CANCER GENETICS, INC. As used herein, the "Company" refer toCancer Genetics, Inc. and its wholly owned subsidiaries atJune 30, 2020 : Cancer Genetics Italia, S.r.l.,Gentris, LLC , and vivoPharmPty, 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 the Company's financial condition and its 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 the Company's annual report on Form 10-K filed with theSEC onMay 29, 2020 . This MD&A may contain forward-looking statements that involve risks and uncertainties. See "Cautionary Note Regarding Forward-Looking Statements" below. The share numbers in the following discussion reflect a 1-for-30 reverse stock split that the Company effectedOctober 24, 2019 .
Overview
Cancer Genetics, Inc. (the "Company") supports the efforts of the biotechnology and pharmaceutical industries to develop innovative new drug therapies. Until the closing of the Business Disposals (as defined below) inJuly 2019 , the Company was an emerging leader in enabling precision medicine in oncology by providing multi-disciplinary diagnostic and data solutions, facilitating individualized therapies through the Company's diagnostic tests, services and molecular markers. Following the Business Disposals, the Company currently has an extensive set of anti-tumor referenced data based on predictive xenograft and syngeneic tumor models from the acquisition of vivoPharm,Pty Ltd. ("vivoPharm") in 2017, to provide Discovery Services such as contract research services, focused primarily on unique specialized studies to guide drug discovery and development programs in the oncology and immuno-oncology fields. The Company's tests and techniques target a wide range of indications, covering all ten of the top cancers in prevalence inthe United States , with additional unique capabilities offered by its FDA-cleared Tissue of Origin® test for identifying difficult to diagnose tumor types or poorly differentiated metastatic disease. The Company offers preclinical services such as predictive tumor models, human orthotopic xenografts and syngeneic immuno-oncology relevant tumor models in itsHershey, PA facility, and is a leader in the field of immuno-oncology preclinical services inthe United States . This service is supplemented with GLP toxicology and extended bioanalytical services in the Company's Australian-based facilities in Clayton,Victoria , and Gilles Plains,South Australia (effective inFebruary 2020 ). The Company does not project that cash atJune 30, 2020 , will be sufficient to fund normal operations for the twelve months from the issuance of these financial statements in the Quarterly Report on Form 10-Q. The Company's ability to continue as a going concern is dependent on reduced losses and improved future cash flows. Alternatively, the Company may be required to raise additional equity or debt capital, or consummate other strategic transactions. The Company is continuing to evaluate strategic options, with the assistance of an investment bank, which could include the sale of assets, a merger, reverse merger, or strategic transaction. These factors raise substantial doubt about the Company's ability to continue as a going concern. The Company can provide no assurance that these actions will be successful or that additional sources of financing will be available on favorable terms, if at all. 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 Quarterly Report on Form 10-Q.
Business Disposals - Discontinuing Operations
Interpace Diagnostics Group, Inc.
OnJuly 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 forGrowth IV, L.P. ("PFG"), Interpace Diagnostics Group, Inc. ("IDXG") and a newly-formed subsidiary of IDXG,Interpace BioPharma, Inc. ("Buyer"). The BioPharma Agreement provided for a consensual private foreclosure sale by PFG of all assets relating to the Company's BioPharma Business (as defined in the BioPharma Agreement) to Buyer (the "BioPharma Disposal"). The BioPharma Disposal was consummated onJuly 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$23.5 million , less certain closing adjustments totaling$2.0 million , of which$7.7 million 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 theSilicon 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$2.3 million was delivered to the Company along with the Excess Consideration Note. The Excess Consideration Note which required interest-only quarterly payments at a rate of 6% per year, matured inOctober 2019 and was settled onOctober 24 , 20 -------------------------------------------------------------------------------- Table of Contents 2019 for$6.0 million , including interest of$24 thousand . The Buyer withheld from the settlement of the Excess Consideration Note approximately$775 thousand for a net worth adjustment (assets less liabilities) of the BioPharma business ("Net Worth"),$153 thousand to secure collection of certain older accounts receivable of the Company purchased by Buyer ("AR Holdback") and an additional$735 thousand as security for indemnification obligations of the Company for any breaches of certain limited warranties and covenants of the Company and other specified items ("Indemnification Holdback"). The Company received the full amounts of the AR Holdback and the Indemnification Holdback in April andMay 2020 , respectively. The Company and Buyer also entered into a transition services agreement (the "TSA") pursuant to which the Company and Buyer are providing certain services to each other to accommodate the transition of the BioPharma Business to Buyer. In particular, the Company agreed to provide to Buyer, among other things, certain personnel services, payroll processing, administration services and benefit administration services, for a period not to exceed six months fromJuly 15, 2019 , subject to the terms and conditions of theTSA , in exchange for payment or reimbursement, as applicable, by Buyer for the costs related thereto, including salaries and benefits for certain of the Company's BioPharma employees during the transition period. Unless and untilJohn A. Roberts , the Company's Chief Executive Officer, andGlenn Miles , the Company's Chief Financial Officer, enter into part-time consulting arrangements with Buyer and/or IDXG to assist with the transition, if any, Buyer is reimbursing the Company for their salaries and benefits.
siParadigm, Inc.
