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| RGDX > SEC Filings for RGDX > Form 10-Q on 16-Nov-2009 | All Recent SEC Filings |
16-Nov-2009
Quarterly Report
Special Note Regarding Forward Looking Statements
Certain statements in this report constitute "forward-looking statements." These forward-looking statements involve known or unknown risks, uncertainties and other factors that may cause the actual results, performance, or achievements of Response Genetics, Inc. to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Specifically, the actions of competitors and customers and our ability to execute our business plan, and our ability to increase revenues is dependent upon our ability to continue to expand our current business and to expand into new markets, general economic conditions, and other factors. You can identify forward-looking statements by terminology such as "may," "will," "should," "expects," "intends," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continues," or the negative of these terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We undertake no obligations to publicly update or review any forward-looking statements, whether as a result of new information, future developments or otherwise.
The following discussion of our financial condition and results of operation should be read in conjunction with our unaudited financial statements and related notes to the financial statements included elsewhere in this Quarterly Report on Form 10-Q as of September 30, 2009 and our audited financial statements for the year ended December 31, 2008 included in our Annual Report on Form 10-K previously filed with the SEC. This discussion contains forward-looking statements that relate to future events or our future financial performance. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward looking statements.
Overview
Response Genetics, Inc. (the "Company") was incorporated in the state of Delaware on September 23, 1999 as Bio Type, Inc. for the purpose of providing unique molecular profiling services of tumor tissue that has been formalin-fixed and embedded in paraffin wax. In August 2000, we changed our name to Response Genetics, Inc. In November 2006, we established Response Genetics Ltd., a wholly owned subsidiary in Edinburgh, Scotland. On February 9, 2009 we implemented a reduction of workforce pursuant to which we closed our subsidiary in Edinburgh. See "liquidity and capital resources" for additional information.
Clinical studies have shown that not all cancer chemotherapy works effectively in every patient, and that a number of patients receive therapy that has no benefit to them and may potentially even be harmful. Our goal is to provide cancer patients and their physicians with a means to make informed, individualized treatment decisions based on genetic analysis of tumor tissues. Our pharmacogenomic analysis of clinical trial specimens for the pharmaceutical industry may provide data that will lead to a better understanding of the molecular basis for response to specific drugs and, therefore lead to individualized treatment. We are focusing our efforts in the following areas:
· Commercialization of our ResponseDX ™ tests;
· Developing additional diagnostic tests for assessing the risk of cancer recurrence, prediction of chemotherapy response and tumor classification in cancer patients; and
· Expanding our pharmacogenomic testing services business into and creating a standardized and integrated testing platform in the major markets of the healthcare industry, including outside of the United States.
Our patented technologies enable us to reliably and consistently extract the nucleic acids RNA and DNA from tumor specimens that are stored as formalin-fixed and paraffin-embedded, or FFPE, specimens and thereby to analyze genetic information contained in these tissues. This is significant because the majority of patients diagnosed with cancer have a tumor biopsy sample stored in paraffin, while only a small percentage of patients' tumor specimens are frozen. Our technologies also enable us to use the FFPE patient biopsies for the development of diagnostic tests. To our knowledge, we were the first company to generate clinically relevant information regarding the risks of recurrence of cancer or chemotherapy response using approximately 30,000 genes available from microarray profiling of FFPE specimens.
ResponseDX™
The outcome of cancer chemotherapy is highly variable due to genetic differences among patients. Some patients respond well with tumor shrinkage and increase in life span. Other patients do not obtain benefit from the same therapy but may still experience toxic side effects as well as delay in effective treatment and psychological trauma.
