In October 2017, the Company issued 2,898 shares of its common stock with an aggregate value of $23,245 to a vendor in exchange for consulting services.
Following receipt of approval from stockholders at a special meeting of stockholders held on January 17, 2018, the Company filed an amendment to its Amended and Restated Certificate of Incorporation to effect a reverse stock split of the issued and outstanding shares of common stock, at a ratio of one share for twenty-five shares, and to reduce the authorized shares of common stock from 200,000,000 to 50,000,000 shares. All share amounts and per share prices in this quarterly report have been adjusted to reflect the reverse stock split.
In the February 2018 Public Offering, the Company issued 2,841,152 units at $3.25 per unit, and 851,155 pre-funded units at $3.24 per pre-funded unit, raising gross proceeds of approximately $12 million and net proceeds of approximately $10.7 million. Each unit included one share of common stock and one common warrant to purchase 0.5 share of common stock at an exercise price of $3.25 per share. Each pre-funded unit included one pre-funded warrant to purchase one share of common stock for an exercise price of $0.01 per share, and one common warrant to purchase 0.5 share of common stock at an exercise price of $3.25 per share. The common warrants are exercisable immediately and have a five-year term from the date of issuance. All 851,155 pre-funded warrants issued in the February 2018 Public Offering were exercised during the nine months ended September 30, 2018.
17
In connection with the
February 2018
Public Offering, the Company issued to its placement agent warrants to purchase 184,615 shares of common stock. The warrants issued to the Placement Agent have an exercise price of $4.0625 pe
r share and are exercisable for five years.
Stock options
In 2008, the Company adopted the 2008 Stock Option and Restricted Stock Plan (the “2008 Plan”), pursuant to which the Company’s Board of Directors could grant either incentive or non-qualified stock options or shares of restricted stock to directors, key employees, consultants and advisors.
In April 2015, the Company adopted, and the Company’s stockholders approved, the 2015 Equity Incentive Plan (the “2015 Plan”); the 2015 Plan became effective upon the execution and delivery of the underwriting agreement for the Company’s initial public offering in May 2015. Following the effectiveness of the 2015 Plan, no further grants will be made under the 2008 Plan. The 2015 Plan provides for the granting of incentive stock options within the meaning of Section 422 of the Code to employees and the granting of non-qualified stock options to employees, non-employee directors and consultants. The 2015 Plan also provides for the grants of restricted stock, restricted stock units, stock appreciation rights, dividend equivalents and stock payments to employees, non-employee directors and consultants.
Under the 2015 Plan, the aggregate number of shares of the common stock authorized for issuance may not exceed (1) 54,200 plus (2) the sum of the number of shares subject to outstanding awards under the 2008 Plan as of the 2015 Plan’s effective date, that are subsequently forfeited or terminated for any reason before being exercised or settled, plus (3) the number of shares subject to vesting restrictions under the 2008 Plan as of the 2015 Plan’s effective date that are subsequently forfeited. In addition, the number of shares that have been authorized for issuance under the 2015 Plan will be automatically increased on the first day of each fiscal year beginning on January 1, 2016 and ending on (and including) January 1, 2025, in an amount equal to the lesser of (1) 4% of the outstanding shares of common stock on the last day of the immediately preceding fiscal year, or (2) another lesser amount determined by the Company’s Board of Directors. Shares subject to awards granted under the 2015 Plan that are forfeited or terminated before being exercised or settled, or are not delivered to the participant because such award is settled in cash, will again become available for issuance under the 2015 Plan. However, shares that have actually been issued shall not again become available unless forfeited. As of September 30, 2018, 43,658 shares remain available for issuance under the 2015 Plan, which includes 90,612 shares automatically added to the 2015 Plan on January 1, 2018.
For the three and nine months ended September 30, 2018 and 2017, the Company recognized share-based compensation expense as follows:
|
|
Three Months Ended September 30,
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
2018
|
|
|
2017
|
|
Cost of services
|
|
$
|
(2,807
|
)
|
|
$
|
2,306
|
|
|
|
$
|
924
|
|
|
$
|
6,274
|
|
Research and development
|
|
|
56,961
|
|
|
|
61,097
|
|
|
|
|
187,512
|
|
|
|
171,652
|
|
General and administrative
|
|
|
141,974
|
|
|
|
187,357
|
|
|
|
|
434,314
|
|
|
|
500,252
|
|
Sales and marketing
|
|
|
10,523
|
|
|
|
16,832
|
|
|
|
|
35,981
|
|
|
|
44,126
|
|
|
|
$
|
206,651
|
|
|
$
|
267,592
|
|
|
|
$
|
658,731
|
|
|
$
|
722,304
|
|
No income tax benefit for share-based compensation arrangements was recognized in the condensed consolidated statements of operations and comprehensive loss due to the Company’s net loss position.
The Company did not grant any stock options during the three months ended September 30, 2018. During the three months ended September 30, 2018, 7,120 options were forfeited at a weighted average exercise price of $5.61 per share.
