Quarterly report pursuant to Section 13 or 15(d)

Organization, Description of Business, Basis of Presentation, Merger with NovellusDx, Ltd., Recently Adopted Accounting Standards, Acquisition, Reclassifications and Recent Accounting Pronouncements

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Organization, Description of Business, Basis of Presentation, Merger with NovellusDx, Ltd., Recently Adopted Accounting Standards, Acquisition, Reclassifications and Recent Accounting Pronouncements
9 Months Ended
Sep. 30, 2018
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Organization, Description of Business, Basis of Presentation, Merger with NovellusDx, Ltd., Recently Adopted Accounting Standards, Acquisition, Reclassifications and Recent Accounting Pronouncements
Organization, Description of Business, Basis of Presentation, Merger with NovellusDx, Ltd., 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 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. We have a comprehensive, disease-focused oncology testing 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 indications, covering all ten of the top 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”) we provide contract research services, focused primarily on unique specialized studies to guide drug discovery and development programs in the oncology and immuno-oncology fields.

We were incorporated in the State of Delaware on April 8, 1999 and have offices and laboratories located in New Jersey, North Carolina, Pennsylvania, and Australia. Our laboratories comply with the highest regulatory standards as appropriate for the services we deliver including CLIA, CAP, New York State and California State, and 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, 2017, filed with the Securities and Exchange Commission on April 2, 2018. The consolidated balance sheet as of December 31, 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, 2018.

Merger with NovellusDx, Ltd.

Merger Agreement

On September 18, 2018, we entered into an agreement and plan of merger (the “Merger Agreement”) with NovellusDx, Ltd., a privately-held company formed under the law of the State of Israel (“NDX”), in regards to Wogolos Ltd., our wholly owned subsidiary company formed under the laws of the State of Israel. Subject to satisfaction or waiver of the conditions set forth in the Merger Agreement, Wogolos Ltd. will merge (the “Merger”) with and into NDX, with NDX becoming a wholly owned subsidiary of us and the surviving company.

At the effective time of the Merger, all of NDX’s share capital will be converted into the right to receive an aggregate number of shares of our common stock equal to 49% of the fully-diluted aggregate number of shares of the Company immediately following the Merger, including shares issuable upon the conversion of the Convertible Note to Iliad Research described in Note 6 and shares issuable upon the exercise of the Company’s options and warrants, determined using the treasury stock method. Shares issuable under the Private Placement described in the following paragraph will be excluded from this calculation.

Private Placement

On September 18, 2018, we also entered into a securities purchase agreement (the “Purchase Agreement”) pursuant to which we agreed to sell and issue, in a private placement, a total of 8,509,891 shares of our common stock and warrants to purchase an aggregate of up to approximately 6,382,418 shares of our common stock, to the purchasers thereunder, all of whom are current NDX shareholders, for an aggregate purchase price of approximately $8.6 million, with the shares and warrants being sold together in a fixed combination of one share and one warrant to purchase 75% of a share of our common stock, at a price of $1.01 per share and related warrant (the “Private Placement”). The closing of the Private Placement is conditional upon, and will occur immediately after, the Merger. In addition, the Company and NDX may continue to solicit additional subscriptions pursuant to this Purchase Agreement prior to the closing of the Private Placement.

The warrants issued under the Private Placement will be exercisable for five years beginning on the closing date of the Merger at an initial exercise price of $1.01 per share, subject to adjustment for certain customary circumstances. The warrants can be exercised on a cashless basis.

Advance from NDX

In connection with the signing of the Merger Agreement, on September 18, 2018, we entered into a credit agreement with NDX, pursuant to which NDX agreed to loan us up to $2,300,000 as discussed in Note 6.

Recently Adopted Accounting Standards

Revenue Recognition

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers.” The guidance requires an entity to recognize the amount of 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 adjustment to the opening balance of accumulated deficit. Financial information for the nine months ended September 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 provision for bad debts are now considered an implicit price concession in determining net revenue under Accounting Standards Codification (“ASC”) Topic 606. Accordingly, we now report uncollectible balances as a 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 nine months ended September 30, 2018 (in thousands):
 
 
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
 
 
As Reported
 
ASC 606 Adjustments
 
Balances Without Adoption
 
As Reported
 
ASC 606 Adjustments
 
Balances Without Adoption
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
Biopharma Services
 
$
3,850

 
$
(35
)
 
3,815

 
11,099

 
$
(797
)
 
10,302

Clinical Services
 
1,555

 

 
1,555

 
6,019

 

 
6,019

Discovery Services
 
535

 

 
535

 
3,525

 
(650
)
 
2,875

 
 
$
5,940

 
$
(35
)
 
$
5,905

 
$
20,643

 
$
(1,447
)
 
$
19,196



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 September 30, 2018 (in thousands):
 