OnJuly 5, 2019 , the Company entered into an asset purchase agreement (the "Clinical Agreement") by and among the Company and siParadigm, LLC ("siParadigm"), pursuant to which the Company sold to siParadigm, certain assets associated with the Company's clinical laboratory business (the "Clinical Business," and such assets, the "Designated Assets"), and agreed to cease operating its Clinical Business. The Designated Assets include intellectual property, equipment and customer lists associated with the Clinical Business, and the Company is providing certain transitional services to siParadigm pursuant to the Clinical Agreement. The cash consideration paid by siParadigm at closing was approximately$747 thousand , which includes approximately$45 thousand for certain equipment plus a$1.0 million advance payment of the Earn-Out (as defined below), less approximately$177 thousand of supplier invoices paid directly by siParadigm, an adjustment of$11 thousand and transaction costs of approximately$110 thousand . The 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 onJuly 8, 2019 . The Business Disposals have been classified as discontinuing operations in conformity with GAAP. Accordingly, BioPharma and Clinical operations and balances have been reported as discontinuing operations and removed from all financial disclosures of continuing operations. Unless otherwise indicated, information in Management's Discussion and Analysis relates only to continuing operations. 2019 Offerings InJanuary 2019 , the Company closed two public offerings and issued an aggregate of 952 thousand shares of common stock for approximately$5.4 million , net of expenses and discounts of approximately$1.1 million . The Company also issued 67 thousand warrants to its underwriters in conjunction with these offerings.
Note Payable to
OnOctober 21, 2019 , the Company issued an unsecured promissory note toAtlas Sciences, LLC ("Atlas Sciences"), an affiliate ofIliad Research and Trading, L.P. ("Iliad"), for$1.3 million (the "Atlas Sciences Note"). The Company received consideration of$1.3 million , reflecting an original issue discount of$88 thousand and expenses payable by the Company of$10 thousand . The Atlas Sciences Note has a 12-month term and bears interest at 10% per annum. The proceeds from the Atlas Sciences Note were utilized to partially repay the convertible promissory note issued to Iliad onJuly 17, 2018 (the "Convertible Note"), which was settled in cash for$2.7 million inOctober 2019 . BetweenJune 3, 2020 andJune 9, 2020 , the Company issued an aggregate of approximately 153 thousand shares of the Company's common stock, with a fair value of$531 thousand , to Atlas Sciences in exchange for the return to the Company of$500 thousand of principal amount from their unsecured promissory note. AtJune 30, 2020 , the Atlas Sciences Note had a principal balance of approximately$848 thousand , which is presented net of discounts and unamortized debt issuance costs of$7 thousand and$1 thousand , respectively. Subsequent toJune 30, 2020 , the Company issued approximately 47 thousand shares of common stock to Atlas Sciences in exchange for the return to the Company of$150 thousand of principal amount from its unsecured promissory note. 21
--------------------------------------------------------------------------------
Table of Contents
Key Factors Affecting the Company's Results of Operations and Financial Condition
The Company's 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 bioanalytical 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. The Company's ability to complete such studies is dependent upon its ability to leverage its collaborative relationships with pharmaceutical and biotechnology companies and leading institutions to facilitate its research and obtain data for its quality assurance and test validation efforts. The Company believes that the factors discussed in the following paragraphs have had and are expected to continue to have a material impact on its results of operations and financial condition.
Revenues from Continuing Operations
Revenue from the Company's Discovery Services comes from preclinical oncology and immuno-oncology services offered to its biotechnology and pharmaceutical customers. The Company is a leader in orthotopic and metastases tumor models and offer whole body imaging, in addition to toxicology testing and bioanalytical 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
Cost of Revenues from Continuing Operations
The Company's 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. The Company continues to pursue various strategies to control its cost of revenues, including automating the Company's processes through more efficient technology and attempting to negotiate improved terms with its suppliers.
