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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
Or
¨ 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
(State or other jurisdiction of
incorporation or organization)
04-3462475
(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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.0001 par value per share
Name of each exchange on which registered
NASDAQ Capital Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes: ¨ No: ý
Indicate by check mark if 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 Website; if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. ý
Indicate by check mark if the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See
definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):
Large accelerated filer ¨
Accelerated filer
ý
ý
Non-accelerated filer
¨ (do not check if a smaller reporting company)
Smaller reporting company
Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes: ¨ No: ý
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was $83.2 million on June 30, 2014, the
last business day of the registrant’s most recently completed second fiscal quarter, based on the closing price of $11.30 on that date.
Indicate the number of shares outstanding of each of the registrant’s classes of common equity, as of March 1, 2015:
Class
Number of Shares
Common Stock, $.0001 par value
9,821,169
Documents incorporated by reference
Portions of the registrant’s proxy statement for the 2015 annual meeting of stockholders to be filed pursuant to Regulation 14A within 120 days after the
registrant’s fiscal year ended December 31, 2014, are incorporated by reference in Part III of this Form 10-K.
EXPLANATORY NOTE
The Registrant meets the "accelerated filer" requirements as of the end of its 2014 fiscal year pursuant to Rule 12b-2 of the Securities Exchange Act
of 1934, as amended. However, pursuant to Rule 12b-2 and SEC Release No. 33-8876, the Registrant (as a smaller reporting company transitioning to the
larger reporting company system based on its public float as of June 30, 2014) is not required to satisfy the larger reporting company requirements until its
first quarterly report on Form 10-Q for the 2015 fiscal year and thus is eligible to check the "Smaller Reporting Company" box on the cover of this Form
10-K.
Table of Contents
PART I
PART II
1.
1A.
1B.
2.
3.
4.
5.
TABLE OF CONTENTS
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
6.
7.
7A.
8.
9.
9A.
9B.
10.
11.
12.
13.
14.
PART IV 15.
PART III
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits, Financial Statement Schedules
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60
60
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75
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Table of Contents
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements include all statements that are not historical facts. In some cases, you can identify forward-looking statements by terms such as
“may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “potential,” or the
negative of those terms, and similar expressions and comparable terminology intended to identify forward-looking statements. These
statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties including
those set forth below under Part I, Item 1A, “Risk Factors” in this annual report on Form 10-K. Given these uncertainties, you should not
place undue reliance on these forward-looking statements. These forward-looking statements represent our estimates and assumptions only as
of the date of this annual report on Form 10-K 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 annual report on Form 10-
K. You should read this annual report on Form 10-K and the documents referenced in this annual report on Form 10-K and filed as exhibits
completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our
forward-looking statements by these cautionary statements. Such statements may include, but are not limited to, statements concerning the
following:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
our ability to achieve profitability by increasing sales of our laboratory tests and services and to continually develop and
commercialize novel and innovative genomic-based diagnostic tests and services for cancer patients;
our ability to raise additional capital to meet our liquidity
needs;
our ability to clinically validate our pipeline of genomic microarray tests currently in
development;
our ability to execute on our marketing and sales strategy for our genomic tests and gain acceptance of our tests 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 obtain reimbursement from governmental and other third-party payors for our tests and
services;
competition from clinical laboratory services companies, genomic-based diagnostic 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 genomic 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;
our ability to attract and retain a sufficient number of scientists, clinicians, sales personnel and other key personnel with extensive
experience in 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 in emerging markets, such as India and Brazil;
and
our ability to adequately support future
growth.
Table of Contents
Item 1.
Business.
Overview
PART I
We are an oncology diagnostics company focused on developing, commercializing and providing DNA-based tests and services to improve
the personalization of cancer treatment and to better inform biopharmaceutical companies of genomic factors influencing subject responses to
therapeutics. Our vision is to become the oncology diagnostics partner for companies and clinicians by participating in the entire care
continuum from bench to bedside. We believe the diagnostic industry is undergoing a metamorphosis in its approach to oncology testing,
embracing individualized medicine as a means to drive higher standards of patient treatment and disease management. Similarly, biopharma
companies are increasingly engaging companies such as ours to provide information on clinical trial participants’ DNA profiles in order to
identify genomic variations that may be responsible for differing responses to pharmaceuticals, and particularly to oncology drugs, thereby
increasing the efficiency of trials while lowering related costs. We believe tailored therapeutics can revolutionize oncology medicine through
DNA-based testing services, enabling physicians and researchers to target the factors that make each patient and disease unique. We have
created a unique position in the industry by providing targeted somatic analysis of tumor sample cells alongside germline analysis of an
individuals' non-cancerous cells' DNA as we attempt to reach the next milestone in personalized medicine. Individuals are born with germline
mutations and somatic mutations arise in tissues over the course of a lifetime.
Cancer is genetically-driven and constitutes a heterogeneous class of diseases characterized by uncontrollable cell growth. Many cancers are
becoming increasingly understood at a molecular level and it is possible to attribute specific cancers to identifiable genetic changes in unhealthy
cells. Cancer cells contain modified genetic material compared to normal human cells. Common genetic abnormalities correlated to cancer
include gains or losses of genetic material on specific chromosomal regions (loci) or changes in specific genes (mutations) that ultimately
result in detrimental cellular changes followed by cancerous or pre-cancerous conditions. Understanding the differences in these genomic
changes helps clinicians to identify and stratify different forms of cancer in order to optimize patient treatment and patient management.
Therefore, understanding and analysis of cancer at the molecular level is not only useful for diagnostic purposes, but we also believe it can
play an important role in prognosis and disease management. We believe technology that can apply predictive information has the potential to
dramatically improve treatment outcomes for patients fighting against cancer. Our molecular diagnostic tests for cancer aim to remove
subjectivity from the diagnostic phase, and add prognostic information, thus enabling personalized treatments based on cancer analysis at its
most basic genetic level.
Our business is based on demand for DNA-based diagnostic services from three main sectors, including cancer centers and hospitals,
biotechnology and biopharmaceutical companies, and the research community. Clinicians and oncologists in cancer centers and hospitals seek
genomic-based testing since these methods produce higher value and more accurate cancer diagnostic information than traditional analytical
methods. Our unique and focused tests aim to provide actionable information that can guide patient management decisions, potentially
resulting in decreased costs for cancer centers and hospitals while streamlining therapy selection. Our services are also sought by biotech and
biopharma companies engaged in designing and running clinical trials for their value and efficacy in oncology treatments and therapeutics. We
believe trial participants' likelihood of experiencing either favorable or adverse responses to the trial treatment can be determined by genomic
testing, increasing trial efficiency, subject safety and trial success rates. We aggressively pursue the strategy of trying to demonstrate increased
value and efficacy with payors who are trying to contain costs and academic collaborators seeking to develop new insights and cures.
Our go-to market strategy is organized to align with the three aforementioned industry segments. We utilize relatively the same technologies
across each of these businesses to deliver results-oriented information important to cancer treatment and patient management. Our tests address
the limitations of traditional cancer diagnostic approaches, including reliance on human inspection of specimens and interpretation of clinical
measurements, and inter-institutional variability. Our suite of clinical and biopharma services remove subjectivity from diagnoses and
additionally provide information on treatment selection that cannot be obtained from anatomic pathology and staining techniques alone. We
believe the level of personalized treatment required to optimize a patient's treatment regimen and to maximize clinical trial success rates is only
possible through the use of DNA-based molecular diagnostics.
The following table lists our go to market strategy by customer category:
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Customer Category
Types of Customers
Nature of Services
Clinical Services
Biopharma Services
• Hospitals
• Cancer Centers
• Clinics
Discovery Services
• Biopharma and Biotech
companies performing
clinical trials
• Biopharma and Biotech
companies
• Researchers
Clinical services provide information on diagnosis,
prognosis and theranosis of cancers to guide patient
management.
Biopharma services provide companies customized
solutions for patient stratification and treatment selection
through an extensive suite of DNA-based testing
services.
Discovery services provide the tools and testing
methods for companies and researchers seeking to
identify new DNA-based biomarkers for disease.
In 2014, we generated approximately 55% of our revenue from Biopharma Services, approximately 43% from Clinical Services and
approximately 2% from Discovery Services, a new line of service launched in 2014. In 2013, we generated approximately 55% of our
revenue from Clinical Services, approximately 40% from Biopharma Services and approximately 5% from government grants. During 2014
we had no government grants.
We utilize relatively the same proprietary and nonproprietary molecular diagnostic tests and technologies across our clinical services,
biopharma services and discovery services businesses to deliver results-oriented information important to cancer treatment and patient
management. 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 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::NGSTM) for clinical use.
Clinical Services
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.
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, and DNA fluorescent in situ hybridization (FISH) probes.
Our comprehensive oncology-focused testing services for cancer are utilized in the diagnosis, prognosis and predicting treatment outcomes
(theranosis) of cancer patients and are growing rapidly as clinicians demand more precise and more comprehensive diagnostic evaluation of
their patients. We utilize highly skilled scientists, pathologists and hematologists in our laboratory, with 35% of individuals holding advanced
degrees. These individuals assist our customers in integrating and technically assessing the testing results for their patients.
The non-proprietary testing services we offer are focused in part on specific oncology categories where we are developing our proprietary
arrays and probe panels. We believe that there is significant synergy in developing and marketing a complete set of tests and services that are
disease- and treatment-focused and delivering those tests and services in a comprehensive manner to help with patient management 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 for clinical use.
We believe that we can be successful by offering cancer professionals a fully-integrated menu of oncology- focused proprietary tests and
customizable laboratory services. We believe that our proprietary tests provide superior diagnostic and prognostic values than other currently
available tests and services. We believe our ability to rapidly translate research insights about the genetics and molecular mechanisms of cancer
into the clinical setting will improve patient treatment and management and that this approach can become a key component in the standard of
care for personalized cancer treatment.
We currently offer a range of proprietary and non-proprietary services in the following areas:
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Proprietary Microarray based testing
(MatBA®-CLL, MatBA®-SLL, MatBA®-
DLBCL, MatBA®-MCL and UroGenRA®-
Kidney)
Proprietary Next Generation Sequencing
testing (Focus::CLL™, Focus::Myeloma™,
Focus::Lymphoma™
Molecular Testing
Cytogenetics Testing
FISH Testing
Histology Testing
Cytology Testing
IHC Testing
Our proprietary microarray tests for the detection of chromosomal
abnormalities observed in Chronic Lymphocytic Leukemia, Small Lymphocytic
Lymphoma, Diffuse Large B-Cell Lymphoma, Mantle Cell Lymphoma and
kidney cancer.
Our proprietary NGS tests for the diagnosis and prognosis of genomic
alterations in Chronic Lymphocytic Leukemia, Myeloma, and B-Cell Non-
Hodgkin's Lymphomas.
Using quantitative methods, such as polymerase chain reaction, sequencing and
mutation analysis, to analyze DNA and RNA to follow progression of disease
and response to therapy at the genetic level.
A series of methods that analyze human chromosomes in order to identify
malignancy.
Analysis of abnormalities at the chromosomal and gene levels using analyte
specific reagents and FED-cleared probes performed on whole specimen or
separated purified plasma cells.
Microscopic examination of stained tissue sections using various special
staining techniques.
Non-gynecological fluid preparation for microscopic evaluations by a
pathologist.
Analysis of the distribution of tumor antigens in specific cell and tissue types.
Our clinical services strategy is focused on direct sales to oncologists and pathologists at hospitals, cancer centers, and physician offices in the
United States, and expanding our relationships with leading distributors and medical facilities in emerging markets. In addition, we intend to
continue to focus on partnering with community hospitals, where nearly 85% of all cancers are initially diagnosed, through our program called
Expand Dx™, which was specifically designed to meet the needs of community hospitals. We believe our proprietary tests and services will
enable community hospitals to optimize and expand their oncology services to better serve their cancer patients and reduce costs associated
with cancer care.
We have developed the Summation™ Report which, we believe, provides an integrated view of a patient’s test results and diagnosis in a user-
friendly, visually appealing format for clinicians. Our hematopathologists and laboratory directors prepare these Summation™ Reports based
on the clinical information and diagnosis provided by our laboratory professionals. All our testing technologies are integrated into a
Summation™ Report to allow oncologists to efficiently arrive at a definitive diagnosis and drive complete and effective decisions.
Our principle clinical services leverage and utilize our proprietary tests and testing methods, which include the categories below:
NGS Panels
Next-Generation Sequencing performs massively parallel sequencing (over 100 reads of a selected segment of DNA in one test run) of DNA
from cancer cells effectively permitting a highly sensitive analysis of not only the sequence of the genome in cancer cells to reveal mutations
and other aberrations associated with a cancer, but also other genomic rearrangements previously unknown to occur in the cancer genome.
Translation of these findings for clinical implementation can also be achieved with a high degree of sensitivity using deep sequencing at
specific nucleotide sequences and can be translated where applicable into FISH or microarray-based assays depending on the aberrations that
need to be detected, to develop more specific tests. Deep sequencing is a technique by which a selected segment of nucleotides is sequenced
repeatedly in order to reveal potentially rare genetic changes that may not be discoverable by traditional sequencing methods.
CGH Microarrays
Oligonucleotide-based CGH microarrays are a multiplex technology that allows the attachment of thousands of microscopic spots of DNA
onto a surface. The DNA sequences on the microarray can hybridize to multiple genetic aberrations in cancerous tissue and can yield
diagnostic and prognostic information of importance to the treatment of the patient from a small amount of patient sample. We believe
microarrays provide a powerful approach to distinguishing cancer types and differentiate those more or less likely to recur, progress or
respond to specific treatments based upon comprehensive sequence analysis and the ability of one microarray to interrogate multiple cancer
subtypes in parallel. Because thousands of individual DNA sequences are being tested by the microarray, analysis involves bioinformatics-
based algorithms. Considering the current clinical and societal demand for minimally invasive procedures, we believe the diagnostic and
prognostic applications of microarrays are highly desirable.
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CompleteTM Program
Our CompleteTM program is our branded program offering a unique suite of common and proprietary tests that assist clinicians in determining
the best treatment options to improve patient outcomes. Each CompleteTM program integrates the latest diagnostic and prognostic biomarkers
across multiple testing methodologies. We offer CompleteTM testing for a number of hematological cancers and solid tumors, including
CLL/SLL, DLBCL, MCL, MPN, colorectal, lung and breast cancers.
DNA Probes
FISH-based DNA probes are fluorescently labeled sequences of DNA complementary to a genomic region of interest, which when hybridized
to chromosomes, give rise to signals revealing with high sensitivity the presence or absence of a specific genomic abnormality. One probe
identifies one specific genomic region. To create higher levels of specificity, multiple probes may be required to identify multiple genomic
aberrations in the same cancer cell. Depending on the color scheme and custom design of each FISH-based DNA probe, genomic gain/loss
and rearrangements can be detected in cancer specimens of multiple tissue types. Our proprietary FHACT® probe panel for detection and
prognostication of HPV-associated cervical cancer and precancerous lesions uses a patented four-probe set to differentiate between cervical
lesions likely to progress to cancer and those likely to regress without intervention.
We expect to offer additional proprietary tests as LDTs in other areas of oncology and will seek the required CLIA and state approvals, as well
as any FDA approvals that may be required for these tests.
Biopharma Services
Biopharma services include laboratory and testing services performed for biopharmaceutical companies engaged in clinical trials. Our
biopharma services focus on providing pharmaceutical companies with oncology specific and non-oncology genetic testing services for phase
I-III trials along with ancillary services including biorepository and trials logistics support. These services include DNA and RNA extraction
and purification, genotyping, gene expression analyses and biorepository sample storage solutions.
Industry research has shown many promising drugs have produced disappointing results in clinical trials. For example, a study by Princess
Margaret Hospital in Toronto estimated that 85% of the phase III trials testing new therapies for solid tumors studied over a five-year period
failed to meet their primary endpoint. Given such a high failure rate of oncology drugs, combined with constrained budgets for
biopharmaceutical companies, there is a significant need for drug developers to utilize molecular diagnostics to decrease these failure rates. For
specific molecular-targeted therapeutics, the identification of appropriate biomarkers potentially may help to optimize clinical trial patient
selection and increase trial success rates by helping clinicians identify patients that are most likely to benefit from a therapy based on their
individual genomic profile.
Our Select One® offering was created specifically to help the biopharmaceutical community with clinical trials and companion diagnostic
development in areas of our core expertise. Oncology drugs have the potential to be among the most personalized of therapeutics, and yet
oncology trials have one of the worst approval success rates, hovering at approximately 10%. In an effort to improve the outcome of these
trials, and more rapidly advanced targeted therapeutics, the biotechnology and pharmaceutical community is increasingly looking to companies
that have both proprietary disease insights and comprehensive testing services as they move toward biomarker-based therapeutics.
In July 2014, the United States National Institutes of Health reported over 83,000 clinical trials were currently being conducted in the United
States, and over 12,000 of these trials were actively recruiting participants for studies with oncology pharmaceuticals or biologics. Genomic
testing services have been altering the clinical trials landscape by providing biopharma companies with information about trial subjects’ genetic
profiles that may be able to inform researchers whether or not a subject will benefit from the trial drug or will experience adverse effects.
Streamlined subject selection and stratification, and tailored therapies selected to maximally benefit each group of subjects may increase the
number of trials that result in approved therapies and make conducting clinical trials more efficient and less costly for biopharma companies. In
2014, forty-one new drugs were approved by the FDA. This is the highest number of FDA approvals since 1996, and twenty of these drugs
were personalized medicines, highlighting the potential value of incorporating genomic information into clinical trial design.
In addition to the tests and services provided to biopharma companies, we are developing NGS panels focused on pharmacogenomics and
oncology that will inform researchers of trial subjects' drug sensitivities.
We provide the following services to biopharma companies and researchers conducting clinical trials:
Genotyping and Pharmacogenomics Testing Services
•
Over 400 genotyping assays including drug metabolizing enzymes, transporters and receptors
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•
•
•
Over 30 validated gene expression assays
Testing for the FDA’s Pharmacogenomic (PGx) Biomarkers in Drug Labels recommended panel
Loss of heterozygosity and copy number detection assays
We also utilize our laboratories to provide clinical trial services to biopharmaceutical companies and clinical research organizations to improve
the efficiency and economic viability of clinical trials. Our clinical trials services leverage our knowledge of clinical oncology and molecular
diagnostics and our laboratory’s fully integrated capabilities. Our Select One®
program integrates clinical information into the drug discovery
process in order to provide customized solutions for patient stratification and treatment. By utilizing biomarkers, we intend to optimize the
clinical trial patient selection. This may result in an improved success rate of the clinical trial and may eventually help biopharmaceutical
companies to select patients that are most likely to benefit from a therapy based on their genetic profile. We believe we are one of only a few
laboratories with the capability to combine somatic and germline mutational analyses in clinical trials.
Our Select One ® clinical trial services are aimed at developing customizable tests and techniques utilizing our proprietary tests and laboratory
services to provide enhanced genetic signature and more comprehensive understanding of complex diseases at earlier stages. We leverage our
knowledge of clinical oncology and molecular diagnostics and provide access to our genomic database and assay development capabilities for
the development and validation of companion diagnostics. This potentially enables companies to reduce the costs associated with development
by determining earlier in the development process if they should proceed with additional clinical studies. We have been chosen by Gilead
Sciences Inc. to provide clinical trial services and molecular profiling of chronic lymphocytic leukemia (CLL) patients. We believe our clinical
trial services may allow Gilead and others to improve patient responder selection, thereby potentially increasing the likelihood our customer’s
product is approved by FDA. Additionally, through our services we gain further insights into disease progression and the latest drug
development that we can incorporate into our proprietary tests and services.
We also provide genetic testing for drug metabolism to aid biopharmaceutical companies identify subjects’ likely responses to treatment,
allowing these companies to conduct more efficient and safer clinical trials. We believe pharmacogenomics drug metabolism testing helps
deliver the promise of personalized medicine by enabling researchers to tailor therapies in development to differences in patients' genomic
profiles.
Discovery Services
Our discovery services provide the tools and testing methods for companies and researchers seeking to identify new DNA-based biomarkers
for disease. In 2014, we added discovery services as a new revenue category and for the year ended December 31, 2014 this category
accounted for approximately 2% of our total revenue. Discovery services we offer include validation of biomarkers for diseases including
cancers, from which tests for diagnosis or prognosis may be established. We also provide consulting, guidance and preparation of samples
and clinical trial design. We believe the ability to analyze variations in DNA and interpret these changes into meaningful predictors of disease
or indicators of diagnosis is essential to discovering new biomarkers for cancer and targets for therapies.
Our Laboratory Facilities
Rutherford, New Jersey, United States
Our Rutherford location is a 17,900 square foot facility and also serves as our corporate headquarters. We offer our clinical services,
biopharma services and discovery services out of our Rutherford location. This location has been accredited by the College of American
Pathologists, which is an approved accreditation method under the Clinical Laboratory Improvement Amendments of 1988 (“CLIA”), to
perform high complexity testing. CLIA certification and accreditation are required before any laboratory may perform clinical testing on human
samples for the purpose of diagnosis, prevention, treatment of disease or assessment of health. Our Rutherford location is licensed by the
appropriate state departments of health and able to receive and test patient samples from all 50 states, as well as from oversees locations.
Additionally, our Rutherford laboratory is self-certified under the US-EU and US-Swiss Safe Harbor Frameworks governing use of personal
information received on patients or clinical trial participants from the European Union. Our Rutherford laboratory also holds the requisite
licenses from the New Jersey State Department of Health to operate and perform clinical testing on patient samples. In addition, certain states,
such as New York, require out-of-state laboratories to obtain licenses in order to accept patient specimens from such states. Our Rutherford
location holds clinical laboratory licenses from the New York Department of Health, Florida Department of Health, Maryland Department of
Health, Pennsylvania Department of Health, and California Department of Health for all of our clinical departments.
Morrisville, North Carolina, United States
We offer our biopharma services, including biopharmaceutical trials testing services, pharmacogenomics testing, and sample
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storage and biorepository services from our 25,000 square foot facility located in Research Triangle Park, Morrisville, North Carolina. Our
facility in Morrisville is compliant under CLIA and Good Laboratory Practices (“GLP”), and has received accreditation by the College of
American Pathologists (“CAP”) for its industry-leading biorepository capabilities. Our Morrisville laboratory does not require individual state
licensure since it is not performing clinical testing on patient samples and is only involved in clinical trials testing. Our Morrisville laboratory
is also self-certified under US-European and US-Swiss Safe Harbor frameworks.
Hyderabad, India and Shanghai, China
We also have two laboratories operating outside of the United States: one in Hyderabad, India and one in Shanghai, China. Our 10,000 square
foot Hyderabad facility services government entities, academic institutions, and health and cancer centers. It is a Department of Scientific and
Industrial Research (“DSIR”) recognized laboratory and is ISO9001-2008 and National Accreditation Board for Testing and Calibration
Laboratories (“NABL”) certified. Our 2,700 square foot Shanghai facility is both CLIA and GLP compliant, and provides biopharma services
to companies performing clinical trials in China.
Market Overview
United States Clinical Oncology Market Overview
Despite many advances in the treatment of cancer, it remains one of the greatest areas of unmet medical need. In 2012, the World Health
Organization attributed 8.2 million deaths worldwide to cancer-related causes. In 2014, the World Health Organization projected that over the
next two decades this number will rise to 13 million deaths per year. Within the United States, cancer is the second most common cause of
death, exceeded only by heart disease, accounting for nearly one out of every four deaths. The incidence and deaths caused by the major cancer
categories are staggering. The following table published by The American Cancer Society shows estimated new cases and deaths in 2014 in
the United States for the major cancers:
Cancer Type
Breast . . . . . . . . . . . . . . . .
Cervical* . . . . . . . . . . . . .
Colorectal . . . . . . . . . . . . .
Endometrial . . . . . . . . . . .
Kidney* . . . . . . . . . . . . . .
Leukemia* . . . . . . . . . . . .
Lung** . . . . . . . . . . . . . . .
Melanoma . . . . . . . . . . . .
Multiple Myeloma** . . . .
Non-Hodgkin’s
Lymphomas* . . . . . . . . . .
Ovarian . . . . . . . . . . . . . . .
Pancreatic . . . . . . . . . . . . .
Prostate . . . . . . . . . . . . . . .
Estimated New Cases For 2014 Estimated Deaths For 2014
40,430
4,020
50,310
8,590
13,860
24,090
159,260
9,710
11,090
235,030
12,360
136,830
52,630
63,920
52,380
224,210
76,100
24,050
70,800
21,980
46,420
233,000
18,990
14,270
39,590
29,480
* Areas where we have active development programs.
** Areas where we have active development programs with Oncospire Genomics, LLC.
In addition to the human toll, the financial cost of cancer is overwhelming. An independent study published in 2010 and conducted jointly by
the American Cancer Society and LIVESTRONG ranked cancer as the most economically devastating cause of death in the world-estimated to
be as high as $895 billion globally in 2008. According to the National Institutes of Health, the direct cost of cancer care in the United States is
projected to increase from $125 billion in 2010 to $173 billion by the year 2020 taking into account the rising costs of medical care.
United States Clinical Trials Market Overview
The United States is currently the world leader in biopharmaceutical research and development and manufacturing. In 2013 it is estimated that
over $50 billion dollars was spent in pharmaceutical research and development, increasing 20% from spending in 2005. The average cost to
develop a drug can be as high as $1.2 billion and the approval process from development to market may be as long as 15 years. Since 1980,
approximately 63% of life expectancy increases in cancer patients are due to new treatments and oncology medications.
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While oncology drugs have the potential to be among the most personalized therapeutics, oncology clinical trials continue to have some of the
poorest approval rates. The application of pharmacogenomics to oncology clinical trials enables researchers to better predict differences in drug
response, efficacy and toxicity among trial participants, as well as to optimize treatment regimens based on these differences. It is estimated
that by 2020, half of all pharmaceutical sales in the United States will be from specialty drugs, a category of drugs including oncology
treatments tailored to patients’ genomic profiles. A study by Grand Market Research places the oncology market at 34% of revenue for
molecular diagnostics services in 2013, with the pharmacogenomics market following closely at 26.3%. Pharmacogenomics is the study of
genetic analysis based on a patient's response to a particular therapy or drug. We believe a growing demand for personalized medicine as a
diagnostic tool is a growth driver of this market.
Our Strategy
Our strategy is to serve a diverse group of market participants - biotechnology and pharmaceutical companies, cancer centers and community
hospitals, and research centers both public and private - that all require genomic assessment of cancer and biomarker based information to
understand and manage the patient, their cancer and customize therapy choices. We believe that our integrated approach to testing combined
with our ability to rapidly translate research insights about the genetics and molecular mechanisms of cancer into the clinical setting will
improve patient treatment and management will become a key component in the standard of care for personalized cancer treatment.
Our approach is to develop and commercialize proprietary genomic tests and services to enable us to provide a full service solution to improve
the diagnosis, prognosis and treatment of targeted cancers and to better predict differences in drug response, efficacy and toxicity among
clinical trial participants, as well as to optimize treatment regimens based on these differences. To achieve this, we intend to:
Continue investing in our portfolio by developing and commercializing additional proprietary genomic tests and services. We
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intend to continue the development of additional proprietary diagnostic and prognostic tests and services, including next generation sequencing
tests, to provide information that is essential to personalized cancer treatment. These tests focus on hematological cancers and solid tumors. To
facilitate the development of additional tests and further demonstrate the clinical value of our existing tests, we will continue to develop and
expand our collaborations with leading universities and research centers.
Continue investing in our portfolio by performing additional validation studies with collaborators. We intend to continue
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performing validation studies on our existing portfolio of proprietary diagnostic and prognostic tests with universities and research
institutions. Validation studies demonstrate the clinical utility and efficacy of a test, and the results of validation studies may be used to
demonstrate value to clinicians, hospitals and cancer care centers. Validation studies also provide data necessary for approval of the tests by
governmental regulatory bodies, and to get our tests approved for reimbursement by third-party payors.
Continue our focus on translational oncology and drive innovation and cost efficiency in diagnostics by continuing to develop next
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generation sequencing offerings independently and through our joint venture with Mayo Clinic. Translational oncology refers to our focus on
bringing novel research insights that characterize cancer at the genomic level directly and rapidly into the clinical setting with the overall goal of
improving value to patients and providers in the treatment and management of disease. We believe that continuing to develop our existing
platforms and next generation sequencing panels will enable significant growth and efficiencies. We will continue to develop next generation
sequencing panels independently as well as leverage our joint venture with Mayo to advance this diagnostic technology.
Increase our focus on providing to biopharmaceutical companies and clinical research organizations our proprietary and non-
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proprietary genomic tests and services through our Select One® offerings. Oncology drugs have the potential to be among the most
personalized of therapeutics, and yet oncology trials have one of the worst approval success rates, hovering at approximately 10%. In an effort
to improve the outcome of these trials, and more rapidly advanced targeted therapeutics, the biotechnology and pharmaceutical community is
increasingly looking to companies that have both proprietary disease insights and comprehensive testing services as they move toward
biomarker-based therapeutics. Our Select One® offering was created specifically to help the biopharmaceutical community with clinical trials
and companion diagnostic development in areas of our core expertise. In our core areas of disease focus, hematologic malignancies, urogenital
cancers and HPV-associated cancers, there are over 4,500 active trials in the United States according to clinicaltrials.gov.
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community hospitals in the United States. Community hospitals represent a large target market for our genomic
Enhance our efforts to partner with community hospitals. According to the American Hospital Association, there are nearly 5,000
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tests and services because approximately 85% of cancer patients in the United States are initially diagnosed in such hospitals as reported to the
National Cancer Database. We intend to continue to focus on partnering with such hospitals by targeting our sales and marketing efforts on
this important customer segment though our branded Expand Dx™ program. Our Expand Dx™ program for community hospitals is a suite
of diagnostic and consultative services offered on a collaborative basis to expand and optimize the oncology diagnostics services and
personalized cancer treatment provided by community hospitals so that such hospitals can retain their cancer patients. Our Expand Dx™
program focuses on enhancing the quality and increasing the efficiency of the community hospital’s oncology diagnostic process, including
billing, turnaround time for diagnostic tests, diagnostic procedures and training and assistance in the use of additional biomarkers for their
routine cancer testing. We believe that through our Expand Dx™ solution, community hospitals and laboratories can get cost-effective access
to leading-edge diagnostic tests and specialized testing capabilities of our clinical reference laboratory. Our sales force works with our
laboratory directors as a team to market our Expand Dx™ solution to community hospitals, geographically focused on the eastern and mid-
western United States.
Increase our geographic coverage by expanding our scalable sales and marketing capabilities. We currently have a specialized
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team of sales professionals with backgrounds in hematology, pathology, and laboratory services. We intend to continue expanding our sales
force in order to provide increased geographic coverage throughout the United States. Additionally, we intend to develop and continue to
expand both our domestic and international footprint through our recent acquisitions in North Carolina, USA and Hyderabad, India, and by
focusing on emerging markets by seeking additional leading local partners to market and sell our tests and services.
Reduce the costs associated with the development, manufacture, and interpretation of our proprietary genomic tests and services.
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We successfully migrated key components of our probe manufacturing to India in 2013, which reduced the labor costs involved and increased
manufacturing yield and flexibility. In 2015, we will continue to assess how geographic advantage can help us improve our cost structure.
Work with health care providers and payors to demonstrate the value of our testing in providing cost efficient and accountable
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care. We are actively involved in dialog with key payers, cost management organizations and insurance providers to demonstrate the value and
effectiveness of our approach in genomic assessment of complex tumor systems.
Continue offering our proprietary tests in the United States as laboratory-developed tests (“LDTs”) and internationally as CE-
•
marked in vitro diagnostic medical devices. As part of our long-term strategy, we may seek Food and Drug Administration (“FDA”)
clearance or approval to expand the commercial use of our tests to other non-affiliated laboratories and testing sites, or as may be required by
developing FDA regulations. We believe it would likely take two years or more to conduct the studies and trials necessary to obtain approval
from FDA to commercially launch our proprietary tests outside of our clinical laboratory.
Our Competitive Advantages
We believe that our competitive advantages are as follows:
Our proprietary and clinically relevant genetic tests are the first to address several complex cancers that are difficult to prognose
•
and where it is difficult to predict treatment outcomes using currently available technologies. Two of our marketed tests are the first to address
several under-served, complex cancers. MatBA®-CLL is, to our knowledge based on our informal communications with New York State
Department of Health personnel, the first microarray to have been approved by the New York State Department of Health for diagnostic
treatment and management of CLL. In addition, in 2014 we launched Focus::CLLTM, the first NGS panel designed to specifically target
genomic alterations clinically associated with CLL. FHACT®, our proprietary HPV-associated cancer test, is the first multi-region DNA probe
to identify and stage HPV-associated cancers, which includes cervical, anal and oropharyngeal cancers.
