CANCER GENETICS, INC.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was $8.0$6.6 million on June 30, 2019,2020, the last business day of the registrant’s most recently completed second fiscal quarter, based on the closing price of $4.80$3.03 on that date.
None.
This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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's current views with respect to future events and are based on assumptions and subject to risks and uncertainties including those set forth below and under Part I, Item 1A, “Risk Factors” in this annual report on Form 10-K. 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 annual report on Form 10-K and, except as required by law, the Company undertakes 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 annual report on Form 10-K. You should read this annual report on Form 10-K and the documents referenced in this annual report on Form 10-K 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. The Company qualifies all of its forward-looking statements by these cautionary statements. Such statements may include, but are not limited to, statements concerning the following:
The share numbers throughout this Annual Report on Form 10-K reflect a 1-for-30 reverse stock split that the Company effected October 24, 2019.
Cancer Genetics, Inc. (the "Company"“Company” or “CGI”) supports the efforts of the biotechnology and pharmaceutical industries to develop innovative new drug therapies. Until the closing of the Business Disposals (as defined below) in July 2019, the Company was an emerging leader in enabling precision medicine in oncology by providing multi-disciplinary diagnostic and data solutions, facilitating individualized therapies through 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 as2017. vivoPharm is a contract research services, focused primarily onorganization (“CRO”) that specializes in planning and conducting unique, specialized studies to guide drug discovery and development programs with a concentration in the oncology and immuno-oncology fields. The Company's testsimmuno-oncology. These studies range from early compound selection to developing comprehensive sets of in vitro and techniques target a wide range of indications, covering all ten of the top cancers in prevalence in the United States, with additional unique capabilities offered by its FDA-cleared Tissue of Origin® testvivo data, as needed for identifying difficult to diagnose tumor types or poorly differentiated metastatic disease.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 its Hershey, PA facility, and is a leader in the field of immuno-oncology preclinical services in the United States. This service is supplemented with GLP toxicology and extended bioanalytical services in the Company'sCompany’s Australian-based facilities in Clayton, VIC,Victoria, and Gilles Plains, SASouth Australia (effective in February 2020).
The Company was founded in 1999 to conduct critical research and development of innovative diagnostic tests for the benefit of helping physicians treat complicated cancer cases for patients with blood-borne disease. Upon becoming a publicly-traded company through an initial public offering in 2013, the Company completed a series of acquisitions which expanded the footprint of the business globally, and enlarged the Company'sCompany’s capabilities to offer unique diagnostic tests and services to biotechnology and pharmaceutical companies, and extended the Company'sCompany’s development and patient care expertise to solid tumor cancers. Until the consummation of the Business Disposals (as defined below) in July 2019, the Company was an emerging leader infocused on enabling precision medicine in oncology by providing multi-disciplinary diagnostic and data solutions, facilitating individualized therapies through the Company'sCompany’s diagnostic tests, services and molecular markers.
The Company utilized relatively the same proprietary and nonproprietary diagnostic tests, laboratory developed tests (LDTs) and technologies across all of its service offerings to deliver results-oriented information important to cancer treatment and patient management. The Company'sCompany’s portfolio primarily included comparative genomic hybridization (CGH) microarrays, gene expression tests, next generation sequencing (NGS) panels, and DNA fluorescent in situ hybridization (FISH) probes. The Company provided testing services from its Clinical Laboratory Improvement Amendments (“CLIA”) - certified and College of American Pathologists (“CAP”) - accredited laboratories in Rutherford, NJ and Raleigh,Morrisville, NC.
siParadigm, Inc.
On July 5, 2019, the Company entered into an asset purchase agreement (the “Clinical Agreement”) by and among the Company and siParadigm, LLC (“siParadigm”), pursuant to which the Company sold to siParadigm certain assets associated with the Company’s clinical laboratory business (the “Clinical Business,” and such assets, the “Designated Assets”) and agreed to cease operating the 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 includes approximately $45 thousand for certain equipment plusincluded a $1.0 million advance payment of the Earn-Out (as defined below),an earn out, less approximately $177 thousand of supplier invoices paid directly by siParadigm, an adjustment of $11 thousandadjustments and transaction
Interpace Biosciences, Inc.
On July 15, 2019, the Company entered into a secured creditor asset purchase agreement (the “BioPharma Agreement”) by and among the Company, Gentris, LLC, a wholly-owned subsidiary of the Company, Partners for Growth IV, L.P. (“PFG”), Interpace Biosciences, Inc. (formerly known as 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 including the lease agreements to its CLIA certified and CAP accredited laboratories in Rutherford, NJ and Raleigh, NC (as defined in the BioPharma Agreement) to Buyer (the “BioPharma Disposal”). The BioPharma Disposal was consummated on July 15, 2019.
Pursuant to the BioPharma Agreement, Buyer purchased from PFG certain assets and assumed certain liabilities of the Company relating to the BioPharma Business, providing as gross consideration $23.5 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 the Silicon Valley Bank (“SVB”) asset-based revolving line of credit (“ABL”) and the $6.0 million term note to PFG (“PFG Term Note”), and to satisfy certain transaction expenses. The balance of approximately $2.3 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, was settled on October 24, 2019 for $6.0 million, including interest of $24 thousand.million. 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, 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 and May 2020, respectively.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, (collectively, the “Payroll and Benefits Services”), for a period not to exceed six months from July 15, 2019, subject to the terms and conditions of the TSA, in exchange for payment or reimbursement, as applicable, by Buyer for the costs related thereto, including salaries and benefits for certain of the Company’s BioPharma employees during the transition period. The Company continues to provideBuyer paid for certain costs of the Payroll and Benefits ServicesCompany under the TSA with respect to a limited number of employees.employees and professionals. Such shared services amounted to $208 thousand and $186 thousand for the years ended December 31, 2020 and 2019, respectively. In addition, the Buyer iswas reimbursing the Company, in part, for the salaries and benefits of John A. Roberts, the Company’s Chief Executive Officer, and Glenn Miles, the Company’s former Chief Financial Officer.Officer through July 2020. The reimbursed portion of such salaries and benefits amounted to $155 thousand and $188 thousand for the years ended December 31, 2020 and 2019, respectively.
The Business Disposals have been classified as discontinuing operations in conformity with US GAAP. Accordingly, BioServe, BioPharma and Clinical operations and balances have been reported as discontinuing operations and removed from all financial disclosures of continuing operations for the years ended December 31, 20192020 and 2018.2019.
failures can be as high as $2.6 billion and the approval process from development to market may be as long as 15 years. According to the National Cancer Institute, since the 1990s, cancer death rates in the United States have declined 23%, and approximately 83% of life expectancy increases in cancer patients are due to new treatments and oncology medications.
Outside of the United States, growth in the pharmaceuticals and clinical trials market is continuing, and trials are increasingly becoming more complex. Growth in the European pharma market is anticipated to be driven largely by the United Kingdom, Germany, Spain, France and Italy. The size of this market is expected to grow 25% between 2017 and 2022, accounting for nearly 70% of the European pharma market by 2022.
While oncology drugs have the potential to be among the most personalized therapeutics, very few successfully make it to market. The application of pharmacogenomics to oncology clinical trials enables researchers to better predict differences, initially driven by data derived in preclinical research. The Company believes a growing demand for faster development of personalized medicines and more effective clinical trials are growth drivers of this market, and its core expertise is preclinical efficacy, toxicity and bioanalytical services.
The Company has a particularly strong set of experiences working in the preclinical area of checkpoint inhibitors and specifically immunotherapies. Drug development is continuing to attract biotech companies transforming scientific innovation into practice-changing cancer drugs, thereby driving demand for the Company'sCompany’s services. When considering druggable targets within the different immuno-oncology drug classes, T cell immunomodulators and cell therapies had the largest increase in new targets in the past 2 years, which suggests that more innovation is going into these drug classes than the other IO drug classes. Overall,According to Nature Reviews December 2019, active drugs in development hashave grown from 2,030 to 3,876, a 91% increase in just 2two years, resulting in more than 3,400 active clinical trials evaluating such agents, 66% of all active immuno-oncology drugs in development.
being developed, particularly in the area of immuno-oncology therapies. To achieve this, and in order of its focus and priority, the Company intends to:to:
•Continue to aggressively manage its cost structure.The Company is focusedcontinues to focus on aggressively managing its operating costs while continuing to seek additional revenue growth opportunities. The Company is implementing measures to streamline costs across its laboratory facilities, and integrating administrative functions across its global operations, implementing a cloud-based laboratory management system across all of its sites, along with key financial enterprise resource planning and human resource systems that enable greater efficiency.
The Company believes that the pending merger with StemoniX, if consummated, will be beneficial in furthering the business of the Company for a number of reasons:
•The Company believes that the merger will position the post-merger company to harness the synergies between two critical modalities of drug discovery and development - advanced animal models and relevant human high-throughput organoid platforms;
•The Company believes in the scientific and clinical value of the StemoniX business and that the resulting integration of scientific and technology-based expertise, skilled management teams, and ability to offer customers an end-to-end platform will de-risk and accelerate discovery and development of preclinical and clinical pipelines for biopharma partners as well as for the proprietary pipeline of the post-merger company;
•The Company believes that the post-merger company will be able to create partnership engagements with pharmaceutical and biotechnology companies that will yield significant revenue opportunities, based on the combined technology and scientific expertise to the combined professional staff;
•The Company believes that the resulting integration of scientific capabilities from the merger provides the best opportunity to improve upon CGI’s cash position and historic substantial doubt about CGI’s ability to continue as a going concern; and
•The Company expects that the post-merger company will include experienced members from the senior management team of StemoniX who have expertise in drug discovery that is valued by potential pharmaceutical and biotechnology partners.
The Company's Service Offerings
Prior to the Business Disposals, the Company's business was based on demand for molecular- and biomarker-based characterization of cancers from three main sectors: (1) biotechnology and pharmaceutical companies, (2) cancer centers and hospitals, and (3) the research community. With the Company's continued focus on the preclinical market, its services are primarily sought by biotechnology and pharmaceutical companies engaged in designing and preparing to run clinical trials, for their value and efficacy in oncology and immuno-oncology treatments and therapeutics. The Company believes trial participants' likelihood of experiencing either favorable or adverse responses to the trial treatment can be determined first by its extended portfolio of orthotopic, xenografts and syngeneic tumor test systems, and in early development through biomarker identification and development, thereby increasing trial efficiency, participant safety and trial success rates. Biotechnology and pharmaceutical companies also seek the Company's services in preclinical trial design and drug development, in order to effectively and efficiently select those therapeutic candidates most likely to progress to clinical treatment options. The Company's services are also sought by researchers and research groups seeking to identify biomarkers and panels and develop methods for diagnostic technologies and tests for disease.
Discovery Services
Through its acquisition of vivoPharm in 2017, theThe Company offers proprietary preclinical test systems valued by the pharmaceutical industry, biotechnology companies and academic research centers. In particular, the Company'sCompany’s preclinical development of biomarker detection methods, response to immuno-oncology directed novel treatments and early prediction of clinical outcome is supported by its extended portfolio of orthotopic, xenografts and syngeneic tumor test systems. vivoPharmvivoPharm 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 filing. vivoPharmvivoPharm operates in AAALAC accredited and GLP-compliant audited facilities. The Company provides its preclinical services, with a focus on efficacy models, from its Hershey, PA facility for the U.S. and European markets, and supplemented with GLP toxicology and extended bioanalytical services in its Australia-based facility in Clayton, VIC and Gilles Plains, SA (effective in February 2020).
The Company'sCompany’s Discovery Services provide the tools and testing methods for companies and researchers seeking to identify new molecular- and biomarker-based indicators for disease and to determine the pharmacogenomics, toxicitysafety and efficacyeffectiveness of potential therapeutic candidate compounds. Discovery Services offered include development of both xenograft and syngeneic animal models,
toxicology and genetic toxicology services, pharmacology testing, pathology services, and validation of biomarkers for diseases including cancers. The Company also provides consulting, guidance and preparation of samples and clinical trial design. The Company believes the ability to analyze variations in biomarkers, tumor cells and compounds, and to interpret results into meaningful predictors of disease or indicators of therapeutic success is essential to discovering new molecular markers for cancer, new therapeutics, and targets for therapies.
We execute on our market strategy by delivering results-oriented information and insights which we believe is or will become important to drug discovery and development and ultimately to accelerated therapy approvals and commercialization. Our Discovery Services aim to accelerate the development of novel treatment candidates and precision medicine, with a current focus in oncology. We believe the level of personalized treatment required to optimize a patient’s treatment regimen and to maximize clinical trial success rates may be significantly improved through the use of molecular- and biomarker-based characterization.
The following table lists our market strategy by customer category:
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| Customer Category | | Types of Customers | | Nature of Services |
| Discovery Services | | •Pharmaceutical and Biotech companies •Academic Institutions •Government-Sponsored Research Institutions | | Discovery services, including preclinical anti-tumor efficacy, GLP compliant toxicity studies, small molecular and biologics analytical services, provide the tools and testing methods for companies and researchers seeking to identify and to develop new compounds and molecular-based biomarkers for diagnostics and treatment of disease. |
Retained Tests
The Company continues to own a portfolio of proprietary disease-focused tests, which are currently available for licensing to the biopharma industry and diagnostic companies. The Company currently has a U.S. based diagnosticChinese laboratory company offering its FHACT test domestically and a Chinese laboratory company preparing to offer its Tissue of Origin test in China. The Company intends to monetize this asset in 2021 through the sale to a Chinese or U.S. based diagnostic laboratory.
HPV-Associated Cancers
HPV-associated cancers, including cervical, anal, and head and neck cancers, are caused by infection with high-risk variants of human papillomavirus (HPV), and are responsible for approximately 4% of all cancer diagnoses worldwide. Cervical cancer is the third most common cancer among women. According to the National Institutes of Health, while there are more than 100 types of HPV, approximately 15 types are considered to be cancer-causing, with only 2 strains being responsible for 70% of cervical cancer cases worldwide. Cervical cancer may be detected by traditional methods, including Pap smears and liquid cytology, where cervical cells obtained by Pap smear are observed by a pathologist, or by HPV typing, which identifies the strain of HPV virus presently infecting the patient. Neither of these techniques is able to identify the likelihood of the HPV-infection’s developing into cancerous or precancerous lesions. According to the National Cancer Institute, about 50 million Pap smear tests to detect HPV are performed in the United States each year. It is estimated that approximately 2 million patients have abnormal Pap smear test results and are referred for biopsy/colposcopy as a result of such tests. However, only approximately 12,000 of these patients will develop cervical cancer. It is believed that early detection of HPV-associated cancers and lesions most likely to progress to cancer could eliminate unnecessary biopsies/colposcopies and thereby reduce health care costs.
The Company's Proprietary Tests for HPV-Associated Cancers
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| | |
Test | Targeted Cancers | Technology & Advantages |
FHACT® | • HPV-Associated Cancers
- Cervical Cancer
- Anal Cancer
- Head & Neck Cancers
| • FHACT® is the Company's proprietary, 4-color FISH-based DNA probe designed to identify aberrations in four important chromosomal regions that have been implicated in cancers associated with infection by the human papilloma virus (HPV): cervical, anal and oropharyngeal.
• FHACT® is designed to determine copy number changes of four particular genomic regions by fluorescent in situ hybridization (FISH). These regions of DNA give specific information about the progression from HPV infection to cervical cancer, in particular the stage and subtype of disease.
• FHACT® is designed to enable earlier detection of abnormal cells and can identify the additional genomicbiomarkers that allow for the prediction of cancer progression.
• FHACT® is designed to leverage the same Pap smear sample taken from the patient during routine screening, thus reducing the burden on the patient while delivering greater information to the clinician.
• The Company offers an application of FHACT® as an LDT for cervical cancer and are developing applications for additional cancer targets.
• The Company has obtained CE marking for FHACT®, which allows the Company to market the test in the European Economic Area.
|
Solid Tissue Cancers
The term “solid tumors” encompasses abnormal masses of cells that do not include fluid areas (e.g. blood) or cysts. Solid tumors are composed of abnormal cell growths that originate in organs or soft tissue and are normally named after the types of cells that form them. Examples of solid tumors include breast cancer, lung cancer, ovarian cancer and melanoma. Solid tumors may be benign (not cancerous) or malignant (cancerous) and may spread from their primary tissue of origin to other locations in the body (metastasis). There are over 200 individual chemotherapeutic drugs available for combating solid tumor cancers. Selection of an appropriate course of treatment for a patient may depend on identification of the gene mutation or mutations present in their particular cancer and on determining the cancer’s tissue of origin. Metastatic tumors with an uncertain primary site can be a difficult clinical problem. In tens of thousands of oncology patients every year, no confident diagnosis is ever issued, making standard-of-care treatment impossible.
The Company'sCompany’s Proprietary Tests for Solid Tissue Cancers
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| Test | | Targeted Cancers | | Technology & Advantages |
| Tissue of Origin® | | •Solid Tissue Cancers - –Thyroid
- –Breast
- –Non-Small Cell Lung Cancer (NSCLC)
- –Gastric
- –Pancreas
- –Colorectal
- –Liver
- –Bladder
- –Kidney
- Non-Hodgkin’s–Non-Hodgkin's Lymphoma
- –Melanoma
- –Ovarian
- –Sarcoma
- –Testicular Germ Cell
- –Prostate
| | •Tissue of Origin® (TOO®) is FDA-cleared, Medicare-reimbursed, and provides extensive analytical and clinical validation for statistically significant improvement in accuracy over other methods. •TOO® is a gene expression test that is used to identify the origin in cancer cases that are metastatic and/or poorly differentiated and unable to be typed by traditional testing methods. •TOO® increases diagnostic accuracy and confidence in site-specific treatment decisions, and leads to a change in patient treatment based on results 65% of the time it is used. •TOO® assesses 2,000 genes, covering 15 of the most common tumor types and 90% of all solid tumors. •In the fourth quarter of 2015, the Company acquired the TOO® test through its acquisition of substantially all of the assets of Response Genetics, Inc. |
Tissue of Origin® Test. The Company continues to own and maintain its FDA-cleared Tissue of Origin® test, or TOO®, a gene expression test that is indicated when there is clinical uncertainty about a poorly differentiated or undifferentiated, or a metastatic tumor where the primary tissue of cancer development is unknown. The Tissue of Origin® test the Company believes is currently the only FDA-cleared test of its kind on the market, and can determine the most likely tissue of origin of a patient tumor sample from the fifteen most common tumor types - including thyroid, breast, pancreas, colon, ovarian and prostate - which account for ninety percent of all incidences of solid tissue tumors, by measuring the expression levels of 2,000 individual genes. TOO® is supported by extensive analytical and clinical validation data from robust, multi-center clinical studies. The Company believes TOO® can reduce the need for repeated testing, examinations, imaging and biopsy procedures by providing clinicians with the primary tissue type with greater certainty than traditional diagnostic techniques. This in turn empowers physicians to select the correct type of treatment earlier in the course of the patient’s therapy. The Company is holding the patent for sale.
