Company Quick10K Filing
Quick10K
Cancer Genetics
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.10 58 $6
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-11-08 Other Events
8-K 2019-10-24 Shareholder Rights, Amend Bylaw, Exhibits
8-K 2019-10-21 Enter Agreement, Off-BS Arrangement, Sale of Shares, Regulation FD, Exhibits
8-K 2019-08-20 Earnings, Exhibits
8-K 2019-08-12 Accountant
8-K 2019-07-15 Enter Agreement, Leave Agreement, M&A, Off-BS Arrangement, Other Events, Exhibits
8-K 2019-07-08 Officers, Exhibits
8-K 2019-07-05 Enter Agreement, M&A
8-K 2019-06-20 Off-BS Arrangement
8-K 2019-06-13 Enter Agreement, Off-BS Arrangement
8-K 2019-05-31 Shareholder Vote
8-K 2019-05-20 Earnings, Exhibits
8-K 2019-05-06 Enter Agreement, Off-BS Arrangement, Sale of Shares
8-K 2019-04-24 Accountant, Exhibits
8-K 2019-04-16 Earnings, Exhibits
8-K 2019-04-08
8-K 2019-02-15 Enter Agreement, Off-BS Arrangement
8-K 2019-01-29
8-K 2019-01-28 Sale of Shares, Other Events, Exhibits
8-K 2019-01-16 Earnings, Regulation FD, Exhibits
8-K 2019-01-16 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2019-01-09 Other Events, Exhibits
8-K 2019-01-09 Other Events, Exhibits
8-K 2019-01-03
8-K 2018-12-17 Other Events
8-K 2018-12-15 Leave Agreement, Off-BS Arrangement, Other Events, Exhibits
8-K 2018-11-19 Earnings, Exhibits
8-K 2018-11-13
8-K 2018-11-07 Officers, Exhibits
8-K 2018-10-16 Other Events, Exhibits
8-K 2018-10-08 Other Events, Exhibits
8-K 2018-09-18 Enter Agreement, Off-BS Arrangement, Sale of Shares, Other Events, Exhibits
8-K 2018-08-20 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-08-14 Earnings, Exhibits
8-K 2018-08-10 Officers
8-K 2018-08-06
8-K 2018-07-17 Enter Agreement, Off-BS Arrangement, Sale of Shares, Regulation FD, Exhibits
8-K 2018-06-21 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-06-12 Other Events, Exhibits
8-K 2018-04-30 Officers
8-K 2018-04-26 Enter Agreement, M&A, Other Events, Exhibits
8-K 2018-02-01 Officers, Regulation FD, Exhibits
ANTM Anthem 66,969
CI Cigna 35,909
CNC Centene 19,145
HSIC Henry Schein 9,146
GHDX Genomic Health 2,761
BEAT Biotelemetry 1,347
TRUP Trupanion 844
FLGT Fulgent Genetics 222
MGEN Miragen Therapeutics 36
OPGN OpGen 5
CGIX 2019-06-30
Part I - Financial Information
Item 1. Condensed Financial Statements (Unaudited)
Note 2. Going Concern
Note 4. Revenue
Note 5. Earnings per Share
Note 6. Leasing Arrangements
Note 7. Financing
Note 8. Capital Stock
Note 9. Sale of Net Operating Losses
Note 10. Stock-Based Compensation
Note 11. Warrants
Note 12. Fair Value of Warrants
Note 13. Fair Value Measurements
Note 14. Joint Venture Agreement
Note 15. Related Party Transactions
Note 16. Contingencies
Note 17. Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds From Sales of Registered Securities
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-2.1 exh21assetpurchaseagreem.htm
EX-10.2 exh102sixthforbearancesvb.htm
EX-31.1 q22019exhibit311certificat.htm
EX-31.2 q22019exhibit312certificat.htm
EX-32.1 q22019exhibit321certificat.htm
EX-32.2 q22019exhibit322certificat.htm

Cancer Genetics Earnings 2019-06-30

CGIX 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 a2019q2cgix-630201910q.htm 10-Q Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM 10-Q
 
 
 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
Or
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 001-35817
 
CANCER GENETICS, INC.
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
 
04-3462475
State or Other Jurisdiction of
Incorporation or Organization
 
I.R.S. Employer Identification No.

201 Route 17 North 2nd Floor Rutherford, NJ
 
07070
Address of Principal Executive Offices
 
Zip Code

(201) 528-9200
Registrant’s Telephone Number, Including Area Code
 
 








Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol
Name of exchange on which registered
Common Stock, $0.0001 par value per share
CGIX
NASDAQ Capital Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
 
¨
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
x
  
Smaller reporting company
 
x
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
¨
 
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  ý
As of August 16, 2019, there were 60,408,467 shares of common stock, par value $0.0001 of Cancer Genetics, Inc. outstanding.
 



CANCER GENETICS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 




PART I — FINANCIAL INFORMATION 
Item 1.    Condensed Financial Statements (Unaudited)
Cancer Genetics, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
(in thousands, except par value)
 
June 30,
2019
 
December 31,
2018
ASSETS
 
 
 
CURRENT ASSETS
 
 
 
Cash and cash equivalents
$
667

 
$
161

Accounts receivable
691

 
777

Other current assets
536

 
553

Current assets of discontinued operations
24,660

 
23,421

Total current assets
26,554

 
24,912

FIXED ASSETS, net of accumulated depreciation
634

 
497

OTHER ASSETS
 
 
 
Operating lease right-of-use assets
153

 

Restricted cash
350

 
350

Patents and other intangible assets, net of accumulated amortization
3,126

 
3,349

Investment in joint venture
92

 
92

Goodwill
5,963

 
5,963

Other
243

 
243

Total other assets
9,927

 
9,997

Total Assets
$
37,115

 
$
35,406

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES
 
 
 
Accounts payable and accrued expenses
$
2,777

 
$
3,100

Obligations under operating leases, current portion
207

 

Obligations under finance leases, current portion
36

 
20

Deferred revenue
1,622

 
1,215

Convertible note, net
3,101

 
2,481

Advance from NovellusDx, Ltd., net
1,500

 
535

Other derivatives

 
86

Current liabilities of discontinued operations
22,665

 
20,742

Total current liabilities
31,908

 
28,179

Obligations under finance leases, less current portion
140

 
23

Obligations under operating leases, less current portion
78

 

Deferred rent payable and other

 
154

Warrant liability
49

 
248

Total Liabilities
32,175

 
28,604

COMMITMENTS AND CONTINGENCIES

 

STOCKHOLDERS’ EQUITY
 
 
 
Preferred stock, authorized 9,764 shares, $0.0001 par value, none issued

 

Common stock, authorized 100,000 shares, $0.0001 par value, 57,816 and 27,726 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively
6

 
3

Additional paid-in capital
171,021

 
164,455

Accumulated other comprehensive income
19

 
60

Accumulated deficit
(166,106
)
 
(157,716
)
Total Stockholders’ Equity
4,940

 
6,802

Total Liabilities and Stockholders’ Equity
$
37,115

 
$
35,406


1



See Notes to Unaudited Condensed Consolidated Financial Statements.

2


Cancer Genetics, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations and Other Comprehensive Loss (Unaudited) 
(in thousands, except per share amounts)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Revenue
$
1,525

 
$
1,281

 
$
3,347

 
$
2,708

Cost of revenues
725

 
875

 
1,719

 
1,633

Gross profit
800

 
406

 
1,628

 
1,075

Operating expenses:
 
 
 
 
 
 
 
Research and development
7

 
16

 
15

 
31

General and administrative
1,266

 
1,464

 
3,173

 
3,384

Sales and marketing
322

 
386

 
514

 
612

Total operating expenses
1,595

 
1,866

 
3,702

 
4,027

Loss from continuing operations
(795
)
 
(1,460
)
 
(2,074
)
 
(2,952
)
Other income (expense):
 
 
 
 
 
 
 
Interest expense
(514
)
 
(2
)
 
(1,129
)
 
(5
)
Interest income

 

 
2

 
21

Change in fair value of acquisition note payable
7

 
64

 
7

 
81

Change in fair value of other derivatives
55

 

 
86

 

Change in fair value of warrant liability
206

 
2,154

 
199

 
2,846

Other expense
(11
)
 
(23
)
 
(11
)
 
(23
)
Total other income (expense)
(257
)
 
2,193

 
(846
)
 
2,920

Income (loss) before income taxes
(1,052
)
 
733

 
(2,920
)
 
(32
)
Income tax benefit
(512
)
 

 
(512
)
 

Income (loss) from continuing operations
(540
)
 
733

 
(2,408
)
 
(32
)
Loss from discontinuing operations
(3,233
)
 
(4,366
)
 
(5,982
)
 
(8,057
)
Net loss
(3,773
)
 
(3,633
)
 
(8,390
)
 
(8,089
)
Foreign currency translation gain (loss)
35

 
85

 
(41
)
 
65

Comprehensive loss
$
(3,738
)
 
$
(3,548
)
 
$
(8,431
)
 
$
(8,024
)
 
 
 
 
 
 
 
 
Basic and diluted net income (loss) per share from continuing operations
$
(0.01
)
 
$
0.03

 
$
(0.05
)
 
$

Basic and diluted net loss per share from discontinuing operations
(0.06
)
 
(0.16
)
 
(0.11
)
 
(0.30
)
Basic and diluted net loss per share
$
(0.07
)
 
$
(0.13
)
 
$
(0.16
)
 
$
(0.30
)
 
 
 
 
 
 
 
 
Basic and diluted weighted-average shares outstanding
57,164

 
27,049

 
53,049

 
27,049

See Notes to Unaudited Condensed Consolidated Financial Statements.

