Notes to Unaudited Condensed Consolidated Financial Statements
Note 1. Organization, Description of Business, Basis of Presentation, Reverse Stock Split, Business Disposals, 2019 Offerings, Standstill Agreement, Advance from NDX, Loan from Atlas Sciences, LLC, Recently Adopted Accounting Standard, and Recent Accounting Pronouncements
Cancer Genetics, Inc. supports the biotechnology and pharmaceutical industry to develop innovative new drug therapies.
Until the closing of the Business Disposals (as defined below) in July 2019, we were an emerging leader in enabling precision medicine in oncology by providing multi-disciplinary diagnostic and data solutions, facilitating individualized therapies through our diagnostic tests, services and molecular markers. Following the Business Disposals described below, we currently have an extensive set of anti-tumor referenced data based on predictive xenograft and syngeneic tumor models from the acquisition of vivoPharm, Pty Ltd. (“vivoPharm”) in 2017, to 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, until the Business Disposals, had offices and state-of-the-art laboratories located in New Jersey and North Carolina and today continue to have laboratories in Pennsylvania and Australia. The Company’s corporate headquarters are in Rutherford, New Jersey. 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 are 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 consolidated 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, 2018, filed with the Securities and Exchange Commission on April 16, 2019. The condensed consolidated balance sheet as of December 31, 2018, 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, 2019.
Reverse Stock Split
On October 24, 2019, we amended our Certificate of Incorporation and effected a 30-for-1 reverse stock split of our common stock. All shares and per share information referenced throughout the condensed consolidated financial statements and footnotes have been retrospectively adjusted to reflect the reverse stock split.
Business Disposals - Discontinuing Operations
Interpace Diagnostics Group, Inc.
On July 15, 2019, the Company entered into and consummated a secured creditor asset purchase agreement (the “BioPharma Agreement”) by and among the Company, Gentris, LLC, a wholly owned subsidiary of the Company, Partners for Growth IV, L.P. (“PFG”), Interpace Diagnostics Group, Inc. (“IDXG”) and a newly-formed subsidiary of IDXG, Interpace BioPharma, Inc. (“Buyer”). The BioPharma Agreement provided for a consensual private foreclosure sale by PFG of all assets relating to the Company’s BioPharma Business (as defined in the BioPharma Agreement) to Buyer (the “BioPharma Disposal”).
Pursuant to the BioPharma Agreement, Buyer purchased from PFG certain assets and assumed certain liabilities of the Company relating to the BioPharma Business, providing as gross consideration $23,500,000, less certain closing adjustments totaling $1,978,240, of which $7,692,300 was settled in the form of a promissory note issued by Buyer to the Company (the “Excess Consideration Note”) and the remainder was paid to PFG in cash. PFG utilized the cash proceeds to satisfy the outstanding balances of the Silicon Valley Bank (“SVB”) asset-based revolving line of credit (“ABL”) and the $6.0 million term note to PFG (“PFG Term Note”), and to satisfy certain transaction expenses. The balance of $2,258,450 was
delivered to the Company in addition to the Excess Consideration Note. The fair value of the Excess Consideration Note was $6,795,000 at September 30, 2019.
The Excess Consideration Note, which required interest-only quarterly payments at a rate of 6% per year, matured in October 2019 and was settled on October 24, 2019 for $6,024,489, including interest of $23,674. The Buyer withheld from the settlement of the Excess Consideration Note approximately $775,000 for a net worth adjustment (assets less liabilities) of the BioPharma business (“Net Worth”), $153,000 to secure collection of certain older accounts receivable of the Company purchased by Buyer (“AR Holdback”) and an additional $735,000 as security for indemnification obligations of the Company for any breaches of certain limited warranties and covenants of the Company and other specified items (“Indemnification Holdback”). The amount of the older accounts receivable determined to be paid as of December 31, 2019 will be remitted to Company from the AR Holdback. Any amounts remaining in the Indemnification Holdback shall be remitted to the Company on January 15, 2020 (six months from the date of the BioPharma Agreement), unless there are pending indemnification claims.
The Company and Buyer also entered into a transition services agreement (the “TSA”) pursuant to which the Company and Buyer are providing certain services to each other to accommodate the transition of the BioPharma Business to Buyer. In particular, the Company agreed to provide to Buyer, among other things, certain personnel services, payroll processing, administration services and benefit administration services, for a period not to exceed six months from July 15, 2019, subject to the terms and conditions of the TSA, in exchange for payment or reimbursement, as applicable, by Buyer for the costs related thereto, including salaries and benefits for certain of the Company’s BioPharma employees during the transition period. Unless and until John A. Roberts, the Company’s Chief Executive Officer, and Glenn Miles, the Company’s Chief Financial Officer, enter into part-time consulting arrangements with Buyer and/or IDXG to assist with the transition, if any, Buyer is reimbursing the Company for their salaries and benefits. In addition, Buyer is providing office space, rent-free, for certain of the Company’s employees during the TSA period.
In connection with the closing of the BioPharma Disposal, the SVB ABL and the PFG Term Note were terminated, and all related liens were released.
siParadigm, Inc.
On July 5, 2019, the Company entered into an asset purchase agreement (the “Clinical Agreement”) by and among the Company and siParadigm, LLC (“siParadigm”), pursuant to which the Company sold to siParadigm, certain assets associated with the Company’s clinical laboratory business (the “Clinical Business,” and such assets, the “Designated Assets”), and agreed to cease operating its Clinical Business. The Designated Assets include intellectual property, equipment and customer lists associated with the Clinical Business, and the Company is providing certain transitional services to siParadigm pursuant to the Clinical Agreement. The cash consideration paid by siParadigm at closing was approximately $758,000, which includes approximately $45,000 for certain equipment plus a $1,000,000 advance payment of the Earn-Out (as defined below), less approximately $177,000 of supplier invoices paid directly by siParadigm and transaction costs of approximately $110,000. The Clinical Business sale (together with the BioPharma Disposal, the “Business Disposals”) was completed on July 8, 2019.
