UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)



ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September~~June 30, ~~2017~~2018



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-35817

CANCER GENETICS, INC.

(Exact name of registrant as specified in its charter)



Delaware		04-3462475
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

201 Route 17 North 2nd Floor

Rutherford, NJ 07070

(201) 528-9200

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	¨	Accelerated filer	¨

Non-accelerated filer	¨ (Do not check if a smaller reporting company)	Smaller reporting company	x

		Emerging growth company	x

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No ý

As of ~~November~~August 6, ~~2017,~~2018, there were ~~24,253,831~~27,746,497 shares of common stock, par value $0.0001 of Cancer Genetics, Inc. outstanding.

CANCER GENETICS, INC. AND SUBSIDIARIES

TABLE OF CONTENTS



PART I—FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets	1
	Consolidated Statements of Operations and Other Comprehensive Loss	32
	Consolidated Statements of Cash Flows	43
	Notes to Unaudited Consolidated Financial Statements	65

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1718

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3031

Item 4.	Controls and Procedures	3031

PART II—OTHER INFORMATION

Item 1.	Legal Proceedings	3132

Item 1A.	Risk Factors	3132

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds from Sales of Registered Securities	3433

Item 3.	Defaults Upon Senior Securities	3433

Item 4.	Mine Safety Disclosures	3433

Item 5.	Other Information	3433

Item 6.	Exhibits	3433

SIGNATURE		3534

INDEX TO EXHIBITS		3635

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Cancer Genetics, Inc. and Subsidiaries

Consolidated Balance Sheets (Unaudited)

(in thousands, except par value)


	September 30, 2017			December 31, 2016			June 30, 2018			December 31, 2017
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	4,807		$	9,502		$	1,601		$	9,541
Accounts receivable, net of allowance for doubtful accounts of 2017 $2,277; 2016 $1,387	15,797			11,748
Accounts receivable, net of allowance for doubtful accounts of 2018 $7,401; 2017 $6,539							9,357			10,958
Other current assets	2,881			2,174			3,245			2,707
Total current assets	23,485			23,424			14,203			23,206
FIXED ASSETS, net of accumulated depreciation	6,009			4,738			4,742			5,550
OTHER ASSETS
Restricted cash	300			300			350			350
Patents and other intangible assets, net of accumulated amortization	8,356			1,503			4,276			4,478
Investment in joint venture	247			268			243			246
Goodwill	14,158			12,029			17,257			17,992
Other	1,415			172			300			399
Total other assets	24,476			14,272			22,426			23,465
Total Assets	$	53,970		$	42,434		$	41,371		$	52,221
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses	$	9,314		$	8,148		$	9,778		$	8,715
Obligations under capital leases, current portion	271			109			322			272
Deferred revenue	109			789			2,004			516
Line of credit	2,000			—			3,438			4,137
Term note, current portion	—			2,000			6,000			6,000
Total current liabilities	11,694			11,046			21,542			19,640
Term note	4,936			2,654
Obligations under capital leases	726			374			564			624
Deferred rent payable and other	181			290			304			360
Warrant liability	4,167			2,018			1,134			4,403
Deferred revenue, long-term	1,130			428			547			429
Total Liabilities	22,834			16,810			24,091			25,456
STOCKHOLDERS’ EQUITY
Preferred stock, authorized 9,764 shares, $0.0001 par value, none issued	—			—			—			—
Common stock, authorized 100,000 shares, $0.0001 par value, 24,252 and 18,936 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively	2			2
Common stock, authorized 100,000 shares, $0.0001 par value, 27,726 and 27,754 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively							3			3
Additional paid-in capital	158,068			139,576			162,575			161,527
Accumulated other comprehensive (loss)	(1		)	—
Accumulated other comprehensive income							134			69
Accumulated (deficit)	(126,933		)	(113,954		)	(145,432		)	(134,834		)
Total Stockholders’ Equity	31,136			25,624			17,280			26,765
Total Liabilities and Stockholders’ Equity	$	53,970		$	42,434		$	41,371		$	52,221

See Notes to Unaudited Consolidated Financial Statements.

Cancer Genetics, Inc. and Subsidiaries

Consolidated Statements of Operations and Other Comprehensive Loss (Unaudited)

(in thousands, except per share amounts)


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016			2018			2017			2018			2017
Revenue	$	8,028		$	6,750		$	21,598		$	19,819		$	7,036		$	6,604		$	14,703		$	13,570
Cost of revenues	4,588			4,444			12,831			12,832			4,853			4,034			9,935			8,243
Gross profit	3,440			2,306			8,767			6,987			2,183			2,570			4,768			5,327
Operating expenses:
Research and development	981			1,594			3,080			4,806			673			989			1,354			2,099
General and administrative	4,346			3,701			11,352			11,677			5,419			3,529			10,679			7,006
Sales and marketing	1,301			1,054			3,437			3,731			1,341			1,165			2,932			2,136
Total operating expenses	6,628			6,349			17,869			20,214			7,433			5,683			14,965			11,241
Loss from operations	(3,188		)	(4,043		)	(9,102		)	(13,227		)	(5,250		)	(3,113		)	(10,197		)	(5,914		)
Other income (expense):
Interest expense	(350		)	(111		)	(797		)	(344		)	(578		)	(253		)	(817		)	(447		)
Interest income	10			4			37			21			—			10			21			27
Change in fair value of acquisition note payable	105			18			(114		)	119			64			13			81			(219		)
Change in fair value of warrant liability	2,790			712			(3,927		)	729			2,154			577			2,846			(6,717		)
Other expense	—			(325		)	(46		)	(325		)
Total other (expense)	2,555			298			(4,847		)	200
Other income (expense)													(23		)	—			(23		)	(46		)
Total other income (expense)													1,617			347			2,108			(7,402		)
Loss before income taxes	(633		)	(3,745		)	(13,949		)	(13,027		)	(3,633		)	(2,766		)	(8,089		)	(13,316		)
Income tax (benefit)	—			—			(970		)	—			—			—			—			(970		)
Net (loss)	$	(633	)	$	(3,745	)	$	(12,979	)	$	(13,027	)	$	(3,633	)	$	(2,766	)	$	(8,089	)	$	(12,346	)
Basic net (loss) per share	$	(0.03	)	$	(0.23	)	$	(0.65	)	$	(0.88	)	$	(0.13	)	$	(0.14	)	$	(0.30	)	$	(0.64	)
Diluted net (loss) per share	$	(0.15	)	$	(0.23	)	$	(0.65	)	$	(0.88	)	$	(0.13	)	$	(0.16	)	$	(0.30	)	$	(0.64	)
Basic weighted-average shares outstanding	21,577			16,519			20,059			14,868			27,049			19,697			27,049			19,301
Diluted weighted-average shares outstanding	22,359			16,519			20,059			14,868			27,049			20,663			27,049			19,301

Net (loss)	(633		)	(3,745		)	(12,979		)	(13,027		)	$	(3,633	)	$	(2,766	)	$	(8,089	)	$	(12,346	)
Foreign currency translation (loss)	(1		)	—			(1		)	—
Foreign currency translation gain													85			—			65			—
Comprehensive (loss)	(634		)	(3,745		)	(12,980		)	(13,027		)	$	(3,548	)	$	(2,766	)	$	(8,024	)	$	(12,346	)

See Notes to Unaudited Consolidated Financial Statements.

Cancer Genetics, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

(in thousands)



	Six Months Ended June 30,
	2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss)	$	(8,089	)	$	(12,346	)
Adjustments to reconcile net (loss) to net cash (used in) operating activities:
Depreciation	879			981
Amortization	269			166
Provision for bad debts	862			236
Stock-based compensation	542			876
Change in fair value of acquisition note payable	(81		)	219
Change in fair value of warrant liability	(2,846		)	6,717
Amortization of debt issuance costs	—			31
Amortization of discount on debt	—			48
Gain on sale of India subsidiary	(9		)	—
Modification of 2017 Debt warrants	83			—
Loss in equity method investment	3			19
Loss on extinguishment of debt	—			78
Changes in:
Accounts receivable	374			(1,638		)
Other current assets	(467		)	(370		)
Other non-current assets	1			38
Accounts payable, accrued expenses and deferred revenue	421			(2,361		)
Deferred rent payable and other	(43		)	(83		)
Net cash (used in) operating activities	(8,101		)	(7,389		)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets	(529		)	(400		)
Patent costs	(63		)	(63		)
Purchase of cost method investment	—			(200		)
Cash received in the sale of India subsidiary, net of cash transferred	1,551			—
Net cash provided by (used in) investing activities	959			(663		)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on capital lease obligations	(160		)	(101		)
Proceeds from warrant exercises	—			1,771
Proceeds from option exercises	—			4
Proceeds from borrowings on Silicon Valley Bank line of credit	3,162			2,000
Repayment of borrowings on Silicon Valley Bank line of credit	(3,861		)	—
Proceeds from Partners for Growth IV, L.P. term note	—			6,000
Principal payments on Silicon Valley Bank term note	—			(4,667		)
Payment of debt issuance costs and loan fees	—			(287		)
Net cash provided by (used in) financing activities	(859		)	4,720
Effect of foreign exchange rates on cash and cash equivalents and restricted cash	61			—
Net (decrease) in cash and cash equivalents and restricted cash	(7,940		)	(3,332		)
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH
Beginning	9,891			9,502
Ending	$	1,951		$	6,170

Nine Months Ended September 30,
2017 2016
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) $ (12,979 ) $ (13,027 )
Adjustments to reconcile net (loss) to net cash (used in) operating activities:
Depreciation 1,436
1,502
Amortization 234
260
Provision for bad debts 890
8
Stock-based compensation 1,395
1,538
Change in fair value of acquisition note payable 114
(119 )
Change in fair value of warrant liability 3,927
(729 )
Amortization of debt issuance costs 51
9
Amortization of discount on debt 134
—
Loss in equity method investment 21
45
Loss on extinguishment of debt 78
—
Changes in:
Accounts receivable (4,029 ) (7,066 )
Other current assets (606 ) (67 )
Other non-current assets 251
(9 )
Accounts payable, accrued expenses and deferred revenue (1,057 ) 372
Deferred rent payable and other (109 ) (16 )
Net cash (used in) operating activities (10,249 ) (17,299 )
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (1,192 ) (345 )
Patent costs (73 ) (127 )
Purchase of cost method investment (200 ) —
Acquisition of vivoPharm, Pty Ltd., net of cash acquired (656 ) —
Net cash (used in) investing activities (2,121 ) (472 )
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on capital lease obligations (170 ) (101 )
Proceeds from warrant exercises 1,827
—
Proceeds from option exercises 7
—
Proceeds from offerings of common stock with derivative warrants, net of certain offering costs —
9,962
Proceeds from borrowings on Silicon Valley Bank line of credit 2,000
—
Proceeds from Partners for Growth IV, L.P. term note 6,000
—
Proceeds from Aspire Capital common stock purchases, net of certain offering costs 2,965
—
Principal payments on Silicon Valley Bank term note (4,667 ) (833 )
Payment of debt issuance costs and loan fees (287 ) —
Net cash provided by financing activities 7,675
9,028
Net (decrease) in cash and cash equivalents (4,695 ) (8,743 )
CASH AND CASH EQUIVALENTS
Beginning 9,502
19,459
Ending $ 4,807
$ 10,716
SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash paid for interest $ 633
$ 250
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Fixed assets acquired through capital lease arrangements $ 567
$ —
Derivative warrants issued with debt 1,004
—
Acquisition of vivoPharm business 9,856
—



SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash paid for interest	$	638		$	410
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Fixed assets acquired through capital lease arrangements	$	150		$	567
Derivative warrants issued with debt	—			1,004
Fair value of warrants reclassified from liabilities to equity	423			—
Sale of India subsidiary:
Accounts receivable, net	$	365		$	—
Other current assets	(71		)	—
Fixed assets, net	608			—
Goodwill	735			—
Other noncurrent assets	98			—
Accounts payable, accrued expenses and deferred revenue	(180		)	—
Deferred rent and other	(13		)	—
Gain on sale of India subsidiary	9			—
Cash received in the sale of India subsidiary, net of cash transferred	$	1,551		$	—

See Notes to Unaudited Consolidated Financial Statements.

Notes to Unaudited Consolidated Financial Statements

Note 1. Organization, Description of Business, Basis of Presentation, Recently Adopted Accounting Standards, Acquisition, Reclassifications and Recent Accounting Pronouncements

We are an emerging leader in the field of precision medicine, enabling individualized therapies in the field of oncology through our ~~diagnostic products and~~tests, services and molecular markers. We develop, commercialize and provide molecular- and biomarker-based tests and services, including proprietary preclinical oncology and immuno-oncology services, that enable biotech and pharmaceutical companies engaged in oncology and immuno-oncology trials to better select candidate populations and reduce adverse drug reactions by providing information regarding genomic and molecular factors influencing subject responses to therapeutics. Through our clinical services, we enable physicians to personalize the clinical management of each individual patient by providing genomic information to better diagnose, monitor and inform cancer treatment and that enable biotech and pharmaceutical companies engaged in oncology trials to better select candidate populations and reduce adverse drug reactions by providing information regarding genomic factors influencing subject responses to therapeutics.treatment. We have a comprehensive, disease-focused oncology testing ~~portfolio.~~portfolio, and extensive set of anti-tumor referenced data based on predictive xenograft and syngeneic tumor models. Our tests and techniques target a wide range of ~~cancers,~~indications, covering ~~nine~~all ten of the top ~~ten~~ cancers in prevalence in the United States, with additional unique capabilities offered by our FDA-cleared Tissue of Origin® test for identifying difficult to diagnose tumor types or poorly differentiated metastatic disease. Following the acquisition of vivoPharm, Pty Ltd. (“vivoPharm”)~~, as discussed in more detail below,~~ we provide contract research services, focused primarily on unique specialized studies to guide drug discovery and development programs in the oncology and ~~immune-oncology~~immuno-oncology fields.

We were incorporated in the State of Delaware on April 8, 1999 and have offices and ~~state-of-the-art~~ laboratories located in ~~California,~~ New Jersey, North Carolina, Pennsylvania, ~~Shanghai (China), Victoria (Australia)~~ and ~~Hyderabad (India).~~Australia. Our laboratories comply with the highest regulatory standards as appropriate for the services ~~they~~we deliver including CLIA, CAP, NYNew York State and California State, and ~~NABL (India).~~are regularly audited by our biopharmaceutical customers under strict requirements for drug discovery and development. Our services are built on a foundation of world-class scientific knowledge and intellectual property in solid tumor and blood-borne cancers, as well as strong academic relationships with major cancer centers such as Memorial Sloan-Kettering, Mayo Clinic, and the National Cancer Institute. We offer preclinical services such as predictive tumor models, human orthotopic xenografts and syngeneic immuno-oncology relevant tumor models in our Hershey, Pennsylvania facility, and we are a leader in the field of immuno-oncology preclinical services in the United States. This service is supplemented with GLP toxicology and extended bioanalytical services in our Australian based facility in Bundoora VIC.

Basis of Presentation

The accompanying unaudited condensed financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions for interim reporting as prescribed by the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary to make the financial statements not misleading have been included. As such, the information included in this quarterly report on Form 10-Q should be read in conjunction with the audited consolidated financial statements as of and for the year ended December 31, ~~2016,~~2017, filed with the Securities and Exchange Commission on ~~March 23, 2017.~~April 2, 2018. The consolidated balance sheet as of December 31, ~~2016,~~2017, included herein was derived from the audited financial statements as of that date, but does not include all disclosures including notes required by GAAP. Interim financial results are not necessarily indicative of the results that may be expected for any future interim period or for the year ending December 31, ~~2017.~~

~~Foreign Currency Translation~~2018.

During the three months ended September 30, 2017, we started accounting for our foreign currency translation in other comprehensive income (loss). Assets and liabilities recorded in foreign currencies are translated at the exchange rate on the balance sheet date. Revenue and expenses are translated at average rates of exchange prevailing during the year. Translation adjustments for prior periods have not been presented, as they are not material.Recently Adopted Accounting Standards

~~Liquidity and Going Concern~~Revenue Recognition

~~At September 30, 2017, our cash position and history of losses required management to asses our ability to continue operating as a going concern, according to FASB~~

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ~~No. 2014-15, Disclosure~~(“ASU”) 2014-09, “Revenue from Contracts with Customers.” The guidance requires an entity to recognize the amount of ~~Uncertainties about~~revenue to which it expects to be entitled for the transfer of promised goods or services to a customer. The ASU replaces most existing revenue recognition guidance in U.S. GAAP. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers: Deferral of the Effective Date” which defers the effective date for ASU 2014-09 by one year. In March 2016, the FASB issued ASU 2016-08, “Principal versus Agent Considerations (Reporting Gross versus Net),” which clarifies the implementation guidance in ASU 2014-09 relating to principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10, “Identifying Performance Obligations and Licensing,” which clarifies guidance related to the impact of goods and services on a performance obligation and timing and pattern of recognition issues related to intellectual property contracts. In May 2016, the FASB issued ASU 2016-12, “Narrow-Scope Improvements and Practical Expedients,” which clarifies certain narrow provisions of ASU 2014-09. On January 1, 2018, we adopted these ASUs using the modified retrospective method. We

recognized the cumulative effect of initially applying the new revenue standard as an ~~Entity’s Ability~~adjustment to ~~Continue~~the opening balance of accumulated deficit. Financial information for the six months ended June 30, 2017 has not been restated and continues to be reported under the accounting standards in effect for that period.

The transition adjustment resulted in a net reduction to the opening balance of accumulated deficit of $2.5 million on January 1, 2018 and increased deferred revenue associated with Biopharma Services and Discovery Services by $1.9 million and $0.6 million, respectively, due to a change in our policies for recognized revenue for performance obligations fulfilled over time. In our Clinical Services area, the majority of the amounts historically charged as a ~~Going Concern~~provision for bad debts are now considered an implicit price concession in determining net revenue under Accounting Standards Codification (“~~ASU 2014-15”~~ASC”)~~. Management evaluated the history and operational losses to have a material effect on our ability to continue~~ Topic 606. Accordingly, we now report uncollectible balances as a ~~going concern, unless~~reduction in the transaction price, and therefore, as a reduction in net revenues rather than a component of selling, general and administrative expenses.

