XNAS:BGMD BG Medicine Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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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 March 31, 2012

or

 

¨ 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: 001-33827

 

 

BG MEDICINE, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   04-3506204

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

610 Lincoln Street North

Waltham, Massachusetts

  02451
(Address of principal executive offices)   (Zip Code)

(781) 890-1199

(Registrant’s telephone number, including area code)

 

 

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

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

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    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

As of April 30, 2012, the registrant had 20,007,197 shares of common stock outstanding.

 

 

 


Table of Contents

BG Medicine, Inc.

Index to Form 10-Q

 

              Page  

PART I

       
  Item 1:   

Financial Statements

  
    

Unaudited Condensed Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011

     3   
    

Unaudited Condensed Consolidated Statements of Operations for the Three Month Periods Ended March  31, 2012 and 2011

     4   
    

Unaudited Condensed Consolidated Statements of Cash Flows for the Three Month Periods Ended March  31, 2012 and 2011

     5   
    

Notes to Unaudited Condensed Consolidated Financial Statements

     6   
  Item 2:   

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

     10   
  Item 3:   

Quantitative and Qualitative Disclosures about Market Risk

     16   
  Item 4:   

Controls and Procedures

     16   

PART II

       
  Item 1:   

Legal Proceedings

     17   
  Item 1A:   

Risk Factors

     17   
  Item 2:   

Unregistered Sales of Equity Securities and Use of Proceeds

     17   
  Item 3:   

Defaults Upon Senior Securities

     17   
  Item 4:   

Mine Safety Disclosures

     17   
  Item 5:   

Other Information

     17   
  Item 6:   

Exhibits

     18   


Table of Contents

PART I: FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

BG Medicine, Inc. and Subsidiary

 

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

 

     March 31, 2012     December 31, 2011  
     (in thousands, except share and per share data)  

Assets

    

Current assets

    

Cash and cash equivalents

   $ 27,952      $ 23,874   

Restricted cash

     561        565   

Accounts receivable

     205        115   

Inventory

     528        212   

Prepaid expenses and other current assets

     891        550   
  

 

 

   

 

 

 

Total current assets

     30,137        25,316   

Property and equipment, net

     327        301   

Intangible assets, net

     435        456   

Deposits and other assets

     210        37   
  

 

 

   

 

 

 

Total assets

   $ 31,109      $ 26,110   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Current liabilities

    

Term loan, current portion

   $ 265      $ —     

Accounts payable

     1,312        487   

Accrued expenses

     4,302        3,348   

Deferred revenue and customer deposits

     1,293        1,368   
  

 

 

   

 

 

 

Total current liabilities

     7,172        5,203   

Term loan, net of current portion

     9,505        —     

Warrant liability

     26        15   
  

 

 

   

 

 

 

Total liabilities

     16,703        5,218   
  

 

 

   

 

 

 

Stockholders’ equity

    

Common stock; $.001 par value; 100,000,000 shares authorized at March 31, 2012 and December 31, 2011; 19,988,088 and 19,966,034 shares issued and outstanding at March 31, 2012 and December 31, 2011, respectively

     20        20   

Additional paid-in capital

     135,369        134,192   

Accumulated deficit

     (120,983     (113,320
  

 

 

   

 

 

 

Total stockholders’ equity

     14,406        20,892   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 31,109      $ 26,110   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

3


Table of Contents

BG Medicine, Inc. and Subsidiary

 

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

     Three Months Ended March 31,  
     2012     2011  
     (in thousands, except share and per share data)  

Revenue:

    

Product revenue

   $ 416      $ 12   

Service revenue

     64        843   
  

 

 

   

 

 

 

Total revenue

     480        855   
  

 

 

   

 

 

 

Costs and Operating Expenses:

    

Cost of product revenue

     147        4   

Cost of service revenue

     64        147   

Research and development

     2,980        1,713   

Selling, general and administrative

     4,789        1,987   
  

 

 

   

 

 

 

Total costs and operating expenses

     7,980        3,851   
  

 

 

   

 

 

 

Loss from operations

     (7,500     (2,996

Interest income

     —          8   

Interest expense

     (153     (91

Other expense

     (10     (52
  

 

 

   

 

 

 

Net loss

     (7,663     (3,131

Accretion of redeemable convertible preferred stock

     —          (118
  

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (7,663   $ (3,249
  

 

 

   

 

 

 

Net loss attributable to common stockholders per share - basic and diluted

   $ (0.38   $ (0.27
  

 

 

   

 

 

 

Weighted-average common shares outstanding used in computing per share amounts - basic and diluted

     19,977,632        12,176,870   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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Table of Contents

BG Medicine, Inc. and Subsidiary

 

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Three Months Ended March 31,  
     2012     2011  
     (in thousands)  

Cash flows from operating activities

    

Net loss

   $ (7,663   $ (3,131

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

    

Depreciation and amortization

     77        117   

Stock-based compensation

     777        353   

Non-cash interest expense and changes in fair value of warrant liability

     30        142   

Changes in operating assets and liabilities

    