The Earn-Out, to be paid over the 24 months post-closing, is based on fees for all tests performed by siParadigm for the Company’s clinical customers during the 12-month period following the closing (the “Earn-Out”). At September 30, 2019, the fair value of the current and long-term portion of the Earn-Out from siParadigm was approximately $693,000 and $594,000, respectively. In addition, the current and long-term portion of the Advance from siParadigm was approximately $469,000 and $505,000, respectively.
Under the Clinical Agreement, the Company agreed to certain non-competition and non-solicitation provisions, including that it will cease performing certain clinical tests and will not solicit or seek business from certain of its customers (other than for the Company’s other lines of business) for a period of three years following the closing date.
The Business Disposals have been classified as discontinuing operations in conformity with GAAP. Accordingly, BioPharma and Clinical operations and balances have been reported as discontinuing operations and removed from all financial disclosures of continuing operations. As permitted by Accounting Standards Codification (“ASC”) 205-20, the Company elected to allocate approximately $22,000 and $1,464,000 of interest expense on debt not required to be repaid to discontinuing operations during the three and nine months ended September 30, 2019, respectively. The Company elected to allocate approximately $105,000 of interest expense from the Convertible Note and Advance from NDX to discontinuing operations during the three and nine months ended September 30, 2018. Unless otherwise indicated, information in these notes to unaudited condensed consolidated financial statements relates to continuing operations.
2019 Offerings
On January 9, 2019, we entered into an underwriting agreement with H.C. Wainwright & Co., LLC (“H.C. Wainwright”), relating to an underwritten public offering of 444,444 shares of our common stock for $6.75 per share. We received proceeds from the offering of approximately $2,437,000, net of expenses and discounts of approximately $563,000. We also issued warrants to purchase 31,111 shares of common stock to H.C. Wainwright in connection with this offering. The warrants are exercisable for five years from the date of issuance at a per share price of $7.43.
On January 26, 2019, we issued 507,246 shares of common stock at a public offering price of $6.90 per share. We received proceeds from the offering of approximately $2,975,000, net of expenses and discounts of approximately $525,000. We also issued warrants to purchase 35,507 shares of common stock to the underwriter, H.C. Wainwright, in connection with this offering. The warrants are exercisable for five years from the date of issuance at a per share price of $7.59.
The January 9, 2019 and January 26, 2019 offerings will be referred to collectively as the “2019 Offerings.” As disclosed in Note 15, certain of our directors and executive officers purchased shares in the 2019 Offerings at the public offering price.
Standstill Agreement
In May 2019, we entered into a second standstill agreement (“Second Standstill”) with Iliad Research and Trading, L.P. (“Iliad”), related to the $2,625,000 convertible promissory note dated July 17, 2018 (“Convertible Note”) described further in Note 7. The Second Standstill provided that Iliad would not seek to redeem any portion of the Convertible Note until May 31, 2019. In consideration for the Second Standstill, we agreed to adjust the conversion price on the first $1,250,000 of our debt to Iliad from $24.00 to $6.82. In May 2019, Iliad converted $350,000 of the Convertible Note balance into 51,327 shares of our common stock at a conversion price of $6.82 per share. On or about June 11, 2019, following the expiration of the Second Standstill, Iliad sent the Company a Redemption Notice (as defined in Note 7). On June 20, 2019, Iliad sent a notice to the Company asserting that the nonpayment of the redemption amount by the redemption due date constituted an event of default. Iliad asserted its right to increase the interest rate to 22% and to increase the then-outstanding balance of the loan by 15% (approximately $408,000). During the three and nine months ended September 30, 2019, the Company issued an aggregate of 173,557 shares of common stock to Iliad in exchange for the return of $612,175 of principal amount of the Convertible Note to the Company. In October 2019, the Company settled its debt with Iliad for approximately $2,712,000, using, in part, all of the proceeds of its loan from Atlas Sciences, LLC, described below.
Advance from NovellusDx, Ltd.
On September 18, 2018, we entered into an agreement and plan of merger (“Merger Agreement”) with NovellusDx, Ltd. (“NDX”). In connection with signing the Merger Agreement, NDX loaned us $1,500,000 (“Advance from NDX”). Interest accrued on the outstanding balance at 10.75% per annum until we terminated the Merger Agreement on December 15, 2018. As a result of the termination, the Advance from NDX, plus interest thereon, became due and payable on March 15, 2019. On October 21, 2019, the Company and NDX entered into a settlement agreement (“NDX Settlement Agreement”). The NDX Settlement Agreement required the Company to pay $100,000 on the date of execution and $1,000,000 upon receipt of proceeds from the Excess Consideration Note. The $1,000,000 payment was made in October 2019. As a result of such payment, pursuant to the NDX Settlement Agreement, the balance of the Advance from NDX was reduced to $450,000 and each party released the other from all claims under the original credit agreement and the Merger Agreement. The remaining amount due is to be paid in nine monthly payments of $50,000 commencing one month after the receipt of the Excess Consideration Note. If the Company fails to make any of the required monthly payments, NDX may convert all, but not less than all, of the amounts then owing into a number of shares of the Company’s common stock at a conversion price of $4.50 per share. The NDX Settlement Agreement adjusted the interest rate of the obligation to 0%.
Loan from Atlas Sciences, LLC
On October 21, 2019, we issued an unsecured promissory note to Atlas Sciences, LLC (“Atlas Sciences”), an affiliate of Iliad, for $1,347,500 (“Atlas Sciences Note”). We received consideration of $1,250,000, reflecting an original issue discount of $87,500 and expenses payable by us of $10,000. The Atlas Sciences Note has a 12 month term and bears interest at 10% per annum. The proceeds from the Atlas Sciences Note were utilized to partially repay the Convertible Note. Atlas Sciences may redeem any portion of the note, at any time after six months from the issuance date upon three business days' notice, subject to a monthly maximum redemption amount of $300,000. We may prepay the Atlas Sciences Note at any time without penalty. Upon the occurrence of an event of default, the interest rate will be adjusted to 22% per annum.
Recently Adopted Accounting Standards
In February 2016, the Financial Accounting Standards Board (“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 right-of-use assets and lease liabilities on the balance sheet and disclosure of key information about leasing arrangements (with the exception of short-term leases).