The following table presents the amounts by which each line item in the Consolidated Statements of Operations and Other Comprehensive Loss was affected by adopting the new revenue recognition guidance for the three and six months ended June 30, 2018 (in thousands):



	Three Months Ended June 30, 2018							Six Months Ended June 30, 2018
	As Reported		ASC 606 Adjustments			Balances Without Adoption		As Reported		ASC 606 Adjustments			Balances Without Adoption
Revenue:
Biopharma Services	$	3,591	$	(455	)	3,136		7,249		$	(762	)	6,487
Clinical Services	2,122		—			2,122		4,464		—			4,464
Discovery Services	1,323		(131		)	1,192		2,990		(650		)	2,340
	$	7,036	$	(586	)	$	6,450	$	14,703	$	(1,412	)	$	13,291

The following table presents the amounts by which each line item in the Consolidated Balance Sheet was affected by adopting the new revenue recognition guidance at June 30, 2018 (in thousands):



	June 30, 2018
	As Reported			ASC 606 Adjustments			Balances Without Adoption
CURRENT LIABILITIES
Deferred revenue
Biopharma Services	$	1,161		$	(1,092	)	$	69
Clinical Services	—			—			—
Discovery Services	843			—			843
	$	2,004		$	(1,092	)	$	912

NON-CURRENT LIABILITIES
Deferred revenue
Biopharma Services	$	532		$	—		$	532
Clinical Services	—			—			—
Discovery Services	15			—			15
	$	547		$	—		$	547

STOCKHOLDERS' EQUITY
Accumulated (deficit)	$	(145,432	)	$	1,092		$	(144,340	)

Restricted Cash

Effective January 1, 2018, we ~~take actions~~adopted ASU 2016-18, which requires companies to alleviate those conditions. Our primary sources of liquidity have been funds generated from our debt financings and equity financings. We have reduced, and plan to continue reducing, our operating expenses, and expect to grow our revenue in 2017 and beyond, and have also increased ourinclude restricted cash ~~collections from our customers and third-party payors and plan to continue to improve our cash collection results.~~

~~Management believes that its existing~~accounts with cash and cash equivalents ~~taken together with~~when reconciling the ~~borrowings available from~~beginning of period and end of period total amounts shown on the ~~Silicon Valley Bank line~~Consolidated Statements of credit and the common stock purchase agreement with Aspire Capital Fund, LLC (described in Note 3), will be sufficient to fund the Company's operations for at least the next twelve months after filing this quarterly report on Form 10-Q.Cash Flows.

Acquisition of vivoPharm

On August 15, 2017, we purchased all of the outstanding stock of vivoPharm, with its principal place of business in Victoria, Australia, in a transaction valued at approximately ~~$1.2~~$1.6 million in cash ~~$9.5 million in~~and shares of the ~~Company's~~Company’s common stock, valued at $8.1 million based on the closing price of the stock on August 15, ~~2017, plus an estimated settlement of $345,000 for excess working capital in accounts payable and accrued expenses in the accompanying balance sheet.~~2017. The Company has deposited in escrow 20% of the stock consideration until the expiration of twelve months from the closing date to serve as the initial source for any indemnification claims and adjustments. ~~The Company had an estimated $150,000 in transaction costs associated with the purchase of vivoPharm, which were expensed during the three and nine months ended September 30, 2017.~~

Prior to the acquisition, vivoPharm was a contract research organization (“CRO”) that specialized in planning and conducting unique, specialized studies to guide drug discovery and development programs with a concentration in oncology and immuno-oncology. The transaction is being accounted for using the acquisition method of accounting for business combinations in accordance with GAAP. Under this method, the total consideration transferred to consummate the acquisition is being allocated to the identifiable tangible and intangible assets acquired and liabilities assumed based on their respective fair values as of the closing date of the acquisition. The acquisition method of accounting requires extensive use of estimates and judgments to allocate the consideration transferred to the identifiable tangible and intangible assets acquired and liabilities assumed. Accordingly, the allocation of the consideration transferred is preliminary and will be adjusted upon completion of the final valuation of the assets acquired and liabilities assumed. The final valuation is expected to be completed as soon as practicable but no later than twelve months after the closing date of the acquisition. As of June 30, 2018, the valuation of the lab supplies, deferred revenue and deferred taxes is provisional.

The estimated allocation of the purchase price as of August 15, 2017 consists of the following (in thousands):


Cash	$	544		$	544
Accounts receivable	905			905
Lab supplies	1,258			350
Prepaid expenses and other current assets	101			60
Fixed assets	949			765
Intangible assets	7,014			3,160
Goodwill	2,129			5,960
Accounts payable and accrued expenses	(913		)	(913		)
Deferred revenue	(814		)	(814		)
Deferred rent and other				(222		)
Obligations under capital leases	(117		)	(76		)
Total purchase price	$	11,056		$	9,719

The following table provides certain pro forma financial information for the Company as if the acquisition of vivoPharm discussed above occurred on January 1, ~~2016~~2017 (in thousands except per share amounts):

Three Months Ended September 30 Nine Months Ended September 30,
2017 2016 2017 2016
Revenue $ 9,069
$ 7,958
$ 25,335
$ 23,595
Net loss (976 ) (3,919 ) (13,788 ) (13,596 )

Basic net loss per share $ (0.04 ) $ (0.20 ) $ (0.61 ) $ (0.76 )
Diluted net loss per share (0.16 ) (0.20 ) (0.61 ) (0.76 )

The pro forma numbers above are derived from historical numbers of the Company and vivoPharm. Over time the operations of vivoPharm will be integrated into the operations of the Company. At the current time, we do not have enough information to prepare a reliable estimate of any possible changes.



	Three Months Ended June 30,			Six Months Ended June 30,
	2017			2017
Revenue	$	7,933		$	16,070
Net loss	(2,850		)	(12,642		)

Basic net loss per share	$	(0.13	)	$	(0.57	)
Dilutive net loss per share	(0.14		)	(0.57		)

The results of operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 include the operations of vivoPharm, ~~from August 15, 2017,~~ which accounted for approximately ~~$794,000~~$1,280,000 and $2,708,000 of the Company’s consolidated Discovery Services ~~revenue.~~

revenue, respectively. The net income (loss) of vivoPharm ~~that is included in~~cannot be determined, as its operations were integrated with Cancer Genetics.

Restructuring

During the ~~Company’s results~~three months ended June 30, 2018, the Company adopted a plan to migrate its California operations to its New Jersey and North Carolina locations and to permanently close its California laboratory. The Company incurred approximately $733,000 of ~~operations for~~restructuring costs during the three and ~~nine~~six months ended ~~September~~June 30, ~~2017 was approximately $380,000.~~2018, which are included in general and administrative expenses on the Consolidated Statements of Operations and Other Comprehensive Loss.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation.

Recent Accounting Pronouncements

In ~~May 2014,~~February 2016, the ~~Financial Accounting Standards Board (“FASB��)~~FASB issued ~~Accounting Standards Update 2014-09, Revenue from Contracts~~guidance codified in ASC 842, Leases, which supersedes the guidance in former ASC 840, Leases, to increase transparency and comparability among organizations by requiring recognition of lease assets and lease liabilities on the balance sheet and disclosure of key information about leasing arrangements. The standard will become effective for interim and annual periods beginning after December 15, 2018, with ~~Customers (Topic 606) (“ASU 2014-09”), requiring an entity to recognize the amount of revenue to which it expects~~early adoption permitted. The guidance is required to be ~~entitled for~~adopted at the transfer of promised goods or services to customers. As issued and amended, ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of eitherearliest period presented using a ~~full~~modified retrospective or retrospective with cumulative effect transition method. The updated standard becomes effective for the Company in the first quarter of fiscal year 2018. Early adoption is permitted in the first quarter of fiscal year 2017. The Company believes its Biopharma Service and Discovery Service revenues will be affected by the new standard. The Company is presently evaluating all of its contracts for performance obligations and variable consideration provisions that may affect the timing of revenue recognition subsequent to ASU 2014-09’s adoption. The Company expectsapproach. We plan to adopt ~~the new standard~~this guidance on ~~January 1, 2018, using the modified retrospective approach, which involves applying the new standard to all contracts initiated on or after~~ the effective ~~date and recording an adjustment to opening equity for pre-existing contracts that~~date. We are currently evaluating the impact the provisions will have ~~remaining obligations as of the effective date.~~on our consolidated financial statements.

Note 2. Going Concern

At June 30, 2018, our cash position and history of losses required management to assess our ability to continue operating as a going concern, according to FASB ASC 205-40, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The Company does not have sufficient cash at June 30, 2018 to fund normal operations for the next twelve months. In addition, the Company was in violation of certain financial covenants under its debt agreements at April 30, 2018. These covenant violations were waived on May 14, 2018 by Silicon Valley Bank (“SVB”) and Partners for Growth IV, L.P. (“PFG”). The SVB and PFG loan covenants were modified on June 21, 2018 and June 30, 2018, respectively; however, the Company was in violation of certain of the modified covenants at May 31, 2018 and June 30, 2018 and expects to be in violation of these covenants at July 31, 2018. The Company's ability to continue as a going concern is dependent on the Company’s ability to obtain waivers of its covenant violations, modify its existing debt, raise additional equity or debt capital or spin-off non-core assets to raise additional cash. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

Net cash used in operating activities was $8.1 million and $7.4 million for the six months ended June 30, 2018 and 2017, respectively, and the Company had unrestricted cash and cash equivalents of $1.6 million at June 30, 2018, a reduction from $9.5 million at December 31, 2017. The Company has negative working capital at June 30, 2018 of $7.3 million.

The Company currently requires a significant amount of additional capital to fund operations and pay its accounts payable, and its ability to continue as a going concern is dependent upon its ability to raise such additional capital and achieve profitability. If the Company is not able to raise such additional capital on a timely basis or on favorable terms, the Company may need to scale back or, in extreme cases, discontinue its operations or liquidate its assets.

We have hired Raymond James & Associates, Inc. as our financial advisor to assist with evaluating strategic options. Such options could include raising more capital, the acquisition of another company and/or complementary assets, the sale of the Company or another type of strategic partnership. We can provide no assurances that our current actions will be successful or that additional sources of financing with be available to us 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.

Note 2.3. Revenue and Accounts Receivable

Revenue by service type for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017 is comprised of the following (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016		2018		2017		2018		2017
Biopharma Services	$	4,168	$	3,805	11,175		$	11,374	$	3,591	$	3,288	7,249		$	7,007
Clinical Services	2,880		2,687		8,887		7,685		2,122		3,053		4,464		6,007
Discovery Services	980		258		1,536		760		1,323		263		2,990		556
	$	8,028	$	6,750	$	21,598	$	19,819	$	7,036	$	6,604	$	14,703	$	13,570

The table above includes approximately $1,280,000 and $2,708,000 of Discovery Services revenue from our acquisition of vivoPharm for the three and six months ended June 30, 2018, respectively.

Accounts receivable by service type at ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016~~2017 consists of the following (in thousands):

September 30,
2017 December 31,
2016
Biopharma Services $ 3,702
$ 3,683
Clinical Services 13,072
8,972
Discovery Services 1,300
480
Allowance for doubtful accounts (2,277 ) (1,387 )

$ 15,797
$ 11,748

Allowance for Doubtful Accounts (in thousands)
Balance, December 31, 2016 $ 1,387
Bad debt expense 890
Balance, September 30, 2017 $ 2,277



	June 30, 2018			December 31, 2017
Biopharma Services	$	3,350		$	3,746
Clinical Services	12,292			12,205
Discovery Services	1,116			1,546
Allowance for doubtful accounts	(7,401		)	(6,539		)
	$	9,357		$	10,958

Revenue for Biopharma Services are customized solutions for patient stratification and treatment selection through an extensive suite of DNA-based testing services. Biopharma Services are billed to pharmaceutical and biotechnology companies. Clinical Services are tests performed to provide information on diagnosis ~~prognosis and theranosis~~ of cancers to guide patient management. ~~These~~Clinical Services tests can be billed to Medicare, another third party insurer or the referring community hospital or other healthcare ~~facility.~~facility, or directly to patients. Discovery Services are services that provide the tools and testing methods for companies and researchers seeking to identify new DNA-based biomarkers for disease. The breakdown of our Clinical Services revenue (as a percent of total revenue) is as follows:

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
Medicare 11% 14% 14% 13%
Other insurers 19% 21% 22% 20%
Other healthcare facilities 6% 5% 5% 6%
36% 40% 41% 39%



	Three Months Ended June 30,		Six Months Ended June 30,
	2018	2017	2018	2017
Medicare	9%	16%	11%	15%
Other third party payors	21%	30%	19%	29%
	30%	46%	30%	44%

We have historically derived a significant portion of our revenue from a limited number of test ordering ~~sites, although the test ordering sites that generate a significant portion of our revenue have changed from period to period.~~sites. Test ordering sites account for all of our Clinical ~~Services along with a portion of the Biopharma~~ Services revenue. Our test ordering sites are largely hospitals, cancer centers, reference laboratories, physician offices and biopharmaceutical companies. Oncologists and pathologists at these sites order the tests on behalf of the needs of their oncology patients or as part of a clinical trial sponsored by a biopharmaceutical company in which the patient is being enrolled. We generally do not have formal, long-term written agreements with such test ordering sites, and, as a result, we may lose a significant test ordering site at any ~~time.~~time, except with biopharmaceutical companies.

During the three months ended June 30, 2018, we began using our billing system to calculate test counts as opposed to our laboratory information systems, as we believe it more closely aligns the volume of tests with the tests on which we calculate expected collection prices. The billing software may count a test differently than our laboratory information systems have in prior periods. The top five test ordering sites during the three months ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017 accounted for approximately ~~45%~~30% and ~~39%~~50% of our testing volumes, respectively. During the three months ended ~~September~~June 30, 2018, there were no customers that accounted for more than 10% of our total revenue. During the three months ended June 30, 2017, there was one biopharmaceutical company which accounted for approximately 12% of our total revenue.

The top five test ordering sites during the six months ended June 30, 2018 and 2017 accounted for approximately 31% and 41% of our testing volumes, respectively. During the six months ended June 30, 2018, there were no customers that accounted for more than 10% of our total revenue. During the six months ended June 30, 2017, there was one biopharmaceutical company which accounted for approximately 11% of our total revenue. ~~During the three months ended September 30, 2016, there was one biopharmaceutical company which accounted for approximately 18%~~

We record deferred revenues (contract liabilities) when cash payments are received or due in advance of our ~~total revenue.~~performance, including amounts which are refundable.

Performance Obligations:



	Biopharma Services	Clinical Services	Discovery Services
Performance Obligation Satisfaction and Revenue Recognition:	Performance obligations are satisfied at a point in time as the Company processes samples delivered by the customer. Project level activities, including study setup and project management, are satisfied over the life of the contract. Revenues are recognized at a point in time when the test results or other deliverables are reported to the customer. Project level fee revenue is recognized ratably over the life of the contract.	Performance obligations are satisfied at a point in time when the tests are reported to the customer. Revenues are recognized at a point in time when the test results are reported to the ordering site.	Performance obligations are satisfied over time and revenue is recognized using the time elapsed method as the Company delivers study results to the customers.

Significant Payment Terms:	Monthly invoices at a contractual rate are generated as services are delivered for work completed during the prior month. Some contracts have prepayments prior to services being rendered that are recorded as deferred revenue.	The Company invoices at its list price or contractually negotiated price. Payments realized vary from amounts invoiced. Accordingly, the Company estimates the variable consideration it expects to collect.	As results are delivered, the invoices are generated based on contractual rates. Some contracts have prepayments prior to services being rendered that are recorded as deferred revenue.

Nature of Services:	Biopharma testing services, study setup and study management	Clinical testing services	Discovery services

Remaining Performance Obligations:

Services offered under the Biopharma and Discovery Services frequently take time to complete under their respective contacts. These times vary depending on specific contract arrangements like the length of the study in the case of Discovery Services and how samples are delivered to us for processing in the case of Biopharma Services. In the case of Clinical Services and Discovery Services, the duration of performance obligation is less than one year. As of June 30, 2018 the Company had approximately $15.3 million in remaining performance obligations in the Biopharma Services area. We expect to recognize the remaining performance obligations over the next two years.

Practical Expedients:

Our customer arrangements in Biopharma Services and Discovery Services do not contain any significant financing component (interest). We have not recognized the financing component in the case of Clinical Services, as the payment plans we may grant to our self-pay customers do not to exceed six months.

We do not incur any incremental costs to obtain or fulfill our customer contracts that require capitalization under the new revenue standard and have elected the practical expedient afforded by the new revenue standard to expense such costs as incurred.

We exclude from the measurement of the transaction price all taxes that we collect from customers that are assessed by governmental authorities and are both imposed on and concurrent with specific revenue-producing transactions.

Note 4. Sale of India Subsidiary

On April 26, 2018, we sold our India subsidiary, BioServe Biotechnologies (India) Private Limited (“BioServe”) to Reprocell, Inc., for $1.9 million, including $1.6 million in cash at closing and up to an additional $300,000, which is recorded in other current assets in our Consolidated Balance Sheet at June 30, 2018. The ~~top five test ordering sites during~~additional $300,000 is contingent upon the ~~nine months ended September 30, 2017~~India subsidiary meeting a specified revenue target in 2018. As a result of this transaction, we recognized a gain of approximately $9,000 on the disposal of BioServe, which is included in other income (expense) in our Consolidated Statements of Operations and 2016 accounted for approximately 40% and 31% of our testing volumes, respectively. During the nine months ended September 30, 2017, there was one biopharmaceutical company which accounted for approximately 11% of our total revenue. During the nine months ended September 30, 2016, there was one biopharmaceutical company which accounted for approximately 10% of our total revenue.Other Comprehensive Loss.

~~Note 3. Common Stock Purchase Agreement with Aspire Capital~~

On August 14, 2017, we entered into a Common Stock Purchase Agreement (the “Purchase Agreement”) with Aspire Capital Fund, LLC, an Illinois limited liability company (“Aspire Capital”), which provides that Aspire Capital is committed to purchase up to an aggregate of $16.0 million of our common stock (the “Purchase Shares”) from time to time over the term of the Purchase Agreement. Aspire Capital made an initial purchase of 1,000,000 Purchase Shares (the “Initial Purchase”) at a purchase price of $3.00 per share on the commencement date of the agreement.

After the commencement date, on any business day over the 24-month term of the Purchase Agreement, we have the right, in our sole discretion, to present Aspire Capital with a purchase notice (each, a “Purchase Notice”) directing Aspire Capital to purchase up to 33,333 Purchase Shares per business day, provided that Aspire Capital will not be required to buy Purchase Shares pursuant to a Purchase Notice that was received by Aspire Capital on any business day on which the last closing trade price of our common stock on the NASDAQ Capital Market is below $3.00. The Company and Aspire Capital also may mutually agree to increase the number of shares that may be sold to as much as an additional 2,000,000 Purchase Shares per business day. The purchase price per Purchase Share will be $3.00. As consideration for entering into the Purchase Agreement, we issued 320,000 shares of our common stock to Aspire Capital (“Commitment Shares”).

The number of Purchase Shares covered by and timing of each Purchase Notice are determined by us, at our sole discretion. The aggregate number of shares that we can sell to Aspire Capital under the Purchase Agreement may in no case exceed 3,938,213 shares of our common stock (which is equal to approximately 19.9% of the common stock outstanding on the date of the Purchase Agreement), including the 320,000 Commitment Shares and the 1,000,000 Initial Purchase Shares, unless shareholder approval is obtained to issue additional shares.

Our net proceeds will depend on several factors, including the frequency of our sales of Purchase Shares to Aspire Capital and the frequency at which the last closing trade price of our common stock is below $3.00, subject to a maximum of $16.0 million in gross proceeds, including the Initial Purchase. Our delivery of Purchase Notices will be made subject to market conditions, in light of our capital needs from time to time and under the limitations contained in the Purchase Agreement. We currently intend to use the net proceeds from sales of Purchase Shares for general corporate purposes and working capital requirements.

