Item 1B.
Unresolved Staff Comments
None.
As of December 31, 2017, we had a lease for approximately 17,900 square feet of office and laboratory space in Rutherford, New Jersey, 24,900 square feet of laboratory space located in Research Triangle Park (RTP) in Morrisville, North Carolina, 5,800 square feet in Hershey, Pennsylvania, 10,000 square feet of laboratory space in Hyderabad, India and 1,959 square feet in Bundoora, Australia. These lease agreements have escalating lease payments and expire in February 2023, May 2020, November 2020 and July 2021, respectively. During 2017, we vacated our 2,700 square feet of laboratory space in Shanghai, China. We also have approximately 19,100 square feet of laboratory space in Los Angeles, California; the California lease expires in December 2018.
Item 3.
Item 3.
Legal Proceedings
In the normal course of business, the Company may be involved in legal proceedings or threatened legal proceedings. We are not party to any legal proceedings or aware of any threatened legal proceedings which are expected to have a material adverse effect on our financial condition, results of operations or liquidity.
Item 4.
Item 4.
Mine Safety Disclosures
Not applicable.
PART II
Item 5.
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The following table sets forth, for the periods indicated, the reported high and low sales prices of our common stock on The NASDAQ Capital Market.
Holders
As of December 31, 2017, we had approximately 100 holders of record of our common stock. The number of record holders was determined from the records of our transfer agent and does not include beneficial owners of common stock whose shares are held in the names of various security brokers, dealers, and registered clearing agencies. The transfer agent of our common stock is Continental Stock Transfer & Trust, 17 Battery Place, 8th Floor, New York, New York, 10004.
Dividends
We have never declared dividends on our equity securities, and currently do not plan to declare dividends on shares of our common stock in the foreseeable future. We expect to retain our future earnings, if any, for use in the operation and expansion of our business. Our loan agreements prohibit us from paying cash dividends on our common stock and the terms of any future loan agreement we enter into or any debt securities we may issue are likely to contain similar restrictions on the payment of dividends. Subject to the foregoing, the payment of cash dividends in the future, if any, will be at the discretion of our board of directors and will depend upon such factors as earnings levels, capital requirements, our overall financial condition and any other factors deemed relevant by our board of directors.
Item 6.
Item 6.
Selected Financial Data.
The selected financial data set forth below as of December 31, 2017 and 2016, and for the years then ended has been derived from the audited consolidated financial statements of the Company, which are included elsewhere in this Annual Report on Form 10-K. We derived the consolidated financial data as of and for the years ended December 31, 2015, 2014 and 2013 from our audited consolidated financial statements that are not included elsewhere in this Annual Report on Form 10-K.
The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the audited consolidated financial statements, and the notes thereto, and other financial information included herein. Our historical results are not necessarily indicative of our future results.
Item 7.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
As used herein, the “Company,” “we,” “us,” “our” or similar terms, refer to Cancer Genetics, Inc. and its wholly owned subsidiaries: Cancer Genetics Italia, S.r.l., Gentris, LLC, BioServe Biotechnologies (India) Private Limited and vivoPharm Pty, Ltd., except as expressly indicated or unless the context otherwise requires. The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help facilitate an understanding of our financial condition and our historical results of operations for the periods presented. This MD&A should be read in conjunction with the audited consolidated financial statements and notes thereto included in this annual report on Form10-K. This MD&A may contain forward-looking statements that involve risks and uncertainties. For a discussion on forward-looking statements, see the information set forth in the Introductory Note to this Annual Report under the caption “Forward Looking Statements”, which information is incorporated herein by reference.
Overview
We are an emerging leader in the field of precision medicine, enabling individualized therapies in the field of oncology through tests, services and molecular markers. We develop, commercialize and provide molecular- and biomarker-based tests and services, including proprietary preclinical oncology and immuno-oncology services, that enable biotech and pharmaceutical companies engaged in oncology trials to better select candidate populations and reduce adverse drug reactions by providing information regarding genomic factors influencing subject responses to therapeutics. Through our clinical services, we enable physicians to personalize the clinical management of each individual patient by providing genomic information to better diagnose, monitor and inform cancer treatment. We have a comprehensive, disease-focused oncology testing portfolio, and an extensive set of anti-tumor referenced data based on predictive xenograft and syngeneic tumor models. Our tests and techniques target a wide range of indications, covering all ten of the top cancers in prevalence in the United States, with additional unique capabilities offered by our FDA-cleared Tissue of Origin® test for identifying difficult to diagnose tumor types or poorly differentiated metastatic disease.
We are currently executing a strategy of partnering with pharmaceutical and biotech companies and clinicians as oncology diagnostic specialists by supporting therapeutic discovery, development and patient care from bench to bedside. Pharmaceutical and biotech companies are increasingly attracted to work with us to provide molecular profiles on clinical trial participants. Similarly, we believe the oncology industry is undergoing a rapid evolution in its approach to diagnostic, prognostic and treatment outcomes (theranostic) testing, embracing precision medicine and individualized testing as a means to drive higher standards of patient treatment and disease management. These profiles may help identify biomarker and genomic variations that may be responsible for differing responses to oncology therapies, thereby increasing the efficiency of trials while lowering costs. We believe tailored and combination therapies can revolutionize oncology care through molecular- and biomarker-based testing services, enabling physicians and researchers to target the factors that make each patient and disease unique.
We believe the next shift in cancer management will bring together testing capabilities for germline, or inherited mutations, and somatic mutations that arise in tissues over the course of a lifetime. We have created a unique position in the industry by providing both targeted somatic analysis of tumor sample cells alongside germline analysis of an individual's non-cancerous cells' molecular profile as we attempt to continue achieving milestones in precision medicine.
Our clinical offerings include our portfolio of proprietary tests targeting hematological, urogenital and HPV-associated cancers, in conjunction with ancillary non-proprietary tests. Our proprietary tests target cancers that are difficult to prognose and predict treatment outcomes through currently available mainstream techniques. We provide our proprietary tests and services, along with a comprehensive range of non-proprietary oncology-focused tests and laboratory services, to oncologists and pathologists at hospitals, cancer centers, and physician offices, as well as biotech and pharmaceutical companies to support their clinical trials. Our proprietary tests are based principally on our expertise in specific cancer types, test development methodologies and proprietary algorithms correlating genetic events with disease specific information. Our portfolio primarily includes comparative genomic hybridization (CGH) microarrays and next generation sequencing (NGS) panels, gene expression tests, and DNA fluorescent in situ hybridization (FISH) probes.
The non-proprietary testing services we offer are focused in part on specific oncology categories where we are developing our proprietary tests. We believe that there is significant synergy in developing and marketing a complete set of tests and services that are disease focused and delivering those tests and services in a comprehensive manner to help with treatment decisions. The insight that we develop in delivering the non-proprietary services are often leveraged in the development of our proprietary programs and now increasingly in the validation of our proprietary programs, such as MatBA and Focus::NGS.
We expect to continue to incur material losses for the near future. We incurred losses of $20.9 million and $15.8 million for fiscal years ended December 31, 2017 and 2016, respectively. As of December 31, 2017, we had an accumulated deficit of
$134.8 million. We need to raise additional capital. The report of our independent registered public accounting firm with respect to our financial statements appearing in our Form 10-K contains an explanatory paragraph stating that our operating losses and negative cash flows from operations, raise substantial doubt about our ability to continue as a going concern. There can be no assurance that additional capital will be available to us on acceptable terms, if at all. In addition, we are in default of certain financial covenants in our credit agreements with our senior lenders, and while we are in negotiations with such lenders and believe we will be able to secure relief with respect to such defaults, there is no assurance that we will be successful in negotiating for waivers of such defaults or amendments of such covenants.
Acquisitions
On August 15, 2017, we purchased all of the outstanding stock of vivoPharm, with its principal place of business in Victoria, Australia, in a transaction valued at approximately $1.6 million in cash and $8.1 million in the Company’s common stock based on the closing price of the stock on August 15, 2017.
Key Factors Affecting our Results of Operations and Financial Condition
Our overall long-term growth plan is predicated on our ability to develop and commercialize our proprietary tests, penetrate the Pharmaceutical and Biotechnology (Biopharma) community to achieve more revenue supporting clinical trials and develop and penetrate the Indian market. Our proprietary tests include CGH microarrays, NGS panels, gene expression tests and DNA FISH probes. We continue to develop additional proprietary tests. To facilitate market adoption of our proprietary tests, we anticipate having to successfully complete additional studies with clinical samples and publish our results in peer-reviewed scientific journals. Our ability to complete such studies is dependent upon our ability to leverage our collaborative relationships with leading institutions to facilitate our research and obtain data for our quality assurance and test validation efforts.
We believe that the factors discussed in the following paragraphs have had and are expected to continue to have a material impact on our results of operations and financial condition.
Revenues
Our revenue is primarily generated through our Clinical Services and Biopharma Services. Clinical Services can be billed to Medicare, another third party insurer or the referring community hospital or other healthcare facility or patients in accordance with state and federal law. Biopharma Services are billed to the customer directly. While we have agreements with our Biopharma clients, volumes from these clients are subject to the progression and continuation of the clinical trials which can impact testing volume. We also derive revenue from Discovery Services, which are services provided in the development of new testing assays and methods and include pre-clinical toxicology and efficacy studies. Discovery Services are billed directly to the customer.
We have historically derived a significant portion of our revenue from a limited number of test ordering sites, although the test ordering sites that generate a significant portion of our revenue have changed from period to period. Test ordering sites account for all of our Clinical Services revenue along with a portion of the Biopharma Services revenue. Our test ordering sites are hospitals, cancer centers, reference laboratories, physician offices, and pharmaceutical and biotechnology companies. Oncologists and pathologists at these sites order the tests on behalf of the needs of their oncology patients or as part of a clinical trial sponsored by a pharmaceutical or biotechnology company in which the patient is being enrolled.
The top five test ordering clients during 2017 and 2016 accounted for 38% and 31%, respectively, of our testing volumes. During the year ended December 31, 2017, one Biopharma client accounted for approximately 11% of our revenue. During the year ended December 31, 2016 one Biopharma client accounted for approximately 16% of our revenue. The loss of our largest client would materially adversely affect our results of operations; however, the loss of any other test ordering client would not materially adversely affect our results of operations.
We receive revenue for our Clinical Services from Medicare, other insurance carriers and other healthcare facilities. Some of our customers choose, generally at the beginning of our relationship, to pay for laboratory services directly as opposed to having patients (or their insurers) pay for those services and providing us with the patients’ insurance information. A hospital may elect to be a direct bill customer and pay our bills directly, or may provide us with patient information so that their patients pay our bills, in which case we generally expect payment from their private insurance carrier or Medicare. In a few instances, we have arrangements where a hospital may have two accounts with us, so that certain tests are billed directly to the hospital, and certain tests are billed to and paid by a patient’s insurer. The billing arrangements generally are dictated by our customers and in accordance with state and federal law.
For the year ended December 31, 2017, Medicare accounted for approximately 12% of our total revenue, other insurance accounted for approximately 20% of our total revenue and other healthcare facilities accounted for 5% of our total revenue. On average, we generate less revenue per test from other healthcare facilities billed directly, than from other insurance payors.
Cost of Revenues
Our cost of revenues consists principally of internal personnel costs, including non-cash stock-based compensation, laboratory consumables, shipping costs, overhead and other direct expenses, such as specimen procurement and third party validation studies. We are pursuing various strategies to reduce and control our cost of revenues, including automating our processes through more efficient technology and attempting to negotiate improved terms with our suppliers. In 2017, we purchased all of the outstanding stock of vivoPharm. Overall, with four acquisitions completed, we have made significant progress with integrating our resources and services and leveraging enterprise wide purchasing power to gain supplier discounts, in an effort to reduce costs. We will continue to assess other possible advantages to help us improve our cost structure.
Operating Expenses
We classify our operating expenses into three categories: research and development, sales and marketing, and general and administrative. Our operating expenses principally consist of personnel costs, including non-cash stock-based compensation, outside services, laboratory consumables and overhead, development costs, marketing program costs and legal and accounting fees.
Research and Development Expenses. We incur research and development expenses principally in connection with our efforts to develop our proprietary tests. Our primary research and development expenses consist of direct personnel costs, laboratory equipment and consumables and overhead expenses. In 2013, we entered into a joint venture with the Mayo Foundation for Medical Education and Research, with a focus on developing oncology diagnostic services and tests utilizing next generation sequencing. These efforts continued throughout 2016 and 2017. All research and development expenses are charged to operations in the periods they are incurred.
General and Administrative Expenses. General and administrative expenses consist principally of personnel-related expenses, professional fees, such as legal, accounting and business consultants, occupancy costs, bad debt and other general expenses. We have incurred increases in our general and administrative expenses and anticipate further increases as we expand our business operations.
Sales and Marketing Expenses. Our sales and marketing expenses consist principally of personnel and related overhead costs for our sales team and their support personnel, travel and entertainment expenses, and other selling costs including sales collaterals and trade shows. We expect our sales and marketing expenses to increase as we expand into new geographies and add new clinical tests and services.
Seasonality
Our business experiences decreased demand during spring vacation season, summer months and the December holiday season when patients are less likely to visit their health care providers. We expect this trend in seasonality to continue for the foreseeable future.