In July 2018, the FASB issued Accounting Standards Update (“ASU”) 2018-11 to the existing transition guidance that allows entities to recognize a cumulative-effect adjustment to the opening balance of accumulated deficit in the period of adoption. Effective January 1, 2019, we adopted ASC 842 using this new transition guidance. The comparative information has not been restated and continues to be reported under the accounting standard in effect for those periods.
We have elected to use the package of practical expedients, which allows us to not (1) reassess whether any expired or existing contracts are considered or contain leases; (2) reassess the lease classification for any expired or existing leases; and (3) reassess the initial direct costs for any existing leases. We did not elect the hindsight practical expedient, which permits entities to use hindsight in determining the lease term and assessing impairment.
The most significant impact of adopting ASC 842 is related to the recognition of right-of-use assets and lease liabilities for operating leases. Our accounting for finance leases remains substantially unchanged. The adoption of ASC 842 had no impact on our unaudited condensed consolidated statements of operations or total cash flows from operations.
The cumulative effect of the changes made to our unaudited consolidated January 1, 2019 balance sheet for the adoption of ASC 842 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
Adjustment for Adoption of ASC 842
|
|
As of January 1, 2019
|
|
ASSETS
|
|
|
|
|
|
|
|
Current assets of discontinuing operations
|
|
$
|
23,421
|
|
|
$
|
2,327
|
|
|
$
|
25,748
|
|
|
Operating lease right-of-use assets
|
|
—
|
|
|
238
|
|
|
238
|
|
|
|
|
$
|
23,421
|
|
|
$
|
2,565
|
|
|
$
|
25,986
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
Current liabilities of discontinuing operations
|
|
$
|
20,742
|
|
|
$
|
2,327
|
|
|
$
|
23,069
|
|
|
Deferred rent payable and other
|
|
154
|
|
|
(154
|
)
|
|
—
|
|
|
Obligations under operating leases, current portion
|
|
—
|
|
|
204
|
|
|
204
|
|
|
Obligations under operating leases, less current portion
|
|
—
|
|
|
188
|
|
|
188
|
|
|
|
|
$
|
20,896
|
|
|
$
|
2,565
|
|
|
$
|
23,461
|
|
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): “Simplifying the Accounting for Goodwill Impairment,” which removes the requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The Company adopted this standard July 1, 2019. Because we adopted ASU 2017-04, we did not have to fair value all of the Company's assets and liabilities to determine the amount of goodwill impairment. Instead we impaired goodwill for the difference between the fair value of the Company and the book value of the Company's stockholders' equity.
Recent Accounting Pronouncements
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which clarifies the accounting for implementation costs in cloud computing arrangements. The update will become effective for interim and annual periods beginning after December 15, 2019 and may be adopted either retrospectively or prospectively. Early adoption is permitted. We plan to adopt this standard prospectively. We are currently evaluating the impact that adoption of this ASU will have on our consolidated financial statements and whether or not to early adopt.
Note 2. Going Concern
At September 30, 2019, our cash position and history of losses required management to assess our ability to continue operating as a going concern, according to FASB ASC 205-40, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. Prior to the closing of the Business Disposals transactions in July 2019, the Company did not anticipate having
sufficient cash at September 30, 2019 to fund normal operations beyond the next three months unless certain current assets were converted to cash, as described below. After the Business Disposals, the Company’s ability to continue as a going concern is still dependent on the Company’s ability to raise additional equity or debt capital, spin-off non-core assets to raise additional cash, collect its outstanding accounts receivable and collect amounts held in escrow by Buyer or receive the Earn-Out payments from siParadigm without significant offsets, and negotiate discounts in good faith with its trade suppliers. These factors raise substantial doubt about the Company's ability to continue as a going concern for the next twelve months from the issuance of this current report on Form 10-Q.
Net cash used in operating activities for continuing operations was $1.0 million for the nine months ended September 30, 2019 and the Company had unrestricted cash and cash equivalents of $2.1 million at September 30, 2019, an increase from $0.2 million at December 31, 2018. The Company has positive working capital from continuing operations at September 30, 2019 of $2.0 million.
The Company currently requires additional capital to pay its unsecured debt and accounts payable, and its ability to continue as a going concern is dependent upon its ability to collect amounts held in escrow by Buyer and its outstanding accounts receivable, receive the Earn-Out payments from siParadigm and negotiate discounts in good faith with its trade suppliers. In July 2019, we sold our BioPharma Business and Clinical Business as described in Note 1. While the Buyer assumed certain of our liabilities in the BioPharma Disposal, the cash received to date from the Business Disposals is insufficient to satisfy all of the Company’s liabilities and other obligations, and the Company cannot determine at this time if future Earn-Out payments and receipt of amounts held in escrow by Buyer, combined with settlements of claims against the Company will enable all creditors to be paid in full and provide sufficient funds for future operations. We are continuing to evaluate additional strategic options, with the assistance of an investment bank, which could include the sale of other assets, a merger, reverse merger or other strategic transaction. We can provide no assurances that our current actions will be successful or that additional sources of cash or financing will be available to us on favorable terms, if at all. If the Company is not able to collect its accounts receivable or raise additional capital on a timely basis or on favorable terms, the Company may need to scale back further its operations.
The unaudited condensed 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. Discontinuing Operations
As described in Note 1, the Company sold its BioPharma Business and Clinical Business in July 2019. In conjunction with the BioPharma Disposal, the Company repaid its debt to SVB and PFG. The Company elected to allocate approximately $22,000 and $1,464,000 of interest expense from the Convertible Note and Advance from NDX to discontinuing operations during the three and nine months ended September 30, 2019, respectively. The Company elected to allocate approximately $105,000 of interest expense from the Convertible Note and Advance from NDX to discontinuing operations during the three and nine months ended September 30, 2018. Revenue and other significant accounting policies associated with the discontinuing operations have not changed since the most recently filed audited financial statements as of and for the year ended December 31, 2018, except for the adoption of ASC 842 as described in Note 1.
