Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended September 30, 2011

 

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

For the transition period from                     to                    

Commission File Number: 001-34753

 

 

GenMark Diagnostics, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   27-2053069

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

5964 La Place Court, Suite 100, Carlsbad, California   92008-8829
(Address of principal executive offices)   (Zip code)

Registrant’s telephone number, including area code: 760-448-4300

 

 

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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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  x    No  ¨

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

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x    Smaller reporting company   ¨

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

The number of outstanding shares of the registrant’s common stock on November 5, 2011 was 20,477,820.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          Page  
PART I - FINANCIAL INFORMATION

(Unaudited)

  

  

Item 1.    Financial Statements      1   
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      13   
Item 3.    Quantitative and Qualitative Disclosures About Market Risk      19   
Item 4.    Controls and Procedures      20   
   PART II - OTHER INFORMATION   
Item 1.    Legal Proceedings      22   
Item 1A.    Risk Factors      22   
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds      22   
Item 3.    Defaults Upon Senior Securities      22   
Item 4.    (Removed and Reserved)      23   
Item 5.    Other Information      23   
Item 6.    Exhibits      23   


Table of Contents

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

GENMARK DIAGNOSTICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

(Unaudited)

 

     As of
September 30, 2011
    As of
December 31, 2010
 

Current assets

    

Cash and cash equivalents

   $ 31,001      $ 18,329   

Short-term investments

     5,000        —     

Accounts receivable, net of allowance of $111 and $39 at September 30, 2011 and December 31, 2010, respectively

     724        678   

Inventories

     1,963        897   

Other current assets

     428        2,193   
  

 

 

   

 

 

 

Total current assets

     39,116        22,097   

Property and equipment, net

     3,122        2,702   

Intangible assets, net

     1,382        1,460   

Other long-term assets

     80        55   
  

 

 

   

 

 

 

Total assets

   $             43,700      $ 26,314   
  

 

 

   

 

 

 

Current liabilities

    

Accounts payable

   $ 1,496      $ 823   

Accrued compensation

     1,219        1,172   

Current portion of loan payable

     1,000        —     

Other current liabilities

     2,705        1,945   
  

 

 

   

 

 

 

Total current liabilities

     6,420        3,940   

Long-term liabilities

    

Loan payable

     833        —     

Other non-current liabilities

     630        1,307   
  

 

 

   

 

 

 

Total liabilities

   $ 7,883      $ 5,247   
  

 

 

   

 

 

 

Stockholders’ equity

    

Preferred stock, $0.0001 par value; 5,000 authorized, none issued

     —          —     

Common stock, $0.0001 par value; 100,000 authorized; 20,478 and 11,728 issued and outstanding as of September 30, 2011 and December 31, 2010, respectively

     2        1   

Additional paid-in capital

     199,300        166,009   

Accumulated deficit

     (163,027     (144,493

Accumulated other comprehensive loss

     (458 )     (450
  

 

 

   

 

 

 

Total stockholders’ equity

     35,817        21,067   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 43,700      $ 26,314   
  

 

 

   

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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Table of Contents

GENMARK DIAGNOSTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

     Three Months Ended
September 30,
    Nine months Ended
September 30,
 
     2011     2010     2011     2010  

Product Revenue

   $ 1,206      $ 656      $ 2,765      $ 1,563   

License and other revenue

     110        28        210        196   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     1,316        684        2,975        1,759   

Cost of sales

     1,785        1,123        4,580        2,372   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross loss

     (469 )     (439 )     (1,605 )     (613 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

        

Sales and marketing

     1,328        1,173        3,767        3,567   

General and administrative

     2,405        1,603        6,338        5,798   

Research and development

     1,903        1,709        6,759        4,935   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     5,636        4,485        16,864        14,300   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (6,105 )     (4,924 )     (18,469 )     (14,913 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income

        

Other income (expense)

     (180 )     —          (50 )     (1 )

Interest income (expense)

     (29 )     7        6        16   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

     (209 )     7        (44 )     15   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (6,314 )     (4,917 )     (18,513 )     (14,898 )

Provision for income taxes

     1        —          (21 )     (5 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (6,313 )   $ (4,917 )   $ (18,534 )   $ (14,903 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share, basic and diluted

   $ (0.31 )   $ (0.42 )   $ (1.20 )   $ (1.63 )

Weighted average number of shares outstanding

     20,043        11,724        15,393        9,142   

Condensed consolidated statements of comprehensive loss for the three and nine months ended September 30, 2011 and 2010

        

Net loss

   $ (6,313 )   $ (4,917 )   $ (18,534 )   $ (14,903 )

Foreign currency translation adjustment

     56        —          (8 )     (35 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

   $ (6,257 )   $ (4,917 )   $ (18,542 )   $ (14,938 )
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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GENMARK DIAGNOSTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

     Nine months Ended
September 30,
 
     2011     2010  

Cash flows from operating activities:

    

Net loss

   $ (18,534   $ (14,903 )

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

    

Depreciation and amortization

     948        725   

Share-based compensation

     1,639        1,119   

Inventory write-down

     428        984   

Changes in operating assets and liabilities:

    

Trade accounts receivable

     (46     (363 )

Inventories

     (1,448     (1,510 )

Other current assets

     1,741        183   

Accounts payable

     510        (446 )

Accrued compensation

     22        517   

Accrued and other liabilities

     731        104   
  

 

 

   

 

 

 

Net cash used in operating activities

     (14,009     (13,590 )
  

 

 

   

 

 

 

Investing activities:

    

Payments for intellectual property licenses

     (728     —     

Purchases of property and equipment

     (1,172     (1,398 )

Purchase of short-term investments

     (5,000     —     
  

 

 

   

 

 

 

Net cash used in investing activities

     (6,900     (1,398 )
  

 

 

   

 

 

 

Financing activities:

    

Proceeds from issuance of ordinary shares and common stock

     34,532        27,600   

Costs incurred in conjunction with public offering

     (2,790     (4,909 )

Proceeds from borrowings

     2,000        —     

Principal repayment of borrowings

     (167     —     

Proceeds from stock option exercises

     —          5   
  

 

 

   

 

 

 

Net cash provided by financing activities

     33,575        22,696   
  

 

 

   

 

 

 

Effect of foreign exchange rate changes

     6        (47 )
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     12,672        7,661   

Cash and cash equivalents at beginning of period

     18,329        16,483   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 31,001      $ 24,144   
  

 

 

   

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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Genmark Diagnostics, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(unaudited)

 

1. Organization and basis of presentation

Genmark Diagnostics, Inc. (the “Company” or “GenMark”) is a molecular diagnostics company focused on developing and commercializing the Company’s proprietary eSensor technology. On February 12, 2010, the Company was established to serve as the parent company of Osmetech plc (“Osmetech”) upon a corporate reorganization and initial public offering (“IPO”). On June 3, 2010, the Company completed an IPO for 4,600,000 shares. Immediately prior to the completion of the IPO, the Company underwent a corporate reorganization whereby the ordinary shares of Osmetech were exchanged by its shareholders for the common stock of the Company on a 230 for 1 basis.

As the reorganization is deemed to be a transaction under common control, GenMark accounted for the reorganization in a manner similar to a pooling-of-interests, meaning:

(i) assets and liabilities were carried over at their respective carrying values;

(ii) common stock was carried over at the nominal value of the shares issued by GenMark;

(iii) additional paid-in capital represents the difference between the nominal value of the shares issued by GenMark, and the total of the additional paid-in capital and nominal value of Osmetech’s shares cancelled pursuant to the described reorganization; and

(iv) the accumulated deficit represents the aggregate of the accumulated deficit of Osmetech and the Company.

Once the reorganization became effective, all stock options granted under the Osmetech plc 2003 U.S. Equity Compensation Plan, Long Term Incentive Awards and all warrants issued were exchanged for options and warrants exercisable for the common stock of the Company.

In these consolidated financial statements, the Company means Osmetech when referring to periods prior to the corporate reorganization and IPO.

The accompanying financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred net losses from operations since its inception and has an accumulated deficit of $163.0 million at September 30, 2011. Cash and cash equivalents and short-term investments at September 30, 2011 were $36.0 million.

Management expects operating losses to continue through the foreseeable future until the Company has expanded its product offerings and increased its product revenues to an extent that covers the fixed cost base of the business. The Company’s management has prepared cash flow forecasts which indicate, based on the current cash resources available and the availability of unutilized credit facilities, that the Company has sufficient capital to fund its operations for at least the next twelve months.

The Company has prepared the accompanying unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by U.S. GAAP for audited financial statements. In the opinion of management, all adjustments, which include only normal recurring adjustments considered necessary for a fair presentation, have been included. Operating results for the nine months ended September 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. The information presented in the condensed consolidated financial statements and related footnotes at September 30, 2011, and for the three and nine months ended September 30, 2011 and 2010, is unaudited and the condensed consolidated balance sheet amounts and related footnotes at December 31, 2010 have been derived from our audited financial statements. For further information, refer to the consolidated financial statements and accompanying footnotes included in our annual report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 14, 2011.

