Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
As used herein, the “Company,” “CGI,” “we,” “us,” “our” or similar terms, refer to Cancer Genetics, Inc. and its wholly owned subsidiaries at
September 30, 2018
: Cancer Genetics Italia, S.r.l., Gentris, LLC, 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 our annual report on Form 10-K filed with the SEC on April 2, 2018. This MD&A may contain forward-looking statements that involve risks and uncertainties. See “Cautionary Note Regarding Forward-Looking Statements” below.
Overview
We are an emerging leader in 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. 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 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. 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.
Net cash used in operating activities was
$11.4 million
and
$10.2 million
for the
nine months ended September 30, 2018
and
2017
, respectively, and the Company had unrestricted cash and cash equivalents of
$1.2 million
at
September 30, 2018
, a reduction from
$9.5 million
at December 31, 2017. The Company has negative working capital at
September 30, 2018
of
$15.2 million
.
The Company currently requires a significant amount of additional capital to fund operations and pay its accounts payable, and its ability to continue as a going concern is dependent upon its ability to raise such additional capital and achieve profitability. If the Company is not able to close the Merger and Private Placement (see Merger Agreement just below) or raise such additional capital on a timely basis or on favorable terms, the Company may need to scale back or, in extreme cases, discontinue its operations or liquidate its assets.
While we have implemented an aggressive consolidation strategy to reduce our operating costs in 2018, including the closure of our California laboratory and facility, we expect to continue to incur significant 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, and
$16.6 million
for the
nine months ended September 30, 2018
, which included restructuring charges of $2.1 million associated with the closing of the California operations and $0.9 million costs associated with strategic financing, merger and acquisition options.
As of
September 30, 2018
, we had an accumulated deficit of
$154.0 million
.
Merger Agreement
On September 18, 2018, we entered into an agreement and plan of merger (the “Merger Agreement”) with NovellusDx, Ltd., a privately-held company formed under the law of the State of Israel (“NDX”), in regards to Wogolos Ltd., our wholly owned subsidiary company formed under the laws of the State of Israel. Subject to satisfaction or waiver of the conditions set forth in the Merger Agreement, Wogolos Ltd. will merge (the “Merger”) with and into NDX, with NDX becoming a wholly owned subsidiary of us and the surviving company.
At the effective time of the Merger, all of NDX’s share capital will be converted into the right to receive an aggregate number of shares of our common stock equal to
49%
of the fully-diluted aggregate number of shares of the Company immediately following the Merger, including shares issuable upon the conversion of the Convertible Note to Iliad Research (the “Iliad Note”) described in Note 6 and shares issuable upon the exercise of the Company’s options and warrants, determined using the treasury stock method. Shares issuable under the Private Placement described in the following paragraph will be excluded from this calculation.
Private Placement
On September 18, 2018, we also entered into a securities purchase agreement (the “Purchase Agreement”) pursuant to which we agreed to sell and issue, in a private placement, a total of
8,509,891
shares of our common stock and warrants to purchase an aggregate of up to approximately
6,382,418
shares of our common stock, to the purchasers thereunder, all of whom are current NDX shareholders, for an aggregate purchase price of approximately
$8.6 million
, with the shares and warrants being sold together in a fixed combination of
one
share and
one
warrant to purchase
75%
of a share of our common stock, at a price of
$1.01
per share and related warrant (the “Private Placement”). The closing of the Private Placement is conditional upon, and will occur immediately after, the Merger. In addition, the Company and NDX may continue to solicit additional subscriptions pursuant to this Purchase Agreement prior to the closing of the Private Placement.
The warrants issued under the Private Placement will be exercisable for
five years
beginning on the closing date of the Merger at an initial exercise price of
$1.01
per share, subject to adjustment for certain customary circumstances. The warrants can be exercised on a cashless basis.
Advance from NDX
In connection with the signing of the Merger Agreement, on September 18, 2018, we entered into a credit agreement (the “Credit Agreement”) with NDX, pursuant to which NDX agreed to loan us up to
$2,300,000
as discussed in Note 6.
Acquisition
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 Company 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 measurement period expired on August 15, 2018 and the final valuation was deemed consistent with the preliminary valuation, specifically concerning lab supplies, deferred revenue and deferred taxes. On August 15, 2018, the escrowed shares were released. Subsequent to the measurement period expiration, a review of deferred revenue surfaced a refinement in contract completion estimate of $0.2 million associated with the acquisition valuation and accordingly the revenue reduction was recorded in the statement of operations for the
three months ended September 30, 2018
.
Disposal
On April 26, 2018, we sold our India subsidiary, BioServe Biotechnologies (India) Private Limited (“BioServe”) to Reprocell, Inc., for
$1.9 million
, including
$1.6 million
in cash at closing and up to an additional
$300,000
, which was contingent upon the India subsidiary meeting a specified revenue target through August 31, 2018. During the
three months ended September 30, 2018
, the Company reduced the contingent consideration to
$213,000
, which is recorded in other current assets in our Consolidated Balance Sheet at September 30, 2018. As a result of this transaction, we recognized a loss of approximately
$87,000
and
$78,000
on the disposal of BioServe during the
three and nine months ended September 30, 2018
, respectively, which is included in other income (expense) in our Consolidated Statements of Operations and Other Comprehensive Loss. In November 2018, we received the contingent consideration.