3


Cancer Genetics, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) 
(in thousands)

 
 
Three and Six Months Ended June 30, 2019
 
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Accumulated
Deficit
 
Total
 
 
Shares
 
Amount
 
Balance, January 1, 2019
 
27,726

 
$
3

 
$
164,455

 
$
60

 
$
(157,716
)
 
$
6,802

Stock based compensation—employees
 
(1
)
 

 
158

 

 

 
158

Issuance of common stock - 2019 Offerings, net
 
28,551

 
3

 
5,409

 

 

 
5,412

Unrealized loss on foreign currency translation
 

 

 

 
(76
)
 

 
(76
)
Net loss
 

 

 

 

 
(4,617
)
 
(4,617
)
Balance, March 31, 2019
 
56,276

 
6

 
170,022

 
(16
)
 
(162,333
)
 
7,679

Stock based compensation—employees
 

 

 
102

 

 

 
102

Issuance of common stock - Iliad conversions
 
1,540

 

 
350

 

 

 
350

Increase in fair value of embedded conversion option
 

 

 
547

 

 

 
547

Unrealized gain on foreign currency translation
 

 

 

 
35

 

 
35

Net loss
 

 

 

 

 
(3,773
)
 
(3,773
)
Balance, June 30, 2019
 
57,816

 
$
6

 
$
171,021

 
$
19

 
$
(166,106
)
 
$
4,940


 
 
Three and Six Months Ended June 30, 2018
 
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Accumulated
Deficit
 
Total
 
 
Shares
 
Amount
 
Balance, January 1, 2018
 
27,754

 
$
3

 
$
161,527

 
$
69

 
$
(134,834
)
 
$
26,765

Stock based compensation—employees
 
(24
)
 

 
274

 

 

 
274

Transition adjustment for adoption of Accounting Standards Codification Topic 606
 

 

 

 

 
(2,509
)
 
(2,509
)
Unrealized loss on foreign currency translation
 

 

 

 
(20
)
 

 
(20
)
Net loss
 

 

 

 

 
(4,456
)
 
(4,456
)
Balance, March 31, 2018
 
27,730

 
3

 
161,801

 
49

 
(141,799
)
 
20,054

Stock based compensation—employees
 
(4
)
 

 
268

 

 

 
268

Fair value of warrants reclassified from liabilities to equity
 

 

 
423

 

 

 
423

Warrant modification costs
 

 

 
83

 

 

 
83

Unrealized gain on foreign currency translation
 

 

 

 
85

 

 
85

Net loss
 

 

 

 

 
(3,633
)
 
(3,633
)
Balance, June 30, 2018
 
27,726

 
$
3

 
$
162,575

 
$
134

 
$
(145,432
)
 
$
17,280

See Notes to Unaudited Condensed Consolidated Financial Statements.


4


Cancer Genetics, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited) 
(in thousands)
 
Six Months Ended June 30,
 
2019
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net loss
$
(8,390
)
 
$
(8,089
)
Loss from discontinuing operations
5,982

 
8,057

Net loss from continuing operations
(2,408
)
 
(32
)
 
 
 
 
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation
29

 
77

Amortization
223

 
258

Stock-based compensation
260

 
542

Change in fair value of warrant liability, acquisition note payable and other derivatives
(292
)
 
(2,927
)
Amortization of discount of debt and debt issuance costs
470

 

Interest added to Convertible Note
268

 

Modification of 2017 Debt warrants

 
83

Loss in equity-method investment

 
3

Loss on extinguishment of debt
256

 

Changes in:
 
 
 
Accounts receivable
85

 
(43
)
Other current assets
(61
)
 
65

Operating lease right-of-use assets
85

 

Other non-current assets

 
6

Accounts payable, accrued expenses and deferred revenue
306

 
201

Obligations under operating leases
(107
)
 

Deferred rent payable and other

 
(23
)
Net cash used in operating activities, continuing operations
(886
)
 
(1,790
)
Net cash used in operating activities, discontinuing operations
(3,974
)
 
(6,311
)
Net cash used in operating activities
(4,860
)
 
(8,101
)
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Purchase of fixed assets
(21
)
 
(4
)
Net cash used in investing activities, continuing operations
(21
)
 
(4
)
Net cash provided by (used in) investing activities, discontinuing operations
(34
)
 
963

Net cash provided by (used in) investing activities
(55
)
 
959

CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Principal payments on obligations under finance leases
(12
)
 
(27
)
Proceeds from offerings of common stock, net of certain offering costs
5,412

 

Net cash provided by (used in) financing activities, continuing operations
5,400

 
(27
)
Net cash provided by (used in) financing activities, discontinuing operations
62

 
(832
)
Net cash provided by (used in) financing activities
5,462

 
(859
)
Effect of foreign exchange rates on cash and cash equivalents and restricted cash
(41
)
 
61

Net increase (decrease) in cash and cash equivalents and restricted cash
506

 
(7,940
)
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH
 
 
 
Beginning
511

 
9,891

Ending
$
1,017

 
$
1,951





5


SUPPLEMENTAL CASH FLOW DISCLOSURE
 
 
 
Cash paid for interest
$
694

 
$
638

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
 
 
 
Fixed assets acquired through capital lease arrangement
$
145

 
$

Conversion of debt and accrued interest into common stock
350

 

Increase in fair value of conversion option
547

 
 
Fair value of warrants reclassified from liabilities to equity

 
423


See Notes to Unaudited Condensed Consolidated Financial Statements.

6


Notes to Unaudited Condensed Consolidated Financial Statements

Note 1.     Organization, Description of Business, Basis of Presentation, Business Disposals, 2019 Offerings, Standstill Agreement, Advance from NDX, Recently Adopted Accounting Standard, and Recent Accounting Pronouncements

Cancer Genetics, Inc. supports the biotechnology and pharmaceutical industry to develop innovative new drug therapies.
Until the closing of the Business Disposals (as defined below) in July 2019, we were an emerging leader in enabling precision medicine in oncology by providing multi-disciplinary diagnostic and data solutions, facilitating individualized therapies through our diagnostic tests, services and molecular markers. Following the Business Disposals described below, we currently have an extensive set of anti-tumor referenced data based on predictive xenograft and syngeneic tumor models from the acquisition of vivoPharm, Pty Ltd. (“vivoPharm”) in 2017, to provide contract research services, focused primarily on unique specialized studies to guide drug discovery and development programs in the oncology and immuno-oncology fields.

We were incorporated in the State of Delaware on April 8, 1999 and, until the Business Disposals, had offices and state-of-the-art laboratories located in New Jersey and North Carolina and today continue to have laboratories in Pennsylvania and Australia. Our laboratories comply with the highest regulatory standards as appropriate for the services they deliver including CLIA, CAP, and NY State. Our services are built on a foundation of world-class scientific knowledge and intellectual property in solid and blood-borne cancers, as well as strong academic relationships with major cancer centers such as Memorial Sloan-Kettering, Mayo Clinic, and the National Cancer Institute. We offer preclinical services such as predictive tumor models, human orthotopic xenografts and syngeneic immuno-oncology relevant tumor models in our Hershey PA facility, and are a leader in the field of immuno-oncology preclinical services in the United States. This service is supplemented with GLP toxicology and extended bioanalytical services in our Australian based facility in Bundoora VIC.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions for interim reporting as prescribed by the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary to make the financial statements not misleading have been included. As such, the information included in this quarterly report on Form 10-Q should be read in conjunction with the audited consolidated financial statements as of and for the year ended December 31, 2018, filed with the Securities and Exchange Commission on April 16, 2019. The consolidated balance sheet as of December 31, 2018, included herein was derived from the audited financial statements as of that date, but does not include all disclosures including notes required by GAAP. Interim financial results are not necessarily indicative of the results that may be expected for any future interim period or for the year ending December 31, 2019.

Business Disposals - Discontinued Operations

Interpace Diagnostics Group, Inc.

On July 15, 2019, the Company entered into and consummated a secured creditor asset purchase agreement (the “BioPharma Agreement”) by and among the Company, Gentris, LLC, a wholly owned subsidiary of the Company, Partners for Growth IV, L.P. (“PFG”), Interpace Diagnostics Group, Inc. (“IDXG”) and a newly-formed subsidiary of IDXG, Interpace BioPharma, Inc. (“Buyer”). The BioPharma Agreement provides for a consensual private foreclosure sale by PFG of all assets relating to the Company’s BioPharma Business (as defined in the BioPharma Agreement) to Buyer (the “BioPharma Disposal”).
 
Pursuant to the BioPharma Agreement, Buyer purchased from PFG certain assets and assumed certain liabilities of the Company relating to the BioPharma Business, providing as gross consideration of $23,500,000, less certain closing adjustments totaling $1,978,240, of which $7,692,300 was paid in the form of a promissory note issued by Buyer to the Company (the “Excess Consideration Note”) and the remainder was paid to PFG in cash. PFG utilized the cash proceeds to satisfy the outstanding balances of the Silicon Valley Bank (“SVB”) asset-based revolving line of credit (“ABL”) and the $6.0 million term note to PFG (“PFG Term Note”), and to satisfy certain transaction expenses. The balance of approximately $2,260,000 was delivered to the Company along with the Excess Consideration Note. The Excess Consideration Note will mature on the earlier of the date of (i) the consummation of an investment by Ampersand Capital Partners or any of its affiliates into IDXG or Buyer, following IDXG receiving the approval of its shareholders of the issuance of shares of its common stock in connection therewith and (ii) July 15, 2022, and will be paid interest-only quarterly prior to maturity at a rate of 6% per year.