During the nine months ended September 30, 2018, the Company granted stock options to acquire 95,800 shares of common stock at a weighted average exercise price of $3.84 per share and a weighted average grant date fair value of $1.93 per share. During the nine months ended September 30, 2018, 13,336 options were forfeited at a weighted average exercise price of $13.36 per share. The Company had total stock options to acquire 218,759 shares of common stock outstanding at September 30, 2018.
Restricted stock units
During the nine months ended September 30, 2018, 5,400 restricted stock units vested and no restricted stock units were forfeited. The Company had 500 total restricted stock units outstanding at September 30, 2018.
18
Stock purchase warrants
At September 30, 2018 and December 31, 2017, the following warrants to purchase shares of common stock were outstanding:
|
|
|
|
|
|
|
|
Outstanding at
|
|
Issuance
|
|
Exercise
Price
|
|
|
Expiration
|
|
September 30, 2018 (1)
|
|
|
December 31, 2017 (1)
|
|
March 2008
|
|
$
|
19,763.50
|
|
|
March 2018
|
|
|
—
|
|
|
|
2
|
|
November 2009
|
|
$
|
197.75
|
|
|
November 2019
|
|
|
270
|
|
|
|
270
|
|
January 2010
|
|
$
|
197.75
|
|
|
January 2020
|
|
|
270
|
|
|
|
270
|
|
March 2010
|
|
$
|
197.75
|
|
|
March 2020
|
|
|
55
|
|
|
|
55
|
|
November 2011
|
|
$
|
197.75
|
|
|
November 2021
|
|
|
212
|
|
|
|
212
|
|
December 2011
|
|
$
|
197.75
|
|
|
December 2021
|
|
|
27
|
|
|
|
27
|
|
March 2012
|
|
$
|
2,747.50
|
|
|
March 2019
|
|
|
165
|
|
|
|
165
|
|
February 2015
|
|
$
|
165.00
|
|
|
February 2025
|
|
|
9,001
|
|
|
|
9,001
|
|
May 2015
|
|
$
|
165.00
|
|
|
May 2020
|
|
|
138,310
|
|
|
|
138,310
|
|
May 2016
|
|
$
|
32.81
|
|
|
May 2021
|
|
|
189,577
|
|
|
|
189,577
|
|
June 2016
|
|
$
|
32.81
|
|
|
May 2021
|
|
|
82,035
|
|
|
|
82,035
|
|
June 2017
|
|
$
|
19.50
|
|
|
June 2022
|
|
|
18,754
|
|
|
|
18,754
|
|
July 2017
|
|
$
|
17.25
|
|
|
July 2022
|
|
|
6,350
|
|
|
|
6,350
|
|
July 2017
|
|
$
|
12.50
|
|
|
July 2022
|
|
|
50,000
|
|
|
|
50,000
|
|
July 2017
|
|
$
|
10.63
|
|
|
July 2022
|
|
|
1,000,003
|
|
|
|
1,000,003
|
|
February 2018
|
|
$
|
4.06
|
|
|
February 2023
|
|
|
184,615
|
|
|
|
—
|
|
February 2018
|
|
$
|
3.25
|
|
|
February 2023
|
|
|
1,846,153
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
3,525,797
|
|
|
|
1,495,031
|
|
The warrants listed above were issued in connection with various debt, equity or development contract agreements.
(1)
|
Warrants to purchase fractional shares of common stock resulting from the reverse stock split on January 17, 2018 were rounded up to the next whole share of common stock on a holder by holder basis.
|
Note 9 – Commitments
Operating leases
The Company
leases a facility in Gaithersburg, Maryland under an operating lease that expires January 31, 2021, with one additional five-year renewal at the Company’s election.
The Company also leases a facility in Woburn, Massachusetts under an operating lease that expires January 30, 2022. Additionally, the Company leases office space in Denmark; this lease is currently on a month-to-month basis.
Rent expense under the Company’s facility operating leases for the three months ended September 30, 2018 and 2017 was $248,580 and $238,791, respectively. Rent expense under the Company’s facility operating leases for the nine months ended September 30, 2018 and 2017 was $750,872 and $710,330, respectively.
Capital leases
The Company leases computer equipment, office furniture, and equipment under various capital leases. The leases expire at various dates through 2021. The leases require monthly principal and interest payments.
Registration and other stockholder rights
In connection with the various investment transactions, the Company entered into registration rights agreements with stockholders, pursuant to which the investors were granted certain demand registration rights and/or piggyback and/or resale registration rights in connection with subsequent registered offerings of the Company’s common stock.
Restructuring
In early June 2017, the Company commenced a restructuring of its operations to improve efficiency and reduce its cost structure. Under the restructuring plan, the Company is consolidating its operations for FDA-cleared and CE marked QuickFISH and PNA FISH products and research and development activities for the Acuitas AMR Gene Panel in Gaithersburg, Maryland, and reducing the size of its commercial organization while the Company works to complete the development of its Acuitas AMR Gene Panel and Acuitas Lighthouse Knowledgebase products and services in development.