Restricted cash

     4        (209

Accounts receivable

     (90     407   

Inventory

     (316     (49

Prepaid expenses and other current assets

     (269     (288

Accounts payable and accrued expenses

     1,803        (513

Deferred revenue and customer deposits

     (75     (127
  

 

 

   

 

 

 

Net cash flows used in operating activities

     (5,722     (3,298
  

 

 

   

 

 

 

Cash flows from investing activities

    

Purchases of property and equipment and intangibles

     (82     (8
  

 

 

   

 

 

 

Net cash flows used in investing activities

     (82     (8
  

 

 

   

 

 

 

Cash flows from financing activities

    

Proceeds from initial public offering

     —          37,433   

Proceeds from issuance of term loan

     10,000        —     

Payments on term loan

     —          (100

Costs related to initial public offering

     —          (833

Costs related to term loan issuance

     (256     —     

Proceeds from the exercise of stock options

     138        —     
  

 

 

   

 

 

 

Net cash flows provided by financing activities

     9,882        36,500   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     4,078        33,194   

Cash and cash equivalents, beginning of period

     23,874        2,425   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 27,952      $ 35,619   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information

    

Cash paid for interest

   $ 62      $ 2   

Accrued deferred offering costs

     —          462   

Supplemental disclosure of non-cash activities

    

Settlement of 2011 accrued bonus with stock issuance

     22        —     

Issuance of common stock warrants

     240        —     

Conversion of preferred stock

     —          72,210   

Conversion of bridge notes and accrued interest

     —          6,361   

Conversion of warrant liability

     —          272   

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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Table of Contents

BG Medicine, Inc. and Subsidiary

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. Description of Business and Basis of Presentation

Description of Business

BG Medicine, Inc. (“BG Medicine “ or the “Company”) is a life sciences company focused on the discovery, development and commercialization of novel cardiovascular diagnostics to address significant unmet medical needs, improve patient outcomes and contain healthcare costs. The Company has developed initial product candidates to address significant unmet needs in cardiovascular disease. The Company’s first commercialized product, the BGM Galectin-3 TM test for use in patients with heart failure, received clearance from the FDA in late 2010 and is commercially available in the United States, as well as in Europe under a CE Mark. The Company is also developing CardioSCORE, a blood test designed to identify individuals at high risk for near-term, significant cardiovascular events, such as heart attack and stroke. In December 2011, the Company submitted a
510(k) premarket notification to the FDA in order to obtain regulatory clearance to market the CardioSCORE test in the United States. The Company’s headquarters and primary place of business is located in Waltham, Massachusetts.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States and in accordance with the rules and regulations of the SEC for interim financial information. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. The interim financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s financial position at March 31, 2012 and results of operations and cash flows for the interim periods ended March 31, 2012 and 2011. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. Subsequent events have been evaluated through the date of issuance of these financial statements. The results of the three months ended March 31, 2012 are not necessarily indicative of the results to be expected for the year ending December 31, 2012 or for any other interim period or for any other future year.

At March 31, 2012, the Company had cash and cash equivalents totaling $28.0 million, restricted cash totaling $561,000, and working capital totaling $23.0 million. During the quarter ended March 31, 2012, the Company incurred a net loss totaling $7.7 million and used cash in operating activities totaling $5.7 million. The Company expects to continue to incur losses and use cash in operating activities during the remainder of 2012 and beyond. In February 2012, the Company entered into a $15.0 million loan facility under which the Company immediately borrowed $10.0 million (Note 4). The Company believes that its existing cash and cash equivalents, together with the Company’s achievement of certain revenue milestones that would allow the Company to draw the second tranche of $5.0 million under the loan facility, would be sufficient to meet the Company’s anticipated cash requirements through 2013.

 

2. Significant Accounting Policies

Restricted Cash

Restricted cash of approximately $561,000 at March 31, 2012 consisted of cash received under the High Risk Plaque (HRP) Initiative. This cash is to be used solely to fund the research and development efforts under this strategic initiative.

 

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Table of Contents

BG Medicine, Inc. and Subsidiary

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Inventory

Inventory is stated at the lower of cost or market. Costs are determined under the first-in, first-out (FIFO) method. Inventories at March 31, 2012 and December 31, 2011 consisted of the following:

 

(in thousands)    March 31, 2012      December 31, 2011  

Raw materials

   $ 69       $ 51   

Finished goods

     459         161   
  

 

 

    

 

 

 

Total inventories

   $ 528       $ 212   
  

 

 

    

 

 

 

Intangible Assets

Intangible assets with an original cost of $750,000 are comprised of completed technology that was obtained under a perpetual license. The asset is being amortized over its economic life, which has been determined to be 10 years. Accumulated amortization totaled $315,000 and $294,000 at March 31, 2012 and December 31, 2011, respectively. Amortization expense for the three months ended March 31, 2012 and 2011 was $21,000 and $21,000, respectively. The annual amortization expense for the next 5 years is expected to approximate $85,000.