7


Following closing, the purchase price will be adjusted based on the net worth (assets less liabilities) of the BioPharma business as of June 30, 2019 as compared to the net worth of the BioPharma business as of April 30, 2019, with any increase or decrease in net worth over such period being added or subtracted, respectively, to the principal of the Excess Consideration Note, with such adjustment not to exceed $775,000. The Excess Consideration Note is also subject to set-off in the event that certain older accounts receivable of the Company purchased by Buyer, in the aggregate amount of approximately $830,000, are not collected prior to December 31, 2019, and as indemnification for breaches of certain limited warranties and of covenants of the Company and other specified items, subject to agreed-upon caps, baskets and survival periods as set forth in the BioPharma Agreement. Alternatively, if the Excess Consideration Note is no longer outstanding after December 31, 2019, the above-mentioned accounts receivable adjustment will be satisfied through an AR Holdback (as defined in the BioPharma Agreement) mechanism, as set forth in the BioPharma Agreement. The Excess Consideration Note is subordinated in favor of Buyer’s senior lender, subject to certain exceptions set forth therein.

The Company and Buyer also entered into a transition services agreement (the “TSA”) pursuant to which the Company and Buyer will provide certain services to each other to accommodate the transition of the BioPharma Business to Buyer. In particular, the Company agreed to provide to Buyer, among other things, certain personnel services, payroll processing, administration services and benefit administration services described in an exhibit thereto, for a period not to exceed six months from July 15, 2019, subject to the terms and conditions of the TSA, in exchange for payment or reimbursement, as applicable, by Buyer for the costs related thereto, including salaries and benefits for certain of the Company’s BioPharma employees during the transition period. In addition, it is anticipated that John A. Roberts, the Company’s Chief Executive Officer, and Glenn Miles, the Company’s Chief Financial Officer, may enter into part-time consulting arrangements with Buyer and/or IDXG to assist with the transition.
 
In connection with the closing of the BioPharma Disposal, the SVB ABL and the PFG Term Note were terminated, and all related liens were released.

siParadigm, Inc.

On July 5, 2019, the Company entered into an asset purchase agreement (the “Clinical Agreement”) by and among the Company and siParadigm, LLC (“siParadigm”), pursuant to which the Company sold to siParadigm, certain assets associated with the Company’s clinical laboratory business (the “Clinical Business,” and such assets, the “Designated Assets”), and agreed to cease operating its Clinical Business. The Designated Assets include intellectual property, equipment and customer lists associated with the Clinical Business, and the Company will provide certain transitional services to siParadigm pursuant to the Clinical Agreement. The cash consideration paid by siParadigm at closing was approximately $758,000, which includes approximately $45,000 for certain equipment plus a $1,000,000 advance payment of the Earn-Out (as defined below), less approximately $177,000 of supplier invoices paid directly by siParadigm and transaction costs of approximately $110,000. The Earn-Out, to be paid over the 24 months post-closing, is based on fees for all tests performed by siParadigm for the Company’s clinical customers during the 12-month period following the closing (the “Earn-Out”). The Clinical Business sale (together with the BioPharma Disposal, the “Business Disposals”) was completed on July 8, 2019.

Under the Clinical Agreement, the Company agreed to certain non-competition and non-solicitation provisions, including that it will cease performing certain clinical tests and will not solicit or seek business from certain of its customers (other than for the Company’s other lines of business) for a period of three years following the closing date.

The Business Disposals have been classified as discontinued operations in conformity with GAAP. Accordingly, BioPharma and Clinical operations and balances have been reported as discontinued operations and removed from all financial disclosures of continuing operations. As permitted by Accounting Standards Codification (“ASC”) 205-20, the Company elected to allocate approximately $657,000 and $1,442,000 of interest expense on debt not required to be repaid to discontinued operations during the three and six months ended June 30, 2019, respectively. No interest expense was allocated to discontinued operations for the three and six months ended June 30, 2018, as all debt outstanding during those periods was repaid as part of the BioPharma Disposal. Unless otherwise indicated, information in these notes to unaudited condensed consolidated financial statements relates to continuing operations. Certain of our operations have been presented as discontinued.

2019 Offerings

On January 9, 2019, we entered into an underwriting agreement with H.C. Wainwright & Co., LLC (“H.C. Wainwright”), relating to an underwritten public offering of 13,333,334 shares of our common stock for $0.225 per share. We received proceeds from the offering of approximately $2,437,000, net of expenses and discounts of approximately $563,000. We also issued warrants to purchase 933,334 shares of common stock to H.C. Wainwright in connection with this offering. The warrants are exercisable for five years from the date of issuance at a per share price of $0.2475.

8



On January 26, 2019, we issued 15,217,392 shares of common stock at a public offering price of $0.23 per share. We received proceeds from the offering of approximately $2,975,000, net of expenses and discounts of approximately $525,000. We also issued warrants to purchase 1,065,217 shares of common stock to the underwriter, H.C. Wainwright, in connection with this offering. The warrants are exercisable for five years from the date of issuance at a per share price of $0.253.

The January 9, 2019 and January 26, 2019 offerings will be referred to collectively as the “2019 Offerings.” As disclosed in Note 15, certain of our directors and executive officers purchased shares in the 2019 Offerings at the public offering price.

Standstill Agreement

In May 2019, we entered into a second standstill agreement (“Second Standstill”) with Iliad Research and Trading, L.P. (“Iliad”), related to the $2,625,000 convertible promissory note dated July 17, 2018 (“Convertible Note”) described further in Note 7. The Second Standstill provided that Iliad would not seek to redeem any portion of the Convertible Note until May 31, 2019. In consideration for the Second Standstill, we agreed to adjust the conversion price on the first $1,250,000 of our debt to Iliad from $0.80 to $0.2273. In May 2019, Iliad converted $350,000 of the Convertible Note balance into 1,539,815 shares of our common stock at a conversion price of $0.2273 per share. On or about June 11, 2019, following the expiration of the Second Standstill, Iliad sent the Company a Redemption Notice (as defined in Note 7). On June 20, 2019, Iliad sent a notice to the Company asserting that the nonpayment of the redemption amount by the redemption due date constituted an event of default. Iliad asserted its right to increase the interest rate to 22% and to increase the then-outstanding balance of the loan by 15% (approximately $408,000). The Company and Iliad are currently negotiating a possible resolution.

Advance from NovellusDx, Ltd.

On September 18, 2018, we entered into an agreement and plan of merger (“Merger Agreement”) with NovellusDx, Ltd. (“NDX”). In connection with signing the Merger Agreement, NDX loaned us $1,500,000 (“Advance from NDX”). Interest accrued on the outstanding balance at 10.75% per annum until we terminated the Merger Agreement on December 15, 2018. As a result of the termination, the Advance from NDX, plus interest thereon, became due and payable on March 15, 2019. The Company and NDX are currently negotiating a possible resolution or settlement of the Advance from NDX.

Recently Adopted Accounting Standards

In February 2016, the Financial Accounting Standards Board (“FASB”) issued guidance codified in ASC 842, Leases, which supersedes the guidance in former ASC 840, Leases, to increase transparency and comparability among organizations by requiring recognition of right-of-use assets and lease liabilities on the balance sheet and disclosure of key information about leasing arrangements (with the exception of short-term leases).
In July 2018, the FASB issued Accounting Standards Update (“ASU”) 2018-11 to the existing transition guidance that allows entities to recognize a cumulative-effect adjustment to the opening balance of accumulated deficit in the period of adoption. Effective January 1, 2019, we adopted ASC 842 using this new transition guidance. The comparative information has not been restated and continues to be reported under the accounting standard in effect for those periods.
We have elected to use the package of practical expedients, which allows us to not (1) reassess whether any expired or existing contracts are considered or contain leases; (2) reassess the lease classification for any expired or existing leases; and (3) reassess the initial direct costs for any existing leases. We did not elect the hindsight practical expedient, which permits entities to use hindsight in determining the lease term and assessing impairment.
The most significant impact of adopting ASC 842 is related to the recognition of right-of-use assets and lease liabilities for operating leases. Our accounting for finance leases remains substantially unchanged. The adoption of ASC 842 had no impact on our unaudited condensed consolidated statements of operations or total cash flows from operations.
The cumulative effect of the changes made to our unaudited consolidated January 1, 2019 balance sheet for the adoption of ASC 842 were as follows (in thousands):

9


 
 
As of December 31, 2018
 
Adjustment for Adoption of ASC 842
 
As of January 1, 2019
ASSETS
 
 
 
 
 
 
Current assets of discontinued operations
 
$
23,421

 
$
2,327

 
$
25,748

Operating lease right-of-use assets
 

 
238

 
238

 
 
$
23,421

 
$
2,565

 
$
25,986

LIABILITIES
 
 
 
 
 
 
Current liabilities of discontinued operations
 
$
20,742

 
$
2,327

 
$
23,069

Deferred rent payable and other
 
154

 
(154
)
 

Obligations under operating leases, current portion
 

 
204

 
204

Obligations under operating leases, less current portion
 

 
188

 
188

 
 
$
20,896

 
$
2,565

 
$
23,461


Recent Accounting Pronouncements

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which clarifies the accounting for implementation costs in cloud computing arrangements. The update will become effective for interim and annual periods beginning after December 15, 2019 and may be adopted either retrospectively or prospectively. Early adoption is permitted. We plan to adopt this standard prospectively. We are currently evaluating the impact that adoption of this ASU will have on our consolidated financial statements and whether or not to early adopt.

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 on our consolidated financial statements.

Note 2. Going Concern

At June 30, 2019, our cash position and history of losses required management to assess our ability to continue operating as a going concern, according to FASB ASC 205-40, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. Prior to the closing of the Business Disposals transactions in July 2019, the Company did not have sufficient cash at June 30, 2019 to fund normal operations beyond the next three months from the date of this report unless certain current assets were converted to cash, as described below. After the Business Disposals, the Company’s ability to continue as a going concern is still dependent on the Company’s ability to raise additional equity or debt capital, spin-off non-core assets to raise additional cash, collect its outstanding accounts receivable and timely collect on the Excess Consideration Note or receive the Earn-Out payments from siParadigm without significant offsets, and negotiate discounts in good faith with its trade suppliers. These factors raise substantial doubt about the Company's ability to continue as a going concern for the next twelve months from the issuance of this current report on Form 10-Q.

