Notes to Unaudited Consolidated Financial Statements
Note 1. Organization, Description of Business, Basis of Presentation, Recently Adopted Accounting Standards, Acquisition, Reclassifications and Recent Accounting Pronouncements
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 we 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.
Basis of Presentation
The accompanying unaudited condensed financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions for interim reporting as prescribed by the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary to make the financial statements not misleading have been included. As such, the information included in this quarterly report on Form 10-Q should be read in conjunction with the audited consolidated financial statements as of and for the year ended
December 31, 2017
, filed with the Securities and Exchange Commission on April 2, 2018. The consolidated balance sheet as of
December 31, 2017
, included herein was derived from the audited financial statements as of that date, but does not include all disclosures including notes required by GAAP. Interim financial results are not necessarily indicative of the results that may be expected for any future interim period or for the year ending
December 31, 2018
.
Recently Adopted Accounting Standards
Revenue Recognition
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers.” The guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to a customer. The ASU replaces most existing revenue recognition guidance in U.S. GAAP. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers: Deferral of the Effective Date” which defers the effective date for ASU 2014-09 by one year. In March 2016, the FASB issued ASU 2016-08, “Principal versus Agent Considerations (Reporting Gross versus Net),” which clarifies the implementation guidance in ASU 2014-09 relating to principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10, “Identifying Performance Obligations and Licensing,” which clarifies guidance related to the impact of goods and services on a performance obligation and timing and pattern of recognition issues related to intellectual property contracts. In May 2016, the FASB issued ASU 2016-12, “Narrow-Scope Improvements and Practical Expedients,” which clarifies certain narrow provisions of ASU 2014-09. On January 1, 2018, we adopted these ASUs using the modified retrospective method. We recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of
accumulated deficit. Financial information for the
three months ended March 31, 2017
has not been restated and continues to be reported under the accounting standards in effect for that period.
The transition adjustment resulted in a net reduction to the opening balance of accumulated deficit of
$2.5 million
on January 1, 2018 and increased deferred revenue associated with Biopharma Services and Discovery Services by
$1.9 million
and
$0.6 million
, respectively, due to a change in our policies for recognized revenue for performance obligations fulfilled over time. In our Clinical Services area, the majority of the amounts historically charged as a provision for bad debts are now considered an implicit price concession in determining net revenue under Accounting Standards Codification (“ASC”) Topic 606. Accordingly, we now report uncollectible balances as a reduction in the transaction price, and therefore, as a reduction in net revenues rather than a component of selling, general and administrative expenses.
The following table presents the amounts by which each financial statement line item was affected by adopting the new revenue recognition guidance (in thousands):
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Three Months Ended March 31, 2018
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As Reported
|
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ASC 606 Adjustments
|
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Balances Without Adoption
|
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Consolidated Statements of Operations and Other Comprehensive Loss
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Revenue:
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|
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|
Biopharma Services
|
|
$
|
3,658
|
|
|
$
|
(307
|
)
|
|
3,351
|
|
|
Clinical Services
|
|
2,342
|
|
|
—
|
|
|
2,342
|
|
|
Discovery Services
|
|
1,667
|
|
|
(529
|
)
|
|
1,138
|
|
|
|
|
$
|
7,667
|
|
|
$
|
(836
|
)
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|
$
|
6,831
|
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|
Consolidated Balance Sheets
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CURRENT LIABILITIES
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Deferred revenue
|
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|
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|
Biopharma Services
|
|
$
|
1,625
|
|
|
$
|
(1,547
|
)
|
|
$
|
78
|
|
|
Clinical Services
|
|
—
|
|
|
—
|
|
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—
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|
Discovery Services
|
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126
|
|
|
(126
|
)
|
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—
|
|
|
|
|
$
|
1,751
|
|
|
$
|
(1,673
|
)
|
|
$
|
78
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|
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NON-CURRENT LIABILITIES
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Deferred revenue
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Biopharma Services
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|
$
|
516
|
|
|
$
|
—
|
|
|
$
|
516
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|
Clinical Services
|
|
—
|
|
|
—
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|
|
—
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|
Discovery Services
|
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476
|
|
|
—
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|
|
476
|
|
|
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$
|
992
|
|
|
$
|
—
|
|
|
$
|
992
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STOCKHOLDERS' EQUITY
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Accumulated (deficit)
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$
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(141,799
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)
|
|
$
|
1,673
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|
|
$
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(140,126
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)
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Restricted Cash
Effective January 1, 2018, we adopted ASU 2016-18, which requires companies to include restricted cash accounts with cash and cash equivalents when reconciling the beginning of period and end of period total amounts shown on the consolidated statements of cash flows.