Net Loss Attributable to Common Stockholders Per Share

Basic net loss attributable to common stockholders per share is computed by dividing the net loss attributable to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted net loss attributable to common stockholders per share is computed by dividing the net loss attributable to common stockholders by the weighted-average number of common shares and dilutive common share equivalents outstanding for the period, determined using the treasury-stock method and the as-if-converted method, for convertible securities, if inclusion of these is not antidilutive. Because the Company has reported a net loss for all periods presented, diluted net loss per common share is the same as basic net loss per common share for all periods presented.

The following table summarizes the computation of basic and diluted net loss per share applicable to common stockholders for the three months ended March 31, 2012 and 2011:

 

     2012     2011  
     (in thousands, except share and per share data)  

Net loss

   $ (7,663   $ (3,131

Accretion of preferred stock

     —          (118
  

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (7,663   $ (3,249
  

 

 

   

 

 

 

Weighted average number of shares - basic and diluted

     19,977,632        12,176,870   

Net loss per share attributable to common stockholders - basic and diluted

   $ (0.38   $ (0.27

For the three months ended March 31, 2012 and 2011, the following potential common shares were excluded from the computation of diluted net loss per share attributable to common stockholders because they had an antidilutive impact due to the losses reported:

 

     2012      2011  

Options to purchase common stock

     3,704,711         2,474,100   

Warrants to purchase common stock

     1,134,042         1,355,646   

 

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Table of Contents

BG Medicine, Inc. and Subsidiary

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

3. Fair Value of Financial Instruments

The Company’s financial instruments consist of cash equivalents, restricted cash, accounts receivable, accounts payable, long-term debt and certain warrant instruments. The carrying amounts of accounts receivable and accounts payable are considered reasonable estimates of their fair value, due to the short maturity of these instruments. Based on the borrowing rates currently available to the Company for long-term debt with similar terms and average maturities as the Company’s long-term debt, the fair value of long-term debt was not significantly different than the carrying value at March 31, 2012. The fair value of the other financial instruments is addressed below.

Accounting literature provides a fair value hierarchy, which classifies fair value measurements based on the inputs used in measuring fair value. These inputs include: Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.

The following table represents information about the assets and liabilities measured at fair value on a recurring basis as of March 31, 2012 and December 31, 2011:

 

Description

   Level 1      Level 2      Level 3      Total  
     (in thousands)  

March 31, 2012

           

Liabilities:

           

Warrant liability

   $ —         $ —         $ 26       $ 26   

December 31, 2011

           

Assets:

           

Cash equivalents, including restricted cash

   $ 24,045       $ —         $ —         $ 24,045   

Liabilities:

           

Warrant liability

   $ —         $ —         $ 15       $ 15   

The Company’s cash equivalents and restricted cash at December 31, 2011 consist of money market funds which have been classified as Level 1 because these investments are registered securities that are actively traded. As such, fair value was determined based upon the quoted price for identical assets.

The fair value of the common stock warrants at March 31, 2012 and December 31, 2011 was determined using the Black-Scholes option pricing method. The assumptions included in the Black-Scholes model were as follows:

 

     Common Stock Warrant Liability  
     March 31, 2012     December 31, 2011  

Weighted-average risk-free interest rate

     1.05     0.90

Expected dividend yield

     0     0

Weighted-average remaining contractual term

     5.0 years        5.3 years   

Expected volatility

     69% - 70     70

Fair value of underlying shares of stock

   $ 7.02      $ 4.72   

Significant increases (decreases) in any of those inputs, but primarily the fair value of underlying shares of stock, in isolation would result in a significantly lower (higher) fair value measurement.

 

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Table of Contents

BG Medicine, Inc. and Subsidiary

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The following table provides a roll-forward for the three months ending March 31, 2012 and 2011 of the fair value of the warrant liability categorized with Level 3 inputs:

 

     Warrant Liability  
     2012      2011  
     (in thousands)  

Balance - Beginning of period

   $ 15       $ 248   

Increase in fair value - recognized in operations as other expense

     11         54   

Reclassification of warrant liability to additional paid in capital

     —           (272
  

 

 

    

 

 

 

Balance - End of period

   $ 26       $ 30   
  

 

 

    

 

 

 

The change in fair value of the warrants was primarily due to the passage of time and changes in the fair value of the equity instruments that underlie the warrants.

 

4. Term Loan

On February 10, 2012, the Company entered into a $15.0 million loan facility. Initial funding under the facility was $10.0 million, which was received by the Company upon closing. Subject to successful achievement of certain revenue milestones and other customary conditions, the Company may draw an additional $5.0 million term loan on or before February 10, 2013. The initial term loan accrues interest at a rate of 8% per annum plus the higher of (a) the 3-month LIBOR rate or (b) 1.25%. Interest only payments will be made for the first twelve months of the loan term. Principal and interest payments commence in March 2013 and continue through maturity at September 2015.