Results of Operations
Years Ended December 31, 2017 and 2016
The following table sets forth certain information concerning our results of operations for the periods shown:
Non-GAAP Financial Information
In addition to disclosing financial results in accordance with United States generally accepted accounting principles (“GAAP”), the table below contains non-GAAP financial measures that we believe are helpful in understanding and comparing our past financial performance and our future results. The non-GAAP financial measures disclosed by the Company exclude the non- operating changes in the fair value of derivative instruments. These non-GAAP financial measures should not be considered a substitute for, or superior to, financial measures calculated in accordance with GAAP, and the financial results calculated in accordance with GAAP and reconciliations from these results should be carefully evaluated. Management believes that these non-GAAP measures provide useful information about the Company’s core operating results and thus are appropriate to enhance the overall understanding of the Company’s past financial performance and its prospects for the future. The non-GAAP financial measures in the table below include adjusted net (loss) and the related adjusted basic and diluted net (loss) per share amounts.
Reconciliation from GAAP to Non-GAAP Results (in thousands, except per share amounts):
Adjusted net (loss) increased 8% to $18.9 million during the year ended December 31, 2017, from an adjusted net (loss) of $17.5 million during the year ended December 31, 2016. Adjusted basic and diluted net (loss) per share decreased 17% to $0.91 during the year ended December 31, 2017, down from $1.10 during the year ended December 31, 2016.
Revenue
The breakdown of our revenue is as follows:
Revenue increased 8%, or $2.1 million, to $29.1 million for the year ended December 31, 2017, from $27.0 million for the year ended December 31, 2016, principally due to our acquisition of vivoPharm, which accounted for $2.7 million of the increase. Our average revenue (excluding probe revenue) per test decreased to $363 per test for the year ended December 31, 2017 from $421 per test for the year ended December 31, 2016, principally due to the increased volume from our California facility at lower average revenue per test. Overall test volumes increased by 7% from 48,427 tests for the year ended December 31, 2016 to 51,999 tests for the year ended December 31, 2017.
Revenue from Biopharma Services decreased 5%, or $0.7 million, to $14.6 million for the year ended December 31, 2017, from $15.3 million for the year ended December 31, 2016, principally due to fluctuations in the start-up and patient enrollment timing of our clinical study projects with pharmaceutical and biotechnology customers. Revenue from Clinical Services customers increased 1%, or $0.1 million, to $10.8 million for the year ended December 31, 2017, from $10.7 million for the year ended December 31, 2016, principally due to increased test volumes. Revenue from Discovery Services increased $2.6 million, to $3.7 million for the year ended December 31, 2017, from $1.1 million for the year ended December 31, 2016 due to revenue contributed by the acquisition of vivoPharm in the third quarter of 2017, which accounted for all of the increase.
Cost of Revenues
Cost of revenues increased 6%, or $1.0 million, to $18.1 million for the year ended December 31, 2017, from $17.1 million for the year ended December 31, 2016, principally due to the following: increased lab supplies expense of $0.4 million as a result of higher test volumes and a higher concentration of next generation sequencing test volume in the second half of 2017, increased payroll and other benefits of $0.2 million, increased professional services of $0.3 million to support clinical capabilities and increases in shipping costs of $0.3 million as the Company shipped samples between laboratory facilities to meet customer demands. These increases were partially offset by a decrease in outsourced labor of $0.1 million, and a reduction in depreciation expense of $0.2 million.
Operating Expenses
Research and Development Expenses. Research and development expenses decreased 20%, or $1.2 million, to $4.8 million for the year ended December 31, 2017, from $6.0 million for the year ended December 31, 2016. The decrease relates primarily to a reduced payroll and benefits costs of $0.5 million, decreased facility cost of $0.2 million, and a reduction of $0.4 million in lab supplies due to fewer validations of diagnostic tests as we partnered with our biopharma customers to complete the development of new test capabilities in support of their clinical trials. In addition, our share of the loss from Oncospire, our joint venture with Mayo Clinic, decreased by $0.1 million.
General and Administrative Expenses. General and administrative expenses increased 24%, or $3.9 million to $19.9 million for the year ended December 31, 2017, from $16.0 million for the year ended December 31, 2016. The increase primarily relates to an increase in our bad debt expense of $4.6 million due to challenges with the integration of the lab management system into the billing platform from the Response Genetics acquisition in California for the periods from October 2015 to September 30, 2017 and low collections experience due to the lack of coverage for certain of our next generation sequencing tests by Medicare and most third-party managed care plans. We also experienced an increase in professional fees of $0.4 million as we prepare for the impacts of conforming to new revenue recognition guidance in accordance with ASC 606, partially offset by a $0.8 million decrease in facility costs primarily resulting from the elimination of building management fees at our North Carolina location. We also experienced reduced legal, accounting and other financial consulting fees of $0.2 million and decreased franchise and property taxes of $0.3 million.
Sales and Marketing Expenses. Sales and marketing expenses increased 7%, or $0.3 million, to $5.0 million for the year ended December 31, 2017, from $4.7 million for the year ended December 31, 2016, principally due to the following: compensation
costs increased by $0.6 million as a result of an increase in our Clinical Services sales force and related increase in commission payments, offset by decreased travel and entertainment costs of $0.1 million, reduced professional fees of $0.1 million and decreased facility costs of $0.1 million primarily resulting from the elimination of building management fees at our North Carolina location.
Interest Expense, Net
Interest expense increased 379%, or $1.6 million, to $2.1 million for the year ended December 31, 2017, from $0.4 million for the year ended December 31, 2016, principally due to accelerating the amortization of debt issuance costs and the discount on debt as a result of violating certain financial covenants. The acceleration of these costs resulted in additional interest expense of approximately $1.0 million. In addition, the debt we refinanced in March 2017 resulted in increased borrowings and also bears a higher interest rate.
Change in Fair Value of Warrant Liability
Changes in fair value of some of our common stock warrants may impact our results. Accounting rules require us to record certain of our warrants as a liability, measure the fair value of these warrants each quarter and record changes in that value in earnings. We recognized non-cash expense of $2.0 million for the year ended December 31, 2017, as compared to non-cash income of $1.5 million for the year ended December 31, 2016, as a result of fluctuations in our stock price. In the future, if our stock price increases, we would record a non-cash charge as a result of changes in the fair value of our common stock warrants. Consequently, we may be exposed to non-cash charges, or we may record non-cash income, as a result of this warrant exposure in future periods.
Change in Fair Value of Acquisition Note Payable
The change in fair value of the acquisition note payable resulted in $42,000 in non-cash expense for the year ended December 31, 2017, as compared to non-cash income $0.2 million for the year ended December 31, 2016 as a result of fluctuations in our stock price.
Other Expense
During the year ended December 31, 2017, we recognized $0.3 million of aggregate expense resulting from the issuance of derivative warrants as part of a debt refinancing and the 2017 Offering. During the year ended December 31, 2016, we incurred $0.3 million of expense resulting from the issuance of derivative warrants as part of the 2016 Offerings.
Income Taxes
During 2017, we received approximately $2.1 million of net proceeds from the sale of state NOL’s and state research and development credits. No NOL’s or research and development tax credits were sold during the year ended December 31, 2016.
Liquidity and Capital Resources
Sources of Liquidity
Our primary sources of liquidity have been funds generated from our debt financings and equity financings. In addition, we have generated funds from the following sources: (i) cash collections from customers and (ii) cash received from sale of state NOL’s.
In general, our primary uses of cash are providing for operating expenses, working capital purposes and servicing debt. On March 22, 2017, we restructured our debt with Silicon Valley Bank, by repaying the outstanding term loan and entering into a new two-year $6.0 million asset-based revolving line of credit agreement. We concurrently entered into a new $6.0 million term loan agreement with Partners for Growth, which, on the day of closing, increased our indebtedness from $4.4 million to $6.0 million and increased our available cash by $1.6 million. We may be able to borrow up to $6.0 million on the revolver, based on a formula tied to eligible accounts receivable, which will increase our indebtedness dollar for dollar. At December 31, 2017, we have borrowed $4.1 million of the maximum $6.0 million on the revolving line of credit. Due to the terms of the revolver, we have reached the borrowing limit based on eligible accounts receivable at December 31, 2017. In connection with such debt restructuring we issued warrants to such lenders to purchase an aggregate of 443,262 shares of our common stock.
Both loan agreements require us to comply with certain financial covenants, including minimum adjusted EBITDA, revenue and liquidity covenants, and restrict us from, among other things, paying cash dividends, incurring debt and entering into certain transactions without the prior consent of the lenders. Repayment of amounts borrowed under the new loan agreements may be accelerated if an event of default occurs, which includes, among other things, a violation of such financial covenants and negative covenants. As of December 31, 2017, January 31, 2018, February 28, 2018 and March 31, 2018, we were in default of certain financial covenants in our credit agreements with PFG and SVB as a result of the significant increase in our bad debt allowance in the fourth quarter of 2017 and other factors. We are currently in negotiations with our lenders with respect to waivers of the covenant defaults or amendments of the covenants. However, no assurances can be given that the lenders will agree to any such waivers or amendments, nor as to the cost or consequences to us of the terms of any such waivers or amendments if they are reached. If our lenders were to declare a default and seek repayment of the loans we would not have adequate capital to make such payment and continue to operate our business.
Our largest source of operating cash flow is cash collections from our customers.
Offerings
2016 Offerings
On May 25, 2016, we sold 2,467,820 shares of common stock in a public offering and warrants to purchase 1,233,910 shares of common stock in a concurrent private placement. These offerings resulted in gross proceeds of $5 million. We sold 2,150,000 shares of common stock and warrants to purchase 1,075,000 shares of common stock to certain institutional investors at a combined offering price of $2.00 per common share, and our Chairman of the Board, John Pappajohn, purchased 317,820 shares of common stock and warrants to purchase 158,910 shares of common stock at a combined offering price of $2.2025 per common share. In addition, we issued warrants to purchase an aggregate of 123,391 shares of common stock to the placement agent. Subject to certain ownership limitations, the warrants were initially exercisable commencing six months from the issuance date at an exercise price equal to $2.25 per share of common stock. The warrants are exercisable for five years from the initial exercise date.
On September 14, 2016, we sold 2,750,000 shares of common stock in a public offering and warrants to purchase 1,375,000 shares of common stock in a concurrent private placement at a combined price of $2.00 per common share. These offerings resulted in gross proceeds of $5.5 million. In addition, we issued warrants to purchase an aggregate of 137,500 shares of common stock to the placement agent. Subject to certain ownership restrictions, the warrants will be initially exercisable six months from the issuance date at an exercise price of $2.25 per share of common stock. The warrants are exercisable for five years from the initial exercise date.
2017 Offering
On December 8, 2017, we sold 3,500,000 shares of our common stock and warrants to purchase 3,500,000 shares of common stock in a public offering (the “2017 Offering”). The offering resulted in gross proceeds of $7.0 million. The 2017 Offering warrants have an exercise price of $2.35 per share of common stock. In addition, we issued warrants to purchase an aggregate of 175,000 shares of common stock at $2.50 per share to the placement agent (“Wainwright Warrants”). Subject to certain ownership limitations, these warrants will be initially exercisable 6 months from the issuance date and are exercisable for 12 months from the initial exercise date.
Common Stock Purchase Agreement with Aspire Capital
On August 14, 2017, we entered into a Common Stock Purchase Agreement (the “Purchase Agreement”) with Aspire Capital Fund, LLC, an Illinois limited liability company (“Aspire Capital”), which provides that Aspire Capital is committed to purchase up to an aggregate of $16 million of our common stock (the “Purchase Shares”) from time to time over the term of the Purchase Agreement. Aspire Capital made an initial purchase of 1,000,000 Purchase Shares (the “Initial Purchase”) at a purchase price of $3.00 per share on the commencement date of the agreement.
After the commencement date, on any business day over the 24-month term of the Purchase Agreement, we have the right, in our sole discretion, to present Aspire Capital with a purchase notice (each, a “Purchase Notice”) directing Aspire Capital to purchase up to 33,333 Purchase Shares per business day, provided that Aspire Capital will not be required to buy Purchase Shares pursuant to a Purchase Notice that was received by Aspire Capital on any business day on which the last closing trade price of our common stock on the NASDAQ Capital Market is below $3.00. The Company and Aspire Capital also may mutually agree to increase the number of shares that may be sold to as much as an additional 2,000,000 Purchase Shares per
business day. The Purchase Agreement provides for a purchase price per Purchase Share of $3.00. As consideration for entering into the Purchase Agreement, we issued 320,000 shares of our common stock to Aspire Capital (“Commitment Shares”).
The number of Purchase Shares covered by and timing of each Purchase Notice are determined by us, at our sole discretion. The aggregate number of shares that we can sell to Aspire Capital under the Purchase Agreement may in no case exceed 3,938,213 shares of our common stock (which is equal to approximately 19.9% of the common stock outstanding on the date of the Purchase Agreement), including the 320,000 Commitment Shares and the 1,000,000 Initial Purchase Shares, unless shareholder approval is obtained to issue additional shares.
Our net proceeds will depend on several factors, including the frequency of our sales of Purchase Shares to Aspire Capital and the frequency at which the last closing trade price of our common stock is below $3.00, subject to a maximum of $16 million in gross proceeds, including the Initial Purchase. Our delivery of Purchase Notices will be made subject to market conditions, in light of our capital needs from time to time and under the limitations contained in the Purchase Agreement.
As of December 31, 2017, the Company has sold 1,000,000 shares under this agreement at $3.00 per share, resulting in proceeds of approximately $2,965,000, net of offering costs of approximately $35,000. The Company has also issued 320,000 shares as consideration for entering into the Purchase Agreement. The Company has not deferred any offering costs associated with this agreement. Due to the price of the Company’s stock being lower than the $3.00 per share, the Company does not expect to sell more shares under the Purchase Agreement in the foreseeable future.
