Item 1B.
Unresolved Staff Comments
None.
As of December 31, 2016, we had a lease for approximately 17,900 square feet of office and laboratory space in Rutherford, New Jersey, 24,900 square feet of laboratory space located in Research Triangle Park (RTP) in Morrisville, North Carolina,
10,000 square feet of laboratory space in Hyderabad, India, 2,700 square feet of laboratory space in Shanghai, China and approximately 19,100 square feet of laboratory space in Los Angeles, California. We have escalating lease agreements for both our New Jersey and North Carolina spaces which expire February 2018 and May 2020, respectively. We also have a lease agreement for our California space which expires on December 31, 2017.
Item 3.
Item 3.
Legal Proceedings
In the normal course of business, the Company may be involved in legal proceedings or threatened legal proceedings. We are not party to any legal proceedings or aware of any threatened legal proceedings which are expected to have a material adverse effect on our financial condition, results of operations or liquidity.
Item 4.
Item 4.
Mine Safety Disclosures
Not applicable.
PART II
Item 5.
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The following table sets forth, for the periods indicated, the reported high and low sales prices of our common stock on The NASDAQ Capital Market.
Holders
As of December 31, 2016, we had approximately 95 holders of record of our common stock. The number of record holders was determined from the records of our transfer agent and does not include beneficial owners of common stock whose shares are held in the names of various security brokers, dealers, and registered clearing agencies. The transfer agent of our common stock is Continental Stock Transfer & Trust, 17 Battery Place, 8th Floor, New York, New York, 10004.
Dividends
We have never declared dividends on our equity securities, and currently do not plan to declare dividends on shares of our common stock in the foreseeable future. We expect to retain our future earnings, if any, for use in the operation and expansion of our business. Our loan agreements prohibit us from paying cash dividends on our common stock and the terms of any future loan agreement we enter into or any debt securities we may issue are likely to contain similar restrictions on the payment of dividends. Subject to the foregoing, the payment of cash dividends in the future, if any, will be at the discretion of our board of directors and will depend upon such factors as earnings levels, capital requirements, our overall financial condition and any other factors deemed relevant by our board of directors.
Equity Compensation Plan Information
The following table provides information as of December 31, 2016 regarding shares of our common stock that may be issued under our existing equity compensation plans, including our 2008 Stock Option Plan (the “2008 Plan”) and our 2011 Equity Incentive Plan (the “2011 Plan”) as well as shares issued outside of these plans.
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(1)Does not include any restricted stock as such shares are already reflected in our outstanding shares.
(2)Consists of the 2008 Plan and the 2011 Plan.
(3)Includes securities available for future issuance under the 2008 Plan and the 2011 Plan.
(4)
These options were issued to one of our current board members in connection with consulting services.
Item 6.
Item 6.
Selected Financial Data.
The selected financial data set forth below as of December 31, 2016 and 2015, and for the years then ended has been derived from the audited consolidated financial statements of the Company, which are included elsewhere in this Annual Report on Form 10-K. We derived the consolidated financial data as of and for the years ended December 31, 2014, 2013 and 2012 from our audited consolidated financial statements that are not included elsewhere in this Annual Report on Form 10-K.
The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the audited consolidated financial statements, and the notes thereto, and other financial information included herein. Our historical results are not necessarily indicative of our future results.
Item 7.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
As used herein, the “Company,” “we,” “us,” “our” or similar terms, refer to Cancer Genetics, Inc. and its wholly owned subsidiaries: Cancer Genetics Italia, S.r.l., Gentris, LLC and BioServe Biotechnologies (India) Private Limited, except as expressly indicated or unless the context otherwise requires. The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help facilitate an understanding of our financial condition and our historical results of operations for the periods presented. This MD&A should be read in conjunction with the audited consolidated financial statements and notes thereto included in this annual report on Form10-K. This MD&A may contain forward-looking statements that involve risks and uncertainties. For a discussion on forward-looking statements, see the information set forth in the Introductory Note to this Annual Report under the caption “Forward Looking Statements”, which information is incorporated herein by reference.
Overview
We are an emerging leader in the field of precision medicine, enabling individualized therapies in the field of oncology through our diagnostic products and services and molecular markers. We develop, commercialize and provide molecular- and biomarker-based tests and services that enable physicians to personalize the clinical management of each individual patient by providing genomic information to better diagnose, monitor and inform cancer treatment and that enable biotech and pharmaceutical companies engaged in oncology trials to better select candidate populations and reduce adverse drug reactions by providing information regarding genomic factors influencing subject responses to therapeutics. We have a comprehensive, disease-focused oncology testing portfolio. Our tests and techniques target a wide range of cancers, covering nine of the top ten cancers in prevalence in the United States, with additional unique capabilities offered by our FDA-cleared Tissue of Origin® test for identifying difficult to diagnose tumor types or poorly differentiated metastatic disease.
Our vision is to become the oncology diagnostics partner for pharmaceutical and biotech companies and clinicians by participating in the entire care continuum from bench to bedside. We believe the oncology industry is undergoing a rapid evolution in its approach to diagnostic, prognostic and theranostic testing, embracing precision medicine and individualized testing as a means to drive higher standards of patient treatment and disease management. Similarly, pharmaceutical and biotech companies are increasingly working with precision diagnostic and molecular technology providers such as CGI to provide molecular profiles on clinical trial participants. These profiles may help identify biomarker and genomic variations that may be responsible for differing responses to oncology therapies, thereby increasing the efficiency of trials while lowering costs. We believe tailored and combination therapies can revolutionize oncology care through molecular- and biomarker-based testing services, enabling physicians and researchers to target the factors that make each patient and disease unique.
Our services are performed at our state-of-the-art laboratories located in New Jersey, North Carolina, California, Shanghai (China), and Hyderabad, India. Our laboratories comply with the highest regulatory standards as appropriate for the services they deliver including CLIA, CAP, NY State, California State and NABL (India). Our services are built on a foundation of world-class scientific knowledge and intellectual property in solid and blood-borne cancers, as well as strong academic relationships with major cancer centers such as Memorial Sloan-Kettering, Mayo Clinic, and the National Cancer Institute.
Our clinical offerings include our portfolio of proprietary tests targeting hematological, urogenital and HPV-associated cancers, in conjunction with ancillary non-proprietary tests. Our proprietary tests target cancers that are difficult to prognose and predict treatment outcomes through currently available mainstream techniques. We provide our proprietary tests and services, along with a comprehensive range of non-proprietary oncology-focused tests and laboratory services, to oncologists and pathologists at hospitals, cancer centers, and physician offices, as well as biotech and pharmaceutical companies to support their clinical trials. Our proprietary tests are based principally on our expertise in specific cancer types, test development methodologies and proprietary algorithms correlating genetic events with disease specific information. Our portfolio primarily includes comparative genomic hybridization (CGH) microarrays and next generation sequencing (NGS) panels, gene expression tests, and DNA fluorescent in situ hybridization (FISH) probes.
The non-proprietary testing services we offer are focused in part on specific oncology categories where we are developing our proprietary tests. We believe that there is significant synergy in developing and marketing a complete set of tests and services that are disease focused and delivering those tests and services in a comprehensive manner to help with treatment decisions. The insight that we develop in delivering the non-proprietary services are often leveraged in the development of our proprietary programs and now increasingly in the validation of our proprietary programs, such as MatBA and Focus::NGS.
We expect to continue to incur material losses for the near future. We incurred losses of $15.8 million and $20.2 million for fiscal years ended December 31, 2016 and 2015, respectively. As of December 31, 2016, we had an accumulated deficit of $114.0 million.
Acquisitions
On October 9, 2015, we acquired substantially all of the assets of Response Genetics, Inc. (“Response Genetics”), now referred to as CGI West, with its principal place of business in California, for aggregate consideration of approximately $12.9 million.
Key Factors Affecting our Results of Operations and Financial Condition
Our overall long-term growth plan is predicated on our ability to develop and commercialize our proprietary tests, penetrate the Pharmaceutical and Biotechnology (Biopharma) community to achieve more revenue supporting clinical trials and develop and penetrate the Indian market. Our proprietary tests include CGH microarrays, NGS panels, gene expression tests and DNA FISH probes. We continue to develop additional proprietary tests. To facilitate market adoption of our proprietary tests, we anticipate having to successfully complete additional studies with clinical samples and publish our results in peer-reviewed scientific journals. Our ability to complete such studies is dependent upon our ability to leverage our collaborative relationships with leading institutions to facilitate our research and obtain data for our quality assurance and test validation efforts.
We believe that the factors discussed in the following paragraphs have had and are expected to continue to have a material impact on our results of operations and financial condition.
Revenues
Our revenue is primarily generated through our Clinical Services and Biopharma Services. Clinical Services can be billed to Medicare, another third party insurer or the referring community hospital or other healthcare facility or patients in accordance with state and federal law. Biopharma Services are billed to the customer directly. While we have agreements with our Biopharma clients, volumes from these clients are subject to the progression and continuation of the clinical trials which can impact testing volume. We also derive limited revenue from Discovery Services, which are services provided in the development of new testing assays and methods. Discovery Services are billed directly to the customer.
We have historically derived a significant portion of our revenue from a limited number of test ordering sites, although the test ordering sites that generate a significant portion of our revenue have changed from period to period. Test ordering sites account for all of our Clinical Services revenue along with a portion of the Biopharma Services revenue. Our test ordering sites are hospitals, cancer centers, reference laboratories, physician offices, and pharmaceutical and biotechnology companies. Oncologists and pathologists at these sites order the tests on behalf of the needs of their oncology patients or as part of a clinical trial sponsored by a pharmaceutical or biotechnology company in which the patient is being enrolled.
The top five test ordering clients during 2016 and 2015 accounted for 31% and 49%, respectively, of our testing volumes, with 6% and 18%, respectively, of the test volume coming from community hospitals. During the year ended December 31, 2016, one Biopharma client accounted for approximately 16% of our revenue. During the year ended December 31, 2015 one Biopharma client accounted for approximately 19% of our revenue. The loss of our largest client would materially adversely affect our results of operations, however the loss of any other test ordering client would not materially adversely affect our results of operations.
We receive revenue for our Clinical Services from Medicare, other insurance carriers and other healthcare facilities. Some of our customers choose, generally at the beginning of our relationship, to pay for laboratory services directly as opposed to having patients (or their insurers) pay for those services and providing us with the patients’ insurance information. A hospital may elect to be a direct bill customer and pay our bills directly, or may provide us with patient information so that their patients pay our bills, in which case we generally expect payment from their private insurance carrier or Medicare. In a few instances, we have arrangements where a hospital may have two accounts with us, so that certain tests are billed directly to the hospital, and certain tests are billed to and paid by a patient’s insurer. The billing arrangements generally are dictated by our customers and in accordance with state and federal law.
For the year ended December 31, 2016, Medicare accounted for approximately 14% of our total revenue, other insurance accounted for approximately 20% of our total revenue and other healthcare facilities accounted for 5% of our total revenue. On average, we generate less revenue per test from other healthcare facilities billed directly, than from other insurance payors.