Summarized results of our unaudited condensed consolidated discontinuing operations are as follows for the three and nine months ended September 30, 2019 and 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Revenue
|
$
|
428
|
|
|
$
|
5,405
|
|
|
$
|
10,066
|
|
|
$
|
17,400
|
|
|
Cost of revenues
|
563
|
|
|
3,969
|
|
|
7,692
|
|
|
12,444
|
|
|
Gross profit (loss)
|
(135
|
)
|
|
1,436
|
|
|
2,374
|
|
|
4,956
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Research and development
|
47
|
|
|
692
|
|
|
937
|
|
|
2,046
|
|
|
General and administrative
|
782
|
|
|
3,065
|
|
|
4,121
|
|
|
9,714
|
|
|
Sales and marketing
|
15
|
|
|
960
|
|
|
1,527
|
|
|
3,312
|
|
|
Restructuring costs
|
100
|
|
|
1,418
|
|
|
100
|
|
|
2,151
|
|
|
Transaction costs
|
—
|
|
|
—
|
|
|
651
|
|
|
—
|
|
|
Impairment of patents and other intangible assets
|
601
|
|
|
—
|
|
|
601
|
|
|
—
|
|
|
Total operating expenses
|
1,545
|
|
|
6,135
|
|
|
7,937
|
|
|
17,223
|
|
|
Loss from discontinuing operations
|
(1,680
|
)
|
|
(4,699
|
)
|
|
(5,563
|
)
|
|
(12,267
|
)
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Interest expense
|
(38
|
)
|
|
(383
|
)
|
|
(2,211
|
)
|
|
(1,195
|
)
|
|
Gain on disposal of Clinical Business
|
1,222
|
|
|
—
|
|
|
1,222
|
|
|
—
|
|
|
Gain on disposal of BioPharma Business
|
7,274
|
|
|
—
|
|
|
7,274
|
|
|
—
|
|
|
Total other income (expense)
|
8,458
|
|
|
(383
|
)
|
|
6,285
|
|
|
(1,195
|
)
|
|
Net income (loss) from discontinuing operations
|
$
|
6,778
|
|
|
$
|
(5,082
|
)
|
|
$
|
722
|
|
|
$
|
(13,462
|
)
|
Unaudited condensed consolidated carrying amounts of major classes of assets and liabilities from discontinuing operations were as follows as of September 30, 2019 and December 31, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
Current assets of discontinuing operations:
|
|
|
|
|
Accounts receivable, net of allowance for doubtful accounts of $3,785 in 2019; $3,462 in 2018
|
$
|
1,082
|
|
|
$
|
6,261
|
|
|
Other current assets
|
43
|
|
|
1,652
|
|
|
Fixed assets, net of accumulated depreciation
|
—
|
|
|
3,559
|
|
|
Patents and other intangible assets, net of accumulated amortization
|
—
|
|
|
655
|
|
|
Goodwill
|
—
|
|
|
11,294
|
|
|
Current assets of discontinuing operations
|
$
|
1,125
|
|
|
$
|
23,421
|
|
|
|
|
|
|
|
Current liabilities of discontinuing operations
|
|
|
|
|
Accounts payable and accrued expenses
|
$
|
3,229
|
|
|
$
|
9,967
|
|
|
Obligations under finance leases
|
—
|
|
|
666
|
|
|
Deferred revenue
|
—
|
|
|
1,337
|
|
|
Line of credit
|
—
|
|
|
2,621
|
|
|
Term note
|
—
|
|
|
6,000
|
|
|
Deferred rent payable and other
|
—
|
|
|
151
|
|
|
Current liabilities of discontinuing operations
|
$
|
3,229
|
|
|
$
|
20,742
|
|
Note 4. Revenue
Revenue from the Company’s Discovery Services comes from preclinical oncology and immuno-oncology services offered to our biotechnology and pharmaceutical customers. The Company is a leader in orthotopic and metastases tumor models and
offers whole body imaging, in addition to toxicology testing and bionalytical analysis. Our Discovery Services are designed to support new compounds being studied to guide drug development, starting from compound libraries and ending with a comprehensive set of in vitro and in vivo data and reports, as needed for Investigational New Drug (IND) filing.
During the nine months ended September 30, 2019, four customers accounted for approximately 79% of our consolidated revenue from continuing operations. During the nine months ended September 30, 2018, three customers accounted for approximately 47% of our consolidated revenue from continuing operations.
During the three months ended September 30, 2019, four customer accounted for approximately 83% of our consolidated revenue from continuing operations. During the three months ended September 30, 2018, two customers accounted for approximately 48% of our consolidated revenue from continuing operations.
Remaining Performance Obligations:
Services offered under Discovery Services frequently take time to complete under their respective contacts. These times vary depending on specific contract arrangements including the length of the study and how samples are delivered to us for processing. In the case of Discovery Services, the duration of performance obligations is less than one year.
Note 5. Earnings Per Share
For purposes of this calculation, stock warrants, outstanding stock options, convertible debt and unvested restricted shares are considered common stock equivalents using the treasury stock method, and are the only such equivalents outstanding. For all periods presented, 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Common stock purchase warrants
|
279
|
|
|
335
|
|
|
279
|
|
|
335
|
|
|
Stock options
|
68
|
|
|
101
|
|
|
68
|
|
|
101
|
|
|
Convertible Note
|
206
|
|
|
112
|
|
|
206
|
|
|
112
|
|
|
Advance from NDX
|
98
|
|
|
—
|
|
|
98
|
|
|
—
|
|
|
Restricted shares of common stock
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
|
|
651
|
|
|
550
|
|
|
651
|
|
|
550
|
|
Note 6. Leasing Arrangements
Operating Leases
We lease our laboratory, research facility and administrative office space under various operating leases. We also lease scientific equipment under various finance leases. Following the Business Disposals, we have assigned our office leases in North Carolina and New Jersey to Buyer.