We have collaborative relationships with leading research centers, medical centers and oncology groups. Our collaborations with
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leading cancer centers provide us with a number of benefits, including valuable access to patient samples, data for validation studies and a
pipeline of innovation. As of December 31, 2014 we have 19 active collaborations with cancer centers and academic institutions. Oncospire
Genomics, our joint venture with Mayo Clinic, focuses on developing oncology diagnostic services and tests utilizing next-generation
sequencing, particularly for lung cancer, multiple myeloma and follicular lymphoma. With respect to marketing, we can leverage the brand
name recognition of our academic and research center collaborators when selling to our customers. With regard to research and development,
our collaborations provide us with the fundamental science and research that underpin the development of our diagnostic tests and insight to
maximize the utility of our tests in the clinical setting.
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Our tests provide more information than existing tests to enable a more personalized treatment plan and to provide more
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actionable information for clinical trials for development of oncology drugs. Our tests are designed to provide an earlier, more accurate and
more complete diagnosis, which potentially leads to better treatment outcomes and lower health care costs. For example, MatBA®-CLL
evaluates a set of five biomarkers not previously assessed in CLL and also allows a more accurate interpretation of the loss at chromosome
13q as a sole abnormality than previously possible. Our FHACT® test for HPV-associated cancers is the only four-color DNA-FISH probe
that can be used for cervical cancer screening as additional triage before colposcopy. Our Focus::CLLTM NGS panel is a unique test that asses
seven genes with clinical relevance to prognosis, disease management and treatment selection, and has an analytical sensitivity of 5%, allowing
it to detect changes in DNA that occur at very low frequencies and may be missed by other technologies. Our proprietary tests also lead to
more actionable information for clinical trials for development of oncology drugs. Through our Select One® offering and biopharma services
we aim to identify genomic differences that can predict patient responses to drugs, enabling personalized oncology therapy regimens.
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Our genomic tests are not platform dependent. The biology and algorithms behind our tests are adaptable to multiple
instrumentation platforms, allowing us to incorporate our tests into a variety of existing clinical laboratory infrastructures without additional
capital investment. We have currently optimized our microarray tests for the Agilent platform. However, we believe that we can migrate to
other similar platforms, including next gen sequencing, without significant modification. Our NGS panels are able to be run on both Illumina
and Ion Torrent platforms.
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Our tests are designed for a wide range of sample types and sample preparation methods and we have the ability to test on FFPE
tissue samples, which accelerates the time required to validate, develop and patent new tests. We can currently process specimen types that
include blood, bone marrow and tissue, including fresh, frozen and formalin-fixed paraffin-embedded (FFPE) tissue samples. The ability to
interrogate a wide variety of sample types increases clinical adoption of our tests and allows the health care provider to quickly and efficiently
integrate our tests into its established workflow. This integration with existing oncology and pathology workflow and tissue analysis methods
is integral to ensuring near term adoption. For several reasons, we have designed our tests for FFPE tissue samples. For decades, archival
FFPE has routinely been used to preserve cancer samples and offers a wealth of information and collaboration potential in comparison with
fresh or freshly prepared samples. Our use of FFPE has three important consequences. First, it significantly increases the datasets of samples
that can be used to validate our products, leading to more robust and reliable diagnostic tools. Second, it permits utilization of FFPE in a
clinical setting, where often it is the only specimen available for study. This is of particular importance to tumors diagnosed using minimally
invasive technologies where often very small biopsy material is available for diagnostic and prognostic studies. Third, it affords enrichment, or
more specific targeting within, the sample to be analyzed, increasing the probability with which genomic aberrations will be detected for any
given specimen.
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We offer consultative, oncology-centered laboratory and clinical trial services. Our specimens are tested and interpreted by highly
qualified oncology-focused laboratory professionals, many of whom hold MDs and PhDs. Because our clinical staff is highly specialized in
oncology, we are better positioned to consult with our oncologist customers and biopharma clients to help them derive maximum value from
the diagnostic and prognostic data generated by our tests.
Our global laboratory infrastructure provides us with access to emerging clinical and biopharma markets. Access to emerging
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clinical and biopharma markets in India and China enables our participation in a robust and diverse client base outside of the United States. We
have recently begun to provide clinical and research services to hospitals, government centers and biopharma companies in India and are
engaged in clinical trials test services in China.
Our Proprietary Genomic Tests and Services
We currently develop and produce a variety of platform-independent DNA-based genomic tests: microarrays, probes and next generation
sequencing panels. Each is directed at identifying specific genetic aberrations in cancer cells that serve as markers for diagnosis, prognosis and
theranosis.
We offer microarrays, next generation sequencing and FISH probes because each serves a unique diagnostic or prognostic function. FISH-
based tests, or probes, offer great sensitivity while microarrays provide a more comprehensive analysis of the cancer genome, and NGS panels
offer a method of detecting mutations or chromosomal aberrations of lesser frequency.
FDA clearance or approval is not currently required to offer these tests in our laboratory once they have been clinically and analytically
validated and approved by the appropriate regulatory bodies. We seek licenses and approvals for our laboratory facility and for our LDTs from
the appropriate regulatory authorities, such as the CMS, which oversees CLIA, and various state regulatory bodies, including the New York
State Department of Health. We will seek FDA clearance and approval as may be required in the future dependent upon the FDA's final
guidelines in its decision to regulate LDTs. At the federal level,
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certain proprietary tests must be part of proficiency testing programs approved under CLIA in order for us to be able to bill government payor
program beneficiaries, such as Medicare patients, for such tests. In addition, certain states, such as New York, require us to obtain approval of
our proprietary tests in order for us to collect patient specimens from such state.
We have obtained CE marking for FHACT®, which entitles us to market the test in the European Economic Area (which includes the 27
Member States of the EU plus Norway, Liechtenstein and Iceland). We anticipate that we will need to conduct additional developmental
activities for this test and to submit it for regulatory clearance or approval by FDA or other regulatory agencies prior to commercialization
outside of our reference laboratory in each of the markets where we plan to introduce them. FHACT® is our four-probe set used to detect
genomic biomarkers indicative of HPV-associated precancer and cancer of several tissue types including cervix and pharynx. FHACT® has
received two United States patents, covering the combination of genomic probes as well as its clinical use in patient samples.
The following diagram portrays our proprietary programs:
Hematological Cancer Tests: MatBA® and Focus::NGS™
As a group, hematologic cancers (cancers of the blood, bone marrow or lymph nodes) display significant clinical, pathologic and genetic
complexity. Current diagnosis relies mostly on pathologic examination, flow cytometry and detection of only a few genetic markers.
Importantly, the clinical course of the six main subtypes of these neoplasms ranges from indolent (follicular lymphoma) to aggressive (diffuse
large B-cell lymphoma, mantle cell lymphoma and multiple myeloma), or mixed (chronic lymphocytic leukemia/small lymphocytic lymphoma,
or CLL/SLL). Currently most risk-stratification for treatment decisions is based on clinical features of the disease. Few molecular prognostic
biomarkers are utilized in a clinical setting. There is unmet medical need for robust biomarkers for the diagnosis, prognosis, theranosis and
overall patient management in B-cell cancers. Given the higher frequency of these malignancies in the United States than in other countries due
to relatively
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long lifespans and an aging population, we expect significant clinical demand for MatBA® and Focus::NGS™. Additionally, the increasing
number of clinical trials in malignancies of blood and bone marrow is driving demand and usage of our tests and services that are focused on
hematological cancers.
MatBA® is the first targeted oligonucleotide-based microarray we developed for the analysis of genomic alterations in mature B-cell neoplasms
to determine prognosis and theranosis. MatBA® incorporates a common architecture of specific genomic regions that can be applied across the
seven major mature B-cell neoplasms. Mature B-cell neoplasms account for approximately 7% of all cancers diagnosed in the United States
annually and for approximately 6% of all estimated cancer-related deaths. An estimated 761,600 people in the United States are living with, or
are in remission from, mature B-cell neoplasms. They are the fifth most common malignancy in both males and females, and the incidence is
rising.
MatBA® is designed to detect genomic copy number changes in mature B-cell neoplasms either solely or in a unique combination, thus
assisting the clinician in the management of a patient’s disease. The test relies on the comparative genomic hybridization of fluorescently
differentially-labeled normal DNA and DNA extracted from the cancer specimen (array-CGH). Array-CGH utilizes minimal biopsy material
and uses DNA as the analyte (the component whose properties are being measured), which is more stable, as compared to RNA used in other
array detection methodologies. Both are important considerations for the ever increasing demand for less invasive procedures for diagnostic
and prognostic purposes. Additionally, we have optimized the utility of the MatBA® array-CGH so that it can be routinely applied to the study
of a range of specimen types including blood and bone marrow and FFPE biopsy specimens, which are often the only specimen available for
analysis of Follicular Lymphoma (FL), Diffuse Large B-Cell Lymphoma (DLBCL) and Mantle Cell Lymphoma (MCL). With the exception
of Chronic Lymphocytic Leukemia (CLL), biopsy/surgical procedures are rarely performed for B-cell neoplasms prior to the initiation of
treatment, thus limiting the amount of tissue available for testing prior to deciding on the initial treatment regimen.
MatBA® was custom-designed to represent 80 regions of the human genome which have diagnostic and/or prognostic value in one or more of
the mature B-cell neoplasm subtypes as identified through our research and analysis efforts. Unlike other technologies such as FISH, array-
CGH using MatBA® simultaneously permits the detection of genomic gains and losses at multiple locations on a chromosome (loci) that
characterize the mature B-cell neoplasm subtypes. For each subtype of B-cell neoplasm, cohorts of specimens with full clinical annotation are
evaluated using MatBA® to identify novel associations between single and weighted combinations of genomic gains/losses and clinically
relevant endpoints, including time to first treatment, treatment response, progression-free survival and overall survival, and to validate
previously known associations. It is these associations, we believe, that provide valuable assistance to clinicians in risk stratification and
guiding treatment plans for patients with these cancers. In 2014 we updated MatBA®-CLL/SLL to provide greater clarity of risk outcome for
patients.
Focus::NGS™ is our family of next generation sequencing tests developed for the analysis of genomic alterations in hematological and other
cancers to determine, guide and inform diagnosis, prognosis and theranosis. The tests rely on massively parallel sequencing, which is able to
detect biomarker mutations and aberrations that are present at very low levels and which may be missed by other, less sensitive methodologies.
In 2014, we launched our proprietary Focus::CLL™ panel for CLL and small lymphocytic leukemia (SLL). This panel is the only test that
assesses 7 genes in a single test, providing clinically relevant data for prognosis, disease management and treatment selection. The panel is
available both for routine clinical patient diagnosis and management, as well as for patient stratification in clinical trials for CLL or SLL. In
addition to being offered for clinical use, the Focus::NGS™ panels became available in the fourth quarter of 2014 through our Select One®
clinical trial offering. In 2014 Focus::CLL™ was chosen for use in a global clinical trial by a leading biotechnology company.
In addition to our Focus::CLL™ NGS panel, we are in developmental phases for two additional NGS panels for hematological cancers. Our
Focus::Myeloid™ panel is designed to target 54 genes, and we believe it will provide important prognostic information for myelodysplastic
syndromes (MDS) and acute myeloid leukemia (AML), as well as diagnostic and prognostic information for myeloproliferative neoplasms
(MPN). MDS are a group of bone marrow disorders in which the bone marrow does not produce enough healthy blood cells. Approximately
30% of patients diagnosed with MDS will progress to AML, which is a cancer of the myeloid line of blood cells characterized by rapid
growth of abnormal white blood cells which interferes with the normal production of other blood cells. MPNs consist of a group of diseases
where there is an overproduction of different types of blood cells. The form of MPN is defined by the type of cell that is overproduced. MPNs
also have a high possibility of progressing to AML depending on the mutations responsible for the MPN. AML is the most common acute
leukemia in adults and its incidence increases with age. AML is expected to account for approximately 20,800 new leukemia cases in 2015,
and its prevalence is expected to increase as the population ages.
Focus::Lymphoma™ is our NGS panel in development for B-cell lymphomas, a type of Non-Hodgkin lymphoma. The panel targets 220
genes known to be associated with diagnosis, prognosis and patient treatment response based on their mutational
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frequency and their potential to interact with cellular pathways known to be dysregulated in these diseases and associated with treatment
success and resistance. B-cell lymphomas are a group of approximately one dozen different cancers that are the result of over proliferation of
B cells. B-cell lymphomas may either be indolent or aggressive, and diagnosis and staging of the cancer is essential for appropriate diseases
and treatment management. In 2014, approximately 60,100 cases of B-cell lymphoma were diagnosed in the United States and the incidence of
this disease is expected to rise as the population ages.
We are also actively developing two solid tumor NGS panels. We are designing a cancer HotSpot NGS panel that targets 50 genes associated
with cancer development in various tissue types, and which have been identified by scientific literature to play a role in patient response to
cancer treatments as well as provide information on likelihood of survival and cancer recurrence. Our pharmacogenomics (PGx) panel in
development targets 1885 DNA changes associated with patient drug response. Through detection of these changes, the PGx panel can
provide information about a patient's ability to metabolize pharmaceuticals, including anti-inflammatory drugs and warfarin, among others.
This information is important to determining drug dosage and to avoid adverse reactions to medications.
MatBA® Microarrays and Focus::NGS™ Panels offered as LDTs
We offer the first application of MatBA® for prognostication in one subtype of mature B-cell neoplasm, CLL, where about half of patients
experience indolent disease, or slow progression, and the remaining half, a relatively aggressive progression. MatBA®-CLL provides
important genetic-based information to guide clinical management of this disease. The test results are reported out in a unique format that
allows ease of interpretation by the hematologist or oncologist. MatBA®-CLL is included in the tests we can provide under our New York
laboratory and CLIA licenses. New York is one of only a few states that separately reviews LDTs for clinical and analytical validity. To date
there are only a few companies that have commercially available oncology microarrays and, to our knowledge based on our informal
communications with New York State Department of Health, MatBA®-CLL was the first oncology microarray approved for commercial use
by the New York State Department of Health.
We offer Focus::CLL™ for prognostication in CLL and SLL to provide genetic-based information to guide clinical management of these
diseases. Similar to CLL, SLL is experienced in patients as either indolent disease or active progression, which require different approaches to
treatment. Therefore, it is important for clinicians and oncologists to be able to differentiate between disease types that are likely to progress or
not. Based on the Focus::CLL™ panel test results, each patient may receive the most suitable treatment tailored to their unique cancer subtype.
Focus::CLL™ is included in the tests we can provide under our CLIA license, effective December 2014, and we are engaged in the application
process for New York laboratory approval.
Approximately 14,600 new cases of CLL are expected to be diagnosed in the United States in 2015, and importantly, over time these cases
undergo evolution, requiring risk stratification and guidance on patient management issues at multiple points during the course of the disease.
Prior to the introduction of MatBA® and Focus::CLL™, clinicians relied on the assessment of the gain or loss on only four chromosomal
regions and potentially one gene mutation when testing for and stratifying a CLL patient. MatBA® improves on this by identifying information
on five additional chromosomal regions, providing more valuable diagnostic data and critical information about the risk of progression and
overall prognosis of the patient. In particular, because MatBA® has greater resolution than that available with prior tests, we can interrogate
two different regions or loci on the 13q chromosome. Loss of one specific locus or loss of both loci are in some circumstances believed to
have differing prognostic value, hence the importance of being able to evaluate both loci. Also, loss of 13q as a sole abnormality is associated
with a lower risk of progression and overall favorable outcome. With the increased capacity of MatBA® to assess abnormalities in multiple
regions of the genome not usually assessed by other technologies, our studies have indicated that up to 23% of cases that would have shown
13q loss as a sole abnormality when assessed by FISH technologies do in fact have additional abnormalities. For these cases, the “favorable
outcome” that would have been reported to the clinician was not accurate, leading to a change in the prognosis and consequently decision-
making by the clinician regarding the management of these patients. In addition we have identified novel biomarkers using MatBA® that are
associated with a poor outcome in CLL. These include gains at 2p, 3q and 8q and a loss at 8p. Additional prognostic regions have been
identified and are undergoing validation. These will be reported, further driving the value of more comprehensive genomic assessment of the
patient’s cancer. We believe this type of genomic assessment of the patient’s cancer also saves the health care system thousands of dollars per
year per patient as a result of improved patient management and more targeted therapeutic intervention.
Kidney cancer: UroGenRA®-Kidney and Focus::RenalTM
There is an unmet clinical and patient need for improved diagnosis, prognosis and theranosis, including more detailed and staging information,
in kidney cancers, where biopsy materials are increasingly scarce. The cumulative number of annual new
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reported cases for kidney cancers is estimated at 61,560 for 2015 according to the American Cancer Society. Although generally characterized
by early stage detections, these cancers still represent a major health risk, a significant variability in patient outcome, which can be better
managed through genomic assessment of the tumor(s), and a substantial medical cost burden to the public with the high rates of incidence and
ongoing patient management needs. Developing sophisticated, state-of-the-art molecular tests that enable more accurate diagnosis and/or
prognosis of these cancers will not only benefit the patients by offering more appropriate treatments, but also effectively reduce the
unnecessary medical cost associated with surgery, long-term follow-up surveillance, or therapy after the treatment.
The UroGenRA® microarray, which has been validated in collaboration with Memorial Sloan-Kettering Cancer Center, will provide diagnostic
and prognostic analysis for kidney, bladder and prostate cancer. We launched UroGenRA® in 2013.
UroGenRA® is a proprietary CGH-based array which will serve as a platform for the diagnosis, prognosis and theranosis of kidney cancers.
It was designed to detect gains and losses that frequently occur in genetic material in these cancer types and has the potential to differentially
diagnose and/or stratify patients to assist and guide clinical management. It represents 101 regions of the human genome potentially with
diagnostic, prognostic and/or theranostic value. UroGenRA® is specifically designed to classify renal tumors into the four main subtypes
(clear cell, papillary, chromophobe and oncocytoma), which is critical to patient management and treatment protocols. This allows the clinician,
especially in cases where there is limited biopsy material, to diagnose renal cancer and accurately classify it into the correct subtype, (ii)
provide rationale for selection among surgical and non-surgical intervention or ablation, (iii) stratify patients based on prognostic information
for the advancement of renal cancer into local or regional cancer which then guides decisions on surgical intervention, and (iv) guide drug trial
decisions in those with metastatic disease or “unclassified” renal cancers.
We developed a study with two leading academic cancer centers for which we obtained and used a group of 200 specimens comprising four
kidney cancer subtypes to further develop and validate the algorithm of copy number variation known to be associated with these tumors that
gives the best ability to differentiate among these four subtypes. These copy number changes are already known to minimally include loss in
six regions of chromosomes among these four types and gain in three other regions and we were able to define additional and specific regional
copy number variations. The derived proprietary renal cancer diagnostic algorithm or decision tree based on UroGenRA® copy number
alterations was validated for diagnostic potential in the IRB-approved study of over 50 image-guided needle biopsies and compared with the
sensitivity and specificity obtained by our proprietary FISH-based assay for kidney cancer, FReCaD™.
UroGenRA®-Kidney is now available as a LDT available under our CLIA and New York laboratory licenses. At the current time, validation
of the clinical utility of UroGenRA® is further advanced for kidney cancers than for prostate and bladder cancers, because we are able to
leverage research and insights used in the clinical validation of FReCaD™ in our development activity for the UroGenRA® indication for
kidney cancer.
In 2014, in a collaboration with Memorial Sloan-Kettering Cancer Center, we identified genomic signatures that can differentiate between
patients with clear cell renal carcinoma (ccRCC), a type of kidney cancer, whose disease is likely to relapse or metastasize, or spread to other
tissues in the body. The study analyzed 144 ccRCC samples and the genomic signatures identified by this collaborative effort have the
potential to allow for better risk stratification and treatment selection for patients with metastatic ccRCC. ccRCC is the most common type of
kidney cancer, with approximately 43,000 cases diagnosed in the US each year. Identifying patients whose disease is likely to relapse or
metastasize is essential for planning appropriate treatment strategies and improving survival outcomes. We plan on integrating the genomic
signatures identified in this study into an NGS panel for kidney cancer, Focus::RenalTM..
Proprietary DNA Probe
FHACT® HPV-Associated Cancer Test
We have developed a proprietary, 4-color FISH-based DNA probe designed to identify the gain of the three most important chromosomal
regions that have been implicated in cancers associated with HPV: cervical, anal and oropharyngeal. According to the National Cancer
Institute, about 55 million PAP smear tests to detect HPV are performed in the United States each year. It is estimated that approximately 2
million patients have abnormal PAP smear test results and are referred for biopsy/colposcopy as a result of such tests. However, only 0.6%,
or approximately 12,000 of these patients will develop cervical cancer. It is believed that early detection of HPV-associated cancers and lesions
most likely to progress to cancer could eliminate unnecessary biopsies/colposcopies and thereby reduce health care costs.
FHACT® is designed to determine copy number changes of four particular genomic regions by FISH. These regions of DNA give specific
information about the progression from HPV infection to cervical cancer, in particular the stage and subtype of disease. FHACT® is designed
to enable earlier detection of abnormal cells and can identify the additional genomic
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biomarkers that allow for the prediction of cancer progression. FHACT® is designed to leverage the same PAP smear sample taken from the
patient during routine screening, thus reducing the burden on the patient while delivering greater genomic-based information to the clinician.
We in-license a biomarker from the National Cancer Institute that is used in our FHACT® probe.
In conjunction with the National Cancer Institute, we are performing a blinded study to evaluate the effectiveness of FHACT® for both anal
and cervical cancers associated with the HPV virus that involves over 1,000 specimens. We completed study on over 300 cervical specimens
and the data has been provided to National Cancer Institute. The results from this study along with the methods and values validated by this
work will be used to enhance the product performance of FHACT®. Upon review of the data analysis and results, National Cancer Institute
will provide additional anal tissue samples. This data has been used for validation of the assay and development of automatic analysis for the
FHACT® probe. We continue to validate FHACT® for anal and oropharyngeal cancers (cancers of the mouth and throat) using specimens
from the National Cancer Institute and are actively seeking additional collaborations to further validate the clinical utility of FHACT®.
We continue further clinical validations in collaborations that have been established with the University of Iowa and with Kamineni Hospital in
Hyderabad, India to further strengthen the claims and data for use of FHACT® as a staging and prognostic tool for cervical cancer in both the
United States and in emerging markets. The sensitivity of FHACT® was presented as a poster at the 27th International Pappillomavirus
Conference in Berlin, Germany in 2011. The publication demonstrated that by using FHACT® over 90.9% sensitivity can be achieved as a
screening tool for cervical intraepithelial neoplasia of 2nd degree or higher (known as CIN2+), which is a critical milestone in the development
of cervical cancer, after which stage treatment choices are limited.
In 2012, we made FHACT® available outside the United States as a diagnostic tool for cervical cancer in certain emerging market countries,
including India. Cervical cancer is the third most common cancer among women worldwide, with one-fifth of global cases originating in India.
The World Health Organization projects that cervical cancer deaths will rise to 320,000 in 2015 and 435,000 in 2030. In many emerging
economies, cervical cancer is the most common cancer that affects women, and 80% of deaths from cervical cancer occur in developing
countries. We began making FHACT® available for clinical use in the United States in 2013. We actively market FHACT® to hospitals,
cancer clinics and individual physicians' offices for testing cervical cell samples obtained from patients' pap smear liquid.
In October and November of 2014, we were granted U.S. Patent Nos. 8,883,414 and 8,865,883, respectively, by the United States Patent and
Trademark Office for FHACT®. The '883 patent covers the 4-probe design and the '414 patent covers FHACT® for use to detect HPV-
associated cancer and precancerous lesions in clinical samples.
Oncospire Genomics, LLC: Our Joint Venture with Mayo Clinic
On November 7, 2011, we entered into an affiliation agreement with the Mayo Foundation for Medical Education and Research, pursuant to
which we agreed to form a joint venture with Mayo. We funded the joint venture with an initial $1.0 million contribution in October 2013. The
objectives of the joint venture entity will be to try to discover and validate biomarkers in lung cancer, multiple myeloma and follicular
lymphoma utilizing next-generation sequencing with a possible expansion into other solid tumors, such as esophageal, head and neck and
breast cancers. Additionally, the joint venture entity will engage in biomarker discovery utilizing Mayo’s next-generation sequencing facility
and the development of commercial products in the form of diagnostic products and services, as well as early stage therapeutic markers. In the
third quarter of 2014 we made an additional $1.0 million capital contribution. In exchange for its membership interest, we also granted Mayo
an aggregate of 30,000 shares of our common stock.
The joint venture entity is in the form of a limited liability company named OncoSpire Genomics, LLC, and is governed by a board of
governors consisting of six members, with three members appointed by us and three members appointed by Mayo. Our appointees to the
board of governors are Dr. Raju Chaganti, John Pappajohn, and Panna L. Sharma. Initially, we hold fifty percent of the issued and
outstanding membership interests and Mayo holds fifty percent of the issued and outstanding membership interests of the new entity. In
exchange for our membership interests in the joint venture entity, in addition to the $2.0 million capital contributions, we currently anticipate
that we will make capital contributions of $1.0 million in the second quarter of 2015. 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.
We also entered into a three-year joint development intellectual property agreement with Mayo and the joint venture entity, pursuant to which
we and Mayo will grant each other non-exclusive, non-transferable licenses to use certain intellectual property required for the performance of
statements of work to be issued under such agreement. Also pursuant to the joint development agreement, we, Mayo and the joint venture
entity will agree that unless otherwise specified in the applicable
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statement of work any intellectual property created by the joint venture entity shall be the property of the joint venture entity; however, the joint
venture entity will grant us and Mayo licenses to commercialize such intellectual property in the form of diagnostic products and diagnostic lab
services, respectively, at prices to be determined by the board of governors of the joint venture entity. The joint development agreement further
provides that the prior written consent of Mayo is required before we or the joint venture entity can commercialize products or services that
contain Mayo’s pre-existing property and that our prior written consent is required before Mayo or the joint venture entity can commercialize
products or services that contain our pre-existing property.
The board of governors is advised by a six-member scientific review committee, which is composed of three members selected by us and three
members selected by Mayo. The affiliation agreement may be terminated by mutual consent of the parties or by the non-breaching party upon a
material breach of the affiliation agreement that remains uncured for a period of 90 days.
2014 M&A Activity
In 2014, we have acquired two leading companies in pharmacogenomics and genomic testing: Gentris Corporation and BioServe
Biotechnologies (India) Pvt. Ltd. With the acquisition of Gentris and BioServe India, we now have over 60,000 square feet of state-of-the-art
lab space and are positioned to solidify our position as a unique global provider for the development and delivery of targeted, personalized
oncology diagnostics. We now have fully staffed laboratories in the U.S., India and China, which gives us a uniquely competitive platform to
develop, commercialize, and deliver genomic and biomarker based oncology diagnostics to our clients. These acquisitions provide a pathway
and growth opportunity to sell our genomic based diagnostic tests to some of the largest pharma companies in the world with additional
capabilities such as germline DNA testing and drug response optimization and monitoring.
Acquisition of Gentris Corporation
On July 16, 2014 we purchased substantially all of the assets of Gentris Corporation ("Gentris"), a laboratory specializing in
pharmacogenomics profiling for therapeutic development, companion diagnostics and clinical trials. Gentris’ laboratory is located in
Morrisville, North Carolina and the company has a CLIA and FDA-compliant laboratory facility in Shanghai, China. Upon closing of the
acquisition transaction, Gentris Corporation was re-named Gentris, LLC and is now a wholly-owned subsidiary of Cancer Genetics, Inc.
Gentris' expertise in pharmacogenomics, the study of the role of an individual's genetics in drug response, enables its clients to quickly obtain
and translate quality genomic biomarker results into safer, more effective medicines that improve and personalize the standard of care for
patients globally. Gentris provides genomic testing and pharmacogenomics services to half of the top ten biopharma companies globally and
has participated and performed genomic analysis for over 1,000 clinical trials. The acquisition allows us to expand our biopharma services.
The initial acquisition price of Gentris was (i) $3.25 million in cash (subject to minor reduction based on obligations of Gentris due at closing),
plus (ii) 147,843 shares of common stock valued at $1.50 million, plus (iii) a potential earn-out of up to $1.50 million over the next calendar
year, which earn-out is payable in cash or shares of our common stock at our option, and is based upon a formula that provides for additional
amounts starting at revenues of $4.75 million, up to revenues of $8.55 million, plus (iv) a potential payment to be made in connection with the
termination of Merck’s biorepository relationship with Gentris, based upon exit fees to be received by Gentris from Merck. The computation
of the purchase price is included in footnote 1 to the Consolidated Financial Statements. The amounts used in computing the purchase price
differ due to fair value measurement conventions prescribed in accounting standards.
Acquisition of BioServe Biotechnologies (India) Pvt. Ltd.
On August 18, 2014 we entered into two agreements by which we acquired BioServe Biotechnologies (India) Pvt. Ltd., a premier genomics
services provider serving both the research and clinical markets in India. This transaction was completed through a newly formed subsidiary,
Cancer Genetics (India) Pvt. Ltd. BioServe India is located in Hyderabad, the shared capital city for the states of Andhra Pradesh and
Telangana. BioServe India, which operates out of a 14,000 square foot, state-of-the-art genomics facility in Hyderabad, has serviced over 200
clients with best-in-class genomic services, including next-generation sequencing, genotyping and DNA synthesis. BioServe India's clients
include some of the leaders in the Indian life sciences industry, including Dr. Reddy's Laboratories, NATCO Pharmaceuticals, Piramal Life
Sciences, the Indian Institute of Science Education and Research and the Centre for Cellular and Molecular Biology.
With the BioServe acquisition we believe we will be able to access and service clinical and research sectors of the Indian healthcare market.
The acquisition provides us with an infrastructure in India for developing lower cost manufacturing of probes and kits including probes and
kits used for our proprietary FHACT test and access to one of the fastest-growing
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molecular and clinical diagnostic markets in the world. BioServe will continue to serve biotechnology and biopharmaceutical companies,
diagnostic companies and research hospitals, including those owned or operated by the Indian government, as well as seek to expand its
customer base.
The parties to the first agreement (the “India Agreement”) are the Company, Ramakishna V. Modali (the current general manager of BioServe,
“Modali”), VenturEast Trustee Company Pvt Ltd and affiliates, its principal shareholder (“VenturEast”), and certain other shareholders
residing in India all of whom in the aggregate owned approximately 74% of BioServe. The parties to the second share purchase agreement (the
“US Agreement”) are the Company and BioServe Biotechnologies LTD, a Maryland corporation and an affiliate of BioServe which owned
approximately 15% of BioServe (BioServe US), with the majority of the other outstanding shares held by the BioServe Employee Stock
Ownership Plan which will remain in place.
The aggregate purchase price was approximately $1.9 million payable to the different shareholders of BioServe as follows: (i) Ventureast will
receive a payment equivalent to the cash value of 84,278 shares of the Company’s common stock at the time of payment, payable in 30 months
or sooner if the Company effects a public offering of its common stock prior to that time, (ii) approximately $100,000 was payable in cash,
and (iii) approximately 31,370 shares of the Company’s common stock were issued. We also assumed approximately $160,000 in
indebtedness. The source of the cash payables at closing was the Company's working capital. The computation of the purchase price is
included in footnote 1 to the Consolidated Financial Statements. The amounts used in computing the purchase price for financial statement
purposes differ due to fair value measurement conventions prescribed in accounting standards. The future payment described in (i) above is
subject to periodic adjustment due to changes in the Company's share price. Any changes are reflected in the Consolidated Statement of
Operations.
India Clinical Oncology and Biopharma Market Overview
India has a growing market for molecular diagnostics and oncology services. According to a 2010 study published in the Asian Pacific
Journal of Cancer Prevention, each year, more than 1 million new cases of cancer are diagnosed in India, and incidence rates are expected to
rise by more than 72 percent by 2025. In those cancer types for which we provide diagnostic and prognostic proprietary tests and services,
incidences are also predicted to rise steadily over the next decade even while the population is expected to experience a decrease in population
growth rate. Gynecological cancers account for approximately 30% of the total cancer burden among women in India. Furthermore, over 80%
of cancers in India are first detected in advanced or terminal stages, indicating an important opportunity in this market for DNA-based
oncology diagnostic tools that can provide early-stage information to guide treatment resulting in greater survival rates.
