CANCER GENETICS, INC. As used herein, the "Company" refers toCancer Genetics, Inc. and its wholly owned subsidiaries: 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 this annual report on Form 10-K. This MD&A may contain forward-looking statements that involve risks and uncertainties. For a discussion on forward-looking statements, see the information set forth in the Introductory Note to this Annual Report under the caption "Forward Looking Statements", which information is incorporated herein by reference. The share numbers in the following discussion reflect a 1-for-30 reverse stock split that the Company effectedOctober 24, 2019 . OverviewCancer Genetics, Inc. supports the efforts of the biotechnology and pharmaceutical industries to develop innovative new drug therapies. 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. vivoPharm is a contract research organization ("CRO") that specializes in planning and conducting unique, specialized studies to guide drug discovery and development programs with a concentration in oncology and immuno-oncology. These studies range from early compound selection to developing comprehensive sets of in vitro and in vivo data, as needed forU.S. Food and Drug Administration ("FDA") Investigational New Drug ("IND") applications. 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 ). Net cash used in operating activities from continuing operations was$4.9 million and$3.2 million for the years endedDecember 31, 2020 and 2019, respectively, and the Company had unrestricted cash and cash equivalents of$2.4 million atDecember 31, 2020 , a decrease of$1.4 million fromDecember 31, 2019 . The Company has working capital from continuing operations atDecember 31, 2020 of$0.5 million . In addition, the Company has$0.7 million of current liabilities associated with its discontinuing operations that will be funded primarily from its continuing operations.
Merger with StemoniX
The Company,CGI Acquisition, Inc. , a wholly-owned subsidiary of CGI ("Merger Sub"), andStemoniX, Inc. , aMinnesota corporation ("StemoniX"), have entered into an Agreement and Plan of Merger and Reorganization, as amended (the "Merger Agreement"), pursuant to which Merger Sub will merge (the "merger") with and into StemoniX, with StemoniX surviving the merger as a wholly-owned subsidiary of CGI following the merger. It is expected that the shareholders of StemoniX will become the majority owners of CGI's outstanding common stock upon the closing of the merger. The Company has filed an effective registration statement on Form S-4, as amended, datedFebruary 12, 2021 , as supplemented by a proxy supplement filed onFebruary 26, 2021 , describing StemoniX and the terms of the Merger Agreement. The merger with StemoniX is subject to certain closing conditions including listing by Nasdaq, and no assurance can be given that the closing conditions will be satisfied or that the merger with StemoniX will occur. StemoniX develops and manufactures human induced pluripotent stem cell (iPSC) based neural, cardiac and pancreatic screening platforms for drug discovery and development. Engineered from human skin and blood cells, iPSCs are made with in-licensed patented processes discovered by 2012 Nobel Prize recipient Dr.Shinya Yamanaka . StemoniX's iPSC innovations are made from living human cells and have organ-like, or organoid, characteristics; referred to as microOrgans®. StemoniX has industrialized these microOrgans into standard multi-well plate formats that are sufficiently robust and reproducible to enable drug screening and optimization activities.
OnOctober 28, 2020 the Company entered into an underwriting agreement withH.C. Wainwright & Co., LLC ("Wainwright"), relating to an underwritten public offering (the "November 2020 Offering") of approximately 1.6 million shares of common 35 -------------------------------------------------------------------------------- Table of Contents stock, including approximately 0.2 million shares subject to an option to purchase additional shares, which option was exercised in full onOctober 30, 2020 , at a price to the public of$2.20 per share. The Company received gross proceeds from the offering of approximately$3.5 million , less underwriting discounts and commissions and estimated offering expenses payable by the Company of approximately$534 thousand . In addition, Wainwright received warrants to purchase approximately 94 thousand shares of common stock at$2.42 per share.