Net cash used in operating activities for continuing operations was $0.9 million for the six months ended June 30, 2019 and the Company had unrestricted cash and cash equivalents of $0.7 million at June 30, 2019, an increase from $0.2 million at December 31, 2018. The Company has negative working capital from continuing operations at June 30, 2019 of $7.3 million.

The Company currently requires a significant amount of additional capital to fund operations and pay its unsecured debt and accounts payable, and its ability to continue as a going concern is dependent upon its ability to collect its Excess Consideration Note and its outstanding accounts receivable, receive the Earn-Out payments from siParadigm and negotiate discounts in good faith with its trade suppliers. In July 2019, we sold our BioPharma Business and Clinical Business as described in Note 1. While the Buyer assumed certain of our liabilities in the BioPharma Disposal, the cash received to date from the Business Disposals is insufficient to satisfy all of the Company’s liabilities and other obligations, and the Company cannot determine at this time if future Earn-Out payments and payoff of the Excess Consideration Note, combined with settlements of claims against the Company will enable all creditors to be paid in full and provide sufficient funds for future operations. We are continuing to evaluate additional strategic options, which could include the sale of other assets, a merger, reverse merger or

10


other strategic transaction. We can provide no assurances that our current actions will be successful or that additional sources of cash or financing will be available to us on favorable terms, if at all. If the Company is not able to collect its accounts and notes receivable or raise additional capital on a timely basis or on favorable terms, the Company may need to scale back further or, in extreme cases, discontinue its operations or liquidate its assets.

The unaudited condensed consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.

Note 3. Discontinued Operations

As described in Note 1, the Company sold its BioPharma Business and Clinical Business in July 2019. In conjunction with the BioPharma Disposal, the Company repaid its debt to SVB and PFG. At June 30, 2019, we had borrowings of approximately $2.8 million on the ABL and the principal balance of the PFG Term Note was $6.0 million. The Company elected to allocate approximately $657,000 and $1,442,000 of interest expense from the Convertible Note and Advance from NovellusDx to discontinued operations during the three and six months ended June 30, 2019, respectively. No interest expense was allocated to discontinued operations for the three and six months ended June 30, 2018, as all debt outstanding during those periods was repaid as part of the BioPharma Disposal. Revenue and other significant accounting policies associated with the discontinued operations have not changed since the most recently filed audited financial statements as of and for the year ended December 31, 2018, except for the adoption of ASC 842 as described in Note 1.

Summarized results of our unaudited condensed consolidated discontinuing operations are as follows for the three and six months ended June 30, 2019 and 2018 (in thousands):

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Revenue
$
4,621

 
$
5,755

 
$
9,638

 
$
11,995

Cost of revenues
3,438

 
3,978

 
7,081

 
8,302

Gross profit
1,183

 
1,777

 
2,557

 
3,693

Operating expenses:
 
 
 
 
 
 
 
Research and development
429

 
657

 
875

 
1,323

General and administrative
1,937

 
3,955

 
3,339

 
7,295

Sales and marketing
585

 
955

 
1,501

 
2,320

Transaction costs
402

 

 
651

 

Total operating expenses
3,353

 
5,567

 
6,366

 
10,938

Loss from discontinuing operations
(2,170
)
 
(3,790
)
 
(3,809
)
 
(7,245
)
Other expense:
 
 
 
 
 
 
 
Interest expense
(1,063
)
 
(576
)
 
(2,173
)
 
(812
)
Total other expense
(1,063
)
 
(576
)
 
(2,173
)
 
(812
)
Net loss from discontinuing operations
$
(3,233
)
 
$
(4,366
)
 
$
(5,982
)
 
$
(8,057
)

Unaudited condensed consolidated carrying amounts of major classes of assets and liabilities from discontinued operations were as follows as of June 30, 2019 and December 31, 2018 (in thousands):


11


 
June 30, 2019
 
December 31, 2018
Current assets of discontinued operations:
 
 
 
Accounts receivable, net of allowance for doubtful accounts of $3,487 in 2019; $3,462 in 2018
$
6,150

 
$
6,261

Other current assets
1,422

 
1,652

Fixed assets, net of accumulated depreciation
3,090

 
3,559

Operating lease right-of-use assets
2,060

 

Patents and other intangible assets, net of accumulated amortization
644

 
655

Goodwill
11,294

 
11,294

Current assets of discontinued operations
$
24,660

 
$
23,421

 
 
 
 
Current liabilities of discontinued operations
 
 
 
Accounts payable and accrued expenses
$
10,154

 
$
9,967

Operating lease liabilities
2,109

 

Obligations under finance leases
502

 
666

Deferred revenue
1,053

 
1,337

Line of credit
2,847

 
2,621

Term note
6,000

 
6,000

Deferred rent payable and other

 
151

Current liabilities of discontinued operations
$
22,665

 
$
20,742


Note 4.     Revenue

Revenue from the Company’s Discovery Services comes from preclinical oncology and immuno-oncology services offered to our biotechnology and pharmaceutical customers. The Company is a leader in orthotopic and metastases tumor models and offers whole body imaging, in addition to toxicology testing and bionalytical analysis. Our Discovery Services are designed to support new compounds being studied to guide drug development, starting from compound libraries and ending with a comprehensive set of in vitro and in vivo data and reports, as needed for Investigational New Drug (IND) filing.

During the six months ended June 30, 2019, three customers accounted for approximately 68% of our consolidated revenue from continuing operations. During the six months ended June 30, 2018, two customers accounted for approximately 37% of our consolidated revenue from continuing operations.

During the three months ended June 30, 2019, one customer accounted for approximately 65% of our consolidated revenue from continuing operations. During the three months ended June 30, 2018, four customers accounted for approximately 69% of our consolidated revenue from continuing operations.

Remaining Performance Obligations:

Services offered under Discovery Services frequently take time to complete under their respective contacts. These times vary depending on specific contract arrangements including the length of the study and how samples are delivered to us for processing. In the case of Discovery Services, the duration of performance obligations is less than one year.

Note 5.     Earnings Per Share

For purposes of this calculation, stock warrants, outstanding stock options, convertible debt and unvested restricted shares are considered common stock equivalents using the treasury stock method, and are the only such equivalents outstanding. For all periods presented, all common stock equivalents outstanding were anti-dilutive.

The following table summarizes equivalent units outstanding that were excluded from the earnings per share calculation because their effects were anti-dilutive (in thousands):

12


 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Common stock purchase warrants
8,378

 
10,055

 
8,378

 
10,055

Stock options
1,743

 
3,085

 
1,743

 
3,085

Convertible note
4,710

 

 
4,710

 

Advance from NovellusDx, Ltd.
2,819

 

 
2,819

 

Restricted shares of common stock
19

 
57

 
19

 
57

 
17,669

 
13,197

 
17,669

 
13,197


Note 6. Leasing Arrangements

Operating Leases

We lease our laboratory, research facility and administrative office space under various operating leases. We also lease scientific equipment under various finance leases. Following the Business Disposals, we have assigned our office lease in North Carolina, and are in the process of assigning our lease in New Jersey, to Buyer.

We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, operating lease liabilities, and operating lease liabilities, non-current on our unaudited condensed consolidated balance sheets. Finance leases are included in fixed assets, net of accumulated depreciation and obligations under finance leases.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. Our incremental borrowing rate was determined by adjusting our secured borrowing interest rate for the longer-term nature of our leases. Our variable lease payments primarily consist of maintenance and other operating expenses from our real estate leases. Variable lease payments are excluded from the ROU assets and lease liabilities and are recognized in the period in which the obligation for those payments is incurred. The operating lease ROU asset also includes any lease payments made and excludes lease incentives incurred. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

We have lease agreements with lease and non-lease components. We have elected to account for these lease and non-lease components as a single lease component. We are also electing not to apply the recognition requirements to short-term leases of twelve months or less and instead will recognize lease payments as expense on a straight-line basis over the lease term.

The components of lease expense were as follows for the three and six months ended June 30, 2019 for continuing operations (in thousands):

 
 
Three months ended June 30, 2019
 
Six months ended
June 30, 2019
Operating lease cost
 
$
44

 
$
87

Short-term lease cost
 
29

 
54

Variable lease cost
 
15

 
45

 
 
$
88

 
$
186


Supplemental cash flow related to leases of our continuing operations was as follows for the three and six months ended June 30, 2019 (in thousands):


13


 
 
Three months ended June 30, 2019
 
Six months ended
June 30, 2019
Cash paid amounts included in the measurement of lease liabilities:
 
 
 
 
Operating cash flows from operating leases
 
$
55

 
$
110


Other supplemental information related to leases of our continuing operations was as follows for the six months ended June 30, 2019:

Weighted average remaining lease term (in years)
 
 
Operating leases
 
1.49

 
 
 
Weighted average discount rate
 
 
Operating leases
 
7.96
%

We did not enter into any new operating leases that met scope during the three and six months ended June 30, 2019.