Segment Information

The Company operates in one business segment, which is the development and commercialization of molecular tests based on its proprietary eSensor detection technology. Substantially all of the Company’s operations and assets are in the United States of America.

Principles of Consolidation-The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

 

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Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) or other standard setting bodies that are adopted by the Company as of the specified effective date. We believe that the impact of recently issued standards that are not yet effective will not have a material impact on our financial position or results of operations upon adoption.

Fair Value of Financial Instruments

Assets and liabilities are classified based upon the lowest level of input that is significant to the fair value measurement. The carrying amounts of financial instruments such as cash equivalents, accounts receivable, prepaid and other current assets, accounts payable and other current liabilities approximate the related fair values due to the short-term maturities of these instruments. The Company reviews the fair value hierarchy on a quarterly basis. Changes in the observations or valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy.

The Company’s cash equivalents and short-term investments include money market funds and certificates of deposit. When available, the Company uses quoted market prices to determine fair value and classifies such items as Level 1. If quoted market prices are not available, prices are determined using prices for recently traded financial instruments with similar underlying terms, such as interest rates and yield curves that are observable at commonly quoted intervals. The Company classifies such items as Level 2.

The following table presents the Company’s hierarchy for assets measured at fair value on a recurring basis as of September 30, 2011 and December 31, 2010 (in thousands):

 

     September 30, 2011  
     Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs (Level 3)
     Total  

Cash equivalents

   $ 23,225       $ —         $ —         $ 23,225   

Certificates of deposit

     —           8,000         —           8,000   
     December 31, 2010  
     Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs (Level 3)
     Total  

Cash equivalents

   $ 16,707       $ —         $ —         $ 16,707   

Cash and cash equivalents and short-term investments

Cash and cash equivalents consist of cash on deposit with banks, money market instruments and certificates of deposit with maturities of three months or less at the date of purchase. Short-term investments consist of a certificate of deposit that matures in greater than three months, but less than one year from the date of purchase. The carrying amounts reported in the balance sheets for cash, cash equivalents and short-term investments are stated at their fair market value.

Concentration of Risk

The Company had sales to one customer representing approximately 14% of total revenues for the nine months ended September 30, 2011. Also, the Company’s XT-8 system is manufactured by a single source supplier that specializes in contract design and manufacturing of electronic and electromechanical devices for medical use.

Product Shipment Costs

Product shipment costs are included in sales and marketing expense in the accompanying Condensed Consolidated Statements of Operations. Shipping and handling costs were $134,000 and $142,000 for the nine months ended September 30, 2011 and 2010, respectively.

Product Warranties

The Company generally offers a one-year warranty for its systems sold to customers and provides for the estimated cost of the product warranty at the time the system sale is recognized. Factors that affect the Company’s warranty reserves include the number of units sold, historical and anticipated rates of warranty repairs and the cost per repair. The Company periodically assesses the adequacy of the warranty reserve and adjusts the amount as necessary.

Impairment of Long-Lived Assets

The Company assesses the recoverability of long-lived assets, including intangible assets, by periodically evaluating the carrying value whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If impairment is indicated, the Company writes down the carrying value of the asset to its estimated fair value. This fair value is primarily determined based on estimated discounted cash flows.

Income Taxes

Current income tax expense is the amount of income taxes expected to be payable for the current year. A deferred income tax liability or asset is established for the expected future tax consequences resulting from the differences in financial reporting and tax bases of assets and liabilities. A valuation allowance is provided if it is more likely than not that some or all of the deferred tax assets will not be realized. A full valuation allowance has been recorded against the Company’s deferred tax assets due to the uncertainty surrounding the Company’s ability to utilize these assets in the future. The Company provides for uncertain tax positions when such tax positions do not meet the recognition thresholds or measurement standards prescribed by the authoritative guidance on income taxes. Amounts for uncertain tax positions are adjusted in periods when new information becomes available or when positions are effectively settled. The Company recognizes accrued interest and penalties related to uncertain tax positions as a component of income tax expense.

Corporate Reorganization

During the quarter ended June 30, 2011, the Company underwent a corporate reorganization (the “Reorganization”) intended to simplify its U.S. entity structure. As part of the Reorganization, Osmetech Technologies, Inc. merged into Clinical Micro Sensors, Inc. (“CMS”), with CMS surviving. Additionally, Osmetech plc converted to a U.K. limited company for U.K. legal and tax purposes, and made an entity classification election to be treated as an entity disregarded from GenMark Diagnostics, Inc. for U.S. federal income tax purposes. It is anticipated that the Reorganization will not trigger any material U.S. federal or U.K. income tax expense. Additionally, it is anticipated that the post-Reorganization structure will allow GenMark Diagnostics, Inc. to elect to file a consolidated U.S. federal income tax return with its remaining U.S. subsidiaries, CMS and Osmetech, Inc.

 

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2. Share-Based Compensation

The Company recognizes share-based compensation expense related to share options, warrants and restricted stock issued to employees, directors and consultants in exchange for services. The compensation expense is based on the fair value of the awards, which are determined by utilizing various assumptions regarding the underlying attributes of the options and shares. The estimated fair value of options granted and restricted stock, net of forfeitures expected to occur during the vesting period, is amortized as compensation expense on a straight line basis over the period the vesting occurs. The share-based compensation expense is recorded in cost of sales, sales and marketing, research and development and general and administrative expenses based on the employee’s or consultant’s respective function. The option and warrant-related expense is derived from the Black-Scholes Option Pricing Model that uses several judgment based variables to calculate the expense. The inputs include the expected life of the option or warrant, the expected volatility and other factors. The compensation expense related to the restricted stock is calculated as the difference between the fair market value of the stock on the date of grant, less the cost to acquire the shares, which is $0.0001 per share, and is recognized over the vesting period of the award.

On June 3, 2010, the Company exchanged all of the outstanding options under the Osmetech plc 2003 U.S. Equity Compensation Plan (the “U.S. Plan”) for options under the 2010 Equity Incentive Plan (the “Plan”). The options were exchanged using an exchange ratio of 230 options to purchase shares of Osmetech plc to one share of the Company and was accounted for as a modification of the share-based payment arrangement. There was no additional compensation cost recorded related to the exchange as there was no change in the economic value of the options exchanged.

Employee participation in the Plan is at the discretion of the compensation committee or senior management of the Company. All options granted since June 3, 2010 are exercisable at a price equal to the average closing quoted market price of the Company’s shares on the NASDAQ on the date of grant. Options granted prior to June 3, 2010 under the Osmetech plc 2003 U.S. Equity Compensation Plan were exercisable at a price equal to the average closing quoted market price of the Osmetech plc’s shares on the Alternative Investment Market of the London Stock Exchange on the date of the grant as adjusted for the exchange ratio to the Company’s shares as described above. Options generally vest between 1 and 4 years.

Options are generally exercisable for a period up to 10 years after grant and are forfeited if the employee leaves the Company before the options vest. As of September 30, 2011, 169,428 shares remained available for future grant of awards under the Plan. Restricted stock grants reduce the amount of stock options available for grant under the 2010 Plan and are excluded from the table below.

The following table summarizes stock option activity during the nine months ended September 30, 2011:

 

     Number of
Share options
    Weighted average
exercise price
 

Outstanding at December 31, 2010

     1,107,920      $ 6.40   

Granted

     695,000      $ 4.33   

Exercised

     —          —     

Cancelled

     (249,035   $ 6.63   
  

 

 

   

 

 

 

Outstanding at September 30, 2011

     1,553,885      $ 5.42   
  

 

 

   

 

 

 

Exercisable at September 30, 2011

     534,046      $ 6.49   
  

 

 

   

 

 

 

As of September 30, 2011, there were 1,469,624 options that are vested or expected to vest and these options have a remaining weighted average contractual term of 8.48 years, and an aggregate intrinsic value of $1,020,823.

Valuation of Share-Based Awards—The Black-Scholes option pricing model was used for estimating the grant date fair value of stock options granted during the nine months ended September 30, 2011 with the following assumptions:

 

Expected volatility (%)

     70.00   

Expected life (years)

     6.08   

Risk free rate (%)

     2.50   

Expected dividend yield (%)

     0.00   

Estimated forfeitures (%)

     5.00   

During the nine months ended September 30, 2011, the Company granted 425,169 shares of restricted stock to employees and 10,000 shares of restricted stock to an outside consultant. The restricted stock granted to employees generally vests over a four year period except for 4,000 shares of restricted stock issued to one employee as part of a separation agreement that vested on May 31, 2011 and 222,926 shares issued to senior management employees that vested May 5, 2011. The restricted stock granted to the outside consultant vested on March 31, 2011 commensurate with the period of service rendered to the Company.