We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, operating lease liabilities, and operating lease liabilities, non-current on our unaudited condensed consolidated balance sheets. Finance leases are included in fixed assets, net of accumulated depreciation and obligations under finance leases.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. Our incremental borrowing rate was determined by adjusting our secured borrowing interest rate for the longer-term nature of our leases. Our variable lease payments primarily consist of maintenance and other operating expenses from our real estate leases. Variable lease payments are excluded from the ROU assets and lease liabilities and are recognized in the period in which the obligation for those payments is incurred. The operating lease ROU asset also includes any lease payments made and excludes lease incentives incurred. Our lease terms may include options to
extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
We have lease agreements with lease and non-lease components. We have elected to account for these lease and non-lease components as a single lease component. We are also electing not to apply the recognition requirements to short-term leases of twelve months or less and instead will recognize lease payments as expense on a straight-line basis over the lease term.
The components of lease expense were as follows for the three and nine months ended September 30, 2019 for continuing operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2019
|
|
Nine months ended
September 30, 2019
|
|
Operating lease cost
|
|
$
|
43
|
|
|
$
|
130
|
|
|
Short-term lease cost
|
|
14
|
|
|
68
|
|
|
Variable lease cost
|
|
29
|
|
|
74
|
|
|
|
|
$
|
86
|
|
|
$
|
272
|
|
Supplemental cash flow related to leases of our continuing operations was as follows for the three and nine months ended September 30, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2019
|
|
Nine months ended
September 30, 2019
|
|
Cash paid amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
Operating cash flows used for operating leases
|
|
$
|
54
|
|
|
$
|
164
|
|
Other supplemental information related to leases of our continuing operations was as follows at September 30, 2019:
|
|
|
|
|
|
|
|
Weighted average remaining lease term (in years)
|
|
|
|
Operating leases
|
|
1.24
|
|
|
|
|
|
|
Weighted average discount rate
|
|
|
|
Operating leases
|
|
7.97
|
%
|
We did not enter into any new operating leases that met scope during the three and nine months ended September 30, 2019.
At September 30, 2019, future estimated minimum lease payments under non-cancelable operating leases were as follows (in thousands):
|
|
|
|
|
|
|
|
|
2019 (remaining 3 months)
|
|
$
|
56
|
|
|
2020
|
|
191
|
|
|
2021
|
|
11
|
|
|
Total minimum lease payments
|
|
258
|
|
|
Less amount representing interest
|
|
22
|
|
|
Total
|
|
$
|
236
|
|
Note 7. Financing
Convertible Note
On July 17, 2018, the Company entered into the Convertible Note, pursuant to which the Company issued an unsecured 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 had an eighteen month term, carried interest at 10% per annum and was subordinated in right of payment to the ABL and PFG Term Note. The note was convertible into shares of the Company’s common stock at a conversion price of $24.00 per share (“Conversion Price”) upon five trading days’ notice, subject to certain adjustments (standard dilution) and ownership limitations specified in the Convertible Note. In May 2019, the conversion price was reduced to $6.82 for $1,250,000 of the balance of the Convertible Note; the remainder was still convertible at $24.00. The reduction in the conversion price increased the fair value of the embedded conversion option by approximately $547,000. The future cash flows of the Convertible Note changed by more than 10% as a result of the Standstill Agreement, so the Company amortized the remaining debt discount and debt issuance costs of $37,000, resulting in a loss on debt extinguishment of approximately $584,000 during the nine months ended September 30, 2019, of which approximately $328,000 was allocated to discontinuing operations. Loss on debt extinguishment allocated to continuing operations was recorded in interest expense.
The investor could redeem any portion of the Convertible Note upon five trading days’ notice (“Redemption Notice”) subject to a maximum monthly redemption amount of $650,000, with the Company having the option to pay such redemptions in cash, the Company’s common stock at the Conversion Price, or by a combination thereof, subject to certain conditions, including that the stock price is $30.00 per share or higher. The Company could prepay the outstanding balance of the Convertible Note, in part or in full, at a 10% premium to par value if prior to the one year anniversary of the date of issuance and at par if prepaid thereafter. At maturity, the Company could pay the outstanding balance in cash, the Company’s common stock at the Conversion Price, or by a combination thereof, subject to certain conditions. The note provides that in the event of default, the lender may, at its option, elect to increase the outstanding balance applying the default effect (defined as outstanding balance at date of default multiplied by 15% plus outstanding amount) by providing written notice to the Company. In addition, the interest rate increases to 22% upon default. The Convertible Note is the general unsecured obligation of the Company. At September 30, 2019, the principal balance of the Convertible Note is approximately $2.3 million, not including accrued interest of approximately $406,000, which is recorded in accounts payable and other accrued expenses on the Condensed Consolidated Balance Sheets.
In May 2019, Iliad converted $350,000 of the Convertible Note balance into 51,327 shares of our common stock at $6.82 per share. During the three and nine months ended September 30, 2019, the Company issued an aggregate of 173,557 shares of common stock to Iliad in exchange for the return of $612,175 of principal amount of the Convertible Note to the Company.
As of June 20, 2019, the Company was in default on the Convertible Note. The Convertible Note was accruing interest at the default rate of 22%, and the outstanding balance was increased by 15% (approximately $408,000) upon the notice of default. In October 2019, the Convertible Note was settled for $2,712,000, including interest of approximately $439,000, as discussed in Note 1.
Advance from NDX
On September 18, 2018, we entered into the Merger Agreement with NDX. In connection with signing the Merger Agreement, NDX loaned us $1,500,000. Interest accrued on the outstanding balance at 10.75% per annum until we terminated the Merger Agreement on December 15, 2018. As a result of the termination, the Advance from NDX, plus interest thereon, became due and payable on March 15, 2019. The termination was a specified event of default, so on December 15, 2018, the interest rate was increased to 21%. The default also gave NDX the right to convert all, but not less than all, of the outstanding balance into shares of the Company’s common stock at a conversion price of $18.18 per share. At September 30, 2019, the principal balance of the Advance from NDX was $1,500,000, not including accrued interest of approximately $288,000, which is recorded in accounts payable and other accrued expenses on the Condensed Consolidated Balance Sheets.
The Advance from NDX is the general unsecured obligation of the Company and was subordinated in right of payment to the ABL and PFG Term Note, provided that NDX has asserted that its obligation to standstill under its subordination agreements will not be applicable at a time when the Company attains certain levels of unrestricted cash, as a result of the Company having improperly terminated the Merger Agreement. The Company does not believe it improperly terminated the Merger Agreement. The Company and NDX entered into the NDX Settlement Agreement in October 2019, which is discussed in detail in Note 1.