In connection with this initial loan facility draw down, the Company issued warrants to purchase 36,657 shares of its common stock with an exercise price of $6.82 per share. The warrants expire ten years from the date of issuance. The warrants were valued using the Black-Scholes option pricing model using the following assumptions: fair value of the underlying common stock of $8.51 per share; volatility of 70%; no dividend yield; risk free interest rate of 1.96%; and an expected life of ten years. The relative fair value of the warrants, aggregating $240,000, has been accounted for as a debt discount and is being recognized as interest expense over the term of the loan. Additional warrants will be issued to the lenders in the event that the Company draws down an additional $5.0 million under the facility.

The term loan is secured by substantially all of the Company’s assets, other than its intellectual property, for which the Company has provided a negative pledge. The term loan agreement contains customary representations and warranties and customary affirmative and negative covenants, including, among others, covenants that limit or restrict the Company’s ability to incur indebtedness, merge or consolidate, dispose of assets, make acquisitions, pay dividends or make distributions, or repurchase stock. In addition, the term loan agreement contains customary events of default that entitle the lenders to cause any or all of the Company’s indebtedness under the term loan agreement to become immediately due and payable. The events of default include, among others, non-payment, inaccuracy of representations and warranties, covenant defaults, bankruptcy and insolvency and the occurrence of a material adverse effect (as defined in the term loan agreement).

 

5. Warrants

During the three months ended March 31, 2012, the Company issued 36,657 common stock warrants pursuant to a term loan (Note 4). At March 31, 2012, there were warrants to purchase 1,134,042 shares of common stock outstanding with a weighted-average exercise price of $0.80 per share.

 

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Table of Contents
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following in conjunction with our unaudited condensed consolidated financial statements and the related notes thereto that appear elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2011. In addition to historical information, the following discussion and analysis includes forward-looking information that involves risks, uncertainties and assumptions. Our actual results and the timing of events could differ materially from those anticipated by these forward-looking statements as a result of many factors, including those discussed under “Risk Factors” in Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2011, as supplemented by the risk factors discussed under “Risk Factors” in Part II, Item 1A. of this Quarterly Report on Form 10-Q.

Overview

We are a life sciences company focused on the discovery, development and commercialization of novel cardiovascular diagnostics to address significant unmet medical needs, improve patient outcomes and contain healthcare costs. We have developed our initial product candidates to address significant unmet needs in cardiovascular disease. Our first commercialized product, the BGM Galectin-3TM test for use in patients with heart failure, received clearance from the FDA in late 2010 and is commercially available in the United States, as well as in Europe under a CE Mark. This manual version of our test is being marketed in the United States through several regional and national laboratory testing facilities. In addition, we have partnered with four leading diagnostic instrument manufacturers which are developing automated instrument versions of our galectin-3 test, and we expect that, during 2012, the first of our partners will file for regulatory clearance in the United States and also begin marketing an automated version of the test in Europe under a CE Mark. In May 2012, we submitted a 510(k) to extend the approved labeling indication for the BGM Galectin-3 test to include individuals in the general adult population who are at risk for developing heart failure based on elevated levels of galectin-3. If we obtain clearance in the United States for this additional indication, we expect that the potential market for our galectin-3 test will increase significantly. In May 2012, we also obtained CE Mark in the European Union (EU) for this expanded indication for the BGM Galectin-3 test and we are working with our partners to begin commercialization in the EU. We are also developing CardioSCORE, a blood test designed to identify individuals at high risk for near-term, significant cardiovascular events, such as heart attack and stroke. Our validation, or registration, study demonstrated that CardioSCORE has the potential to offer a significant improvement over conventional risk factor-based approaches for heart attack and stroke risk. In December 2011, we submitted a 510(k) premarket notification to the FDA in order to obtain regulatory clearance to market our CardioSCORE test in the United States. In February 2012, we received a letter from the FDA regarding our 510(k) notification that requested additional information, including information regarding our clinical validation study and additional analytical study data. We are undertaking activities to respond to the FDA. Our response to the FDA is due no later than mid-August 2012. Based on anticipated future interactions with the FDA regarding the additional information requested, we expect to be able to better assess whether our goal of obtaining FDA clearance by year-end is achievable.

During the three months ended March 31, 2012, we incurred a net loss of $7.7 million. During the three months ended March 31, 2012, we used cash in operating activities of $5.7 million. We expect to continue to incur losses and use cash in operating activities during the remainder of 2012 and beyond.

Material Factors Affecting Our Results of Operations and Financial Condition

We believe that the factors described in the following paragraphs have had and are expected to continue to have a material effect on our operational results and financial condition.

Revenue

In 2011, we began marketing and selling the manual version of our BGM Galectin-3 test for heart failure. In December 2011, we submitted a 510(k) premarket notification to the FDA in order to obtain regulatory clearance to market our CardioSCORE test in the United States. We expect to receive the substantial portion of any future revenue from our sales of our diagnostic tests, subject to obtaining regulatory clearance in the United States and other jurisdictions. Our revenues from inception to date have been generated primarily through initiatives, collaborations and biomarker discovery and analysis services agreements. In 2012 and beyond, we do not expect to generate significant revenue from these collaborative research and development and services agreements. Our revenue has tended to be concentrated, with arrangements with a limited number of large customers generating a significant percentage of revenue in any given year.