Discontinued Services
Biopharma Services
Until the Business Disposals, the Company'sCompany’s Biopharma Services included laboratory and testing services performed for biotechnology and pharmaceutical companies engaged in clinical trials. The Company'sCompany’s focus was on providing these clients
with oncology specific and non-oncology genetic testing services for phase I-IV trials along with critical support of ancillary services. These services included: biorepository, clinical trial logistics, clinical trial design, bioinformatics analysis, customized assay development. DNA and RNA extraction and purification, genotyping, gene expression and biomarker analyses. The Company
also sought to apply its expertise in laboratory developed tests (“LDTs”) to assist in developing and commercializing drug-specific companion diagnostics. The Company established business relationships with key instrument manufacturers to support their platforms in the market, and to drive acceptance among biopharmaceutical sponsors developing innovative immuno-oncology therapies.
In addition to the tests and services the Company provided to biotech and pharmaceutical companies, the Company developed Next Generation Sequencing (NGS) panels focused on pharmacogenomics and oncology that will inform researchers of trial subjects'subjects’ drug sensitivities.
The Company also utilized its laboratories to provide clinical trial services to biotech and pharmaceutical companies and clinical research organizations to improve the efficiency and economic viability of clinical trials. The Company'sCompany’s clinical trials services leveraged its knowledge of clinical oncology and molecular diagnostics and its laboratories’ fully integrated capabilities.
From a laboratory infrastructure standpoint, the Company possessed capabilities in histology, immunohistochemistry (IHC), flow cytometry, cytogenetics and fluorescent in-situ hybridization (FISH), as well as sophisticated molecular analysis techniques, including next generation sequencing. This allowed for comprehensive esoteric testing within one lab enterprise, with a CAP-accredited biorepository serving as a central hub for specimen tracking. Using this approach, the Company was able to support demanding clinical trial protocols requiring multiple assays and techniques aimed at capturing data on multiple biomarkers. The Company'sCompany’s suite of available testing platforms allowed for highly customized clinical trial design which was supported by a dedicated group of development scientists and technical personnel.
The Company also provided genetic testing for drug metabolism to aid biotech and pharmaceutical companies identify subjects'subjects’ likely responses to treatment, allowing these companies to conduct more efficient and safer clinical trials. The Company believes pharmacogenomics drug metabolism testing helps deliver the promise of personalized medicine by enabling researchers to tailor therapies in development to differences in patients'patients’ genomic profiles.
Clinical Services
Until the Business Disposals, the Company provided its oncology and immuno-oncology tests and services to oncologists and pathologists at hospitals, cancer centers, and physician offices. The Company'sCompany’s portfolio contains proprietary tests to target cancers that are difficult to prognose and predict treatment outcomes through currently available mainstream techniques. The Company utilized an expansive range of non-proprietary tests and technologies to provide a comprehensive profile for each patient it serves. Clinical testing was available through anatomic pathology, flow cytometry, karotype, FISH, liquid biopsy and molecular diagnostics (including next generation sequencing and gene expression panels).
Sales and Marketing
The Company'sCompany’s sales and marketing efforts consist of both direct and indirect efforts, with the majority of efforts focused on direct sales in the United States, Europe and Australia. The Company collaboratescollaborates with preclinical development and translational science teams at pharmaceutical and biotech companies on studies involving tumor models and therapeutic candidate compound testing.
The Company'sCompany’s U.S. and European business development and sales professionals have scientific backgrounds in hematology, pathology, and laboratory services, with many years of experience in biopharmaceutical and clinical oncology sales, esoteric laboratory sales from leading biopharmaceutical, pharmaceutical or specialty reference laboratory companies. The Company currently has a team of 3four business development and sales professionals in the United States and Europe.
The Company also promotes its services through marketing channels commonly used by the biopharma and pharmaceutical industries, such as internet, medical meetings and broad-based publication of its scientific and economic data. In addition, the Company provides easy-to-access information to its customers over the internet through dedicated websites. The Company'sCompany’s customers value easily accessible information in order to quickly review patient or study information.
Competition
The largest competitors in the global preclinical CRO market are companies like Pharmaceutical Product Development, LLC
(US), MD Biosciences (US)., IQVIA (US), PAREXEL International Corporation (US), Envigo (US), Charles River (US), ICON PLC (Dublin), PRA Health Sciences (US), Medpace (US), Laboratory Corporation of America Holdings (US), WuXi AppTec (China) and Eurofins Scientific (Luxembourg). The players operating in the global preclinical CRO market are focusing on product unveilings, along with intensifying their global presence by entering untouched markets.
Projects related to the molecular mechanisms driving cancer development have received increased government funding, both in the United States and internationally. The National Cancer Institutes'Institutes’ Cancer Moonshot is anticipated to increase both patient awareness and federal government funding for research and clinical trials. The Federal Government has committed $1.8 billion over a 7 year7-year period to fund the 21st21st Century Cures Act. As more information regarding cancer genomics and biomarkers becomes available to the public, the Company anticipates that more products aimed at identifying targeted treatment options will be developed and that these products may compete with its products.
Third-Party Suppliers
The Company currently relies on third-party suppliers for its specialized research and scientific instrumentation and related supplies of reagents, tumor cell lines, and other inventory for it to successfully perform its CRO services for its customers. In addition, the Company relies on contracted manufacturers and collaborative partners to produce materials necessary for its FHACT® and FDA-cleared Tissue of Origin® tests. The Company plans to continue to rely on these manufacturers and collaborative partners to manufacture these materials. The Company does not believe a short-term disruption from any one of these suppliers would have a material effect on its business, nor has the Company experienced any disruptions due to COVID-19.
Patents and Proprietary Technology
The Company has proprietary tests that enable oncologists and pathologists at hospitals, cancer centers, and physician offices to properly diagnose and inform cancer treatment. The Company relies on a combination of patents, patent applications, trademarks, trade secrets, know-how, as well as various contractual arrangements, in order to protect the proprietary aspects of its technology. The Company may also license its technology to others. The Company believes that no single patent, technology, trademark, intellectual property asset or license is material to its business as a whole.
Until the Business Disposals, the Company'sCompany’s patent portfolio consisted of 20 issued U.S. patents, 5 pending U.S. applications, and more than 40 foreign patents. Most of this intellectual property was transferred to those parties the Company entered into to complete the Business Disposals. The Company'sCompany’s key remaining patents currently include:
•Hematological cancers. The Company has two U.S. patents (U.S. Patent Nos. 8,580,713 and 8,557,747), directed to MatBA®, a microarray for detecting (and distinguishing) particular types of mature B cell neoplasms present in typical non-Hodgkin’s lymphoma, Hodgkin’s lymphoma and chronic lymphocytic leukemia. These patents cover the Company'sCompany’s trademarked MatBA® microarray and are directed to both the microarray itself as well as associated methodologies designed to detect the particular type of mature B cell neoplasm present in a patient. The MatBA® microarray patents issued from the first of the Company'sCompany’s family of applications in the microarray space. The term of these patents runs through 2030.
•The Company has four U.S. patents (U.S. Patent Nos. 8,977,506, 8,321,137, 7,747,547 and 8,473,217) covering its Tissue of Origin® Test. These patents are directed at systems and methods for detecting biological features in solid tumors. The term of these patents run through 2030.
•HPV-Associated Cancers. The Company has three U.S. patents (U.S. Patent Nos. 9,157,129, 8,865,882 and 8,883,414) that cover methods for detecting HPV-associated cancers used in its FHACT® test. The term of these patents run through 2031.
•FISH Probes. The Company has two patents covering its FISH probes. These patents cover probes and methodologies designed to detect and analyze particular chromosomal translocations (genetic lesions) associated with a wide range of cancers using a technique known as FISH and serve as the backbone for several of its other pending patent applications, which are more specifically geared towards other probes (and methodologies). The term of these patents run through 2022.
Until the Business Disposals, the Company held twenty-six U.S. registered trademarks, including a federal registration for the term “CGI” as well as three U.S. trademark applications and one foreign trademark registration for certain of its proprietary tests and services. The Company transferred the ownership of these trademarks to the Buyer, subject to a royalty-free license to
use such intellectual property for six months after following the closing, and subject to its right to request an additional six months, which request has been made. The Company also owns the trademark for the vivoPharmvivoPharm trade name, which is the primary revenue-generating business unit.
Operations and Production Facilities
As a preclinical oncology contract research organization (CRO), the Company's leased facilities are built to house immunocompromised animals and specialized models. They incorporate surgical suites, gowning rooms, and holding rooms. In order to ensure an environment of utmost sterility, while also minimizing the workload by negating dependency on cage-wash infrastructure, the Company relies on its landlords and licensors to manage the vivarium’s at its animal facilities. This allows for more investment of time and energy into scientific endeavors.
Third-Party Payor ReimbursementQuality Assurance
UntilWe are committed to maintaining a standard of excellence and to providing reliable and accurate laboratory services to our customers. To that goal, our independent Quality Assurance Unit (QAU) has implemented a comprehensive and integrated Quality Management System (QMS) designed to drive consistent high quality testing services while ensuring the Business Disposals,highest ethical standards across our enterprise.
Our QMS documents quality assurance policies as well as the Company was reimbursedquality control procedures that are necessary to ensure we offer a consistently high quality of testing services. Our quality management program is designed to satisfy all the requirements necessary for clinical serviceslocal, state, and federal regulations in order to maintain licensures, permits and regulatory approvals applicable to our business. In addition, our QMS satisfies the Food and Drug Administration (FDA) requirements for nonclinical studies conduct and content, computer systems validation, electronic records and signatures, and Good Laboratory Practice (GLP). For additional information on our laboratory licensure and permitting, please review our Risk Factors.
Quality indicators, which are metrics related to ensuring accurate and reliable test results, are routinely tracked at each of our facilities and are compared to previously determined benchmarks. These indicators are reviewed periodically by our scientific management team and include key performance indicators, non-conformance indicators (deviations, corrective and preventives actions), proficiency testing reports, and customer satisfaction surveys. We leverage third-party payors that provided coverageproficiency testing whenever practicable to provide objective analysis of our QMS and procedures, and we implement internal review protocols for assays for which third-party proficiency testing is not available.
Our facilities and QMS are audited internally on a periodic basis for compliance with applicable regulations, policies, analytical plans and internal standard operating procedures. Any needed revisions to the patient, such asQMS that are identified through these audits are made to ensure continued compliance with applicable standards, and we believe that we meet State and Federal regulations in the geographies where we operate.
Customer satisfaction is another key to successful implementation of our QMS. We routinely monitor customer input and complaints, and take necessary actions to assure their satisfaction. Our management team encourages employees to communicate any concerns they may have with respect to scientific misconduct, quality and safety.
In addition to maintaining a robust QMS, we have defined a plan that covers a wide range of disaster recovery and business continuity issues including data recovery. Both the business continuity and disaster recovery plans are reviewed on an insurance company, managed care organization or a governmental payor program or from physicians or other authorized parties (such as hospitals or independent laboratories) that ordered testing services or otherwise refer the services to the Company or directly from the patient.annual basis.
Governmental Regulations
The Company'sCompany’s Pennsylvania and Australia research laboratory facilities comply with Good Laboratory Practices (“GLP”) to the extent required by the FDA, Environmental Protection Agency, USDA, Organization for Economic Co-operation and Development (OECD), as well as other international regulatory agencies. Furthermore, the Company'sCompany’s early-stage discovery work, which is not subject to GLP standards, is typically carried out under a quality management system or internally developed quality systems. The Company'sCompany’s facilities are regularly inspected by U.S. and other regulatory compliance monitoring authorities, its clients'clients’ quality assurance departments, and its own internal quality assessment program. The Company is also accredited by AAALAC International, a private, nonprofit organization that promotes the humane treatment of animals in science through voluntary accreditation and assessment programs. The Company volunteers to participate in the AAALAC’s program to demonstrate its commitment to responsible animal care and use, in addition to its compliance with local, state and federal laws that regulate animal research.
FDA
The U.S. Food and Drug Administration (“FDA”) regulates the sale or distribution, in interstate commerce, of medical devices under the Federal Food, Drug, and Cosmetic Act (“FDCA”), including in vitro diagnostic test kits, reagents and instruments used to perform diagnostic testing. Certain of such devices must undergo premarket review by FDA prior to commercialization unless the device is of a type exempted from such review by statute or pursuant to FDA’s exercise of enforcement discretion. FDA, to date, has not exercised its authority to actively regulate the development and use of LDTs, such as the Company's,Company’s, as medical devices and therefore the Company does not believe that its LDTs currently require premarket clearance or approval.
Post-market Regulation
The Company's Tissue of Origin® test obtained clearance under section 510(k) of the FDCA. After a device, such as its Tissue of Origin® test, is cleared or approved for marketing, numerous and pervasive regulatory requirements continue to apply once the test is marketed, including FDA’s current good manufacturing practice requirements. Since the Company does not offer its FDA-approved product in the European Economic Area (“EEA”) the Company is not currently subject to post-market regulation in the EEA or any member state. The FDA has broad regulatory compliance and enforcement powers. If the FDA determines that a company has failed to comply with applicable regulatory requirements, it can take a variety of compliance or enforcement actions, which may result in any of the following sanctions:
•warning letters, untitled letters, fines, injunctions, consent decrees and civil penalties;
•recalls, withdrawals, or administrative detention or seizure of products;
•operating restrictions or partial suspension or total shutdown of production;
•refusing or delaying requests for 510(k) marketing clearance or PMA approvals of new products or modified products;
•reconsideration of 510(k) clearances or PMA approvals that have already been granted;
•refusal to grant export approvals for products; and/or
•criminal prosecution.
In addition, FDA could publicly issue a safety notice related to the Company's test or request updates to its product labeling, including the addition of warnings, precautions, or contraindications.
Health Insurance Portability and Accountability Act, as amended by the Health Information Technology for Economic and Clinical Health Act (“HITECH Act”)
Under the administrative simplification provisions of HIPAA, as amended by the HITECH Act, the United States Department of Health and Human Services has issued regulations which establish uniform standards governing the conduct of certain electronic health care transactions and protecting the privacy and security of Protected Health Information used or disclosed by health care providers and other covered entities. For further discussion of HIPAA and the impact on the Company's business, see the section entitled “Risk Factors-Risks Related to its Business-The Company is required to comply with laws governing the transmission, security and privacy of health information that require significant compliance costs, and any failure to comply with these laws could result in material criminal and civil penalties.”
European General Data Protection Regulation
The collection and use of personal health data in the European Union had previously been governed by the provisions of the Data Protection Directive, which has been replaced by the General Data Protection Regulation (“GRPR”) which became effective on May 25, 2018 While the Data Protection Directive did not apply to organizations based outside the EU, the GDPR has expanded its reach to include any business, regardless of its location, that provides goods or services to residents in the EU. This expansion would incorporate the Company's clinical trial activities in EU members states. The GDPR imposes strict requirements on controllers and processors of personal data, including special protections for “sensitive information” which includes health and genetic information of data subjects residing in the EU. GDPR grants individuals the opportunity to object to the processing of their personal information, allows them to request deletion of personal information in certain circumstances, and provides the individual with an express right to seek legal remedies in the event the individual believes his or her rights have been violated. Further, the GDPR imposes strict rules on the transfer of personal data out of the European
Union to the United States or other regions that have not been deemed to offer “adequate” privacy protections. Failure to comply with the requirements of the GDPR and the related national data protection laws of the European Union Member States, which may deviate slightly from the GDPR, may result in fines of up to 4% of global revenues, or € 20,000,000, whichever is greater. As a result of the implementation of the GDPR, the Company may be required to put in place additional mechanisms ensuring compliance with the new data protection rules.
The Company's research activities in the EU are currently limited to non-human preclinical studies, and as such, the Company does not collect, store, maintain, process, or transmit any Personal Data (as that term is defined under the GDPR) of trial subjects. However, since the Company currently has three employees located in the EU, its processing and transfer for employee Personal Data is subject to GDPR requirements. The Company has implemented a privacy and security program that is designed to adhere to the requirements of the GDPR in order to protect employee Personal Data, and in the event the Company progresses to research or clinical trials involving humans, to protect participant Personal Data. However, there is significant uncertainty related to the manner in which data protection authorities will seek to enforce compliance with GDPR. For example, it is not clear if the authorities will conduct random audits of companies doing business in the EU, or if the authorities will wait for complaints to be filed by individuals who claim their rights have been violated. Enforcement uncertainty and the costs associated with ensuring GDPR compliance be onerous and adversely affect the Company's business, financial condition, results of operations and prospects. As a result, the Company cannot predict the impact of the GDPR regulations on its current or future business, either in the US or the EU.
Federal, State and Foreign Fraud and Abuse Laws
The federal Anti-Kickback Statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce or in return for purchasing, leasing, ordering or arranging for the purchase, lease or order of any health care item or service reimbursable under a governmental payor program. The definition of “remuneration” has been broadly interpreted to include anything of value, including gifts, discounts, credit arrangements, payments of cash, waivers of co-payments, ownership interests and providing anything at less than its fair market value. Recognizing that the Anti-Kickback Statute is broad and may technically prohibit many innocuous or beneficial arrangements within the health care industry, the Department of Health and Human Services has issued a series of regulatory “safe harbors.” These safe harbor regulations set forth certain provisions, which, if met, will assure health care providers and other parties that they will not be prosecuted under the federal Anti- Kickback Statute. Although full compliance with these provisions ensures against prosecution under the federal Anti-Kickback Statute, the failure of a transaction or arrangement to fit within a specific safe harbor does not necessarily mean that the transaction or arrangement is illegal or that prosecution under the federal Anti-Kickback Statute will be pursued. For further discussion of the impact of federal and state health care fraud and abuse laws and regulations on the Company'sCompany’s business, see the section entitled “Risk ."
Factors-Risks Related to its Business-The Company is subject to federal and state health care fraud and abuse laws and regulations and could face substantial penalties if the Company is unable to fully comply with such laws.”
In addition to the administrative simplification regulations discussed above, HIPAA also created two new federal crimes: health care fraud and false statements relating to health care matters. The health care fraud statute prohibits knowingly and willfully executing a scheme to defraud any health care benefit program, including private payors. A violation of this statute is a felony and may result in fines, imprisonment or exclusion from governmental payor programs such as the Medicare and Medicaid programs. The false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for health care benefits, items or services. A violation of this statute is a felony and may result in fines, imprisonment or exclusion from governmental payor programs.
Finally, another development affecting the health care industry is the increased enforcement of the federal False Claims Actand, in particular, actions brought pursuant to the False Claims Act’s “whistleblower” or “qui tam” provisions. The False Claims Act imposes liability on any person or entity that, among other things, knowingly presents, or causes to be presented, a false or fraudulent claim for payment by a federal governmental payor program. The qui tam provisions of the False Claims Act allow a private individual to bring actions on behalf of the federal government alleging that the defendant has defrauded the federal government by submitting a false claim to the federal government and permit such individuals to share in any amounts paid by the entity to the government in fines or settlement. In addition, various states have enacted false claim laws analogous to the federal False Claims Act, although many of these state laws apply where a claim is submitted to any third-party payor and not merely a governmental payor program. When an entity is determined to have violated the False Claims Act, it may be required to pay up to three times the actual damages sustained by the government, plus civil penalties ranging from approximately $11 thousand to $22 thousand for each false claim violation that occurred after January 15, 2018. (Those whose false claims violations that occurred before January 15, 2018 could be liable for treble damages plus lower civil monetary penalties.)