Key Factors Affecting our Results of Operations and Financial Condition
Our overall long-term growth plan is predicated on our ability to develop or acquire technology solutions to accelerate the penetration into the Biopharma community to achieve more revenue supporting clinical trials and develop and commercialize unique or proprietary services and tests to achieve sustainable organic growth. Our unique and proprietary tests include CGH microarrays, NGS panels, and DNA FISH probes. We continue to develop additional unique and 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 generated through our Biopharma Services, Discovery Services and Clinical Services. 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. Our 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.
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 their oncology patients or as part of a clinical trial sponsored by a pharmaceutical or biotechnology company in which the patient is being enrolled.
During the
three months ended September 30, 2018
, there was
one
biopharmaceutical company that accounted for approximately
10%
of our total revenue. During the
three months ended September 30, 2017
, there was
one
biopharmaceutical company that accounted for approximately
11%
of our total revenue.
During the
nine months ended September 30, 2018
, there were
no
customers that accounted for more than
10%
of our total revenue. During the
nine months ended September 30, 2017
, there was
one
biopharmaceutical company that accounted for approximately
11%
of our total revenue.
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
three months ended September 30, 2018
, Medicare and other third party payors accounted for approximately
8%
and
18%
of our total revenue, respectively. For the
nine months ended September 30, 2018
, Medicare and other third party payors accounted for approximately
10%
and
19%
of our total revenue, respectively. The reduction in this concentration of revenue is part of the planned transitions the Company is making in 2018 to reduce cost and attempt to improve its operating metrics.
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, 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, including other consolidations of operations and further reductions in headcount.
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. 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 only modest 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.
Restructuring Costs.
In alignment with our strategic plan to migrate our California operations to our New Jersey and North Carolina locations and to permanently close our California laboratory, we experienced various expenses associated with exiting a facility, transition of lab equipment and supplies, disposal of assets and termination benefits associated with displaced employees. We consider this expense to be one time in nature and subject to board approved strategic initiatives.
Merger Costs
. In the pursuit of various strategic options for the Company, legal and other professional costs are incurred while evaluating, negotiating, executing and implementing merger and acquisition alternatives. We expect this expense to be one time in nature and yet to continue into the near term as the existing merger agreement with NovellusDX, Ltd. moves forward to final consummation.
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
Three Months Ended September 30, 2018
and
2017
The following table sets forth certain information concerning our results of operations for the periods shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Change
|
(dollars in thousands)
|
2018
|
|
2017
|
|
$
|
|
%
|
Revenue
|
$
|
5,940
|
|
|
$
|
8,028
|
|
|
$
|
(2,088
|
)
|
|
(26
|
)%
|
Cost of revenues
|
4,654
|
|
|
4,588
|
|
|
66
|
|
|
1
|
%
|
Research and development expenses
|
692
|
|
|
981
|
|
|
(289
|
)
|
|
(29
|
)%
|
General and administrative expenses
|
5,004
|
|
|
4,346
|
|
|
658
|
|
|
15
|
%
|
Sales and marketing expenses
|
1,280
|
|
|
1,301
|
|
|
(21
|
)
|
|
(2
|
)%
|
Restructuring costs
|
1,418
|
|
|
—
|
|
|
1,418
|
|
|
N/A
|
|
Merger costs
|
890
|
|
|
—
|
|
|
890
|
|
|
N/A
|
|
Loss from operations
|
(7,998
|
)
|
|
(3,188
|
)
|
|
(4,810
|
)
|
|
151
|
%
|
Interest income (expense)
|
(465
|
)
|
|
(340
|
)
|
|
(125
|
)
|
|
37
|
%
|
Change in fair value of acquisition note payable
|
(13
|
)
|
|
105
|
|
|
(118
|
)
|
|
(112
|
)%
|
Change in fair value of warrant liability
|
12
|
|
|
2,790
|
|
|
(2,778
|
)
|
|
(100
|
)%
|
Other income (expense)
|
(55
|
)
|
|
—
|
|
|
(55
|
)
|
|
N/A
|
|
Net (loss)
|
$
|
(8,519
|
)
|
|
$
|
(633
|
)
|
|
$
|
(7,886
|
)
|
|
1,246
|
%
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
2018
|
|
2017
|
Reconciliation of net (loss):
|
|
|
|
|
Net (loss)
|
|
$
|
(8,519
|
)
|
|
$
|
(633
|
)
|
Adjustments:
|
|
|
|
|
Change in fair value of acquisition note payable
|
|
13
|
|
|
(105
|
)
|
Change in fair value of warrant liability
|
|
(12
|
)
|
|
(2,790
|
)
|
Adjusted net (loss)
|
|
$
|
(8,518
|
)
|
|
$
|
(3,528
|
)
|
Reconciliation of basic net (loss) per share:
|
|
|
|
|
Basic net (loss) per share
|
|
$
|
(0.31
|
)
|
|
$
|
(0.03
|
)
|
Adjustments to net (loss)
|
|
—
|
|
|
(0.13
|
)
|
Adjusted basic net (loss) per share
|
|
$
|
(0.31
|
)
|
|
$
|
(0.16
|
)
|
Basic weighted-average shares outstanding
|
|
27,370
|
|
|
21,577
|
|
Reconciliation of diluted net (loss) per share:
|
|
|
|
|
Diluted net (loss) per share
|
|
$
|
(0.31
|
)
|
|
$
|
(0.15
|
)
|
Adjustments to net (loss)
|
|
—
|
|
|
(0.01
|
)
|
Adjusted diluted net (loss) per share
|
|
$
|
(0.31
|
)
|
|
$
|
(0.16
|
)
|
Diluted weighted-average shares outstanding
|
|
27,370
|
|
|
22,359
|
|
Adjusted net (loss) increased 141% to
$8.5 million
during the
three months ended September 30, 2018
, from an adjusted net (loss) of
$3.5 million
during the
three months ended September 30, 2017
. Adjusted basic net (loss) per share increased 94% to
$0.31
during the
three months ended September 30, 2018
, from
$0.16
during the
three months ended September 30, 2017
. Adjusted diluted net (loss) per share increased 94% to
$0.31
during the
three months ended September 30, 2018
, from
$0.16
during the
three months ended September 30, 2017
.