 

 

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3. Net Loss per Common Share

Basic net loss per share is computed by dividing loss available to common shareholders (the numerator) by the weighted average number of common shares outstanding during the period (the denominator). Shares issued during the period and shares reacquired during the period are weighted for the portion of the period that they were outstanding, as adjusted for the effect of participating securities. The Company’s unvested restricted share awards are participating securities as they contain non-forfeiture rights to dividends. Diluted loss per share is calculated in a similar manner to basic loss per share except that the denominator is increased to include the number of additional shares that would have been outstanding if the dilutive potential shares had been issued unless the effect would be anti-dilutive. As the Company had a net loss in each of the periods presented, basic and diluted net loss per ordinary share are the same.

The computations of diluted net loss per share did not include the effects of the following securities as the inclusion of these items would have been anti-dilutive (in thousands):

 

     September 30,  
     2011      2010  

Weighted average stock options

     1,554         1,121   

Warrants

     88         88   

Restricted Stock—unvested, issued and held in escrow

     427         —     

Restricted Stock—vested, not issued or outstanding

     —           4   
  

 

 

    

 

 

 

Total

     2,069         1,213   
  

 

 

    

 

 

 

Common Stock Warrants — During 2009, the Company issued warrants to purchase 132,475 of Osmetech’s ordinary shares with an exercise price of £4.60 per share, and warrants to purchase 88,317 of Osmetech’s ordinary shares with an exercise price of £6.90 per share to a director for services to the Company in connection with the share offering completed in 2009. Pursuant to the terms of the warrant, the warrant to purchase 132,475 was cancelled upon the closing of the IPO in June 2010. At the same time, the warrant to purchase 88,317 of Osmetech’s ordinary shares was converted to warrants to purchase 88,317 shares of the Company’s common stock at an exercise price of $9.98. These warrants were fully vested and exercisable upon issue, and shall continue to be exercisable up to and including the earlier to occur of (i) 60 days after the director leaving the Company’s board of directors (for whatever reason) and (ii) June 30, 2012.

 

4. Property and Equipment, net

Property and equipment was comprised of the following as of September 30, 2011 and December 31, 2010 (in thousands):

 

     September 30,
2011
    December 31,
2010
 

Property and equipment—at cost:

    

Plant and machinery

   $ 2,539      $ 2,452   

Instruments

     3,959        2,822   

Office equipment

     1,574        1,542   

Leasehold improvements

     537        596   
  

 

 

   

 

 

 

Total property and equipment—at cost

     8,609        7,412   

Less accumulated depreciation

     (5,487 )     (4,710 )
  

 

 

   

 

 

 

Net property and equipment

   $ 3,122      $ 2,702   
  

 

 

   

 

 

 

Depreciation expense was $869,000 and $672,000 for the nine months ended September 30, 2011 and 2010, respectively.

 

5. Loan payable

In March 2010, the Company entered into a loan and security agreement with Square 1 Bank, pursuant to obtaining a credit facility consisting of a revolving line of credit in the amount of up to $2 million and an equipment term loan in the amount of up to $2 million. Based upon certain financial covenants, interest on the revolving line of credit will be either (i) the greater of (a) the bank’s prime rate (3.25% as of September 30, 2011) plus 2.75%, or (b) 6%; or (ii) the greater of (a) the bank’s prime rate plus 3.75%, or (b) 7%. In addition, based upon certain financial covenants, interest on the equipment term loan will be either (i) the greater of (a) the bank’s prime rate plus 3.25%, or (b) 6.50%; or (ii) the greater of (a) the bank’s prime rate plus 4.25%, or (b) 7.50%. The revolving line matures in July 2011 and the term loan matures in July 2013. In March 2011, the loan and security agreement was amended, whereby the line of credit availability was increased to $3 million and the maturity was extended to July 2012. The term loan was modified to allow invoices up to 360 days to qualify to be submitted for credit extension. There were no other changes to these two loans.

 

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In March 2011, an additional loan was made available under the amended loan and security agreement for up to $1.0 million to finance equipment purchases. Based upon certain financial covenants, interest on this equipment term loan will be either (i) the greater of (a) the bank’s prime rate plus 3.25%, or (b) 6.50%; or (ii) the greater of (a) the bank’s prime rate plus 4.25%, or (b) 7.50%. This term loan matures March 2014.

As of September 30, 2011, the Company had no outstanding loans on the line of credit or the 2011 equipment loan and had a balance of $1.8 million used to finance 2010 equipment purchases and tenant improvements to its Carlsbad facility on the original 2010 equipment term loan. The loan bears an interest rate of 6.5%. Interest-only payments at the rate of 6.5% were due monthly from the date of each initial equipment advance until July 12, 2011. Initial equipment advances that were then outstanding are payable in 24 equal monthly installments of principal, plus all accrued and unpaid interest, beginning on August 12, 2011 and continuing on the same day of each month thereafter through July 12, 2013.

Pursuant to the terms of the loan and security agreement, the Company is required to maintain a ratio of liquidity to bank indebtedness equal to at least 1.50 to 1.00. In addition, the loan and security agreement includes several restrictive covenants, including requirements that the Company obtains the consent of Square 1 Bank prior to entering into any change of control event unless all debt is repaid to Square 1 Bank prior to the change of control event, incurring other indebtedness or liens with respect to the Company’s property, making distributions to stockholders, making certain investments or entering into certain transactions with affiliates and other restrictions on storing inventory and equipment with third parties. The agreement also limits the amount the Company can borrow under the term loan to license genetic biomarkers to $500,000. To secure the credit facility, the Company granted Square 1 Bank a first priority security interest in its assets and intellectual property rights. The Company is currently in compliance will all ratios and covenants.

 

6. Income taxes

The Company uses an estimated annual effective tax rate, which is based on expected annual income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which the Company operates, to determine its quarterly provision for income taxes. Certain significant or unusual items are separately recognized in the quarter in which they occur and can be a source of variability in the effective tax rates from quarter to quarter.

As of September 30, 2011, the Company has recorded a full valuation allowance against all of its net deferred tax assets due to the uncertainty surrounding the Company’s ability to utilize these assets in the future. Provision for income tax was $22,000 and $5,000 for the nine months ended September 30, 2011 and 2010, respectively. Due to the Company’s losses it only records tax provision or benefit related to minimum tax payments or refunds and interest and penalties related to its uncertain tax positions.

The total amount of unrecognized tax benefits was $382,000 as of September 30, 2011 which would impact the effective tax rate if recognized. The gross liability for income taxes related to unrecognized tax benefits is included in other long-term liabilities in the Company’s condensed consolidated balance sheets.

The total balance of accrued interest related to uncertain tax positions was $116,000 as of September 30, 2011. The Company recognizes interest and penalties related to uncertain tax positions as a component of income tax expense. The Company does not expect its unrecognized tax benefits to change significantly over the next twelve months.

The Company is subject to taxation in the U.S., the U.K. based on its legacy operations, and in various state jurisdictions. As of September 30, 2011 the Company’s tax years after 2007 are subject to examination by the U.K. tax authorities. Except for net operating losses generated in prior years carrying forward to the current year, as of September 30, 2011, the Company is no longer subject to U.S. federal, state, local or foreign examinations by tax authorities for years before 2006.

 

7. Common stock offering

The Company issued 8,125,440 shares of common stock on June 22, 2011 at a price of $4.25 per share, which included a public offering of 7,065,600 shares and 1,059,840 purchased by the underwriter in accordance with the over-allotment provisions of their agreement. The Company raised approximately $31.7 million in net proceeds after deducting underwriting discounts and commissions of $2.2 million and other offering expenses of $0.6 million.

 

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8. Unrecorded licensing agreement and reclassifications

Subsequent to the issuance of the 2010 audited financial statements, the Company concluded that a contract for the purchase of certain intellectual property rights should have been recorded as both an asset and a liability in the financial statements for the periods ended December 31, 2010 and March 31, 2011. The contract was properly recorded in the financial statements for the period ended June 30, 2011. The Company has recorded this contract which results in an increase of $1,389,000 to intangible assets for the year ended December 31, 2010 and for the period ended March 31, 2011, respectively. The current and long-term portion of the liability for the contract was $695,000 and $694,000 and $1,043,000 and $346,000 respectively as of December 31, 2010 and March 31, 2011. As of September 30, 2011, the current and long-term portion of the obligation for the contract was $726,000 and $0, respectively.

Subsequent to the issuance of the 2010 audited financial statements, the Company further concluded that certain expenses were classified incorrectly in its Consolidated Statements of Operations for the past periods presented herein, with no net impact to operating loss, net loss, statements of cash flows or balance sheets. The Company has corrected these immaterial misstatements. These corrections result in reductions to cost of sales of $98,000 and $279,000 in the quarter and nine month period ending September 30, 2010 and corresponding increases to revenues and sales and marketing, general and administrative and research and development expenses.

Additionally, based on a loan amendment dated March 2011, the Company should have reclassified $667,000 of its loan payable to current portion of long-term debt at March 31, 2011. The Company corrected this presentation in subsequent filings.

 

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The following tables reconcile the “As Reported” financial statements with the “As Corrected” financial statements.