Operating Expenses from Continuing Operations
The Company classifies its operating expenses into two categories: general and administrative, and sales and marketing. The Company's 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. General and Administrative Expenses. General and administrative expenses consist principally of personnel-related expenses, professional fees, such as legal, accounting and business consultants, occupancy costs, bad debt and other general expenses. Sales and Marketing Expenses. The Company's sales and marketing expenses consist principally of personnel and related overhead costs for its business development team and their support personnel, travel and entertainment expenses, and other selling costs including sales collaterals and trade shows. The Company expects its sales and marketing expenses to increase due to additional salaries as it continues to operate and grow its Discovery Services business. Coronavirus (COVID-19) Pandemic. OnMarch 11, 2020 theWorld Health Organization declared the novel strain of coronavirus ("COVID-19") a global pandemic and recommended containment and mitigation measures worldwide. In addition, the Company is located inNew Jersey and was under a shelter-in-place mandate. Many of the Company's customers worldwide were similarly impacted. The global outbreak of COVID-19 continues to rapidly evolve, and the extent to which COVID-19 may impact the Company's business will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the ultimate geographic spread of the disease, the duration of the outbreak, travel restrictions and social distancing inthe United States and other countries, business closures or business disruptions, and the effectiveness of actions taken inthe United States and other countries to contain and treat the disease. As a healthcare provider, the Company is still providing Discovery Services and has yet to experience a significant slowdown in its project work, however, the future of 22 -------------------------------------------------------------------------------- Table of Contents many projects may be delayed. The Company continues to vigilantly monitor the situation with its primary focus on the health and safety of its employees and clients. Results of Operations
Three Months Ended
The following table sets forth certain information concerning the Company's results of continuing operations for the periods shown:
Three Months Ended June 30, Change
(dollars in thousands) 2020 2019 $ %
Revenue $ 1,446 $ 1,525 $ (79) (5) %
Cost of revenues 640 734 (94) (13) %
General and administrative 2,232 1,184 1,048 89 %
Sales and marketing 284 317 (33) (10) %
Loss from continuing operations (1,710) (710) (1,000) 141 %
Interest expense, net (97) (514) 417 (81) %
Change in fair value of acquisition
note payable - 7 (7) n/a
Change in fair value of other
derivatives - 55 (55) n/a
Change in fair value of warrant
liability 25 206 (181) (88) %
Change in fair value of siParadigm
Earn-Out (89) - (89) n/a
Other expense 105 (11) 116 n/a
Loss before income taxes (1,766) (967) (799) 83 %
Income tax expense (benefit) - (512) 512 (100) %
Loss from continuing operations $ (1,766) $ (455) Non-GAAP Financial Information
In addition to disclosing financial results in accordance withUnited States generally accepted accounting principles ("GAAP"), the table below contains non-GAAP financial measures that the Company believe are helpful in understanding and comparing its past financial performance and its 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):
23--------------------------------------------------------------------------------
Table of Contents
Three Months Ended June 30,
2020 2019Reconciliation of net loss from continuing operations: Net loss from continuing operations
$ (1,766) (455) Adjustments: Interest expense, net 97 514 Depreciation 38 22 Amortization 135 141 Stock-based compensation 55 67 Change in fair value of acquisition note payable - (7) Change in fair value of other derivatives - (55) Change in fair value of warrant liability (25) (206) Change in fair value of siParadigm Earn-Out 89 - Income tax expense (benefit) - (512) Adjusted EBITDA loss from continuing operations $
(1,377)
Adjusted EBITDA loss from continuing operations increased 180% to$1.4 million during the three months endedJune 30, 2020 , from an adjusted EBITDA loss from continuing operations of$491 thousand during the three months endedJune 30, 2019 .
Revenue from Continuing Operations
Revenue from continuing operations decreased 5%, or$79 thousand , during the three months endedJune 30, 2020 compared to the same period in 2019 principally due to the timing of discovery service studies.
Cost of Revenues from Continuing Operations
Cost of revenues from continuing operations decreased 13%, or$94 thousand , for the three months endedJune 30, 2020 , principally due to a$83 thousand decrease in lab supplies and decreased salaries of$51 thousand , offset in part by$48 thousand increase in outsourcing costs. As a result of the changes in revenues and cost of revenues, gross margin from continuing operations increased to 56% during the three months endedJune 30, 2020 , up from 52% for the three months endedJune 30, 2019 .