Additionally, in Europe various countries have adopted anti-bribery laws providing for severe consequences, in the form of criminal penalties and/or significant fines, for individuals and/or companies committing a bribery offense. Violations of these anti-bribery laws, or allegations of such violations, could have a negative impact on the Company'sCompany’s business, results of operations and reputation. For instance, in the United Kingdom, under the new Bribery Act 2010, which went into effect in July 2011, a bribery occurs when a person offers, gives or promises to give a financial or other advantage to induce or reward another individual to improperly perform certain functions or activities, including any function of a public nature. Bribery of foreign public officials also falls within the scope of the Bribery Act 2010. Under the new regime, an individual found in violation of the Bribery Act of 2010 faces imprisonment of up to 10 years. In addition, the individual can be subject to an unlimited fine, as can commercial organizations for failure to prevent bribery.
Corporate Practice of Medicine
Approximately thirty (30) states have enacted laws prohibiting business corporations, such as the Company, from practicing medicine and employing or engaging physicians to practice medicine, generally referred to as the prohibition against the corporate practice of medicine. These laws, which vary among the states that have enacted them, are designed to prevent interference in the medical decision-making process by anyone who is not a licensed physician. Violation of these laws may result in civil or criminal fines, as well as sanctions imposed against the Company and/or the professional through licensure proceedings.
Other Regulatory Requirements
The Company'sCompany’s laboratory is subject to federal, state and local regulations relating to the handling and disposal of regulated medical waste, hazardous waste and biohazardous waste, including chemical, biological agents and compounds, blood and bone marrow samples and other human tissue. Typically, the Company uses outside vendors who are contractually obligated to comply with applicable laws and regulations to dispose of such waste. These vendors are licensed or otherwise qualified to handle and dispose of such waste.
OSHA has established extensive requirements relating to workplace safety for health care employers, including requirements to develop and implement programs to protect workers from exposure to blood-borne pathogens by preventing or minimizing any exposure through needle stick or similar penetrating injuries.
Segment and Geographical Information
The Company operates in one reportable business segment and derive revenue from multiple countries, with 80%61% and 67%80% of its continuing operations revenue coming from the United States in fiscal year 2020 and 2019, and 2018, respectively.
Employees
As of December 31, 2019,2020, the Company had a total of approximately 110 full-time employees, and on January 1, 2020 approximately 75 employees were transferred to IDXG pursuant to the terms of the TSA. The Company therefore retained approximately 3540 full time employees, with 34 employees in business development, 2731 employees in clinical services and 5 employees in general and administrative. None of its employees are represented by a labor union, and the Company considers its employee relations to be good.
Corporate and Available Information
The Company was incorporated in the State of Delaware on April 8, 1999. On July 16, 2014, the Company purchased substantially all of the assets of Gentris Corporation (“Gentris”), a laboratory specializing in pharmacogenomics profiling for therapeutic development, companion diagnostics and clinical trials. On October 9, 2015, the Company acquired substantially all the assets and assumed certain liabilities of Response Genetics, Inc.
On August 18, 2014 the Company acquired BioServe Biotechnologies (India) Pvt. Ltd. (“BioServe”). On April 26, 2018, the Company sold BioServe to Reprocell, Inc.
On August 15, 2017, the Company purchased all of the outstanding stock of vivoPharm, with its principal place of business in Victoria, Australia.
On July 5, 2019, the Company entered into an asset purchase agreement with siParadigm, LLC, pursuant to which the Company sold to siParadigm certain assets associated with the Company's clinical laboratory business and agreed to cease operating the Clinical Business. On July 15, 2019, the Company entered into commercial agreements with the Company's senior lenders to divest all of the assets relating to the BioPharma Business.
The Company's principal executive offices are located at 201 Route 17 North, 2nd Floor, Rutherford, New Jersey 07070. The Company's telephone number is (201) 528-9200 and the corporate website address is www.cancergenetics.com. The Company included the website address in this annual report on Form 10-K only as an inactive textual reference and does not intend it to be an active link to the Company website. The information on the website is not incorporated by reference in this annual report on Form 10-K.
This annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports, as well as other documents the Company files with the U.S. Securities and Exchange Commission (“SEC”), are available free of charge through the Investors section of the Company website as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. The public can obtain documents that the Company files with the SEC at www.sec.gov.
This report includes the following trademarks, service marks and trade names owned by the Company: MatBA®, FHACT®, Tissue of Origin®, TOO®. These trademarks, service marks and trade names are the property of Cancer Genetics, Inc. and its affiliates.
An investment in the Company's common stock involves a high degree of risk including the risk of a loss of your entire investment. You should carefully consider the risks and uncertainties described below and the other information contained in this report and the other Company reports filed with the Securities and Exchange Commission. For instance, if our pending merger with StemoniX occurs, there are risks associated with the StemoniX business described in our prospectus/proxy statement included in our Form S-4/A filed with the Securities and Exchange Commission on February 12, 2021. The risks set forth below are not the only ones facing the Company. Additional risks and uncertainties may exist that could also adversely affect the Company's business, operations and financial condition. If any of the following risks actually materialize, the Company's business, financial condition and/or operations could suffer. In such event, the value of the Company's common stock could decline, and you could lose all or a substantial portion of the money that you pay for the Company's common stock.
Risks Related to the StemoniX Merger and the Post-Merger Company
We may not realize the expected benefits of our merger with StemoniX
While we anticipate certain benefits from our pending merger with StemoniX, if consummated, we may not be able to realize the expected benefits. We may not be able to integrate the two businesses successfully, and we could assume unknown or contingent liabilities. The StemoniX intellectual property may not have the scientific value and commercial potential which we envision. Any failure of the acquisition to meet our expectations could have a material negative effect on our results of operations.
The total number of shares of CGI Common Stock that StemoniX securityholders will be entitled to receive pursuant to the Merger Agreement, in the aggregate, is not fully adjustable based on the market price of CGI common stock, so the merger consideration at the closing may have a greater value than at the time the Merger Agreement was signed.
The Merger Agreement has set the Exchange Ratio (as defined in the Merger Agreement) for the StemoniX Common Stock, which governs most but not all of the consideration to be paid by CGI in the merger, and the Exchange Ratio is only adjustable upward or downward based on (i) increases or decreases in the number of shares of StemoniX’s issued and outstanding capital stock and the number of shares of StemoniX capital stock issuable upon the exercise or conversion of other StemoniX securities, (ii) increases or decreases in the number of shares of CGI’s issued and outstanding capital stock and the number of shares of CGI capital stock issuable on a net exercise basis under in-the-money CGI warrants and in-the-money CGI options (in each case excluding securities issued in the CGI PIPE (as defined below) and (iii) if the net cash of either CGI or StemoniX changes in relation to each other. Any changes in the market price of CGI common stock before the closing of the merger will have limited effect on the total number of shares of CGI common stock that most historical StemoniX security holders will be entitled to receive (or will be entitled to receive upon the exercise of options to purchase CGI common stock issued in exchange for StemoniX options). Therefore, if before the closing of the merger the market price of CGI common stock increases from the market price on the date of the Merger Agreement, then such StemoniX shareholders could receive merger consideration with substantially more value.
The amount of CGI Common Stock to be issued to the Series C Investors upon conversion of the Series C Preferred Stock in the merger is based on the market price per share of CGI Common Stock at the closing of the Merger, subject to a valuation cap.
Pursuant to the Merger Agreement, each share of StemoniX Series C Preferred Stock (“Series C Preferred Stock”) issued and outstanding immediately prior to the effective time of the merger (the “Effective Time”) will be converted in the merger into the right to receive a number of shares of CGI common stock (the “Series C Conversion Shares”) equal to the price per share paid for the Series C Preferred Stock divided by a conversion price (the “Series C Conversion Price”) equal to 85% of the weighted average share price of CGI common stock over the five trading days prior to the closing of the merger, which conversion price is subject to a valuation cap (the “Series C Valuation Cap”) based on a $85,000,000 valuation of CGI, after giving effect to the issuance of all shares of CGI common stock at or prior to the closing of the merger (excluding the Series C Conversion Shares and out-of-the-money options and warrants to purchase shares of CGI Common Stock, but including in-the-money options and warrants to purchase shares of CGI common stock on a net exercise basis). Therefore, if before the closing of the merger the market price of CGI common stock declines, then the Series C investors could receive more shares of CGI common stock at closing for no additional consideration, resulting in additional dilution to the other equity holders of the post-merger company. Alternatively, if the market price of CGI common stock increases to a level representing a valuation at or above the Series C Valuation Cap, the Series C Conversion Price will only increase up to a price based on the Series C Valuation Cap, and the other stockholders of CGI will suffer dilution. As of February 1, 2021, the Series C Valuation Cap would be reached if CGI’s stock prices resulted in a 5 day value weighted average price of CGI’s common stock of $4.39 or
more. There is expected to be an aggregate of $2 million of Series C Preferred Stock outstanding immediately prior to the merger.
The post-merger company may need to raise additional capital by issuing securities or debt or through licensing arrangements, which may cause dilution to the post-merger company’s stockholders or restrict the post-merger company’s operations or proprietary rights. CGI and StemoniX have recurring losses from operations which in the past have raised substantial doubt regarding their respective abilities to continue as a going concern.
Although management of CGI and StemoniX believe that, assuming the merger and the transactions related thereto are consummated, the post-merger company’s cash reserves and cash flows from operations will be adequate to fund operations for at least the 12 months from the closing of the merger, such estimate may prove to be wrong, and we could use our available capital resources sooner than we currently expect. Accordingly, the post-merger company may be required to raise funds sooner than currently planned.
The post-merger company’s ability to continue as a going concern will depend upon (among other things) the availability and terms of future funding. Additional financing may not be available to the post-merger company when it needs it or may not be available on favorable terms. To the extent that the post-merger company raises additional capital by issuing equity securities, such an issuance may cause significant dilution to the post-merger company’s stockholders’ ownership and the terms of any new equity securities may have preferences over the post-merger company’s common stock. Any debt financing the post-merger company enters into may involve covenants that restrict its operations. These restrictive covenants may include limitations on additional borrowing and specific restrictions on the use of the post-merger company’s assets, as well as prohibitions on its ability to create liens, pay dividends, redeem its stock or make investments. In addition, if the post-merger company raises additional funds through licensing arrangements, it may be necessary to grant licenses on terms that are not favorable to the post-merger company.
Failure to complete the merger may result in CGI or StemoniX paying an expense reimbursement to the other party and could harm the common stock price of CGI and future business and operations of each company.
If the merger is not completed, CGI and StemoniX are subject to the following risks:
•if the Merger Agreement is terminated under certain circumstances and certain events occur, CGI or StemoniX will be required to pay the other party an amount equal to all reasonable and documented out-of-pocket fees and expenses incurred by such other party in connection with the preparation and negotiation of the Merger Agreement, due diligence efforts by the party or otherwise in connection with the merger; provided, however, that the amount payable may be up to and will in no event exceed $500,000;
•the price of CGI stock may decline; and
•costs related to the merger, such as legal, accounting and investment banking fees must be paid even if the merger is not completed.
In addition, if the Merger Agreement is terminated and the CGI or StemoniX board of directors determines to seek another business combination, there can be no assurance that CGI or StemoniX will be able to find a partner willing to provide equivalent or more attractive consideration than the consideration to be provided by each party in the merger.
If the conditions to the merger are not met, the merger may not occur.
There are a number of conditions to the merger, including but not limited to approval by Nasdaq for listing of the shares, and certain other conditions. We cannot assure you that all of the conditions will be satisfied or waived. If the conditions are not satisfied or waived, the merger may not occur or will be delayed, and CGI may lose some or all of the intended benefits of the merger.
CGI is the target, and may in the future be the target, of securities class action and derivative lawsuits, which could result in substantial costs and may delay or prevent the completion of the merger.
Securities class action lawsuits and derivative lawsuits are often brought against companies that have entered into merger agreements in an effort to enjoin the relevant merger or seek monetary relief. CGI is currently the defendant in eight lawsuits, and CGI may in the future be defendants in one or more lawsuits, relating to the Merger Agreement and the merger and, even if the pending or any future lawsuits are without merit, defending against these claims can result in substantial costs and divert
management time and resources. CGI cannot predict the outcome of these lawsuits, or others, nor can it predict the amount of time and expense that will be required to resolve such litigation. An unfavorable resolution of any such litigation surrounding the merger could delay or prevent its consummation. In addition, the costs of defending the litigation, even if resolved in CGI’s favor, could be substantial and such litigation could distract CGI from pursuing the consummation of the merger and other potentially beneficial business opportunities.
No fairness opinion was obtained in connection with the merger.
While CGI engaged H.C. Wainwright & Co., LLC (“Wainwright”) as its exclusive financial advisor with respect to considering strategic alternatives including finding a merger partner, neither Wainwright nor any other independent investment banker or other professional was requested to provide a fairness opinion in connection with the merger. The consideration to be received by the holders of StemoniX securities in the merger was reached through negotiation by CGI and Wainwright, on one hand, and StemoniX and Northland Securities (“Northland”), its investment banker, on the other, and was found to be fair to the stockholders of CGI by CGI’s board of directors. In determining whether to obtain a fairness opinion in connection with consideration of the merger, CGI’s board considered the cost of such an opinion as well as, among other factors, the search process leading to the Business Disposals (as defined elsewhere herein), the extensive search process conducted by CGI and Wainwright thereafter seeking a merger partner or other strategic alternative for CGI, the absence of any offers to purchase vivoPharm for other than a nominal sum, the extensive negotiations with StemoniX by CGI and Wainwright, the board’s assessment of the prospects for StemoniX based on its evaluation of its medical and scientific intellectual property and the valuation of StemoniX implicit in its prior financings, when compared to and in light of CGI’s current market value and its financial position.
The merger may be completed even though material adverse changes may result from the announcement of the merger, industry-wide changes or other causes.
In general, either CGI or StemoniX can refuse to complete the merger if there is a material adverse change affecting the other party prior to closing. However, certain types of changes do not permit either party to refuse to complete the merger, even if such change could be said to have a material adverse effect on CGI or StemoniX, including:
•any adverse effect that results from general economic, business, financial or market conditions (unless such adverse effect affects CGI or StemoniX in a disproportionate manner as compared to their respective industry peers);
•any adverse effect that results from conditions in any of the industries or industry sectors in which CGI or StemoniX operates (unless such adverse effect affects CGI or StemoniX in a disproportionate manner as compared to their respective industry peers);
•any adverse effect resulting from any epidemic, pandemic or disease outbreak (including COVID-19), act of terrorism, war, national or international calamity or any other similar event (unless such adverse effect affects CGI or StemoniX in a disproportionate manner as compared to their respective industry peers);
•the taking of any action required to be taken by the Merger Agreement; or
•with respect to CGI, any change in the stock price or trading volume of CGI Common Stock.
If adverse changes occur and CGI and StemoniX still complete the merger, the post-merger company stock price may suffer. This in turn may reduce the value of the merger to the stockholders of CGI.
The market price of the post-merger company’s common stock following the merger may decline as a result of the merger.
The market price of the post-merger company’s common stock may decline as a result of the merger for a number of reasons including if:
•investors react negatively to the prospects of the post-merger company’s business and prospects from the merger;
•the effect of the merger on the post-merger company’s business and prospects is not consistent with the expectations of financial or industry analysts; or
•the post-merger company does not achieve the perceived benefits of the merger as rapidly or to the extent anticipated by financial or industry analysts.
CGI stockholders may not realize a benefit from the merger commensurate with the ownership dilution they will experience in connection with the merger.
If the post-merger company is unable to realize the full strategic and financial benefits currently anticipated from the merger, CGI securityholders will have experienced substantial dilution of their ownership interests in CGI without receiving any commensurate benefit, or only receiving part of the commensurate benefit to the extent the post-merger company is able to realize only part of the strategic and financial benefits currently anticipated from the merger.
The lack of a public market for StemoniX shares makes it difficult to determine the fair market value of the StemoniX shares, and StemoniX shareholders may receive consideration in the merger that is less than the fair market value of the StemoniX shares and/or CGI may pay more than the fair market value of the StemoniX shares.
StemoniX is privately held and its capital stock is not traded in any public market. The lack of a public market makes it extremely difficult to determine StemoniX’s fair market value. Because the percentage of CGI equity to be issued to StemoniX stockholders was determined based on negotiations between the parties, it is possible that the value of the CGI Common Stock to be received by StemoniX shareholders will be less than the fair market value of StemoniX, or CGI may pay more than the aggregate fair market value for StemoniX.
The pendency of the merger could have an adverse effect on the trading price of CGI Common Stock and CGI’s business, financial condition, results of operations or business prospects.
While there have been no significant adverse effects to date, the pendency of the merger could disrupt CGI’s businesses in the following ways, including:
•the attention of CGI’s management may be directed toward the closing of the merger and related matters and may be diverted from the day-to-day business operations; and
•third parties may seek to terminate or renegotiate their relationships with CGI as a result of the merger, whether pursuant to the terms of their existing agreements with CGI or otherwise.
Should they occur, any of these matters could adversely affect the trading price of CGI Common Stock or harm CGI’s financial condition, results of operations or business prospects.
Risks Relating to the Company'sCompany’s Financial Condition and Capital Requirements
The Company has a history of net losses; the Company expects to incur net losses in the future, and the Company may never achieve sustained profitability.
The Company has historically incurred substantial net losses. The Company incurred losses of $8.0 million and $6.7 million and $20.4 million for the fiscal years ended December 31, 20192020 and 2018,2019, respectively. From the Company'sCompany’s inception in April 1999 through December 31, 2019,2020, the Company had an accumulated deficit of $164.4$172 million. 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, and the potential for ongoing losses associated with operating the Discovery Services business.continue. These losses have had, and will continue to have, an adverse effect on working capital, total assets and stockholders’ equity. Because of the numerous risks and uncertainties associated with the Company'sCompany’s revenue growth and costs associated with being a public company, the Company is unable to predict when the Company will become profitable, and the Company may never become profitable. Even if the Company does achieve profitability, the Company may not be able to sustain or increase profitability on a quarterly or annual basis. The Company'sCompany’s inability to achieve and then maintain profitability would negatively affect business, financial condition, results of operations and cash flows.
The Company'sPrior to the closingof the CGI PIPE and CGI RD Financing, the Company’s recurring losses from operations have raised substantial doubt regarding the Company'sCompany’s ability to continue as a going concern.
At December 31, 2019, the Company's history of losses required management to assessThe Company believes that its ability to continue operating as a going concern, according to ASC 205-40, Going Concern. Even after the Business Disposals, the Company does not project that cash at December 31, 20192020, together with net proceeds of (i) $8.9 million from the issuance and sale of CGI securities in the CGI PIPE (ii) $15.8 million from the issuance and sale of CGI securities in the CGI RD Financing (as defined below), and (iii) $4.0 million from three warrant exercises between February 10, 2021 and March 23, 2021, will be sufficient to fund normal operations for the twelve24 months from the issuancedate of these financial statements inthis filing.
Nevertheless, the Annual Report on Form 10-K. The Company's ability to continue as a going concern is dependent on reduced losses and improved future cash flows. Alternatively, the Company may be required to raise additional equity or debt capital, or consummate other strategic transactions. These factors raise substantial doubt about the Company's ability to continue as a going concern. The Company can provide no assurance that, these actionsgiven its history of losses, it will be successful or that additional sources of financing will be available on favorable terms, if at all.
The consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.concern, including after the merger.
The Company's ability to satisfy claims of all its creditors in full is uncertain.
While in connection with the closing of the BioPharma Disposal, the SVB ABL and the PFG Term Note were terminated, and all related liens were released, the Company remains liable to various unsecured creditors, including in the amount of $100 thousand due to NovellusDx, Ltd. (“NDX”) as of the date of this Form 10-K, in connection with its October 2019 NDX Settlement Agreement, and the principal amount of $1.3 million, plus interest due to Atlas Sciences, LLC pursuant to its one-year October 2019 unsecured note. At December 31, 2019, other than those of discontinuing operations, the Company had an aggregate of $5.7 million of current liabilities and $6.3 million in total liabilities. This is compared to current assets other than those of discontinuing operations of $7.1 million, as of December 31, 2019. However, at December 31, 2019, the Company has an additional $1.2 million of liabilities associated with discontinuing operations that will be funded primarily from the Company's continuing operations. No assurances can be given that the Company will be able to pay such unsecured creditors in full or that claims will not be asserted in addition to the amounts which the Company believes it is liable for at this time.
The Company’s additional sources of funds are uncertain.
The Company has three sources of potential cash receipts following the Business Disposals, with only the third, the proceedsearns revenue and generates cashflow from the Discovery Business, being material. First, as part of the sale of the Clinical Business to siParadigm, the Company is receiving earn-out payments based on the revenues of siParadigm from the former customers of the Company’s Clinical Services business. Such earn-out payments are based on revenues generated in the 12 months following the closing of the sale of the Clinical Services business, and are to be paid over 24 months following such sale. While the Company received net payments of approximately $156 thousand from siParadigm in the July through December 2019 period, the monthly payments from siParadigm have decreased since the end of the third quarter of 2019, and no assurances can be given with respect to the amount and timing of any further payments. Second, the Company is attempting to collect on certain accounts receivable it owns that were not sold to siParadigm or IDXG. The net amount of such accounts receivable expected to be collected as of December 31, 2019 was approximately $71 thousand.
Third, the Company continues to own its Discovery Business through its vivoPharmvivoPharm subsidiary. For the twelve monthtwelve-month period ended December 31, 2020, the Company had a net loss from continuing operations of $8.0 million, cash used in continuing operations of $4.9 million and revenues from the Discovery Services business unit of $5.8 million in the period. For the year period ended December 31, 2019, the Company had a net loss from continuing operations of $6.9 million, had cash used in continuing operations of $3.2 million and $7.3 million in revenues from the Discovery Business.Services business unit of $7.3 million in the period. No assurances can be given as to whether the Company will ever be profitable,profitable.
The Company’s business operations are more limited than prior to the sale of its Clinical Services business and there are substantial doubts about the Company's ability to continuesale of its BioPharma Services business, and thus the costs of maintaining itself as a publicly traded corporation are proportionally higher as a percentage of total revenue and will be more burdensome to the Company going concern.forward.
As a public company, the Company has incurred and will continue to incur significant legal, accounting and other expenses. The Company is subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, the other rules and regulations of the Securities and Exchange Commission, or SEC, and the rules and regulations of The Nasdaq Stock Market, or Nasdaq. Compliance with the various reporting and other requirements applicable to public companies requires considerable time and attention of management. For example, the Sarbanes-Oxley Act and the rules of the SEC and national securities exchanges have imposed various requirements on public companies, including requiring establishment and maintenance of effective disclosure and financial controls. Management and other personnel are devoting and will continue to need to devote a substantial amount of time and money to these compliance obligations. The board may view these costs to be disproportionately expensive when viewed in light of the Company’s reduced revenues and overall operations following the Business Disposals.
As a result of the above, the board of directors elected to pursue the merger transaction with StemoniX and may elect to pursue other strategic transactions, to attempt to expand the business and create additional value for shareholders, or in light of the time, costs and uncertainties inherent in seeking such a strategic transaction, and the costs in remaining as a public company, the Company’s board may decide to pursue a dissolution and liquidation of the Company. If the Company’s board of directors were to approve and recommend, and the Company’s stockholders were to approve, a dissolution and liquidation of the Company, the Company would be required under Delaware corporate law to pay the Company’s outstanding obligations, as well as to make reasonable provision for contingent and unknown obligations, prior to making any distributions in liquidation to the Company’s stockholders. The Company’s commitments and contingent liabilities may include severance obligations related to the recent asset sales. As a result of this requirement, a portion of the Company’s assets may need to be reserved pending the resolution of such obligations. If a dissolution and liquidation were pursued, the board of directors, in consultation with its advisors, would need to evaluate these matters and make a determination about a reasonable amount to reserve. Accordingly, holders of the Company’s common stock could lose all or a significant portion of their investment in the event of a liquidation, dissolution or winding up of the company.
The Company identified a material weakness in its internal control over financial reporting. If the Company is not able to remediate the material weakness and otherwise maintain an effective system of internal control over financial reporting, the reliability of its financial reporting, investor confidence in the Company and the value of its common stock could be adversely affected.
As a public company, the Company is required to maintain internal control over financial reporting and to report any material weaknesses in such internal controls. Section 404 of the Sarbanes-Oxley Act ("Section 404"), requires that the Company evaluate and determine the effectiveness of internal controls over financial reporting and provide a management report on internal control over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected and corrected on a timely basis.
During the fourth quarter of 2019,audit for the 2020 fiscal year, the Company identified a material weakness in internal control over financial reporting related to controls overthe Company's accounting for foreign currency exchange rate. As a result, a non-cash adjustment had to be recorded to correct the error identified during the 2019 audit procedures. In addition,potential impairment of intangible assets. This accounting requires the Company identified a material weaknessto record an impairment charge if the carrying amount of the asset group is not recoverable and is in internal control over financial reporting related to controls over accounting forexcess of the fair value of an investment held by the Company. Asasset group. The Company's calculation of undiscounted future cashflows resulted in a result, a non-cash adjustment hadconclusion that no impairment was necessary, however, the Company could not supply supporting evidence that its calculation was accurate.
Management is committed to be recorded to correctremediating the error identified during the 2019 audit procedures.material weakness. The Company has begunbegan the process of implementing changes to its internal control over financial reportingintangible assets to remediate the control deficiencies that gave rise to the material weakness, including
further improvements in its processes and analyses that support the accounting for foreign currency exchanges.recording of possible impairment of intangible assets. The Company expects this deficiency to be corrected by the end of the second quarter of 2020.May 15, 2021.
During the fourth quarter of 2017, the Company identified a continued material weakness in internal control over financial reporting related to controls over accounting for uncollectible Clinical Services revenue. This material weakness in the Company's revenue and cash receipts process continued in 2018 as remediation efforts were not adequate. As a result, additional amounts had to be recorded as bad debt expense for older balances. Based on a change in financial leadership in late November 2018, the Company has demonstrated a commitment to remediate the material weakness in a timely fashion. The Company had noted the need for additional corporate accounting and financial personnel, supplemented by external resources as appropriate, with the requisite skill and technical expertise. This deficiency was ultimately corrected by the disposal of the Clinical Business in July 2019.
If the Company's steps are insufficient to successfully remediate the material weaknesses and otherwise establish and maintain an effective system of internal control over financial reporting, the reliability of its financial reporting, investor confidence in the Company and the value of its common stock could be materially and adversely affected. Effective internal control over financial reporting is necessary for the Company to provide reliable and timely financial reports and, together with adequate disclosure controls and procedures, are designed to reasonably detect and prevent fraud. Any failure to implement required new or improved controls, or difficulties encountered in their implementation could cause the Company to fail to meet its reporting obligations. For as long as the Company is a “smaller reporting company” under the U.S. securities laws, the Company's independent registered public accounting firm will not be required to attest to the effectiveness of its internal control over financial reporting pursuant to Section 404. An independent assessment of the effectiveness of internal control over financial reporting could detect problems that management’s assessment might not. Undetected material weaknesses in its internal control over financial reporting could lead to financial statement restatements and require the Company to incur the expense of remediation.
Moreover, the Company does not expect that disclosure controls or internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Failure of its control systems to prevent error or fraud could materially adversely impact the Company.
The Company’s business operations are more limited than prior to the sale of its Clinical Services business and the sale of its BioPharma Services business, and thus the costs of maintaining itself as a publicly traded corporation are proportionally higher as a percentage of total revenue and will be more burdensome to the Company going forward.
As a public company, the Company has incurred and will continue to incur significant legal, accounting and other expenses. The Company is subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, the other rules and regulations of the Securities and Exchange Commission, or SEC, and the rules and regulations of The Nasdaq Stock Market, or Nasdaq. Compliance with the various reporting and other requirements applicable to public companies requires considerable time and attention of management. For example, the Sarbanes-Oxley Act and the rules of the SEC and national securities exchanges have imposed various requirements on public companies, including requiring establishment and maintenance of effective disclosure and financial controls. Management and other personnel are devoting and will continue to need to devote a substantial amount of time and money to these compliance obligations. The board may view these costs to be disproportionately expensive when viewed in light of the Company's reduced revenues and overall operations following the Business Disposals.
As a result, the board of directors may elect to pursue a strategic transaction to attempt to expand the business and create additional value for shareholders, or in light of the time, costs and uncertainties inherent in seeking such a strategic transaction, and the costs in remaining as a public company, the Company's board may decide to pursue a dissolution and liquidation of the Company. If the Company's board of directors were to approve and recommend, and the Company's stockholders were to approve, a dissolution and liquidation of the Company, the Company would be required under Delaware corporate law to pay the Company's outstanding obligations, as well as to make reasonable provision for contingent and unknown obligations, prior to making any distributions in liquidation to the Company's stockholders. The Company's commitments and contingent liabilities may include severance obligations related to the recent asset sales. As a result of this requirement, a portion of the Company's assets may need to be reserved pending the resolution of such obligations. If a dissolution and liquidation were pursued, the board of directors, in consultation with its advisors, would need to evaluate these matters and make a determination about a reasonable amount to reserve. Accordingly, holders of the Company's common stock could lose all or a significant portion of their investment in the event of a liquidation, dissolution or winding up of the company.
Management may have conflicts of interest.
Current management of the Company, principally its Chief Executive Officer and Chief Financial Officer, are responsible for the day-to-day operations of the Company, including planning for the future direction of the Company after the Business Disposals. Such officers may enter into consulting agreements with Buyer (and, in the case of the Chief Executive Officer, siParadigm) and have been assisting in the transition of the Clinical Business and BioPharma Business to siParadigm and IDXG, as applicable. It is possible that the dual roles will create conflicts of interest for such officers with respect to allocation of their time and otherwise. No assurance can be given that the officers of the Company will have sufficient time and resources to properly direct the future operations of the Company, or that other conflicts of interest in their dual roles will not arise.
Risks Relating to the Company'sCompany’s Business and Strategy
If the Company is unable to increase sales, the Company revenues will be insufficient to achieve profitability.
The Company currently derives substantially all revenues from testing services, laboratory services and CRO at the premarket stage. Discovery Services are services that include proprietary preclinical test systems supporting clinical diagnostic and prognostic offerings at early stages, supporting the pharmaceutical industry, biotechnology companies and academic research centers. In particular, the Company'sCompany’s preclinical development of biomarker detection methods, response to immuno-oncology directed novel treatments and early prediction of clinical outcome is supported by the Company'sCompany’s extended portfolio of orthotopic, xenografts and syngeneic tumor test systems. It is unclear whether the Company will be able to maintain and grow the number of pharmaceutical and biotech companies and clinical research organizations who will avail themselves of the Company'sCompany’s services.
If the Company is unable to increase sales of tests and services, the Company will not produce sufficient revenues to become profitable.
The Company'sCompany’s business is subject to risks arising from epidemic diseases, such as the recent global outbreak of the COVID-19 coronavirus.COVID-19.
The recent outbreak of the novel coronavirus, COVID-19, which has been declared by the World Health Organization to be a pandemic, has spread across the globe and is impacting worldwide economic activity. A pandemic, including COVID-19 or other public health epidemic, poses the risk that the Company or its employees, contractors, suppliers, courier delivery services and other partners may be prevented from conducting business activities for an indefinite period of time, including due to spread of the disease within these groups or due to shutdowns that may be requested or mandated by governmental authorities. While it is not possible at this time to estimate the impact that COVID-19 couldhas had and may have on the Company'sCompany’s business, the COVID-19 pandemic and mitigation measures have had and may continue to have an adverse impact on global economic conditions which could have an adverse effect on the Company'sCompany’s business and financial condition, including impairing the ability to raise capital when needed.condition.
The continued spread of COVID-19 and the measures taken by the governments of countries affected could disrupt the supply chain of material needed for the Company'sCompany’s Discovery Services and could delay future projects from commencing due to COVID-19 related impacts on the demand for Company services and therefore have a material adverse effect on business, financial condition and results of operations.
In addition, the Company'sCompany’s corporate and accounting functions are located in New Jersey and are currently subject to a shelter-in-place mandate. The Company's U.S. based preclinical laboratory is located in Pennsylvania and iswere previously subject to a stay-at-home order, and manyare currently subject to social distancing orders and guidelines. The Company’s preclinical laboratories located in the United States were subject to a stay-at-home order until June 2020, and are now subject to social distancing
orders, and its Australia laboratories remain subject to stay-at-home orders. Many of the Company’s customers worldwide are similarly impacted. As a healthcare provider, the Company ishas been allowed to remain open in compliance with the shelter-in-place and stay-at-home mandates and continue to provide critical services in the development of new therapies and the fight against cancer.cancer and other diseases. The Company is still providing Discovery Services, and has yetbegan to experience a slowdown in project work as a result of the COVID-19 pandemic; however,pandemic during the second and third quarters of 2020 and expects the future of many projects may be delayed. The global outbreak of COVID-19 continues to rapidly evolve, and the extent to which COVID-19 may impact business, results of operations and financial position will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the ultimate geographic spread of the disease, the duration of the outbreak, travel restrictions and social distancing in the United States and other countries, business closures or business disruptions, and the effectiveness of actions taken in the United States and other countries to contain and treat the disease.
Also, it may hamper the Company’s efforts to provide its investors with timely information and comply with its filing obligations with the Securities and Exchange Commission.
If pharmaceutical and biotech companies and clinical research organizations decide not to use the Company'sCompany’s preclinical CRO services in connection with their clinical trials, the Company may be unable to generate sufficient revenue to sustain the Company'sCompany’s business.
To generate demand for the its Discovery Services, the Company needs to educate pharmaceutical and biotech companies and clinical research organizations on the utility of the Company'sCompany’s tests and services to improve the outcomes of clinical trials for new oncology drugs and more rapidly advance targeted therapies through the clinical development process through published papers, presentations at scientific conferences and one-on-one education sessions by members of the Company'sCompany’s sales force. The Company may need to hire additional commercial, scientific, technical and other personnel to support this process. If the Company cannot convince pharmaceutical and biotech companies or clinical research organizations to order its diagnostic tests or other future tests the Company develops, the Company will likely be unable to create demand for tests in sufficient volume for it to achieve sustained profitability.
The potential loss or delay of the Company'sCompany’s large contracts or of multiple contracts could adversely affect results.
Most of the Company'sCompany’s Discovery Services customers can terminate the contracts upon 30 to 90 days’ notice. These customers may delay, terminate or reduce the scope of the contracts for a variety of reasons beyond the Company'sCompany’s control, including but not limited to:
•decisions to forego or terminate a particular clinical trial;
•lack of available financing, budgetary limits or changing priorities;
•failure of products being tested to satisfy safety requirements or efficacy criteria;
•unexpected or undesired clinical results for products; or
•shift of business to a competitor or internal resources.
As a result, contract terminations, delays and alterations are a possible outcome in the Company'sCompany’s Discovery Services business. In the event of termination, the contracts often provide for fees for winding down the project, but these fees may not be sufficient for the Company to maintain margins, and termination may result in lower resource utilization rates. In addition, the Company may not realize the full benefits of the backlog of contractually committed services if customers cancel, delay or reduce their commitments under the Company'sCompany’s contracts with them, which may occur if, among other things, a customer decides to shift its
business to a competitor or revoke the Company'sCompany’s status as a preferred provider. Thus, the loss or delay of a large contract or the loss or delay of multiple contracts could adversely affect Company revenues and profitability. The Company believes the risk of loss or delay of multiple contracts potentially has greater effect where the Company is party to broader partnering arrangements with global biopharmaceutical companies.
The Company'sCompany’s quarterly operating results may be subject to significant fluctuations and may be difficult to forecast.
The timing, size and duration of the Company'sCompany’s contracts with pharmaceutical and biotech companies and clinical research organizations depend on the size, pace and duration of such customer’s clinical trial, over which the Company has no control and sometimes limited visibility. In addition, expense levels are based, in part, on expectation of future revenue levels. A
shortfall in expected revenue could, therefore, result in a disproportionate decrease in the Company'sCompany’s net income. As a result, quarterly operating results may be subject to significant fluctuations and may be difficult to forecast.
If the market for the Company'sCompany’s services does not experience significant growth or if services do not achieve broad acceptance, operations will suffer.
The Company cannot accurately predict the future growth rate or the size of the market for the Company'sCompany’s services. The expansion of this market depends on a number of factors, such as:
•the cost, performance and reliability of the Company'sCompany’s services, and the services offered by competitors;
customers'•customers’ perceptions regarding the benefits of the Company'sCompany’s services;
customers'•customers’ satisfaction with the Company'sCompany’s services; and
•marketing efforts and publicity regarding the Company'sCompany’s services.
The Company'sCompany’s financial results may be adversely affected if it underprices contracts, overruns cost estimates or fails to receive approval for or experience delays in documenting change orders.
Most of the Discovery Services contracts are either fee for service contracts or fixed-fee contracts. The Company'sCompany’s past financial results have been, and future financial results may be, adversely impacted if the Company initially underprices contracts or otherwise overrun cost estimates and is unable to successfully negotiate a change order. Change orders can occur when the scope of work the Company performs needs to be modified from that originally contemplated by the contract with the customer and are typically treated as new projects. Modifications can occur, for example, when there is a change in a key clinical trial assumption or parameter or a significant change in timing. Where the Company is not successful in converting out-of-scope work into change orders under current contracts, the Company bears the cost of the additional work. Such underpricing, significant cost overruns or delay in documentation of change orders could have a material adverse effect on business, results of operations, financial condition or cash flows.
If the Company fails to perform the services in accordance with contractual requirements, regulatory standards and ethical considerations, the Company could be subject to significant costs or liability and the Company'sCompany’s reputation could be harmed.
In connection with the Discovery Services business, the Company contracts with biopharmaceutical companies to provide specialized services to assist them in planning and conducting unique, specialized studies to guide drug discovery and development programs with a concentration in oncology and immuno-oncology. The Company'sCompany’s services include monitoring clinicalmanaging pre-clinical trials, data and laboratory analysis, electronic data capture and other related services. Such services are complex and subject to contractual requirements, regulatory standards and ethical considerations. If the Company fails to perform the services in accordance with these requirements, regulatory agencies may take action against the Company for failure to comply with applicable regulations governing clinical trials. Customers may also bring claims against the Company for breach of contractual obligations. Any such action could have a material adverse effect on results of operations, financial condition and reputation.