Revenue
The breakdown of our revenue is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Change
|
|
2018
|
|
2017
|
|
|
|
|
(dollars in thousands)
|
$
|
|
%
|
|
$
|
|
%
|
|
$
|
|
%
|
Biopharma Services
|
$
|
3,850
|
|
|
65
|
%
|
|
$
|
4,168
|
|
|
52
|
%
|
|
$
|
(318
|
)
|
|
(8
|
)%
|
Clinical Services
|
1,555
|
|
|
26
|
%
|
|
2,880
|
|
|
36
|
%
|
|
(1,325
|
)
|
|
(46
|
)%
|
Discovery Services
|
535
|
|
|
9
|
%
|
|
980
|
|
|
12
|
%
|
|
(445
|
)
|
|
(45
|
)%
|
Total Revenue
|
$
|
5,940
|
|
|
100
|
%
|
|
$
|
8,028
|
|
|
100
|
%
|
|
$
|
(2,088
|
)
|
|
(26
|
)%
|
Revenue decreased
26%
, or
$2.1 million
, to
$5.9 million
for the
three months ended September 30, 2018
, from
$8.0 million
for the
three months ended September 30, 2017
, principally due to a decrease in Discovery Services of
$0.4 million
, a decrease in our Biopharma Services of
$0.3 million
and a decline in Clinical Services revenue of
$1.3 million
.
Revenue from Biopharma Services decreased
8%
, or
$0.3 million
, to
$3.9 million
for the
three months ended September 30, 2018
, from
$4.2 million
for the
three months ended September 30, 2017
as a result of a shift in the portfolio due to the completion and delivery of two large projects offset by the start-up of multiple smaller value contracts in the comparable periods. Revenue from Clinical Services customers decreased by
$1.3 million
, or
46%
, compared to the
three months ended September 30, 2017
, due to lower realization on third party and direct billings and the effects of the adoption of ASC 606, which is directly the result of actual cash collection trends. Revenue from Discovery Services decreased
45%
, or
$0.4 million
, during the
three months ended September 30, 2018
primarily due to an out of measurement period adjustment of $0.2 million offsetting the contract obligations liability associated with the vivoPharm acquisition and a corresponding 2018 impact of $0.2 million of resulting estimate updates of contract obligations for the remaining portfolio of contracts.
Cost of Revenues
Cost of revenues increased
1%
, or
$0.1 million
, for the
three months ended September 30, 2018
, principally due to increases in payroll and benefit costs and shipping costs of $0.1 million and $0.2 million, respectively, offset by a decline in lab and clinical supplies costs of $0.2 million. Gross margin decreased to
22%
during the
three months ended September 30, 2018
down from
43%
for the
three months ended September 30, 2017
directly related to lower revenue in the comparable periods, while our labor costs are relatively fixed.
Operating Expenses
Research and development expenses decreased
29%
, or
$0.3 million
, to
$0.7 million
for the
three months ended September 30, 2018
, from
$1.0 million
for the
three months ended September 30, 2017
, principally due to a $0.2 million decrease in payroll and benefit costs due to the shift in our staffing costs as we reduced the amount of research and development initiatives and concentrated our staff on the delivery of our services. Given the current financial condition of the Company, we are limiting our spending for research and development expenses to our most promising projects.
General and administrative expenses increased
15%
, or
$0.7 million
, to
$5.0 million
for the
three months ended September 30, 2018
, from
$4.3 million
for the
three months ended September 30, 2017
principally due to a full quarter of expenses for vivoPharm as it was acquired on August 15, 2017.
Sales and marketing expenses increased
2%
, or
$21,000
, to
$1.3 million
for the
three months ended September 30, 2018
, from
$1.3 million
for the
three months ended September 30, 2017
.
Restructuring costs of
$1.4 million
were incurred for the
three months ended September 30, 2018
primarily associated with the closure of the California laboratory and operations.
Merger costs of
$0.9 million
were incurred for the
three months ended September 30, 2018
principally due to the evaluation and pursuit of strategic options including the merger agreement with NovellusDx.
Interest Income (Expense)
Net interest expense increased
37%
, or
$0.1 million
, to
$0.5 million
during the
three months ended September 30, 2018
due to interest incurred on the Convertible Note as well as increased borrowings on our ABL, debt modification costs incurred and paying interest at the default rate.