Acquisition of vivoPharm
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 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.
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 in accordance with GAAP. 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. 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
March 31, 2018
, the valuation of the lab supplies, deferred revenue and deferred taxes is provisional.
The estimated allocation of the purchase price as of August 15, 2017 consists of the following (in thousands):
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Cash
|
|
$
|
544
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|
Accounts receivable
|
|
905
|
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|
Lab supplies
|
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350
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|
Prepaid expenses and other current assets
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60
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Fixed assets
|
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765
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Intangible assets
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3,160
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Goodwill
|
|
5,960
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Accounts payable and accrued expenses
|
|
(913
|
)
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Deferred revenue
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|
(814
|
)
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Deferred rent and other
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(222
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)
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Obligations under capital leases
|
|
(76
|
)
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Total purchase price
|
|
$
|
9,719
|
|
The following table provides certain pro forma financial information for the Company as if the acquisition of vivoPharm discussed above occurred on January 1, 2017 (in thousands except per share amounts):
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Three Months Ended March 31,
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2017
|
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Revenue
|
$
|
8,134
|
|
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Net loss
|
(9,795
|
)
|
|
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Basic and dilutive net loss per share
|
$
|
(0.45
|
)
|
The results of operations for the
three months ended March 31, 2018
include the operations of vivoPharm, which accounted for approximately
$1,428,000
of the Company’s consolidated Discovery Services revenue. The net income (loss) of vivoPharm cannot be determined, as its operations were integrated with Cancer Genetics.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation.
Recent Accounting Pronouncements
In February 2016, the FASB issued guidance codified in ASC 842,
Leases
, which supersedes the guidance in former ASC 840,
Leases
, to increase transparency and comparability among organizations by requiring recognition of lease assets and lease liabilities on the balance sheet and disclosure of key information about leasing arrangements. The standard will become effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. The guidance is
required to be adopted at the earliest period presented using a modified retrospective approach. 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.
Note 2. Going Concern
At
March 31, 2018
, our cash position and history of losses required management to assess our ability to continue operating as a going concern, according to FASB ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The Company does not have sufficient cash at
March 31, 2018
to fund normal operations for the next
twelve months
. In addition, the Company was in violation of certain financial covenants under its debt agreements at December 31, 2017, January 31, 2018, February 28, 2018, March 31, 2018 and April 30, 2018. These covenant violations were waived on May 14, 2018 by SVB and PFG. The Company is in discussions with its lenders to modify the loans and reset the loan covenants, but we can provide no assurances that our current negotiations will be successful. The Company's ability to continue as a going concern is dependent on the Company’s ability to modify its existing debt, 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 options. Such options 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. Revenue and Accounts Receivable
Revenue by service type for the
three months ended March 31, 2018
and
2017
is comprised of the following (in thousands):
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Three Months Ended March 31,
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2018
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2017
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Biopharma Services
|
3,658
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|
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$
|
3,719
|
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Clinical Services
|
2,342
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|
|
2,954
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Discovery Services
|
1,667
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|
293
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|
|
|
$
|
7,667
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|
|
$
|
6,966
|
|
The table above includes approximately
$1,428,000
of Discovery Services revenue from our acquisition of vivoPharm for the
three months ended March 31, 2018
.