19
There were approximately $121,000
of one-time termination benefits that were recognized during the year ended December 31, 2017 related to the restructuring. The Company does not anticipate any further one-time termination benefits related to the restructuring plan. Retention agreements
were issued to certain employees in which retention bonuses are earned and paid upon the completion of a designated service period. The service periods ended in December 2017. The Company incurred total retention expense of approximately $68,000 during
the year ended December 31, 2017. The future minimum lease payments for the Woburn facility were approximately $1.
5
million as of
September
30
, 2018. A liability for costs that will continue to be incurred under a contract for its remaining term without economic benefit to the entity shall be recognized at the cease-use date. If the contract is an operating lease the fair value of the liabilit
y at the cease-use date shall be determined based on the remaining lease rentals, adjusted for the effects of any prepaid or deferred items recognized under the lease, and reduced by estimated sublease rentals that could be reasonably obtained for the prop
erty. The Company expects the cease-use date for the Woburn facility to be in the
next six months
. We have not estimated the contract termination costs associated with this lease given that we have not yet reached the cease
-
use date
.
We do not believe th
ere will be significant additional costs related to restructuring outside of what is described herein.
Supply
Agreements
In June 2017, the Company entered into an agreement with Life Technologies Corporation (“LTC”) to supply the Company with QuantStudio 5 Real-Time PCR Systems (“QuantStudio 5”) to be used to run OpGen’s Acuitas AMR Gene Panel tests. Under the terms of the agreement the Company must notify LTC of the number of QuantStudio 5s that it commits to purchase in the following quarter. As of September 30, 2018 the Company has acquired thirteen QuantStudio 5s including nine in the nine months ended September 30, 2018. As of September 30, 2018 the Company has committed to acquiring an additional two QuantStudio 5s at a total cost of approximately $90 thousand in the next three months.
Note 10 – License agreements, research collaborations and development agreements
The Company is a party to one license agreement to acquire certain patent rights and technologies
related to its FISH product line. Royalties are incurred upon the sale of a product or service which utilizes the licensed technology. The Company recognized net royalty expense of $62,500 and $62,500 for the three months ended September 30, 2018 and 2017, respectively. The Company recognized net royalty expense of $187,500 and $194,686 for the nine months ended September 30, 2018 and 2017, respectively. Annual future minimum royalty fees are $250,000 under this agreement.
Note 11 – Related party transactions
In October 2016, the Company entered into an agreement with Merck Sharp & Dohme Corp. (“MSD”), a wholly-owned subsidiary of Merck, and an affiliate of MGHIF, a principal stockholder of the Company and a related party to the Company. Under the agreement, MSD provided access to its archive of over 200,000 bacterial pathogens. The Company is initially performing molecular analyses on up to 10,000 pathogens to identify markers of resistance to support rapid decision making using the Acuitas Lighthouse, and to speed development of its rapid diagnostic products. MSD gains access to the high-resolution genotype data for the isolates as well as access to the Acuitas Lighthouse informatics to support internal research and development programs. The Company is
required to expend up to $175,000 for the procurement of materials related to the activities contemplated by the agreement. Contract life-to-date, the Company has incurred $171,646 of procurement costs which have been recognized as research and development expense. The Company did not recognize any research and development expense
related to the agreement
in the three months ended September 30, 2018 and 2017. The Company recognized research and development expense of $22,604 and
$113,907 related to the agreement
in the nine months ended September 30, 2018 and 2017, respectively.
In December 2017, the Company entered into a subcontractor agreement with ILÚM Health Solutions, LLC, an entity created by Merck’s Healthcare Services and Solutions division, whereby ILÚM Health Solutions will provide services to the Company in the performance of the Company’s CDC contract to deploy ILÚM’s commercially-available cloud- and mobile-based software platform for infectious disease management in up to three medical sites in Colombia with the aim of improving antibiotic use in resource-limited settings. The Company recognized $0 and $198,665 of cost of services expense related to the contract in
the three and nine months ended September 30, 2018, respectively
.
Note 12 – Subsequent events
On October 22, 2018, the Company closed the October 2018 Public Offering of 2,220,000 shares of its common stock at a public offering price of $1.45 per share. The Company also granted to the underwriters a 45-day option to acquire an additional 330,751 shares to cover overallotments in connection with the offering. The offering raised
gross proceeds of approximately $3.2 million and net proceeds of approximately $2.8 million.
In connection with the October 2018 Public Offering, the Company terminated the at the market offering.
20
Item 2. Management’s Discussion and Analysis
of
Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the unaudited condensed consolidated financial statements and the accompanying notes thereto included in Part I, Item 1 of this quarterly report on Form 10-Q. This discussion contains forward-looking statements, based on current expectations and related to future events and our future financial performance, that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many important factors, including those set forth under Part II. Item 1A. “Risk Factors” of this quarterly report on Form 10-Q and Part 1. Item 1A of our annual report on Form 10-K for the year ended December 31, 2017.
