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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014

¨

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number 001-36662

 

GREAT BASIN SCIENTIFIC, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

83-0361454

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

 

2441 South 3850 West, Salt Lake City, UT

 

84120

(Address of principal executive offices)

 

(Zip Code)

(801) 990-1055

(Registrant’s telephone number, including area code)

 

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

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

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

 

Large Accelerated Filer

 

¨

  

Accelerated Filer

 

¨

 

 

 

 

Non-Accelerated Filer

 

¨  (Do not check if a smaller reporting company)

  

Smaller Reporting Company

 

x

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

The issuer had 5,078,462 shares of common stock outstanding as of November 14, 2014.

 

 

 

 

 

 


TABLE OF CONTENTS

 

 

 

 

  

Page

 

 

PART I. FINANCIAL INFORMATION

  

3

 

 

 

Item 1.

 

Financial Statements (Unaudited)

  

3

 

 

 

 

 

Condensed Balance Sheets (Unaudited) September 30, 2014 and December 31, 2013

  

3

 

 

Condensed Statements of Operations (Unaudited) For the Three and Nine Months Ended September 30, 2014 and 2013

  

4

 

 

Condensed Statements of Cash Flows (Unaudited) For the Nine Months Ended September 30, 2014 and 2013

  

5

 

 

Notes to Condensed Financial Statements (Unaudited)

  

6

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

15

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

  

25

 

 

 

Item 4.

 

Controls and Procedures

  

25

 

 

PART II. OTHER INFORMATION

  

26

 

 

 

Item 1.

 

Legal Proceedings

  

26

 

 

 

Item 1A.

 

Risk Factors

  

26

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

  

42

 

 

 

Item 3.

 

Defaults Upon Senior Securities

  

43

 

 

 

Item 4.

 

Mine Safety Disclosures

  

43

 

 

 

Item 5.

 

Other Information

  

43

 

 

 

Item 6.

 

Exhibits

  

44

 

 

SIGNATURES

  

45

 

 

 

2


PART I. FINANCIAL INFORMATION

 

 

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

GREAT BASIN SCIENTIFIC, INC.

CONDENSED BALANCE SHEETS

September 30, 2014 and December 31, 2013

(Unaudited)

 

 

 

September 30,

 

 

December 31,

 

 

 

2014

 

 

2013

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash

 

$

676,471

 

 

$

1,211,423

 

Accounts receivable, net of allowances of $5,482 and $5,482, respectively

 

 

233,426

 

 

 

184,415

 

Inventory

 

 

381,952

 

 

 

320,239

 

Prepaid and other current assets

 

 

895,160

 

 

 

94,421

 

Total current assets

 

 

2,187,009

 

 

 

1,810,498

 

Intangible assets, net

 

 

245,896

 

 

 

334,025

 

Property and equipment, net

 

 

3,529,265

 

 

 

3,703,582

 

Total assets

 

$

5,962,170

 

 

$

5,848,105

 

Liabilities and Stockholders' Deficit

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,695,497

 

 

$

874,119

 

Accrued expenses

 

 

858,412

 

 

 

815,814

 

Current portion of notes payable

 

 

48,586

 

 

 

44,601

 

Notes payable - related party, net of discount of $83,333

 

 

416,667

 

 

 

 

Current portion of capital lease obligations

 

 

959,403

 

 

 

506,506

 

Total current liabilities

 

 

3,978,565

 

 

 

2,241,040

 

Notes payable, net of current portion

 

 

18,732

 

 

 

55,730

 

Capital lease obligations, net of current portion

 

 

2,435,625

 

 

 

2,042,359

 

Derivative liability

 

 

13,900,400

 

 

 

 

Total liabilities

 

 

20,333,322

 

 

 

4,339,129

 

Commitments and contingencies (see NOTE 10 LEGAL PROCEEDINGS)

 

 

 

 

 

 

 

 

Convertible preferred stock:

 

 

 

 

 

 

 

 

Series A convertible preferred stock, par value $.001; 119,987,898 and 125,000,000 shares

 

 

 

 

 

 

 

 

   authorized; 107,881,171 and 117,131,171 shares issued and outstanding, respectively

 

 

17,366,539

 

 

 

18,846,539

 

Series B convertible preferred stock, par value $.001; 59,465,350 and 100,000,000 shares

 

 

 

 

 

 

 

 

   authorized; 59,465,350 shares issued and outstanding, respectively

 

 

9,464,454

 

 

 

9,464,454

 

Series C convertible preferred stock, par value $.001; 165,877,435 and 210,000,000 shares

 

 

 

 

 

 

 

 

   authorized; 165,877,435 and 150,989,224 shares issued and outstanding, respectively

 

 

4,040,585

 

 

 

3,674,335

 

Series C-1 convertible preferred stock, par value $.001; 84,027,175 and 100,000,000 shares

 

 

 

 

 

 

 

 

   authorized; 84,027,175 shares issued and outstanding, respectively

 

 

2,067,068

 

 

 

2,067,068

 

Series D convertible preferred stock, par value $.001;  325,000,000 and 0 shares

 

 

 

 

 

 

 

 

   authorized; 306,091,710 and 0 shares issued and outstanding, respectively

 

 

6,716,765

 

 

 

 

Stockholders' deficit:

 

 

 

 

 

 

 

 

Common stock, $.001 par value: 1,800,000,000 and 375,000,000 shares

 

 

 

 

 

 

 

 

   authorized; 161,760 and 115,510 shares issued and outstanding, respectively

 

 

162

 

 

 

116

 

Additional paid-in capital

 

 

11,481,055

 

 

 

9,733,342

 

Accumulated deficit

 

 

(65,507,780

)

 

 

(42,276,878

)

Total stockholders' deficit

 

 

(54,026,563

)

 

 

(32,543,420

)

Total liabilities, convertible preferred stock and stockholders' deficit

 

$

5,962,170

 

 

$

5,848,105

 

 

See the accompanying notes to condensed financial statements

 

 

 

3


GREAT BASIN SCIENTIFIC, INC.

CONDENSED STATEMENTS OF OPERATIONS

For the Three and Nine Months Ended September 30, 2014 and 2013

(Unaudited)

 

 

 

Three Months Ended

 

 

Nine  Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Revenues

 

$

409,390

 

 

$

223,470

 

 

$

1,160,971

 

 

$

464,861

 

Cost of sales

 

 

942,334

 

 

 

660,695

 

 

 

2,761,153

 

 

 

1,078,610

 

Gross loss

 

 

(532,944

)

 

 

(437,225

)

 

 

(1,600,182

)

 

 

(613,749

)

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

1,424,877

 

 

 

792,690

 

 

 

3,265,149

 

 

 

2,678,912

 

Selling and marketing

 

 

479,499

 

 

 

725,984

 

 

 

1,646,782

 

 

 

2,066,479

 

General and administrative

 

 

597,795

 

 

 

384,664

 

 

 

2,004,080

 

 

 

1,257,109

 

(Gain) loss on sale of assets

 

 

-

 

 

 

6,504

 

 

 

(8,166

)

 

 

22,767

 

Total operating expenses

 

 

2,502,171

 

 

 

1,909,842

 

 

 

6,907,845

 

 

 

6,025,267

 

Loss from operations

 

 

(3,035,115

)

 

 

(2,347,067

)

 

 

(8,508,027

)

 

 

(6,639,016

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(314,450

)

 

 

(82,239

)

 

 

(819,235

)

 

 

(114,065

)

Interest income

 

 

619

 

 

 

889

 

 

 

2,057

 

 

 

2,945

 

Change in fair value of derivative liability

 

 

(13,900,400

)

 

 

-

 

 

 

(13,900,400

)

 

 

-

 

Total other income (expense)

 

 

(14,214,231

)

 

 

(81,350

)

 

 

(14,717,578

)

 

 

(111,120

)

Loss before provision for income taxes

 

 

(17,249,346

)

 

 

(2,428,417

)

 

 

(23,225,605

)

 

 

(6,750,136

)

Provision for income taxes

 

 

822

 

 

 

-

 

 

 

(5,297

)

 

 

-

 

Net loss

 

$

(17,248,524

)

 

$

(2,428,417

)

 

$

(23,230,902

)

 

$

(6,750,136

)

Net loss per common share - basic and diluted

 

$

(117.59

)

 

$

(21.02

)

 

$

(184.35

)

 

$

(58.44

)

Weighted average common shares - basic and diluted

 

 

146,678

 

 

 

115,510

 

 

 

126,014

 

 

 

115,510

 

See the accompanying notes to condensed financial statements

 

 

 

4


GREAT BASIN SCIENTIFIC, INC.

