10-Q 1 a06302013lpdx10q.htm 10-Q 06302013LPDX10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549






FORM 10-Q

þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2013
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-35792
LIPOSCIENCE, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
56-1879288
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)

2500 Sumner Boulevard, Raleigh, North Carolina
 
27616
(Address of principal executive offices)
 
(Zip Code)

(919) 212-1999
 (Registrant's telephone number, including area code)
         Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ     No o
    

        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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ     No o

         
        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 definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
 
 
 
 
 
 
Large accelerated filer o
 
Accelerated filer o
 
Non-accelerated filer  þ
 (Do not check if a
 smaller reporting company)
 
Smaller reporting company o
         Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No þ

        The number of outstanding shares of the registrant's common stock, par value $0.001 per share, as of the close of business on August 2, 2013 was 14,837,187.

1


LipoScience, Inc.

Form 10-Q
Table of Contents
 
 
Page
PART I - FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
          Notes to Financial Statements
 
 
 
 
 
 
 
 
 
 
PART II - OTHER INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



2


SPECIAL NOTE REGARDING FORWARD‑LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking statements in addition to historical information. We use words such as may,” “might,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “objective,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue” and “ongoing,” or any variations of these words or other words with similar meanings. All statements that address activities, events or developments that we intend, expect or believe may occur in the future are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward looking statements may relate to such matters as our industry, business strategy, goals and expectations concerning our future operations, performance or results, profitability, capital expenditures, liquidity and capital resources and other financial and operating information.

Our forward-looking statements contained in this Form 10-Q are based on management's current expectations and projections about future events and are subject to uncertainty and changes in circumstances. We cannot guarantee that the results and other expectations expressed, anticipated or implied in any forward-looking statement will be realized. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Although we believe that we have a reasonable basis for each forward-looking statement contained in this Form 10-Q, we caution you that these statements are based on a combination of facts and factors currently known by us and our expectations of the future, about which we cannot be certain. All statements other than statements of historical fact could be deemed forward-looking, including but not limited to statements about:

our expectation that, for the foreseeable future, substantially all of our revenues will be derived from the NMR LipoProfile test;

the future demand for our NMR LipoProfile test and future tests, if any, that we may develop;

the factors that we believe drive demand for our NMR LipoProfile test and our ability to sustain such demand;

the size of the market for our NMR LipoProfile test;

our plans for the Vantera system and our expectations about deploying it on-site in third-party clinical diagnostic laboratories;

the potential clearance by the FDA of our HDL-P test pursuant to our 510(k) premarket notification and the timing thereof;

the timing of our submissions of other non-cleared portions of our NMR LipoProfile test to the FDA for clearance;

the potential impact resulting from any regulation of our NMR LipoProfile test or future tests, if any, that we may develop, by the FDA or any other regulation of our business or any regulatory proceedings to which we may be subject from time to time;

our plans for pursuing coverage and reimbursement for our NMR LipoProfile test, and any changes in reimbursement affecting our business;

the ability of our NMR LipoProfile test to impact treatment decisions;

our plans for future diagnostic tests;

the capacity of our laboratory to process our NMR LipoProfile test;

our anticipated cash needs and our estimates regarding our capital requirements and our needs for additional financing; and

the anticipated trends and challenges in our business and the market in which we operate.

Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, our actual results may vary in material respects from those projected in these forward-looking statements. You should bear this in mind as you consider forward-looking statements.

Any forward-looking statement made by us in this Form 10-Q speaks only as of the date on which we make it. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. These factors are discussed elsewhere in this Form 10-Q, particularly under "Risk Factors," and in our other filings with the Securities and Exchange Commission (the "SEC") from time to time. While we may elect to update these forward-looking statements at some point in the future, we do not undertake, and we specifically disclaim, any obligation to update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by any applicable securities laws. You are advised, however, to consult any further disclosures we may make in our future reports to the SEC on our website, or otherwise.


3


PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
LipoScience, Inc.
Balance Sheets
(in thousands, except share and per share data)

 
June 30, 2013
 
December 31, 2012
 
(unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
54,246

 
$
24,768

Accounts receivable, net
6,849

 
5,149

Inventories
250

 
125

Prepaid expenses and other
875

 
719

     Total current assets
62,220

 
30,761

Property and equipment, net
12,125

 
11,493

Other noncurrent assets:
 
 
 
Restricted cash
501

 
1,505

Intangible assets, net of accumulated amortization of $156 and $147 at June 30, 2013 and December 31, 2012, respectively
739

 
637

Deferred financing costs
83

 
100

Deferred offering costs

 
3,151

Other assets
68

 
32

     Total other noncurrent assets
1,391

 
5,425

Total assets
$
75,736

 
$
47,679

Liabilities, redeemable convertible preferred stock and stockholders’ equity (deficit)
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
1,193

 
$
1,003

Accrued expenses
3,459

 
5,349

Revolving line of credit

 
5,000

Current maturities of long-term debt
2,411

 

     Total current liabilities
7,063

 
11,352

Long-term liabilities:
 
 
 
Long-term debt, less current maturities
13,349

 
15,708

Preferred stock warrant liability

 
412

Other long-term liabilities
2,536

 
2,462

Total liabilities
22,948

 
29,934

Redeemable Convertible Preferred Stock:
 
 
 
Series D, D-1, E and F Redeemable Convertible Preferred Stock, par value $.001; 15,216,336 shares designated and 11,205,672 issued and outstanding at December 31, 2012; aggregate liquidation preference of $51,695

 
57,301

     Total Redeemable Convertible Preferred Stock

 
57,301

Stockholders’ equity (deficit):
 
 
 
Series A, A-1, B, B-1, C and C-1 Convertible Preferred Stock, par value $.001; 3,428,677 shares designated and 1,687,010 shares issued and outstanding at December 31, 2012; aggregate liquidation preference of $7,472

 
1

Common stock, $.001 par value; 75,000,000 and 90,000,000 shares authorized at June 30, 2013 and December 31, 2012, respectively; 14,721,527 and 1,894,277 shares issued and outstanding at June 30, 2013 and December 31, 2012, respectively
15

 
2

Additional paid-in capital
106,058

 
8,434

Accumulated deficit
(53,285
)
 
(47,993
)
     Total stockholders’ equity (deficit)
52,788

 
(39,556
)
Total liabilities, redeemable convertible preferred stock and stockholders’ equity (deficit)
$
75,736

 
$
47,679

See accompanying notes to financial statements.

4


LipoScience, Inc.
Statements of Comprehensive (Loss) Income
(in thousands, except share and per share data)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
 
(unaudited)
Revenues
$
13,311

 
$
13,894

 
$
26,927

 
$
27,677

Cost of revenues
2,616

 
2,677

 
5,466

 
4,995

Gross profit
10,695

 
11,217

 
21,461

 
22,682

Operating expenses:
 
 
 
 
 
 
 
Research and development
3,118

 
2,738

 
6,250

 
4,885

Sales and marketing
6,802

 
5,273

 
13,461

 
10,838

General and administrative
2,770

 
2,804

 
6,077

 
5,054

Loss on disposal of long-lived assets

 
30

 

 
30

     Total operating expenses
12,690

 
10,845

 
25,788

 
20,807

(Loss) income from operations
(1,995
)
 
372

 
(4,327
)
 
1,875

Other expense:
 
 
 
 
 
 
 
Interest income
26

 
3

 
47

 
5

Interest expense
(468
)
 
(122
)
 
(998
)
 
(229
)
Other (expense) income
(7
)
 
16

 
(14
)
 
(113
)
     Total other expense
(449
)
 
(103
)
 
(965
)
 
(337
)
Net (loss) income
(2,444
)
 
269

 
(5,292
)
 
1,538

Undistributed earnings allocated to participating preferred stockholders

 
(215
)
 

 
(1,236
)
Net (loss) income attributable to common stockholders—basic
(2,444
)
 
54

 
(5,292
)
 
302

Undistributed earnings re-allocated to common stockholders

 
27

 

 
173

Net (loss) income attributable to common stockholders—diluted
$
(2,444
)
 
$
81

 
$
(5,292
)
 
$
475

Net (loss) income per share attributable to common stockholders—basic
$
(0.17
)
 
$
0.03

 
$
(0.36
)
 
$
0.18

Net (loss) income per share attributable to common stockholders—diluted
$
(0.17
)
 
$
0.03

 
$
(0.36
)
 
$
0.15

Weighted average shares used to compute basic net (loss) income per share attributable to common stockholders
14,670,779

 
1,703,485

 
14,670,779

 
1,703,485

Weighted average shares used to compute diluted net (loss) income per share attributable to common stockholders
14,670,779

 
2,957,904

 
14,670,779

 
3,119,432

Comprehensive (loss) income
(2,444
)
 
269

 
(5,292
)
 
1,538


See accompanying notes to financial statements.

5


LipoScience, Inc.
Statements of Cash Flows
(in thousands)
 
Six Months Ended June 30,
 
2013
 
2012
 
(unaudited)
Operating activities
 
 
 
Net (loss) income
$
(5,292
)
 
$
1,538

Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
 
 
 
Depreciation and amortization
775

 
679

Amortization of deferred financing costs
18

 

Amortization of debt discount
52

 

Stock-based compensation expense
552

 
617

Fair value remeasurement of preferred stock warrant liability
(2
)
 
105

Loss on disposal of long-lived assets

 
30

Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
(1,700
)
 
(1,230
)
Inventories
(125
)
 

Prepaid expenses and other
(156
)
 
42

Accounts payable, accrued expenses and other current liabilities
(1,057
)
 
(875
)
Other non-current assets
(36
)
 

Other long-term liabilities
126

 
571

Net cash (used in) provided by operating activities
(6,845
)
 
1,477

Investing activities
 
 
 
Purchases of property and equipment
(1,920
)
 
(2,983
)
Capitalized patent and trademark costs
(80
)
 
(35
)
Net cash used in investing activities
(2,000
)
 
(3,018
)
Financing activities
 
 
 
Payments on revolving line of credit
(5,000
)
 

Payments of Series F redeemable convertible preferred stock accrued dividends
(5,200
)
 

Payments on long-term debt

 
(1,000
)
Changes in restricted cash for operating lease
1,004

 
(1
)
Changes in deferred financing costs
(6
)
 

Deferred offering costs

 
(644
)
Issuance cost of common stock
(4,443
)
 

Proceeds from line of credit

 
3,500

Proceeds from issuance of common stock
51,750

 

Proceeds from exercise of stock options and warrants
218

 
36

Net cash provided by financing activities
38,323

 
1,891

Net increase in cash and cash equivalents
29,478

 
350

Cash and cash equivalents at beginning of period
24,768

 
12,483

Cash and cash equivalents at end of period
$
54,246

 
$
12,833

Supplemental disclosure of cash flow information
 
 
 
Cash paid for interest
$
708

 
$
185


See accompanying notes to financial statements.

6


LipoScience, Inc.
Notes to Financial Statements
June 30, 2013
(Unaudited)
1. Description of Business and Significant Accounting Policies
Description of Business
LipoScience, Inc. (“LipoScience” or the “Company”) was incorporated under the laws of North Carolina in June 1994 under the name LipoMed, Inc. and reincorporated under the laws of Delaware in June 2000. In January 2002, the Company changed its corporate name to LipoScience, Inc. The Company is an in vitro diagnostic company pioneering a new field of personalized diagnostics based on nuclear magnetic resonance (“NMR”) technology. The Company's first diagnostic test, the NMR LipoProfile test, is cleared by the U.S. Food and Drug Administration (the "FDA"), and directly measures the number of low density lipoprotein, (“LDL”) particles in a blood sample and provides physicians and their patients with actionable information to personalize management of risk for heart disease.
Basis of Presentation and Use of Estimates
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and include all adjustments necessary for the fair presentation of the Company's financial position, results of operations and cash flows for the periods presented. In preparing the financial statements, management must make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the financial statements and reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates and assumptions used.
Unaudited Financial Statements
The accompanying unaudited financial statements have been prepared in accordance with the rules and regulations for the United States Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete annual financial statements. These financial statements should be read in conjunction with the audited financial statements and the accompanying notes for the year ended December 31, 2012 contained in the Company's Annual Report on Form 10-K filed with the SEC on March 27, 2013 (the "Form 10-K"). The unaudited interim financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments (consisting of normal recurring adjustments) necessary to state fairly the Company's financial position as of June 30, 2013, the results of operations for the three and six months ended June 30, 2013 and 2012, and cash flows for the six months ended June 30, 2013 and 2012. The December 31, 2012 balance sheet included herein was derived from audited financial statements, but does not include all disclosures including notes required by GAAP for complete annual financial statements. The financial data and other information disclosed in these notes to the financial statements related to the three and six months ended June 30, 2013 and 2012 are unaudited. Interim results are not necessarily indicative of results to be expected for the year ending December 31, 2013 or any other interim period or for any other future year.
Reverse Stock Split
On January 4, 2013, the Company's Board of Directors approved a 0.485-for-1 reverse stock split of the Company's outstanding common stock. The reverse stock split was effected on January 10, 2013, which resulted in an adjustment to the preferred stock conversion price to reflect a proportional decrease in the number of shares of common stock to be issued upon conversion. The accompanying financial statements and notes to financial statements give retroactive effect to the reverse stock split for all periods presented.

7


Initial Public Offering
On January 30, 2013, the Company closed its initial public offering ("IPO") pursuant to a registration statement that was declared effective on January 24, 2013. The Company sold 5,750,000 shares of its common stock in the IPO, at a price to the public of $9.00 per share, for aggregate gross proceeds of $51.8 million, which included 750,000 shares of its common stock that the underwriters purchased pursuant to an over-allotment option granted to the underwriters. As a result of the IPO, the Company raised a total of $44.4 million in net proceeds after deducting underwriting discounts and commissions of approximately $3.4 million and offering costs of approximately $4.0 million. Costs directly associated with the IPO were capitalized and recorded as deferred offering costs prior to the closing of the IPO. These costs were recorded as a reduction of the IPO proceeds received in arriving at the amount to be recorded in additional paid-in capital. Upon the closing of the IPO, 12,892,682 shares of the Company's outstanding preferred stock automatically converted into a total of 6,994,559 shares of its common stock, and the then-outstanding preferred stock warrant liability was reclassified to additional paid-in capital upon the conversion of warrants to purchase preferred stock into warrants to purchase common stock.
Concurrently with the closing of the IPO, the Company paid $5.2 million to holders of its Series F redeemable convertible preferred stock in full satisfaction of accrued dividends on such shares immediately prior to their conversion to common stock.
Customers and Payors
The Company provides diagnostic tests to a broad range of customers. A majority of these tests are comprised of orders generated through clinical diagnostic laboratory customers and clinicians. The Company also receives requests from academic institutions as well as pharmaceutical companies. In most cases, the customer that orders the tests is not responsible for the payments for services. The Company considers a party that refers a test to it to be a “customer” and a party that reimburses the Company as a “payor.” Depending on the billing arrangement and applicable law, the payor may be (i) a clinical diagnostic laboratory, (ii) a third party responsible for providing health insurance coverage to patients, such as a health insurance plan or the traditional Medicare or Medicaid program, (iii) the physician or (iv) the patient or other party (such as academic institutions or pharmaceutical companies) who requested the test from the Company.
Revenue Recognition
The Company currently derives revenue from sales of its NMR LipoProfile test to clinical diagnostic laboratories and clinicians for use in patient care, from sales of ancillary tests for use in patient care requested in conjunction with the NMR LipoProfile test and from contract research arrangements.
Revenues from diagnostic tests for patient care, which consist of sales of the NMR LipoProfile test performed at the Company's laboratory facility and at third party clinical diagnostic laboratory facilities (see “The Vantera System Placement Arrangements” below) and sales of ancillary tests, are recognized on the accrual basis when the following revenue recognition criteria are met: (1) persuasive evidence that an arrangement exists; (2) services have been rendered or at the time final results are reported; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured. Testing services provided for patient care are covered by clinical diagnostic laboratories through negotiated contracts with commercial insurance carriers, programs with commercial insurance carriers (including managed care organizations) and various governmental programs, primarily Medicare.
Billings for diagnostic tests for patient care under governmental and physician-based programs are included in revenues net of contractual adjustments. These contractual adjustments represent the difference between the final settlement amount paid by the program and the estimated settlement amount based on either the list price for tests performed or the reimbursement rate set by commercial insurance carriers or governmental programs. Estimated contractual adjustments are updated either upon notification from payors as to changes in existing reimbursement rates, which are typically received prior to changes going into effect, or upon a material variance between the final settlement and the estimated contractual adjustment originally established when the revenues were recognized. To date, the Company's final settlement adjustments have not been material.
Revenues from contract research arrangements are generally derived from studies conducted by academic institutions and pharmaceutical companies. The specific methodology for revenue recognition is determined on a case-by-case basis according to the facts and circumstances applicable to a given agreement. The Company's output, measured in terms of full-time equivalent level of effort or processing a set of diagnostic tests under a contractual protocol, typically triggers payment obligations under these agreements. Revenues are recognized as costs are incurred or diagnostic tests are processed. Contract research costs include all direct material and labor costs, equipment costs and fringe benefits. Advance payments received in excess of revenues recognized are classified as deferred revenue until such time as the revenue recognition criteria have been met.