As of September 30, 2017, the Company has sold 1,000,000 shares under this agreement at $3.00 per share, resulting in proceeds of approximately $2,965,000, net of offering costs of approximately $35,000. The Company has also issued 320,000 shares as consideration for entering into the Purchase Agreement. The Company has not deferred any offering costs associated with this

~~agreement.~~

Note 4.5. Earnings Per Share

For purposes of this calculation, stock warrants, outstanding stock options and unvested restricted shares are considered common stock equivalents using the treasury stock method, and are the only such equivalents outstanding.

Basic net loss and diluted net loss per share data were computed as follows (in thousands except per share data):

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
Numerator:
Net (loss) for basic earnings per share $ (633 ) $ (3,745 ) $ (12,979 ) $ (13,027 )
Change in fair value of warrant liability 2,790
—
—
—
Net (loss) for diluted earnings per share $ (3,423 ) $ (3,745 ) $ (12,979 ) $ (13,027 )
Denominator:
Weighted-average basic common shares outstanding 21,577
16,519
20,059
14,868
Assumed conversion of dilutive securities:
Common stock purchase warrants 782
—
—
—
Potentially dilutive common shares 782
—
—
—
Denominator for diluted earnings per share – adjusted weighted-average shares 22,359
16,519
20,059
14,868
Basic net (loss) per share $ (0.03 ) $ (0.23 ) $ (0.65 ) $ (0.88 )
Diluted net (loss) per share $ (0.15 ) $ (0.23 ) $ (0.65 ) $ (0.88 )

The above table includes adjustments to diluted earnings per share in accordance with FASB Accounting Standards Codification (“ASC”) 260. The adjustments were required for the three months ended September 30, 2017 as the derivative warrants were dilutive and the change in fair value of the derivative warrants was a gain.



	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
Numerator:
Net (loss) for basic earnings per share	$	(3,633	)	$	(2,766	)	$	(8,089	)	$	(12,346	)
Change in fair value of warrant liability	—			577			—			—
Net (loss) for diluted earnings per share	$	(3,633	)	$	(3,343	)	$	(8,089	)	$	(12,346	)
Denominator:
Weighted-average basic common shares outstanding	27,049			19,697			27,049			19,301
Assumed conversion of dilutive securities:
Common stock purchase warrants	—			966			—			—
Potentially dilutive common shares	—			966			—			—
Denominator for diluted earnings per share – adjusted weighted-average shares	27,049			20,663			27,049			19,301
Basic net (loss) per share	$	(0.13	)	$	(0.14	)	$	(0.30	)	$	(0.64	)
Diluted net (loss) per share	$	(0.13	)	$	(0.16	)	$	(0.30	)	$	(0.64	)

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

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
Common stock purchase warrants 4,163
7,145
6,574
7,145
Stock options 2,816
2,128
2,816
2,128
Restricted shares of common stock 115
73
115
73
7,094
9,346
9,505
9,346

~~Note 5. Sale of Net Operating Losses~~

On February 22, 2017, we sold $18,177,059 of gross State of New Jersey NOL’s relating to the 2014 and 2015 tax years for approximately $876,000 as well as $167,572 of state research and development tax credits. The sale resulted in the net receipt by the Company of approximately $970,000. This figure includes all costs and expenses associated with the sale of these state tax attributes as deducted from the gross sales price of $1,043,517.



	Three Months Ended June 30,		Six Months Ended June 30,
	2018	2017	2018	2017
Common stock purchase warrants	10,055	4,163	10,055	6,599
Stock options	3,085	2,578	3,085	2,578
Restricted shares of common stock	57	75	57	75
	13,197	6,816	13,197	9,252

Note 6. Debt

Term ~~Notes~~Note and Line of Credit

On March 22, 2017, we ~~refinanced our debt with Silicon Valley Bank (“SVB”), by repaying the outstanding term loan (“SVB Term Note”), which was scheduled to mature in April 2019, and~~ entered into a ~~new~~ two year asset-based revolving line of

credit ~~agreement.~~agreement (“ABL”) with SVB. The ~~new~~ SVB credit facility provides for an ~~asset-based line of credit (“ABL”)~~ABL for an amount not to exceed the lesser of (a) $6.0 million or (b) 80% of eligible accounts receivable plus the lesser of 50% of the net collectible value of third party accounts receivable or three (3) times the average monthly collection amount of third party accounts receivable over the previous quarter. The ABL requires monthly interest payments at the Wall Street Journal prime rate plus 1.50% ~~(5.75%~~(6.50% at ~~September~~June 30, ~~2017)~~2018) and matures on March 22, 2019. We ~~paid to SVB a $30,000 commitment fee at closing and will~~also pay a fee of 0.25% per year on the average unused portion of the ABL. At ~~September~~June 30, ~~2017,~~2018, we have borrowed ~~$2.0~~approximately $3.4 million on the ~~ABL.~~ABL, which is the maximum amount allowed based on eligible accounts receivable.

We concurrently entered into a ~~new~~ three year $6.0 million term loan agreement (“PFG Term Note”) with ~~Partners for Growth IV, L.P. (“PFG”).~~PFG. The PFG Term Note is an interest only loan with the full principal and any outstanding interest due at maturity on March 22, 2020. Interest is payable monthly at a rate of 11.5% per ~~annum, with the possibility of reducing to 11.0% in 2018 based on achieving certain financial milestones set forth by PFG.~~annum. We may prepay the PFG Term Note in whole or part at any time without penalty. ~~We paid PFG a commitment fee of $120,000~~ ~~at closing.~~

Both loan agreements require us to comply with certain financial covenants, including minimum adjusted EBITDA, revenue and liquidity covenants, and restrict us from, among other things, paying cash dividends, incurring debt and entering into certain transactions without the prior consent of the lenders. Repayment of amounts borrowed under the new loan agreements may be accelerated if an event of default occurs, which includes, among other things, a violation of such financial covenants

and negative covenants.
As of April 30, 2018, we were in violation of certain financial covenants. These covenant violations were waived on May 14, 2018 by SVB and PFG. The SVB and PFG loan covenants were modified on June 21, 2018 and June 30, 2018, respectively; in conjunction with these modifications. The Company incurred approximately $208,000 of debt modification costs that were expensed due to violating the modified covenants as of May 31, 2018 and June 30, 2018. In addition, the Company expects to be in violation of certain of the modified covenants at July 31, 2018. The Company is in discussions with its lenders to obtain waivers of these loan covenants.

Our obligations to SVB under the ABL facility are secured by a first priority security interest on substantially all of our assets, and our obligations under the PFG Term Note are secured by a second priority security interest subordinated to the SVB lien.

In connection with the PFG Term Note, we issued seven year warrants to the lenders to purchase an aggregate of 443,262 shares of our common stock at an exercise price of $2.82 per ~~share. The number of warrants may be reduced by 20% subject~~share (the “PFG Warrants”). On June 30, 2018, the PFG Warrants were amended to ~~us achieving certain financial milestones set forth by PFG.~~reduce the exercise price to $0.92 per share.

~~The following is a summary of long-term debt (in thousands):~~

September 30, 2017 December 31, 2016
SVB Term Note, repaid in 2017 $ —
$ 4,667
PFG Term Note, net of discount of $865 5,135
—
Less unamortized debt issuance costs 199
13
Term notes, net 4,936
4,654
Less current maturities —
2,000
Long-term portion $ 4,936
$ 2,654

At ~~September~~June 30, ~~2017,~~2018, the principal amount of the PFG Term Note of $6,000,000 is due in 2020. Because we are in violation of certain financial covenants at May 31, 2018 and June 30, 2018 and have not obtained waivers from our lenders, the PFG Term Note is presented as a current liability.

Convertible Debt

On July 17, 2018, the Company entered into an agreement pursuant to which the Company issued a convertible promissory note to an institutional accredited investor in the initial principal amount of $2,625,000. The Company received consideration of $2,500,000, reflecting an original issue discount of $100,000 and expenses payable by the Company of $25,000. The convertible note has an 18 month term and carries interest at 10% per annum. The note is convertible into shares of the Company’s common stock at a conversion price of $0.80 per share. See Note 14 for additional information.

Note 7. Stock-Based Compensation

We have two equity incentive plans: the 2008 Stock Option Plan (the “2008 Plan”) and the 2011 Equity Incentive Plan (the “2011 Plan”, and together with the 2008 Plan, the “Stock Option Plans”). The Stock Option Plans are meant to provide additional incentive to officers, employees and consultants to remain in our employment. Options granted are generally exercisable for up to 10 years.

At ~~September~~June 30, ~~2017, 391,317~~2018, 145,753 shares remain available for future awards under the 2011 ~~Plan and 134,354 shares remain available for future awards under~~Plan. Effective April 9, 2018, the Company is no longer able to issue options from the 2008 Plan.

A summary of employee and non-employee stock option activity for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 is as follows:

Options Outstanding
Weighted-
Average
Remaining
Contractual
Term (in years)

Aggregate
Intrinsic
Value
(in thousands)

Number of
Shares
(in thousands)

Weighted-
Average
Exercise
Price

Outstanding January 1, 2017 2,198
$ 9.09
7.04 $ —
Granted 860
2.87

Exercised (3 ) 2.23

Cancelled or expired (239 ) 10.80

Outstanding September 30, 2017 2,816
$ 7.05
7.19 $ 367
Exercisable September 30, 2017 1,533
$ 9.54
5.69 $ 76



	Options Outstanding				Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)
	Number of Shares (in thousands)		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)
Outstanding January 1, 2018	2,844		$	7.00	6.96	$	4
Granted	657		0.89
Cancelled or expired	(416	)	5.98
Outstanding June 30, 2018	3,085		$	5.84	6.34	$	—
Exercisable June 30, 2018	1,776		$	8.70	4.18	$	—

Aggregate intrinsic value represents the difference between the fair value of our common stock and the exercise price of outstanding, in-the-money options. ~~During the three and nine months ended September 30, 2017, the Company received approximately $2,500 and $6,500, respectively, from the exercise of options.~~

As of ~~September~~June 30, ~~2017,~~2018, total unrecognized compensation cost related to non-vested stock options granted to employees was ~~$2,865,963~~$1,546,522 which we expect to recognize over the next ~~2.32~~2.97 years.

As of September 30, 2017, total unrecognized compensation cost related to non-vested stock options granted to non-employees was $12,625 which we expect to recognize over the next 0.25 years. The estimate of unrecognized non-employee compensation is based on the fair value of the non-vested options as of September 30, 2017.

The fair value of options granted to employees is estimated on the grant date using the Black-Scholes option valuation model. This valuation model requires us to make assumptions and judgments about the variables used in the calculation, including the expected term (the period of time that the options granted are expected to be outstanding), the volatility of our common stock, a

risk-free interest rate, and expected dividends. ~~To the extent actual forfeitures differ from the estimates, the difference~~Forfeitures will be recorded ~~as a cumulative adjustment in the period estimates are revised.~~when they occur. No compensation cost is recorded for options that do not vest. We use the simplified calculation of expected life described in the SEC’s Staff Accounting Bulletin No. 107, Share-Based Payment, and volatility is based on the historical volatility of our common stock. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option. We use an expected dividend yield of zero, as we do not anticipate paying any dividends in the foreseeable future. ~~Forfeitures will be recorded when they occur.~~

The following table presents the weighted-average assumptions used to estimate the fair value of options granted to employees during the periods presented:


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,						Six Months Ended June 30,
	2017		2016		2017		2016		2018			2017			2018			2017
Volatility	75.28	%	74.30	%	74.60	%	74.30	%	77.81		%	76.91		%	77.81		%	74.31		%
Risk free interest rate	1.92	%	1.17	%	1.97	%	1.17	%	2.89		%	1.87		%	2.89		%	1.99		%
Dividend yield	0.00	%	0.00	%	0.00	%	0.00	%	0.00		%	0.00		%	0.00		%	0.00		%
Term (years)	5.73		5.92		5.90		5.92		6.49			5.90			6.49			5.98
Weighted-average fair value of options granted during the period	1.91		1.30		1.89		1.30		$	0.63		$	2.75		$	0.63		$	1.88

In May 2014, we issued 200,000 options to ~~our~~a Director ~~Raju Chaganti,~~ with an exercise price of $15.89. See Note 12 for additional information. The following table presents the weighted-average assumptions used to estimate the fair value of options reaching their measurement date for non-employees during the periods presented:


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,		Six Months Ended June 30,
	2017		2016		2017		2016		2017		2017
Volatility	74.39	%	72.97	%	76.06	%	74.50	%	76.39	%	76.90	%
Risk free interest rate	2.17	%	1.46	%	2.19	%	1.43	%	2.19	%	2.21	%
Dividend yield	0.00	%	0.00	%	0.00	%	0.00	%	0.00	%	0.00	%
Term (years)	6.64		7.64		6.89		7.89		6.89		7.02

Restricted stock awards have been granted to employees, directors and consultants as compensation for services. At ~~September~~June 30, ~~2017,~~2018, there was ~~$383,829~~$117,763 of unrecognized compensation cost related to non-vested restricted stock granted to employees and directors; we expect to recognize the cost over ~~1.50~~1.13 years.

The following table summarizes the activities for our non-vested restricted stock awards for the ~~nine~~six months ended ~~September~~June 30, ~~2017:~~2018:

Non-vested Restricted Stock Awards
Number of
Shares
(in thousands) Weighted-Average Grant Date Fair Value
Non-vested at January 1, 2017 80
$ 6.30
Granted 65
3.29
Vested (30 ) 8.30
Non-vested at September 30, 2017 115
$ 4.09



	Non-vested Restricted Stock Awards
	Number of Shares (in thousands)		Weighted-Average Grant Date Fair Value
Non-vested at January 1, 2018	91		$	4.21
Vested	(11	)	4.58
Cancelled	(23	)	6.66
Non-vested at June 30, 2018	57		$	3.16

The following table presents the effects of stock-based compensation related to stock option and restricted stock awards to employees and non-employees on our Consolidated Statements of Operations and Other Comprehensive Loss during the periods presented (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016		2018		2017		2018		2017
Cost of revenues	$	122	$	83	$	250	$	219	$	90	$	69	$	181	$	128
Research and development	11		45		110		140		16		49		31		99
General and administrative	356		356		949		1,095		140		293		298		593
Sales and marketing	30		30		86		84		22		30		32		56
Total stock-based compensation	$	519	$	514	$	1,395	$	1,538	$	268	$	441	$	542	$	876

Note 8. Warrants

~~On March 22, 2017, we issued seven~~ year warrants to PFG and certain of its affiliates to purchase an aggregate of 443,262 shares of our common stock at an exercise price of $2.82 per share, in conjunction with our debt refinancing described in Note 5. The number of warrants may be reduced by 20% subject to us achieving certain financial milestones set forth by PFG. The warrants can be net settled in common stock using the average 90-trading day price of our common stock. These warrants are defined in the table below as 2017 Debt derivative warrants.

During the three and nine months ended September 30, 2017, the Company received approximately $56,000 and $1,827,000, respectively, from shareholders who exercised warrants to purchase 25,000 and 811,900 shares of common stock, respectively, at $2.25. In addition, on March 28, 2017, warrant holders exercised warrants to purchase 90,063 shares of common stock at an exercise price of $2.25 per share using the net issuance exercise method whereby 45,162 shares were surrendered as payment in full of the exercise price resulting in a net issuance of 44,901 shares.

The following table summarizes the warrant activity for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 (in thousands, except exercise price):


Issued With / For	Exercise Price			Warrants Outstanding January 1, 2017	2017 Warrants Issued	2017 Warrants Exercised		Warrants Outstanding September 30, 2017	Exercise Price			Warrants Outstanding January 1, 2018	Transfer Between Derivative Warrants and Non-Derivative Warrants		Warrants Outstanding June 30, 2018
Non-Derivative Warrants:
Financing	$	10.00		243	—	—		243	$	10.00		243	—		243
Financing	15.00			361	—	—		361	15.00			276	—		276
Debt guarantee	15.00			109	—	—		109
2015 Offering	5.00			3,450	—	—		3,450	5.00			3,450	—		3,450
2017 Debt									0.92		B	—	443		443
Total non-derivative warrants	6.42		C	4,163	—	—		4,163	5.49		C	3,969	443		4,412
Derivative Warrants:
2016 Offerings	2.25		A	2,870	—	(902	)	1,968	2.25		A	1,968	—		1,968
2017 Debt	2.82		B	—	443	—		443	2.82		B	443	(443	)	—
2017 Offering									2.35		A	3,500	—		3,500
2017 Offering									2.50		A	175	—		175
Total derivative warrants	2.35		C	2,870	443	(902	)	2,411	2.32		C	6,086	(443	)	5,643
Total	$	4.93	C	7,033	443	(902	)	6,574	$	3.71	C	10,055	—		10,055


A	These warrants are subject to fair value accounting and contain a contingent net cash settlement feature. See Note 9.

These warrants ~~are~~were subject to fair value accounting ~~and contain a net settlement provision that uses~~until the ~~90-trading day~~number of shares issuable upon the exercise of the warrants became fixed on April 2, 2018. Effective June 30, 2018, the exercise price ~~of our common stock. These warrants are subject~~was reduced from $2.82 per share to ~~a 20% reduction if certain financial milestones are met.~~$0.92 per share. See Note 9.


C	Weighted-average exercise prices are as of ~~September~~June 30, ~~2017.~~2018.

Note 9. Fair Value of Warrants

The following table summarizes the derivative warrant activity subject to fair value accounting for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 (in thousands):


Issued with/for	Fair value of warrants outstanding as of December 31, 2016		Fair value of warrants issued		Fair value of warrants exercised			Change in fair value of warrants			Fair value of warrants outstanding as of September 30, 2017		Fair value of warrants outstanding as of December 31, 2017		Change in fair value of warrants			Reclassification of warrants from liability to equity			Fair value of warrants outstanding as of June 30, 2018
2016 Offerings	$	2,018	$	—	$	(2,782	)	$	4,107		$	3,343	$	1,929	$	(1,091	)	$	—		$	838
2017 Debt	—		1,004		—			(180		)	824		501		(78		)	(423		)	—
2017 Offering													1,973		(1,677		)	—			296
	$	2,018	$	1,004	$	(2,782	)	$	3,927		$	4,167	$	4,403	$	(2,846	)	$	(423	)	$	1,134

The derivative warrants issued as part of the 2016 Offerings are valued using a probability-weighted Binomial model, while the derivative warrants issued as part of the 2017 Debt refinancing ~~are~~were valued using a Monte Carlo model. The derivative warrants issued in conjunction with the 2017 Offering are valued using a Black-Scholes model. Effective April 2, 2018, the

number of shares issuable under the 2017 Debt refinancing became fixed at 443,262, causing the warrants to be reclassified to equity. The following tables summarize the assumptions used in computing the fair value of derivative warrants subject to fair value accounting at the date of issue, exercise or ~~exercise~~reclassification to equity during the three and ~~nine~~six months ended ~~September~~June 30, 2018 and 2017, and ~~2016, and~~ at ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016.~~2017.