CONDENSED STATEMENTS OF CASH FLOWS

For the Nine Months Ended September 30, 2014 and 2013

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2014

 

 

2013

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(23,230,902

)

 

$

(6,750,136

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

855,484

 

 

 

549,629

 

Change in fair value measurement

 

 

13,900,400

 

 

 

 

(Gain) loss on sale of assets

 

 

(8,166

)

 

 

22,767

 

Interest converted to preferred stock

 

 

13,129

 

 

 

 

Employee stock compensation

 

 

242,696

 

 

 

83,317

 

Warrant issuance and modifications

 

 

25,063

 

 

 

 

Debt discount amortization

 

 

16,667

 

 

 

 

Asset disposal

 

 

11,124

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Increase in accounts receivable, net

 

 

(49,011

)

 

 

(46,400

)

Increase in inventory

 

 

(61,713

)

 

 

(95,040

)

Increase in prepaid and other assets

 

 

(269,459

)

 

 

(29,765

)

Increase in accounts payable

 

 

360,882

 

 

 

135,029

 

Increase in accrued liabilities

 

 

42,598

 

 

 

415,182

 

Net cash used in operating activities

 

 

(8,151,208

)

 

 

(5,715,417

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Acquisition of property and equipment

 

 

(222,584

)

 

 

(774,540

)

Acquisition of intangible asset

 

 

-

 

 

 

(200,000

)

Construction of equipment

 

 

(479,196

)

 

 

(1,774,341

)

Proceeds from sale of assets

 

 

35,000

 

 

 

63,000

 

Proceeds from sale leaseback

 

 

1,500,000

 

 

 

 

Net cash provided by (used in) investing activities

 

 

833,220

 

 

 

(2,685,881

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of convertible notes payable

 

 

100,000

 

 

 

4,577,688

 

Proceeds from issuance of convertible notes payable - related party

 

 

300,000

 

 

 

 

Proceeds from issuance of preferred stock

 

 

6,569,886

 

 

 

 

Proceeds from issuance of notes payable - related party

 

 

890,000

 

 

 

 

Proceeds from subscriptions receivable

 

 

 

 

 

3,288,333

 

Principal payments of capital leases

 

 

(653,837

)

 

 

(23,677

)

Principal payments of notes payable

 

 

(390,000

)

 

 

(24,995

)

Principal payments of notes payable -related party

 

 

(33,013

)

 

 

 

Net cash provided by financing activities

 

 

6,783,036

 

 

 

7,817,349

 

Net increase (decrease) in cash

 

 

(534,952

)

 

 

(583,949

)

Cash, beginning of the period

 

 

1,211,423

 

 

 

1,143,009

 

Cash, end of the period

 

$

676,471

 

 

$

559,060

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Interest paid

 

$

775,666

 

 

$

10,021

 

Income taxes paid

 

$

6,447

 

 

$

 

Supplemental schedule of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Conversion of preferred stock to common stock

 

$

1,480,000

 

 

$

 

Issuance of preferred stock as debt discount

 

$

100,000

 

 

$

 

Conversion of note payable to preferred stock

 

$

400,000

 

 

$

 

Assets acquired through capital leases

 

$

807,272

 

 

$

 

Initial public offering costs incurred but unpaid

 

$

531,280

 

 

$

 

Property and equipment included in accounts payable

 

$

70,784

 

 

$

 

 

See the accompanying notes to condensed financial statements

 

 

5


GREAT BASIN SCIENTIFIC, INC.

Notes to Condensed Financial Statements (Unaudited)

 

 

NOTE 1 DESCRIPTION OF BUSINESS

Great Basin Scientific, Inc. (the “Company”) (d.b.a., Great Basin Corporation) is a Delaware corporation headquartered in Salt Lake City, Utah. The Company was originally incorporated as Diagnostic Micro Arrays, Inc., a Nevada corporation, on June 27, 2003. The Company changed its name to Great Basin Scientific, Inc. on April 19, 2006. On August 12, 2008, the Company took steps to change its corporate domicile from Nevada to Delaware by forming Great Basin Scientific, Inc., a Delaware corporation, and on August 29, 2008, Great Basin Scientific, Inc., a Nevada corporation, was merged with and into Great Basin Scientific, Inc., a Delaware corporation, wherein the Delaware corporation was the sole surviving entity.

The Company is a molecular diagnostics company that develops and manufactures test kits and analyzers for a patented, proprietary low-cost, easy-to-use molecular diagnostic system for single pathogen tests. The Company sells its test kits to customers throughout the world for use in the Company’s analyzers. Our system utilizes a sample-in result-out format, enabling simple, rapid and cost-effective analysis of multiple pathogens from a single clinical sample. The Company’s technology processes up to 64 distinct targets in a single assay for more answers with results in 90 minutes or less. It is a fully automated process with few hands-on steps that allows on-demand testing instead of the traditional batching of tests that delay results. The Company’s simple-to-use system allows smaller hospitals that traditionally could not afford more expensive, advanced molecular diagnostics systems to modernize their laboratory testing and provide better patient care at an affordable cost.

 

 

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

These condensed unaudited financial statements have been prepared to reflect the financial position, results of operations and cash flows of the Company as of September 30, 2014 and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. The accompanying condensed financial statements and notes are unaudited. In management’s opinion, the unaudited interim financial statements have been prepared on the same basis as the audited financial statements and include all adjustments, which include only normal recurring adjustments, necessary for the fair presentation of the Company’s financial position as of September 30, 2014 and its results of operations and cash flows for the nine months ended September 30, 2014 and 2013. The results for the nine months ended September 30, 2014 are not necessarily indicative of the results expected for the full fiscal year or any other interim period.

Loss per Common Share

Basic loss per share (“EPS”) is computed by dividing net loss (the numerator) by the weighted average number of common shares outstanding for the period (the denominator). Diluted EPS is computed by dividing net loss by the weighted average number of common shares and potential common shares outstanding (if dilutive) during each period. Potential common shares include convertible preferred stock, stock options and warrants. The number of potential common shares outstanding is computed using the treasury stock method.

As the Company has incurred losses for the nine months ended September 30, 2014 and 2013, the potentially dilutive shares are anti-dilutive and are thus not added into the loss per share calculations. As of September 30, 2014 and 2013, there were 8,141,418 and 2,082,111 potentially dilutive shares, respectively.

Reverse Stock Split

On September 5, 2014, the Company effected a reverse stock split of the Company’s common stock whereby each two hundred shares of common stock was replaced with one share of common stock (with no fractional shares issued).  The par value and authorized shares of the common stock were not adjusted as a result of the reverse stock split.  All common share, options, warrants and per share amounts for all periods presented in these financial statements have been adjusted retroactively to reflect the reverse stock split. The convertible preferred stock was not included in the reverse stock split and the outstanding amounts have not been adjusted. However, the conversion ratio was adjusted as a result of the reverse stock split such that upon conversion, each two hundred shares of preferred stock will be converted into one share of common stock.