8


Billing for diagnostic testing services for patient care is complex. In most cases, tests are performed in advance of payment and without certainty as to the outcome of the billing process, which may negatively affect revenues, cash flow and profitability. Payments are received from a variety of payors, including clinical diagnostic laboratories, commercial insurance carriers (including managed care organizations), governmental payors (primarily Medicare) and individual patients. Each payor typically has different billing requirements, and the billing requirements of many payors have become increasingly stringent.
The Company generally assumes the financial risk related to collection, including the potential uncollectibility of accounts and the other complex factors identified above. For sales of its NMR LipoProfile test to clinical diagnostic laboratories, the clinical diagnostic laboratories are responsible for obtaining reimbursement from third-party payors or directly from patients. Delays in collection and uncollectible bills may negatively affect the Company's revenues, cash flow and profitability.
The Vantera System Placement Arrangements
The Company's automated clinical analyzer, the Vantera system, was cleared by the FDA in August 2012 and became commercially available in December 2012. The Company plans to selectively place the Vantera system on-site with national and regional clinical diagnostic laboratories as well as leading medical centers and hospital outreach laboratories. The Company's Vantera system placement arrangements are generally negotiated and accounted for as operating leases. The placement arrangements with third parties typically include the NMR LipoProfile test, the right to use the Vantera system, consumables and related maintenance, and support to process the NMR LipoProfile test at the clinical diagnostic laboratory's facilities for which the clinical diagnostic laboratory pays a negotiated price-per-reportable NMR LipoProfile test result. There is no fixed or minimum lease payment that the clinical diagnostic laboratory is obligated to make over the contract term. The Company's revenues are determined based on the test volume and the negotiated price-per-reportable result. Revenues under the Vantera system placement arrangements are allocated considering the relative selling prices of the lease and non-lease deliverables included in the operating lease arrangement. Lease deliverables include the right to use the Vantera system and related maintenance and support, while non-lease deliverables consist of the NMR LipoProfile test and consumables. Lease deliverables are accounted for in accordance with specific leasing guidance while non-lease deliverables are accounted for in accordance with the multiple-element arrangement guidance. The Company evaluates each non-lease deliverable to determine whether it represents a separate unit of accounting. A deliverable constitutes a separate unit of accounting when the delivered item has stand-alone value and delivery of the undelivered element is probable and within the Company's control. The Company has determined that both the NMR LipoProfile test and consumables have separate units of accounting.
The Company allocates revenue to each deliverable in the Vantera system placement arrangement based on a selling price hierarchy at the inception of the arrangement. The selling price for a deliverable is based on vendor-specific objective evidence of selling price (“VSOE”) if available, third-party evidence of selling price (“TPE”) if VSOE is not available, or estimated selling price (“ESP”) if neither VSOE nor TPE is available.
The Company has determined that only the selling price of its NMR LipoProfile test is based on VSOE. The Company does not sell the license to use the Vantera system, the consumables or related maintenance and support separately on a regular basis and therefore it does not have the evidence to support VSOE for these deliverables. Due to the high degree of customization involved with these deliverables, the Company has determined that there is no comparable TPE for these deliverables. Since these deliverables have neither VSOE nor TPE, the allocation of revenue to them has been based on ESP.
The Company's objective in determining ESP is to establish the price at which the Company would transact a sale if the deliverables were sold regularly on a stand-alone basis. The Company's process for determining ESP for its deliverables considers all reasonably available information including both market data and conditions, as well as entity specific factors that may vary depending upon the facts and circumstances related to each deliverable. The factors considered in developing ESP relating to deliverables include cost structures, established pricing and approval policies and customization of the product or service and industry pricing. The Company regularly reviews ESP and maintains internal controls over the establishment and updates of these estimates. The NMR LipoProfile test is the Company's most significant deliverable under these Vantera system placement arrangements. Once the selling price of each deliverable has been established, the Company allocates the negotiated price per reportable result among deliverables in the arrangement using the relative selling price method. Revenue allocated to each deliverable is then recognized when the basic revenue recognition criteria, as described above, is met for each deliverable.
Shipping and Handling
The Company does not bill its customers for shipping and handling charges. All charges relating to inbound and outbound freight costs are incurred by the Company and recorded within cost of revenues. The Company incurred shipping and handling costs of approximately $0.4 million for each of the three months ended June 30, 2013 and 2012, and approximately $0.8 million for each of the six months ended June 30, 2013 and 2012.

9


Fair Value of Financial Instruments
The Company measures certain financial assets and liabilities at fair value based on the price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. As of June 30, 2013 and December 31, 2012, the Company's financial instruments consisted principally of cash and cash equivalents, a revolving line of credit, long-term debt and preferred stock warrant liability. See Note 2, “Fair Value Measurement,” to the financial statements for further information on the fair value of the Company's financial instruments.
Cash and Cash Equivalents
The Company invests its available cash balances in cash, certificates of deposits and money market funds. The Company considers all highly liquid instruments purchased with original maturity of three months or less at the time of purchase to be cash equivalents. Cash equivalents are stated at cost and the carrying amounts approximate fair value. The Company maintains deposits in federally insured financial institutions in excess of federally insured limits. Management believes that the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held. Additionally, the Company has established guidelines regarding approved investments and maturities of investments, which are designed to maintain safety and liquidity. See Note 6 for a discussion of Restricted Cash.
 Accounts Receivable
Accounts receivable are primarily amounts due from clinical diagnostic laboratories, commercial insurance companies (including managed care organizations), governmental programs (primarily Medicare), physicians, and individual patients.
Accounts receivable are reported net of an allowance for uncollectible accounts and contractual allowance adjustments. The process of estimating the collection of accounts receivable involves significant assumptions and judgments. Specifically, the accounts receivable allowance is based on management's analysis of current and past due accounts, collection experience in relation to amounts billed, changes in reimbursement levels, known contract terms, channel mix, any specific customer collection issues that have been identified and other relevant information. The Company's provision for uncollectible accounts is recorded as bad debt expense and included in general and administrative expenses. Historically, the Company has not experienced significant credit loss related to its customers or payors. Although the Company believes amounts provided are adequate, the ultimate amounts of uncollectible accounts receivable could be in excess of the amounts provided.
Inventories
Inventories consist of materials and spare parts to service the Vantera system. Inventories are valued at the lower of cost or net realizable value. The cost of inventories is maintained using the average-cost method.
Property and Equipment
Property and equipment are stated at cost. Property and equipment financed under capital leases are initially recorded at the present value of minimum lease payments at the inception of the lease. Amortization of assets financed under capital leases is included with purchased property and equipment as part of depreciation and amortization.
Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Property and equipment under capital leases and leasehold improvements are amortized using the straight-line method over the shorter of the lease term or estimated useful life of the asset. Depreciable lives range from three to seven years for laboratory equipment, customer-use assets, office equipment and furniture and fixtures and three years for software.
Intangible Assets
Intangible assets include patent costs, trademark costs and technology licenses that are capitalized and amortized over estimated useful lives (generally nine to twenty years) using the straight-line method. Patent costs are expensed if the patent is not granted. On an ongoing basis, the Company assesses the recoverability of its intangible assets by determining its ability to generate undiscounted future cash flows sufficient to recover the unamortized balances over the remaining useful lives. Intangible assets determined to be unrecoverable are expensed in the period in which the determination is made.
Amortization expense on intangible assets was approximately $6,000 and $5,000 for the three months ended June 30, 2013 and 2012, respectively, and approximately $11,000 and $10,000 for the six months ended June 30, 2013 and 2012, respectively.

10


Impairment of Long-Lived Assets
The Company evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may be impaired and assesses their recoverability based upon anticipated future cash flows. If changes in circumstances lead the Company to believe that any of its long-lived assets may be impaired, the Company will (a) evaluate the extent to which the remaining book value of the asset is recoverable by comparing the future undiscounted cash flows estimated to be associated with the asset to the asset's carrying amount and (b) write-down the carrying amount to market value or discounted cash flow value to the extent necessary.
 Deferred Offering Costs
Deferred offering costs represent legal, accounting and other direct costs related to the Company's efforts to raise capital through the IPO. Costs related to the Company's IPO activities were deferred until the completion of the IPO, at which time they were reclassified to additional paid-in capital as a reduction of the IPO proceeds. Upon closing of the IPO, the approximately $3.2 million of deferred offering costs at December 31, 2012 were recorded as a reduction of the proceeds received.
Redeemable Convertible Preferred Stock
The Company had historically classified its redeemable convertible preferred stock, for which the Company did not control the redemption, outside of permanent equity. The Company had recorded redeemable convertible preferred stock at fair value upon issuance, net of any issuance costs or discounts, and the carrying value was increased by periodic accretion to its redemption value. These increases were effected through charges against additional paid-in capital. Upon closing of the IPO, all outstanding redeemable convertible preferred stock as well as convertible preferred stock was reclassified to additional paid-in capital. The notes to the Company's audited financial statements for the year ended December 31, 2012 included in its Annual Report on Form 10-K for that year, filed with the Securities and Exchange Commission on March 27, 2013, provide details regarding the various features of the redeemable convertible preferred stock.
Preferred Stock Warrant Liability
The Company had historically accounted for its freestanding warrants to purchase the Company's Series E and Series F Redeemable Convertible Preferred Stock as liabilities at fair value on the accompanying balance sheets. The warrants were subject to re-measurement at each balance sheet date, and the change in fair value, if any, was recognized as other income or expense. As a result of the IPO, all preferred stock warrant liability was reclassified to additional paid-in capital upon the conversion of warrants to purchase preferred stock into warrants to purchase common stock.
Concentration of Credit Risk and Other Risks
The Company derives its revenues from diagnostic testing services provided for patient care and contract research arrangements with institutional customers. The Company operates in one industry segment. Substantially all of the Company's historical revenues have been derived from the sale of the NMR LipoProfile test.
The Company's principal financial instruments subject to potential concentration of credit risk are cash equivalents and trade accounts receivable, which are unsecured. Through June 30, 2013, no material losses have been incurred.
Revenues from customers representing 10% or more of total revenues for the respective periods, are summarized as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Health Diagnostics Laboratory
34
%
 
32
%
 
34
%
 
30
%
LabCorp
30

 
29

 
30

 
29


11


The Company’s accounts receivable due from these significant customers as a percentage of total accounts receivable was as follows as of the dates indicated:
 
June 30, 2013
 
December 31, 2012
Health Diagnostics Laboratory
38
%
 
*

LabCorp
19

 
39
%
* Less than 10%.
The Company depends on a limited number of suppliers, including single-source suppliers, of various critical components used in its NMR analyzers. The loss of these suppliers, or their failure to supply the Company with the necessary components on a timely basis, could cause delays in the diagnostic testing process and adversely affect the Company.
Research and Development Expenses
Research and development expenses include all costs associated with the development of NMR technology products and are charged to expense as incurred. Research and development expenses include direct costs and an allocation of indirect costs, including amortization, depreciation, telephone, rent, supplies, insurance and repairs and maintenance.
Financing Costs
The Company capitalizes direct financing costs, which are included as other non-current assets on the Company's balance sheets. The Company accretes debt discounts, which are included as a direct deduction from the face amount of the financing. Debt financing costs and debt discounts are deferred and amortized to interest expense using the effective interest method over the life of the related debt. The related expense is included in interest expense in the Company's statements of comprehensive (loss) income.
Income Taxes
The Company accounts for income taxes under the asset and liability method, which requires, among other things, that deferred income taxes be provided for temporary differences between the tax basis of the Company's assets and liabilities and their financial statement reported amounts. In addition, deferred tax assets are recorded for the future benefit of utilizing net operating losses and research and development credit carryforwards. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized.
The Company has adopted the accounting guidance for uncertainties in income taxes, which proscribes a recognition threshold and measurement process for recording uncertain tax positions taken, or expected to be taken, in a tax return in the financial statements. Additionally, the guidance also proscribes a new treatment for the derecognition, classification, accounting in interim periods and disclosure requirements for uncertain tax positions. The Company accrues for the estimated amount of taxes for uncertain tax positions if it is more likely than not that the Company would be required to pay such additional taxes. An uncertain tax position will not be recognized if it has less than a 50% likelihood of being sustained. As of the date of adoption of this guidance, the Company did not have any accrued interest or penalties associated with any unrecognized tax positions, and there were no such interest or penalties recognized during the three and six months ended June 30, 2013 and 2012.
Advertising
Advertising costs, which are included in sales and marketing expenses, are expensed as incurred. Advertising expense was $0.3 million and $0.1 million for the three months ended June 30, 2013 and 2012, respectively, and $0.5 million and $0.3 million for the six months ended June 30, 2013 and 2012, respectively.
Stock-Based Compensation
The Company accounts for stock-based compensation arrangements with employees and non-employee directors using a fair value method that requires the recognition of compensation expense for costs related to all stock-based payments, including stock options and restricted stock units. The fair value method requires the Company to estimate the fair value of stock options on the date of grant using an option pricing model. The fair value of restricted stock units is estimated based on the closing price of the Company's stock on the date of grant, and for the purposes of expense recognition, the total new number of shares expected to vest is adjusted for estimated forfeitures.