Cost of Revenues
Our cost of revenues consists principally of internal personnel costs, including non-cash stock-based compensation, laboratory consumables, shipping costs, overhead and other direct expenses, such as specimen procurement and third party validation studies. We are pursuing various strategies to reduce and control our cost of revenues, including automating our processes through more efficient technology and attempting to negotiate improved terms with our suppliers. In 2015, we acquired substantially all of the assets of Response Genetics in California. Overall, with three acquisitions completed, we have made significant progress with integrating our resources and services and leveraging enterprise wide purchasing power to gain supplier discounts, in an effort to reduce costs. We will continue to assess other possible advantages to help us improve our cost structure.
Operating Expenses
We classify our operating expenses into three categories: research and development, sales and marketing, and general and administrative. Our operating expenses principally consist of personnel costs, including non-cash stock-based compensation, outside services, laboratory consumables and overhead, development costs, marketing program costs and legal and accounting fees.
Research and Development Expenses. We incur research and development expenses principally in connection with our efforts to develop our proprietary tests. Our primary research and development expenses consist of direct personnel costs, laboratory equipment and consumables and overhead expenses. In 2013, we entered into a joint venture with the Mayo Foundation for Medical Education and Research, with a focus on developing oncology diagnostic services and tests utilizing next generation sequencing. These efforts continued throughout 2015 and 2016. All research and development expenses are charged to operations in the periods they are incurred.
General and Administrative Expenses. General and administrative expenses consist principally of personnel-related expenses, professional fees, such as legal, accounting and business consultants, occupancy costs, bad debt and other general expenses. We have incurred increases in our general and administrative expenses and anticipate further increases as we expand our business operations.
Sales and Marketing Expenses. Our sales and marketing expenses consist principally of personnel and related overhead costs for our sales team and their support personnel, travel and entertainment expenses, and other selling costs including sales collaterals and trade shows. We expect our sales and marketing expenses to increase as we expand into new geographies and add new clinical tests and services.
Seasonality
Our business experiences decreased demand during spring vacation season, summer months and the December holiday season when patients are less likely to visit their health care providers. We expect this trend in seasonality to continue for the foreseeable future.
Results of Operations
Years Ended December 31, 2016 and 2015
The following table sets forth certain information concerning our results of operations for the periods shown:
Revenue
The breakdown of our revenue is as follows:
Revenue increased 50%, or $9.0 million, to $27.0 million for the year ended December 31, 2016, from $18.0 million for the year ended December 31, 2015, principally due to a full year of operations at CGI West, whose revenue accounted for $6.5 million of the increase. The remaining increase was driven by additional clinical trial studies, as we execute on a growing number of signed contracts with pharmaceutical and biotechnology companies, and continued growth of our Discovery Services. Our average revenue (excluding probe revenue) per test decreased to $421 per test for the year ended December 31, 2016 from $532 per test for the year ended December 31, 2015, principally due to the increased volume from our CGI West facility at lower average revenue per test. Overall test volumes increased by 142% from 19,996 tests for the year ended December 31, 2015 to 48,427 tests for the year ended December 31, 2016.
Revenue from Biopharma Services increased 32%, or $3.8 million, to $15.3 million for the year ended December 31, 2016, from $11.6 million for the year ended December 31, 2015, principally due to additional clinical trial studies performed at our New Jersey location which accounted for $2.9 million of the increase and a full year of operations at CGI West, which accounted for $1.6 million of the increase. These increases were partially offset by a decrease in Biopharma Services revenue of $0.7 million at our North Carolina location as we continue to leverage a multi-site strategy utilizing our diverse portfolio of diagnostic tests and medical and clinical staff expertise across our enterprise. Revenue from Clinical Services customers increased 88%, or $5.0 million, to $10.7 million for the year ended December 31, 2016, from $5.7 million for the year ended December 31, 2015, principally due to a full year of operations at CGI West, which accounted for $4.9 million of the increase. Revenue from Discovery Services increased $0.3 million, to $1.1 million for the year ended December 31, 2016, representing 4% of total revenue.
Cost of Revenues
Cost of revenues increased 21%, or $3.0 million, to $17.1 million for the year ended December 31, 2016, from $14.1 million for the year ended December 31, 2015, principally due to the following: increased costs of $3.8 million related to a full year of
operations at CGI West, and lab supplies expenses increased by $0.3 million or 7% as a result of higher test volumes. These increases were partially offset by a decrease in compensation of $1.1 million due to decreased headcounts and our focus on integrating prior acquisitions, executing on enterprise-wide purchasing programs and controlling direct labor costs.
Operating Expenses
Research and Development Expenses. Research and development expenses increased 9%, or $0.5 million, to $6.0 million for the year ended December 31, 2016, from $5.5 million for the year ended December 31, 2015. Research and development costs increased by $1.6 million, as we added scientific, medical and clinical expertise to our R&D initiatives from our staff at CGI West, and related supplies costs increased by $0.2 million, or 18%, as a result of an increase in R&D activities across the enterprise. These increases were partially offset by a decrease in our share of the loss from Oncospire, our joint venture with Mayo Clinic, of $0.6 million, or 90%, and a reduction in non-cash stock-based compensation of $0.2 million, or 61%. We also reduced collaboration costs by $0.4 million during the year ended December 31, 2016 due to the proximity to reaching commercialization of a developed test with our joint venture partner Mayo Clinic.
General and Administrative Expenses. General and administrative expenses increased 10%, or $1.5 million to $16.0 million for the year ended December 31, 2016, from $14.6 million for the year ended December 31, 2015. The increase primarily relates to the cost of operating CGI West for a full year, which increased general and administrative costs by $2.5 million. This increase was partially offset by a decrease in non-cash stock-based compensation of $0.6 million, or 30%, and a reduction in travel and entertainment costs of $0.3 million, or 66%.
Sales and Marketing Expenses. Sales and marketing expenses decreased 11%, or $0.6 million, to $4.7 million for the year ended December 31, 2016, from $5.3 million for the year ended December 31, 2015, principally due to the following: compensation costs decreased by $0.8 million, or 21%, as a result of decreased headcounts, along with a $0.1 million decrease in advertising and trade show expenses, a $0.1 million decrease in consulting fees and a $0.1 million decrease in travel and entertainment as a result of our efforts to cut costs. These decreases were offset partially by increased costs associated with operating CGI West for a full year of $0.6 million
Interest Income and Expense
Interest expense increased 46%, or $0.1 million, to $0.4 million for the year ended December 31, 2016, from $0.3 million for the year ended December 31, 2015, principally due to the higher interest rate related to debt that was refinanced in May 2015.
Change in Fair Value of Warrant Liability
Changes in fair value of some of our common stock warrants may impact our results. Accounting rules require us to record certain of our warrants as a liability, measure the fair value of these warrants each quarter and record changes in that value in earnings. As a result of a decrease in our stock price, we recognized non-cash income of $1.5 million for the year ended December 31, 2016, as compared to non-cash income of $35,000 for the year ended December 31, 2015. In the future, if our stock price increases, we would record a non-cash charge as a result of changes in the fair value of our common stock warrants. Consequently, we may be exposed to non-cash charges, or we may record non-cash income, as a result of this warrant exposure in future periods.
Change in Fair Value of Acquisition Note Payable
The change in fair value of the acquisition note payable resulted in $0.2 million in non-cash income for the year ended December 31, 2016, as compared to $0.3 million for the year ended December 31, 2015. The fair value of the note, representing part of the purchase price for BioServe, decreased as a consequence of a decrease in our stock price.
Other Expense
During the year ended December 31, 2016, we incurred $325,000 of expense resulting from the issuance of derivative warrants as part of the 2016 Offerings.
Income Taxes
In November 2015, we received $1.2 million from sales of state NOL's and research and development tax credits. No NOL's or research and development tax credits were sold during the year ended December 31, 2016.
Liquidity and Capital Resources
Sources of Liquidity
Our primary sources of liquidity have been funds generated from our debt financings and equity financings. In addition, we have generated funds from the following sources: (i) cash collections from customers and (ii) cash received from sale of state NOL’s.
During November 2015, we received $1.2 million from sales of state NOL’s and research and development tax credits.
In general, our primary uses of cash are providing for operating expenses, working capital purposes and servicing debt. On January 28, 2016, the Line of Credit was amended with SVB, and we are no longer able to draw on the Line of Credit until, as of December 31, 2016, we raise approximately $2.5 million of additional equity. On March 22, 2017, we restructured our debt with Silicon Valley Bank, by repaying the outstanding term loan and entering into a new two year $6.0 million asset-based revolving line of credit agreement. We concurrently entered into a new $6.0 million term loan agreement with Partners for Growth, which, on the day of closing, increased our indebtedness from $4.4 million to $6.0 million and increased our available cash by $1.6 million. We will be able to borrow up to $6.0 million on the revolver, based on a formula tied to eligible accounts receivable, which will increase our indebtedness dollar for dollar. In connection with such debt restructuring we issued warrants to such lenders to purchase an aggregate of 443,262 shares of our common stock.
Our largest source of operating cash flow is cash collections from our customers.
Offerings
In July 2015, we sold 2,800 shares of common stock that resulted in net proceeds to the Company of $34,000 through our sales agreement with Cantor Fitzgerald & Co.
On November 12, 2015, we sold 3,000,000 shares of common stock with warrants to purchase an aggregate of 3,000,000 shares of common stock at a combined public offering price of $4.00 per share and warrant resulting in gross proceeds of $12.0 million ($10.3 million of net proceeds after offering expenses and underwriting discounts). The underwriters also received 450,000 warrants pursuant to the partial exercise of the over-allotment option. The warrants have an exercise price of $5.00, became fully-exercisable at issuance and expire on November 12, 2020.
On May 25, 2016, we sold 2,467,820 shares of common stock in a public offering and warrants to purchase 1,233,910 shares of common stock in a concurrent private placement. These offerings resulted in gross proceeds of $5 million. We sold 2,150,000 shares of common stock and warrants to purchase 1,075,000 shares of common stock to certain institutional investors at a combined offering price of $2.00 per common share, and our Chairman of the Board, John Pappajohn, purchased 317,820 shares of common stock and warrants to purchase 158,910 shares of common stock at a combined offering price of $2.2025 per common share. In addition, we issued warrants to purchase an aggregate of 123,391 shares of common stock to the placement agent. Subject to certain ownership limitations, the warrants will be initially exercisable commencing six months from the issuance date at an exercise price equal to $2.25 per share of common stock. The warrants are exercisable for five years from the initial exercise date.
On September 14, 2016, we sold 2,750,000 shares of common stock in a public offering and warrants to purchase 1,375,000 shares of common stock in a concurrent private placement at a combined price of $2.00 per common share. These offerings resulted in gross proceeds of $5.5 million. In addition, we issued warrants to purchase an aggregate of 137,500 shares of common stock to the placement agent. Subject to certain ownership restrictions, the warrants will be initially exercisable six months from the issuance date at an exercise price of $2.25 per share of common stock. The warrants are exercisable for five years from the initial exercise date.