Change in Fair Value of Acquisition Note Payable
The change in fair value of acquisition note payable resulted in approximately
$13,000
of non-cash expense and
$105,000
of non-cash income for the
three months ended September 30, 2018
and
2017
, respectively, as a consequence of a changes in our stock price.
Change in Fair Value of Warrant Liability
Changes in fair value of some of our common stock warrants may impact our quarterly 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. As a result of changes in our stock price and volatility expectations, we recognized non-cash income of
$12,000
and
$2.8 million
for the
three months ended September 30, 2018
and
2017
, respectively. In the future, if our stock price increases, with all other factors being equal, we would record a non-cash charge as a result of changes in the fair value of our common stock warrants. Alternatively, if the stock price decreases, with all other factors being equal, we may record non-cash income.
Nine Months Ended September 30, 2018
and
2017
The following table sets forth certain information concerning our results of operations for the periods shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
Change
|
(dollars in thousands)
|
2018
|
|
2017
|
|
$
|
|
%
|
Revenue
|
$
|
20,643
|
|
|
$
|
21,598
|
|
|
$
|
(955
|
)
|
|
(4
|
)%
|
Cost of revenues
|
14,589
|
|
|
12,831
|
|
|
1,758
|
|
|
14
|
%
|
Research and development expenses
|
2,046
|
|
|
3,080
|
|
|
(1,034
|
)
|
|
(34
|
)%
|
General and administrative expenses
|
14,950
|
|
|
11,352
|
|
|
3,598
|
|
|
32
|
%
|
Sales and marketing expenses
|
4,212
|
|
|
3,437
|
|
|
775
|
|
|
23
|
%
|
Restructuring costs
|
2,151
|
|
|
—
|
|
|
2,151
|
|
|
N/A
|
|
Merger costs
|
890
|
|
|
—
|
|
|
890
|
|
|
N/A
|
|
Loss from operations
|
(18,195
|
)
|
|
(9,102
|
)
|
|
(9,093
|
)
|
|
100
|
%
|
Interest income (expense)
|
(1,261
|
)
|
|
(760
|
)
|
|
(501
|
)
|
|
66
|
%
|
Change in fair value of acquisition note payable
|
68
|
|
|
(114
|
)
|
|
182
|
|
|
(160
|
)%
|
Change in fair value of warrant liability
|
2,858
|
|
|
(3,927
|
)
|
|
6,785
|
|
|
(173
|
)%
|
Other income (expense)
|
(78
|
)
|
|
(46
|
)
|
|
(32
|
)
|
|
70
|
%
|
Loss before income taxes
|
(16,608
|
)
|
|
(13,949
|
)
|
|
(2,659
|
)
|
|
19
|
%
|
Income tax provision (benefit)
|
—
|
|
|
(970
|
)
|
|
970
|
|
|
(100
|
)%
|
Net (loss)
|
$
|
(16,608
|
)
|
|
$
|
(12,979
|
)
|
|
$
|
(3,629
|
)
|
|
28
|
%
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
2017
|
Reconciliation of net (loss):
|
|
|
|
|
Net (loss)
|
|
$
|
(16,608
|
)
|
|
$
|
(12,979
|
)
|
Adjustments:
|
|
|
|
|
Change in fair value of acquisition note payable
|
|
(68
|
)
|
|
114
|
|
Change in fair value of warrant liability
|
|
(2,858
|
)
|
|
3,927
|
|
Adjusted net (loss)
|
|
$
|
(19,534
|
)
|
|
$
|
(8,938
|
)
|
Reconciliation of basic and diluted net (loss) per share:
|
|
|
|
|
Basic and diluted net (loss) per share
|
|
$
|
(0.61
|
)
|
|
$
|
(0.65
|
)
|
Adjustments to net (loss)
|
|
(0.11
|
)
|
|
0.20
|
|
Adjusted basic and diluted net (loss) per share
|
|
$
|
(0.72
|
)
|
|
$
|
(0.45
|
)
|
Basic and diluted weighted-average shares outstanding
|
|
27,156
|
|
|
20,059
|
|
Adjusted net (loss) increased 119% to
$19.5 million
during the
nine months ended September 30, 2018
, up from an adjusted net (loss) of
$8.9 million
during the
nine months ended September 30, 2017
. Adjusted basic and diluted net (loss) per share increased 60% to
$0.72
during the
nine months ended September 30, 2018
from
$0.45
during the
nine months ended September 30, 2017
.
Revenues
The breakdown of our revenue for the
nine months ended September 30, 2018
and
2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
Change
|
|
2018
|
|
2017
|
|
|
|
|
(dollars in thousands)
|
$
|
|
%
|
|
$
|
|
%
|
|
$
|
|
%
|
Biopharma Services
|
11,099
|
|
|
54
|
%
|
|
$
|
11,175
|
|
|
52
|
%
|
|
$
|
(76
|
)
|
|
(1
|
)%
|
Clinical Services
|
6,019
|
|
|
29
|
%
|
|
8,887
|
|
|
41
|
%
|
|
(2,868
|
)
|
|
(32
|
)%
|
Discovery Services
|
3,525
|
|
|
17
|
%
|
|
1,536
|
|
|
7
|
%
|
|
1,989
|
|
|
129
|
%
|
Total Revenue
|
$
|
20,643
|
|
|
100
|
%
|
|
$
|
21,598
|
|
|
100
|
%
|
|
$
|
(955
|
)
|
|
(4
|
)%
|
Revenue decreased
4%
, or
$1.0 million
, to
$20.6 million
for the
nine months ended September 30, 2018
, from
$21.6 million
for the
nine months ended September 30, 2017
, principally due to an decrease in Clinical Services of
$2.9 million
, partially offset by an increase in Discovery Services of
$2.0 million
.