Accounts receivable by service type at
March 31, 2018
and
December 31, 2017
consists of the following (in thousands):
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|
March 31,
2018
|
|
December 31,
2017
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Biopharma Services
|
$
|
3,847
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|
|
$
|
3,746
|
|
|
Clinical Services
|
12,572
|
|
|
12,205
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|
Discovery Services
|
1,238
|
|
|
1,546
|
|
|
Allowance for doubtful accounts
|
(7,003
|
)
|
|
(6,539
|
)
|
|
|
$
|
10,654
|
|
|
$
|
10,958
|
|
The table above includes
$319,000
of net accounts receivables relating to Discovery Services that are included in assets held for sale on the Consolidated Balance Sheet as of
March 31, 2018
.
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 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, or
directly to patients. 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:
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Three Months Ended March 31,
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2018
|
|
2017
|
|
Medicare
|
9%
|
|
14%
|
|
Other insurers
|
16%
|
|
23%
|
|
Other healthcare facilities
|
5%
|
|
6%
|
|
|
30%
|
|
43%
|
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, except with biopharmaceutical companies.
The top five test ordering sites during the
three months ended March 31, 2018
and
2017
accounted for approximately
17%
and
35%
of our testing volumes, respectively. During the
three months ended March 31, 2018
, there were
no
customers that accounted for more than
10%
of our total revenue. During the
three months ended March 31, 2017
, there was
one
biopharmaceutical company which accounted for approximately
11%
of our total revenue.
We record deferred revenues (contract liabilities) when cash payments are received or due in advance of our performance, including amounts which are refundable.
Performance Obligations
:
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Biopharma Services
|
|
Clinical Services
|
|
Discovery Services
|
|
Performance Obligation Satisfaction and Revenue Recognition:
|
Performance obligations are satisfied at a point in time as the Company processes samples delivered by the customer. Project level activities, including study setup and project management, are satisfied over the life of the contract. Revenues are recognized at a point in time when the test results or other deliverables are reported to the customer. Project level fee revenue is recognized ratably over the life of the contract.
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|
Performance obligations are satisfied at a point in time when the tests are reported to the customer. Revenues are recognized at a point in time when the test results are reported to the ordering site.
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|
Performance obligations are satisfied over time and revenue is recognized using the time elapsed method as the Company delivers study results to the customers.
|
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Significant Payment Terms:
|
Monthly invoices at a contractual rate are generated as services are delivered for work completed during the prior month. Some contracts have prepayments prior to services being rendered that are recorded as deferred revenue.
|
|
The Company invoices at its list price or contractually negotiated price. Payments realized vary from amounts invoiced. Accordingly, the Company estimates the variable consideration it expects to collect.
|
|
As results are delivered, the invoices are generated based on contractual rates. Some contracts have prepayments prior to services being rendered that are recorded as deferred revenue.
|
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Nature of Services:
|
Biopharma testing services, study setup and study management
|
|
Clinical testing services
|
|
Discovery services
|
Remaining Performance Obligations
:
Services offered under the Biopharma and Discovery Services frequently take time to complete under their respective contacts. These times vary depending on specific contract arrangements like the length of the study in the case of Discovery Services and how samples are delivered to us for processing in the case of Biopharma Services. In the case of Clinical Services and
Discovery Services, the duration of performance obligation is less than
one year
. As of
March 31, 2018
the Company had
$27.4 million
in remaining performance obligations in the Biopharma Services area. We expect to recognize the remaining performance obligations over the next
two years
.
Practical Expedients
:
Our customer arrangements in Biopharma Services and Discovery Services do not contain any significant financing component (interest). We have not recognized the financing component in the case of Clinical Services, as the payment plans we may grant to our self-pay customers do not to exceed
six months
.
We do not incur any incremental costs to obtain or fulfill our customer contracts that require capitalization under the new revenue standard and have elected the practical expedient afforded by the new revenue standard to expense such costs as incurred.
We exclude from the measurement of the transaction price all taxes that we collect from customers that are assessed by governmental authorities and are both imposed on and concurrent with specific revenue-producing transactions.
Note 4. Assets and Liabilities Held for Sale
On March 22, 2018, our Board of Directors unanimously approved a plan to sell our India subsidiary, BioServe Biotechnologies (India) Private Limited to Reprocell, Inc., for cash consideration of
$1.5 million
to
$2.0 million
in the next
30
to
45 days
. On April 26, 2018, the sale closed for an all cash purchase price of
$1.9 million
, subject to downward adjustment of up to
$300,000
, based on a formula set forth in the purchase agreement, if the India subsidiary does not meet the specified revenue target.