At June 30, 2019, future estimated minimum lease payments under non-cancelable operating leases were as follows (in thousands):

2019 (remaining 6 months)
 
$
94

2020
 
209

2021
 
12

Total minimum lease payments
 
315

Less amount representing interest
 
30

Total
 
$
285


Note 7. Financing

Convertible Note

On July 17, 2018, the Company entered into the Convertible Note, pursuant to which the Company issued a convertible promissory note to an institutional accredited investor in the initial principal amount of $2,625,000. The Company received consideration of $2,500,000, reflecting an original issue discount of $100,000, a beneficial conversion feature discount of approximately $328,000 and expenses payable by the Company of $25,000. The Convertible Note has an 18 month term, carries interest at 10% per annum and is subordinated in right of payment to the ABL and PFG Term Note. The note is convertible into shares of the Company’s common stock at a conversion price of $0.80 per share (“Conversion Price”) upon five trading days’ notice, subject to certain adjustments (standard dilution) and ownership limitations specified in the Convertible Note. In May 2019, the conversion price was reduced to $0.2273 for $1,250,000 of the balance of the Convertible Note; the remainder is still convertible at $0.80. The reduction in the conversion price increased the fair value of the embedded conversion option by approximately $547,000. The future cash flows of the Convertible Note changed by more than 10% as a result of the Standstill Agreement, so the Company amortized the remaining debt discount and debt issuance costs of $37,000, resulting in a loss on debt extinguishment of approximately $584,000 during the three and six months ended June 30, 2019, of which approximately $328,000 was allocated to discontinuing operations. Loss on debt extinguishment allocated to continuing operations was recorded in interest expense.

The investor can redeem any portion of the Convertible Note upon five trading days’ notice (“Redemption Notice”) subject to a maximum monthly redemption amount of $650,000, with the Company having the option to pay such redemptions in cash, the Company’s common stock at the Conversion Price, or by a combination thereof, subject to certain conditions, including that the stock price is $1.00 per share or higher. The Company may prepay the outstanding balance of the Convertible Note, in part or in full, at a 10% premium to par value if prior to the one year anniversary of the date of issuance and at par if prepaid thereafter. At maturity, the Company may pay the outstanding balance in cash, the Company’s common stock at the Conversion Price, or by a combination thereof, subject to certain conditions. The note provides that in the event of default, the lender may, at its option, elect to increase the outstanding balance applying the default effect (defined as outstanding balance at date of default

14


multiplied by 15% plus outstanding amount) by providing written notice to the Company. In addition, the interest rate increases to 22% upon default. The Convertible Note is the general unsecured obligation of the Company. At June 30, 2019, the principal balance of the Convertible Note is approximately $3.1 million.

In May 2019, Iliad converted $350,000 of the Convertible Note balance into 1,539,815 shares of our common stock at $0.2273 per share. Between July 24, 2019 and July 31, 2019, the Company issued an aggregate of 2,571,429 shares of common stock to Iliad in exchange for the return of $375,000 of principal amount of the Convertible Note to the Company.

As of June 20, 2019, the Company is in default on the Convertible Note. The Convertible Note is accruing interest at the default rate of 22%, and the outstanding balance was increased by 15% (approximately $408,000) upon the notice of default.

Advance from NDX

On September 18, 2018, we entered into the Merger Agreement with NDX. In connection with signing the Merger Agreement, NDX loaned us $1,500,000. Interest accrued on the outstanding balance at 10.75% per annum until we terminated the Merger Agreement on December 15, 2018. As a result of the termination, the Advance from NDX, plus interest thereon, became due and payable on March 15, 2019. The termination was a specified event of default, so on December 15, 2018, the interest rate was increased to 21%. The default also gives NDX the right to convert all, but not less than all, of the outstanding balance into shares of the Company’s common stock at a conversion price of $0.606 per share. At June 30, 2019, the principal balance of the Advance from NDX was $1,500,000.

The Advance from NDX is the general unsecured obligation of the Company and is subordinated in right of payment to the ABL and PFG Term Note, provided that NDX has asserted that its obligation to standstill under its subordination agreements will not be applicable at a time when the Company attains certain levels of unrestricted cash, as a result of the Company having improperly terminated the Merger Agreement. The Company does not believe it improperly terminated the Merger Agreement. The Company and NDX are currently negotiating a possible resolution or settlement of the Advance from NDX.

Note 8. Capital Stock

2019 Offerings

On January 9, 2019, we entered into an underwriting agreement with H.C. Wainwright & Co., LLC (“H.C. Wainwright”), relating to an underwritten public offering of 13,333,334 shares of our common stock for $0.225 per share. We received proceeds from the offering of approximately $2,437,000, net of expenses and discounts of approximately $563,000.

On January 26, 2019, we issued 15,217,392 shares of common stock at a public offering price of $0.23 per share. We received proceeds from the offering of approximately $2,975,000, net of expenses and discounts of approximately $525,000.

Exchanges of Debt into Common Stock

In May 2019, Iliad converted $350,000 of the Convertible Note into an aggregate of 1,539,815 shares of our common stock at a conversion price of $0.2273 per share. Between July 24, 2019 and July 31, 2019, the Company issued an aggregate of 2,571,429 shares of common stock to Iliad in exchange for the return of $375,000 of principal amount of the Convertible Note to the Company.

Note 9. Sale of Net Operating Losses

On April 4, 2019, we sold $11,638,516 of gross State of New Jersey NOL’s relating to the 2017 tax year as well as $71,968 of state research and development tax credits. The sale resulted in the net receipt by the Company of approximately $512,000. This figure includes all costs and expenses associated with the sale of these state tax attributes as deducted from the gross sales price of approximately $521,000.

Note 10. Stock-Based Compensation

We have two equity incentive plans: the 2008 Stock Option Plan (the “2008 Plan”) and the 2011 Equity Incentive Plan (the “2011 Plan”, and together with the 2008 Plan, the “Stock Option Plans”). The Stock Option Plans are meant to provide additional incentive to officers, employees and consultants to remain in our employment. Options granted are generally exercisable for up to 10 years. Effective April 9, 2018, the Company cannot issue additional options from the 2008 Plan.


15


At June 30, 2019, 1,174,875 shares remain available for future awards under the 2011 Plan. On July 23, 2019, the Company issued 100,000 stock options to each of its five non-employee directors. The options will vest in equal monthly installments over the next twelve months and have an exercise price of $0.15 per share.

A summary of employee and non-employee stock option activity for the six months ended June 30, 2019 is as follows:
 
Options Outstanding
 
Weighted-
Average
Remaining
Contractual
Term (in years)
 
Aggregate
Intrinsic
Value
(in thousands)
 
Number of
Shares
(in thousands)
 
Weighted-
Average
Exercise
Price
 
Outstanding January 1, 2019
3,004

 
$
5.77

 
5.70
 
$

Granted
95

 
0.44

 
 
 
 
Cancelled or expired
(1,356
)
 
5.55

 
 
 
 
Outstanding June 30, 2019
1,743

 
$
5.66

 
6.91
 
$

Exercisable June 30, 2019
1,149

 
$
7.92

 
5.93
 
$


Aggregate intrinsic value represents the difference between the fair value of our common stock and the exercise price of outstanding, in-the-money options.

As of June 30, 2019, total unrecognized compensation cost related to non-vested stock options granted to employees was $423,948 which we expect to recognize over the next 2.89 years.

The fair value of options granted to employees is estimated on the grant date using the Black-Scholes option valuation model. This valuation model requires us to make assumptions and judgments about the variables used in the calculation, including the expected term (the period of time that the options granted are expected to be outstanding), the volatility of our common stock, a risk-free interest rate, and expected dividends. Forfeitures will be recorded when they occur. No compensation cost is recorded for options that do not vest. We use the simplified calculation of expected life described in the SEC’s Staff Accounting Bulletin No. 107, Share-Based Payment, and volatility is based on the historical volatility of our common stock. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option. We use an expected dividend yield of zero, as we do not anticipate paying any dividends in the foreseeable future.

The following table presents the weighted-average assumptions used to estimate the fair value of options granted to employees during the periods presented:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2019
 
2018
Volatility
77.81
%
 
90.15
%
 
77.81
%
Risk free interest rate
2.89
%
 
2.54
%
 
2.89
%
Dividend yield
0.00
%
 
0.00
%
 
0.00
%
Term (years)
6.49

 
6.32

 
6.49

Weighted-average fair value of options granted during the period
$
0.63

 
$
0.34

 
$
0.63


Restricted stock awards have been granted to employees, directors and consultants as compensation for services. At June 30, 2019, there was $13,817 of unrecognized compensation cost related to non-vested restricted stock granted to employees and directors; we expect to recognize the cost over 0.25 years.

The following table summarizes the activities for our non-vested restricted stock awards for the six months ended June 30, 2019:

16


 
Non-vested Restricted Stock Awards
 
Number of
Shares
(in thousands)
 
Weighted-Average Grant Date Fair Value
Non-vested at January 1, 2019
29

 
$
3.43

Vested
(9
)
 
4.15

Cancelled
(1
)
 
6.30

Non-vested at June 30, 2019
19

 
$
2.94


The TSA with Buyer described in Note 1 requires the Company to continue to employ individuals who will transfer to Buyer no later than six months from the closing of the transaction. Buyer will reimburse the Company for the payroll and benefit costs of these employees, but not the stock-based compensation. Therefore, stock-based compensation is considered part of the Company’s continuing operations. The following table presents the effects of stock-based compensation related to stock option and restricted stock awards to employees and non-employees on our Unaudited Condensed Consolidated Statements of Operations and Other Comprehensive Loss during the periods presented (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Cost of revenues
$
28

 
$
90

 
$
56

 
$
181

Research and development
7

 
16

 
15

 
31

General and administrative
62

 
140

 
178

 
298

Sales and marketing
5

 
22

 
11

 
32

Total stock-based compensation
$
102

 
$
268

 
$
260

 
$
542


Note 11. Warrants

On January 14, 2019, we issued 933,334 warrants to purchase common stock at $0.2475 per share. The warrants are immediately exercisable and expire on January 9, 2024. On January 31, 2019 we issued 1,065,217 warrants to purchase common stock at $0.253 per share. These warrants are immediately exercisable and expire on January 26, 2024. All of these warrants were issued in conjunction with the 2019 Offerings.