	Issued During the						Exercised During the																		Exercised During the
2016 Offerings	Three Months Ended September 30, 2016			Nine Months Ended September 30, 2016			Three Months Ended September 30, 2017			Nine Months Ended September 30, 2017			As of September 30, 2017			As of December 31, 2016			As of June 30, 2018			As of December 31, 2017			Three Months Ended June 30, 2017			Six Months Ended June 30, 2017
Exercise price	$	2.25		$	2.25		$	2.25		$	2.25		$	2.25		$	2.25		$	2.25		$	2.25		$	2.25		$	2.25
Expected life (years)	5.50			5.50			4.30			4.78			4.33			5.06			3.58			4.08			4.51			4.79
Expected volatility	73.28		%	74.36		%	74.20		%	76.24		%	75.07		%	72.82		%	100.00		%	73.44		%	77.11		%	76.29		%
Risk-free interest rate	1.21		%	1.30		%	1.81		%	1.94		%	1.92		%	1.93		%	2.63		%	2.11		%	1.80		%	1.94		%
Expected dividend yield	—		%	—		%	—		%	—		%	—		%	—		%	—		%	—		%	—		%	—		%


2017 Debt	Issued During the Nine Months Ended September 30, 2017			As of September 30, 2017			As of December 31, 2017			Reclassified to Equity During the Three and Six Months Ended June 30, 2018			Issued During the Six Months Ended June 30, 2017
Exercise price	$	2.82		$	2.82		$	2.82		$	2.82		$	2.82
Expected life (years)	7.00			6.48			6.22			5.97			7.00
Expected volatility	74.61		%	74.07		%	74.18		%	73.40		%	74.61		%
Risk-free interest rate	2.22		%	2.16		%	2.33		%	—		%	2.22		%
Expected dividend yield	—		%	—		%	—		%	2.55		%	—		%



2017 Offering	As of June 30, 2018			As of December 31, 2017
Exercise price	$	2.36		$	2.36
Expected life (years)	0.94			1.43
Expected volatility	89.49		%	77.55		%
Risk-free interest rate	2.33		%	1.83		%
Expected dividend yield	—		%	—		%

Note 10. Fair Value Measurements

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

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

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

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

The following table summarizes the financial liabilities measured at fair value on a recurring basis segregated by the level of valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):


	September 30, 2017								June 30, 2018
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Warrant liability	$	4,167	$	—	$	—	$	4,167	$	1,134	$	—	$	—	$	1,134
Note payable	228		—		—		228		75		—		—		75
	$	4,395	$	—	$	—	$	4,395	$	1,209	$	—	$	—	$	1,209


	December 31, 2016								December 31, 2017
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Warrant liability	$	2,018	$	—	$	—	$	2,018	$	4,403	$	—	$	—	$	4,403
Note payable	114		—		—		114		156		—		—		156
	$	2,132	$	—	$	—	$	2,132	$	4,559	$	—	$	—	$	4,559

At June 30, 2018 and December 31, 2017, the Company had a liability payable to VenturEast from a prior acquisition. The ultimate payment to VenturEast will be the fair value of 84,278 shares of our common stock at the time of payment. ~~The value of the note payable to VenturEast was determined using the fair value of our common stock.~~ During the three months ended

~~September~~ June 30, ~~2017~~2018 and ~~2016,~~2017, we recognized a gain of approximately ~~$105,000~~$64,000 and ~~$18,000,~~$13,000, respectively, due to the change in value of the note. During the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, we recognized a gain of approximately $81,000 and a loss of approximately ~~$114,000 and a gain of approximately $119,000,~~$219,000, respectively, due to ~~the change~~changes in ~~value of the note.~~our stock price.

At ~~September~~June 30, ~~2017,~~2018, the warrant liability consists of stock warrants issued as part of the 2016 Offerings and 2017 Offering that contain contingent redemption ~~features and warrants issued as part of the debt refinancing outlined in Note 6.~~features. In accordance with derivative accounting for warrants, we calculated the fair value of ~~these~~ warrants and the assumptions used are described in Note 9, “Fair Value of Warrants.” During the three months ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, we recognized gains of approximately ~~$2,790,000~~$2,154,000 and ~~$712,000,~~$577,000, respectively, on the derivative warrants due to the decrease in our stock price. During the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2018, we recognized a ~~loss~~gain of approximately ~~$3,927,000~~$2,846,000 on the derivative warrants due to changes in our stock price. During the ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2017, we recorded a ~~gain~~loss of approximately ~~$712,000~~$6,717,000 on the derivative warrants due to changes in our stock price. ~~During the nine months ended September 30, 2016, we also recorded a gain of approximately $17,000 due to the expiration of derivative warrants outstanding at December 31, 2015.~~

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

The following table summarizes the activity of the note payable to VenturEast and of our derivative warrants, which was measured at fair value using Level 3 inputs (in thousands):

Note Payable Warrant
to VenturEast Liability
Fair value at December 31, 2016 $ 114
$ 2,018
Fair value of warrants issued —
1,004
Fair value of warrants exercised —
(2,782 )
Change in fair value 114
3,927
Fair value at September 30, 2017 $ 228
$ 4,167



	Note Payable			Warrant
	to VenturEast			Liability
Fair value at December 31, 2017	$	156		$	4,403
Fair value of warrants reclassified to equity	—			(423		)
Change in fair value	(81		)	(2,846		)
Fair value at June 30, 2018	$	75		$	1,134

Note 11. Joint Venture Agreement

In November 2011, we entered into an affiliation agreement with the Mayo Foundation for Medical Education and Research (“Mayo”), subsequently amended. Under the agreement, we formed a joint venture with Mayo in May 2013 to focus on

developing oncology diagnostic services and tests utilizing next generation sequencing. The joint venture is a limited liability company, with each party initially holding fifty percent of the issued and outstanding membership interests of the new entity (the “JV”).

The agreement requires aggregate capital contributions by us of up to $6.0 million, of which $2.0 million has been paid to date. The timing of the remaining installments is subject to the JV's achievement of certain operational milestones agreed upon by the board of governors of the JV. In exchange for its membership interest, Mayo’s capital contribution takes the form of cash, staff, services, hardware and software resources, laboratory space and instrumentation, the fair market value of which will be approximately equal to $6.0 million. Mayo’s continued contribution will also be conditioned upon the JV’s achievement of certain milestones.

Our share of the JV’s net loss was approximately ~~$2,000~~$1,000 and ~~$18,000~~$7,000 for the three months ended ~~September~~June 30, ~~2017~~2018 and ~~2016, and approximately $21,000 and $45,000 for the nine months ended September 30,~~ 2017, ~~and 2016,~~ respectively, and is included in research and development expense on the Consolidated Statements of ~~Operations.~~Operations and Other Comprehensive Loss. Our share of the JV’s net loss was approximately $3,000 and $19,000 for the six months ended June 30, 2018 and 2017, respectively, and is included in research and development expense on the Consolidated Statements of Operations and Other Comprehensive Loss. We have a net receivable due from the JV of approximately $10,000 at ~~September~~June 30, ~~2017,~~2018, which is included in other assets in the Consolidated Balance Sheets.

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

Note 12. Related Party Transactions

We have a consulting agreement with Equity Dynamics, Inc. (“EDI”), an entity controlled by John Pappajohn, effective April 1, 2014 pursuant to which EDI receives a monthly fee of $10,000. Total expenses for each of the three months ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017 were $30,000. Total expenses for each of the ~~nine~~six months ended ~~September~~June 30, 2018 and 2017 ~~and 2016~~ were ~~$90,000.~~$60,000. As of ~~September~~June 30, ~~2017,~~2018, we owed EDI ~~$20,000.~~$50,000.

~~In 2010, we entered into~~Pursuant to a ~~three-year~~ consulting and advisory agreement ~~with Dr. Chaganti, which was subsequently renewed through~~that ended December 31, 2016, ~~pursuant to which Dr. Chaganti received $5,000 per month for providing consulting and technical support services. Pursuant to the terms of the renewed consulting agreement,~~ Dr. Chaganti received an option to purchase 200,000 shares of our common stock at a purchase price of $15.89 per share vesting over a period of four years. Total non-cash stock-based compensation recognized under the consulting agreement for the three months ended ~~September~~June 30, 2018 and 2017 was $0 and ~~2016 was $12,625 and $7,125,~~$23,875, respectively. Total non-cash stock-based compensation recognized under the consulting agreement for the ~~nine~~six months ended ~~September~~June 30, 2018 and 2017 was $0 and ~~2016 was $62,125 and $32,750,~~$49,500, respectively. Also pursuant to the consulting agreement, Dr. Chaganti assigned to us all rights to any inventions which he may invent during the course of rendering consulting services to us. In exchange for this assignment, if the USPTO issues a patent for an invention on which Dr. Chaganti is listed as an inventor, we are required to pay Dr. Chaganti (i) a one-time payment of $50,000 and (ii) 1% of any net revenues we receive from any licensed sales of the invention. In the first quarter of 2016, we paid Dr. Chaganti $50,000 which was recognized as an expense in fiscal 2015 when one patent was issued.

Note 13. Contingencies

~~In the normal course~~On April 5, 2018 and April 12, 2018, purported stockholders of ~~business,~~ the Company ~~may become involved~~filed nearly identical putative class action lawsuits in ~~various claims~~the U.S. District Court for the District of New Jersey, against the Company, Panna L. Sharma, John A. Roberts, and ~~legal proceedings. In~~Igor Gitelman, captioned Ben Phetteplace v. Cancer Genetics, Inc. et al., No. 2:18-cv-05612 and Ruo Fen Zhang v. Cancer Genetics, Inc. et al., No. 2:18-06353, respectively. The complaints allege violations of Sections 10(b) and 20(a) of the ~~opinion~~Securities Exchange Act of ~~management,~~1934 and SEC Rule 10b-5 based on allegedly false and misleading statements and omissions regarding our business, operational, and financial results. The lawsuits seek, among other things, unspecified compensatory damages in connection with purchases of our stock between March 23, 2017 and April 2, 2018, as well as interest, attorneys’ fees, and costs. The Company is unable to predict the ultimate ~~liability~~outcome of these actions and therefore cannot estimate possible losses or ~~disposition thereof is not expected to have a material adverse effect on our financial condition, results~~ranges of ~~operations, or liquidity.~~losses, if any.

Note 14. Subsequent Events

On July 17, 2018, the Company entered into a Securities Purchase Agreement (the “Agreement”) pursuant to which the Company issued a convertible promissory note (the “Note”) to an institutional accredited investor (the “Investor”) in the initial principal amount of $2,625,000. The Investor gave consideration of $2,500,000, reflecting original issue discount of $100,000 and expenses payable by the Company of $25,000. The Company anticipates to use the proceeds for general working capital.

The Note is the general unsecured obligation of the Company and is subordinated in right of payment to the Amended and Restated Loan and Security Agreement between the Company, certain of its wholly-owned subsidiaries and SVB, dated March 22, 2017, as amended, and to the Loan and Security Agreement between the Company, certain of its wholly-owned subsidiaries and PFG, dated March 22, 2017, as amended. Interest accrues on the outstanding balance of the Note at 10% per annum, and

the Note has an 18 month term. Upon the occurrence of an event of default, interest accrues at the lesser of 22% per annum or the maximum rate permitted by applicable law. The Note contains customary default provisions, including provisions for potential acceleration.

The Investor may convert all or any part the outstanding balance of the Note into shares of common stock, par value $0.0001 per share, of the Company (the “Common Stock”) at an initial conversion price of $0.80 per share (the “Conversion Price”), at any time after the issue date upon five trading days’ notice, subject to certain adjustments and ownership limitations specified in the Note. The Note provides for liquidated damages upon failure to deliver Common Stock within specified timeframes.

The Investor may redeem any portion of the Note, at any time after six months from the issue date upon five trading days’ notice, subject to a maximum monthly redemption amount of $650,000, with the Company having the option to pay such redemptions in cash, in Common Stock at the Conversion Price, or by a combination thereof, subject to certain conditions specified in the Note. The Company may prepay the outstanding balance of the Note, in part or in full, at a 10% premium to par value if prior to the one year anniversary of the date of issuance and at par if prepaid thereafter. At maturity, the Company may pay the outstanding balance of the Note in cash, in Common Stock, or by a combination thereof, subject to certain conditions specified in the Note.

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

As used herein, the “Company,” “we,” “us,” “our” or similar terms, refer to Cancer Genetics, Inc. and its wholly owned ~~subsidiaries:~~subsidiaries at June 30, 2018: Cancer Genetics Italia, S.r.l., Gentris, LLC, and ~~BioServe Biotechnologies (India) Private Limited,~~vivoPharm Pty, Ltd, except as expressly indicated or unless the context otherwise requires. The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help facilitate an understanding of our financial condition and our historical results of operations for the periods presented. This MD&A should be read in conjunction with the audited consolidated financial statements and notes thereto included in our annual report on Form 10-K filed with the SEC on ~~March 23, 2017.~~April 2, 2018. This MD&A may contain forward-looking statements that involve risks and uncertainties. See “Cautionary Note Regarding Forward-Looking Statements” below.

Overview

We are an emerging leader in ~~the field of~~ precision medicine, enabling individualized therapies in the field of oncology through ~~our diagnostic products and~~tests, services and molecular markers. We develop, commercialize and provide molecular- and biomarker-based tests and services, ~~that enable physicians to personalize the clinical management of each individual patient by providing genomic information to better diagnose, monitor~~including proprietary preclinical oncology and ~~inform cancer treatment and~~immuno-oncology services, that enable biotech and pharmaceutical companies engaged in oncology trials to better select candidate populations and reduce adverse drug reactions by providing information regarding genomic factors influencing subject responses to therapeutics. Through our clinical services, we enable physicians to personalize the clinical management of each individual patient by providing genomic information to better diagnose, monitor and inform cancer treatment. We have a comprehensive, disease-focused oncology testing ~~portfolio.~~portfolio, and an extensive set of anti-tumor referenced data based on predictive xenograft and syngeneic tumor models. Our tests and techniques target a wide range of ~~cancers,~~indications, covering ~~nine~~all ten of the top ~~ten~~ cancers in prevalence in the United States, with additional unique capabilities offered by our FDA-cleared Tissue of Origin® test for identifying difficult to diagnose tumor types or poorly differentiated metastatic disease.

~~Our vision is to become the oncology diagnostics partner for biopharmaceutical~~We are currently executing a strategy of partnering with pharmaceutical and biotech companies and clinicians as oncology diagnostic specialists by ~~participating in the entire~~supporting therapeutic discovery, development and patient care ~~continuum~~ from bench to bedside. WePharmaceutical and biotech companies are increasingly attracted to work with us to provide molecular profiles on clinical trial participants. Similarly, we believe the ~~diagnostics~~oncology industry is undergoing a rapid evolution in its approach to ~~oncology~~diagnostic, prognostic and treatment outcomes (theranostic) testing, embracing precision medicine and individualized testing as a means to drive higher standards of patient treatment and disease management. ~~Similarly, biopharmaceutical companies are increasingly engaging companies such as ours to provide information on clinical trial participants' molecular~~These profiles ~~in order to~~may help identify biomarker and genomic variations that may be responsible for differing responses to ~~pharmaceuticals, and particularly to~~ oncology ~~drugs,~~therapies, thereby increasing the efficiency of trials while lowering ~~related~~ costs. We believe tailored ~~therapeutics~~and combination therapies can revolutionize oncology ~~medicine~~care through molecular- and biomarker-based testing services, enabling physicians and researchers to target the factors that make each patient and disease unique.

~~Our services are performed at our state-of-the-art laboratories located~~We believe the next shift in ~~New Jersey, Pennsylvania, North Carolina, California, Shanghai (China), Victoria (Australia),~~cancer management will bring together testing capabilities for germline, or inherited mutations, and ~~Hyderabad (India). Our laboratories comply with~~somatic mutations that arise in tissues over the ~~highest regulatory standards~~

course of a lifetime. We have created a unique position in the industry by providing both targeted somatic analysis of tumor sample cells alongside germline analysis of an individual's non-cancerous cells' molecular profile as appropriate for the services they deliver including CLIA, CAP, NY State, California State and NABL (India). Our services are built on a foundation of world-class scientific knowledge and intellectual propertywe attempt to continue achieving milestones in ~~solid and blood-borne cancers, as well as strong academic relationships with major cancer centers such as Memorial Sloan-Kettering, Mayo Clinic, and the National Cancer Institute.~~precision medicine.

Our clinical offerings include our portfolio of proprietary tests targeting hematological, urogenital and HPV-associated cancers, in conjunction with ancillary non-proprietary tests. Our proprietary tests target cancers that are difficult to prognose and predict treatment outcomes through currently available mainstream techniques. We provide our proprietary tests and

services, along with a comprehensive range of non-proprietary oncology-focused tests and laboratory services, to oncologists and pathologists at hospitals, cancer centers, and physician offices, as well as biotech and pharmaceutical companies to support their clinical trials. Our proprietary tests are based principally on our expertise in specific cancer types, test development methodologies and proprietary algorithms correlating genetic events with disease specific information. Our portfolio primarily includes comparative genomic hybridization (CGH) microarrays and next generation sequencing (NGS) panels, gene expression tests, and DNA fluorescent in situ hybridization (FISH) probes.

The non-proprietary testing services we offer are focused in part on specific oncology categories where we are developing our proprietary tests. We believe that there is significant synergy in developing and marketing a complete set of tests and services that are disease focused and delivering those tests and services in a comprehensive manner to help with treatment decisions.

The insight that we develop in delivering the non-proprietary services are often leveraged in the development of our proprietary programs and now increasingly in the validation of our proprietary programs, such as MatBA and Focus::NGS.

WeNet cash used in operating activities was $8.1 million and $7.4 million for the six months ended June 30, 2018 and 2017, respectively, and the Company had unrestricted cash and cash equivalents of $1.6 million at June 30, 2018, a reduction from $9.5 million at December 31, 2017. The Company has negative working capital at June 30, 2018 of $7.3 million.

While we have implemented an aggressive consolidation strategy to reduce our operating costs in 2018, we expect to continue to incur significant losses for the near future. We incurred losses of ~~$15.8~~$20.9 million and ~~$20.2~~$15.8 million for fiscal years ended December 31, ~~2016~~2017 and ~~2015,~~2016, respectively, and ~~$13.0~~$8.1 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2018.

As of ~~September~~June 30, ~~2017,~~2018, we had an accumulated deficit of ~~$126.9~~$145.4 million.