Credit Facility
On March 22, 2017, we refinanced our debt with SVB, by repaying the SVB Term Note, which was scheduled to mature in April 2019, and entered into a new two year asset-based revolving line of credit agreement. The new SVB credit facility provides for an asset-based line of credit (“ABL”) for an amount not to exceed the lesser of (a) $6.0 million or (b) an amount equal to 80% of eligible accounts receivable plus the lesser of 50% of the net collectible value of third party accounts receivable or three times the average monthly collection amount of third party accounts receivable over the previous quarter. The ABL requires monthly interest payments at the Wall Street Journal prime rate plus 1.5% (6.0% at December 31, 2017) and matures on March 22, 2019. We paid to SVB a $30,000 commitment fee at closing and will pay a fee of 0.25% per year on the average unused portion of the ABL. At December 31, 2017, the ABL had a principal balance of $4,136,907 and represented the maximum we could borrow based on eligible accounts receivable.
We concurrently entered into a new three year $6.0 million term loan agreement (“PFG Term Note”) with Partners for Growth IV, L.P. (“PFG”). The PFG Term Note is an interest only loan with the full principal and any outstanding interest due at maturity on March 22, 2020. Interest is payable monthly at a rate of 11.5% per annum, with the possibility of reducing to 11.0% in 2018 based on achieving certain financial milestones set forth by PFG. We may prepay the PFG Term Note in whole or in part at any time without penalty. We paid PFG a commitment fee of $120,000 at closing. At December 31, 2017, the PFG Term Note had a principal balance of $6,000,000.
As discussed above, as of December 31, 2017, January 31, 2018, February 28, 2018 and March 31, 2018, we are in breach of certain financial covenants in our credit agreements with SVB and PFG and are currently attempting to negotiate waivers of such breaches or amendments of the covenants.
Cash Flows
Our net cash flow from operating, investing and financing activities for the periods below were as follows:
We had cash and cash equivalents of $9.5 million at both December 31, 2017 and 2016.
The primary uses of cash during 2017 include $13.6 million of net cash used to fund operations, $1.3 million of net cash used to invest in fixed assets, $1.1 million of net cash used to acquire vivoPharm and $4.7 million used to repay debt. These uses were offset by $6.6 million of net proceeds from the 2017 Offering, $3.0 million of net proceeds from Aspire Capital stock purchases, $1.8 million of proceeds from warrant exercises and $10.1 million in aggregate borrowings from our PFG Term Note and the ABL.
The $10.0 million decrease in cash and cash equivalents for the year ended December 31, 2016 was principally the result of the use of $17.9 million of net cash in operations and repaying $1.3 million of debt, offset by $10.0 million in net proceeds from the 2016 Offerings.
Cash Used in Operating Activities
Net cash used in operating activities was $13.6 million for the year ended December 31, 2017. We used $8.1 million in net cash to run our core operations, including losses from operations and $0.9 million in cash paid for interest. We incurred additional uses of cash when adjusting for working capital items as follows: a net increase in accounts receivable of $3.6 million, a net increase in other current assets of $0.2 million, a net decrease in accounts payable, accrued expenses and deferred revenue of $1.5 million and a net decrease in deferred rent and other of $0.2 million.
Net cash used in operating activities was $17.9 million for the year ended December 31, 2016. We used $12.2 million in net cash to run our core operations, including losses from operations and $0.3 million in cash paid for interest. We incurred additional uses of cash when adjusting for working capital items as follows: a net increase in accounts receivable of $5.9 million and a combined increase in other current and non-current assets of $0.1 million. All of these uses of cash were partially offset by a net increase in accounts payable, accrued expenses and deferred revenue of $0.4 million.
Cash Used in Investing Activities
Net cash used in investing activities was $2.8 million for the year ended December 31, 2017 and principally resulted from the purchase of fixed assets for $1.3 million, net cash used in the acquisition of vivoPharm of $1.1 million, patent costs of $0.1 million, $0.2 million used in a cost method investment and an increase in our restricted cash of $0.1 million.
Net cash used in investing activities was $0.6 million for the year ended December 31, 2016 and principally resulted from the purchase of fixed assets for $0.5 million and patent costs of $0.1 million.
Cash Used/Provided by Financing Activities
Net cash provided by financing activities was $16.3 million for the year ended December 31, 2017 and principally resulted from the 2017 Offering, which resulted in $6.6 million in net proceeds, aggregate borrowings on our PFG Term Note and ABL of $10.1 million, proceeds from warrant exercises of $1.8 million and net proceeds from Aspire Capital stock proceeds of $3.0 million, offset by the repayment of $4.7 million in indebtedness, debt issuances costs of $0.3 million and capital lease payments of $0.2 million.
Net cash provided by financing activities was $8.5 million for the year ended December 31, 2016 and principally resulted from the 2016 Offerings, which resulted in $10.0 million in net proceeds, offset by the repayment of $1.3 million in indebtedness and capital lease payments of $0.1 million.
Capital Resources, Acquisitions and Expenditure Requirements
We expect to continue to incur material operating losses in the future. It may take several years, if ever, to achieve positive operational cash flow. We may need to raise additional capital to fund our current operations, to repay certain outstanding indebtedness and to fund expansion of our business to meet our long-term business objectives through public or private equity offerings, debt financings, borrowings or strategic partnerships coupled with an investment in our company or a combination thereof. If we raise additional funds through the issuance of convertible debt securities, or other debt securities, these securities could be secured and could have rights senior to those of our common stock. In addition, any new debt incurred by the Company could impose covenants that restrict our operations and increase our interest expense. The issuance of any new equity securities will also dilute the interest of our current stockholders. Given the risks associated with our business, including our unprofitable operating history and our ability to develop additional proprietary tests, additional capital may not be available when needed on acceptable terms, or at all. If adequate funds are not available, we will need to curb our expansion plans or
limit our research and development activities, which may have a material adverse impact on our business prospects and results of operations. Due to the terms of the revolver, we have reached the borrowing limit based on eligible accounts receivable at December 31, 2017. In addition, we were in violation of certain financial covenants with SVB and PFG as of December 31, 2017, January 31, 2018, February 28, 2018 and March 31, 2018. We are currently in negotiations with our lenders with respect to waivers of the covenant defaults or amendments of the covenants. However, no assurances can be given that the lenders will agree to any such waivers or amendments, nor as to the cost or consequences to us of the terms of any such waivers or amendments if they are reached. If our lenders were to declare a default and seek repayment of the loans we would likely not have adequate capital to make such payment and continue to operate our business.
We do not believe that our current cash will support operations for at least the next 12 months from the date of this report unless we raise additional equity or debt capital or spin-off non-core assets to raise additional cash. We have hired Raymond James & Associates Inc. as our financial advisor to assist with evaluating strategic alternatives. Such alternatives could include raising more capital, the acquisition of another company and / or complementary assets, the sale of the Company or another type of strategic partnership. There is no assurance that the review of strategic alternatives will result in the Company changing its business plan, pursuing any particular transaction, if any, or, if it pursues any such transaction, that it will be completed.
Meanwhile we are taking steps to improve our operating cash flow. We can provide no assurances that our current actions will be successful or that any additional sources of financing will be available to us on favorable terms, if at all, when needed. Our cash position, recurring losses from operations and negative cash flows from operations raise substantial doubt about our ability to continue as a going concern, and as a result, our independent registered public accounting firm included an explanatory paragraph in its report on our financial statements as of and for the year ended December 31, 2017 with respect to this uncertainty. This going concern opinion, and any future going concern opinion, could materially limit our ability to raise additional capital. The perception that we may not be able to continue as a going concern may cause potential partners or investors to choose not to deal with us due to concerns about our ability to meet our contractual and financial obligations. If we cannot continue as a going concern, our stockholders may lose their entire investment in our common stock.
Our forecast of the period of time through which our current financial resources will be adequate to support our operations and our expected operating expenses are forward-looking statements and involve risks and uncertainties. Actual results could vary materially and negatively as a result of a number of factors, including:
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our ability to negotiate a waiver or amendment of the financial covenants in our credit agreements with our senior lenders;
•
our ability to achieve revenue growth and profitability;
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our ability to secure financing and the amount thereof;
•
the costs for funding the operations we recently acquired and our ability to realize anticipated benefits from the vivoPharm acquisition;
•
our ability to improve efficiency of billing and collection processes;
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our ability to obtain approvals for our new diagnostic tests;
•
our ability to execute on our marketing and sales strategy for our tests and gain acceptance of our tests in the market;
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our ability to obtain adequate reimbursement from governmental and other third-party payors for our tests and services;
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our ability to maintain our present customer base and obtain new customers;
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our ability to clinically validate our pipeline of tests currently in development;
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the costs of operating and enhancing our laboratory facilities;
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our ability to succeed with our cost control initiative;
•
our ability to satisfy US (FDA) and international regulatory regiments with respect to our tests and services, many of which are new and still evolving;
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the costs of maintaining, expanding and protecting our intellectual property portfolio, including potential litigation costs and liabilities;
•
our ability to manage the costs of manufacturing our tests;
•
our rate of progress in, and cost of research and development activities associated with, products in research and early development;
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the effect of competing technological and market developments;
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costs related to expansion; and
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other risks discussed in the section entitled “Risk Factors.”
We expect that our operating expenses and capital expenditures may increase in the future as we expand our business. We plan to take steps to decrease our sales and marketing expenses related to our clinical tests and services, and will continue our
research and development expenditures associated with performing work with research collaborators, to expand our pipeline and to perform work associated with our research collaborations. For example, in 2011 we entered into an affiliation agreement to form a joint venture with the Mayo Foundation for Medical Education and Research pursuant to which we made an initial $1.0 million capital contribution in October 2013 and $1.0 million in the third quarter of 2014. We do not expect to make additional capital contributions to the joint venture entity’s operational activities. Until we can generate a sufficient amount of revenues to finance our cash requirements, which we may never do, we may need to raise additional capital to fund our operations.
Subject to the availability of future financing, we may use significant cash to fund acquisitions. On August 15, 2017, we purchased all of the outstanding stock of vivoPharm, with its principal place of business in Victoria, Australia, in a transaction valued at approximately $1.6 million in cash and $8.1 million in the Company’s common stock based on the closing price of the stock on August 15, 2017.
The consolidated financial statements for the year ended December 31, 2017 were prepared on the basis of a going concern, which contemplates that the Company will be able to realize assets and discharge liabilities in the normal course of business. Accordingly, they do not give effect to adjustments that would be necessary should the Company be required to liquidate its assets. The ability of the Company to meet its obligations, and to continue as a going concern is dependent upon the availability of future funding and the continued growth in revenues. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.
Future Contractual Obligations
The following table reflects a summary of our estimates of future contractual obligations as of December 31, 2017. The information in the table reflects future unconditional payments and is based on the terms of the relevant agreements, appropriate classification of items under U.S. GAAP as currently in effect and certain assumptions, such as the interest rate on our variable debt that was in effect as of December 31, 2017. Future events could cause actual payments to differ from these amounts.
Income Taxes
Over the past several years we have generated operating losses in all jurisdictions in which we may be subject to income taxes. As a result, we have accumulated significant net operating losses and other deferred tax assets. Because of our history of losses and the uncertainty as to the realization of those deferred tax assets, a full valuation allowance has been recognized. We do not expect to report a benefit related to the deferred tax assets until we have a history of earnings, if ever, that would support the realization of our deferred tax assets.
Off-Balance Sheet Arrangements
Since inception, we have not engaged in any off balance sheet activities as defined in Item 303(a)(4) of Regulation S-K.
Critical Accounting Policies and Significant Judgment and Estimates
Our management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates based on
historical experience and make various assumptions, which management believes to be reasonable under the circumstances, which form the basis for judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Section 107 of the JOBS Act provides that an “emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we have chosen to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.
The notes to our audited consolidated financial statements contain a summary of our significant accounting policies. We consider the following accounting policies critical to the understanding of the results of our operations:
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Revenue recognition;
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Accounts receivable and bad debts;
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Stock-based compensation; and
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Warrant liability.
Recent Accounting Pronouncements
The notes to our audited consolidated financial statements contain a summary of recent accounting pronouncements.
Item 7A.
Item 7A.
Qualitative and Quantitative Disclosures about Market Risk
We have exposure to financial market risks, including changes in foreign currency exchange rates and interest rates, and risk associated with how we invest our cash.
Foreign Exchange Risk
We conduct business in foreign markets through our subsidiary in India (BioServe Biotechnologies (India) Private Limited), in Australia through our subsidiary (vivoPharm Pty Ltd.) and in Italy through our subsidiary (Cancer Genetics Italia, S.r.l.). For the years ended December 31, 2017 and 2016, approximately 6% and 4%, respectively, of our revenues were earned outside the United States and collected in local currency. We are subject to risk for exchange rate fluctuations between such local currencies and the United States dollar and the subsequent translation of the Indian Rupee, Australia Dollar or Euro to United States dollars. We currently do not hedge currency risk. The translation adjustments for the years ended December 31, 2017 and 2016 were not significant.
Interest Rate Risk
At December 31, 2017, we had interest rate risk primarily related to borrowings of $4.1 million on the asset-based line of credit with Silicon Valley Bank (“ABL”). The ABL requires monthly interest payments at the Wall Street Journal prime rate plus 1.5% (6.0% at December 31, 2017). If interest rates increased by 1.0%, interest expense in 2018 on our current borrowings would increase by approximately $41,000.
Investment of Cash
We invest our cash primarily in money market funds. Because of the short-term nature of these investments, we do not believe we have material exposure due to market risk. The impact to our financial position and results of operations from likely changes in interest rates is not material.
Item 8.
Item 8.