Credit Facility
On May 7, 2015, we entered into a new debt financing facility with Silicon Valley Bank (“SVB”) to refinance the Company’s cash collateralized loan from Wells Fargo and to provide an additional working capital line of credit. The SVB credit facility provides for a $6.0 million term note (“Term Note”) and a revolving line of credit (“Line of Credit”) for an amount not to exceed the lesser of (i) $4.0 million or (ii) an amount equal to 80% of eligible accounts receivable. The Term Note requires monthly principal payments of approximately $167,000 plus interest through maturity on April 1, 2019. The interest rate of the Term Note is the Wall Street Journal prime rate plus 2%, with a floor of 5.25% (5.75% at December 31, 2016) and an additional deferred interest payment of $180,000 will be due upon maturity. The Line of Credit requires monthly interest-only payments
of the Wall Street Journal prime rate plus 1.5% (5.25% at December 31, 2016) and matures on May 7, 2017. The new loan agreement requires maintenance of certain financial ratios and grants SVB a first security interest in substantially all Company assets (other than our intellectual property). Pursuant to the new loan agreement, we are no longer required to maintain restricted cash accounts. At December 31, 2016, the principal balance of the Term Note was $4.7 million and the principal balance of the Line of Credit was $0. Pursuant to the amendment dated January 28, 2016, we are restricted from using the Line of Credit until, as of December 31, 2016, $2.5 million of additional equity is raised.
On March 22, 2017, we restructured our debt with Silicon Valley Bank, by repaying the outstanding term loan and entering into a new two year asset-based revolving line of credit agreement. The new SVB credit facility provides for an asset-based line of credit (“ABL”) for an amount not to exceed the lesser of $6.0 million or 80% of eligible accounts receivable plus the lesser of 50% of the net collectable value of 3rd party accounts receivable or three (3) times the average monthly collection amount of 3rd party accounts receivable over the previous quarter. The ABL requires monthly interest payments of the Wall Street Journal prime rate plus 1.5% (5.5% at March 22, 2017) and matures on March 22, 2019.
We concurrently entered into a new $6.0 million term loan agreement with Partners for Growth (“PFG”). The term note is an interest only loan with the full principal and any outstanding interest due at maturity on March 22, 2020. The interest rate of the term note is 11.5% per annum, and may reduce to 11.0% in 2018 based on achieving certain financial milestones set forth by PFG. In connection with such debt restructuring we issued 7 year warrants to such lenders to purchase an aggregate of 443,262 shares of our common stock at a price of $2.82 per share.
Cash Flows
Our net cash flow from operating, investing and financing activities for the periods below were as follows:
We had cash and cash equivalents of $9.5 million at December 31, 2016 and $19.5 million at December 31, 2015.
The $10.0 million decrease in cash and cash equivalents for the year ended December 31, 2016 was principally the result of using $17.9 million of net cash in operations, investing $0.5 million in fixed assets and repaying $1.3 million of debt, offset by $10.0 million in net proceeds from the 2016 Offerings.
The $6.1 million decrease in cash and cash equivalents for the year ended December 31, 2015 was principally the result of the use of $13.6 million of net cash in operations, purchasing substantially all of assets of Response Genetics for $7.5 million (plus stock), and investing $1.0 million in fixed assets, offset by the $6.0 million decrease in restricted cash and the $10.3 million in net proceeds from the 2015 Offering.
Cash Used in Operating Activities
Net cash used in operating activities was $17.9 million for the year ended December 31, 2016. We used $12.2 million in net cash to run our core operations, including losses from operations and $0.3 million in cash paid for interest. We incurred additional uses of cash when adjusting for working capital items as follows: a net increase in accounts receivable of $5.9 million and a combined increase in other current and non-current assets of $0.1 million. All of these uses of cash were partially offset by a net increase in accounts payable, accrued expenses and deferred revenue of $0.4 million.
Net cash used in operating activities was $13.6 million for the year ended December 31, 2015. We used $15.7 million in net cash to run our core operations, which included $0.2 million in cash paid for interest. We incurred additional uses of cash when adjusting for working capital items as follows: a net increase in accounts receivable of $1.7 million; an increase in other current assets of $0.4 million and an increase in other assets of $0.1 million. All of these uses of cash were partially offset by a net
increase in accounts payable, accrued expenses and deferred revenue of $3.1 million and the receipt of $1.2 million from the sale of state NOL carryforwards and research and development credits in November 2015.
Cash Used in Investing Activities
Net cash used in investing activities was $0.6 million for the year ended December 31, 2016 and principally resulted from the purchase of fixed assets for $0.5 million and patent costs of $0.1 million.
Net cash used in investing activities was $2.6 million for the year ended December 31, 2015 and principally resulted from the purchase of substantially all assets of Response Genetics for $7.5 million, plus stock, and the purchase of fixed assets for $1.0 million, offset by the $6.0 million decrease in restricted cash resulting from refinancing our debt in May 2015.
Cash Used/Provided by Financing Activities
Net cash provided by financing activities was $8.5 million for the year ended December 31, 2016 principally due to the 2016 Offerings, which resulted in $10.0 million in net proceeds, offset by the repayment of $1.3 million in indebtedness and capital lease payments of $0.1 million.
Net cash used in financing activities was $10.1 million for the year ended December 31, 2015 principally due to the 2015 Offering, which resulted in $10.3 million in net proceeds, offset by capital lease payments of $0.1 million and equity issuance costs of $0.1 million.
Capital Resources, Acquisitions and Expenditure Requirements
We expect to continue to incur material operating losses in the future. It may take several years, if ever, to achieve positive operational cash flow. We may need to raise additional capital to fund our current operations, to repay certain outstanding indebtedness and to fund expansion of our business to meet our long-term business objectives through public or private equity offerings, debt financings, borrowings or strategic partnerships coupled with an investment in our company or a combination thereof. If we raise additional funds through the issuance of convertible debt securities, or other debt securities, these securities could be secured and could have rights senior to those of our common stock. In addition, any new debt incurred by the Company could impose covenants that restrict our operations and increase our interest expense. The issuance of any new equity securities will also dilute the interest of our current stockholders. Given the risks associated with our business, including our unprofitable operating history and our ability to develop additional proprietary tests, additional capital may not be available when needed on acceptable terms, or at all. If adequate funds are not available, we will need to curb our expansion plans or limit our research and development activities, which would have a material adverse impact on our business prospects and results of operations.
We believe that our current cash will support operations for at least the next 12 months from the date of this report. We continue to explore opportunities for additional equity or debt financing, and we are taking steps to improve our operating cash flow. We can provide no assurances that our current actions will be successful or that any additional sources of financing will be available to us on favorable terms, if at all, when needed. Our forecast of the period of time through which our current financial resources will be adequate to support our operations and the costs to support our general and administrative, sales and marketing and research and development activities are forward-looking statements and involve risks and uncertainties.
Management believes that its existing cash and cash equivalents, taken together with the net proceeds of the debt financing completed in March 2017, will be sufficient to fund the Company's operations for at least the next twelve months after filing this Annual Report on Form 10-K.
We expect our operating expenses to increase as we continue investing in sales and marketing, research and development and other general and administrative expenses.
Our forecast of the period of time through which our current financial resources will be adequate to support our operations and our expected operating expenses are forward-looking statements and involve risks and uncertainties. Actual results could vary materially and negatively as a result of a number of factors, including:
•
our ability to achieve revenue growth and profitability;
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the costs for funding the operations we recently acquired;
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our ability to improve efficiency of billing and collection processes;
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our ability to obtain approvals for our new diagnostic tests;
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our ability to execute on our marketing and sales strategy for our tests and gain acceptance of our tests in the market;
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our ability to obtain adequate reimbursement from governmental and other third-party payors for our tests and services;
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the costs, scope, progress, results, timing and outcomes of the clinical trials of our tests;
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the costs of operating and enhancing our laboratory facilities;
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our ability to succeed with our cost control initiative;
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the timing of and the costs involved in regulatory compliance, particularly if the regulations change;
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the costs of maintaining, expanding and protecting our intellectual property portfolio, including potential litigation costs and liabilities;
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our ability to manage the costs of manufacturing our tests;
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our rate of progress in, and cost of research and development activities associated with, products in research and early development;
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the effect of competing technological and market developments;
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costs related to expansion;
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our ability to secure financing and the amount thereof; and
•
other risks discussed in the section entitled “Risk Factors.”
We expect that our operating expenses and capital expenditures will increase in the future as we expand our business. We plan to increase our sales and marketing headcount to promote our new clinical tests and services and to expand into new geographies and to continue our research and development expenditures associated with performing work with research collaborators, to expand our pipeline and to perform work associated with our research collaborations. For example, in 2011 we entered into an affiliation agreement to form a joint venture with the Mayo Foundation for Medical Education and Research pursuant to which we made an initial $1.0 million capital contribution in October 2013 and $1.0 million in the third quarter of 2014. We may make additional capital contributions of up to $4.0 million, subject to the joint venture entity’s achievement of certain operational milestones. Until we can generate a sufficient amount of revenues to finance our cash requirements, which we may never do, we may need to raise additional capital to fund our operations.
Subject to the availability of future financing, we may use significant cash to fund acquisitions. On October 9, 2015, we acquired substantially all of the assets of Response Genetics for aggregate consideration of approximately $12.9 million consisting of $7.5 million in cash and our common stock valued at approximately $5.4 million.
Future Contractual Obligations
The following table reflects a summary of our estimates of future contractual obligations as of December 31, 2016. The information in the table reflects future unconditional payments and is based on the terms of the relevant agreements, appropriate classification of items under U.S. GAAP as currently in effect and certain assumptions, such as the interest rate on our variable debt that was in effect as of December 31, 2016. Future events could cause actual payments to differ from these amounts.
Income Taxes
Over the past several years we have generated operating losses in all jurisdictions in which we may be subject to income taxes. As a result, we have accumulated significant net operating losses and other deferred tax assets. Because of our history of losses and the uncertainty as to the realization of those deferred tax assets, a full valuation allowance has been recognized. We do not
expect to report a benefit related to the deferred tax assets until we have a history of earnings, if ever, that would support the realization of our deferred tax assets.
Off-Balance Sheet Arrangements
Since inception, we have not engaged in any off balance sheet activities as defined in Item 303(a)(4) of Regulation S-K.
Critical Accounting Policies and Significant Judgment and Estimates
Our management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates based on historical experience and make various assumptions, which management believes to be reasonable under the circumstances, which form the basis for judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Section 107 of the JOBS Act provides that an “emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we have chosen to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.
The notes to our audited consolidated financial statements contain a summary of our significant accounting policies. We consider the following accounting policies critical to the understanding of the results of our operations:
•
Revenue recognition;
•
Accounts receivable and bad debts;
•
Stock-based compensation; and
•
Warrant liability.
Item 7A.
Item 7A.
Qualitative and Quantitative Disclosures about Market Risk
We have exposure to financial market risks, including changes in foreign currency exchange rates and interest rates, and risk associated with how we invest our cash.
