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COLLABRX, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations - (Amounts in thousands)
(Edgar Glimpses Via Acquire Media NewsEdge) Special Note Regarding Forward Looking Statements
Information contained or incorporated by reference in this report contains
forward-looking statements. These forward-looking statements are based on
current expectations and beliefs and involve numerous risks and uncertainties
that could cause actual results to differ materially from expectations. These
forward-looking statements should not be relied upon as predictions of future
events as we cannot assure you that the events or circumstances reflected in
these statements will be achieved or will occur. You can identify
forward-looking statements by the use of forward-looking terminology such as
"may," "will", "expect," "anticipate," "estimate" or "continue" or the negative
thereof or other variations thereon or comparable terminology which constitutes
projected financial information. These forward-looking statements are subject to
risks, uncertainties and assumptions about the Company including, but not
limited to, industry conditions, economic conditions and acceptance of new
technologies. For a discussion of the factors that could cause actual results to
differ materially from the forward-looking statements, see "Part II, Item
1A.-Risk Factors" and the "Liquidity and Capital Resources" section set forth in
this section and such other risks and uncertainties as set forth below in this
report or detailed in our other SEC reports and filings. We assume no obligation
to update forward-looking statements.
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During fiscal years 2010 through 2012, we were engaged in the sale of
product-line assets and intellectual property that we had either previously
acquired or internally developed during the previous decade or more in the
semiconductor and MEMS capital equipment industries. This effort followed
extensive consideration by the Company's Board of Directors of our strategic
options in light of the global financial crisis, rapidly declining sales and our
relatively weak competitive position in those industries. Following the decision
to sell assets or discontinue development programs associated with each of the
major product lines, we classified those operations as "discontinued" and sought
appropriate buyers. The first such sale of assets occurred on March 19, 2010, in
which we sold our 6500 series and 900 series legacy etch products to OEM Group,
Inc. At the end of Fiscal 2010, we discontinued our development efforts in our
Nano Layer Deposition ("NLD") and Compact platform projects in an effort to
reduce expenses and conserve capital. On February 9, 2011, we sold our Deep
Reactive Ion Etch ("DRIE") product lines and technology, which we had acquired
in 2008 from Alcatel Micro Machining Systems ("AMMS"), to SPP Process Technology
Systems Limited ("SPTS"). This sale included all of the shares of Tegal France,
SAS, the Company's wholly-owned subsidiary. On December 23, 2011, we sold a
portfolio of 35 US and international patents in the areas of pulsed-chemical
vapor deposition ("CVD"), plasma-enhanced atomic layer deposition ("ALD"), and
nano layer deposition ("NLD") to multiple IC and semiconductor equipment
manufacturers, and we continue at the present time a marketing effort to sell
additional related patents in our portfolio.
Throughout the fiscal years 2010 through 2012, we were continuously downsizing
our operations, through transfers of our employees to other companies in
connection with the sale of specific product lines, as well as through attrition
and lay-offs. We also began a process of closing and/or liquidating all of our
wholly-owned subsidiary companies, including SFI and Tegal GmbH, along with
branches in Taiwan, Korea and Italy. As a result, all of our activities related
to our legacy etch and PVD business, our DRIE business, our NLD development
activities and our subsidiaries and branches are now included in discontinued
operations.
Throughout most of fiscal 2012, our operations consisted mainly of our
management agreement with Sequel Power, LLC, a company dedicated to development
of large-scale solar photovoltaic ("PV") power plants and in providing related
advisory services. In January of 2011, we contributed $2 million in cash to
Sequel Power in exchange for an approximate 25% economic interest and voting
control on its Board of Managers. In connection with the investment, our
President and CEO was appointed Chairman of Sequel Power. In addition to our
management role in Sequel Power, we were engaged in the sale of remaining
intellectual property from our discontinued operations in semiconductor capital
equipment and in researching potential new investment opportunities in several
areas, including solar technology, medical devices and health technology.
On November 22, 2011, we made an investment of $300 in NanoVibronix, Inc. in the
form of a convertible promissory note. NanoVibronix is a private company that
develops medical devices and products that implement its proprietary therapeutic
ultrasound technology which may be utilized for a variety of medical
applications requiring low cost therapeutic ultrasound qualities. NanoVibronix
is focused on creating products utilizing its unique, patented approach which
enables the transmission of low-frequency, low-intensity ultrasound surface
acoustic waves ("SAWs") through a variety of soft, flexible materials, including
skin and tissue, enabling low-cost, breakthrough devices targeted at large,
high-growth markets.
On June 29, 2012, we signed a definitive agreement to acquire CollabRx, Inc.