Operating Expenses from Continuing Operations
General and administrative expenses from continuing operations increased 89%, or$1.0 million , to$2.2 million for the three months endedJune 30, 2020 , from$1.2 million for the three months endedJune 30, 2019 , principally due to$901 thousand increase in professional services (of which$619 thousand represent one-time costs),$136 thousand increase in taxes and insurance, and$40 thousand increase in legal costs, offset in part by$36 thousand decrease in travel, meals and entertainment. Sales and marketing expenses from continuing operations decreased 10%, or$33 thousand , to$284 thousand for the three months endedJune 30, 2020 from$317 thousand for the three months endedJune 30, 2019 . The decrease was primarily related to salaries. Interest Expense,Net Net interest expense from continuing operations decreased by$417 thousand during the three months endedJune 30, 2020 due to the payoff of various debt agreements that were previously in place during the three months endedJune 30, 2019 . From the end of the same quarter in 2019, the Advance from NDX has declined from$1.5 million to$50 thousand atJune 30, 2020 , resulting in a reduction of$78 thousand of interest expense. The Convertible Note with Iliad of approximately$3.1 million atJune 30, 2019 has been replaced by a note payable to Atlas Sciences with a balance atJune 30, 2020 of$848 thousand , resulting in a reduction of$928 thousand of interest expense. The Company allocated$657 thousand of these interest expenses to discontinuing operations during the three months endedJune 30, 2019 . 24 -------------------------------------------------------------------------------- Table of Contents Change in Fair Value of Acquisition Note Payable There was no change in fair value of acquisition note payable during the three months endedJune 30, 2020 . During the three months endedJune 30, 2019 , the Company recognized a gain of$7 thousand from the change in fair value of acquisition note payable.
Change in Fair Value of Other Derivatives
There were no other derivatives in 2020. During the three months ended
Change in Fair Value of Warrant Liability
Changes in fair value of some of the Company's common stock warrants may impact its quarterly results. Accounting rules require the Company to record certain of its 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 the Company's stock price, it recognized non-cash income of$25 thousand and$206 thousand during the three months endedJune 30, 2020 and 2019, respectively. The Company may be exposed to non-cash charges, or the Company may record non-cash income, as a result of this warrant exposure in future periods.
Change in Fair Value of siParadigm Earn-Out
During the three months ended
Income Tax Benefit
OnApril 4, 2019 , the Company sold$11.6 million of grossState of New Jersey NOL's relating to the 2017 tax year as well as$100 thousand of state research and development tax credits. The sale resulted in the net receipt to the Company of$512 thousand .
Six Months Ended
The following table sets forth certain information concerning the Company's results of continuing operations for the periods shown:
Six Months Ended June 30, Change
(dollars in thousands) 2020 2019 $ %
Revenue $ 2,872 $ 3,347 $ (475) (14) %
Cost of revenues 1,454 1,736 (282) (16) %
General and administrative 3,765 2,966 799 27 %
Sales and marketing 625 502 123 25 %
Loss from operations (2,972) (1,857) (1,115) 60 %
Interest expense, net (171) (1,127) 956 (85) %
Change in fair value of acquisition note
payable 4 7 (3) n/a
Change in fair value of other derivatives - 86 (86) (100) %
Change in fair value of warrant liability 152 199 (47) (24) %
Change in fair value of siParadigm
Earn-Out (65) - (65) n/a
Other income (expense) 105 (11) 116 n/a
Loss before income taxes (2,947) (2,703) (244) 9 %
Income tax expense (benefit) 6 (512) 518 n/a
Loss from continuing operations $ (2,953) $ (2,191) $ (762) 35 %
25-------------------------------------------------------------------------------- Table of Contents Non-GAAP Financial Information In addition to disclosing financial results in accordance withUnited States generally accepted accounting principles ("GAAP"), the table below contains non-GAAP financial measures that the Company believe are helpful in understanding and comparing its past financial performance and its 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 are included in the table below.
Reconciliation from GAAP to Non-GAAP Results (in thousands):
Six Months Ended
2020 2019
Reconciliation of net loss from continuing operations: Net loss from continuing operations
$ (2,953) (2,191) Adjustments: Interest expense, net 171 1,127 Depreciation 90 36 Amortization 214 223 Stock-based compensation 113 186 Change in fair value of acquisition note payable (4) (7) Change in fair value of other derivatives - (86) Change in fair value of warrant liability (152) (199) Change in fair value of siParadigm Earn-Out 65 - Income tax expense (benefit) 6 (512) Adjusted EBITDA loss from continuing operations $
(2,450)
Adjusted EBITDA loss from continuing operations increased 72% to$2.5 million during the six months endedJune 30, 2020 , from an adjusted EBITDA loss from continuing operations of$1.4 million during the six months endedJune 30, 2019 .
Revenue from Continuing Operations
Revenue from continuing operations decreased 14%, or$475 thousand , to$2.9 million for the six months endedJune 30, 2020 , from$3.3 million for the six months endedJune 30, 2019 , principally due to Tissue of Origin® tests of approximately$300 thousand in 2019 that are not expected to occur until the second half of 2020, and the timing of discovery service studies.