ATM Offering
OnDecember 2, 2020 , the Company entered into an At The Market Offering Agreement (the "ATM Agreement") with Wainwright, as sales agent, pursuant to which the Company may offer and sell (the "ATM Offering"), from time to time through Wainwright, shares of CGI Common Stock, for aggregate gross proceeds of up to$2.4 million (the "ATM Shares"). The Company suspended the offering of shares under the ATM Agreement onFebruary 10, 2021 . Prior to the suspension, the Company sold an aggregate of 50 thousand shares under the ATM Agreement for net proceeds of approximately$159 thousand inDecember 2020 . InJanuary 2021 , the Company sold an additional 200 thousand shares for net proceeds of approximately$798 thousand . CGI PIPE OnJanuary 28, 2021 , CGI entered into a Securities Purchase Agreement (the "CGI PIPE Securities Purchase Agreement") with certain institutional and accredited investors (the "CGI PIPE Purchasers"), pursuant to which CGI issued and sold to the CGI PIPE Purchasers in a private placement (the "CGI PIPE") an aggregate of (i) 2.8 million shares of CGI Common Stock and (ii) common warrants to purchase up to an aggregate of 2.8 million shares of CGI Common Stock, at a combined offering price of$3.625 per CGI PIPE Share and accompanying CGI PIPE Warrant to purchase one share of CGI Common Stock, for gross proceeds of approximately$10 million . The net proceeds to CGI from the CGI PIPE were approximately$8.9 million , after deducting placement agent fees and expenses and estimated offering expenses payable by CGI. The net proceeds are expected to be available to the post-merger company upon the closing of the merger. The Private Placement closed onFebruary 1, 2021 .Between February 10 and March 22, 2021 a total of approximately 1.1 million of the warrants were exercised for common stock resulting in proceeds to the Company of approximately$4.0 million .
CGI RD Financing
OnFebruary 10, 2021 , CGI issued and sold to certain institutional investors an aggregate of 2.8 million shares of CGI Common Stock in a registered direct offering at an offering price of$6.30 per share for gross proceeds of approximately$17.5 million , or$15.8 million of net proceeds, after deducting placement agent fees and expenses and estimated offering expenses payable by CGI and issued warrants to purchase an aggregate of 167 thousand shares of CGI Common Stock to Wainwright as placement agent compensation.
Business Disposals - Discontinuing Operations
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 for a period the Company was providing certain transitional services to siParadigm pursuant to the Clinical Agreement. The cash consideration paid by siParadigm at closing was approximately$747 thousand , which included approximately$45 thousand for certain equipment plus a$1.0 million advance payment of the Earn-Out (as defined below), less adjustments and costs of approximately$298 thousand . The Clinical Business sale (together with the BioPharma Disposal, the "Business Disposals") was completed onJuly 8, 2019 . The Earn-Out, to be paid over the 24 months post-closing, is based on fees for all tests performed by siParadigm for the Company's clinical customers during the 12-month period following the closing (the "Earn-Out"). The Company has netted the Earn-out and Advance from siParadigm as ofDecember 31, 2020 as all amounts are fixed and determinable and the Company and siParadigm intend to offset. AtDecember 31, 2020 , the Earn-Out from siParadigm was approximately$91 thousand . Interpace Biosciences, Inc. 36
-------------------------------------------------------------------------------- Table of Contents 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 Biosciences, Inc. ("IDXG") and a newly-formed subsidiary of IDXG,Interpace BioPharma, Inc. ("Buyer"). The BioPharma Agreement provided for a consensual private foreclosure sale by PFG of all assets relating to the Company's BioPharma Business (as defined in the BioPharma Agreement) to Buyer (the "BioPharma Disposal"). 