GENMARK DIAGNOSTICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

(unaudited)

 

     As Reported
December 31, 2010
    Adjustment      As Corrected
December 31, 2010
 
Current assets        

Cash and cash equivalents

   $ 18,329        —         $ 18,329   

Accounts receivable, net of allowance of $39 at December 31, 2010

     678        —           678   

Inventories

     897        —           897   

Other current assets

     2,193        —           2,193   
  

 

 

   

 

 

    

 

 

 
Total current assets      22,097        —           22,097   

Property and equipment, net

     2,702        —           2,702   

Intangible assets, net

     71        1,389         1,460   

Other long-term assets

     55        —           55   
  

 

 

   

 

 

    

 

 

 
Total assets    $ 24,925      $ 1,389       $ 26,314   
  

 

 

   

 

 

    

 

 

 

Current liabilities

       

Accounts payable

   $ 823        —         $ 823   

Accrued compensation

     1,172        —           1,172   

Other current liabilities

     1,250        695         1,945   
  

 

 

   

 

 

    

 

 

 
Total current liabilities      3,245        695         3,940   
Long-term liabilities        

Loan payable

     —          —           —     

Other non-current liabilities

     613        694         1,307   
  

 

 

   

 

 

    

 

 

 
Total liabilities    $ 3,858      $ 1,389       $ 5,247   
  

 

 

   

 

 

    

 

 

 
Stockholders’ equity        

Preferred stock, $0.0001 par value; 5,000 authorized, none issued

     —          —           —     

Common stock, $0.0001 par value; 100,000 authorized; 11,728 issued and outstanding as of December 31, 2010

     1        —           1   

Additional paid-in capital

     166,009        —           166,009   

Accumulated deficit

     (144,493 )     —           (144,493 )

Accumulated other comprehensive loss

     (450 )     —           (450 )
  

 

 

   

 

 

    

 

 

 
Total stockholders’ equity      21,067        —           21,067   
  

 

 

   

 

 

    

 

 

 
Total liabilities and stockholders’ equity    $ 24,925      $ 1,389       $ 26,314   
  

 

 

   

 

 

    

 

 

 

 

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GENMARK DIAGNOSTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

     As Reported     Adjustments     As Corrected  
     Three Months  Ended
September 30,
    Three Months  Ended
September 30,
    Three Months  Ended
September 30,
 
     2010     2010     2010  
Product Revenue    $ 653      $ 3      $ 656   

License and other revenue

     14        14        28   
  

 

 

   

 

 

   

 

 

 
Total revenue      667        17        684   

Cost of sales

     1,221        (98 )     1,123   
  

 

 

   

 

 

   

 

 

 
Gross loss      (554 )     (115 )     (439 )
  

 

 

   

 

 

   

 

 

 
Operating expenses       

Sales and marketing

     1,109        64        1,173   

General and administrative

     1,592        11        1,603   

Research and development

     1,669        40        1,709   
  

 

 

   

 

 

   

 

 

 
Total operating expenses      4,370        115        4,485   
  

 

 

   

 

 

   

 

 

 
Loss from operations      (4,924 )     —          (4,924 )
  

 

 

   

 

 

   

 

 

 
Other income       

Other income (expense)

     —          —          —     

Interest income (expense)

     7        —          7   
  

 

 

   

 

 

   

 

 

 
Total other income      7        —          7   
  

 

 

   

 

 

   

 

 

 
Loss before income taxes      (4,917 )     —          (4,917 )

Provision for income taxes

     —            —     
  

 

 

   

 

 

   

 

 

 
Net loss    $ (4,917 )   $ —        $ (4,917 )
  

 

 

   

 

 

   

 

 

 

Net loss per share, basic and diluted

   $ (0.42 )     —        $ (0.42 )

Weighted average number of shares outstanding

     11,724        —          11,724   

Condensed consolidated statements of comprehensive loss for the three months ended September 30, 2010

      

Net loss

   $ (4,917 )     —        $ (4,917 )

Foreign currency translation adjustment

     —          —          —     
  

 

 

   

 

 

   

 

 

 

Comprehensive loss

   $ (4,917 )     —        $ (4,917 )
  

 

 

   

 

 

   

 

 

 

 

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GENMARK DIAGNOSTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

     As Reported     Adjustments     As Corrected  
     Nine months  ended
September 30,
    Nine months  ended
September 30,
    Nine months  ended
September 30,
 
     2010     2010     2010  
Product Revenue    $ 1,575      $ (12   $ 1,563   

License and other revenue

     142        54        196   
  

 

 

   

 

 

   

 

 

 
Total revenue      1,717        42        1,759   

Cost of sales

     2,651        (279     2,372   
  

 

 

   

 

 

   

 

 

 
Gross loss      (934 )     (321     (613 )
  

 

 

   

 

 

   

 

 

 
Operating expenses       

Sales and marketing

     3,371        196        3,567   

General and administrative

     5,761        37        5,798   

Research and development

     4,847        88        4,935   
  

 

 

   

 

 

   

 

 

 
Total operating expenses      13,979        321        14,300   
  

 

 

   

 

 

   

 

 

 
Loss from operations      (14,913 )     —          (14,913 )
  

 

 

   

 

 

   

 

 

 
Other income       

Other income (expense)

     (1 )     —          (1 )

Interest income (expense)

     16        —          16   
  

 

 

   

 

 

   

 

 

 
Total other income      15        —          15   
  

 

 

   

 

 

   

 

 

 
Loss before income taxes      (14,898 )     —          (14,898 )

Provision for income taxes

     (5 )     —          (5 )
  

 

 

   

 

 

   

 

 

 
Net loss    $ (14,903 )   $ —        $ (14,903 )
  

 

 

   

 

 

   

 

 

 

Net loss per share, basic and diluted

   $ (1.63 )   $ —        $ (1.63 )

Weighted average number of shares outstanding

     9,142        —          9,142   

Condensed consolidated statements of comprehensive loss for the nine months ended September 30, 2010

      

Net loss

   $ (14,903 )   $ —        $ (14,903 )

Foreign currency translation adjustment

     (35 )     —          (35 )
  

 

 

   

 

 

   

 

 

 

Comprehensive loss

   $ (14,938 )     —        $ (14,938 )
  

 

 

   

 

 

   

 

 

 

 

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

The following discussion of our financial condition and results of operations should be read with our unaudited condensed consolidated financial statements and notes included in Item 1 of this Quarterly Report for the nine months ended September 30, 2011, as well as the audited financial statements and notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the fiscal year ended December 31, 2010, included in our Annual Report on Form 10-K dated March 11, 2011. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, 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 regarding future events and our future results are based on current expectations, estimates, forecasts, and projections and the beliefs and assumptions of our management including, without limitation, our expectations regarding our results of operations, sales and marketing expenses, general and administrative expenses, research and development expenses, and the sufficiency of our cash for future operations. Words such as “we expect,” “anticipate,” “target,” “project,” “believe,” “goals,” “estimate,” “potential,” “predict,” “may,” “will,” “expect,” “might,” “could,” “intend,” variations of these terms or the negative of those terms and similar expressions are intended to identify these forward-looking statements. Readers are cautioned that these forward-looking statements are subject to risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements.

Among the important factors that could cause actual results to differ materially from those indicated by our forward-looking statements are those discussed under the heading “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2010 and our risk factors described under the heading “Risk Factors” in Item 1A of Part II of our Quarterly Report for the quarter ended June 30, 2011. We do not intend to update these forward looking statements to reflect future events or circumstances.

Overview

GenMark was formed by Osmetech in Delaware in February 2010 and had no operations prior to its initial public offering which was completed in June 2010. Immediately prior to the closing of the initial public offering, GenMark acquired all of the outstanding ordinary shares of Osmetech in a reorganization under the applicable laws of the United Kingdom. As a result of the reorganization, all of the issued ordinary shares in Osmetech were cancelled in consideration of (i) the issuance of common stock of GenMark to the former shareholders of Osmetech and (ii) the issuance of new shares in Osmetech to GenMark. Following the reorganization, Osmetech became a wholly-owned subsidiary controlled by GenMark, and the former shareholders of Osmetech held shares of GenMark. Any historical discussion of GenMark relates to Osmetech and its consolidated subsidiaries prior to the reorganization.

We are a molecular diagnostics company focused on developing and commercializing our proprietary eSensor detection technology. Our proprietary electrochemical technology enables fast, accurate and highly sensitive detection of up to 72 distinct biomarkers in a single sample. Our XT-8 system received 510(k) clearance from the FDA and is designed to support a broad range of molecular diagnostic tests with a compact and easy-to-use workstation and self-contained, disposable test cartridges. Within 30 minutes of receipt of an amplified DNA sample, our XT-8 system produces clear and accurate results. Our XT-8 system supports between one and three analyzers. Each analyzer holds up to eight independent test cartridges, resulting in the XT-8 system supporting up to 24 test cartridges, each of which can be run independently, resulting in a convenient and flexible workflow for our target customers, which are hospitals and reference laboratories. As of September 30, 2011, we had an installed base of 141 analyzers, or placements, with our customers.