It is estimated by the India Brand Equity Foundation that the Indian biopharma and biotech markets are expected to experience over a 20%
increase in CAGR by 2017 due to favorable business conditions and increasing government expenditures in these sectors. The
biopharmaceutical services segment accounted for the largest share of sector growth in 2013 and 2014, accounting for approximately 64% of
total revenues, and experienced the highest growth rate in this period, with an approximately 17% CAGR. Over the next decade, growth in
this industry is anticipated to come largely from India’s strong position in biosimilars and molecular diagnostics, as well as from personalized
medicine. The Indian government has been increasing spending on the biotech and biopharma sectors through 5-year budget allocation plans
aimed at research and development as well as health care.
In the first quarter of 2014 we launched FHACT® in collaboration with Kamineni Hospitals in Hyderabad, India for the detection and
management of cervical cancer. This was the first broad-scale adoption of FHACT® in India. The launch culminates a collaboration that was
begun in July 2013 to assess the value and clinical utility of FHACT® in India.
China Clinical Oncology and Biopharma Market Overview
Cancer is one of the leading public health problems in both urban and rural China. The disease is among the leading causes of death in the
Chinese population, representing approximately 25% of all deaths in urban areas and 21% in rural areas. Over the past 30 years, the risk
factors for cancer in China have been increasing, including an aging population, decreased environmental conditions and westernization of diet
and lifestyle. The Chinese biopharma is currently the third largest pharma market globally, after the United States and Japan. With more than
one fifth of the world’s population, China is an important market for biopharma and biotech products and China’s minister of health has
pledged that the country will spend an additional $11.8 billion to advance biotech innovation from 2015 to 2020 in its 13th five-year plan. Our
Shanghai laboratory performs clinical trials services for biopharma companies in China, where governmental regulations prevent human
samples from being exported from the country.
Test Development Process
Our proprietary microarrays, DNA probes and NGS panels have been, and continue to be, developed in conjunction with
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leading academic and clinical research centers to ensure that the needs of the clinical community are being met with the latest research on
genomic alterations that cause, lead to, or are related to the development of cancer. We undergo a thorough research and validation process to
ensure we are providing diagnostic and prognostic information that is clinically relevant and accurate. In our experience the time-frame for this
process from design through development and market launch can be between 18 to 40 months based on complexity of the disease, the specific
clinical claims being pursued and the availability of high quality samples with strong clinical correlations. We monitor and review the process
in four stages as detailed in the table below:
• We conduct extensive research of peer-reviewed publications and other disease-specific literature and public information
databases for information regarding genomic abnormalities as hallmarks and references for particular cancers and clinical
correlations.
Stage 1: Research and Development
• Within a cancer type, the observed gains, losses or other aberrations and rearrangements of genetic material are recorded
and noted when reported to have diagnostic or prognostic potential. During this process, which is technology and platform
agnostic, we extensively cross-analyze our findings in the literature with published data sets across a variety of
technologies.
• Finally, we assess the merits of these findings internally with our research and development teams and with our scientific
advisory board, when applicable, so that we can assure robust genomic coverage as we proceed into clinical development.
Stage 2: Clinical Development
• We design a targeted array, probe panel or NGS panel based on the information gathered from the literature and database
searches and review. A team of our scientists then seeks to refute the evidence compiled in the literature search process,
serving as a system of checks and balances.
• Once that process is complete, we design a test platform based on its application within a particular cancer. For example,
the kidney array is designed to subtype among the four main types of kidney cancers at various stages in the treatment of
the patient. Within one test, we may be assessing three to four different subtypes of a cancer and for different applications,
ranging from differential diagnosis to prognosis to prediction of therapeutic response.
• During this stage we select and refine the targeted regions and their potential suitability for analysis.
Stage 3: Commercial Development
• This process involves validating the performance characteristics of the test, as well as developing protocols for the use of
the test for the intended specimen. The quality assurance process notes reproducibility, accuracy, sensitivity, and
specificity, and potential compliance to ranges of normalcy and reportability.
• We also compare data obtained for specimens and cell lines across different technology platforms to ensure accuracy of
our processes. In this process, we confirm and validate the genomic biomarkers in independent clinically relevant datasets.
During this process we also begin to develop the decision trees and algorithms, which are core to our intellectual property
that guide the diagnostic and prognostic value of the test.
• We conduct trials which help to validate its design and usage. For this validation process, we partner with leading cancer
institutions and regional cancer centers.
Stage 4: Market Entry and Launch
• After commercial development is completed and prior to market launch, we take several steps to prepare for marketing
our tests as LDTs. We create standard operating procedures and quality assurance and quality control measures to ensure
repeatability and high standards of quality. We train our staff on the interpretation and use of the data.
• Licenses and approvals for our laboratory to use LDTs are obtained from the appropriate regulatory authorities, such as
the Centers for Medicare and Medicaid Services (“CMS”), which oversees CLIA, and state regulatory bodies. Before we
CE mark our tests we also need to assess the conformity of our tests with the essential requirements of the European In
Vitro Diagnostic Medical Devices Directive.
• We will also need to complete additional activities to submit each of these tests for regulatory clearance or approval prior
to commercialization in each of the international markets where we plan to introduce them.
Research and Development Expenses
We incurred research and development expenses of $4.6 million, which represented 45% of our net revenue, for the year
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ended December 31, 2014; $2.2 million, which represented 33% of our net revenue, for the year ended December 31, 2013; and $2.1 million,
which represented 49% of our net revenue, for the year ended December 31, 2012. Research and development expenses represented 22% of
our total operating expenses for the year ended December 31, 2014, 22% of our total operating expenses for the year ended December 31,
2013, and 26% for the year ended December 31, 2012. Major components of the research and development expenses included direct
personnel costs, laboratory equipment and consumables and overhead expenses.
Sales and Marketing
Our sales and marketing efforts consist of both direct and indirect efforts, with the majority of efforts focused on direct sales in both the
United States and India. The table below summarizes our sales approach by geography and customer segment:
• Collaborate with leading research universities and institutions that enable the
validation of our new tests
Clinical Sales
• Work with community-based cancer centers that need a reliable and
collaborative partner for genomic-based cancer testing
United
States
India
Biopharma Sales
Clinical Sales
Biopharma & Discovery
Sales
China
Biopharma Sales
• Build relationships with individual thought leaders in oncology, hematology
and pathology to deliver services that provide value to their patients.
• Collaborate with scientific development teams at pharmaceutical companies on
studies involving translational medicine and genotyping.
• Build relationships in the research and development segment to identify
partners with a need for biomarker discovery studies.
• Develop relationships with oncologists, corporate hospitals and reference labs,
as well as with physicians in local clinics.
• Engage the population of oncology patients in India, where a majority of
oncology drugs are paid for out-of-pocket.
• Work with academic and research institutions for validation of our tests in the
Indian population.
• Collaborate with scientific development teams at biopharma companies and
government agencies on studies involving genomic-based tests and services.
• Leverage US-based companies conducting clinical trials with a component of
those trials occurring in China.
Our sales force professionals have backgrounds in hematology, pathology, and laboratory services, and have an average of 20 years of
experience in clinical oncology sales, esoteric laboratory sales from leading biopharmaceutical, pharmaceutical or specialty reference laboratory
companies. We currently have a team of eight sales professionals in the United States and seven in India. We plan on continuing to grow this
specialized, oncology-focused sales force and support it with clinical specialists who bring deep domain knowledge in the design and use of
the tests and services that we currently offer, and those we plan on offering in the United States.
We also promote our tests and services through marketing channels commonly used by the biopharma and pharmaceutical industries, such as
internet, medical meetings and broad-based publication of our scientific and economic data. In addition, we provide easy-to-access information
to our customers over the internet through dedicated websites. Our customers value easily accessible information in order to quickly review
patient or study information.
Research and Development Collaborations
We formally and informally collaborate with leading oncology centers and community-based hospitals to develop our proprietary diagnostic
tests, and we work closely with leading cancer researchers at these institutions to develop proprietary tests tailored to their needs and
specifications. Additionally, many of these centers have obtained Specialized Programs of Research Excellence status, as designated by the
National Cancer Institute. Our collaborations with these centers give us access to large datasets of information that we use to develop our
proprietary tests.
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Below is a summary of our active key collaborations. In certain cases we have formal written agreements with collaborators and in other cases
we have no written agreement with our collaborators or only informal written arrangements.
Principle Investigator(s)
Focus of Collaboration
Dr. Kanti Rai
Dr. Nicholas Chiorazzi
Clinical validation of MatBA®-CLL and search for
additional DNA-based biomarkers of CLL
Year
Entered
2007
Collaborating
Institution
North Shore-Long
Island Jewish Health
System, New York
Memorial Sloan-
Kettering Cancer
Center, New York
National Cancer
Institute, Maryland
Kamineni Hospital,
Hyderabad, India
Dr. Victor Reuter
Dr. Julie Teruya-Feldstein
Dr. Raju S.K. Chaganti
Dr. Raju S.K. Chaganti
Dr. Jonathan Coleman
Dr. Jeremy Durack
Dr. Nicolas Wentzensen
Dr. Annie Hassan
University of Iowa
Hospitals and Clinics,
Iowa
Dr. Aaron Bossler
Dr. Sergei Syrbu
Dr. Anthony Mato
Hackensack University
Medical Center, New
Jersey
Cleveland Clinic, Ohio Dr. Eric Klein
Dr. Maggie Galluzzi
Dr. Vamsi Kota
Dr. Ravindra Kolhe
Dr. Ravindra Holhe
Dr. Jennifer Brown
Georgia Health
Sciences University,
Georgia
Dana Farber Cancer
Institute, Massachusetts
Columbia University,
New York
Beth Israel Deaconess
Medical Center, New
York
Keck Medicine of
University of Southern
California, California
Validation of FReCAD™ assay to evaluate the ability of
the assay to classify renal cortical neoplasms
Clinical validation of MatBA® in all subtypes of mature
B cell neoplasms
Validation of a CGH microarray-based assay in the
diagnosis and prognosis of mature B cell neoplasms
Validation of a CGH microarray-based assay in the
diagnosis and prognosis of genitourinary cancers
Evaluation of FISH-based CGH-array tests in the
diagnosis of renal mass biopsies using FReCAD™ and
UroGenRA® assays
Evaluation of FISH-based and CHG-array tests in the
diagnosis of renal oncocytoma
Evaluation of FISH-based tests as a screening tool for
the detection of HPV-associated precancerous cells
Evaluation of FHACT® as a screening tool for the
identification of precancerous and cancerous cervical
cells
Evaluation of FHACT® in cervical liquid biopsy
specimens with known HPV type and clinical follow-up
Evaluation methods to improve the diagnosis, prognosis
and management of diffuse large B cell lymphoma
MatBA®-CLL validation testing
Validation of genomic biomarkers for validation of
UroGenRA®-Kidney
Development of molecular testing for diagnosis,
prognosis and management of DLBCL patients and
validation of genomic biomarkers for DLBCL using
MatBA®-DLBCL
Validation of FHACT® in diagnosis and management
of head and neck squamous cell carcinoma
Clinical validation of MatBA®-CLL outcome scheme
2008
2009
2009
2010
2011
2013
2009
2010
2011
2013
2012
2012
2012
2012
2013
2014
2014
Dr. Azra Raza
Dr. Siddhartha Mukherjee
Dr. Rajan Dewar
Identification of genomic biomarkers and novel
treatments for myelodysplastic syndromes and acute
myeloid leukemia
Analysis of genomic biomarkers and associated
outcomes in patients with DLBCL
Dr. Imran Siddiqi
Identification and evaluation of genomic biomarkers for
DLBCL and further validation of MatBA®-DLBCL
2014
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Scientific and Clinical Advisory Boards
We have two advisory boards to counsel our scientific and clinical direction. Our Scientific Advisory Board is comprised of preeminent
scientists and physicians from the fields of cancer biology, cancer pathology, cancer medicine and molecular genetics. We have scientists and
clinicians from leading cancer centers, including Memorial Sloan-Kettering Cancer Center, Mt. Sinai and the Institute for Cancer Genetics at
Columbia University. These distinguished scientists and clinicians help oversee and review the scientific innovation, integrity and clinical
relevancy of our program. The board of directors appoints members to the Scientific Advisory Board. Our Clinical Advisory Board is
comprised of preeminent clinicians and scientists focused on clinical implementation of our proprietary tests and services and mapping those
tests and services to patient needs.
Competition
As a developer and provider of genomic-based tests and services that provide personalized diagnostic, prognostic and theranostic information
for hematological, and other cancers, we rely extensively on our ability to combine research insights with high-quality, state-of-the art clinical
laboratory testing. We believe that we compete principally on the basis of:
•
•
•
•
•
•
•
•
our ability to address complex cancers that are currently difficult to prognose and challenging to predict treatment outcomes using
currently available technologies;
the ability of our proprietary tests and services to provide more information than existing tests with respect to the cancers we
address;
our ability to utilize a wide variety of sample types, accelerating the time-frame for clinical validation of our tests and allowing health
care providers to readily integrate our tests into their established workflow;
our ability to perform clinical studies using FFPE samples to either validate or develop novel insights for our proprietary
programs;
the quality of our services and our ability to collaborate with our customers on a consultative
basis;
our research and clinical collaborations with key academic and clinical study
groups;
the quality and global reach of our clinical reference laboratories, which enables consistent, comprehensive and reproducible
results;
the level of disease specific knowledge and customer service we provide, both to academic centers and community based health care
professionals; and
We believe that we compete favorably with respect to these factors, although we cannot provide assurances that we will be able to continue to
do so in the future or that new products or tests that perform better than our proprietary tests and services will be introduced. We believe that
our continued success depends on our ability to:
•
•
•
•
•
•
•
•
•
•
•
expand and enhance our proprietary tests to provide clinically meaningful information in additional indications;
continue to innovate and maintain scientifically advanced technology;
successfully market and sell our proprietary tests in the United States;
continue to obtain appropriate regulatory approvals in the United States and abroad;
continue to validate our pipeline of genomic tests and proprietary services;
continue to obtain positive reimbursement decisions from payors and from CMS;
maintain existing and enter into new research and clinical collaborations with key academic and clinical study groups;
continue to enter into partnerships with local distributors and/or manufacturers to expand into emerging markets, including Mexico
and Brazil;
continue to attract and retain skilled scientific and clinical personnel;
obtain and maintain our clinical reference laboratory accreditations and licenses; and
obtain patents or other protection for our proprietary tests and services.
Our principal competition comes from existing mainstream diagnostic methods and laboratories that pathologists and oncologists use and have
used for many years or decades. It may be difficult to change the methods or behavior of the referring pathologists and oncologists to
incorporate our molecular diagnostic testing in their practices. In addition, companies offering capital equipment and kits or reagents to local
pathology laboratories represent another source of potential competition. These kits are used directly by the pathologist, which can facilitate
adoption.
We also face competition from companies that offer products or have conducted research to profile genes, gene expression or protein
biomarkers in various cancers. In particular, Quest Diagnostics market arrays which are competitive to our MatBA®-CLL and MatBA®-SLL
arrays, and both Foundation Medicine and LabCorp offer NGS based tests and panels for oncology. Personalized genetic diagnostics is a new
area of science, and we cannot predict what tests others will develop that may
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compete with or provide results superior to the results we are able to achieve with the tests we develop. Our competitors include public
companies such as: NeoGenomics, Inc., Quest Diagnostics, Abbott Laboratories, Inc., Johnson & Johnson, Roche Molecular Systems, Inc.,
bioTheranostics, Inc. (part of the bioMérieux S.A.), Genomic Health, Inc., LabCorp, Inc., Myriad Genetics, Inc., Qiagen N.V., Response
Genetics, Inc., Rosetta Genomics Ltd., and Foundation Medicine, Inc., and many private companies. We expect that pharmaceutical and
biopharmaceutical companies will increasingly focus attention and resources on the personalized diagnostic sector as the potential and
prevalence increases of molecularly targeted oncology therapies approved by FDA along with companion diagnostics. For example, FDA has
recently approved two such agents- Xalkori crizotinib from Pfizer Inc. along with its companion anaplastic lymphoma kinase FISH test from
Abbott Laboratories, Inc. and Zelboraf vemurafenib from Genentech USA Incorporated and Daiichi-Sankyo Inc. along with its companion B-
RAF kinase V600 mutation test from Roche Molecular Systems, Inc. These two recent FDA approvals are only the second and third instances
ever of simultaneous approvals of a drug and companion diagnostic, the first being the 1998 approval of Genentech, Inc.’s Herceptin
trastuzumab for HER2 positive breast cancer along with the HercepTest from partner Dako A/S. Our competitors may invent and
commercialize technology platforms or tests that compete with ours.
Additionally, projects related to cancer genomics have received increased government funding, both in the United States and internationally.
As more information regarding cancer genomics becomes available to the public, we anticipate that more products aimed at identifying targeted
treatment options will be developed and that these products may compete with ours. In addition, competitors may develop their own versions
of our tests in countries where we did not apply for patents or where our patents have not issued and compete with us in those countries,
including encouraging the use of their test by physicians or patients in other countries.
Third-Party Suppliers and Manufacturers
We maintain control, validation and quality assurance over our NGS panels, DNA microarrays and probes. Our microarrays are designed in
our facility by our scientists and technicians using state of the art genomic mapping and analysis software. The specifications are sent to
Agilent for final manufacturing. Agilent manufactures our microarrays under strict quality control and compliance with ISO 9001 and ISO
13485 at its Santa Clara, California facility. Agilent also has another manufacturing facility in Europe that can be made available for microarray
printing. Upon manufacturing our custom, proprietary microarrays, Agilent ships them back to our Rutherford facility for testing and
acceptance.
The DNA component of our DNA FISH probes is produced under strict adherence to regulatory procedures in our Rutherford facility and
also at a third party facility depending on demand and workflow. The DNA is shipped for final manufacture to our partner in India. In
February 2012 we entered in to an agreement with Kamineni Life Sciences to supply outsourced manufacturing for the production of our
DNA FISH probes. The manufacturing operations became fully operational in India in the fourth quarter of 2012 and several batches of DNA
FISH probes have been successfully manufactured. We control overall quality and process management and the final quality assurance in a
manner that is CE compliant and adheres to our Quality Management System.
Patents and Proprietary Technology
Our business develops proprietary tests that enable oncologists and pathologists at hospitals, cancer centers, and physician offices to properly
diagnose and inform cancer treatment. We rely on a combination of patents, patent applications, trademarks, trademark applications, trade
secrets, industry know-how, as well as various contractual arrangements, in order to protect the proprietary aspects of our technology.
Our patent portfolio consists of eight issued U.S. patents, several pending U.S. applications, and foreign applications. These patents and patent
applications are related to various DNA-based probes and microarrays designed for detecting and correlating certain chromosomal markers
associated with particular types of cancers. As of the date of this filing, we have eight issued U.S. Utility Patents (U.S. Patent Nos. 7,585,964;
7,964,345; 8,557,747; 8,580,713; 8,603,948; 8,716,193; 8,865,882; and 8,883,414), which cover our probe and microarray technologies.
U.S. Patent Nos. 7,585,964 and 7,964,345 cover probes and methodologies designed to detect and analyze particular chromosomal
translocations (genetic lesions) associated with a wide range of cancers using a technique known as FISH and serve as the backbone for
several of our other pending patent applications, which are more specifically geared towards other probes (and methodologies).
U.S. Patent Nos. 8,580,713 and 8,557,747 are our seminal patents in the microarray space. These two patents and foreign PCT Application
No. US2010/062295 are directed to a microarray for detecting (and distinguishing) particular types of mature B cell neoplasms present in
typical non-Hodgkin’s lymphoma, Hodgkin’s lymphoma and chronic lymphocytic leukemia. These
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patents and foreign application cover our trademarked MatBA® microarray and are directed to both the microarray itself as well as associated
methodologies designed to detect the particular type of mature B cell neoplasm present in a patient. These patents and foreign application also
cover the use of computer-assisted means to facilitate and expedite that detection process. The MatBA® microarray patents issued from the first
of our family of applications in the microarray space.
U.S. Patent Nos. 8,603,948 and 8,716,193 are directed to a novel, highly sensitive, and specific probe panel which detects the type of renal
cortical neoplasm present in a biopsy sample. These patents covers a probe that permits diagnosis of the predominant subtypes of renal cortical
neoplasms without the use of invasive methods and provides a molecular cytogenetic method for detecting and analyzing the type of renal
cortical neoplasm present in a renal biopsy sample.
Moreover, U.S. Patent Nos. 8,865,882 and 8,883,414 are directed our FHACT® test for the detection method and probe sets associated with
HPV-associated cancers. We are also working on several additional patent filings directed to our other microarrays, and we filed a U.S. patent
application and a PCT patent application covering UroGenRA® reagents and assays (U.S. Patent Application No. 14/180,814; PCT
Application No. PCT/US2014/016541).
The following table lists each of our US patents and their respective expiration dates:
Patent
Expiration
7,585,964
7,964,345
8,557,747
8,580,713
8,603,948
8,716,193
8,865,882
8,883,414
May 14, 2022
September 14, 2024
March 30, 2031
December 29, 2030
October 31, 2027
October 31, 2027
September 7, 2031
September 7, 2031
In addition to patents, we hold seven U.S. registered trademarks, including a federal registration for “CGI” as well as three U.S. trademark
applications and one foreign trademark registration for certain of our proprietary tests and services. Our strategic use of distinctive trademarks
has garnered increased name recognition and brand awareness for our tests and services within the industry.
Through our clinical laboratory, we provide several clinical services that utilize our proprietary trade secrets. In particular, we maintain trade
secrets with respect to specimen accessioning, sample preparation, and certain aspects of cytogenetic analysis. All of our trade secrets are kept
under strict confidence, and we take all reasonable steps, including the use of non-disclosure agreements and confidentiality agreements, to
ensure that our confidential information is not unlawfully disseminated. We also conduct training sessions on the importance of maintaining
and protecting trade secrets with our scientific staff and laboratory directors and supervisors.
In addition to our proprietary intellectual property, we entered into nonexclusive licenses with the National Cancer Institute for the use of its
intellectual property relating to a 3q marker and with Stanford University for use and development of a diagnostic assay and predictive model
that has been granted two patents for the stratification and risk prediction for DLBCL patients. Under the terms of the license, we are permitted
to use the National Cancer Institute’s proprietary intellectual property for use in our patent pending FHACT® DNA probe, which is directed
to the diagnosis and prognosis of certain HPV-associated cancers.
Operations and Production Facilities
We work with electronic medical records providers to facilitate seamless communication between our laboratory and the oncologist or
pathologist at the test ordering site. Currently, we have the ability to integrate with electronic medical record systems, as we have already done
with MDL, an electronic medical record provider. We do this integration through utilizing HL7 interfaces, which are standard in health care
information technology systems. We currently employ HL7 for its integration with a revenue cycle management company, XiFin, as well as
with its electronic medical records partners such as MDL. The use of the HL7 interface allows systems written in different languages and
running on different platforms to be able to talk to each other through the use of an abstracted data layer. This means that we do not have to
spend significant extra time, often months, designing and developing common communications protocols when integrating with other
electronic
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health records systems or billing systems providers.
When a customer takes a specimen from a patient for diagnostic testing, he or she will complete a requisition form (either by hand or
electronically, or via electronic medical records technology), and package the specimen for shipment to us. Once we receive the specimen at
our laboratory and we enter all pertinent information about the specimen into our clinical laboratory information system, one of our
histotechnologists, cytotechnologists, flow technologists or molecular technologists prepares the specimen for diagnosis. The prepared
specimen is sent to one of our pathologists or directors who is experienced in making the diagnosis requested by the referring oncologist or
pathologist.
After diagnosis, our pathologist uses our laboratory information systems to prepare a comprehensive report, which includes any relevant
images associated with the specimen. Our clinical reporting portal, cgireports.com, allows a referring oncologist or pathologist to access
his/her test results in real time in a secure HIPAA compliant manner. The reports are generated in industry standard PDF formats which
allows for high definition color images to be reproduced clearly. This portal has been fully operational at our facilities since 2011.
In most cases we provide both the technical analysis and professional diagnosis, although we also fulfill requests from oncologists and
pathologists for only one service or the other. If an oncologist or pathologist at the hospital, cancer center, reference laboratory or physician
office requires only the analysis, we prepare the data and then return it to the referring oncologist or pathologist for assessment and diagnosis.
Quality Assurance
We are committed to providing reliable and accurate diagnostic services to our customers. Accurate specimen identification, timely
communication of diagnoses, and prompt correction of errors, is critical. We monitor and improve our performance through a variety of
methods, including performance improvement indicators, proficiency testing (CAP and New York State), external audits and satisfaction
surveys. All quality concerns and incidents are subject to root cause analysis and our procedures are put through annual evaluation to ensure
that we are providing the best services possible to our patients and customers. Protection of patient results from misuse and improper access is
imperative and thus electronic and paper results are guarded via password- protection and identification cards.
We have established a comprehensive Quality Assurance and Management Program for our laboratory designed to drive accurate and timely
test results and to ensure the consistent high quality of our testing services. The Quality Assurance and Management Program documents the
quality assurance/performance improvement plans and policies and the laboratory quality assurance and quality control procedures that are
necessary to ensure that we offer the highest quality of diagnostic testing services. This program is designed to satisfy all the requirements
necessary for local and state licensures by the New Jersey Health Department and the New York Department of Health Clinical Laboratory
Evaluation Program and accreditation for clinical diagnostic laboratories by CAP. We follow the policies and procedures for patient and
employee safety, hazardous waste disposal and fire codes stated in the general laboratory procedure manual. We believe that all pertinent
regulations of CLIA, Occupational Safety and Health Administration (“OSHA”), Environmental Protection Agency and FDA are satisfied by
following the established guidelines and procedures of our Quality Assurance and Management Program.
In addition to the compulsory proficiency programs and external inspections required by CMS and other regulatory agencies, we have
developed a variety of internal systems and procedures to emphasize, monitor and continuously improve the quality of our operations. We
maintain internal quality controls by routinely processing specimens with known diagnoses in parallel with patient specimens. We also have an
extensive, internally administered program of specimen proficiency testing, in which our laboratory staff are blinded to the results.
We participate in numerous externally administered quality surveillance programs and our laboratory is accredited by CAP. The CAP
accreditation program involves both unannounced on-site inspections of our laboratories and our participation in CAP’s ongoing proficiency
testing program. CAP is an independent, non- governmental organization of board-certified pathologists that accredits laboratories nationwide
on a voluntary basis and that has been recognized by CMS as an accreditation organization to inspect laboratories to determine adherence to
the CLIA standards. Successful participation in CAP’s proficiency testing program satisfies the CLIA requirement for participation in
proficiency testing programs administered by an external source.
Each of our facilities maintains its own quality assurance processes, which are coordinated across sites to maintain consistency in standard
operating procedures, employee training and safety manuals.
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Third-party Payor Reimbursement
Depending on the billing arrangement and applicable law, we are reimbursed for clinical services by:
•
third-party payors that provide coverage to the patient, such as an insurance company, managed care organization or a governmental
payor program;
physicians or other authorized parties (such as hospitals or independent laboratories) that order the testing service or otherwise refer
the services to us; or
the
patient.
•
•
For the year ended December 31, 2014, we derived approximately 16% of our total revenue from private insurance, including managed care
organizations and other health care insurance providers, 11% from Medicare, and 16% from other health care facilities, including hospitals.
Where there is a coverage policy, contract or agreement in place, we bill the third-party payor, the hospital or referring laboratory as well as the
patient (for deductibles and coinsurance or copayments, where applicable) in accordance with the policy or contractual terms. Where there is
no coverage policy, contract or agreement in place, we pursue reimbursement on behalf of each patient on a case-by-case basis and rely on
applicable billing standards to guide our claims. In addition, we have implemented a new patient financial assistance program (CGI MAP
Program) that complies with Federal guidelines.
We are reimbursed for three categories of tests: (1) genetic and molecular testing; (2) anatomic pathology and IHC and (3) general
immunology and flow cytometry. Reimbursement under the Medicare program for the diagnostic services that we offer is based on either the
Medicare Physician Fee Schedule or Medicare Clinical Laboratory Fee Schedule, each of which in turn is subject to geographic adjustments
and is updated annually. Medical services provided to Medicare beneficiaries that require a degree of physician supervision or other
involvement, such as pathology tests, are generally reimbursed under the Medicare Physician Fee Schedule, whereas clinical diagnostic
laboratory tests are generally reimbursed under the Clinical Laboratory Fee Schedule. Most of the services that we provide are for genetic and
molecular testing, which are reimbursed as clinical diagnostic laboratory tests.
Medicare fee schedule amounts are established for each billing code, or CPT code. In addition, for its laboratory fee schedule, Medicare also
sets a cap on the amount that it will pay for any individual test. This cap, usually referred to as the National Limitation Amount, is set at a
percentage of the median of all the contractor fee schedule amounts for each billing code. In the past, Congress has lowered the percentage of
the median used to calculate the National Limitation Amount in order to achieve budget savings. Currently, the National Limitation Amount
ceiling is set at 74% of the median for established tests and 100% of the median for certain new tests that were not previously reimbursed. In
billing Medicare for clinical laboratory services, we are required to accept, as payment in full, the lowest of our actual charge, the fee schedule
amount for the state or local geographical area or the National Limitation Amount. There is currently no copayment or deductible required for
tests paid under the CLFS, although Congress periodically has considered implementing such a requirement.
In addition, Congress routinely lowers or eliminates the update factor that would otherwise apply to the applicable clinical laboratory fee
schedule (CLFS) payment. For example, under the health care reform legislation, passed in 200-, payments under the CLFS are reduced by
1.75% through 2015 and, in addition, a productivity adjustment, further reducing payment rates is also imposed. In addition, in February
2012, Congress passed the Middle Class Tax Relief and Job Creation Act of 2012, which required that the CLFS be “rebased” by -2%. As a
result of these changes, for 2015 the CLFS was reduced by -.25%.
Further, in 2014, Congress passed the Protecting Access to Medicare Act or PAMA which also makes significant changes in the way the
Medicare will pay for laboratory services. Under PAMA, laboratories will be required to report the amount that they are paid by third party
payors for each test beginning in January 2016. CMS will use this data to calculate a weighted median for each test. That new price will
become effective on January 1, 2017, although any resulting reductions will be phased in over time. This data reporting process will be
repeated every three years for most tests, although Advanced Diagnostic Laboratory Tests (ADLTs) will have to be reported every year. It is
possible that some of our tests could be considered ADLTs, which will require us to report prices annually. In addition, we may also be
required to obtain a code from CMS or an entity that it designates for our tests that have not previously had a code. It is not known at this time
how these changes will affect our reimbursement.
Certain of our tests are paid under the Physician Fee Schedule, rather than the CLFS. Tests paid for under the PFS are based on “relative value
units” established for each service. These RVUs are then multiplied by a conversion factor to arrive at a monetary amount. Each year, CMS
calculates an update to this conversion factor based on a formula included in the Medicare law, referred to as the Sustainable Growth Rate
(SGR) Formula. When it is applied, this SGR formula often would require a decrease in reimbursement unless Congress acts to overturn this
result. As a result, Congress consistently passes legislation to
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prevent implementation of significant cuts that would otherwise be effective. . For 2014, CMS had projected the reimbursement cut resulting
from the SGR formula would be approximately 20 percent, unless Congress acted to prevent the reduction. On December 18, 2013, Congress
passed legislation that enacted a 0.5 percent increase in the conversion factor, which was effective until March 31, 2014. On April 1, 2014,
President Obama signed the Protecting Access to Medicare Act of 2014, or PAMA. PAMA extended the 0.5 percent increase through March
31, 2015 and made other changes to laboratory reimbursement discussed below. Currently, Congress is considering an extension of the
increase enacted by PAMA. If Congress fails to act before March 31, 2015, or if it does not enact a long-term change to the SGR, then future
decreases in the Medicare physician schedule are possible.
Medicare also has policies that may limit when we can bill directly for our services and when we must instead bill another provider, such as a
hospital. When the testing that we perform is done on a specimen that was collected while the patient was in the hospital, as either an inpatient
or outpatient, we may be required to bill the hospital for our services, rather than the Medicare program, depending on whether or not the
service was ordered more than 14 days after the patient’s discharge from the hospital. These requirements are complex and time- consuming
and, depending on what they require, may affect our ability to collect for our services.