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 settled in the form of a promissory note issued by Buyer to the Company (the "Excess Consideration Note") and the remainder was paid to PFG in cash. PFG utilized the cash proceeds to satisfy the outstanding balances of 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$2.3 million was delivered to the Company in addition to the Excess Consideration Note. The Excess Consideration Note which required interest-only quarterly payments at a rate of 6% per year, was settled onOctober 24, 2019 for$6.0 million , including interest of$24 thousand . The Buyer withheld from the settlement of the Excess Consideration Note$775 thousand for a net worth adjustment (assets less liabilities) of theBioPharma 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, subject to agreed-upon caps, baskets and survival periods as set forth in the BioPharma Agreement ("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'sBioPharma employees during the transition period. The Buyer paid for certain costs of the Company under theTSA with respect to a limited number of employees and professionals. Such shared services amounted to$208 thousand and$186 thousand for the years endedDecember 31, 2020 and 2019, respectively. In addition, the Buyer was reimbursing the Company, in part, for the salaries and benefits ofJohn A. Roberts , the Company's Chief Executive Officer, andGlenn Miles , the Company's former Chief Financial Officer throughJuly 2020 . The reimbursed portion of such salaries and benefits amounted to$155 thousand and$188 thousand for the years endedDecember 31, 2020 and 2019, respectively. Including the amounts due under theTSA described above, the net amount due to the Buyer is approximately$15 thousand atDecember 31, 2020 . The above business disposals have been classified as discontinuing operations in conformity with accounting principles generally accepted inthe United States of America . Accordingly, the operations and balances of BioServe and the Company'sBioPharma and Clinical operations have been reported as discontinuing operations. Unless otherwise indicated, information in the MD&A relates 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$5.4 million , net of expenses and discounts of$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 had a 12-month term and accrued interest at 10% per annum. The proceeds from the Note Payable were utilized to partially repay the Convertible Note (see Note 6 to the audited consolidated financial statements included in Part II Item 8 of this Annual Report on Form 10-K). BetweenJune 3, 2020 andSeptember 23, 2020 , the Company issued an aggregate of approximately 399 thousand shares of the Company's common stock, with a fair value of$1.6 million , to Atlas Sciences in exchange for the return to the Company of the 37 -------------------------------------------------------------------------------- Table of Contents remaining principal and interest from its unsecured promissory note. As such the Note Payable balance onDecember 31, 2020 was$0 .
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. During the year endedDecember 31, 2020 , four customers accounted for approximately 61% of the consolidated revenue from continuing operations. During the year endedDecember 31, 2019 , three customers accounted for approximately 61% of the consolidated revenue from continuing operations.
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 four categories: sales and marketing, general and administrative, impairment of goodwill and merger costs. 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 remain relatively flat as it continues to operate and grow its Discovery Services business. Impairment ofGoodwill : During 2019, the Company recorded a goodwill impairment charge of$2.9 million after considering the effects of the Business Disposals and declines in its stock price. No impairment was recognized during the year endedDecember 31, 2020 . If the Company is not successful in executing its strategic business plans, there may be further impairments in the future. 38 -------------------------------------------------------------------------------- Table of Contents Impairment of Intangible Assets. Based upon the actual results for the first two months of the 2021 fiscal year, the Company updated the forecasted operating results for the period from 2021 through 2026, the amortization period of the Company's intangible assets and determine that the fair value of the intangible assets which was calculated using the present value of future cashflows, did not support its carrying value resulting in an impairment charge of$2.2 million , which was recorded in operating expenses for the year endedDecember 31, 2020 .
Merger Costs. In the pursuit of various strategic options for the Company, legal and other professional costs are incurred while evaluating, negotiating, executing and implementing merger and acquisition alternatives.
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, as the Company is located inNew Jersey , the Company is currently under a shelter-in-place mandate and many of its customers worldwide are 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 slowdown in its project work, however, the future of many projects may be delayed. The Company continues to vigilantly monitor the situation with its primary focus on the health and safety of its employees and clients.