 

 

 

6


GREAT BASIN SCIENTIFIC, INC.

Notes to Condensed Financial Statements (Unaudited)

 

New Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the FASB that are adopted by the Company as of the specified effective date. If not discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on the Company’s financial statements upon adoption.

In May 2014, the Financial Accounting Standards Board issued accounting guidance on revenue recognition. The amended guidance will enhance the comparability of revenue recognition practices and will be applied to all contracts with customers. Improved disclosures related to the nature, amount, timing, and uncertainty of revenue that is recognized are requirements under the amended guidance. This guidance will be effective for fiscal 2017 and will be required to be applied retrospectively. We are currently assessing the impact that this guidance will have on our financial statements at this time.

 

 

NOTE 3 GOING CONCERN

The Company’s condensed unaudited financial statements have been prepared on a going concern basis which contemplates the realization of assets and the liquidation of liabilities in the ordinary course of business. The Company has incurred substantial losses from operations causing negative working capital and negative operating cash flows, which raise substantial doubt about the Company’s ability to continue as a going concern. The Company sustained a net loss for the nine months ended September 30, 2014 of $23,230,902 and a net loss for the year ended December 31, 2013 of $9,561,280, and has an accumulated deficit of $65,507,780 as of September 30, 2014.

The Company intends to develop its products and expand its customer base, but does not have sufficient realized revenues or operating cash flows in order to finance these activities internally. As a result, the Company intends to seek financing in order to fund its working capital and development needs.

The Company has been able to meet its short-term needs through private placements of convertible preferred securities, convertible notes and the sale and leaseback of analyzers used to report test results. The Company will continue to seek funding through the issuance of additional equity securities, debt financing, the sale and leaseback of analyzers, or a combination of these items. Any proceeds received from these items could provide the needed funds for continued operations and development programs. The Company can provide no assurance that it will be able to obtain sufficient additional financing that it needs to alleviate doubt about its ability to continue as a going concern. If the Company is able to obtain sufficient additional financing proceeds, the Company cannot be certain that this additional financing will be available on acceptable terms, if at all. To the extent the Company raises additional funds by issuing equity securities, the Company’s stockholders may experience significant dilution. Any debt financing, if available, may involve restrictive covenants that impact the Company’s ability to conduct business. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. If the Company is unable to obtain additional financings, the impact on the Company’s operations will be material and adverse.

 

 

NOTE 4 NOTES PAYABLE

The Company purchased certain machinery and equipment under two note payable agreements which consist of the following as of September 30, 2014 and December 31, 2013:

 

 

 

September 30,

 

 

December 31,

 

 

 

2014

 

 

2013

 

Note payable, 15.2% interest, monthly payments of

   $1,328, due February 6, 2016, secured by

   equipment.

 

$

20,194

 

 

$

29,259

 

Note payable, 10.0% interest, monthly payments of

   $3,161, due January 1, 2016, secured by

   equipment.

 

 

47,124

 

 

 

71,072

 

Total notes payable

 

 

67,318

 

 

 

100,331

 

Less: current portion of notes payable

 

 

(48,586

)

 

 

(44,601

)

Long term portion of notes payable

 

$

18,732

 

 

$

55,730

 

 

7


GREAT BASIN SCIENTIFIC, INC.

Notes to Condensed Financial Statements (Unaudited)

 

NOTE 5 NOTES PAYABLE – RELATED PARTY

 

In July 2014, the Company entered into a note agreement for $500,000 with Spring Forth Investments, LLC a company owned by Mr. David Spafford, a director. The maturity date for the note is July 18, 2015.  The note pays interest at an annual rate of 20% and shall be paid monthly. The Company may extend the due date of the note to July 18, 2016 by giving notice no later than April 18, 2015 and paying an extension fee of $10,000. The Company prepaid the last three months of interest for a total of $25,000 at the time of issuance of the note.  As additional consideration for the note, the Company issued 4,000,000 Series D preferred stock units (which  are separable into 4,000,000 shares of Series D preferred stock, 20,000 Class A warrants to purchase a share of common stock at $4.92 and  20,000 Class B warrants to purchase a share of common stock at $0.20) at a value of $100,000 or $0.025 per unit.  The Series D preferred stock units were accounted as a debt discount to be amortized over the life of the note.  As of September 30, 2014 the unamortized debt discount was $83,333.

 

 

NOTE 6 PREFERRED STOCK

During the nine months ended September 30, 2014 the Company issued 14,888,211 shares of Series C preferred stock for cash in the amount of $366,250 or $0.0246 per share. The shares of Series C preferred stock are convertible into shares of common stock at a ratio of 200:1, at the option of the holder at any time after issuance. The series C preferred stock will be automatically converted upon a qualified initial public offering, or upon the election of a majority of the outstanding shares.

During the nine months ended September 30, 2014 the Company sold 285,566,560 shares of Series D preferred stock units for gross proceeds in the amount of $7,139,164 or $0.025 per unit and after deducting offering costs and expenses, the Company received $6,203,636 in net proceeds. The preferred stock units are separable into 285,566,560 shares of Series D preferred stock, 1,427,832 Class A warrants to purchase a share of common stock at $4.92 and 1,427,832 Class B warrants to purchase a share of common stock at $0.20. The shares of Series D preferred stock are convertible into shares of common stock at a ratio of 200:1, at the option of the holder at any time after issuance. The Series D preferred stock will be automatically converted upon a qualified initial public offering, or upon the election of a majority of the outstanding shares. In conjunction with the offering an additional 7,200,000, 466,436 and 251,216 of Series D preferred stock warrants, Class A warrants and Class B warrants, respectively, were granted as part of the offering costs.

In July 2014, the Company converted notes payable in the amount of $400,000 plus $13,129 in accrued interest into 16,525,121 Series D preferred stock units at a conversion price of $0.025 per share. These units consist of 16,525,121 shares of Series D preferred stock, 82,625 Class A warrants to purchase a share of common stock at $4.92 and 82,625 Class B warrants to purchase a share of common stock at $0.20. The shares of Series D preferred stock are convertible into shares of common stock at a ratio of 200:1, at the option of the holder at any time after issuance. The conversion of the notes was pursuant to the terms of the notes that upon a qualified equity financing of at least $5 million the notes would be converted into shares of the equity securities at the price per share at which the equity securities were issued in the qualified equity financing. The sale of the Series D preferred stock units through July 2014 met this threshold and triggered the conversion.

In July 2014, as additional consideration for the issuance of a the Spring Forth Note (See NOTE 5 NOTES PAYABLE – RELATED PARTY) the Company issued 4,000,000 Series D preferred stock units (which are separable into 4,000,000 shares of Series D preferred stock, 20,000 Class A warrants to purchase a share of common stock at $4.92 and 20,000 Class B warrants to purchase a share of common stock at $0.20) at a value of $100,000 or $0.025 per unit.

In July 2014, Spring Forth Investments exercised its conversion option and converted 9,250,000 shares of Series A preferred stock valued at $1,480,000 or $0.16 per share into 46,250 shares of common stock.

The Series C and Series D preferred stock have a conversion price adjustment provision that in the event the Company sells shares of any additional stock, subject to certain exceptions, at a price per share less than the original issue price of the respective series preferred stock, the conversion price shall be adjusted to a price equal to the price paid per share for such additional stock. These conversion price adjustment provisions, and other relevant features of the preferred stock, were analyzed in accordance with the provisions of FASB ASC 815, “Derivatives and Hedging”. The Company evaluated the conversion price adjustment provision embedded in the preferred stock and other relevant features and determined, in accordance with the provisions of the referenced accounting guidance, that such conversion option or other relevant features do not meet the criteria requiring bifurcation as a derivative liability of these instruments. The characteristics of the common stock that is issuable upon a holder’s exercise of the conversion option embedded in the convertible preferred stock are deemed to be clearly and closely related to the characteristics of the preferred shares. Further, the Company determined the other relevant features of the preferred stock are clearly and closely related to the equity host and do not qualify for derivative accounting.

