Quarterly report pursuant to Section 13 or 15(d)

Basis of Presentation

v2.4.0.6
Basis of Presentation
9 Months Ended
Dec. 31, 2012
Basis of Presentation [Abstract]  
Basis of Presentation
1.      Basis of Presentation:

In the opinion of management, the unaudited condensed consolidated interim financial statements have been prepared on the same basis as the March 31, 2012 audited consolidated financial statements and include all adjustments, consisting only of normal recurring adjustments, necessary to fairly state the information set forth herein.  The financial statements have been prepared in accordance with the regulations of the Securities and Exchange Commission ("SEC"), but omit certain information and footnote disclosures necessary to present the financial statements in accordance with generally accepted accounting principles ("GAAP").  These interim financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2012.  The results of operations for the three and nine months ended December 31, 2012 are not necessarily indicative of results to be expected for the entire year.

CollabRx, Inc., a Delaware corporation ("CollabRx," the "Company" or "we," "us, and "our"), is the recently renamed Tegal Corporation, a Delaware corporation ("Tegal"), which acquired a private company of the same name on July 12, 2012.  Following approval by its stockholders on September 25, 2012, Tegal amended its charter and changed its name to "CollabRx, Inc." (the "Name Change").

 Tegal was formed in December 1989 to acquire the operations of the former Tegal Corporation, a division of Motorola, Inc.  Tegal's predecessor company was founded in 1972 and acquired by Motorola, Inc. in 1978. Tegal completed its initial public offering in October 1995.

The Company's 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 $3,115 for the nine months ended December 31, 2012 and net income of $798 for the nine months ended December 31, 2011.  We used $2,833 and $2,273 of cash in operating activities for the nine months ended December 31, 2012 and 2011, respectively.  We believe that our existing balance of cash and cash equivalents will be adequate to fund operations through fiscal year 2014.
 
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.

      On January 14, 2011, the Company, se2quel Partners and Sequel Power entered into a Formation and Contribution Agreement. The Company contributed $2 million in cash to Sequel Power in exchange for an approximate 25% economic interest in Sequel Power.  Sequel Power is focused on the promotion of solar power plant development projects worldwide, the development of self-sustaining businesses from such projects, including but not limited to activities relating to and supporting, developing, building and operating solar photovoltaic fabrication facilities and solar farms, the consideration of other non-photovoltaic renewable energy projects and engagement in ancillary activities, such as advisory services

CollabRx 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 Sequel Power or any other solar-related businesses.

Discontinued Operations

Since 2009, the Company engaged in a process of transitioning away from its legacy lines of business in semiconductor capital equipment.  Most recently, and as a result of the sale of the Company's Deep Reactive Ion Etch ("DRIE") assets in the prior fiscal year, and in accordance with GAAP, the DRIE business operations related to the designing, manufacturing, marketing and servicing of systems and parts within the semiconductor industry has been presented in discontinued operations in our condensed consolidated financial statements.   The exit from the DRIE operation was essentially completed by the end of the fourth quarter of our 2011 fiscal year.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash investments.  Prior to the sale of the DRIE assets, the Company's accounts receivable balance was also subject to credit risk. Substantially all of the Company's liquid investments are invested in money market funds. The Company's accounts receivable are derived primarily from sales to customers located in the United States.  The Company performs ongoing credit evaluations of its customers and generally requires no collateral. The Company no longer maintains reserves for potential credit losses. Write-offs during the periods presented have been insignificant.

As of December 31, 2012, the Company had a $50 balance in accounts receivable, which is included in prepaid and other current assets on the condensed consolidated balance sheet.

For the three months ended December 31, 2012 and 2011, respectively, Sequel accounted for all the Company's revenue.  For the nine months ended December 31, 2012, Sequel and Everyday Health accounted for 60% and 40% respectively of total revenue.  For the nine months ended December 31, 2011, Sequel Power accounted for 100% of total revenue.

Note Receivable

The balance of the note receivable at December 31, 2012 was $0.  The note receivable balance in the first quarter of the current fiscal year consisted of a loan related to Tegal's investment in CollabRx.  Tegal's  investment in CollabRx was in the form of a loan that bears interest at a rate of 0.28% per year compounded annually and matured on or about November 7, 2012.  After the completion of the acquisition of CollabRx, the note receivable was reclassified to be included as part of the purchase price, thereby extinguishing the $300 bridge loan previously extended to CollabRx.