Foreign Exchange Risk
We conduct business in foreign markets through our subsidiary in India (BioServe Biotechnologies (India) Private Limited) and in Italy through our subsidiary (Cancer Genetics Italia, S.r.l.). For the years ended December 31, 2016 and 2015, approximately 4% and 5%, respectively, of our revenues were earned outside the United States and collected in local currency. We are subject to risk for exchange rate fluctuations between such local currencies and the United States dollar and the subsequent translation of the Indian Rupee or Euro to United States dollars. We currently do not hedge currency risk. The translation adjustments for the years ended December 31, 2016 and 2015 were not significant.
Interest Rate Risk
At December 31, 2016, we had interest rate risk primarily related to borrowings of $4.7 million on the term note with Silicon Valley Bank (“Silicon Valley Line”). Borrowings under the Silicon Valley term note bear interest at the Wall Street Journal prime rate plus 2%, with a floor of 5.25% (5.75% at December 31, 2016). If interest rates increased by 1.0%, interest expense in 2017 on our current borrowings would increase by approximately $37,000.
Investment of Cash
We invest our cash primarily in money market funds. Because of the short-term nature of these investments, we do not believe we have material exposure due to market risk. The impact to our financial position and results of operations from likely changes in interest rates is not material.
Item 8.
Item 8.
Financial Statements and Supplementary Data
Cancer Genetics, Inc. and Subsidiaries
Consolidated Financial Report December 31, 2016
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Changes in Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Cancer Genetics, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Cancer Genetics, Inc. and subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cancer Genetics, Inc. and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.
/s/ RSM US LLP
New York, New York
March 23, 2017
CANCER GENETICS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except par value)
See Notes to Consolidated Financial Statements.
CANCER GENETICS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands, except per share amounts)
See Notes to Consolidated Financial Statements.
CANCER GENETICS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity
Years Ended December 31, 2016 and 2015
(in thousands)
See Notes to Consolidated Financial Statements
CANCER GENETICS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
See Notes to Consolidated Financial Statements.
CANCER GENETICS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1. Organization, Description of Business and Offerings
We are an emerging leader in the field of precision medicine, enabling individualized therapies in the field of oncology through our diagnostic products and services and molecular markers. We develop, commercialize and provide molecular- and biomarker-based tests and services that enable physicians to personalize the clinical management of each individual patient by providing genomic information to better diagnose, monitor and inform cancer treatment and that enable biotech and pharmaceutical companies engaged in oncology trials to better select candidate populations and reduce adverse drug reactions by providing information regarding genomic factors influencing subject responses to therapeutics. We have a comprehensive, disease-focused oncology testing portfolio. Our tests and techniques target a wide range of cancers, covering nine of the top ten cancers in prevalence in the United States, with additional unique capabilities offered by our FDA-cleared Tissue of Origin® test for identifying difficult to diagnose tumor types or poorly differentiated metastatic disease.
We were incorporated in the State of Delaware on April 8, 1999 and have offices and state-of-the-art laboratories located in California, New Jersey, North Carolina, Shanghai (China), and Hyderabad (India). Our laboratories comply with the highest regulatory standards as appropriate for the services they deliver including CLIA, CAP, NY State, California State and NABL (India). Our services are built on a foundation of world-class scientific knowledge and intellectual property in solid and blood-borne cancers, as well as strong academic relationships with major cancer centers such as Memorial Sloan-Kettering, Mayo Clinic, and the National Cancer Institute.
2015 Offering
On November 12, 2015, we sold 3,000,000 shares of common stock with warrants to purchase an aggregate of 3,000,000 shares of common stock at a combined public offering price of $4.00 per share and warrant resulting in gross proceeds of $12.0 million ($10.3 million of net proceeds after offering expenses and underwriting discounts). The underwriters also received 450,000 warrants pursuant to the partial exercise of the over-allotment option. The warrants have an exercise price of $5.00, became fully-exercisable at issuance and expire on November 12, 2020. All references to the sales of common stock with warrants mentioned in this paragraph are referred to as the “2015 Offering.”
2016 Offerings
May Offering
On May 25, 2016, we sold 2,467,820 shares of common stock in a public offering and warrants to purchase 1,233,910 shares of common stock in a concurrent private placement. These offerings resulted in gross proceeds of $5 million. We sold 2,150,000 shares of common stock and warrants to purchase 1,075,000 shares of common stock to certain institutional investors at a combined offering price of $2.00 per common share, and our Chairman of the Board, John Pappajohn, purchased 317,820 shares of common stock and warrants to purchase 158,910 shares of common stock at a combined offering price of $2.2025 per common share. In addition, we issued warrants to purchase an aggregate of 123,391 shares of common stock to the placement agent. Subject to certain ownership limitations, the warrants were initially exercisable commencing six months from the issuance date at an exercise price equal to $2.25 per share of common stock. The warrants are exercisable for five years from the initial exercise date. All references to the sales of common stock with warrants mentioned in this paragraph, along with the September Offering below, are referred to as the “2016 Offerings.”
September Offering
On September 14, 2016, we sold 2,750,000 shares of common stock in a public offering and warrants to purchase 1,375,000 shares of common stock in a concurrent private placement at a combined price of $2.00 per common share. These offerings resulted in gross proceeds of $5.5 million. In addition, we issued warrants to purchase an aggregate of 137,500 shares of common stock to the placement agent. Subject to certain ownership restrictions, the warrants will be initially exercisable six months from the issuance date at an exercise price of $2.25 per share of common stock. The warrants are exercisable for five years from the initial exercise date. All references to the sales of common stock with warrants mentioned in this paragraph, along with the May Offering above, are referred to as the “2016 Offerings.”
Note 2. Significant Accounting Policies
Basis of presentation: We prepare our financial statements on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America.
Segment reporting: Operating segments are defined as components of an enterprise about which separate discrete information is used by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. We view our operations and manage our business in one operating segment, which is the business of developing and selling diagnostic tests and services.
Liquidity and going concern: At December 31, 2016, our cash position and history of losses required management to asses our ability to continue operating as a going concern, according to FASB Accounting Standards Update No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). Management evaluated the history and operational losses to have a material effect on our ability to continue as a going concern, unless we take actions to alleviate those conditions. Our primary sources of liquidity have been funds generated from our debt financings and equity financings. Subsequent to December 31, 2016, we were able to restructure our senior debt with our lender and secure additional debt capital with another lender to increase our cash positon and have available funds to operate, and we completed the sale of State of New Jersey net operating loss carryforwards in early 2017 (Note 20 Subsequent Events). We have reduced, and plan to continue reducing, our operating expenses, and expect to grow our revenue in 2017 and beyond, and have also increased our cash collections from our customers and third-party payors and plan to continue to improve our cash collection results.
Management believes that its existing cash and cash equivalents, taken together with the net proceeds of the debt financing completed in March 2017, will be sufficient to fund the Company's operations for at least the next twelve months after filing this Annual Report on Form 10-K.
Principles of consolidation: The accompanying consolidated financial statements include the accounts of Cancer Genetics, Inc. and our wholly owned subsidiaries.
All significant intercompany account balances and transactions have been eliminated in consolidation.
Use of estimates and assumptions: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates made by management include, among others, realization of amounts billed, realization of long-lived assets, realization of intangible assets, accruals for litigation and registration payments, assumptions used to value stock options, warrants and goodwill and the valuation of assets acquired and liabilities assumed from acquisitions. Actual results could differ from those estimates.
Risks and uncertainties: We operate in an industry that is subject to intense competition, government regulation and rapid technological change. Our operations are subject to significant risk and uncertainties including financial, operational, technological, regulatory, foreign operations, and other risks, including the potential risk of business failure.
Cash and cash equivalents: Highly liquid investments with original maturities of three months or less when purchased are considered to be cash equivalents. Financial instruments which potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents. We maintain cash and cash equivalents with high-credit quality financial institutions. At times, such amounts may exceed insured limits. We have not experienced any losses in such accounts and believe we are not exposed to any significant credit risk on our cash and cash equivalents.
Restricted cash: Represents cash held at financial institutions which we may not withdraw and which collateralizes certain of our financial commitments. All of our restricted cash is invested in interest bearing certificates of deposit. Our restricted cash collateralizes a $300,000 letter of credit in favor of our landlord, pursuant to the terms of the lease for our Rutherford facility.
Revenue recognition: The Company recognizes revenue in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 605, as well as SEC Staff Accounting Bulletin 104, for its Biopharma and Discovery Services, and ASC 954-605, Health Care Entities, Revenue Recognition for its Clinical Services. These standards generally require that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence that an arrangement exists; (2) delivery has occurred and title and the risks and rewards of ownership have been transferred to the customer or services have been rendered; (3) the price is fixed or determinable; and (4) collectability is reasonably assured. In determining whether the price is fixed or determinable, we consider payment limits imposed by insurance carriers and
Medicare, and the amount of revenue recorded takes into account the historical percentage of revenue we have collected for each type of test for each payor category. Periodically, an adjustment is made to Clinical Services revenue to record differences between our anticipated cash receipts from third parties, such as insurance carriers and Medicare and actual receipts from such payors. For the periods presented, such adjustments were not significant. For some Clinical Service and Biopharma customers billed directly, revenue is recorded based upon the contractually agreed upon fee schedule. When assessing collectability, we consider whether we have sufficient payment history to reliably estimate a payor’s individual payment patterns. We do not bill customers for shipping and handling fees, other than reimbursement of such expenses we incur on behalf of our Biopharma clients, and we do not collect any sales or other taxes from customers.
Accounts receivable: Accounts receivable are carried at net realizable value, which is the original invoice amount less an estimate for contractual adjustments, discounts and doubtful receivables, the amounts of which are determined by an analysis of individual accounts. Our policy for assessing the collectability of receivables is dependent upon the major payor source of the underlying revenue. For Biopharma and Discovery clients, an assessment of credit worthiness is performed prior to initial engagement and is reassessed periodically. If deemed necessary, an allowance is established on receivables from direct bill clients. For Clinical Services clients, we record revenues and related receivables when the testing process is complete and the results are reported. Revenue is recorded at the expected price, taking into account the patient's ability to pay, as well as anticipated discounts, adjustments and/or contractual allowances, as applicable. After reasonable collection efforts are exhausted, amounts deemed to be uncollectible are written off against the allowance for doubtful accounts. Since the Company only recognizes revenue to the extent it expects to collect such amounts, bad debt expense related to receivables from patient service revenue is recorded in general and administrative expense in the consolidated statements of operations. Recoveries of accounts receivable previously written off are recorded when received.
Deferred revenue: Payments received in advance of services rendered are recorded as deferred revenue and are subsequently recognized as revenue in the period in which the services are performed.
Fixed assets: Fixed assets consist of diagnostic equipment, furniture and fixtures and leasehold improvements. Fixed assets are carried at cost and are depreciated using the straight-line method over the estimated useful lives of the assets, which generally range from five to seven years. Leasehold improvements are depreciated over the lesser of the lease term or the estimated useful lives of the improvements using the straight-line method. Repairs and maintenance are charged to expense as incurred while improvements are capitalized. Upon sale, retirement or disposal of fixed assets, the accounts are relieved of the cost and the related accumulated depreciation with any gain or loss recorded to the consolidated statements of operations.