8


GREAT BASIN SCIENTIFIC, INC.

Notes to Condensed Financial Statements (Unaudited)

 

In July 2014, the Company filed a sixth amended and restated Certificate of Incorporation authorizing a modification to the number of authorized shares of common stock and Series D preferred stock. The number of common shares authorized was amended to 1,800,000,000 shares and the number of Series D preferred shares authorized was amended to 325,000,000 shares. In addition Hitachi Chemical Co., Ltd. was given the right to elect one director upon certain requirements and any amendment that would affect this right would require Hitachi’s consent.

 

 

NOTE 7 WARRANTS

As of September 30, 2014, there were 4,178,782, 2,231,727 and 7,200,000 fully vested warrants outstanding to purchase shares of common stock, shares of Series A preferred stock and shares of Series D preferred stock, respectively. During the nine months ended September 30, 2014, a total of 3,904,362 warrants to purchase shares of common stock and 7,200,000 warrants to purchase shares of Series D preferred stock were granted.

Of the total warrants to purchase common stock granted during the nine months ended September 30, 2014; 2,855,664 Class A and Class B warrants to purchase common stock were issued as part of the sale for cash of the Series D preferred stock units (see NOTE 6 PREFERRED STOCK) that have an exercise price between $0.20 and $4.92 and expire between April 2021 and July 2021.

The remaining 1,048,698 common warrants, Class A warrants and Class B warrants to purchase common stock granted during the nine months ended September 30, 2014 were granted in conjunction with the issuance of certain convertible notes payable, consulting services and as financing fees. The warrants have an exercise price between $0.20 and $4.92 and expire between February 2021 and July 2021. The Company recorded an expense associated with the fair value of stock-based payments and uses the Black-Scholes option valuation model to calculate the fair value of stock-based payments at the date of grant. Warrant pricing models require the input of highly subjective assumptions, including the expected price volatility. For warrants granted, the Company used a variety of comparable and peer companies to determine the expected volatility. The Company believes that the use of peer company data fairly represents the expected volatility it would experience if the Company were actively publicly traded in the life sciences industry over the contractual term of the warrants. Changes in these assumptions can materially affect the fair value estimate. The Company determined that the value of the 1,048,698 common stock warrants granted was nominal due to the fair value of the Company’s common stock as of the grant date being nominal as a result of the priority provisions of the preferred stock.

Our Class A and Class B warrants to purchase common stock have a conversion price adjustment provision that falls within the scope of ASC 815.  They are accounted for as liabilities and are recorded at fair value at each reporting date.  The warrants had nominal value on the date of issuance and the subsequent reporting period and no liability was recorded.  The liability was revalued at September 30, 2014 and the change in the fair value of the warrant liability was included as a component of Other income (expense).  The change in fair value of the warrant liability has no effect on the Company’s cash flows.

The following summarizes the change in the value of the warrant liability:

 

Balance at December 31, 2013

 

$

-

 

Issuance of warrants

 

 

-

 

Change in fair value of warrant liability

 

 

13,900,400

 

Balance at September 30, 2014

 

$

13,900,400

 

The Company estimates the fair value of the warrants using the Black-Scholes option valuation model utilizing the fair value of underlying common stock. Black-Scholes has inherent limitations for use in the case of a warrant with a price protection provision, since the model is designed to be used when the inputs to the model are static throughout the life of a security. Management concluded, under the Company’s facts and circumstances, that the estimated fair values of the warrants using the Black-Scholes option-pricing model approximates, in all material respects, the values determined using a Monte Carlo valuation model. The estimates in the Black-Scholes option-pricing model and the Monte Carlo valuation model are based, in part, on assumptions, including but not limited to stock price volatility, the expected life of the warrants, the risk free rate and the fair value of the equity stock underlying the warrants.

9


GREAT BASIN SCIENTIFIC, INC.

Notes to Condensed Financial Statements (Unaudited)

 

The following is the weighted average of the assumptions used in calculating the fair value of the Class A and Class B warrants as of September 30, 2014 using the Black-Scholes method:

 

Fair Market Value

 

$

4.94

 

Exercise Price

 

$0.20 - $4.92

 

Risk Free Rate

 

 

2.20

%

Dividend Yield

 

 

0.00

%

Expected Volatility

 

 

50.27

%

Contractual Term

 

6.75 years

 

In September 2014, certain warrants previously issued were amended to eliminate a clause that would cancel the warrant upon the completion of an IPO. The Company recorded an expense for the incremental fair value based on the difference between the fair value of the modified award and the fair value of the original award immediately before it was modified.  The Company uses the Black-Scholes option valuation model to calculate the fair value of stock-based payments at the date of grant. Warrant pricing models require the input of highly subjective assumptions, including the expected price volatility. For warrants granted, the Company used a variety of comparable and peer companies to determine the expected volatility. The Company believes that the use of peer company data fairly represents the expected volatility it would experience if the Company were actively publicly traded in the life sciences industry over the contractual term of the warrants. Changes in these assumptions can materially affect the fair value estimate. The Company determined the incremental fair value of the warrants to be $25,061 which was expensed in the period as the warrants were fully vested.  

The following is the weighted average of the assumptions used in calculating the fair value of the warrants modified in September 2014 using the Black-Scholes method:

 

Fair Market Value

 

$

4.94

 

Exercise Price

 

$

10.00

 

Risk Free Rate

 

 

0.61

%

Dividend Yield

 

 

0.00

%

Expected Volatility

 

 

37.23

%

Contractual Term

 

1.97 years

 

 

The following table summarizes the common stock warrant activity during the nine months ended September 30, 2014:

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

Weighted

 

 

Remainder

 

 

 

Common

 

 

Average

 

 

Contractual

 

 

 

Stock

 

 

Exercise

 

 

Term in

 

 

 

Warrants

 

 

Price

 

 

Years

 

As of September 30, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

Warrants Outstanding as of January 1, 2014

 

 

274,420

 

 

$

7.08

 

 

 

4.2

 

Granted

 

 

3,904,362

 

 

$

2.69

 

 

 

6.7

 

Exercised

 

 

 

 

 

 

 

 

 

Expired

 

 

 

 

 

 

 

 

 

Warrants outstanding as of September 30, 2014

 

 

4,178,782

 

 

$

2.98

 

 

 

6.2

 

 

10


GREAT BASIN SCIENTIFIC, INC.

Notes to Condensed Financial Statements (Unaudited)

 

The following table summarizes the preferred A stock warrant activity during the nine months ended September 30, 2014:

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

Weighted

 

 

Remainder

 

 

 

Preferred

 

 

Average

 

 

Contractual

 

 

 

Stock A

 

 

Exercise

 

 

Term in

 

 

 

Warrants

 

 

Price

 

 

Years

 

As of September 30, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

Warrants Outstanding as of January 1, 2014

 

 

2,231,727

 

 

$

0.16

 

 

 

3.1

 

Granted

 

 

 

 

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

 

Expired

 

 

 

 

 

 

 

 

 

Warrants outstanding as of September 30, 2014

 

 

2,231,727

 

 

$

0.16

 

 

 

3.1

 

 

The following table summarizes the preferred D stock warrant activity during the nine months ended September 30, 2014:

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

Weighted

 

 

Remainder

 

 

 

Preferred

 

 

Average

 

 

Contractual

 

 

 

Stock D

 

 

Exercise

 

 

Term in

 

 

 

Warrants

 

 

Price

 

 

Years

 

As of September 30, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

Warrants Outstanding as of January 1, 2014

 

 

 

 

 

 

 

 

 

Granted

 

 

7,200,000

 

 

$

0.025

 

 

 

6.8

 

Exercised

 

 

 

 

 

 

 

 

 

Expired

 

 

 

 

 

 

 

 

 

Warrants outstanding as of September 30, 2014

 

 

7,200,000

 

 

$

0.025

 

 

 

6.8

 

 

 

NOTE 8 EMPLOYEE STOCK OPTIONS

The Company has two stock based employee compensation plans pursuant to which stock option grants may be made. Under both the 2014 and the 2006 Stock Option Plan certain employees and non-employee directors have been granted options to purchase common stock. The Company has 578,750 employee stock options outstanding as of September 30, 2014. All options vest in installments over a four year period and expire ten years from the date of grant.