Such consequences could arise if, among other things, the following occur:
Improper performance of the Company'sCompany’s services. The performance of clinical development services is complex and time-consuming. For example, the Company may make mistakes in conducting a clinical trial that could negatively impact or obviate the usefulness of the clinical trial or cause the results of the clinical trial to be reported improperly. If the clinical trial results are compromised, the Company could be subject to significant costs or liability, which could have an adverse impact on the ability to perform services. As examples:
•non-compliance generally could result in the termination of ongoing clinical trials or sales and marketing projects or the disqualification of data for submission to regulatory authorities;
•compromise of data from a particular clinical trial, such as failure to verify that informed consent was obtained from patients, could require the Company to repeat the clinical trial under the terms of the contract at no further cost to the customer, but at a substantial cost to the Company; and
•breach of a contractual term could result in liability for damages or termination of the contract.
While the Company endeavors to contractually limit exposure to such risks, improper performance of the Company'sCompany’s services could have an adverse effect on the Company'sCompany’s financial condition, damage reputation and result in the cancellation of current contracts by or failure to obtain future contracts from the affected customer or other customers.
InvestigationAny investigation of customers.our customers could damage our business.
From time to time, one or more of the Company'sCompany’s customers are audited or investigated by regulatory authorities or enforcement agencies with respect to regulatory compliance of their clinical trials, programs or the marketing and sale of their drugs. There is a risk that either the Company'sCompany’s customers or regulatory authorities could claim that the Company performed services improperly or that the Company is responsible for clinical trial or program compliance. If the Company'sCompany’s customers or regulatory authorities make such claims against the Company and prove them, the Company could be subject to damages, fines or penalties. In addition, negative publicity regarding regulatory compliance of customers’ clinical trials, programs or drugs could have an adverse effect on the Company'sCompany’s business and reputation.
Business or economic disruptions or global health concerns could seriously harm the Company'sCompany’s development efforts and increase costs and expenses.
Broad-based business or economic disruptions could adversely affect the Company'sCompany’s business and ongoing or planned research and development activities of customers. For example, in December 2019 an outbreak of a novel strain of coronavirus originated in Wuhan, China and has since spread to a number of other countries, including the United States. To date, this outbreak has already resulted in extended shutdowns of certain businesses in the Wuhan region and has had ripple effects to businesses around the world. Global health concerns, such as coronavirus, could also result in social, economic, and labor instability in the countries in which the Company or Company customers operate. The Company cannot presently predict the scope and severity of any potential business shutdowns or disruptions, but if the Company or any of its customers, suppliers, regulators and other third parties with whom the Company conducts business, were to experience shutdowns or other business disruptions, the ability to conduct business in the manner and on the timelines presently planned could be materially and negatively impacted. It is also possible that global health concerns such as this one could disproportionately impact the healthcare-related facilities in which Company customers conduct studies, which could have a material adverse effect on the Company'sCompany’s business and results of operation and financial condition.
If the Company is unable to manage growth in business, prospects may be limited and the Company'sCompany’s future results of operations may be adversely affected.
The Company intends to continue with sales and marketing programs and other activities as needed to meet future demand. Any significant expansion may strain managerial, financial and other resources. If the Company is unable to manage such growth, business, operating results and financial condition could be adversely affected. The Company will need to improve continually the operations, financial and other internal systems to manage growth effectively, and any failure to do so may lead to inefficiencies and redundancies, and result in reduced growth prospects and diminished operational results.
The Company may acquire other businesses or make investments in other companies or technologies that could harm operating results, dilute its stockholders’ ownership, increase debt or cause the Company to incur significant expense.
As part of the Company'sCompany’s business strategy, the Company may pursue other mergers or acquisitions of businesses and assets. For example, the Company has an acquisition of StemoniX pending, and it acquired vivoPharmvivoPharm in 2017, Response Genetics, Inc. in 2015 and Gentris Corporation in 2014, and entered into a joint venture in May 2013 with Mayo Foundation for Education and Research. The Company subsequently shut down Response Genetics operations in California and moved them to New Jersey and North Carolina and in February 2020 completed the commitments thereby ending the need for the Company'sCompany’s joint venture with Mayo. The Company also purchased a business in India in August 2014 which was sold in April 2018. The Company also sold the Clinical Business and BioPharma Business in two transactions in July 2019 (the “Business Disposals”). The Company has developed experience with acquiring other companies and forming strategic alliances and joint ventures. The Company may not be able to find suitable partners or merger or acquisition candidates, and may not be able to complete such transactions on favorable terms, if at all. If the Company makes any acquisitions,
the Company may not be able to integrate these acquisitions successfully into existing business, and could assume unknown or contingent liabilities. Any future acquisitions also could result in significant write-offs or the incurrence of debt and contingent liabilities, any of which could have a material adverse effect on the Company'sCompany’s financial condition, results of operations and cash flows. Integration of an acquired company also may disrupt ongoing operations and require management resources that would otherwise focus on developing existing business. The Company may experience losses related to investments in other companies, which could have a material negative effect on the results of operations. The Company may not
identify or complete these transactions in a timely manner, on a cost-effective basis, or at all, and may not realize the anticipated benefits of any acquisition, technology license, strategic alliance or joint venture.
To finance any mergers or acquisitions, the Company may choose to issue shares of common stock as consideration, which would dilute the ownership of its stockholders. If the price of the Company'sCompany’s common stock is low or volatile, the Company may not be able to acquire other companies using stock as consideration. Alternatively, it may be necessary for the Company to raise additional funds for acquisitions through public or private financings. Additional funds may not be available on terms that are favorable to the Company, or at all.
There is a scarcity of experienced professionals in the Company'sCompany’s industry. If the Company is not able to retain and recruit personnel with the requisite technical skills, the Company may be unable to successfully execute the business strategy.
The specialized nature of the Company'sCompany’s industry results in an inherent scarcity of experienced personnel in the field. The Company'sCompany’s future success depends upon the ability to attract and retain highly skilled personnel (including medical, scientific, technical, commercial, business, regulatory and administrative personnel) necessary to support anticipated growth, develop business and perform certain contractual obligations. Given the scarcity of professionals with the scientific knowledge that the Company requires and the competition for qualified personnel among life science businesses, the Company may not succeed in attracting or retaining the personnel required to continue and grow operations. The loss of a key employee, the failure of a key employee to perform in his or her current position or the Company'sCompany’s inability to attract and retain skilled employees could result in the inability to continue to grow the Company'sCompany’s business or to implement business strategy.
The loss or transition of any member of the Company'sCompany’s senior management team or the inability to attract and retain highly skilled scientists, clinicians, and salespeople could adversely affect Company business.
The Company'sCompany’s success depends on the skills, experience, and performance of key members of the senior management team. The individual and collective efforts of these employees will be important as the Company continues to develop tests and services, and as the Company expands commercial activities. The loss or incapacity of existing members of the senior management team could adversely affect operations if the Company experiences difficulties in hiring qualified successors.
The complexity inherent in integrating a new key member of the senior management team with existing senior management may limit the effectiveness of any such successor or otherwise adversely affect the Company'sCompany’s business. Leadership transitions can be inherently difficult to manage and may cause uncertainty or a disruption to business or may increase the likelihood of turnover of other key officers and employees. Specifically, a leadership transition in the commercial team may cause uncertainty about or a disruption to the Company'sCompany’s commercial organization, which may impact the ability to achieve sales and revenue targets.
The Company'sCompany’s inability to attract, hire and retain a sufficient number of qualified sales professionals would hamper the ability to increase demand for the Company'sCompany’s services and to expand geographically.
The Company'sCompany’s success in selling Discovery Services could require the Company to expand the sales force in the United States and internationally by recruiting additional sales representatives with extensive experience in the Company'sCompany’s field. To achieve the Company'sCompany’s marketing and sales goals, the Company will need to continue to expand sales and commercial infrastructure. Sales professionals with the necessary technical and business qualifications are in high demand, and there is a risk that the Company may be unable to attract, hire and retain the number of sales professionals with the right qualifications, scientific backgrounds and relationships with decision-makers at potential customers needed to achieve sales goals. The Company may face competition from other companies in the industry, some of whom are much larger than the Company and who can pay greater compensation and benefits than the Company can, in seeking to attract and retain qualified sales and marketing employees. If the Company is unable to hire and retain qualified sales and marketing personnel, business will suffer.
If the Company'sCompany’s laboratory facilities become damaged or inoperable, or the Company is required to vacate any facility, the ability to provide services may be jeopardized.
The Company currently derives substantially all revenues from preclinical services. The Company'sCompany’s facilities and equipment could be harmed or rendered inoperable by natural or man-made disasters, including fire, flooding and power outages, which may render
it difficult or impossible for the Company to perform tests or provide laboratory services for some period of time. The inability to perform services or the backlog of projects that could develop if any of the Company'sCompany’s facilities is inoperable for even a short period of time may result in the loss of customers or harm to the Company'sCompany’s reputation or relationships with key researchers, collaborators, and customers, and the Company may be unable to regain those customers or repair the Company's
Company’s reputation in the future. Furthermore, the Company'sCompany’s facilities and the equipment used to perform research and development work could be costly and time-consuming to repair or replace.
If the Company cannot compete successfully with competitors, the Company may be unable to increase or sustain revenues or achieve and sustain profitability.
The Company faces competition from companies that offer or are developing animal models for tumors and that have capabilities in toxicology and pharmacology testing. The competitors in the Company'sCompany’s Discovery Services business include Covance, Champions Oncology, Crown BioScience (recently acquired by JSR Life Sciences), Eurofins Scientific, Charles River, Jackson Labs and Explora Biolabs.
The Company'sCompany’s competitors may succeed in selling their products to pharmaceutical and biotech customers more effectively than the Company sells products. In addition, academic institutions, hospitals, governmental agencies, and other public and private research organizations also may conduct similar research, seek patent protection, and may develop and commercially introduce competing products or technologies on their own or through joint ventures. If one or more of the Company'sCompany’s competitors succeeds in developing similar technologies and products that are more effective or successful than any of those that the Company currently sells or will develop, results of operations will be significantly adversely affected.
A small number of customers account for most of the sales of the Company'sCompany’s services. If any of these customers require fewer services from the Company for any reason, revenues could decline.
Due to the early stageearly-stage nature of the Company'sCompany’s business and the limited sales and marketing activities to date, the Company has historically derived a significant portion of revenue from a limited number of customers, although the customers that generate a significant portion of Company revenue may change from period to period. The Company'sCompany’s customers are largely pharmaceutical and biotech companies as part of a clinical trial. During the twelve months ended December 31, 2020, four customers accounted for approximately 61% of the Company’s consolidated revenue from continuing operations. During the year ended December 31, 2019, three customers accounted for approximately 61% of the Company's consolidated revenue from continuing operations. During the year ended December 31, 2018, three customers accounted for approximately 53% of the Company'sCompany’s consolidated revenue from continuing operations. 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.
If the Company uses biological and hazardous materials in a manner that causes injury, the Company could be liable for damages.
The Company'sCompany’s activities currently require the controlled use of potentially harmful biological materials and hazardous materials and chemicals. The Company cannot eliminate the risk of accidental contamination or injury to employees or third parties from the use, storage, handling or disposal of these materials. In the event of contamination or injury, the Company could be held liable for any resulting damages, and any liability could exceed the Company'sCompany’s resources or any applicable insurance coverage the Company may have. Additionally, the Company is subject to, on an ongoing basis, federal, state and local laws and regulations governing the use, storage, handling and disposal of these materials and specified waste products. The cost of compliance with these laws and regulations may become significant and could have a material adverse effect on the financial condition, results of operations and cash flows. In the event of an accident or if the Company otherwise fails to comply with applicable regulations, the Company could lose permits or approvals or be held liable for damages or penalized with fines.
The Company'sCompany’s Discovery Services customers face intense competition from lower cost generic products, which may lower the amount that they spend on the Company'sCompany’s services.
The Company'sCompany’s Discovery Services customers face increasing competition from lower cost generic products, which in turn may affect their ability to pursue research and development activities with the Company. In the United States, EU and Japan, political pressure to reduce spending on prescription drugs has led to legislation and other measures which encourages the use of generic products. In addition, proposals emerge from time to time in the United States and other countries for legislation to further encourage the early and rapid approval of generic drugs. Loss of patent protection for a product typically is followed promptly by generic substitutes, reducing customers’ sales of that product and their overall profitability. Availability of generic substitutes for the Company'sCompany’s customers’ drugs may adversely affect their results of operations and cash flow, which in turn may mean that they would not have surplus capital to invest in research and development and drug commercialization, including in the Company's
Company’s services. If competition from generic products impacts customers’ finances such that they decide to curtail the Company'sCompany’s services, revenues may decline and this could have a material adverse effect on the Company'sCompany’s business.
The Company depends on information technology and telecommunications systems, and any failure of these systems could harm the Company'sCompany’s business.
The Company depends on information technology and telecommunications systems for significant aspects of operations. These information technology and telecommunications systems support a variety of functions, including test processing, sample tracking, quality control, customer service and support, billing, and general and administrative activities. Information technology and telecommunications systems are vulnerable to damage from a variety of sources, including telecommunications or network failures, malicious human acts and natural disasters. Moreover, despite network security and back-up measures, some of the Company'sCompany’s servers are potentially vulnerable to physical or electronic break-ins, computer viruses and similar disruptive problems. Any disruption or loss of information technology or telecommunications systems on which critical aspects of the Company'sCompany’s operations depend could have an adverse effect on business.
The Company'sCompany’s results of operations may be adversely affected if the Company fails to realize the full value of goodwill and intangible assets.
The Company assesses the realizable condition of indefinite-lived intangible assets and goodwill annually and conducts an interim evaluation whenever events or changes in circumstances, such as operating losses or a significant decline in earnings associated with the acquired business or asset, indicate that these assets may be impaired. The Company'sCompany’s ability to realize the value of the goodwill and indefinite-lived intangible assets will depend on the future cash flows of the businesses the Company has acquired, which in turn depend in part on how well the Company has integrated these businesses into the Company'sCompany’s own business. If the Company is not able to realize the value of the goodwill and indefinite-lived intangible assets, the Company may be required to incur material charges relating to the impairment of those assets. During the year ended December 31, 2019, the Company recognized goodwill impairment of $2.9 million after considering the effects of the Business Disposals and declines in stock price. Such impairment charges could materially and adversely affect the Company'sCompany’s operating results and financial condition.
The Company'sCompany’s operations are subject to environmental, health and safety laws and regulations, with which compliance may be costly.
The Company'sCompany’s business is subject to federal, state, and local laws and regulations relating to the protection of the environment, worker health and safety and the use, management, storage, and disposal of hazardous substances and wastes. Failure to comply with these laws and regulations may result in substantial fines, penalties or other sanctions. In addition, environmental laws and regulations could require the Company to pay for environmental remediation and response costs, or subject the Company to third party claims for personal injury, natural resource or property damage, relating to environmental contamination. Liability may be imposed whether or not the Company knew of, or were responsible for, such environmental contamination. The cost of defending against environmental claims, of compliance with environmental, health and safety regulatory requirements or of remediating contamination could materially adversely affect the Company'sCompany’s business, assets or results of operations.
Intellectual Property Risks Relating to the Company'sCompany’s Business
The Company'sCompany’s rights to use technologies licensed from third parties are not within the Company'sCompany’s control, and the Company may not be able to sell products if the Company loses existing rights or cannot obtain new rights on reasonable terms.
The Company'sCompany’s ability to market certain of services, domestically and/or internationally, is in part derived from licenses to intellectual property which is owned by third parties. As such, the Company may not be able to continue selling services if the Company loses existing licensed rights or sell new services if the Company cannot obtain such licensed rights on reasonable terms. As may be expected, the Company'sCompany’s business may suffer if (i) these licenses terminate; (ii) if the licensors fail to abide by the terms of the license, properly maintain the licensed intellectual property or fail to prevent infringement of such intellectual property by third parties; (iii) if the licensed patents or other intellectual property rights are found to be invalid or (iv) if the Company is unable to enter into necessary licenses on reasonable terms or at all. In return for the use of a third-party’s technology, the Company may agree to pay the licensor royalties based on sales of products as well as other fees. Such royalties and fees are a component of cost of product revenues and will impact the margins on the Company'sCompany’s tests.
If the Company is unable to maintain intellectual property protection, competitive position could be harmed.
The Company'sCompany’s ability to protect proprietary discoveries and technologies affects the Company'sCompany’s ability to compete and to achieve sustained profitability. Currently, the Company relies on a combination of copyrights, trademarks and trademark applications,
confidentiality or non-disclosure agreements, material transfer agreements, licenses, work-for-hire agreements and
invention assignment agreements to protect intellectual property rights. The Company also maintains as trade secrets certain company know-how and technological innovations designed to provide the Company with a competitive advantage in the marketplace. Currently, including both U.S. and foreign patent applications, the Company has only two issued U.S. patents and twelve pending patent applications relating to various aspects of the Company'sCompany’s technology. While the Company does not currently intend to pursue additional patent applications, it is possible that pending patent applications and any future applications may not result in issued patents. Even if patents are issued, third parties may independently develop similar or competing technology that avoids the Company'sCompany’s patents. Further, the Company cannot be certain that the steps that have been taken will prevent the misappropriation of the Company'sCompany’s trade secrets and other confidential information and technology, particularly in foreign countries where the Company does not have intellectual property rights.
The Company may become involved in lawsuits or other proceedings to protect or enforce patents or other intellectual property rights, which could be time-consuming and costly to defend, and could result in loss of significant rights and the assessment of treble damages.
From time to time the Company may face intellectual property infringement (or misappropriation) claims from third parties. Some of these claims may lead to litigation. The outcome of any such litigation can never be guaranteed, and an adverse outcome could affect the Company negatively. For example, were a third-party to succeed on an infringement claim against the Company, the Company may be required to pay substantial damages (including up to treble damages if such infringement were found to be willful). In addition, the Company could face an injunction, barring the Company from conducting the allegedly infringing activity. The outcome of the litigation could require the Company to enter into a license agreement which may not be pursuant to acceptable or commercially reasonable or practical terms or which may not be available at all. It is also possible that an adverse finding of infringement against the Company may require the Company to dedicate substantial resources and time in developing non-infringing alternatives, which may or may not be possible. In the case of diagnostic tests, the Company would also need to include non-infringing technologies which would require the Company to re-validate tests. Any such re-validation, in addition to being costly and time consuming, may be unsuccessful.
Furthermore, the Company may initiate claims to assert or defend intellectual property against third parties. Any intellectual property litigation, irrespective of whether the Company is the plaintiff or the defendant, and regardless of the outcome, is expensive and time-consuming, and could divert management’s attention from the Company'sCompany’s business and negatively affect operating results or financial condition. The Company may not be able to prevent, alone or with third-party collaborators or suppliers, misappropriation of the Company'sCompany’s proprietary rights, particularly in countries where the laws may not protect those rights as fully as in the United States. In addition, interference proceedings brought by the USPTO may be necessary to determine the priority of inventions with respect to patents and patent applications or those of the Company'sCompany’s current or future collaborators, suppliers or customers.
Finally, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of the Company'sCompany’s confidential and proprietary information could be compromised by disclosure during this type of litigation. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the Company'sCompany’s financial condition.