12


Stock-based compensation costs for stock options are based on the fair value of the underlying option calculated using the Black-Scholes option-pricing model on the date of grant for stock options and recognized as expense on a straight-line basis over the requisite service period, which is the vesting period. Determining the appropriate fair value model and related assumptions requires judgment, including estimating stock price volatility, forfeiture rates and expected term. The expected volatility rates are estimated based on the actual volatility of comparable public companies over the expected term. The expected term represents the average time that options are expected to be outstanding based on the mid-point between the vesting date and the end of the contractual term of the award. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company has not paid dividends and does not anticipate paying a cash dividend in the foreseeable future and, accordingly, uses an expected dividend yield of zero. The risk-free interest rate is based on the rate of U.S. Treasury securities with maturities consistent with the estimated expected term of the awards. The measurement of nonemployee share-based compensation is subject to periodic adjustments as the underlying equity instruments vest and is recognized as an expense over the period over which services are received.
 Segment Reporting
The Company operates in one operating segment. The Company's chief operating decision maker (the “CODM”), its chief executive officer, manages the Company's operations on an integrated basis for purposes of allocating resources. When evaluating the Company's financial performance, the CODM reviews separate revenue information for the Company's patient care testing and its research services, while all other financial information is reviewed on a combined basis. All of the Company's principal operations and decision-making functions are located in the United States. Accordingly, the Company has determined that it has a single reporting segment.
Off-Balance Sheet Arrangements
Through June 30, 2013, the Company has not entered into any off-balance sheet arrangements, other than the operating leases described in Note 14, and does not have any holdings in variable interest entities.
Recent Accounting Pronouncements
In October 2012, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2012-04, Technical Corrections and Improvements. The amendments in this update cover a wide range of topics in the Accounting Standards Codification. These amendments include technical corrections and improvements to the Accounting Standards Codification and conforming amendments related to fair value measurements. For public companies, the amendments that are subject to the transition guidance were effective for reporting periods beginning after December 15, 2012. Accordingly, the Company adopted this update on January 1, 2013. Adoption of this new guidance had no material impact on the Company's financial statements.
In February 2013, the FASB issued ASU No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The amendments in this update are intended to improve the reporting of reclassifications out of accumulated other comprehensive income by requiring an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required to be reclassified in its entirety to net income. For other amounts that are not required to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required that provide additional detail about those amounts. This would be the case when a portion of the amount reclassified out of accumulated other comprehensive income is reclassified to a balance sheet account instead of directly to income or expense in the same reporting period.   For public companies, the amendments that are subject to this update were effective for interim and annual reporting periods beginning after December 15, 2012. Accordingly, the Company adopted this update on January 1, 2013. Adoption of this new guidance had no material impact on the Company's financial statements.

13


2. Fair Value Measurement
As a basis for determining the fair value of certain of the Company's financial instruments, the Company utilizes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level I - Observable inputs such as quoted prices in active markets for identical assets or liabilities.
Level II - Observable inputs, other than Level I prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level III - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. The Company did not elect to report any of its non-financial assets or non-financial liabilities at fair value.
The fair value of the Company's revolving line of credit and long-term debt were estimated using the discounted cash flow method, which is based on the future expected cash flows, discounted to their present values, using a discount rate that approximates market rates. The carrying value of the Company's revolving line of credit and long-term debt as of June 30, 2013 and December 31, 2012 approximated fair value because the interest rates under those obligations approximate market rates of interest available to the Company for similar instruments.
Recurring Fair Value Measurements
The Company's financial instruments that are measured at fair value on a recurring basis consist only of cash equivalents and the preferred stock warrant liability prior to the completion of the IPO. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company's assessment of the significance of a particular input to the entire fair value measurement requires management to make judgments and consider factors specific to the asset or liability.
Cash equivalents
All of the Company's cash equivalents, which include certificates of deposits and money market funds, are classified within Level I of the fair value hierarchy because they are valued using quoted market prices.
Preferred stock warrant liability
The fair value determination of the Company's preferred stock warrant liability had historically required a number of assumptions, including significant unobservable inputs that reflect the Company's own assumptions about the assumptions a market participant would use in valuing the liability, and therefore was classified within Level III of the fair value hierarchy. The significant unobservable inputs used in the fair value measurement of the Company's preferred stock warrant liability were (i) probability weighting of potential liquidity event outcomes, (ii) the implied value of the underlying preferred shares derived in the IPO scenario and (iii) the weighted average cost of capital (“WACC”). Significant increases (decreases) in the probability weighting of potential liquidity event outcomes and the implied value of the underlying preferred stock in isolation would historically resulted in a significantly higher (lower) fair value measurement. Conversely, significant increases (decreases) in the anticipated timing of a liquidity event and WACC inputs in isolation would historically resulted in a significantly lower (higher) fair value measurement.

14


The following table sets forth the Company's financial instruments that were measured at fair value as of June 30, 2013 and December 31, 2012 by level within the fair value hierarchy (in thousands):
 
June 30, 2013
 
December 31, 2012
 
Level I
 
Level III
 
Total
 
Level I
 
Level III
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposits
$

 
$

 
$

 
$
5,253

 
$

 
$
5,253

Money market funds
501

 

 
501

 
21,016

 

 
21,016

Total assets measured at fair value
$
501

 
$

 
$
501

 
$
26,269

 
$

 
$
26,269

Liabilities
 
 
 
 
 
 
 
 
 
 
 
Preferred stock warrant liability
$

 
$

 
$

 
$

 
$
412

 
$
412

Total liabilities measured
at fair value
$

 
$

 
$

 
$

 
$
412

 
$
412

The change in the fair value of the Level III preferred stock warrant liability is summarized below (in thousands):
 
Six Months Ended June 30,
 
2013
 
2012
Fair value at beginning of period
$
412

 
$
229

Reclassification to additional paid in capital upon the IPO
(410
)
 

Change in fair value recorded in other expense
(2
)
 
105

Fair value at end of period
$

 
$
334

For the six months ended June 30, 2013, there were no transfers between Level I and Level II within the fair value hierarchy.
3. Cash and Cash Equivalents
Cash and cash equivalents consist of the following as of (in thousands):
 
June 30, 2013
 
December 31, 2012
Cash
$
54,246

 
$
4

Certificates of deposit

 
5,253

Money market funds

 
19,511

Total cash and cash equivalents
$
54,246

 
$
24,768

The Company has an arrangement with its primary bank that excess cash balances are transferred daily to an overnight sweep deposits account. At June 30, 2013, the balance in the overnight sweep deposits account totaling $4.9 million was invested in bank deposits which are classified as cash on the Company's balance sheet. At December 31, 2012, the balance in the overnight sweep deposits account totaling $19.5 million was invested in shares of a money market fund.

15


4. Accounts Receivable and Revenues
Accounts receivable, net, consists of the following as of (in thousands):
 
June 30, 2013
 
December 31, 2012
Accounts receivable
$
8,048

 
$
6,526

Less allowance for uncollectible accounts receivable
(1,199
)
 
(1,377
)
Accounts receivable, net
$
6,849

 
$
5,149

Activity for the allowance for uncollectible accounts receivable is as follows (in thousands):
 
Six Months Ended June 30, 2013
 
Year Ended December 31, 2012
Balance at beginning of period
$
1,377

 
$
1,676

Provision for bad debt expense
212

 
818

Write-off, net of recoveries
(390
)
 
(1,117
)
Balance at end of period
$
1,199

 
$
1,377

Revenues consist of the following (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Gross billings
$
13,626

 
$
14,386

 
$
27,599

 
$
28,707

Less contractual adjustments
(315
)
 
(492
)
 
(672
)
 
(1,030
)
Revenues
$
13,311

 
$
13,894

 
$
26,927

 
$
27,677


5. Property and Equipment
Property and equipment consists of the following as of (in thousands):
 
June 30, 2013
 
December 31, 2012
Laboratory equipment
$
9,605

 
$
9,415

Office equipment, furniture and fixtures
3,575

 
3,497

Leasehold improvements
3,165

 
2,652

Software
1,901

 
1,793

Customer-use assets
328

 

Construction in progress
5,745

 
5,778

 
24,319

 
23,135

Less accumulated depreciation
(12,194
)
 
(11,642
)
Property and equipment, net
$
12,125

 
$
11,493

Customer-use assets represent the Company's Vantera system placed at customer sites, to which title and risk of loss is retained by the Company, for the customer's use in performing the NMR LipoProfile tests sold by the Company.

Depreciation expense was $0.4 million and $0.5 million for the three months ended June 30, 2013 and 2012, respectively, and was $0.8 million and $0.6 million for the six months ended June 30, 2013 and 2012, respectively. There were no disposals of fixed assets for the three months ended June 30, 2013, and for the six months ended June 30, 2013, the Company retired $0.2 million of fully depreciated assets. The Company disposed of $30,000 of damaged assets during the three and six months ended June 30, 2012.

16


6. Restricted Cash
As of June 30, 2013 and December 31, 2012, money market funds totaling $0.5 million and $1.5 million, respectively, were pledged as security for the Company's office and laboratory space operating lease. These funds may be released by the bank upon the achievement of minimum sales and cash flow levels and upon the satisfaction of specified financial ratios.
7. Accrued Expenses
Accrued expenses consist of the following as of (in thousands):
 
June 30, 2013
 
December 31, 2012
Accrued wages and benefits
$
1,451

 
$
1,541

Accrued bonus
800

 
2,200

Other accrued liabilities
1,208

 
1,608

Total accrued expenses
$
3,459

 
$
5,349

8. Long-Term Debt and Line of Credit
The Company had total debt with a carrying value of $15.8 million and $15.7 million as of June 30, 2013 and December 31, 2012, respectively. Long-term debt consists of the following (in thousands):
 
June 30, 2013
 
December 31, 2012
Long-term debt to financial institutions
$
16,000

 
$
16,000

Less unamortized debt discount
(240
)
 
(292
)
Less current maturities of long-term debt
(2,411
)
 

Long-term debt, less current maturities and unamortized debt discount
$
13,349

 
$
15,708

Credit Facility
On December 20, 2012, the Company entered into a credit facility with Square 1 and Oxford Finance and repaid the outstanding balance under a previous facility. The current facility consists of $16.0 million in term loans and a revolving line of credit of up to $6.0 million in borrowing capacity, subject to certain limitations relating to the Company's eligible accounts receivable. In connection with entering into the current credit facility, the Company issued warrants to these financial institutions to purchase an aggregate of 73,564 shares of Series E redeemable convertible preferred stock at an exercise price of $4.35 per share. The Company determined the fair value of the warrants at issuance to be approximately $0.2 million. In connection with the IPO, the warrants converted into warrants to purchase common stock (see Note 10, "Preferred Stock Warrant Liability"). At June 30, 2013, total unamortized debt issuance costs incurred in connection with this new credit facility were $83,000.
The term loans carry interest at a fixed annual rate of 9.5% and are payable in monthly installments of interest only through January 2014 and then principal and interest thereafter in monthly installments through July 2016. Advances under the revolving line of credit, which matures in December 2013, carry a variable interest rate equal to the greater of 6.25% or the institution's prime rate plus 3.0%.
As of December 31, 2012, the Company had borrowed $5.0 million under the revolving line of credit. During the three months ended March 31, 2013, the Company paid off outstanding balances under the revolving line of credit and there was no amount outstanding as of June 30, 2013.
Borrowings under the credit facility are secured by substantially all of the Company's tangible assets. The covenants set forth in the loan and security agreement require, among other things, that the Company maintain a specified liquidity ratio, measured monthly, that begins at 1.25 and is reduced to 1.0 over the term of the credit facility. The Company is also required to achieve minimum three-month trailing revenue levels relative to projections approved by the Company's Board of Directors, and such three-month trailing revenue levels must also be equal to or greater than the revenues for the same period for the prior year.

17


In June 2013, the Company discovered that it failed to comply with the minimum three-month trailing revenue levels against prior period covenant set forth in the agreement for the measuring periods from March 2013 to May 2013. On June 11, 2013, the Company entered into the first amendment to the agreement to waive the noncompliance with this covenant for the measuring periods described above, and to eliminate the necessity of complying with this financial covenant through the end of 2013. As of June 30, 2013 and December 31, 2012, the Company was in compliance with all financial and non-financial covenants under this credit facility, as modified.

9. Net (Loss) Income Per Share
Net (Loss) Income Per Share
The Company computes basic net (loss) income per share by dividing net (loss) income by the weighted average number of shares of common stock outstanding for the period, without consideration for common share equivalents. Diluted net (loss) income per share is computed on the basis of the weighted average number of shares of common stock plus dilutive potential common share equivalents during the period, consisting of incremental common shares deemed outstanding from the assumed exercise of common stock options, warrants and restricted stock units. The dilutive effect of common share equivalents is reflected in diluted earnings per shares by application of treasury stock method. Under the treasury stock method, earnings per share data is computed as if the common share equivalents were outstanding at the beginning of the period (or at the time of issuance, if later) and as if the funds obtained from exercise of the common share equivalents were used to purchase common stock at the average market price during the period.
Prior to the IPO, the Company computed net (loss) income per share in accordance with the accounting guidance regarding the computation of earnings or net loss per share by companies that have issued securities other than common stock that contractually entitle the holder to participate in earnings and dividends. Basic net (loss) income per share was computed by dividing net (loss) income allocable to common stockholders, which was net (loss) income after deduction of any required returns to preferred stockholders prior to paying dividends to the common stock and assuming current income for the period had been distributed based on the respective rights of the common and preferred stockholders to receive dividends, by the weighted average number of shares of common stock outstanding during the period. Diluted net (loss) income per share was computed on the basis of the weighted average number of shares of common stock plus dilutive potential common shares outstanding during the period. Since the Company's participating preferred stock was not contractually required to share in the Company's losses, in applying the two-class method to compute basic net (loss) income per share, no allocation was made to preferred stock if a net loss existed.
Because of their anti-dilutive effect, the following common stock equivalents, consisting of convertible preferred shares, redeemable convertible preferred shares, common stock options, warrants and restricted stock units, have been excluded from the diluted loss per share calculations for the respective periods presented:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Anti-Dilutive Common Share Equivalents:
2013
 
2012
 
2013
 
2012
Convertible Preferred Stock (Series A, A-1, B, B-1, C, and C-1)

 
1,222,211

 

 
1,222,211

Redeemable Convertible Preferred Stock (Series D, D-1, E and F)

 
5,763,606

 

 
5,763,606

Common Stock Options and Warrants
2,329,988

 
204,426

 
2,329,988

 
225,341

Restricted Stock Units
56,398

 

 
56,398

 

 
2,386,386

 
7,190,243

 
2,386,386

 
7,211,158


18


A reconciliation of the numerator and denominator used in the computation of basic and diluted net (loss) income per share allocable to common stockholders follows (in thousands, except share and per share data):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Historical net (loss) income per share:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Net (loss) income
$
(2,444
)
 
$
269

 
$
(5,292
)
 
$
1,538

Less: Undistributed earnings allocated to participating preferred shares

 
(215
)
 

 
(1,236
)
Net (loss) income attributable to common stockholders – basic
(2,444
)
 
54

 
(5,292
)
 
302

Add: Undistributed earnings re-allocated to common stockholders

 
27

 

 
173

Net (loss) income attributable to common stockholders – diluted
$
(2,444
)
 
$
81

 
$
(5,292
)
 
$
475

Denominator:
 
 
 
 
 
 
 
Weighted average common shares outstanding – basic
14,670,779

 
1,703,485

 
14,670,779

 
1,703,485

Dilutive effect of common stock equivalent shares resulting from common stock options and warrants

 
1,254,419

 

 
1,415,947

Weighted average common shares outstanding – diluted
14,670,779

 
2,957,904

 
14,670,779

 
3,119,432

Net (loss) income per common share:
 
 
 
 
 
 
 
Net (loss) income per share attributable to common stockholders – basic
$
(0.17
)
 
$
0.03

 
$
(0.36
)
 
$
0.18

Net (loss) income per share attributable to common stockholders – diluted
$
(0.17
)
 
$
0.03

 
$
(0.36
)
 
$
0.15

10. Equity Transactions and Share-Based Compensation
Preferred Stock Warrant Liability
Prior to the IPO, the Company accounted for its freestanding warrants to purchase the Company's Series E and Series F Redeemable Convertible Preferred Stock as liabilities at fair value on its balance sheets. The warrants were subject to re-measurement at each balance sheet date, and the change in fair value, if any, was recognized as other expense. The Company estimated the fair value of these warrants at the respective balance sheet dates using the Black-Scholes option pricing model. The estimated fair value of the Company, calculated at each valuation date, was allocated to the shares of redeemable convertible preferred stock, convertible preferred stock, warrants to purchase shares of redeemable convertible preferred stock, and common stock, using a “hybrid” approach of the probability-weighted expected return method and the option pricing model. This approach treats the various components of the Company's capital structure as a series of call options on the proceeds expected from the sale of the Company or the liquidation of the Company's assets in the future. This approach defines the securities' fair values as functions of the current fair value of the Company and assumptions based on the securities' rights and preferences. These call options were then valued using the Black-Scholes option pricing model. As a result, the option-pricing model requires a number of assumptions to estimate the fair value including the anticipated timing of a potential liquidity event, such as an initial public offering, remaining contractual terms of the warrant, risk-free interest rates, expected dividend yield and the estimated volatility of the price of the underlying securities. The anticipated timing of a liquidity event utilized in these valuations was based on then current plans and estimates of the Company's board of directors and management regarding the IPO. These assumptions were highly judgmental.
The fair values of outstanding Series E and Series F Redeemable Convertible Preferred Stock warrants were estimated using the Black-Scholes option-pricing model with the following assumptions as of:
 
 
December 31, 2012
Expected term (in years)
 
0.25-0.5

Risk-free interest rate
 
0.0%-0.1%

Expected volatility
 
30
%
Expected dividend rate
 
0
%
The Company adjusted the liability for changes in fair value until the earlier of (i) exercise of the warrants, (ii) conversion of the warrants into warrants to purchase common stock upon an event such as the completion of the IPO or (iii) expiration of the warrants. Upon the completion of the IPO in January 2013, all warrants to purchase redeemable convertible preferred stock were converted into warrants to purchase common stock, and the preferred stock warrant liability was reclassified into additional paid-in capital at its then fair value of $0.4 million.