In September 2014, the Company completed a tender offer to eligible employees to exchange 103,250 employee stock options held by such employees under the 2006 Stock Option Plan for new options under the 2014 Stock Option Plan.  The new options have an exercise price of $3.50 with all other terms the same as the original terms under the 2006 Option Plan.   These transactions are accounted for under the provisions of FASB ASC 718 as a modification of a stock based compensation award and require the Company to record an expense for the incremental fair value based on the difference between the fair value of the modified award and the fair value of the original award immediately before it was modified.  The Company uses the Black-Scholes option valuation model to calculate the fair value of stock-based payments at the date of grant. Option pricing models require the input of highly subjective assumptions, including the expected price volatility. For options modified, the Company used a variety of comparable and peer companies to determine the expected volatility. The Company believes that the use of peer company data fairly represents the expected volatility it would experience if the Company were actively publicly traded in the life sciences industry over the expected term of the options. The Company has no historical data regarding the expected life of the options and therefore used the simplified method of calculating the expected life. Changes in these assumptions can materially affect the fair value estimate. The Company determined the incremental fair value of the options to be $223,031 which was expensed in the period as the options are fully vested.  

11


GREAT BASIN SCIENTIFIC, INC.

Notes to Condensed Financial Statements (Unaudited)

 

The following is the weighted average of the assumptions used in calculating the fair value of the options modified in September 2014 using the Black-Scholes method:

 

Fair Market Value

 

$

4.94

 

Exercise Price

 

$

3.50

 

Risk Free Rate

 

 

1.06

%

Dividend Yield

 

 

0.00

%

Expected Volatility

 

 

46.31

%

Contractual Term

 

2.74 years

 

 

The following table summarizes the Company’s total option activity for the nine months ended September 30, 2014:

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

Weighted

 

 

Remaining

 

 

 

 

 

 

 

Average

 

 

Contractual

 

 

 

 

 

 

 

Exercise

 

 

Term in

 

 

 

Options

 

 

Price

 

 

Years

 

As of September 30, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

Options outstanding as of January 1, 2014

 

 

115,750

 

 

$

30.70

 

 

 

6.3

 

Granted

 

 

586,250

 

 

$

2.20

 

 

 

10.0

 

Exercised

 

 

 

 

 

 

 

 

 

Cancelled

 

 

123,250

 

 

$

27.13

 

 

 

6.1

 

Options outstanding as of September 30, 2014

 

 

578,750

 

 

$

2.65

 

 

 

8.7

 

 

Outstanding and exercisable stock options as of September 30, 2014 are as follows:

 

 

 

Options Outstanding

 

 

Options Exercisable

 

 

 

Number of

 

 

Remaining

 

 

 

 

 

 

Number of

 

 

 

 

 

 

 

Options

 

 

Life

 

 

Exercise

 

 

Options

 

 

Exercise

 

 

 

Outstanding

 

 

(Years)

 

 

Price

 

 

Exercisable

 

 

Price

 

September 30, 2014

 

 

578,750

 

 

 

8.7

 

 

$

2.65

 

 

 

110,667

 

 

$

5.43

 

 

The estimated fair value of the Company stock options, less expected forfeitures, is amortized over the options vesting period on the straight-line basis. The Company recognized the following equity-based compensation expenses during the nine months ended September 30, 2014 and 2013:

 

 

 

Nine Months Ended September 30,

 

 

 

2014

 

 

2013

 

Stock based compensation expense

 

$

242,696

 

 

$

83,318

 

 

As of September 30, 2014 and 2013, there were $154 and $47,591 of total unrecognized compensation cost with a remaining vesting period of 0.04 and 0.43 years, respectively. As of September 30, 2014, there was $148,560 in intrinsic value of outstanding and vested stock options.

12


GREAT BASIN SCIENTIFIC, INC.

Notes to Condensed Financial Statements (Unaudited)

 

NOTE 9 FAIR VALUE

FASB ASC 820 defines fair value, establishes a framework for measuring fair value under U.S. generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under FASB ASC 820 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under FASB ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, with the first two inputs considered observable and the last input considered unobservable, that may be used to measure fair value as follows:

·

Level one — Quoted market prices in active markets for identical assets or liabilities;

·

Level two — Inputs other than level one inputs that are either directly or indirectly observable; and

·

Level three — Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that a market participant would use.

Determining which category an asset or liability falls within the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each quarter. The Company issued Class A and Class B warrants to purchase common stock as well as warrants to purchase Series D preferred stock. These warrants have a conversion price adjustment provision that in the event the Company sells shares of any additional stock, subject to certain exceptions, at a price per share less than the original issue price of the respective warrant, the conversion price shall be adjusted to a price equal to the price paid per share for such additional stock. The Company has determined that these warrants fall within the scope of ASC 815. The Company will account for them as liabilities and record them at fair value measured at the transaction date and again at each reporting period. The fair value of the warrants were determined using estimates and assumptions that are not readily available in public markets and the Company has designated this liability as Level 3. The assumptions used for the fair value calculation as well as the changes in the value of the warrant liability are shown in NOTE 7 WARRANTS.

 

 

NOTE 10 LEGAL PROCEEDINGS

We are not currently a party to any pending or threatened legal proceeding or regulatory or government investigations. We may become involved in litigation from time to time relating to claims arising in the ordinary course of our business. We do not believe that the ultimate resolution of such claims would have a material effect on our business, results of operations, financial condition or cash flows. However, the results of these matters cannot be predicted with certainty, and an unfavorable resolution of one or more of these matters could have a material effect on our business, results of operations, financial condition and cash flows.

 

 

NOTE 11 COMMITMENTS

The Company entered into a second agreement in April 2014 for the sale-leaseback of molecular diagnostic analyzers. The agreement provided for the sale of 75 molecular diagnostic analyzers for a purchase price of $1,500,000, which are being leased back for thirty-six monthly payments of $64,665. At the end of the lease term, the lease shall automatically renew for twelve additional months at the current monthly rate unless the Company gives written notice 150 days prior to the end of the lease. If timely notice is given the Company shall have the opportunity to: 1) repurchase the analyzers for a negotiated purchase price, not to exceed forty percent of their original cost; or 2) terminate the lease, return the property and enter into a new lease with new property that replaces the property of the old lease. Both the Company and the lessor shall have the right to reject any terms of option 1 or 2 and if rejected, the 12 month extension shall apply. The agreement has a rewrite clause wherein the leasing company agrees to use its commercially best efforts to rewrite the lease agreement at more favorable terms when the Company raises sufficient capital to cover current and future expenses for a minimum of 12 months. The Company’s obligations under the lease agreement are secured by a $500,000 letter of credit. The Letter of Credit was issued by a bank at the behest of a non-profit foundation and Spring Forth Investments LLC both of which are related parties through Mr. David Spafford, a director of the Company. The Company is obligated to reimburse the non-profit foundation and Spring Forth Investments LLC for any draws made under the Letter of Credit. The lease agreement is also secured by personal guarantees from Mr. Ryan Ashton, the Chief Executive Officer of the Company, and Mr. Spafford. The lease is accounted for as a capital lease sale-leaseback transaction in accordance with ASC 840, “Leases”.