At present most chemotherapy regimens are administered without any pre-selection of patients on the basis of their particular genetics. However recent development of very sensitive molecular technologies has enabled researchers to identify and measure genetic and biochemical factors in patients' tissues that may predict the probability of success or failure of many currently used anti-cancer agents. In order to increase the chances of a better chemotherapy outcome for cancer patients, we are developing genetic tests that will measure predictive factors for tumor response in tumor tissue samples. We have begun offering tests for non-small cell lung cancer (NSCLC) (ResponseDX: Lung Ô ) and colorectal cancer (CRC) (ResponseDX: Colon Ô ) and gastric and gastroesophageal (GE) cancer (ResponseDX: Gastric Ô ) patients' tumor tissue through our laboratory located in Los Angeles, California, which is certified under the Clinical Laboratory Improvement Amendments of 1988 (CLIA), and we anticipate offering additional tests for ovarian, and pancreatic cancer in the future. These tests are proprietary based tests which serve to help oncologists make optional therapeutic decisions for cancer patients. The results from our tests may help oncologists choose among chemotherapy regimens to treat their cancer patients. On September 29, 2008, we announced an exclusive agreement with NeoGenomics Laboratories (OTCBB: NGNM) whereby NeoGenomics will offer our proprietary ResponseDx:Colon and ResponseDx: Lung tests nationwide. Under the terms of the agreement NeoGenomics will be the national exclusive clinical reference laboratory authorized to offer our proprietary tests through NeoGenomics national sales force and our sales team. Currently, our recently formed sales team has been expanded to 11 sales people located in the West Coast, Midwest, and East Coast areas of the United States.
Diagnostic Tests for Other Cancers
In addition to ResponseDX: Lung, ResponseDX: Colon,and ResponseDX: Gastric, we are developing and intend to commercialize tests for other types of cancer that identify genetic profiles of tumors that are more aggressive and recur rapidly after surgery. We also are identifying genetic profiles of tumors that are more or less responsive to a particular chemotherapy. Following the development of tests to predict the risk of recurrence after surgery, we intend to develop tests to determine the most active chemotherapy regimen for the individual patient at risk. Once developed and after obtaining any necessary regulatory approvals, we intend to leverage our relationships in the healthcare industry to market, sell or license these tests as a means for physicians to determine the courses of cancer treatment.
Expansion of our pharmacogenomic testing services business
We have started the expansion of our pharmacogenomic testing services business into major markets of the healthcare industry outside of the United States. We have a service laboratory in Japan, and are working to potentially establish a service laboratory in China, through collaboration with some of our current clients in the pharmaceutical industry. The pharmaceutical industry is in need of standardized integrated worldwide analysis of clinical trial specimens. It is important to the pharmaceutical industry and the regulatory agencies that the same analytical methods are used for each clinical trial sample around the world so that the data can be easily compared and used for global drug development. Also, export of clinical trial specimens to the United States is restricted from some areas of the world, such as China. Our goal is to offer an analysis of patient specimens and generate consistent data based on integrated common platforms and technology into the major markets of the healthcare industry including outside of the United States.
There are no assurances that we will be able to continue making our current ResponseDX tests available, or make additional ResponseDX tests available; will be able to develop and commercialize tests of other types of cancer; or will be able to expand our pharmacogenomic testing service business.
We anticipate that, over the next 12 months, a substantial portion of our capital resources and efforts will be focused on research and development to expand our series of diagnostic tests for cancer patients, to establish a laboratory overseas in collaboration with certain of our current pharmaceutical clients, sales and marketing activities related to our ResponseDX diagnostic tests, and for other general corporate purposes.
Research and development expenses represented 13% and 14 % of our total operating expenses for the nine months ended September 30, 2009 and September 30, 2008, respectively. Major components in research and development expenses for the nine months ended September 30, 2009 included supplies and reagents for our research activities, personnel costs, occupancy costs, equipment warranties and service, patent fees, and sample procurement costs.
Critical Accounting Policies and Significant Judgments and Estimates
This discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as revenues and expenses during the reporting periods. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could therefore differ materially from those estimates under different assumptions or conditions. We believe the following critical accounting policies reflect our more significant estimates and assumptions used in the preparation of our financial statements.
Revenue Recognition
Revenues are derived from services provided to pharmaceutical companies and from revenues generated from our ResponseDX tests. Revenue is recognized in accordance with SEC Staff Accounting Bulletin No. 104, Revenue Recognition, which requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence that an arrangement exists; (2) delivery has occurred and title and the risks and rewards of ownership have been transferred to the client or services have been rendered; (3) the price is fixed or determinable; and (4) collectability is reasonably assured.