Revenue from Biopharma Services decreased
1%
, or
$0.1 million
, to
$11.1 million
for the
nine months ended September 30, 2018
, from
$11.2 million
for the
nine months ended September 30, 2017
due to the completion and delivery of two large projects offset by the start-up of multiple smaller value contracts in the comparable periods. This is in addition to a shift of volume to our North Carolina location from New Jersey which in turn has freed up capacity to absorb the forthcoming volume from our California location due to its closing at the end of the third quarter this year. Revenue from Clinical Services customers decreased by
$2.9 million
, or
32%
, for the
nine months ended September 30, 2018
due to.three quarters of refined experience in recognizing revenue under ASC 606 within collectability constraints. Revenue from Discovery Services increased
129%
, or
$2.0 million
, during the
nine months ended September 30, 2018
due to our acquisition of vivoPharm in August 2017, offset, in part, by a decline in revenue reported from our India subsidiary, due to its sale in April 2018 and an out of measurement period adjustment of $0.2 million offsetting the contract obligations liability associated with the vivoPharm acquisition and a corresponding 2018 impact of $0.2 million of resulting estimate updates of contract obligations for the remaining portfolio of contracts.
Cost of Revenues
Cost of revenues increased
$1.8 million
to
$14.6 million
for the
nine months ended September 30, 2018
from
$12.8 million
for the
nine months ended September 30, 2017
, principally due to increased payroll and benefit costs of $1.1 million and increased shipping costs of $0.8 million. Gross margin declined to
29%
during the
nine months ended September 30, 2018
from
41%
during the
nine months ended September 30, 2017
, directly related to lower revenue in the comparable periods, while our labor costs are relatively fixed. This decline also encompasses the incremental costs associated with the vivoPharm operations acquired in August 2017 now consolidated into the Company’s results.
Operating Expenses
Research and development expenses decreased
34%
, or
$1.0 million
, to
$2.0 million
for the
nine months ended September 30, 2018
, from
$3.1 million
for the
nine months ended September 30, 2017
, principally due to reduced payroll and benefit costs of $1.0 million due to the shift in our staffing costs as we reduced the amount of research and development initiatives and concentrated our staff on the delivery of our services. Given the current financial condition of the Company, we are limiting our spending for research and development expenses to our most promising projects.
General and administrative expenses increased
32%
, or
$3.6 million
, to
$15.0 million
for the
nine months ended September 30, 2018
, from
$11.4 million
for the
nine months ended September 30, 2017
, principally due to the incremental costs associated with the vivoPharm operations acquired in August 2017 now consolidated into the Company’s results.. Other increases include approximately $0.5 million of severance expense incurred in the first quarter of 2018, professional service fees of $1.2 million primarily related to our compliance requirements to adopt ASC 606 and our recent financing activities. Our bad debt expense increased $0.7 million, primarily due to accounts receivable incurred in the prior year now being deemed to be uncollectible. Taxes and insurance costs increased $0.3 million, primarily due to a net increase in Delaware franchise taxes of $0.2 million. Depreciation and amortization also increased by $0.2 million, primarily due to the additional intangibles and fixed assets acquired in August 2017 as part of the vivoPharm acquisition.
Sales and marketing expenses increased
23%
, or
$0.8 million
, to
$4.2 million
for the
nine months ended September 30, 2018
, from
$3.4 million
for the
nine months ended September 30, 2017
, principally due incremental costs associated with the vivoPharm operations acquired in August 2017 now consolidated into the Company’s results.
Restructuring costs of
$2.2 million
were incurred for the
nine months ended September 30, 2018
primarily associated with the closure of the California laboratory and operations.
Merger costs of
$0.9 million
were incurred for the
nine months ended September 30, 2018
principally due to the evaluation and pursuit of strategic options including the merger agreement with NovellusDx.
Interest Income (Expense)
Net interest expense increased
66%
, or
$0.5 million
, due to increased borrowings and a higher effective interest rate on the debt we refinanced in late March 2017 and interest incurred on the Convertible Note. We also incurred debt modification costs and paid interest at the default rate.
Change in Fair Value of Acquisition Note Payable
The change in fair value of note payable resulted in
$68,000
in non-cash income for the
nine months ended September 30, 2018
, as compared to non-cash expense of
$0.1 million
for the
nine months ended September 30, 2017
. The fair value of the note decreased during the
nine months ended September 30, 2018
as a consequence of a decrease in our stock price.
Change in Fair Value of Warrant Liability
Changes in fair value of some of our common stock warrants may impact our quarterly 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. As a result of changes in our stock price and our volatility expectations, we recognized non-cash income of
$2.9 million
for the
nine months ended September 30, 2018
due to decrease in our stock price, as opposed to a non-cash charge of
$3.9 million
during the
nine months ended September 30, 2017
that resulted from an increase in our stock price. 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.