~~Acquisitions~~Acquisition

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 FDA Investigational New Drug (“IND”) applications. vivoPharm has developed industry recognized capabilities in early phase development and discovery, especially in immuno-oncology models, tumor micro-environment studies, specialized pharmacology services, and PDx (patient derived xenograft) model studies that support basic discovery, preclinical and phase 1 clinical trials.Disposal

~~vivoPharm maintains three international locations, enabling the company~~On April 26, 2018, we sold our India subsidiary, BioServe Biotechnologies (India) Private Limited (“BioServe”) to ~~access global market opportunities. The headquarters~~Reprocell, Inc., for $1.9 million, including $1.6 million in ~~Victoria, Australia, specializes in safety~~cash at closing and toxicology studies, including mammalian, genetic and in vitro, along with bioanalytical services including immune-analytical capabilities. vivoPharm’s U.S. based lab, located at the Hershey Center for Applied Research in Hershey, Pennsylvania, primarily focuses on screening and efficacy testing for a wide range of pharmaceutical and chemical products. The third location, in Munich, Germany, hosts project management and marketing personnel. Further, vivoPharm bringsup to ~~CGI~~ an additional ~~38 employees, 16 of~~$300,000, which ~~are located~~is recorded in other current assets in our Consolidated Balance Sheet at June 30, 2018. The additional $300,000 is contingent upon the ~~U.S. and 17~~India subsidiary meeting a specified revenue target in ~~Australia, with expertise in early stage discovery services and pre-clinical testing.~~

vivoPharm’s studies have been utilized to support over 200 IND submissions to date across a range of therapeutic indications, including lymphomas, leukemia, GI-cancers, liver cancer, pancreatic cancer, non-small cell lung cancer, and other non-cancer rare diseases. vivoPharm is presently serving over forty biotechnology and pharmaceutical companies across five continents in over 55 studies and trials with highly specialized development, clinical and preclinical research. Over the past 10 years, vivoPharm has also generated an extensive library of human xenograft and syngeneic tumor models, including subcutaneous, orthotopic and metastatic models.

vivoPharm’s specialized tumor and disease models, toxicology and pharmacology services and animal imaging capabilities provide CGI opportunities to deepen its relationships with existing biopharma customers through additional discovery and downstream molecular work, while also furthering CGI’s previously announced initiative aimed at early-phase drug repurposing and drug rescue programs.2018.

Key Factors Affecting our Results of Operations and Financial Condition

Our overall long-term growth plan is predicated on our ability to develop ~~and commercialize our proprietary tests, penetrate~~or acquire technology solutions to accelerate the penetration into the Biopharma community to achieve more revenue supporting clinical trials and develop and ~~penetrate the Indian market.~~commercialize unique or proprietary services and tests to achieve sustainable organic growth. Our proprietary tests include CGH microarrays, NGS panels, and DNA FISH probes. We continue to develop additional proprietary tests. To facilitate market adoption of our proprietary tests, we anticipate having to successfully complete additional studies with clinical samples and publish our results in peer-reviewed scientific journals. Our ability to complete such studies is dependent upon our ability to leverage our collaborative relationships with leading institutions to facilitate our research and obtain data for our quality assurance and test validation efforts.

We believe that the factors discussed in the following paragraphs have had and are expected to continue to have a material impact on our results of operations and financial condition.

Revenues

Our revenue is ~~primarily~~ generated through our ~~Clinical~~Biopharma Services, Discovery Services and ~~Biopharma~~Clinical Services. ~~Clinical Services can be billed to Medicare, another third party insurer or the referring community hospital or other healthcare facility or patients in accordance with state and federal law.~~ Biopharma Services are billed to the customer directly. While we have agreements with our Biopharma clients, volumes from these clients are subject

to the progression and continuation of the clinical trials which can impact testing volume. We also derive revenue from Discovery Services, which are services provided in the development of new testing assays and ~~methods.~~methods and include pre-clinical toxicology and efficacy studies. Discovery Services are billed directly to the customer. Our Clinical Services can be billed to Medicare, another third party insurer or the referring community hospital or other healthcare facility, or patients in accordance with state and federal law.

We have historically derived a significant portion of our revenue from a limited number of test ordering sites, although the test ordering sites that generate a significant portion of our revenue have changed from period to period. Test ordering sites account for all of our Clinical Services revenue along with a portion of the Biopharma Services revenue. Our test ordering sites are hospitals, cancer centers, reference laboratories, physician offices, and ~~biopharmaceutical~~pharmaceutical and biotechnology companies. Oncologists and pathologists at these sites order the tests on behalf ~~of the needs~~ of their oncology patients or as part of a clinical trial sponsored by a ~~biopharmaceutical~~pharmaceutical or biotechnology company in which the patient is being enrolled.

The top five test ordering sites during the three months ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017 accounted for approximately ~~45%~~30% and ~~39%~~50% of our testing volumes, respectively. During the three months ended ~~September~~June 30, 2018, no individual customer accounted for more than 10% of our revenue. During the three months ended June 30, 2017, one Biopharma client accounted for approximately ~~11% of our revenue. During the three months ended September 30, 2016, one Biopharma client accounted for approximately 18%~~12% of our revenue.

The top five test ordering sites during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017 accounted for approximately ~~40%~~31% and ~~31%~~41% of our testing volumes, respectively. During the ~~nine~~six months ended ~~September~~June 30, 2018, no individual customer accounted for more than 10% of our total revenue. During the six months ended June 30, 2017, there was one biopharmaceutical company which accounted for approximately 11% ~~of our total revenue. During the nine months ended September 30, 2016, there was one biopharmaceutical company which accounted for approximately 10%~~ of our total revenue.

We receive revenue for our Clinical Services from Medicare, other insurance carriers and other healthcare facilities. Some of our customers choose, generally at the beginning of our relationship, to pay for laboratory services directly as opposed to having patients (or their insurers) pay for those services and providing us with the patients’ insurance information. A hospital may elect to be a direct bill customer and pay our bills directly, or may provide us with patient information so that their patients pay our bills, in which case we generally expect payment from their private insurance carrier or Medicare. In a few instances, we have arrangements where a hospital may have two accounts with us, so that certain tests are billed directly to the hospital, and certain tests are billed to and paid by a patient’s insurer. The billing arrangements generally are dictated by our customers and in accordance with state and federal law.

For the three months ended ~~September~~June 30, ~~2017,~~2018, Medicare and other third party payors accounted for approximately 9% and 21% of our total revenue, respectively. For the six months ended June 30, 2018, Medicare and other third party payors accounted for approximately 11% ~~of our total revenue, other insurance accounted for approximately~~and 19% of our total revenue, and other healthcare facilities accounted for 6% of our total revenue. For the nine months ended September 30, 2017, Medicare accounted for approximately 14% of our total revenue, other insurance accounted for approximately 22% of our total revenue and other healthcare facilities accounted for 5% of our total revenue. On average, we generate less revenue per test from other healthcare facilities billed directly, than from other insurance payers. respectively.

Cost of Revenues

Our cost of revenues consists principally of internal personnel costs, including non-cash stock-based compensation, laboratory consumables, shipping costs, overhead and other direct expenses, such as specimen procurement and third party validation studies. We are pursuing various strategies to reduce and control our cost of revenues, including automating our processes through more efficient technology and attempting to negotiate improved terms with our suppliers. ~~With our three acquisitions in 2014 and 2015,~~In 2017, we purchased all of the outstanding stock of vivoPharm. Overall we have made significant progress with integrating our resources and services and leveraging enterprise wide purchasing power to gain supplier discounts, in an effort to ~~reduce costs. With our acquisition of vivoPharm in the third quarter of 2017, we are working to integrate its business and~~ reduce costs. We will continue to assess other possible advantages to help us improve our cost structure.

Operating Expenses

We classify our operating expenses into three categories: research and development, sales and marketing, and general and administrative. Our operating expenses principally consist of personnel costs, including non-cash stock-based compensation, ~~facility costs,~~ outside services, laboratory consumables and overhead, development costs, marketing program costs and legal and accounting fees.

Research and Development Expenses. We incur research and development expenses principally in connection with our efforts to develop our proprietary tests. Our primary research and development expenses consist of direct personnel costs, laboratory equipment and consumables and overhead expenses. In 2013, we entered into a joint venture with the Mayo Foundation for Medical Education and Research, with a focus on developing oncology diagnostic services and tests utilizing next generation sequencing. These efforts have continued. All research and development expenses are charged to operations in the periods they are incurred.

General and Administrative Expenses. General and administrative expenses consist principally of personnel-related expenses, professional fees, such as legal, accounting and business consultants, occupancy costs, bad debt and other general expenses. We have ~~experienced decreases~~incurred increases in our general and administrative expenses ~~but~~and anticipate further increases as we expand our business operations.

Sales and Marketing Expenses. Our sales and marketing expenses consist principally of personnel and related overhead costs for our sales team and their support personnel, travel and entertainment expenses, and other selling costs including sales collaterals and trade shows. We expect our sales and marketing expenses to increase as we expand into new geographies and add new clinical tests and services.

Seasonality

Our business experiences decreased demand during spring vacation season, summer months and the December holiday season when patients are less likely to visit their health care providers. We expect this trend in seasonality to continue for the foreseeable future.

Results of Operations

Three Months Ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017

The following table sets forth certain information concerning our results of operations for the periods shown:

Three Months Ended September 30, Change
(dollars in thousands) 2017 2016 $ %
Revenue $ 8,028
$ 6,750
$ 1,278
19 %
Cost of revenues 4,588
4,444
144
3 %
Research and development expenses 981
1,594
(613 ) (38 )%
General and administrative expenses 4,346
3,701
645
17 %
Sales and marketing expenses 1,301
1,054
247
23 %
Loss from operations (3,188 ) (4,043 ) 855
(21 )%
Interest income (expense) (340 ) (107 ) (233 ) 218 %
Change in fair value of acquisition note payable 105
18
87
483 %
Change in fair value of warrant liability 2,790
712
2,078
292 %
Other expense —
(325 ) 325
(100 )%
Net (loss) $ (633 ) $ (3,745 ) $ 3,112
(83 )%

~~Non-GAAP Financial Information~~

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

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

Three Months Ended September 30,
2017 2016
Reconciliation of net (loss):
Net (loss) $ (633 ) $ (3,745 )
Adjustments:
Change in fair value of acquisition note payable (105 ) (18 )
Change in fair value of warrant liability (2,790 ) (712 )
Adjusted net (loss) $ (3,528 ) $ (4,475 )
Reconciliation of basic net (loss) per share:
Basic net (loss) per share $ (0.03 ) $ (0.23 )
Adjustments to net (loss) (0.13 ) (0.04 )
Adjusted basic net (loss) per share $ (0.16 ) $ (0.27 )
Basic weighted-average shares outstanding 21,577
16,519
Reconciliation of diluted net (loss) per share:
Diluted net (loss) per share $ (0.15 ) $ (0.23 )
Adjustments to net (loss) (0.01 ) (0.04 )
Adjusted diluted net (loss) per share $ (0.16 ) $ (0.27 )
Diluted weighted-average shares outstanding 22,359
16,519

Adjusted net (loss) decreased 21% to $3.5 million during the three months ended September 30, 2017, down from an adjusted net (loss) of $4.5 million during the three months ended September 30, 2016. Adjusted basic net (loss) per share decreased 41% to $0.16 during the three months ended September 30, 2017, down from $0.27 during the three months ended September 30,

~~2016. Adjusted diluted net (loss) per share decreased 41% to $0.16 during the three months ended September 30, 2017, down from $0.27 during the three months ended September 30, 2016.~~

~~Revenue~~

~~The breakdown of our revenue is as follows:~~

Three Months Ended September 30, Change
2017 2016
(dollars in thousands) $ % $ % $ %
Biopharma Services $ 4,168
52 % $ 3,805
56 % $ 363
10 %
Clinical Services 2,880
36 % 2,687
40 % 193
7 %
Discovery Services 980
12 % 258
4 % 722
280 %
Total Revenue $ 8,028
100 % $ 6,750
100 % $ 1,278
19 %

Revenue increased 19%, or $1.3 million, to $8.0 million for the three months ended September 30, 2017, from $6.8 million for the three months ended September 30, 2016, principally due to an increase in Discovery Services of $0.7 million and an increase in our Biopharma Services of $0.4 million. Our average revenue per test decreased to $376 per test for the three months ended September 30, 2017 from $397 per test for the three months ended September 30, 2016, principally due to the additional Clinical Services volume from our Los Angeles facility, which yields lower average revenue per test. Test volume increased by 11% from 12,348 tests for the three months ended September 30, 2016 to 13,726 tests for the three months ended September 30, 2017.

Revenue from Biopharma Services increased 10%, or $0.4 million, to $4.2 million for the three months ended September 30, 2017, from $3.8 million for the three months ended September 30, 2016 due to completing more studies from its top ten customers. Revenue from Clinical Services customers increased by $0.2 million, or 7%, compared to the three months ended September 30, 2016, due to increased clinical test volume. Revenue from Discovery Services increased 280%, or $0.7 million, during the three months ended September 30, 2017 due to the acquisition of vivoPharm, which accounted for $0.8 million of the increase.

~~Cost of Revenues~~

Cost of revenues increased 3%, or $0.1 million, for the three months ended September 30, 2017, principally due to increased payroll and benefit costs of $0.2 million offset by reduced costs of supplies used in our testing facilities of $0.1 million. Gross margin improved to 43% during the three months ended September 30, 2017 up from 34% for the three months ended September 30, 2016.

~~Operating Expenses~~

Research and development expenses decreased 38%, or $0.6 million, to $1.0 million for the three months ended September 30, 2017, from $1.6 million for the three months ended September 30, 2016, principally due to a $0.3 million decrease in payroll and benefit costs and a $0.3 million decrease in lab supplies used to validate new diagnostic tests and perform certain research and development projects.

General and administrative expenses increased 17%, or $0.6 million, to $4.3 million for the three months ended September 30, 2017, from $3.7 million for the three months ended September 30, 2016, principally due to an increase in our bad debt reserve of $0.7 million and an increase in payroll and other benefits of $0.3 million, offset by a $0.2 million decrease in facility costs resulting from the elimination of building management fees at our North Carolina location and decreased professional fees and taxes of $0.1 million each.

Sales and marketing expenses increased 23%, or $0.2 million, to $1.3 million for the three months ended September 30, 2017, from $1.1 million for the three months ended September 30, 2016, principally due to increased compensation costs of $0.3 million and offset by decreased facility costs of $0.1 million.

~~Interest Income (Expense)~~

~~Net interest expense increased 218%, or $0.2 million, to $0.3 million during the three months ended September 30, 2017 due to the higher effective interest rate on our refinanced debt.~~

~~Change in Fair Value of Acquisition Note Payable~~

The change in fair value of note payable resulted in approximately $105,000 and $18,000 of non-cash income for the three months ended September 30, 2017 and 2016, respectively. The fair value of the note representing part of the purchase price for BioServe decreased during the three months ended September 30, 2017 and 2016 as a consequence of a decrease in our stock price.

~~Change in Fair Value of Warrant Liability~~

Changes in fair value of some of our common stock warrants may impact our quarterly results. Accounting rules require us to record certain of our warrants as a liability, measure the fair value of these warrants each quarter and record changes in that value in earnings. As a result of a decrease in our stock price, we recognized non-cash income of $2.8 million and $0.7 million for the three months ended September 30, 2017 and 2016, respectively. In the future, if our stock price increases, with all other factors being equal, we would record a non-cash charge as a result of changes in the fair value of our common stock warrants. Alternatively, if the stock price decreases, with all other factors being equal, we may record non-cash income.

~~Other Expense~~

~~During the three months ended September 30, 2016, we expensed $0.3 million of offering costs associated with the derivative warrants issued in the 2016 Offerings.~~

~~Nine Months Ended September 30, 2017 and 2016~~

~~The following table sets forth certain information concerning our results of operations for the periods shown:~~


	Nine Months Ended September 30,						Change					Three Months Ended June 30,						Change
(dollars in thousands)	2017			2016			$			%		2018			2017			$			%
Revenue	$	21,598		$	19,819		$	1,779		9	%	$	7,036		$	6,604		$	432		7	%
Cost of revenues	12,831			12,832			(1		)	—	%	4,853			4,034			819			20	%
Research and development expenses	3,080			4,806			(1,726		)	(36	)%	673			989			(316		)	(32	)%
General and administrative expenses	11,352			11,677			(325		)	(3	)%	5,419			3,529			1,890			54	%
Sales and marketing expenses	3,437			3,731			(294		)	(8	)%	1,341			1,165			176			15	%
Loss from operations	(9,102		)	(13,227		)	4,125			(31	)%	(5,250		)	(3,113		)	(2,137		)	69	%
Interest income (expense)	(760		)	(323		)	(437		)	135	%	(578		)	(243		)	(335		)	138	%
Change in fair value of acquisition note payable	(114		)	119			(233		)	(196	)%	64			13			51			392	%
Change in fair value of warrant liability	(3,927		)	729			(4,656		)	(639	)%	2,154			577			1,577			273	%
Other income	(46		)	(325		)	279			(86	)%
Loss before income taxes	(13,949		)	(13,027		)	(922		)	7	%
Income tax provision (benefit)	(970		)	—			(970		)	n/a
Other income (expense)												(23		)	—			(23		)	N/A
Net (loss)	$	(12,979	)	$	(13,027	)	$	48		—	%	$	(3,633	)	$	(2,766	)	$	(867	)	31	%

Non-GAAP Financial Information

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


	Nine Months Ended September 30,						Three Months Ended June 30,
	2017			2016			2018			2017
Reconciliation of net (loss):
Net (loss)	$	(12,979	)	$	(13,027	)	$	(3,633	)	$	(2,766	)
Adjustments:
Change in fair value of acquisition note payable	114			(119		)	(64		)	(13		)
Change in fair value of warrant liability	3,927			(729		)	(2,154		)	(577		)
Adjusted net (loss)	$	(8,938	)	$	(13,875	)	$	(5,851	)	$	(3,356	)
Reconciliation of basic and diluted net (loss) per share:
Basic and diluted net (loss) per share	$	(0.65	)	$	(0.88	)
Reconciliation of basic net (loss) per share:
Basic net (loss) per share							$	(0.13	)	$	(0.14	)
Adjustments to net (loss)	0.20			(0.05		)	(0.09		)	(0.03		)
Adjusted basic and diluted net (loss) per share	$	(0.45	)	$	(0.93	)
Basic and diluted weighted-average shares outstanding	20,059			14,868
Adjusted basic net (loss) per share							$	(0.22	)	$	(0.17	)
Basic weighted-average shares outstanding							27,049			19,697
Reconciliation of diluted net (loss) per share:
Diluted net (loss) per share							$	(0.13	)	$	(0.16	)
Adjustments to net (loss)							(0.09		)	—
Adjusted diluted net (loss) per share							$	(0.22	)	$	(0.16	)
Diluted weighted-average shares outstanding							27,049			20,663

Adjusted net (loss) ~~decreased 36%~~increased 74% to ~~$8.9~~$5.9 million during the ~~nine~~three months ended ~~September~~June 30, ~~2017, down~~2018, from an adjusted net (loss) of ~~$13.9~~$3.4 million during the ~~nine~~three months ended ~~September~~June 30, ~~2016.~~2017. Adjusted basic ~~and~~net (loss) per share increased 29% to $0.22 during the three months ended June 30, 2018, from $0.17 during the three months ended June 30, 2017. Adjusted diluted net (loss) per share ~~decreased 52%~~increased 38% to ~~$0.45~~$0.22 during the ~~nine~~three months ended ~~September~~June 30, ~~2017, down~~2018, from ~~$0.93~~$0.16 during the ~~nine~~three months ended ~~September~~June 30, ~~2016.~~2017.