Revenues from pharmaceutical company contracts are recorded on an accrual basis as the contractual obligations are completed and as a set of assays is processed through our laboratory under a specified contractual protocol. Certain contracts have minimum assay requirements that, if not met, result in payments that are due upon the completion of the designated period. In these cases, revenues are recognized when the end of the specified contract period is reached.
On occasion, we may enter into a contract that requires the client to provide an advance payment for specimens that will be processed at a later date. In these cases, we record this advance as deferred revenue and recognize the revenue as the specimens are processed or at the end of the contract period, as appropriate.
We recognize a portion of product revenue from our ResponseDX tests invoiced to Medicare on an accrual basis and to third-party payors, including private payors on a cash basis. We have received our Medicare provider number which allows us to invoice and collect from Medicare. Our invoicing to Medicare is primarily based on amounts allowed by Medicare for the service provided as defined by Common Procedural Terminology (CPT) codes. We recognize revenue from third party and private payors currently on a cash basis until a collection history can be determined. Until we are reasonably assured about a pattern of collections we will continue to record revenues from third party payors of ResponseDX on a cash basis. We continue to process samples for ResponseDX testing services. Currently we are processing more samples for ResponseDX testing services than revenue is being recorded. This is primarily due to timing and recognition of revenue from third party payors until a collection history can be established.
We are subject to potentially significant variations in the timing of revenue recognized from period to period due to a variety of factors including: (1) the timing of when specimens are submitted to us for testing; and (2) the specific terms, such as minimum assay requirements in any given period, advance payment requirements, and terms of agreements, as set forth in each contract we have with significant clients.
License Fees
We have licensed technology for the extraction of RNA and DNA from FFPE tumor specimens from USC in exchange for royalty fees on revenue generated by use of this technology. These royalties are calculated as a fixed percentage of revenue that we generate from use of the technology licensed from USC. Total license fees due under the royalty agreement to USC were $135,369 and $57,781 for the nine months ended September 30, 2009 and September 30, 2008, respectively. We also maintain a non-exclusive license to use Roche's polymerase chain reaction (PCR), homogenous PCR, and reverse transcription PCR processes. We pay Roche a fixed percentage royalty fee for revenue that we generate through use of certain applications of this technology. Royalties accrued under this agreement totaled $116,402 and $236,473 for the nine months ended September 30, 2009 and September 30, 2008, respectively.
We are subject to potentially significant variations in royalties recorded in any period. While the amount paid is based on a fixed percentage from revenues of specific tests pursuant to terms set forth in the agreements with USC and Roche, the amount due is calculated based on the revenue we recognize using the respective licensed technology. As discussed above, this revenue can vary from period to period as it is dependent on the timing of the specimens submitted by our clients for testing.
Accounts Receivable
We invoice our pharmaceutical clients as specimens are processed and any other contractual obligations are met. Our contracts with pharmaceutical clients typically require payment within 45 days of the date of invoice. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our clients to make required payments. We specifically analyze accounts receivable and historical bad debts, client credit, current economic trends and changes in client payment trends when evaluating the adequacy of the allowance for doubtful accounts. Account balances are charged-off against the allowance when it is probable the receivable will not be recovered. To date, our clients have primarily been large pharmaceutical companies. As a result, bad debts to date have been minimal.
We bill Medicare and third-party payors for ResponseDX upon completion of the required testing services. As such, we take assignment of benefits and the risk of collection with Medicare and third-party payors. As we continue to generate revenues from ResponseDX, we will monitor the collection history from third party payors. Until we are reasonably assured about a pattern of collections, we will continue to record revenues from third party payors of ResponseDX on a cash basis.
While we have not had credit losses in the past, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. Measurement of such losses requires consideration of historical loss experience, including the need to adjust for current conditions, and judgments about the probable effects of relevant observable data, including present economic conditions such as delinquency rates and financial health of specific customers. We consider all available information in our assessments of the adequacy of the reserves for uncollectible accounts.
