Note 1. Organization, Description of Business, Basis of Presentation, Reverse Stock Split, Business Disposals, 2019 Offerings, Standstill Agreement, Advance from NovellusDx, Ltd., Loan from Atlas Sciences, LLC, Recently Adopted Accounting Standard, and Recent Accounting Pronouncements
Cancer Genetics, Inc. (the "Company") supports the efforts of the biotechnology and pharmaceutical industries to develop innovative new drug therapies. Until the closing of the Business Disposals (as defined below) in July 2019, the Company was an emerging leader in enabling precision medicine in oncology by providing multi-disciplinary diagnostic and data solutions, facilitating individualized therapies through its diagnostic tests, services and molecular markers. Following the Business Disposals described below, the Company currently has 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 Discovery Services such as contract research services, focused primarily on unique specialized studies to guide drug discovery and development programs in the oncology and immuno-oncology fields.
The Company was 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 continues to have laboratories in Pennsylvania and Australia. The Company’s corporate headquarters are in Rutherford, New Jersey. The Company offers preclinical services such as predictive tumor models, human orthotopic xenografts and syngeneic immuno-oncology relevant tumor models in its Hershey PA facility, and is 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 its Australian-based facilities in Clayton, Victoria. Beginning in February 2020, the Company also has an animal testing facility and laboratory in Gilles Plains, South Australia, Australia.
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 ("SEC"). 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, 2019, filed with the SEC on May 29, 2020. The condensed consolidated balance sheet as of December 31, 2019, 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, 2020.
Reverse Stock Split
On October 24, 2019, the Company amended its Certificate of Incorporation and effected a 30-for-1 reverse stock split of its 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 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 Biosciences, 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 $23.5 million, less certain closing adjustments totaling $2.0 million, of which $7.7 million 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 $2.3 million was delivered to the Company in addition to the Excess Consideration Note.
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 $6.0 million, including interest of $24 thousand. The Buyer withheld from the settlement of the Excess Consideration Note approximately $775 thousand for a net worth adjustment (assets less liabilities) of the BioPharma business (“Net Worth”), $153 thousand to secure collection of certain older accounts receivable of the Company purchased by Buyer (“AR Holdback”) and an additional $735 thousand 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 Company received the full amounts of the AR Holdback and the Indemnification Holdback in April and May 2020. The fair value of the Excess Consideration Note was $888 thousand at March 31, 2020.
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 (collectively, the “Payroll and Benefits Services”), for a reasonable period commencing 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. The Buyer paid for certain costs of the Company under the TSA with respect to a limited number of employees and professionals. Such shared services amounted to $102 thousand for the quarter ended March 31, 2020. In addition, the Buyer is reimbursing the Company, in part, for the salaries and benefits of John A. Roberts, the Company’s Chief Executive Officer, and Glenn Miles, the Company’s Chief Financial Officer. The reimbursed portion of such salaries and benefits amounted to $102 thousand for the quarter ended March 31, 2020. Including the amounts due under the TSA described above, the net amount due to the Buyer is approximately $1.3 million at March 31, 2020. This net amount was subsequently remitted under the TSA arrangement.
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 $747 thousand, which includes approximately $45 thousand for certain equipment plus a $1.0 million advance payment of the Earn-Out (as defined below), less approximately $177 thousand of supplier invoices paid directly by siParadigm, an adjustment of $11 thousand and transaction costs of approximately $110 thousand. 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 March 31, 2020, the fair value of the current and long-term portion of the Earn-Out from siParadigm was approximately $772 thousand and $201 thousand, respectively. In addition, the current and long-term portion of the Advance from siParadigm was approximately $573 thousand and $119 thousand, respectively.
Under the Clinical Agreement, the Company agreed to certain non-competition and non-solicitation provisions, including that it 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 (through July 2022).
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 $786 thousand of interest expense on the convertible promissory note (“Convertible Note”) to Iliad Research and Trading, L.P. (“Iliad”) and Advance from NovellusDx, Ltd. (“NDX”) that was not required to be repaid to discontinuing operations during the three months ended March 31, 2019. Unless otherwise indicated, information in these notes to unaudited condensed consolidated financial statements relates to continuing operations.