Revenue

The breakdown of our revenue is as follows:


	Nine Months Ended September 30,								Change					Three Months Ended June 30,								Change
	2017				2016									2018				2017
(dollars in thousands)	$		%		$		%		$			%		$		%		$		%		$			%
Biopharma Services	11,175		52	%	$	11,374	57	%	$	(199	)	(2	)%	$	3,591	51	%	$	3,288	50	%	$	303		9	%
Clinical Services	8,887		41	%	7,685		39	%	1,202			16	%	2,122		30	%	3,053		46	%	(931		)	(30	)%
Discovery Services	1,536		7	%	760		4	%	776			102	%	1,323		19	%	263		4	%	1,060			403	%
Total Revenue	$	21,598	100	%	$	19,819	100	%	$	1,779		9	%	$	7,036	100	%	$	6,604	100	%	$	432		7	%

Revenue increased 9%7%, or ~~$1.8~~$0.4 million, to ~~$21.6~~$7.0 million for the ~~nine~~three months ended ~~September~~June 30, ~~2017,~~2018, from ~~$19.8~~$6.6 million for the ~~nine~~three months ended ~~September~~June 30, ~~2016,~~2017, principally due to ~~an increase of $1.2 million in our Clinical Services and~~ an increase in Discovery Services of ~~$0.8~~$1.1 million and an increase in our Biopharma Services of $0.3 million, offset by a ~~decrease~~decline in Clinical Services revenue of ~~$0.2 million~~$0.9 million.

During the three months ended June 30, 2018, we began using our billing system to calculate test counts as opposed to our laboratory information systems, as we believe it more closely aligns the volume of tests with the tests on which we calculate expected collection prices. The billing software may count a test differently than our laboratory information systems have in ~~our Biopharma Services.~~prior periods. Test volume decreased by 18% from 20,007 tests for the three months ended June 30, 2017 to 16,485 tests for the three months ended June 30, 2018. Our average revenue per test decreased to ~~$378~~$129 per test for the ~~nine~~three months ended ~~September~~June 30, ~~2017~~2018 from ~~$408~~$153 per test for the ~~nine~~three months ended ~~September~~June 30, ~~2016,~~2017, principally due to changes in the ~~additional Clinical Services volume from~~amount expected to be collected for our Los Angeles facility, which yields lower average revenue per test. Test volume increased by 12% from 36,156 tests for the nine months ended September 30, 2016 to 40,451 tests for the nine months ended September 30, 2017.tests.

Revenue from Biopharma Services ~~decreased 2%~~increased 9%, or ~~$0.2~~$0.3 million, to ~~$11.2~~$3.6 million for the ~~nine~~three months ended ~~September~~June 30, ~~2017,~~2018, from ~~$11.4~~$3.3 million for the ~~nine~~three months ended ~~September~~June 30, ~~2016 due~~2017 as a result of the Company’s efforts to ~~completing fewer studies for~~expand its ~~top ten customers.~~business in this area. Revenue from Clinical Services customers ~~increased~~decreased by ~~$1.2~~$0.9 million, or ~~16%~~30%, ~~for~~compared to the ~~nine~~three months ended ~~September~~June 30, 2017, due to ~~increased~~changes in the amount expected to be collected for our tests and a decline in overall test volume ~~in our clinical services laboratory operations in Los Angeles.~~ processed.

Revenue from Discovery Services increased ~~102%~~403%, or ~~$0.8~~$1.1 million, during the ~~nine~~three months ended ~~September~~June 30, ~~2017~~2018 due to ~~our~~the acquisition of vivoPharm, which accounted for ~~all~~$1.3 million of the ~~increase.~~increase, offset in part by the decrease in revenue reported by our India subsidiary, due to its sale in April 2018.

Cost of Revenues

Cost of revenues ~~remained steady~~increased 20%, or $0.8 million, for the ~~nine~~three months ended ~~September~~June 30, ~~2017~~2018, principally due to increased payroll and ~~2016. While lab supplies and facility~~benefit costs ~~both~~of $0.5 million, increased byshipping costs of $0.2 million and increased cost of outsourcing of $0.1 million. These increases encompass the incremental costs associated with the vivoPharm operations acquired in August 2017 now consolidated into the Company’s results. Gross margin decreased to 31% during the ~~nine~~three months ended ~~September~~June 30, ~~2017, depreciation of equipment and outsourced labor decreased by $0.1 million and $0.2 million, respectively, during~~2018 down from 39% for the ~~nine~~three months ended ~~September~~June 30, 2017. In addition, our shipping costs declined by $0.1 million during the nine months ended September 30, 2017. Gross margin improved to 41% during the nine months ended September 30, 2017 from 35% during the nine months ended September 30, 2016, as we continue to rationalize our cost structure from prior acquisitions and introduce greater efficiency in our laboratory operations.

Operating Expenses

Research and development expenses decreased ~~36%~~32%, or ~~$1.7~~$0.3 million, to ~~$3.1~~$0.7 million for the ~~nine~~three months ended ~~September~~June 30, ~~2017,~~2018, from ~~$4.8~~$1.0 million for the ~~nine~~three months ended ~~September~~June 30, ~~2016,~~2017, principally due to ~~reduced~~a $0.4 million decrease in payroll and benefit costs due to the shift in our staffing costs as we reduced the amount of ~~$0.7 million, decreased lab supplies~~research and development initiatives and concentrated our staff on the delivery of ~~$0.7 million~~our services. Given the current financial condition of the Company, we are limiting our spending for research and ~~reduced facility costs of $0.2 million.~~development expenses to our most promising projects.

General and administrative expenses ~~decreased 3%~~increased 54%, or ~~$0.3~~$1.9 million, to ~~$11.4~~$5.4 million for the ~~nine~~three months ended ~~September~~June 30, ~~2017,~~2018, from ~~$11.7~~$3.5 million for the ~~nine~~three months ended ~~September~~June 30, ~~2016,~~2017, principally due to ~~decreased facility~~restructuring costs of ~~$0.6~~$0.7 million, ~~decreased~~an increase in our professional ~~fess~~fees of ~~$0.2~~$0.5 million, ~~decreased miscellaneous expenses of $0.2 million~~ and ~~decreased franchise and property taxes of $0.2 million, partially offset by~~ an increase in our bad debt ~~reserve~~expense of ~~$0.9~~$0.2 million. These increases encompass the incremental costs associated with the vivoPharm operations acquired in August 2017 now consolidated into the Company’s results.

Sales and marketing expenses ~~decreased 8%~~increased 15%, or ~~$0.3~~$0.2 million, to ~~$3.4~~$1.3 million for the ~~nine~~three months ended ~~September~~June 30, ~~2017,~~2018, from ~~$3.7~~$1.2 million for the ~~nine~~three months ended ~~September~~June 30, ~~2016,~~2017, principally due to ~~reduced travel and entertainment expenses of $0.2 million and decreased facility~~increased compensation costs of ~~$0.2~~$0.1 million. These increases encompass the incremental costs associated with the vivoPharm operations acquired in August 2017 now consolidated into the Company’s results.

Interest Income (Expense)

Net interest expense increased ~~135%~~138%, or ~~$0.4~~$0.3 million, ~~principally~~to $0.6 million during the three months ended June 30, 2018 due to ~~recognizing a loss on extinguishment of debt of $0.1 million in March 2017 and the higher effective interest rate~~increased borrowings on our ~~refinanced debt.~~ABL, debt modification costs incurred and paying interest at the default rate.

Change in Fair Value of Acquisition Note Payable

The change in fair value of acquisition note payable resulted in ~~$0.1 million in~~approximately $64,000 and $13,000 of non-cash ~~expense~~income for the ~~nine~~three months ended ~~September~~June 30, 2018 and 2017, as compared to non-cash income of $0.1 million for the nine months ended September 30, 2016. The fair value of the note representing part of the purchase price for BioServe increased during the nine months ended September 30, 2017respectively, as a consequence of a ~~increase~~decrease in our stock price.

Change in Fair Value of Warrant Liability

Changes in fair value of some of our common stock warrants may impact our quarterly results. Accounting rules require us to record certain of our warrants as a liability, measure the fair value of these warrants each quarter and record changes in that value in earnings. As a result of ~~an increase~~a decrease in our stock price, we recognized non-cash ~~expense~~income of ~~$3.9~~$2.2 million and $0.6 million for the ~~nine~~three months ended ~~September~~June 30, ~~2017.~~2018 and 2017, respectively. In the future, if our stock price increases, with all other factors being equal, we would record a non-cash charge as a result of changes in the fair value of our common stock warrants. Alternatively, if the stock price decreases, with all other factors being equal, we may record non-cash income.

Six Months Ended June 30, 2018 and 2017

The following table sets forth certain information concerning our results of operations for the periods shown:



	Six Months Ended June 30,						Change
(dollars in thousands)	2018			2017			$			%
Revenue	$	14,703		$	13,570		$	1,133		8	%
Cost of revenues	9,935			8,243			1,692			21	%
Research and development expenses	1,354			2,099			(745		)	(35	)%
General and administrative expenses	10,679			7,006			3,673			52	%
Sales and marketing expenses	2,932			2,136			796			37	%
Loss from operations	(10,197		)	(5,914		)	(4,283		)	72	%
Interest income (expense)	(796		)	(420		)	(376		)	90	%
Change in fair value of acquisition note payable	81			(219		)	300			(137	)%
Change in fair value of warrant liability	2,846			(6,717		)	9,563			(142	)%
Other income (expense)	(23		)	(46		)	23			(50	)%
Loss before income taxes	(8,089		)	(13,316		)	5,227			(39	)%
Income tax provision (benefit)	—			(970		)	970			n/a
Net (loss)	$	(8,089	)	$	(12,346	)	$	4,257		(34	)%

Non-GAAP Financial Information

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



	Six Months Ended June 30,
	2018			2017
Reconciliation of net (loss):
Net (loss)	$	(8,089	)	$	(12,346	)
Adjustments:
Change in fair value of acquisition note payable	(81		)	219
Change in fair value of warrant liability	(2,846		)	6,717
Adjusted net (loss)	$	(11,016	)	$	(5,410	)
Reconciliation of basic and diluted net (loss) per share:
Basic and diluted net (loss) per share	$	(0.30	)	$	(0.64	)
Adjustments to net (loss)	(0.11		)	0.36
Adjusted basic and diluted net (loss) per share	$	(0.41	)	$	(0.28	)
Basic and diluted weighted-average shares outstanding	27,049			19,301

Adjusted net (loss) increased 104% to $11.0 million during the six months ended June 30, 2018, up from an adjusted net (loss) of $5.4 million during the six months ended June 30, 2017. Adjusted basic and diluted net (loss) per share increased 46% to $0.41 during the six months ended June 30, 2018 from $0.28 during the six months ended June 30, 2017.

Revenues

The breakdown of our revenue for the six months ended June 30, 2018 and 2017 is as follows:



	Six Months Ended June 30,								Change
	2018				2017
(dollars in thousands)	$		%		$		%		$			%
Biopharma Services	7,249		50	%	$	7,007	52	%	$	242		3	%
Clinical Services	4,464		30	%	6,007		44	%	(1,543		)	(26	)%
Discovery Services	2,990		20	%	556		4	%	2,434			438	%
Total Revenue	$	14,703	100	%	$	13,570	100	%	$	1,133		8	%

Revenue increased 8%, or $1.1 million, to $14.7 million for the six months ended June 30, 2018, from $13.6 million for the six months ended June 30, 2017, principally due to an increase in Discovery Services of $2.4 million, offset by a decrease of $1.5 million in our Clinical Services.

Revenue from Biopharma Services increased 3%, or $0.2 million, to $7.2 million for the six months ended June 30, 2018, from $7.0 million for the six months ended June 30, 2017 due to the Company’s efforts to expand its business in this area. Revenue from Clinical Services customers decreased by $1.5 million, or 26%, for the six months ended June 30, 2018 due to changes in the amount expected to be collected for our tests and a decline in overall test volume processed. Revenue from Discovery Services increased 438%, or $2.4 million, during the six months ended June 30, 2018 due to our acquisition of vivoPharm in August 2017, which accounted for $2.7 million, offset, in part, by a decline in revenue reported from our India subsidiary, due to its sale in April 2018.

Cost of Revenues

Cost of revenues increased $1.7 million to $9.9 million for the six months ended June 30, 2018 from $8.2 million for the six months ended June 30, 2017, principally due to increased payroll and benefit costs of $1.0 million and increased shipping costs of $0.6 million. Gross margin declined to 32% during the six months ended June 30, 2018 from 39% during the six months ended June 30, 2017, due to a shift in our staffing costs as we reduced the amount of research and development initiatives and concentrated our staff on the delivery of our services. These increases encompass the incremental costs associated with the vivoPharm operations acquired in August 2017 now consolidated into the Company’s results.

Operating Expenses

Research and development expenses decreased 35%, or $0.7 million, to $1.4 million for the six months ended June 30, 2018, from $2.1 million for the six months ended June 30, 2017, principally due to reduced payroll and benefit costs of $0.8 million due to the shift in our staffing costs as we reduced the amount of research and development initiatives and concentrated our staff on the delivery of our services. Given the current financial condition of the Company, we are limiting our spending for research and development expenses to our most promising projects.

General and administrative expenses increased 52%, or $3.7 million, to $10.7 million for the six months ended June 30, 2018, from $7.0 million for the six months ended June 30, 2017, principally due to increased payroll and benefit costs of $0.8 million, including approximately $0.5 million of severance expense incurred in the first quarter of 2018, increased professional service fees of $0.7 million primarily related to our compliance requirements to adopt ASC 606, increased software costs of $0.1 million due to migrating our California location to the New Jersey laboratory information system, increased depreciation and amortization of $0.1 million due to the purchase of vivoPharm, a net increase in our bad debt reserve of $0.9 million relating to prior year uncollectible revenues, a net increase in Delaware franchise taxes of $0.2 million and restructuring costs of $0.7 million. These increases encompass the incremental costs associated with the vivoPharm operations acquired in August 2017 now consolidated into the Company’s results.

Sales and marketing expenses increased 37%, or $0.8 million, to $2.9 million for the six months ended June 30, 2018, from $2.1 million for the six months ended June 30, 2017, principally due to increased payroll and benefit costs of $0.7 million as we

had ramped up sales personnel in our Clinical Services business in the second half of 2017. These increases encompass the incremental costs associated with the vivoPharm operations acquired in August 2017 now consolidated into the Company’s results.

Interest Income (Expense)

Net interest expense increased 90%, or $0.4 million, due to increased borrowings and a higher effective interest rate on the debt we refinanced in late March 2017. We also incurred debt modification costs of approximately $0.2 million in June 2018 and paid interest at the default rate.

Change in Fair Value of Acquisition Note Payable

The change in fair value of note payable resulted in $81,000 in non-cash income for the six months ended June 30, 2018, as compared to non-cash expense of $0.2 million for the six months ended June 30, 2017. The fair value of the note decreased during the six months ended June 30, 2018 as a consequence of a decrease in our stock price.

Change in Fair Value of Warrant Liability

Changes in fair value of some of our common stock warrants may impact our quarterly results. Accounting rules require us to record certain of our warrants as a liability, measure the fair value of these warrants each quarter and record changes in that value in earnings. As a result of a decrease in our stock price, we recognized non-cash income of $2.8 million for the six months ended June 30, 2018, as opposed to a non-cash charge of $6.7 million during the six months ended June 30, 2017 that resulted from an increase in our stock price. Consequently, we may be exposed to non-cash charges, or we may record non-cash income, as a result of this warrant exposure in future periods.

We recognized non-cash income of $0.7 million during the nine months ended September 30, 2016 due to changes in the fair value of the warrants issued in the 2016 Offerings and the expiration of other unexercised warrants.

~~Other Expense~~Income Taxes

During the ~~nine~~six months ended ~~September~~June 30, 2017, ~~and 2016,~~ we ~~expensed $46,000 and $0.3~~received approximately $1.0 million of ~~issuance costs associated with~~net proceeds from the ~~derivative warrants issued as part~~sale of ~~the 2017 debt refinancing~~state NOL’s and ~~the 2016 Offerings, respectively.~~state research and development credits.

Liquidity and Capital Resources

Sources of Liquidity

Our primary sources of liquidity have been funds generated from our debt financings and equity financings. In addition, we have generated funds from the following sources: (i) cash collections from customers and (ii) cash received from sale of state NOL’s. On April 26, 2018, we sold our India subsidiary for $1.9 million, including $1.6 million in cash at closing and up to an additional $300,000.

In general, our primary uses of cash are providing for operating expenses, working capital purposes and servicing debt. ~~As of~~

~~September 30, 2017, we have up to $4.0 million of available borrowings from our line of credit with Silicon Valley Bank, and we are able to sell shares to Aspire Capital.~~

~~Aspire Capital~~

Cash Flows

Our net cash flow from operating, investing and financing activities for the periods below were as follows:


	Nine Months Ended September 30,						Six Months Ended June 30,
(in thousands)	2017			2016			2018			2017
Cash provided by (used in):
Operating activities	$	(10,249	)	$	(17,299	)	$	(8,101	)	$	(7,389	)
Investing activities	(2,121		)	(472		)	959			(663		)
Financing activities	7,675			9,028			(859		)	4,720
Net (decrease) in cash and cash equivalents	$	(4,695	)	$	(8,743	)
Effect of foreign currency exchange rates on cash and cash equivalents							61			—
Net increase (decrease) in cash and cash equivalents							$	(7,940	)	$	(3,332	)

We had cash and cash equivalents and restricted cash of ~~$4.8~~$2.0 million at ~~September~~June 30, ~~2017,~~2018, and ~~$9.5~~$9.9 million at December 31, ~~2016.~~2017.

The ~~$4.7~~$7.9 million decrease in cash and cash equivalents for the ~~nine~~six months ended ~~September~~June 30, 2018, principally resulted from net cash used in operations of $8.1 million, offset in part by net proceeds from the sale of our India subsidiary of $1.6 million.

The $3.3 million decrease in cash and cash equivalents for the six months ended June 30, 2017, principally resulted from net cash used in operations of ~~$10.2~~$7.4 million and principal payments made on the Silicon Valley Bank term note of $4.7 million, ~~and fixed asset additions of $1.2 million,~~ partially offset by proceeds from the exercise of warrants of $1.8 ~~million, net proceeds from the sale of stock to Aspire Capital of $3.0~~ million, proceeds from refinancing our debt of $6.0 million and borrowings on our line of credit of $2.0 million.

~~The $8.7 million decrease in cash and cash equivalents for the nine months ended September~~At June 30, ~~2016, principally resulted from $17.3 million of net cash used in operations, partially offset by $10.0 million of net proceeds from the 2016 Offerings.~~

~~At September 30, 2017,~~2018, we had total indebtedness of ~~$8.0~~$9.4 million, excluding capital lease obligations.

Cash Used in Operating Activities

Net cash used in operating activities was ~~$10.2~~$8.1 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2018. We used ~~$4.7~~$8.4 million in net cash to fund our core operations, which included $0.6 million in cash paid for interest, and another $0.5 million to purchase other current assets, offset by a net increase in accounts payable, accrued expenses and deferred revenue of $0.4 million and a net reduction in accounts receivable of $0.4 million.