Cost of Revenues from Continuing Operations
Cost of revenues from continuing operations decreased 16%, or$282 thousand , to$1.5 million for the six months endedJune 30, 2020 from$1.7 million for the six months endedJune 30, 2019 , principally due to a reduction in outsourcing costs of$132 thousand and reduction in lab supplies of$126 thousand . As a result of the changes in revenues and cost of revenues, gross margin increased to 49% during the six months endedJune 30, 2020 from 48% during the six months endedJune 30, 2019 .
Operating Expenses from Continuing Operations
General and administrative expenses from continuing operations increased 27%, or$799 thousand , to$3.8 million for the six months endedJune 30, 2020 , from$3.0 million for the six months endedJune 30, 2019 , principally due to$903 thousand increase in professional services (of which$619 thousand represent one-time costs), and a$202 thousand increase in taxes and insurance, offset in part by$225 thousand decrease in salaries and a$97 thousand decrease in legal costs. 26 -------------------------------------------------------------------------------- Table of Contents Sales and marketing expenses from continuing operations increased 25%, or$123 thousand , to$625 thousand for the six months endedJune 30, 2020 , from$502 thousand for the six months endedJune 30, 2019 , principally due to increased salary costs. Interest Expense,Net Net interest expense from continuing operations decreased by$956 thousand during the six months endedJune 30, 2020 due to the payoff of various debt agreements that were previously in place during the six months endedJune 30, 2019 . From the end of the same quarter in 2019, the Advance from NDX has declined from$1.5 million to$50 thousand atJune 30, 2020 , resulting in a reduction of$1.1 million of interest expense. The Convertible Note with Iliad of approximately$3.1 million atJune 30, 2019 has been replaced by a note payable to Atlas Sciences with a balance atJune 30, 2020 of$848 thousand , resulting in a reduction of$1.3 million of interest expense. The Company allocated$1.4 million of these interest expenses to discontinuing operations during the six months endedJune 30, 2019 . Change in Fair Value of Acquisition Note Payable During the six months endedJune 30, 2020 , the Company recognized a gain of$4 thousand from the change in fair value of acquisition note payable. During the six months endedJune 30, 2019 , the Company recognized a gain of$7 thousand from the change in fair value of acquisition note payable.
Change in Fair Value of Other Derivatives
There were no other derivatives in 2020. During six months endedJune 30, 2019 , the Company recognized a gain of$86 thousand from the change in fair value of other derivatives.
Change in Fair Value of Warrant Liability
Changes in fair value of some of the Company's common stock warrants may impact its quarterly results. Accounting rules require the Company to record certain of its 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 the Company's stock price, it recognized non-cash income of$152 thousand and$199 thousand during the six months endedJune 30, 2020 and 2019, respectively. The Company may be exposed to non-cash charges, or the Company may record non-cash income, as a result of this warrant exposure in future periods.
Change in Fair Value of siParadigm Earn-Out
During the six months ended
Income Tax Benefit
OnApril 4, 2019 , the Company sold$11.6 million of grossState of New Jersey NOL's relating to the 2017 tax year as well as$100 thousand of state research and development tax credits. The sale resulted in the net receipt to the Company of$512 thousand .
Liquidity and Capital Resources
Sources of Liquidity
The Company's primary sources of liquidity have been cash collections from customers, funds generated from debt and equity financings, and cash received from the Business Disposals. The Company expects to continue generating additional cash from its customers in the future and from its Business Disposals for a limited time until the Earn-Out is paid as discussed below. InJuly 2019 , the Company completed two business disposals, resulting in an aggregate of$9.0 million of net cash proceeds at the time of closing; however,$1.0 million of the funds received is an advance from siParadigm that is being deducted from the Earn-Out amounts due during the period. AtJune 30, 2020 . the estimated future Earn-Out payments from siParadigm, net of the remaining balance of the advance, were$180 thousand , which are expected to be collected in variable monthly payments throughJuly 2021 ; the monthly payment amount is based on the number of tests performed by siParadigm for the Company's former Clinical Services' customers. 27
--------------------------------------------------------------------------------
Table of Contents
The primary uses of the Company's liquidity have been cash used to fund the Company's operations, as detailed in the cash flows section below, as well as cash used to repay the Company's lenders. During 2020, the Company significantly reduced the amount of its Advance from NDX. The Company is required to remit monthly installments of$50 thousand to NDX until the Advance from NDX is repaid. AtDecember 31, 2019 , the Company owed$350 thousand to NDX. AtJune 30, 2020 , the Company owed NDX$50 thousand , and subsequent to quarter-end, the remaining$50 thousand was repaid on the Advance from NDX. The note payable to Atlas Sciences of$840 thousand matures inOctober 2020 ; furthermore, Atlas Sciences is entitled to demand monthly redemptions of up to$300 thousand beginning inApril 2020 . InJune 2020 , the Company reduced the note payable to Atlas Sciences by$500 thousand through the exchange of shares of common stock. Subsequent toJune 30, 2020 , approximately 47 thousand shares of common stock was exchanged to reduce the note payable to Atlas Sciences by$150 thousand . The Company does not project that cash atJune 30, 2020 will be sufficient to fund normal operations for the twelve months from the issuance of these financial statements in the Quarterly Report on Form 10-Q. The Company's ability to continue as a going concern is dependent on reduced losses and improved future cash flows. Alternatively, the Company may be required to raise additional equity or debt capital, or consummate other strategic transactions. The Company is continuing to evaluate strategic options, with the assistance of an investment bank, which could include the sale of assets, a merger, reverse merger or other strategic transaction. 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 these financial statements in the Quarterly Report on Form 10-Q. The Company can provide no assurance that these actions will be successful or that additional sources of financing will be available on favorable terms, if at all.