Fixed assets are reviewed for impairment whenever changes in circumstances indicate that the carrying amount of an asset may not be recoverable. These computations utilize judgments and assumptions inherent in our estimate of future cash flows to determine recoverability of these assets. If our assumptions about these assets were to change as a result of events or circumstances, we may be required to record an impairment loss.
Goodwill: Goodwill resulted from the purchases of Gentris Corporation (“Gentris”) and BioServe Biotechnologies (India) Pvt. Ltd. (“BioServe”) in 2014 and the purchase of Response Genetics, Inc. (“Response Genetics”) in 2015, as described in Note 16. In accordance with ASC 350, Intangibles - Goodwill and Other, we are required to test goodwill for impairment and adjust for impairment losses, if any, at least annually and on an interim basis if an event or circumstance indicates that it is likely impairment has occurred. Our annual goodwill impairment testing date is October 1 of each year. No such losses were incurred during the years ended December 31, 2016 and 2015.
Loan guarantee and financing fees: Loan guarantee fees are amortized on a straight-line basis over the term of the guarantee. Financing fees are amortized using the effective interest method over the term of the related debt.
Warrant liability: We have issued certain warrants which contain an exercise price adjustment feature in the event we issue additional equity instruments at a price lower than the exercise price of the warrant. We have also issued warrants containing a contingent net cash settlement feature. The warrants are described herein as derivative warrants. We account for these derivative warrants as liabilities. These common stock purchase warrants do not trade in an active securities market, and as such, we estimate the fair value of these warrants using the binomial lattice valuation pricing model with the assumptions as follows: The risk-free interest rate for periods within the contractual life of the warrant is based on the U.S. Treasury yield
curve. The expected life of the warrants is based upon the contractual life of the warrants. Prior to 2016, volatility was estimated based on an average of the historical volatilities of the common stock of four entities with characteristics similar to those of the Company. Effective January 1, 2016, we began using the historical volatility of our common stock. We used the closing price of our shares on the NASDAQ Capital Market.
We compute the fair value of the warrant liability at each reporting period and the change in the fair value is recorded as non-cash expense or non-cash income. The key component in the value of the warrant liability is our stock price, which is subject to significant fluctuation and is not under our control. The resulting effect on our net income (loss) is therefore subject to significant fluctuation and will continue to be so until the warrants are exercised, amended or expire. Assuming all other fair value inputs remain constant, we will record non-cash expense when the stock price increases and non-cash income when the stock price decreases.
Income taxes: Income taxes are provided for the tax effects of transactions reported in the consolidated financial statements and consist of taxes currently due plus deferred income taxes. Deferred income taxes are recognized for temporary differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future. Deferred income taxes are also recognized for net operating loss carryforwards that are available to offset future taxable income and research and development credits.
Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. We have established a full valuation allowance on our deferred tax assets as of December 31, 2016 and 2015, therefore we have not recognized any tax benefit or expense in the periods presented.
ASC 740, Income Taxes, clarifies the accounting for uncertainty in income taxes recognized in the financial statements. ASC 740 provides that a tax benefit from uncertain tax positions may be recognized when it is more-likely-than-not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits of the position. Income tax positions must meet a more-likely-than-not recognition threshold to be recognized. ASC 740 also provides guidance on measurement, de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. At December 31, 2016 and 2015 we had no uncertain tax positions.
Our policy is to recognize interest and/or penalties related to income tax matters in income tax expense. There is no accrual for interest or penalties on our consolidated balance sheets at December 31, 2016 or 2015, and we have not recognized interest and/or penalties in the consolidated statements of operations for the years ended December 31, 2016 or 2015.
Patents and other intangible assets: We account for intangible assets under ASC 350-30. Patents consisting of legal fees incurred are initially recorded at cost. We have also acquired patents that are initially recorded at fair value. Patents are amortized over the useful lives of the assets, using the straight-line method. Certain patents are in the legal application process and therefore are not currently being amortized. We review the carrying value of patents at the end of each reporting period. Based upon our review, there were no patent impairments in 2016 or 2015.
Other intangible assets consist of software acquired with Response Genetics, which are amortized using the straight-line method over the estimated useful lives of the assets, which range from three to five years.
Research and development: Research and development costs associated with service and product development include direct costs of payroll, employee benefits, stock-based compensation and supplies and an allocation of indirect costs including rent, utilities, depreciation and repairs and maintenance. All research and development costs are expensed as they are incurred.
Stock-based compensation: Stock-based compensation is accounted for in accordance with the provisions of ASC 718, Compensation-Stock Compensation, which requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors based on estimated fair values on the grant date. We estimate the fair value of stock-based awards on the date of grant using the Black-Scholes option pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods using the straight-line method. See additional information in Note 12.
All issuances of stock options or other issuances of equity instruments to employees as the consideration for services received by us are accounted for based on the fair value of the equity instrument issued.
We account for stock-based compensation awards to non-employees in accordance with ASC 505-50, Equity Based Payments to Non-Employees. Under ASC 505-50, we determine the fair value of the warrants or stock-based compensation awards granted as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is
more reliably measurable. Stock-based compensation awards issued to non-employees are recorded in expense and additional paid-in capital in stockholders’ equity (deficit) over the applicable service periods based on the fair value of the awards or consideration received at the vesting date.
Fair value of financial instruments: The carrying amount of cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued expenses, approximate their estimated fair values due to the short term maturities of those financial instruments. The fair value of warrants recorded as derivative liabilities, contingent consideration and note payable to VenturEast are described in Notes 14 and 15.
Joint venture accounted for under the equity method: The Company records its joint venture investment following the equity method of accounting, reflecting its initial investment in the joint venture and its share of the joint venture’s net earnings or losses and distributions. The Company’s share of the joint venture’s net loss was approximately $73,000 in 2016 and $707,000 in 2015 and is included in research and development expense on the Consolidated Statements of Operations. The Company has a net receivable due from the joint venture of approximately $10,000 at both December 31, 2016 and 2015, which is included in other assets in the Consolidated Balance Sheets. See additional information in Note 18.
Subsequent events: We have evaluated potential subsequent events through the date the financial statements were issued.
Recent Accounting Pronouncements: In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which provides guidance for accounting for leases. Under ASU 2016-02, the Company will be required to recognize the assets and liabilities for the rights and obligations created by leased assets. ASU 2016-02 will take effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently evaluating the effect this standard will have on the consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. As issued and amended, ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either a full retrospective or retrospective with cumulative effect transition method. The updated standard becomes effective for the Company in the first quarter of fiscal year 2018. Early adoption is permitted in the first quarter of fiscal year 2017. The Company believes its Biopharma Service revenue could be affected by the new standard. The Company is presently evaluating its Biopharma Service contacts for multiple elements and variable consideration provisions that may affect the timing of revenue recognition subsequent to ASU 2014-09's adoption. The Company expects to adopt the new standard on January 1, 2018, using the modified retrospective approach, which involves applying the new standard to all contracts initiated on or after the effective date and recording an adjustment to opening equity for pre-existing contracts that have remaining obligations as of the effective date.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805) “Clarifying the Definition of a Business.” ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The updated standard is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The Company is currently evaluating the effect this standard will have on the consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) “Classification of Certain Cash Receipts and Cash Payments.” ASU 2016-15 provides guidance on statement of cash flow presentation for eight specific cash flow issues where diversity in practice exists. The updated standard is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company is currently evaluating the effect this standard will have on the consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718) “Improvements to Employee Share-Based Payment Accounting.” ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statements of cash flows. The updated standard is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. We do not expect ASU 2016-09 to have a material impact on our financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): “Simplifying the Accounting for Goodwill Impairment,” which removes the requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for annual periods beginning after December
15, 2019, and interim periods within those annual periods. Early adoption is permitted and applied prospectively. We do not expect ASU 2017-04 to have a material impact to our financial statements.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): “Restricted Cash,” clarifying the treatment of restricted cash accounts on the statements of cash flows. ASU 2016-18 indicates that restricted cash accounts should be included with cash and cash equivalents when reconciling the beginning of year and end of year total amounts shown on the statements of cash flows. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017. The Company is currently evaluating the effect this standard will have on the consolidated financial statements.
Earnings (loss) per share: Basic earnings (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares assumed to be outstanding during the period of computation. Diluted earnings per share is computed similar to basic earnings per share except that the numerator is adjusted for the change in fair value of the warrant liability (only if dilutive) and the denominator is increased to include the number of dilutive potential common shares outstanding during the period using the treasury stock method.
Basic net loss and diluted net loss per share data were computed as follows (in thousands, except per share amounts):
The following table summarizes potentially dilutive adjustments to the weighted average number of common shares which were excluded from the calculation (in thousands):
Note 3. Revenue and Accounts Receivable
Revenue by service type for each of the years ended December 31 is comprised of the following (in thousands):
The table above includes approximately $2,085,000 of biopharma services revenue and approximately $6,190,000 of clinical services revenue from our acquisition of Response Genetics for the year ended December 31, 2016. The table above includes approximately $486,000 of biopharma services revenue and approximately $1,265,000 of clinical services revenue from our acquisition of Response Genetics for the period October 9, 2015 through December 31, 2015.
Accounts receivable by service type at December 31, 2016 and 2015 consists of the following (in thousands):
Revenue for Biopharma Services are customized solutions for patient stratification and treatment selection through an extensive suite of DNA-based testing services. Biopharma Services are billed to pharmaceutical and biotechnology companies. Clinical Services are tests performed to provide information on diagnosis, prognosis and theranosis of cancers to guide patient management. Clinical Services tests can be billed to Medicare, another third party insurer or the referring community hospital or other healthcare facility. Discovery Services are services that provide the tools and testing methods for companies and researchers seeking to identify new DNA-based biomarkers for disease. The breakdown of our Clinical Services revenue (as a percent of total revenue) is as follows:
We have historically derived a significant portion of our revenue from a limited number of test ordering sites. Test ordering sites account for all of our Clinical Services revenue. Our test ordering sites are largely hospitals, cancer centers, reference laboratories, physician offices and biopharmaceutical companies. Oncologists and pathologists at these sites order the tests on behalf of the needs of their oncology patients or as part of a clinical trial sponsored by a biopharmaceutical company in which the patient is being enrolled. We generally do not have formal, long-term written agreements with such test ordering sites, and, as a result, we may lose a significant test ordering site at any time.
The top five test ordering clients during 2016 and 2015 accounted for 31% and 49%, respectively, of our testing volumes, with 6% and 18%, respectively, of the test volume coming from community hospitals. During the year ended December 31, 2016, one Biopharma client accounted for approximately 16% of our revenue. During the year ended December 31, 2015, one Biopharma client accounted for approximately 19% of our revenue.
Note 4. Other Current Assets
At December 31, 2016 and 2015, other current assets consisted of the following (in thousands):
Note 5. Lease Commitments
We lease our laboratory, research facility and administrative office space under various operating leases. We have approximately 17,900 square feet of office and laboratory space in Rutherford, New Jersey, 24,900 square feet in Morrisville, North Carolina, 19,100 square feet in Los Angeles, California, 10,000 square feet in Hyderabad, India and 2,700 square feet in Shanghai, China. We have escalating lease agreements for both our New Jersey and North Carolina spaces which expire January 2018 and May 2020, respectively. These leases require monthly rent with periodic rent increases that vary from $1 to $2 per square foot of the rented premises per year. The difference between minimum rent and straight-line rent is recorded as deferred rent payable. The terms of our New Jersey lease require that a $300,000 security deposit for the facility be held in a stand by letter of credit in favor of the landlord (see Note 7).