 

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Table of Contents

Costs and Operating Expenses

We classify our costs and operating expenses into four categories: cost of product revenue, cost of service revenue, research and development, and selling, general and administrative. Our costs and operating expenses primarily consist of personnel costs, outside services, manufactured kits, laboratory consumables and overhead, license fees, royalties on products, development costs, marketing program costs and including legal and regulatory costs, director’s and officers’ insurance premiums, and accounting and financial reporting expense. Personnel costs for each category of operating expenses include salaries, bonuses, employee benefit costs and stock-based compensation.

Cost of Product Revenue

Our cost of product revenue to date consists of expenses related to our galectin-3 test. These expenses include contract-manufactured galectin-3 tests and royalty expenses on our galectin-3 tests.

Cost of Service Revenue

Our cost of service revenue to date consists primarily of expenses incurred to support our initiatives, collaborative research and development agreements and biomarker discovery and analysis services agreements. These expenses include outside services and internal personnel costs, laboratory consumables, license fees and overhead expenses. Cost of service revenue in 2012 is expected to consist primarily of costs incurred to support the HRP initiative.

Research and Development Expenses

We incur research and development expenses in connection with our internal biomarker discovery and development efforts. Our research and development expenses consist primarily of direct personnel costs, fees for consultants and outside services, laboratory consumables and overhead expenses. We use consultants and outside services to provide expertise or services which we do not have.

Selling, General and Administrative Expenses

Selling expenses consist primarily of costs related to commercialization activities for our galectin-3 test. We expect increases in our selling and marketing expenses during the remainder of 2012 and beyond as we continue to conduct selling and marketing activities for the market development and commercialization of our products and product candidates.

General and administrative expenses consist primarily of personnel-related expenses, occupancy expenses, and expenses related to operating as a public company. These expenses include legal and regulatory costs, directors’ and officers’ insurance premiums, investor relation services, and accounting and financial reporting expenses. We expect that our general and administrative expenses will increase as we expand our business operations to accommodate new product offerings and add commercial infrastructure.

Provision for Income Taxes

We have historically generated operating losses in all jurisdictions in which we may be subject to income taxes. As such, we have not incurred any income taxes. We have accumulated significant net operating losses and other deferred tax assets. Because of our history of losses and the uncertainty as to the realization of those deferred tax assets, a full valuation allowance has been recorded. We do not expect to report a benefit for our deferred tax assets until we have a history of earnings, if ever, that would support their future realization.

 

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Critical Accounting Policies and Significant Judgments and Estimates

A summary of our significant accounting policies is contained in the notes to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2011. There have been no material changes to those policies during the three months ended March 31, 2012.

Results of Operations

Comparison of the three months ended March 31, 2012 and 2011

Revenue

Revenue decreased by 44%, or $375,000, to $480,000 in the three months ended March 31, 2012 from $855,000 in the same period in 2011. Service revenue decreased in the three months ended March 31, 2012 by $779,000 to $64,000 from $843,000 in the same period in 2011 primarily due to reduced activity in the HRP initiative. We do not expect to generate significant service revenue from the HRP initiative and other service agreements for the balance of 2012 and beyond. Product revenue increased in the three months ended March 31, 2012 by $404,000, to $416,000 from $12,000 in the same period in 2011. This increase is due to increased sales of our manual Galectin-3 test to our regional and national laboratory customers. We expect product revenues from sales of our diagnostic products to increase as the automated versions of the galectin-3 test become available for commercial use and we obtain an analyte-specific CPT Code for our galectin-3 test.

Costs and Operating Expenses

Cost of Product Revenue

Cost of product revenue increased by $143,000, to $147,000 in the three months ended March 31, 2012 as compared to $4,000 in the same period in 2011. The increase in cost of product revenue was commensurate with the increase in product revenue from increased sales of our galectin-3 tests and royalty expenses.

Cost of Service Revenue

Cost of service revenue decreased by 56%, or $83,000, to $64,000 in the three months ended March 31, 2012 as compared to $147,000 in the same period in 2011. The decrease in cost of service revenue was commensurate with the decrease in service revenue and primarily attributable to the reduced activity from the HRP initiative and the general winding down of activity under prior service agreements.

Research and Development Expenses

Research and development expenses increased by 74%, or $1.3 million, to $3.0 million in the three months ended March 31, 2012 as compared to $1.7 million in the same period in 2011. The increase was primarily due to activity associated with our internal biomarker discovery and development efforts, primarily related to automated versions of our galectin-3 test in conjunction with our automated partners and our CardioSCORE program.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by $2.8 million, to $4.8 million in the three months ended March 31, 2012 as compared to $2.0 million in the same period in 2011. Marketing expenses increased by 250%, or $2.1 million, primarily due to marketing activities, personnel-related costs and medical education programs associated with commercialization support for our galectin-3 product. General and administrative expenses increased by 63%, or $727,000, primarily due to personnel-related costs and expenses related to being a public company, including legal and regulatory costs, directors’ and officers’ insurance premiums, and accounting and financial reporting expense.