Overview
OpGen was incorporated in Delaware in 2001. On July 14, 2015, OpGen completed the Merger with AdvanDx. Pursuant to the terms of a Merger Agreement, Velox Acquisition Corp., OpGen’s wholly owned subsidiary formed for the express purpose of effecting the Merger, merged with and into AdvanDx with AdvanDx surviving as OpGen’s wholly-owned subsidiary. OpGen, AdvanDx are collectively referred to hereinafter as the “Company.” The Company’s headquarters and principal operations are in Gaithersburg, Maryland. The Company also has operations in Woburn, Massachusetts, Copenhagen, Denmark, and Bogota, Colombia. The Company operates in one business segment.
OpGen is a precision medicine company using molecular diagnostics and informatics to help combat infectious disease. The Company is developing molecular information products and services for global healthcare settings, helping to guide clinicians with more rapid and actionable information about life threatening infections, improve patient outcomes, and decrease the spread of infections caused by multidrug-resistant microorganisms (“MDRO”). The Company’s proprietary DNA tests and informatics address the rising threat of antibiotic resistance by helping physicians and other healthcare providers optimize care decisions for patients with acute infections.
The Company’s molecular diagnostics and informatics offerings combine its Acuitas DNA tests and Acuitas Lighthouse informatics platform for use with its proprietary, curated MDRO knowledgebase. The Company is working to deliver products and services, some in development, to a global network of customers and partners.
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•
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The Company’s Acuitas DNA tests provide rapid microbial identification and antibiotic resistance gene information. These products include the Acuitas AMR Gene Panel u5.47 for complicated urinary tract infections in development as a clinical diagnostic test and available for Research Use Only, the QuickFISH® and PNA FISH FDA-cleared and CE-marked diagnostics used to rapidly detect pathogens in positive blood cultures, and the Acuitas Resistome Tests for genetic analysis of hospital surveillance isolates.
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•
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The Company’s Acuitas Lighthouse informatics systems are cloud-based HIPAA compliant informatics offerings that combine clinical lab test results with patient and hospital information to provide analytics and actionable insights to help manage MDROs in the hospital and patient care environment.
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The Company’s operations are subject to certain risks and uncertainties. The risks include rapid technology changes, the need to manage growth, the need to retain key personnel, the need to protect intellectual property and the need to raise additional capital financing on terms acceptable to the Company. The Company’s success depends, in part, on its ability to develop and commercialize its proprietary technology as well as raise additional capital.
Recent Developments
Since inception, the Company has incurred, and continues to incur, significant losses from operations. The Company has funded its operations primarily through external investor financing arrangements. The following financing transactions took place during 2017 and 2018:
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•
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On October 22, 2018, the Company closed a public offering (the “October 2018 Public Offering”) of 2,220,000 shares of its common stock at a public offering price of $1.45 per share. The Company also granted to the underwriters a 45-day option to acquire an additional 330,751 shares to cover overallotments in connection with the offering. The offering raised
gross proceeds of approximately $3.2 million and net proceeds of approximately $2.8 million.
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•
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On June 11, 2018, the Company executed an Allonge (the “Allonge”) to its Second Amended and Restated Senior Secured Promissory Note, dated June 28, 2017, with a principal amount of $1,000,000 issued to Merck Global Health Innovation Fund, LLC (“MGHIF”). The Allonge provided that accrued and unpaid interest of $285,512 due as of July 14, 2018, the original maturity date, will be paid through the issuance of shares of OpGen’s common stock in a private placement transaction. In addition, the Allonge revised and extended the maturity date for payment of the Note to six semi-annual payments of $166,667 plus accrued and unpaid interest beginning on January 2, 2019 and ending on July 1, 2021. On July 30, 2018, the Company issued 144,238 shares of common stock to MGHIF in a private placement transaction for $285,512 of accrued and unpaid interest due as of July 14, 2018 under the MGHIF Note.
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21
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•
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On February
6
, 2018, the Company closed its February 2018 Public Offering of 2,841,152 units at $3.25 per unit, an
d 851,155 pre-funded units at $3.24 per pre-funded unit, raising gross proceeds of approximately $12 million and net proceeds of approximately $10.7 million. Each unit included one share of common stock and one common warrant to purchase 0.5 share of comm
on stock at an exercise price of $3.25 per share. Each pre-funded unit included one pre-funded warrant to purchase one share of common stock for an exercise price of $0.01 per share, and one common warrant to purchase 0.5 share of common stock at an exerc
ise price of $3.25 per share. The common warrants are exercisable immediately and have a five-year term from the date of issuance.
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•
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On July 18, 2017, the Company closed its July 2017 Public Offering of 18,164,195 units at $0.40 per unit, and 6,835,805 pre‑funded units at $0.39 per pre-funded unit, raising gross proceeds of approximately $10 million and net proceeds of approximately $8.8 million. jVen Capital
,
an affiliate of Evan Jones, the Company’s Chairman of the Board and Chief Executive Officer,
and three employees of the Company participated in the July 2017 Public Offering. Each unit included one share of common stock and one common warrant to purchase one share of common stock at an exercise price of $0.425 per share. Each pre-funded unit included one pre-funded warrant to purchase one share of common stock for an exercise price of $0.01 per share, and one common warrant to purchase one share of common stock at an exercise price of $0.425 per share. The common warrants are exercisable immediately and have a five-year term from the date of issuance. Approximately $1 million of the gross proceeds was used to repay the outstanding Bridge Financing Notes to jVen Capital in July 2017.