We have developed six tests for use with our XT-8 system and expect to expand this test menu by introducing new tests annually. Three of our diagnostic tests have received FDA clearance, including our Cystic Fibrosis Genotyping Test, which detects pre-conception risks of cystic fibrosis, our Warfarin Sensitivity Test, which determines an individual’s ability to metabolize the oral anticoagulant warfarin, and our Thrombophilia Risk Test, which detects an individual’s increased risk of blood clots. Our eSensor technology has demonstrated 100% accuracy in clinical studies compared to DNA sequencing in our Cystic Fibrosis Genotyping Test, our Warfarin Sensitivity Test and our Thrombophilia Risk Test. We have also developed a Respiratory Viral Panel Test, which detects the presence of major respiratory viruses and is currently labeled for Investigational use Only (IUO). We intend to submit the application for FDA clearance for our Respiratory Viral Panel Test in 2011. We also have developed a Hepatitis C Virus genotyping assay for Research Use Only (RUO), as well as an assay to test an individual’s sensitivity to Plavix, a commonly prescribed anti-coagulalant, also available for RUO customers. We also have a pipeline of several additional potential products in different stages of development or design, including a diagnostic test for mutations in a gene known as KRAS, which is predictive of an individual’s response rates to certain prescribed anti-cancer therapies.

We are also developing our next-generation platform, the NexGen system. We are designing the NexGen system to integrate automated nucleic acid extraction and amplification with our eSensor detection technology to enable technicians using the NexGen system to be able to place a raw or a minimally prepared patient sample into our test cartridge and obtain results without any additional steps. This sample-to-answer capability is enabled by the robust nature of our eSensor detection

 

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technology, which is not impaired by sample impurities that we believe hinder competing technologies. We are designing our NexGen system to further simplify workflow and provide powerful, cost-effective molecular diagnostics solutions to a significantly expanded group of hospitals and reference laboratories.

Since inception, we have incurred net losses from continuing operations each year, and we expect to continue to incur losses for the foreseeable future. Our losses attributable to continuing operations for the nine months ended September 30, 2011 and 2010 were approximately $18.5 million and $14.9 million, respectively. As of September 30, 2011, we had an accumulated deficit of $163.0 million. Our operations to date have been funded principally through sales of capital stock, borrowings and revenues. We expect to incur increasing expenses over the next several years, principally to develop additional diagnostic tests, as well as to further increase our spending to manufacture, sell and market our products.

Results of Operations — Three months ended September 30, 2011 compared to the three months ended September 30, 2010 (in thousands)

Revenue

 

     September 30,                
     2011      2010      $ Change      % Change  

Three months ended

   $ 1,316       $ 684       $ 632         92

The increase in revenue for the three month period ended September 30, 2011 as compared to the three month period ended September 30, 2010 was due to higher reagent revenues of $550,000 driven by the increase in the number of our installed base of systems as well as an expanded menu of tests available for sale, including products at higher price points than legacy tests, and higher licensing revenues of $87,000 for the period.

Cost of Sales and Gross Loss

 

     September 30,                
     2011      2010      $ Change      % Change  

Cost of Sales-three months ended

   $ 1,785       $ 1,123       $ 662         59

Gross Loss-three months ended

   $ 469       $ 439       $ 30         7

The increase in cost of sales for the three months ended September 30, 2011 compared to the three months ended September 30, 2010 was due to higher cost of goods sold expense of $366,000 directly related to the increase in reagent sales and an inventory charge of $421,000 recorded during the quarter. The inventory charge reflects the write-off of several assay production lots that did not meet the Company’s quality standards and other manufacturing inefficiencies arising from the Company’s transfer of manufacturing operations from Pasadena to Carlsbad during the second quarter of 2011. The increase in gross loss resulted primarily from costs associated with our expanded product offerings which will be reduced as a percentage of sales as our sales volume increases.

Operating Expenses

Sales and Marketing

 

     September 30,                
     2011      2010      $ Change      % Change  

Three months ended

   $ 1,328       $ 1,173       $ 155         13

The increase in sales and marketing expense was primarily driven by an increase in sales commissions due to the buildout of our commercial team as well as increased revenue for the three months ended September 30, 2011 compared to the three months ended September 30, 2010.

 

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General and Administrative

 

     September 30,                
     2011      2010      $ Change      % Change  

Three months ended

   $ 2,405       $ 1,603       $ 802         50

General and administrative expense increased for the three months ended September 30, 2011 due to increased outside service and consulting fees $393,000, an increase in personnel costs of $228,000, and additional audit and compliance-related consulting costs of $174,000 as compared to the three months ended September 30, 2010.

Research and Development

 

     September 30,                
     2011      2010      $ Change      % Change  

Three months ended

   $ 1,903       $ 1,709       $ 194         11

The increase in research and development expense for the three months ended September 30, 2011 was due primarily to increased clinical trial costs and spending for new product development, specifically the Company’s Hepatitis C Virus genotyping (HCVg) and Respiratory Viral Panel tests.

Other Income (Expense), Net

 

     September 30,               
     2011     2010      $ Change     % Change  

Three months ended

   $ (209   $ 7       $ (216     3086

Other income (expense) represent non-operating revenue and expenses, earnings on cash and cash equivalents, interest expense related to a loan payable and foreign currency gains or losses. The increase in other (expense) for the three months ended September 30, 2011 as compared to the same period in 2010 was due primarily to a note payment received in a prior period that must be returned and interest expense related to the loan payable of $32,000.

Provision for Income Taxes

 

     September 30,               
     2011     2010      $ Change     % Change  

Three months ended

   $ (1   $ —         $ (1     100

Due to the Company’s losses it has only recorded tax provisions or benefits related to interest on uncertain tax positions, minimum tax payments and refunds.

Results of Operations — Nine months ended September 30, 2011 compared to the nine months ended September 30, 2010 (in thousands)

Revenue

 

     September 30,                
     2011      2010      $ Change      % Change  

Nine months ended

   $ 2,975       $ 1,759       $ 1,216         69

The increase in revenue for the nine month period ended September 30, 2011 as compared to the nine month period ended September 30, 2010 was due to higher reagent sales of $1.2 million due to the increase in its number of our installed base of systems as well as an expanded menu of tests available for sale, including products at higher price points than legacy tests.

 

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Cost of Sales and Gross Loss

 

     September 30,                
     2011      2010      $ Change      % Change  

Cost of Sales-nine months ended

   $ 4,580       $ 2,372       $ 2,208         93

Gross Loss-nine months ended

   $ 1,605       $ 613       $ 992         162

The increase in cost of sales for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010 was due to higher cost of goods sold expense of $890,000 directly related to the increase in reagent sales, increased costs related to warranties of $116,000, higher depreciation of rental systems due to increased placements of $250,000, and an inventory write down of $421,000 recorded during the quarter. The inventory charge reflects the write-off of several assay production lots that did not meet the Company’s quality standards and other manufacturing inefficiencies arising from the Company’s transfer of manufacturing operations from Pasadena to Carlsbad during the second quarter of 2011. Additional costs incurred in relocating our manufacturing facilities from Pasadena to our Carlsbad location in 2011 included higher temporary labor costs of $230,000. The increase in gross loss resulted primarily from costs associated with our expanded product offerings which will be reduced as a percentage of sales as our sales volume increases and the one-time expense of relocating our manufacturing facility which was completed in June 2011.

Operating Expenses

Sales and Marketing

 

     September 30,                
     2011      2010      $ Change      % Change  

Nine months ended

   $ 3,767       $ 3,567       $ 200         6

The increase in expense was primarily driven by increased commissions related to the buildout of our commercial team as well as higher revenues and sample costs for prospective customers offset by lower consulting and website development costs for the nine months ended September 30, 2011 as compared to the nine months ended September 30, 2010.

General and Administrative

 

     September 30,                
     2011      2010      $ Change      % Change  

Nine months ended

   $ 6,338       $ 5,798       $ 540         9

General and administrative expense increased for the nine months ended September 30, 2011 as compared to the nine months ended September 30, 2010 due to increases in consulting, outside services and professional services of $1,790,000, offset by lower personnel-related costs of $646,000, reduced expenses related to relocating our UK operations of $384,000, and lower exit costs related to our Pasadena facility of $202,000.

Research and Development

 

     September 30,                
     2011      2010      $ Change      % Change  

Nine months ended

   $ 6,759       $ 4,935       $ 1,824         37

The increase in research and development expense for the nine months ended September 30, 2011 was due to higher clinical trial costs, including materials and consulting expenses of $1,769,000 related to RVP clinical trial, development of our HCVg assay, FDA certification of our new Carlsbad manufacturing facility and increased personnel costs of $613,000 that were offset by reductions in spending for lab supplies of $447,000 and outside services of $205,000 as compared to the same period in 2010.

 

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Other Income (Expense), Net

 

     September 30,               
     2011     2010      $ Change     % Change  

Nine months ended

   $ (44   $ 15       $ (59     (393 )% 

Other income (expense) represent non-operating income and expenses, earnings on cash and cash equivalents, interest expense on our loan payable and foreign currency gains or losses. The increase in other income (expense) for the nine months ended September 30, 2011 as compared to the same period in 2010 was due primarily to interest expense incurred on the term loan. There was no loan payable balance in 2010.