19


Common Stock Warrants
As of June 30, 2013, the following warrants to purchase common stock were outstanding:
Issuance Date
 
 
Number of Shares
 
Exercise Price
 
Expiration Date
12/13/2006
 
 
6,689

 
$
8.97

 
12/13/2013
2/7/2008
 
 
36,375

 
8.97

 
2/7/2015
3/31/2011
 
 
6,689

 
8.97

 
3/31/2018
12/20/2012
 
 
35,677

 
8.97

 
12/20/2022
Equity Incentive Plans
On September 12, 1997, the Company's Board of Directors adopted the Stock Option Plan (the "1997 Plan") to create an additional incentive for key employees, directors and consultants or advisors of the Company. Both incentive stock options, which meet the requirements of Section 422 of the Internal Revenue Code, and nonqualified stock options, could be granted under the 1997 Plan. The exercise price of all options was determined by the Board of Directors, provided that such price for incentive stock options was not to be less than the estimated fair market value of the Company’s stock on the date of grant. The options vest based on terms in the stock option agreements (generally over four years) and are exercisable after they have been granted for up to ten years from the date of grant. The 1997 Plan expired on September 12, 2007.
On October 25, 2007, the Company's Board of Directors adopted the 2007 Stock Incentive Plan (the "2007 Plan") to replace the expired 1997 Plan. The terms of the 2007 Plan are consistent with those of the 1997 Plan. On May 24, 2012, the Company's Board of Directors adopted, and stockholders subsequently approved, the 2012 Equity Incentive Plan (the "2012 Plan"). The 2012 Plan became effective immediately upon the completion of the IPO in January 2013, and no further shares may be issued under the 2007 Plan. The 2012 Plan will terminate on May 24, 2022, unless sooner terminated by the Company's Board of Directors.
Restricted Stock Units
During the six months ended June 30, 2013, the Company's Board of Directors approved and granted restricted stock units ("RSUs") to certain of the Company's employees and directors as follows:
Issuance Date
 
Number of Shares
 
Weighted-Average Grant-Date Fair Value (per Share)
3/1/2013
 
53,286

 
$
9.65

6/12/2013
 
9,277

 
$
6.68

Each RSU represents the contingent right to receive one share of common stock of the Company. The RSUs granted to the Company's employees vest 100% on the three-year anniversary of the grant date. The RSUs granted to non-employee directors typically vest quarterly over a one-year period from the date of grant. The fair value of RSUs is estimated based on the closing price of the underlying common stock on the date of grant. For the purposes of expense recognition, the total number of shares expected to vest is adjusted for estimated forfeitures and the expense is recognized on a straight-line basis over the requisite service period. As of June 30, 2013, there was $0.4 million of unrecognized compensation expense, net of estimated forfeitures, related to unvested RSUs, which is expected to be recognized over a weighted-average period of 2.4 years.

20


Stock Options
During the six months ended June 30, 2013, the Company issued approximately 83,000 shares of outstanding common stock upon the exercise of stock options, with a weighted average exercise price of $2.64 a share. During the six months ended June 30, 2013, the Board of Directors authorized and granted common stock options from the 2012 Plan to employees and directors as follows:
Issuance Date
 
 
Number of Shares
 
Exercise Price
 
Weighted-Average Grant-Date Fair Value (per Share)
3/1/2013
 
 
296,419

 
$
9.65

 
$
4.31

6/12/2013
 
 
55,685

 
$
6.68

 
$
2.82

The Company estimates the fair value of its stock options on the grant date using the Black-Scholes option pricing model. The fair value of both employee and non-employee director options is then amortized on a straight-line basis over the requisite service period of the awards. The exercise prices of all stock options granted was equal to the closing market price of the underlying common stock on the grant date. The weighted average assumptions used in the Black-Scholes valuation model for equity awards granted for the six months ended June 30, 2013 and 2012 are shown in the table below. As of June 30, 2013, there was $2.2 million of unrecognized compensation expense, net of estimated forfeitures, related to non-vested stock options, which is expected to be recognized over a weighted-average period of 2.7 years.
The Company determined the options' life based upon the use of the simplified method. As a newly public company, sufficient history to estimate the volatility and dividend yield of the Company's common stock is not available. The Company elected to utilize a peer group of comparable companies as a basis for the expected volatility assumption and dividend yield. The Company intends to continue to consistently apply this process using the peer group of comparable companies until a sufficient amount of historical information becomes available. The risk-free interest rate is based upon the yield of an applicable U.S. Treasury instrument.
The fair value of these stock options was estimated using the following weighted average assumptions:
 
Six Months Ended June 30,
 
2013
 
2012
Expected dividend yield
0.0
%
 
0.0
%
Risk-free interest rate
1.1
%
 
0.9
%
Expected volatility
46.0
%
 
51.4
%
Expected life (in years)
6.0

 
5.5

The Company recognized non-cash stock-based compensation expense, for both RSUs and stock options, to employees in its research and development, sales and marketing and general and administrative functions as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Cost of revenues
$
11

 
$
24

 
$
18

 
$
27

Research and development
138

 
228

 
240

 
270

Sales and marketing
47

 
110

 
90

 
154

General and administrative
105

 
109

 
204

 
166

Total:
$
301

 
$
471

 
$
552

 
$
617


21


The following table summarizes information about stock options outstanding as of June 30, 2013:
 
Total Options Outstanding
 
Options Exercisable
Range of
Exercise Prices
Number
of
Options
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Life in Years
 
Number
of
Options
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Life in Years
$1.87 – $2.49
746,813
 
$2.44
 
 
 
746,609
 
$2.44
 
 
$3.88 – $4.23
262,340
 
3.92
 
 
 
262,340
 
3.92
 
 
$5.15
53,573
 
5.15
 
 
 
53,573
 
5.15
 
 
$5.63
219,270
 
5.63
 
 
 
200,030
 
5.63
 
 
$6.68 - $6.89
212,984
 
6.83
 
 
 
122,116
 
6.89
 
 
$9.01
91,928
 
9.01
 
 
 
52,371
 
9.01
 
 
$9.65
270,010
 
9.65
 
 
 
17,445
 
9.65
 
 
$9.84
44,018
 
9.84
 
 
 
27,946
 
9.84
 
 
$11.11
29,100
 
11.11
 
 
 
20,202
 
11.11
 
 
$11.44
231,296
 
11.44
 
 
 
132,358
 
11.44
 
 
$12.80
83,226
 
12.80
 
 
 
31,216
 
12.80
 
 
 
2,244,558
 
6.11
 
6.5
 
1,666,206
 
4.89
 
5.5
11. Related-Party Transactions
On May 12, 1997, the Company entered into a license agreement with North Carolina State University ("North Carolina State"). Under the terms of the agreement, North Carolina State granted the Company an exclusive, worldwide license, including patent rights, to technology related to measuring lipoprotein levels using NMR spectroscopy. The Company paid an initial license fee and made a commitment to fund future collaborative research for $25,000. The Company is required to pay certain royalties based on net sales, subject to a minimum annual royalty. The agreement also requires the Company to commercialize the patent rights. The agreement shall remain in effect until the expiration of the last-to-expire patent covered by the agreement. Dr. James Otvos, the Chief Scientific Officer, and a principal stockholder, of the Company, is an Adjunct Professor of Biochemistry at North Carolina State. There was $2,500 in accrued license royalties due to North Carolina State as of June 30, 2013. As of December 31, 2012, the accrued license royalties due to North Carolina State totaled approximately $5,000.
12. Income Taxes
The Company computes its provision for income taxes by applying the estimated annual effective tax rate, adjusted for any material items. For each of the six months ended June 30, 2013 and 2012, no provision or benefits for income taxes have been recorded. The Company has recorded a full valuation allowance against its net deferred tax assets based on the Company's assessment regarding the realizability of these net deferred tax assets in future periods. The Company also does not anticipate being subject to the alternative minimum tax due to the available exemptions such as research and development credit carryforwards. At June 30, 2013, the Company had no unrecognized tax benefits that would affect the Company's effective tax rate. The Company's effective tax rate for each of the six months ended June 30, 2013 and 2012 was 0%.
13. Employee Benefit Plan
The Company has adopted a defined contribution plan (the "Employee Benefit Plan") that qualifies under Section 401(k) of the Internal Revenue Code. All employees of the Company who have attained 21 years of age are eligible for participation in the Employee Benefit Plan after thirty days of employment.

22


Under the Employee Benefit Plan, participating employees may defer up to the Internal Revenue Service annual contribution limit. On July 1, 2012, the Company increased its employer match from 25% to 50% of the first 6% that an eligible participant contributes each year. The Company paid $0.1 million and $60,000 during the three months ended June 30, 2013 and 2012, respectively, and $0.3 million and $0.1 million during the six months ended June 30, 2013 and 2012, respectively, in employer match contributions to the Employee Benefit Plan.
14. Commitments and Contingencies
Leases
The Company leases an aggregate of approximately 83,000 square feet of office and laboratory space under a lease agreement that expires on September 30, 2022. In connection with the lease, the Company obtained a $1.5 million letter of credit secured by restricted cash (see Note 6). In June 2013, the required amount for the letter of credit secured by restricted cash was reduced to $0.5 million.
The Company also leases office equipment and software licenses through operating leases.
Rent expense is calculated on a straight-line basis over the term of the lease. The Company incurred rent expense of $0.2 million during each of the three months ended June 30, 2013 and 2012, and $0.5 million and $0.6 million for the six months ended June 30, 2013 and 2012, respectively.
Property and equipment includes the following amounts financed under capital leases as of (in thousands):
 
June 30, 2013
 
December 31, 2012
Office equipment
$
182

 
$
182

Less accumulated depreciation
(182
)
 
(182
)
Property and equipment under capital leases, net
$

 
$

Purchase Obligations
The Company has outstanding purchase obligations relating to the purchase of hardware components from third-party manufacturers for the Vantera system in the amount of $5.1 million as of June 30, 2013.
Legal Contingencies
The Company is subject to claims and assessments from time to time in the ordinary course of business. The Company's management does not believe that any such matters, individually or in the aggregate, will have a material adverse effect on the Company's business, financial condition, results of operations or cash flows.
Indemnification
In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties and provide for general indemnification. The Company's exposure under these agreements is unknown because it involves claims that may be made against the Company in the future, but that have not yet been made. To date, the Company has not paid any claims or been required to defend any action related to its indemnification obligations. The Company may, however, record charges in the future as a result of these indemnification obligations.
In accordance with its Certificate of Incorporation and Bylaws, the Company has indemnification obligations to its directors, and has the authority to indemnify its officers and employees, for certain events or occurrences, subject to certain limits, while they are serving at the Company's request in such capacity. There have been no claims to date, and the Company has director and officer insurance that enables it to recover a portion of any amounts paid for future potential claims.
In addition to the indemnification provided for in its Certificate of Incorporation and Bylaws, the Company has also entered into separate indemnification agreements with each of its directors, which agreements provide such directors with indemnification rights under certain circumstances.

23


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following management's discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited financial statements and related notes that appear elsewhere in this Quarterly Report on Form 10-Q and with our audited financial statements and related notes for the fiscal year ended December 31, 2012 appearing in our Annual Report on Form 10-K filed with the SEC on March 27, 2013.
Overview
We are an in vitro diagnostic company pioneering a new field of personalized diagnostics based on nuclear magnetic resonance, or NMR, technology. Our first diagnostic test, the NMR LipoProfile test, directly measures the number of low density lipoprotein, or LDL, particles in a blood sample and provides physicians and their patients with actionable information to personalize management of risk for heart disease. Our automated clinical analyzer, the Vantera system, was cleared by the FDA in August 2012 and became commercially available in December 2012. The Vantera system requires no previous knowledge of NMR technology to operate and has been designed to significantly simplify complex technology through ease of use and walk-away automation. We plan to selectively place the Vantera system on-site with national and regional clinical diagnostic laboratories as well as leading medical centers and hospital outreach laboratories, which we believe will facilitate their ability to offer our NMR LipoProfile test and other diagnostic tests that we may develop. During the second quarter of 2013, we placed the Vantera system in a leading medical center. We are driving toward becoming a clinical standard of care by decentralizing our technology and expanding our menu of personalized diagnostic tests to address a broad range of cardiovascular, metabolic and other diseases.
To date, the NMR LipoProfile test has been ordered over 10 million times, including nearly 2 million times during 2012 and over 1 million times in the six months ended June 30, 2013, and the number of tests ordered has grown at a compound annual growth rate of approximately 28% from 2007 to 2012. The NMR LipoProfile test is reimbursed by a number of governmental and private payors, which we believe collectively represent approximately 150 million covered lives.
We currently perform the vast majority of the NMR LipoProfile tests at our certified and accredited laboratory facilities in Raleigh, North Carolina. We intend to accelerate clinician and clinical diagnostic laboratory adoption of the NMR LipoProfile test and future clinical diagnostic tests by increasing access to our technology platform through strategic placement of the Vantera system in third party clinical diagnostic laboratories. In the second quarter of 2013 we placed the Vantera system in a leading medical center, and we have entered into agreements with some of our current clinical diagnostic laboratory customers to place the Vantera system in their laboratories. We are also in discussions with additional laboratory customers who have indicated a similar interest in the placement of the Vantera system in their laboratories. In addition, we are placing the Vantera system in academic centers that are collaborating with us to further validate the efficacy of our NMR LipoProfile test, and to develop additional high-value diagnostic assays based on NMR technology. We retain full ownership of any Vantera system placed in third-party clinical diagnostic laboratories and are responsible for support and maintenance obligations. In general, we expect that the number of Vantera system that will be placed in our clinical diagnostic laboratory customers' facilities will depend on their demonstrated annual production volume for the NMR LipoProfile test and their ability to increase demand for our tests.
We believe that the inherent analytical advantages of NMR technology will also allow us to expand our diagnostic test menu. We are currently developing NMR-based diagnostic tests for use in the prediction of diabetes, including the assessment of insulin resistance, and we are investigating opportunities to develop new diagnostic tests for other diseases.
We have incurred significant losses since our inception. As of June 30, 2013, our accumulated deficit was $53.3 million. We expect to incur significant operating losses for the next several years as we seek to establish the NMR LipoProfile test as a clinical standard of care for managing a patient's risk of cardiovascular disease.