Note 2. Going Concern
At March 31, 2020, the Company's history of losses required management to assess its ability to continue operating as a going concern, according to ASC 2015-40, Going Concern. Even after the disposal of the Company's BioPharma Business and Clinical Business discussed in Note 1, the Company does not project that cash at March 31, 2020 will be sufficient to fund normal operations for the twelve months from the issuance of these financial statements in the Quarterly Report on Form 10-Q. The Company's ability to continue as a going concern is dependent on reduced losses and improved future cash flows. Alternatively, the Company may be required to raise additional equity or debt capital, or consummate other strategic transactions. These factors raise substantial doubt about the Company's ability to continue as a going concern for the twelve months from the issuance of these financial statements in the Quarterly Report on Form 10-Q. The Company can provide no assurance that these actions will be successful or that additional sources of financing will be available on favorable terms, if at all.
The condensed consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to
continue as a going concern.
On March 11, 2020 the World Health Organization declared the novel strain of coronavirus (“COVID-19”) a global pandemic and recommended containment and mitigation measures worldwide. In addition, the Company is located in New Jersey and was under a shelter-in-place mandate. Many of the Company's customers worldwide were similarly impacted. The global outbreak of the COVID-19 continues to rapidly evolve, and the extent to which the COVID-19 may impact the Company's business will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the ultimate geographic spread of the disease, the duration of the outbreak, travel restrictions and social distancing in the United States and other countries, business closures or business disruptions, and the effectiveness of actions taken in the United States and other countries to contain and treat the disease. As a healthcare provider, the Company is still providing Discovery Services and has yet to experience a slowdown in its project work; however, the future of many projects may be delayed. The Company continues to vigilantly monitor the situation with its primary focus on the health and safety of its employees and clients.
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 $786 thousand of interest expense from the Convertible Note and Advance from NDX to discontinuing operations during the three months ended March 31, 2019. 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, 2019.
Summarized results of the Company's unaudited condensed consolidated discontinuing operations are as follows for the three months ended March 31, 2020 and 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
Revenue
|
$
|
—
|
|
|
$
|
5,017
|
|
Cost of revenues
|
—
|
|
|
3,635
|
|
Gross profit
|
—
|
|
|
1,382
|
|
Operating expenses:
|
|
|
|
Research and development
|
—
|
|
|
454
|
|
General and administrative
|
(8
|
)
|
|
1,527
|
|
Sales and marketing
|
—
|
|
|
923
|
|
Transaction costs
|
—
|
|
|
249
|
|
Total operating expenses
|
(8
|
)
|
|
3,153
|
|
Income (loss) from discontinuing operations
|
8
|
|
|
(1,771
|
)
|
Other income (expense):
|
|
|
|
Interest expense
|
—
|
|
|
(1,110
|
)
|
Total other income (expense)
|
—
|
|
|
(1,110
|
)
|
Net income (loss) from discontinuing operations
|
$
|
8
|
|
|
$
|
(2,881
|
)
|
Unaudited condensed consolidated carrying amounts of major classes of assets and liabilities from discontinuing operations were as follows as of March 31, 2020 and December 31, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
Current assets of discontinuing operations:
|
|
|
|
Accounts receivable, net of allowance for doubtful accounts of $4,518 in 2020; $4,536 in 2019
|
$
|
—
|
|
|
$
|
71
|
|
Current assets of discontinuing operations
|
$
|
—
|
|
|
$
|
71
|
|
|
|
|
|
Current liabilities of discontinuing operations
|
|
|
|
Accounts payable and accrued expenses
|
$
|
764
|
|
|
$
|
1,137
|
|
Due to Interpace Biosciences, Inc.
|
97
|
|
|
92
|
|
Current liabilities of discontinuing operations
|
$
|
861
|
|
|
$
|
1,229
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
Income (loss) from discontinuing operations
|
$
|
8
|
|
|
$
|
(2,881
|
)
|
|
|
|
|
Adjustments to reconcile income (loss) from discontinuing operations to net cash used in operating activities, discontinuing operations
|
|
|
|
Depreciation
|
—
|
|
|
256
|
|
Amortization
|
—
|
|
|
6
|
|
Provision for bad debts
|
(18
|
)
|
|
—
|
|
Accounts payable settlements
|
(26
|
)
|
|
—
|
|
Stock-based compensation
|
—
|
|
|
39
|
|
Amortization of operating lease right-of-use assets
|
—
|
|
|
94
|
|
Amortization of discount of debt and debt issuance costs
|
—
|
|
|
593
|
|
Interest added to Convertible Note
|
—
|
|
|
113
|
|
Change in working capital components:
|
|
|
|
Accounts receivable
|
89
|
|
|
(151
|
)
|
Other current assets
|
—
|
|
|
(272
|
)
|
Other non-current assets
|
—
|
|
|
(1
|
)
|
Accounts payable, accrued expenses and deferred revenue
|
(347
|
)
|
|
(942
|
)
|
Obligations under operating leases
|
—
|
|
|
(31
|
)
|
Deferred rent payable and other
|
—
|
|
|
(151
|
)
|
Due to Interpace Biosciences, Inc.