Provision for Income Taxes

 

     September 30,                
     2011      2010      $ Change      % Change  

Nine months ended

   $ 21       $ 5       $ 16         320

Due to the Company’s losses it has only recorded tax provisions or benefits related to interest on uncertain tax positions, minimum tax payments and refunds.

Liquidity and Capital Resources

To date we have funded our operations primarily from the sale of our common stock, borrowings and revenues. We have incurred net losses from continuing operations each year and have not yet achieved profitability. At September 30, 2011, we had $32.7 million of working capital, including $36.0 million in cash and cash equivalents and short term investments.

Cash Flows

The following table summarizes, for the periods indicated, selected items in our consolidated statements of cash flows (in thousands):

 

     September 30,  
     2011     2010  

Nine months ended:

    

Cash used by operating activities

   $ (14,009   $ (13,590

Cash used by investing activities

     (6,900     (1,398

Cash provided by financing activities

     33,575        22,696   

Effect of foreign exchange rate changes

     6       (47
  

 

 

   

 

 

 

Increase in cash and cash equivalents

   $ 12,672      $ 7,661   
  

 

 

   

 

 

 

Cash flows used by operating activities

Net cash used in operating activities increased $0.4 million to $14.0 million for the nine months ended September 30, 2011 compared to $13.6 million for the nine months ended September 30, 2010. The increased use of cash was due primarily to an increased net loss for the nine months ended September 30, 2011 and use of cash to increase inventory balances, accounts payable and accrued liabilities offset by the collection of a $1.6 million therapeutic tax credit in 2011.

Cash flows used by investing activities

Net cash used in investing activities increased $5.5 million to $6.9 million for the nine months ended September 30, 2011 compared to $1.4 million for the nine months ended September 30, 2010 due to purchasing a short-term investment for $5.0 million and a payment made for intellectual property licensing in 2011.

Cash flows provided by financing activities

Net cash provided by financing activities increased by $10.9 million for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010. Cash provided in 2011 resulted from net proceeds of our secondary public offering and a $2.0 million term loan in 2011. Cash provided in 2010 resulted substantially from the net proceeds of our initial public offering.

 

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The Company issued 8,125,440 shares of common stock on June 22, 2011 at a price of $4.25 per share. We raised approximately $31.7 million in net proceeds after deducting underwriting discounts and commissions of $2.2 million and other offering expenses of $0.6 million.

In March 2010, we entered into a loan and security agreement with Square 1 Bank, pursuant to which we obtained a credit facility consisting of a revolving line of credit in the amount of up to $2 million and an equipment term loan in the amount of up to $2 million. Based upon certain financial covenants, interest on the revolving line of credit will be either (i) the greater of (a) the bank’s prime rate (3.25% as of September 30, 2011) plus 2.75%, or (b) 6%; or (ii) the greater of (a) the bank’s prime rate plus 3.75%, or (b) 7%. In addition, based upon certain financial covenants, interest on the equipment term loan will be either (i) the greater of (a) the bank’s prime rate plus 3.25%, or (b) 6.50%; or (ii) the greater of (a) the bank’s prime rate plus 4.25%, or (b) 7.50%. The revolving line matures in July 2011 and the term loan matures in July 2013. In March 2011, the loan and security agreement was amended, whereby the line of credit availability was increased to $3 million and the maturity was extended to July 2012. The term loan was modified to allow invoices up to 360 days to qualify to be submitted for credit extension. There were no other changes to these two loans.

In March 2011, an additional loan was made available under the amended loan and security agreement for up to $1 million to finance equipment purchases. Based upon certain financial covenants, interest on this equipment term loan will be either (i) the greater of (a) the bank’s prime rate plus 3.25%, or (b) 6.50%; or (ii) the greater of (a) the bank’s prime rate plus 4.25%, or (b) 7.50%. This term loan matures March 2014.

As of September 30, 2011, the Company had no outstanding loans on the line of credit or the 2011 equipment loan and had a balance of $1.8 million used to finance 2010 equipment purchases and tenant improvements to its Carlsbad facility on the original 2010 equipment term loan. The loan bears an interest rate of 6.5%. Interest-only payments at the rate of 6.5% were due monthly from the date of each initial equipment advance until July 12, 2011. Initial equipment advances that were then outstanding are payable in 24 equal monthly installments of principal, plus all accrued and unpaid interest, beginning on August 12, 2011 and continuing on the same day of each month thereafter through July 12, 2013.

Pursuant to the terms of the loan and security agreement, we are required to maintain a ratio of liquidity to bank indebtedness equal to at least 1.50 to 1.00. In addition, the loan and security agreement includes several restrictive covenants, including requirements that we obtain the consent of Square 1 Bank prior to entering into any change of control event unless all debt is repaid to Square 1 Bank prior to the change of control event, incurring other indebtedness or liens with respect to our property, making distributions to our stockholders, making certain investments or entering into certain transactions with affiliates and other restrictions on storing inventory and equipment with third parties. The agreement also limits the amount we can borrow under the term loan to license genetic biomarkers to $500,000. To secure the credit facility, we granted Square 1 Bank a first priority security interest in our assets and intellectual property rights. We are currently in compliance will all ratios and covenants.

The Company’s management has prepared cash flow forecasts which indicate, based on the current cash resources available, the availability of unutilized credit facilities, and our ability to access the equity markets, that we will have sufficient resources to fund our business for at least the next 12 months. We expect capital outlays and operating expenditures to increase over the next several years as we grow our customer base and revenues, expand our research and development, commercialization and manufacturing activities. The amount of additional capital we may need to raise in the future depends on many factors, including:

 

   

the level of revenues and the rate of revenue growth;

 

   

the level of expenses required to expand our sales and marketing activities;

 

   

the level of research and development investment required to maintain and improve our technology;

 

   

our need to acquire or license complementary technologies or acquire complementary businesses;

 

   

the costs of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights;

 

   

competing technological and market developments; and

 

   

changes in regulatory policies or laws that affect our operations.

We cannot be certain that additional capital will be available when and as needed or that our actual cash requirements will not be greater than anticipated. If we require additional capital at a time when investment in diagnostics companies or in the marketplace in general is limited due to the then prevailing market or other conditions, we may not be able to raise such funds at the time that we desire, on acceptable terms, or at all. In addition, if we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders could be significantly diluted, and these newly issued securities may have

 

18


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rights, preferences or privileges senior to those of existing stockholders. If we obtain additional debt financing, a substantial portion of our operating cash flow may be dedicated to the payment of principal and interest on such indebtedness, and the terms of the debt securities issued could impose significant restrictions on our operations. If we raise additional funds through collaborations and licensing arrangements, we might be required to relinquish significant rights to our technologies or products, or grant licenses on terms that are not favorable to us.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our estimates including those related to bad debts, inventories, valuation of intangibles and other long-term assets, income taxes, and stock-based compensation. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities not readily apparent from other sources. Actual results may differ from these estimates. Our critical accounting policies and estimates are discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010 and our Registration Statement on Form S-1/A filed June 8, 2011 and there have been no material changes during the nine months ended September 30, 2011 or since the filing of our registration statement.

Contractual Obligations

On February 8, 2010, we entered into a 91 month lease for a new 31,098 square foot facility in Carlsbad, California. The facility is part of a three-building office and research and development project located at 5964 La Place Court, Carlsbad, California, and the project totals 158,733 rentable square feet. Monthly rental payments of $45,092 commenced on July 14, 2010 and increase 3% annually thereafter. We also pay our pro-rata share of the building and project maintenance, property tax, management and other costs subject to certain limitations. We have paid a $55,000 security deposit and provided a $500,000 standby letter of credit as security for the future rent as well as for up to $2.0 million in landlord funded tenant improvements. The lease also provides for rights of first refusal for expansion within our building, subject to certain limitations.

On October 20, 2010, we entered into a licensing agreement for intellectual property. The agreement requires minimum payments of €1.0 million in four equal installments over two years and contains provisions for additional licensing fees of €1.25 million and additional royalties based on related product sales. The license terminates upon election by us as defined or termination of every patent and application of patent right included in the agreement or other material breach as defined in the contract.

On February 28, 2011, we entered into a 36 month operating lease for office equipment with total lease payments of $85,000. In conjunction with the lease, the lessor paid the Company approximately $27,000 to payoff previous contracts for similar equipment leased from a different vendor.

Off-Balance Sheet Arrangements

We have no other off-balance sheet arrangements except as follows:

We have unutilized credit facilities with Square 1 Bank that provides a revolving line of credit up to $2.0 million and an unutilized equipment term loan totaling $1.0 million at September 30, 2011.