Cash Flows from Continuing Operations
The Company's net cash flow from operating, investing and financing activities from continuing operations for the periods below were as follows:
Six Months Ended
June 30,
(in thousands) 2020 2019
Cash provided by (used in) continuing operations:
Operating activities $ (1,420) (33)
Investing activities 885 (21)
Financing activities (323) 5,387Effect of foreign currency exchange rates on cash and cash equivalents and restricted cash
(67) (41)
Net increase (decrease) in cash and cash equivalents and restricted cash from continuing operations
$ (925)
The Company had cash and cash equivalents and restricted cash of$2.9 million atJune 30, 2020 , and$4.2 million atDecember 31, 2019 . Restricted cash of$350 thousand was released from restriction inMay 2020 . The$925 thousand decrease in cash and cash equivalents and restricted cash from continuing operations for the six months endedJune 30, 2020 , principally resulted from cash flows used by operations of$1.4 million , payments of debt of$323 thousand , and the effect of foreign currency exchange rates of$67 thousand , offset by receipts from investing activities of$885 thousand . The$5.3 million increase in cash and cash equivalents and restricted cash for the six months endedJune 30, 2019 , principally resulted from net proceeds from the 2019 Offerings of$5.4 million .
At
Cash Used in Operating Activities from Continuing Operations
Net cash used by continuing operating activities was$1.4 million for the six months endedJune 30, 2020 , consisting of a net loss from continuing operations of$3.0 million , increased for non-cash adjustments of$496 thousand and additional cash provided by working capital items of$1.0 million . Changes in cash flows from working capital items were primarily driven by an increase in amounts due to Interpace of$628 thousand , a net decrease in other current assets of$136 thousand , a net increase in accounts payable, accrued expenses and deferred revenue of$321 thousand , and a net decrease of accounts receivable of$82 28 -------------------------------------------------------------------------------- Table of Contents thousand. The cash provided by these activities was partially offset by payments on obligations under operating leases of$125 thousand . The increase in the amount due to Interpace was due to collections from Interpace's customers received under theTSA . This net amount was subsequently remitted under theTSA arrangement. For the six months endedJune 30, 2019 , the Company used$33 thousand of cash in continuing operating activities. Cash used was made up of a net loss from continuing operations of$2.2 million , positive non-cash adjustments of$1.2 million , and additional cash provided by working capital items of$926 thousand . Changes in cash flows from working capital items was primarily driven by a net decrease in accounts receivable of$86 thousand and a net increase in accounts payable, accrued expenses and deferred revenue of$889 thousand . These uses of cash were partially offset by payments on obligations under operating leases of$107 thousand .
Cash Used in Investing Activities from Continuing Operations
Net cash provided by continuing investing activities was
Net cash used in continuing investing activities was
Cash Provided by Financing Activities from Continuing Operations
Net cash used in continuing financing activities was$323 thousand for the six months endedJune 30, 2020 and relates principally to payments on the Advance from NDX of$300 thousand . Net cash provided by continuing financing activities was$5.4 million for the six months endedJune 30, 2019 and resulted principally from proceeds of the 2019 Offerings of$5.4 million .