("CollabRx"), a privately held technology company in the rapidly growing market
of interpretive content and data analytics for genomics-based medicine. The
closing of our acquisition of CollabRx occurred on July 12, 2012. In connection
with that transaction, we agreed to issue an aggregate of 236,433 shares of
common stock, representing 14% of our total shares outstanding prior to the
closing, to former CollabRx stockholders in exchange for 100% of the capital
stock of CollabRx, Inc. The Company and certain former CollabRx stockholders
entered into a Stockholders Agreement providing for, among other things,
registration rights, transfer restrictions and voting and standstill
agreements. We also assumed $500 of existing CollabRx indebtedness through the
issuance of 5-year promissory notes in substitution for outstanding notes
previously issued by CollabRx. In addition, we granted a total of 368,417 RSUs
and options as "inducement grants" to newly hired management and employees, all
subject to four-year vesting and other restrictions. At the closing, we
appointed James M. Karis, former CEO of CollabRx to fill a vacancy on our Board
of Directors and elected him Co-CEO. After the completion of the acquisition of
CollabRx, the prior balance of a note receivable due from CollabRx was reclassed
to be included as part of the purchase price.
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CollabRx offers cloud-based expert systems that provide clinically relevant
interpretive knowledge to institutions, physicians, researchers and patients for
genomics-based medicine in cancer and other diseases to inform health care
decision making. With access to approximately 50 clinical and scientific
advisors at leading academic institutions and a suite of tools and processes
that combine artificial intelligence-based analytics with proprietary
interpretive content, the company is well positioned to participate in the $300
billion value-added "big data" opportunity in the US health care market (as
reported by McKinsey Global Institute), over half of which specifically targets
areas in cancer and cancer genomics. Originally founded in 2008, CollabRx has
developed clinical advisory networks, expert systems, proprietary tools and
processes, and a pipeline of commercial data products and applications ("apps")
for cancer. CollabRx Therapy Finders™, its first commercial product, provides
sophisticated, credible, personalized, and actionable information to physicians
and patients for rapidly determining which medical tests, therapies, and
clinical trials may be considered in cancer treatment planning with a specific
emphasis on the tumor genetic profile.
CollabRx Therapy Finders™, the company's first commercial product, is a
collection of web-based apps that serve as one type of user interface to access
proprietary CollabRx content. Other interfaces include mobile apps, narrative
published reports, statistical analyses and private-label, customized
reports. CollabRx content is dynamically updated and organized in a
knowledgebase that includes information on molecular diagnostics, medical tests,
clinical trials, drugs, biologics and other information relevant for cancer
treatment planning. Capturing how highly respected practicing physicians use
this information in the clinical setting further refines the knowledgebase.
We intend that our most recent acquisition of CollabRx, Inc. will form the core
of our operations going forward. Although we will continue to have an active
role in the management of Sequel Power, we do not anticipate making any
additional investments in that or any other solar-related businesses. On
September 25, 2012, the Company filed a Certificate of Amendment to its
Certificate of Incorporation to change its name to "CollabRx, Inc." The
Company's stockholders approved the Certificate of Amendment at the Company's
Annual Meeting of Stockholders. The Certificate of Amendment is filed as Exhibit
3.1 to the Form 8-K filed on September 25, 2012. In connection with the Name
Change, the Company's common stock, which previously traded under the ticker
symbol "TGAL" on the Nasdaq Capital Market, began trading under the new ticker
symbol "CLRX" on September 27, 2012. Outstanding stock certificates representing
shares of common stock of the Company will continue to be valid and need not be
exchanged in connection with the Name Change.
We cannot assure you that we will be successful in pursuing our new strategic
initiative in CollabRx. If our efforts do not succeed, we may need to raise
additional capital which may include capital raises through the issuance of debt
or equity securities. If additional funds are raised through the issuance of
preferred stock or debt, these securities could have rights, privileges or
preferences senior to those of our common stock, and debt covenants could impose
restrictions on our operations. Moreover, such financing may not be available to
us on acceptable terms, if at all. Failure to raise any needed funds would
materially adversely affect us. It is not possible to predict when our business
and results of operations will improve. In consideration of these circumstances,
the Company may be forced to consider a merger with or into another company or
the liquidation or dissolution of the Company, including through a bankruptcy
proceeding. We cannot assure you that we will be successful in pursuing this or
any other strategic alternatives. If we were to liquidate or dissolve the
Company through or outside of a bankruptcy proceeding, you could lose all of
your investment in the Company's common stock.
We cannot assure you that we will be successful in pursuing any of these
strategic alternatives. As we pursue various strategic alternatives and
determine that some are more or less likely than others, the consequences of
such determinations will be reflected in our financial statements in accordance
with generally accepted accounting principles ("GAAP") in the United States of
America.