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•
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On May 31, 2017, the Company entered into a Note Purchase Agreement with jVen Capital, under which jVen Capital agreed to provide bridge financing in an aggregate principal amount of up to $1,500,000 to the Company in up to three separate tranches of Bridge Financing Notes. The interest rate on each Bridge Financing Note was ten percent (10%) per annum (subject to increase upon an event of default).
In connection with the Bridge Financing Notes, the Company issued jVen Capital stock purchase warrants to acquire 5,634 shares with an exercise price of $19.50 per share, and stock purchase warrants to acquire 6,350 shares at an exercise price of $17.25 per share.
On June 14
,
2017, the Company drew down on the first of three Bridge Financing Notes, with $1 million remaining capacity available. The Company drew down on the second
Bridge Financing Note on July 5, 2017 and the third Bridge Financing Note was never issued. The outstanding Bridge Financing Notes were repaid in full upon the closing of the July 2017 Public Offering.
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•
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On June 6, 2017, as amended on June 28, 2017, the Company issued the amended and restated MGHIF Note to MGHIF, which extended the maturity date of the MGHIF Note from July 14, 2017 to July 14, 2018. In return for MGHIF’s consent to such extension, the Company increased the interest rate of the MGHIF Note to 10% per annum and issued warrants to purchase shares of common stock to MGHIF equal to 20% of the principal balance of the MGHIF Note, plus interest accrued thereon, as of June 28, 2017.
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•
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During the year ended December 31, 2017, the Company sold 227,216 shares of its common stock under its at the market offering resulting in aggregate net proceeds to the Company of approximately $3.8 million, and gross proceeds of $4.0 million.
During the nine months ended September 30, 2018, the Company sold 318,236 shares of its common stock under its at the market offering resulting in aggregate net proceeds to the Company of approximately $0.6 million, and gross proceeds of $0.6 million.
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On January 17, 2018, at a special meeting of stockholders, our stockholders approved an amendment to our Amended and Restated Certificate of Incorporation, authorizing a reverse stock split of the issued and outstanding shares of our common stock, at a ratio within a range of two-to-one and not more than twenty-five-to-one, such ratio and the implementation and timing of such reverse stock split to be determined in the discretion of our Board of Directors, and to reduce the authorized shares of common stock to 50,000,000 shares. On January 17, 2018, our Board of Directors approved a reverse stock split of one share for twenty-five outstanding shares, or the Reverse Stock Split, and we filed an Amendment to our Amended and Restated Certificate of Incorporation to effect the Reverse Stock Split and reduce our authorized shares of common stock to 50,000,000.
In early June 2017, the Company commenced a restructuring of its operations to improve efficiency and reduce its cost structure. Under the restructuring plan, the Company is consolidating its operations for FDA-cleared and CE marked QuickFISH and PNA FISH products and research and development activities for the Acuitas AMR Gene Panel in Gaithersburg, Maryland, and reducing the size of its commercial organization while the Company works to complete the development of its Acuitas AMR Gene Panel and Acuitas Lighthouse Knowledgebase products and services in development. As part of this restructuring, the Company decommissioned its CLIA laboratory operations in the third quarter of 2018 to provide incremental resources in support of efforts to gain FDA clearance for the Company’s Acuitas AMR Gene Panel products in development.
22
There were approximately $121,000 of one-time termination benefits that were recognized during the year ended December 31, 2017 related to the restructuring. The
Company does not anticipate any further one-time termination benefits related to the restructuring plan. Retention agreements were issued to certain employees in which retention bonuses are earned and paid upon the completion of a designated service perio
d. The service periods ended in December 2017. The Company incurred total retention expense of approximately $68,000 during the year ended December 31, 2017. The future minimum lease payments for the Woburn facility were approximately $1.
5
million as of
September
30
, 2018. A liability for costs that will continue to be incurred under a contract for its remaining term without economic benefit to the entity shall be recognized at the cease-use date. If the contract is an operating lease the
fair value of the liability at the cease-use date shall be determined based on the remaining lease rentals, adjusted for the effects of any prepaid or deferred items recognized under the lease, and reduced by estimated sublease rentals that could be reaso
nably obtained for the property. The Company expects the cease-use date for the Woburn facility to be in the
next six months
. We have not estimated the contract termination costs associated with this lease given that we have not yet reached the cease use
date
.
We do not believe there will be significant additional costs related to restructuring outside of what is described herein.
