News Column

SIGNAL GENETICS, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.

August 14, 2014

The following discussion and analysis should be read together with our consolidated financial statements and the related notes appearing elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. See "Forward-Looking Statements" for a discussion of the uncertainties, risks and assumptions associated with these statements. Actual results and the timing of events could differ materially from those discussed in our forward-looking statements as a result of many factors, including those set forth under "Risk Factors" and elsewhere in this Quarterly Report on Form 10-Q.



Overview

We are a commercial stage, molecular diagnostic company focused on providing innovative diagnostic services that help physicians make better-informed decisions concerning the care of their patients suffering from cancer. Our mission is to develop, validate and deliver innovative diagnostic services that enable better patient-care decisions. We were founded in January 2010 and became the exclusive licensee in our licensed field to the renowned research on multiple myeloma ("MM") performed at the University of Arkansas for Medical Sciences ("UAMS") in April 2010. Our flagship service offering is the Myeloma Prognostic Risk Signature ("MyPRSŪ") test. The MyPRSŪ test is a microarray-based gene expression profile ("GEP") assay that tests for the presence of specific groups of genes that can predict low or high level risk of early relapse in patients suffering from MM. The information provided by the MyPRSŪ test aids physicians in selecting the optimal treatment regime for each patient's unique MM condition. To our knowledge, we are the only company marketing a GEP test for assessing the status of MM in the United States.



Our growth strategy includes the following key elements:

· Expand the U.S. market penetration of our MyPRSŪ test by increasing the

geographic coverage of our sales force which currently consists of one employee. · Broaden the base of health care insurance companies that have approved reimbursements for MyPRSŪ. · Expand the diagnostic indications for MyPRSŪ to include asymptomatic monoclonal gammopathies ("AMG"), the precursor condition to MM.



· Establish partnerships with other reference laboratories to expand the market

reach for MyPRSŪ.

· Pursue collaborations with pharmaceutical companies who focus on developing

therapies to treat MM and its precursor disease.

· Expand our information technology infrastructure to further improve our

customer service experience.

· Continue to leverage our relationship with UAMS via our exclusive license

agreement.

· Expand our test offering with the addition of conventional tests used by

physicians who care for MM patients.

· Pursue additional collaborations and in-licensing to expand our service

offering.

· Continue to reduce the costs associated with the development, manufacture and

interpretation of our proprietary genomic tests and services.

Our revenue is derived primarily from our laboratory testing services, and in particular from our MyPRSŪ testing services. We derive a significant portion of our revenues from payments or reimbursements received from various payors, including Medicare, contracted insurance companies, directly billed customers (UAMS, pharmaceutical companies, reference laboratories and hospitals) and non-contracted insurance companies. We believe a key challenge to achieving our growth strategy will be our ability to become contracted with additional payors beyond Medicare and Arkansas Blue Cross Blue Shield. In order to broaden our coverage policy approval to include a majority of the major health care insurance providers in the United States, we plan to hire experienced managed care professionals who can assist us with gaining contractual agreements with third-party payors. Other challenges to our growth strategy include: (1) the acceptance of our tests by the oncology community. For example, if medical oncologists do not adopt the use of MyPRSŪ to evaluate the risk of developing MM in patients with AMG, our growth strategy could be adversely affected; (2) if other tests that more accurately predict the severity of MM, the risk of progression of AMG to MM or the likelihood of response to therapy, are developed, physicians could stop ordering MyPRSŪ, adversely affecting our ability to generate revenue; and (3) payors, including our currently contracted payors, could reduce payment for MyPRSŪ.



Current Events

On June 17, 2014, we completed a corporate conversion and Signal Genetics LLC converted from a Delaware limited liability company to a Delaware corporation (the "Corporate Conversion"). Immediately prior to the Corporate Conversion pursuant to the terms of an Exchange Agreement, $27,326,287 of a note payable - related party was converted into 2,732,629 Class C units (the "Debt Conversion"). In connection with the Corporate Conversion, all outstanding Class A and C units of Signal Genetics LLC were converted into an aggregate of 2,932,629 shares of common stock of the Company, the members of Signal Genetics LLC became stockholders of the Company and the Company succeeded to the business of Signal Genetics LLC and its consolidated subsidiaries. 14 -------------------------------------------------------------------------------- On June 23, 2014, we completed the initial public offering ("IPO") of shares of our common stock. We issued 850,000 shares in the offering and received net proceeds from the offering of approximately $6,144,000 (after the payment of underwriter commissions and offering expenses).