Critical Accounting Policies and Estimates
We prepare the condensed consolidated financial statements in conformity with
generally accepted accounting principles ("GAAP") in the United States which
requires management to make certain estimates, judgments and assumptions that
affect the reported amounts in the accompanying condensed consolidated financial
statements, disclosure of contingent assets and liabilities and related
footnotes. Accounting and disclosure decisions with respect to material
transactions that are subject to significant management judgment or estimates
include but are not limited to revenue recognition, accounting for stock-based
compensation, accounts for receivables and allowance for doubtful accounts,
impairment of long-lived assets and warranty obligations. Actual results may
differ from these estimates under different assumptions or conditions. Critical
accounting policies are defined as those that are required for management to
make estimates, judgments and assumptions giving due consideration to
materiality, in certain circumstances that affect amounts reported in the
condensed, consolidated financial statements, and potentially result in
materially different results under different conditions and assumptions. We
based these estimates and assumptions on historical experience and evaluate them
on an on-going basis to help ensure they remain reasonable under current
conditions. Actual results could differ from those estimates. During the three
and six months ended September 30, 2012, there were no significant changes to
the critical accounting policies and estimates discussed in the Company's 2012
Annual Report on Form 10-K.
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Pension Obligations
Prior to fiscal year 2011, the Company began the process of closing and/or
liquidating all of our wholly-owned subsidiary companies, not already sold,
including our German subsidiary. The subsidiaries are now included in
discontinued operations. The Company has recognized an ongoing liability for
pensions related to the German subsidiary. However, in fiscal year 2011, the
Company recognized an additional liability for the independent third-party
administration of the pension program. The total pension liability in the prior
period was $700. The total pension liability for the period ended September 30,
2012 was $0. The pension liability was settled on October 6, 2011. The
settlement of the pension obligation was classified as a reduction of
liabilities of discontinued operations. The related foreign exchange gain of $23
was classified as a gain or loss on the sale of discontinued operations in the
third quarter of the prior fiscal year. The Company has no future pension
obligations.
Results of Operations
The following table sets forth certain financial items for the three and six
months ended September 30, 2012 and 2011:
Three Months Ended Six Months Ended
September 30, September 30,
2012 2011 2012 2011
Revenue $ 75 $ 19 $ 100 $ 38
Cost of revenue 20 -- 20 --
Gross profit 55 19 80 38
Operating expenses:
Engineering 328 -- 328 --
Sales and marketing expenses 49 -- 49 --
General and administrative expenses 970 568 1,682 1,441
Total operating expenses 1,347 568 2,059 1,441
Operating loss (1,292 ) (549 ) (1,979 ) (1,403 )
Equity in (loss) of unconsolidated
affiliate -- (170 ) -- (320 )
Other income (expense), net 11 2 20 14
Loss before income tax expense (benefit) (1,281 ) (717 ) (1,959 ) (1,709 )
Income tax expense (benefit)
-- -- -- --
Loss from continuing operations (1,281 ) (717 ) (1,959 ) (1,709 )
(Loss) income from discontinued
operations, net of taxes (3 ) 241 (4 ) 239
Net loss and comprehensive loss $ (1,284 ) $ (476 ) $ (1,963 ) $ (1,470 )
Net loss per share:
Basic and diluted $ (0.68 ) $ (0.28 ) $ (1.13 ) $ (0.87 )
Weighted-average shares used in per
share computation:
Basic and diluted 1,884 1,689 1,738 1,689
Revenue
Prior to the acquisition of CollabRx, the Company's sole source of revenue for
the three and six months ended September 30, 2011 was from management activities
related to Sequel Power. Sequel Power is a related party. Revenue for the three
and six months ended September 30, 2012 increased by $56 and $62 from revenue
for the three and six months ended September 30, 2011, respectively. The
increase is related to our acquisition of CollabRx.
As a percentage of total revenue for the three and six months ended September
30, 2012 and 2011, respectively, international sales were 0%. The Company's
historical operations had revenues in international markets. With the
acquisition of CollabRx and if the continued solar project activities of Sequel
Power are successful, we expect that international sales will once again account
for a significant portion of any future revenue.
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All DRIE related revenues and expenses are captured in Discontinued Operations
in our statement of operations and comprehensive loss.
Gross Profit
Gross profit for the three and six months ended September 30, 2012 increased $36
and $42, respectively, from our gross profit of $19 and $38 for the three and
six months ended September 30, 2011.