Results of operations for the three months ended September 30, 2018 and 2017
Revenues
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Three Months Ended September 30,
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|
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2018
|
|
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2017
|
|
Product sales
|
|
$
|
539,856
|
|
|
$
|
729,742
|
|
Laboratory services
|
|
|
12,365
|
|
|
|
9,070
|
|
Collaboration revenue
|
|
|
-
|
|
|
|
6,302
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|
Total revenue
|
|
$
|
552,221
|
|
|
$
|
745,114
|
|
Total revenue for the three months ended September 30, 2018 decreased approximately 26%. This decrease is primarily attributable to:
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•
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Product Sales: the decrease in revenue of approximately 26% in the 2018 period compared to the 2017 period is primarily
attributable
to a reduction in the sale of our rapid pathogen ID testing products
;
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•
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Laboratory Services: the increase in revenue of approximately 36% in the 2018 period compared to the 2017 period is a result of increases in sales of our Acuitas MDRO test products; and
|
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•
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Collaboration Revenue: the decrease in revenue in the 2018 period compared to the 2017 period
is primarily the result of decreased revenue associated with our license agreement with Hitachi
.
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Operating expenses
|
|
Three Months Ended September 30,
|
|
|
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2018
|
|
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2017
|
|
Cost of products sold
|
|
$
|
292,984
|
|
|
$
|
448,407
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|
Cost of services
|
|
|
98,189
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|
|
|
49,119
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|
Research and development
|
|
|
1,286,300
|
|
|
|
1,513,157
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General and administrative
|
|
|
1,743,636
|
|
|
|
1,600,577
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Sales and marketing
|
|
|
361,310
|
|
|
|
330,305
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|
Total operating expenses
|
|
$
|
3,782,419
|
|
|
$
|
3,941,565
|
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The Company’s total operating expenses for the three months ended September 30, 2018 decreased approximately 4% when compared to the same period in 2017. This decrease is primarily attributable to:
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•
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Costs of products sold: cost of products sold for the three months ended September 30, 2018 decreased approximately 35% when compared to the same period in 2017. The change in costs of products sold is primarily
attributable
to a reduction in the sale of our rapid pathogen ID testing products
;
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•
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Costs of services: cost of services for the three months ended September 30, 2018 increased approximately 100% when compared to the same period in 2017. The change in costs of services is primarily attributable to an increase in our CLIA lab inventory reserve;
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23
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•
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Research and development: research and development expenses for the
three months ended September 30, 2018
decreased approximately
15
% when compared to the same period in 201
7
,
primarily due to the
consolidation o
f our Woburn and Gaithersburg R&D activities
in 2017
;
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•
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General and administrative: general and administrative expenses for the three months ended September 30, 2018 increased approximately 9% when compared to the same period in 2017, primarily due to increased outside service costs; and
|
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•
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Sales and marketing: sales and marketing expenses for the
three months ended September 30, 2018
increased approximately
9
% when compared to the same period in 2017,
primarily due to the increased headcount of our marketing team
.
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Other income (expense)
|
|
Three Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Interest expense
|
|
$
|
(28,074
|
)
|
|
$
|
(90,317
|
)
|
Foreign currency transaction gains
|
|
|
3,025
|
|
|
|
8,018
|
|
Other expense
|
|
|
(93
|
)
|
|
|
(87,292
|
)
|
Change in fair value of derivative financial instruments
|
|
|
(85
|
)
|
|
|
97,395
|
|
Total other expense
|
|
$
|
(25,227
|
)
|
|
$
|
(72,196
|
)
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The Company’s total other expense for the three months ended September 30, 2018 decreased primarily as a decrease in interest expense and
the expense of the unamortized discount on the outstanding Bridge Financing Notes at repayment in the prior year. These decreases were offset by
decreased gains due to changes in the fair value of warrant liabilities.
Results of operations for the nine months ended September 30, 2018 and 2017
Revenues
|
|
Nine Months Ended September 30,
|
|
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|
2018
|
|
|
2017
|
|
Product sales
|
|
$
|
1,805,877
|
|
|
$
|
2,145,371
|
|
Laboratory services
|
|
|
22,155
|
|
|
|
41,025
|
|
Collaboration revenue
|
|
|
359,316
|
|
|
|
33,699
|
|
Total revenue
|
|
$
|
2,187,348
|
|
|
$
|
2,220,095
|
|
Total revenue for the nine months ended September 30, 2018 decreased approximately 1%. This decrease is primarily attributable to:
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•
|
Product Sales: the decrease in revenue of approximately 16% in the 2018 period compared to the 2017 period is primarily
attributable
to a reduction in the sale of our rapid pathogen ID testing products and the discontinuance of our legacy whole genome mapping business
;
|
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•
|
Laboratory Services: the decrease in revenue of approximately 46% in the 2018 period compared to the 2017 period is a result of decreases in sales of our Acuitas MDRO test products; and
|
|
•
|
Collaboration Revenue: the increase in revenue in the 2018 period compared to the 2017 period
is primarily the result of increased revenue associated with our CDC contract
.