24


Financial Operations Overview
Revenues
Substantially all of our revenues are currently derived from sales of our NMR LipoProfile test to clinical diagnostic laboratories, clinicians and other healthcare professionals for use in patient care. For the three months ended June 30, 2013 and 2012, sales of the NMR LipoProfile test represented approximately 96% and 95%, respectively, of our total revenues. For the six months ended June 30, 2013 and 2012, sales of the NMR LipoProfile test represented approximately 96% and 94%, respectively, of our total revenues. The remainder of our revenues is derived from sales of standard analytical chemistry tests, which we refer to as ancillary tests, requested by clinicians in conjunction with our NMR LipoProfile test, as well as revenue from contract research arrangements. Ancillary tests are FDA-approved blood tests that most clinical laboratories can process but that may be ordered from us at the same time as the NMR LipoProfile test for convenience. These tests are not run on our NMR technology platform, but instead are run on a traditional chemistry analyzer.
The following table presents our revenues by service offering and source:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
 
(in thousands)
Revenues:
 
 
 
 
 
 
 
NMR LipoProfile tests
$
12,796

 
$
13,141

 
$
25,886

 
$
26,008

Ancillary tests
202

 
443

 
510

 
956

Research contracts
313

 
310

 
531

 
713

Total revenues
$
13,311

 
$
13,894

 
$
26,927

 
$
27,677

Our revenues are driven by both test volume and the average selling price of our NMR LipoProfile test. For the six months ended June 30, 2013, we generated 89% of our total revenues from clinical diagnostic laboratory customers. We expect to continue to increase the proportion of NMR LipoProfile tests performed through clinical diagnostic laboratories, both under Vantera system placement arrangements and arrangements under which we perform the test for them at our own facility, as compared to our direct distribution channel in which clinicians order the test directly from us. The average selling price of our tests sold to these laboratories is less than that for tests we sell directly to clinicians, and therefore we expect that our overall average selling price will continue to decline in the future. For direct sales, the price we ultimately receive depends upon the level of reimbursement we receive from Medicare or commercial insurance carriers. Clinical diagnostic laboratories purchase our test at prices that we negotiate with them, which will continue to be the case for NMR LipoProfile tests performed using the Vantera system, whether the analyzer is located on-site at the customer's laboratory or at our own facility. Our clinical diagnostic laboratory customers are responsible for obtaining reimbursement from third-party payors or directly from patients.
We expect declines in our average selling price to continue as we place additional Vantera system in third-party laboratories, as the price we receive for a test performed on-site at third-party laboratories using the Vantera system will generally be less than the price for the same test performed at our own facility. Our business model contemplates that this decline in average selling price due to changes in the channel mix will be more than offset by increases in test volumes, especially if demand increases for Vantera system placements.
During the initial placement rollout period for the Vantera system, we expect that most Vantera system placements will be with our existing clinical diagnostic laboratory customers. As a result, we anticipate a gradual decrease in the proportion of  NMR LipoProfile tests performed at our existing laboratory facility as compared to tests performed at our customers' facilities using the Vantera system. We expect that the reduced volume in the number of tests performed at our facility for customers with a Vantera clinical analyzer on-site will be partially offset by growth in NMR LipoProfile test orders from new clinical diagnostic laboratory customers who may not initially meet our test volume criteria for a Vantera system placement.
Our revenues from ancillary tests, while a diminishing portion of our business, are similarly dependent upon our rates of reimbursement from various payor sources. For example, Medicare reimbursement rates are adjusted annually. Changes in Medicare reimbursement rates are dependent on a number of factors that we cannot predict. Reductions in reimbursement rates for these ancillary tests would reduce our overall revenues from these tests.


25


Cost of Revenues and Operating Expenses
We allocate certain overhead expenses, such as costs associated with information technology, rent, utilities, insurance and depreciation of office equipment, to cost of revenues and operating expense categories based on headcount and facility usage. As a result, an overhead expense allocation is reflected in cost of revenues and each operating expense category.
Cost of Revenues and Gross Margin
Cost of revenues consists of direct labor expenses, including employee benefits and stock-based compensation expenses, cost of laboratory supplies, freight costs, depreciation of laboratory equipment, leasehold improvements, royalties paid under license agreements and certain allocated overhead expenses. Since the Vantera system became commercially available in December 2012, our placement costs and associated service and maintenance support have been included in cost of revenues. We expect these expenses to increase in absolute dollars as we support our customers' use of the Vantera system, although we expect these increased expenses to be offset by increased revenues from additional test volume. Our cost of revenues represented approximately 20% and 19% during the three months ended June 30, 2013 and 2012, respectively, and approximately 20% and 18% during the six months ended June 30, 2013 and 2012, respectively, of our total revenues.
Our gross profit represents total revenues less the cost of revenues, and gross margin is gross profit expressed as a percentage of total revenues. Our gross margins were approximately 80% and 81% for the three months ended June 30, 2013 and 2012, respectively, and approximately 80% and 82% for the six months ended June 30, 2013 and 2012, respectively.
Research and Development Expenses
Our research and development expenses include those costs associated with performing research and development activities, such as personnel-related expenses, including stock-based compensation, fees for contractual and consulting services, travel costs, laboratory supplies, fees associated with collaboration agreements and allocated overhead expenses. We expense all research and development costs as incurred.
Our research and development expenses represented approximately 23% and 20% of our total revenues, respectively, during the three months ended June 30, 2013 and 2012, and approximately 23% and 18% during the six months ended June 30, 2013 and 2012, respectively. We expect that our overall research and development expenses will continue to increase in absolute dollars as we develop additional in vitro diagnostic assays that can be performed using the Vantera system.
Sales and Marketing Expenses
Our sales and marketing expenses include costs associated with our sales organization, including our direct sales force and sales management, and our marketing, managed care and business development personnel. These expenses consist principally of salaries, commissions, bonuses and employee benefits for these personnel, including stock-based compensation, as well as travel costs related to sales and marketing activities, marketing and medical education activities and allocated overhead expenses. We expense all sales and marketing costs as incurred.
Our sales and marketing expenses represented approximately 51% and 38% of our total revenues, respectively, during the three months ended June 30, 2013 and 2012, and approximately 50% and 39% during the six months ended June 30, 2013 and 2012, respectively, of our total revenues. We expect our sales and marketing costs to increase, both in absolute dollars as well as a percentage of our total revenues, as we expand our sales force, increase our geographic presence, and increase marketing and medical education efforts to drive awareness and adoption of the NMR LipoProfile test.
General and Administrative Expenses
Our general and administrative expenses include costs for our executive, accounting and finance, legal, and human resources functions. These expenses consist principally of salaries, bonuses and employee benefits for the personnel included in these functions, including stock-based compensation and professional services fees, such as consulting, audit, tax and legal fees, medical device excise tax, general corporate costs and allocated overhead expenses, and bad debt expense. We expense all general and administrative expenses as incurred.

26


Our general and administrative expenses represented approximately 21% and 20% of our total revenues, respectively, during the three months ended June 30, 2013 and 2012, and approximately 23% and 18% during the six months ended June 30, 2013 and 2012, respectively. We expect that our general and administrative expenses will increase, primarily due to the impact of the medical device excise tax, described below, and the costs of operating as a public company, such as additional legal, accounting and corporate governance expenses, including expenses related to compliance with the Sarbanes-Oxley Act of 2002 and investor relations expenses.
Medical Device Excise Tax
In March 2010, President Obama signed into law a legislative overhaul of the U.S. healthcare system, known as the Patient Protection and Affordable Care Act of 2010, as amended by the Healthcare and Education Affordability Reconciliation Act of 2010, or the PPACA. The PPACA includes provisions that, among other things, require the medical device industry to subsidize healthcare reform in the form of a 2.3% excise tax on U.S. sales of most medical devices beginning in 2013. While we continue to evaluate the impact of this tax on our overall business, this tax is applicable to the sales of our NMR LipoProfile test and could adversely affect our results of operations, cash flows and financial condition. Our sales of the NMR LipoProfile test resulted in excise taxes of $0.2 million and $0.5 million for the three and six months ended June 30, 2013, respectively, which we have recorded in the statements of comprehensive (loss) income as general and administrative expense.
Other Expense
Interest income consists of interest earned on our cash and cash equivalents. During the three and six months ended June 30, 2013 and 2012, this income has not been material, although we expect our interest income to increase as we invest the net proceeds from our January 2013 initial public offering, or IPO.
Interest expense consists primarily of interest expense on our loan balances and the amortization of debt discounts and debt issuance costs. We amortize both debt discounts and debt issuance costs over the life of the loan and report them as interest expense in our statements of comprehensive (loss) income.
Other (expense) income primarily consists of gains and losses on the sale or disposal of assets. Prior to our IPO, the fair value of preferred stock warrants was re-measured at the end of each reporting period, and changes in fair value were also recognized in other (expense) income. Upon completion of the IPO in January 2013, the preferred stock warrants automatically converted into warrants to purchase common stock and no further changes in fair value will be recognized in other (expense) income.
Critical Accounting Policies and Significant Judgments and Estimates
Our management's discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States, or U.S. GAAP. The preparation of these financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reported period. In accordance with U.S. GAAP, we base our estimates on historical experience and on various other factors that 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 these estimates under different assumptions or conditions.
We believe that of our significant accounting policies, which are described in Note 1 to our financial statements appearing elsewhere in this report, we believe the following accounting policies involve a greater degree of judgment and complexity. A critical accounting policy is one that is both material to the preparation of our financial statements and requires us to make difficult, subjective or complex judgments for uncertain matters that could have a material effect on our financial condition and results of operations. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations:
revenue recognition;
accounts receivable and allowance for uncollectible accounts receivable;
stock-based compensation expense; and
income taxes.

27


During the six months ended June 30, 2013, there were no significant changes in our critical accounting policies or estimates, except as described in the Vantera System Placement Arrangement discussion with respect to our revenue recognition policy noted below. See Note 1 to our financial statements included in this Quarterly Report on Form 10-Q and under the heading "Description of Business and Significant Accounting Policies" in our Annual Report on Form 10-K for the year ended December 31, 2012, which was filed with the Securities and Exchange Commission on March 27, 2013, for additional information regarding our critical accounting policies, as well as a description of our other significant accounting policies.
Revenue Recognition
We currently derive revenue from sales of our NMR LipoProfile test to clinical diagnostic laboratories and clinicians for use in patient care, from sales of ancillary tests for use in patient care requested in conjunction with the NMR LipoProfile test, and from contract research arrangements.
Revenues from diagnostic tests for patient care, which consist of sales of the NMR LipoProfile test performed in-house and at third party clinical diagnostic laboratory facilities (see “The Vantera System Placement Arrangements” below) and sales of ancillary tests, are recognized on the accrual basis when the following revenue recognition criteria are met: (1) persuasive evidence that an arrangement exists; (2) services have been rendered or at the time final results are reported; (3) the fee is fixed or determinable; and (4) collectibility is reasonably assured. Testing services provided for patient care are covered by clinical diagnostic laboratories through negotiated contracts with commercial insurance carriers, programs with commercial insurance carriers, including managed care organizations, and various governmental programs, primarily Medicare.
Revenues from contract research arrangements are generally derived from clinical studies conducted by academic institutions and pharmaceutical companies for which we provide testing services. The specific methodology for revenue recognition is determined on a case-by-case basis according to the facts and circumstances applicable to a given agreement. Our output, measured in terms of full-time equivalent level of effort or processing a set of diagnostic tests under a contractual protocol, typically triggers payment obligations under these agreements. Revenues are recognized as costs are incurred or diagnostic tests are processed. Contract research costs include all direct labor and material costs, equipment costs and fringe benefits. Advance payments received in excess of revenues recognized are classified as deferred revenue until such time as the revenue recognition criteria have been met.
Billings for diagnostic tests for patient care under governmental and physician-based programs are included in revenues net of contractual adjustments. These contractual adjustments represent the difference between the final settlement amount paid by the program and the estimated settlement amount based on either the list price for tests performed or the reimbursement rate set by commercial insurance carriers or governmental programs. Estimated contractual adjustments are updated either upon notification from payors as to changes in existing reimbursement rates, which are typically received prior to changes going into effect, or upon a material variance between the final settlement and the estimated contractual adjustment originally established when the revenues were recognized. To date, our final settlement adjustments have not been material.
The Vantera System Placement Arrangements
The Vantera system placement arrangements are generally negotiated and accounted for as operating leases. The placement arrangements typically include the NMR LipoProfile test, right to use the Vantera system, consumables and related maintenance, and support to process the NMR LipoProfile test at the third party clinical diagnostic laboratory's facilities for which the clinical diagnostic laboratory pays a negotiated price-per-reportable NMR LipoProfile test result. There is no fixed or minimum lease payment that the clinical diagnostic laboratory is obligated to make over the contract term. Our revenues are determined based on test volume and the negotiated price-per-reportable result. Revenues under the Vantera system placement arrangements are allocated considering the relative selling prices of the lease and non-lease deliverables included in the operating lease arrangement. Lease deliverables include the right to use the Vantera system and related maintenance and support while non-lease deliverables consist of the NMR LipoProfile test and consumables. Lease deliverables are accounted for in accordance with specific leasing guidance while non-lease deliverables are accounted for in accordance with the multiple-element arrangement guidance. We evaluate each non-lease deliverable to determine whether it represents a separate unit of accounting. A deliverable constitutes a separate unit of accounting when the delivered item has stand-alone value and delivery of the undelivered element is probable and within our control. We determine that both the NMR LipoProfile test and consumables have separate units of accounting.

28


We allocate revenue to each deliverable in the Vantera system placement arrangement based on a selling price hierarchy at the inception of the arrangement. The selling price for a deliverable is based on vendor-specific objective evidence of selling price, or VSOE, if available, third-party evidence of selling price, or TPE, if VSOE is not available, or estimated selling price, ESP, if neither VSOE nor TPE is available. We have determined that only the selling price of the NMR LipoProfile test is based on VSOE. Currently, we do not sell the license to use the Vantera system, the consumables or related maintenance and support separately on a regular basis and therefore we do not have the evidence to support VSOE for these deliverables. Due to the high degree of customization involved with these deliverables, we also determine that there are no comparable TPE for these deliverables. Since these deliverables have neither VSOE nor TPE, the allocation of revenue to them has been based on ESP.
Our objective in determining ESP is to establish the price at which we would transact a sale if the deliverables were sold regularly on a stand-alone basis. Our process for determining ESP for the deliverables considers all reasonably available information including both market data and conditions, as well as entity specific factors that may vary depending upon the facts and circumstances related to each deliverable. The factors considered in developing ESP relating to deliverables include cost structures, established pricing and approval policies and customization of the product or service and industry pricing. We regularly review ESP and maintain internal controls over the establishment and updates of these estimates. The NMR LipoProfile test is our most significant deliverable under these Vantera system placement arrangements. Once the selling price of each deliverable has been established, we allocate the negotiated price per reportable result among deliverables in the arrangement using the relative selling price method. Revenue allocated to each deliverable is then recognized when the basic revenue recognition criteria, as described above, is met for each deliverable.

29


Results of Operations
Comparison of Three Months Ended June 30, 2013 and 2012
The following table sets forth, for the periods indicated, the amounts of certain components of our statements of comprehensive (loss) income and the percentage of total revenues represented by these items, showing period-to-period changes.
 