Results of Operations
Years Ended
The following table sets forth certain information concerning the Company's results of continuing operations for the periods shown (in thousands):
Year Ended December 31, Change
2020 2019 $ %
Revenue $ 5,751 $ 7,305 $ (1,554) -21 %
Cost of revenues 3,353 3,701 (348) -9 %
General and administrative 6,595 5,171 1,424 28 %
Sales and marketing 1,246 1,146 100 9 %
Impairment of goodwill - 2,873 (2,873) -100 %
Impairment of intangible assets 2,201 - 2,201 100 %
Merger costs 539 117 422 361 %
Loss from continuing operations (8,183) (5,703) (2,480) 43 %
Interest expense, net (272) (1,329) 1,057 -80 %
Change in fair value of acquisition note payable 4 4 - - %
Change in fair value of other derivatives - 86 (86) -100 %
Change in fair value of warrant liability 167 70 97 139 %
Change in fair value of siParadigm Earn-Out (66) (935) 869 -93 %
Change in fair value of Excess Consideration
Note - 93 (93) -100 %
Gain on troubled debt restructuring - 258 (258) -100 %
Other expense 307 59 248 420 %
Loss before income taxes (8,043) (7,397) (646) 9 %
Income tax benefit - 512 (512) -100
Net loss from continuing operations $ (8,043) $ (6,885) $ (1,158) 17 %
Non-GAAP Financial Information
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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 the Company believes are helpful in
understanding and comparing its past financial performance and its future
results, and are reflected as "Adjusted EBITDA." The Company uses Adjusted
EBITDA to normalize its operations. The Company defined adjusted EBITDA as
earnings before (1) net interest expense, (2) taxes, (3) depreciation and
amortization, (4) non-cash stock-based compensation, (5) goodwill impairment,
(7) gain on troubled debt restructuring and (6) changes in fair value of various
assets and liabilities that are remeasured on a recurring basis. 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 cash flow
performance 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):
Year Ended
2020 2019
Reconciliation of net loss from continuing operations: Net loss from continuing operations
$ (8,043) $ (6,885) Adjustments: Interest expense, net 272 1,329 Depreciation 166 159 Amortization 462 454 Stock-based compensation 179 263 Impairment of goodwill - 2,873 Impairment of intangible assets 2,201 - Merger costs 539 117 Change in fair value of acquisition note payable (5) (4) Change in fair value of other derivatives - (86) Change in fair value of warrant liability (167) (70) Change in fair value of siParadigm Earn-Out 65 935 Change in fair value of Excess Consideration Note - (93) Gain on troubled debt restructuring - (258) Income tax benefit - (512) Adjusted EBITDA (loss) from continuing operations $
(4,331)
Adjusted EBITDA loss from continuing operations increased 143% to$4.3 million during the year endedDecember 31, 2020 , from an Adjusted EBITDA loss of$1.8 million during the year endedDecember 31, 2019 .
Revenue from Continuing Operations
Revenue from continuing operations decreased 21%, or$1.6 million , to$5.8 million for the year endedDecember 31, 2020 , from$7.3 million for the year endedDecember 31, 2019 , principally due to a decrease in the number of clinical studies conducted in the Company'sU.S. operations from sponsors based in theU.S. andEurope , which resulted in a lower volume of active projects as the demand for its CRO services decreased.
Cost of Revenues from Continuing Operations
Cost of revenues from continuing operations decreased 9%, or$348 thousand , to$3.4 million for the year endedDecember 31, 2020 , from$3.7 million for the year endedDecember 31, 2019 , principally due to decreased usage of lab supplies of$340 thousand , payroll costs and benefits of$355 thousand , offset by an increase in outsourcing of$317 thousand . Gross margin decreased from 49% to 42% during the year endedDecember 31, 2020 . The decrease in gross margin was caused by the increase in the use of outsourcing on studies which have lower margins then studies performed in house.