Our gross margin for the three and six months ended September 30, 2012 were
72.9% and 79.6%, respectively. Our gross margin for the three and six months
ended September 30, 2011, respectively, was 100%, as all revenues were
management services revenues and no costs were incurred to record this revenue.
At the present time our core operations consist primarily in the commercial
application of the CollabRx technology and content. We offer cloud-based expert
systems that provide clinically relevant interpretive knowledge to institutions,
physicians, researchers and patients for genomics-based medicine in cancer and
other diseases to inform health care decision-making. While we and our advisors
do not provide specific treatment recommendations, this clinically relevant
knowledge is a key part of the "context engine" for informing healthcare
decision-making.
We will continue to be involved in supporting the activities of Sequel Power
through our direct management efforts.
Engineering
With the acquisition of CollabRx, Engineering expenses consist primarily of
salaries. Prior to the sale of the DRIE related assets, engineering expenses
consisted primarily of salaries, prototype material and other costs associated
with our ongoing systems and process technology development, applications and
field process support efforts. The spending increase of $336 for the three and
six months ended September 30, 2012, compared to the same period in 2011,
resulted from the CollabRx acquisition. The Company had no expenses associated
with engineering for the three and six months ended September 30, 2011 due to
the exit from our core historical DRIE operations.
Sales and Marketing
With the acquisition of CollabRx, sales and marketing expenses consist primarily
of salaries. Prior to the sale of the DRIE related assets, sales and marketing
expenses consisted primarily of salaries, commissions, trade show promotion and
travel and living expenses associated with those functions. The spending
increase of $64 for the three and six months ended September 30, 2012, compared
to the same period in 2011, resulted from the CollabRx acquisition. The Company
had no expenses associated with sales and marketing for the three and six months
ended September 30, 2011 due to the exit from our core historical DRIE
operations.
General and Administrative
General and administrative expenses consist of salaries, legal, accounting and
related administrative services and expenses associated with general management,
finance, information systems, human resources and investor relations
activities. The increase of continuing general and administrative expenses of
$402 and $241 for the three and six month periods ended September 30, 2012 as
compared to the same period in 2011 was due primarily to stock related
compensation associated with the issuance of inducement grants and employee
bonuses for key employees. Expenses for accounting and travel were down for the
same periods. The decreases in these expenses were offset by increases in legal,
consulting, outside services and stock related compensation expenses.
Equity in Loss of Unconsolidated Affiliate
The Company recorded a loss in earnings of the unconsolidated affiliate of $0
and no amortization expenses related to the difference between the net book
value of Sequel's assets and the cost of the investment for the three and six
months ended September 30, 2012. The Company recorded a loss in earnings of the
unconsolidated affiliate of $127 and $43 of amortization expenses related to the
difference between the net book value of Sequel's assets and the cost of the
investment for the three months ended September 30, 2011. The Company recorded a
loss in earnings of the unconsolidated affiliate of $234 and $86 of amortization
expenses related to the difference between the net book value of Sequel's assets
and the cost of the investment for the six months ended September 30,
2011. Currently, the net book value of the Sequel Power investment is zero.
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Other Income (Expense), net
Other income (expense), net consists of the change in fair value of the common
stock warrant liability and interest earned on our NanoVibronix investment.
Income Taxes
During the three and six months ended September 30, 2012 and 2011, respectively,
there was no income tax expense or benefit for federal and state income taxes
reflected in our condensed consolidated statements of operations due to our net
loss and a valuation allowance on the resulting deferred tax asset.
As of March 31, 2012, the Company had net operating loss carryforwards of
approximately $98.7 million and $47.5 million for federal and state tax
purposes, respectively. The federal net operating loss carryforward will begin
to expire in the year ended March 31, 2020 and the state of California will
start to expire in the year ended March 31, 2013. At March 31, 2012, the Company
also had research and experimentation credit carryforwards of
$1.3 million and $0.8 million for federal and state income tax purposes,
respectively. A portion of the federal credit began to expire in the year ended
March 31, 2012 and the state of California will never expire under current
law. Net operating loss carryforwards and R&D credits can only offset 90% of
taxable income.
Discontinued Operations
Discontinued operations consists of interest income from accounts related to
discontinued operations, other income, gains and losses on the disposal of fixed
assets of discontinued operations, gains and losses on foreign exchange and
interest income on money market accounts, as well as the reclassification of net
expenses associated with our exit from our historical core operations. For the
three and six months ended September 30, 2012 compared to the three months ended
September 30, 2011, loss from discontinued operations, net decreased by $1. For
the six months ended September 30, 2012, gain from discontinued operations
increased by $2. In the period just ended, discontinued operations included
research and development ("R&D") expense and foreign exchange loss, offset by a
VAT write off of $59.