Three Months Ended June 30,
 
Period-to-period change
 
2013
 
% of
Revenues
 
2012
 
% of
Revenues
 
Amount  
 
Percentage  
 
(in thousands, except for percentages)
Revenues
$
13,311

 
100.0
 %
 
$
13,894

 
100.0
 %
 
$
(583
)
 
(4.2
)%
Cost of revenues
2,616

 
19.7

 
2,677

 
19.3

 
(61
)
 
(2.3
)
Gross profit
10,695

 
80.3

 
11,217

 
80.7

 
(522
)
 
(4.6
)
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Research and development
3,118

 
23.4

 
2,738

 
19.7

 
380

 
13.9

Sales and marketing
6,802

 
51.1

 
5,273

 
37.9

 
1,529

 
29.0

General and administrative
2,770

 
20.8

 
2,804

 
20.2

 
(34
)
 
(1.2
)
Loss on disposal of long-lived assets

 

 
30

 
0.2

 
(30
)
 
*
  Total operating expenses
12,690

 
95.3

 
10,845

 
78.1

 
1,845

 
17.0

(Loss) income from operations
(1,995
)
 
(15.0
)
 
372

 
2.7

 
(2,367
)
 
*

Total other expense
(449
)
 
(3.4
)
 
(103
)
 
(0.7
)
 
(346
)
 
*

(Loss) income before taxes
(2,444
)
 
(18.4
)
 
269

 
1.9

 
(2,713
)
 
*

Net (loss) income
$
(2,444
)
 
(18.4
)%
 
$
269

 
1.9
 %
 
$
(2,713
)
 
*

 * Percentage not meaningful
Revenues
Total revenues decreased by 4.2% to $13.3 million for the three months ended June 30, 2013 from $13.9 million for the three months ended June 30, 2012. Revenues from sales of our NMR LipoProfile test decreased to $12.8 million for the three months ended June 30, 2013 from $13.1 million for the three months ended June 30, 2012, resulting from an overall decline in average selling price which was partially offset by growth in the number of NMR LipoProfile tests sold, particularly to our clinical diagnostic laboratory customers.
The overall number of NMR LipoProfile tests increased by 7.5% to approximately 529,000 tests for the three months ended June 30, 2013 from approximately 492,000 tests for the three months ended June 30, 2012. This volume growth reflected the impact of an increase in the number of our sales representatives and greater geographic coverage of our sales force, as well as increased market acceptance of our test. The overall average selling price of NMR LipoProfile tests decreased 9.4%, to $24.20 for the three months ended June 30, 2013 from $26.72 for the three months ended June 30, 2012. This decrease in average selling price was primarily the result of reductions in price for some clinical laboratory customers based on their achievement of higher test volumes set forth in their agreements with us, a reduction in the Medicare reimbursement rate for the NMR LipoProfile test, and the continuing shift in channel mix toward high-volume clinical laboratory customers. The percentage of our total NMR LipoProfile tests sold through direct distribution channels decreased from 5.0% for the three months ended June 30, 2012 to 2.7% for the three months ended June 30, 2013. This continued shift reflects our current strategy of accelerating the adoption of our NMR LipoProfile test through clinical diagnostic laboratories, which we expect will result in fewer tests ordered through direct channels and an overall decrease in average selling price.

30


Revenues from sales of ancillary tests decreased to $0.2 million for the three months ended June 30, 2013 from $0.4 million for the three months ended June 30, 2012. The decrease in revenues from these ancillary tests was primarily driven by the shift in testing mix and an overall reduction of reimbursement rates from Medicare. Revenues from our clinical research clients were approximately $0.3 million for each of the three months ended June 30, 2013 and 2012, respectively.
Cost of Revenues and Gross Margin
Cost of revenues decreased by 2.3%, to $2.6 million for the three months ended June 30, 2013 from $2.7 million for the three months ended June 30, 2012. This slight decrease resulted primarily from the reduction in materials and freight costs due to lower negotiated vendor pricing and less expensive ancillary tests performed, offset by higher personnel-related and allocated costs associated with the launch of the Vantera system and an increase in the number of NMR LipoProfile tests sold to patient care clients during the three months ended June 30, 2013. We experienced higher costs associated with site preparation, instrument installation and customer service support as we prepared for the launch of the Vantera system at third-party customer sites. Gross profit as a percentage of total revenues, or gross margin, decreased slightly to 80.3% for the three months ended June 30, 2013 from 80.7% for the three months ended June 30, 2012.
Research and Development Expenses
Research and development expenses increased by 13.9% to $3.1 million for the three months ended June 30, 2013 from $2.7 million for the three months ended June 30, 2012. This increase was partially the result of $0.2 million in higher salaries and benefits due to increased headcount within our research and development function. The total number of research and development employees increased to 49 at June 30, 2013 from 45 at June 30, 2012. We also experienced a $0.3 million increase in consulting fees for conducting external research and development studies in support of our publication efforts and other engineering projects and $0.2 million in higher allocated expenses due to increases in information technology and facility costs. These increases were partially offset by $0.3 million in lower depreciation expense in 2013, as in 2012 we incurred additional depreciation expense from correction of an immaterial error relating to prior periods. As a percentage of total revenues, research and development expenses increased to 23.4% for the three months ended June 30, 2013, as compared to 19.7% for the three months ended June 30, 2012.
Sales and Marketing Expenses
Sales and marketing expenses increased by 29.0%, to $6.8 million for the three months ended June 30, 2013 from $5.3 million for the three months ended June 30, 2012. This increase was primarily due to an increase of $1.3 million in compensation and benefit costs, training, and travel and entertainment-related expenses as a result of the growth and expansion of our sales organization. Consistent with our strategy of expanding our sales and marketing function,the total number of our sales and marketing employees increased to 103 at June 30, 2013 from 72 at June 30, 2012. We also experienced $0.2 million in higher marketing expenses associated with various marketing programs, medical education and campaign efforts. As a percentage of total revenues, sales and marketing expenses increased to 51.1% for the three months ended June 30, 2013 from 37.9% for the three months ended June 30, 2012.
General and Administrative Expenses
General and administrative expenses decreased slightly by 1.2%, to $2.8 million for the three months ended June 30, 2013 from $2.8 million for the three months ended June 30, 2012. The decrease was primarily attributable to $0.3 million in lower personnel-related costs, which was primarily attributable to lower bonus expense as a result of our financial performance during the year to date. This decrease was offset by $0.3 million in higher professional fees, largely from additional accounting, tax, legal and consulting fees associated with the expansion of our business operations and compliance obligations in connection with becoming a publicly traded company. In addition, we also incurred $0.2 million in tax liability as a result of the new U.S. medical device excise tax that became applicable to sales of the NMR LipoProfile test in January 2013.
Our bad debt expense decreased by $0.2 million to $0.1 million for the three months ended June 30, 2013 from $0.3 million for the three months ended June 30, 2012. As a percentage of total revenues, bad debt expense decreased to 0.4% for the three months ended June 30, 2013 from 1.8% for the three months ended June 30, 2012. The decrease in bad debt expense, both in absolute dollars and as a percentage of total revenues, resulted primarily from the shift of our customer mix toward clinical diagnostic laboratories, from which we typically experience higher collection rates.
As a percentage of total revenues, general and administrative expenses increased to 20.8% for the three months ended June 30, 2013, compared to 20.2% for the three months ended June 30, 2012.

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Other Expense
Other expense increased to $0.4 million for the three months ended June 30, 2013 from $0.1 million for the three months ended June 30, 2012. The increase was primarily attributable to a $0.3 million increase in interest expense compared to the prior year period, due to higher average principal amounts outstanding on our indebtedness during 2013.
Comparison of Six Months Ended June 30, 2013 and 2012
The following table sets forth, for the periods indicated, the amounts of certain components of our statements of comprehensive (loss) income and the percentage of total revenues represented by these items, showing period-to-period changes.
 
Six Months Ended June 30,
 
Period-to-period change
 
2013
 
% of
Revenues
 
2012
 
% of
Revenues
 
Amount  
 
Percentage  
 
(in thousands, except for percentages)
Revenues
$
26,927

 
100.0
 %
 
$
27,677

 
100.0
 %
 
$
(750
)
 
(2.7
)%
Cost of revenues
5,466

 
20.3

 
4,995

 
18.1

 
471

 
9.4

Gross profit
21,461

 
79.7

 
22,682

 
81.9

 
(1,221
)
 
(5.4
)
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Research and development
6,250

 
23.2

 
4,885

 
17.6

 
1,365

 
27.9

Sales and marketing
13,461

 
50.0

 
10,838

 
39.2

 
2,623

 
24.2

General and administrative
6,077

 
22.6

 
5,054

 
18.3

 
1,023

 
20.2

Loss on disposal of long-lived assets

 

 
30

 
0.1

 
(30
)
 
*

  Total operating expenses
25,788

 
95.8

 
20,807

 
75.2

 
4,981

 
23.9

(Loss) income from operations
(4,327
)
 
(16.1
)
 
1,875

 
6.8

 
(6,202
)
 
*

Total other expense
(965
)
 
(3.6
)
 
(337
)
 
(1.2
)
 
(628
)
 
*

(Loss) income before taxes
(5,292
)
 
(19.7
)
 
1,538

 
5.6

 
(6,830
)
 
*

Net (loss) income
$
(5,292
)
 
(19.7
)%
 
$
1,538

 
5.6
 %
 
$
(6,830
)
 
*

 * Percentage not meaningful
Revenues
Total revenues decreased by 2.7% to $26.9 million for the six months ended June 30, 2013 from $27.7 million for the six months ended June 30, 2012. Revenues from sales of our NMR LipoProfile test decreased to $25.9 million for the six months ended June 30, 2013 from $26.0 million for the six months ended June 30, 2012, resulting from an overall decline in average selling price, which was partially offset by growth in the number of NMR LipoProfile tests sold, particularly to our clinical diagnostic laboratory customers.
The overall number of NMR LipoProfile tests increased by 8% to approximately 1,047,000 tests for the six months ended June 30, 2013 from approximately 969,000 tests for the six months ended June 30, 2012. This volume growth reflected the impact of an increase in the number of our sales representatives and greater geographic coverage of our sales force, as well as increased market acceptance of our test. The overall average selling price of NMR LipoProfile tests decreased 7.9%, to $24.72 for the six months ended June 30, 2013 from $26.85 for the six months ended June 30, 2012. This decrease in average selling price was primarily the result of reductions in price for some clinical laboratory customers based on their achievement of higher test volumes set forth in their agreements with us, a reduction in the Medicare reimbursement rate for the NMR LipoProfile test and the continuing shift in channel mix toward high-volume clinical laboratory customers. The percentage of our total NMR LipoProfile tests sold through direct distribution channels decreased from 5% for the six months ended June 30, 2012 to 3% for the six months ended June 30, 2013. This continued shift reflects our current strategy of accelerating the adoption of our NMR LipoProfile test through clinical diagnostic laboratories, which we expect will result in fewer tests ordered through direct channels and an overall decrease in average selling price.


32


Revenues from sales of ancillary tests decreased to $0.5 million for the six months ended June 30, 2013 from $1.0 million for the six months ended June 30, 2012. The decrease in revenues from these ancillary tests was primarily driven by the shift in testing mix and an overall reduction of reimbursement rates from Medicare. Revenues from our clinical research clients were approximately $0.5 million and $0.7 million for the six months ended June 30, 2013 and 2012, respectively.
Cost of Revenues and Gross Margin
Cost of revenues increased by 9.4%, to $5.5 million for the six months ended June 30, 2013 from $5.0 million for the six months ended June 30, 2012. This increase was partially the result of $0.5 million in higher personnel-related costs associated with the launch of the Vantera system and an increase in the number of NMR LipoProfile tests sold to patient care clients during the six months ended June 30, 2013. We experienced higher costs associated with site preparation, instrument installation and customer service support as we prepared for the launch of the Vantera system at third-party customer sites. In addition, we experienced $0.3 million higher allocated expenses due to increases in information technology and facility costs. These increases were partially offset by $0.3 million lower materials and freight costs due to lower negotiated vendor pricing and less expensive ancillary tests performed. Gross profit as a percentage of total revenues, or gross margin, decreased to 79.7% for the six months ended June 30, 2013 from 81.9% for the six months ended June 30, 2012. The decrease we experienced in gross margin resulted primarily from the costs incurred in 2013 associated with the launch of the Vantera system at third-party customer sites.
Research and Development Expenses
Research and development expenses increased by 27.9% to $6.3 million for the six months ended June 30, 2013 from $4.9 million for the six months ended June 30, 2012. This increase was partially the result of $0.5 million in higher salaries and benefits due to increased headcount within our research and development function, including recruiting fees and stock-based compensation expense for stock option grants and restricted stock unit grants to certain research and development employees. The total number of research and development employees increased to 49 at June 30, 2013 from 45 at June 30, 2012. We also experienced a $0.8 million increase in consulting fees for conducting external research and development studies in support of our publication efforts and other engineering projects and $0.4 million in higher allocated expenses due to increases in information technology and facility costs. These increases were partially offset by the $0.3 million in lower depreciation expense in 2013, as in 2012 we incurred additional depreciation expense from correction of an immaterial error relating to prior periods. As a percentage of total revenues, research and development expenses increased to 23.2% for the six months ended June 30, 2013, as compared to 17.6% for the six months ended June 30, 2012.
Sales and Marketing Expenses
Sales and marketing expenses increased by 24.2%, to $13.5 million for the six months ended June 30, 2013 from $10.8 million for the six months ended June 30, 2012. This increase was primarily due to an increase of $2.2 million in compensation and benefit costs, training, and travel and entertainment-related expenses as a result of the growth and expansion of our sales organization. Consistent with our strategy of expanding our sales and marketing function, the total number of our sales and marketing employees increased to 103 at June 30, 2013 from 72 at June 30, 2012. We also experienced $0.4 million in higher marketing expenses associated with various marketing programs, medical education and campaign efforts. As a percentage of total revenues, sales and marketing expenses increased to 50.0% for the six months ended June 30, 2013 from 39.2% for the six months ended June 30, 2012.
General and Administrative Expenses
General and administrative expenses increased by 20.2%, to $6.1 million for the six months ended June 30, 2013 from $5.1 million for the six months ended June 30, 2012. The increase was partially the result of $0.7 million in higher professional fees, largely from additional accounting, tax, legal and consulting fees associated with the expansion of our business operations and compliance obligations in connection with becoming a publicly traded company. In addition to professional fees, we also incurred $0.5 million in tax liability as a result of the new U.S. medical device excise tax that became applicable to sales of the NMR LipoProfile test in January 2013, as well as $80,000 higher allocated expenses due to increases in information technology and facility costs.
Our bad debt expense decreased by $0.3 million to $0.2 million for the six months ended June 30, 2013 from $0.5 million for the six months ended June 30, 2012. As a percentage of total revenues, bad debt expense decreased to 0.8% for the six months ended June 30, 2013 from 1.8% for the six months ended June 30, 2012. The decrease in bad debt expense, both in absolute dollars and as a percentage of total revenues, resulted primarily from the shift of our customer mix toward clinical diagnostic laboratories, from which we typically experience higher collection rates.