Operating Expenses from Continuing Operations
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General and Administrative Expenses. General and administrative expenses from continuing operations increased 28%, or$1.4 million , to$6.6 million for the year endedDecember 31, 2020 , from$5.2 million for the year endedDecember 31, 2019 principally due to a$1.2 million increase in audit and professional services (of which$619 thousand represent one-time costs) related to increased financial consulting incurred to prepare discontinued operations for audit,$580 thousand increase in legal expense primarily due to large refunds negotiated and recorded in the fourth quarter of 2019,$416 thousand increase in taxes and insurance related to a significant increase in Directors & Officers insurance, a$180 thousand increase in board of director fees, offset in part by a$748 thousand decrease in salaries related to the reversal of discretionary bonus accruals in 2020, and$99 thousand decrease in stock based compensation. Impairment ofGoodwill . During the year endedDecember 31, 2020 andDecember 31 2019 , the Company recorded impairment of goodwill of$0 and$2.9 million respectively, after considering the effects of the Business Disposals and declines in its stock price. Impairment of Intangible Assets. Based upon the actual results for the first two months of the 2021 fiscal year, the Company updated the forecasted operating results for the period from 2021 through 2026, the amortization period of the Company's intangible assets and determine that the fair value of the intangible assets which was calculated using the present value of future cashflows, did not support its carrying value resulting in an impairment charge of$2.2 million , which was recorded in operating expenses for the year endedDecember 31, 2020 . Merger Costs. During the year endedDecember 31, 2020 , the Company recognized$539 thousand of merger costs associated with the pending merger with Stemonix, as compared to$117 thousand during the year endedDecember 31, 2019 related to its terminated merger withNovellusDx, Ltd. ("NDX").
Interest Expense, Net
Net interest expense from continuing operations decreased by$1.1 million during the year endedDecember 31, 2020 due to the payoff of various debt agreements that were previously in place during the year endedDecember 31, 2019 . During the fourth quarter of 2019 the Company entered into a Settlement Agreement with NDX that reduced the outstanding balance of the Advance from NDX (as defined below) by$1.1 million dollars and put in place a$450 thousand interest free note payable in monthly installments of$50 thousand . The note was paid in full inJuly 2020 . The Convertible Note with Iliad of approximately$2.3 million was replaced by a note payable to Atlas Sciences inOctober 2019 . The note payable to Atlas Sciences was settled though the exchange of common stock in 2020 and was fully paid off as ofSeptember 30, 2020 .
Change in Fair Value of Warrant Liability
Changes in fair value of some of the Company's common stock warrants may impact its 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$167 thousand and non-cash expense of$70 thousand during the years endedDecember 31, 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
The siParadigm Earn-Out relates to the disposal of the Company's Clinical Business inJuly 2019 . During the years endedDecember 31, 2020 and 2019, the Company recognized a$66 thousand and$935 thousand reduction in the fair value of the siParadigm Earn-Out due to a decrease in expected future payments.
Change in Fair Value of Excess Consideration Note
The Excess Consideration Note relates to the disposal of the Company'sBiopharma Business inJuly 2019 . During the years endedDecember 31, 2020 and 2019, the Company recognized$0 and$93 thousand gain related to the increase in fair value of the Excess Consideration Note due to changes in the expected settlement of the AR Holdback and the Indemnification Holdback. The Excess Consideration Note was paid off inMay 2020 .
Gain on Troubled Debt Restructuring
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During the year ended December 31, 2019 , the Company recognized a $258 thousand
gain on troubled debt restructuring related to a settlement agreement reached
with NDX ("NDX Settlement Agreement") covering $1.5 million in funds advanced to
the Company prior to the failed merger in 2018 ("Advance from NDX"). The NDX
Settlement Agreement required the Company to repay $1.1 million of principal and
interest on the Advance from NDX. Upon receipt of these payments, the Advance
from NDX was reduced to $450 thousand . The remaining amount due was
interest-free and payable in monthly installments of $50 thousand , which began
in November 2019 . The Settlement Agreement was paid in full in July 2020 .
Income Tax Benefit
OnApril 4, 2019 , the Company sold$11.6 million of grossState of New Jersey NOLs relating to the 2017 tax year as well as$72 thousand of state research and development tax credits. The sale resulted in the net receipt by the Company of$512 thousand . The Company did not sell any NOLs during 2020. The Company's effective rate for the years endedDecember 31, 2020 and 2019 was 0% and 7.1%, respectively.