|
5
|
|
|
—
|
|
Net cash used in operating activities, discontinuing operations
|
$
|
(289
|
)
|
|
$
|
(3,328
|
)
|
Note 4. Revenue
The Company has remaining performance obligations as of March 31, 2020 and December 31, 2019 of $1.1 million and $1.2 million, respectively. Deferred revenue of $690 thousand from December 31, 2019 was recognized as revenue in the three months ended March 31, 2020. Remaining performance obligations as of March 31, 2020 of approximately $510 thousand are expected to be recognized as revenue in the next twelve months.
During the three months ended March 31, 2020, two customers accounted for approximately 56% of the Company's consolidated revenue from continuing operations. During the three months ended March 31, 2019, three customers accounted for approximately 55% of the Company's consolidated revenue from continuing operations.
During the three months ended March 31, 2020 and 2019, approximately 13% and 33%, respectively, of the Company's continuing operations revenue was earned outside the United States and collected in local currency.
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 March 31,
|
|
2020
|
|
2019
|
Common stock purchase warrants
|
279
|
|
|
402
|
|
Stock options
|
73
|
|
|
76
|
|
Convertible Note
|
—
|
|
|
126
|
|
Advance from NDX
|
—
|
|
|
90
|
|
Restricted shares of common stock
|
—
|
|
|
1
|
|
|
352
|
|
|
695
|
|
Note 6. Leasing Arrangements
Operating Leases
The Company leases its laboratory, research facility and administrative office space under various operating leases. The Company also leases scientific equipment under various finance leases. Following the Business Disposals, the Company has assigned its office leases in North Carolina and New Jersey to Buyer.
The Company determines 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 its unaudited condensed consolidated balance sheets. Finance leases are included in fixed assets, net of accumulated depreciation and obligations under finance leases.
ROU assets represent the Company's right to use an underlying asset for the lease term and lease obligations represent the Company's obligation to make lease payments arising from the lease. Operating lease ROU assets and operating lease obligations are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. As the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The Company's incremental borrowing rate was determined by adjusting its secured borrowing interest rate for the longer-term nature of its leases. The Company's variable lease payments primarily consist of maintenance and other operating expenses from its 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. The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
The Company has lease agreements with lease and non-lease components. The Company has elected to account for these lease and non-lease components as a single lease component. The Company is 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 operating and finance lease expense were as follows for the three months ended March 31, 2020 and 2019, respectively, for continuing operations (in thousands):
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2020
|
|
Three months ended March 31, 2019
|
Finance lease cost:
|
|
|
|
Amortization of right-of use assets
|
$
|
21
|
|
|
$
|
10
|
|
Interest on lease liabilities
|
3
|
|
|
1
|
|
Operating lease cost
|
56
|
|
|
44
|
|
Short-term lease cost
|
28
|
|
|
30
|
|
Variable lease cost
|
15
|
|
|
24
|
|
|
$
|
123
|
|
|
$
|
109
|
|
Supplemental cash flow related to leases of the Company's continuing operations was as follows for the three months ended March 31, 2020 and March 31, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2020
|
|
Three months ended March 31, 2019
|
Cash paid amounts included in the measurement of lease liabilities:
|
|
|
|
Operating cash flows used for operating leases
|
$
|
56
|
|
|
$
|
44
|
|
Other supplemental information related to leases of the Company's continuing operations was as follows at March 31, 2020 and 2019, respectively:
|
|
|
|
|
|
|
|
Three months ended March 31, 2020
|
|
Three months ended March 31, 2019
|
Weighted average remaining lease term (in years)
|
|
|
|
Operating leases
|
0.63
|
|
|
1.73
|
|
Finance leases
|
3.13
|
|
|
1.89
|
|
|
|
|
|
Weighted average discount rate
|
|
|
|
Operating leases
|
7.99
|
%
|
|
7.96
|
%
|
Finance leases
|
8.24
|
%
|
|
10.28
|
%
|
At March 31, 2020, future estimated minimum lease payments under non-cancelable operating leases were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance
Leases
|
|
Operating
Leases
|
|
Total
|
2020 (remaining 9 months)
|
|
$
|
60
|
|
|
$
|
158
|
|
|
$
|
218
|
|
2021
|
|
39
|
|
|
20
|
|
|
59
|
|
2022
|
|
31
|
|
|
11
|
|
|
42
|
|
2023
|
|
31
|
|
|
2
|
|
|
33
|
|
2024
|
|
7
|
|
|
—
|
|
|
7
|
|
Total minimum lease payments
|
|
$
|
168
|
|
|
191
|
|
|
359
|
|
Less amount representing interest
|
|
21
|
|
|
17
|
|
|
38
|
|
Present value of net minimum obligations
|
|
147
|
|
|
174
|
|
|
321
|
|
Less current obligation under finance and operating leases
|
|
66
|
|
|
153
|
|
|
219
|
|
Long-term obligation under finance and operating leases
|
|
$
|
81
|
|
|
$
|
21
|
|
|
$
|
102
|
|
Note 7. Financing
Advance from NDX
On September 18, 2018, the Company entered into the Merger Agreement with NDX. In connection with signing the Merger Agreement, NDX loaned the Company $1.5 million. 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 thousand on the date of execution and $1.0 million upon receipt of proceeds from the Excess Consideration Note. The $1.0 million 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 thousand 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 thousand commencing in November 2019. 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%. At March 31, 2020, the principal balance of the Advance from NDX was $200 thousand. Subsequent to March 31, 2020, an additional $150 thousand was paid on the Advance from NDX.
Atlas Sciences Note
In October 2019, the Company entered into a twelve month unsecured promissory note with Atlas Sciences, LLC ("Atlas Sciences") of $1.3 million (the "Atlas Sciences Note"). The Atlas Sciences Note resulted in cash receipts of $1.3 million, reflecting an original issue discount of $88 thousand and expenses payable by the Company of $10 thousand. 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 thousand. The Company 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. At March 31, 2020, the Atlas Sciences Note had a principal balance of $1.3 million, which is presented net of discounts and unamortized debt issuance costs of $31 thousand and $3 thousand, respectively. See Note 15 for transactions with Atlas after March 31, 2020.
Note 8. Stock-Based Compensation
The Company has 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 the Company's 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 March 31, 2020, 24 thousand shares remain available for future awards under the 2011 Plan. On January 2, 2020, the Company granted 20 thousand options to key employees. The options will vest in equal monthly installments over the next twelve months and have an exercise price of $5.53 per share.
A summary of employee and non-employee stock option activity for the three months ended March 31, 2020 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, 2020
|
64
|
|
|
$
|
113.63
|
|
|
7.48
|
|
$
|
24
|
|
Granted
|
20
|
|
|
5.53
|
|
|
|
|
|
Cancelled or expired
|
(11
|
)
|
|
87.11
|
|
|
|
|
|
Outstanding March 31, 2020
|
73
|
|
|
$
|
88.15
|
|
|
7.93
|
|
$
|
—
|
|
Exercisable March 31, 2020
|
43
|
|
|
$
|
140.57
|
|
|
7.01
|
|
$
|
—
|
|
Aggregate intrinsic value represents the difference between the fair value of the Company's common stock and the exercise price of outstanding, in-the-money options.
As of March 31, 2020, total unrecognized compensation cost related to non-vested stock options granted to employees was approximately $207 thousand for continuing operations, which the Company expect to recognize over the next 1.72 years.