Our reimbursement rates can vary based on whether we are considered to be an “in-network” provider, a participating provider, a covered
provider or an “out-of-network” provider. These definitions can vary from insurance company to insurance company, but we are generally
considered an “out of network” or non- participating provider in the vast majority of our cases. It is not unusual for a company that offers
highly specialized or unique testing to be an “out of network” provider. An “in-network” provider usually has a contracted arrangement with
the insurance company or benefits provider. This contract governs, among other things, service-level agreements and reimbursement rates. In
certain instances an insurance company may negotiate an “in-network” rate for our testing rather than pay the typical “out-of-network” rate. An
“in-network” provider usually has rates that are lower per test than those that are “out-of-network”, and that rate is based on the laboratory fee
schedule. The discount rate varies based on the insurance company, the testing type and the often times the specifics of the patient’s insurance
plan.
In May 2013 we entered into an agreement with Multiplan, Inc., a leading provider of healthcare cost management solutions, which we believe
will help us improve reimbursement rates and shorten our collection times. We intend to seek similar arrangements with other health cost care
managers and insurance companies.
In addition, as part of the Middle Class Tax Relief and Job Creation Act of 2012 (“MCTRJCA”), signed into law by the President on
February 22, 2012, Congress eliminated the special billing rule that had allowed laboratories to bill Medicare for the technical component of
certain pathology services furnished to patients of qualifying hospitals. Effective July 1, 2012, independent laboratories, like our laboratory,
are required to bill the hospital, rather than the Medicare Program, for the technical component of these services in most instances.
Billing Codes for Third-party Payor Reimbursement
CPT codes are the main data code set used by physicians, hospitals, laboratories and other health care professionals to report separately-
payable clinical laboratory tests for reimbursement purposes. The CPT coding system is maintained and updated on an annual basis by the
American Medical Association. Although there is no specific code to report microarrays for oncology, such as our MatBA®-CLL, there are
existing codes that describe all of the steps in our MatBA®-CLL testing process. We currently use a combination of different codes to describe
the various steps in our testing process. Many of the CPT codes used to bill for molecular pathology tests such as ours have been significantly
revised by the CPT Code Editorial Panel. These new codes replace the more general “stacking” codes that were previously used to bill for
these services with more test-specific codes, which became effective January 2013. In the Final Physician Fee Schedule Rule, which was
issued in November 2012, CMS stated that it had determined it would pay for the new codes as clinical laboratory tests, which are payable on
the Clinical Laboratory Fee Schedule (CLFS). CMS also stated that it planned to “gapfill” the new codes; that is, it will ask the contractors to
determine a reasonable price for the new codes. This process was completed in 2013, and these tests are now paid for under the new
"gapfilled" rates.
Among the new codes that were created by CPT were a specific subset of codes called Multi-analyte Assays with Algorithmic Analysis
(MAAAs). These tests typically use an algorithm applied to certain specific components to arrive at a score that is used to predict a particular
clinical outcome. CMS recently stated that it will not issue a categorical determination for all MAAA tests, but will consider each individual
test that is classified by the CPT as a MAAA on its own merits. Currently less than 10% of our revenue is derived from tests that may be
considered MAAAs.
As of January 1, 2014 we are utilizing the “Not Otherwise Classified” (NOC) codes when billing for some of our MAAA
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tests. The reimbursement policies for the NOC codes vary from payor to payor with regard to specific tests and many of the payors have
followed suit. This extends our revenue cycle for these particular tests, where the normal timeframe for reimbursement of a claim is
approximately 45-90 days. These tests can take upwards of a year to be reimbursed. There can be no guarantees that Medicare and other
payors will establish positive or adequate coverage policies or reimbursement rates in the future. We are moving forward with plans to obtain
billing codes for our tests. A specific code for our tests, however, does not assure an adequate coverage policy or reimbursement rate. Please
see the section entitled “Legislative and Regulatory Changes Impacting Clinical Laboratory Tests” for further discussion of certain legislative
and regulatory changes to these billing codes and the impact on our business.
Coverage and Reimbursement for Our Proprietary Tests
Although MatBA® is a relatively new test, some third-party payors have established coverage and reimbursement policies set for other
microarray-based tests. We have been able to receive reimbursement for our tests from some payors based on their established policies,
including major commercial third-party payors.
The current landscape with payors is generally as follows:
Commercial Third-party Payors and Patient Pay. Where there is a coverage policy in place, we bill the payor and the patient in accordance
with the established policy. Where there is no coverage policy in place, we pursue reimbursement on behalf of each patient on a case-by-case
basis. Our efforts in obtaining reimbursement based on individual claims, including pursuing appeals or reconsiderations of claims denials,
take a substantial amount of time, and bills may not be paid for many months, if at all. Furthermore, if a third-party payor denies coverage after
final appeal, payment may not be received at all. We are working to decrease risks of nonpayment by implementing a revenue cycle
management system. Third party payors are still establishing payment policies for panel-based tests.
Medicare and Medicaid. We believe that as much as 30% to 40% of our future market for our tests may be derived from patients covered by
Medicare and Medicaid.
We cannot predict whether, or under what circumstances, payors will reimburse our proprietary tests. Payment amounts can also vary across
individual policies. Denial of coverage by payors, or reimbursement at inadequate levels, would have a material adverse impact on market
acceptance of our tests.
Legislative and Regulatory Changes Impacting Clinical Laboratory Tests
From time to time, Congress has revised the Medicare statute and the formulas it establishes for both the Medicare Clinical Laboratory Fee
Schedule and the Physician Fee Schedule. The payment amounts under the Medicare fee schedules are important not only for our
reimbursement under Medicare, but also because the schedule often is used as a basis for establishing the payment amounts set by other third
party payors. For example, state Medicaid programs are prohibited from paying more than the Medicare fee schedule limit for clinical
laboratory services furnished to Medicaid recipients.
Under the statutory formula for clinical laboratory fee schedule amounts, increases are made annually based on the Consumer Price Index for
All Urban Consumers as of June 30 for the previous twelve-month period. From 2004 through 2008, Congress eliminated the Consumer
Price Index for All Urban Consumers update in the Medicare Prescription Drug, Improvement and Modernization Act of 2003. In addition,
for years 2009 through 2013, the Medicare Improvements for Patients and Providers Act of 2008 (“MIPPA”) mandated a 0.5% cut to the
Consumer Price Index for All Urban Consumers. Accordingly, the update for 2009 was reduced to 4.5% and negative 1.9% for 2010. In
March 2010, the President signed into law PPACA, which, among other things, imposed additional cuts to the Medicare reimbursement for
clinical laboratories. The PPACA replaced the 0.5% cut enacted by MIPPA with a “productivity adjustment” that will reduce the Consumer
Price Index update in payments for clinical laboratory tests. In 2011, the productivity adjustment was -1.2%. In addition, the PPACA includes
a separate 1.75% reduction in the CPI update for clinical laboratories for the years 2011 through 2015. On February 22, 2012, President
Obama signed the MCTRJCA, which mandated an additional change in reimbursement for clinical laboratory services payments. This
legislation requires CMS to reduce the Medicare clinical laboratory fee schedule by 2% in 2013, which in turn will serve as a base for 2014
and subsequent years. Based on the changes required by PPACA and MCTRJCA, payment for clinical laboratory services will be reduced by
approximately 0.25% for 2015.
With respect to our diagnostic services for which we are reimbursed under the Medicare Physician Fee Schedule, because of the statutory
formula, the “Sustainable Growth Rate” (SGR), the rates would have decreased for the past several years if Congress failed to intervene. In
the past, when the application of the statutory formula resulted in lower payment, Congress has passed interim legislation to prevent the
reductions. On November 1, 2012, the Centers for Medicare & Medicaid Services
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(CMS) issued its 2013 Physician Fee Schedule Final Rule (the “Final Rule”). In the Final Rule, CMS called for a reduction of approximately
26.5% in the 2013 conversion factor that is used to calculate physician reimbursement. However, the American Taxpayer Relief Act of 2012,
which was signed into law on January 2, 2013, prevented this proposed reduction and kept the existing reimbursement rate in effect until
December 31, 2013.
For 2014, CMS projected the cut would be about 24%, unless Congress acted. However, on December 18, 2013, Congress passed legislation
that enacted a 0.5% update in the conversion factor, which will be effective until March 31, 2014. Currently, Congress is considering a long-
term fix to the SGR, which could eliminate the need for annual Congressional action. On April 1, 2014, President Obama signed the
Protecting Access to Medicare Act of 2014, or PAMA. PAMA extended the 0.5 percent increase through March 31, 2015 and made other
changes to laboratory reimbursement discussed below. Currently, Congress is considering an extension of the increase enacted by PAMA. If
Congress fails to act before March 31, 2015, or if it does not enact a long-term change to the SGR, then future decreases in the Medicare
physician schedule are possible.
In addition to the reductions described above, our Medicare payments under both the CLFS and the PFS are also subject to an additional 2%
reduction, as a result of “sequestration.” This automatic cut results because the Joint Select Committee on Deficit Reduction, which was
created by congress in 2011, was unable to agree on a set of deficit reduction recommendations for Congress to vote on. The reduction is
scheduled to continue until 2024.
For the year ended December 31, 2014 and the year ended December 31, 2013, approximately 11% and 13%, respectively, of our total
revenues are derived from Medicare generally and any changes to the physician fee schedule that result in a decrease in payment could
adversely impact our revenues and results of operations.
In addition, periodically CMS also changes its payment policies related to laboratory reimbursement in ways that could have an impact on the
revenues of the Company. For example, in 2013 Final Rule, CMS included a reduction of certain relative value units and geographic
adjustment factors used to determine reimbursement for a number of commonly used pathology codes, including CPTs 88300, 88302, 88304,
and 88305. In particular, the 2013 Final Rule implemented a cut of approximately 33% in the global billing code for 88305 and a 52% cut in
the Technical Component of that code. These codes describe services that we must perform in connection with our tests and we bill for these
codes in connection with the services that we provide. In the 2013 Final Rule, CMS also announced how it intended to set prices for the new
molecular diagnostic tests, for which the American Medical Association had adopted over 100 new codes. In that Rule, CMS announced it
intended to continue to pay for the new molecular codes on the CLFS rather than move them to the Physician Fee Schedule, as some
stakeholders had urged. It would then request that the Medicare Administrative Contractors “gapfill” the new codes and set an appropriate
price for them. That “gapfilling” process took place over 2013 and CMS announced the new prices for these codes in September, 2013. The
median of the prices set by the contractors will become the new prices for these codes, effective January 1, 2014. We do not yet know what
impact, if any, these changes will have on the Company’s operations.
In the Proposed Physician Fee Schedule Rule for 2014, issued on July 8, 2013, CMS made two proposals that could affect laboratory
reimbursement. First, CMS made a proposal to change how it calculates the RVUs used to calculate payments under the PFS. Under this
proposal, where a service was paid at a lower rate in the hospital based on the hospital Outpatient Prospective Payment System (OPPS) than it
is under the PFS, CMS proposed to reduce the RVUs for that service in order to equalize the payment between the two systems. This change,
if implemented, would have resulted in approximately a 25% cut in aggregate payments to independent laboratories. In the Final Physician
Rule for 2014, however, CMS chose not to implement this proposal, although it stated that it would develop a revised proposal that it would
propose in the future. At this point, it is impossible to know what the impact of such a proposal might be on the Company.
In addition, in the 2014 Proposed Rule, CMS also noted that payments for many codes paid under the Clinical Laboratory Fee Schedule have
not been revised to reflect technological advances that have occurred since the CLFS was first developed in 1984. CMS therefore proposed
that it would begin to review all codes on the CLFS and adjust them to reflect technological changes, a process that it expected would take
about five years. However, in April of 2014, Congress passed the Protecting Access to Medicare Act, which eliminated CMS’s authority to
implement its plan to adjust payments based on technological advances. CMS has since stated it will not implement this proposal.
In PAMA, Congress also changed the way the Medicare will pay for clinical laboratory services. Under PAMA, laboratories will be required
to report the amount that they are paid by third party payors for each test beginning in January 2016. CMS will use this data to calculate a
weighted median for each test. That new price will become effective on January 1, 2017, although any resulting reductions will be phased in
over time. This data reporting process will be repeated every three years for most tests, although Advanced Diagnostic Laboratory Tests
(“ADLTs”) will have to report every year. It is possible that some of our tests could be considered ADLTs, which will require us to report
prices annually. In addition, we may also be required to obtain
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a code from CMS or an entity that it designates for our tests that have not previously had a code. It is not known at this time how these
changes will affect our reimbursement.
In addition, CMS made several other changes in the 2014 Final Rule that could impact our business. First, CMS implemented a policy that
will bundle payment for the examination of 10 or more prostate biopsies for an individual patient, rather than paying separately for each
individual procedure as had been done previously. This will result in a significant reduction in reimbursement on each of these procedures. In
addition, CMS also has developed new codes applicable to billing for Immunohistochemistry procedures, which are a common staining
procedure used in pathology. Those codes will reduce the reimbursement that we will receive when we provide these services. Finally, CMS
has also implemented a set of edits under its National Correct Coding Initiative, which will only pay for a single unit of service when we
perform a FISH (Fluorescent In Situ Hybridization) test. As many FISH tests require two or more probes, this change will also reduce the
reimbursement received by the Company. We are still reviewing the provisions to determine the impact of these changes.
Further, with respect to the Medicare Program, Congress has proposed on several occasions to impose a 20% coinsurance on patients for
clinical laboratory tests reimbursed under the clinical laboratory fee schedule, which would require us to bill patients for these amounts.
Because of the relatively low reimbursement for many clinical laboratory tests, in the event that Congress were to ever enact such legislation,
the cost of billing and collecting for these services would often exceed the amount actually received from the patient and effectively increase
our costs of billing and collecting.
Finally, some of our Medicare claims may be subject to policies issued by Palmetto GBA, the current Medicare Administrative Contractor for
North Carolina, South Carolina, Virginia and West Virginia. The Medicare contractor has recently issued a Local Coverage Decision that
affects coverage, coding and billing of many molecular diagnostic tests. Under this Local Coverage Determination, Palmetto will not cover any
molecular diagnostic tests, including our tests, unless the test is expressly included in a National Coverage Determination issued by CMS or a
Local Coverage Determination or coverage article issued by Palmetto. Currently, laboratory providers may submit coverage determination
requests to Palmetto for consideration and apply for a unique billing code for each test (which is a separate process from the coverage
determination). In the event that a non-coverage determination is issued, the laboratory must wait six months following the determination to
submit a new request. In addition, effective May 1, 2012, Palmetto implemented its new Molecular Diagnostic Services Program, under
which, among other things, laboratories must use newly-assigned billing codes specific to the test. These new billing codes enable Palmetto to
measure utilization and apply coverage determinations. Denial of coverage by Palmetto, or reimbursement at inadequate levels, would have a
material adverse impact on market acceptance of our tests. Other Medicare contractors are also following the policies adopted by Palmetto.
Governmental Regulations
Clinical Laboratory Improvement Amendments of 1988 and State Regulation
As a diagnostic service provider, we are required to hold certain federal, state and local licenses, certifications and permits to conduct our
business. As to federal certifications, in 1988, Congress passed the Clinical Laboratory Improvement Amendments (“CLIA”) establishing
quality standards for all laboratories testing to ensure the accuracy, reliability and timeliness of patient test results regardless of where the test
was performed. The Company’s laboratory is CLIA accredited. As to state laws, we are required to meet certain laboratory licensing and other
requirements. Our laboratory holds the required licenses and accreditations obtained from the applicable state agencies in which we operate.
For more information on state licensing requirements, see the sections entitled “Description of the Business-Government Regulations-New
Jersey and New York State Laboratory Licensing” and “Description of the Business-Government Regulations-Other States’ Laboratory
Testing”. Under CLIA, a laboratory is defined as any facility which performs laboratory testing on specimens derived from humans for the
purpose of providing information for the diagnosis, prevention or treatment of disease, or the impairment of, or assessment of health. CLIA
also requires that we hold a certificate applicable to the type of work we perform and comply with certain standards. CLIA further regulates
virtually all clinical laboratories by requiring they be accredited by the federal government and comply with various operational, personnel,
facilities administration, quality and proficiency requirements intended to ensure that their clinical laboratory testing services are accurate,
reliable and timely. CLIA compliance and accreditation is also a prerequisite to be eligible to bill for services provided to governmental payor
program beneficiaries. CLIA is user-fee funded. Therefore, all costs of administering the program must be covered by the regulated facilities,
including certification and survey costs.
We are subject to survey and inspection every two years to assess compliance with program standards, and may be subject to additional
unannounced inspections. Laboratories performing high complexity testing are required to meet more stringent requirements than laboratories
performing less complex tests. In addition, a laboratory like ours that is certified as “high complexity” under CLIA may obtain analyte specific
reagents, which are used as the basis for diagnostic tests that are developed and validated for use in examinations the laboratory performs itself
known as laboratory-developed tests (“LDTs”).
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Our laboratory is CLIA accredited and under our CLIA accreditation, we were allowed to first use MatBA®-CLL in November 2010 and
MatBA®-SLL in the first quarter 2012.
In addition to CLIA requirements, we participate in the oversight program of the College of American Pathologists (“CAP”). Under CMS
requirements, accreditation by CAP is sufficient to satisfy the requirements of CLIA. Therefore, because we are accredited by CAP, we are
deemed to also comply with CLIA. CLIA also provides that a state may adopt laboratory regulations that are more stringent than those under
federal law, and a number of states have implemented their own more stringent laboratory regulatory schemes. State laws may require that
laboratory personnel meet certain qualifications, specify certain quality controls, or prescribe record maintenance requirements.
FDA
The U.S. Food and Drug Administration (“FDA”) regulates the sale or distribution, in interstate commerce, of medical devices under the
Federal Food, Drug, and Cosmetic Act (“FDCA”), including in vitro diagnostic test kits, reagents and instruments used to perform diagnostic
testing. Such devices must undergo pre-market review by FDA prior to commercialization unless the device is of a type exempted from such
review by statute or pursuant to FDA’s exercise of enforcement discretion. FDA, to date, has not exercised its authority to actively regulate the
development and use of LDTs such as ours as medical devices and therefore we do not believe that our LDTs currently require pre-market
clearance or approval.
Section 1143 of the Food and Drug Administration Safety and Innovation Act, signed by the President on July 9, 2012, requires FDA to
notify Congress at least 60 days prior to issuing a draft or final guidance regulating LDTS and provide details of the anticipated action. On
July 31, 2014, FDA notified Congress pursuant to the FDASIA that it intended to issue draft Guidances that would regulate LDTs. On
October 3, 2014, the FDA issued two separate draft guidances: “Framework for Regulatory Oversight of Laboratory Developed Tests
(LDTs)” (“The Framework Draft Guidance”) and “FDA Notification and Medical Device Reporting for Laboratory Developed Tests” (the
“Notification Draft Guidance.”). In the Framework Draft Guidance, FDA states that after the Guidances are finalized, it will no longer exercise
enforcement discretion with respect to most LDTs and will, instead, regulate them in a risk-based manner consistent with the existing
classification of medical devices. Thus, the FDA plans to begin to enforce its medical device requirements, including premarket submission
requirements, on LDTs that have historically been marketed without FDA premarket review and oversight. Comments on the Draft Guidances
were due on February 2 and those comments are now being considered by the FDA. It is not known when the FDA may issue final
Guidances or what form those Guidances may take.
The Framework Draft Guidance states that within six months after the Guidances are finalized, all laboratories will be required to give notice
to the FDA and provide basic information concerning the nature of the LDTs offered. The FDA will then begin a phased review of the LDTs
available, based on the risk associated with the test. For the highest risk LDTs, which the FDA classifies as Class III devices, the Framework
Draft Guidance states that the FDA will begin to require premarket review within 12 months after the Guidance is finalized. Other high risk
LDTs will be reviewed over the next four years and then lower risk tests, which will be classified as Class II, will be reviewed in the
following four to nine years. The Framework Draft Guidance states that FDA expects to issue a separate Guidance describing the criteria for
its risk-based classification 18-24 months after the Guidances are finalized.
If the FDA regulates LDTs as proposed, then it would classify LDTs according to the current system used to regulate medical devices. Under
that system, there are three different classes of medical devices, with the requirements becoming more stringent depending on the Class. Class
I devices are those for which reasonable assurance of the safety and effectiveness can be provided by adherence to FDA’s general regulatory
controls for medical devices, which include compliance with the applicable portions of FDA’s Quality System Regulations, facility registration
and product listing, reporting of adverse medical events and appropriate, truthful and non-misleading labeling, advertising and promotional
materials, or general controls. Many Class I devices are exempt from pre-market regulation, however, some Class I devices require pre-market
clearance by FDA through the 510(k) pre-market notification process described below.
Class II devices are subject to FDA’s general controls, and any other special controls as deemed necessary by FDA to provide reasonable
assurance of the safety and effectiveness of the devices. Pre-market review and clearance by FDA for Class II devices are generally
accomplished through the 510(k) pre-market notification procedure. Pre- market notification submissions are subject to user fees, unless a
specific exemption applies. To obtain 510(k) clearance for a medical device (or for certain modifications to devices that have received 510(k)
clearance), a manufacturer must submit a pre-market notification demonstrating that the proposed device is substantially equivalent to a
previously cleared 510(k) device or to a pre-amendment device that was in commercial distribution before May 28, 1976 (a “predicate device”)
for which FDA has not yet called for the submission of a pre-market approval (“PMA”) application. In making a determination that the device
is substantially equivalent to a predicate device, FDA compares the proposed device to the predicate device or predicate devices
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and assesses whether the subject device is comparable to the predicate device or predicate devices with respect to intended use, technology,
design and other features which could affect the safety and effectiveness. If FDA determines that the subject device is substantially equivalent
to the predicate device or predicate devices, the subject device may be cleared for marketing. FDA’s 510(k) clearance pathway generally takes
from three to twelve months from the date the application is completed, but can take significantly longer. Moreover, in January 2011, FDA
announced twenty-five specific action items it intended to take to improve transparency and predictability of the 510(k) program. We anticipate
that the changes may also result in additional requirements with which manufacturers will need to comply in order to obtain or maintain 510(k)
clearance for their devices. These additional requirements could increase the costs or time for manufacturers’ seeking marketing clearances
through the 510(k) process. Moreover, the 510(k) process could result in a not-substantially equivalent determination, in which case the device
would be regulated as a Class III device, discussed below, or could be eligible for de novo classification available for novel low and moderate
risk devices. In the de novo process, FDA can classify a device into Class I or Class II based on a risk- based determination without the
submission of a 510(k) or within 30 days after receipt of a not-substantially equivalent determination. In 2013, several assays and diagnostic
tests received pre-market approval through the de novo process.
Class III devices are those devices which are deemed by FDA to pose the greatest risk, such as life-sustaining, life-supporting or implantable
devices, have a new intended use, or use advanced technology that is not substantially equivalent to that of a legally marketed device.
Reasonable assurance of the safety and effectiveness of Class III devices cannot be assured solely by the general controls and the other
requirements described above. These devices are required to undergo the pre-market approval (“PMA”) process in which the manufacturer
must demonstrate reasonable assurance of the safety and effectiveness of the device to FDA’s satisfaction. A PMA application must provide
extensive preclinical and clinical trial data and also information about the device and its components regarding, among other things, device
design, manufacturing and labeling. Premarket approval applications (and supplemental pre-market approval applications) are subject to
significantly higher user fees than are 510(k) pre-market notifications. After approval of a PMA, a new PMA or PMA supplement is required
in the event of a modification to the device, its labeling or its manufacturing process. The PMA process, including the gathering of clinical and
nonclinical data and the submission to and review by FDA, can take several years.
A clinical trial may be required in support of a 510(k) submission and generally is required for a PMA application. These trials generally
require an effective Investigational Device Exemption from FDA for a specified number of patients, unless the product is exempt from
Investigational Device Exemption requirements or deemed a non-significant risk device eligible for more abbreviated Investigational Device
Exemption requirements. The Investigational Device Exemption application must be supported by appropriate data, such as animal and
laboratory testing results. Clinical trials may begin 30 days after the submission of the Investigational Device Exemption application unless
FDA or the appropriate institutional review boards at the clinical trial sites place the trial on clinical hold.
Under the Guidances, LDTs would also be subject to significant post-market requirements as well. After a device is placed on the market,
regardless of the classification or pre-market pathway, it remains subject to significant regulatory requirements. Even if regulatory approval or
clearance of a medical device is granted, FDA may impose limitations or restrictions on the uses and indications for which the device may be
labeled and promoted. Medical devices may be marketed only for the uses and indications for which they are cleared or approved.
Device manufacturers must also establish registration and device listings with FDA. A medical device manufacturer’s manufacturing
processes and those of its suppliers are required to comply with the applicable portions of the Quality Systems Regulations, which cover the
methods and documentation of the design, testing, production, processes, controls, quality assurance, labeling, packaging and shipping of
medical devices. Domestic facility records and manufacturing processes are subject to periodic unscheduled inspections by FDA. FDA also
may inspect foreign facilities that export products to the United States.
Failure to comply with applicable regulatory requirements can result in enforcement action by FDA, which may include any of the following
sanctions: warning letters, fines, injunctions, civil or criminal penalties, recall or seizure of current or future products, operating restrictions,
partial suspension or total shutdown of production, denial of 510(k) clearance or PMA applications for new products, or challenges to existing
510(k) clearances or PMA applications.
We are monitoring developments and anticipate that our products (CGH-Microarrays and FISH Probes) will be able to comply with
requirements that are ultimately imposed by the FDA. In the meantime, we maintain our CLIA accreditation, which permits the use of LDTs
for diagnostics purposes.
We believe that our LDTs and, should we reach that point, our in vitro diagnostic test kits, would likely be regulated as either Class II or Class
III devices should FDA decide to proceed in the way that it has outlined in the Guidances. It is also possible
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under those circumstances that some may fall into one Class and some into the other. Accordingly, some level of premarket review-either a
510(k), PMA or de novo approval-would likely be required for each test. While the data requirements are typically greater for Class III
devices, the data required for Class II devices has increased, and it is likely that some amount of clinical data (retrospective or prospective or
both) would be required for either type of submission. FDA continues to review the adequacy of its 510(k) process. It is difficult to predict
what changes may result, but it should be assumed that any changes will increase, not decrease, the regulatory requirements.
In addition to the Draft Guidances discussed above, the FDA has taken other actions that could have an impact on our business. In 2013,
FDA issued Final Guidance for industry regarding appropriate labeling and distribution practices for in vitro diagnostic products intended for
research or investigational use only. FDA’s guidance cautions that labeling or distribution practices that conflict with research or
investigational use (e.g., use in clinical diagnostic applications) could subject products shipped with research or investigational use labeling to
all applicable requirements of the FDCA as well as enforcement action. As a result of FDA’s recent guidance, component suppliers for our
LDTs may no longer be willing to distribute components to our clinical laboratory. If this were to occur, we could not produce our LDTs.
On August 6, 2014, the FDA also issued its Final Guidance on In Vitro Companion Diagnostic Devices. According to the Guidance,
companion diagnostic devices are in vitro diagnostic devices that provide information that is essential for the safe and effective use of a
corresponding therapeutic product. The Guidance notes that in most circumstances, FDA expects to approve or clear a companion diagnostic
device and its corresponding therapeutic product contemporaneously, based on the label of the therapeutic product. If it were determined that
our tests qualified as Diagnostic Devices then we might be required to file for either a 510(k) or a PMA, depending on the nature of the
particular test.
Health Insurance Portability and Accountability Act, as amended by the Health Information Technology for Economic and Clinical Health
Act (“HITECH”)
Under the administrative simplification provisions of HIPAA, as amended by HITECH, the United States Department of Health and Human
Services has issued regulations which establish uniform standards governing the conduct of certain electronic health care transactions and
protecting the privacy and security of Protected Health Information used or disclosed by health care providers and other covered entities. For
further discussion of HIPAA and the impact on our business, see the section entitled “Risk Factors-Risks Related to Our Business-We are
required to comply with laws governing the transmission, security and privacy of health information that require significant compliance
costs, and any failure to comply with these laws could result in material criminal and civil penalties.”
Federal, State and Foreign Fraud and Abuse Laws
The federal Anti-Kickback Statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving
remuneration to induce or in return for purchasing, leasing, ordering or arranging for the purchase, lease or order of any health care item or
service reimbursable under a governmental payor program. The definition of “remuneration” has been broadly interpreted to include anything
of value, including gifts, discounts, credit arrangements, payments of cash, waivers of co-payments, ownership interests and providing
anything at less than its fair market value. Recognizing that the Anti-Kickback Statute is broad and may technically prohibit many innocuous
or beneficial arrangements within the health care industry, the Department of Health and Human Services has issued a series of regulatory
“safe harbors.” These safe harbor regulations set forth certain provisions, which, if met, will assure health care providers and other parties that
they will not be prosecuted under the federal Anti- Kickback Statute. Although full compliance with these provisions ensures against
prosecution under the federal Anti-Kickback Statute, the failure of a transaction or arrangement to fit within a specific safe harbor does not
necessarily mean that the transaction or arrangement is illegal or that prosecution under the federal Anti-Kickback Statute will be pursued. For
further discussion of the impact of federal and state health care fraud and abuse laws and regulations on our business, see the section entitled
“Risk Factors-Risks Related to Our Business-We are subject to federal and state health care fraud and abuse laws and regulations and could
face substantial penalties if we are unable to fully comply with such laws.”
In addition to the administrative simplification regulations discussed above, HIPAA also created two new federal crimes: health care fraud and
false statements relating to health care matters. The health care fraud statute prohibits knowingly and willfully executing a scheme to defraud
any health care benefit program, including private payors. A violation of this statute is a felony and may result in fines, imprisonment or
exclusion from governmental payor programs such as the Medicare and Medicaid programs. The false statements statute prohibits knowingly
and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in
connection with the delivery of or payment for health care benefits, items or services. A violation of this statute is a felony and may result in
fines, imprisonment or exclusion from governmental payor programs.
Finally, another development affecting the health care industry is the increased enforcement of the federal False Claims Act
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and, in particular, actions brought pursuant to the False Claims Act’s “whistleblower” or “qui tam” provisions. The False Claims Act imposes
liability on any person or entity that, among other things, knowingly presents, or causes to be presented, a false or fraudulent claim for
payment by a federal governmental payor program. The qui tam provisions of the False Claims Act allow a private individual to bring actions
on behalf of the federal government alleging that the defendant has defrauded the federal government by submitting a false claim to the federal
government and permit such individuals to share in any amounts paid by the entity to the government in fines or settlement. In addition,
various states have enacted false claim laws analogous to the federal False Claims Act, although many of these state laws apply where a claim
is submitted to any third-party payor and not merely a governmental payor program. When an entity is determined to have violated the False
Claims Act, it may be required to pay up to three times the actual damages sustained by the government, plus civil penalties ranging from
$5,500 to $11,000 for each false claim.
Additionally, in Europe various countries have adopted anti-bribery laws providing for severe consequences, in the form of criminal penalties
and/or significant fines, for individuals and/or companies committing a bribery offence. Violations of these anti-bribery laws, or allegations of
such violations, could have a negative impact on our business, results of operations and reputation. For instance, in the United Kingdom,
under the new Bribery Act 2010, which went into effect in July 2011, a bribery occurs when a person offers, gives or promises to give a
financial or other advantage to induce or reward another individual to improperly perform certain functions or activities, including any function
of a public nature. Bribery of foreign public officials also falls within the scope of the Bribery Act 2010. Under the new regime, an individual
found in violation of the Bribery Act of 2010, faces imprisonment of up to 10 years. In addition, the individual can be subject to an unlimited
fine, as can commercial organizations for failure to prevent bribery.
Physician Referral Prohibitions
Under a federal law directed at “self-referral,” commonly known as the “Stark Law,” there are prohibitions, with certain exceptions, on
Medicare and Medicaid payments for laboratory tests referred by physicians who personally, or through a family member, have an investment
or ownership interest in, or a compensation arrangement with, the clinical laboratory performing the tests. A person who engages in a scheme
to circumvent the Stark Law’s referral prohibition may be fined up to $100,000 for each such arrangement or scheme. In addition, any person
who presents or causes to be presented a claim to the Medicare or Medicaid programs in violation of the Stark Law is subject to civil monetary
penalties of up to $15,000 per bill submission, an assessment of up to three times the amount claimed and possible exclusion from
participation in federal governmental payor programs. Bills submitted in violation of the Stark Law may not be paid by Medicare or Medicaid,
and any person collecting any amounts with respect to any such prohibited bill is obligated to refund such amounts. Many states have
comparable laws that are not limited to Medicare and Medicaid referrals.