We acquired office and scientific equipment under long term leases which have been capitalized at the present value of the minimum lease payments. The equipment under these capital leases had a cost of $916,600 and accumulated depreciation of $279,788, as of December 31, 2016.
Minimum future lease payments under all capital and operating leases as of December 31, 2016 are as follows (in thousands):
Rent expense for the years ended December 31, 2016 and 2015 was approximately $1.7 million and $1.1 million, respectively.
Note 6. Bank Term Note and Line of Credit
On May 7, 2015, we entered into a debt financing facility with Silicon Valley Bank (“SVB”) to refinance the Company’s cash collateralized loan from Wells Fargo and to provide an additional working capital line of credit. The SVB credit facility provides for a $6.0 million term note (“Term Note”) and a revolving line of credit (“Line of Credit”) for an amount not to exceed the lesser of (i) $4.0 million or (ii) an amount equal to 80% of eligible accounts receivable. The Term Note requires interest-only payments through April 30, 2016 and beginning May 1, 2016, monthly principal payments of approximately$167,000 will be required plus interest through maturity on April 1, 2019. The interest rate of the Term Note is the Wall Street Journal prime rate plus 2%, with a floor of 5.25% (5.75% and 5.50% at December 31, 2016 and 2015, respectively) and an additional deferred interest payment of $180,000 will be due upon maturity. The Line of Credit requires monthly interest-only payments of the Wall Street Journal prime rate plus 1.5% (5.25% and 5.00% at December 31, 2016 and 2015, respectively) and matures on May 7, 2017. The loan agreement requires maintenance of certain financial ratios and grants SVB a first security interest in substantially all Company assets (other than our intellectual property). At December 31, 2016 and 2015, the principal balance of the Term Note was $4,666,667 and $6,000,000, respectively, and the principal balance of the Line of Credit was $0. On January 28, 2016, the Line of Credit was amended with SVB and as of December 31, 2016, we were no longer able to draw on the Line of Credit until we raised approximately $2.5 million of additional equity. The Term Loan and Line of Credit were subsequently paid, see Note 20 Subsequent Events.
The following is a summary of long-term debt as of December 31 (in thousands):
Principal maturities of the Term Note as of December 31, 2016 are as follows: 2017 - $2,000,000; 2018 - $2,000,000; 2019 - $666,667.
Note 7. Letter of Credit
We maintain a $300,000 letter of credit in favor of our landlord pursuant to the terms of the lease for our Rutherford facility. At December 31, 2016 the letter of credit was fully secured by the restricted cash disclosed on our Consolidated Balance Sheet.
Note 8. Fixed Assets
Fixed assets are summarized by major classifications as follows (in thousands):
Note 9. Patents and Other Intangible Assets
Patents and other intangible assets consist of the following at December 31, 2016 and 2015:
Future amortization expense for legally approved patents (excluding patent applications in progress of approximately $444,000 as of December 31, 2016) and other intangible assets, is estimated as follows (in thousands):
Note 10. Income Taxes
The provision (benefit) for income taxes for the years ended December 31, 2016 and 2015 differs from the approximate amount of income tax benefit determined by applying the U.S. federal income tax rate to pre-tax loss, due to the following:
During November 2015, we sold $15,990,475 of gross State of New Jersey net operating loss (“NOL”) carryforwards relating to the 2013 and 2014 tax years as well as $289,978 of research and development tax credits, resulting in the receipt of $1,183,564, net of expenses. On February 22, 2017, we sold $18,177,059 of gross State of New Jersey NOL’s relating to the 2014 and 2015 tax years as well as $167,572 of state research and development tax credits, resulting in the receipt of approximately $950,000, net of expenses.
We transferred the NOL carryforwards through the Technology Business Tax Certificate Transfer Program sponsored by the New Jersey Economic Development Authority.
Approximate deferred taxes consist of the following components as of December 31, 2016 and 2015 (in thousands):
Due to a history of losses we have generated since inception, we believe it is more-likely-than-not that all of the deferred tax assets will not be realized as of December 31, 2016 and 2015. Therefore, we have recorded a full valuation allowance on our deferred tax assets. We have net operating loss carryforwards for federal income tax purposes of approximately $87 million as of December 31, 2016. The net operating loss carryforwards will begin to expire in 2027. Utilization of these carryforwards is subject to limitation due to ownership changes that may delay the utilization of a portion of the carryforwards.
Note 11. Capital Stock
Cantor Sales Agreement
In July 2015, we sold 2,800 shares of common stock that resulted in net proceeds to the Company of $34,000.
2015 Offering
On November 12, 2015, we sold 3,000,000 shares of common stock with warrants to purchase an aggregate of 3,000,000 shares of common stock at a combined public offering price of $4.00 per share and warrant resulting in gross proceeds of $12.0 million ($10.3 million of net proceeds after offering expenses and underwriting discounts). The underwriters also received 450,000 warrants pursuant to the partial exercise of the over-allotment option. The warrants have an exercise price of $5.00, became fully-exercisable at issuance and expire on November 12, 2020.
2016 Offerings
May Offering
On May 25, 2016, we sold 2,467,820 shares of common stock in a public offering and warrants to purchase 1,233,910 shares of common stock in a concurrent private placement. These offerings resulted in gross proceeds of $5 million. We sold 2,150,000 shares of common stock and warrants to purchase 1,075,000 shares of common stock to certain institutional investors at a combined offering price of $2.00 per common share, and our Chairman of the Board, John Pappajohn, purchased 317,820 shares of common stock and warrants to purchase 158,910 shares of common stock at a combined offering price of $2.2025 per common share. In addition, we issued warrants to purchase an aggregate of 123,391 shares of common stock to the placement agent. Subject to certain ownership limitations, the warrants were initially exercisable commencing six months from the issuance date at an exercise price equal to $2.25 per share of common stock. The warrants are exercisable for five years from the initial exercise date.
September Offering
On September 14, 2016, we sold 2,750,000 shares of common stock in a public offering and warrants to purchase 1,375,000 shares of common stock in a concurrent private placement at a combined price of $2.00 per common share. These offerings resulted in gross proceeds of $5.5 million. In addition, we issued warrants to purchase an aggregate of 137,500 shares of common stock to the placement agent. Subject to certain ownership restrictions, the warrants will be initially exercisable six months from the issuance date at an exercise price of $2.25 per share of common stock. The warrants are exercisable for five years from the initial exercise date.
Stock Issued to Consultant
On October 24, 2016, we issued 50,000 shares of common stock to Maxim, LLC (“Maxim”) at a value of $1.50 per common share in exchange for consulting services.
Preferred Stock
We are currently authorized to issue up to 9,764,000 shares of preferred stock. As of December 31, 2016 and 2015, no shares of preferred stock were outstanding.
Note 12. Stock-Based Compensation
We have two equity incentive plans: the 2008 Stock Option Plan (the “2008 Plan”) and the 2011 Equity Incentive Plan (the “2011 Plan”, and together with the 2008 Plan, the “Stock Option Plans”). The Stock Option Plans are meant to provide additional incentive to officers, employees and consultants to remain in our employment. Options granted are generally exercisable for up to 10 years.
The Board of Directors adopted the 2011 Plan on June 30, 2011 and reserved 350,000 shares of common stock for issuance under the 2011 Plan. On May 22, 2014, May 14, 2015 and on October 11, 2016, the stockholders voted to increase the number of shares reserved by the plan to 2,000,000, 2,650,000, and 3,150,000 shares of common stock, respectively, under several types of equity awards including stock options, stock appreciation rights, restricted stock awards and other awards defined in the 2011 Plan.
The Board of Directors adopted the 2008 Plan on April 29, 2008 and reserved 251,475 shares of common stock for issuance under the plan. On April 1, 2010, the stockholders voted to increase the number of shares reserved by the plan to 550,000. We are authorized to issue incentive stock options or non-statutory stock options to eligible participants, as defined in the 2008 Plan.
We have also issued 48,000 options outside of the Stock Option Plans.
At December 31, 2016, 1,097,355 shares remain available for future awards under the 2011 Plan and 114,254 shares remain available for future awards under the 2008 Plan.
As of December 31, 2016, no stock appreciation rights and 293,000 shares of restricted stock had been awarded under the Stock Option Plans.
A summary of employee and non-employee stock option activity for the years ended December 31, 2016 and 2015 is as follows:
Aggregate intrinsic value represents the difference between the fair value of our common stock and the exercise price of outstanding, in-the-money options. No options were exercised during the year ended December 31, 2016. During the year ended December 31, 2015, we received $23,480 from the exercise of options.
As of December 31, 2016, total unrecognized compensation cost related to non-vested stock options granted to employees was $2,971,371, which we expect to recognize over the next 2.3 years.
As of December 31, 2016, total unrecognized compensation cost related to non-vested stock options granted to non-employees was $19,500, which we expect to recognize over the next 1.0 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 for stock-based compensation expense requires us to make assumptions and judgments about the variables used in the calculation, including the fair value of our common stock, 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. We also estimate forfeitures of unvested stock options. To the extent actual forfeitures differ from the estimates, the difference will be recorded as a cumulative adjustment in the period estimates are revised. No compensation cost is recorded for options that do not vest. We use the simplified calculation of expected life described in the SEC’s Staff Accounting Bulletin No. 107, Share-Based Payment, and volatility is based on an average of the historical volatilities of the common stock of three entities with characteristics similar to those of the Company. 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. Expected forfeitures are assumed to be zero due to the plan design which has monthly vesting after an initial cliff vesting period.
The following table presents the weighted-average assumptions used to estimate the fair value of options granted to employees during the periods presented:
In October 2013, we issued 10,000 options to a non-employee with an exercise price of $15.39. In May 2014, we issued 200,000 options to a Director, with an exercise price of $15.89. See Note 19 for additional information. The following table
presents the weighted-average assumptions used to estimate the fair value of options reaching their measurement date for non-employees during the periods presented:
Restricted stock awards have been granted to employees, directors and consultants as compensation for services. At December 31, 2016, there was $400,575 of unrecognized compensation cost related to non-vested restricted stock granted to employees; we expect to recognize the cost over 1.8 years.
The following table summarizes the activities for our non-vested restricted stock awards for the years ended December 31, 2016 and 2015:
The following table presents the effects of stock-based compensation related to stock option and restricted stock awards to employees and non-employees on our Consolidated Statements of Operations during the periods presented (in thousands):
Note 13. Warrants
Prior to 2015, we issued certain warrants containing an exercise price adjustment (identified as Financing and Series B Pref. Stock under the heading “derivative” in the table below). For these warrants, in the event new equity instruments were issued at a price lower than the exercise price of the warrant, the exercise price would be adjusted to the new equity instruments issued (price adjustment feature). These warrants were initially recorded as a warrant liability, with any subsequent change in their fair value recognized in earnings until the warrants were exercised, amended or expired. At December 31, 2015, 60,200 of these warrants were outstanding. At December 31, 2016, all of these warrants had either been exercised or expired. During 2016, we issued warrants containing a contingent net cash settlement feature (identified as 2016 Offerings under the heading “derivative” in the table below). These warrants are recorded as a warrant liability, and all subsequent changes in their fair value are recognized in earnings until they are exercised, amended or expired.