Results of Operations

Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013

Revenue

Revenue was $1,273,571 for the three months ended June 30, 2014, an increase of $170,667, or 15.5%, compared to $1,102,904 for the same period in 2013. The increase in revenue was due to a combination of the following factors:

· A $112,343 increase in revenue sourced either from or through our major

customer, UAMS. Despite a 4% decrease in tests performed during the three

months ended June 30, 2014 as compared to the same period in 2013 (899 tests

performed in 2014 versus 936 tests performed in 2013), the average sales price

per test increased by $166.34, or 17%, primarily due to the mix in both the

type of test being performed (research versus clinical) and the type of payor

category.



· A $58,324 increase in revenue sourced from non-UAMS customers. Despite a 27%

decrease in revenue from pharmaceutical companies due to the completion of a

clinical study in 2013 ($5,512 decrease), revenue from other hospitals outside

of UAMS increased by 45% (a $63,836 increase). The increase in revenues

resulted from a 39% increase in the number of tests performed during the three

months ended June 30, 2014 as compared to the same period in 2013 (114 tests

performed in 2014 versus 82 tests performed in 2013). The increase in volume

was slightly offset by a decrease of 4 tests for pharmaceutical companies due

to the completion of the clinical study in 2013. Additionally, we experienced

a decrease in average selling price per test of $42.99, or 2%. The decrease in

average sales price was primarily due to the completion of the clinical study

in 2013 which had a higher average selling price per test.

Cost of revenue

Cost of revenue was $675,731 (53% of revenues) for the three months ended June 30, 2014, an increase of $72,677, or 12.1%, compared to $603,054 (55% of revenues) for the same period in 2013. The primary reason for the increase in dollars is due to 1) approximately $98,000 in increased material and supply costs primarily due to increases in costs from our suppliers and increases in usage of certain materials offset by 2) approximately $21,000 in decreased personnel cost.



Selling and marketing expenses

Selling and marketing expenses were $73,754 for the three months ended June 30, 2014, an increase of $6,701, or 10.0%, compared to $67,053 for the same period in 2013. The primary reason for the increase in selling and marketing expenses was due to the increased revenues during the 2014 period resulting in increased commission expense. We plan to expand our sales force and marketing expenditures now that we have completed the IPO.



Stock Compensation

Stock compensation expense was $2,874,740 for the three months ended June 30, 2014, compared to no expense for the same period in 2013. Stock compensation expense in 2014 relates to the restricted stock unit awards that were granted to three individuals in connection with the IPO and primarily relates to the portion of those awards that were immediately vested.



General and administrative expenses

General and administrative expenses were $451,711 for the three months ended June 30, 2014, a decrease of $18,639, or 4.0%, compared to $470,350 for the same period in 2013. The primary reason for the decrease was due to decreased legal costs primarily related to a tortious interference case that was initiated in 2012 and eventually settled in August 2013. 15 --------------------------------------------------------------------------------



Research and development expenses

Research and development expenses were $9,023 for the three months ended June 30, 2014, a decrease of $13,797, or 60.5%, compared to $22,820 for the same period in 2013. The primary reason for the decrease in research and development expenses was due to the abandonment of certain research projects that were deemed to no longer be viable. In the future, we expect research and development expenses to increase as we work to develop additional diagnostic tests and add indications to our MyPRSŪ test. We cannot estimate the amounts we will need to invest in order to achieve the new indications or new tests, nor do we know if we will be successful in these endeavors. Interest expense Interest expense was $477,561 for the three months ended June 30, 2014, compared to $479,318 for the same period in 2013. The decrease was due to the Debt Conversion that occurred on June 17, 2014. We expect that interest expense going forward will decrease significantly.



Net loss attributable to stockholders

For the foregoing reasons, we had a net loss attributable to stockholders of Signal Genetics, Inc. of $(3,288,949) for the three months ended June 30, 2014 compared to a net loss attributable to stockholders of Signal Genetics, Inc. of $(629,691) for the three months ended June 30, 2013.



Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013

Revenue

Revenue was $2,364,494 for the six months ended June 30, 2014, an increase of $122,202, or 5.4% compared to $2,242,292 for the same period in 2013. The increase in revenue was due to a combination of the following factors:

· A $44,122 increase in revenue sourced either from or through our major

customer, UAMS. Despite an 11% decrease in tests performed during the six

months ended June 30, 2014 as compared to the same period in 2013 (1,640 tests

performed in 2014 versus 1,846 tests performed in 2013), the average sales

price per test increased by $154.20, or 15% primarily due to the mix in both

the type of test being performed (research versus clinical) and the type of

payor category.