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Operating expenses
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Cost of products sold
|
|
$
|
939,479
|
|
|
$
|
1,266,148
|
|
Cost of services
|
|
|
446,144
|
|
|
|
228,115
|
|
Research and development
|
|
|
3,821,117
|
|
|
|
5,397,906
|
|
General and administrative
|
|
|
5,365,221
|
|
|
|
5,319,811
|
|
Sales and marketing
|
|
|
1,117,380
|
|
|
|
2,345,293
|
|
Total operating expenses
|
|
$
|
11,689,341
|
|
|
$
|
14,557,273
|
|
24
The Company’s
total operating
expenses for the nine months ended September 30, 2018 decreased approximately 20% to $11.7 million from $14.6 million, when compared to the same period in 2017. This decrease
is primarily attributable to:
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•
|
Costs of products sold: cost of products sold for the nine months ended September 30, 2018 decreased approximately 26% when compared to the same period in 2017. The change in costs of products sold is primarily
attributable
to a reduction in the sale of our rapid pathogen ID testing products
;
|
|
•
|
Costs of services: cost of services for the nine months ended September 30, 2018 increased approximately 96% when compared to the same period in 2017. The change in costs of services is primarily attributable to increased costs of services associated with our CDC contract;
|
|
•
|
Research and development: research and development expenses for the nine months ended September 30, 2018 decreased approximately 29% when compared to the same period in 2017, primarily
due to a decrease in costs related to the automated rapid pathogen identification project that was suspended in the first half of 2017;
|
|
•
|
General and administrative: general and administrative expenses for the nine months ended September 30, 2018 increased approximately 1% when compared to the same period in 2017, primarily due to increased payroll costs; and
|
|
•
|
Sales and marketing: sales and marketing expenses for the nine months ended September 30, 2018 decreased approximately 52% when compared to the same period in 2017,
primarily due to the reductions in the size of our commercial organization in 2017
.
|
Other income (expense)
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Interest expense
|
|
$
|
(140,453
|
)
|
|
$
|
(173,974
|
)
|
Foreign currency transaction gains (losses)
|
|
|
(6,556
|
)
|
|
|
19,636
|
|
Other (expense) income
|
|
|
5,210
|
|
|
|
(87,270
|
)
|
Change in fair value of derivative financial instruments
|
|
|
8,070
|
|
|
|
124,139
|
|
Total other expense
|
|
$
|
(133,729
|
)
|
|
$
|
(117,469
|
)
|
The Company’s total other expense for the nine months ended September 30, 2018 increased primarily as a result of decreased gains due to the change in fair value of warrant liabilities offset by
the expense of the unamortized discount on the outstanding Bridge Financing Notes at repayment in the prior year
.
Liquidity and capital resources
As of September 30, 2018, the Company had cash and cash equivalents of $4.7 million compared to $1.8 million at December 31, 2017. The Company has funded its operations primarily through external investor financing arrangements and has raised funds in 2018 and 2017, including:
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•
|
On February 6, 2018, the Company closed a public offering, or the February 2018 Public Offering, of 2,841,152 units at $3.25 per unit, and 851,155 pre-funded units at $3.24 per pre-funded unit, raising gross proceeds of approximately $12 million and net proceeds of approximately $10.7 million as described above under "Recent Developments."
|
|
•
|
On July 18, 2017, the Company closed a public offering of 18,164,195 units at $0.40 per unit, and 6,835,805 pre‑funded units at $0.39 per pre-funded unit, raising gross proceeds of approximately $10 million and net proceeds of approximately $8.8 million as described above under "Recent Developments."
|
|
•
|
On May 31, 2017, the Company entered the bridge financing transaction with jVen Capital described above under “Recent Developments.”
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A condition to the receipt of the bridge financing was an extension of the maturity date of the MGHIF Note from July 14, 2017 to July 14, 2018. In return for MGHIF’s consent to such extension, the Company issued the amended and restated MGHIF Note to increase the interest rate to 10% and issued warrants to purchase shares of common stock to MGHIF equal to 20% of the principal balance of the MGHIF Note, plus interest accrued thereon, as of June 28, 2017.
25
In Se
ptember 2016, the Company entered into the Sales Agreement with Cowen pursuant to which the Company may offer and sell from time to time, up to an aggregate of $25 million of shares of its common stock through Cowen, as sales agent, with initial sales limi
ted to an aggregate of $11.5 million. The Company pays Cowen compensation equal to 3.0% of the gross proceeds from the sales of common stock pursuant to the terms of the Sales Agreement. As of
September
30, 2018
, the Company sold an aggregate of
690,247
s
hares of its common stock under this at the market offering resulting in aggregate net proceeds to the Company of approximately $8.
8
million, and gross proceeds of $
9
.
4
million. During the year ended December 31, 2017, the Company sold
227,216
shares of it
s common stock under this at the market offering resulting in aggregate net proceeds to the Company of approximately $3.8 million, and gross proceeds of $4.0 million.
During the three
months
ended
September
30, 2018, the Company has sold
214,193
shares of
its common stock under this at the market offering resulting in aggregate net proceeds to the Company of approximately $0.
4
million, and gross proceeds of $0.