Corporate Practice of Medicine
Numerous states have enacted laws prohibiting business corporations, such as us, from practicing medicine and employing or engaging
physicians to practice medicine, generally referred to as the prohibition against the corporate practice of medicine. These laws are designed to
prevent interference in the medical decision-making process by anyone who is not a licensed physician. Violation of these laws may result in
civil or criminal fines, as well as sanctions imposed against us and/or the professional through licensure proceedings.
New Jersey and New York State Laboratory Licensing
Our laboratory is licensed and in good standing under both the New Jersey and the New York State Departments of Health standards. Our
current licenses permit us to receive specimens obtained in those states.
New Jersey and New York state laws and regulations also establish standards for the day-to-day operations of clinical laboratories, including
physical facility requirements and equipment and quality control. New York standards include proficiency testing requirements, even for a
laboratory not located in New York. In addition, the New York Department of Health separately approves certain LDTs offered in New York
State. The Company has obtained the requisite approvals for its LDTs. If we are found to be out of compliance with New Jersey or New York
statutory or regulatory standards we may be subject to suspension, restriction or revocation of our laboratory license or assessed civil money
penalties. A noncompliant laboratory may also be found guilty of a misdemeanor under New Jersey and New York laws. A finding of
noncompliance, therefore, may result in harm to our business.
Other States’ Laboratory Testing
In addition to New York, several other states require the licensure of out-of-state laboratories that accept specimens from those states, even
though we are physically located in New Jersey. We have obtained licenses in these states and believe we are in compliance with their
applicable licensing laws. Among the other states that require our laboratory to be licensed is the State of California. We believe we are
currently in compliance with these requirements.
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From time to time, other states may require out of state laboratories to obtain licensure in order to accept specimens from the state. If we
identify any other state with such requirements or if we are contacted by any other state advising us of such requirements, we intend to follow
instructions from the state regulators as to how we should comply with such requirements.
Other Regulatory Requirements
Our laboratory is subject to federal, state and local regulations relating to the handling and disposal of regulated medical waste, hazardous
waste and biohazardous waste, including chemical, biological agents and compounds, blood and bone marrow samples and other human
tissue. Typically, we use outside vendors who are contractually obligated to comply with applicable laws and regulations to dispose of such
waste. These vendors are licensed or otherwise qualified to handle and dispose of such waste.
OSHA has established extensive requirements relating to workplace safety for health care employers, including requirements to develop and
implement programs to protect workers from exposure to blood-borne pathogens by preventing or minimizing any exposure through needle
stick or similar penetrating injuries.
Segment and Geographical Information
We operate in one reportable business segment and derive revenue from multiple countries, with 97%, 97% and 92% coming from the United
States in fiscal year 2014, 2013 and 2012, respectively.
Employees
As of December 31, 2014, we had a total of 139 full-time and 10 part-time employees, 35% of which hold graduate degrees including 20
doctorate degrees and 14 of which are engaged in full-time research and development activities. We plan to expand production, sales and
marketing and our research and development programs, and we plan to hire additional staff as these initiatives are implemented. None of our
employees are represented by a labor union, and we consider our employee relations to be good.
Corporate and Available Information
We were incorporated in the State of Delaware on April 8, 1999. On July 16, 2014 we purchased substantially all of the assets of Gentris
Corporation ("Gentris"), a laboratory specializing in pharmacogenomics profiling for therapeutic development, companion diagnostics and
clinical trials. On August 18, 2014 we entered into two agreements by which we acquired BioServe Biotechnologies (India) Pvt. Ltd.
(“BioServe”), a premier genomics services provider serving both the research and clinical markets in India, and as a result of the acquisition,
BioServe became a subsidiary of ours.
Our principal executive offices are located at 201 Route 17 North, 2nd Floor, Rutherford, New Jersey 07070. Our telephone number is (201)
528-9200 and our corporate website address is www.cancergenetics.com. We include our website address in this annual report on Form 10-K
only as an inactive textual reference and do not intend it to be an active link to our website. The information on our website is not incorporated
by reference in this annual report on Form 10-K.
This annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports, as well
as other documents we file with the U.S. Securities and Exchange Commission (“SEC”), are available free of charge through the Investors
section of our website as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. The public can
obtain documents that we file with the SEC at www.sec.gov.
This report includes the following trademarks, service marks and trade names owned by us: MatBA®, UroGenRA®, FHACT®, FReCaD™,
Expand Dx™, Summation™, Select One®, DLBCL Complete™, Cervixcyte™, Leuka™, CGI®, CLL Complete®, and Empowering Personal
Cancer Treatment®. These trademarks, service marks and trade names are the property of Cancer Genetics, Inc. and its affiliates.
Item 1A.
Risk Factors.
Risks Relating to Our Financial Condition and Capital Requirements
We are an early stage company with a history of net losses; we expect to incur net losses in the future, and we may never achieve
sustained profitability.
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We have historically incurred substantial net losses. We incurred losses of $16.6 million, $12.4 million and $6.7 million for fiscal years ended
December 31, 2014, 2013 and 2012, respectively. From our inception in April 1999 through December 31, 2014, we had an accumulated
deficit of $78.0 million. We expect our losses to continue principally as a result of ongoing research and development expenses and increased
sales and marketing costs. These losses have had, and will continue to have, an adverse effect on our working capital, total assets and
stockholders’ equity. Because of the numerous risks and uncertainties associated with our research, development and commercialization
efforts, we are unable to predict when we will become profitable, and we may never become profitable. Even if we do achieve profitability, we
may not be able to sustain or increase profitability on a quarterly or annual basis. Our inability to achieve and then maintain profitability would
negatively affect our business, financial condition, results of operations and cash flows.
We may need to raise additional capital to fund our existing operations, to develop, validate and commercialize new tests and
technologies, to expand our operations and repay indebtedness.
We may need to raise additional financing to fund our current level of operations. For the year ended December 31, 2014, net cash used in
operating activities was $12.3 million. We also need capital to fund our capital contributions of up to $4.0 million to our joint venture with
Mayo and to satisfy indebtedness of approximately $6.0 million due to Wells Fargo Bank. We believe that our current cash will support our
operations for 24 months. We can provide no assurances 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 and research and development activities are forward-
looking statements and involve risks and uncertainties.
Additional financing, which is not in place at this time, may be from the sale of equity or convertible or other debt securities in a public or
private offering, from an additional or new credit facility or from strategic partnership coupled with an investment in us or a combination of
forms. We may be unable to raise sufficient additional financing on terms that are acceptable to us, if at all. Our failure to raise additional
capital and in sufficient amounts when needed may significantly impact our ability to expand our business. For further discussion of our
liquidity requirements, see the section entitled “Liquidity and Capital Resources—Capital Resources and Expenditure Requirements”.
We also may need to raise capital to expand our business to meet our long-term business objectives, including to:
•
•
•
•
•
•
•
•
increase our sales and marketing efforts to drive market adoption and address competitive
developments;
fund development, validation and marketing efforts of current and future
tests;
comply with current and evolving regulatory
requirements;
further expand our clinical laboratory
operations;
expand our technologies into other types of
cancer;
acquire, license or invest in
technologies;
acquire or invest in complementary businesses or assets;
and
finance capital expenditures and general and administrative
expenses.
Our present and future funding requirements and our forecast of the period of time through which our current financial resources will be
adequate to support our operations will depend on many factors, including:
•
•
•
•
•
•
•
•
•
our ability to achieve revenue
growth;
our ability to obtain approvals for our new diagnostic
tests;
our ability to execute on our marketing and sales strategy for our genomic tests and gain acceptance of our tests 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 and outcomes of the clinical trials of our diagnostic
tests;
the costs of operating and enhancing our laboratory
facilities;
the costs for funding the operations we recently acquired and our ability to successfully integrate those operations with and into our
own;
the costs of additional general and administrative
personnel;
the timing of and the costs involved in regulatory compliance. particularly in the regulations
change;
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•
•
•
•
•
•
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 NGS panels, microarrays and FHACT®
probe;
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 international expansion;
and
our ability to secure financing and the amount
thereof.
The various ways we could raise additional capital carry potential risks. If we raise funds by issuing equity securities, dilution to our
stockholders could result. Any equity securities issued also could provide for rights, preferences or privileges senior to those of holders of our
common stock. If we raise funds by issuing debt securities, those debt securities would have rights, preferences and privileges senior to those
of holders of our common stock. The terms of debt securities issued or borrowings pursuant to a credit agreement could impose significant
restrictions on our operations and increase our interest expense. If we raise funds through collaborations and licensing arrangements, we might
be required to relinquish significant rights to our technologies or tests, or grant licenses on terms that are not favorable to us.
Additional equity or debt financing might not be available on reasonable terms, if at all. If we cannot secure additional funding when needed,
we may have to delay, reduce the scope of or eliminate one or more research and development programs or sales and marketing initiatives. In
addition, we may have to work with a partner on one or more of our development programs, which could lower the economic value of those
programs to us.
Risks Relating to Our Business and Strategy
If we are unable to increase sales of our laboratory tests and services or to successfully develop and commercialize other proprietary
tests, our revenues will be insufficient for us to achieve profitability.
We currently derive substantially all of our revenues from our laboratory testing services. We have only recently begun offering our
proprietary NGS panels and microarrays through our CLIA-accredited and state licensed laboratory. We also only recently launched
FHACT™ for use as a diagnostic tool for cervical cancer in non-U.S. markets. We are in varying stages of research and development for
other diagnostic tests that we may offer.
We also have only recently begun to provide our Biopharma Services and Discovery Services. Biopharma Services are services and tests
provided to biopharmaceutical companies and clinical research organizations in connection with phase I, phase II or phase III studies for
development of therapeutic drugs. The nature of these services is that they tend to come in relatively large projects but episodically, rather than
providing steady sources of revenues. It is unclear at this stage of our development whether we will be able to maintain and grow the number
of biopharmaceutical companies and clinical research organizations who will avail themselves of our services, or how regular a flow of drug
development projects we will be able to obtain from existing customers.
If we are unable to increase sales of our laboratory tests and services or to successfully develop, validate and commercialize other diagnostic
tests, we will not produce sufficient revenues to become profitable.
Our quarterly operating results may be subject to significant fluctuations and may be difficult to forecast.
In recent years, we have been expanding our Biopharma Services and Discovery Services business. The nature of these services is that they
tend to come in relatively large projects but episodically, rather than providing steady sources of revenues. The timing, size and duration of our
contracts with biopharmaceutical companies and clinical research organizations depend on the size, pace and duration of such customer’s
clinical trial, over which we have no control and sometimes limited visibility. In addition, our expense levels are based, in part, on expectation
of future revenue levels. A shortfall in expected revenue could, therefore, result in a disproportionate decrease in our net income. As a result,
our quarterly operating results may be subject to significant fluctuations and may be difficult to forecast.
If pathologists and oncologists decide not to order our diagnostic tests and/or biopharmaceutical companies and clinical research
organizations decide not to use our diagnostic tests and services in connection with their clinical trials, we may be unable to generate
sufficient revenue to sustain our business.
To generate demand for our Clinical Services, we will need to educate oncologists and pathologists on the clinical utility, benefits and value of
each type of test we provide through published papers, presentations at scientific conferences and one-on-
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one education sessions by members of our sales force. In addition, we will need to assure oncologists and pathologists of our ability to obtain
and maintain adequate reimbursement coverage from third-party payors. To generate demand for our Biopharma Services and Discovery
Services, we need to educate biopharmaceutical companies and clinical research organizations on the utility of our genomic-based tests and
services to improve the outcomes of clinical trials for new oncology drugs and more rapidly advance targeted therapies through the clinical
development process through published papers, presentations at scientific conferences and one-on-one education sessions by members of our
sales force. We may need to hire additional commercial, scientific, technical and other personnel to support this process. If we cannot convince
medical practitioners, biopharmaceutical companies or clinical research organizations to order our diagnostic tests or other future tests we
develop, we will likely be unable to create demand for our tests in sufficient volume for us to achieve sustained profitability.
If we are unable to successfully validate our laboratory tests and services, we will not be able to increase revenues.
Pathologists and oncologists may not order our proprietary tests unless we are able to provide compelling evidence that the tests are useful to
patient treatment and produce actionable information with respect to the diagnosis, prognosis and theranosis of the various cancers on which
our work is focused. In addition, biopharmaceutical companies and clinical research organizations may not order our proprietary tests unless
we are able to provide compelling evidence that such tests improve the outcomes of clinical trials for new oncology drugs and allow
biopharmaceutical companies to more rapidly advance targeted therapeutics. While we have validated all of the tests that we currently offer, we
believe that we will need to finance and successfully complete additional and more powerful studies, and then effectively disseminate the
results of those studies, to drive widespread adoption of our tests and thereby increase our revenues.
The commercial success of our Clinical Services business could be compromised if third-party payors, including managed care
organizations and Medicare, do not provide coverage and reimbursement, breach, rescind or modify their contracts or reimbursement
policies or delay payments for our molecular diagnostic tests.
Pathologists and oncologists may not order our molecular diagnostic tests unless third-party payors, such as managed care organizations and
government payors, such as Medicare and Medicaid, pay a substantial portion of the test price. Coverage and reimbursement by a third-party
payor may depend on a number of factors, including a payor’s determination that tests using our technologies are:
•
not experimental or
investigational;
•
•
• medically
necessary;
appropriate for the specific
patient;
cost-
effective;
supported by peer-reviewed publications;
and
included in clinical practice
guidelines.
•
•
Uncertainty surrounds third-party payor reimbursement of any test incorporating new technology, including tests developed using our
microarrays and NGS panels. Technology assessments of new medical tests and devices conducted by research centers and other entities may
be disseminated to interested parties for informational purposes. Third-party payors and health care providers may use such technology
assessments as grounds to deny coverage for a test or procedure.
Because each payor generally determines for its own enrollees or insured patients whether to cover or otherwise establish a policy to
reimburse our diagnostic tests, seeking payor approvals is a time-consuming and costly process. We cannot be certain that coverage for our
tests will be provided in the future by additional third-party payors or that existing contracts, agreements or policy decisions or reimbursement
levels will remain in place or be fulfilled under existing terms and provisions. If we cannot obtain coverage and reimbursement from private
and governmental payors such as Medicare and Medicaid for our current tests, or new tests or test enhancements that we may develop in the
future, our ability to generate revenues from our clinical services could be limited, which may have a material adverse effect on our financial
condition, results of operations and cash flow. Further, we have experienced in the past, and will likely experience in the future, delays and
temporary interruptions in the receipt of payments from third-party payors due to missing documentation and other issues, which could cause
delay in collecting our revenue.
Our business depends on our ability to successfully commercialize novel cancer diagnostic tests and services, which is time consuming
and complex, and our development efforts may fail.
Our current business strategy focuses on discovering, developing and commercializing molecular diagnostic tests and services. We believe the
success of our business depends on our ability to fully validate and commercialize our existing diagnostic tests and services and to develop
and commercialize new diagnostic tests. We have multiple tests we are currently offering and in development, but research, development and
commercialization of diagnostic tests is time-consuming, uncertain and complex.
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Tests we currently offer in our laboratory, or any additional technologies that we may develop, may not succeed in reliably diagnosing or
predicting the recurrence of cancers with the sensitivity and specificity necessary to be clinically useful, and thus may not succeed
commercially. In addition, prior to or an in continuing in conjunction with commercializing our diagnostic tests, we must undertake time-
consuming and costly development activities, including clinical studies, and obtain regulatory clearance or approval, which may be denied.
This development process involves a high degree of risk, substantial expenditures and will occur over several years. Our development efforts
may fail for many reasons, including:
•
•
•
failure of the tests at the research or development
stage;
difficulty in accessing archival tissue samples, especially tissue samples with known clinical results;
or
lack of sufficient clinical validation data to support the effectiveness of the
test.
Tests that appear promising in early development may fail to be validated in subsequent studies, and even if we achieve positive results, we
may ultimately fail to obtain the necessary regulatory clearances or approvals. There is substantial risk that our research and development
projects will not result in commercial tests, and that success in early clinical trials will not be replicated in later studies. At any point, we may
abandon development of a test or be required to expend considerable resources repeating clinical trials, which would adversely impact the
timing for generating potential revenues from that test. In addition, as we develop tests, we will have to make significant investments in
research, development and marketing resources. If a clinical validation study of a particular test then fails to demonstrate the outlined goals of
the study, we might choose to abandon the development of that test. Further, our ability to develop and launch diagnostic tests will likely
depend on our receipt of additional funding. If our discovery and development programs yield fewer commercial tests than we expect, we may
be unable to execute our business plan, which may adversely affect our business, financial condition and results of operations.
We may not be able to successfully integrate our recent acquisitions into our business and we may not achieve the anticipated benefits of
such acquisitions.
In July 2014, we acquired Gentris, which provides genomic testing and pharmacogenomics services to half of the top ten BioPharma
companies globally and has participated and performed genomic analysis for over 1,000 clinical trials. Gentris has operations in Raleigh
(Research Triangle Park), North Carolina and Shanghai, China. In addition, in August 2014 we acquired BioServe. BioServe is a genomic
service and next-generation sequencing company founded in 2002 serving both the research and clinical markets and based a leading genomic
service and next-generation sequencing company founded in 2002 serving both the research and clinical markets and based in Hyderabad,
India in Hyderabad, India. Our failure to successfully integrate the operations of Gentris and BioServe could have a material adverse effect on
our business, operating results and financial condition by reason of our failure to realize a sufficient benefit and financial return on capital
expended in connection with these acquisitions.
We expect to realize increased revenues and market penetration as a result of the acquisition of BioServe and Gentris. Achievement of these
expected benefits will depend, in part, on how we manage the integration of these businesses into our operations. Our management team has
limited experience in purchasing and integrating new businesses, particularly those with operations in emerging markets, such as China and
India. If we are unsuccessful in integrating such businesses in a cost-effective manner, we may not realize the expected benefits of these
acquisitions and our business, operating results and financial condition may be materially and adversely affected.
We may acquire other businesses or form joint ventures or make investments in other companies or technologies that could harm our
operating results, dilute our stockholders’ ownership, increase our debt or cause us to incur significant expense.
As part of our business strategy, we may pursue other acquisitions of businesses and assets. We also may pursue strategic alliances and joint
ventures that leverage our core technology and industry experience to expand our offerings or distribution. For example, we entered into a
joint venture in May 2013 with Mayo Foundation for Education and Research. We have no experience with acquiring other companies and
limited experience with forming strategic alliances and joint ventures. We may not be able to find suitable partners or acquisition candidates,
and we may not be able to complete such transactions on favorable terms, if at all. If we make any acquisitions, we may not be able to integrate
these acquisitions successfully into our existing business, and we could assume unknown or contingent liabilities. Any future acquisitions also
could result in significant write-offs or the incurrence of debt and contingent liabilities, any of which could have a material adverse effect on
our financial condition, results of operations and cash flows. Integration of an acquired company also may disrupt ongoing operations and
require management resources that would otherwise focus on developing our existing business. We may experience losses related to
investments in other companies, which could have a material negative effect on our results of operations. We may not identify or complete
these transactions in a timely manner, on a cost-effective basis, or at all, and we may not realize the anticipated benefits of any acquisition,
technology license, strategic alliance or joint venture.
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To finance any acquisitions or joint ventures, we may choose to issue shares of our common stock as consideration, which would dilute the
ownership of our stockholders. If the price of our common stock is low or volatile, we may not be able to acquire other companies or fund a
joint venture project using our stock as consideration. Alternatively, it may be necessary for us to raise additional funds for acquisitions
through public or private financings. Additional funds may not be available on terms that are favorable to us, or at all.
Our agreement with Mayo may not proceed successfully.
In November 2011, we entered into an affiliation agreement with the Mayo Foundation for Medical Education and Research, subsequently
amended. Under the agreement, we formed a joint venture in May 2013 to focus on developing oncology diagnostic services and tests utilizing
next generation sequencing. We have made $2.0 million in capital contributions to that joint venture through December 31, 2014. The
agreement requires additional capital contributions by us of up to $4.0 million over the next thirty months, subject to the joint venture
achieving certain operational milestones. The operation of the joint venture may also divert management time from operating our business. No
assurances can be given that we will be able to fully fund the joint venture agreement, or that, even if funded, the joint venture will ever
achieve the research, development and commercial objectives currently contemplated by the parties, such as the discovery and
commercialization of new diagnostic tests utilizing next-generation sequencing. If the development efforts of the joint venture do not result in
commercially successful tests or services, it will have an adverse effect on our business, financial condition and results of operations.
If we are unable to obtain regulatory clearance or approvals in the United States, if we experience delays in receiving clearance or
approvals, or if we do not gain acceptance from other laboratories of any cleared or approved diagnostic tests at their facilities, our
growth strategy may not be successful.
We currently offer our proprietary tests in conjunction with our comprehensive panel of laboratory services in our CLIA-accredited laboratory.
Because we currently offer these tests and services solely for use within our laboratory, we believe we may market the tests as LDTs. Under
current FDA enforcement policies and guidance, LDTs generally do not require FDA premarket clearance or approval before
commercialization, and we have marketed our LDTs on that basis (although, the FDA has recently announced that such policy may be
changing). However, an element of our long-term strategy is to place molecular diagnostic tests on-site with other laboratories to broaden
access to our technology and increase demand for our tests and any future diagnostic tests that we may develop. FDA regulates diagnostic kits
sold and distributed through interstate commerce as medical devices. Unless an exemption applies, generally, before a new medical device or a
new use for a medical device may be sold or distributed in the United States, the medical device must receive either FDA clearance of a 510(k)
pre-market notification or pre-market approval. As a result, before we can market or distribute our tests in the United States for use by other
clinical testing laboratories, we must first obtain pre-market clearance or pre-market approval from FDA. We have not yet applied for clearance
or approval from FDA, and need to complete additional validations before we are ready to apply. We believe it would likely take two years or
more to conduct the studies and trials necessary to obtain approval from FDA to commercially launch any of our proprietary products outside
of our clinical laboratory. Once we do apply, we may not receive FDA clearance or approval for the commercial use of our tests on a timely
basis, or at all. If we are unable to achieve clearance or approval or if clinical diagnostic laboratories do not accept our tests, our ability to grow
our business by deploying our tests could be compromised.
Recent announcements from the Federal Food and Drug Administration may impose additional regulatory obligations and costs upon
our business.
On October 3, 2014 the FDA issued two draft guidance documents regarding oversight of laboratory developed tests (LDTs). The two draft
guidance documents are entitled “Framework for Regulatory Oversight of Laboratory Developed Tests (LDTs)” (the “Framework Guidance”)
and “FDA Notification and Medical Device Reporting for Laboratory Developed Test (LDTs)” (the “Notification Guidance”). According to
the Framework Guidance, FDA plans to take a phased-in risk-based approach to regulating LDTs. FDA has proposed in the Framework
Guidance that there will be three groups of LDTs: (i) LDTs subject to full enforcement discretion, (ii) LDTs subject to partial enforcement
discretion; and (iii) LDTs subject to full FDA regulation. FDA plans to phase in enforcement of LTD premarket review, quality system
oversight and adverse event reporting over a number of years. Under this new risk based approach, it is possible that some level of pre-market
review may be required for our LDTs-either a 510(k) or PMA-which may require us to obtain additional clinical data. The draft guidance
documents are subject to public comment. The final date for comments was February 2, 2015, after which time the FDA will review the
comments. The FDA has noted that while it has always asserted the power to regulate LDTs, it has chosen not to do so to date as a matter of
enforcement discretion. We cannot tell at this time what additional costs and regulatory burdens, any final FDA guidance or FDA enforcement
of its regulations may have on our business or operations.
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If we are unable to execute our marketing strategy for our cancer diagnostic tests and are unable to gain acceptance in the market, we
may be unable to generate sufficient revenue to sustain our business.
We are an early-stage company and have engaged in only limited sales and marketing activities for the diagnostic tests and services offered in
our clinical laboratory. To date, we have received very limited revenue from sales of our tests.
Although we believe that our diagnostic tests represent promising commercial opportunities, our tests may never gain significant acceptance in
the marketplace and therefore may never generate substantial revenue or profits for us. We will need to establish a market for our diagnostic
tests and build that market through physician education and awareness programs. Gaining acceptance in medical communities requires that we
perform additional studies after validating the efficacy of our tests and services for the diagnosis, prognosis and treatment of cancer, and that
we obtain acceptance of the results of those studies using our tests for publication in leading peer-reviewed medical journals. The results of
any studies are always uncertain and even if we believe such studies demonstrate the value of our tests, they process of publication in leading
medical journals is subject to a peer review process and peer reviewers may not consider the results of our studies sufficiently novel or worthy
of publication. Failure to have our studies published in peer-reviewed journals would limit the adoption of our tests. Our ability to successfully
market the diagnostic tests that we may develop will depend on numerous factors, including:
•
•
•
whether healthcare providers believe our diagnostic tests provide clinical
utility;
whether the medical community accepts that our diagnostic tests are sufficiently sensitive and specific to be meaningful in patient care
and treatment decisions; and
whether health insurers, government health programs and other third-party payors will cover and pay for our diagnostic tests and, if
so, whether they will adequately reimburse us.
Failure to achieve widespread market acceptance of our diagnostic tests would materially harm our business, financial condition and results of
operations.
If we cannot develop tests to keep pace with rapid advances in technology, medicine and science, our operating results and competitive
position could be harmed.
In recent years, there have been numerous advances in technologies relating to the diagnosis and treatment of cancer. There are several new
cancer drugs under development that may increase patient survival time. There have also been advances in methods used to analyze very large
amounts of genomic information. We must continuously develop new tests and enhance our existing tests to keep pace with evolving
standards of care. Our existing tests could become obsolete unless we continually innovate and expand them to demonstrate benefit in patients
treated with new therapies. New cancer therapies typically have only a few years of clinical data associated with them, which limits our ability
to perform clinical studies and correlate sets of genes to a new treatment’s effectiveness. If we cannot adequately demonstrate the applicability
of our tests to new treatments, sales of our tests and services could decline, which would have a material adverse effect on our business,
financial condition and results of operations.
If our tests do not continue to perform as expected, our operating results, reputation and business will suffer.
Our success depends on the market’s confidence that we can continue to provide reliable, high-quality diagnostic tests. We believe that our
customers are likely to be particularly sensitive to test defects and errors. As a result, the failure of our tests or services to perform as expected
would significantly impair our reputation and the public image of our tests and services, and we may be subject to legal claims arising from
any defects or errors.
There is a scarcity of experienced professionals in our industry. If we are not able to retain and recruit personnel with the requisite
technical skills, we may be unable to successfully execute our business strategy.
The specialized nature of our industry results in an inherent scarcity of experienced personnel in the field. Our future success depends upon
our ability to attract and retain highly skilled personnel (including medical, scientific, technical, commercial, business, regulatory and
administrative personnel) necessary to support our anticipated growth, develop our business and perform certain contractual obligations.
Given the scarcity of professionals with the scientific knowledge that we require and the competition for qualified personnel among life
science businesses, we may not succeed in attracting or retaining the personnel we require to continue and grow our operations. The loss of a
key employee, the failure of a key employee to perform in his or her current position or our inability to attract and retain skilled employees
could result in our inability to continue to grow our business or to implement our business strategy.
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Our inability to attract, hire and retain a sufficient number of qualified sales professionals would hamper our ability to increase demand
for our tests, to expand geographically and to successfully commercialize any other diagnostic tests or products we may develop.
Our success in selling our clinical laboratory services, biopharma services, discovery services, diagnostic tests and any other tests or products
that we are able to develop will require us to expand our sales force in the United States and internationally by recruiting additional sales
representatives with extensive experience in oncology and close relationships with medical oncologists, surgeons, pathologists and other
hospital personnel, as well as biopharmaceutical companies and clinical research organizations. To achieve our marketing and sales goals, we
will need to substantially expand our sales and commercial infrastructure, with which to date we have had little experience. Sales professionals
with the necessary technical and business qualifications are in high demand, and there is a risk that we may be unable to attract, hire and retain
the number of sales professionals with the right qualifications, scientific backgrounds and relationships with decision-makers at potential
customers needed to achieve our sales goals. We may face competition from other companies in our industry, some of whom are much larger
than us and who can pay greater compensation and benefits than we can, in seeking to attract and retain qualified sales and marketing
employees. If we are unable to hire and retain qualified sales and marketing personnel, our business will suffer.
We have indebtedness with restrictive covenants that limit our ability to obtain additional debt financing and that requires us to restrict
cash as collateral, which could have a material adverse effect on our financial condition, our ability to fund operations, and react to
changes in our business.
As of December 31, 2014, we had indebtedness for borrowed money due on April 1, 2016 in the aggregate principal amount of $6.0 million
under a line of credit with Wells Fargo. We are required to restrict $6.0 million in cash as collateral. Additionally, we are required to maintain
limits on capital spending and are restricted as to the amount we may pledge as collateral for additional borrowings from any source. Our debt
and related covenants could limit our ability to satisfy our obligations, limit our ability to operate our business and impair our competitive
position. For example, it could:
•
•
•
•
require us to dedicate a substantial portion of our cash flow from operations to payments on our debt, reducing the availability of our
cash flow from operations to fund working capital, capital expenditures or other general corporate purposes;
limit our flexibility in planning for, or reacting to, changes in our business and
industry;
place us at a disadvantage compared to competitors that may have proportionately less debt;
and
increase our cost of
borrowing.
If our laboratory facilities become damaged or inoperable, or we are required to vacate any facility, our ability to provide services and
pursue our research and development efforts may be jeopardized.
We currently derive substantially all of our revenues from our laboratory testing services. We do not have any clinical reference laboratory
facilities outside of our facilities in Rutherford, New Jersey, Morrisville, North Carolina and Hyderabad, India. Our facilities and equipment
could be harmed or rendered inoperable by natural or man-made disasters, including fire, flooding and power outages, which may render it
difficult or impossible for us to perform our tests or provide laboratory services for some period of time. The inability to perform our tests or
the backlog of tests that could develop if any of our facilities is inoperable for even a short period of time may result in the loss of customers
or harm to our reputation or relationships with collaborators, and we may be unable to regain those customers or repair our reputation in the
future. Furthermore, our facilities and the equipment we use to perform our research and development work could be costly and time-
consuming to repair or replace.
Additionally, a key component of our research and development process involves using biological samples and the resulting data sets and
medical histories, as the basis for our diagnostic test development. In some cases, these samples are difficult to obtain. If the parts of our
laboratory facilities where we store these biological samples are damaged or compromised, our ability to pursue our research and development
projects, as well as our reputation, could be jeopardized. We carry insurance for damage to our property and the disruption of our business,
but this insurance may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms, if at
all.
Further, if any of our laboratories became inoperable we may not be able to license or transfer our proprietary technology to a third-party, with
established state licensure and CLIA accreditation under the scope of which our diagnostic tests could be performed following validation and
other required procedures, to perform the tests. Even if we find a third-party with such qualifications to perform our tests, such party may not
be willing to perform the tests for us on commercially reasonable terms.
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If we cannot compete successfully with our competitors, we may be unable to increase or sustain our revenues or achieve and sustain
profitability.
We face competition from mainstream diagnostic methods that pathologists and oncologists use and have used for many years. It may be
difficult to change the methods or behavior of the referring pathologists and oncologists to incorporate our molecular diagnostic testing in their
practices. We believe that we can introduce our diagnostic tests successfully due to their clinical utility and the desire of pathologists and
oncologists to find solutions for more accurate diagnosis, prognosis and personalized treatment options for cancer patients.
We also face competition from companies that currently offer or are developing products to profile genes, gene expression or protein
biomarkers in various cancers. Personalized genetic diagnostics is a new area of science, and we cannot predict what tests others will develop
that may compete with or provide results superior to the results we are able to achieve with the tests we develop. Our competitors include
public companies such as NeoGenomics, Inc., Quest Diagnostics, Abbott Laboratories, Inc., Johnson & Johnson, Roche Molecular Systems,
Inc., bioTheranostics, Inc. (part of bioMérieux SA), Genomic Health, Inc., Myriad Genetics Inc., Response Genetics, Inc., and Foundation
Medicine, Inc., and many private companies. We expect that pharmaceutical and biopharmaceutical companies will increasingly focus attention
and resources on the personalized diagnostic sector as the potential and prevalence increases for molecularly targeted oncology therapies
approved by FDA along with companion diagnostics. For example, FDA has recently approved two such agents—Xalkori crizotinib from
Pfizer Inc. along with its companion anaplastic lymphoma kinase FISH test from Abbott Laboratories, Inc. and Zelboraf vemurafenib from
Genentech USA Incorporated and Daiichi-Sankyo Inc. along with its companion B-RAF kinase V600 mutation test from Roche Molecular
Systems, Inc. These two recent FDA approvals are only the second and third instances of simultaneous approvals of a drug and companion
diagnostic, the first being the 1998 approval of Genentech, Inc.’s Herceptin trastuzumab for HER2 positive breast cancer along with the
HercepTest from partner Dako A/S.