Prior to the sale of the DRIE related assets, R&D expenses consisted primarily
of salaries, prototype material and other costs associated with our ongoing
systems and process technology development, applications and field process
support efforts for our DRIE product line. As a result of the sale of the
Company's historical DRIE related assets, and in accordance with generally
accepted accounting principles, the DRIE business operation, including related
and continuing R&D expenses, have all been reclassified to discontinued
operations. At the time of the DRIE sale, all the Company's R&D expenses were
related to the DRIE operations. Currently the Company's R&D expenses are related
to the NLD product line, the assets of which are held for sale to third parties.
Contractual Obligations
The following summarizes our contractual obligations as of September 30, 2012,
and the effect such obligations are expected to have on our liquidity and cash
flows in future periods (in thousands).
Contractual obligations: Less than After
Total 1 Year 1-3 Years 3-5 Years 5 Years
Non-cancelable operating lease
obligations $ 603 $ 108 $ 243 $ 252 $ -
Total contractual cash
obligations $ 603 $ 108 $ 243 $ 252 $ -
Most leases provide for the Company to pay real estate taxes and other
maintenance expenses. Rent expense for operating leases related to discontinued
operations, net of sublease income, was $0 for the six months ended September
30, 2012. Rent expense for operating leases related to continuing operations,
net of sublease income, was $15 for each of the three month periods ended
September 30, 2012 and 2011, respectively. Rent expense for operating leases
related to continuing operations, net of sublease income, was $25 and $30 for
each of the six month periods ended September 30, 2012 and 2011, respectively.
As of September 1, 2012, we maintain our headquarters, encompassing our
executive office and storage areas in San Francisco, California. We have a
primary lease for office space, consisting of 2,614 square feet, which expires
August 31, 2017. Prior to moving to San Francisco, we were located in Petaluma,
California. We had a primary lease for office space, consisting of 2,187 square
feet, which expired August 31, 2012. We rent storage/workspace areas on a
monthly basis. We own all of the equipment used in our facilities. Such
equipment consists primarily of computer related assets.
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Certain of our past sales contracts included provisions under which customers
would be indemnified by us in the event of, among other things, a third party
claim against the customer for intellectual property rights infringement related
to our products. There were no limitations on the maximum potential future
payments under these guarantees. We have accrued no amounts in relation to these
provisions as no such claims have been made, and we believe we have valid,
enforceable rights to the intellectual property embedded in its products.
Liquidity and Capital Resources
For the six months ended September 30, 2012, and the fiscal year ended March 31,
2012, we financed our operations from existing cash on hand. Net cash used in
operating activities during the six months ended September 30, 2012, was
$1,708. The primary significant changes in our cash flow statement for the six
months ended September 30, 2012 were due to our acquisition of CollabRx, a net
loss of $1,963, partially offset by a VAT refund related to the discontinued
operations in our former French subsidiary in the amount of 312 euros. Net cash
used in operating activities during the six months ended September 30, 2011 was
$1,644, due primarily to the net loss from continuing operations of $1,709, the
decreases in the net value of current assets and liabilities of discontinued
operations and other assets related to our Sequel Power investment, offset by
the decrease in accounts payable.
The consolidated financial statements contemplate the realization of assets and
the satisfaction of liabilities in the normal course of business for the
foreseeable future. We incurred a net loss of $1,963 and $1,470 for the six
months ended September 30, 2012 and 2011, respectively. We used cash flows from
operations of $1,708 and $1,644 for the six months ended September 30, 2012 and
2011, respectively. Although we believe that our existing cash balances will be
adequate to fund operations through fiscal year 2013, we cannot assure you that
we will be successful in pursuing any of the strategic alternatives indicated in
Note 1 - Basis of Presentation on page 7. CollabRx, Inc. will form the core of
our business and operations going forward. Although we will continue to have an
active role in the management of Sequel Power, we do not anticipate making any
additional investments in that or any other solar-related businesses. We cannot
assure you that we will be successful in pursuing our new strategic initiative
in CollabRx. It is not possible to predict when our business and results of
operations will improve. In consideration of these circumstances, the Company
may be forced to consider a merger with or into another company or the
liquidation or dissolution of the company, including through a bankruptcy
proceeding. We cannot assure you that we will be successful in pursuing any of
these strategic alternatives. If we were to liquidate or dissolve the company
through or outside of a bankruptcy proceeding, you could lose all of your
investment in the Company's common stock.
Off-Balance Sheet Arrangements
We do not currently have, nor have we ever had, any relationships with
unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, established for
the purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes. In addition, we do not engage in
trading activities involving non-exchange traded contracts.
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