Income Taxes
During the
nine months ended September 30, 2017
, we received approximately
$1.0 million
of net proceeds from the sale of state NOL’s and state research and development credits.
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. On April 26, 2018, we sold our India subsidiary, BioServe Biotechnologies (India) Private Limited (“BioServe”) to Reprocell, Inc., for
$1.9 million
, including
$1.6 million
in cash at closing and up to an additional
$300,000
, which was contingent upon the India subsidiary meeting a specified revenue target through August 31, 2018. During the
three months ended September 30, 2018
, the Company reduced the contingent consideration to
$213,000
In general, our primary uses of cash are providing for operating expenses, working capital purposes and servicing debt.
Cash Flows
Our net cash flow from operating, investing and financing activities for the periods below were as follows:
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
(in thousands)
|
2018
|
|
2017
|
Cash provided by (used in):
|
|
|
|
Operating activities
|
$
|
(11,439
|
)
|
|
$
|
(10,249
|
)
|
Investing activities
|
720
|
|
|
(2,121
|
)
|
Financing activities
|
2,356
|
|
|
7,675
|
|
Effect of foreign currency exchange rates on cash and cash equivalents
|
28
|
|
|
—
|
|
Net increase (decrease) in cash and cash equivalents
|
$
|
(8,335
|
)
|
|
$
|
(4,695
|
)
|
We had cash and cash equivalents and restricted cash of
$1.6 million
at
September 30, 2018
, and
$9.9 million
at
December 31, 2017
.
The
$8.3 million
decrease in cash and cash equivalents for the
nine months ended September 30, 2018
, principally resulted from net cash used in operations of
$11.4 million
and net repayments of borrowings on our ABL of $1.4 million, offset in part by net proceeds from the sale of our India subsidiary of $1.6 million and net proceeds received from the Convertible Note and Advance from NovellusDx, Ltd of $2.5 million and $1.5 million, respectively.
The
$4.7 million
decrease in cash and cash equivalents for the
nine months ended September 30, 2017
, principally resulted from net cash used in operations of $10.2 million, principal payments made on the SVB term note of $4.7 million and fixed asset additions of $1.2 million, partially offset by proceeds from the exercise of warrants of $1.8 million, net proceeds from the sale of stock to Aspire Capital of $3.0 million, proceeds from refinancing our debt of $6.0 million and borrowings on our line of credit of $2.0 million.
At
September 30, 2018
, we had total indebtedness of $12.9 million, excluding capital lease obligations.
Cash Used in Operating Activities
Net cash used in operating activities was
$11.4 million
for the
nine months ended September 30, 2018
. We used $15.3 million in net cash to fund our core operations, which included $0.8 million in cash paid for interest, and another $0.2 million to purchase other current assets, offset by a net increase in accounts payable, accrued expenses and deferred revenue of $4.0 million and a net decrease in accounts receivable of $0.2 million.
For the
nine months ended September 30, 2017
, we used
$10.2 million
in operating activities. We used $4.7 million in net cash to fund our core operations, which included $0.6 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 $4.0 million, an increase in other current assets of $0.6 million, a net decrease in accounts payable, accrued expenses and deferred revenue of $1.1 million and a decrease in deferred rent payable and other of $0.1 million, offset by a decrease in other assets of $0.3 million.
Cash Used in Investing Activities
Net cash provided by investing activities was
$0.7 million
for the
nine months ended September 30, 2018
and principally resulted from net cash received from the sale of our India subsidiary of $1.6 million, offset in part by fixed asset purchases of $0.8 million.
Net cash used in investing activities was
$2.1 million
for the
nine months ended September 30, 2017
and resulted from the purchase of fixed assets of $1.2 million, patent costs of $0.1 million, net cash paid to acquire vivoPharm of $0.7 million and investing $0.2 million in a cost method investment.
Cash Provided by Financing Activities
Net cash provided by financing activities was
$2.4 million
for the
nine months ended September 30, 2018
and resulted from net proceeds received from the Convertible Note and Advance from NovellusDx, Ltd of $2.5 million and $1.5 million, respectively. offset, in part by the net repayment of borrowings on our ABL of $1.4 million and principal payments on capital lease obligations of $0.3 million.
Net cash provided by financing activities was
$7.7 million
for the
nine months ended September 30, 2017
and principally resulted from proceeds received from warrants exercised of $1.8 million, proceeds from the sale of stock to Aspire Capital of $3.0 million net of certain offering costs, proceeds from refinancing our debt of $6.0 million and proceeds from borrowing $2.0 million on our line of credit, offset by principal payments made on our SVB term note of $4.7 million, capital lease payments of $0.2 million and debt issuance costs and loan fees of $0.3 million related to our refinanced debt.