At
March 31, 2018
, the assets and liabilities of the India subsidiary have been presented as being held for sale in our Consolidated Balance Sheets. The carrying value of the assets and liabilities held for sale of our India subsidiary approximates the fair value on
March 31, 2018
.
Assets and liabilities held for sale consist of the following at
March 31, 2018
:
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|
|
|
|
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|
|
Current assets held for sale:
|
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|
|
Cash and cash equivalents
|
|
$
|
49
|
|
|
Accounts receivable, net
|
|
319
|
|
|
Other current assets
|
|
228
|
|
|
Fixed assets, net
|
|
628
|
|
|
Goodwill
|
|
735
|
|
|
Other
|
|
99
|
|
|
Total current assets held for sale
|
|
$
|
2,058
|
|
|
|
|
|
|
Current liabilities held for sale:
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
209
|
|
|
Deferred rent and other
|
|
12
|
|
|
Total current liabilities held for sale
|
|
$
|
221
|
|
Note 5. Earnings Per Share
For purposes of this calculation, stock warrants, outstanding stock options and unvested restricted shares are considered common stock equivalents using the treasury stock method, and are the only such equivalents outstanding. For the three months ended March 31, 2018 and 2017, all common stock equivalents outstanding were anti-dilutive.
The following table summarizes equivalent units outstanding that were excluded from the earnings per share calculation because their effects were anti-dilutive (in thousands):
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|
|
|
|
|
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Three Months Ended March 31,
|
|
|
2018
|
|
2017
|
|
Common stock purchase warrants
|
10,055
|
|
|
6,608
|
|
|
Stock options
|
2,534
|
|
|
2,520
|
|
|
Restricted shares of common stock
|
683
|
|
|
68
|
|
|
|
13,272
|
|
|
9,196
|
|
Note 6. Term Note and Line of Credit
On March 22, 2017, we entered into a
two
year asset-based revolving line of credit agreement with Silicon Valley Bank (“SVB”). The 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)
80%
of eligible accounts receivable plus the lesser of
50%
of the net collectible value of third party accounts receivable or three (
3
) 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
1.50%
(
6.25%
at
March 31, 2018
) and matures on March 22, 2019. We also pay a fee of
0.25%
per year on the average unused portion of the ABL. At
March 31, 2018
, we have borrowed
$3.5 million
on the ABL, which is the maximum amount allowed based on eligible accounts receivable.
We concurrently entered into a
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.
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, March 31, 2018 and April 30, 2018, we were in violation of certain financial covenants. These covenant violations were waived on May 14, 2018 by SVB and PFG. The Company is in discussions with its lenders to modify the loans and reset the loan 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 (the “PFG Warrants”).
At
March 31, 2018
, the principal amount of the PFG Term Note of
$6,000,000
is due in 2020. Even though we received loan covenant waivers through April 30, 2018, future anticipated violations under the existing agreements and the requirement to raise capital requires us to present the PFG Term Note as a current liability.
Note 7. 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
.
At
March 31, 2018
,
693,161
shares remain available for future awards under the 2011 Plan and
134,546
shares remain available for future awards under the 2008 Plan. Effective April 9, 2018, the Company is no longer able to issue options from the 2008 Plan.
A summary of employee and non-employee stock option activity for the
three months ended March 31, 2018
is as follows:
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|
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|
|
|
|
|
|
|
|
Options Outstanding
|
|
Weighted-
Average
Remaining
Contractual
Term (in years)
|
|
Aggregate
Intrinsic
Value
(in thousands)
|
|
|
Number of
Shares
(in thousands)
|
|
Weighted-
Average
Exercise
Price
|
|
|
Outstanding January 1, 2018
|
2,844
|
|
|
$
|
7.00
|
|
|
6.96
|
|
$
|
4
|
|
|
Cancelled or expired
|
(310
|
)
|
|
5.13
|
|
|
|
|
|
|
Outstanding March 31, 2018
|
2,534
|
|
|
$
|
7.23
|
|
|
5.70
|
|
$
|
—
|
|
|
Exercisable March 31, 2018
|
1,749
|
|
|
$
|
9.02
|
|
|
4.30
|
|
$
|
—
|
|
On May 10, 2018, the Company granted employees options to purchase
661,000
shares of the Company’s common stock, including
350,000
options granted to our Chief Executive Officer, which are subject to certain performance conditions, as discussed in Note 14. The options have an exercise price of
$0.89
per share and vest over a period of
5 years
.