With respect to our clinical laboratory sciences business we face competition from companies such as Genoptix, Inc. (a Novartis AG
Company), Clarient, Inc. (a division of GE Healthcare, a unit of General Electric Company), Bio-Reference Laboratories, Inc., and Genzyme
Genetics (a LabCorp Specialty Testing Group).
Many of our present and potential competitors have widespread brand recognition and substantially greater financial and technical resources
and development, production and marketing capabilities than we do. Others may develop lower-priced, less complex tests that payors,
pathologists and oncologists could view as functionally equivalent to our tests, which could force us to lower the list price of our tests and
impact our operating margins and our ability to achieve profitability. In addition, technological innovations that result in the creation of
enhanced diagnostic tools may enable other clinical laboratories, hospitals, physicians or medical providers to provide specialized diagnostic
services similar to ours in a more patient-friendly, efficient or cost-effective manner than is currently possible. If we cannot compete
successfully against current or future competitors, we may be unable to increase market acceptance and sales of our tests, which could prevent
us from increasing or sustaining our revenues or achieving or sustaining profitability.
A small number of test ordering sites account for most of the sales of our tests and services. If any of these sites orders fewer tests from
us for any reason, our revenues could decline.
Due to the early stage nature of our business and our limited sales and marketing activities to date, 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 may change from period to period. Our test ordering sites are largely hospitals, cancer centers, reference laboratories and physician
offices, as well as biopharmaceutical companies as part of a clinical trial. 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. The top five test ordering sites during 2014, 2013 and 2012 accounted for 56%, 69% and 58% respectively, of our clinical testing
volumes, with 38%, 36% and 46% respectively, of the volume coming from community hospitals. During the year ended December 31, 2014,
two Biopharma clients accounted for approximately 23% and 12% respectively of our revenue. During the year ended December 31, 2013
there was one Biopharma client that accounted for approximately 40% of our revenue. During 2012 there were three sites which each
accounted for more than 10% of our revenue: a Biopharma client accounted for approximately 13%, a university teaching center accounted for
approximately 11% and a community hospital accounted for approximately 10% of our revenue.
We expect to continue to incur significant expenses to develop and market our diagnostic tests, which could make it difficult for us to
achieve and sustain profitability.
In recent years, we have incurred significant costs in connection with the development of our diagnostic tests. For the year ended
December 31, 2014, our research and development expenses were $4.6 million, which was 45% of our net revenue and
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our sales and marketing expenses were $4.0 million, which was 39% of revenue. For the year ended December 31, 2013, our research and
development expenses were $2.2 million, which was 33% of our revenue, and our sales and marketing expenses were $1.8 million, which
was 28% of revenue. For the year ended December 31, 2012, our research and development expenses were $2.1 million, which was 49% of
our revenue and our sales and marketing expenses were $1.4 million, which was 33% of revenue. We expect our expenses to continue to
increase, in absolute dollars, for the foreseeable future as we seek to expand the clinical utility of our diagnostic tests, drive adoption of and
reimbursement for our diagnostic tests and develop new tests. As a result, we will need to generate significant revenues in order to achieve
sustained profitability.
We depend on certain collaborations with third parties for the supply of certain tissue samples and biological materials that we use in
our research and development efforts. If the costs of such collaborations increase or our third party collaborators terminate their
relationship with us, our business may be materially harmed.
Under standard clinical practice in the United States, tumor biopsies removed from patients are chemically preserved, embedded in paraffin
wax and stored. Our clinical development relies on our ability to access these archived tumor biopsy samples, as well as information pertaining
to their associated clinical outcomes. Other companies often compete with us for access. Additionally, the process of negotiating access to
archived samples is lengthy, because it typically involves numerous parties and approvals to resolve complex issues such as usage rights,
institutional review board approval, privacy rights, publication rights, intellectual property ownership and research parameters.
We have collaborative relationships with Memorial Sloan-Kettering Cancer Center, Mayo, North Shore—Long Island Jewish Health System,
the National Cancer Institute, the Cleveland Clinic and other institutions who provide us with tissue samples and other biological materials that
we use in developing and validating our tests. We do not have any written arrangement with certain third party collaborators, and in many of
the cases in which the arrangements are in writing, our collaborative relationships are terminable on 30 days’ notice or less. If one or more
collaborators terminate their relationship with us, we will need to identify other third parties to provide us with tissue samples and biological
materials, which could result in a delay in our research and development activities and negatively affect our business.
We currently rely on a single third-party to produce our microarrays and any problems experienced by this vendor could result in a delay
or interruption in the supply of our microarrays to us until the problem is cured by such vendor or until we locate and qualify an
alternative source of supply.
The design of our microarrays is currently optimized on a family of instruments referred to as the Agilent Microarray Platform, which is
currently produced solely by Agilent Technologies Inc. (“Agilent”). We currently purchase these components from Agilent under purchase
orders and do not have a long-term contract with Agilent. If Agilent were to delay or stop producing our microarrays, or if the prices Agilent
charges us were to increase significantly, we would need to identify another supplier and optimize our microarrays on a new technology
platform. We could experience delays in manufacturing the microarrays while finding another acceptable supplier, which could impact our
results of operations. The changes could also result in increased costs associated with migrating to the new technology platform and in
increased manufacturing costs. Further, any prolonged disruption in Agilent’s operations could have a significant negative impact on the
supply of our microarrays.
If we were sued for product liability or professional liability, we could face substantial liabilities that exceed our resources.
The marketing, sale and use of our tests could lead to the filing of product liability claims were someone to allege that our tests failed to
perform as designed. We may also be subject to liability for errors in the test results we provide to pathologists and oncologists or for a
misunderstanding of, or inappropriate reliance upon, the information we provide. A product liability or professional liability claim could result
in substantial damages and be costly and time-consuming for us to defend.
Although we believe that our existing product and professional liability insurance is adequate, our insurance may not fully protect us from the
financial impact of defending against product liability or professional liability claims. Any product liability or professional liability claim
brought against us, with or without merit, could increase our insurance rates or prevent us from securing insurance coverage in the future.
Additionally, any product liability lawsuit could damage our reputation, result in the recall of our tests, or cause current clinical partners to
terminate existing agreements and potential clinical partners to seek other partners, any of which could impact our results of operations.
If we use biological and hazardous materials in a manner that causes injury, we could be liable for damages.
Our activities currently require the controlled use of potentially harmful biological materials and hazardous materials and chemicals. We cannot
eliminate the risk of accidental contamination or injury to employees or third parties from the use, storage, handling or disposal of these
materials. In the event of contamination or injury, we could be held liable for any
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resulting damages, and any liability could exceed our resources or any applicable insurance coverage we may have. Additionally, we are
subject to, on an ongoing basis, federal, state and local laws and regulations governing the use, storage, handling and disposal of these
materials and specified waste products. The cost of compliance with these laws and regulations may become significant and could have a
material adverse effect on our financial condition, results of operations and cash flows. In the event of an accident or if we otherwise fail to
comply with applicable regulations, we could lose our permits or approvals or be held liable for damages or penalized with fines.
If we cannot support demand for our tests, including successfully managing the evolution of our technology and manufacturing
platforms, our business could suffer.
As our test volume grows, we will need to increase our testing capacity, implement increases in scale and related processing, customer service,
billing, collection and systems process improvements and expand our internal quality assurance program and technology to support testing on
a larger scale. We will also need additional certified laboratory scientists and other scientific and technical personnel to process these additional
tests. Any increases in scale, related improvements and quality assurance may not be successfully implemented and appropriate personnel may
not be available. As additional tests are commercialized, we will need to bring new equipment on line, implement new systems, technology,
controls and procedures and hire personnel with different qualifications. Failure to implement necessary procedures or to hire the necessary
personnel could result in a higher cost of processing or an inability to meet market demand. We cannot assure you that we will be able to
perform tests on a timely basis at a level consistent with demand, that our efforts to scale our commercial operations will not negatively affect
the quality of our test results or that we will respond successfully to the growing complexity of our testing operations. If we encounter
difficulty meeting market demand or quality standards for our tests, our reputation could be harmed and our future prospects and business
could suffer, which may have a material adverse effect on our financial condition, results of operations and cash flows.
We depend on our information technology and telecommunications systems, and any failure of these systems could harm our business.
We depend on information technology and telecommunications systems for significant aspects of our operations. In addition, our third-party
billing and collections provider depends upon telecommunications and data systems provided by outside vendors and information we provide
on a regular basis. These information technology and telecommunications systems support a variety of functions, including test processing,
sample tracking, quality control, customer service and support, billing and reimbursement, research and development activities and our general
and administrative activities. Information technology and telecommunications systems are vulnerable to damage from a variety of sources,
including telecommunications or network failures, malicious human acts and natural disasters. Moreover, despite network security and back-
up measures, some of our servers are potentially vulnerable to physical or electronic break-ins, computer viruses and similar disruptive
problems. Despite the precautionary measures we have taken to prevent unanticipated problems that could affect our information technology
and telecommunications systems, failures or significant downtime of our information technology or telecommunications systems or those used
by our third-party service providers could prevent us from processing tests, providing test results to pathologists, oncologists, billing payors,
processing reimbursement appeals, handling patient or physician inquiries, conducting research and development activities and managing the
administrative aspects of our business. Any disruption or loss of information technology or telecommunications systems on which critical
aspects of our operations depend could have an adverse effect on our business.
Security breaches, loss of data, and other disruptions could compromise sensitive information related to our business or prevent us from
accessing critical information and expose us to liability, which could adversely affect our business and our reputation.
In the ordinary course of our business, we and our third-party billing and collections provider collect and store sensitive data, including legally
protected health information, personally identifiable information, intellectual property, and proprietary business information owned or
controlled by ourselves or our customers, payors, and biopharmaceutical partners. The secure processing, storage, maintenance, and
transmission of this critical information is vital to our operations and business strategy, and we devote significant resources to protecting such
information. Although we take measures to protect sensitive information from unauthorized access or disclosure, our information technology
and infrastructure, and that of our third-party billing and collections provider, may be vulnerable to attacks by hackers or viruses or breached
due to employee error, malfeasance, or other disruptions. Any such breach or interruption could compromise our networks, and the
information stored there could be accessed by unauthorized parties, publicly disclosed, lost, or stolen. Any such access, disclosure, or other
loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, such as the
HIPAA, and regulatory penalties. Unauthorized access, loss, or dissemination could also disrupt our operations, including our
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ability to conduct our analyses, provide test results, bill payors or patients, process claims and appeals, provide customer assistance services,
conduct research and development activities, collect, process, and prepare company financial information, provide information about our
products and other patient and physician education and outreach efforts through our website, manage the administrative aspects of our
business, and damage our reputation, any of which could adversely affect our business.
The U.S. Office of Civil Rights may impose penalties on a covered entity for a failure to comply with a requirement of HIPAA. Penalties will
vary significantly depending on factors such as the date of the violation, whether the covered entity knew or should have known of the failure
to comply, or whether the covered entity’s failure to comply was due to willful neglect. These penalties include civil monetary penalties of
$100 to $50,000 per violation, up to an annual cap of $1,500,000. A person who knowingly obtains or discloses individually identifiable
health information in violation of HIPAA may face a criminal penalty of up to $50,000 and up to one year imprisonment. The criminal
penalties increase to $100,000 and up to five years imprisonment if the wrongful conduct involves false pretenses, and to $250,000 and up to
10 years imprisonment if the wrongful conduct involves the intent to sell, transfer, or use identifiable health information for commercial
advantage, personal gain, or malicious harm. The U.S. Department of Justice is responsible for criminal prosecutions under HIPAA.
Furthermore, in the event of a breach as defined by HIPAA, the covered entity has specific reporting requirements under the HIPAA
regulations. In the event of a significant breach, the reporting requirements could include notification to the general public.
In addition, the interpretation and application of consumer, health-related, and data protection laws in the United States, Europe, and elsewhere
are often uncertain, contradictory, and in flux. It is possible that these laws may be interpreted and applied in a manner that is inconsistent with
our practices. If so, this could result in government-imposed fines or orders requiring that we change our practices, which could adversely
affect our business. In addition, these privacy regulations may differ from country to country, and may vary based on whether testing is
performed in the United States or in the local country. Complying with these various laws could cause us to incur substantial costs or require
us to change our business practices and compliance procedures in a manner adverse to our business.
Regulatory Risks Relating to Our Business
Healthcare policy changes, including recently enacted legislation reforming the U.S. health care system, may have a material adverse
effect on our financial condition, results of operations and cash flows.
In March 2010, U.S. President Barack Obama signed the Patient Protection and Affordable Care Act, as amended by the Health Care and
Education Reconciliation Act (collectively, “PPACA”), which makes a number of substantial changes in the way health care is financed by
both governmental and private insurers. Among other things, the PPACA:
•
Requires each medical device manufacturer to pay a sales tax equal to 2.3% of the price for which such manufacturer sells its medical
devices, beginning in 2013. This tax may apply to some or all of our current products and products which are in development.
• Mandates a reduction in payments for clinical laboratory services paid under the Medicare Clinical Laboratory Fee Schedule of 1.75%
for the years 2011 through 2015. In addition, a productivity adjustment is made to the fee schedule payment amount. These changes
in payments apply to some or all of the clinical laboratory test services we furnish to Medicare beneficiaries.
Establishes an Independent Payment Advisory Board to reduce the per capita rate of growth in Medicare spending. The Independent
Payment Advisory Board has broad discretion to propose policies, which may have a negative impact on payment rates for services,
including clinical laboratory services, beginning in 2016, and for hospital services beginning in 2020.
•
Although some of these provisions may negatively impact payment rates for clinical laboratory services, the PPACA also extends coverage to
approximately 32 million previously uninsured people, which may result in an increase in the demand for our tests and services. The
mandatory purchase of insurance has been strenuously opposed by a number of state governors, resulting in lawsuits challenging the
constitutionality of certain provisions of the PPACA. On June 28, 2012, the Supreme Court upheld the constitutionality of the health care
reform law, with the exception of certain provisions dealing with the expansion of Medicaid coverage under the law. Therefore, most of the
law’s provisions will go into effect in 2013 and 2014. Congress has also proposed a number of legislative initiatives, including possible repeal
of the PPACA. Recently, the Supreme Court heard arguments in the case of Burwell v. King, which considers whether the it was permissible
for the federal government to extend tax subsidies to those individuals who purchased coverage through federal exchanges, in addition to the
exchanges established by individual states. If the Court were to find that subsidies to those who purchased through the federal exchanges were
not permissible, it is possible that many individuals would be unable to afford to purchase coverage. This would significantly affect the
viability of PPACA.
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In addition, other legislative changes have been proposed and adopted since the PPACA was enacted. Recently, on August 2, 2011, the
President signed into law the Budget Control Act of 2011, which, among other things, creates the Joint Select Committee on Deficit Reduction
to recommend proposals in spending reductions to Congress. The Joint Select Committee did not achieve a targeted deficit reduction of at least
$1.2 trillion for the years 2013 through 2021, triggering the legislation’s automatic reduction to several government programs. This includes
aggregate reductions to Medicare payments to providers of up to 2% per fiscal year, starting in 2013. This 2% sequester was recently extended
through 2024.
The full impact on our business of the PPACA and the new law is uncertain. In addition, on February 22, 2012, the President signed the
Middle Class Tax Relief and Job Creation Act of 2012 (“MCTRJCA”), which, among other things, mandated an additional change in
Medicare reimbursement for clinical laboratory services. This legislation requires a rebasing of the Medicare clinical laboratory fee schedule to
effect a 2% reduction in payment rates otherwise determined for 2013. This will serve as a base for 2014 and subsequent years. As a result of
the changes mandated by PPACA and MCTRJCA, CMS projects laboratory services for 2015 will be reduced by approximately 0.25%.
Further, in 2014, Congress passed the Protecting Access to Medicare Act or PAMA which also makes significant changes in the way the
Medicare will pay for laboratory services. Under PAMA, laboratories will be required to report the amount that they are paid by third party
payors for each test beginning in January 2016. CMS will use this data to calculate a weighted median for each test. That new price will
become effective on January 1, 2017, although any resulting reductions will be phased in over time. This data reporting process will be
repeated every three years for most tests, although certain advanced diagnostic tests will have to report every year. It is possible that some of
our tests may qualify as Advanced Diagnostic Laboratory Tests, which will require us to submit pricing annually. In addition, under PAMA,
we will also be required to obtain new codes from CMS or any entity it designates, for our tests that do not currently have codes. If PAMA
results in a significant reduction in the prices for our tests, it could have a significant impact on our revenues.
Certain of our laboratory services are paid under the Medicare Physician Fee Schedule and, under the current statutory formula, the rates for
these services are updated annually. For the past several years, the application of the statutory formula would have resulted in substantial
payment reductions if Congress failed to intervene. In the past, Congress passed interim legislation to prevent the decreases. On November 1,
2012, the Centers for Medicare & Medicaid Services (CMS) issued the Final Rule. In the Final Rule, CMS called for a reduction of
approximately 26.5% in the 2013 conversion factor that is used to calculate physician reimbursement. However, the American Taxpayer Relief
Act of 2012, which was signed into law on January 2, 2013, prevents this proposed cut and keeps the current reimbursement rate in effect
until December 31, 2013. For 2014, CMS had projected the reimbursement cut resulting from the SGR formula would be approximately 20
percent, unless Congress acted to prevent the reduction. On December 18, 2013, Congress passed legislation that enacted a 0.5 percent
increase in the conversion factor, which was effective until March 31, 2014. On April 1, 2014, President Obama signed the Protecting Access
to Medicare Act of 2014, or PAMA. PAMA extended the 0.5 percent increase through March 31, 2015 and made other changes to laboratory
reimbursement discussed below. Currently, Congress is considering an extension of the increase enacted by PAMA. If Congress fails to act
before March 31, 2015, or if it does not enact a long-term change to the SGR, then future decreases in the Medicare physician schedule are
possible. If Congress fails to act in future years to offset similar proposed reductions, the resulting decrease in payment could adversely impact
our revenues and results of operations.
In addition, many of the Current Procedure Terminology (“CPT”) procedure codes that we use to bill our tests were revised by the AMA,
effective January 1, 2013. In the Final Rule, CMS announced that it has decided to keep the new molecular codes on the Clinical Laboratory
Fee Schedule (CLFS), rather than move them to the Physician Fee Schedule as some stakeholders had urged. CMS also announced that for
2013 it would price the new codes using a “gapfilling” process by which it will refer the codes to the Medicare contractors to allow them to
determine an appropriate price. Those prices were determined and became effective January 1, 2014. In addition, CMS also stated that it would
not recognize certain of the new codes for Multi-analyte Assays for Algorithmic Assays (MAAAs) because it does not believe they qualify as
clinical laboratory tests. However, more recently, it has determined that the individual contractors may determine whether to pay for MAAA
tests on a case by case basis. Our reimbursement could be adversely affected by CMS’ action in this area. There can be no guarantees that
Medicare and other payors will establish positive or adequate coverage policies or reimbursement rates.
We cannot predict whether future health care initiatives will be implemented at the federal or state level, or how any future legislation or
regulation may affect us. The taxes imposed by the new federal legislation and the expansion of government’s role in the U.S. health care
industry as well as changes to the reimbursement amounts paid by payors for our products or our medical procedure volumes may reduce our
profits and have a materially adverse effect on our business, financial condition, results of operations and cash flows. Moreover, Congress has
proposed on several occasions to impose a 20% coinsurance on patients for clinical laboratory tests reimbursed under the clinical laboratory
fee schedule, which would require us to bill patients for these amounts. Because of the relatively low reimbursement for many clinical
laboratory tests, in the event that Congress were to ever enact such legislation, the cost of billing and collecting for these services would often
exceed the amount actually received from the patient and effectively increase our costs of billing and collecting.
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We depend on Medicare and a limited number of private payors for a significant portion of our revenues and if these or other payors
stop providing reimbursement or decrease the amount of reimbursement for our tests, our revenues could decline.
For the year ended December 31, 2014, we derived approximately 16% of our total revenue from private insurance, including managed care
organizations and other health care insurance providers, 11% from Medicare and 16% from other healthcare facilities billed directly. Medicare
and other third-party payors may withdraw their coverage policies or cancel their contracts with us at any time, review and adjust the rate of
reimbursement or stop paying for our tests altogether, which would reduce our total revenues.
Payors have increased their efforts to control the cost, utilization and delivery of health care services. In the past, measures have been
undertaken to reduce payment rates for and decrease utilization of the clinical laboratory industry generally. Because of the cost-trimming
trends, third-party payors that currently cover and provide reimbursement for our tests may suspend, revoke or discontinue coverage at any
time, or may reduce the reimbursement rates payable to us. Any such action could have a negative impact on our revenues, which may have a
material adverse effect on our financial condition, results of operations and cash flows.
In addition, we are currently considered a “non-contracting provider” by a number of private third-party payors because we have not entered
into a specific contract to provide our specialized diagnostic services to their insured patients at specified rates of reimbursement. If we were to
become a contracting provider in the future, the amount of overall reimbursement we receive is likely to decrease because we will be
reimbursed less money per test performed at a contracted rate than at a non-contracted rate, which could have a negative impact on our
revenues. Further, we typically are unable to collect payments from patients beyond that which is paid by their insurance and will continue to
experience lost revenue as a result.
Because of certain Medicare billing rules, we may not receive reimbursement for all tests provided to Medicare patients.
Under current Medicare billing rules, claims for our tests performed on Medicare beneficiaries who were hospital inpatients when the tumor
tissue samples were obtained and whose tests were ordered less than 14 days from discharge must be incorporated in the payment that the
hospital receives for the inpatient services provided. Accordingly, we must bill individual hospitals for tests performed on Medicare
beneficiaries during these timeframes in order to receive payment for our tests. Because we generally do not have a written agreement in place
with these hospitals that purchase these tests, we may not be paid for our tests or may have to pursue payment from the hospital on a case-by-
case basis. In addition, until 2012, we were permitted to bill globally for certain anatomic pathology services we furnished to certain hospitals,
i.e. we billed both the technical component and the professional component to Medicare. As part of the Middle Class Tax Relief and Job
Creation Act of 2012, Congress terminated the special provision for “grandfathered” hospitals as of July 1, 2012. Therefore, as of that date we
were required to bill all hospitals for the technical component of all anatomic pathology services we furnish to their patients, which may be
difficult and/or costly for us.
Further, the Medicare Administrative Contractors who process claims for Medicare also can impose their own rules related to coverage and
payment for laboratory services provided in their jurisdiction. Recently, Palmetto GBA, the Medicare Administrative Contractor for North
Carolina, South Carolina, Virginia and West Virginia, announced a comprehensive new billing policy and a coverage policy applicable to
molecular diagnostic tests, such as ours. Under coverage policy, Palmetto will deny payment for molecular diagnostic tests, unless it has
issued a positive coverage determination for the test. Other Medicare contractors are also adopting policies similar to Palmetto’s. If any of our
tests are subject to the Palmetto policy and/or the Palmetto policy is adopted by other contractors that process claims with hospitals or
laboratories that purchase and bill for our tests, our business could be adversely impacted.
Complying with numerous regulations pertaining to our business is an expensive and time-consuming process, and any failure to
comply could result in substantial penalties.
We are subject to CLIA, a federal law regulating clinical laboratories that perform testing on specimens derived from humans for the purpose
of providing information for the diagnosis, prevention or treatment of disease. Our clinical laboratory must be accredited under CLIA in order
for us to perform testing on human specimens. In addition, our proprietary tests must also be recognized as part of our accredited programs
under CLIA so that we can offer them in our laboratory. CLIA is intended to ensure the quality and reliability of clinical laboratories in the
United States by mandating specific standards in the areas of personnel qualifications, administration, and participation in proficiency testing,
patient test management, quality control, quality assurance and inspections. We have a current certificate of accreditation under CLIA to
perform high complexity testing and our laboratory is accredited by the College of American Pathologists (“CAP”), one of six CLIA-
approved accreditation
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organizations. To renew this certificate, we are subject to survey and inspection every two years. Moreover, CLIA inspectors may make
periodic inspections of our clinical reference laboratory outside of the renewal process.
The law also requires us to maintain a state laboratory license to conduct testing in that state. Our laboratory is located in New Jersey and must
have a New Jersey state license; as we expand our geographic focus, we may need to obtain laboratory licenses from additional states. New
Jersey laws establish standards for day-to-day operation of our clinical reference laboratory, including the training and skills required of
personnel and quality control. In addition, several other states require that we hold licenses to test specimens from patients in those states.
Other states may have similar requirements or may adopt similar requirements in the future. Finally, we may be subject to regulation in foreign
jurisdictions as we seek to expand international distribution of our tests.
If we were to lose our CLIA accreditation or New Jersey laboratory license, whether as a result of a revocation, suspension or limitation, we
would no longer be able to offer our tests, which would limit our revenues and harm our business. If we were to lose our license in other
states where we are required to hold licenses, we would not be able to test specimens from those states.
If FDA were to begin requiring approval or clearance of our tests, we could incur substantial costs and time delays associated with
meeting requirements for pre-market clearance or approval or we could experience decreased demand for, or reimbursement of, our
tests.
Although FDA maintains that it has authority to regulate the development and use of LDTs, such as ours, as medical devices, it has not
exercised its authority with respect to most LDTs as a matter of enforcement discretion. FDA does not generally extend its enforcement
discretion to reagents or software provided by third parties and used to perform LDTs, and therefore these products must typically comply
with FDA medical device regulations, which are wide-ranging and govern, among other things: product design and development, product
testing, product labeling, product storage, pre-market clearance or approval, advertising and promotion and product sales and distribution.
We believe that our proprietary tests, as utilized in our laboratory testing, are LDTs. As a result, we believe that pursuant to FDA’s current
policies and guidance that FDA does not require that we obtain regulatory clearances or approvals for our LDTs. The container we provide for
collection and transport of tumor samples from a pathology laboratory to our clinical reference laboratory may be a medical device subject to
FDA regulation but is currently exempt from pre-market review by FDA. While we believe that we are currently in material compliance with
applicable laws and regulations, we cannot assure you that FDA or other regulatory agencies would agree with our determination, and a
determination that we have violated these laws, or a public announcement that we are being investigated for possible violations of these laws,
could adversely affect our business, prospects, results of operations or financial condition.
Moreover, FDA guidance and policy pertaining to diagnostic testing is continuing to evolve and is subject to ongoing review and revision. A
significant change in any of the laws, regulations or policies may require us to change our business model in order to maintain regulatory
compliance. At various times since 2006, FDA has issued guidance documents or announced draft guidance regarding initiatives that may
require varying levels of FDA oversight of our tests. For example, in June 2010, FDA announced a public meeting to discuss the agency’s
oversight of LDTs prompted by the increased complexity of LDTs and their increasingly important role in clinical decision-making and
disease management, particularly in the context of personalized medicine. FDA indicated that it was considering a risk-based application of
oversight to LDTs and that, following public input and discussion, it might issue separate draft guidance on the regulation of LDTs, which
ultimately could require that we seek and obtain either pre-market clearance or approval of LDTs, depending upon the risk-based approach
FDA adopts. The public meeting was held in July 2010 and further public comments were submitted to FDA through September 2010. FDA
has stated it is continuing to develop draft guidance in this area. Section 1143 of the Food and Drug Administration Safety and Innovation
Act, signed by the U.S. President on July 9, 2012, requires FDA to notify U.S. Congress at least 60 days prior to issuing a draft or final
guidance regulating LDTs and provide details of the anticipated action.
Moreover, FDA guidance and policy pertaining to diagnostic testing is continuing to evolve and is subject to ongoing review and revision. A
significant change in any of the laws, regulations or policies may require us to change our business model in order to maintain regulatory
compliance. At various times since 2006, FDA has issued guidance documents or announced draft guidance regarding initiatives that may
require varying levels of FDA oversight of our tests. For example, in June 2010, FDA announced a public meeting to discuss the agency’s
oversight of LDTs prompted by the increased complexity of LDTs and their increasingly important role in clinical decision-making and
disease management, particularly in the context of personalized medicine. FDA indicated that it was considering a risk-based application of
oversight to LDTs and that, following public input and discussion, it might issue separate draft guidance on the regulation of LDTs, which
ultimately could require that we seek and obtain either pre-market clearance or approval of LDTs, depending upon the risk-based approach
FDA adopts. The public meeting was held in July 2010 and further public comments were submitted to FDA through September 2010. FDA
has stated it
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is continuing to develop draft guidance in this area. Section 1143 of the Food and Drug Administration Safety and Innovation Act, signed by
the U.S. President on July 9, 2012, requires FDA to notify U.S. Congress at least 60 days prior to issuing a draft or final guidance regulating
LDTs and provide details of the anticipated action.
On July 31, 2014, FDA notified Congress pursuant to the FDASIA that it intended to issue draft Guidances that would regulate LDTs. On
October 3, 2014, the FDA issued two separate draft guidances: “Framework for Regulatory Oversight of Laboratory Developed Tests
(LDTs)” (“The Framework Draft Guidance”) and “FDA Notification and Medical Device Reporting for Laboratory Developed Tests” (the
“Notification Draft Guidance.”). In the Framework Draft Guidance, FDA states that after the Guidances are finalized, it will no longer exercise
enforcement discretion with respect to most LDTs and will, instead, regulate them in a risk-based manner consistent with the existing
classification of medical devices. Thus, the FDA plans to begin to enforce its medical device requirements, including premarket submission
requirements, on LDTs that have historically been marketed without FDA premarket review and oversight. Comments on the Draft Guidances
were due on February 2 and those comments are now being considered by the FDA. It is not known when the FDA may issue final
Guidances or what form those Guidances may take.
The Framework Draft Guidance states that within six months after the Guidances are finalized, all laboratories will be required to give notice
to the FDA and provide basic information concerning the nature of the LDTs offered. The FDA will then begin a phased review of the LDTs
available, based on the risk associated with the test. For the highest risk LDTs, which the FDA classifies as Class III devices, the Framework
Draft Guidance states that the FDA will begin to require premarket review within 12 months after the Guidance is finalized. Other high risk
LDTs will be reviewed over the next four years and then lower risk tests, which will be classified as Class II, will be reviewed in the
following four to nine years. The Framework Draft Guidance states that FDA expects to issue a separate Guidance describing the criteria for
its risk-based classification 18-24 months after the Guidances are finalized. At this time, we cannot predict how our tests would be classified.
If the FDA regulates LDTs as proposed, then it would classify LDTs according to the current system used to regulate medical devices. Under
that system, there are three different classes of medical devices, with the requirements becoming more stringent depending on the Class.
If the Guidances are finalized, it could require that we conduct clinical trials in support of a 510(k) submission or PMA application. These
trials generally require an effective Investigational Device Exemption from FDA for a specified number of patients, unless the product is
exempt from Investigational Device Exemption requirements or deemed a non-significant risk device eligible for more abbreviated
Investigational Device Exemption requirements. The Investigational Device Exemption application must be supported by appropriate data,
such as animal and laboratory testing results. Clinical trials may begin 30 days after the submission of the Investigational Device Exemption
application unless FDA or the appropriate institutional review boards at the clinical trial sites place the trial on clinical hold.
Under the Guidances, LDTs would also be subject to significant post-market requirements as well. After a device is placed on the market,
regardless of the classification or pre-market pathway, it remains subject to significant regulatory requirements. Even if regulatory approval or
clearance of a medical device is granted, FDA may impose limitations or restrictions on the uses and indications for which the device may be
labeled and promoted. Medical devices may be marketed only for the uses and indications for which they are cleared or approved.
Device manufacturers must also establish registration and device listings with FDA. A medical device manufacturer’s manufacturing
processes and those of its suppliers are required to comply with the applicable portions of the Quality Systems Regulations, which cover the
methods and documentation of the design, testing, production, processes, controls, quality assurance, labeling, packaging and shipping of
medical devices. Domestic facility records and manufacturing processes are subject to periodic unscheduled inspections by FDA. FDA also
may inspect foreign facilities that export products to the United States.
Failure to comply with applicable regulatory requirements can result in enforcement action by FDA, which may include any of the following
sanctions: warning letters, fines, injunctions, civil or criminal penalties, recall or seizure of current or future products, operating restrictions,
partial suspension or total shutdown of production, denial of 510(k) clearance or PMA applications for new products, or challenges to existing
510(k) clearances or PMA applications.