Capital Resources 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 further limit our research and development activities, which may have a material adverse impact on our business prospects and results of operations. The Company amended its debt agreements with SVB and PFG in May 2018; the new agreements required the Company to raise $2,500,000 through the sale of its equity securities or issuance of subordinated debt (in the case of the agreement with SVB, to investors accepted to SVB), which occurred on July 17, 2018, when the Company entered into an agreement pursuant to which the Company issued a convertible promissory note to an institutional accredited investor in the initial principal amount of $2,625,000. The Company received consideration of $2,500,000, reflecting an original issue discount of $100,000, a beneficial conversion feature discount of approximately $328,000 and expenses payable by the Company of $25,000. The convertible note has an 18 month term and carries interest at 10% per annum. The note is convertible into shares of the Company’s common stock at a conversion price of $0.80 per share. See Note 6 of the Notes to Unaudited Consolidated Financial Statements of this quarterly report on Form 10-Q. Effective June 21, 2018 and June 30, 2018, the loan covenants were modified with respect to the debt owed to SVB and PFG, respectively, and the exercise price of the PFG Warrants was reduced to $0.92 as of June 30, 2018. We were in violation of the modified covenants with SVB and PFG as of July 31, 2018, August 31, 2018 and September 30, 2018, and we expect to be in violation as of October 31, 2018 and November 30, 2018. On August 20, 2018, the Company received waivers from its senior lenders for the covenant violations for the months of July and August 2018. In consideration of these waivers, we agreed to reduce the maximum borrowings under the ABL from $6.0 million to $3.0 million, and agreed to enter into a binding and enforceable agreement satisfactory to each lender by August 31, 2018 with respect to a merger or other business combination transaction between the Company and an unrelated third party satisfactory to each lender (the “Transaction Condition”). While we were in violation of the Transaction Condition as of August 31, we subsequently entered into a binding and enforceable agreement satisfactory to each lender on September 18, 2018 by entering into the Merger Agreement. We have obtained waivers from our lenders for the September, October and November 2018 defaults, conditioned upon the Company raising $3,000,000 through the sale of its equity securities or issuance of subordinated debt (in the case of the agreement with SVB, to investors accepted to SVB) by November 30, 2018.
In September 2018, the Company announced the Merger Agreement with NDX. In conjunction with the plan to merge, NDX agreed to advance up to
$2,300,000
to the Company. The first advance of
$1,500,000
was extended on September 18, 2018, and the second advance of
$800,000
is payable upon satisfaction of certain conditions, including our filing of a registration statement on Form S-4 related to the Merger Agreement. Interest accrues on the outstanding balance at
10.75%
per annum, and the Credit Agreement matures upon the earlier of
March 31, 2019
or the date on which the Merger Agreement is terminated in accordance with its terms (or
90 days
thereafter in the case of certain causes for termination). Upon certain events of default, NDX may convert all, but not less than all, of the outstanding balance into shares of the Company’s common stock at a conversion price of
$0.606
per share. At
September 30, 2018
, the principal balance of the Credit Agreement was
$1,500,000
.
On September 18, 2018, we also entered into a securities purchase agreement (the “Purchase Agreement”) pursuant to which we agreed to sell and issue, in a private placement, a total of
8,509,891
shares of our common stock and warrants to purchase an aggregate of up to approximately
6,382,418
shares of our common stock, to the purchasers thereunder, all of whom are current NDX shareholders, for an aggregate purchase price of approximately
$8.6 million
, with the shares and warrants being sold together in a fixed combination of one share and one warrant to purchase
75%
of a share of our common stock, at a price of
$1.01
per share and related warrant (the “Private Placement”). The closing of the Private Placement is conditional upon, and will occur immediately after, the Merger. In addition, the Company and NDX may continue to solicit additional subscriptions pursuant to this Purchase Agreement prior to the closing of the Private Placement.
The warrants issued under the Private Placement will be exercisable for
five years
beginning on the closing date of the Merger at an initial exercise price of
$1.01
per share, subject to adjustment for certain customary circumstances. The warrants can be exercised on a cashless basis.
Net cash used in operating activities was
$11.4 million
and
$10.2 million
for the
nine months ended September 30, 2018
and 2017, respectively, and the Company had unrestricted cash and cash equivalents of
$1.2 million
at
September 30, 2018
, a reduction from
$9.5 million
at December 31, 2017. The Company has negative working capital at
September 30, 2018
of
$15.2 million
.
The Company currently requires a significant amount of additional capital to fund operations and pay its accounts payable, and its ability to continue as a going concern is dependent upon its ability to raise such additional capital and achieve profitability. If the Company is not able to close the Merger and Private Placement or raise such additional capital on a timely basis or on favorable terms, the Company may need to scale back or, in extreme cases, discontinue its operations or liquidate its assets.
We do not believe that our current cash will support operations beyond the next 3 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 hired Raymond James & Associates Inc. as our financial advisor to assist with evaluating strategic options and their efforts resulted in the current Merger Agreement and related credit agreement with NDX referenced elsewhere herein. We are currently in discussions with possible bridge financing sources to provide adequate funding to execute on the merger with NDX As previously disclosed, one of the conditions to closing of the Merger is that the combined company have available cash of at least $20 million at the effective time of the Merger (inclusive of amounts raised in the Private Placement and advanced under the related credit agreement, but exclusive of the Company’s cash) (the “Cash Condition”). If the Merger is consummated and the Cash Condition is not waived, we anticipate that we will have approximately $18 million in cash (net of the Bridge Loan proceeds already received and being used), principally raised through the Private Placement. Consequently, if the Private Placement is successful and the Merger is closed, we believe we will have sufficient cash to support our operations for the 12 months following closing, notwithstanding that the acquisition of NDX will increase our cash flow deficits as we fund their continued development, validation and commercialization efforts. If the Merger and the Private Placement are not consummated, we will not have sufficient cash to continue to operate for any significant period after termination of the Merger Agreement. Accordingly, we intend to seek additional financing in the interim prior to consummation of the Merger, which is not anticipated to occur until the first quarter of 2019. Any such financing will dilute our current stockholders’ 51% interest in the combined company to which our current stockholders are entitled under the Merger Agreement by the number of shares issued or issuable in any such interim financing. We cannot determine at this time whether any interim financing will be available to us or, if it is, the terms of such interim financing and its effect on the percentage interest in the combined company to be held by our current stockholders post-closing of the Merger.
