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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. 18-------------------------------------------------------------------------------- Index 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. 19-------------------------------------------------------------------------------- Index 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. 20-------------------------------------------------------------------------------- Index 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. 21-------------------------------------------------------------------------------- Index 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. 22-------------------------------------------------------------------------------- Index 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. 23-------------------------------------------------------------------------------- Index 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. |