Risks Relating to the Company'sCompany’s International Operations
International expansion of the Company'sCompany’s business exposes the Company to business, regulatory, political, operational, financial and economic risks associated with doing business outside of the United States.
The Company'sCompany’s business strategy incorporates international expansion, including recent acquisitions which have provided facilities in Australia, and the possibility of establishing and maintaining other locations outside of the United States and expanding relationships with biopharmaceutical, academic and governmental research organizations. Doing business internationally involves a number of risks, including:
•multiple, conflicting and changing laws and regulations such as tax and transfer pricing laws, export and import restrictions, employment laws, regulatory requirements and other governmental approvals, permits and licenses;
•being subject to additional privacy and cybersecurity laws, including the Australian Privacy Act of 1988;
•failure by the Company or distributors to obtain regulatory approvals for the sale or use of tests in various countries, including failure to achieve “CE Marking”, a conformity mark which is required to market in vitro diagnostic medical devices in the European Economic Area and which is broadly accepted in other international markets;
•difficulties in managing foreign operations;
•financial risks, such as longer payment cycles, difficulty enforcing contracts and collecting accounts receivable and exposure to foreign currency exchange rate fluctuations;
•reduced protection for intellectual property rights;
•natural disasters, political and economic instability, including wars, terrorism and political unrest, outbreak of disease, boycotts, curtailment of trade and other business restrictions; and
•failure to comply with the Foreign Corrupt Practices Act, including its books and records provisions and its anti-bribery provisions, by maintaining accurate information and control over sales and distributors’ activities.
Any of these risks, if encountered, could significantly harm future international expansion and operations and, consequently, have a material adverse effect on the Company'sCompany’s financial condition, results of operations and cash flows.
The Company'sCompany’s operating results may be adversely affected by fluctuations in foreign currency exchange rates and restrictions on the deployment of cash across global operations.
Although the Company reports operating results in U.S. dollars, a portion of the Company'sCompany’s revenues and expenses are or will be denominated in currencies other than the U.S. dollar, particularly in Australia and Europe. Fluctuations in foreign currency exchange rates can have a number of adverse effects on the Company. Because the Company'sCompany’s consolidated financial statements are presented in U.S. dollars, the Company must translate revenues, expenses and income, as well as assets and liabilities, into U.S. dollars at exchange rates in effect during or at the end of each reporting period. Therefore, changes in the value of the U.S. dollar against other currencies will affect revenues, income from operations, other income (expense), net and the value of balance sheet items originally denominated in other currencies. There is no guarantee that the Company'sCompany’s financial results will not be adversely affected by currency exchange rate fluctuations. In addition, in some countries the Company could be subject to strict restrictions on the movement of cash and the exchange of foreign currencies, which could limit the Company'sCompany’s ability to use these funds across its global operations.
The Company could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and other worldwide anti-bribery laws.
The FCPA and anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments for the purpose of obtaining or retaining business or other commercial advantage. The Company'sCompany’s policies mandate compliance with these anti-bribery laws, which often carry substantial penalties, including criminal and civil fines, potential loss of export licenses, possible suspension of the ability to do business with the federal government, denial of government reimbursement for products and exclusion from participation in government health care programs. The Company may operate in jurisdictions that have experienced governmental and private sector corruption to some degree, and, in certain circumstances, strict compliance with anti-bribery laws may conflict with certain local customs and practices. The Company cannot assure that the internal control policies and procedures always will protect the Company from reckless or other inappropriate acts committed by affiliates, employees or agents. Violations of these laws, or allegations of such violations, could have a material adverse effect on the Company'sCompany’s business, financial position and results of operations.
Risks Relating to the Company'sCompany’s Common Stock
The price of the Company'sCompany’s common stock has been and could remain volatile, and the market price of common stock may decrease.
The market price of the Company'sCompany’s common stock has historically experienced and may continue to experience significant volatility. From January 2015 through March 27, 2020,18, 2021, the market price of the Company'sCompany’s common stock has fluctuated from a high of $382.50 per share in the third quarter of 2015, to a low of $2.00$1.92 per share in the fourthfirst quarter of 2019.2020. In the month of February 2021, the market price of the Company’s stock fluctuated from a low of $3.52 per share to a high of $17.50 per share. Market prices for securities of development-stage life sciences companies have historically been particularly volatile. The factors that may cause the market price of the Company'sCompany’s common stock to fluctuate include, but are not limited
•progress, or lack of progress, in developing and commercializing the Company'sCompany’s proprietary tests;
•the Company'sCompany’s ability to recruit and retain qualified regulatory and research and development personnel;
•changes in the relationship with key collaborators, suppliers, customers and third parties;
•changes in the market valuation or earnings of competitors or companies viewed as similar to the Company;
•changes in key personnel;
•depth of the trading market in the Company'sCompany’s common stock;
•changes in the Company'sCompany’s capital structure, such as future issuances of securities or the incurrence of additional debt;
•the granting or exercise of employee stock options or other equity awards;
•realization of any of the risks described under this section titled “Risk Factors”; and
•general market and economic conditions.
In addition, the equity markets have experienced significant price and volume fluctuations that have affected the market prices for the securities of newly public companies for a number of reasons, including reasons that may be unrelated to business or operating performance. These broad market fluctuations may result in a material decline in the market price of the Company'sCompany’s common stock and you may not be able to sell your shares at prices you deem acceptable. In the past, following periods of volatility in the equity markets, securities class action lawsuits have been instituted against public companies. Such litigation, if instituted against the Company, could result in substantial cost and the diversion of management attention.
Reports published by securities or industry analysts, including projections in those reports that exceed actual results, could adversely affect the Company'sCompany’s common stock price and trading volume.
Securities research analysts establish and publish their own periodic projections for the Company'sCompany’s business. These projections may vary widely from one another and may not accurately predict the results the Company actually achieves. The Company'sCompany’s stock price may decline if the actual results do not match securities research analysts’ projections. Similarly, if one or more of the analysts who writes reports on the Company downgrades the Company'sCompany’s stock or publishes inaccurate or unfavorable research about the Company'sCompany’s business, stock price could decline. If one or more of these analysts ceases coverage of the Company or fails to publish reports on the Company regularly, the Company'sCompany’s stock price or trading volume could decline. While the Company expects securities research analyst coverage, if no securities or industry analysts begin to cover the Company, the trading price for the Company'sCompany’s stock and the trading volume could be adversely affected.
The Company is incurring significant costs and devotes substantial management time as a result of operating as a public company.
As a public company, the Company is incurring significant legal, accounting and other expenses. For example, in addition to being required to comply with certain requirements of the Sarbanes-Oxley Act of 2002, the Company is required to comply with certain requirements of the Dodd Frank Wall Street Reform and Consumer Protection Act, as well as rules and regulations subsequently implemented by the SEC, including the establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. The Company expects that compliance with these requirements will continue to increase legal and financial compliance costs and will make some activities more time consuming and costly. In addition, the Company expects that management and other personnel will continue to need to divert attention from operational and other business matters to devote substantial time to these public company requirements.
The Sarbanes-Oxley Act requires, among other things, that the Company maintains effective internal control over financial reporting and disclosure controls and procedures. In particular, the Company must perform system and process evaluation and testing of internal control over financial reporting to allow management to report on the effectiveness of internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. In addition, if the Company loses status as a “smaller reporting company,“non-accelerated filer,” the Company will be required to have the Company'sCompany’s independent registered public accounting firm attest to the effectiveness of internal control over financial reporting. The Company'sCompany’s compliance with Section 404 of the Sarbanes-Oxley Act, as applicable, requires the Company to incur substantial accounting expense and expend significant management efforts. The Company currently does not have an internal audit group, and the Company will need to continue to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge. If the Company or the independent registered public accounting firm identify deficiencies in the Company'sCompany’s internal control over
financial reporting that are deemed to be material weaknesses, the market price of the Company'sCompany’s stock could decline and the Company could be subject to sanctions or investigations by the NASDAQ, the SEC or other regulatory authorities, which would require additional financial and management resources.
The Company'sCompany’s ability to successfully implement the Company'sCompany’s business plan and maintain compliance with Section 404, as applicable, requires the Company to be able to prepare timely and accurate financial statements. The Company expects that the Company will need to continue to improve existing, and implement new operational and financial systems, procedures and controls
to manage the Company'sCompany’s business effectively. Any delay in the implementation of, or disruption in the transition to, new or enhanced systems, procedures or controls, may cause operations to suffer and the Company may be unable to conclude that internal control over financial reporting is effective and to obtain an unqualified report on internal controls from the Company's auditors as required under Section 404 of the Sarbanes-Oxley Act.effective. If the Company fails to maintain an effective system of internal control over financial reporting, the Company may not be able to accurately report financial results, and current and potential stockholders may lose confidence in the Company'sCompany’s financial reporting. This, in turn, could have an adverse impact on trading prices for the Company'sCompany’s common stock, and could adversely affect the Company'sCompany’s ability to access the capital markets.
Anti-takeover provisions of the Company'sCompany’s certificate of incorporation, bylaws and Delaware law could make an acquisition of the Company, which may be beneficial to the Company'sCompany’s stockholders, more difficult and may prevent attempts by the Company'sCompany’s stockholders to replace or remove the current members of the board and management.
Certain provisions of the Company'sCompany’s amended and restated certificate of incorporation and bylaws could discourage, delay or prevent a merger, acquisition or other change of control that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. Furthermore, these provisions could prevent or frustrate attempts by the Company'sCompany’s stockholders to replace or remove members of the board of directors. These provisions also could limit the price that investors might be willing to pay in the future for the Company'sCompany’s common stock, thereby depressing the market price of the Company'sCompany’s common stock. Stockholders who wish to participate in these transactions may not have the opportunity to do so. These provisions, among other things:
•authorize the board of directors to issue, without stockholder approval, preferred stock, the rights of which will be determined at the discretion of the board of directors and that, if issued, could operate as a “poison pill” to dilute the stock ownership of a potential hostile acquirer to prevent an acquisition that the board of directors does not approve;
•establish advance notice requirements for stockholder nominations to the board of directors or for stockholder proposals that can be acted on at stockholder meetings; and
•limit who may call a stockholder meeting.
In addition, the Company is governed by the provisions of Section 203 of the Delaware General Corporation Law, or DGCL, which may, unless certain criteria are met, prohibit large stockholders, in particular those owning 15% or more of the voting rights on the Company'sCompany’s common stock, from merging or combining with the Company for a prescribed period of time.
Because the Company does not expect to pay cash dividends for the foreseeable future, you must rely on appreciation of the Company'sCompany’s common stock price for any return on your investment. Even if the Company changes that policy, the Company may be restricted from paying dividends on the Company'sCompany’s common stock.
The Company does not intend to pay cash dividends on shares of common stock for the foreseeable future. Any determination to pay dividends in the future will be at the discretion of the board of directors and will depend upon results of operations, financial performance, contractual restrictions, restrictions imposed by applicable law and other factors the board of directors deems relevant. Accordingly, you will have to rely on capital appreciation, if any, to earn a return on your investment in the Company'sCompany’s common stock. Investors seeking cash dividends in the foreseeable future should not purchase the Company'sCompany’s common stock.
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| Item 1B. | Unresolved Staff Comments |
None.
As of December 31, 2019,2020, the Company had leases for 5,800 square feet in Hershey, Pennsylvania and 1,959 square feet in Bundoora, Australia and a license to use 994 square feet of laboratory facilities in Clayton, Australia. The lease agreements have escalating lease payments and expire in November 2020January 2022 and July 2021, respectively, and the license agreement has a flat license fee subject to Consumer Price Index-based adjustment and expires in October 2024.
In 2020, the Company began leasing a laboratory in Gilles Plains, SA and an administrative office in Modbury, SA. These leases expire in January 2023 and February 2023, respectively.
On April 5, 2018November 13, 2020, a purported stockholder of CGI filed a complaint against CGI, the chief executive officer of CGI and April 12, 2018, purported stockholdersthe directors of CGI in the United States District Court for the Southern District of New York, entitled, Scott Sawin v. Cancer Genetics, Inc. et al. The complaint (the “Sawin Complaint”) alleges that CGI’s Registration Statement on Form S-4, as filed with the SEC on October 16, 2020 related to the merger (the “Prior Registration Statement”), omitted to disclose certain material information allegedly necessary to make statements made in the Prior Registration Statement not misleading and/or false, in violation of Section 14(a) and Section 20(a) of the CompanySecurities Exchange Act of 1934, as amended (the “Exchange Act”) and Rule 14a-9 promulgated thereunder, and alleges breach of fiduciary duty of candor/disclosure. The complaint seeks injunctive relief, enjoining the merger until the defendants to the applicable lawsuit disclose the alleged omitted material information, and costs, among other remedies.
On November 19, 2020, a purported stockholder of CGI filed nearly identical putative class action lawsuitsa complaint against CGI and the directors of CGI in the U.S.United States District Court for the Southern District of New York, entitled, Carlos Juan Pastrana v. Cancer Genetics, Inc. et al. On November 19, 2020, a purported stockholder of CGI filed a complaint against CGI and the directors of CGI in the United States District Court for the District of New Jersey, against the Company, Panna L. Sharma, John A. Roberts, and Igor Gitelman, captioned Ben Phetteplaceentitled, Joshua Dunn v. Cancer Genetics, Inc. et al., No. 2:18-cv-05612 and Ruo Fen Zhang v. Cancer Genetics, Inc. et al., No. 2:18-06353, respectively. The complaints alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 based on allegedly false and misleading statements and omissions regarding the Company's business, operational, and financial results. The lawsuits sought, among other things, unspecified compensatory damages in connection with purchases of the Company's stock between March On November 23, 2017 and April 2, 2018, as well as interest, attorneys’ fees, and costs. On August 28, 2018, the Court consolidated the two actions in one action captioned In re Cancer Genetics, Inc. Securities Litigation (the “Securities Litigation”) and appointed shareholder Randy Clark as the lead plaintiff. On October 30, 2018, the lead plaintiff filed an amended complaint, adding Edward Sitar as2020, a defendant and seeking, among other things, compensatory damages in connection with purchasespurported stockholder of CGI stock between March 10, 2016 and April 2, 2018. On December 31, 2018, Defendants filed a motion to dismisscomplaint against CGI and the amended complaint for failure to state a claim. The Court granted the defendants’ motion to dismiss during the oral argument and on February 25, 2020, the Court issued a written order dismissing the case with prejudice. The Lead Plaintiff has not appealed the dismissal.
In addition, on June 1, 2018, September 20, 2018, and September 25, 2018, purported stockholdersdirectors of the Company filed nearly identical derivative lawsuits on behalf of the CompanyCGI in the U.S.United States District Court for the District of New Jersey, entitled, Matthew Haller v. Cancer Genetics, Inc. et al. On November 25, 2020, a purported stockholder of CGI filed a complaint against CGI and the Company (asdirectors of CGI in the United States District Court for the District of New Jersey, entitled, Steve Prentiss v. Cancer Genetics, Inc. et al. On December 1, 2020, a nominal defendant)purported stockholder of CGI filed a complaint against CGI and currentthe directors of CGI in the United States District Court for the Southern District of New York, entitled, Virginia Weiderman v. Cancer Genetics, Inc. et al. On December 18, 2020, a purported stockholder of CGI filed a complaint against CGI and former membersthe directors of CGI in the United States District Court for the Southern District of New York, entitled, Jason Kauffman v. Cancer Genetics, Inc. et al. On January 27, 2021, a purported stockholder of CGI filed a complaint against CGI and the directors of CGI in the United States District Court for the District of New Jersey, entitled, Joseph Sheridan v. Cancer Genetics, Inc. et al. Each of the Company’s Board of Directors and current and former officers of the Company. The three cases are captioned: Bell v. Sharma et al., No. 2:18-cv-10009-CCC-MF, McNeece v. Pappajohn et al., No. 2:18-cv-14093, and Workman v. Pappajohn, et al., No. 2:18-cv-14259 (the “Derivative Litigation”). Theforegoing seven complaints allege facts and seek relief substantially similar to the Sawin Complaint.
CGI believes that the claims for breach of fiduciary duty, violations of Section 14(a) of the Securities Exchange Act of 1934 (premised upon alleged omissionsasserted in the Company’s 2017 proxy statement),lawsuits described above are without merit and unjust enrichment,intends to vigorously defend CGI, CGI Acquisition, Inc. and allegethe director and officer defendants against these claims, as applicable, however, there can be no assurance that the individual defendants failedwill prevail in such lawsuits. CGI is not able to implement and maintain adequate controls, which resultedestimate any possible loss from these litigations at this time. It is possible that additional lawsuits may be filed in ineffective disclosure controls and procedures, and conspiredconnection with the merger.
In November 2020 vivoPharm Pty Ltd received a letter from counsel for a customer of vivoPharm alleging entitlement to conceal this alleged failure. The lawsuits seek, among other things, damages and/or restitution to the Company, appropriate equitable relief to remedy the alleged breachesa refund of fiduciary duty, and attorneys’ fees and costs. On November 9, 2018, the Courtprepayments made under a master services agreement in the Bell v. Sharma action entered a stipulation filedsum of approximately $306 thousand. Counsel for vivoPharm responded and denied any liability. In February 2021 counsel for the customer repeated its claim,and stated its intent to commence litigation if the matter were not resolved. Counsel for vivoPharm responded by repeating its denial of any liability but offering to pay $60 thousand to resolve the parties staying the Bell action until the Securities Litigation is dismissed, with prejudice, and all appeals havematter. No litigation has been exhausted; or the defendants’ motioncommenced to dismiss in the Securities Litigation is denied in whole or in part; or either of the parties in the Bell action gives 30 days’ notice that they no longer consent to the stay. On December 10, 2018, the parties in the McNeece action filed a stipulation that is substantially identical to the Bell stipulation. On February 1, 2019, the Court in the Workman action granted a stipulation that is substantially identical to the Bell stipulation. On May 15, 2020, the plaintiff’s in the Workman action filed a notice of voluntary dismissal to the original action. The plaintiff’s in the McNeece action sent an identical notice that they intend to file a similar notice of voluntary dismissal to their original action. Based upon the above dismissal of the securities class action litigation, the Company anticipates the plaintiffs in the remaining derivative lawsuit may voluntarily dismiss their action as well. The Company is unable to predict the ultimate outcome of the Derivative Litigation and therefore cannot estimate possible losses or ranges of losses, if any. The Company is expensing legal costs associated with the loss contingency as incurred.date.
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| Item 4. | Mine Safety Disclosures |
Not applicable.
PART II
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| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Market Information
The Company's common stock trades on The NASDAQ Capital Market under the symbol “CGIX.”
Holders
As of December 31, 2019,2020, the Company had approximately 3545 holders of record of the Company's common stock. The number of record holders was determined from the records of the transfer agent and does not include beneficial owners of common stock whose shares are held in the names of various security brokers, dealers, and registered clearing agencies. The transfer agent of the Company's common stock is Continental Stock Transfer & Trust, 17 Battery Place, 8th Floor, New York, New York, 10004.10004
Dividends
The Company has never declared dividends on the Company's equity securities, and currently dodoes not plan to declare dividends on shares of the Company's common stock in the foreseeable future. The Company expects to retain future earnings, if any, for use in the operation and expansion of the Company's business. The Company's loan agreements prohibit the Company from paying cash dividends on the Company's common stock and the terms of any future loan agreements the Company enters into or any debt securities the Company may issue are likely to contain similar restrictions on the payment of dividends. Subject to the foregoing, the payment of cash dividends in the future, if any, will be at the discretion of the board of directors and will depend upon such factors as earnings levels, capital requirements, overall financial condition and any other factors deemed relevant by the board of directors.