Atlas Sciences Note
In October 2019, we entered into a twelve month unsecured promissory note with Atlas Sciences of $1,347,500. The Atlas Sciences Note resulted in cash receipts of $1,250,000, reflecting an original issue discount of $87,500 and expenses payable by us of $10,000. The Atlas Sciences Note has a 12 month term and bears interest at 10% per annum. Atlas Sciences may redeem any portion of the note, at any time after six months from the issuance date upon three business days' notice, subject to a
monthly maximum redemption amount of $300,000. We may prepay the Atlas Sciences Note at any time without penalty. Upon the occurrence of an event of default, the interest rate will be adjusted to 22% per annum.
Note 8. Capital Stock
2019 Offerings
On January 9, 2019, we entered into an underwriting agreement with H.C. Wainwright & Co., LLC (“H.C. Wainwright”), relating to an underwritten public offering of 444,444 shares of our common stock for $6.75 per share. We received proceeds from the offering of approximately $2,437,000, net of expenses and discounts of approximately $563,000.
On January 26, 2019, we issued 507,246 shares of common stock at a public offering price of $6.90 per share. We received proceeds from the offering of approximately $2,975,000, net of expenses and discounts of approximately $525,000.
Conversions and Exchanges of Debt into Common Stock
In May 2019, Iliad converted $350,000 of the Convertible Note into an aggregate of 51,327 shares of our common stock at a conversion price of $6.82 per share.
During the three and nine months ended September 30, 2019, the Company issued 173,557 shares of common stock to Iliad in exchange for the return of $612,175 of principal amounts due under the Convertible Note using the exchange date fair market value of the Company's common stock.
Note 9. Sale of Net Operating Losses
On April 4, 2019, we sold $11,638,516 of gross State of New Jersey NOL’s relating to the 2017 tax year as well as $71,968 of state research and development tax credits. The sale resulted in the net receipt by the Company of approximately $512,000, which is included in the income tax benefit line on the Condensed Consolidated Statements of Operations and Other Income (Loss).
Note 10. 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. Effective April 9, 2018, the Company cannot issue additional options from the 2008 Plan.
At September 30, 2019, 28,524 shares remain available for future awards under the 2011 Plan. On July 23, 2019, the Company issued 3,333 stock options to each of its five non-employee directors. The options will vest in equal monthly installments over the next twelve months and have an exercise price of $4.50 per share.
A summary of employee and non-employee stock option activity for the nine months ended September 30, 2019 for both continuing and discontinuing employees is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2019
|
100
|
|
|
$
|
173.10
|
|
|
5.70
|
|
$
|
—
|
|
|
Granted
|
20
|
|
|
5.89
|
|
|
|
|
|
|
Cancelled or expired
|
(52
|
)
|
|
183.59
|
|
|
|
|
|
|
Outstanding September 30, 2019
|
68
|
|
|
$
|
116.79
|
|
|
7.30
|
|
$
|
—
|
|
|
Exercisable September 30, 2019
|
38
|
|
|
$
|
194.39
|
|
|
5.80
|
|
$
|
—
|
|
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 September 30, 2019, total unrecognized compensation cost related to non-vested stock options granted to employees was approximately $214,000 for continuing operations, which we expect to recognize over the next 2.27 years. We expect to incur stock-based compensation for employees who will transfer to Buyer no later than January 15, 2020 pursuant to the TSA described in Note 1.
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 continuing and discontinuing employees during the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Volatility
|
94.57
|
%
|
|
76.89
|
%
|
|
93.86
|
%
|
|
77.69
|
%
|
|
Risk free interest rate
|
1.84
|
%
|
|
2.76
|
%
|
|
1.95
|
%
|
|
2.88
|
%
|
|
Dividend yield
|
0.00
|
%
|
|
0.00
|
%
|
|
0.00
|
%
|
|
0.00
|
%
|
|
Term (years)
|
5.27
|
|
|
6.32
|
|
|
5.44
|
|
|
6.47
|
|
|
Weighted-average fair value of options granted during the period
|
$
|
3.23
|
|
|
$
|
21.60
|
|
|
$
|
4.32
|
|
|
$
|
19.20
|
|
Restricted stock awards have been granted to employees, directors and consultants as compensation for services. At September 30, 2019, there was no unrecognized compensation cost related to non-vested restricted stock granted to employees and directors.
The following table summarizes the activities for our non-vested restricted stock awards for the nine months ended September 30, 2019 for both continuing and discontinuing employees:
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested Restricted Stock Awards
|
|
|
Number of
Shares
(in thousands)
|
|
Weighted-Average Grant Date Fair Value
|
|
Non-vested at January 1, 2019
|
1
|
|
|
$
|
102.82
|
|
|
Vested
|
(1
|
)
|
|
107.00
|
|
|
Non-vested at September 30, 2019
|
—
|
|
|
$
|
—
|
|
The TSA with Buyer described in Note 1 requires the Company to continue to employ individuals who will transfer to Buyer no later than six months from the closing of the transaction. Stock-based compensation related to these employees is included in discontinuing operations. 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 continuing operations included in our Unaudited Condensed Consolidated Statements of Operations and Other Comprehensive Income (Loss) during the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Cost of revenues
|
$
|
4
|
|
|
$
|
4
|
|
|
$
|
12
|
|
|
$
|
12
|
|
|
General and administrative
|
36
|
|
|
130
|
|
|
214
|
|
|
391
|
|
|
Total stock-based compensation related to continuing operations
|
$
|
40
|
|
|
$
|
134
|
|
|
$
|
226
|
|
|
$
|
403
|
|
During the three and nine months ended September 30, 2019, we recognized approximately $17,000 and $91,000, respectively, of stock-based compensation related to discontinuing operations. During the three and nine months ended September 30, 2018, we recognized approximately $55,000 and $328,000, respectively, of stock-based compensation related to discontinuing operations.