Promissory Notes

On July 12, 2012, Tegal completed the acquisition of CollabRx.  As part of the purchase price, Tegal issued a promissory note in the amount of $500 in exchange for the existing CollabRx indebtedness of promissory notes.  The principal of the promissory notes is payable in equal installments on the third, fourth and fifth anniversaries of the date of issuance, along with the accrued but unpaid interest as of such dates.  See Note 8, CollabRx Acquisition.

On November 22, 2011, the Company completed a $300 strategic investment in the form of a convertible promissory note from NanoVibronix, Inc., a private company that develops medical devices and products that implement its proprietary therapeutic ultrasound technology.

The Company's investment in NanoVibronix is in the form of a convertible promissory note that bears interest at a rate of 10% per year compounded annually and matures on November 15, 2014.  Principal and accrued interest under the note automatically convert into shares of Series B-1 Participating Convertible Preferred Stock of NanoVibronix upon the earlier to occur of (i) a $3,000 (or larger) equity financing by NanoVibronix or (ii) a sale of NanoVibronix.  In addition, the Company may convert principal and accrued interest under the note into shares of NanoVibronix Series B-1 Participating Convertible Preferred Stock at its election at any time.  In either case, the conversion price is $0.284 per share.

Derivative Instruments

In June 2008, the Financial Accounting Standards Board ("FASB")  ratified the Emerging Issues Task Force ("EITF") consensus on EITF Issue No. 07-05, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity's Own Stock ("EITF Issue 07-05") (Topic 815) which applies to the determination of whether any freestanding financial instruments or embedded features that have the characteristics of a derivative, as defined by Statement of Financial Accounting Standards ("SFAS") No. 133 (Topic 815), Accounting for Derivative Instruments and Hedging Activities, and to any freestanding financial instruments are potentially indexed to an entity's own common stock.  EITF Issue No. 07-05 (Topic 815) became effective for fiscal years beginning after December 15, 2008.  The Company adopted Topic 815 as of April 1, 2009.  As a result, warrants to purchase 285,454 shares of our common stock previously treated as equity pursuant to the derivative treatment exemption were no longer afforded equity treatment. The warrants had exercise prices ranging from $30.00-$495.00 and expired or will expire between February 2010 and September 2013. As such, effective April 1, 2009, the Company reclassified the fair value of these warrants, which had exercise price reset features, from equity to liability status as if these warrants were treated as a derivative liability since their date of issue between February 2000 and January 2006.  On April 1, 2009, the Company reclassified $346 from additional paid-in capital, as a cumulative effect adjustment, to beginning accumulated deficit, and $502 to common stock warrant liability to recognize the fair value of such warrants on such date.  As of March 31, 2011, the fair value of the warrants was estimated using the Black-Scholes pricing model with the following weighted-average assumptions:  risk-free interest rate of 2.24%; expected life of 1.1 years; an expected volatility factor of 79.1%; and a dividend yield of 0.0%.  At December 31, 2012, the fair value of the warrants was $16, which was calculated using the Black-Scholes pricing model with the following weighted-average assumptions:  risk-free interest rate of 0.72%; expected life of 0.69 years; an expected volatility factor of 152%; and a dividend yield of 0.0%.  For the nine months ended December 31, 2012 and 2011, respectively, the Company recorded non-cash gains of $3 and $6 related to these warrants.

Investment in Unconsolidated Affiliate

Management evaluates our joint venture arrangements to determine whether they should be recorded on a consolidated basis.  The percentage of ownership interest in the joint venture, an evaluation of control and whether a variable interest entity ("VIE") exists are all considered in the consolidation assessment.
 
We account for our investment in joint ventures where we own a non-controlling interest or where we are not the primary beneficiary of a VIE using the equity method of accounting. Under the equity method, our cost of investment is adjusted for our share of equity in the earnings of the unconsolidated affiliate and reduced by distributions received.
 
Any differences between the cost of our investment in an unconsolidated affiliate and our underlying equity as reflected in the unconsolidated affiliate's financial statements generally result from a different basis in assets contributed to the joint venture. The net difference between our investment in unconsolidated affiliates and the underlying equity of unconsolidated affiliates is generally amortized over a period of ten years, which was determined to be the estimated useful life of the underlying intangibles which created the difference in carrying amount.  As a result of the impairment charge taken against our unconsolidated affiliate during fiscal 2012, the net difference at March 31, 2012 was $0.  Therefore, the amortization expense related to this difference for the period ended December 31, 2012 was $0.  The amortization expense related to this difference for both the three and nine month periods ended December 31, 2012 was $0, respectively.  The amortization expense related to this difference for the three and nine month periods ended December 31, 2011 was $43 and $129, respectively.