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| Item 6. | Selected Financial Data. |
Not applicable.
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| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
As used herein, the “Company” refers to Cancer Genetics, Inc. and its wholly owned subsidiaries: Cancer Genetics Italia, S.r.l., Gentris, LLC, and vivoPharm Pty, Ltd., except as expressly indicated or unless the context otherwise requires. The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help facilitate an understanding of 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 effected October 24, 2019.
Overview
The Company is focused on supportingCancer Genetics, Inc. supports the efforts of the biotechnology and pharmaceutical industries to develop innovative new drug therapies. Until the closing of the Business Disposals (as defined below) in July 2019, the Company was an emerging leader in enabling precision medicine in oncology by providing multi-disciplinary diagnostic and data solutions, facilitating individualized therapies through 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. 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 for U.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 its U.S. operations,Hershey, PA facility, and is a leader in the field of immuno-oncology preclinical services for its global customers.in the United States. This service is supplemented with GLP toxicology and extended bioanalytical services in the Company's Australia-based operations.Company’s Australian-based facilities in Clayton, Victoria, and Gilles Plains, South Australia (effective in February 2020).
Net cash used in operating activities from continuing operations was $3.2$4.9 million and $3.2 million for the years ended December 31, 20192020 and 2018,2019, respectively, and the Company had unrestricted cash and cash equivalents of $3.9$2.4 million at December 31, 2019, an increase2020, a decrease of $3.7$1.4 million from December 31, 2018.2019. The Company has working capital from continuing operations at December 31, 20192020 of $1.4$0.5 million. In addition, the Company has $1.2$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, does not projectCGI Acquisition, Inc., a wholly-owned subsidiary of CGI (“Merger Sub”), and StemoniX, Inc., a Minnesota 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 cash at December 31, 2019the 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, dated February 12, 2021, as supplemented by a proxy supplement filed on February 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 sufficientsatisfied 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 fund normal operations foras 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.
November 2020 Offering
On October 28, 2020 the twelve monthsCompany entered into an underwriting agreement with H.C. Wainwright & Co., LLC (“Wainwright”), relating to an underwritten public offering (the “November 2020 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 on October 30, 2020, at a price to the public of $2.20 per share. The Company received gross proceeds from the issuanceoffering of these financial statements inapproximately $3.5 million, less underwriting discounts and commissions and estimated offering expenses payable by the Annual Report on Form 10-K.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
On December 2, 2020, the Company entered into an At The Company's abilityMarket Offering Agreement (the “ATM Agreement”) with Wainwright, as sales agent, pursuant to continue as a going concern is dependent on reduced losses and improved future cash flows. Alternatively,which the Company may be requiredoffer and sell (the “ATM Offering”), from time to raise additional equity or debt capital, or consummate other strategic transactions. These factors raise substantial doubt about the Company's abilitytime through Wainwright, shares of CGI Common Stock, for aggregate gross proceeds of up to continue as a going concern.$2.4 million (the “ATM Shares”). The Company can provide no assurance that these actions will be successful or thatsuspended the offering of shares under the ATM Agreement on February 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 in December 2020. In January 2021, the Company sold an additional sources200 thousand shares for net proceeds of financing willapproximately $798 thousand.
CGI PIPE
On January 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 on favorable terms, ifFebruary 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
On February 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 all.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
BioServe Biotechnologies
On April 26, 2018, the Company sold its India subsidiary, BioServe Biotechnologies (India) Private Limited (“BioServe”) to Reprocell, Inc., for $1.8 million.
siParadigm, Inc.
On July 5, 2019, the Company entered into an asset purchase agreement (the “Clinical Agreement”) by and among the Company and siParadigm, LLC (“siParadigm”), pursuant to which the Company sold to siParadigm, certain assets associated with the Company’s clinical laboratory business (the “Clinical Business,” and such assets, the “Designated Assets”), and agreed to cease operating theits 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 includesincluded approximately $45 thousand for certain equipment plus a $1.0 million advance payment of the Earn-Out (as defined below), less $177 thousand of supplier invoices paid directly by siParadigm, an adjustment of $11 thousandadjustments and transaction costs of $110approximately $298 thousand. The Clinical Business sale (together with the BioPharma Disposal, the “Business Disposals”) was completed on July 8, 2019.
The Earn-Out, to be paid over
the 24 months post-closing, is based on fees for all tests performed by siParadigm for the Company’s clinical customers during the 12-month period following the closing (the “Earn-Out”). The Clinical Business sale (together withCompany has netted the BioPharma Disposal defined below,Earn-out and Advance from siParadigm as of December 31, 2020 as all amounts are fixed and determinable and the “Business Disposals”)Company and siParadigm intend to offset. At December 31, 2020, the Earn-Out from siParadigm was completed on July 8, 2019.approximately $91 thousand.
Interpace Biosciences, Inc.
On July 15, 2019, the Company entered into a secured creditor asset purchase agreement (the “BioPharma Agreement”) by and among the Company, Gentris, LLC, a wholly owned subsidiary of the Company, Partners for Growth IV, L.P. (“PFG”), Interpace Biosciences, Inc. (“IDXG”) and a newly-formed subsidiary of IDXG, Interpace BioPharma, Inc. (“Buyer”). The BioPharma Agreement provided for a consensual private foreclosure sale by PFG of all assets relating to the Company’s BioPharma Business (as defined in the BioPharma Agreement) to Buyer (the “BioPharma Disposal”). The BioPharma Disposal was consummated on July 15, 2019.
Pursuant to the BioPharma Agreement, Buyer purchased from PFG certain assets and assumed certain liabilities of the Company relating to the BioPharma Business, providing as gross consideration $23.5 million, less certain closing adjustments totaling $2.0 million, of which $7.7 million was settled in the form of a promissory note issued by Buyer to the Company (the “Excess Consideration Note”) and the remainder was paid to PFG in cash. PFG utilized the cash proceeds to satisfy the outstanding balances of the Silicon Valley Bank (“SVB”) asset-based revolving line of credit (“ABL”) and the $6.0 million term note to PFG (“PFG Term Note”), and to satisfy certain transaction expenses. The balance of $2.3 million was delivered to the Company in addition to the Excess Consideration Note. The Excess Consideration Note which required interest-only quarterly payments at a rate of 6% per year, was settled on October 24, 2019 for $6.0 million, including interest of $24 thousand. The Buyer withheld from the settlement of the Excess Consideration Note $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, 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 and May 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, (collectively, the “Payroll and Benefits Services”), for a period not to exceed six months from July 15, 2019, subject to the terms and conditions of the TSA, in exchange for payment or reimbursement, as applicable, by Buyer for the costs related thereto, including salaries and benefits for certain of the Company’s BioPharma employees during the transition period. The Company continues to provideBuyer paid for certain costs of the Payroll and Benefits ServicesCompany under the TSA with respect to a limited number of employees.employees and professionals. Such shared services amounted to $208 thousand and $186 thousand for the years ended December 31, 2020 and 2019, respectively. In addition, the Buyer iswas reimbursing the Company, in part, for the salaries and benefits of John A. Roberts, the Company’s Chief Executive Officer, and Glenn Miles, the Company’s former Chief Financial Officer.Officer through July 2020. The reimbursed portion of such salaries and benefits amounted to $155 thousand and $188 thousand for the years ended December 31, 2020 and 2019, respectively. Including the amounts due under the TSA described above, the net amount due to the Buyer is approximately $15 thousand at December 31, 2020.
The above business disposals have been classified as discontinuing operations in conformity with accounting principles generally accepted in the United States of America. Accordingly, the operations and balances of BioServe and the Company's BioPharma and Clinical operations have been reported as discontinuing operations. Unless otherwise indicated, information in the MD&A relates to continuing operations.
2019 Offerings
In January 2019, the Companyclosed two public offeringsand issued an aggregate of952 thousand shares of common stock for $5.4 million, net of expenses and discounts of $1.1 million. The Company also issued67 thousand warrants to its underwriters in conjunction with these offerings.
Note Payable to Atlas Sciences, LLC
On October 21, 2019, the Company issued an unsecured promissory note to Atlas Sciences, LLC (“Atlas Sciences”), an affiliate of Iliad Research and Trading, L.P. (“Iliad”), for $1.3 million (“Note Payable”(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 Payable hashad a 12-month term and bearsaccrued interest at 10% per annum. The proceeds from the Note Payable were utilized to partially repay the Convertible Note (see Note 86 to the audited consolidated financial statements included in Part II Item 8 of this Annual Report on Form 10-K).
Between June 3, 2020 and September 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
remaining principal and interest from its unsecured promissory note. As such the Note Payable balance on December 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 ended December 31, 2020, four customers accounted for approximately 61% of the consolidated revenue from continuing operations. During the year ended December 31, 2019, three customers accounted for approximately 61% of the consolidated revenue from continuing operations. During the year ended December 31, 2018, three customers accounted for approximately 53% 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 fivefour categories: research and development, 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.
Research and Development Expenses. Research and development expenses from continuing operations relate to the Company's allocation of losses from its joint venture with Mayo Foundation for Medical Education and Research. The Company was in the process of winding down the joint venture during 2019, and the joint venture was dissolved in February 2020.
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 of Goodwill: 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 ended December 31, 2020. If the Company is not successful in executing its strategic business plans, there may be further impairments in the future.
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 ended December 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. On March 11, 2020 the World Health Organization declared the novel strain of coronavirus (“COVID-19”) a global pandemic and recommended containment and mitigation measures worldwide. In addition, as the Company is located in New 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 in the United States and other countries, business closures or business disruptions, and the effectiveness of actions taken in the United States and other countries to contain and treat the disease. As a healthcare provider, the Company is still providing Discovery Services and has yet to experience a slowdown in its project work, however, the future of many projects may be delayed. The Company continues to vigilantly monitor the situation with its primary focus on the health and safety of its employees and clients.
Results of Operations
Years Ended December 31, 20192020 and 20182019
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 | % |
|
| | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | Change |
| | | 2019 | | 2018 | | $ | | % |
| | | | | | | | | |
| Revenue | | $ | 7,305 |
| | $ | 4,932 |
| | $ | 2,373 |
| | 48 | % |
| Cost of revenues | | 3,701 |
| | 3,090 |
| | 611 |
| | 20 | % |
| Research and development | | — |
| | 154 |
| | (154 | ) | | -100 | % |
| General and administrative | | 5,171 |
| | 6,716 |
| | (1,545 | ) | | -23 | % |
| Sales and marketing | | 1,146 |
| | 1,197 |
| | (51 | ) | | -4 | % |
| Impairment of goodwill | | 2,873 |
| | — |
| | 2,873 |
| | N/A |
|
| Merger costs | | 117 |
| | 1,464 |
| | (1,347 | ) | | -92 | % |
| Loss from continuing operations | | (5,703 | ) | | (7,689 | ) | | 1,986 |
| | -26 | % |
| Interest expense, net | | (1,329 | ) | | (298 | ) | | (1,031 | ) | | 346 | % |
| Change in fair value of acquisition note payable | | 4 |
| | 136 |
| | (132 | ) | | -97 | % |
| Change in fair value of other derivatives | | 86 |
| | (86 | ) | | 172 |
| | -200 | % |
| Change in fair value of warrant liability | | 70 |
| | 3,732 |
| | (3,662 | ) | | -98 | % |
| Change in fair value of siParadigm Earn-Out | | (935 | ) | | — |
| | (935 | ) | | N/A |
|
| Change in fair value of Excess Consideration Note | | 93 |
| | — |
| | 93 |
| | N/A |
|
| Gain on troubled debt restructuring | | 258 |
| | — |
| | 258 |
| | N/A |
|
| Other expense | | 59 |
| | — |
| | 59 |
| | N/A |
|
| Loss before income taxes | | (7,397 | ) | | (4,205 | ) | | (3,192 | ) | | 76 | % |
| Income tax benefit | | 512 |
| | — |
| | 512 |
| | N/A |
|
| Net loss from continuing operations | | $ | (6,885 | ) | | $ | (4,205 | ) | | $ | (2,680 | ) | | 64 | % |
Non-GAAP Financial Information
In addition to disclosing financial results in accordance with United States generally accepted accounting principles (“GAAP”), the table below contains non-GAAP financial measures that 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 December 31, |
| | 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) | | | $ | (1,778) | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
|
| | | | | | | | |
| | | Year Ended December 31, |
| | | 2019 | | 2018 |
| Reconciliation of net loss from continuing operations: | | | | |
| Net loss from continuing operations | | $ | (6,885 | ) | | $ | (4,205 | ) |
| Adjustments: | | | | |
| Interest expense, net | | 1,329 |
| | 298 |
|
| Depreciation | | 159 |
| | 310 |
|
| Amortization | | 454 |
| | 491 |
|
| Stock-based compensation | | 263 |
| | 530 |
|
| Impairment of goodwill | | 2,873 |
| | — |
|
| Merger costs | | 117 |
| | 1,464 |
|
| Change in fair value of acquisition note payable | | (4 | ) | | (136 | ) |
| Change in fair value of other derivatives | | (86 | ) | | 86 |
|
| Change in fair value of warrant liability | | (70 | ) | | (3,732 | ) |
| Change in fair value of siParadigm Earn-Out | | 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 | | $ | (1,778 | ) | | $ | (4,894 | ) |
Adjusted EBITDA loss from continuing operations decreased 64%increased 143% to $4.3 million during the year ended December 31, 2020, from an Adjusted EBITDA loss of $1.8 million during the year ended December 31, 2019,2019.
Revenue from an Adjusted EBITDA loss of $4.9Continuing Operations
Revenue from continuing operations decreased 21%, or $1.6 million, duringto $5.8 million for the year ended December 31, 2018.
Revenue2020, from Continuing Operations
Revenue from continuing operations increased 48%, or $2.4 million, to $7.3 million for the year ended December 31, 2019, from $4.9 million for the year ended December 31, 2018, principally due to an increasea decrease in the number of clinical studies conducted in the Company's U.S. operations from sponsors based in the U.S. and Europe, which resulted in a higherlower volume of active projects as the demand for its CRO services continued to increase throughout the year.decreased.
Cost of Revenues from Continuing Operations
Cost of revenues from continuing operations increased 20%decreased 9%, or $611$348 thousand, to $3.4 million for the year ended December 31, 2020, from $3.7 million for the year ended December 31, 2019, from $3.1 million for the year ended December 31, 2018, principally due to increaseddecreased usage of lab supplies of $431$340 thousand, outsourced labor of $124 thousand and payroll costs and benefits of $110$355 thousand, required to support theoffset by an increase in revenue.outsourcing of $317 thousand. Gross margin increaseddecreased from 37%49% to 49%42% during the year ended December 31, 2019.2020. The increasedecrease in gross margin was caused by gaining operating leverage over the Company's fixed costs associated with its laboratory operations and personnel as its revenue increased incrementally higher than its related costs.increase in the use of outsourcing on studies which have lower margins then studies performed in house.
Operating Expenses from Continuing Operations
Research and Development Expenses. Research and development expenses from continuing operations decreased $154 thousand due to winding down the joint venture with the Mayo Foundation for Medical Education and Research.
General and Administrative Expenses. General and administrative expenses from continuing operations decreased 23%increased 28%, or $1.5$1.4 million, to $6.6 million for the year ended December 31, 2020, from $5.2 million for the year ended December 31, 2019 from $6.7principally 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 of Goodwill. During the year ended December 31, 2018 primarily due to decreased legal costs of $1.2 million2020 and decreased costs of other professional services of $557 thousand as a result of negotiating fee arrangements with certain vendors. The Company also had a $207 thousand reduction in director fees primarily as a result of the directors waiving past due compensation of $263 thousand in exchange for stock options valued at $54 thousand. Other causes for the decline include reduced stock-based compensation expense of $251 thousand and a $237 thousand decrease in NASDAQ and transfer agent fees during the year ended December 31, 2019. These reductions were offset, in part, by an increase
in salaries and bonuses of $302 thousand, an increase in depreciation and amortization expense of $149 thousand and increases in software and other office supplies of $88 thousand and $87 thousand, respectively.
Impairment of Goodwill. During the year ended December 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 ended December 31, 2020.
Merger Costs. During the year ended December 31, 2019,2020, the Company recognized $117$539 thousand of merger costs associated with the Business Disposals,pending merger with Stemonix, as compared to $1.5$117 thousand during the year ended December 31, 2019 related to its terminated merger with NovellusDx, Ltd. (“NDX”).
Interest Expense, Net
Net interest expense from continuing operations decreased by $1.1 million during the year ended December 31, 2018 related2020 due to its failed merger with NovellusDx, Ltd. (“NDX”).
Interest Expense, Net
Net interest expense from continuing operations increased by $1.0 millionthe payoff of various debt agreements that were previously in place during the year ended December 31, 2019 primarily due to two financing agreements that were only in place for a portion of2019. During the year ended December 31, 2018. The Company incurred $571 thousand of interest on the Convertible Note and the Advance from NDX (defined below) during the year ended December 31, 2019, compared to $175 thousand during the year ended December 31, 2018. The Company also amortized $1.1 million of debt discounts on these two agreements during the year ended December 31, 2019 compared to $517 thousand during the year ended December 31, 2018. The Company entered into a standstill agreement with Iliad during the firstfourth quarter of 2019 which resulted in $202 thousand of additional fees. Later the Company entered into a second standstill agreementSettlement Agreement with NDX that reduced the conversion price on a portionoutstanding 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 in July 2020. The Convertible Note resultingwith Iliad of approximately $2.3 million was replaced by a note payable to Atlas Sciences in $547 thousandOctober 2019. The note payable to Atlas Sciences was settled though the exchange of additional interest. In June 2019, the Company defaulted on the Convertible Note, creating a 15% increasecommon stock in the outstanding balance at the date2020 and was fully paid off as of default, which totaled $409 thousand. The Company allocated $1.5 million and $389 thousand of this interest to discontinuing operations during the years ended December 31, 2019 and 2018, respectively.September 30, 2020.
The interest expense was partially offset by interest income received from the Excess Consideration Note of $107 thousand during the year ended December 31, 2019.
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. The Company recognized non-cash income of $70 thousand for the year ended December 31, 2019, as compared to non-cash income of $3.7 million for the year ended December 31, 2018, as a result of fluctuations in its stock price. In the future, if the its stock price increases, the Company would record a non-cash charge asAs a result of changes in the fair valueCompany's stock price, it recognized non-cash income of its common stock warrants. Consequently,$167 thousand and non-cash expense of $70 thousand during the years ended December 31, 2020 and 2019, respectively. The Company may be exposed to non-cash charges, or itthe 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 in July 2019. During the yearyears ended December 31, 2020 and 2019, the Company recognized a $66 thousand and $935 thousand loss due toreduction in the decrease in fair value of the siParadigm Earn-Out due to the loss of several significant Clinical Business customersa decrease in the latter part of 2019.expected future payments.
Change in Fair Value of Excess Consideration Note
The Excess Consideration Note relates to the disposal of itsthe Company's Biopharma Business in July 2019. During the yearyears ended December 31, 2020 and 2019, the Company recognized a$0 and $93 thousand gain duerelated 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 in May 2020.