· A $78,080 increase in revenue sourced from non-UAMS customers. Despite a 52%

decrease in revenue from pharmaceutical companies due to the completion of a

clinical study in 2013 ($37,825 decrease), revenue from other hospitals

outside of UAMS increased by 39% (a $115,905 increase). The increase in

revenues resulted from a 30% increase in the number of tests performed during

the six months ended June 30, 2014 as compared to the same period in 2013 (239

tests performed in 2014 versus 184 tests performed in 2013). The increase in

volume was slightly offset by a decrease of 17 tests for pharmaceutical

companies due to the completion of the clinical study in 2013. Additionally,

we experienced a decrease in average selling price per test of $138.00, or 7%.

The decrease in average sales price was primarily due to the completion of the

clinical study in 2013 which had a higher average selling price per test.

Cost of revenue Cost of revenue was $1,339,245 (57% of revenues) for the six months ended June 30, 2014, an increase of $67,224, or 5.3%, compared to $1,272,021 (57% of revenues) for the same period in 2013. The increase in dollars was primarily due to 1) approximately $108,000 in increased material and supply costs primarily due to increases in costs from our suppliers and increases in usage of certain materials offset by 2) approximately $55,000 in decreased personnel cost.



Selling and marketing expenses

Selling and marketing expenses were $146,824 for the six months ended June 30, 2014, a decrease of $6,329, or 4.1%, compared to $153,153 in the same period in 2013. The primary reason for the decrease in selling and marketing expenses was due to reduction of our sales staff. We plan to expand our sales force and marketing expenditures now that we have completed the IPO. 16 --------------------------------------------------------------------------------



Stock Compensation

Stock compensation expense was $2,874,740 for the six months ended June 30, 2014, compared to no expense for the same period in 2013. Stock compensation in 2014 relates to the restricted stock unit awards that were granted to three individuals in connection with the IPO and primarily relates to the portion of the awards that were immediately vested.



General and administrative expenses

General and administrative expenses were $964,036 for the six months ended June 30, 2014, an increase of $75,856, or 8.5%, compared to $888,180 for the same period in 2013. The primary reason for the increase was due to an additional charge of $46,000, which resulted from a change in estimate related to the termination agreement signed with the landlord of a previously abandoned lease, $50,000 of additional consulting fees and $17,000 in increased insurance expense related to our IPO, offset by $48,000 of decreased legal costs primarily related to a tortious interference case which was initiated in 2012 and eventually settled in August 2013.



Research and development expenses

Research and development expenses were $17,730 for the six months ended June 30, 2014, a decrease of $50,833, or 74.1%, compared to $68,563 in the same period in 2013. The primary reason for the decrease in research and development expenses was due to the abandonment of certain research projects that were deemed to not be viable. In the future, we expect research and development expenses to increase as we work to develop additional diagnostic tests and add indications to our MyPRSŪ test. We cannot estimate the amounts we will need to invest in order to achieve the new indications or new tests, nor do we know if we will be successful in these endeavors. Interest expense Interest expense was $1,016,647 for the six months ended June 30, 2014, compared to $937,222 for the same period in 2013. The primary reason for the increase was due to increased borrowings on our note payable to the related party. Due to the Debt Conversion that occurred on June 17, 2014, we expect that interest expense going forward will decrease significantly.



Net loss attributable to stockholders

For the foregoing reasons, we had a net loss attributable to stockholders of Signal Genetics, Inc. of $(3,994,728) for the six months ended June 30, 2014 compared to a net loss attributable to stockholders of Signal Genetics, Inc. of $(1,256,847) for the six months ended June 30, 2013.



Liquidity and Capital Resources

We had cash of $7,696,325 at June 30, 2014 compared to $209,348 at December 31, 2013, and total current liabilities of $2,137,301 at June 30, 2014 compared to $27,300,316 at December 31, 2013. As of June 30, 2014, we had working capital of approximately $7,631,000. Prior to our IPO, our principal sources of cash were primarily borrowings on our note payable to the related party. We received net proceeds of approximately $6,144,000 from the IPO (after the payment of underwriter commissions and offering expenses). We expect that as our revenues grow, our operating expenses will grow and, as a result, we will need to generate significant additional net revenues to achieve profitability.



The Company has no material commitments for capital expenditures at this time.