Aggregate intrinsic value represents the difference between the fair value of our common stock and the exercise price of outstanding, in-the-money options.
As of
March 31, 2018
, total unrecognized compensation cost related to non-vested stock options granted to employees was
$1,463,020
which we expect to recognize over the next
2.28
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. Forfeitures will be recorded when they occur. 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:
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2017
|
|
Volatility
|
73.57
|
%
|
|
Risk free interest rate
|
2.03
|
%
|
|
Dividend yield
|
0.00
|
%
|
|
Term (years)
|
6.00
|
|
|
Weighted-average fair value of options granted during the period
|
1.63
|
|
In May 2014, we issued
200,000
options to a Director with an exercise price of
$15.89
. See Note 12 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:
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2017
|
|
Volatility
|
77.41
|
%
|
|
Risk free interest rate
|
2.22
|
%
|
|
Dividend yield
|
0.00
|
%
|
|
Term (years)
|
7.14
|
|
Restricted stock awards have been granted to employees, directors and consultants as compensation for services. At
March 31, 2018
, there was
$155,911
of unrecognized compensation cost related to non-vested restricted stock granted to employees and directors; we expect to recognize the cost over
1.29
years.
The following table summarizes the activities for our non-vested restricted stock awards for the
three months ended March 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested Restricted Stock Awards
|
|
|
Number of
Shares
(in thousands)
|
|
Weighted-Average Grant Date Fair Value
|
|
Non-vested at January 1, 2018
|
91
|
|
|
$
|
4.21
|
|
|
Vested
|
(2
|
)
|
|
6.30
|
|
|
Cancelled
|
(20
|
)
|
|
$
|
6.50
|
|
|
Non-vested at March 31, 2018
|
69
|
|
|
$
|
3.48
|
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2018
|
|
2017
|
|
Cost of revenues
|
$
|
91
|
|
|
$
|
59
|
|
|
Research and development
|
15
|
|
|
50
|
|
|
General and administrative
|
158
|
|
|
300
|
|
|
Sales and marketing
|
10
|
|
|
26
|
|
|
Total stock-based compensation
|
$
|
274
|
|
|
$
|
435
|
|
Note 8. Warrants
There was no warrant activity during the
three months ended March 31, 2018
. The following table presents warrants outstanding at March 31, 2018 (in thousands, except exercise price):
|
|
|
|
|
|
|
|
|
|
|
|
Issued With / For
|
Exercise
Price
|
|
|
Warrants Outstanding March 31, 2018
|
|
Non-Derivative Warrants:
|
|
|
|
|
|
Financing
|
$
|
10.00
|
|
|
|
243
|
|
|
Financing
|
15.00
|
|
|
|
276
|
|
|
2015 Offering
|
5.00
|
|
|
|
3,450
|
|
|
Total non-derivative warrants
|
$
|
6.00
|
|
C
|
|
3,969
|
|
|
Derivative Warrants:
|
|
|
|
|
|
2016 Offerings
|
2.25
|
|
A
|
|
1,968
|
|
|
2017 Debt
|
2.82
|
|
B
|
|
443
|
|
|
2017 Offering
|
2.35
|
|
A
|
|
3,500
|
|
|
2017 Offering
|
2.50
|
|
A
|
|
175
|
|
|
Total derivative warrants
|
2.36
|
|
C
|
|
6,086
|
|
|
Total
|
$
|
3.80
|
|
C
|
|
10,055
|
|
|
|
|
|
A
|
These warrants are subject to fair value accounting and contain a contingent net cash settlement feature. See Note 9.