During the three and six months ended June 30, 2019, 3,675,000 warrants issued as part of the 2017 Offering expired unexercised.

The following table summarizes the warrant activity for the six months ended June 30, 2019 (in thousands, except exercise price): 

17


Issued With / For
Exercise
Price
 
Warrants
Outstanding
January 1,
2019
 
2019 Warrants Issued
 
2019 Warrants Expired
 
Warrants Outstanding June 30, 2019
Non-Derivative Warrants:
 
 
 
 
 
 
 
 
 
Financing
$
10.00

  
243

 

 

 
243

Financing
15.00

  
276

 

 

 
276

2015 Offering
5.00

  
3,450

 

 

 
3,450

2017 Debt
0.92


443

 

 

 
443

2019 Offering
0.2475

 

 
933

 

 
933

2019 Offering
0.253

 

 
1,065

 

 
1,065

Total non-derivative warrants
3.86

B
4,412

 
1,998

 

 
6,410

Derivative Warrants:
 
 
 
 
 
 
 
 
 
2016 Offerings
2.25

A
1,968

 

 

 
1,968

2017 Offering
2.35

A
3,500

 

 
(3,500
)
 

2017 Offering
2.50

A
175

 

 
(175
)
 

Total derivative warrants
2.25

B
5,643

 

 
(3,675
)
 
1,968

Total
$
3.48

B
10,055

 
1,998

 
(3,675
)
 
8,378


A
These warrants are subject to fair value accounting and contain a contingent net cash settlement feature. See Note 12.
B
Weighted-average exercise prices are as of June 30, 2019.

Note 12. Fair Value of Warrants

The following table summarizes the derivative warrant activity subject to fair value accounting for the six months ended June 30, 2019 (in thousands):
Issued with/for
Fair value of warrants
outstanding as of
December 31, 2018
 
Change in fair
value of warrants
 
Fair value of warrants
outstanding as of
June 30, 2019
2016 Offerings
$
225

 
$
(176
)
 
$
49

2017 Offering
23

 
(23
)
 

 
$
248

 
$
(199
)
 
$
49


The derivative warrants issued as part of the 2016 Offerings are valued using a probability-weighted Binomial model, while the derivative warrants issued in conjunction with the 2017 Offering were valued using a Black-Scholes model. The following tables summarize the assumptions used in computing the fair value of derivative warrants subject to fair value accounting at June 30, 2019 and December 31, 2018.

2016 Offerings
As of June 30, 2019
 
As of December 31, 2018
Exercise price
$
2.25

 
$
2.25

Expected life (years)
2.58

 
3.08

Expected volatility
114.13
%
 
100.51
%
Risk-free interest rate
1.73
%
 
2.46
%
Expected dividend yield
%
 
%


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2017 Offering
As of December 31, 2018
Exercise price
$
2.36

Expected life (years)
0.44

Expected volatility
172.5
%
Risk-free interest rate
2.56
%
Expected dividend yield
%

Note 13. Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The Fair Value Measurements and Disclosures Topic of the FASB ASC requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect our own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, the Topic establishes a fair value hierarchy for valuation inputs that give the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that we have the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect our own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The following table summarizes the financial liabilities measured at fair value on a recurring basis segregated by the level of valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):
 
June 30, 2019
 
Total
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Warrant liability
$
49

 
$

 
$

 
$
49

Note payable
13

 

 

 
13

 
$
62

 
$

 
$

 
$
62

 
 
 
 
 
 
 
 
 
December 31, 2018
 
Total
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Warrant liability
$
248

 
$

 
$

 
$
248

Note payable
20

 

 

 
20

Other derivatives
86

 
$

 
$

 
86

 
$
354

 
$

 
$

 
$
354


At June 30, 2019 and December 31, 2018, the Company had a liability payable to VenturEast from a prior acquisition. The ultimate payment to VenturEast will be the fair value of 84,278 shares of our common stock at the time of payment. During the

19


three months ended June 30, 2019 and 2018, we recognized gains of approximately $7,000 and $64,000, respectively, due to the change in value of the note. During the six months ended June 30, 2019 and 2018, we recorded gains of approximately $7,000 and $81,000, respectively, due to the change in value of the note.

At June 30, 2019, the warrant liability consists of stock warrants issued as part of the 2016 Offerings that contain contingent net settlement features. In accordance with derivative accounting for warrants, we calculated the fair value of warrants and the assumptions used are described in Note 12, “Fair Value of Warrants.” During the three months ended June 30, 2019 and 2018, we recognized gains of approximately $206,000 and $2,154,000, respectively, on the derivative warrants due to the decrease in our stock price. During the six months ended June 30, 2019 and 2018, we recognized gains of approximately $199,000 and $2,846,000 on the derivative warrants primarily due to changes in our stock price.

Realized and unrealized gains and losses related to the change in fair value of the VenturEast note, warrant liability and other derivatives are included in other income (expense) on the Unaudited Condensed Consolidated Statements of Operations and Other Comprehensive Loss.

The following table summarizes the activity of the note payable to VenturEast and of our derivative warrants and other derivatives, which were measured at fair value using Level 3 inputs (in thousands):
 
Note Payable
 
Warrant
 
Other
 
to VenturEast
 
Liability
 
Derivatives
Fair value at December 31, 2018
$
20

 
$
248

 
$
86

Change in fair value
(7
)
 
(199
)
 
(86
)
Fair value at June 30, 2019
$
13

 
$
49

 
$


Note 14. Joint Venture Agreement

In November 2011, we entered into an affiliation agreement with the Mayo Foundation for Medical Education and Research (“Mayo”), subsequently amended. Under the agreement, we formed a joint venture with Mayo in May 2013 to focus on developing oncology diagnostic services and tests utilizing next generation sequencing. The joint venture is a limited liability company, with each party initially holding fifty percent of the issued and outstanding membership interests of the new entity (the “JV”).

The agreement requires aggregate capital contributions by us of up to $6.0 million, of which $2.0 million has been paid to date. The timing of the remaining installments is subject to the JV’s achievement of certain operational milestones agreed upon by the board of governors of the JV. In exchange for its membership interest, Mayo’s capital contribution takes the form of cash, staff, services, hardware and software resources, laboratory space and instrumentation, the fair market value of which will be approximately equal to $6.0 million. Mayo’s continued contribution will also be conditioned upon the JV’s achievement of certain milestones. We are in the process of winding down the JV and do not expect to incur further liabilities in connection with the JV.

During the three and six months ended June 30, 2019, there was no activity in the JV. Our share of the JV’s net loss was approximately $1,000 and $3,000 for the three and six months ended June 30, 2018, respectively, and is included in research and development expense on the Unaudited Condensed Consolidated Statements of Operations and Other Comprehensive Loss. We have a net receivable due from the JV of approximately $10,000 at June 30, 2019, which is included in other assets in the Unaudited Condensed Consolidated Balance Sheets.

The joint venture is considered a variable interest entity under ASC 810-10, but we are not the primary beneficiary as we do not have the power to direct the activities of the JV that most significantly impact its performance. Our evaluation of ability to impact performance is based on our equal board membership and voting rights and day-to-day management functions which are performed by the Mayo personnel.

Note 15. Related Party Transactions

We had a consulting agreement with Equity Dynamics, Inc. (“EDI”), an entity controlled by the former Chairman of our Board of Directors, John Pappajohn, effective April 1, 2014 through August 31, 2018, pursuant to which EDI received a monthly fee of $10,000. Total expenses for the three and six months ended June 30, 2018 were $30,000 and $60,000, respectively. As of June 30, 2019, we accrued liabilities of $70,000 for unpaid fees due to EDI.


20


As described in Note 1, the Company closed two public offerings in January 2019, in which various executives and directors purchased shares at the public offering price. On January 14, 2019, John Pappajohn, John Roberts, our President and Chief Executive Officer, and Geoffrey Harris, a Director, purchased 1,000,000 shares, 100,000 shares and 100,000 shares, respectively, at the public offering price of $0.225 per share. On January 31, 2019, John Pappajohn, John Roberts, Edmund Cannon, a Director, and M. Glenn Miles, our Chief Financial Officer, purchased 1,000,000 shares, 185,436 shares, 43,479 shares and 150,000 shares, respectively, at the public offering price of $0.23 per share.

On July 23, 2019, the Company issued 100,000 stock options to each of its five non-employee directors. The options will vest in equal monthly installments over the next twelve months and have an exercise price of $0.15 per share. The directors have waived their rights to any claim for past due director compensation as a condition of these option grants.

Note 16. Contingencies

On April 5, 2018 and April 12, 2018, purported stockholders of the Company filed nearly identical putative class action lawsuits in the U.S. District Court for the District of New Jersey, against the Company, Panna L. Sharma, John A. Roberts, and Igor Gitelman, captioned Ben Phetteplace v. Cancer Genetics, Inc. et al., No. 2:18-cv-05612 and Ruo Fen Zhang v. Cancer Genetics, Inc. et al., No. 2:18-06353, respectively. The complaints alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 based on allegedly false and misleading statements and omissions regarding our business, operational, and financial results. The lawsuits sought, among other things, unspecified compensatory damages in connection with purchases of our stock between March 23, 2017 and April 2, 2018, as well as interest, attorneys’ fees, and costs. On August 28, 2018, the Court consolidated the two actions in one action captioned In re Cancer Genetics, Inc. Securities Litigation (the “Securities Litigation”) and appointed shareholder Randy Clark as the lead plaintiff. On October 30, 2018, the lead plaintiff filed an amended complaint, adding Edward Sitar as a defendant and seeking, among other things, compensatory damages in connection with purchases of CGI stock between March 10, 2016 and April 2, 2018. On December 31, 2018, Defendants filed a motion to dismiss the amended complaint for failure to state a claim. On March 1, 2019, lead plaintiff filed its opposition to the motion to dismiss. On April 15, 2019, defendants filed their reply in further support of their motion to dismiss. Defendants' motion remains pending before the Court. The Company is unable to predict the ultimate outcome of the Securities Litigation and therefore cannot estimate possible losses or ranges of losses, if any.