We have provided a $500,000 standby letter of credit as security for future rent to our landlord in conjunction with the lease of our Carlsbad facility.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk is limited to our cash and cash equivalents, all of which have maturities of less than three months and short-term investments, which have maturities of less than one year. The goals of our investment policy are preservation of capital, fulfillment of liquidity needs and fiduciary control of cash and investments. We also seek to maximize income from our investments without assuming significant risk. To achieve our goals, in the future we may maintain a portfolio of cash equivalents and investments in a variety of securities that management believes to be of high credit quality. We currently do not hedge interest rate exposure. Because of the short-term maturities of our cash equivalents and short-term investments, we do not believe that an increase in market rates would have a material negative impact on the value of our portfolio.

Interest Rate Risk

We have exposure to interest rate risk related to our variable rate borrowings. In 2010, we entered into a credit facility consisting of a revolving line of credit in the amount of $2.0 million and an equipment term loan in the amount of up to $2.0 million. In 2011, we amended the credit facility to provide an additional $1.0 million of borrowings to finance equipment purchases. As of September 30, 2011, we had no outstanding loans on the line of credit or the 2011 equipment loan increase and had drawn $2.0 million against the original 2010 equipment term loan. This loan bears an interest rate of 6.5%. As of September 30, 2011, based on current interest rates and total borrowings outstanding, a hypothetical 100 basis point increase in interest rates would have an insignificant pre-tax impact on our results of operations.

 

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Foreign Currency Exchange Risks

All of our operating facilities are located within the United States. We are a U.S. entity and our functional currency is the U.S. dollar. Virtually all of our revenues are based in the United States. In 2010, we entered into a licensing agreement for intellectual property that requires payment in Euros, and a small portion of our expenses in the first quarter of 2010, relating to our corporate office, were transacted in British pounds. We currently have no material operations outside of the United States which diminishes the extent of any foreign currency exchange risk.

 

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended (Exchange Act), is recorded, processed, summarized and reported within the timelines specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

In the second quarter of 2011, we identified that some prior members of our finance and accounting department did not follow our internal control over financial reporting procedures. Specifically, members of our finance and accounting personnel did not effectively coordinate with members of our business development team regarding the terms of a license agreement. As a result of this failure, we failed to record certain intellectual property rights as both an asset and liability and, as a result, misstated our intangible assets in the periods identified in Note 8 to our condensed consolidated unaudited financial statements included in this quarterly report. In addition, in the second quarter of 2011, we identified that some prior members of our finance team misclassified a number of operating expenses as costs of goods sold and misclassified the current portion of a loan payable as long term debt. We believe that these misstatements and misclassifications, although immaterial to the prior periods in which they occurred, resulted from a deficiency in our internal control over financial reporting existing during these prior periods which constituted a material weakness in our internal control over financial reporting. Although the material weakness existed as of the fiscal year ended December 31, 2010, and as of the first quarter ended March 31, 2011, we did not discover the material weakness in our internal control over financial reporting until the second quarter of 2011, after the respective filing dates of our annual and quarterly reports. We believe the material weakness resulted from turnover in our finance and accounting departments, including turnover at the Chief Executive Officer and Chief Financial Officer level, resulting in improper training of prior members of our finance and accounting department to execute our internal control over financial reporting procedures.

Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Our internal control over financial reporting are the controls, processes and procedures designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our financial statements for external purposes in accordance with generally accepted accounting principles. A deficiency in internal control over financial reporting exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

 

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Remediation of Material Weakness

Unrelated to the discovery of the material weakness, we had previously hired a new Chief Executive Officer, Chief Financial Officer and controller to lead our finance our accounting departments. Each of these individuals understands our system of internal controls, including our post-closing procedures which are designed to ensure our financial statements are prepared in accordance with generally accepted accounting principles. These new hires have also provided proper guidance and training on our internal control procedures to other finance and accounting personnel, many of which are also new hires. As a result, we have enhanced communication among our finance and accounting personnel and the personnel from our other departments. We believe these new hires will remediate the material weakness and that the financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented. No material weakness will be considered remediated, however, until any remedial procedures that we take have operated for an appropriate period, have been tested and management has concluded that they are operating effectively. In addition, we reviewed our processes and procedures for our internal control over financial reporting and we did not identify any additional controls with similar deficiencies. We have reviewed our assessment of the material weakness and our remediation and the status of its implementation and effectiveness with our audit committee.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as of the end of the period covered by this quarterly report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2011, our disclosure controls and procedures were not effective due to the prior material weakness in our internal control over financial reporting that is still in process of being remediated and tested.

Changes in Internal Control over Financial Reporting

As required by Rule 13a-15(d) of the Exchange Act, our management, including our principal executive officer and our principal financial officer, conducted an evaluation of the internal control over financial reporting to determine whether any changes occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

During the second quarter and continuing into the third quarter, we implemented the changes to our disclosure controls and procedures and internal control over financial reporting described above. There were no other changes to our internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

While our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance that their respective objectives will be met, we do not expect that our disclosure controls and procedures or our internal control over financial reporting are or will be capable of preventing or detecting all errors and all fraud. Any control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

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PART II-OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

We are from time to time subject to various claims and legal actions during the ordinary course of our business. We believe that there are currently no claims or legal actions that would reasonably be expected to have a material adverse effect on our results of operations or financial condition.

 

ITEM 1A. RISK FACTORS

An investment in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described under Item 1A of Part I of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, filed with the Securities and Exchange Commission on August 15, 2011, which updated and superseded the risks and uncertainties described in our Annual Report on Form 10-K for the year ended December 31, 2011, filed with the Securities and Exchange Commission on March 11, 2011, together with all other information contained or incorporated by reference in this Quarterly Report on Form 10-Q before you decide to invest in our common stock. The risks described in our Annual Report on Form 10-K, as previously updated and superseded by our Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, filed with the Securities and Exchange Commission on August 15, 2011, have not materially changed. If any of the risks described in the Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 actually occurs, our business, financial condition, results of operations and our future growth prospects could be materially and adversely affected. Under these circumstances, the trading price of our common stock could decline, and you may lose all or part of your investment.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Unregistered Sales of Equity Securities

None

Use of Proceeds from Registered Securities

On June 3, 2010, we closed our initial public offering, in which we sold 4,600,000 shares of common stock at a price to the public of $6.00 per share. The aggregate offering price for shares sold in the offering was $27.6 million. The offer and sale of all of the shares in the initial public offering were registered under the Securities Act pursuant to a registration statement on Form S-1 (File No. 333-165562), which was declared effective by the SEC on May 28, 2010. The offering commenced as of May 28, 2010 and did not terminate before all of the securities registered in the registration statement were sold. Piper Jaffray acted as sole book-running manager for the offering. William Blair & Company and ThinkEquity LLC acted as co-managers of the offering. There were no selling stockholders in the offering. We raised approximately $22.6 million in net proceeds after deducting underwriting discounts and commissions of $1.9 million and other offering expenses of $3.0 million. No payments were made by us to directors, officers or persons owning ten percent or more of our common stock or to their associates, or to our affiliates, other than payments in the ordinary course of business to officers for salaries and to non-employee directors as compensation for board or board committee service. There has been no material change in the planned use of proceeds from our initial public offering as described in our final prospectus filed with the SEC on June 1, 2010 pursuant to Rule 424(b). We invested the funds received in registered money market funds.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

 

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ITEM 4. (REMOVED AND RESERVED).

 

ITEM 5. OTHER INFORMATION.

None.

 

ITEM 6. EXHIBITS.

The exhibits listed in the Exhibit Index are incorporated herein by reference.

 

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SIGNATURES

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

 

     GENMARK DIAGNOSTICS, INC.
Date: November 14, 2011   

/s/ Paul Ross

     Paul Ross
     Chief Financial Officer
     (principal financial and accounting officer)

 

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EXHIBIT INDEX

Listed and indexed below are all Exhibits filed as part of this report.

 

10.30    Executive Employment Agreement, dated September 2, 2011, by and between Clinical Micro Sensors, Inc. d.b.a. GenMark Diagnostics, Inc. and Brad Calvin.†
10.31    Executive Employment Agreement, dated October 10, 2011, by and between Clinical Micro Sensors, Inc. d.b.a. GenMark Diagnostics, Inc. and Matthew R. Cohen.†
31.1    Certification of Principal Executive Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended
31.2    Certification of Principal Financial Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.
32.1    Certification of Principal Executive Officer and Principal Financial Officer Required Under Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. §1350.
101*    XBRL Instance Document
101*    XBRL Taxonomy Extension Schema Document
101*    XBRL Taxonomy Calculation Linkbase Document
101*    XBRL Taxonomy Label Linkbase Document
101*    XBRL Taxonomy Presentation Linkbase Document

 

* Pursuant to applicable securities laws and regulations, we are deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and are not subject to liability under any anti-fraud provisions of the federal securities laws as long as we have made a good faith attempt to comply with the submission requirements and promptly amend the interactive data files after becoming aware that the interactive data files fail to comply with the submission requirements. Users of this data are advised that, pursuant to Rule 406T, these interactive data files are deemed not filed and otherwise are not subject to liability.
Management Compensation Plan
Executive Employment Agreement

Exhibit 10.30

 

LOGO

   GenMark Diagnostics, Inc.
5964 La Place Court
Carlsbad, CA 92008
   Tel 1 800 373 6767
Fax 1 760 448 4301
www.genmarkdx.com

September 2, 2011

Brad Calvin

12533 War Admiral Way

North Potomac, MD 20878

Dear Brad:

Clinical Micro Sensors, Inc. d.b.a. GenMark Diagnostics, Inc. (“GenMark Dx”) is pleased to offer you employment in the position of Senior Vice President, Global Marketing with a start date of October 3, 2011.