Capital Resources and Expenditure Requirements
The Company expects to continue to incur operating losses in the future, as the costs of being public have significant effect on losses that keep the Company from being profitable. The Company expects losses to continue, only to the extent that the business does not outpace the public company-related expenses, such as legal and audit fees and director's and officer's liability insurance. These losses have had, and will continue to have, an adverse effect on the Company's working capital, total assets and stockholders' equity. Because of the numerous risks and uncertainties associated with its revenue growth and costs associated with being a public company, the Company is unable to predict when it will become profitable, and it may never become profitable. Even if the Company does achieve profitability, it may not be able to sustain or increase profitability on a quarterly or annual basis. The Company's inability to achieve and then maintain profitability would negatively affect its business, financial condition, results of operations and cash flows. As a result, it may need to raise additional capital to fund its current operations, to repay certain outstanding indebtedness and to fund its business to meet its long-term business objectives through public or private equity offerings, debt financings, borrowings or strategic partnerships coupled with an investment in the Company or a combination thereof. If the Company raises additional funds through the issuance of convertible debt securities, or other debt securities, these securities could be secured and could have rights senior to those of its common stock. In addition, any new debt incurred by the Company could impose covenants that restrict its operations and increase its interest expense. The issuance of any new equity securities will also dilute the interest of current stockholders. The Company owes$848 thousand to Atlas Sciences ($840 thousand net of discounts and issuance costs) as ofJune 30, 2020 under an unsecured note due inOctober 2020 , which principal was reduced by$150 thousand subsequent toJune 30, 2020 through an exchange of approximately 47 thousand shares of common stock. The Company also owes an aggregate of$50 thousand to NDX as ofJune 30, 2020 pursuant to the NDX Settlement Agreement, which is payable in monthly installments of$50 thousand , which was paid in full subsequent toJune 30, 2020 . The Company has no material capital commitments outside of its existing debt arrangements. Even after the Business Disposals, the Company does not project that cash atJune 30, 2020 will be sufficient to fund normal operations for the twelve months from the issuance of these financial statements in the Quarterly Report on Form 10-Q. The Company's ability to continue as a going concern is dependent on reduced losses and improved future cash flows. Alternatively, the Company may be required to raise additional equity or debt capital, or consummate other strategic transactions. The Company is continuing to evaluate strategic options, with the assistance of an investment bank, which could include the sale of assets, a merger, reverse merger or other strategic transactions. 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 these financial statements in the 29 -------------------------------------------------------------------------------- Table of Contents Quarterly Report on Form 10-Q. The Company can provide no assurance that these actions will be successful or that additional sources of financing will be available on favorable terms, if at all. The Company made this assessment in light of the continued impact of COVID 19. The Company's forecast of the period of time through which its current financial resources will be adequate to support its operations and its expected operating expenses are forward-looking statements and involve risks and uncertainties. Actual results could vary materially and negatively as a result of a number of factors, including: •the Company's ability to adapt its business for future developments in-light of the global outbreak of the novel coronavirus, which continues to rapidly evolve; •the Company's ability to achieve profitability by increasing sales of the Company's preclinical CRO services focused on oncology and immuno-oncology; •the Company's ability to raise additional capital to repay its indebtedness and meet its liquidity needs; •the Company's ability to execute on its marketing and sales strategy for its preclinical research services and gain acceptance of its services in the market; •the Company's ability to keep pace with rapidly advancing market and scientific developments; •the Company's ability to satisfyU.S. (including FDA) and international regulatory requirements with respect to its services; •the Company's ability to maintain its present customer base and obtain new customers; •competition from preclinical CRO services companies, many of which are much larger than the Company in terms of employee base, revenues and overall number of customers and related market share; •the Company's ability to maintain the Company's clinical and research collaborations and enter into new collaboration agreements with highly regarded organizations in the field of oncology so that, among other things, the Company has access to thought leaders in advanced preclinical and translational science; •potential product liability or intellectual property infringement claims; •the Company's dependency on third-party manufacturers to supply it with instruments and specialized supplies; •the Company's ability to attract and retain a sufficient number of scientists, clinicians, sales personnel and other key personnel with extensive experience in oncology and immuno-oncology,who are in short supply; •the Company's ability to obtain or maintain patents or other appropriate protection for the intellectual property in its proprietary tests and services; •the Company's ability to effectively manage its international businesses inAustralia ,Europe andChina , including the expansion of its customer base and volume of new contracts in these markets; •the Company's dependency on the intellectual property licensed to the Company or possessed by third parties; and •other risks and uncertainties discussed in the Company's annual report on Form 10-K for the year endedDecember 31, 2019 , as updated in this Form 10-Q and other reports, as applicable, the Company file with theSecurities and Exchange Commission . The unaudited condensed consolidated financial statements for the three and six months endedJune 30, 2020 were prepared on the basis of a going concern, which contemplates that the Company will be able to realize assets and discharge liabilities in the normal course of business. Accordingly, they do not give effect to adjustments that would be necessary should the Company be required to liquidate its assets. The ability of the Company to meet its obligations, and to continue as a going concern is dependent upon the availability of future funding and the continued growth in revenues. The unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
Income Taxes
Over the past several years the Company has generated operating losses in all jurisdictions in which it may be subject to income taxes. As a result, the Company has accumulated significant net operating losses and other deferred tax assets. Because of the Company's history of losses and the uncertainty as to the realization of those deferred tax assets, a full valuation allowance has been recognized. The Company does not expect to report a benefit related to the deferred tax assets until it has a history of earnings, if ever, that would support the realization of its deferred tax assets.