Income Taxes
We estimate our tax liability through calculations we perform for the determination of our current tax liability, together with assessing temporary differences resulting from the different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are recorded in our balance sheets. Our management then assesses the likelihood that deferred tax assets will be recovered in future periods through future operating results. To the extent that we cannot conclude that it is more likely than not that the benefit of such assets will be realized, we establish a valuation allowance to adjust the net carrying value of such assets. The carrying value of our net deferred tax assets assumes that we will be able to generate sufficient future taxable income, based on management's estimates and assumptions. These estimates and assumptions take into consideration future taxable income and ongoing feasible tax strategies in determining recoverability of such assets. Our valuation allowance is subject to significant change based on management's estimates of future profitability and the ultimate realization of the deferred tax assets.
Results of Operations
In the course of preparing the financial statements for the third quarter ended September 30, 2009, management identified certain prior period errors. The errors related to an overstatement of net revenues in the amount $278,123. In accordance with the SEC's Staff Accounting Bulletin ("SAB") No. 99, Materiality and SAB No. 108 Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, management evaluated the materiality of the errors from qualitative and quantitative perspectives and concluded that the errors were not material to any prior periods. The correction of the errors in the current period is material to the third quarter financial statements but is not anticipated to be material to the full fiscal year or the trend of financial results. Accordingly, management has corrected the errors in the third quarter of 2009.
Quarters Ended September 30, 2009 and 2008
Revenues. Revenues were $2,259,523 for the quarter ended September 30, 2009, as compared to $1,957,030 for the comparable period in 2008, an increase of $302,493 or 15%. This increase was generated primarily through growth in the number of Response DX assays processed by our laboratory. Revenues from ResponseDX were $914,650 for the quarter ended September 30, 2009 compared to $58,597 in the third quarter of 2008. This increase in Response DX related revenues was partially offset by a decrease in revenue related to our pharmaceutical clients of $553,559 in the third quarter of 2009 as compared to the third quarter of 2008. The decrease in our pharmaceutical client revenue was generated primarily due to a delay in receipt of samples to be tested from our pharmaceutical clients which we expect to receive later in 2009 and 2010. For the quarter ended September 30, 2009, two of our clients, GSK and Taiho, accounted for approximately 58% of our revenue, as compared to approximately 95% of our revenue for the quarter ended September 30, 2008.
Cost of Revenues. Cost of revenues for the quarter ended September 30, 2009 were $1,175,615 as compared to $1,025,383 for the quarter ended September 30, 2008, an increase of $150,232 or 14.7%. This increase is primarily related to an increase of $276,994 in processing costs associated with our sample processing relationship with Hitachi in Japan, offset by a reduction of $93,870 in consulting expenses and $57,004 in lab supply and reagent costs.
Research and Development Expenses . Research and development expenses were $726,696 for the quarter ended September 30, 2009, as compared to $410,469 for the same period in 2008, an increase of $316,227 or 77.0%. This increase resulted primarily from an increase in personnel costs of $171,968, an increase of $59,278 in lab supplies and reagents, and an increase of $69,638 in consultation fees. We expect research and development expenses to increase as we continue work to develop additional aspects of our technology and to study diagnostic indicators for various forms of cancer.
General and Administrative Expenses. General and administrative expenses totaled $1,305,247 for the quarter ended September 30, 2009, as compared to $2,101,864 for the comparable period in 2008, a decrease of $796,617 or 38%. This decrease resulted primarily from a reduction of $74,432 in staff salary and benefits expenses, a decrease in stock option expense of $287,115, a reduction of $106,585 in business consulting expenses, a $116,938 decrease in insurance expenses, a $54,893 reduction in depreciation and amortization expenses. We expect general and administrative expenses to increase as a result of the need to hire additional administrative personnel due to higher legal, accounting, compliance and related expenses associated with being a public company and to support the growth of ResponseDX.