Financial Statements and Supplementary Data
Cancer Genetics, Inc. and Subsidiaries
Consolidated Financial Report December 31, 2017
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations and Other Comprehensive Loss
Consolidated Statements of Changes in Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Cancer Genetics, Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Cancer Genetics, Inc. and its subsidiaries (the Company) as of December 31, 2017 and 2016, and the related consolidated statements of operations and other comprehensive loss, changes in stockholders’ equity and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Substantial Doubt About the Company’s Ability to Continue as a Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered recurring losses, an accumulated deficit and negative cash flows from operations. The Company is also in violation of certain debt covenants. This raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2 to the financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ RSM US LLP
We have served as the Company’s auditor since 2010.
New York, New York
April 2, 2018
CANCER GENETICS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except par value)
See Notes to Consolidated Financial Statements.
CANCER GENETICS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations and Other Comprehensive Loss
(in thousands, except per share amounts)
See Notes to Consolidated Financial Statements.
CANCER GENETICS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity
Years Ended December 31, 2017 and 2016
(in thousands)
See Notes to Consolidated Financial Statements.
CANCER GENETICS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
See Notes to Consolidated Financial Statements.
CANCER GENETICS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1. Organization, Description of Business, Acquisition and Offerings
We are an emerging leader in the field of precision medicine, enabling individualized therapies in the field of oncology through our tests, services and molecular markers. We develop, commercialize and provide molecular- and biomarker-based tests and services, including proprietary preclinical oncology and immuno-oncology services, that enable biotech and pharmaceutical companies engaged in oncology and immuno-oncology trials to better select candidate populations and reduce adverse drug reactions by providing information regarding genomic and molecular factors influencing subject responses to therapeutics. Through our clinical services, we enable physicians to personalize the clinical management of each individual patient by providing genomic information to better diagnose, monitor and inform cancer treatment. We have a comprehensive, disease-focused oncology testing portfolio, and extensive set of anti-tumor referenced data based on predictive xenograft and syngeneic tumor models. Our tests and techniques target a wide range of indications, covering all ten of the top cancers in prevalence in the United States, with additional unique capabilities offered by our FDA-cleared Tissue of Origin® test for identifying difficult to diagnose tumor types or poorly differentiated metastatic disease. Following the acquisition of vivoPharm, Pty Ltd. (“vivoPharm”) we provide contract research services, focused primarily on unique specialized studies to guide drug discovery and development programs in the oncology and immuno-oncology fields.
We were incorporated in the State of Delaware on April 8, 1999 and have offices and state-of-the-art laboratories located in California, New Jersey, North Carolina, Pennsylvania, Australia, and Hyderabad (India). Our laboratories comply with the highest regulatory standards as appropriate for the services they deliver including CLIA, CAP, NY State, California State and NABL (India). Our services are built on a foundation of world-class scientific knowledge and intellectual property in solid and blood-borne cancers, as well as strong academic relationships with major cancer centers such as Memorial Sloan-Kettering, Mayo Clinic, and the National Cancer Institute. We offer preclinical services such as predictive tumor models, human orthotopic xenografts and syngeneic immuno-oncology relevant tumor models in our Hershey PA facility, and a leader in the field of immuno-oncology preclinical services in the United States. This service is supplemented with GLP toxicology and extended bioanalytical services in our Australian based facility in Bundoora VIC.
Acquisition of vivoPharm Pty, Ltd.
On August 15, 2017, we purchased all of the outstanding stock of vivoPharm, Pty Ltd. (“vivoPharm”), with its principal place of business in Victoria, Australia, in a transaction valued at approximately $1.6 million in cash and shares of the Company's common stock, valued at $8.1 million based on the closing price of the stock on August 15, 2017. The Company has deposited in escrow 20% of the stock consideration until the expiration of twelve months from the closing date to serve as the initial source for any indemnification claims and adjustments. The Company has incurred approximately $135,000 in transaction costs associated with the purchase of vivoPharm, which were expensed during the year ended December 31, 2017.
Prior to the acquisition, vivoPharm was a contract research organization (“CRO”) that specialized in planning and conducting unique, specialized studies to guide drug discovery and development programs with a concentration in oncology and immuno-oncology. The transaction is being accounted for using the acquisition method of accounting for business combinations. Under this method, the total consideration transferred to consummate the acquisition is being allocated to the identifiable tangible and intangible assets acquired and liabilities assumed based on their respective fair values as of the closing date of the acquisition. Goodwill arising from the acquisition of vivoPharm relates to expected growth and synergies, as well as an assembled workforce. Goodwill is not deductible for income tax purposes.
The acquisition method of accounting requires extensive use of estimates and judgments to allocate the consideration transferred to the identifiable tangible and intangible assets acquired and liabilities assumed. Accordingly, the allocation of the consideration transferred is preliminary and will be adjusted upon completion of the final valuation of the assets acquired and liabilities assumed. The final valuation is expected to be completed as soon as practicable but no later than twelve months after the closing date of the acquisition. As of December 31, 2017, the valuation of the lab supplies, deferred revenue and deferred taxes is provisional.
The Company made revisions to the preliminary valuation of certain assets and liabilities acquired which decreased lab supplies by approximately $908,000, decreased prepaid expenses and other current assets by approximately $41,000, decreased fixed assets by approximately $184,000, decreased intangible assets by approximately $3,854,000, increased goodwill by approximately $3,831,000, increased deferred rent and other by approximately $222,000 and decreased capital lease obligations by $41,000.
The estimated allocation of the purchase price as of August 15, 2017 consists of the following (in thousands):
The following table provides certain pro forma financial information for the Company as if the acquisition of vivoPharm discussed above occurred on January 1, 2016 (in thousands except per share amounts):
The pro forma numbers above are derived from historical numbers of the Company and vivoPharm and reflect adjustments for pro forma amortization and certain operating expenses. The Company's results of operations for the year ended December 31, 2017 include the operations of vivoPharm from August 15, 2017, with revenues of approximately $2,717,000. The net income (loss) of vivoPharm cannot be determined, as its operations were integrated with Cancer Genetics.
2016 Offerings
May Offering
On May 25, 2016, we sold 2,467,820 shares of common stock in a public offering and warrants to purchase 1,233,910 shares of common stock in a concurrent private placement. These offerings resulted in gross proceeds of $5 million. We sold 2,150,000 shares of common stock and warrants to purchase 1,075,000 shares of common stock to certain institutional investors at a combined offering price of $2.00 per common share, and our Chairman of the Board, John Pappajohn, purchased 317,820 shares of common stock and warrants to purchase 158,910 shares of common stock at a combined offering price of $2.2025 per common share. In addition, we issued warrants to purchase an aggregate of 123,391 shares of common stock to the placement agent. Subject to certain ownership limitations, the warrants were initially exercisable commencing six months from the issuance date at an exercise price equal to $2.25 per share of common stock. The warrants are exercisable for five years from the initial exercise date. All references to the sales of common stock with warrants mentioned in this paragraph, along with the September Offering below, are referred to as the “2016 Offerings.”
September Offering
On September 14, 2016, we sold 2,750,000 shares of common stock in a public offering and warrants to purchase 1,375,000 shares of common stock in a concurrent private placement at a combined price of $2.00 per common share. These offerings
resulted in gross proceeds of $5.5 million. In addition, we issued warrants to purchase an aggregate of 137,500 shares of common stock to the placement agent. Subject to certain ownership restrictions, the warrants will be initially exercisable six months from the issuance date at an exercise price of $2.25 per share of common stock. The warrants are exercisable for five years from the initial exercise date. All references to the sales of common stock with warrants mentioned in this paragraph, along with the May Offering above, are referred to as the “2016 Offerings.”
2017 Offering
On December 8, 2017, we sold 3,500,000 shares of our common stock and warrants to purchase 3,500,000 shares of common stock in a public offering (“2017 Offering”). The offering resulted in gross proceeds of $7.0 million. The 2017 Offering warrants have an exercise price of $2.35 per share of common stock. In addition, we issued warrants to purchase an aggregate of 175,000 shares of common stock at $2.50 per share to the placement agent (“Wainwright Warrants”). Subject to certain ownership limitations, these warrants will be initially exercisable 6 months from the issuance date and are exercisable for 12 months from the initial exercise date.
Common Stock Purchase Agreement with Aspire Capital
On August 14, 2017, we entered into a Common Stock Purchase Agreement (the “Purchase Agreement”) with Aspire Capital Fund, LLC, an Illinois limited liability company (“Aspire Capital”), which provides that Aspire Capital is committed to purchase up to an aggregate of $16 million of our common stock (the “Purchase Shares”) from time to time over the term of the Purchase Agreement. Aspire Capital made an initial purchase of 1,000,000 Purchase Shares (the “Initial Purchase”) at a purchase price of $3.00 per share on the commencement date of the agreement.
After the commencement date, on any business day over the 24-month term of the Purchase Agreement, we have the right, in our sole discretion, to present Aspire Capital with a purchase notice (each, a “Purchase Notice”) directing Aspire Capital to purchase up to 33,333 Purchase Shares per business day, provided that Aspire Capital will not be required to buy Purchase Shares pursuant to a Purchase Notice that was received by Aspire Capital on any business day on which the last closing trade price of our common stock on the NASDAQ Capital Market is below $3.00. The Company and Aspire Capital also may mutually agree to increase the number of shares that may be sold to as much as an additional 2,000,000 Purchase Shares per business day. The Purchase Agreement provides for a purchase price per Purchase Share of $3.00. As consideration for entering into the Purchase Agreement, we issued 320,000 shares of our common stock to Aspire Capital (“Commitment Shares”).
The number of Purchase Shares covered by and timing of each Purchase Notice are determined by us, at our sole discretion. The aggregate number of shares that we can sell to Aspire Capital under the Purchase Agreement may in no case exceed 3,938,213 shares of our common stock (which is equal to approximately 19.9% of the common stock outstanding on the date of the Purchase Agreement), including the 320,000 Commitment Shares and the 1,000,000 Initial Purchase Shares, unless shareholder approval is obtained to issue additional shares.
Our net proceeds will depend on several factors, including the frequency of our sales of Purchase Shares to Aspire Capital and the frequency at which the last closing trade price of our common stock is below $3.00, subject to a maximum of $16 million in gross proceeds, including the Initial Purchase. Our delivery of Purchase Notices will be made subject to market conditions, in light of our capital needs from time to time and under the limitations contained in the Purchase Agreement. We currently intend to use the net proceeds from sales of Purchase Shares for general corporate purposes and working capital requirements.
As of December 31, 2017, the Company has sold 1,000,000 shares under this agreement at $3.00 per share, resulting in proceeds of approximately $2,965,000, net of offering costs of approximately $35,000. The Company has also issued 320,000 shares as consideration for entering into the Purchase Agreement. The Company has not deferred any offering costs associated with this agreement. Due to the price of the Company’s stock being lower than the $3.00 per share, the Company does not expect to sell more shares under the Purchase Agreement in the foreseeable future.
Note 2. Going Concern
At December 31, 2017, our cash position and history of losses required management to assess our ability to continue operating as a going concern, according to Financial Accounting Standards Board Accounting Standards Update No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). The Company does not have sufficient cash at December 31, 2017 to fund normal operations for the next twelve months. In addition, the Company is in violation of certain financial covenants under its debt agreements at December 31, 2017, January 31, 2018, February 28, 2018 and March 31, 2018. The Company's ability to continue as a going concern is dependent on the Company's ability to obtain a waiver of its financial covenant violations, raise additional equity or debt capital or spin-off non-core assets to raise additional cash. These factors raise substantial doubt about the Company's ability to continue as a going concern.
We have hired Raymond James & Associates, Inc. as our financial advisor to assist with evaluating strategic alternatives. Such alternatives could include raising more capital, the acquisition of another company and/or complementary assets, the sale of the Company or another type of strategic partnership. We can provide no assurances that our current actions will be successful or that additional sources of financing with be available to us on favorable terms, if at all.
The consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.
Note 3. Significant Accounting Policies
Basis of presentation: We prepare our financial statements on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America.
Segment reporting: Operating segments are defined as components of an enterprise about which separate discrete information is used by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. We view our operations and manage our business in one operating segment, which is the business of developing and selling diagnostic tests and services.
Principles of consolidation: The accompanying consolidated financial statements include the accounts of Cancer Genetics, Inc. and our wholly owned subsidiaries.
All significant intercompany account balances and transactions have been eliminated in consolidation.
Foreign currency: We translate the financial statements of our foreign subsidiaries, which have a functional currency in the respective country’s local currency, to U.S. dollars using month-end exchange rates for assets and liabilities and average exchange rates for revenue, costs and expenses. Translation gains and losses are recorded in accumulated
other comprehensive income as a component of stockholders’ equity. Gains and losses resulting from foreign currency transactions that are denominated in currencies other than the entity's functional currency are included within the consolidated statements of operations and other comprehensive loss and were not significant during 2017 or 2016.
Use of estimates and assumptions: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates made by management include, among others, realization of amounts billed, realization of long-lived assets, realization of intangible assets, accruals for litigation and registration payments, assumptions used to value stock options, warrants and goodwill and the valuation of assets acquired and liabilities assumed from acquisitions. Actual results could differ from those estimates.
Risks and uncertainties: We operate in an industry that is subject to intense competition, government regulation and rapid technological change. Our operations are subject to significant risk and uncertainties including financial, operational, technological, regulatory, foreign operations, and other risks, including the potential risk of business failure.
Cash and cash equivalents: Highly liquid investments with original maturities of three months or less when purchased are considered to be cash equivalents. Financial instruments which potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents. We maintain cash and cash equivalents with high-credit quality financial institutions. At times, such amounts may exceed insured limits. We have not experienced any losses in such accounts and believe we are not exposed to any significant credit risk on our cash and cash equivalents.