A significant number of our warrants are held by Mr. Pappajohn, the Chairman of our Board of Directors and stockholder. See Note 19 for additional details on these warrants.
On April 1, 2015, 19,138 warrants expired unexercised.
On November 12, 2015, the Company issued 3,000,000 warrants in conjunction with the 2015 Offering and an additional 450,000 warrants pursuant to the underwriter’s partial exercise of the over-allotment option. The warrants have an exercise price of $5.00 per share and will expire November 12, 2020. See Note 11. We have evaluated the terms and conditions of warrants issued with the 2015 Offering and determined the warrants should be included in equity and are not required to be reported as a liability.
On November 12, 2015, the exercise price of 75,215 warrants were adjusted from $10.00 per common share to $4.00 per common share due to 2015 Offering and the exercise price adjustment feature in certain warrants.
On November 18, 2015, 14,665 warrants expired unexercised and the Company received $1,400 from a warrant holder who exercised warrants to purchase 350 shares of common stock at $4.00 per share.
On December 9, 2015, 120,000 warrants held by Mr. Pappajohn expired unexercised.
On February 21, 2016 and March 23, 2016, 200 and 70,000 warrants expired unexercised, respectively.
On May 25, 2016, we issued 1,357,301 warrants to purchase shares of our common stock as part of our May Offering. Subject to certain ownership limitations, the warrants will be initially exercisable commencing six months from the issuance date at an exercise price equal to $2.25 per share of common stock. The warrants are exercisable for five years from the initial exercise date. These warrants contain a contingent net cash settlement feature and are part of the 2016 Offerings derivative warrants in the table below.
On June 30, 2016, 86,533 warrants held by Mr. Pappajohn expired unexercised.
On September 14, 2016, we issued 1,512,500 warrants to purchase shares of our common stock as part of our September Offering. Subject to certain ownership limitations, the warrants will be initially exercisable commencing six months from the issuance date at an exercise price equal to $2.25 per share of common stock. The warrants are exercisable for five years from the initial exercise date. These warrants also contain a contingent net cash settlement feature and are part of the 2016 Offerings derivative warrants in the table below.
On December 1, 2016 and December 21, 2016, 37,000 and 75,294 warrants held by Mr. Pappajohn expired unexercised, respectively.
The following table summarizes the warrant activity for the years ending December 31, 2016 and 2015 (in thousands, except exercise price):
________________________
A
These warrants are subject to fair value accounting and contain an exercise price adjustment feature. See Note 14.
B
On November 12, 2015 the Company completed the 2015 Offering and the exercise price of certain derivative warrants were adjusted to $4.00.
C
These warrants are subject to fair value accounting and contain a contingent net cash settlement feature. See Note 14.
D
Weighted average exercise prices are as of December 31, 2016.
Note 14. Fair Value of Warrants
The following tables summarize the assumptions used in computing the fair value of derivative warrants subject to fair value accounting at the date of issue at December 31, 2016 and 2015 and during the years then ended.
The assumed ranges of Company stock prices used in computing the warrant fair value for warrants issued during the year is as follows: in 2016, $1.35-$2.14; in 2015, $3.30-$11.76. In determining the fair value of warrants issued at each reporting date, the assumed Company stock price was $1.35 and $3.30 (the closing price on the NASDAQ Capital Market) at December 31, 2016 and 2015.
The following table summarizes the derivative warrant activity subject to fair value accounting for the years ended December 31, 2016 and 2015 (in thousands):
Note 15. Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The Fair Value Measurements and Disclosures Topic of the FASB Accounting Standards Codification requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect our own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, the Topic establishes a fair value hierarchy for valuation inputs that give the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.
The fair value hierarchy is as follows:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that we have the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect our own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The following table summarizes the financial liabilities measured at fair value on a recurring basis segregated by the level of valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):
At December 31, 2016, the warrant liability consists of stock warrants issued as part of the 2016 Offerings that contain contingent redemption features. At December 31, 2015, the warrant liability consists of stock warrants we issued that contain an exercise price adjustment feature. In accordance with derivative accounting for warrants, we calculated the fair value of warrants and the assumptions used are described in Note 14, “Fair Value of Warrants.” Realized and unrealized gains and losses related to the change in fair value of the warrant liability are included in other income (expense) on the Consolidated Statements of Operations.
The value of the Gentris contingent consideration was determined using a discounted cash flow of the expected payments required by the purchase agreement. During the year ended December 31, 2015 we recognized a gain of $207,000 due to settling the contingent consideration for $86,400.
The ultimate payment to VenturEast will be the value of 84,278 shares of common stock at the time of payment. The value of the note payable to VenturEast was determined using the fair value of our common stock less a discount for credit risk. During the years ended December 31, 2016 and 2015, we recognized a gain of $152,000 and $269,000, respectively, due to the decrease in value of the note.
Realized and unrealized gains and losses related to the change in fair value of the Gentris contingent consideration are included in general and administrative expense, while realized and unrealized gains and losses related to the VenturEast note are included in other income (expense) on the Consolidated Statements of Operations.
A table summarizing the activity for the derivative warrant liability which is measured at fair value using Level 3 inputs is presented in Note 14. The following table summarizes the activity of the notes payable to VenturEast and Gentris contingent consideration which were measured at fair value using Level 3 inputs (in thousands):
Note 16. Acquisition of Response Genetics
On October 9, 2015, we acquired substantially all the assets and assumed certain liabilities of Response Genetics, with its principal place of business in California, in a transaction valued at approximately $12.9 million, comprised of $7.5 million in cash and 788,584 shares of the Company’s common stock, with the common stock being valued at $5.4 million.
Response Genetics was a life sciences company engaged in the research and development of clinical diagnostic tests for cancer. Response Genetics generated revenues primarily from sales of its ResponseDX® diagnostic tests, which Response Genetics launched in 2008, and by providing clinical trial testing services to pharmaceutical companies.
The transaction is being accounted for using the acquisition method of accounting for business combinations in accordance with GAAP. Under this method, the total consideration transferred to consummate the acquisition is being allocated to the identifiable tangible and intangible assets acquired and liabilities assumed based on their respective fair values as of the closing date of the acquisition. The acquisition method of accounting requires extensive use of estimates and judgments to allocate the consideration transferred to the identifiable tangible and intangible assets acquired and liabilities assumed.
Goodwill arising from the acquisition consists largely of a trained workforce in place and expected synergies from new lines of business. Goodwill recorded in conjunction with the acquisition is deductible for income tax purposes. Business transactions expense of approximately $890,000 incurred in connection with the acquisition was expensed as incurred.
The final allocation of the purchase price of the fair value of the assets acquired and the liabilities assumed as of October 9, 2015 is as follows (in thousands):
The results of operations for the year ended December 31, 2015 include the operations of Response Genetics from October 9, 2015 with revenues of approximately $1,751,000. The net loss of Response Genetics cannot be determined, as its operations were integrated with Cancer Genetics.
Note 17. Contingencies
In the normal course of business, the Company is involved in various claims and legal proceedings. In the opinion of management, the ultimate liability or disposition thereof is not expected to have a material adverse effect on our financial condition, results of operations or liquidity.
Note 18. Joint Venture Agreement
In November 2011, we entered into an affiliation agreement with the Mayo Foundation for Medical Education and Research (“Mayo”), subsequently amended. Under the agreement, we formed a joint venture with Mayo in May 2013 to focus on developing oncology diagnostic services and tests utilizing next generation sequencing. The joint venture is a limited liability company, with each party initially holding fifty percent of the issued and outstanding membership interests of the new entity (the “JV”). In exchange for our membership interest in the JV, we made an initial capital contribution of $1.0 million in October 2013. In addition, we issued 10,000 shares of our common stock to Mayo pursuant to our affiliation agreement and recorded an expense of approximately $175,000. We also recorded additional expense of approximately $231,000 during the fourth quarter of 2013 related to shares issued to Mayo in November of 2011 as the JV achieved certain performance milestones. In the third quarter of 2014 we made an additional $1.0 million capital contribution.
The agreement also requires aggregate total capital contributions by us of up to an additional $4.0 million. The timing of the remaining installments is subject to the JV's achievement of certain operational milestones agreed upon by the board of governors of the JV. In exchange for its membership interest, Mayo’s capital contribution will take the form of cash, staff, services, hardware and software resources, laboratory space and instrumentation, the fair market value of which will be approximately equal to $6.0 million. Mayo’s continued contribution will also be conditioned upon the JV’s achievement of certain milestones.
The joint venture is considered a variable interest entity under ASC 810-10, but we are not the primary beneficiary as we do not have the power to direct the activities of the joint venture that most significantly impact its performance. Our evaluation of ability to impact performance is based on our equal board membership and voting rights and day to day management functions which are performed by the Mayo personnel.
Note 19. Related Party Transactions
John Pappajohn, a member of the Board of Directors and stockholder, had personally guaranteed our revolving line of credit with Wells Fargo Bank through March 31, 2014. As consideration for his guarantee, as well as each of the eight extensions of this facility through March 31, 2014, Mr. Pappajohn received warrants to purchase an aggregate of 1,051,506 shares of common stock of which Mr. Pappajohn assigned warrants to purchase 284,000 shares of common stock to certain third parties. Through December 31, 2016, warrants to purchase 440,113 shares of common stock have been exercised by Mr. Pappajohn and 476,867 warrants to purchase common stock have expired. After adjustment pursuant to the terms of the warrants in conjunction with our IPO, the number of these warrants outstanding retained by Mr. Pappajohn was 108,778 at $15.00 per share on December 31, 2016.
In addition, John Pappajohn also had loaned us an aggregate of $6,750,000 (all of which was converted into 675,000 shares of common stock at the IPO price of $10.00 per share). In connection with these loans, Mr. Pappajohn received warrants to purchase
an aggregate of 202,630 shares of common stock. After adjustment pursuant to the terms of the warrants in conjunction with our IPO, the number of warrants outstanding was 360,785 at $15.00 per share at December 31, 2016.
Effective January 6, 2014, the board of directors appointed John Pappajohn to serve as the Chairman of the Board, a position previously held by Dr. Raju S.K. Chaganti. As compensation for serving as the Chairman of the Board, the Company will pay Mr. Pappajohn $100,000 per year and granted to Mr. Pappajohn 25,000 restricted shares of the Company's common stock, and options to purchase an aggregate of 100,000 shares of the Company's common stock. The options have a term of ten years from the date on which they were granted. The restricted stock and the options each vest in two equal installments on the one year anniversary and the two year anniversary of the date on which Mr. Pappajohn became the Chairman of the Board.
We have a consulting agreement with Equity Dynamics, Inc. (“EDI”), an entity controlled by John Pappajohn, effective April 1, 2014 pursuant to which EDI receives a monthly fee of $10,000. We expensed $120,000 annually for the years ended December 31, 2016 and 2015 related to this agreement. At December 31, 2016 and 2015, we owed EDI $50,000 and $0, respectively.