At June 30, 2014, following the Debt Conversion, the Corporation Conversion and the IPO, the Company had positive working capital and stockholders' equity. Although we are forecasting continued losses and negative cash flows as we fund our selling and marketing activities and research and development programs, we believe that we have enough cash on hand to support operations at least through August 2015. Going forward, as we continue our selling and marketing activities and research and development programs, we may seek additional financing and/or strategic investments. However, there can be no assurance that any additional financing or strategic investments will be available on acceptable terms, if at all. If events or circumstances occur such that we do not obtain additional funding, we will most likely be required to reduce our plans and/or certain discretionary spending, which could have a material adverse effect on our ability to achieve our intended business objectives. 17 --------------------------------------------------------------------------------



Operating activities

The following table sets forth our net cash used in operations for the periods indicated: Six Months Ended June 30, 2014 2013 Net loss $ (3,994,728 )$ (1,076,847 ) Non-cash adjustments 4,000,485 998,841 Changes in operating assets and liabilities (390,980 ) (342,190 ) Net cash used in operating activities of discontinued operations - (93,875 ) Net cash used in operations $ (385,223 )$ (514,071 ) We used $385,223 of net cash in operating activities in the six months ended June 30, 2014. Non-cash adjustments primarily reflect stock compensation of $2,874,740 and non-cash accrued interest on the note to the related party of $1,007,733. Changes in operating assets and liabilities primarily reflect a decrease in inventory of $163,501, offset by increases in accounts receivable of $365,395 and a decrease in lease termination/abandonment payable of $242,542. The increase in inventory was primarily due to timing of the receipt of supplies. The increase in accounts receivable was due to increased revenues in 2014 from our non-contracted customers, who have historically taken longer to pay. Our days sales outstanding ("DSO") for the six months ended June 30, 2014 also increased to 94 days from 89 days for the year ended December 31, 2013, due to the increased revenues from non-contracted customers. We do not know if collections will remain at these levels. Moreover, future collections may depend upon our ability to obtain in-network contracts with additional insurance providers. The decrease in the lease termination/abandonment payable was due to payments made on the now terminated lease. We used $514,071 of net cash in operating activities in the six months ended June 30, 2013. Non-cash adjustments primarily reflect non-cash accrued interest on the note to the related party of $923,898. Changes in operating assets and liabilities primarily reflect decreases in accounts receivable and inventory of $65,658 and $78,440, respectively, offset by decreases in accounts payable and other accrued expenses and the lease termination/abandonment payable of $298,669 and $157,988, respectively. The primary reason for the decrease in accounts receivable was due to an improvement in our internal billing processes and the collection rate from third party providers. Our DSO for the six months ended June 30, 2013 was 94 days. The decrease in inventory was primarily due to a combination of timing of purchases combined with a decrease in material costs due to re-negotiations with a key supplier. The decreases in accounts payable and other accrued expenses were primarily due to payments and reductions in fees for legal and consulting services. The decrease in the lease termination/abandonment payable was due to payments made on the now terminated lease. The net cash used in operating activities of discontinued operations was primarily due to payments made for remaining liabilities of one of our subsidiaries.



Investing activities

We had $4,287 of net cash used in investing activities in the six months ended June 30, 2014 due primarily to purchases of property and equipment.

We had $10,498 of net cash provided by investing activities in the six months ended June 30, 2013 due primarily to decreases in security deposits.

As of this time, we plan to focus on our growth strategies and do not plan to use a material amount of the net proceeds for investing activities.

Financing activities

We generated $7,876,487 of net cash from financing activities during the six months ended June 30, 2014, primarily due to proceeds of $8,500,000 received from the IPO and $795,000 received from our note payable - related party, offset by $1,387,064 paid for deferred issuance costs.



We generated $638,099 of net cash from financing activities during the six months ended June 30, 2013, primarily due to the net proceeds of $848,544 from our note payable - related party, offset by distributions of $180,000.

18 --------------------------------------------------------------------------------



Description of Indebtedness

Prior to the IPO, we historically borrowed money from our majority stockholder and various entities owned by him to support our operations. The majority of these borrowed amounts were converted into equity as part of the Debt Conversion, which occurred prior to the Corporate Conversion. As of June 30, 2014, the aggregate amount payable was $1,045,000, which amount is non-interest bearing and due on demand. In addition, we acquired certain property and equipment through the issuance of a note payable totaling approximately $182,000 of which the balance at June 30, 2014 was approximately $11,000. The note is payable in thirty-six monthly installments of $5,320 through August 2014. The effective interest rate of the note is 3.4%. The related equipment is collateral for the note.