We cannot provide any assurance that FDA regulation, including pre-market review, will not be required in the future for our tests, whether
through additional guidance issued by FDA, new enforcement policies adopted by FDA or new legislation enacted by Congress. We believe it
is possible that legislation will be enacted into law or guidance could be issued by FDA
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which may result in increased regulatory burdens for us to continue to offer our tests or to develop and introduce new tests. Given the
attention Congress continues to give to these issues, legislation affecting this area may be enacted into law and may result in increased
regulatory burdens on us as we continue to offer our tests and to develop and introduce new tests.
In addition, the Secretary of the Department of Health and Human Services requested that its Advisory Committee on Genetics, Health and
Society make recommendations about the oversight of genetic testing. A final report was published in April 2008. If the report’s
recommendations for increased oversight of genetic testing were to result in further regulatory burdens, they could negatively affect our
business and delay the commercialization of tests in development.
The requirement of pre-market review could negatively affect our business until such review is completed and clearance to market or approval
is obtained. FDA could require that we stop selling our tests pending pre-market clearance or approval. If FDA allows our tests to remain on
the market but there is uncertainty about our tests, if they are labeled investigational by FDA or if labeling claims FDA allows us to make are
very limited, orders or reimbursement may decline. The regulatory approval process may involve, among other things, successfully completing
additional clinical trials and making a 510(k) submission, or filing a pre-market approval application with FDA. If FDA requires pre-market
review, our tests may not be cleared or approved on a timely basis, if at all. We may also decide voluntarily to pursue FDA pre-market review
of our tests if we determine that doing so would be appropriate.
Additionally, should future regulatory actions affect any of the reagents we obtain from vendors and use in conducting our tests, our business
could be adversely affected in the form of increased costs of testing or delays, limits or prohibitions on the purchase of reagents necessary to
perform our testing.
If we were required to conduct additional clinical trials prior to continuing to offer our proprietary genetic-based tests or any other tests
that we may develop as LDTs, those trials could lead to delays or failure to obtain necessary regulatory approval, which could cause
significant delays in commercializing any future products and harm our ability to achieve sustained profitability.
If FDA decides to require that we obtain clearance or approvals to commercialize our proprietary genetic-based tests, we may be required to
conduct additional pre-market clinical testing prior to submitting a regulatory notification or application for commercial sales. In addition, as
part of our long-term strategy we plan to seek FDA clearance or approval so we can sell our proprietary tests outside our laboratory; however,
we need to conduct additional clinical validation activities on our proprietary tests before we can submit an application for FDA approval or
clearance. Clinical trials must be conducted in compliance with FDA regulations or FDA may take enforcement action or reject the data. The
data collected from these clinical trials may ultimately be used to support market clearance or approval for our tests. Once commenced, we
believe it would likely take two years or more to conduct the studies and trials necessary to obtain approval from FDA to commercially launch
any of our proprietary microarrays outside of our clinical laboratory. Even if our clinical trials are completed as planned, we cannot be certain
that their results will support our test claims or that FDA or foreign authorities will agree with our conclusions regarding our test results.
Success in early clinical trials does not ensure that later clinical trials will be successful, and we cannot be sure that the later trials will replicate
the results of prior trials and studies. If we are required to conduct pre-market clinical trials, whether using prospectively acquired samples or
archival samples, delays in the commencement or completion of clinical testing could significantly increase our test development costs and
delay commercialization. Many of the factors that may cause or lead to a delay in the commencement or completion of clinical trials may also
ultimately lead to delay or denial of regulatory clearance or approval. The commencement of clinical trials may be delayed due to insufficient
patient enrollment, which is a function of many factors, including the size of the patient population, the nature of the protocol, the proximity of
patients to clinical sites and the eligibility criteria for the clinical trial. Moreover, the clinical trial process may fail to demonstrate that our tests
are effective for the proposed indicated uses, which could cause us to abandon a test candidate and may delay development of other tests.
We may find it necessary to engage contract research organizations to perform data collection and analysis and other aspects of our clinical
trials, which might increase the cost and complexity of our trials. We may also depend on clinical investigators, medical institutions and
contract research organizations to perform the trials properly. If these parties do not successfully carry out their contractual duties or
obligations or meet expected deadlines, or if the quality, completeness or accuracy of the clinical data they obtain is compromised due to the
failure to adhere to our clinical protocols or for other reasons, our clinical trials may have to be extended, delayed or terminated. Many of these
factors would be beyond our control. We may not be able to enter into replacement arrangements without undue delays or considerable
expenditures. If there are delays in testing or approvals as a result of the failure to perform by third parties, our research and development costs
would increase, and we may not be able to obtain regulatory clearance or approval for our tests. In addition, we may not be able to establish or
maintain relationships with these parties on favorable terms, if at all. Each of these outcomes would harm our ability to market our tests or to
achieve sustained profitability.
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We are subject to federal and state healthcare fraud and abuse laws and regulations and could face substantial penalties if we are
unable to fully comply with such laws.
We are subject to health care fraud and abuse regulation and enforcement by both the federal government and the states in which we conduct
our business. These health care laws and regulations include, for example:
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the federal Anti-kickback Statute, which prohibits, among other things, persons or entities from soliciting, receiving, offering or
providing remuneration, directly or indirectly, in return for or to induce either the referral of an individual for, or the purchase order or
recommendation of, any item or services for which payment may be made under a federal health care program such as the Medicare
and Medicaid programs;
the federal physician self-referral prohibition, commonly known as the Stark Law, which prohibits physicians from referring
Medicare or Medicaid patients to providers of “designated health services” with whom the physician or a member of the physician’s
immediate family has an ownership interest or compensation arrangement, unless a statutory or regulatory exception applies;
the federal Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), which established federal crimes for knowingly
and willfully executing a scheme to defraud any health care benefit program or making false statements in connection with the
delivery of or payment for health care benefits, items or services;
federal false claims laws, which, prohibit, among other things, individuals or entities from knowingly presenting, or causing to be
presented, claims for payment from Medicare, Medicaid, or other third-party payors that are false or fraudulent, and which may apply
to entities like us to the extent that our interactions with customers may affect their billing or coding practices; and
state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws, which may apply to items or
services reimbursed by any third-party payor, including commercial insurers.
We have adopted policies and procedures designed to comply with these laws, including policies and procedures relating to financial
arrangements between us and physicians who refer patients to us. In the ordinary course of our business, we conduct internal reviews of our
compliance with these laws. Our compliance is also subject to governmental review. The government alleged that we engaged in improper
billing practices in the past and we may be the subject of such allegations in the future as the growth of our business and sales organization
may increase the potential of violating these laws or our internal policies and procedures. See the section entitled “Legal Proceedings” for a
detailed description of the government’s prior allegations. The risk of our being found in violation of these laws and regulations is further
increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open
to a variety of interpretations. Further, the PPACA, among other things, amends the intent requirement of the federal anti-kickback and
criminal health care fraud statutes. A person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it. In
addition, the government may assert that a claim including items or services resulting from a violation of the federal anti-kickback statute
constitutes a false or fraudulent claim for purposes of the false claims statutes. Any action brought against us for violation of these laws or
regulations, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention
from the operation of our business. If our operations are found to be in violation of any of these laws and regulations, we may be subject to
any applicable penalty associated with the violation, including civil and criminal penalties, damages and fines, and/or exclusion from
participation in Medicare, Medi-Cal or other state or federal health care programs, we could be required to refund payments received by us,
and we could be required to curtail or cease our operations. Any of the foregoing consequences could seriously harm our business and our
financial results.
We are required to comply with laws governing the transmission, security and privacy of health information that require significant
compliance costs, and any failure to comply with these laws could result in material criminal and civil penalties.
Under the administrative simplification provisions of HIPAA, the U.S. Department of Health and Human Services has issued regulations
which establish uniform standards governing the conduct of certain electronic health care transactions and protecting the privacy and security
of Protected Health Information used or disclosed by health care providers and other covered entities. Three principal regulations with which
we are currently required to comply have been issued in final form under HIPAA: privacy regulations, security regulations and standards for
electronic transactions.
The privacy regulations cover the use and disclosure of Protected Health Information by health care providers. It also sets forth certain rights
that an individual has with respect to his or her Protected Health Information maintained by a health care provider, including the right to access
or amend certain records containing Protected Health Information or to request restrictions on the use or disclosure of Protected Health
Information. We have also implemented policies, procedures and standards to comply appropriately with the final HIPAA security regulations,
which establish requirements for safeguarding the confidentiality, integrity and availability of Protected Health Information, which is
electronically transmitted or electronically stored. The HIPAA privacy and security regulations establish a uniform federal “floor” and do not
supersede state laws that are
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more stringent or provide individuals with greater rights with respect to the privacy or security of, and access to, their records containing
Protected Health Information. As a result, we are required to comply with both HIPAA privacy regulations and varying state privacy and
security laws. Moreover, the Health Information Technology for Economic and Clinical Health Act (“HITECH”), among other things,
established certain health information security breach notification requirements. A covered entity must notify any individual whose protected
health information is breached.
These laws contain significant fines and other penalties for wrongful use or disclosure of Protected Health Information. We have implemented
practices and procedures to meet the requirements of the HIPAA privacy regulations and state privacy laws. In addition, we are in the process
of taking necessary steps to comply with HIPAA’s standards for electronic transactions, which establish standards for common health care
transactions. Given the complexity of the HIPAA, HITECH and state privacy restrictions, the possibility that the regulations may change, and
the fact that the regulations are subject to changing and potentially conflicting interpretation, our ability to comply with the HIPAA, HITECH
and state privacy requirements is uncertain and the costs of compliance are significant. To the extent that we submit electronic health care
claims and payment transactions that do not comply with the electronic data transmission standards established under HIPAA and HITECH,
payments to us may be delayed or denied. Additionally, the costs of complying with any changes to the HIPAA, HITECH and state privacy
restrictions may have a negative impact on our operations. We could be subject to criminal penalties and civil sanctions for failing to comply
with the HIPAA, HITECH and state privacy restrictions, which could result in the incurrence of significant monetary penalties.
Intellectual Property Risks Related to Our Business
Our rights to use technologies licensed from third parties are not within our control, and we may not be able to sell our products if we
lose our existing rights or cannot obtain new rights on reasonable terms.
Our ability to market certain of our tests and services, domestically and/or internationally, is in part derived from licenses to intellectual
property which is owned by third parties. As such, we may not be able to continue selling our tests and services if we lose our existing
licensed rights or sell new tests and services if we cannot obtain such licensed rights on reasonable terms. In particular, we currently in-license
a biomarker from the National Cancer Institute used in our FHACT® probe. Further, we may also need to license other technologies to
commercialize future products.
As may be expected, our business may suffer if (i) these licenses terminate; (ii) if the licensors fail to abide by the terms of the license,
properly maintain the licensed intellectual property or fail to prevent infringement of such intellectual property by third parties; (iii) if the
licensed patents or other intellectual property rights are found to be invalid or (iv) if we are unable to enter into necessary licenses on
reasonable terms or at all.
In return for the use of a third-party’s technology, we may agree to pay the licensor royalties based on sales of our products as well as other
fees. Such royalties and fees are a component of cost of product revenues and will impact the margins on our tests.
Our collaborators may assert ownership or commercial rights to inventions we develop from our use of the biological materials they
provide to us.
We rely on certain collaborators to provide us with tissue samples and biological materials that we use to develop our tests. In some cases we
have written agreements with collaborators that may require us to negotiate ownership and commercial rights with the collaborator if our use
of such collaborator’s materials results in an invention. Other agreements may limit our use of those materials to research/not for profit use. In
other cases, we may not have written agreements, or the written agreements we have may not clearly deal with intellectual property rights. If
we cannot successfully negotiate sufficient ownership and commercial rights to the inventions that result from our use of a collaborator’s
materials where required, or if disputes otherwise arise with respect to the intellectual property developed with the use of a collaborator’s
samples, we may be limited in our ability to capitalize on the market potential of these inventions.
The U.S. government may have “march-in rights” to certain of our probe related intellectual property.
Because federal grant monies were used in support of the research and development activities that resulted in our two issued U.S. patents, the
federal government retains what are referred to as “march-in rights” to these patents.
In particular, the National Cancer Institute and the National Institutes of Health, each of which administered grant monies to us, technically
retain the right to require us, under certain specific circumstances, to grant the U.S. government either a nonexclusive, partially exclusive, or
exclusive license to the patented invention in any field of use, upon terms that are
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reasonable for a particular situation. Circumstances that trigger march-in rights include, for example, failure to take, within a reasonable time,
effective steps to achieve practical application of the invention in a field of use, failure to satisfy the health and safety needs of the public, and
failure to meet requirements of public use specified by federal regulations. The National Cancer Institute and the National Institutes of Health
can elect to exercise these march-in rights on their own initiative or at the request of a third-party.
If we are unable to maintain intellectual property protection, our competitive position could be harmed.
Our ability to protect our proprietary discoveries and technologies affects our ability to compete and to achieve sustained profitability.
Currently, we rely on a combination of U.S. and foreign patents and patent applications, copyrights, trademarks and trademark applications,
confidentiality or non-disclosure agreements, material transfer agreements, licenses, work-for-hire agreements and invention assignment
agreements to protect our intellectual property rights. We also maintain as trade secrets certain company know-how and technological
innovations designed to provide us with a competitive advantage in the marketplace. Currently, including both U.S. and foreign patent
applications, we have only two issued U.S. patents and twelve pending patent applications relating to various aspects of our technology. While
we intend to pursue additional patent applications, it is possible that our pending patent applications and any future applications may not result
in issued patents. Even if patents are issued, third parties may independently develop similar or competing technology that avoids our patents.
Further, we cannot be certain that the steps we have taken will prevent the misappropriation of our trade secrets and other confidential
information and technology, particularly in foreign countries where we do not have intellectual property rights.
From time to time the U.S. Supreme Court, other federal courts, the U.S. Congress or the U.S. Patent and Trademark Office (“USPTO”) may
change the standards of patentability. Any such changes could have a negative impact on our business. For instance, on October 30, 2008, the
Court of Appeals for the Federal Circuit issued a decision that methods or processes cannot be patented unless they are tied to a machine or
involve a physical transformation. The U.S. Supreme Court later reversed that decision in Bilski v. Kappos, finding that the “machine-or-
transformation” test is not the only test for determining patent eligibility. The Court, however, declined to specify how and when processes are
patentable. Most recently, on March 20, 2012, in the case Mayo v. Prometheus, the U.S. Supreme Court reversed the Federal Circuit’s
application of Bilski and invalidated a patent focused on a diagnostic process because the patent claim embodied a law of nature. On July 3,
2012, the USPTO issued its Interim Guidelines for Subject Matter Eligibility Analysis of Process Claims Involving Laws of Nature in view
of the Prometheus decision. It remains to be seen how these guidelines play out in the actual prosecution of diagnostic claims. Similarly, it
remains to be seen lower courts will interpret the Prometheus decision. Some aspects of our technology involve processes that may be subject
to this evolving standard, and we cannot guarantee that any of our pending process claims will be patentable as a result of such evolving
standards.
The U.S. Supreme Court’s June 14, 2013 decision in Association for Molecular Pathology v. Myriad will likely have an impact on the entire
biotechnology industry. Specifically, the case involved certain of Myriad Genetics, Inc.’s U.S. patents related to the breast cancer susceptibility
genes BRCA1 and BRCA2. Plaintiffs asserted that the breast cancer genes were not patentable subject matter. The Supreme Court
unanimously held that the isolated form of naturally occurring DNA molecules does not rise to the level of patent-eligible subject matter. But
the Court also held that claims directed to complementary DNA (cDNA) molecules were patent-eligible because cDNA is not naturally
occurring. The Supreme Court focused on the informational content of the isolated DNA and determined that the information contained in the
isolated DNA molecule was not markedly different from that naturally found in the human chromosome. Yet, in holding isolated cDNA
molecules patent-eligible, the Court recognized the differences between human chromosomal DNA and the corresponding cDNA. Because the
non-coding regions of naturally occurring chromosomal DNA have been removed in cDNA, the Court accepted that cDNA is not a product of
nature and, therefore, is patent-eligible subject matter.
It does not appear that the Supreme Court’s ruling in Myriad will adversely affect our current patent portfolio which, unlike the claims at issue
in Myriad, centers on algorithmic methods associating chromosomal markers to specific clinical end-points. Nevertheless, we of course need
to remain mindful that this is an evolving area of law.
In addition, on February 5, 2010, the Secretary’s Advisory Committee on Genetics, Health and Society voted to approve a report entitled
“Gene Patents and Licensing Practices and Their Impact on Patient Access to Genetic Tests.” That report defines “patent claims on genes”
broadly to include claims to isolated nucleic acid molecules as well as methods of detecting particular sequences or mutations. The report also
contains six recommendations, including the creation of an exemption from liability for infringement of patent claims on genes for anyone
making, using, ordering, offering for sale or selling a test developed under the patent for patient care purposes, or for anyone using the patent-
protected genes in the pursuit of research. The report also recommended that the Secretary should explore, identify and implement mechanisms
that will encourage more voluntary adherence to current guidelines that promote nonexclusive in-licensing of diagnostic genetic and genomic
technologies. It is unclear whether the U.S. Department of Health and Human Services will act upon these recommendations, or if the
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recommendations would result in a change in law or process that could negatively impact our patent portfolio or future research and
development efforts.
We may face intellectual property infringement claims that could be time-consuming and costly to defend, and could result in our loss of
significant rights and the assessment of treble damages.
From time to time we may face intellectual property infringement (or misappropriation) claims from third parties. Some of these claims may
lead to litigation. The outcome of any such litigation can never be guaranteed, and an adverse outcome could affect us negatively. For example,
were a third-party to succeed on an infringement claim against us, we may be required to pay substantial damages (including up to treble
damages if such infringement were found to be willful). In addition, we could face an injunction, barring us from conducting the allegedly
infringing activity. The outcome of the litigation could require us to enter into a license agreement which may not be pursuant to acceptable or
commercially reasonable or practical terms or which may not be available at all. It is also possible that an adverse finding of infringement
against us may require us to dedicate substantial resources and time in developing non-infringing alternatives, which may or may not be
possible. In the case of diagnostic tests, we would also need to include non-infringing technologies which would require us to re-validate our
tests. Any such re-validation, in addition to being costly and time consuming, may be unsuccessful.
Finally, we may initiate claims to assert or defend our own intellectual property against third parties. Any intellectual property litigation,
irrespective of whether we are the plaintiff or the defendant, and regardless of the outcome, is expensive and time-consuming, and could divert
our management’s attention from our business and negatively affect our operating results or financial condition.
Risks relating to our International Operations
International expansion of our business exposes us to business, regulatory, political, operational, financial and economic risks
associated with doing business outside of the United States.
Our business strategy incorporates international expansion, including our recent acquisitions which have provided us with facilities in India
and China, and the possibility of establishing and maintaining clinician marketing and education capabilities in other locations outside of the
United States and expanding our relationships with distributors and manufacturers. Doing business internationally involves a number of risks,
including:
• multiple, conflicting and changing laws and regulations such as tax laws, export and import restrictions, employment laws, regulatory
•
•
•
•
•
•
•
•
•
requirements and other governmental approvals, permits and licenses;
failure by us or our distributors to obtain regulatory approvals for the sale or use of our tests in various countries, including failure to
achieve “CE Marking”, a conformity mark which is required to market in vitro diagnostic medical devices in the European Economic
Area and which is broadly accepted in other international markets;
difficulties in managing foreign
operations;
complexities associated with managing multiple payor-reimbursement regimes or self-pay
systems;
logistics and regulations associated with shipping tissue samples, including infrastructure conditions and transportation
delays;
limits on our ability to penetrate international markets if our diagnostic tests cannot be processed by an appropriately qualified local
laboratory;
financial risks, such as longer payment cycles, difficulty enforcing contracts and collecting accounts receivable and exposure to
foreign currency exchange rate fluctuations;
reduced protection for intellectual property
rights;
natural disasters, political and economic instability, including wars, terrorism and political unrest, outbreak of disease, boycotts,
curtailment of trade and other business restrictions; and
failure to comply with the Foreign Corrupt Practices Act, including its books and records provisions and its anti-bribery provisions,
by maintaining accurate information and control over sales and distributors’ activities.
Any of these risks, if encountered, could significantly harm our future international expansion and operations and, consequently, have a
material adverse effect on our financial condition, results of operations and cash flows.
Our operations are subject to risks associated with emerging markets, including China and India.
Emerging markets are a significant focus of our growth strategy. The developing nature of these markets presents several risks, including
deterioration of social, political, labor, or economic conditions in a country or region, and difficulties in staffing and managing foreign
operations. Perceived risks associated with investing in emerging markets such as China and India, or a general disruption in the development
of such markets could materially and adversely affect our business, operating results and financial condition.
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With the completion of the Gentris acquisition, a portion of our assets and operations are located in China and we are subject to
regulatory, economic, political and other uncertainties in China.
The Chinese government has the ability to exercise significant influence and control over our operations in China. In recent years, the Chinese
government has implemented measures for economic reform, the reduction of state ownership of productive assets and the establishment of
corporate governance practices in business enterprises. However, many productive assets in China are still owned by the Chinese government.
In addition, the government continues to play a significant role in regulating industrial development by imposing business regulations. It also
exercises significant control over the country’s economic growth through the allocation of resources, controlling payment of foreign currency-
denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies.
There can be no assurance that China’s economic, political or legal systems will not develop in a way that becomes detrimental to our
business, results of operations and financial condition. Our activities may be materially and adversely affected by changes in China’s economic
and social conditions and by changes in the policies of the government, such as measures to control inflation, changes in the rates or method of
taxation and the imposition of additional restrictions on currency conversion.
Additional factors that we may experience in connection with having operations in China or other foreign countries that may adversely affect
our business and results of operations include:
•
•
•
•
•
•
our inability to enforce or obtain a remedy under any material
agreements;
Chinese restrictions on foreign investment that could impair our ability to conduct our business or acquire or contract with other
entities in the future;
restrictions on currency exchange that may limit our ability to use cash flow most effectively or to repatriate our
investment;
fluctuations
values;
cultural, language and managerial differences that may reduce our overall performance;
and
political
instability.
currency
in
With the completion of the BioServe acquisition a portion of our assets and operations are located in India and we are subject to
regulatory, economic, political and other uncertainties in India.
In August 2014 we acquired BioServe a leading genomic service and next-generation sequencing company founded in 2002 serving both the
research and clinical markets and based in Hyderabad, India. In the past, the Indian economy has experienced many of the problems that
commonly confront the economies of developing countries, including high inflation, erratic gross domestic product growth and shortages of
foreign exchange. The Indian government has exercised, and continues to exercise, significant influence over many aspects of the Indian
economy through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and
providing preferential treatment to particular industries, and Indian government actions concerning the economy could have a material adverse
effect on private sector entities like us.
India has experienced significant economic growth over the last several years, but faces major challenges in sustaining that growth in the years
ahead. These challenges include the need for substantial infrastructure development. India has also recently experienced civil unrest and
terrorism and has been involved in conflicts with neighboring countries. In recent years, there have been military confrontations between India
and Pakistan that have occurred in the region of Kashmir and along the India-Pakistan border. If India becomes engaged in armed hostilities,
particularly if these hostilities are protracted or involve the threat of or use of weapons of mass destruction, it is likely that our operations
would be materially adversely affected.
Our financial performance may be adversely affected by general economic conditions and economic and fiscal policy in India, including
changes in exchange rates and controls, interest rates and taxation policies, as well as social stability and political, economic or diplomatic
developments affecting India in the future.
Some of our contract manufacturers and distributors are located outside of the United States, which may subject us to increased
complexity and costs.
We rely on manufacturing facilities located outside the United States for our FHACT® probes, particularly in India. We also utilize
distributors to sell FHACT® probes outside the United States. Our FHACT® probe manufacturing and international sales may be subject to
certain risks, including:
•
•
•
difficulty in obtaining, maintaining or enforcing intellectual property rights in some
countries;
local business and cultural factors that differ from our normal standards and
practices;
foreign currency exchange
fluctuations;
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•
•
•
•
•
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•
different regulatory
requirements;
impediments to the flow of foreign exchange capital payments and receipts due to exchange controls instituted by certain foreign
governments and the fact that local currencies of some countries are not freely convertible;
geopolitical and economic instability and military
conflicts;
difficulties in managing international
distributors;
burdens of complying with a variety of foreign laws and treaties and changes in local laws and regulations, including tax
laws;
difficulty in enforcing agreements, judgments and arbitration awards in foreign jurisdictions;
and
adverse economic conditions in any
jurisdiction.
Our operating results may be adversely affected by fluctuations in foreign currency exchange rates and restrictions on the deployment of
cash across our global operations.
Although we report our operating results in U.S. dollars, a portion of our revenues and expenses are or will be denominated in currencies
other than the U.S. dollar. Fluctuations in foreign currency exchange rates can have a number of adverse effects on us. Because our
consolidated financial statements are presented in U.S. dollars, we must translate revenues, expenses and income, as well as assets and
liabilities, into U.S. dollars at exchange rates in effect during or at the end of each reporting period. Therefore, changes in the value of the
U.S. dollar against other currencies will affect our revenues, income from operations, other income (expense), net and the value of balance
sheet items originally denominated in other currencies. There is no guarantee that our financial results will not be adversely affected by
currency exchange rate fluctuations. In addition, in some countries we could be subject to strict restrictions on the movement of cash and the
exchange of foreign currencies, which could limit our ability to use these funds across our global operations.
We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and other worldwide anti-bribery laws.
The FCPA and anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments
for the purpose of obtaining or retaining business or other commercial advantage. Our policies mandate compliance with these anti-bribery
laws, which often carry substantial penalties, including criminal and civil fines, potential loss of export licenses, possible suspension of the
ability to do business with the federal government, denial of government reimbursement for products and exclusion from participation in
government healthcare programs. We operate in jurisdictions such as India and China that have experienced governmental and private sector
corruption to some degree, and, in certain circumstances, strict compliance with anti-bribery laws may conflict with certain local customs and
practices. We cannot assure that our internal control policies and procedures always will protect us from reckless or other inappropriate acts
committed by our affiliates, employees or agents. Violations of these laws, or allegations of such violations, could have a material adverse
effect on our business, financial position and results of operations.
Risks Relating to Our Common Stock
There has been a limited trading market for our common stock.
We only recently received approval to list our common stock on The NASDAQ Capital Market. Prior to August 2013, our common stock had
been quoted on the OTCQB, and prior to our initial public offering in April 2013, there was no trading activity in our common stock.
Although the NASDAQ listing improved the liquidity of our common stock, such listing has been of limited duration and no assurance can be
given that recent levels of trading activity will continue. A lack of an active market may impair the ability of our stockholders to sell shares at
the time they wish to sell them or at a price that they consider reasonable. The lack of an active market may also reduce the fair market value of
our shares. An inactive market may also impair our ability to raise capital by selling shares of capital stock and may impair our ability to
acquire other companies or technologies by using our common stock as consideration.
The price of our common stock may be volatile, and the market price of our common stock may decrease.
Our stock price per share may vary from time to time. Even if an active market for our stock continues, our stock price nevertheless may be
volatile. Market prices for securities of early-stage life sciences companies have historically been particularly volatile. The factors that may
cause the market price of our common stock to fluctuate include, but are not limited to:
•
progress, or lack of progress, in developing and commercializing our proprietary
tests;
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•
•
•
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•
favorable or unfavorable decisions about our tests or services from government regulators, insurance companies or other third-party
payors;
our ability to recruit and retain qualified regulatory and research and development
personnel;
changes in investors’ and securities analysts’ perception of the business risks and conditions of our
business;
changes in our relationship with key
collaborators;
changes in the market valuation or earnings of our competitors or companies viewed as similar to
us;
changes in key
personnel;
depth of the trading market in our common
stock;
termination of the lock-up agreements or other restrictions on the ability of persons who held our stock prior to our initial public
offering to sell shares;
changes in our capital structure, such as future issuances of securities or the incurrence of additional
debt;
the granting or exercise of employee stock options or other equity
awards;
realization of any of the risks described under this section entitled “Risk Factors”;
and
general market and economic
conditions.
In addition, the equity markets have experienced significant price and volume fluctuations that have affected the market prices for the securities
of newly public companies for a number of reasons, including reasons that may be unrelated to our business or operating performance. These
broad market fluctuations may result in a material decline in the market price of our common stock and you may not be able to sell your shares
at prices you deem acceptable. In the past, following periods of volatility in the equity markets, securities class action lawsuits have been
instituted against public companies. Such litigation, if instituted against us, could result in substantial cost and the diversion of management
attention.
Our stockholders may be diluted by exercises of outstanding options and warrants.
As of December 31, 2014, we had outstanding options to purchase an aggregate of 1,839,458 shares of our common stock at a weighted
average exercise price of $10.58 per share and warrants to purchase an aggregate of 1,136,078 shares of our common stock at a weighted
average exercise price of $13.47 per share. The exercise of such outstanding options and warrants will result in dilution of the value of our
shares.
Reports published by securities or industry analysts, including projections in those reports that exceed our actual results, could adversely
affect our common stock price and trading volume.
Securities research analysts, including those affiliated with our underwriters, establish and publish their own periodic projections for our
business. These projections may vary widely from one another and may not accurately predict the results we actually achieve. Our stock price
may decline if our actual results do not match securities research analysts’ projections. Similarly, if one or more of the analysts who writes
reports on us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price could decline. If one
or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, our stock price or trading volume could
decline. While we expect securities research analyst coverage, if no securities or industry analysts begin to cover us, the trading price for our
stock and the trading volume could be adversely affected.
Our directors and executive officers have substantial influence over us and could delay or prevent a change in corporate control.
Our directors and executive officers, together with their affiliates, beneficially own approximately 31.2% of our outstanding common stock,
based on the number of shares outstanding on December 31, 2014. These stockholders, acting together, have significant influence over the
outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation or sale of all
or substantially all of our assets. In addition, these stockholders, acting together, have significant influence over our management and affairs.
Accordingly, this concentration of ownership might harm the market price of our common stock by:
•
•
•
delaying, deferring or preventing a change in
control;
impeding a merger, consolidation, takeover or other business combination involving us;
or
discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of
us.
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We are an “emerging growth company,” and any decision on our part to comply only with certain reduced disclosure requirements
applicable to “emerging growth companies” could make our common stock less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act, and, for as long as we continue to be an “emerging growth company,”
we intend to take advantage of exemptions from various reporting requirements applicable to other public companies but not to “emerging
growth companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the
Sarbanes-Oxley Act of 2002, as discussed above, reduced disclosure obligations regarding executive compensation in our periodic reports and
proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder
approval of any golden parachute payments not previously approved. We could be an “emerging growth company” for up to five years, or
until the earliest of (i) the last day of the first fiscal year in which our annual gross revenues exceed $1 billion, (ii) the date that we become a
“large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, or the Exchange Act, which would
occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most
recently completed second fiscal quarter, or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the
preceding three year period. We have irrevocably chosen to “opt out” of the extended transition periods available under the JOBS Act for
complying with new or revised accounting standards. We intend to take advantage of certain exemptions from various reporting requirements
including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements,
and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any
golden parachute payments not previously approved, and if we do take advantage of these exemptions, we cannot predict if investors will find
our common stock less attractive as a result. If some investors find our common stock less attractive as a result of any choices to take
advantage of these reduced disclosure obligations, there may be a less active trading market for our common stock and our stock price may be
more volatile.
We are incurring significantly increased costs and devote substantial management time as a result of operating as a public company
particularly after we are no longer an “emerging growth company.”
As a public company and particularly after we cease to be an “emerging growth company”, we are incurring significant legal, accounting and
other expenses that we did not incur as a private company and which may increase after we are no longer an "emerging growth company." For
example, in addition to being required to comply with certain requirements of the Sarbanes-Oxley Act of 2002, we will be required to comply
with certain requirements of the Dodd Frank Wall Street Reform and Consumer Protection Act, as well as rules and regulations subsequently
implemented by the SEC, including the establishment and maintenance of effective disclosure and financial controls and changes in corporate
governance practices. We expect that compliance with these requirements will increase our legal and financial compliance costs and will make
some activities more time consuming and costly. In addition, we expect that our management and other personnel will need to divert attention
from operational and other business matters to devote substantial time to these public company requirements.