In addition, on June 1, 2018, September 20, 2018, and September 25, 2018, purported stockholders of the Company filed nearly identical derivative lawsuits on behalf of the Company in the U.S. District Court for the District of New Jersey against the Company (as a nominal defendant) and current and former members of the Company’s Board of Directors and current and former officers of the Company. The three cases are captioned: Bell v. Sharma et al., No. 2:18-cv-10009-CCC-MF, McNeece v. Pappajohn et al., No. 2:18-cv-14093, and Workman v. Pappajohn, et al., No. 2:18-cv-14259 (the “Derivative Litigation”). The complaints allege claims for breach of fiduciary duty, violations of Section 14(a) of the Securities Exchange Act of 1934 (premised upon alleged omissions in the Company’s 2017 proxy statement), and unjust enrichment, and allege that the individual defendants failed to implement and maintain adequate controls, which resulted in ineffective disclosure controls and procedures, and conspired to conceal this alleged failure. The lawsuits seek, among other things, damages and/or restitution to the Company, appropriate equitable relief to remedy the alleged breaches of fiduciary duty, and attorneys’ fees and costs. On November 9, 2018, the Court in the Bell v. Sharma action entered a stipulation filed by the parties staying the Bell action until the Securities Litigation is dismissed, with prejudice, and all appeals have been exhausted; or the defendants’ motion to dismiss in the Securities Litigation is denied in whole or in part; or either of the parties in the Bell action gives 30 days’ notice that they no longer consent to the stay. On December 10, 2018, the parties in the McNeece action filed a stipulation that is substantially identical to the Bell stipulation. On February 1, 2019, the Court in the Workman action granted a stipulation that is substantially identical to the Bell stipulation. The Company is unable to predict the ultimate outcome of the Derivative Litigation and therefore cannot estimate possible losses or ranges of losses, if any.

Note 17. Subsequent Events

Business Disposals

In July 2019, we sold our BioPharma Business and our Clinical Business as described in Note 1.

Assignment of Leases

In connection with the BioPharma Disposal in July 2019, we assigned the lease to our North Carolina location to Buyer, and we are currently in the process of assigning the lease to our New Jersey location to Buyer. Such leases were assumed by Buyer as part of the BioPharma Disposal, effective July 15, 2019.


21


Issuance of Stock Options

On July 23, 2019, the Company issued 100,000 stock options to each of its five non-employee directors. The options will vest in equal monthly installments over the next twelve months and have an exercise price of $0.15 per share. The directors have waived their rights to any claim for past due director compensation as a condition of these option grants.

Exchanges of Debt into Common Stock

Between July 24, 2019 and July 31, 2019, the Company issued an aggregate of 2,571,429 shares of common stock to Iliad in exchange for the return of an aggregate of $375,000 of principal amount of the Convertible Note to the Company.

Item 2.        Management's Discussion and Analysis of Financial Condition and Results of Operations

As used herein, the “Company,” “CGI,” “we,” “us,” “our” or similar terms, refer to Cancer Genetics, Inc. and its wholly owned subsidiaries at June 30, 2019: Cancer Genetics Italia, S.r.l., Gentris, LLC, and vivoPharm Pty, Ltd, except as expressly indicated or unless the context otherwise requires. The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help facilitate an understanding of our financial condition and our historical results of operations for the periods presented. This MD&A should be read in conjunction with the audited consolidated financial statements and notes thereto included in our annual report on Form 10-K filed with the SEC on April 16, 2019. This MD&A may contain forward-looking statements that involve risks and uncertainties. See “Cautionary Note Regarding Forward-Looking Statements” below.

Overview

Cancer Genetics, Inc. supports the biotechnology and pharmaceutical industry to develop innovative new drug therapies. Until the closing of the Business Disposals (as defined below) in July 2019, we were an emerging leader in enabling precision medicine in oncology by providing multi-disciplinary diagnostic and data solutions, facilitating individualized therapies through our diagnostic tests, services and molecular markers. Following the Business Disposals described below, we currently have an extensive set of anti-tumor referenced data based on predictive xenograft and syngeneic tumor models from the acquisition of vivoPharm, Pty Ltd. (“vivoPharm”) in 2017, to provide Discovery Services such as contract research services, focused primarily on unique specialized studies to guide drug discovery and development programs in the oncology and immuno-oncology fields.

For the period ended June 30, 2019, we were executing a strategy of partnering with pharmaceutical and biotech companies and clinicians as oncology diagnostic specialists by supporting therapeutic discovery, development and patient care.

Our clinical offerings included 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 provided 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 included 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 offered were focused in part on specific oncology categories where we were developing proprietary tests.

Net cash used in operating activities for continuing operations was $0.9 million for the six months ended June 30, 2019 and the Company had unrestricted cash and cash equivalents of $0.7 million at June 30, 2019, an increase from $0.2 million at December 31, 2018. The Company has negative working capital from continuing operations at June 30, 2019 of $7.3 million.

The Company currently requires a significant amount of additional capital to fund operations and pay its unsecured debt and accounts payable, and its ability to continue as a going concern is dependent upon its ability to collect its outstanding accounts and notes receivable, receive the Earn-Out payments from siParadigm and negotiate discounts in good faith with its trade suppliers. In July 2019, we sold our BioPharma Business and Clinical Business as described below. While the Buyer assumed certain of our liabilities in the BioPharma Disposal, the cash received to date from the Business Disposals is insufficient to satisfy all of the Company’s liabilities and other obligations, and the Company cannot determine at this time if future Earn-Out

22


payments and payoff of the Excess Consideration Note, combined with settlements of claims against the Company will enable all creditors to be paid in full and provide sufficient funds for future operations. We are continuing to evaluate additional strategic options, which could include the sale of other assets, a merger, reverse merger or other strategic transaction. We can provide no assurances that our current actions will be successful or that additional sources of cash or financing will be available to us on favorable terms, if at all. If the Company is not able to collect its accounts and notes receivable or raise additional capital on a timely basis or on favorable terms, the Company may need to scale back further or, in extreme cases, discontinue its operations or liquidate its assets.

Business Disposals - Discontinued Operations

Interpace Diagnostics Group, Inc.

On July 15, 2019, the Company entered into a secured creditor asset purchase agreement (the “BioPharma Agreement”) by and among the Company, Gentris, LLC, a wholly owned subsidiary of the Company, Partners for Growth IV, L.P. (“PFG”), Interpace Diagnostics Group, Inc. (“IDXG”) and a newly-formed subsidiary of IDXG, Interpace BioPharma, Inc. (“Buyer”). The BioPharma Agreement provides for a consensual private foreclosure sale by PFG of all assets relating to the Company’s BioPharma Business (as defined in the BioPharma Agreement) to Buyer (the “BioPharma Disposal”). The BioPharma Disposal was consummated on July 15, 2019.
 
Pursuant to the BioPharma Agreement, Buyer purchased from PFG certain assets and assumed certain liabilities of the Company relating to the BioPharma Business, providing as gross consideration $23,500,000, less certain closing adjustments totaling $1,978,240, of which $7,692,300 was paid in the form of a promissory note issued by Buyer to the Company (the “Excess Consideration Note”) and the remainder was paid to PFG in cash. PFG utilized the cash proceeds to satisfy the outstanding balances of the Silicon Valley Bank (“SVB”) asset-based revolving line of credit (“ABL”) and the $6.0 million term note to PFG (“PFG Term Note”), and to satisfy certain transaction expenses. The balance of approximately $2,260,000 was delivered to the Company along with the Excess Consideration Note. The Excess Consideration Note will mature on the earlier of the date of (i) the consummation of an investment by Ampersand Capital Partners or any of its affiliates into IDXG or Buyer, following IDXG receiving the approval of its shareholders of the issuance of shares of its common stock in connection therewith and (ii) July 15, 2022, and will be paid interest-only quarterly prior to maturity at a rate of 6% per year.

The Company and Buyer also entered into a transition services agreement (the “TSA”) pursuant to which the Company and Buyer will provide certain services to each other to accommodate the transition of the BioPharma Business to Buyer. In particular, the Company agreed to provide to Buyer, among other things, certain personnel services, payroll processing, administration services and benefit administration services described in an exhibit thereto, for a period not to exceed six months from July 15, 2019, subject to the terms and conditions of the TSA, in exchange for payment or reimbursement, as applicable, by Buyer for the costs related thereto, including salaries and benefits for certain of the Company’s BioPharma employees during the transition period. In addition, it is anticipated that John A. Roberts, the Company’s Chief Executive Officer, and Glenn Miles, the Company’s Chief Financial Officer, may enter into part-time consulting arrangements with Buyer and/or IDXG to assist with the transition.

siParadigm, Inc.

On July 5, 2019, the Company entered into an asset purchase agreement (the “Clinical Agreement”) by and among the Company and siParadigm, LLC (“siParadigm”), pursuant to which the Company sold to siParadigm, certain assets associated with the Company’s clinical laboratory business (the “Clinical Business,” and such assets, the “Designated Assets”), and agreed to cease operating its Clinical Business. The Designated Assets include intellectual property, equipment and customer lists associated with the Clinical Business, and the Company will provide certain transitional services to siParadigm pursuant to the Clinical Agreement. The cash consideration paid by siParadigm at closing was approximately $758,000, which includes approximately $45,000 for certain equipment plus a $1,000,000 advance payment of the Earn-Out (as defined below), less approximately $177,000 of supplier invoices paid directly by siParadigm and transaction costs of approximately $110,000. The Earn-Out, to be paid over the 24 months post-closing, is based on fees for all tests performed by siParadigm for the Company’s clinical customers during the 12-month period following the closing (the “Earn-Out”). The Clinical Business sale (together with the BioPharma Disposal, the “Business Disposals”) was completed on July 8, 2019.