Restricted cash: Represents cash held at financial institutions which we may not withdraw and which collateralizes certain of our financial commitments. All of our restricted cash is invested in interest bearing certificates of deposit. At December 31, 2017 and 2016, our restricted cash collateralizes a $350,000 and $300,000, respectively, letter of credit in favor of our landlord, pursuant to the terms of the lease for our Rutherford facility.
Revenue recognition: The Company recognizes revenue in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 605, as well as SEC Staff Accounting Bulletin 104, for its Biopharma and Discovery Services, and ASC 954-605, Health Care Entities, Revenue Recognition for its Clinical Services. These standards generally require that four basic criteria must 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 customer or services have been rendered; (3) the price is fixed or determinable; and (4) collectability is reasonably assured. In determining whether the price is fixed or determinable, we consider payment limits imposed by insurance carriers and Medicare, and the amount of revenue recorded takes into account the historical percentage of revenue we have collected for each type of test for each payor category. Periodically, an adjustment is made to Clinical Services revenue to record differences between our anticipated cash receipts from third parties, such as insurance carriers and Medicare, and actual receipts from such payors. These adjustments primarily relate to contractual allowances and discount and were not significant for the year ended December 31, 2016. For the year ended December 31, 2017, the Company recorded an adjustment of approximately $1,640,000. For some Clinical Service and Biopharma customers billed directly, revenue is recorded based upon the contractually agreed upon fee schedule. When assessing collectability, we consider whether we have sufficient payment history to reliably estimate a payor’s individual payment patterns. We do not bill customers for shipping and handling fees, other than reimbursement of such expenses we incur on behalf of our Biopharma clients, and we do not collect any sales or other taxes from customers.
Accounts receivable: Accounts receivable are carried at net realizable value, which is the original invoice amount less an estimate for contractual adjustments, discounts and doubtful receivables, the amounts of which are determined by an analysis of individual accounts. Our policy for assessing the collectability of receivables is dependent upon the major payor source of the underlying revenue. For Biopharma and Discovery clients, an assessment of credit worthiness is performed prior to initial engagement and is reassessed periodically. If deemed necessary, an allowance is established on receivables from direct bill clients. For Clinical Services clients, we record revenues and related receivables when the testing process is complete and the results are reported. Revenue is recorded at the expected price, taking into account the patient's ability to pay, as well as anticipated discounts, adjustments and/or contractual allowances, as applicable. After reasonable collection efforts are exhausted, amounts deemed to be uncollectible are written off against the allowance for doubtful accounts. Since the Company only recognizes revenue to the extent it expects to collect such amounts, bad debt expense related to receivables from patient service revenue is recorded in general and administrative expense in the consolidated statements of operations. Recoveries of accounts receivable previously written off are recorded when received. For the 2017 calendar year, the Company, as part of its evaluation of outstanding accounts receivable, determined that a substantial amount of its receivables will not likely be collectible. Accordingly, the Company recorded approximately $5,278,000 of bad debt expenses in its Consolidated Statements of Operations and Other Comprehensive Loss during the year ended December 31, 2017. While the Company continues with its collections efforts on all claims, the Company has determined most of its challenges in cash collections is related to the acquisition of Response Genetics, some dating back to 2015 and 2016, and was associated with the integration of invoices into CGI’s billing platform. These invoices were deemed uncollectible due to delays in filing its claims, the demands by payors for copies of patient medical records or diagnosis codes which has been difficult to obtain, among other reasons that payors have declined to reimburse the Company for its services. In addition, the Company has experienced low collection rates for its next generation sequencing tests due to the lack of coverage for certain of our next generation sequencing tests by Medicare and most third-party managed care plans, along with challenges in the integration of the lab management system in its Los Angeles laboratory facility into the Company’s billing system, resulting in lower collections from third-party payors.
Deferred revenue: Payments received in advance of services rendered are recorded as deferred revenue and are subsequently recognized as revenue in the period in which the services are performed.
Fixed assets: Fixed assets consist of diagnostic equipment, furniture and fixtures and leasehold improvements. Fixed assets are carried at cost and are depreciated using the straight-line method over the estimated useful lives of the assets, which generally range from five to seven years. Leasehold improvements are depreciated over the lesser of the lease term or the estimated useful lives of the improvements using the straight-line method. Repairs and maintenance are charged to expense as incurred while improvements are capitalized. Upon sale, retirement or disposal of fixed assets, the accounts are relieved of the cost and the related accumulated depreciation with any gain or loss recorded to the consolidated statements of operations.
Fixed assets are reviewed for impairment whenever changes in circumstances indicate that the carrying amount of an asset may not be recoverable. These computations utilize judgments and assumptions inherent in our estimate of future cash flows to
determine recoverability of these assets. If our assumptions about these assets were to change as a result of events or circumstances, we may be required to record an impairment loss.
Goodwill: Goodwill resulted from the purchases of Gentris Corporation (“Gentris”) and BioServe Biotechnologies (India) Pvt. Ltd. (“BioServe”) in 2014, the purchase of certain assets of Response Genetics, Inc. (“Response Genetics”) in 2015 and the purchase of vivoPharm in 2017, as discussed in Note 1. In accordance with ASC 350, Intangibles - Goodwill and Other, we are required to test goodwill for impairment and adjust for impairment losses, if any, at least annually and on an interim basis if an event or circumstance indicates that it is likely impairment has occurred. Our annual goodwill impairment testing date is October 1 of each year. No such losses were incurred during the years ended December 31, 2017 and 2016.
Financing fees: Financing fees are amortized using the effective interest method over the term of the related debt. Debt is recorded net of unamortized debt issuance costs.
Warrant liability: We had issued certain warrants that contained an exercise price adjustment feature in the event we issued additional equity instruments at a price lower than the exercise price of the warrant. These warrants expired unexercised during the year ended December 31, 2016. We issued warrants during the 2016 Offerings and that 2017 Offering that contain a contingent net cash settlement feature. We also issued warrants that are subject to a 20% reduction if we achieve certain financial milestones as part of our 2017 debt refinancing described in Note 7. All of these warrants are described herein as derivative warrants. We account for these derivative warrants as liabilities. These common stock purchase warrants do not trade in an active securities market, and as such, we estimate the fair value of these warrants using the binomial lattice, Black-Scholes and Monte Carlo valuation pricing models with the assumptions as follows: The risk-free interest rate for periods within the contractual life of the warrant is based on the U.S. Treasury yield curve. The expected life of the warrants is based upon the contractual life of the warrants. We use the historical volatility of our common stock and the closing price of our shares on the NASDAQ Capital Market.
We compute the fair value of the warrant liability at each reporting period and the change in the fair value is recorded as non-cash expense or non-cash income. The key component in the value of the warrant liability is our stock price, which is subject to significant fluctuation and is not under our control. The resulting effect on our net income (loss) is therefore subject to significant fluctuation and will continue to be so until the warrants are exercised, amended or expire. Assuming all other fair value inputs remain constant, we will record non-cash expense when the stock price increases and non-cash income when the stock price decreases.
Income taxes: Income taxes are provided for the tax effects of transactions reported in the consolidated financial statements and consist of taxes currently due plus deferred income taxes. Deferred income taxes are recognized for temporary differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future. Deferred income taxes are also recognized for net operating loss (“NOLs”) carryforwards that are available to offset future taxable income and research and development credits.
On December 22, 2017, the U.S. federal government enacted legislation commonly referred to as the “Tax Cuts and Jobs Act” (the “TCJA”). The TCJA makes widespread changes to the Internal Revenue Code, including, among other items, the introduction of a new international “Global Intangible Low-Taxed Income” (“GILTI”) regime effective January 1, 2018. Companies may adopt one of two views in regards to establishing deferred taxes in accordance with the new GILTI regime under ASC 740. Companies may account for the effects of GILTI either (1) in the period the entity becomes subject to GILTI, or (2) establish deferred taxes (similar to the guidance that currently exists with respect to basis differences that will reverse under current Subpart F rules) for basis differences that upon reversal will be subject to GILTI. We have elected to account for GILTI in the period we become subject to GILTI.
Pursuant to the Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No.118 (“SAB 118”), the Company is allowed a measurement period of up to one year after the enactment date of the TCJA to finalize the recording of the related tax impacts. While we have not yet completed our assessment of the effects of the TCJA, we are able to determine reasonable estimates for the impacts of certain key items, thus we have reported provisional amounts for these items. The Company will continue to calculate the impact of the TCJA and will record any resulting tax adjustments during 2018, prior to the permitted
remeasurement date. On a provisional basis, the Company is electing to use tax NOLs to offset any inclusion to U.S. taxable income prescribed by the guidance in new Internal Revenue Code Section 965 (“Section 965”). Given the availability to use NOLs to offset this income inclusion, at this time the Company does not expect to pay any one-time transition tax over the eight-year installment period as prescribed by Section 965. This conclusion is subject to change as we refine the provisional estimate of our total post-1986 E&P, cash position and other related calculations.
Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. We have established a full valuation allowance on our deferred tax assets as of December 31, 2017 and 2016; therefore, we have not recognized any tax benefit or expense in the periods presented.
ASC 740, Income Taxes, clarifies the accounting for uncertainty in income taxes recognized in the financial statements. ASC 740 provides that a tax benefit from uncertain tax positions may be recognized when it is more-likely-than-not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits of the position. Income tax positions must meet a more-likely-than-not recognition threshold to be recognized. ASC 740 also provides guidance on measurement, de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. At December 31, 2017 and 2016 we had no uncertain tax positions.
Our policy is to recognize interest and/or penalties related to income tax matters in income tax expense. There is no accrual for interest or penalties on our consolidated balance sheets at December 31, 2017 or 2016, and we have not recognized interest and/or penalties in the Consolidated Statements of Operations and Other Comprehensive Loss for the years ended December 31, 2017 or 2016.
Patents and other intangible assets: We account for intangible assets under ASC 350-30. Patents consisting of legal fees incurred are initially recorded at cost. We have also acquired patents that are initially recorded at fair value. Patents are amortized over the useful lives of the assets, using the straight-line method. Certain patents are in the legal application process and therefore are not currently being amortized. We review the carrying value of patents at the end of each reporting period. Based upon our review, there were no patent impairments in 2017 or 2016.
Other intangible assets consist of software acquired with Response Genetics and vivoPharm’s customer list and trade name, which are all amortized using the straight-line method over the estimated useful lives of the assets, which range from three to ten years.
Research and development: Research and development costs associated with service and product development include direct costs of payroll, employee benefits, stock-based compensation and supplies and an allocation of indirect costs including rent, utilities, depreciation and repairs and maintenance. All research and development costs are expensed as they are incurred.
Stock-based compensation: Stock-based compensation is accounted for in accordance with the provisions of ASC 718, Compensation-Stock Compensation, which requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors based on estimated fair values on the grant date. We estimate the fair value of stock-based awards on the date of grant using the Black-Scholes option pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods using the straight-line method. See additional information in Note 13.
All issuances of stock options or other issuances of equity instruments to employees as the consideration for services received by us are accounted for based on the fair value of the equity instrument issued.
We account for stock-based compensation awards to non-employees in accordance with ASC 505-50, Equity Based Payments to Non-Employees. Under ASC 505-50, we determine the fair value of the warrants or stock-based compensation awards granted as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. Stock-based compensation awards issued to non-employees are recorded in expense and additional paid-in capital in stockholders’ equity over the applicable service periods based on the fair value of the awards or consideration received at the vesting date.
Fair value of financial instruments: The carrying amount of cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued expenses, approximate their estimated fair values due to the short term maturities of those financial instruments. The fair value of warrants recorded as derivative liabilities and the note payable to VenturEast are described in Notes 15 and 16.
Joint venture accounted for under the equity method: The Company records its joint venture investment following the equity method of accounting, reflecting its initial investment in the joint venture and its share of the joint venture’s net earnings or losses and distributions. The Company’s share of the joint venture’s net loss was approximately $22,000 and $73,000 for the years ended December 31, 2017 and 2016, respectively, and is included in research and development expense on the Consolidated Statements of Operations and Other Comprehensive Loss. The Company has a net receivable due from the joint venture of approximately $10,000 at both December 31, 2017 and 2016, which is included in other assets in the Consolidated Balance Sheets. See additional information in Note 18.
Subsequent events: We have evaluated potential subsequent events through the date the financial statements were issued.
Recent Accounting Pronouncements: In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. As issued and amended, ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either a full retrospective or retrospective with cumulative effect transition method. We adopted this guidance as of January 1, 2018, utilizing the modified retrospective transition method only with respect to contracts that were not completed as of January 1, 2018. The adoption changes our policies for recognizing revenue for performance obligations fulfilled over time in the Biopharma Services and Discovery Services areas. This transition adjustment is expected to reduce the opening balance of accumulated deficit by less than $3.0 million as of January 1, 2018 and increase deferred revenue associated with Biopharma Services and Discovery Services by up to $2.0 million and $1.0 million, respectively. In our Clinical Services area, the majority of the amounts historically classified as a provision for bad debts related to patient responsibility and will be considered an implicit price concession in determining net revenue under ASC 606. Accordingly, we will report uncollectible balances associated with individual patients as a reduction in the transaction price, and therefore, as a reduction in net revenues when historically these amounts were classified as bad debt expense within selling, general and administrative expenses. Pursuant to our adoption of the standard we also anticipate expanding our disclosures relating to revenue recognition, assets and liabilities relating to contracts with customers, the nature of our performance obligations and the manner by which we determine and allocate transaction prices and variable consideration to our performance obligations, and the significant judgments inherent in our revenue recognition policies. We also anticipate implementing enhancements to our internal controls to support our ability to sustain compliance with the standard after adoption.