Off-Balance Sheet Arrangements
Since inception, the Company has not engaged in any off-balance sheet activities as defined in Item 303(a)(4) of Regulation S-K.
30
--------------------------------------------------------------------------------
Table of Contents
Critical Accounting Policies and Significant Judgment and Estimates
The Company's management's discussion and analysis of financial condition and
results of operations is based on its unaudited condensed consolidated financial
statements, which have been prepared in accordance with U.S. GAAP. The
preparation of unaudited condensed consolidated financial statements requires
management to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenue and expenses and related disclosure of contingent
assets and liabilities. On an ongoing basis, the Company evaluate its estimates
based on historical experience and make various assumptions, which management
believes to be reasonable under the circumstances, which form the basis for
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
The notes to the Company's audited consolidated financial statements in its
annual report on Form 10-K for the year ended December 31, 2019 contain a
summary of the Company's significant accounting policies. Management considers
the following accounting policies critical to the understanding of the results
of the Company's operations:
•Revenue recognition;
•Accounts receivable and bad debts;
•Warrant liabilities and other derivatives;
•Stock-based compensation;
•Income taxes; and
•Impairment of intangibles and long-lived assets.
Cautionary Note Regarding Forward-Looking Statements
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
This report on Form 10-Q contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include all statements that are not historical facts. In some cases, you can identify forward-looking statements by terms such as "may," "will," "should," "could," "would," "expects," "plans," "anticipates," "believes," "estimates," "projects," "predicts," "potential," or the negative of those terms, and similar expressions and comparable terminology intended to identify forward-looking statements. These statements reflect the Company current views with respect to future events. There are a number of important factors that could cause the actual results to differ materially from those expressed in any forward-looking statement made by the Company. These factors include, but are not limited to: •the Company's ability to adapt its business for future developments in light of the global outbreak of the novel coronavirus, which continues to rapidly evolve; •the Company's ability to achieve profitability by increasing sales of the Company's preclinical CRO services focused on oncology and immuno-oncology; •the Company's ability to raise additional capital to repay its indebtedness and meet its liquidity needs; •the Company's ability to execute on its marketing and sales strategy for its preclinical research services and gain acceptance of its services in the market; •the Company's ability to keep pace with rapidly advancing market and scientific developments; •the Company's ability to satisfyU.S. (including FDA) and international regulatory requirements with respect to its services; •the Company's ability to maintain its present customer base and obtain new customers; •competition from preclinical CRO services companies, many of which are much larger than the Company in terms of employee base, revenues and overall number of customers and related market share; •the Company's ability to maintain the Company's clinical and research collaborations and enter into new collaboration agreements with highly regarded organizations in the field of oncology so that, among other things, the Company has access to thought leaders in advanced preclinical and translational science; •potential product liability or intellectual property infringement claims; •the Company's dependency on third-party manufacturers to supply it with instruments and specialized supplies; •the Company's ability to attract and retain a sufficient number of scientists, clinicians, sales personnel and other key personnel with extensive experience in oncology and immuno-oncology,who are in short supply; •the Company's ability to obtain or maintain patents or other appropriate protection for the intellectual property in its proprietary tests and services; 31
--------------------------------------------------------------------------------
Table of Contents •the Company's ability to effectively manage its international businesses inAustralia ,Europe andChina , including the expansion of its customer base and volume of new contracts in these markets; •the Company's dependency on the intellectual property licensed to the Company or possessed by third parties; and •other risks and uncertainties discussed in the Company's annual report on Form 10-K for the year endedDecember 31, 2019 , as updated in this Form 10-Q and other reports, as applicable, the Company file with theSecurities and Exchange Commission . Given these uncertainties, you should not place undue reliance on these forward-looking statements. These forward-looking statements represent the Company's estimates and assumptions only as of the date of this Quarterly Report on Form 10-Q and, except as required by law, the Company undertake no obligation to update or review publicly any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this Quarterly Report on Form 10-Q. You should read this Quarterly Report on Form 10-Q and the documents referenced herein and filed as exhibits completely and with the understanding that the Company's actual future results may be materially different from what the Company expects.
© Edgar Online, source