The Business Disposals have been classified as discontinued operations in conformity with GAAP. Accordingly, BioPharma and Clinical operations and balances have been reported as discontinued operations and removed from all financial disclosures of continuing operations.

2019 Offerings

23



In January 2019, we closed two public offerings and issued an aggregate of 28,550,726 shares of common stock for approximately $5.4 million, net of expenses and discounts of approximately $1.1 million. The Company also issued 1,998,551 warrants to its underwriters in conjunction with these offerings.

Key Factors Affecting our Results of Operations and Financial Condition

Our overall long-term growth plan is predicated on our ability to develop or acquire technology solutions to accelerate the penetration into the Biopharma community to achieve more revenue supporting clinical trials and develop and commercialize unique or proprietary services and tests to achieve sustainable organic growth in the drug discovery field. Our wholly-owned subsidiary, vivoPharm, provides proprietary preclinical oncology and immuno-oncology services, offering integrated services in different disease areas to the biotechnology and pharmaceutical industries. vivoPharm is a leader in orthotopic and metastases tumor models. The Company provides all services including toxicology testing and bionalytical analysis to GLP. vivoPharm specializes in conducting studies tailored to guide drug development, starting from compound libraries and ending with a comprehensive set of in vitro and in vivo data and reports, as needed for Investigational New Drug (IND) filing.

Our ability to complete such studies is dependent upon our ability to leverage our collaborative relationships with pharmaceutical and biotechnology companies and 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 from Continuing Operations

Revenue from our Discovery Services comes from preclinical oncology and immuno-oncology services offered to our biotechnology and pharmaceutical customers.  We are a leader in orthotopic and metastases tumor models and offers whole body imaging, in addition to toxicology testing and bionalytical analysis. Discovery Services are designed to specialize in conducting studies tailored to guide drug development, starting from compound libraries and ending with a comprehensive set of in vitro and in vivo data and reports, as needed for Investigational New Drug (IND) filing.

Due to the Business Disposals that occurred in July 2019, revenues from our Biopharma Services and Clinical Services are presented net of expenses in discontinued operations.

Cost of Revenues from Continuing Operations

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 continue to pursue various strategies to control our cost of revenues, including automating our processes through more efficient technology and attempting to negotiate improved terms with our suppliers.

Operating Expenses from Continuing Operations

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. Prior to the Business Disposals, we incurred research and development expenses principally in connection with our efforts to develop our proprietary tests. Our primary research and development expenses consisted of direct personnel costs, laboratory equipment and consumables and overhead expenses. All research and development expenses were charged to operations in the periods they are incurred. In our Discovery Services business, we are limited in the demand for continuing research and development requirements, so are not expended our capital resources on these activities.

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, and other general expenses. We have incurred increases in our general and administrative expenses and anticipate only modest increases as our Discovery Business grows.

24



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 remain relatively flat as we continue to operate and grow our Discovery Services business.

Results of Operations

Three Months Ended June 30, 2019 and 2018

The following table sets forth certain information concerning our results of operations for the periods shown: 
 
Three Months Ended June 30,
 
Change
(dollars in thousands)
2019
 
2018
 
$
 
%
Revenue
$
1,525

 
$
1,281

 
$
244

 
19
 %
Cost of revenues
725

 
875

 
(150
)
 
(17
)%
Research and development expenses
7

 
16

 
(9
)
 
(56
)%
General and administrative expenses
1,266

 
1,464

 
(198
)
 
(14
)%
Sales and marketing expenses
322

 
386

 
(64
)
 
(17
)%
Loss from continuing operations
(795
)
 
(1,460
)
 
665

 
(46
)%
Interest expense, net
(514
)
 
(2
)
 
(512
)
 
25,600
 %
Change in fair value of acquisition note payable
7

 
64

 
(57
)
 
(89
)%
Change in fair value of other derivatives
55

 

 
55

 
n/a

Change in fair value of warrant liability
206

 
2,154

 
(1,948
)
 
(90
)%
Other expense
(11
)
 
(23
)
 
12

 
(52
)%
Income (loss) before income taxes from continuing operations
(1,052
)
 
733

 
(1,785
)
 
(244
)%
Income tax benefit
(512
)
 

 
(512
)
 
n/a

Net income (loss) from continuing operations
(540
)
 
733

 
(1,273
)
 
(174
)%
Net loss from discontinuing operations
(3,233
)
 
(4,366
)
 
1,133

 
(26
)%
Net loss
$
(3,773
)
 
$
(3,633
)
 
$
(140
)
 
4
 %

Non-GAAP Financial Information

In addition to disclosing financial results in accordance with United States generally accepted accounting principles (“GAAP”), the table below contains non-GAAP financial measures that we believe are helpful in understanding and comparing our past financial performance and our future results. The non-GAAP financial measures disclosed by the Company exclude the non- operating changes in the fair value of derivative instruments. These non-GAAP financial measures should not be considered a substitute for, or superior to, financial measures calculated in accordance with GAAP, and the financial results calculated in accordance with GAAP and reconciliations from these results should be carefully evaluated. Management believes that these non-GAAP measures provide useful information about the Company’s core operating results and thus are appropriate to enhance the overall understanding of the Company’s past financial performance and its prospects for the future. The non-GAAP financial measures in the table below include adjusted net (loss) and the related adjusted basic and diluted net (loss) per share amounts.

Reconciliation from GAAP to Non-GAAP Results (in thousands, except per share amounts):

25


 
 
Three Months Ended June 30,
 
 
2019
 
2018
Reconciliation of net income (loss) from continuing operations:
 
 
 
 
Net income (loss) from continuing operations
 
$
(540
)
 
$
733

Adjustments:
 
 
 
 
Change in fair value of acquisition note payable
 
(7
)
 
(64
)
Change in fair value of other derivatives
 
(55
)
 

Change in fair value of warrant liability
 
(206
)
 
(2,154
)
Adjusted net loss from continuing operations
 
$
(808
)
 
$
(1,485
)
Reconciliation of basic and diluted net loss per share from continuing operations:
 
 
 
 
Basic and diluted net income (loss) per share from continuing operations
 
$
(0.01
)
 
$
0.03

Adjustments to net loss
 

 
(0.08
)
Adjusted basic and diluted net loss per share from continuing operations
 
$
(0.01
)
 
$
(0.05
)
Basic and diluted weighted-average shares outstanding
 
57,164

 
27,049


Adjusted net loss from continuing operations decreased 46% to $0.8 million during the three months ended June 30, 2019, from an adjusted net loss from continuing operations of $1.5 million during the three months ended June 30, 2018. Adjusted basic and diluted net loss per share from continuing operations decreased 80% to $0.01 during the three months ended June 30, 2019, from $0.05 during the three months ended June 30, 2018.

Revenue from Continuing Operations

Revenue from continuing operations increased 19%, or $0.2 million, during the three months ended June 30, 2019 compared to the same period in 2018 primarily due to a higher volume of active projects as the demand for toxicity and efficacy studies continued to increase.

Cost of Revenues from Continuing Operations

Cost of revenues from continuing operations decreased 17%, or $0.2 million, for the three months ended June 30, 2019, principally due to a $0.1 million decrease in payroll and benefit costs and accruals for study-related costs in the comparable periods. Correspondingly, gross margin from continuing operations increased to 52% during the three months ended June 30, 2019 up from 32% for the three months ended June 30, 2018.

Operating Expenses from Continuing Operations

Research and development expenses from continuing operations decreased 56%, or $9,000, to $7,000 for the three months ended June 30, 2019, from $16,000 for the three months ended June 30, 2018, principally due to a decrease in stock-based compensation.

General and administrative expenses from continuing operations decreased 14%, or $0.2 million, to $1.3 million for the three months ended June 30, 2019, from $1.5 million for the three months ended June 30, 2018 principally due to a $0.3 million decrease in professional services and board of director fees.

Sales and marketing expenses from continuing operations decreased 17%, or $0.1 million, to $0.3 million for the three months ended June 30, 2019, from $0.4 million for the three months ended June 30, 2018.

Interest Expense, Net

Net interest expense from continuing operations increased by $0.5 million during the three months ended June 30, 2019 due to the addition of two financing agreements that were not in place during the three months ended June 30, 2018. The Company incurred $0.2 million of interest on its Convertible Note and Advance from NovellusDx. The Company also recognized $0.5 million of additional interest as a result of reducing the conversion price on a portion of the Convertible Note debt. In June 2019, the Company defaulted on the Convertible Note, creating a 15% increase in the outstanding balance at the date of default, which approximated $0.4 million. The Company allocated $0.6 million of this interest to discontinuing operations.


26


Change in Fair Value of Warrant Liability

Changes in fair value of some of our common stock warrants may impact our quarterly results.  Accounting rules require us to record certain of our warrants as a liability, measure the fair value of these warrants each quarter and record changes in that value in earnings. As a result of changes in our stock price, we recognized non-cash income of $0.2 million and $2.2 million for the three months ended June 30, 2019 and 2018, respectively. In the future, if our stock price increases, with all other factors being equal, we would record a non-cash charge as a result of changes in the fair value of our common stock warrants. Alternatively, if the stock price decreases, with all other factors being equal, we may record non-cash income.

Income Tax Benefit

On April 4, 2019, we sold $11.6 million of gross State of New Jersey NOL’s relating to the 2017 tax year as well as $0.1 million of state research and development tax credits. The sale resulted in the net receipt by the Company of approximately $0.5 million.

Six Months Ended June 30, 2019 and 2018

The following table set