In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842),” which provides guidance for accounting for leases. Under ASU 2016-02, the Company will be required to recognize the assets and liabilities for the rights and obligations created by leased assets. ASU 2016-02 will take effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. We plan to adopt this guidance on the effective date. We are currently evaluating the impact the provisions will have on our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) “Classification of Certain Cash Receipts and Cash Payments.” ASU 2016-15 provides guidance on statement of cash flow presentation for eight specific cash flow issues where diversity in practice exists. We will adopt this guidance as of January 1, 2018. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): “Restricted Cash,” clarifying the treatment of restricted cash accounts on the statements of cash flows. ASU 2016-18 indicates that restricted cash accounts should be included with cash and cash equivalents when reconciling the beginning of year and end of year total amounts shown on the statements of cash flows. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017. We will adopt this guidance as of January 1, 2018. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805) “Clarifying the Definition of a Business.” ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The updated standard is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. We will adopt this guidance as of January 1, 2018. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): “Simplifying the Accounting for Goodwill Impairment,” which removes the requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for annual periods beginning after December
15, 2019, and interim periods within those annual periods. Early adoption is permitted and applied prospectively. We do not expect ASU 2017-04 to have a material impact on our consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): “Scope of Modification Accounting.” This ASU clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The ASU is effective for annual reporting periods beginning after December 15, 2017 and interim periods within those annual periods. Early adoption is permitted. We will adopt this guidance as of January 1, 2018. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.
In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): “(Part 1) Accounting for Certain Financial Instruments with Down Round Features (Part 2) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception.” This guidance changes the methodology for determining the liability or equity classification of certain financial instruments with a down round feature and clarifies existing disclosure requirements for equity-classified instruments, among other things. The revised guidance is effective for annual reporting periods beginning after December 15, 2018. Early adoption is permitted and applied retrospectively. We plan to adopt the guidance on its effective date and do not expect it to have a material impact on our consolidated financial statements.
Earnings (loss) per share: Basic earnings (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares assumed to be outstanding during the period of computation. Diluted earnings per share is computed similar to basic earnings per share except that the numerator is adjusted for the change in fair value of the warrant liability (only if dilutive) and the denominator is increased to include the number of dilutive potential common shares outstanding during the period using the treasury stock method.
Basic net loss and diluted net loss per share data were computed as follows (in thousands, except per share amounts):
The following table summarizes potentially dilutive adjustments to the weighted average number of common shares which were excluded from the calculation (in thousands):
Note 4. Revenue and Accounts Receivable
Revenue by service type for each of the years ended December 31 is comprised of the following (in thousands):
The table above includes approximately $2,717,000 of Discovery Services revenue from our acquisition of vivoPharm for the year ended December 31, 2017.
Accounts receivable by service type at December 31, 2017 and 2016 consists of the following (in thousands):
Revenue for Biopharma Services are customized solutions for patient stratification and treatment selection through an extensive suite of DNA-based testing services. Biopharma Services are billed to pharmaceutical and biotechnology companies. Clinical Services are tests performed to provide information on diagnosis, prognosis and theranosis of cancers to guide patient management. Clinical Services tests can be billed to Medicare, another third party insurer or the referring community hospital or other healthcare facility. Discovery Services are services that provide the tools and testing methods for companies and researchers seeking to identify new DNA-based biomarkers for disease. The breakdown of our Clinical Services revenue (as a percent of total revenue) is as follows:
We have historically derived a significant portion of our revenue from a limited number of test ordering sites. Test ordering sites account for all of our Clinical Services revenue. Our test ordering sites are largely hospitals, cancer centers, reference laboratories, physician offices and biopharmaceutical companies. Oncologists and pathologists at these sites order the tests on behalf of the needs of their oncology patients or as part of a clinical trial sponsored by a biopharmaceutical company in which the patient is being enrolled. We generally do not have formal, long-term written agreements with such test ordering sites, and, as a result, we may lose a significant test ordering site at any time.
The top five test ordering clients during 2017 and 2016 accounted for 38% and 31%, respectively, of our testing volumes. During the year ended December 31, 2017, one Biopharma client accounted for approximately 11% of our revenue. During the year ended December 31, 2016, one Biopharma client accounted for approximately 16% of our revenue.
Note 5. Other Current Assets
At December 31, 2017 and 2016, other current assets consisted of the following (in thousands):
Note 6. Lease Commitments
We lease our laboratory, research facility and administrative office space under various operating leases. We have approximately 17,900 square feet of office and laboratory space in Rutherford, New Jersey, 24,900 square feet in Morrisville, North Carolina, 19,100 square feet in Los Angeles, California, 5,800 square feet in Hershey, Pennsylvania, 10,000 square feet in Hyderabad, India, and 1,959 square feet in Bundoora, Australia. For 2016 and a portion of 2017, we also had 2,700 square
feet in Shanghai, China, which was vacated in July 2017. We have escalating lease agreements for our New Jersey, North Carolina, Pennsylvania and Australia spaces, which expire February 2023, May 2020, November 2020 and July 2021, respectively. These leases require monthly rent with periodic rent increases that vary from $0.15 to $0.83 per square foot of the rented premises per year. The difference between minimum rent and straight-line rent is recorded as deferred rent payable. The terms of our New Jersey lease require that a $350,000 security deposit for the facility be held in a stand by letter of credit in favor of the landlord (see Note 8).
We acquired office and scientific equipment under long term leases which have been capitalized at the present value of the minimum lease payments. The equipment under these capital leases had a cost of $1,453,797 and accumulated depreciation of $342,454, as of December 31, 2017.
Minimum future lease payments under all capital and operating leases as of December 31, 2017 are as follows (in thousands):
Rent expense for the years ended December 31, 2017 and 2016 was approximately $1.79 million and $1.71 million, respectively.
Note 7. Bank Term Note and Line of Credit
At December 31, 2016, we had a term note with Silicon Valley Bank (“SVB”) that required monthly principal payments of approximately $167,000 and interest at the Wall Street Journal prime rate plus 2%, with a floor of 5.25% (5.75% at December 31, 2016) (“SVB Term Note”). An additional deferred interest payment of $180,000 was due at payoff. At December 31, 2016, the principal balance of the SVB Term Note was $4,666,667.
On March 22, 2017, we refinanced our debt with SVB, by repaying the SVB Term Note, which was scheduled to mature in April 2019, and entered into a new two year asset-based revolving line of credit agreement. The new SVB credit facility provides for an asset-based line of credit (“ABL”) for an amount not to exceed the lesser of (a) $6.0 million or (b) an amount equal to 80% of eligible accounts receivable plus the lesser of 50% of the net collectible value of third party accounts receivable or three times the average monthly collection amount of third party accounts receivable over the previous quarter. The ABL requires monthly interest payments at the Wall Street Journal prime rate plus 1.5% (6.0% at December 31, 2017) and matures on March 22, 2019. We paid to SVB a $30,000 commitment fee at closing and will pay a fee of 0.25% per year on the average unused portion of the ABL. At December 31, 2017, the ABL had a principal balance of $4,136,907, which is the maximum amount allowed based on eligible accounts receivable.
We concurrently entered into a new three year $6.0 million term loan agreement (“PFG Term Note”) with Partners for Growth IV, L.P. (“PFG”). The PFG Term Note is an interest only loan with the full principal and any outstanding interest due at maturity on March 22, 2020. Interest is payable monthly at a rate of 11.5% per annum, with the possibility of reducing to 11.0% in 2018 based on achieving certain financial milestones set forth by PFG. We may prepay the PFG Term Note in whole or part at any time without penalty. We paid PFG a commitment fee of $120,000 at closing. At December 31, 2017, the PFG Term Note had a principal balance of $6,000,000.
Both loan agreements require us to comply with certain financial covenants, including minimum adjusted EBITDA, revenue and liquidity covenants, and restrict us from, among other things, paying cash dividends, incurring debt and entering into certain transactions without the prior consent of the lenders. Repayment of amounts borrowed under the new loan agreements may be accelerated if an event of default occurs, which includes, among other things, a violation of such financial covenants and negative covenants. As of December 31, 2017, January 31, 2018, February 28, 2018 and March 31, 2018, we were in violation of certain financial covenants. We are in discussion with PFG and SVB to amend the terms of the loan agreement which would, among other modifications, cure the default and reset the financial covenants.
Our obligations to SVB under the ABL facility are secured by a first priority security interest on substantially all of our assets, and our obligations under the PFG Term Note are secured by a second priority security interest subordinated to the SVB lien.
In connection with the PFG Term Note, we issued seven year warrants to the lenders to purchase an aggregate of 443,262 shares of our common stock at an exercise price of $2.82 per share, valued at $1,004,000. This amount has been recorded as a derivative warrant liability (see Note 14). The number of warrants may be reduced by 20% subject to us achieving certain financial milestones set forth by PFG.
The following is a summary of long-term debt as of December 31 (in thousands):
At December 31, 2017, the principal amount of the PFG Term Note of $6,000,000 was due in 2020; however, due to the financial covenant violations, the debt is now considered due on demand and has been reclassified as a current liability. As a result of these violations, we also recorded additional interest expense of approximately $220,000 to fully amortize debt issuance costs on the PFG Term Note and the ABL, as well as approximately $796,000 of interest expense to accrete the remaining discount on debt.
Note 8. Letter of Credit
We maintain a $350,000 letter of credit in favor of our landlord pursuant to the terms of the lease for our Rutherford facility. At December 31, 2017 and 2016, the letter of credit was fully secured by the restricted cash disclosed on our Consolidated Balance Sheets.
Note 9. Fixed Assets
Fixed assets are summarized by major classifications as follows (in thousands):
Note 10. Patents and Other Intangible Assets
Patents and other intangible assets consist of the following at December 31, 2017 and 2016:
The customer list and trade name in the table above include foreign currency translation gains of approximately $38,000 and $17,000, respectively, at December 31, 2017.
Future amortization expense for legally approved patents (excluding patent applications in progress of approximately $570,000 as of December 31, 2017) and other intangible assets, is estimated as follows (in thousands):
Note 11. Income Taxes
On December 22, 2017, the U.S. federal government enacted legislation commonly referred to as the “Tax Cuts and Jobs Act” (the “TCJA”). The TCJA makes widespread changes to the Internal Revenue Code, including, among other things, a reduction in the federal corporate tax rate from 35% to 21%, effective January 1, 2018. The carrying value of deferred tax assets and liabilities is also determined by the enacted U.S. corporate income tax rate. Consequently, the U.S. corporate tax rate will impact the carrying value of our deferred tax assets and liabilities. Under the new corporate tax rate of 21%, deferred income tax assets, net of deferred tax liabilities have decreased by $15.2 million. There is no net effect of the tax reform enactment on the consolidated financial statements as of December 31, 2017 due to full valuation allowance on the net deferred tax assets.
The provision (benefit) for income taxes for the years ended December 31, 2017 and 2016 differs from the approximate amount of income tax benefit determined by applying the U.S. federal income tax rate to pre-tax loss, due to the following:
In February 2017, we sold $18,177,059 of gross State of New Jersey NOL’s relating to the 2014 and 2015 tax years as well as $167,572 of state research and development tax credits, resulting in the receipt of approximately $970,000, net of expenses. In December 2017, we sold $15,876,736 of gross State of New Jersey NOL’s relating to the 2011 and 2016 tax years as well as $523,385 of state research and development tax credits, resulting in the receipt of approximately $1,109,000, net of expenses.
We transferred the NOL carryforwards through the Technology Business Tax Certificate Transfer Program sponsored by the New Jersey Economic Development Authority.
Approximate deferred taxes consist of the following components as of December 31, 2017 and 2016 (in thousands):
Due to a history of losses we have generated since inception, we believe it is more-likely-than-not that all of the deferred tax assets will not be realized as of December 31, 2017 and 2016. Therefore, we have recorded a full valuation allowance on our deferred tax assets. We have net operating loss carryforwards for federal income tax purposes of approximately $99 million as of December 31, 2017. The net operating loss carryforwards will begin to expire in 2027. Utilization of these carryforwards is subject to limitation due to ownership changes that may delay the utilization of a portion of the carryforwards.
Note 12. Capital Stock
2016 Offerings
May Offering
On May 25, 2016, we sold 2,467,820 shares of common stock in a public offering and warrants to purchase 1,233,910 shares of common stock in a concurrent private placement. These offerings resulted in gross proceeds of $5 million. We sold 2,150,000 shares of common stock and warrants to purchase 1,075,000 shares of common stock to certain institutional investors at a combined offering price of $2.00 per common share, and our Chairman of the Board, John Pappajohn, purchased 317,820 shares of common stock and warrants to purchase 158,910 shares of common stock at a combined offering price of $2.2025 per common share. In addition, we issued warrants to purchase an aggregate of 123,391 shares of common stock to the placement agent. Subject to certain ownership limitations, the warrants were initially exercisable commencing six months from the issuance date at an exercise price equal to $2.25 per share of common stock. The warrants are exercisable for five years from the initial exercise date. These warrants include a contingent net cash settlement feature, as described further in Note 14.
September Offering
On September 14, 2016, we sold 2,750,000 shares of common stock in a public offering and warrants to purchase 1,375,000 shares of common stock in a concurrent private placement at a combined price of $2.00 per common share. These offerings resulted in gross proceeds of $5.5 million. In addition, we issued warrants to purchase an aggregate of 137,500 shares of common stock to the placement agent. Subject to certain ownership restrictions, the warrants will be initially exercisable six months from the issuance date at an exercise price of $2.25 per share of common stock. The warrants are exercisable for five years from the initial exercise date. These warrants include a contingent net cash settlement feature, as described further in Note 14.