33


As a percentage of total revenues, general and administrative expenses increased to 22.6% for the six months ended June 30, 2013, compared to 18.3% for the six months ended June 30, 2012.
Other Expense
Other expense increased to $1.0 million for the six months ended June 30, 2013 from $0.3 million for the six months ended June 30, 2012. The increase was primarily attributable to a $0.8 million increase in interest expense compared to the prior year period, due to higher average principal amounts outstanding on our indebtedness during 2013. This increase was partially offset by a $0.1 million decrease in other expense as a result of changes in the fair value of our preferred stock warrant liability between the periods.
Seasonality
Our financial results may vary significantly from quarter to quarter as a result of many factors, many of which are outside our control. For example, we expect that the volume of the NMR LipoProfile tests ordered will generally decline during the summer months and holiday periods, when patients are less likely to visit their healthcare providers. As a result, comparison of our results of operations for successive quarters may not accurately reflect trends or results for the full year. Our historical results should not be considered a reliable indicator of our future results of operations.
Inflation
We do not believe that inflation has had a material effect on our business, financial condition or results of operations. We continue to monitor the impact of inflation in order to minimize its effect through pricing strategies, productivity improvements and cost reductions. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.
Liquidity and Capital Resources
Sources of Liquidity
Prior to our IPO in January 2013, we funded our operations principally through private placements of our capital stock, bank borrowings and, since 2009, cash flows from operations. Prior to the IPO, we had raised $58.7 million from the sale of common stock and convertible preferred stock to third parties.
In December 2012, we refinanced and paid off our then existing indebtedness with Square 1 Bank, or Square 1, which was comprised of a term loan with an outstanding balance of $3.8 million and a revolving line of credit with an outstanding balance of $3.5 million. We entered into a new credit facility with Square 1 and Oxford Finance that provides for term loans from Oxford Finance of $10.0 million, a term loan from Square 1 of $6.0 million and a revolving line of credit with Square 1 of up to $6.0 million. Our borrowing capacity under the line of credit is subject to borrowing base limitations related to our eligible accounts receivable. Interest on the term loans accrues at a fixed annual rate of 9.5%, while advances under the line of credit continue to carry a variable interest rate equal to the greater of 6.25% or the prime rate plus 3.0%. We are required only to make interest payments on the term loans through January 2014, and then repayments of principal and interest amounts due under the term loans will continue in monthly installments through July 2016. The revolving line of credit matures in December 2013.
As of June 30, 2013, the term loans from Oxford Finance had an outstanding balance of $9.8 million, net of debt discount in the amount of $0.2 million, and the term loan from Square 1 had an outstanding balance of $5.9 million, net of debt discount in the amount of $69,000. As of June 30, 2013, we did not have any outstanding borrowings under the revolving line of credit and therefore had up to $6.0 million in available borrowing capacity.

34


Borrowings under the credit facility are secured by substantially all of our assets other than our intellectual property. The covenants set forth in the loan and security agreement require, among other things, that we maintain a specified liquidity ratio, measured monthly, that begins at 1.25 and is reduced to 1.0 over the term of the facility. Our liquidity ratio was over 8.0 as of June 30, 2013. We are also required to achieve minimum three-month trailing revenue levels that are based on 80% of our projected annual revenue levels approved by our board of directors, which annual projected revenues must be at least $55 million. In addition, beginning in 2014, our revenues must be at 80% of the trailing three-month projections that have been approved by our board of directors and must also be equal to our greater than the revenues for the same period from the previous year. In June 2013, the lenders waived our noncompliance wit the minimum three-month trailing revenue covenants for the period from March 2013 to May 2013. We are currently in compliance with all covenants under this credit facility, as modified. However, if we fail to comply with the covenants and our other obligations under the credit facility, the lenders would be able to accelerate the required repayment of amounts due under the loan and security agreement and, if they are not repaid, could foreclose upon our assets securing our obligations under the credit facility.
In connection with entering into the current and prior credit facilities, we issued warrants to Oxford Finance to purchase an aggregate of 45,978 shares of our Series E redeemable convertible preferred stock at an exercise price of $4.35 per share and warrants to Square 1 to purchase an aggregate of 27,586 shares of our Series E redeemable convertible preferred stock and 88,793 shares of our Series F redeemable convertible preferred stock, in each case at an exercise price of $4.35 per share. Upon the closing of our IPO, the warrants automatically became warrants to purchase an aggregate of 78,741 shares of common stock at an exercise price of $8.97 per share.
Initial Public Offering
On January 30, 2013, we closed our IPO, in which we sold 5,750,000 shares of common stock and received net proceeds of approximately $44.4 million, after deducting underwriting discounts and offering-related expenses paid by us. Upon closing of the IPO, all of the redeemable convertible preferred stock then outstanding automatically converted into 6,994,559 shares of common stock. Concurrently with the closing of the IPO, we paid $5.2 million to holders of our Series F redeemable convertible preferred stock in full satisfaction of accrued dividends on such shares immediately prior to their conversion to common stock. In addition, outstanding warrants to purchase redeemable convertible preferred stock automatically converted into warrants to purchase common stock, and our preferred stock warrant liability of $0.4 million as of January 30, 2013 was reclassified to additional paid-in capital.
Cash and Cash Equivalents
The following table summarizes our cash and cash equivalents, accounts receivable and cash flows for the periods indicated:
 
As of and for the Six Months Ended June 30,
 
2013
 
2012
 
(in thousands)
Cash and cash equivalents
$
54,246

 
$
12,833

Accounts receivable, net
6,849

 
6,856

 
 
 
 
Operating activities
$
(6,845
)
 
$
1,477

Investing activities
(2,000
)
 
(3,018
)
Financing activities
38,323

 
1,891

Net increase in cash and cash equivalents
$
29,478

 
$
350

Our cash and cash equivalents at June 30, 2013 and June 30, 2012 were held for working capital purposes. We do not enter into investments for trading or speculative purposes. Our policy is to invest any cash in excess of our immediate requirements in investments designed to preserve the principal balance and provide liquidity. Accordingly, our cash and cash equivalents are invested primarily in demand deposit accounts, certificates of deposit and money market funds that are currently providing only a minimal return.
Restricted cash, which totaled $0.5 million at June 30, 2013 and $1.5 million at June 30, 2012, respectively, is not included in cash and cash equivalents. Restricted cash consists primarily of money market funds that secure letters of credit related to operating leases for our office and laboratory space.

35


Cash Flows for the Six Months Ended June 30, 2013 and 2012
Operating Activities
Net cash used in operating activities was $6.8 million during the six months ended June 30, 2013, which included a net loss of $5.3 million partially offset by net non-cash items of $1.4 million. Non-cash items for the six months ended June 30, 2013 consisted primarily of depreciation and amortization expense of $0.8 million and stock-based compensation expense of $0.6 million. We also had a net cash outflow from changes in operating assets and liabilities of $2.9 million during the six months ended June 30, 2013. The significant items in the changes in operating assets and liabilities included an increase of $1.7 million in accounts receivable, an increase of $0.1 million in inventories, an increase of $0.2 million in prepaid expenses and a decrease of $1.1 million in accounts payable, accrued liabilities and other current liabilities. The increase in accounts receivable was due primarily to the timing of collections. The decrease in accounts payable, accrued expenses and other current liabilities was due primarily to the timing of disbursements.
Net cash provided by operating activities was $1.5 million during the six months ended June 30, 2012, which included net income of $1.5 million and net non-cash items of $1.4 million. Non-cash items for the six months ended June 30, 2012 consisted primarily of stock-based compensation expense of $0.6 million, depreciation and amortization expense of $0.7 million and $0.1 million in expense incurred due to changes in the fair value of our preferred stock warrant liability. We also had a net cash outflow of $1.5 million from changes in operating assets and liabilities during the six months ended June 30, 2012. The significant items in the changes in operating assets and liabilities included an increase in accounts receivable of $1.2 million, a decrease in current liabilities of $0.9 million, offset by a decrease in prepaid expenses of $42,000 and an increase in other long-term liabilities of $0.6 million. The increase in accounts receivable was due primarily to the growth in our revenues. The decrease in accounts payable, accrued expenses and other current liabilities was due primarily to the timing of disbursements.
Growth in the number of NMR LipoProfile tests we perform, the impact of other revenue and expenses and the timing and amount of future working capital changes will affect the future amount of cash used in or provided by operating activities.
Investing Activities
Net cash used in investing activities was $2.0 million and $3.0 million for the six months ended June 30, 2013 and 2012, respectively. The amounts related primarily to purchases of property and equipment and costs associated with maintaining our patent and trademark portfolio. The purchases of property and equipment during the six months ended June 30, 2013 were primarily for leasehold improvements related to our facilities, computer and furniture for general office use due to increased headcount as well as IT equipment used in test production. The purchases of property and equipment during the six months ended June 30, 2012 were primarily for hardware components purchased from third-party manufacturers for the Vantera system not yet put into service. The capitalized patent and trademark costs during the each of six months ended June 30, 2013 and 2012 were primarily for pending domestic and international patent applications.
Financing Activities
Net cash provided by financing activities was $38.3 million during the six months ended June 30, 2013, consisting primarily of net proceeds from issuance of common stock in connection with our IPO of $47.3 million, net of $4.4 million of underwriting discounts and commissions, cash inflows from changes in restricted cash for operating lease of $1.0 million, and net proceeds from exercise of stock options and warrants of $0.2 million, partially offset by Series F accrued dividend payments of $5.2 million and repayment in full of our revolving line of credit in the amount of $5.0 million.
Net cash provided by financing activities was $1.9 million during the six months ended June 30, 2012, consisting primarily of proceeds from borrowings of $3.5 million under our line of credit, term loan repayments of $1.0 million and cash outlays for deferred offering costs of $0.6 million in connection with our IPO.

36


Operating and Capital Expenditure Requirements
We expect to incur substantial operating losses in the future and expect that our operating expenses will increase as we continue to expand our sales force and increase our marketing efforts to drive market adoption of the NMR LipoProfile test, commercially launch our Vantera system and develop additional diagnostic tests. Our liquidity requirements have historically consisted, and we expect that they will continue to consist, of sales and marketing expenses, research and development expenses, capital expenditures, working capital, debt service and general corporate expenses. As demand for placements of our Vantera system increases from our clinical diagnostic laboratory customers, we anticipate that our capital expenditure requirements will also increase in order to build additional analyzers for placement.
We believe the cash generated from operations and our current cash and cash equivalents balances, which include the net proceeds from our IPO, and interest income we earn on these balances, together with the available borrowing capacity under our credit facilities, will be sufficient to meet our anticipated cash requirements through at least the next 12 months. In the future, we expect our operating and capital expenditures to increase as we increase headcount, expand our sales and marketing activities and grow our customer base. As sales of our NMR LipoProfile test grow, we expect our accounts receivable balance to increase. Any such increase in accounts receivable may not be completely offset by increases in accounts payable and accrued expenses, which could result in greater working capital requirements.
If our cash balances and cash generated from operations are insufficient to satisfy our liquidity requirements, we may seek to sell common or preferred equity or convertible debt securities or enter into an additional credit facilities or seek other debt financing. The sale of equity and convertible debt securities may result in dilution to our stockholders, and those securities may have rights senior to those of our common stock. If we raise additional funds through the issuance of preferred stock, convertible debt securities or other debt financing, these securities or other debt could contain covenants that would restrict our operations. We may require additional capital beyond our currently anticipated amounts. Additional capital may not be available on reasonable terms, or at all.
Our estimates of the period of time through which our financial resources will be adequate to support our operations and the costs to support research and development and our sales and marketing activities are forward-looking statements and involve risks and uncertainties and actual results could vary materially and negatively as a result of a number of factors, including the factors discussed in the section “Risk Factors” of this Quarterly Report. We have based our estimates on assumptions that may prove to be wrong and we could utilize our available capital resources sooner than we currently expect.
Our short- and long-term capital requirements will depend on many factors, including the following:
the cost of our selling and marketing efforts;
the rate of adoption of the NMR LipoProfile test in the marketplace;
our ability to generate cash from operations;
the rate of our progress in establishing additional coverage and reimbursement with third-party payors;
our ability to control our costs and implement operating efficiencies;
demand from clinical diagnostic laboratories for placements of our Vantera system at their facilities;
the emergence of competing or complementary technological developments;
the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights or participating in litigation-related activities;
the economic and other terms and timing of any collaborations, licensing or other arrangements into which we may enter; and
the acquisition of complementary tests or technologies that we may undertake.
Off-Balance Sheet Arrangements
As of June 30, 2013, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K, such as the use of unconsolidated subsidiaries, structured finance, special purpose entities or variable interest entities.

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Contractual Obligations
There were no material changes in our commitments under contractual obligations, as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2012, which was filed with the Securities and Exchange Commission on March 27, 2013.
Recent Accounting Pronouncements
In October 2012, the FASB issued ASU No. 2012-04, Technical Corrections and Improvements. The amendments in this update cover a wide range of topics in the Accounting Standards Codification. These amendments include technical corrections and improvements to the Accounting Standards Codification and conforming amendments related to fair value measurements. For public companies, the amendments that are subject to the transition guidance became effective for reporting periods beginning after December 15, 2012. Accordingly, we adopted this update on January 1, 2013. The adoption of this new guidance had no material impact to our financial position, results of operations or cash flows.
In February 2013, the FASB issued ASU No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The amendments in this update are intended to improve the reporting of reclassifications out of accumulated other comprehensive income by requiring an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required to be reclassified in its entirety to net income. For other amounts that are not required to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures that provide additional detail about those amounts. This would be the case when a portion of the amount reclassified out of accumulated other comprehensive income is reclassified to a balance sheet account instead of directly to income or expense in the same reporting period.   For public companies, the amendments that are subject to this update are effective for interim and annual reporting periods beginning after December 15, 2012. Accordingly, we adopted this update on January 1, 2013. The adoption of this new guidance had no material impact to our financial position, results of operations or cash flows.
JOBS Act
On April 5, 2012, the Jumpstart Our Business Startups Act of 2012, or JOBS Act, was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies.
As defined in the JOBS Act, a public company whose initial public offering of common equity securities occurred after December 8, 2011 and whose annual gross revenues are less than $1.0 billion will, in general, qualify as an “emerging growth company” until the earliest of:
the last day of its fiscal year following the fifth anniversary of the date of its initial public offering of common equity securities;
the last day of its fiscal year in which it has annual gross revenues of $1.0 billion or more;
the date on which it has, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; and
the date on which it is deemed to be a “large accelerated filer,” which will occur at such time as the company (a) has an aggregate worldwide market value of common equity securities held by non-affiliates of $700 million or more as of the last business day of its most recently completed second fiscal quarter, (b) has been required to file annual and quarterly reports under the Securities Exchange Act of 1934, as amended, (the "Exchange Act") for a period of at least 12 months, and (c) has filed at least one annual report pursuant to the Exchange Act.
Under this definition, we are an “emerging growth company” and could remain an emerging growth company until as late as December 31, 2018. Under the JOBS Act, emerging growth companies that become public can delay adopting new and revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards following the completion of our IPO and, therefore, we will be subject to the same new or revised accounting standards as other companies that are not emerging growth companies.



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Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk of loss to future earnings, to fair values or to future cash flows that may result from changes in price of a financial instrument. The value of a financial instrument may change as a result of changes in interest rates, exchange rates, commodity prices, equity prices and other market changes.
Interest Rate Sensitivity
Cash and Cash Equivalents. As of June 30, 2013, we had cash and cash equivalents of $54.2 million. Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of U.S. interest rates. Our cash equivalents are invested in interest-bearing certificates of deposit and money market funds. We do not enter into investments for trading or speculative purposes. Due to the conservative nature of our investment portfolio, which is predicated on capital preservation and mainly consists of investments with short maturities, we do not believe an immediate one percentage point change in interest rates would have a material effect on the fair market value of our portfolio, and therefore we do not expect our operating results or cash flows to be significantly affected by changes in market interest rates.
Term Loan and Line of Credit. Our primary exposure to market risk is interest expense sensitivity, which is affected by changes in the general level of U.S. interest rates. Under our current credit facility, our term loans carry a fixed interest rate of 9.5%, while advances under the line of credit carry a variable interest rate equal to the greater of 6.25% or Square 1's prime rate plus 3.0%. On March 29, 2013, we paid off the outstanding balance under the revolving line of credit. As of June 30, 2013, we had debt obligations of $15.8 million consisting of term loans under our credit facilities with Oxford Finance and Square 1. Since the interest rate on our term loans is fixed, we are not exposed to market risk from changes in interest rates as it relates to this interest-bearing obligation. We have not entered into, and do not expect to enter into, hedging arrangements.
Foreign Currency Exchange Risk
We bill our customers and payors in U.S. dollars and receive payment in U.S. dollars. Accordingly, our results of operations and cash flows are not subject to fluctuations due to changes in foreign currency exchange rates. If we grow sales of our NMR LipoProfile test outside of the United States, or place the Vantera system in foreign jurisdictions, our contracts with foreign customers and payors may be denominated in foreign currency and may become subject to changes in currency exchange rates.