Note 11. Warrants
On January 14, 2019, we issued 31,111 warrants to purchase common stock at $7.43 per share. The warrants are immediately exercisable and expire on January 9, 2024. On January 31, 2019 we issued 35,507 warrants to purchase common stock at $7.59 per share. These warrants are immediately exercisable and expire on January 26, 2024. All of these warrants were issued in conjunction with the 2019 Offerings.
During the three and nine months ended September 30, 2019, 122,500 warrants issued as part of a public offering of the Company's common stock and warrants in December 2017 (the "2017 Offering") expired unexercised.
The following table summarizes the warrant activity for the nine months ended September 30, 2019 (in thousands, except exercise price):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued With / For
|
Exercise
Price
|
|
Warrants
Outstanding
January 1,
2019
|
|
2019 Warrants Issued
|
|
2019 Warrants Expired
|
|
Warrants Outstanding September 30, 2019
|
|
Non-Derivative Warrants:
|
|
|
|
|
|
|
|
|
|
|
Financing
|
$
|
300.00
|
|
|
8
|
|
|
—
|
|
|
—
|
|
|
8
|
|
|
Financing
|
450.00
|
|
|
9
|
|
|
—
|
|
|
—
|
|
|
9
|
|
|
2015 Offering
|
150.00
|
|
|
115
|
|
|
—
|
|
|
—
|
|
|
115
|
|
|
2017 Debt
|
27.60
|
|
|
15
|
|
|
—
|
|
|
—
|
|
|
15
|
|
|
2019 Offering
|
7.43
|
|
|
—
|
|
|
31
|
|
|
—
|
|
|
31
|
|
|
2019 Offering
|
7.59
|
|
|
—
|
|
|
35
|
|
|
—
|
|
|
35
|
|
|
Total non-derivative warrants
|
115.54
|
|
B
|
147
|
|
|
66
|
|
|
—
|
|
|
213
|
|
|
Derivative Warrants:
|
|
|
|
|
|
|
|
|
|
|
2016 Offerings
|
67.50
|
|
A
|
66
|
|
|
—
|
|
|
—
|
|
|
66
|
|
|
2017 Offering
|
70.50
|
|
A
|
117
|
|
|
—
|
|
|
(117
|
)
|
|
—
|
|
|
2017 Offering
|
75.00
|
|
A
|
6
|
|
|
—
|
|
|
(6
|
)
|
|
—
|
|
|
Total derivative warrants
|
67.50
|
|
B
|
189
|
|
|
—
|
|
|
(123
|
)
|
|
66
|
|
|
Total
|
$
|
104.18
|
|
B
|
336
|
|
|
66
|
|
|
(123
|
)
|
|
279
|
|
|
|
|
|
A
|
These warrants are subject to fair value accounting and contain a contingent net cash settlement feature. See Note 12.
|
|
|
|
|
B
|
Weighted-average exercise prices are as of September 30, 2019.
|
Note 12. Fair Value of Warrants
The following table summarizes the derivative warrant activity subject to fair value accounting for the nine months ended September 30, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued with/for
|
Fair value of warrants
outstanding as of
December 31, 2018
|
|
Change in fair
value of warrants
|
|
Fair value of warrants
outstanding as of
September 30, 2019
|
|
2016 Offerings
|
$
|
225
|
|
|
$
|
(210
|
)
|
|
$
|
15
|
|
|
2017 Offering
|
23
|
|
|
(23
|
)
|
|
—
|
|
|
|
$
|
248
|
|
|
$
|
(233
|
)
|
|
$
|
15
|
|
The derivative warrants issued as part of the 2016 Offerings are valued using a probability-weighted Binomial model, while 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 September 30, 2019 and December 31, 2018.
|
|
|
|
|
|
|
|
|
|
|
|
2016 Offerings
|
As of September 30, 2019
|
|
As of December 31, 2018
|
|
Exercise price
|
$
|
67.50
|
|
|
$
|
67.50
|
|
|
Expected life (years)
|
2.33
|
|
|
3.08
|
|
|
Expected volatility
|
114.58
|
%
|
|
100.51
|
%
|
|
Risk-free interest rate
|
1.68
|
%
|
|
2.46
|
%
|
|
Expected dividend yield
|
—
|
%
|
|
—
|
%
|
|
|
|
|
|
|
|
|
2017 Offering
|
As of December 31, 2018
|
|
Exercise price
|
$
|
70.80
|
|
|
Expected life (years)
|
0.44
|
|
|
Expected volatility
|
172.5
|
%
|
|
Risk-free interest rate
|
2.56
|
%
|
|
Expected dividend yield
|
—
|
%
|
Note 13. 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
|
Total
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Warrant liability
|
$
|
15
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
15
|
|
|
Note payable
|
8
|
|
|
—
|
|
|
—
|
|
|
8
|
|
|
|
$
|
23
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 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
|
$
|
248
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
248
|
|
|
Note payable
|
20
|
|
|
—
|
|
|
—
|
|
|
20
|
|
|
Other derivatives
|
86
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
86
|
|
|
|
$
|
354
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
354
|
|
At September 30, 2019 and December 31, 2018, the Company had a liability payable to VenturEast from a prior acquisition. The ultimate payment to VenturEast will be the fair value of 2,809 shares of our common stock at the time of payment. During the three months ended September 30, 2019 and 2018, we recognized a gain of approximately $5,000 and a loss of approximately $13,000, respectively, due to the change in value of the note. During the nine months ended September 30, 2019 and 2018, we recorded gains of approximately $12,000 and $68,000, respectively, due to the change in value of the note.
At September 30, 2019, the warrant liability consists of stock warrants issued as part of the 2016 Offerings that contain contingent net settlement features. In accordance with derivative accounting for warrants, we calculated the fair value of warrants and the assumptions used are described in Note 12, “Fair Value of Warrants.” During the three months ended September 30, 2019 and 2018, we recognized gains of approximately $34,000 and $12,000, respectively, on the derivative warrants due to the decrease in our stock price. During the nine months ended September 30, 2019 and 2018, we recognized gains of approximately $233,000 and $2,858,000 on the derivative warrants primarily due to changes in our stock price.
Realized and unrealized gains and losses related to the change in fair value of the VenturEast note, warrant liability and other derivatives are included in other income (expense) on the Unaudited Condensed Consolidated Statements of Operations and Other Comprehensive Income (Loss).