Liquidity and Capital Resources
Sources and Uses of Liquidity
The primary sources of the Company's liquidity have been cash collections from customers, funds generated from debt financings and equity financings, and cash received from the Business Disposals. The Company expects to continue generating additional cash from its customers in the future. 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. OnOctober 28, 2020 the Company entered into an underwriting agreement with Wainwright relating to an underwritten public offering of approximately 1.6 million shares of common stock, including approximately 0.2 million shares subject to an option to purchase additional shares, which option was exercised in full onOctober 30, 2020 , at a price to the public of$2.20 per share. The Company received gross proceeds from the offering of approximately$3.5 million , less underwriting discounts and commissions and estimated offering expenses payable by the Company of approximately$534 thousand . In addition, Wainwright received warrants to purchase approximately 94 thousand shares of common stock at$2.42 per share. OnDecember 2, 2020 , the Company entered into an At The Market Offering Agreement (the "ATM Agreement") with Wainwright, as sales agent, pursuant to which the Company may offer and sell, from time to time through Wainwright, shares of CGI Common Stock, for aggregate gross proceeds of up to$2.4 million (the "ATM Shares"). Pursuant to the ATM Agreement, Wainwright may sell the ATM Shares in sales deemed to be "at-the-market" equity offerings as defined in Rule 415 promulgated under the Securities Act, including sales made directly on or through the Nasdaq Capital Market. The Company suspended the offering of shares under the ATM Agreement onFebruary 10, 2021 . Prior to the suspension, the Company has sold an aggregate of 250 thousand shares under the ATM Agreement for net proceeds of approximately$957 thousand . OnJanuary 28, 2021 , CGI entered into a Securities Purchase Agreement with certain institutional and accredited investors (the "CGI PIPE Purchasers"), pursuant to which CGI issued and sold to the CGI PIPE Purchasers in a private placement an aggregate of (i) 2.8 million shares of CGI Common Stock and (ii) common warrants to purchase up to an aggregate of 2.8 million shares of CGI Common Stock, at a combined offering price of$3.625 per CGI PIPE Share and accompanying CGI PIPE Warrant to purchase one share of CGI Common Stock, for gross proceeds of approximately$10 million . The net proceeds to CGI from the CGI PIPE were approximately$8.9 million , after deducting placement agent fees and expenses and estimated offering expenses payable by CGI. OnFebruary 10, 2021 , CGI issued and sold to certain institutional investors an aggregate of 2.8 million shares of CGI Common Stock in a registered direct offering at an offering price of$6.30 per share for gross proceeds of approximately$17.5 million , or$15.8 million of net proceeds, after deducting placement agent fees and expenses and estimated offering expenses payable by 42 -------------------------------------------------------------------------------- Table of Contents CGI and issued warrants to purchase an aggregate of 167 thousand shares of CGI Common Stock to Wainwright as placement agent compensation. BetweenFebruary 10, 2021 andMarch 22, 2021 , the Company received proceeds of$4.0 million from four warrant exercises for an aggregate of 1.1 million shares of common stock.
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.
From June throughSeptember 2020 , the Company settled all principal and interest on the note payable to Atlas Sciences through the exchange of shares of common stock. The Company believes that its cash atDecember 31, 2020 , together with net proceeds of (i)$797 thousand from post year end sales pursuant to its At The Market Offering Agreement datedDecember 2, 2020 (the "CGI ATM"), (ii)$8.9 million from the issuance and sale of CGI securities in the CGI PIPE, (iii)$15.8 million from the issuance and sale of CGI securities in the CGI RD Financing and (iv)$4.0 million from warrant exercises will be sufficient to fund normal operations for at least the next 24 months from the date of this filing. These conditions no longer raise substantial doubt about the Company's ability to continue as a going concern.
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 (in thousands):
Year Ended December 31,
2020 2019
Cash provided by (used in) continuing operations:
Operating activities $ (4,908) $ (3,239)
Investing activities 885 (28)
Financing activities 2,640 3,420Effect of foreign currency exchange rates on cash and cash equivalents and restricted cash
(68) (17)
Net increase in cash and cash equivalents and restricted cash from
continuing operations $ (1,451) $ 136
The Company had cash and cash equivalents and restricted cash of $2.4 million
and $4.2 million at December 31, 2020 and 2019, respectively. Restricted cash of
$350 thousand at December 31, 2019 was released from restriction in May 2020 .