Related Party Transactions

See above for a description of our note payable to the related party.

Off-Balance Sheet Arrangements

As of each of June 30, 2014 and December 31, 2013, we were contingently liable for a standby letter of credit for $50,000 issued as a security deposit on a lease. We have approximately $50,000 of cash in a restricted account that is held as collateral for this letter of credit. Otherwise, we have no off-balance sheet arrangements. Commitments and Contingencies As of each of June 30, 2014 and December 31, 2013, other than our office and laboratory lease, employment agreements with key executive officers, a license agreement with UAMS and a services agreement with a third party to assist with collections from customers, we had no material commitments other than the liabilities reflected in our consolidated financial statements.



Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures in the financial statements. Critical accounting policies are those accounting policies that may be material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and that have a material impact on financial condition or operating performance. While we base our estimates and judgments on our experience and on various other factors that we believe to be reasonable under the circumstances, actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies used in the preparation of our consolidated financial statements require significant judgments and estimates. For additional information relating to these and other accounting policies, see Note 2 to our audited consolidated financial statements, appearing in the final prospectus filed with the SEC on June 19, 2014.



Revenue Recognition

We recognize revenue from testing services in accordance with the Financial Accounting Standards Board Accounting Standards Codification, or FASB ASC, 605, Revenue Recognition, which requires that four basic criteria be met before revenue can be recognized: (1) persuasive evidence that an arrangement exists; (2) delivery has occurred and title and the risks and rewards of ownership have been transferred to the client or services have been rendered; (3) the price is fixed or determinable; and (4) collectability is reasonably assured. The Company records revenues when confirmed tests results are delivered to the ordering physicians which are evidence that the services have been performed. Revenues are recorded on an accrual basis as the contractual obligations are completed and as a set of assays is processed through our laboratory under a specified contractual protocol. Revenues are billed to various payors, including Medicare, contracted insurance companies, directly billed customers (UAMS, pharmaceutical companies, reference laboratories and hospitals) and non-contracted insurance companies. The Company reports revenues from Medicare, contracted insurance companies and directly billed customers based on the contractual rate. The contractual rate is based on established, agreed upon rates between the Company and the respective payor and is the price invoiced by the Company. The Company reports revenues from non-contracted payors based on the amount expected to be collected which is based on the historical collection experience of each payor or payor group, as appropriate. The difference between the amount billed and the amount estimated to be collected from non-contracted payors is recorded as a contractual allowance at the same time the revenue is recognized, to arrive at reported net revenue. We do not record revenue from individuals for billings, deductibles or co-pays until cash is collected as collectability is not assured at the time services are provided, therefore there are no accounts receivable from self-payors. Gross revenues from individuals have been immaterial. 19 -------------------------------------------------------------------------------- Our estimates of net revenue for non-contracted insurance companies are subject to change based on the contractual status and payment policies of the third-party payors with whom we deal. We regularly refine our estimates in order to make our estimated revenue as accurate as possible based on our most recent collection experience with each third-party payor. We regularly review our historical collection experience for non-contracted payors and adjust our expected revenues for current and subsequent periods accordingly. During the year ended December 31, 2012, we did not make any adjustments to our original revenue estimates for 2011, our first year of operations. During the year ended December 31, 2013 we recorded a change in estimate related to non-contracted revenues recorded during 2012 of $57,000 which caused a decrease in overall net revenues in 2013. This represented 6% of total non-contracted revenues during 2012 and 1% of our total net revenues for 2012. If we have a similar percentage reduction of 6% in our estimated amount to be collected from non-contracted payors on the uncollected accounts receivable from non-contracted payors at June 30, 2014 of $691,000, this could result in a $41,000 change in our financial position and results of operations.