The fair value of options granted to employees is estimated on the grant date using the Black-Scholes option valuation model. This valuation model requires the Company 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 the Company's 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. Due to significant changes in the Company's business, the Company used 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 the Company's 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. The Company use an expected dividend yield of zero, as it does 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 March 31,
|
|
2020
|
|
2019
|
Volatility
|
110.43
|
%
|
|
90.15
|
%
|
Risk free interest rate
|
1.68
|
%
|
|
2.54
|
%
|
Dividend yield
|
0.00
|
%
|
|
0.00
|
%
|
Term (years)
|
5.27
|
|
|
6.32
|
|
Weighted-average fair value of options granted during the period
|
$
|
4.45
|
|
|
$
|
10.07
|
|
Restricted stock awards have been granted to employees, directors and consultants as compensation for services. At March 31, 2020, there was no unrecognized compensation cost related to non-vested restricted stock granted to employees and directors.
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 the Company's continuing operations included in its Unaudited Condensed Consolidated Statements of Operations and Other Comprehensive Income (Loss) during the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
Cost of revenues
|
$
|
4
|
|
|
$
|
4
|
|
General and administrative
|
54
|
|
|
115
|
|
Total stock-based compensation related to continuing operations
|
$
|
58
|
|
|
$
|
119
|
|
During the three months ended March 31, 2020 and 2019, the Company recognized approximately $0 thousand and $39 thousand, respectively, of stock-based compensation (benefit) related to discontinuing operations.
Note 9. Warrants
The following table summarizes the warrant activity for the three months ended March 31, 2020 (in thousands, except exercise price):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued With / For
|
Exercise
Price
|
|
Warrants
Outstanding
January 1,
2020
|
|
2020 Warrants Issued
|
|
2020 Warrants Expired
|
|
Warrants Outstanding March 31, 2020
|
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
|
213
|
|
|
—
|
|
|
—
|
|
|
213
|
|
Derivative Warrants:
|
|
|
|
|
|
|
|
|
|
2016 Offerings
|
67.50
|
|
A
|
66
|
|
|
—
|
|
|
—
|
|
|
66
|
|
Total derivative warrants
|
67.50
|
|
B
|
66
|
|
|
—
|
|
|
—
|
|
|
66
|
|
Total
|
$
|
104.18
|
|
B
|
279
|
|
|
—
|
|
|
—
|
|
|
279
|
|
|
|
A
|
These warrants are subject to fair value accounting and contain a contingent net cash settlement feature. See Note 10.
|
|
|
B
|
Weighted-average exercise prices are as of March 31, 2020.
|
Note 10. Fair Value of Warrants
The following table summarizes the derivative warrant activity subject to fair value accounting for the three months ended March 31, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued with/for
|
Fair value of warrants
outstanding as of
December 31, 2019
|
|
Change in fair
value of warrants
|
|
Fair value of warrants
outstanding as of
March 31, 2020
|
2016 Offerings
|
$
|
178
|
|
|
$
|
(127
|
)
|
|
$
|
51
|
|
The derivative warrants issued as part of the 2016 Offerings are valued using a probability-weighted Binomial model. The following tables summarize the assumptions used in computing the fair value of derivative warrants subject to fair value accounting at March 31, 2020 and December 31, 2019.
|
|
|
|
|
|
|
|
|
2016 Offerings
|
As of March 31, 2020
|
|
As of December 31, 2019
|
Exercise price
|
$
|
67.50
|
|
|
$
|
67.50
|
|
Expected life (years)
|
1.83
|
|
|
2.08
|
|
Expected volatility
|
157.00
|
%
|
|
150.69
|
%
|
Risk-free interest rate
|
0.23
|
%
|
|
1.58
|
%
|
Expected dividend yield
|
—
|
%
|
|
—
|
%
|
Note 11. Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The Fair Value Measurements and Disclosures Topic of the FASB Accounting Standards Codification requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the Company's 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 the Company has 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 the Company's own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The following table summarizes the financial assets and liabilities measured at fair value on a recurring basis segregated by the level of valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
|
Total
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Assets:
|
|
|
|
|
|
|
|
|
Earn-Out from siParadigm
|
|
$
|
973
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
973
|
|
|
|
$
|
973
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
973
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Warrant liability
|
|
$
|
51
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
51
|
|
|
|
$
|
51
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
Total
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Assets:
|
|
|
|
|
|
|
|
|
Earn-Out from siParadigm
|
|
$
|
1,103
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,103
|
|
|
|
$
|
1,103
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,103
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Warrant liability
|
|
$
|
178
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
178
|
|
Notes payable
|
|
16
|
|
|
—
|
|
|
—
|
|
|
16
|
|
|
|
$
|
194
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
194
|
|
At December 31, 2019, the Company had a liability payable to VenturEast from a prior acquisition. The liability to VenturEast was settled during the three months ended March 31, 2020 with 3 thousand shares of common stock at a value of $4.20 per common share and following two payments of $50 thousand. The cash payments were recorded in general and administrative expense on the consolidated statement of operations and other comprehensive income (loss). During the three months ended March 31, 2020 and 2019, the Company recognized a gain of approximately $4 thousand and $0 thousand, respectively, due to the change in value of the note.