4
million.
During the nine months ended September 30, 2018, the Company has sold 318,236 shares of
its common stock under this at the market offering resulting in aggregate net proceeds to the Company of approximately $0.6 million, and gross proceeds of $0.6 million.
In connection with the October 2018 Public Offering
,
the Company
terminated the
at the
market
offering, leaving $2,075,318
unsold under such terminated at the market offering.
To meet its capital needs, the Company is considering multiple alternatives, including, but not limited to, additional equity financings, debt financings and other funding transactions, licensing and/or partnering arrangements and business combination transactions. There can be no assurance that the Company will be able to complete any such transaction on acceptable terms or otherwise. The Company believes that current cash on hand including the October 2018 Public Offering, will be sufficient to fund operations into the second quarter of 2019. This has led management to conclude that there is substantial doubt about the Company’s ability to continue as a going concern. In the event the Company is unable to successfully raise additional capital during or before the second quarter of 2019, the Company will not have sufficient cash flows and liquidity to finance its business operations as currently contemplated. Accordingly, in such circumstances the Company would be compelled to immediately reduce general and administrative expenses and delay research and development projects, including the purchase of scientific equipment and supplies, until it is able to obtain sufficient financing. If such sufficient financing is not received on a timely basis, the Company would then need to pursue a plan to license or sell its assets, seek to be acquired by another entity, cease operations and/or seek bankruptcy protection.
Sources and uses of cash
The Company’s principal source of liquidity is from financing activities, including issuances of equity and debt securities. The following table summarizes the net cash and cash equivalents provided by (used in) operating activities, investing activities and financing activities for the periods indicated:
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Net cash used in operating activities
|
|
$
|
(8,376,394
|
)
|
|
$
|
(11,201,666
|
)
|
Net cash used in investing activities
|
|
|
(31,470
|
)
|
|
|
(142,687
|
)
|
Net cash provided by financing activities
|
|
|
11,230,780
|
|
|
|
12,094,885
|
|
Net cash used in operating activities
Net cash used in operating activities for the nine months ended September 30, 2018 consists primarily of our net loss of $9.6 million, reduced by certain noncash items; including depreciation and amortization expense of $0.5 million, and share-based compensation expense of $0.7 million. Net cash used in operating activities for the nine months ended September 30, 2017 consists primarily of our net loss of $12.5 million, reduced by certain noncash items; including depreciation and amortization expense of $0.5 million and share-based compensation expense of $0.7 million.
Net cash used in investing activities
Net cash used in investing activities in the nine months ended September 30, 2018 and 2017 consisted solely of purchases of property and equipment offset by proceeds from the sale of equipment.
Net cash provided by financing activities
Net cash provided by financing activities for the nine months ended September 30, 2018 of $11.2 million consisted primarily of the net proceeds from the February 2018 Public Offering and net proceeds from the at the market offering. Net cash provided by financing activities for the nine months ended September 30, 2017 of $12.1 million consisted primarily of net proceeds from the July 2017 Public Offering and net proceeds from the at the market offering.
26
Critical accounting policies and use of estimates
This Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on our unaudited condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. In our unaudited condensed consolidated financial statements, estimates are used for, but not limited to, share-based compensation, valuation of derivative financial instruments and other liabilities measured at fair value on a recurring basis, allowances for doubtful accounts and inventories, deferred tax assets and liabilities and related valuation allowance, depreciation and amortization and estimated useful lives of long-lived assets. Actual results could differ from those estimates.
A summary of our significant accounting policies is included in Note 3 “Summary of significant accounting policies” to the accompanying unaudited condensed consolidated financial statements. Certain of our accounting policies are considered critical, as these policies require significant, difficult or complex judgments by management, often requiring the use of estimates about the effects of matters that are inherently uncertain. Our critical policies are summarized in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2017.
Recently issued accounting pronouncements
See Note 3 “Summary of significant accounting policies” in this Form 10-Q for a full description of recent accounting pronouncements, including the respective expected dates of adoption and effects on our unaudited condensed consolidated financial statements.
Off-balance sheet arrangements
As of September 30, 2018 and December 31, 2017, we did not have any off-balance sheet arrangements.
JOBS Act
On April 5, 2012, the JOBS Act was enacted. Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act, for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. The Company has elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(1) of the JOBS Act. This election allows it to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As a result of this election, the Company’s financial statements may not be comparable to companies that comply with public company effective dates.
Subject to certain conditions set forth in the JOBS Act, as an “emerging growth company,” the Company intends to rely on certain of these exemptions, including without limitation, (i) providing an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002 and (ii) complying with any requirement that may be adopted by the PCAOB regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements, known as the auditor discussion and analysis. The Company will remain an “emerging growth company” until the earliest of (i) the last day of the fiscal year in which it has total annual gross revenues of $1 billion or more; (ii) December 31, 2019; (iii) the date on which the Company has issued more than $1 billion in nonconvertible debt during the previous three years; or (iv) the date on which the Company is deemed to be a large accelerated filer under the rules of the SEC.