 On a periodic basis, we assess whether there are any indicators that the fair value of our investments in unconsolidated affiliates may be impaired. An investment is impaired only if our estimate of the fair value of the investment is less than the carrying value of the investment, and such decline in value is deemed to be other than temporary. To the extent impairment has occurred, the loss is measured as the excess of the carrying amount of the investment over the fair value of the investment. Our estimates of fair value for each investment are based on a number of assumptions such as future revenue projections, operating forecasts, discount rates and capitalization rates, among others.  These assumptions are subject to economic and market uncertainties. As these factors are difficult to predict and are subject to future events that may alter our assumptions, the fair values estimated in the impairment analyses may not be realized.  During fiscal year ended March 31, 2012, our estimate of the fair value of our investment was $0; accordingly we incurred an impairment charge of our investment in our unconsolidated affiliates during the fiscal year ended March 31, 2012 in the amount of $1,377, which represented the unamortized value of Sequel Power's solar development model.

As a result of the impairment charge taken against our investment in our unconsolidated affiliate, the net book value of the Sequel Power investment at March 31, 2012 was $0.  As such, no impairment of investment in unconsolidated affiliate was incurred during the period ended December 31, 2012.

Fair Value Measurements
 
The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value measurements for assets and liabilities required or permitted to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and we consider what assumptions market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance.   The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity's own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:
 
·  
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities.

·  
Level 2: Directly or indirectly observable inputs as of the reporting date through correlation with market data, including quoted prices for similar assets and liabilities in active markets and quoted prices in markets that are not active. Level 2 also includes assets and liabilities that are valued using models or other pricing methodologies that do not require significant judgment since the input assumptions used in the models, such as interest rates and volatility factors, are corroborated by readily observable data from actively quoted markets for substantially the full term of the financial instrument.

·  
Level 3: Unobservable inputs that are supported by little or no market activity and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management's estimates of market participant assumptions.
 
In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk in its assessment of fair value.
 
The Company's financial instruments consist of money market funds.  At December 31, 2012, all of the Company's current assets in financial instruments investments were classified as cash equivalents in the condensed consolidated balance sheet. The investment portfolio at December 31, 2011 was comprised primarily of money market funds.   The restricted cash balance has since been released.  The carrying amounts of the Company's cash equivalents are valued using Level 1 inputs.  The Company also has warrant liabilities which are valued using Level 3 inputs. 
 
The changes in the fair value of warrants is as follows:

 
Nine Months Ended
 
 
December 31,
 
 
2012
 
 
2011
 
Balance at the beginning of the period
 
$
19
 
 
$
26
 
Change in fair value recorded in earnings
 
 
(3
)
 
 
(6
)
Balance at the end of the period
 
$
16
 
 
$
20
 

Intangible Assets

Intangible assets include patents, trade names, software, non-compete agreements, customer relationships and trademarks that are amortized on a straight-line basis over periods ranging from 3 years to 10 years.  The Company performs an ongoing review of its identified intangible assets to determine if facts and circumstances exist that indicate the useful life is shorter than originally estimated or the carrying amount may not be recoverable.  If such facts and circumstances exist, the Company assesses the recoverability of identified intangible assets by comparing the projected undiscounted net cash flow associated with the related asset or group of assets over their remaining lives against their respective carrying amounts.  Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets.   As of fiscal year end 2011, all of the Company's remaining intangible assets were included in the asset sale of the DRIE product line to SPTS, except for those that were internally developed, which have a carrying value of zero.

During fiscal year 2012, the Company, as part of its proposed sale of its intellectual property portfolio for Nanolayer Deposition Technology ("NLD"), finalized the sale transactions of two of the four lots, and for which the Company received approximately $3,600.  While the third lot was awarded in the prior fiscal year, the Company was informed that the potential buyer has withdrawn from the sale. NLD is a process technology that bridges the gap between high throughput, non-conformal chemical vapor deposition ("CVD") and highly conformal, low throughput atomic layer deposition ("ALD").  The entire portfolio includes over 35 US and international patents in the areas of pulsed-CVD, plasma-enhanced ALD, and NLD.