2017 Offering
On December 8, 2017, we sold 3,500,000 shares of our common stock and warrants to purchase 3,500,000 shares of common stock in a public offering (“2017 Offering”). The offering resulted in gross proceeds of $7.0 million. The 2017 Offering warrants have an exercise price of $2.35 per share of common stock. In addition, we issued warrants to purchase an aggregate of 175,000 shares of common stock at $2.50 per share to the placement agent (“Wainwright Warrants”). Subject to certain ownership limitations, these warrants will be initially exercisable 6 months from the issuance date and are exercisable for 12 months from the initial exercise date. These warrants include a contingent net cash settlement feature, as described further in Note 14.
Common Stock Purchase Agreement with Aspire Capital
On August 14, 2017, we entered into a Common Stock Purchase Agreement (the “Purchase Agreement”) with Aspire Capital Fund, LLC, an Illinois limited liability company (“Aspire Capital”), which provides that Aspire Capital is committed to purchase up to an aggregate of $16 million of our common stock (the “Purchase Shares”) from time to time over the term of the Purchase Agreement. Aspire Capital made an initial purchase of 1,000,000 Purchase Shares (the “Initial Purchase”) at a purchase price of $3.00 per share on the commencement date of the agreement.
After the commencement date, on any business day over the 24-month term of the Purchase Agreement, we have the right, in our sole discretion, to present Aspire Capital with a purchase notice (each, a “Purchase Notice”) directing Aspire Capital to purchase up to 33,333 Purchase Shares per business day, provided that Aspire Capital will not be required to buy Purchase Shares pursuant to a Purchase Notice that was received by Aspire Capital on any business day on which the last closing trade price of our common stock on the NASDAQ Capital Market is below $3.00. The Company and Aspire Capital also may mutually agree to increase the number of shares that may be sold to as much as an additional 2,000,000 Purchase Shares per business day. The Purchase Agreement provides for a purchase price per Purchase Share of $3.00. As consideration for entering into the Purchase Agreement, we issued 320,000 shares of our common stock to Aspire Capital (“Commitment Shares”).
The number of Purchase Shares covered by and timing of each Purchase Notice are determined by us, at our sole discretion. The aggregate number of shares that we can sell to Aspire Capital under the Purchase Agreement may in no case exceed 3,938,213 shares of our common stock (which is equal to approximately 19.9% of the common stock outstanding on the date of the Purchase Agreement), including the 320,000 Commitment Shares and the 1,000,000 Initial Purchase Shares, unless shareholder approval is obtained to issue additional shares.
Our net proceeds will depend on several factors, including the frequency of our sales of Purchase Shares to Aspire Capital and the frequency at which the last closing trade price of our common stock is below $3.00, subject to a maximum of $16 million in gross proceeds, including the Initial Purchase. Our delivery of Purchase Notices will be made subject to market conditions, in light of our capital needs from time to time and under the limitations contained in the Purchase Agreement.
As of December 31, 2017, the Company has sold 1,000,000 shares under this agreement at $3.00 per share, resulting in proceeds of approximately $2,965,000, net of offering costs of approximately $35,000. The Company has also issued 320,000 shares as consideration for entering into the Purchase Agreement. The Company has not deferred any offering costs associated with this agreement. Due to the price of the Company’s stock being lower than the $3.00 per share, the Company does not expect to sell more shares under the Purchase Agreement in the foreseeable future.
Stock Issued to Consultants
On October 24, 2016, we issued 50,000 shares of common stock to Maxim, LLC (“Maxim”) at a value of $1.50 per common share in exchange for consulting services. On October 3, 2017, we issued 2,000 shares of common stock to another consultant at a value of $2.65 per common share.
Preferred Stock
We are currently authorized to issue up to 9,764,000 shares of preferred stock. As of December 31, 2017 and 2016, no shares of preferred stock were outstanding.
Note 13. Stock-Based Compensation
We have two equity incentive plans: the 2008 Stock Option Plan (the “2008 Plan”) and the 2011 Equity Incentive Plan (the “2011 Plan”, and together with the 2008 Plan, the “Stock Option Plans”). The Stock Option Plans are meant to provide additional incentive to officers, employees and consultants to remain in our employment. Options granted are generally exercisable for up to 10 years.
The Board of Directors adopted the 2011 Plan on June 30, 2011 and reserved 350,000 shares of common stock for issuance under the 2011 Plan. On May 22, 2014, May 14, 2015 and on October 11, 2016, the stockholders voted to increase the number of shares reserved by the plan to 2,000,000, 2,650,000, and 3,150,000 shares of common stock, respectively, under several types of equity awards including stock options, stock appreciation rights, restricted stock awards and other awards defined in the 2011 Plan.
The Board of Directors adopted the 2008 Plan on April 29, 2008 and reserved 251,475 shares of common stock for issuance under the plan. On April 1, 2010, the stockholders voted to increase the number of shares reserved by the plan to 550,000. We are authorized to issue incentive stock options or non-statutory stock options to eligible participants, as defined in the 2008 Plan.
We have also issued 48,000 options outside of the Stock Option Plans.
At December 31, 2017, 359,776 shares remain available for future awards under the 2011 Plan and 134,354 shares remain available for future awards under the 2008 Plan.
As of December 31, 2017, no stock appreciation rights and 363,334 shares of restricted stock had been awarded under the Stock Option Plans.
A summary of employee and non-employee stock option activity for the years ended December 31, 2017 and 2016 is as follows:
Aggregate intrinsic value represents the difference between the fair value of our common stock and the exercise price of outstanding, in-the-money options. We received $6,500 from the exercise of options during the year ended December 31, 2017. During the year ended December 31, 2016, no options were exercised.
As of December 31, 2017, total unrecognized compensation cost related to non-vested stock options granted to employees was $2,506,099, which we expect to recognize over the next 2.2 years.
The fair value of options granted to employees is estimated on the grant date using the Black-Scholes option valuation model. This valuation model requires us to make assumptions and judgments about the variables used in the calculation, including the expected term (the period of time that the options granted are expected to be outstanding), the volatility of our common stock, a risk-free interest rate, and expected dividends. Effective January 1, 2017, we adopted ASU 2016-09, which permits us to record forfeitures of unvested stock options when they occur. The adoption, along with the remaining provisions of ASU 2016-09, did not have a material impact on our consolidated financial statements. Prior to 2017, we estimated forfeitures of unvested stock options, and to the extent actual forfeitures differed from the estimate, the difference was recorded as a cumulative adjustment in the period the estimate was revised. No compensation cost is recorded for options that do not vest. We use the simplified calculation of expected life described in the SEC’s Staff Accounting Bulletin No. 107, Share-Based Payment, and volatility is based on the historical volatility of our common stock. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option. We use an expected dividend yield of zero, as we do not anticipate paying any dividends in the foreseeable future.
The following table presents the weighted-average assumptions used to estimate the fair value of options granted to employees during the periods presented:
In May 2014, we issued 200,000 options to a Director, with an exercise price of $15.89. See Note 19 for additional information. The following table presents the weighted-average assumptions used to estimate the fair value of options reaching their measurement date for non-employees during the periods presented:
Restricted stock awards have been granted to employees, directors and consultants as compensation for services. At December 31, 2017, there was $314,481 of unrecognized compensation cost related to non-vested restricted stock granted to employees; we expect to recognize the cost over 1.3 years.
The following table summarizes the activities for our non-vested restricted stock awards for the years ended December 31, 2017 and 2016:
The following table presents the effects of stock-based compensation related to stock option and restricted stock awards to employees and non-employees on our Consolidated Statements of Operations and Other Comprehensive Loss during the periods presented (in thousands):
Note 14. Warrants
Prior to 2016, we issued certain warrants containing an exercise price adjustment (identified as Financing under the heading “derivative” in the table below). For these warrants, in the event new equity instruments were issued at a price lower than the exercise price of the warrant, the exercise price would be adjusted to the new equity instruments issued (price adjustment feature). These warrants were initially recorded as a warrant liability, with any subsequent change in their fair value recognized in earnings until the warrants were exercised, amended or expired. At December 31, 2016, all of these warrants had either been exercised or expired. During 2016 and 2017, we issued warrants containing a contingent net cash settlement feature (identified as 2016 Offerings and 2017 Offering, respectively, under the heading “derivative” in the table below). These warrants are recorded as a warrant liability, and all subsequent changes in their fair value are recognized in earnings until they are exercised, amended or expired. During 2017, we issued warrants that are subject to a 20% reduction if we achieve certain financial milestones as part of our debt refinancing in March 2017 (identified as 2017 Debt under the heading “derivative” in the table below). These warrants are recorded as a warrant liability, and all subsequent changes in their fair value are recognized in earnings until the number of shares of common stock issuable upon exercise of the warrants becomes fixed.
A certain number of our warrants are held by Mr. Pappajohn, the Chairman of our Board of Directors and stockholder. See Note 19 for additional details on these warrants.
On February 21, 2016 and March 23, 2016, 200 and 70,000 warrants expired unexercised, respectively.
On May 25, 2016, we issued 1,357,301 warrants to purchase shares of our common stock as part of our May Offering. Subject to certain ownership limitations, the warrants were initially exercisable commencing six months from the issuance date at an exercise price equal to $2.25 per share of common stock. The warrants are exercisable for five years from the initial exercise date. These warrants contain a contingent net cash settlement feature and are part of the 2016 Offerings derivative warrants in the table below.
On June 30, 2016, 86,533 warrants held by Mr. Pappajohn expired unexercised.
On September 14, 2016, we issued 1,512,500 warrants to purchase shares of our common stock as part of our September Offering. Subject to certain ownership limitations, the warrants were initially exercisable commencing six months from the issuance date at an exercise price equal to $2.25 per share of common stock. The warrants are exercisable for five years from the initial exercise date. These warrants also contain a contingent net cash settlement feature and are part of the 2016 Offerings derivative warrants in the table below.
On December 1, 2016 and December 21, 2016, 37,000 and 75,294 warrants held by Mr. Pappajohn expired unexercised, respectively.
On March 22, 2017, we issued seven year warrants to the lenders to purchase an aggregate of 443,262 shares of our common stock at an exercise price of $2.82 per share in connection with the PFG Term Note. The number of warrants may be reduced by 20% subject to us achieving certain financial milestones set forth by PFG. The warrants can be net settled in common stock using the average 90-trading day price of our common stock. These warrants are defined in the table below as 2017 Debt derivative warrants.
On March 24, 2017, warrant holders exercised warrants to purchase 375,700 shares of common stock at an exercise price of $2.25 per share, resulting in proceeds of $845,325.
On March 27, 2017, warrant holders exercised warrants to purchase 214,300 shares of common stock at an exercise price of $2.25 per share, resulting in proceeds of $482,175.
On March 28, 2017, warrant holders exercised warrants to purchase 64,200 shares of common stock at an exercise price of $2.25 per share, resulting in proceeds of $144,450.
On March 28, 2017, warrant holders exercised warrants to purchase 90,063 shares of common stock at an exercise price of $2.25 per share using the net issuance exercise method whereby 45,162 shares were surrendered as payment in full of the exercise price resulting in a net issuance of 44,901 shares.
On March 30, 2017, warrant holders exercised warrants to purchase 123,700 shares of common stock at an exercise price of $2.25 per share, resulting in proceeds of $278,325.
On May 22, 2017, warrant holders exercised warrants to purchase 9,000 shares of common stock at an exercise price of $2.25 per share, resulting in proceeds of $20,250.
On August 9, 2017, warrant holders exercised warrants to purchase 25,000 shares of common stock at an exercise price of $2.25 per share, resulting in proceeds of $56,250.
On November 26, 2017, 194,007 warrants held by Mr. Pappajohn expired unexercised.
On December 8, 2017, we issued warrants to purchase 3,500,000 shares of our common stock at $2.35 per share and warrants to purchase 175,000 shares of our common stock at $2.50 per share to our placement agent, referred to below as the 2017 Offering. Subject to certain ownership limitations, the warrants will be initially exercisable 6 months from the issuance date and are exercisable for 12 months from the initial exercise date. These warrants contain a contingent net cash settlement feature and are part of derivative warrants in the table below.
The following table summarizes the warrant activity for the years ending December 31, 2017 and 2016 (in thousands, except exercise price):
________________________
A
These warrants are subject to fair value accounting and contain an exercise price adjustment feature.
B
These warrants are subject to fair value accounting and contain a contingent net cash settlement feature. See Note 15.
C
These warrants are subject to fair value accounting until the number of shares of common stock issuable upon exercise of the warrants becomes fixed. See Note 15.
D
Weighted average exercise prices are as of December 31, 2017.
Note 15. Fair Value of Warrants
The derivative warrants issued as part of the 2016 Offerings are valued using a probability-weighted Binomial model, while the derivative warrants issued as part of the 2017 Debt refinancing are valued using a Monte Carlo model. The derivative warrants issued in conjunction with the 2017 Offering were valued using a Black-Scholes model. The following tables summarize the assumptions used in computing the fair value of derivative warrants subject to fair value accounting at the date of issue, at December 31, 2017 and 2016, and during the years then ended.
The ranges of Company stock prices used in computing the warrant fair value for warrants issued during the years were as follows: in 2017, $1.95-$2.90; in 2016, $1.90-$2.14. The range of Company stock prices used in computing the fair value for warrants exercised during 2017 was $3.55-$5.05. In determining the fair value of warrants outstanding at each reporting date, the Company stock price was $1.85 and $1.35 (the closing price on the NASDAQ Capital Market) at December 31, 2017 and 2016.