For the six months ended June 30, 2017, we used $7.4 million in operating activities. We used $3.0 million in net cash to fund our core operations, which included $0.4 million in cash paid for interest. We incurred additional uses of cash when adjusting for working capital items as follows: a net increase in accounts receivable of ~~$4.0~~$1.6 million, an increase in other ~~current~~ assets of ~~$0.6~~$0.4 million, a net decrease in accounts payable, accrued expenses and deferred revenue of ~~$1.1~~$2.4 million and a decrease in deferred rent payable and other of $0.1 ~~million, offset by a decrease in other assets of $0.3 million.~~

For the nine months ended September 30, 2016, we used $17.3 million in operating activities. We used $10.5 million in net cash to fund our core operations, which included $0.3 million in cash paid for interest. We incurred additional uses of cash when adjusting for working capital items as follows: a net increase in accounts receivable of $7.1 million and an increase in other current assets of $0.1 million, offset by a net increase in accounts payable, accrued expenses and deferred revenue of $0.4 million.

Cash Used in Investing Activities

Net cash provided by investing activities was $1.0 million for the six months ended June 30, 2018 and principally resulted from net cash received from the sale of our India subsidiary of $1.6 million, offset in part by fixed asset purchases of $0.5 million and patent costs of $0.1 million.

Net cash used in investing activities was ~~$2.1~~$0.7 million for the ~~nine~~six months ended ~~September~~June 30, 2017 and resulted from the purchase of fixed assets of ~~$1.2~~$0.4 million, patent costs of $0.1 ~~million, net cash paid to acquire vivoPharm of $0.7~~ million and investing $0.2 million in a cost method ~~investment.~~

~~Net cash used in investing activities was $0.5 million for the nine months ended September 30, 2016 and resulted from the purchase of fixed assets of $0.3 million and patent costs of $0.1 million.~~investment

Cash Provided by Financing Activities

Net cash used in financing activities was $0.9 million for the six months ended June 30, 2018 and resulted from the repayment of borrowings on our SVB asset-based line of credit (“ABL”) of $3.9 million and principal payments on capital lease obligations of $0.2 million, offset by borrowings on the ABL of $3.2 million.

Net cash provided by financing activities was ~~$7.7~~$4.7 million for the ~~nine~~six months ended ~~September~~June 30, 2017 and principally resulted from proceeds received from warrants exercised of $1.8 million, ~~proceeds from the sale of stock to Aspire Capital of $3.0 million net of certain offering costs,~~ proceeds from refinancing our debt of $6.0 million and proceeds from borrowing $2.0 million on our line of credit, offset by principal payments made on our Silicon Valley Bank term note of $4.7 million, capital lease payments of ~~$0.2~~$0.1 million and debt issuance costs and loan fees of $0.3 million related to our refinanced debt.

Net cash provided by financing activities was $9.0 million for the nine months ended September 30, 2016 and principally resulted from proceeds received in the 2016 Offerings of $10.0 million, offset by principal payments made on the bank term note of $0.8 million and capital lease payments of $0.1 million.

Capital Resources and Expenditure Requirements

We expect to continue to incur material operating losses in the ~~near~~ future. It may take several years, if ever, to achieve positive operational cash flow. We may need to raise additional capital to fund our current operations, to repay certain outstanding indebtedness and to fund expansion of our business to meet our long-term business objectives through public or private equity offerings, debt financings, borrowings or strategic partnerships coupled with an investment in our company or a combination thereof. If we raise additional funds through the issuance of convertible debt securities, or other debt securities, these securities could be secured and could have rights senior to those of our common stock. In addition, any new debt incurred by the Company could impose covenants that restrict our operations and increase our interest expense. The issuance of any new equity securities will also dilute the interest of our current stockholders. Given the risks associated with our business, including our unprofitable operating history and our ability to develop additional proprietary tests, additional capital may not be available when needed on acceptable terms, or at all. If adequate funds are not available, we will need to curb our expansion plans or further limit our research and development activities, which ~~would~~may have a material adverse impact on our business prospects and results of operations. Due to the terms of the ABL, we have reached the borrowing limit based on eligible accounts receivable at June 30, 2018. In addition, we were in violation of certain financial covenants with SVB and PFG as of April 30, 2018. On

May 14, 2018, the Company received a waiver from its senior lenders for its failure to comply with certain financial covenants for the month of April 30, 2018. The Company concurrently amended its debt agreements with SVB and PFG, respectively; the new agreements required the Company to raise $2,500,000 through the sale of its equity securities or issuance of subordinated debt (in the case of the agreement with SVB, to investors accepted to SVB), which occurred on July 17, 2018, when the Company entered into an agreement pursuant to which the Company issued a convertible promissory note to an institutional accredited investor in the initial principal amount of $2,625,000. The Company received consideration of $2,500,000, reflecting an original issue discount of $100,000 and expenses payable by the Company of $25,000. The convertible note has an 18 month term and carries interest at 10% per annum. The note is convertible into shares of the Company’s common stock at a conversion price of $0.80 per share. See Note 14 of the Notes to Unaudited Consolidated Financial Statements of this quarterly report on Form 10-Q. Effective June 21, 2018 and June 30, 2018, the loan covenants were modified with respect to the debt owed to SVB and PFG, respectively, and the exercise price of the PFG Warrants was reduced as of June 30, 2018. At May 31, 2018 and June 30, 2018, we were in violation of certain of the modified financial covenants, and we expect to be in violation of certain of the modified financial covenants at July 31, 2018. We are currently working with our lenders to obtain waivers for these defaults.

We do not believe that our current cash ~~taken together with the borrowings available from the Silicon Valley Bank line of credit and the common stock purchase agreement with Aspire Capital Fund, LLC,~~ will support operations for at least the next 12 months from the date of this ~~report. We continue to explore opportunities for~~report unless we raise additional equity or debt ~~financing,~~capital or spin-off non-core assets to raise additional cash. We have hired Raymond James & Associates Inc. as our financial advisor to assist with evaluating strategic options. Such options could include raising more capital, the acquisition of another company and / or complementary assets, the sale of the Company or another type of strategic partnership. There is no assurance that the review of strategic alternatives will result in the Company changing its business plan, pursuing any particular transaction, if any, or, if it pursues any such transaction, that it will be completed.

Meanwhile we are taking steps to improve our operating cash ~~flow.~~flow, including the consolidation of our laboratory operations and reductions in the number of staff. We can provide no assurances that our current actions will be successful or that any additional sources of financing will be available to us on favorable terms, if at all, when needed. Our ~~forecast of the period of time through which our current financial resources will be adequate to support our~~cash position, recurring losses from operations and negative cash flows from operations raise substantial doubt about our ability to continue as a going concern, and as a result, our independent registered public accounting firm included an explanatory paragraph in its report on our financial statements as of and for the ~~costs~~year ended December 31, 2017 with respect to ~~support~~this uncertainty. This going concern opinion, and any future going concern opinion, could materially limit our ~~general~~ability to raise additional capital. The perception that we may not be able to continue as a going concern may cause potential partners or investors to choose not to deal with us due to concerns about our ability to meet our contractual and ~~administrative, sales and marketing and research and development activities are forward-looking statements and involve risks and uncertainties.~~

~~We expect~~financial obligations. If we cannot continue as a going concern, our ~~sales and marketing, research and development and other general and administrative expenses to increase as we continue to expand~~stockholders may lose their entire investment in our ~~business.~~common stock.

Our forecast of the period of time through which our current financial resources will be adequate to support our operations and our expected operating expenses are forward-looking statements and involve risks and uncertainties. Actual results could vary materially and negatively as a result of a number of factors, including:

our ability to obtain waivers from PFG and SVB for our loan covenant violations for periods subsequent to April 30, 2018;

our ability to achieve revenue growth and profitability;

our ability to secure financing and the amount thereof;

the costs for funding the operations we recently acquired and our ability to realize anticipated benefits from the vivoPharm acquisition;

our ability to save money by moving our California operations to New Jersey and North Carolina;

our ability to improve efficiency of billing and collection processes;

our ability to obtain approvals for our new diagnostic tests;

our ability to execute on our marketing and sales strategy for our tests and ~~CRO~~ services and gain acceptance of our tests and ~~CRO~~ services in the market;

our ability to obtain adequate reimbursement from governmental and other third-party payors for our tests and services;

~~the costs, scope, progress, results, timing~~

our ability to maintain our present customer base and ~~outcomes~~obtain new customers;

our ability to clinically validate our pipeline of ~~the clinical trials of our tests;~~tests currently in development;

the costs of operating and enhancing our laboratory facilities;

our ability to succeed with our cost control initiative;

~~the timing~~our ability to satisfy US (FDA) and international regulatory regiments with respect to our tests and services, many of which are new and ~~the costs involved in regulatory compliance, particularly if the regulations change;~~still evolving;

the costs of maintaining, expanding and protecting our intellectual property portfolio, including potential litigation costs and liabilities;

our ability to manage the costs of manufacturing our tests;

our rate of progress in, and cost of research and development activities associated with, products in research and early development;

the effect of competing technological and market developments;

costs related to expansion;

~~our ability to secure financing and the amount thereof;~~ and

other risks and uncertainties discussed in our annual report on Form 10-K for the year ended December 31, ~~2016,~~2017, as updated in ~~this quarterly report on Form 10-Q and~~ other reports, as applicable, we file with the Securities and Exchange Commission.

We expect that our operating expenses ~~may slightly increase as a result of our purchase of vivoPharm, but at a lesser rate than the expected increase in revenue. We expect our~~and capital expenditures ~~will slightly~~may increase in the future as we expand our business. We plan to ~~increase~~take additional steps to decrease our sales and marketing ~~headcount~~expenses related to ~~promote~~ our ~~new~~ clinical tests and services, and ~~to expand into new geographies and to~~will continue trimming our research and development expenditures ~~associated with performing work with research collaborators,~~for all projects that are not expected to ~~expand our pipeline and to perform work associated with our research collaborations.~~be profitable in the near future. For example, in 2011 we entered into an affiliation agreement to form a joint venture with the Mayo Foundation for Medical Education and Research pursuant to which we made an initial $1.0 million capital contribution in October 2013 and $1.0 million in the third quarter of 2014. We ~~may~~do not expect to make additional capital contributions ~~of up to $4.0 million, subject~~ to the joint venture entity’s ~~achievement of certain~~ operational ~~milestones.~~activities. Until we can generate a sufficient amount of revenues to finance our cash requirements, which we may never do, we ~~will~~may need to raise additional capital to fund our operations.

Subject to the availability of financing, we may use significant cash to fund acquisitions.

~~In March 2017, we entered into~~The consolidated financial statements for the six months ended June 30, 2018 were prepared on the basis of a ~~new line~~going concern, which contemplates that the Company will be able to realize assets and discharge liabilities in the normal course of ~~credit with Silicon Valley Bank~~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 ~~refinanced our term note with~~to continue as a ~~new lender, Partners for Growth. See Note 6~~going concern is dependent upon the availability of ~~Notes to Unaudited Consolidated Financial Statements included~~future funding and the continued growth in ~~Item 1~~revenues. The financial statements do not include any adjustments that might result from the outcome of this quarterly report on Form 10-Q. In August 2017, we entered into a common stock purchase agreement with Aspire Capital Fund, LLC. See Note 3 of Notes to Unaudited Consolidated Financial Statements included in Item 1 of this quarterly report on Form 10-Q.these uncertainties.

Income Taxes

Over the past several years we have generated operating losses in all jurisdictions in which we may be subject to income taxes. As a result, we have accumulated significant net operating losses and other deferred tax assets. Because of our history of losses and the uncertainty as to the realization of those deferred tax assets, a full valuation allowance has been recognized. We do not expect to report a benefit related to the deferred tax assets until we have a history of earnings, if ever, that would support the realization of our deferred tax assets. ~~Utilization of these net operating loss carryforwards is subject to limitation due to ownership changes that may delay the utilization of a portion of the carryforwards.~~

Off-Balance Sheet Arrangements

Since inception, we have not engaged in any off-balance sheet activities as defined in Item 303(a)(4) of Regulation S-K.

Critical Accounting Policies and Significant Judgment and Estimates

~~Our management’s~~Management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates based on historical experience and make various assumptions, which management believes to be reasonable under the circumstances, which form the basis for judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Section 107 of the JOBS Act provides that an “emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise

apply to private companies. However, we have chosen to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

The notes to our audited consolidated financial statements in our annual report on Form 10-K for the year ended December 31, ~~2016~~2017 contain a summary of our significant accounting policies. The adoption of ASU 2014-09 and ASU 2016-18 are discussed in Note 1 of Notes to Unaudited Consolidated Financial Statements included in Item 1 of this quarterly report on Form 10-Q. We consider the following accounting policies critical to the understanding of the results of our operations:

Revenue recognition;

Accounts receivable and bad debts;

Stock-based compensation; and

Warrant liability.

Cautionary Note Regarding Forward-Looking Statements

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995

This report on Form 10-Q contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include all statements that are not historical facts. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “potential,” or the negative of those terms, and similar expressions and comparable terminology intended to identify forward-looking statements. These statements reflect our current views with respect to future events. There are a number of important factors that could cause the actual results to differ materially from those expressed in any forward-looking statement made by us. These factors include, but are not limited to:

our ability to obtain waivers from PFG and SVB for our loan covenant violations for periods subsequent to April 30, 2018;

our ability to achieve revenue growth and profitability;

our ability to secure financing and the amount thereof;

our ability to save money by moving our California operations to New Jersey and North Carolina;

our ability to achieve profitability by increasing sales of our laboratory tests and services and to continually develop and commercialize novel and innovative ~~diagnostic~~laboratory tests and services ~~for cancer patients;~~focused on oncology and immuno-oncology;

our ability to improve efficiency of billing and collection processes;

with respect to our Clinical Services, our ability to obtain reimbursement from governmental and other third-party payors for our tests and services;

our ability to clinically validate our pipeline of tests currently in development;

our ability to execute on our marketing and sales strategy for our tests and ~~CRO~~ services and gain acceptance of our tests and ~~CRO~~ services in the market;

our ability to keep pace with rapidly advancing market and scientific developments;

our ability to satisfy U.S. (including FDA) and international regulatory requirements with respect to our tests and services, many of which are new and still evolving;

our ability to raise additional capital to meet our liquidity needs;

competition from clinical laboratory services companies, tests currently available or new tests that may emerge;

our ability to maintain our clinical collaborations and enter into new collaboration agreements with highly regarded organizations in the cancer field so that, among other things, we have access to thought leaders in the field and to a robust number of samples to validate our tests;

our ability to maintain our present customer base and obtain new customers;

potential product liability or intellectual property infringement claims;

our dependency on third-party manufacturers to supply or manufacture our ~~products;~~tests;

our 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;

our ability to obtain or maintain patents or other appropriate protection for the intellectual property in our proprietary tests and services;

our dependency on the intellectual property licensed to us or possessed by third parties;

our ability to expand internationally and launch our tests and services in emerging markets, such as ~~India~~China and ~~Brazil;~~Japan;

our ability to adequately support future growth; and

the risk factors discussed in our annual report on Form 10-K for the year ended December 31, ~~2016,~~2017, as updated in ~~this quarterly report on Form 10-Q and~~ other reports, as applicable, that we file with the Securities and Exchange Commission.

Given these uncertainties, you should not place undue reliance on these forward-looking statements. These forward-looking statements represent our estimates and assumptions only as of the date of this quarterly report on Form 10-Q and, except as required by law, we undertake no obligation to update or review publicly any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this quarterly report on Form 10-Q. You should read this quarterly report on Form 10-Q and the documents referenced herein and filed as exhibits completely and with the understanding that our actual future results may be materially different from what we expect.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We evaluated, under the supervision and with the participation of the principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934 (“Exchange Act”), as amended, as of ~~September~~June 30, ~~2017,~~2018, the end of the period covered by this report on Form 10-Q. Based on this evaluation, our President and Chief Executive Officer (principal executive ~~officer)~~officer and ~~our Chief Operating Officer (principal~~principal financial officer) ~~have~~has concluded that our disclosure controls and procedures were not effective at the reasonable assurance level at ~~September~~June 30, ~~2017.~~2018 because of the material weakness in the Company’s internal control over financial reporting that existed at December 31, 2017 and has not been fully remediated by the end of the period covered by this quarterly report on Form 10-Q.

Disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) is accumulated and communicated to management, including the principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Due to the inherent limitations of control systems, not all misstatements may be detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. Controls and procedures can only provide reasonable, not absolute, assurance that the above objectives have been met.

Changes in Internal Control over Financial Reporting

~~There~~Our internal control policies changed during the six months ended June 30, 2018 to accommodate the implementation of ASC 606. Other than changes to accommodate the implementation of ASC 606 and the remediation activities discussed below, there were no changes in our internal control over financial reporting during the three months ended ~~September~~June 30, ~~2017~~2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Material Weakness in Internal Control over Financial Reporting

Subsequent to the evaluation made in connection with filing our annual report on Form 10-K for the year ended December 31, 2017, management has begun the process of remediation of the material weakness. The remediation was conducted as part of the ASC 606 implementation that involves design changes to our internal controls over revenue recognition. We believe these actions to be sufficient to remediate the identified material weakness and to enhance our internal control over financial reporting. However the new enhanced controls have not operated long enough to conclude at the time of this filling that the material weakness was fully remediated.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

Item 1A. Risk Factors

Except as set forth below, there have been no material changes to the risk factors disclosed in Part 1, Item 1A, of our annual report on Form 10-K for the year ended December 31, ~~2016.~~2017.

~~Risks Related~~We are not currently in compliance with the continued listing requirements for NASDAQ. If the price of our common stock continues to trade below $1.00 per share for a sustained period or we do not meet other continued listing requirements, our common stock may be delisted from the ~~vivoPharm Acquisition~~

~~Any acquisition exposes a company to additional risks.~~

~~Acquisitions may entail numerous risks~~NASDAQ Capital Market, which could affect the market price and liquidity for ~~Cancer Genetics, including:~~

~~competing claims for capital resources;~~

~~uncertainty regarding~~our common stock and reduce our ability to ~~retain and grow relationships with vivoPharm’s key customers;~~raise additional capital.

~~difficulties in assimilating acquired operations, technologies or products; and~~

~~diversion of management’s attention from our core business.~~

Our ~~failure~~common stock is listed on the NASDAQ Capital Market. In order to ~~successfully complete~~maintain that listing, we must satisfy minimum financial and other requirements including, without limitation, a requirement that our closing bid price be at least $1.00 per share. On August 6, 2018, we received a written notice from NASDAQ indicating that we are not in compliance with the ~~integration~~minimum bid price requirement for continued listing on the NASDAQ Capital Market. We have 180 calendar days in which to regain compliance. We can regain compliance if at any time during this 180 day period the bid price of ~~vivoPharm could have~~our common stock closes at or above $1.00 per share for a ~~material adverse~~minimum of ten consecutive business days.