The Company entered into a second Financial Advisory Agency Agreement with Rona Capital LLC effective in June 2014, wherein Rona Capital will provide the Company with financial advisory services related to the Company’s ongoing financing activities. The Company will pay Rona Capital LLC $15,000 per month and an additional cash amount of $100,000 that will be paid upon the closing of the initial public offering. The Company has also agreed to issue warrants to Rona Capital to purchase shares of the Company’s common stock such that Rona Capital shall own 1% of the Company’s outstanding equity that vest upon continued service to the Company as a consultant or employee.  These terms were fulfilled subsequent to the IPO.

 

 

13


GREAT BASIN SCIENTIFIC, INC.

Notes to Condensed Financial Statements (Unaudited)

 

NOTE 12 SUBSEQUENT EVENTS

On October 8, 2014, the Company completed its IPO, whereby the Company sold 1,150,000 shares of its common stock and 1,150,000 Series A Warrants, which were sold in combinations of one share of common stock and one Series A Warrant at a public offering price of $7.00 per share. Each Series A Warrant is exercisable for one share of common stock and one Series B Warrant. In addition, the underwriter exercised its option to purchase 172,500 Series A Warrants.  The shares began trading on the NASDAQ Capital Market on October 9, 2014. The aggregate net proceeds received by the Company from the offering were approximately $6.4 million, after deducting underwriting discounts and commissions and other estimated offering expenses payable by the Company.  Upon the closing of the IPO, all outstanding shares of convertible preferred stock converted into 3,616,702 shares of common stock and warrants exercisable for preferred stock converted into 47,158 warrants for common stock.

In October 2014, the Company, in connection with the IPO, issued to the underwriters warrants exercisable for up to 57,500 shares of the Company’s common stock with an exercise price of $8.75.  The warrants are not exercisable prior to October 2015 and will expire in October 2019.

In October 2014, Class B Warrants were exercised for 150,000 shares of common stock for proceeds in the amount of $30,000 or $0.20 per share.

In October 2014, the Company issued 17,500 non-qualified stock options under the Company’s 2014 Omnibus Incentive Plan to each Non-Employee Director.  A total of 52,500 options were issued with an exercise price of $7.00 per share that vest quarterly over three years and expire in October 2024.

In October 2014, the Company named Jeffrey A. Rona as Chief Financial Officer of the Company. As part of his hiring, Mr. Rona was granted 50,784 stock options under the Company’s 2014 Omnibus Incentive Plan with an exercise price of $7.00 per share that vest 25% immediately and the remaining 75% over a three year period and expire in October 2024.

In October 2014, the Company filed a seventh amended and restated Certificate of Incorporation which among other things made a modification to the number of authorized shares of common stock and preferred stock.  The number of common shares authorized was amended to 50,000,000 shares and the number of preferred shares authorized was amended to 5,000,000 shares.  The amendment also eliminates all classes of preferred stock.

 

14


 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion is intended to assist in understanding our results of operations and our financial condition. Our condensed financial statements and the accompanying notes included elsewhere in this Quarterly Report on Form 10-Q contains additional information that should be referred to when reviewing this material. Certain statements in this discussion may be forward-looking. These forward-looking statements involve risks and uncertainties, which could cause actual results to differ from those expressed in this report.

Forward-Looking Statements

The statements contained in this quarterly report on Form 10-Q that are not historical facts represent management’s beliefs and assumptions based on currently available information and constitute “forward-looking statements” that involve risks and uncertainties. You should not place undue reliance on these forward-looking statements. Our actual results could differ materially from those anticipated in the forward-looking statements for many reasons, including the reasons described in our “Risk Factors,” and “Management Discussion and Analysis of Financial Condition and Result of Operations” sections. In some cases, you can identify these forward-looking statements by terms such as “anticipate,” “believe,” “continue,” “could,” “depends,” “estimate,” “expects,” “intend,” “may,” “ongoing,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” or the negative of those terms or other similar expressions, although not all forward-looking statements contain those words.

We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements are subject to a number of known and unknown risks, uncertainties and assumptions, including risks described in the section titled “Risk Factors” and elsewhere in this Form 10-Q, regarding, among other things:

·

our expectation that for the foreseeable future, substantially all of our revenue will be derived from sales of our C. diff diagnostic test;

·

our ability to expand our sales and marketing capabilities to increase demand for C. diff and any other diagnostic tests we may develop and gain approval for;

·

our ability to develop additional revenue opportunities, including new diagnostic tests;

·

the timing of regulatory submissions;

·

our ability to maintain regulatory approval of our current diagnostic test and to obtain and maintain regulatory approval for any other diagnostic test we may develop;

·

approvals for clinical trials may be delayed or withheld by regulatory agencies;

·

pre-clinical and clinical studies may not be successful or confirm earlier results or may not meet expectations, regulatory requirements or performance thresholds for commercial success;

·

risks relating to the timing and costs of clinical trials and other expenses;

·

management and employee operations and execution risks;

·

loss of key personnel;

·

competition in the markets we serve;

·

our ability to manufacture our C. diff diagnostic test at sufficient volumes to meet customer needs;

·

our ability to reduce the cost to manufacture our C. diff diagnostic test;

·

risks related to market acceptance of diagnostic tests;

·

intellectual property risks;

·

assumptions regarding the size of the available market, benefits of our diagnostic tests, product pricing and timing of product launches;

·

our ability to fund our working capital requirements;

·

risks associated with the uncertainty of future financial results;

·

risks associated with raising additional capital when needed and at reasonable terms; and

15


 

·

risks associated with our reliance on third party suppliers and other organizations that provide goods and services to us.

These risks are not exhaustive. Other sections of this Form 10-Q may include additional factors that could adversely impact our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time, and it is not possible for our management to predict all risk factors nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in, or implied by, any forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events. We cannot assure you that the events and circumstances reflected in the forward-looking statements will be achieved or occur. 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. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Form 10-Q or to conform these statements to actual results or to changes in our expectations.

You should read this Form 10-Q and the documents that we reference and have filed as exhibits with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

Overview of our Business

We are a commercial stage, molecular diagnostic testing company focused on improving patient care through the development and commercialization of our patented, low-cost, molecular diagnostic platform for testing for infectious disease, especially hospital-acquired infections. We believe our platform has the ability to transform molecular testing for infectious diseases at community hospitals by providing an affordable solution that meets the rapidly evolving needs of patients and providers.

We believe there is a fast-growing market for molecular diagnostic platforms being purchased by hospital microbiology labs to replace culture and other legacy testing formats. We believe our platform is well positioned to meet this need. Our platform provides results in less than 90 minutes. Molecular testing generally reduces test time from days to hours, and provides more accurate results, leading to shortened hospital stays and improved patient outcomes, all of which leads to reduced cost for hospitals that implement molecular testing in their labs.

Our platform is an automated molecular diagnostic system, consisting of an analyzer and associated diagnostic test. Our platform utilizes a sample-to-result format, which means that once a patient specimen is received, it undergoes limited processing before it is placed in the analyzer where the test is run without further technician intervention. This reduces test complexity and eliminates the need for highly trained and expensive molecular technicians to run the tests. Our platform is designed to enable simple, rapid and cost-effective analysis of multiple pathogens from a single clinical sample, which will allow small community hospitals that traditionally could not afford more expensive or complex molecular diagnostic testing platforms to modernize their laboratory testing and provide better patient care at an affordable cost.

In November 2012, we launched our first FDA-cleared test for C. diff, a bacteria that causes life-threatening gastro-intestinal distress in hospital patients. We currently sell our diagnostic tests in the United States through a direct sales force and we use distributors in the European Union and New Zealand.  Our easy to use platform allows community hospitals that we believe could not previously afford more expensive or complex molecular diagnostic testing platforms to modernize their laboratory testing and provide better patient care at an affordable cost.