|
|
|
|
|
B
|
These warrants are subject to fair value accounting until the number of shares issuable upon the exercise of the warrants becomes fixed. See Note 9.
|
|
|
|
|
C
|
Weighted-average exercise prices are as of
March 31, 2018
.
|
Note 9. Fair Value of Warrants
The following table summarizes the derivative warrant activity subject to fair value accounting for the
three months ended March 31, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued with/for
|
Fair value of warrants
outstanding as of
December 31, 2017
|
|
Change in fair
value of warrants
|
|
Fair value of warrants
outstanding as of
March 31, 2018
|
|
2016 Offerings
|
$
|
1,929
|
|
|
$
|
27
|
|
|
$
|
1,956
|
|
|
2017 Debt
|
501
|
|
|
(78
|
)
|
|
423
|
|
|
2017 Offering
|
1,973
|
|
|
(641
|
)
|
|
1,332
|
|
|
|
$
|
4,403
|
|
|
$
|
(692
|
)
|
|
$
|
3,711
|
|
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 or exercise during the
three months ended March 31, 2018
and
2017
, and at
March 31, 2018
and
December 31, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 Offerings
|
As of March 31, 2018
|
|
As of December 31, 2017
|
|
Exercised During the Three Months Ended March 31, 2017
|
|
Exercise price
|
$
|
2.25
|
|
|
$
|
2.25
|
|
|
$
|
2.25
|
|
|
Expected life (years)
|
3.83
|
|
|
4.08
|
|
|
4.79
|
|
|
Expected volatility
|
100.00
|
%
|
|
73.44
|
%
|
|
76.29
|
%
|
|
Risk-free interest rate
|
2.39
|
%
|
|
2.11
|
%
|
|
1.94
|
%
|
|
Expected dividend yield
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 Debt
|
As of March 31, 2018
|
|
As of December 31, 2017
|
|
Issued During the Three Months Ended March 31, 2017
|
|
Exercise price
|
$
|
2.82
|
|
|
$
|
2.82
|
|
|
$
|
2.82
|
|
|
Expected life (years)
|
5.98
|
|
|
6.22
|
|
|
7.00
|
|
|
Expected volatility
|
73.43
|
%
|
|
74.18
|
%
|
|
74.61
|
%
|
|
Risk-free interest rate
|
2.56
|
%
|
|
2.33
|
%
|
|
2.22
|
%
|
|
Expected dividend yield
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
|
|
|
|
|
|
|
|
|
|
2017 Offering
|
As of March 31, 2018
|
|
As of December 31, 2017
|
|
Exercise price
|
$
|
2.36
|
|
|
2.36
|
|
|
Expected life (years)
|
1.19
|
|
|
1.43
|
|
|
Expected volatility
|
76.78
|
%
|
|
77.55
|
%
|
|
Risk-free interest rate
|
2.09
|
%
|
|
1.83
|
%
|
|
Expected dividend yield
|
—
|
%
|
|
—
|
%
|
Note 10. 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 ASC 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
|
Total
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Warrant liability
|
$
|
3,711
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,711
|
|
|
Note payable
|
139
|
|
|
—
|
|
|
—
|
|
|
139
|
|
|
|
$
|
3,850
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
Total
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Warrant liability
|
$
|
4,403
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,403
|
|
|
Note payable
|
156
|
|
|
—
|
|
|
—
|
|
|
156
|
|
|
|
$
|
4,559
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,559
|
|
|
|
|
|
|
|
|
|
|
At
March 31, 2018
and
December 31, 2017
, the Company had a note payable to VenturEast from a prior acquisition. The ultimate payment to VenturEast will be the fair value of
84,278
shares of our common stock at the time of payment. During the
three months ended March 31, 2018
and
2017
, we recognized a gain of approximately
$17,000
and a loss of approximately
$232,000
, respectively, due to changes in our stock price.