 
September 30, 2018
 
 
As Reported
 
ASC 606 Adjustments
 
Balances Without Adoption
CURRENT LIABILITIES
 
 
 
 
 
 
Deferred revenue
 
 
 
 
 
 
Biopharma Services
 
$
1,180

 
$
(1,062
)
 
$
118

Clinical Services
 

 

 

Discovery Services
 
1,229

 

 
1,229

 
 
$
2,409

 
$
(1,062
)
 
$
1,347

 
 
 
 
 
 
 
NON-CURRENT LIABILITIES
 
 
 
 
 
 
Deferred revenue
 
 
 
 
 
 
Biopharma Services
 
$
428

 
$

 
$
428

Clinical Services
 

 

 

Discovery Services
 
14

 

 
14

 
 
$
442

 
$

 
$
442

 
 
 
 
 
 
 
STOCKHOLDERS' EQUITY
 
 
 
 
 
 
Accumulated (deficit)
 
$
(153,951
)
 
$
1,062

 
$
(152,889
)


Restricted Cash

Effective January 1, 2018, we adopted ASU 2016-18, which requires companies to include restricted cash accounts with cash and cash equivalents when reconciling the beginning of period and end of period total amounts shown on the Consolidated Statements of 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 $1.6 million in cash and shares of the Company’s common stock, valued at $8.1 million based on the closing price of the stock on August 15, 2017. The Company 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.
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. The measurement period expired on August 15, 2018 and the final valuation was deemed consistent with the preliminary valuation completed during the acquisition diligence phase, specifically concerning lab supplies, deferred revenue and deferred taxes. On August 15, 2018, the escrowed shares were released. Subsequent to the measurement period expiration, a review of deferred revenue surfaced a refinement in contract completion estimate of $0.2 million associated with the acquisition valuation and accordingly the current revenue offset was recorded in the statement of operations for the three months ended September 30, 2018.

The final allocation of the purchase price as of August 15, 2017 consists of the following (in thousands):
Cash
 
$
544

Accounts receivable
 
905

Lab supplies
 
350

Prepaid expenses and other current assets
 
60

Fixed assets
 
765

Intangible assets
 
3,160

Goodwill
 
5,960

Accounts payable and accrued expenses
 
(913
)
Deferred revenue
 
(814
)
Deferred rent and other
 
(222
)
Obligations under capital leases
 
(76
)
Total purchase price
 
$
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, 2017 (in thousands except per share amounts):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2017
Revenue
$
9,069

 
$
25,335

Net loss
(976
)
 
(13,788
)
 
 
 
 
Basic net loss per share
$
(0.04
)
 
$
(0.61
)
Dilutive net loss per share
(0.16
)
 
(0.61
)


The results of operations for the three and nine months ended September 30, 2018 include the operations of vivoPharm, which accounted for approximately $535,000 and $3,243,000 of the Company’s consolidated Discovery Services revenue, respectively. The net income (loss) of vivoPharm cannot be determined, as its operations were integrated with Cancer Genetics.

The results of operations for the three and nine months ended September 30, 2017 include the operations of vivoPharm from August 15, 2017, which accounted for approximately $794,000 of the Company’s consolidated Discovery Services revenue. The net income of vivoPharm that is included in the Company’s results of operations for the three and nine months ended September 30, 2017 was approximately $380,000.

Restructuring

During the nine months ended September 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 $1,418,000 and $2,151,000 of restructuring costs during the three and nine months ended September 30, 2018, respectively. The costs associated with the restructuring activities incurred are as follows:

 
 
For the Three Months Ended September 30, 2018
 
For the Nine Months Ended September 30, 2018
Disposal activity costs
 
$
243

 
$
692

Costs to consolidate facilities
 
375

 
405

Contract termination costs
 
267

 
521

Employee termination costs
 
533

 
533

 
 
$
1,418

 
$
2,151


 
 
Restructuring Liability at December 31, 2017
 
Cost Incurred / Additions
 
Payments / Adjustments
 
Restructuring Liability at September 30, 2018
Disposal activity costs
 
$

 
$
692

 
$
(692
)
 
$

Costs to consolidate facilities
 

 
405

 
(319
)
 
86

Contract termination costs
 

 
521

 
(304
)
 
217

Employee termination costs
 

 
533

 
(91
)
 
442

 
 
$

 
$
2,151

 
$
(1,406
)
 
$
745



Recent Accounting Pronouncements

In February 2016, the FASB issued guidance codified in ASC 842, Leases, which supersedes the guidance in former ASC 840, Leases, to increase transparency and comparability among organizations by requiring recognition of 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 early adoption permitted. The guidance is required to be adopted at the earliest period presented using a modified retrospective approach. We plan to adopt this guidance on the effective date. We are currently evaluating the impact the provisions will have on our consolidated financial statements.