The following table summarizes the activity of the note payable to VenturEast and of our derivative warrants and other derivatives, which were measured at fair value using Level 3 inputs (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note Payable
|
|
Warrant
|
|
Other
|
|
|
to VenturEast
|
|
Liability
|
|
Derivatives
|
|
Fair value at December 31, 2018
|
$
|
20
|
|
|
$
|
248
|
|
|
$
|
86
|
|
|
Change in fair value
|
(12
|
)
|
|
(233
|
)
|
|
(86
|
)
|
|
Fair value at September 30, 2019
|
$
|
8
|
|
|
$
|
15
|
|
|
$
|
—
|
|
Note 14. 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. We are in the process of winding down the JV and do not expect to incur further liabilities in connection with the JV.
During the three and nine months ended September 30, 2019, there was no activity in the JV. Our share of the JV’s net loss was approximately $1,000 and $4,000 for the three and nine months ended September 30, 2018, respectively, and is included in general and administrative expense on the Unaudited Condensed Consolidated Statements of Operations and Other
Comprehensive Income (Loss). We have a net receivable due from the JV of approximately $10,000 at September 30, 2019, which is included in other assets in the Unaudited Condensed 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 15. Related Party Transactions
We had a consulting agreement with Equity Dynamics, Inc. (“EDI”), an entity controlled by the former Chairman of our Board of Directors, John Pappajohn, effective April 1, 2014 through August 31, 2018, pursuant to which EDI received a monthly fee of $10,000. Total expenses for the three and nine months ended September 30, 2018 were $90,000 and $150,000, respectively. As of September 30, 2019, we accrued liabilities of $70,000 for unpaid fees due to EDI.
As described in Note 1, the Company closed two public offerings in January 2019, in which various executives and directors purchased shares at the public offering price. On January 14, 2019, John Pappajohn, John Roberts, our President and Chief Executive Officer, and Geoffrey Harris, a Director, purchased 33,333 shares, 3,333 shares and 3,333 shares, respectively, at the public offering price of $6.75 per share. On January 31, 2019, John Pappajohn, John Roberts, Edmund Cannon, a Director, and M. Glenn Miles, our Chief Financial Officer, purchased 33,333 shares, 6,181 shares, 1,449 shares and 5,000 shares, respectively, at the public offering price of $6.90 per share.
On July 23, 2019, the Company issued 3,333 stock options to each of its five non-employee directors. The options will vest in equal monthly installments over the next twelve months and have an exercise price of $4.50 per share. The directors have waived their rights to any claim for past due director compensation as a condition of these option grants.
Note 16. 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 alleged 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 sought, 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. On August 28, 2018, the Court consolidated the two actions in one action captioned In re Cancer Genetics, Inc. Securities Litigation (the “Securities Litigation”) and appointed shareholder Randy Clark as the lead plaintiff. On October 30, 2018, the lead plaintiff filed an amended complaint, adding Edward Sitar as a defendant and seeking, among other things, compensatory damages in connection with purchases of CGI stock between March 10, 2016 and April 2, 2018. On December 31, 2018, Defendants filed a motion to dismiss the amended complaint for failure to state a claim. On March 1, 2019, lead plaintiff filed its opposition to the motion to dismiss. On April 15, 2019, defendants filed their reply in further support of their motion to dismiss. Defendants' motion remains pending before the Court. The Company is unable to predict the ultimate outcome of the Securities Litigation and therefore cannot estimate possible losses or ranges of losses, if any.
In addition, on June 1, 2018, September 20, 2018, and September 25, 2018, purported stockholders of the Company filed nearly identical derivative lawsuits on behalf of the Company in the U.S. District Court for the District of New Jersey against the Company (as a nominal defendant) and current and former members of the Company’s Board of Directors and current and former officers of the Company. The three cases are captioned: Bell v. Sharma et al., No. 2:18-cv-10009-CCC-MF, McNeece v. Pappajohn et al., No. 2:18-cv-14093, and Workman v. Pappajohn, et al., No. 2:18-cv-14259 (the “Derivative Litigation”). The complaints allege claims for breach of fiduciary duty, violations of Section 14(a) of the Securities Exchange Act of 1934 (premised upon alleged omissions in the Company’s 2017 proxy statement), and unjust enrichment, and allege that the individual defendants failed to implement and maintain adequate controls, which resulted in ineffective disclosure controls and procedures, and conspired to conceal this alleged failure. The lawsuits seek, among other things, damages and/or restitution to the Company, appropriate equitable relief to remedy the alleged breaches of fiduciary duty, and attorneys’ fees and costs. On November 9, 2018, the Court in the Bell v. Sharma action entered a stipulation filed by the parties staying the Bell action until the Securities Litigation is dismissed, with prejudice, and all appeals have been exhausted; or the defendants’ motion to dismiss in the Securities Litigation is denied in whole or in part; or either of the parties in the Bell action gives 30 days’ notice that they no longer consent to the stay. On December 10, 2018, the parties in the McNeece action filed a stipulation that is substantially identical to the Bell stipulation. On February 1, 2019, the Court in the Workman action granted a stipulation that is substantially
identical to the Bell stipulation. The Company is unable to predict the ultimate outcome of the Derivative Litigation and therefore cannot estimate possible losses or ranges of losses, if any.
Note 17. Subsequent Events
Reverse Stock Split
As discussed in Note 1, we effected a 30-for-1 reverse stock split of our common stock on October 24, 2019.
Settlement of Excess Consideration Note
On October 24, 2019, the Excess Consideration Note matured and was settled for $6,024,489. Buyer withheld from the settlement certain amounts as security for future claims and uncollected receivables. See Note 1 for additional details.
Settlement of Advance from NovellusDx, Ltd.
In October 2019, we settled our Advance from NDX by paying $1,100,000 and agreeing to pay nine monthly payments of $50,000 commencing in November 2019.
Loan from Atlas Sciences, LLC
On October 21, 2019, we issued a $1,347,500 unsecured promissory note to Atlas Sciences, as described further in Note 1. We utilized the proceeds from this note to partially repay our Convertible Note.