With the acquisition of CollabRx, the Company acquired software, trade names, customer relationships, non-compete agreements and goodwill.  The lives of the acquired intangible assets range from three to ten years.  Intangible assets, except for trade names, are amortized on a straight-line basis.  Intangible assets related to trade names are not amortized.  The Company tests for impairment at least annually.  The fair values of these assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount might not be recoverable. If undiscounted expected future cash flows are less than the carrying value of the assets, an impairment loss will be recognized based on the excess of the carrying amount over the fair value of the assets.  The amortization expense for the three months ended December 31, 2012 and 2011, respectively, was $62 and $0.   The amortization expense for the nine months ended December 31, 2012 and 2011, respectively, was $82 and $0.   The amortization expense included in cost of revenue is related to the acquired software and is amortized on a straight-line basis over the expected life of the asset, which the Company believes to be ten years.

Impairment of Long-Lived Assets

Long-lived assets are reviewed for indicators of impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable, as well as at fiscal year end. If undiscounted expected future cash flows are less than the carrying value of the assets, an impairment loss is recognized based on the excess of the carrying amount over the fair value of the assets.

The Company recorded zero disposal losses for fixed assets for the three months ended December 31, 2012 and 2011, respectively.  The Company recorded disposal losses of $17 and $51 for fixed assets for the nine months ended December 31, 2012 and 2011, respectively.    The Company disposed of certain assets in the current period in connection with the relocation of its main offices from Petaluma, CA to San Francisco, CA.

Stock-Based Compensation

We have adopted several stock plans that provide for issuance of equity instruments to our employees and non-employee directors. Our plans include incentive and non-statutory stock options and restricted stock awards.  These equity awards generally vest ratably over a four-year period on the anniversary date of the grant, and stock options expire ten years after the grant date. Certain restricted stock awards may vest on the achievement of specific performance targets.  We also have an Employee Stock Purchase Plan ("ESPP") that allows qualified employees to purchase Company shares at 85% of the fair market value on specified dates.

Total stock-based compensation expense related to stock options and restricted stock units ("RSUs") for the nine months ended December 31, 2012 and 2011 was $507 and $130, respectively.  The total compensation expense related to non-vested stock options and RSUs not yet recognized at December 31, 2012 is $662.

The Company utilized the following valuation assumptions to estimate the fair value of options that would have been granted for the nine month periods ended December 31, 2012 and 2011, respectively.

STOCK OPTIONS:
 
2012
 
 
2011
 
Expected life (years)
 
 
6.0
 
 
 
6.0
 
Volatility
 
 
156.8
%
 
 
155.1
%
Risk-free interest rate
 
 
0.64
%
 
 
0.83
%
Dividend yield
 
 
0
%
 
 
0
%

ESPP awards are valued using the Black-Scholes pricing model with expected volatility calculated using a six-month historical volatility.   No ESPP awards were made in the three and nine month periods ended December 31, 2012.  The valuation assumptions are included for comparison only.

ESPP:
 
2012
 
 
2011
 
Expected life (years)
 
 
0.5
 
 
 
0.5
 
Volatility
 
 
106.1
%
 
 
116.3
%
Risk-free interest rate
 
 
0.05
%
 
 
0.02
%
Dividend yield
 
 
0
%
 
 
0
%
 
Valuation and Other Assumptions for Stock Options
 
Valuation and Amortization Method.    We estimate the fair value of stock options granted using the Black-Scholes pricing model. We estimate the fair value using a single option approach and amortize the fair value on a straight-line basis for options expected to vest. All options are amortized over the requisite service periods of the awards, which are generally the vesting periods.
 
Expected Term.   The expected term of options granted represents the period of time that the options are expected to be outstanding. We estimate the expected term of options granted based on our historical experience of exercises including post-vesting exercises and termination.
 
Expected Volatility.    We estimate the volatility of our stock options at the date of grant using historical volatilities.  Historical volatilities are calculated based on the historical prices of our common stock over a period at least equal to the expected term of our option grants.
 
Risk-Free Interest Rate.    We base the risk-free interest rate used in the Black-Scholes option valuation model on the implied yield in effect at the time of option grant on U.S. Treasury zero-coupon issues with remaining terms equivalent to the expected term of our option grants.
 
Dividends.    We have never paid any cash dividends on common stock and we do not anticipate paying any cash dividends in the foreseeable future.
 
Forfeitures.    We use historical data to estimate pre-vesting option forfeitures. We record stock-based compensation expense only for those awards that are expected to vest.

During the three months ended December 31, 2012, we granted options to purchase an aggregate of 10,000 shares of common stock.   The Company also granted options to purchase an aggregate of approximately 50,000 shares of common stock on January 1, 2013.