In addition to our test for C. diff, we have developed a diagnostic test for Group B Strep for which we began a clinical trial in the third quarter of this year. We expect to file our 510(k) submission to the FDA for this test in the fourth quarter of 2014 and expect to receive approval during the second quarter of 2015. Additionally, we have three tests also in product development: a test for blood infections caused by Staphylococcus bacteria, a nasal screen for Staphylococcus aureus, or SA, and a food borne pathogen test.

Our operations to date have been funded primarily through sales of capital stock, convertible notes, sale-leaseback transactions and cash from operations. We expect to incur increasing expenses over the next several years to develop additional diagnostic tests and to expand our sales and marketing infrastructure, our manufacturing capacity and our research and development activities.

We are a commercial stage molecular diagnostic testing company focused on improving overall patient care by developing and delivering innovative, affordable and accessible molecular testing for infectious diseases generated in the hospital setting. We believe our proprietary technology allows molecular testing to be accessible to all hospitals due to its low cost and ease of use, which we believe will transform complex molecular testing for infectious diseases by providing an affordable solution that meets the rapidly evolving needs of patients and providers.

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Since our inception in 2003, we have been focused on the development of our proprietary platform, which includes an analyzer and disposable cartridge, for use in the diagnosis of infectious diseases. Our first approved and commercialized diagnostic test for C. diff is utilized by hospitals to quickly and accurately diagnose patients so that they can receive appropriate treatment. In June 2011, we began enrollment in our first clinical study of our diagnostic test for C. diff, filed for clearance with the FDA in November 2011, and received FDA clearance in April 2012. We completed a self-assessment regarding the conformity of the platform with applicable EU legislation and directives in March 2012, which allowed us to display our CE mark and market products in Europe. We had our first European commercial sale in June 2012 and launched our diagnostic test for sale in the United States in November 2012. We are currently developing additional diagnostic tests for other infectious diseases that will utilize our platform.

In the United States, our sales cycle typically includes customer evaluations, a decision to utilize our platform and then validations of our platform and C. diff test. Upon successful validation a hospital or reference lab becomes a customer. The analyzer is provided to the customer for their use with our diagnostic test, but we retain ownership and control of the analyzer; we refer to our relationship with our customers as a vending machine model (or modified razor / razor blade). The customer buys our proprietary test cartridge from us and utilizes one disposable test cartridge each time they run a diagnostic test. Outside the U.S., we sell through a network of distributors who purchase the entire system, including the analyzer and disposable cartridges, to sell to their customers. The analyzers are considered fixed assets and any sale outside the U.S. is accounted for as a sale of assets.

Since inception, we have incurred net losses from operations each year and we expect to continue to incur losses for the foreseeable future. Our losses attributable to operations for the fiscal year ending December 31, 2013 and December 31, 2012 and the nine months ended September 30, 2014 and September 30, 2013 were approximately $9.3 million, $6.7 million, $23.2 million and $6.8 million, respectively. As of September 30, 2014, we had an accumulated deficit of $65.5 million.

Our Strategy

Our goal is to become the leading provider of sample-to-result, multiplex molecular diagnostic testing in infectious disease by leveraging the strengths of our affordable diagnostic testing platform. We intend to expand the use of our platform by targeting community hospitals in the United States with fewer than 400 beds. We believe that our low-cost platform will be attractive to these hospitals in particular, which may not otherwise have sufficient resources to justify the purchase of a molecular diagnostic sample-to-result solution. To achieve this objective, we intend to do the following:

·

Leverage our Low-Cost Platform to Quickly Penetrate the Community Hospital Market. We provide our customers with our analyzer at no cost and sell them the disposable, single-use diagnostic tests. This allows us to avoid the long sales cycle inherent in selling capital equipment and expand into hospitals, labs and clinics that previously could not afford to implement a molecular diagnostic platform.

·

Accelerate the Growth of our U.S. Customer Base. With the proceeds from our initial public offering (“IPO”), we will expand our sales force to target community hospitals in the United States. We anticipate that increasing our number of customers will drive sales of our test cartridges. We expect these sales will generate the majority of our revenue for the foreseeable future.

·

Expand our Menu of Molecular Diagnostic Products. We intend to develop a broad menu of molecular diagnostic tests for our platform that will satisfy growing medical needs and present attractive commercial opportunities. For example, we started a clinical trial during 2014 to expand our menu by adding a test for Group B Strep. We also have a pipeline of tests in a pre-clinical stage of development, including Staph ID/R, chlamydia/gonorrhea and other sexually transmitted diseases, respiratory testing, and sepsis (blood infection) panels.

·

Reduce our Cost of Sales through Automation and Volume Purchasing. We manufacture our proprietary test cartridges and analyzers at our headquarters in Salt Lake City, Utah. We currently hand build our test cartridges and purchase materials at higher per unit cost due to low purchase volumes. We believe that investment in automation of portions of the manufacturing and assembly process and volume purchase pricing will significantly improve our gross margins and enhance our ability to provide a low cost solution to customers.

Results of Operations

The following presents an overview of our results of operations for the three and nine months ended September 30, 2014, compared to the three and nine months ended September 30, 2013.

Three months ended September 30, 2014 compared to the three months ended September 30, 2013

Revenue

Revenue increased by $185,920, or 83.2% in the three months ended September 30, 2014 as compared to the three months ended September 30, 2013. This increase was attributable to the increase in the sales of our C. diff products following an increase in the number of our customers resulting in an increase in the volume of sales of C. diff diagnostic tests from 10,710 for the three months ended September 30, 2013 to 19,750 for the three months ended September 30, 2014.

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Cost of Sales

Cost of sales increased $281,639, or 42.6%, for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013.  The increase is attributable to the increased costs associated with manufacturing additional C. diff tests and the depreciation on additional analyzers needed to support the increase in customers. The gross margin increased from (195.7)% for the three months ended September 30, 2013 to (130.2)% for the three months ended September 30, 2014 due to efficiencies in labor and fixed overhead costs.

Research and Development

Research and development expenses increased by $632,187, or 79.8%, for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013 as we began to ramp up efforts to prepare our next diagnostic test for clinical trials. The increase was due to an increase of $275,191 in research and development materials and the usage of finished cartridges for testing, an increase of $206,611 in salaries and wages, a $103,489 increase in a non-cash expense related to the cancelation and issuance of stock options and a $46,896 increase in all other expenses.

Selling and Marketing

Selling and marketing expenses decreased $246,485, or 34.0%, for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013. The decrease was due to a $134,646 decrease in promotional cartridges and the associated freight costs, a decrease of $63,340 in travel costs, a $49,140 decrease in salaries and wages partially offset by a $641 net increase in all other expenses.

General and Administrative

General and administrative expenses increased $213,131, or 55.4%, for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013 as we increased our business activities, raised additional capital and prepared for an initial public offering. The increase was primarily due to a $134,123 increase in professional fees related to financial and accounting services, a $132,547 increase in a non-cash expense related to the modification of stock options, and a $63,999 increase in legal fees. These expenses were partially offset by a decrease in salaries and wages of $54,140 and a decrease in all other expenses of $63,398.

Loss (Gain) on Sale of Assets

The loss on sale of assets for the three months ended September 30, 2013 was $6,504.  There was no gain or loss on the sale of assets for the three months ended September 30, 2014 as we did not have any sales of analyzer fixed assets outside the U.S.

Interest Income

Interest income did not change significantly for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013.

Interest Expense

Interest expense increased by $223,211, or 282.4%, for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013 due to an increase in interest incurred on our capital lease payments and our letters of credit associated with the analyzer sale-leaseback agreement and interest on our related party note payable.