Interest Income

We did not record any interest income in the three months ended March 31, 2012 due to low interest rates. This represents a decrease of $8,000 from the same period in 2011.

Interest Expense

Interest expense increased by 68%, or $62,000, to $153,000 in the three months ended March 31, 2012 as compared to $91,000 the same period in 2011. Interest expense for the three months ended March 31, 2012 was comprised of cash interest and amortization of debt issuance costs associated with our February 2012 term loan facility of $134,000 and $19,000, respectively. Interest expense for the three months ended March 31, 2011 was comprised primarily of the non-cash expenses arising from the 2010 bridge notes of $84,000.

 

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Income Taxes

The provision for income taxes was zero in the three months ended March 31, 2012 and 2011 due to the losses incurred and full valuation allowance recognized on our deferred tax assets because we cannot conclude that it is more likely than not that the deferred tax assets will be realized.

Liquidity and Capital Resources

Sources of Liquidity

As of March 31, 2012, we had $28.0 million of cash, $561,000 of restricted cash from funding received under the HRP initiative, and working capital of $23.0 million.

On February 10, 2012, we entered into a $15.0 million secured loan facility with GE Capital, Healthcare Financial Services and Comerica Bank. An initial term loan in the aggregate principal amount of $10.0 million was funded upon the closing of the transaction. Subject to successful achievement of certain revenue milestones and other customary conditions, we may draw an additional $5.0 million term loan on or before February 10, 2013. The initial term loan accrues interest at a rate of 8% plus the higher of (a) the 3-month LIBOR (London Bank Inter-Bank Offer Rate) rate or (b) 1.25% per annum, and has a term of 42 months. Additionally, no principal repayment is due for the first twelve months of the term. We issued warrants to purchase 36,657 shares of our common stock with an exercise price of $6.82 per share. If we draw the additional $5.0 million term loan, we will be obligated to issue additional warrants to the lenders, consistent with the warrant formula applicable to the initial term loan.

Net Cash Flows

For the three months ended March 31, 2012, we used cash in operating activities of $5.7 million, which reflects the net loss incurred totaling $7.7 million, offset by $2.0 million of non-cash charges and changes in working capital balances. Cash flows used in investing activities of $82,000 consisted of purchases of property and equipment. Net cash flows provided by financing activities were $9.9 million, which included net proceeds raised from the $10 million term loan, and $138,000 from the exercise of employee stock options. As a result, we had a net increase in cash for the three months ended March 31, 2012 of $4.1 million.

For the three months ended March 31, 2011, we used cash in operating activities of $3.3 million, which reflects the net loss incurred totaling $3.1 million, offset by $167,000 of non-cash charges and changes in working capital balances. Cash flows used in investing activities of $8,000 consisted of purchases of property and equipment. Net cash flows provided by financing activities were $36.5 million, which included net proceeds from the initial public offering, offset by $100,000 from the repayment of our term loan. As a result, we had a net increase in cash for the three months ended March 31, 2011 of $33.2 million.

Funding Requirements

To date, we have generated revenue primarily through the provision of services to third parties in connection with our initiatives, collaborations and biomarker discovery and analysis services agreements. We do not expect to generate significant revenue through the provision of services to third parties in the future. Our first commercial product, the manual version of our BGM Galectin-3 test for heart failure, was launched in late 2010 and we generated $416,000 of revenues from the sales of this test in the three months ended March 31, 2012. During the three months ended March 31, 2012, we incurred net losses totaling $7.7 million and used cash in operating activities totaling $5.7 million. We expect to continue to incur losses and use cash in operating activities during the remainder of 2012 and beyond. We expect to use our existing cash to fund operations, including our development and commercialization activities for the automated versions of our galectin-3 test, the potential commercialization of our CardioSCORE diagnostic test, as well as the discovery of new biomarkers. We believe that our existing cash and cash equivalents, which include $10.0 million in proceeds from our February 2012 term loan, and our successful achievement of certain revenue milestones that would allow us to draw the second tranche of $5.0 million under our loan facility, would be sufficient to meet our anticipated cash requirements through 2013.

If we are not able to draw the second tranche of $5.0 million under our loan facility and generate significant revenues from sales of our galectin-3 and CardioSCORE tests, we would be required to raise additional capital by mid-2013 to continue our operations. We may consider any of the following options:

 

   

partnering opportunities with diagnostics, pharmaceutical or biotechnology companies;

 

   

license, sublicense, or other sources of financing relating to the development programs of our product candidates and other intellectual property; or

 

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sales of equity or debt securities or the incurrence of commercial debt.

If we are unable to obtain financing or enter into licensing or partnering arrangements on acceptable terms at that time, we will be required to implement aggressive cost reduction strategies. The most significant portion of our research and development expenses, as well as some portion of sales and marketing expenses, are discretionary and are in connection with development and commercialization of our galectin-3 test and the development of CardioSCORE. These cost reduction strategies could reduce the scope of the activities related to these development and commercialization activities and could harm our long-term financial condition and results of operations.