Sales and Marketing Expenses: Historically, the Company has included sales and marketing expenses in the general and administrative expense category. With the hiring of a sales force to bring our ResponseDX assay to market the Company has commenced with the quarter ended March 31, 2009 to report expenses associated with our sales and marketing efforts separately. For the quarter ended September 30, 2009 our sales and marketing expenses totaled $934,946. These expenses primarily were comprised of $540,505 in personnel costs, $83,668 for business meetings and travel related expenses, and $202,702 in marketing costs such as press releases, promotional event costs and marketing materials. We expect that sales and marketing costs will continue to increase as we expand our sales and marketing activities in order to gain clinical acceptance of our ResponseDX assays.
U.K. Operating Costs and U.K. Impairment of Property and Equipment: In December, 2008, we made the decision to increase the operational efficiency of the Company by consolidating our UK operations with our US operations. Based on this decision we implemented a reduction of workforce pursuant to which we have closed our UK testing facility and consolidated testing services in our laboratory facilities located in Los Angeles. As a result of the implementation of the reduction of workforce management performed a recoverability test of the long-lived assets located at the United Kingdom testing facility. Based on the recoverability analysis performed, the Company recorded a non-cash charge for the impairment of long-lived assets of approximately $0.9 million as of December 31, 2008 to write down the carrying value of the long-lived assets to their estimated fair value of $0. The fair value was estimated based upon offers received from third parties to purchase the long-lived assets. The operating costs related to our UK lab, which were previously included in general and administrative expenses, were $21,645 for the quarter ended September 30, 2009 compared to $688,794 for the same period in 2008. Additionally, in connection with the reduction of workforce we incurred expenses related to redundancy costs of $66,140 in the quarter ended September 30, 2009.
Interest Income: Interest income was $256 for the quarter ended September 30, 2009, compared with $76,087 for the same period in 2008. This $75,831 decrease was due to lower average cash and cash equivalent balances and lower rates of return during the period ending September 30, 2009.
Nine Months Ended September 30, 2009 and 2008
Revenues: Revenues were $5,694,988 for the nine month ended September 30, 2009, as compared to $5,683,409 for the comparable period in 2008, an increase of $11,579 or 0%. This increase was attributable to a $1,623,737 in net revenue associated with our new ResponseDX assays processed by our laboratory. This increase was partially offset by a $1,553,561 decrease in revenues from pharmaceutical clients. The decrease in our pharmaceutical client revenue was generated primarily due to a delay in receipt of samples to be tested from our pharmaceutical clients which we expect to receive later in 2009 and 2010. For the nine months ended September 30, 2009, two of our clients, GSK and Taiho, accounted for approximately 63% of our revenue, as compared to approximately 97% of our revenue for the nine months ended September 30, 2008.
Cost of Revenues: Cost of revenues for the nine month period ended September 30, 2009 were $3,646,358 as compared to $2,849,482 for the same period ended September 30, 2008, an increase of $796,876 or 28.0%. This increase is primarily related to an increase of $968,152 associated with our sample processing relationship with Hitachi in Japan. This increase was partially offset by a $93,870 reduction in business consulting expenses, a $42,176 reduction in employee stock option expenses and a $36,344 reduction in costs associated with processing fluorescence in situ hybridization assays and bioinformatics.
Research and Development Expenses. Research and development expenses were $1,734,223 for the nine month period ended September 30, 2009, as compared to $1,719,013 for the same period in 2008, an increase of $15,210 or 0.1%. This increase resulted primarily from an increase in personnel costs of $38,878, and an increase in consultation fees of $135,764 offset by a decrease in royalties and patent fees of $91,970, a reduction in employee stock option expense of 27,286 and a reduction in equipment related costs of $26,420. We expect research and development expenses to increase as we continue work to develop additional aspects of our technology and to study diagnostic indicators for various forms of cancer.
General and Administrative Expenses. General and administrative expenses totaled $4,453,204for the nine month period ended September 30, 2009, as compared to $5,580,186 for the comparable period in 2008, a decrease of $1,126,982 or 24.4%. This decrease resulted primarily from a reduction of salary and benefits costs of $225,923, a decrease in stock option expense of $391,505, a reduction of $363,813 in business consulting fees, , a reduction of $145,811 in legal and accounting fees. We expect general and administrative expenses to . . .
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