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Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision of and with the participation of our management, including our interim chief executive officer, who is our principal executive officer, and our chief financial officer, who is our principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of June 30, 2013, the end of the period covered by this Quarterly Report on Form 10-Q. The term “disclosure controls and procedures,” as set forth in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to provide reasonable assurance that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of June 30, 2013, our interim chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
We had a material weakness in our internal control over financial reporting because we did not maintain effective controls over the certification of debt covenant compliance with respect to our credit facility. In the second quarter of 2013, we discovered that we failed to comply with covenants related to the achievement of minimum three-month trailing revenue levels for the period from March 2013 to May 2013. In June 2013, we obtained a waiver of this noncompliance from the lenders. Although the material weakness existed as of March 31, 2013, we did not discover the material weakness in our internal control over financial reporting until after the filing of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2013.
During the three months ended June 30, 2013, we implemented the following changes in our internal control over financial reporting that contributed to the remediation of the material weakness described above:
we evaluated and improved the design and operation of our debt covenant compliance process and controls, which has led to the implementation of new and improved procedures where warranted;
we assigned additional personnel from a cross-functional team to evaluate and review non-financial as well as financial covenants on a timely basis; and
we increased the level of review and discussion of each non-financial and financial covenant and supporting documentation with senior financial management.

We have evaluated and tested the effectiveness of these controls as of June 30, 2013 and determined that the material weakness identified above has been remediated.
Except as described above, there have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended June 30, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


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PART II: OTHER INFORMATION
Item 1. Legal Proceedings
We are not currently a party to any pending legal proceedings that we believe will have a material adverse effect on our business or financial condition. We may, however, be subject to various claims and legal actions arising in the ordinary course of business from time to time.
Item 1A. Risk Factors
Our business is subject to numerous risks. You should carefully consider the following risks and all other information contained in this Quarterly Report on Form 10-Q, as well as general economic and business risks, together with any other documents we file with the SEC. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. If any of the following events actually occur or risks actually materialize, it could have a material adverse effect on our business, operating results and financial condition and cause the trading price of our common stock to decline.
Risks Related to Our Business and Strategy
Our ability to successfully execute our strategy is dependent on our achieving greater market acceptance of the NMR LipoProfile test.
Our ability to generate revenue depends on our successful marketing of the NMR LipoProfile test. The NMR LipoProfile test accounted for 96% of our revenues for the three and six months ended June 30, 2013 and 94% of our revenues for the year ended December 31, 2012. We expect that our revenues and profitability will depend on sales of the NMR LipoProfile test for the foreseeable future.
There is not currently widespread awareness of the NMR LipoProfile test among clinicians, even though the test has been available since 1999. In order to achieve greater market acceptance of the NMR LipoProfile test, we must continue to demonstrate to clinicians, other healthcare professionals, clinical diagnostic laboratories, healthcare thought leaders and third-party payors that the test is a clinically useful and cost-effective diagnostic test and disease management tool for cardiovascular disease risk providing improved or additional benefits over traditional cholesterol testing, which has been widely accepted as effective for managing cardiovascular risk for many years.
When seeking testing and management recommendations for coronary heart disease, or CHD, many physicians and other clinicians look to clinical guidelines published by influential organizations. Such organizations include the National Cholesterol Education Program, or NCEP, an authority on cholesterol management overseen by the National Heart, Lung and Blood Institute, or NHLBI, part of the National Institutes of Health, and the AHA. The NMR LipoProfile test is not currently included in guidelines published by NCEP or the AHA. If we are not successful in our strategy of gaining inclusion in the guidelines published by these or other organizations, it could ultimately limit market adoption of the NMR LipoProfile test.
Our industry is characterized by rapid technological changes, and current or future studies may question the utility of LDL-P testing or suggest new approaches or technologies that may be more beneficial to patient care than our current tests or the tests that we may develop in the future. In such cases, it could make it more difficult to persuade clinicians, payors and publishers of clinical guidelines of the utility of our NMR LipoProfile test and other tests that we may develop in the future compared to existing tests or new approaches or technologies.
A small number of clinical diagnostic laboratory customers account for most of the sales of our NMR LipoProfile test. If any of these laboratories orders fewer tests from us for any reason, our revenues could decline.
For the three and six months ended June 30, 2013, we generated 89% of our revenues, and for the year ended December 31, 2012, we generated 84% of our revenues, from clinical diagnostic laboratory customers. Sales to one of these laboratories, Health Diagnostics Laboratory, Inc., accounted for 34% of our revenues for the three and six months ended June 30, 2013 and 32% of our revenues for the year ended December 31, 2012. Sales to a second laboratory customer, Laboratory Corporation of America Holdings, or LabCorp, accounted for 30% of our revenues for the three and six months ended June 30, 2013 and 29% of our revenues for the year ended December 31, 2012.


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Our current agreements with our laboratory customers do not require them to purchase any minimum quantities of the NMR LipoProfile test. In addition, these customers generally have the right to terminate their respective agreements with us at any time. If any major customer were to terminate its relationship with us, or to substantially diminish its purchases of the NMR LipoProfile test, our revenues could significantly decline or it could adversely impact our revenue growth.
We expect to incur losses for the next several years as we increase expenses in our effort to increase market share for the NMR LipoProfile test, place the Vantera system in third-party clinical diagnostic laboratories, and develop new personalized diagnostic tests.
Although we generated net income for the year ended December 31, 2012, we have incurred significant losses since our inception. As of June 30, 2013, we had an accumulated deficit of $53.3 million. We anticipate experiencing losses for the next several years as we increase expenses in pursuit of our growth strategy and our efforts to increase market share for the NMR LipoProfile test, place the Vantera system in third-party clinical diagnostic laboratories, and develop new personalized diagnostic tests.
Historically, our losses have resulted principally from research and development programs, our sales and marketing efforts, and our general and administrative expenses. We expect to continue to incur significant operating expenses and anticipate that our expenses and losses will increase due to costs relating to, among other things:
expansion of our direct sales force and increasing our marketing capabilities to promote market awareness and acceptance of our NMR LipoProfile test;
placement of the Vantera system in third-party clinical diagnostic laboratories;
development of and, as necessary, pursuit of regulatory approvals for, new diagnostic tests;
expansion of our operating capabilities;
maintenance, expansion and protection of our intellectual property portfolio and trade secrets;
employment of additional clinical, quality control, scientific and management personnel; and
employment of operational, financial, accounting and information systems personnel, consistent with expanding our operations and our status as a newly public company.
To become and remain profitable, we must succeed in increasing sales of our NMR LipoProfile test or develop and commercialize new tests with significant market potential, and place the Vantera system in third-party clinical diagnostic laboratories. We may never succeed in these activities and may never generate revenues that are sufficient to achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain consistently profitable would likely depress the market price of our common stock and could significantly impair our ability to raise capital, expand our business or continue to pursue our growth strategy.
If we do not establish relationships with additional clinical diagnostic laboratories, we may not be able to increase the number of NMR LipoProfile tests we sell.
A significant element of our strategy is to leverage relationships with clinical diagnostic laboratories to increase market acceptance of the NMR LipoProfile test and gain market share. Most clinicians who request traditional cholesterol tests, our NMR LipoProfile test and other diagnostic tests to evaluate cardiovascular disease risk order these tests through clinical diagnostic laboratories.
If we are unable to establish relationships with additional clinical diagnostic laboratories, clinicians who order tests through these laboratories may be unwilling or unable to order our NMR LipoProfile test. In addition, we would not have the benefit of leveraging the sales, marketing and distribution capabilities of these laboratories, which we believe is important to our ability to increase awareness of and expand utilization of the NMR LipoProfile test. As a result, if we are unable to establish additional clinical laboratory relationships, our ability to increase sales of our NMR LipoProfile test and to successfully execute our strategy could be compromised.

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We will need to expand our marketing and sales capabilities in order to increase demand for our NMR LipoProfile test, to expand geographically and to successfully commercialize any other personalized diagnostic tests we may develop.
We believe our current sales and marketing operations are not sufficient to achieve the level of market awareness and sales required for us to attain significant commercial success for our NMR LipoProfile test, to expand our geographic presence and to successfully commercialize any other diagnostic tests we may develop. In order to increase sales of our NMR LipoProfile test, we will need to:
expand our direct sales force in the United States by recruiting additional sales representatives in selected markets;
educate clinicians, other healthcare professionals, clinical diagnostic laboratories, healthcare thought leaders and third-party payors regarding the clinical benefits and cost-effectiveness of our NMR LipoProfile test;
expand our number of clinical diagnostic laboratory and hospital outreach laboratory customers; and
establish, expand and manage sales and reimbursement arrangements with third parties, such as clinical diagnostic laboratories and insurance companies.
We have limited experience in selling and marketing the NMR LipoProfile test nationally, and we have only limited experience in placing and servicing the Vantera system in third-party clinical diagnostic laboratories for commercial purposes. We recently hired a new Vice President of Sales, and we intend to hire a significant number of additional sales and marketing personnel with experience in the diagnostic, medical device or pharmaceutical industries. Our new sales personnel may be less efficient and productive than our more experienced, existing sales personnel. We may also face competition from other companies in these industries, some of whom are much larger than us and who can pay significantly greater compensation and benefits than we can, in seeking to attract and retain qualified sales and marketing employees. If we are unable to hire and retain qualified sales and marketing personnel on a timely basis, or at all, our business will suffer.
Furthermore, in order to successfully commercialize diagnostic tests that we may develop in the future, we may need to conduct lengthy, expensive clinical trials and develop dedicated sales and marketing operations to achieve market awareness and demand. If we are not able to successfully implement our marketing, sales and commercialization strategies, we may not be able to expand geographically, increase sales of our NMR LipoProfile test or successfully commercialize any future diagnostic tests that we may develop.
The diagnostic industry features rapidly changing technology that could make our current test or the tests we are developing obsolete or less competitive unless we continue to develop and manufacture new and improved tests and pursue new market opportunities.
Our industry is characterized by rapid technological changes, frequent new product introductions and enhancements and evolving industry standards. Our future success will depend on our ability to keep pace with the evolving needs of our customers on a timely and cost-effective basis and to pursue new market opportunities that develop as a result of technological and scientific advances. These new market opportunities may be outside the scope of our expertise or in areas that have unproven market demand, and the utility and value of new tests that we develop may not be accepted in the market. Our inability to gain market acceptance of new tests could harm our future operating results. Further, if new research or clinical evidence or economic comparative evidence arises that supports a different marker for CHD risk, demand for our test could decline.
Our NMR LipoProfile test competes with other diagnostic testing methods that may be more widely accepted than our test.
The clinical diagnostics market is highly competitive, and we must be able to compete effectively against existing and future competitors in order to be successful. In selling our NMR LipoProfile test, we compete primarily with existing diagnostic, detection and monitoring technologies, particularly the conventional lipid panel test, which is relatively inexpensive, widely reimbursed and broadly accepted as an effective test for managing the risk of developing cardiovascular disease. We also compete against companies that offer other methods for directly or indirectly measuring cholesterol concentrations, lipoproteins or lipoprotein particles. For example, measuring apolipoprotein B, or apoB, is an indirect way to approximate LDL-P. ApoB tests are offered by many clinical diagnostic laboratories and are generally less expensive than our test. It is possible that apoB, or other competing tests, could be perceived by clinicians as more cost-effective than our test in providing information useful in managing CHD risk. In addition, some competitors offering these competing technologies may have longer operating histories, better name recognition and greater financial, technical, sales, marketing, distribution and public relations resources than we have. They may also have more experience in research and development, regulatory matters, manufacturing and marketing than we do, and may have established broad third-party reimbursement for their tests. If we do not compete successfully, we will not be able to increase our market share and our business will be seriously harmed.

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Even though the Vantera system has received regulatory clearance in the United States, if laboratories are not receptive to placement of the Vantera system at their facilities, or if we do not receive regulatory clearance of the Vantera system in other jurisdictions, our growth strategy may not be successful.
A key element of our strategy is to place the Vantera system, our next-generation automated clinical NMR analyzer, on site with qualified clinical diagnostic laboratory customers to broaden access to our technology and increase demand for our NMR LipoProfile test and any future diagnostic tests that we may develop. Although we received clearance from the FDA to perform the FDA-cleared measurements of the NMR LipoProfile test using the Vantera system in August 2012, we have not applied for clearance from comparable regulatory agencies in other countries for the Vantera system, and we may not receive regulatory clearance for the commercial use of the Vantera system in other countries on a timely basis, or at all. Even though the Vantera system is cleared by the FDA, clinical diagnostic laboratories may be unwilling or unable to accept the placement of the Vantera system for any reason, or these laboratories may not be satisfied with the Vantera system after it is placed in their facilities. If clinical diagnostic laboratories do not accept the placement of the Vantera system in their facilities, our ability to grow our business by deploying the Vantera system could be compromised.
We rely on two key suppliers for the components used in the Vantera system. If we were to lose either of these suppliers, our ability to broadly place the Vantera system could be compromised.
We currently rely on a single supplier, Agilent Technologies, Inc., for the magnet, probe and console incorporated in the Vantera system. These are the key components of the analyzers necessary to perform our NMR LipoProfile test. We are party to a supply agreement with Agilent pursuant to which we have agreed to exclusively purchase all of our NMR-related components from them. We are also party to a production agreement with KMC Systems, Inc. under which KMC is our exclusive manufacturer of the sample handler and shell for the Vantera system.
We are currently aware of one other primary supplier of NMR spectrometers, Bruker BioSpin, part of Bruker Corporation. We have in the past acquired NMR spectrometers from Bruker BioSpin, and we use them in our current generation of NMR clinical analyzers, but we do not currently have an agreement or relationship with Bruker BioSpin. In the event it is necessary or desirable to acquire NMR spectrometers from Bruker BioSpin, we might not be able to obtain them on commercially reasonable terms, if at all. It could also require significant time and expense to redesign our current analyzers or the Vantera system to work with the spectrometers provided by another company.
If we are unable to obtain the NMR components we need at a reasonable price or on a timely basis, we may be unable to maintain the analyzers we use in our facility to perform our NMR LipoProfile test, which could compromise our ability to meet our customers' orders for the test. Likewise, if the components or any other part of the Vantera system are not available when needed, we may not be able to place the Vantera system broadly, which could impair our ability to pursue our growth strategy.
If we do not successfully develop or acquire and introduce new personalized diagnostic tests or other applications of our technology, we may not generate new sources of revenue and may not be able to successfully implement our growth strategy.
Our business strategy includes the acquisition, development and introduction of new clinical diagnostic applications of our NMR-based technology in addition to our NMR LipoProfile test. Additionally, we believe that for our Vantera system to be attractive to laboratories to place in their facilities, it may be necessary for us to offer additional tests for use on the Vantera system. All of our diagnostic tests under development will require significant additional research and development, a commitment of significant additional resources and possibly costly and time-consuming clinical testing prior to their commercialization. Our technology is complex, and we cannot be sure that any tests under development will be developed successfully, be proven to be effective, offer diagnostic or other improvements over currently available tests, meet applicable regulatory standards, be produced in commercial quantities at acceptable costs or be successfully marketed.
We may also in the future seek to acquire complementary products or technologies from third parties. Integrating any product or technology we acquire could be expensive and time-consuming, disrupt our ongoing business and distract our management. If we are unable to integrate any tests or technologies effectively, we may not be able to implement our business model. If we do not successfully develop new clinical diagnostic applications of our NMR-based technology or acquire complementary diagnostic products, we could lose interest from academic medical centers and could also lose revenue opportunities with existing or future clinical laboratory customers.

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Our expected transition to a new chief executive officer could be disruptive to our business, and our inability to attract, hire or retain other key personnel could also slow our growth and prevent us from successfully executing our business strategy.