The following table summarizes the derivative warrant activity subject to fair value accounting for the years ended December 31, 2017 and 2016 (in thousands):
Note 16. Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The Fair Value Measurements and Disclosures Topic of the FASB Accounting Standards Codification requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect our own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, the Topic establishes a fair value hierarchy for valuation inputs that give the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.
The fair value hierarchy is as follows:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that we have the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect our own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The following table summarizes the financial liabilities measured at fair value on a recurring basis segregated by the level of valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):
At December 31, 2017, the warrant liability consists of stock warrants issued as part of the 2016 Offerings and 2017 Offering that contain contingent redemption features and warrants issued as part of the 2017 debt refinancing outlined in Note 7. In accordance with derivative accounting for warrants, we calculated the fair value of warrants and the assumptions used are described in Note 15, “Fair Value of Warrants.” Realized and unrealized gains and losses related to the change in fair value of the warrant liability are included in other income (expense) on the Consolidated Statements of Operations and Other Comprehensive Loss.
At December 31, 2017 and 2016, the Company had a note payable to VenturEast from a prior acquisition. The ultimate repayment of the note will be the value of 84,278 shares of common stock at the time of payment. The value of the note payable to VenturEast was determined using the fair value of our common stock at the reporting date. During the years ended December 31, 2017 and 2016, we recognized a loss of $42,000 and gain of $152,000, respectively, due to the changes in value of the note. Realized and unrealized gains and losses related to the VenturEast note are included in other income (expense) on the Consolidated Statements of Operations and Other Comprehensive Loss.
The following table summarizes the activity of the notes payable to VenturEast and our derivative warrants, which were measured at fair value using Level 3 inputs (in thousands):
Note 17. Contingencies
In the normal course of business, the Company is involved in various claims and legal proceedings. In the opinion of management, the ultimate liability or disposition thereof is not expected to have a material adverse effect on our financial condition, results of operations or liquidity.
Note 18. Joint Venture Agreement
In November 2011, we entered into an affiliation agreement with the Mayo Foundation for Medical Education and Research (“Mayo”), subsequently amended. Under the agreement, we formed a joint venture with Mayo in May 2013 to focus on developing oncology diagnostic services and tests utilizing next generation sequencing. The joint venture is a limited liability company, with each party initially holding fifty percent of the issued and outstanding membership interests of the new entity (the “JV”). In exchange for our membership interest in the JV, we made an initial capital contribution of $1.0 million in October 2013. In addition, we issued 10,000 shares of our common stock to Mayo pursuant to our affiliation agreement and recorded an expense of approximately $175,000. We also recorded additional expense of approximately $231,000 during the fourth quarter of 2013 related to shares issued to Mayo in November of 2011 as the JV achieved certain performance milestones. In the third quarter of 2014 we made an additional $1.0 million capital contribution.
The agreement also requires aggregate total capital contributions by us of up to an additional $4.0 million. The timing of the remaining installments is subject to the JV's achievement of certain operational milestones agreed upon by the board of governors of the JV. In exchange for its membership interest, Mayo’s capital contribution will take the form of cash, staff, services, hardware and software resources, laboratory space and instrumentation, the fair market value of which will be approximately equal to $6.0 million. Mayo’s continued contribution will also be conditioned upon the JV’s achievement of certain milestones.
The joint venture is considered a variable interest entity under ASC 810-10, but we are not the primary beneficiary as we do not have the power to direct the activities of the joint venture that most significantly impact its performance. Our evaluation of ability to impact performance is based on our equal board membership and voting rights and day to day management functions which are performed by the Mayo personnel.
Note 19. Related Party Transactions
John Pappajohn, a member of the Board of Directors and stockholder, had personally guaranteed our revolving line of credit with Wells Fargo Bank through March 31, 2014. As consideration for his guarantee, as well as each of the eight extensions of this facility through March 31, 2014, Mr. Pappajohn received warrants to purchase an aggregate of 1,051,506 shares of common stock of which Mr. Pappajohn assigned warrants to purchase 284,000 shares of common stock to certain third parties. Through December 31, 2017, warrants to purchase 440,113 shares of common stock have been exercised by Mr. Pappajohn, and the remaining warrants expired unexercised.
In addition, John Pappajohn also had loaned us an aggregate of $6,750,000 (all of which was converted into 675,000 shares of common stock at the IPO price of $10.00 per share). In connection with these loans, Mr. Pappajohn received warrants to purchase an aggregate of 202,630 shares of common stock. After adjustment pursuant to the terms of the warrants in conjunction with our IPO, the number of warrants outstanding was 275,556 at $15.00 per share at December 31, 2017.
We have a consulting agreement with Equity Dynamics, Inc. (“EDI”), an entity controlled by John Pappajohn, effective April 1, 2014 pursuant to which EDI receives a monthly fee of $10,000. We expensed $120,000 annually for the years ended December 31, 2017 and 2016 related to this agreement. At December 31, 2017 and 2016, we owed EDI $10,000 and $50,000, respectively.
Pursuant to a consulting and advisory agreement that ended December 31, 2016, Dr. Chaganti received $5,000 per month for providing consulting and technical support services. Total expenses for the year ended December 31, 2016 were $60,000. Pursuant to the terms of the consulting agreement, Dr. Chaganti received an option to purchase 200,000 shares of our common stock at a purchase price of $15.89 per share vesting over a period of four years. Total non-cash stock-based compensation recognized under this consulting agreement for the years ended December 31, 2017 and 2016 was $69,250 and $37,625, respectively. Also pursuant to the consulting agreement, Dr. Chaganti assigned to us all rights to any inventions which he may invent during the course of rendering consulting services to us. In exchange for this assignment, if the USPTO issues a patent for an invention on which Dr. Chaganti is listed as an inventor, we are required to pay Dr. Chaganti (i) a one-time payment of $50,000 and (ii)1% of any net revenues we receive from any licensed sales of the invention.
On May 25, 2016, Mr. Pappajohn purchased 317,820 shares of common stock and warrants to purchase 158,910 shares of common stock in the May Offering described in Note 12.
Note 20. Subsequent Events
On February 1, 2018, Panna Sharma resigned as our President, Chief Executive Officer and the Company appointed John A. Roberts as interim Chief Executive Officer. Mr. Sharma has agreed to provide consulting services to the Company during the transition period and will receive 12 months in base salary as severance, payable in accordance with the Company’s standard payroll practices over 12 months, subject to the separation agreement and general release. In addition, Mr. Sharma will be provided with an extension through 1 year after the termination date of the exercise period for his vested stock options.
Financial Advisory Agreement
The Company has retained Raymond James & Associates, Inc. as a financial advisor to assist the Company in its evaluation of a broad range of financial and strategic alternatives to enhance shareholder value, including additional capital raising transactions, the acquisition of another company or complementary assets or the potential sale or merger of the Company or another type of strategic partnership. There is no assurance that the review of strategic alternatives will result in the Company changing its business plan, pursuing any particular transaction, if any, or, if it pursues any such transaction, that it will be
completed. The Company does not expect to make further public comment regarding the strategic review until the Board of Directors has approved a specific transaction or otherwise deems disclosure of significant developments is appropriate.
Item 9.
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A.
Controls and Procedures.
Evaluation of Disclosure Controls and Procedures.
We evaluated, under the supervision and with the participation of our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934 (“Exchange Act”), as amended) as of December 31, 2017, the end of the period covered by this report on Form 10-K. Based on this evaluation, the principal executive officer and the principal financial officer have concluded that our disclosure controls and procedures were not effective at December 31, 2017 as a result of the material weakness in internal controls described below. Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and were operating in an effective manner for the period covered by this report, and (ii) is accumulated and communicated to management, including, the principal executive officer and principal financial officer, or the person performing similar functions as appropriate, to allow timely decisions regarding required disclosures.
Management’s Report on Internal Control Over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934.
The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
•
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
•
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of our management and directors; and
•
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions or because of declines in the degree of compliance with policies or procedures. Our management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework (2013).
In connection with this assessment, we identified a material weakness, as described below, in our internal control over financial reporting as of December 31, 2017. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement for the annual or interim financial statements will not be prevented or detected on a timely basis. Because of the material weakness identified below, and based on management’s assessment, as of December 31, 2017, the Company’s internal control over financial reporting was not effective:
Accounting for uncollectible clinical services revenue: The Company’s quarterly and year- end review procedures includes management’s assessment of collectability and adjustment of its allowance for doubtful accounts. During the fourth quarter management revised its estimation process and as a result of the low collection patterns during the fourth quarter principally related to clinical service revenues from claims generated by the Los Angeles location, a determination was made to
significantly increase the allowance for doubtful accounts to reflect this change in estimate, and our management has determined that this control deficiency constitutes a material weakness at December 31, 2017. However, the Company failed to identify that adjustments which pertained to contractual allowances and reduced expected collections of current quarter revenues should have been recorded as reductions in net revenue rather than bad debt expense. Accordingly, management needed to record audit adjustments to properly account for these items. Although management does perform overall review of revenue and related reserves at each reporting date, the controls designed to identify material misstatements did not operate at a sufficient level of precision to prevent or detect such errors in its determination of this significant accounting estimate.
Remediation plan: Management is committed to remediating the material weakness in a timely fashion. We have begun the process of implementing changes to our internal control over financial reporting to remediate the control deficiencies that gave rise to the material weakness, including further improvements in our processes and analyses that support the estimate of the allowance for doubtful accounts and the related bad debt expense and performing a comprehensive review of the need for additional corporate accounting and financial personnel, supplemented by external resources as appropriate, with the requisite skill and technical expertise. In addition, the Company expects this deficiency to be addressed as part of the implementation of ASU 2014-09 effective January 1, 2018.
Changes in Internal Control over Financial Reporting.
Other than the discovery of the material weakness and the remediation plan set forth above, there were no changes in our internal control over financial reporting during the three months ended December 31, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B.
Item 9B.
Other Information.
The Company has retained Raymond James & Associates, Inc. as a financial advisor to assist the Company in its evaluation of a broad range of financial and strategic alternatives to enhance shareholder value, including additional capital raising transactions, the acquisition of another company or complementary assets or the potential sale or merger of the Company or another type of strategic partnership. There is no assurance that the review of strategic alternatives will result in the Company changing its business plan, pursuing any particular transaction, if any, or, if it pursues any such transaction, that it will be completed. The Company does not expect to make further public comment regarding the strategic review until the Board of Directors has approved a specific transaction or otherwise deems disclosure of significant developments is appropriate.
PART III
Item 10.
Item 10.
Directors, Executive Officers and Corporate Governance.
The information required by this item will be contained in the Proxy Statement for our 2018 Annual Meeting of Stockholders, which we anticipate will be filed no later than 120 days after the end of our fiscal year ended December 31, 2017 and is incorporated herein by reference herein.
The information required by this item will be contained in the Proxy Statement for our 2018 Annual Meeting of Stockholders, which we anticipate will be filed no later than 120 days after the end of our fiscal year ended December 31, 2017 and is incorporated by reference herein.
Item 12.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this item will be contained in the Proxy Statement for our 2018 Annual Meeting of Stockholders, which we anticipate will be filed no later than 120 days after the end of our fiscal year ended December 31, 2017 and is incorporated by reference herein.
Item 13.
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
The information required by this item will be contained in the Proxy Statement for our 2018 Annual Meeting of Stockholders, which we anticipate will be filed no later than 120 days after the end of our fiscal year ended December 31, 2017 and is incorporated by reference herein.
Item 14.
Item 14.
Principal Accounting Fees and Services.
The information required by this item will be contained in the Proxy Statement for our 2018 Annual Meeting of Stockholders, which we anticipate will be filed no later than 120 days after the end of our fiscal year ended December 31, 2017 and is incorporated by reference herein.
PART IV
Item 15.
Item 15.
Exhibits, Financial Statement Schedules.
(a)(1) Financial Statements. The financial statements filed as part of this report are listed on the Index to the Consolidated Financial Statements.
(a)(2) Financial Statement Schedules. Schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.
(a)(3) Exhibits. Reference is made to the Exhibit Index. The exhibits are included, or incorporated by reference, in this annual report on Form 10-K and are numbered in accordance with Item 601 of Regulation S-K.
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Cancer Genetics, Inc.
(Registrant)
Date: April 2, 2018
/s/ John A. Roberts
John A. Roberts
Interim Chief Executive Officer, Chief Operating Officer and Executive Vice President, Finance
(Principal Executive Officer and Principal Financial Officer and duly authorized signatory)
Date: April 2, 2018
/s/ Igor Gitelman
Igor Gitelman
Chief Accounting Officer
(Principal Accounting Officer)
SIGNATURES AND POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints John A. Roberts and Igor Gitelman, and each of them, his true and lawful agent, proxy and attorney-in-fact, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to (i) act on, sign and file with the Securities and Exchange Commission any and all amendments to this annual report on Form 10-K together with all schedules and exhibits thereto, (ii) act on, sign and file such certificates, instruments, agreements and other documents as may be necessary or appropriate in connection therewith and, (iii) take any and all actions which may be necessary or appropriate to be done, as fully for all intents and purposes as he might or could do in person, hereby approving, ratifying and confirming all that such agent, proxy and attorney-in-fact or any of his substitutes may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act, this annual report on Form 10-K has been signed by the following persons in the capacities and on the dates indicated.
INDEX TO EXHIBITS
*
Filed herewith.
**
Furnished herewith.