At
March 31, 2018
, 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. In accordance with derivative accounting for warrants, we calculated the fair value of warrants and the assumptions used are described in Note 9, “Fair Value of Warrants.” During the
three months ended March 31, 2018
, we recognized a gain of approximately
$692,000
on the derivative warrants due to changes in our stock price. During the
three months ended March 31, 2017
, we recorded a loss of approximately
$7,294,000
on the derivative warrants due to changes in our stock price.
Realized and unrealized gains and losses related to the change in fair value of the VenturEast note and warrant liability are included in other income (expense) on the Consolidated Statements of Operations and Other Comprehensive Loss.
The following table summarizes the activity of the note payable to VenturEast and of our derivative warrants, which was measured at fair value using Level 3 inputs (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Note Payable
|
|
Warrant
|
|
|
to VenturEast
|
|
Liability
|
|
Fair value at December 31, 2017
|
$
|
156
|
|
|
$
|
4,403
|
|
|
Change in fair value
|
(17
|
)
|
|
(692
|
)
|
|
Fair value at March 31, 2018
|
$
|
139
|
|
|
$
|
3,711
|
|
Note 11. 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”).
The agreement requires aggregate capital contributions by us of up to
$6.0 million
, of which
$2.0 million
has been paid to date. 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 takes 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.
Our share of the JV’s net loss was approximately
$2,000
and
$12,000
for the
three months ended March 31, 2018
and
2017
, respectively, and is included in research and development expense on the Consolidated Statements of Operations. We have a net receivable due from the JV of approximately
$10,000
at
March 31, 2018
, which is included in other assets in the Consolidated Balance Sheets.
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 JV 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 12. Related Party Transactions
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
. Total expenses for each of the
three months ended March 31, 2018
and
2017
were
$30,000
. As of
March 31, 2018
, we owed EDI
$20,000
.
Pursuant to a consulting and advisory agreement that ended December 31, 2016, 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 the consulting agreement for the
three months ended March 31, 2018
and
2017
was
$0
and
$25,625
, respectively.
Note 13. Contingencies
On April 5, 2018 and April 12, 2018, purported stockholders of the Company filed nearly identical putative class action lawsuits in the U.S. District Court for the District of New Jersey, against the Company, Panna L. Sharma, John A. Roberts, and Igor Gitelman, captioned
Ben Phetteplace v. Cancer Genetics, Inc. et al.
, No. 2:18-cv-05612 and
Ruo Fen Zhang v. Cancer Genetics, Inc. et al
., No. 2:18-06353, respectively. The complaints allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 based on allegedly false and misleading statements and omissions regarding our business, operational, and financial results. The lawsuits seek, among other things, unspecified compensatory damages in connection with purchases of our stock between March 23, 2017 and April 2, 2018, as well as interest, attorneys’ fees, and costs. The Company is unable to predict the ultimate outcome of these actions and therefore cannot estimate possible losses or ranges of losses, if any.
Note 14. Subsequent Events
On April 26, 2018, we entered into a share purchase agreement with Reprocell Incorporated pursuant to which the Company sold its shares in its India subsidiary in an all cash transaction. The purchase price was
$1.9 million
, subject to downward adjustment by up to
$300,000
, based on a formula set forth in the purchase agreement, if the India subsidiary does not meet the specified revenue target.
Effective April 30, 2018, John A. Roberts was promoted to Chief Executive Officer and President of the Company. On May 10, 2018, the Board of Directors increased Mr. Roberts’ salary to
$350,000
per year and approved an award of
350,000
options to purchase common stock to Mr. Roberts, with the vesting of such options subject to satisfaction of certain performance conditions consistent with the Company’s current business plan and time vesting.
On May 14, 2018, the Company received waivers from its senior lenders for its failure to comply with certain financial covenants for the months of December 31, 2017, January 31, 2018, February 28, 2018, March 31, 2018 and April 30, 2018. The Company concurrently amended its debt agreements with SVB and PFG, respectively; the new agreements require the Company to raise
$2,500,000
from the sale of its equity securities or the issuance of subordinated debt (in the case of the agreement with SVB, to investors acceptable to SVB) by June 30, 2018. In addition, as a condition of the waiver by PFG, the Company anticipates entering into an amendment to the PFG Warrants to reduce the exercise price thereof.