Our forecast of the period of time through which our financial resources will be adequate to support our operations, the costs to complete development of product candidates and the cost to commercialize our future products are forward-looking statements and involve risks and uncertainties, and actual results could vary materially and negatively as a result of a number of factors, including the factors discussed in the “Risk Factors” section contained in Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2011, as supplemented by the risk factors discussed under “Risk Factors” in Part II, Item 1A. of this Quarterly Report on Form 10-Q. We have based these estimates on assumptions that may prove to be incorrect, and we could utilize our available capital resources sooner than we currently expect. Our future liquidity and capital funding requirements will depend on numerous factors, including:

 

   

the rate of progress and cost of our commercialization activities;

 

   

our success in obtaining regulatory clearance for our product candidates;

 

   

the success of our research and development efforts;

 

   

the expenses we incur in marketing and selling our products;

 

   

the revenue generated by sales of our galectin-3 test and any future products;

 

   

the emergence of competing or complementary products;

 

   

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

 

   

the terms and timing of any collaborative, licensing or other arrangements that we have or may establish.

Contractual Obligations and Commitments

Except for the $15.0 million term loan we entered into on February 10, 2012, as described in the section entitled “Sources of Liquidity - Term Loan,” there have been no material changes to our contractual obligations and commitments set forth under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Contractual Obligations and Commitments” in our Annual Report on Form 10-K for the year ended December 31, 2011.

Off Balance Sheet Arrangements

As of March 31, 2012, we did not have any off balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.

Special Note Regarding Forward-Looking Statements

The Securities and Exchange Commission encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This Quarterly Report on Form 10-Q contains such “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties and other important factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. Forward-looking statements include, but are not limited to, statements about:

 

 

our estimates of future performance, including the expected commercialization of the automated versions of our galectin-3 test, other indications for our galectin-3 test, our CardioSCORE test and timing of the launch of our product candidates;

 

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our ability to market, commercialize and achieve market acceptance for our cardiovascular diagnostic tests and any of our other product candidates that we are developing or may develop in the future;

 

 

our ability to conduct the clinical studies required for regulatory clearance or approval and to demonstrate the clinical benefits and cost-effectiveness to support commercial acceptance of our product candidates;

 

 

the timing, costs and other limitations involved in obtaining regulatory clearance or approval for any of our product candidates;

 

 

the potential benefits of our cardiovascular diagnostic tests over current medical practices or other diagnostics;

 

 

willingness of third-party payers to reimburse for the cost of our tests;

 

 

estimates of market sizes and anticipated uses of our cardiovascular diagnostic tests and our product candidates;

 

 

our ability to enter into collaboration agreements with respect to our cardiovascular diagnostic tests and our product candidates and the performance of our collaborative partners under such agreements;

 

 

our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others;

 

 

the expected timing, progress or success of our research and development and commercialization efforts;

 

 

our ability to successfully obtain sufficient supplies of samples for our biomarker discovery and development efforts;

 

 

our ability to service the principal and interest amounts payable under our secured loan facility and to achieve revenue milestones and other conditions necessary for us to obtain additional funding under our secured term loan facility; and

 

 

our estimates regarding anticipated operating losses, future revenue, expenses, capital requirements and our needs for additional financing.

Words such as “may,” “anticipate,” “estimate,” “expects,” “projects,” “intends,” “plans,” “believes” and words and terms of similar substance used in connection with any discussion of future operating or financial performance, identify forward-looking statements. All forward-looking statements are management’s present expectations of future events and are subject to a number of risks and uncertainties that could cause actual results to differ materially and adversely from those described in the forward-looking statements. These risks include, but are not limited to those set forth under the heading “Risk Factors” contained in Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2011, as supplemented by the risk factors discussed under “Risk Factors” in Part II, Item 1A. of this Quarterly Report on Form 10-Q.

In light of these assumptions, risks and uncertainties, the results and events discussed in the forward-looking statements contained in this Quarterly Report on Form 10-Q or in any document incorporated by reference might not occur. Stockholders are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. We are not under any obligation, and we expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. All subsequent forward-looking statements attributable to BG Medicine, Inc. or to any person acting on its behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section.

 

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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk is limited to our cash and cash equivalents and long-term debt. However, we periodically invest in short-term marketable securities. 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, we 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. In February 2012, we entered into a variable rate term loan facility. Because of the short-term maturities of our investments and debt, we do not believe that an increase or decrease in market rates would have a material negative impact on our results of operations or financial position

We do not have any material foreign currency exposure and do not hedge any foreign currency exposures.

Our long-term debt under our term loan facility bears interest at variable rates. In February 2012, we entered into a $15.0 million loan facility from which we raised initial gross proceeds of $10.0 million. Interest on the term loan is payable at a rate of 8% per annum plus the higher of (a) the 3-month LIBOR rate or (b) 1.25%. As a result of the maximum 9.25% per annum interest rate under the term loan facility, we have limited exposure to changes in interest rates on borrowings under our term loan facility.