Meanwhile we are taking steps to improve our operating cash flow, including the consolidation of our laboratory operations and reductions in the number of staff. 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 close the Merger and Private Placement;
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our ability to secure financing and the amount thereof;
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our ability to achieve revenue growth and profitability;
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the costs for funding the operations we recently acquired and our ability to realize anticipated benefits from the vivoPharm acquisition;
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our ability to save money by moving our California operations to New Jersey and North Carolina;
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our ability to improve efficiency of billing and collection processes;
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our ability to obtain approvals for our new diagnostic tests;
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our ability to execute on our marketing and sales strategy for our tests and services and gain acceptance of our tests and services 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;
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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;
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our ability to manage the costs of manufacturing our tests;
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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 and uncertainties discussed in our annual report on Form 10-K for the year ended December 31, 2017, as updated in other reports, as applicable, we file with the Securities and Exchange Commission.
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We expect that our operating expenses and capital expenditures may increase in the future as we expand our business. We plan to take additional steps to decrease our sales and marketing expenses related to our clinical tests and services, and will continue trimming our research and development expenditures for all projects that are not expected to be profitable in the near future. 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 financing, we may use significant cash to fund acquisitions.
The consolidated financial statements for the
nine months ended September 30, 2018
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.
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
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 in our annual report on Form 10-K for the year ended December 31, 2017 contain a summary of our significant accounting policies. The adoption of ASU 2014-09 and ASU 2016-18 are discussed in Note 1 of Notes to Unaudited Consolidated Financial Statements included in Item 1 of this quarterly report on Form 10-Q. We consider the following accounting policies critical to the understanding of the results of our operations:
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Accounts receivable and bad debts;
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Stock-based compensation; and
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Cautionary Note Regarding Forward-Looking Statements
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
This report on Form 10-Q contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include all statements that are not historical facts. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “potential,” or the negative of those terms, and similar expressions and comparable terminology intended to identify forward-looking statements. These statements reflect our current views with respect to future events. There are a number of important factors that could cause the actual results to differ materially from those expressed in any forward-looking statement made by us. These factors include, but are not limited to:
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our ability to close the Merger and Private Placement;
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our ability to achieve revenue growth and profitability;
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our ability to secure financing and the amount thereof;
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our ability to save money by moving our California operations to New Jersey and North Carolina;
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our ability to achieve profitability by increasing sales of our laboratory tests and services and to continually develop and commercialize novel and innovative laboratory tests and services focused on oncology and immuno-oncology;
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our ability to improve efficiency of billing and collection processes;
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with respect to our Clinical Services, our ability to obtain reimbursement from governmental and other third-party payors for our tests and services;
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our ability to clinically validate our pipeline of tests currently in development;
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our ability to execute on our marketing and sales strategy for our tests and services and gain acceptance of our tests and services in the market;
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our ability to keep pace with rapidly advancing market and scientific developments;
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our ability to satisfy U.S. (including FDA) and international regulatory requirements with respect to our tests and services, many of which are new and still evolving;
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our ability to raise additional capital to meet our liquidity needs;
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competition from clinical laboratory services companies, tests currently available or new tests that may emerge;
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our ability to maintain our clinical collaborations and enter into new collaboration agreements with highly regarded organizations in the cancer field so that, among other things, we have access to thought leaders in the field and to a robust number of samples to validate our tests;
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our ability to maintain our present customer base and obtain new customers;
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potential product liability or intellectual property infringement claims;
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our dependency on third-party manufacturers to supply or manufacture our tests;
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our ability to attract and retain a sufficient number of scientists, clinicians, sales personnel and other key personnel with extensive experience in oncology and immuno-oncology, who are in short supply;
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our ability to obtain or maintain patents or other appropriate protection for the intellectual property in our proprietary tests and services;
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our dependency on the intellectual property licensed to us or possessed by third parties;
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our ability to expand internationally and launch our tests and services in emerging markets, such as China and Japan;
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our ability to adequately support future growth; and
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the risk factors discussed in our annual report on Form 10-K for the year ended December 31, 2017, as updated in other reports, as applicable, that we file with the Securities and Exchange Commission.
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Given these uncertainties, you should not place undue reliance on these forward-looking statements. These forward-looking statements represent our estimates and assumptions only as of the date of this quarterly report on Form 10-Q and, except as required by law, we undertake no obligation to update or review publicly any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this quarterly report on Form 10-Q. You should read this quarterly report on Form 10-Q and the documents referenced herein and filed as exhibits completely and with the understanding that our actual future results may be materially different from what we expect.