Pursuant to a consulting and advisory agreement that ended December 31, 2016, Dr. Chaganti received $5,000 per month for providing consulting and technical support services. Total expenses for each of the years ended December 31, 2016 and 2015 were $60,000. Pursuant to the terms of the consulting agreement, Dr. Chaganti received an option to purchase 200,000 shares of our common stock at a purchase price of $15.89 per share vesting over a period of four years. Total non-cash stock-based compensation recognized under this consulting agreement for the years ended December 31, 2016 and 2015 was $37,625 and $239,375, respectively. Also pursuant to the consulting agreement, Dr. Chaganti assigned to us all rights to any inventions which he may invent during the course of rendering consulting services to us. In exchange for this assignment, if the USPTO issues a patent for an invention on which Dr. Chaganti is listed as an inventor, we are required to pay Dr. Chaganti (i) a one-time payment of $50,000 and (ii)1% of any net revenues we receive from any licensed sales of the invention. In February 2015, we paid Dr. Chaganti $150,000, which was recognized as an expense in 2014 when three additional patents were issued.
On November 12, 2015, John Pappajohn, Chairman of the Board and Edward Sitar, our former Chief Financial Officer purchased 100,000 and 5,000, respectively, of shares of common stock with warrants to purchase 100,000 shares of common stock and 5,000 shares of common stock, respectively, in the 2015 Offering described in Note 11.
On May 25, 2016, Mr. Pappajohn purchased 317,820 shares of common stock and warrants to purchase 158,910 shares of common stock in the May Offering described in Note 11.
Note 20. Subsequent Events
On February 22, 2017, we sold $18,177,059 of gross State of New Jersey NOL's and $167,572 of state research and development tax credits, resulting in the receipt of approximately $950,000, net of expenses.
On March 22, 2017, we restructured our debt with SVB, by repaying the outstanding term loan, which was scheduled to mature in May 2017, and entered into a new two year asset-based revolving line of credit agreement. The new SVB credit facility provides for an asset-based line of credit (“ABL”) for an amount not to exceed the lesser of (a) $6.0 million or (b) 80% of eligible accounts receivable plus the lesser of 50% of the net collectable value of third party accounts receivable or three (3) times the average monthly collection amount of third party accounts receivable over the previous quarter. The ABL requires monthly interest payments at the Wall Street Journal prime rate plus 1.5% (5.5% at March 22, 2017) and matures on March 22, 2019. We paid to SVB a $30,000 commitment fee at closing and will pay a fee of 0.25% per year on the average unused portion of the ABL.
We concurrently entered into a new three year $6.0 million term loan agreement (“Term Note”) with Partners for Growth IV, L.P. (“PFG”). The Term Note is an interest only loan with the full principal and any outstanding interest due at maturity on March 22, 2020. Interest is payable monthly at a rate of 11.5% per annum, with the possibility of reducing to 11.0% in 2018 based on achieving certain financial milestones set forth by PFG. We may prepay the Term Note in whole or part at any time without penalty. We paid PFG, a commitment fee of $120,000 at closing.
Both loan agreements require us to comply with certain financial covenants, including minimum adjusted EBITDA and minimum revenue covenants, and restrict us from, among other things, paying cash dividends, incurring debt and entering into certain transactions without the prior consent of the lenders. Repayment of amounts borrowed under the new loan agreements may be accelerated if an event of default occurs, which includes, among other things, a violation of such financial covenants and negative covenants.
Our obligations to SVB under the ABL facility are secured by a first priority security interest on substantially all of our assets, and our obligations under the Term Note to PFG are secured by a second priority security interest subordinated to the SVB lien.
In connection with the Term Note, we issued seven year warrants to the lenders to purchase an aggregate of 443,262 shares of our common stock at an exercise price of $2.82 per share. The number of shares may be reduced by 20% subject to us achieving certain financial milestones set forth by PFG.
Item 9.
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A.
Controls and Procedures.
Evaluation of Disclosure Controls and Procedures.
We evaluated, under the supervision and with the participation of our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934 (“Exchange Act”), as amended) as of December 31, 2016, the end of the period covered by this report on Form 10-K. Based on this evaluation, the principal executive officer and the principal financial officer have concluded that our disclosure controls and procedures were effective at December 31, 2016. Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and were operating in an effective manner for the period covered by this report, and (ii) is accumulated and communicated to management, including, the principal executive officer and principal financial officer, or the person performing similar functions as appropriate, to allow timely decisions regarding required disclosures.
Management’s Report on Internal Control Over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934.
The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
•
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
•
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of our management and directors; and
•
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions or because of declines in the degree of compliance with policies or procedures.
Our management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2016. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework (2013).
Based on management’s assessment, as of December 31, 2016, the Company’s internal control over financial reporting was effective.
Changes in Internal Control over Financial Reporting.
There were no changes in our internal control over financial reporting during the three months ended December 31, 2016 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
Item 9B.
Item 9B.
Other Information.
Credit Facilities
On March 22, 2017, we restructured our debt with Silicon Valley Bank (“SVB”), by repaying the outstanding term loan, which was scheduled to mature in May 2017, and entered into a new two year asset-based revolving line of credit agreement. The new SVB credit facility provides for an asset-based line of credit (“the ABL”) in an amount not to exceed the lesser of (a) $6.0 million or (b) 80% of eligible accounts receivable plus the lesser of 50% of the net collectable value of third party accounts receivable or three (3) times the average monthly collection amount of third party accounts receivable over the previous quarter. The ABL requires monthly interest payments at the Wall Street Journal prime rate plus 1.5% (5.5% at March 22, 2017), an annual commitment fee of 0.25% and matures on March 22, 2019. We paid to SVB a $30,000 commitment fee at closing and will pay a fee of 0.25% per year on the average unused portion of the ABL.
We concurrently entered into a new three year $6.0 million term loan agreement (the “Term Loan”) with Partners for Growth IV, L.P. (“PFG”). The Term Loan is an interest only loan with the full principal and any outstanding interest due at maturity on March 22, 2020. Interest is payable monthly at a rate of 11.5% per annum, with the possibility of reducing to 11.0% in 2018 based on achieving certain financial milestones set forth by PFG. We may prepay the Term Loan in whole or part at any time without penalty. We paid PFG, a commitment fee of $120,000 at closing.
Both loan agreements require us to comply with certain financial covenants, including minimum adjusted EBITDA and minimum revenue covenants, and restrict us from, among other things, paying cash dividends, incurring debt and entering into certain transactions without the prior consent of the lenders. Repayment of amounts borrowed under the new loan agreements may be accelerated if an event of default occurs, which includes, among other things, a violation of such financial covenants and negative covenants.
Our obligations to SVB under the ABL facility are secured by a first priority security interest on substantially all of our assets, and our obligations under the Term Loan to PFG are secured by a second priority security interest subordinated to the SVB lien.
In connection with such term loan, we issued seven year warrants to the lenders to purchase an aggregate of 443,262 shares of our common stock at an exercise price of $2.82 per share. The number of shares may be reduced by 20% subject to us achieving certain financial milestones set forth by PFG. The issuance of the warrants and the underlying warrant shares will be exempt from registration under Section 4(a)(2) of the Securities Act or 1933.
The above description of the terms of the loan agreements and the warrant is qualified in its entirety by the full text of the loan agreements and warrant, which are being filed as Exhibits 10.81, 10.82 and 10.83 to this Annual Report on Form 10-K and incorporated herein.
Dr. Shaknovich
Dr. Rita Shaknovich, our Medical Director and Vice President of Hematopathology Services since 2015, will change her status with the Company effective Monday March 27, 2017 from a full time employee to a part-time, independent consultant, so that she can return to academic research. As a part-time consultant, she will continue to serve as our Group Medical Director, an executive officer position, and as the co-chair of our Clinical Advisory Board. Dr. Shaknovich’s employment agreement will be terminated by mutual consent without severance, and as a consultant she will be compensated on an hourly basis for her services to the Company.
PART III
Item 10.
Item 10.
Directors, Executive Officers and Corporate Governance.
The information required by this item will be contained in the Proxy Statement for our 2017 Annual Meeting of Stockholders, which we anticipate will be filed no later than 120 days after the end of our fiscal year ended December 31, 2016 and is incorporated herein by reference herein.
The information required by this item will be contained in the Proxy Statement for our 2017 Annual Meeting of Stockholders, which we anticipate will be filed no later than 120 days after the end of our fiscal year ended December 31, 2016 and is incorporated by reference herein.
Item 12.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this item will be contained in the Proxy Statement for our 2017 Annual Meeting of Stockholders, which we anticipate will be filed no later than 120 days after the end of our fiscal year ended December 31, 2016 and is incorporated by reference herein.
Item 13.
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
The information required by this item will be contained in the Proxy Statement for our 2017 Annual Meeting of Stockholders, which we anticipate will be filed no later than 120 days after the end of our fiscal year ended December 31, 2016 and is incorporated by reference herein.
Item 14.
Item 14.
Principal Accounting Fees and Services.
The information required by this item will be contained in the Proxy Statement for our 2017 Annual Meeting of Stockholders, which we anticipate will be filed no later than 120 days after the end of our fiscal year ended December 31, 2016 and is incorporated by reference herein.
PART IV
Item 15.
Item 15.
Exhibits, Financial Statement Schedules.
(a)(1) Financial Statements. The financial statements filed as part of this report are listed on the Index to the Consolidated Financial Statements.
(a)(2) Financial Statement Schedules. Schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.
(a)(3) Exhibits. Reference is made to the Exhibit Index. The exhibits are included, or incorporated by reference, in this annual report on Form 10-K and are numbered in accordance with Item 601 of Regulation S-K.
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Cancer Genetics, Inc.
(Registrant)
Date: March 23, 2017
/s/ Panna L. Sharma
Panna L. Sharma
President and Chief Executive Officer
(Principal Executive Officer and
duly authorized signatory)
Date: March 23, 2017
/s/ John A. Roberts
John A. Roberts
Chief Operating Officer and
Executive Vice President, Finance
(Principal Financial Officer)
Date: March 23, 2017
/s/ Igor Gitelman
Igor Gitelman
Chief Accounting Officer
(Principal Accounting Officer)
SIGNATURES AND POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Panna Sharma and John A. Roberts, and each of them, his true and lawful agent, proxy and attorney-in-fact, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to (i) act on, sign and file with the Securities and Exchange Commission any and all amendments to this annual report on Form 10-K together with all schedules and exhibits thereto, (ii) act on, sign and file such certificates, instruments, agreements and other documents as may be necessary or appropriate in connection therewith and, (iii) take any and all actions which may be necessary or appropriate to be done, as fully for all intents and purposes as he might or could do in person, hereby approving, ratifying and confirming all that such agent, proxy and attorney-in-fact or any of his substitutes may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act, this annual report on Form 10-K has been signed by the following persons in the capacities and on the dates indicated.
INDEX TO EXHIBITS
*
Filed herewith.
**
Furnished herewith.