Change in Fair Value of Derivative Liability  

The change in fair value of derivative liability resulted in a non-cash expense in the amount of $13,900,400 for the three months ended September 30, 2014.  The charge is the result of the increase in the fair value of Class A and Class B common warrants as a result of the increase in the value of our common stock during the period as we approached our IPO date.  The warrants had a nominal value at issuance and the previous reporting period.

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Nine months ended September 30, 2014 compared to the nine months ended September 30, 2013

Revenue

Revenue increased by $696,110, or 149.7%, for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013. This increase was attributable to the increase in the sales of our C. diff products following an increase in the number of our customers leading to an increase in the volume of sales of C. diff diagnostic tests from 21,970 for the nine months ended September 30, 2013 to 55,030 for the nine months ended September 30, 2014.

Cost of Sales

Cost of sales increased $1,682,543, or 156.0%, for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013, due to the costs associated with manufacturing additional C. diff tests and the depreciation on additional analyzers needed to support the increase in customers. The gross margin decreased from (132.0)% for the nine months ended September 30, 2013 to (137.8)% for the nine months ended September 30, 2014 due to excess capacity partially offset by efficiencies in labor.

Research and Development

Research and development expenses increased by $586,237 or 21.9%, for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013 as we began to ramp up efforts to prepare our next diagnostic test for clinical trials. The increase was due to an increase of $249,423 in research and development materials and the usage of finished cartridges for testing, an increase of $267,833 in salaries and wages, a $103,489 increase in a non-cash expense related to the modification of stock options partially offset by a $34,508 net decrease in all other expenses.

Selling and Marketing

Selling and marketing expenses decreased $419,697, or 20.3%, for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013. The decrease was due to a $298,305 decrease in promotional cartridges and the associated freight costs, a decrease of $131,137 in travel costs, a $53,558 decrease in marketing and other expenses partially offset by a $63,303 increase in salaries and wages.

General and Administrative

General and administrative expenses increased $746,971, or 59.4%, for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013 as we increased our business activities, raised additional capital and prepared for an initial public offering. The increase was primarily due to a $576,979 increase in professional fees related to financial and accounting services, a $218,164 increase in legal fees, a $132,547 increase in a non-cash expense related to the modification of stock options and a $27,509 net increase in other expenses. These expenses were partially offset by a $115,328 decrease in property and use taxes and a $92,900 decrease in temporary staffing.

Loss (Gain) on Sale of Assets

Loss (gain) on sale of assets went from a loss of $22,767 for the nine months ended September 30, 2013 to a gain of $8,166 for the nine months ended September 30, 2014. The change was due primarily to a gain of $12,694 on the sale of retired manufactured equipment in 2014 as well as $18,239 in lower losses in 2014 over the same period in 2013 as the result of fewer sales of analyzer fixed assets outside the U.S.

Interest Income

Interest income did not change significantly for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013.

Interest Expense

Interest expense increased by $705,170 for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013 due to an increase in interest incurred on our capital lease payments and our letters of credit associated with the analyzer sale-leaseback agreement and interest on our other debt financing.

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Change in Fair Value of Derivative Liability  

The change in fair value of derivative liability resulted in a non-cash expense in the amount of $13,900,400 for the nine months ended September 30, 2014.  The charge is the result of the increase in the fair value of Class A and Class B common warrants as a result of the increase in the value of our common stock during the period as we approached our IPO date.  The warrants had a nominal value at issuance and the previous reporting period.

Liquidity and Capital Resources

We have funded our operations to date primarily with net proceeds from sales of our preferred stock, convertible notes, and revenues from operations. As of December 31, 2013 and September 30, 2014, we had approximately $1.2 million and $0.7 million, respectively, in cash. In order to finance the continued growth in product sales, to invest in further product development and to otherwise satisfy obligations as they mature, we may need to seek additional financing through the issuance of common stock, preferred stock, convertible or non-convertible debt financing. Additional funding, however, may not be available to us on acceptable terms, or at all. If we are unable to access additional funds when needed, we will not be able to continue the development of our molecular diagnostic platform, our diagnostic tests or we could be required to delay, scale back or eliminate some or all of our development programs and other operations. Any additional equity financing, if available to us, may not be available on favorable terms, will most likely be dilutive to our current stockholders, and debt financing, if available, may involve restrictive covenants. Any of these events could harm our business, financial condition and prospects.

On October 8, 2014, the Company completed its IPO, whereby the Company sold and issued 1,150,000 shares of its common stock and 1,150,000 Series A Warrants, which were sold in combinations of one share of common stock and one Series A Warrant at a price of $7.00 per share. Each Series A Warrant is exercisable for one share of common stock and one Series B Warrant. In addition, the underwriter exercised its option to purchase an additional 172,500 Series A Warrants.  The shares began trading on the NASDAQ Capital Market on October 9, 2014. The aggregate net proceeds received by the Company from the offering were approximately $6.4 million, after deducting underwriting discounts and commissions and other estimated offering expenses payable by the Company.  

Our independent registered public accounting firm has included an explanatory paragraph relating to our ability to continue as a going concern in its report on our audited financial statements. We may be unable to continue to operate without the threat of liquidation for the foreseeable future unless we raise additional capital.

Summary Statement of Cash Flows for the Nine Months Ended September 30, 2013 and 2014

The following table summarizes our cash flows for the periods indicated:

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2014

 

 

2013

 

Cash used in operating activities

 

$

(8,151,208

)

 

$

(5,715,417

)

Cash provided by (used in) investing activities

 

 

833,220

 

 

 

(2,685,881

)

Cash provided by financing activities

 

 

6,783,036

 

 

 

7,817,349

 

Net decrease in cash

 

$

(534,952

)

 

$

(583,949

)

 

Cash Flows from Operating Activities

Cash used in operating activities for the nine months ended September 30, 2014 was $8,151,208. The net loss of $23,230,902 was partially offset by the non-cash items of $13,900,400 for the change in fair value of derivative liability, $855,484 for depreciation and amortization, $267,759 of stock-based compensation and $32,754 in all other non-cash items and increased by $23,297 in the net change in operating assets and liabilities. As of September 30, 2014, 72.5% of accounts receivable were less than 60 days old. Cash used in operating activities for the nine months ended September 30, 2013 was $5,715,417. The net loss of $6,750,136 was offset by the non-cash items of $549,629 for depreciation and amortization, $83,317 in stock-based compensation and $22,767 in a loss on sale of assets. The change in operating assets and liabilities offset the net loss by another $379,006 due to $415,182 in accrued liabilities relating mainly to payroll, interest and royalties, a $135,029 increase in accounts payable due to the growth in our operations and the timing of payments offset by a $171,205 increase in accounts receivable, inventories and prepaids and other assets. As of September 30, 2013, 84.9% of accounts receivable was less than 60 days old.

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Cash Flows from Investing Activities

Cash provided by investing activities was $833,220 for the nine months ended September 30, 2014 and was related to the proceeds of the analyzer sale-leaseback in the amount of $1,500,000 and the sale of a retired asset in the amount of $35,000. This was offset by the cost of the construction of our analyzer equipment totaling $479,196 and capital expenditures for equipment of $222,584. Cash used in investing activities was $2,685,881 for the nine months ended September 30, 2013 and was related to the cost of the construction of our analyzer equipment totaling $1,774,341, capital expenditures totaling $774,540, the acquisition of intangible assets totaling $200,000 and the proceeds from sale of assets of $63,000.

Cash Flows from Financing Activities

Cash provided by financing activities for the nine months ended September 30, 2014 of $6,783,036 was from the proceeds in the amount of $6,569,886 from the issuance of preferred stock as well as proceeds of $1,290,000 from notes and convertible notes payable offset by $1,076,850 in payments made on capital leases and notes payable. Cash provided by financing activities for the nine months ended September 30, 2013 of $7,817,349 was from the proceeds of $3,288,333 from subscriptions receivable and $4,577,688 from the issuance of convertible notes offset by $48,672 in payments made on capital leases and