Accounts Receivable and Allowance for Doubtful Accounts

We record accounts receivable net of an allowance for doubtful accounts. We estimate an allowance for doubtful accounts based on the aging of the accounts receivable and our historical collection experience for each type of payor. We have not had any bad debts from any of our contracted customers or noncontracted insurance companies, therefore there is no allowance for doubtful accounts recorded as of June 30, 2014 and December 31, 2013. The following tables present our gross accounts receivable from customers outstanding by aging category reduced by total contractual allowances to arrive at the net accounts receivable balance at June 30, 2014 and December 31, 2013. Other than our direct bill customers, all of our receivables were pending approval by third-party payors as of the date that the receivables were recorded: June 30, 2014 0-30 Days 31-60 Days 61-90 Days Over 90 Total Medicare $ 24,348$ 35,586$ 14,983$ 126,523$ 201,440 Contracted insurance companies - 24,300 2,000 89,736 116,036 Direct bill 324,987 17,660 11,880 - 354,527 Non-contracted insurance companies 102,700 70,850 114,094 1,724,104 2,011,748 452,035 148,396 142,957 1,940,363 2,683,751 Less: Contractual allowances 59,053 36,208 64,977 1,164,108 1,324,346 Accounts receivable, net $ 392,982$ 112,188$ 77,980$ 776,255$ 1,359,405 December 31, 2013 0-30 Days 31-60 Days 61-90 Days Over 90 Total Medicare $ 20,602$ 41,204$ 19,799$ 86,876$ 168,481 Contracted insurance companies 20,000 10,000 14,000 54,352 98,352 Direct bill 185,064 13,220 19,570 - 217,854 Non-contracted insurance companies 67,150 114,550



126,400 1,245,367 1,553,467

292,816 178,974 179,769 1,386,595 2,038,154 Less: Contractual allowances 35,952 70,426 73,886 863,880 1,044,144 Accounts receivable, net $ 256,864$ 108,548$ 105,883$ 522,715$ 994,010 The days sales outstanding for the six months ended June 30, 2014 and the year ended December 31, 2013 was 94 and 89 days, respectively. The increase in the number of days is primarily due to increased revenues from our non-contracted insurance companies, which have historically taken longer to pay. The increase in the aging of our non-contracted insurance companies is also the result of inefficiencies we discovered in 2013 in our communication processes with third-party payors, which related to revenues from non-contracted insurance companies during 2012 and early 2013. Once discovered, we corrected these inefficiencies and delivered a large quantity of requested documents to our third-party payors, which we believe will result in our ability to fully collect on these revenues. In addition, now that these processes have been improved, we do not anticipate this type of delay in our future collections from third-party payors. Revenues from non-contracted insurance companies represented 18% and 13% of our total revenues during the six months ended June 30, 2014 and the year ended December 31, 2013, respectively. Since these customers are slower to pay, our accounts receivable over 90 days will increase if revenues to these customers continues to increase. 20 --------------------------------------------------------------------------------



Equity Incentive Compensation

We recognize compensation expense in an amount equal to the estimated grant date fair value of each stock award over the estimated period of service and vesting. This estimation of the fair value of each stock-based grant or issuance on the date of grant involves numerous assumptions by management. The use of different values by management in connection with these assumptions could produce substantially different results.



Impairment of Long-Lived Assets

Our management reviews our long-lived assets with finite useful lives for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We recognize an impairment loss when the sum of the future undiscounted net cash flows expected to be realized from the asset is less than its carrying amount. If an asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. Considerable judgment is necessary to estimate the fair value of the assets and accordingly, actual results could vary significantly from such estimates. Our most significant estimates and judgments relating to the long-lived asset impairments include the timing and amount of projected future cash flows.



Accounting for Income Taxes

Deferred income taxes result primarily from temporary differences between financial and tax reporting. Deferred tax assets and liabilities are determined based on the difference between the financial statement basis and tax basis of assets and liabilities using enacted tax rates. Future tax benefits are subject to a valuation allowance when management is unable to conclude that our deferred tax assets will more-likely-than-not be realized from the results of operations. Our estimate for the valuation allowance for deferred tax assets requires management to make significant estimates and judgments about projected future operating results. If actual results differ from these projections or if management's expectations of future results change, it may be necessary to adjust the valuation allowance.



Recent Accounting Pronouncements

We have reviewed all recently issued standards and have determined that other than as disclosed in Note 2 to the consolidated financial statements included herein, such standards will not have a material impact on our consolidated financial statements or do not apply to our operations.



Future Accounting Pronouncements

Section 107 of the JOBS Act provides that an emerging growth company, such as our company, can take advantage of an extended transition period for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. Although to date, we have not yet taken advantage of this delay, we have elected to avail ourselves of this extended transition period for adopting new or revised accounting standards in the future. Therefore, we will not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. As a result of this election, our consolidated financial statements may not be comparable to companies that comply with public company effective dates. In the future, we may elect to opt out of the extended period for adopting new or revised accounting standards. If we do so, we will be required to disclose such decision, which will be irrevocable. 21



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