Stock Options and Warrants

A summary of the stock option and warrant activity during the nine months ended December 31, 2012 is as follows:

 
 
 
 
 
 
 
Weighted-
 
 
 
 
 
 
 
 
Weighted-
 
 
Average
 
 
 
 
 
 
 
 
Average
 
 
Remaining
 
 
Aggregate
 
 
 
 
 
Exercise
 
 
Contractual
 
 
Intrinsic
 
 
Shares
 
 
Price
 
 
Term (in Years)
 
 
Value
 
Beginning outstanding
 
 
127,833
 
 
$
19.24
 
 
 
 
 
 
 
Granted
 
 
173,999
 
 
$
3.82
 
 
 
 
 
 
 
   Forfeited
 
 
(379
)
 
$
11.70
 
 
 
 
 
 
 
   Expired
 
 
(19,577
)
 
$
17.68
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending outstanding
 
 
281,876
 
 
$
9.84
 
 
 
7.88
 
 
$
-
 
Ending vested and expected to vest
 
 
281,807
 
 
$
9.83
 
 
 
7.88
 
 
$
-
 
Ending exercisable
 
 
141,971
 
 
$
15.70
 
 
 
6.22
 
 
$
-
 

The aggregate intrinsic value of stock options and warrants outstanding at December 31, 2012 is calculated as the difference between the exercise price of the underlying options and the market price of our common stock as of December 31, 2012.

The following table summarizes information with respect to stock options and warrants outstanding as of December 31, 2012:

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-
 
 
 
 
 
 
 
 
 
 
Weighted-
 
 
 
 
 
 
 
 
Average
 
 
 
 
 
 
 
Number
 
 
Average
 
 
 
 
 
Number
 
 
Exercise
 
 
 
 
 
 
 
Outstanding
 
 
Remaining
 
 
Weighted-
 
 
Exercisable
 
 
Price
 
 
 
 
 
 
 
As of
 
 
Contractual
 
 
Average
 
 
As of
 
 
As of
 
Range of
 
 
Dec 31,
 
 
Term
 
 
Exercise
 
 
Dec 31,
 
 
Dec 31,
 
Exercise Prices
 
 
2012
 
 
(in years)
 
 
Price
 
 
2012
 
 
2012
 
$
2.90
 
 
$
6.00
 
 
 
182,329
 
 
 
9.51
 
 
$
3.85
 
 
 
42,493
 
 
$
3.78
 
 
6.25
 
 
 
11.70
 
 
 
45,358
 
 
 
5.89
 
 
 
11.50
 
 
 
45,358
 
 
 
11.50
 
 
17.80
 
 
 
28.10
 
 
 
39,269
 
 
 
4.71
 
 
 
21.63
 
 
 
39,244
 
 
 
21.63
 
 
34.20
 
 
 
61.80
 
 
 
14,006
 
 
 
2.42
 
 
 
43.95
 
 
 
13,998
 
 
 
43.95
 
 
61.94
 
 
 
151.94
 
 
 
854
 
 
 
1.68
 
 
 
89.52
 
 
 
832
 
 
 
89.52
 
 
152.21
 
 
 
285.00
 
 
 
58
 
 
 
0.74
 
 
 
174.00
 
 
 
46
 
 
 
174.00
 
 
286.72
 
 
 
300.27
 
 
 
2
 
 
 
0.00
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
2.90
 
 
$
300.27
 
 
 
281,876
 
 
 
7.88
 
 
$
9.83
 
 
 
141,971
 
 
$
15.70
 

As of December 31, 2012, there was $340 of total unrecognized compensation cost related to outstanding options and warrants which the Company expects to recognize over a period of 3.1 years.

Restricted Stock Units

The following table summarizes the Company's unvested RSU activity for the nine months ended December 31, 2012:

 
 
Number
 
 
Weighted- Average
 
 
 
of
 
 
Grant Date
 
 
 
Shares
 
 
Fair Value
 
Balance March 31, 2012
 
 
236,541
 
 
$
2.11
 
Granted
 
 
288,417
 
 
$
3.85
 
Forfeited
 
 
(279,760
)
 
$
3.51
 
Vested
 
 
(83,689
)
 
$
2.65
 
Balance, Dec. 31, 2012
 
 
161,509
 
 
$
2.52
 

Unvested restricted stock at December 31, 2012

As of December 31, 2012, there was $322 of total unrecognized compensation cost related to outstanding RSUs, which the Company expects to recognize over a period of 2.43 years.