At March 31, 2020, 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, the Company calculated the fair value of warrants and the assumptions used are described in Note 10, “Fair Value of Warrants.” During the three months ended March 31, 2020 and 2019, the Company recognized gains (losses) of approximately $127 thousand and $7 thousand, respectively, on the derivative warrants due to the decrease in its stock price.
At March 31, 2020, the Company had an earn-out receivable from siParadigm that is based on tests performed by siParadigm for the Company's former Clinical Business customers between July 5, 2019 and July 4, 2020, as discussed in Note 1. The value of the earn-out is based on actual tests performed through March 31, 2020 and the Company's estimate of tests to be performed through the remainder of the earn-out period.
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 the Company's derivative warrants and other derivatives, which were measured at fair value using Level 3 inputs (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
Liabilities
|
|
|
Earn-Out
|
|
|
|
|
|
|
from
|
|
Note Payable
|
|
Warrant
|
|
|
siParadigm
|
|
to VenturEast
|
|
Liability
|
Fair value at January 1, 2020
|
|
$
|
1,103
|
|
|
$
|
16
|
|
|
$
|
178
|
|
Receipts received during period
|
|
(154
|
)
|
|
—
|
|
|
—
|
|
Change in fair value
|
|
24
|
|
|
(4
|
)
|
|
(127
|
)
|
Settlement of liability
|
|
—
|
|
|
(12
|
)
|
|
—
|
|
Fair value at March 31, 2020
|
|
$
|
973
|
|
|
$
|
12
|
|
|
$
|
51
|
|
Note 12. Joint Venture Agreement
In November 2011, the Company entered into an affiliation agreement with the Mayo Foundation for Medical Education and Research (“Mayo”), subsequently amended. Under the agreement, the Company 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 the Company 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.
During the three months ended March 31, 2020 and 2019, there was no activity in the JV. The Company has a net receivable due from the JV of approximately $10 thousand at March 31, 2020, which is included in other assets in the Unaudited Condensed Consolidated Balance Sheets. The JV was dissolved effective February 14, 2020, and the dissolution terms include an estimated final cash distribution from the JV to the Company of approximately $$92 thousand, to be paid as soon as practicable. The Company received the first payment of $36 thousand in April 2020, which is consistent with the dissolution terms.
Note 13. Related Party Transactions
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, who was then a Director, John Roberts, the Company's President and Chief Executive Officer, and Geoffrey Harris, a Director, purchased 33 thousand shares, 3 thousand shares and 3 thousand 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, the Company's Chief Financial Officer, purchased 33 thousand shares, 6 thousand shares, 1 thousand shares and 5 thousand shares, respectively, at the public offering price of $6.90 per share.
Note 14. 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 the Company's business, operational, and financial results. The lawsuits sought, among other things, unspecified compensatory damages in connection with purchases of the Company's 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. The Court granted the defendants’ motion to dismiss during the oral
argument and on February 25, 2020, the Court issued a written order dismissing the case with prejudice. The Lead Plaintiff has not appealed the dismissal.
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. On May 15, 2020, the plaintiffs in the Workman action filed a notice of voluntary dismissal to the original action and have formally withdrawn. On May 18, 2020, the plaintiffs in the McNeece action filed a notice of voluntary dismissal to the original action and have formally withdrawn. On June 22, 2020, the plaintiffs in the Bell action voluntarily dismissed their action. Based upon the above dismissal of the securities class action litigation, the Company believes this matter is closed. The Company is expensing legal costs associated with the loss contingency as incurred.
Note 15. Subsequent Events
Between June 3, 2020 and June 9, 2020, the Company issued an aggregate of approximately 153 thousand shares of the Company’s common stock to Atlas Sciences in exchange for the return to the Company of $500 thousand of principal amount from their unsecured promissory note.