We intend to monitor the closing bid price of our common stock and consider our available options to resolve our noncompliance with the minimum bid price requirement, which may include submitting for approval by our stockholders a proposal to grant discretionary authority to our board of directors to amend our certificate of incorporation to effect ona reverse split of our ~~business, financial condition~~outstanding shares of common stock within an appropriate range, with the exact reverse split ratio to be decided and ~~operating results.~~

~~Failure~~publicly announced by the board of directors prior to the effective time of the ~~vivoPharm acquisition~~amendment to ~~achieve potential benefits could harm the business and operating results~~our certificate of ~~the combined company.~~

~~We expect that the acquisition of the vivoPharm businesses will result in potential benefits for the combined company, the expansion of the number and geographic coverage of~~incorporation. No determination regarding our sales and marketing team, stronger penetration into new biotechnology customers, an extended portfolio of capabilities which will differentiate us in the markets we serve, advancing our strategy of bench-to-bedside services, and bolstering our growth with a global customer base of biopharma partners. No assuranceresponse has been made at this time. There can be ~~given~~no assurance that we will ~~achieve any or all of these potential benefits. Even if we are~~be able to achieve any of these potential benefits, we cannot predict with certainty when the benefits will occur, or to the extent to which they actually will be achieved. For example, the benefits from the acquisition may be offset by costs incurred in integrating the businesses. The failure to achieve anticipated benefits could harm the business, financial condition and operating results of the combined company.

If the market for the combined company’s tests and services does not experience significant growth or if the combined company’s tests and services do not achieve broad acceptance, the combined company’s operations will suffer.

Cancer Genetics cannot accurately predict the future growth rate or the size of the market for the combined company’s tests and services. The expansion of this market depends on a number of factors, such as:

~~the results of clinical trials;~~

~~the cost, performance and reliability of the combined company’s tests and services, and the tests and services offered by competitors;~~

~~customers’ perceptions regarding the benefits of the combined company’s test and services;~~

~~customers’ satisfaction with our tests and services; and~~

~~marketing efforts and publicity regarding our tests and services.~~

~~If the combined company is unable to manage growth in its business, its prospects may be limited and its future results of operations may be adversely affected.~~

Any significant expansion such as the acquisition of vivoPharm may strain the combined company’s managerial, financial and other resources. If the combined company is unable to manage its growth, its business, operating results and financial condition could be adversely affected. The combined company will need to improve continually its operations, financial and other

~~internal systems to manage its growth effectively, and any failure to do so may lead to inefficiencies and redundancies, and result in reduced growth prospects and diminished operational results.~~

~~Operating in multiple countries requires us to comply with different legal and regulatory requirements.~~

Other laws applicable to our international business include local clinical, employment, tax, privacy, data security, environmental and intellectual property protection laws and regulations. These requirements may differ significantly from the requirements applicable to our business in the U.S. and may require resources to accommodate, and may result in decreased operational efficiencies and performance. As these laws continue to evolve and if we expand to more jurisdictions or acquire new businesses,regain compliance ~~will become more complex and expensive, and the risk of non-compliance will increase.~~

Compliance with complex foreign and U.S. laws and regulations that apply to our international operations increases our cost of doing business abroad, and violation of these laws or regulations may interfere with our ability to offer our tests and services competitively in one or more countries, expose us or our employees to fines and penalties, and result in the limitation or prohibition of our conduct of business.

~~The potential loss or delay of our large contracts or of multiple contracts could adversely affect our results.~~

Most of our Discovery Services clients can terminate our contracts upon 30 to 90 days notice. These clients may delay, terminate or reduce the scope of our contracts for a variety of reasons beyond our control, including but not limited to:

~~decisions to forego or terminate a particular clinical trial;~~

~~lack of available financing, budgetary limits or changing priorities;~~

~~actions by regulatory authorities;~~

~~production problems resultings in shortages of the drug being tested;~~

~~failure of products being tested to satisfy safety requirements or efficacy criteria;~~

~~unexpected or undesired clinical results for products;~~

~~shift of business to a competitor or internal resources; or~~

~~shut down of manufacturing facilities.~~

As a result, contract terminations, delays and alterations are a possible outcome in our Discovery Services business. In the event of termination, our contracts often provide for fees for winding down the project, but these fees may not be sufficient for us to maintain our margins, and termination may result in lower resource utilization rates. In addition, we may not realize the full benefits of our backlog of contractually committed services if our clients cancel, delay or reduce their commitments under our contracts with them, which may occur if, among other things, a client decides to shift its business to a competitor or revoke our 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 our revenues and profitability. We believe the risk of loss or delay of multiple contracts potentially has greater effect where we are party to broader partnering arrangements with global biopharmaceutical companies.

~~Our financial results may be adversely affected if we underprice our contracts, overrun our cost estimates or fail to receive approval for or experience delays in documenting change orders.~~

Most of our Discovery Services contracts are either fee for service contracts or fixed-fee contracts. Our past financial results have been, and our future financial results may be, adversely impacted if we initially underprice our contracts or otherwise overrun our cost estimates and are unable to successfully negotiate a change order. Change orders typically occur when the scope of work we perform needs to be modified from that originally contemplated by our contract with the ~~client. Modifications can occur, for example, when there is a change~~minimum bid price requirement or we will otherwise be in a key clinical trial assumption or parameter or a significant change in timing. Where we are not successful in converting out-of-scope work into change orders under our current contracts, we bear 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 our business, results of operations, financial condition or cash flows.

compliance with other NASDAQ listing criteria. If we fail to ~~perform~~regain compliance with the minimum bid requirement or to meet the other applicable continued listing requirements for the NASDAQ Capital Market in the future and NASDAQ determines to delist our ~~services in accordance with contractual requirements, regulatory standards~~common stock, the delisting could adversely affect the market price and ~~ethical considerations, we could be subject to significant costs or liability and our reputation could be harmed.~~

In connection with our Discovery Services business, we contract 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. Our services include monitoring 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 we fail to perform our services in accordance with these

~~requirements, regulatory agencies may take action against us for failure to comply with applicable regulations governing clinical trials. Clients may also bring claims against us for breach~~liquidity of our ~~contractual obligations. Any such action could have a material adverse effect on our results of operations, financial condition~~common stock and ~~reputation.~~

~~Such consequences could arise if, among other things, the following occur:~~

~~Improper performance of our services.~~ The performance of clinical development services is complex and time-consuming. For example, we 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, we could be subject to significant costs or liability, which could have an adverse impact onreduce our ability to ~~perform~~raise additional capital. In addition, if our ~~services. As examples:~~common stock is delisted from NASDAQ and the trading price remains below $5.00 per share, trading in our common stock might also become subject to the requirements of certain rules promulgated under the Exchange Act, which require additional disclosure by broker-dealers in connection with any trade involving a stock defined as a “penny stock” (generally, any equity security not listed on a national securities exchange or quoted on NASDAQ that has a market price of less than $5.00 per share, subject to certain exceptions).

~~non-compliance generally could~~We will need to raise additional capital to fund our operations.

We will need to raise additional financing to fund our operations. At June 30, 2018, we had unrestricted cash and cash equivalents of $1.6 million. Net cash used in operating activities was $8.1 million and $7.4 million for the six months ended June 30, 2018 and 2017, respectively.

The Company has retained Raymond James & Associates, Inc. as a financial advisor to assist the Company in its evaluation of a broad range of financial and strategic alternatives to enhance shareholder value, including additional capital raising transactions, the acquisition of another company or complementary assets or the potential sale or merger of the Company or another type of strategic partnership. There is no assurance that the review of strategic alternatives will result in the ~~termination~~Company changing its business plan, pursuing any particular transaction, if any, or, if it pursues any such transaction, that it will be completed. The Company does not expect to make further public comment regarding the strategic review until the Board of ~~ongoing clinical trials~~Directors has approved a specific transaction or otherwise deems disclosure of significant developments is appropriate.

We currently have no availability under our asset-based revolving line of credit agreement with Silicon Valley Bank due to the technical defaults for May and June 2018. We are in process of negotiating waivers for this in order to open up the line again. We can provide no assurance that any additional sources of financing will be available to us on favorable terms, if at all, when needed. Our forecast of the period of time through which our current financial resources will be adequate to support our operations and the costs to support our general and administrative, sales and marketing ~~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 us to repeat the clinical trial under the terms of our contract at no further cost to our client, but at a substantial cost to us; and

~~breach of a contractual term could result in liability for damages or termination of the contract.~~

~~While we endeavor to contractually limit our exposure to such risks, improper performance of our services could have an adverse effect on our financial condition, damage our reputation~~ and ~~result in the cancellation of current contracts by or failure to obtain future contracts from the affected client or other clients.~~

~~Investigation of clients.~~ ~~From time to time, one or more of our clients~~research and development activities are ~~audited or investigated by regulatory authorities or enforcement agencies with respect to regulatory compliance of their clinical trials, programs or the marketing~~forward-looking statements and sale of their drugs. In these situations, we have often provided services to our clients with respect to the clinical trials, programs or activities being audited or investigated, and we are called upon to respond to requests for information by the authorities and agencies. There is a risk that either our clients or regulatory authorities could claim that we performed our services improperly or that we are responsible for clinical trial or program compliance. If our clients or regulatory authorities make such claims against us and prove them, we could be subject to damages, fines or penalties. In addition, negative publicity regarding regulatory compliance of our clients’ clinical trials, programs or drugs could have an adverse effect on our business and reputation.

Security breaches and unauthorized use of our IT systems and information, or the IT systems or information in the possession of our vendors, could expose us, our clients, our data suppliers or others to risk of loss.

We rely upon the security of our computer and communications systems infrastructure to protect us from cyberattacks and unauthorized access. Cyberattacks can include malware, computer viruses, hacking or other significant disruption of our computer, communications and related systems. Although we take steps to manage and avoid theseinvolve risks and to prevent their recurrence, our preventive and remedial actions may not be successful. Such attacks, whether successful or unsuccessful, could result in our incurring costs related to, for example, rebuilding internal systems, defending against litigation, responding to regulatory inquiries or actions, paying damages or fines, or taking other remedial steps with respect to third parties. Publicity about vulnerabilities and attempted or successful incursions could damage our reputation with clients and data suppliers and reduce demand for our services.

We also store proprietary and sensitive information in connection with our business, which could be compromised by a cyberattack. To the extent that any disruption or security breach results in a loss or damage to our data, an inappropriate disclosure of proprietary or sensitive information, an inability to access data sources, or an inability to process data or provide our offerings to our clients, it could cause significant damage to our reputation, affect our relationships with our data suppliers and clients (including loss of suppliers and clients), lead to claims against us and ultimately harm our business. Weuncertainties. Absent sufficient additional financing, we may be ~~required~~unable to incur significant costs to alleviate, remedy or protect against damage caused by these disruptions or security breaches in the future. We may also face inquiry or increased scrutiny from government agencies asremain a result of any such disruption or breach. While we have insurance coverage for certain instances of a cyber security breach, our coverage may not be sufficient if we suffer a significant attack or multiple attacks. Any such breach or disruption could have a material adverse effect on our operating results and our reputation as a provider of mission-critical services.

Some of our vendors have significant responsibility for the security of certain of our data centers and computer-based platforms. Also, our data suppliers have responsibility for security of their own computer and communications environments. These third parties face risks relating to cyber security similar to ours, which could disrupt their businesses and therefore materially impact ours. Accordingly, we are subject to any flaw in or breaches to their computer and communications systems

~~or those that they operate for us, which could result in a material adverse effect on our business, operations and financial results.~~

~~Current and proposed laws and regulations regarding the protection of personal data could result in increased risks of liability or increased cost to us or could limit our service offerings.~~

The confidentiality, collection, use and disclosure of personal data, including clinical trial patient-specific information, are subject to governmental regulation generally in the country that the personal data were collected or used. For example, United States federal regulations under Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) and as amended in 2014 by the Health Information Technology for Economic and Clinical Health (“HITECH”) Act, require individuals’ written authorization, in addition to any required informed consent, before Protected Health Information may be used for research. We are both directly and indirectly affected by the privacy provisions surrounding individual authorizations because many investigators with whom we are involved in clinical trials are directly subject to them as a HIPAA “covered entity” and because we obtain identifiable health information from third parties that are subject to such regulations. As there are some instances where we are a HIPAA “business associate” of a “covered entity,” we can also be directly liable for mishandling protected health information. Under HIPAA’s enforcement scheme, we can be subject to up to $1.5 million in annual civil penalties for each HIPAA violation.

In the EU personal data includes any information that relates to an identified or identifiable natural person with health information carrying additional obligations, including obtaining the explicit consent from the individual for collection, use or disclosure of the information. In addition, we are subject to EU rules with respect to cross-border transfers of such data out of the EU. The United States, the EU and its member states, and other countries where we have operations, such as Japan, South Korea, Malaysia, the Philippines, Russia and Singapore, continue to issue new privacy and data protection rules and regulations that relate to personal data and health information. Failure to comply with certain certification/registration and annual re-certification/registration provisions associated with these data protection and privacy regulations and rules in various jurisdictions, or to resolve any serious privacy complaints, could subject us to regulatory sanctions, criminal prosecution or civil liability. Federal, state and foreign governments are contemplating or have proposed or adopted additional legislation governing the collection, possession, use or dissemination of personal data, such as personal health information, and personal financial data as well as security breach notification rules for loss or theft of such data. Additional legislation or regulation of this type might, among other things, require us to implement new security measures and processes or bring within the legislation other personal data, each of which may require substantial expenditures or limit our ability to offer some of our services. Additionally, if we violate applicable laws, regulations or duties relating to the use, privacy or security of personal data, we could be subject to civil liability or criminal prosecution, be forced to alter our business practices and suffer reputational harm.going concern.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds from Sales of Registered Securities

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

See the Index to Exhibits following the signature page hereto, which Index to Exhibits is incorporated herein by reference.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



						Cancer Genetics, Inc.
						(Registrant)

Date: ~~November 13, 2017~~						~~/s/ Panna L. Sharma~~
						~~Panna L. Sharma~~
						~~President and Chief Executive Officer~~ ~~(Principal Executive Officer)~~

~~Date: November 13, 2017~~August 14, 2018						/s/ John A. Roberts
						John A. Roberts
						President and Chief ~~Operating~~Executive Officer (Principal Executive and Financial Officer)

Date: ~~November 13, 2017~~August 14, 2018						/s/ Igor Gitelman
						Igor Gitelman
						Chief Accounting Officer (Principal Accounting Officer)

INDEX TO EXHIBITS



Exhibit No.		Description

2.1***		Stock Purchase Agreement, dated as of August 14, 2017, by and among the Company, the Trustee of The Brandt Family Trust, Sabine Brandt, Royal Melbourne Institute of Technology, South Australian Life Science Advancement Partnership, LP, vivoPharm Pty Ltd. ACN 106 101 615, the Shareholders’ Representative party thereto, the Management Parties party thereto and certain other stockholders named therein (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on August 16, 2017).

4.1		~~Registration Rights Agreement,~~Omnibus Warrant Amendment to Warrant Issued to Lenders, dated as of ~~August 14, 2017, by and between the Company and Aspire Capital Fund, LLC~~June 30, 2018 (incorporated by reference to Exhibit 4.1 to the ~~Company’s Current Report~~Company's current report on Form 8-K, filed with the Securities and Exchange Commission on ~~August 16, 2017)~~July 5, 2018).

10.1		~~Common Stock~~Share Purchase Agreement dated ~~as of August 14, 2017,~~April 26, 2018 by and ~~between the Company~~among BioServe Biotechnologies (India) Private Limited, Cancer Genetics, Inc. and ~~Aspire Capital Fund, LLC~~Reprocell Incorporated (incorporated by reference to Exhibit 10.1 to the Company’s ~~Current Report~~current report on Form 8-K, filed with the Securities and Exchange Commission on ~~August 16, 2017)~~April 27, 2018).

10.2		Waiver and First Amendment to Amended and Restated Loan and Security Agreement by and between Silicon Valley Bank and Cancer Genetics, Inc., dated May 14, 2018 (incorporated by reference to Exhibit 10.3 of the Company's quarterly report on Form 10-Q, filed with the Securities and Exchange Commission on May 15, 2018).

10.3		Conditional Waiver & Modification No. 1 to Loan and Security Agreement by and between Partners for Growth IV, L.P. and Cancer Genetics, Inc., dated May 14, 2018 (incorporated by reference to Exhibit 10.4 to the Company's quarterly report on Form 10-Q, filed with the Securities and Exchange Commission on May 15, 2018).

10.4		Joinder and Second Amendment to Amended and Restated Loan and Security Agreement with Silicon Valley Bank, dated as of June 21, 2018 (incorporated by reference to Exhibit 10.1 to the Company's current report on Form 8-K, filed with the Securities and Exchange Commission on June 27, 2018).

10.5		Joinder and Modification No. 2 to Loan and Security Agreement with Partners for Growth IV, L.P., dated as of June 30, 2018 (incorporated by reference to Exhibit 10.1 to the Company's current report on Form 8-K, filed with the Securities and Exchange Commission on July 5, 2018).

31.1		Certification of Principal Executive Officer ~~pursuant to Rules 13a-14(a)~~ and ~~15d-14(a) promulgated under The Securities Exchange Act of 1934, as amended~~ *

~~31.2~~		~~Certification of~~ Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under The Securities Exchange Act of 1934, as amended * *

32.1		Certifications of Principal Executive Officer ~~pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002~~ **

~~32.2~~		~~Certifications of~~and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002

101		The following materials from the Registrant’s quarterly report on Form 10-Q for the quarter ended ~~September~~June 30, ~~2017,~~2018, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheet at ~~September~~June 30, ~~2017~~2018 (unaudited) and December 31, ~~2016,~~2017, (ii) Consolidated Statements of Operations and Other Comprehensive Loss for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017 (unaudited), (iii) Consolidated Statements of Cash Flows for the ~~nine~~six month periods ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017 (unaudited) and (iv) Notes to Consolidated Financial Statements (unaudited)

*		Filed herewith.
**		Furnished herewith.
~~***~~		The schedules and exhibits to the Stock Purchase Agreement have been omitted from this filing pursuant to Item 601(b)(2) of Regulation S-K under the Securities Act of 1933, as amended. Cancer Genetics agrees to furnish as a supplement a copy of any omitted schedules or exhibits to the Stock Purchase Agreement to the Securities and Exchange Commission upon request, provided that Cancer Genetics may request confidential treatment for any schedule or exhibit so furnished.



	Three Months Ended September 30						Nine Months Ended September 30,
	2017			2016			2017			2016
Revenue	$	9,069		$	7,958		$	25,335		$	23,595
Net loss	(976		)	(3,919		)	(13,788		)	(13,596		)

Basic net loss per share	$	(0.04	)	$	(0.20	)	$	(0.61	)	$	(0.76	)
Diluted net loss per share	(0.16		)	(0.20		)	(0.61		)	(0.76		)



Allowance for Doubtful Accounts (in thousands)
Balance, December 31, 2016	$	1,387
Bad debt expense	890
Balance, September 30, 2017	$	2,277



	September 30, 2017		December 31, 2016
SVB Term Note, repaid in 2017	$	—	$	4,667
PFG Term Note, net of discount of $865	5,135		—
Less unamortized debt issuance costs	199		13
Term notes, net	4,936		4,654
Less current maturities	—		2,000
Long-term portion	$	4,936	$	2,654