 

Item 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures. Our principal executive officer and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Form 10-Q, have concluded that, based on such evaluation, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

(b) Changes in Internal Controls. There were no changes in our internal control over financial reporting identified in connection with the evaluation of such internal control that occurred during the quarter ended March 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II: OTHER INFORMATION

 

Item 1. LEGAL PROCEEDINGS

We are not currently a party to any material legal proceedings.

 

Item 1A. RISK FACTORS

There have been no material changes to the risk factors discussed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2011.

 

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

 

(a) Unregistered Sales of Equity Securities

Not applicable.

 

(b) Use of Proceeds

We registered shares of our common stock in connection with our initial public offering under the Securities Act of 1933, as amended. The registration statement on Form S-1 (File No. 333-164574), or the Registration Statement, filed in connection with our initial public offering was declared effective by the Securities and Exchange Commission on February 3, 2011. The net offering proceeds received by us, after deducting underwriting discounts and commissions and expenses incurred in connection with the offering, were approximately $34.8 million.

As of March 31, 2012, $16.0 million of the net proceeds of the offering had been used primarily for general working capital purposes, including the commercialization of our BGM Galectin-3 test for heart failure and related sales and marketing expenses incident thereto. The net proceeds from the offering have been invested in our operating account, bank time deposits, money market funds and short term marketable securities. There has been no material change in the expected use of the net proceeds from our initial public offering as described in our final prospectus dated February 3, 2011, filed with the Securities and Exchange Commission pursuant to Rule 424(b)(1).

 

(c) Issuer Purchases of Equity Securities

We did not repurchase any of our equity securities during the quarter ended March 31, 2012.

 

Item 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

 

Item 4. MINE SAFETY DISCLOSURES

Not applicable.

 

Item 5. OTHER INFORMATION

Not applicable.

 

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Item 6. EXHIBITS

 

Exhibit

Number

   Exhibit Description  

Filed

with

this

  Report  

 

Incorporated
by

Reference
herein

from Form or

Schedule

 

Filing

Date

 

SEC File/

Reg. Number

           
  10.1*    Employment Agreement by and between the Registrant and Eric Bouvier, effective as of January 9, 2012      

Form 10-K

  (Exhibit 10.21)  

    3/30/12       001-33827  
           
  10.2*    Employment Agreement by and between the Registrant and Pieter Muntendam, M.D., effective as of January 9, 2012      

Form 10-K

(Exhibit 10.22)

  3/30/12   001-33827
           
  10.3*    Non-Qualified Stock Option Agreement by and between the Registrant and Eric Bouvier, dated as of January 9, 2012      

Form 10-K

(Exhibit 10.33)

  3/30/12   001-33827
           
  10.4    Loan and Security Agreement by and among the Registrant, General Electric Capital Corporation as Agent, the Lenders and the Guarantors, dated as of February 10, 2012      

Form 8-K

(Exhibit 10.1)

  2/16/12   001-33827
           
  10.5    Promissory Note issued by the Registrant to General Electric Capital Corporation, dated as of February 10, 2012      

Form 8-K

(Exhibit 10.2)

  2/16/12   001-33827
           
  10.6    Promissory Note issued by the Registrant to Comerica Bank, dated as of February 10, 2012      

Form 8-K

(Exhibit 10.3)

  2/16/12   001-33827
           
  10.7    Pledge Agreement by and between the Registrant and General Electric Capital Corporation, dated as of February 10, 2012      

Form 8-K

(Exhibit 10.4)

  2/16/12   001-33827
           
  10.8    Warrant issued by the Registrant to GE Capital Equity Investments, Inc., dated as of February 10, 2012      

Form 8-K

(Exhibit 10.5)

  2/16/12   001-33827
           
  10.9    Warrant issued by the Registrant to Comerica Bank, dated as of February 10, 2012      

Form 8-K

(Exhibit 10.6)

  2/16/12   001-33827
           
  31.1    Certification of the Registrant’s Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002   X            
           
  31.2    Certification of the Registrant’s Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002   X            
           
  32    Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002   X            

 

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101@    The following materials from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, formatted in XBRL (eXtensible Business Reporting Language); (i) Unaudited Condensed Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011, (ii) Unaudited Condensed Consolidated Statements of Operations for the three month periods ended March 31, 2012 and 2011, (iii) Unaudited Condensed Consolidated Statements of Cash Flows for the three month periods ended March 31, 2012 and 2011, and (iv) Notes to Unaudited Condensed Consolidated Financial Statements    X               

 

(*) Management contract or compensatory plan or arrangement.
@ Pursuant to Rule 406T of Regulation S-T, the Interactive .Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

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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.

 

    BG MEDICINE, INC.
Date: May 15, 2012     By:  

/s/ Eric Bouvier

      Eric Bouvier
      President and Chief Executive Officer
Date: May 15, 2012     By:  

/s/ Michael W. Rogers

      Michael W. Rogers
      Executive Vice President, Chief Financial Officer and Treasurer

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