Cash Used in Operating Activities from Continuing Operations
Net cash used by continuing operating activities was$4.9 million for the year endedDecember 31, 2020 , consisting of a net loss from continuing operations of$5.9 million , positive non-cash adjustments of$1.2 million and a decrease in cash relating to changes in working capital items of$288 thousand . During the year endedDecember 31, 2019 , cash used in operating activities from continuing operations was$3.2 million , consisting of net loss from continuing operations of$6.9 million , positive non-cash adjustments of$5.4 million and additional uses of cash relating to changes in working capital items of$1.7 million . Changes in cash flows from working capital items were primarily driven by a net increase in other current assets of$279 thousand , a net decrease in accounts payable, accrued expenses and deferred revenue of$1.3 million , and a decrease in obligations under operating leases of$189 thousand . These uses of cash were partially offset by a net decrease in accounts receivable of$81 thousand .
Cash Provided by Investing Activities from Continuing Operations
Net cash provided by continuing investing activities was$885 thousand for the year endedDecember 31, 2020 , relating primarily to the collection of the Excess Consideration Note of$888 thousand . 43 -------------------------------------------------------------------------------- Table of Contents Net cash used in continuing investing activities was$28 thousand for the year endedDecember 31, 2019 , relating to purchases of fixed assets.
Cash Provided by Financing Activities from Continuing Operations
Net cash provided by continuing financing activities was$2.6 million for the year endedDecember 31, 2020 and principally resulted from net proceeds received from theNovember 2020 Offering and the ATM Offering of an aggregate of$3.1 million , offset, in part, by principal payments of$350 thousand on the Convertible Note and the Advance from NDX, respectively, as well as$84 thousand of payments on finance leases. Net cash provided by continuing financing activities was$3.4 million for the year endedDecember 31, 2019 and resulted from proceeds of$5.4 million offset by principal payments of$1.0 million and$892 thousand on the Convertible Note and the Advance from NDX, respectively, as well as$72 thousand of payments on finance leases.
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 is successful in acquiring StemoniX, StemoniX is not profitable and the Company is not able to predict when the combined business would become profitable, and it may never become profitable, thereby increasing the Company's needs for additional financing. Even if the Company does achieve profitability, with or without consummating the StemoniX acquisition, 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 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'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 expected benefits of, and potential value, including synergies, created by, the proposed merger transaction between the Company andStemoniX, Inc. ("StemoniX") for the stockholders of CGI; •likelihood of the satisfaction of certain conditions to the completion of the merger with StemoniX, and whether and when the merger will be consummated; •CGI's ability to control and correctly estimate its operating expenses and its expenses associated with the StemoniX merger; •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; 44 -------------------------------------------------------------------------------- Table of Contents •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 andEurope , 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; •the Company's ability to adequately support future growth; and •other risks discussed in the section entitled "Risk Factors." The consolidated financial statements for the year endedDecember 31, 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 consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
Future Contractual Obligations
The following table reflects a summary of the Company's estimates of future contractual obligations as ofDecember 31, 2020 . The information in the table reflects future unconditional payments and is based on the terms of the relevant agreements, appropriate classification of items underU.S. GAAP as currently in effect and certain assumptions, such as the interest rate on the Company's variable debt that was in effect as ofDecember 31, 2020 . Future events could cause actual payments to differ from these amounts.
Payments Due by Period
Less than 1
Contractual Obligations Total Year 1-3 Years 3-5 Years More than 5 years
(dollars in thousands)
Finance lease obligations, including
interest, for equipment 121 41 80 - -
Operating lease obligations relating
to administrative offices and
laboratories 266 234 32 - -
Total $ 387 $ 275 $ 112 $ - $ -
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.
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 consolidated financial statements, which have been prepared in accordance withU.S. GAAP. The preparation of 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 45 -------------------------------------------------------------------------------- Table of Contents evaluates its estimates based on historical experience and makes 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 contain a summary of its 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.
Recent Accounting Pronouncements
The notes to the Company's audited consolidated financial statements contain a summary of recent accounting pronouncements.
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