Gain on Troubled Debt Restructuring
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 iswas 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
On April 4, 2019, the Company sold $11.6 million of gross State 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 2018.2020. The Company's effective rate for the years ended December 31, 2020 and 2019 was 0% and 2018 was 7.1% and 0.0%, 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 and from its Business Disposals for a limited time until the Earn-Out is paid as discussed below.future.
During January 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. In October 2019, the Company issued the Note Payable to Atlas Sciences for $1.3 million, net of discounts, which was remitted directly to Iliad to satisfy a portion of the Convertible Note balance. The Company also sold $11.6 million of gross State of New Jersey NOL’s relating to the 2017 tax year as well as $72 thousand of state research and development tax credits in April 2019. The sale resulted in the net receipt by the Company of $512 thousand.
In July 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. At December 31, 2019. the estimated future Earn-Out payments from siParadigm, net of the remaining balance of the advance, were $285 thousand, which are expected to be collected in variable monthly payments through July 2021; the monthly payment amount is based on the number of tests performed by siParadigm for the Company's former Clinical Services' customers. At December 31, 2019, the Company also holds a note receivable from IDXG (the Excess Consideration Note) for $888 thousand. The balance at December 31, 2019 represents the AR Holdback of $153 thousand and the Indemnification Holdback of $735 thousand, which were due to the Company on January 15, 2020 and were received in full in April and May 2020, respectively.
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 2019, the Company settled the Convertible Note owed to Iliad and significantly reduced the amount of its Advance from NDX. The Note Payable to Atlas Sciences matures in October 2020; furthermore, Atlas Sciences is entitled to demand monthly redemptions of up to $300 thousand beginning in April 2020. The Company is also required to remit monthly installments of $50 thousand to NDX until the Advance from NDX is repaid. Subsequent to year-end, an additional $250 thousand was repaid on the Advance from NDX.
At December 31, 2019, the Company does not project that cash at December 31, 2019 will be sufficient to fund normal operations for the twelve months from the issuance of these financial statements in the Annual Report on Form 10-K. The Company's ability to continue as a going concern is dependent on reduced losses and improved future cash flows. Alternatively, the Company may be required to raise additional equity or debt capital, or consummate other strategic transactions. These factors raise substantial doubt about the Company's ability to continue as a going concern for the next twelve months from the issuance of these financial statements in the Annual Report on Form 10-K. 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 (in thousands):
|
| | | | | | | | |
| | | Year Ended December 31, |
| | | 2019 | | 2018 |
| | | | | |
| Cash provided by (used in) continuing operations: | | | | |
| Operating activities | | $ | (3,239 | ) | | $ | (3,201 | ) |
| Investing activities | | (28 | ) | | (17 | ) |
| Financing activities | | 3,420 |
| | 3,957 |
|
| Effect of foreign currency exchange rates on cash and cash equivalents and restricted cash | | (17 | ) | | (59 | ) |
| Net increase in cash and cash equivalents and restricted cash from continuing operations | | $ | 136 |
| | $ | 680 |
|
The Company had cash and cash equivalents and restricted cash of $4.2 million and $511 thousand at December 31, 2019 and 2018, respectively.
The $136 thousand increase in cash and cash equivalents and restricted cash from continuing operations was principally the result of $5.4 million received in the 2019 Offerings, net of expenses. These receipts were offset, in part, by $3.2 million of net cash used to fund operations, $1.0 million used to settle the remainder of the Convertible Note with Iliad, and $892 thousand of payments on the Advance from NDX.
The $680 thousand increase in cash and cash equivalents and restricted cash from continuing operations for the year ended December 31, 2018, principally resulted from proceeds of $2.5 million and $1.5 million from the Convertible Note and Advance from NDX, respectively, offset, in part, by net cash used in operations of $3.2 million.
Cash Used in Operating Activities from Continuing Operations
During the year ended December 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.
During the year ended December 31, 2018, cash used in operating activities from continuing operations was $3.2 million, consisting of net loss from continuing operations of $4.2 million, negative non-cash adjustments of $2.0 million and additional cash provided relating to changes in working capital items of $3.0 million. Cash flows from changes in working capital items were primarily driven by a net increase in accounts payable, accrued expenses and deferred revenue of $2.9 million and a net reduction in accounts receivable of $296 thousand. These cash flows were offset by an increase in other current assets of $87 thousand and other non-current assets of $49 thousand.
Cash Provided by Investing Activities from Continuing Operations
Net cash used in continuing investing activities was $28 thousand for the year ended December 31, 2019, relating to purchases of fixed assets.
Net cash used in continuing investing activities was $17 thousand for the year ended December 31, 2018, relating to purchases of fixed assets.
Cash Provided by Financing Activities from Continuing Operations
Net cash provided by continuing financing activities was $3.4 million for the year ended December 31, 2019 and principally resulted from net proceeds received from the 2019 Offerings of $5.4 million, offset, in part, 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.
Net cash provided by continuing financing activities was $4.0 million for the year ended December 31, 2018 and resulted from proceeds of $2.5 million and $1.5 million from the Convertible Note and Advance from NDX, respectively.
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.
On October 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 on October 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.
On December 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 on February 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.
On January 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.
On February 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.
Between February 10, 2021 and March 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 through September 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 at December 31, 2020, together with net proceeds of (i) $797 thousand from post year end sales pursuant to its At The Market Offering Agreement dated December 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 | | | 3,420 | |
| Effect 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 ended December 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 ended December 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 ended December 31, 2020, relating primarily to the collection of the Excess Consideration Note of $888 thousand.
Net cash used in continuing investing activities was $28 thousand for the year ended December 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 ended December 31, 2020 and principally resulted from net proceeds received from the November 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 ended December 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 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.
In October 2019, the Company settled the Convertible Note owed to Iliad and now owes $1.3 million in principal amount to Atlas Sciences under a new unsecured note due in October 2020. The Company also owes an aggregate of $350 thousand to NDX as of December 31, 2019 pursuant to the NDX Settlement Agreement, which is payable in monthly installments of $50 thousand. 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 at December 31, 2019 will be sufficient to fund normal operations for the twelve months from the issuance of these financial statements in the Annual Report on Form 10-K. The Company's ability to continue as a going concern is dependent on reduced losses and improved future cash flows. Alternatively, the Company may be required to raise additional equity or debt capital, or consummate other strategic transactions. These factors raise substantial doubt about the Company's ability to continue as a going concern for the next twelve months from the issuance of these financial statements in the Annual Report on Form 10-K. 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 expected 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 expected benefits of, and potential value, including synergies, created by, the proposed merger transaction between the Company and StemoniX, 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 satisfy U.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 in Australia Europe and China,Europe, 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
•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 ended December 31, 20192020 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 of December 31, 2019.2020. The information in the table reflects future unconditional payments and is based on the terms of the relevant agreements, appropriate classification of items under U.S. GAAP as currently in effect and certain assumptions, such as the interest rate on the Company's variable debt that was in effect as of December 31, 2019.2020. Future events could cause actual payments to differ from these amounts.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period |
| Contractual Obligations | | Total | | Less than 1 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 | | | $ | — | | | $ | — | |
|
| | | | | | | | | | | | | | | | | | | | |
| | | Payments Due by Period |
| Contractual Obligations | | Total | | Less than 1 Year | | 1-3 Years | | 3-5 Years | | More than 5 years |
| (dollars in thousands) | | | | | | | | | | |
| Principal and interest on unsecured debt | | $ | 1,789 |
| | $ | 1,789 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Finance lease obligations, including interest, for equipment | | 209 |
| | 84 |
| | 80 |
| | 45 |
| | — |
|
| Operating lease obligations relating to administrative offices and laboratories | | 220 |
| | 209 |
| | 11 |
| | — |
| | — |
|
| Total | | $ | 2,218 |
| | $ | 2,082 |
| | $ | 91 |
| | $ | 45 |
| | $ | — |
|
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 with U.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
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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| | | | |
| Item 7A. | Qualitative and Quantitative Disclosures about Market Risk |
The Company has exposure to financial market risks, including changes in foreign currency exchange rates, and risk associated with how it invests its cash.
Foreign Exchange Risk
The Company conducts business in foreign markets through its subsidiary in Australia (vivoPharm Pty Ltd.). For the years ended December 31, 2020 and 2019, approximately 39% and 2018, approximately 20% and 33%, respectively, of the Company's continuing revenues were earned outside the United States and collected in local currency. The Company is subject to risk for exchange rate fluctuations between such local currencies and the United States dollar and the subsequent translation of the Australia Dollar or Euro to United States dollars. The Company currently does not hedge currency risk. The translation adjustments for the years ended December 31, 20192020 and 20182019 were not significant.
Investment of Cash
The Company invests its cash primarily in money market funds. Because of the short-term nature of these investments, the Company does not believe it has material exposure due to market risk. The impact to the Company's financial position and results of operations from likely changes in interest rates is not material.
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| | | | |
| Item 8. | Financial Statements and Supplementary Data |
INDEX TO FINANCIAL STATEMENTS
Cancer Genetics, Inc. and Subsidiaries
Consolidated Financial Report December 31, 20192020
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the StockholdersShareholders and Board of Directors of
Cancer Genetics, Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheetsheets of Cancer Genetics, Inc. (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations and other comprehensive loss,changes in stockholders’ equity and cash flows for each of the yeartwo years in the period ended December 31, 2019,2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the yeartwo years in the period ended December 31, 2019,2020, in conformity with accounting principles generally accepted in the United States of America.
Explanatory Paragraph - Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 2, the Company has minimal working capital, has incurred significant losses and needs to raise additional funds to meet its obligations and sustain its operations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Retrospective Adjustments
We also have audited the adjustments to the financial statements as of December 31, 2018 and for the year then ended to retrospectively apply the change in accounting for the reverse stock split and discontinued operations, as described in Note 1. In our opinion, such adjustments are appropriate and have been properly applied. We were not engaged to audit, review, or apply any procedures to the 2018 financial statements of the Company other than with respect to the adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2018 financial statements taken as a whole.
Adoption of New Accounting Standard
As discussed in Note 3 to the consolidated financial statements, the Company has changed its method of accounting for leases in 2019 due to the adoption of the guidance in ASC Topic 842, Leases (“Topic 842”), as amended, effective January 1, 2019, using the modified retrospective approach.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit.audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our auditaudits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our auditaudits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ Marcum LLP
Marcum LLP
We have served as the Company’s auditor since 2019.
Houston, Texas
May 29, 2020
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Cancer Genetics, Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Cancer Genetics, Inc. and its subsidiaries (the Company) as of December 31, 2018, and the related consolidated statements of operations and other comprehensive loss, changes in stockholders' equity and cash flows for the year then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, except for effects of the adjustments, if any, as might have been determined to be necessary had we been engaged to audit the Company’s restatement for discontinued operations and a reverse stock-split, as described below, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
Restatement for 2019 transactions requiring retrospective accounting treatment in 2018 financial statements
We were not engaged to audit the restatement of the 2018 financial statements and disclosures for discontinued operations and a reverse stock-split, as discussed in Note 1 to the 2019 financial statements.
Substantial Doubt About the Company’s Ability to Continue as a Going Concern
The accompanying 2018 financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the 2018 financial statements, the Company has suffered recurring losses, and has an accumulated deficit and negative cash flows from operations. The Company is also in violation of certain debt covenants. This raises substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2 to the 2018 financial statements. The 2018 financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Change in Accounting Principle
As discussed in Note 3 to the 2018 financial statements, the Company changed its method of accounting for recognizing revenue effective January 1, 2018 due to the adoption of Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers”.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
Except as discussed above, we conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
As discussed in Note 2 to the consolidated financial statements, the Company has determined that revenue is recorded at the amount expected to be collected. The Company’s performance obligations are specific to the services included within each revenue contract which requires subjective judgment regarding the satisfaction of the performance obligation criteria for revenue recognition. Performance obligations are satisfied over time and as study data is transmitted to the customer. Revenue from the Company's Discovery Services is recognized using the time elapsed method and at a point in time as the Company delivers study results to the customers. We identified management’s determination of when the satisfaction of the performance obligation was met on the contracts as a critical audit matter.
The primary procedures we performed to address this critical audit matter included the following:
•Tested the completeness of the contracts’ population as of year-end;
•Obtained an understanding of the Company’s revenue recognition process, including processes over the determination of performance obligations for contract arrangements;
•Read the contracts to obtain an understanding of the contractual requirements and deliverables;
•Bifurcated the population of total contracts and performed additional audit procedures for open contracts; and
•Inspected correspondence between the Company and the customer regarding actual and expected contract performance to date and compared to the estimate to complete its performance obligations.
/s/ RSM USMarcum LLP
Marcum LLP
We have served as the Company'sCompany’s auditor from 2010 to 2019.since 2019.
New York, New YorkHouston, Texas
April 15, 2019March 31, 2021
CANCER GENETICS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except par value)
| | | | | December 31, | | | December 31, |
| | | 2019 | | 2018 | | | 2020 | | 2019 |
| ASSETS | | | | | ASSETS | | | | |
| CURRENT ASSETS | | | | | CURRENT ASSETS | |
| Cash and cash equivalents | | $ | 3,880 |
| | $ | 161 |
| Cash and cash equivalents | | $ | 2,444 | | | $ | 3,880 | |
| Restricted cash | | 350 |
| | — |
| Restricted cash | | 0 | | | 350 | |
| Accounts receivable | | 696 |
| | 777 |
| Accounts receivable | | 779 | | | 696 | |
| Earn-Out from siParadigm, current portion | | 747 |
| | — |
| Earn-Out from siParadigm, current portion | | 91 | | | 747 | |
| Excess Consideration Note | | 888 |
| | — |
| Excess Consideration Note | | 0 | | | 888 | |
| Patent held for sale | | Patent held for sale | | 156 | | | 0 | |
| Other current assets | | 546 |
| | 267 |
| Other current assets | | 637 | | | 546 | |
| Current assets of discontinuing operations | | 71 |
| | 23,250 |
| Current assets of discontinuing operations | | 0 | | | 71 | |
| Total current assets | | 7,178 |
| | 24,455 |
| Total current assets | | 4,107 | | | 7,178 | |
| FIXED ASSETS, net of accumulated depreciation | | 558 |
| | 558 |
| FIXED ASSETS, net of accumulated depreciation | | 448 | | | 558 | |
| OTHER ASSETS | | | | | OTHER ASSETS | |
| Operating lease right-of-use assets | | 94 |
| | — |
| Operating lease right-of-use assets | | 248 | | | 94 | |
| Restricted cash | | — |
| | 350 |
| |
| Earn-Out from siParadigm, less current portion | | 356 |
| | — |
| Earn-Out from siParadigm, less current portion | | 0 | | | 356 | |
| Patents and other intangible assets, net of accumulated amortization | | 2,895 |
| | 3,349 |
| Patents and other intangible assets, net of accumulated amortization | | 0 | | | 2,895 | |
| Investment in joint venture | | 92 |
| | 92 |
| Investment in joint venture | | 0 | | | 92 | |
| Goodwill | | 3,090 |
| | 5,963 |
| Goodwill | | 2,977 | | | 3,090 | |
| Other | | 641 |
| | 639 |
| Other | | 568 | | | 641 | |
| Total other assets | | 7,168 |
| | 10,393 |
| Total other assets | | 3,793 | | | 7,168 | |
| Total Assets | | $ | 14,904 |
| | $ | 35,406 |
| Total Assets | | $ | 8,348 | | | $ | 14,904 | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | |
| CURRENT LIABILITIES | | | | | CURRENT LIABILITIES | |
| Accounts payable and accrued expenses | | $ | 2,072 |
| | $ | 4,598 |
| Accounts payable and accrued expenses | | $ | 2,333 | | | $ | 2,072 | |
| Obligations under operating leases, current portion | | 193 |
| | — |
| Obligations under operating leases, current portion | | 223 | | | 193 | |
| Obligations under finance leases, current portion | | 68 |
| | 45 |
| Obligations under finance leases, current portion | | 35 | | | 68 | |
| Deferred revenue | | 1,217 |
| | 1,214 |
| Deferred revenue | | 1,013 | | | 1,217 | |
| Convertible note, net | | — |
| | 2,481 |
| |
| Note payable, net | | 1,277 |
| | — |
| Note payable, net | | 0 | | | 1,277 | |
| Advance from NovellusDx, Ltd., net | | 350 |
| | 535 |
| Advance from NovellusDx, Ltd., net | | 0 | | | 350 | |
| Advance from siParadigm, current portion | | 566 |
| | — |
| Advance from siParadigm, current portion | | 0 | | | 566 | |
| Other derivatives | | — |
| | 86 |
| |
| Current liabilities of discontinuing operations | | 1,229 |
| | 19,189 |
| Current liabilities of discontinuing operations | | 659 | | | 1,229 | |
| Total current liabilities | | 6,972 |
| | 28,148 |
| Total current liabilities | | 4,263 | | | 6,972 | |
| Obligations under operating leases, less current portion | | 10 |
| | — |
| Obligations under operating leases, less current portion | | 32 | | | 10 | |
| Obligations under finance leases, less current portion | | 107 |
| | 54 |
| Obligations under finance leases, less current portion | | 72 | | | 107 | |
| Advance from siParadigm, less current portion | | 252 |
| | — |
| Advance from siParadigm, less current portion | | 0 | | | 252 | |
| Deferred rent payable and other | | — |
| | 154 |
| |
| Warrant liability | | 178 |
| | 248 |
| Warrant liability | | 1 | | | 178 | |
| Total Liabilities | | 7,519 |
| | 28,604 |
| Total Liabilities | | 4,368 | | | 7,519 | |
| STOCKHOLDERS’ EQUITY | | | | | STOCKHOLDERS’ EQUITY | |
| Preferred stock, authorized 9,764 shares $0.0001 par value, none issued | | — |
| | — |
| |
| Common stock, authorized 100,000 shares, $0.0001 par value, 2,104 and 924 shares issued and outstanding as of December 31, 2019 and 2018, respectively | | — |
| | — |
| |
| Preferred stock, authorized 9,764 shares $0.0001 par value, NaN issued | | Preferred stock, authorized 9,764 shares $0.0001 par value, NaN issued | | 0 | | | 0 | |
| Common stock, authorized 100,000 shares, $0.0001 par value, 4,135 and 2,104 shares issued and outstanding as of December 31, 2020 and 2019, respectively | | Common stock, authorized 100,000 shares, $0.0001 par value, 4,135 and 2,104 shares issued and outstanding as of December 31, 2020 and 2019, respectively | | 0 | | | 0 | |
| Additional paid-in capital | | Additional paid-in capital | | 176,628 | | | 171,783 | |
| Accumulated other comprehensive income (loss) | | Accumulated other comprehensive income (loss) | | (223) | | | 26 | |
| Accumulated deficit | | Accumulated deficit | | (172,425) | | | (164,424) | |
| Total Stockholders’ Equity | | Total Stockholders’ Equity | | 3,980 | | | 7,385 | |
| Total Liabilities and Stockholders’ Equity | | Total Liabilities and Stockholders’ Equity | | $ | 8,348 | | | $ | 14,904 | |
See Notes to Consolidated Financial Statements.
CANCER GENETICS, INC. AND SUBSIDIARIES