Your annual gross salary will be $240,000.00 to be paid on a bi-weekly basis in keeping with GenMark Dx’s standard payroll practices and procedures. In addition, you will be eligible to participate in the GenMark Dx performance incentive bonus program with a potential variable earning opportunity of 50% of your base salary. The Company will also provide you with a signing bonus of $25,000.00 payable as soon as practicable upon receiving your signed offer letter. An additional $25,000.00 bonus will be paid 6 months following your first date of employment. In the event you terminate voluntarily from the company within 1 year of employment, GenMark may seek a pro-rated reimbursement of your signing bonuses.

Additionally, you will be provided a severance provision of six months’ base salary continuation, including health care and benefits coverage, and a prorated portion of your annual bonus, in the event you are terminated by the Company for any reason other than Cause.

We are also pleased to inform you that you will be granted the equivalent value of 65,000 GenMark Diagnostics, Inc. stock options – to be provided via a combination of stock options and restricted common stock – subject to board approval and blackout windows. The shares will be granted at the closing price on the date of grant and the vesting anniversary will be your first day of employment. As a member of the GenMark Senior Leadership Team, you will be eligible for accelerated vesting upon a Change In Control, per the Company’s “Amendment of Stock Option Agreement.”

The Company will assist with relocating to the Carlsbad, CA area and will provide up to 3 months temporary housing to assist with your transition. The Company will also cover costs related to selling your home in Maryland up to $30,000, as well as the cost of moving your household goods and the closing costs on the purchase of a home in California to support your relocation transition.

You will be entitled to participate in the benefit plans offered by GenMark Dx, subject to the eligibility requirements, terms and conditions of those plans. The benefits offered at this time include 15 days vacation pay, holiday pay, life insurance, health insurance, disability insurance and a 401k plan, in accordance with GenMark Dx policies and subject to the company’s right to modify, add, and delete any benefit plan.


Calvin Offer
Page 2
   -continued-

 

You understand and agree that during your employment you are required to comply with GenMark Dx’s policies and procedures.

In making you this offer, we relied on your representation that you are not bound by any non-compete or non-solicitation provision that would prevent or restrict you from carrying out your job responsibilities for GenMark Dx. You also promise and represent that you will not bring with you to GenMark Dx, or use while employed by the Company, any confidential or trade secret information of a previous employer.

In addition, as a condition of accepting this offer, you are also agreeing that you have reviewed and signed the enclosed Confidentiality and Non-Disclosure Agreement.

Employment with GenMark Dx is “employment at will.” This means that your employment is not for a designated period of time and that either you or GenMark Dx can terminate the employment at any time, with or without cause. The at-will nature of this employment relationship cannot be changed except by an express written agreement signed by the Chairman of GenMark Dx. The other terms of this offer of employment may not be amended without an express written agreement signed by both parties.

This job offer is also contingent upon successful completion of a post offer background check.

Please sign the acceptance below and sign the enclosed Confidentiality and Non-Disclosure Agreement to formally accept this offer of employment.

Congratulations and we look forward to welcoming you to the GenMark Dx team during this very exciting phase of our company’s transformation!

Sincerely,

LOGO

Jennifer Williams

SVP Global Operations & Human Resources

By accepting, I agree to all terms of this offer and the Confidentiality and Non-Disclosure Agreement.

 

/s/ Brad Calvin   9/6/2011

Brad Calvin

  Date
Executive Employment Agreement

Exhibit 10.31

 

LOGO

   GenMark Diagnostics, Inc.
5964 La Place Court
Carlsbad, CA 92008
   Tel 1 800 373 6767
Fax 1 760 448 4301
www.genmarkdx.com

October 10, 2011

Matthew R. Cohen

2928 Hillside Dr.

Burlingame, CA 94010

Dear Matt:

Clinical Micro Sensors, Inc. d.b.a. GenMark Diagnostics, Inc. (“GenMark Dx”) is pleased to offer you employment in the position of Senior Vice President, General Counsel and Corporate Secretary, reporting to Hany Massarany, President and CEO, with a start date no later than November 9th, 2011.

Your annual gross salary will be $240,000 to be paid on a bi-weekly basis in keeping with GenMark Dx’s standard payroll practices and procedures. In addition, you will be eligible to participate in the GenMark Dx performance incentive bonus program with a target annual bonus equal to 50% of your base salary. You will be eligible to participate in the GenMark Dx performance incentive plan for 2011 on a pro-rata basis. GenMark Dx will also provide you with a signing bonus of $25,000 to be paid as soon as practicable following your start date. In the event you terminate voluntarily from the company within 1 year of employment, GenMark may seek a pro-rated reimbursement of your signing bonus.

Additionally, you will be provided a severance provision of six months’ base salary continuation, including health care and benefits coverage, in the event you are terminated by GenMark Dx for any reason other than Cause.

We are also pleased to inform you that you will be granted the equivalent value of 85,000 GenMark Diagnostics, Inc. stock options – to be provided via a combination of stock options and restricted common stock – subject to board approval and blackout windows. The shares will be granted at the closing price on the date of grant and the vesting anniversary will be your first day of employment. As a member of the GenMark Dx Senior Leadership Team, you will be eligible for accelerated vesting upon a Change In Control, per GenMark Dx’s “Amendment of Stock Option Agreement.”

GenMark Dx will assist you with relocating to the San Diego County, CA area and will provide up to 3 months temporary housing to assist with your transition. GenMark Dx will also cover costs related to selling your home in Burlingame, CA up to $30,000, as well as the cost of moving your household goods, plus the closing costs on the purchase of a home in California to support your relocation transition.

You will be entitled to participate in the benefit plans offered by GenMark Dx, subject to the eligibility requirements, terms and conditions of those plans. The benefits offered at this time include 15 days vacation pay, holiday pay, life insurance, health insurance, disability

 

-continued-


Cohen Offer

Page 2

 

insurance and a 401k plan, in accordance with GenMark Dx policies and subject to the GenMark Dx’s right to modify, add, and delete any benefit plan.

You understand and agree that during your employment you are required to comply with GenMark Dx’s policies and procedures.

In making you this offer, we relied on your representation that you are not bound by any non-compete or non-solicitation provision that would prevent or restrict you from carrying out your job responsibilities for GenMark Dx. You also promise and represent that you will not, while employed by GenMark Dx, use in an unauthorized manner any proprietary or trade secret information of a previous employer.

In addition, as a condition of accepting this offer, you are also agreeing that you have reviewed and signed the enclosed Confidentiality and Non-Disclosure Agreement.

Employment with GenMark Dx is “employment at will.” This means that your employment is not for a designated period of time and that either you or GenMark Dx can terminate the employment at any time, with or without cause. The at-will nature of this employment relationship cannot be changed except by an express written agreement signed by the Chairman of GenMark Dx. The other terms of this offer of employment may not be amended without an express written agreement signed by both parties.

This job offer is also contingent upon successful completion of a post offer background check.

Please sign the acceptance below and sign the enclosed Confidentiality and Non-Disclosure Agreement to formally accept this offer of employment.

Congratulations and we look forward to welcoming you to the GenMark Dx team during this very exciting phase of our company’s transformation!

Sincerely,

LOGO

Jennifer Williams

SVP Global Operations & Human Resources

By accepting, I agree to all terms of this offer and the Confidentiality and Non-Disclosure Agreement.

 

/s/ Matt Cohen   10/12/2011

Matt Cohen

  Date
Certification of Principal Executive Officer

Exhibit 31.1

CERTIFICATIONS

I, Hany Massarany, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q for the quarter ended September 30, 2011 of Genmark Diagnostics, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 14, 2011

 

/s/ Hany Massarany

Hany Massarany,

Chief Executive Officer

Certification of Principal Financial Officer

Exhibit 31.2

CERTIFICATIONS

I, Paul Ross, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q for the quarter ended September 30, 2011 of Genmark Diagnostics, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 14, 2011

 

/s/ Paul Ross

Paul Ross,

Chief Financial Officer

Certification of Principal Executive Officer and Principal Financial Officer

Exhibit 32.1

CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER

AND CHIEF FINANCIAL OFFICER PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Genmark Diagnostic, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Periodic Report”), we, Hany Massarany, Chief Executive Officer of the Company, and Paul Ross, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1. the Periodic Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. the information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Dated: November 14, 2011      

/s/ Hany Massarany

      Hany Massarany,
      Chief Executive Officer
Dated: November 14, 2011      

/s/ Paul Ross

      Paul Ross,
      Chief Financial Officer