The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial reporting and disclosure
controls and procedures. In particular, we must perform system and process evaluation and testing of our internal control over financial
reporting to allow management to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the
Sarbanes-Oxley Act. In addition, after we are no longer an “emerging growth company”, we will be required to have our independent
registered public accounting firm attest to the effectiveness of our internal control over financial reporting. Our compliance with Section 404 of
the Sarbanes-Oxley Act, as applicable, requires us to incur substantial accounting expense and expend significant management efforts. We
currently do not have an internal audit group, and we will need to continue to hire additional accounting and financial staff with appropriate
public company experience and technical accounting knowledge. If we or our independent registered public accounting firm identify
deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our stock could
decline and we could be subject to sanctions or investigations by the NASDAQ, the SEC or other regulatory authorities, which would require
additional financial and management resources.
Our ability to successfully implement our business plan and comply with Section 404, as applicable, requires us to be able to prepare timely
and accurate financial statements. We expect that we will need to continue to improve existing, and implement new operational and financial
systems, procedures and controls to manage our business effectively. Any delay in the implementation of, or disruption in the transition to,
new or enhanced systems, procedures or controls, may cause our operations to suffer and we may be unable to conclude that our internal
control over financial reporting is effective and to obtain an unqualified report on internal controls from our auditors as required under Section
404 of the Sarbanes-Oxley Act. If we fail to maintain an effective system of internal control over financial reporting, we may not be able to
accurately report our financial results, and current and potential stockholders may lose confidence in our financial reporting. This, in turn,
could have an adverse impact on trading prices for our common stock, and could adversely affect our ability to access the capital markets.
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Anti-takeover provisions of our certificate of incorporation, our bylaws and Delaware law could make an acquisition of us, which may
be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove the current members
of our board and management.
Certain provisions of our amended and restated certificate of incorporation and bylaws could discourage, delay or prevent a merger,
acquisition or other change of control that stockholders may consider favorable, including transactions in which you might otherwise receive a
premium for your shares. Furthermore, these provisions could prevent or frustrate attempts by our stockholders to replace or remove members
of our board of directors. These provisions also could limit the price that investors might be willing to pay in the future for our common stock,
thereby depressing the market price of our common stock. Stockholders who wish to participate in these transactions may not have the
opportunity to do so. These provisions, among other things:
•
•
•
•
allow the authorized number of directors to be changed only by resolution of our board of
directors;
authorize our board of directors to issue, without stockholder approval, preferred stock, the rights of which will be determined at the
discretion of the board of directors and that, if issued, could operate as a “poison pill” to dilute the stock ownership of a potential
hostile acquirer to prevent an acquisition that our board of directors does not approve;
establish advance notice requirements for stockholder nominations to our board of directors or for stockholder proposals that can be
acted on at stockholder meetings; and
limit who may call a stockholder
meeting.
In addition, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, or DGCL, which may, unless
certain criteria are met, prohibit large stockholders, in particular those owning 15% or more of the voting rights on our common stock, from
merging or combining with us for a prescribed period of time.
Because we do not expect to pay cash dividends for the foreseeable future, you must rely on appreciation of our common stock price for
any return on your investment. Even if we change that policy, we may be restricted from paying dividends on our common stock.
We do not intend to pay cash dividends on shares of our common stock for the foreseeable future. Any determination to pay dividends in the
future will be at the discretion of our board of directors and will depend upon results of operations, financial performance, contractual
restrictions, restrictions imposed by applicable law and other factors our board of directors deems relevant. Accordingly, you will have to rely
on capital appreciation, if any, to earn a return on your investment in our common stock. Investors seeking cash dividends in the foreseeable
future should not purchase our common stock.
Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
Our ability to utilize our federal net operating loss, carryforwards and federal tax credits are limited under Sections 382 and 383 of the Internal
Revenue Code of 1986, as amended. The limitations apply since we have experienced an “ownership change,” as defined by Section 382, as a
result of the Company’s securities offerings. Generally, an ownership change occurs if the percentage of the value of the stock that is owned
by one or more direct or indirect “five percent shareholders” changes by more than 50 percentage points over their lowest ownership
percentage at any time during the applicable testing period (typically three years). Since we have experienced an “ownership change”, our
NOL carryforwards and federal tax credits are subject to limitations as to our ability to utilize them to offset taxable income and related income
taxes. In addition, future changes in our stock ownership, which may be outside of our control, may trigger further “ownership changes”
which would further limit their utilization. As a result, if we earn net taxable income, our ability to use our pre-change net operating loss
carryforwards and other tax attributes to offset United States federal taxable income and related income taxes are subject to limitations, which
could potentially result in increased future tax liability to us.
Our failure to meet the continued listing requirements of The NASDAQ Capital Market could result in a de-listing of our common stock.
If we fail to satisfy the continued listing requirements of The NASDAQ Capital Market, such as the corporate governance requirements or the
minimum closing bid price requirement, NASDAQ may take steps to de-list our common stock. Such a de-listing would likely have a negative
effect on the price of our common stock and would impair your ability to sell or purchase our common stock when you wish to do so. In the
event of a de-listing, we would take actions to restore our compliance with NASDAQ’s listing requirements, but we can provide no assurance
that any such action taken by us would allow our common stock to become listed again, stabilize the market price or improve the liquidity of
our common stock, prevent our common
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stock from dropping below the NASDAQ minimum bid price requirement or prevent future non-compliance with NASDAQ’s listing
requirements.
Item 1B.
Unresolved Staff Comments
None.
Item 2.
Properties
As of December 31, 2014, we had a lease for approximately 17,900 square feet of office and laboratory space in Rutherford, New Jersey,
24,900 square feet located Research Triangle Park (RTP) in Morrisville, North Carolina,10,000 square feet in Hyderabad, India and 2,700
square feet in Shanghai, China. We have escalating lease agreements for both our New Jersey and North Carolina spaces which expire
February 2018 and May 2020 respectively.
Item 3.
Legal Proceedings
In the normal course of business, the Company may be involved in legal proceedings or threatened legal proceedings. We are not party to any
legal proceedings or aware of any threatened legal proceedings which are expected to have a material adverse effect on our financial condition,
results of operations or liquidity.
Item 4.
Mine Safety Disclosures
Not applicable.
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PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Prior to our initial public offering on April 4, 2013, no public trades occurred in our common stock. From our initial public offering until
August 13, 2013, our common stock was quoted on the OTCQB under the symbol “CGIX,” and since August 14, 2013, our common stock
has been listed on The NASDAQ Capital Market. The following table sets forth, for the periods indicated, the reported high and low closing
bid quotations per share for our common stock based on information provided by the OTC Market Group, Inc. and our high and low sales
prices on The NASDAQ Capital Market. Such OTCQB over-the-counter market quotations reflect inter-dealer prices, without markup,
markdown or commissions and, particularly because our common stock is traded infrequently, may not necessarily represent actual
transactions or a liquid trading market.
4th Quarter 2014
3rd Quarter 2014
2nd Quarter 2014
1st Quarter 2014
4th Quarter 2013
3rd Quarter 2013 (1)
3rd Quarter 2013 (2)
2nd Quarter 2013
__________________________
(1) From August 14, 2013 through September 30, 2013.
(2) From July 1, 2013 through August 13, 2013.
Holders
$
$
$
$
$
$
$
$
High
Low
8.95 $
11.35 $
16.55 $
20.00 $
19.94 $
23.25 $
11.57 $
11.75 $
4.83
8.36
8.54
13.50
11.13
8.58
10.10
8.50
As of March 1, 2015, we had approximately 61 holders of record of our common stock. The number of record holders was determined from
the records of our transfer agent and does not include beneficial owners of common stock whose shares are held in the names of various
security brokers, dealers, and registered clearing agencies. The transfer agent of our common stock is Continental Stock Transfer & Trust, 17
Battery Place, 8th Floor, New York, New York, 10004.
Dividends
We have never declared dividends on our equity securities, and currently do not plan to declare dividends on shares of our common stock in
the foreseeable future. We expect to retain our future earnings, if any, for use in the operation and expansion of our business. Subject to the
foregoing, the payment of cash dividends in the future, if any, will be at the discretion of our board of directors and will depend upon such
factors as earnings levels, capital requirements, our overall financial condition and any other factors deemed relevant by our board of directors.
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Equity Compensation Plan Information
The following table provides information as of December 31, 2014 regarding shares of our common stock that may be issued under our
existing equity compensation plans, including our 2008 Stock Option Plan (the “2008 Plan”) and our 2011 Equity Incentive Plan (the “2011
Plan”) as well as shares issued outside of these plans.
Equity Compensation Plan Information
(a)
Number of securities
to be issued upon exercise
of outstanding options
and rights(1)
(b)
Weighted Average
exercise price of
outstanding options
and rights
(c)
Number of securities
remaining available for
future issuance under equity
compensation plan
(excluding securities
referenced in column (a))
Equity compensation plans
approved by security holders(2)
Equity compensation plans not
approved by security holders(4)
__________________________________
(1)
(2)
(3)
(4)
Does not include any Restricted Stock as such shares are already reflected in our outstanding shares.
Consists of the 2008 Plan and the 2011 Plan.
Includes securities available for future issuance under the 2008 Plan and the 2011 Plan.
These options were issued to one of our current board members in connection with consulting
services.
1,803,458 $
36,000 $
10.58
10.00
475,095
(3)
—
Item 6.
Selected Financial Data.
Not applicable.
Item 7.
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: Cancer
Genetics Italia, S.r.l., Gentris, LLC and BioServe Biotechnologies (India) Private Limited, 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 this annual report
Form10-K. This MD&A may contain forward-looking statements that involve risks and uncertainties. For a discussion on forward-looking
statements, see the information set forth in the Introductory Note to this Annual Report under the caption “Forward Looking Statements”,
which information is incorporated herein by reference.
Overview
We are an oncology diagnostics company focused on developing, commercializing and providing DNA-based tests and services to improve
the personalization of cancer treatment and to better inform biopharmaceutical companies of genomic factors influencing subject responses to
therapeutics. Our vision is to become the oncology diagnostics partner for companies and clinicians by participating in the entire care
continuum from bench to bedside. We believe the diagnostic industry is undergoing a metamorphosis in its approach to oncology testing,
embracing individualized medicine as a means to drive higher standards of patient treatment and disease management. Similarly, biopharma
companies are increasingly engaging companies such as ours to provide information on clinical trial participants’ DNA profiles in order to
identify genomic variations that may be responsible for differing responses to pharmaceuticals, and particularly to oncology drugs, thereby
increasing the efficiency of trials while lowering related costs. We believe tailored therapeutics can revolutionize oncology medicine through
DNA-based testing services, enabling physicians and researchers to target the factors that make each patient and disease unique. We have
created a unique position in the industry by providing targeted somatic analysis of tumor sample cells alongside germline analysis of an
individuals' non-cancerous cells' DNA as we attempt to reach the next milestone in
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personalized medicine.
Our services are performed at our state-of-the-art laboratories located in New Jersey, North Carolina, Shanghai (China), and Hyderabad,
India. Our laboratories comply with the highest regulatory standards as appropriate for the services they deliver including CLIA, CAP, NY
State and NABL (India). We have two advisory boards to counsel our scientific and clinical direction. Our Scientific Advisory Board is
comprised of preeminent scientists and physicians from the fields of cancer biology, cancer pathology, cancer medicine and molecular
genetics. Our Clinical Advisory Board is comprised of clinicians and scientists focused on clinical implementation of our proprietary tests and
services and mapping those tests and services to patient needs. Our services are built on a foundation of world-class scientific knowledge and
intellectual property 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.
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, 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
arrays and probe panels. We believe that there is significant synergy in developing and marketing a complete set of tests and services that are
disease- and treatment-focused and delivering those tests and services in a comprehensive manner to help with patient management 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 for clinical use.
We expect to continue to incur significant losses for the near future. We incurred losses of $16.4 million, $12.4 million and $6.7 million for
fiscal years ended December 31, 2014, 2013 and 2012, respectively. As of December 31, 2014, we had an accumulated deficit of $77.8
million.
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 the BioPharma
community to achieve more revenue supporting clinical trials and develop and penetrate the Indian market. In 2014 we acquired Gentris to
increase our penetration in the Biopharma space. Our proprietary tests include comparative genomic hybridization (CGH) microarrays and
next generation sequencing (NGS) panels, and DNA fluorescent in situ hybridization (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 Services and Biopharma Services. Clinical Services can be billed to Medicare, another
third party insurer or the referring community hospital or other healthcare facility in accordance with state and federal law. Biopharma Services
are billed to the customer directly. We also derive limited revenue from Discovery Services, which are services provided in the development of
new testing assays and methods. Discovery Services are billed directly to the customer. Revenue also includes receipts from grants (2013 and
2012 only).
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. Our test ordering sites are largely hospitals, cancer
centers, reference laboratories and physician offices, as well as biopharmaceutical companies as part of
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a clinical trial. 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.
The top five test ordering clients during 2014 and 2013 accounted for 56% and 69%, respectively, of our testing volumes, with 38% and 36%,
respectively, of the test volume coming from community hospitals. During the year ended December 31, 2014, two Biopharma clients
accounted for approximately 23% and 12%, respectively, of our revenue. During the year ended December 31, 2013 there was one Biopharma
client that accounted for approximately 40% of our revenue. The loss of our largest client would materially adversely affect our results of
operations, however the loss of any other test ordering client would not materially adversely affect our results of operations.
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 year ended December 31, 2014, Medicare accounted for approximately 11% of our total revenue, other insurance accounted for
approximately 16% of our total revenue and other healthcare facilities accounted for 16% of our total revenue. As we expand our portfolio of
tests and services, and our sales activities, we expect the percentage of revenue from other healthcare facilities may decrease over the long
term. However, the addition of new customers, particularly a community hospital or other large volume client, could offset this trend seen in
prior years. On average, we generate less revenue per test from other healthcare facilities billed directly, than from other insurance payors.
However, we have reduced sales cost associated with direct bill clients as well as significantly reduced collections risk. Typically, we negotiate
discounts in the range of 5% to 20% with directly billed healthcare facilities depending on the volume of business.
Cost of Revenues
Our cost of revenues consists principally of internal personnel costs, including 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. We completed two acquisitions in 2014; Gentris in North Carolina and BioServe in India. With these two
acquisitions, we intend to integrate our resources and services in an effort to reduce costs. We will continue to assess how geographic
advantage can 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 stock-based compensation, 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. We anticipate that research and development expenses will increase in the near-term, principally as a result of hiring
additional personnel to develop and validate tests in our pipeline and to perform work associated with our research collaborations. In addition,
we expect that our costs related to collaborations with research and academic institutions will increase. For example, 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. All research and development expenses are charged to operations in the periods they are incurred.
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
have started to increase our sales and marketing and clinical efforts since our IPO and we expect our sales and marketing expenses to increase
significantly as we expand into new geographies and add new clinical tests and services.
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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 incurred increases in
our general and administrative expenses and anticipate further increases as we expand our business operations.
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
Year Ended December 31, 2014 and 2013
The following table sets forth certain information concerning our results of operations for the periods shown:
Year Ended December 31,
Change
2014
2013
$
%
$
$
$
10,199 $
8,454
4,622
3,963
12,369
(19,209) $
(399)
417
198
—
(18,993)
2,350
(16,643) $
6,610 $
4,925
2,190
1,842
6,115
(8,462) $
(2,358)
4,633
(6,850)
(13,037)
664
(12,373) $
3,589
3,529
2,432
2,121
6,254
(10,747)
1,959
(4,216)
(6,850)
(5,956)
1,686
(4,270)
54 %
72 %
111 %
115 %
102 %
127 %
-83 %
-91 %
100 %
46 %
254 %
35 %
(dollars in thousands)
Revenue
Cost of revenues
Research and development expenses
Sales and marketing expenses
General and administrative expenses
Total Operating Loss
Interest income (expense)
Change in fair value of warrant liability
Change in fair value of investors consideration
Debt conversion costs
Loss before income taxes
Income tax benefit (expense)
Net Loss
Revenue
The breakdown of our revenue is as follows:
(dollars in thousands)
Biopharma Services
Clinical Services
Discovery Services
Grants
Total Revenue
Year Ended December 31,
Change
2014
2013
$
%
$
%
5,606
4,432
161
—
10,199
55%
43%
2%
—%
100%
2,650
3,663
—
297
6,610
40%
55%
—%
5%
100%
$
2,956
769
161
(297)
3,589
%
112 %
21 %
n/a
(100)%
54 %
Revenue increased 54%, or $3.6 million, to $10.2 million for the year ended December 31, 2014, from $6.6 million for the year ended
December 31, 2013, principally due to the acquisitions of Gentris and BioServe, whose revenue accounted for $3.3 million of the increase.
Our average revenue (excluding grant revenue and probe revenue) per test decreased to $550 per test for the year ended December 31, 2014
from $566 per test for the year ended December 31, 2013, principally due to a decrease in the average revenue per test from private insurance
carriers and other non-Medicare payors. This was offset by an 11%
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increase in test volume from 10,771 tests for the year ended December 31, 2013, to 11,912 tests for the year ended December 31, 2014.
Revenue from Biopharma Services increased 112%, or $3.0 million, to $5.6 million for the year ended December 31, 2014, from $2.7 million
for the year ended December 31, 2013, principally due to the acquisition of Gentris whose revenue accounted for a $3.1 million increase offset
by an $180,000 decrease in legacy Biopharma Services. Revenue from Clinical Services customers increased 21%, or $770,000, to $4.4
million for the year ended December 31, 2014, from $3.7 million for the year ended December 31, 2013, principally due to an increase in test
volume. This increase in volume was partially offset by a decrease in average revenue per test. Revenue from Discovery Services, our new
line of business, increased $161,000 for the year ended December 31, 2014 representing 2% of total revenue. Revenue from Grants decreased
100%, or $297,000, for the year ended December 31, 2014, due to the completion of all grant activities in the year ended December 31, 2013.
Cost of Revenues
Cost of revenues increased 72%, or $3.5 million, to $8.4 million for the year ended December 31, 2014, from $4.9 million for the year ended
December 31, 2013, principally due to the following: Costs of revenue from the acquired businesses of $2.2 million, lab supplies expenses
increased by $460,000 or 40% as a result of higher test volumes, shipping costs increased by $300,000 or 130% as a result of higher test
volume, outsourcing services increased by $220,000 or 257% as a result of us contracting with select labs to perform some of our tests, and
compensation costs increased by $220,000 or 9% as a result of us securing the expertise needed to continue to deliver high quality test results.
Overall the cost of revenue did not increase proportionately with revenue, due to the cost of revenue in 2013 being lower in proportion as a
result of us performing a large number of tests for a clinical trials client in 2013 and in 2013 there was $297,000 in grant revenues that carried
minimal costs, whereas in 2014 there were no grant revenues.
Operating Expenses
Research and Development Expenses. Research and development expenses increased 111%, or $2.4 million, to $4.6 million for the year ended
December 31, 2014, from $2.2 million for the year ended December 31, 2013, principally due to the following: Our share of the loss from
Oncospire, our joint venture with Mayo Clinic, increased $930,000, as it incurred a full year of research expenses related to the pursuit of
developing new clinical tests. (In 2013, the costs associated with our joint venture was $12,000). Compensation costs increased by $793,000
or 88% as a result of us building up our R&D team, and supplies costs increased by $295,000 or 64% as a result of us accelerating the
development of our proprietary tests.
Sales and Marketing Expenses. Sales and marketing expenses increased 115%, or $2.1 million, to $3.9 million for the year ended
December 31, 2014, from $1.8 million for the year ended December 31, 2013, principally due to the following: Costs from the acquired
businesses of $538,000, compensation costs increased by $1.1 million or 86% as a result of us building and developing our team, marketing
costs increased by $165,000 or 163% as a result of a concentrated effort to expand our customer base, travel costs increased by $100,000, and
stock-based compensation increased by $90,000 due to increases in the number of sales personnel.
General and Administrative Expenses. General and administrative expenses increased 102%, or $6.3 million to $12.4 million for the year
ended December 31, 2014, from $6.1 million for the year ended December 31, 2013, principally due to the following: Costs from the acquired
businesses of $1.4 million, stock-based compensation increased by $2.5 million, costs associated with being a public company increased by
$1.5 million due to higher consulting, legal and insurance expenses, compensation costs increased by $575,000 primarily due to a severance
agreement for a former officer, allowance for doubtful accounts increased by $215,000 as we established a reserve for potential uncollectable
amounts in our Clinical Services business, professional and consulting fees increased by $120,000, recruiting fee costs increased by
$125,000, and travel costs increased by $220,000 as a result of the increased travel related to the acquisitions and our expanded customer base,
partially off-set by $618,000 in IPO costs incurred in 2013, which did not recur in 2014.
Interest Income and Expense
Interest expense decreased 83%, or $2.3 million, to $399,000 for the year ended December 31, 2014, from $2.4 million for the year ended
December 31, 2013. The decrease is attributable to the conversion of $9.6 million of debt into common stock which occurred concurrently
with the closing of our IPO on April 10, 2013 and the repayment of $3.5 million in indebtedness in August 2013.
Debt Conversion Costs
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On April 10, 2013, we completed our IPO. In connection with the IPO, $9.6 million of debt was converted into common stock at the IPO
price of $10.00 per share. In connection with the conversion of debt into common stock, we expensed the applicable remaining debt discounts
of $3.5 million, financing fees of $419,000 and a contingently recognizable beneficial conversion feature in the converted debt of $3.0 million,
the total of which resulted in a $6.9 million write-off. There were no comparable costs in 2014.
Change in Fair Value of Warrant Liability
The change in the fair market value of our warrant liability resulted in $417,000 in non-cash income for the year ended December 31, 2014, as
compared to non-cash income of $4.6 million for the year ended December 31, 2013. The fair market value of these common stock warrants
decreased as a consequence of a decrease in our stock price.
Income Taxes
During the year ended December 31, 2014, we received two payments totaling $2.4 million from sales of state NOL’s. During January 2013,
we received $664,000 from the sale of state NOL’s.
Year Ended December 31, 2013 and 2012
The following table sets forth certain information concerning our results of operations for the periods shown:
Year Ended December 31,
2013
2012
Change
$
%
$
$
$
$
6,610 $
4,925
2,190
6,115
1,842
(8,462) $
(2,358)
4,633
(6,850)
—
(13,037) $
664
(12,373) $
4,302 $
3,929
2,112
4,503
1,399
(7,641) $
(4,701)
7,538
—
(1,862)
(6,666) $
—
(6,666) $
2,308
996
78
1,612
443
(821)
2,343
(2,905)
(6,850)
1,862
(6,371)
664
(5,707)
54 %
25 %
4 %
36 %
32 %
11 %
50 %
-39 %
n/a
100 %
96 %
n/a
86 %
(dollars in thousands)
Revenue
Cost of revenues
Research and development expenses
General and administrative expenses
Sales and marketing expenses
Total Operating Loss
Interest income (expense)
Change in fair value of warrant liability
Debt conversion costs
Loss on debt and warrant restructuring
Loss before income taxes
Income tax benefit (expense)
Net Loss
Revenue
The breakdown of our revenue is as follows:
(dollars in thousands)
Biopharma Services
Clinical Services
Discovery Services
Grants
Total Revenue
Year Ended December 31,
Change
2013
2012
$
2,650
3,663
—
297
6,610
%
$
%
40%
55%
—%
5%
100%
579
3,166
—
557
4,302
13%
74%
—%
5%
92%
$
2,071
497
—
(260)
2,308
%
358 %
16 %
n/a
(47)%
54 %
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Revenue increased 54%, or $2.3 million, to $6.6 million for the year ended December 31, 2013, from $4.3 million for the year ended
December 31, 2012, due to increases in test volume. Our average revenue (excluding grant revenue and probe revenue) per test increased to
$566 per test for the year ended December 31, 2013 from $553 per test for the year ended December 31, 2012 principally due to an increase in
the average revenue per test for Biopharma Services offset by a decrease in the average revenue per test from private insurance carriers and
other non-Medicare payors for Clinical Services. Our test volume increased by 63% to 10,771 tests for the year ended December 31, 2013,
from 6,610 tests for the year ended December 31, 2012 principally due to an increase in tests performed for a significant Biopharma client.
Revenue from Biopharma Services increased 358%, or $2.1 million, to $2.7 million for the year ended December 31, 2013, from $578,000 for
the year ended December 31, 2012, principally due to an increase in revenue from a significant Biopharma client. Revenue from Biopharma
customers as a percentage of total revenue increased to 40% for the year ended December 31, 2013, from 13% for the year ended
December 31, 2012. Revenue from Clinical Services increased 16%, or $497,000, to $3.7 million for the year ended December 31, 2013, from
$3.2 million for the year ended December 31, 2012, principally due to an increase in testing volume partially offset by a decrease in revenue
per test. Revenue from Clinical Services as a percentage of total revenue decreased to 55% of total revenue for the year ended December 31,
2013, from 74% of total revenue for the year ended December 31, 2012. Revenue from Grants decreased 47%, or $260,000, to $297,000 for
the year ended December 31, 2013, from $557,000 for the year ended December 31, 2012, principally due to achieving the scheduled
milestones for grant drawdowns.
Cost of Revenues
Cost of revenues increased 25%, or $996,000, to $4.9 million for the year ended December 31, 2013, from $3.9 million for the year ended
December 31, 2012, principally due to an increase in employee compensation-related expenses of $650,000 resulting from a net increase in
headcount and an increase in supply costs of $244,000 as a result in increased testing volumes. However, due to scaling efficiencies associated
with performing a large number of tests for a clinical trials client in 2013, costs did not increase proportionately relative to the increase in
revenues.
Operating Expenses
Research and Development Expenses. Research and development expenses increased 4%, or $78,000, to $2.2 million for the year ended
December 31, 2013, from $2.1 million for the year ended December 31, 2012, principally as a result of an increase in supplies expense of
$237,000, and an increase in non-employee stock-based compensation related expenses of $72,000, which were offset by a decrease of
$230,000 in employee compensation related expenses as a result of a reduction in stock-based compensation.
Sales and Marketing Expenses. Sales and marketing expenses increased 32%, or $443,000, to $1.8 million for the year ended December 31,
2013, from $1.4 million for the year ended December 31, 2012, principally due to an increase in headcount and compensation-related costs.
General and Administrative Expenses. General and administrative expenses increased 36%, or $1.6 million to $6.1 million for the year ended
December 31, 2013, from $4.5 million for the year ended December 31, 2012, principally due to the write-off of $618,000 of deferred IPO
costs and an increase of $568,000 in compensation and headcount-related expenses (including IPO bonuses paid in 2013 and stock-based
compensation), an increase of $216,000 in insurance costs coincident with the additional risk of a public company, and an increase of
$556,000 of professional and consulting fees as a result of being a public company. These increases were partially offset by a decrease of
$350,000 related to the cost of a legal settlement in 2012.
Interest Income and Expense
Interest expense decreased 50%, or $2.3 million, to $2.4 million for the year ended December 31, 2013, from $4.7 million for the year ended
December 31, 2012. The decrease is attributable to the conversion of $9.6 million of debt into common stock which occurred concurrently
with the closing of our IPO on April 10, 2013 and the repayment of $3.5 million in indebtedness in August 2013.
Debt Conversion Costs
On April 10, 2013, we completed our IPO. In connection with the IPO, $9.6 million of debt was converted into common stock at the IPO
price of $10.00 per share. In connection with the conversion of debt into common stock, we expensed the applicable remaining debt discounts
of $3.5 million, financing fees of $419,000 and a contingently recognizable beneficial conversion feature in the converted debt of $3.0 million,
the total of which resulted in a $6.9 million write-off.
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Change in Fair Value of Warrant Liability
The change in the fair market value of our warrant liability decreased as a consequence of a decrease in our stock price and resulted in $4.6
million in non-cash income for the year ended December 31, 2013, as compared to non-cash income of $7.5 million for the year ended
December 31, 2012. The fair market value of certain of our outstanding common stock warrants, that we are required to account for as
liabilities, decreased during the year ended December 31, 2013, principally as the result of a shareholder, Mr. John Pappajohn, limiting certain
anti-dilution rights in his warrants to purchase shares of the Company’s common stock, resulting in a lower fair value of the warrant liability
and non-cash income during this period. Concurrent with the IPO on April 10, 2013, derivative warrants with a fair value of $7.2 million were
reclassified into equity due to the lapsing of anti-dilution provisions in the warrants. Since the re-classification, future changes in the value of
these specific warrants are no longer required to be recorded in our financial statements although there are 95,130 warrants that are still subject
to future revaluation.
Loss on Debt and Warrant Restructuring
Loss on debt and warrant restructuring was $0, for the year ended December 31, 2013, compared to $1.9 million for the year ended
December 31, 2012. In the 2013, there was no debt and warrant restructuring, whereas in 2012, as a result of the restructuring of borrowings
under the Restated Credit Agreement associated with our 2012 Convertible Debt Financing Transaction, there was a $1.5 million charge and a
$356,000 charge related to the cancellation of certain warrants under the Restated Credit Agreement.
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; (ii) cash received from sale of state NOL’s; and (iii) grants from the
National Institutes of Health.
During the year ended December 31, 2014, we received two payments totaling $2.4 million from sales of state NOL’s. During January 2013,
we received $664,000 from the sale of state NOL’s.
In general, our primary uses of cash are providing for operating expenses, working capital purposes and servicing debt. As of December 31,
2014, we have maximized our borrowings under our revolving credit line of $6.0 million. Our largest source of operating cash flow is cash
collections from our customers.
On April 10, 2013, we sold 690,000 shares of common stock at a public offering price of $10.00 per share and completed our initial public
offering, or IPO, with net proceeds of $5 million. Upon the closing of the IPO, all shares of our then-outstanding Series A and Series B
convertible preferred stock automatically converted into an aggregate of 1,287,325 shares of common stock. Concurrent with the IPO, certain
derivative warrants with a fair value of $7.2 million were reclassified into equity due to the lapsing of anti-dilution provisions in the warrants.
Also concurrent with the IPO, $9.6 million of debt converted into 963,430 shares of common stock. Refer to Notes 1, 6 and 10 to the
Consolidated Financial Statements accompanying this filing.
On August 19, 2013 in our Secondary Offering, or our Secondary Offering, we sold 1,500,000 shares of common stock at a public offering
price of $10.00 per share which resulted in gross proceeds of $15.0 million ($13.3 million of net proceeds after offering expenses and
underwriting discounts). On September 5, 2013, we sold 105,000 additional common shares pursuant to the underwriter’s partial exercise of
the over-allotment option which resulted in gross proceeds of $1.1 million ($947,000 of net proceeds after offering expenses and underwriting
discounts). Upon completion of the Secondary Offering we repaid indebtedness in the aggregate principal amount of $3.5 million plus accrued
interest to DAM and to one of our directors, Andrew Pecora, and an affiliated company NJCCA, all of which indebtedness was due on
August 15, 2013.
On October 28, 2013 in a follow-on public offering, or our Follow-On Offering, we sold 3,286,700 shares of common stock (including the
underwriter’s overallotment of 428,700 shares), at a public offering price of $14.00 per share resulting in gross proceeds of $46.0 million (net
proceeds of $42.3 million).
Following our IPO, Secondary Offering, Follow-On Offering and the related debt repayments, we have the following credit facility
outstanding:
Wells Fargo Line of Credit.
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At December 31, 2014 and 2013, we have fully utilized a line of credit with Wells Fargo Bank which provides for maximum borrowings of
$6 million. On April 1, 2014, the line of credit was extended through April 1, 2016 at a rate of interest equal to the Daily One Month LIBOR
rate plus 1.75% (1.91% at December 31, 2014). The facility requires monthly interest payments.
The loan facility is collateralized by $6 million in restricted cash at December 31, 2014 and will remain restricted until such time as it is repaid.
Additionally, we are required to maintain limits on capital spending and are restricted as to the amount we may pledge as collateral for
additional borrowings from any source.
The line of credit requires the repayment of principal, and any unpaid interest, in a single payment due upon maturity.
Cash Flows
Our net cash flow from operating, investing and financing activities for the periods below were as follows:
(in thousands)
Cash provided by (used in):
Operating activities
Investing activities
Financing activities
Net increase (decrease) in cash and cash equivalents
Year Ended
December 31,
2013
2014
2012
$
$
(12,338) $
(11,373)
(195)
(23,906) $
(8,075) $
(1,399)
58,114
48,640 $
(7,578)
(347)
6,328
(1,597)
We had cash and cash equivalents of $25.6 million at December 31, 2014, $49.5 million at December 31, 2013, and $820,000 at
December 31, 2012.
The $23.9 million decrease in cash and cash equivalents for the year ended December 31, 2014, was principally the result of the use of $12.3
million of net cash in operations, restricting $6.0 million to secure a line of credit with Wells Fargo of $6.0 million, payments of $2.9 million
for the acquisitions of Gentris and BioServe, payment of $1.0 million to invest in our joint venture with Mayo and the purchase of fixed assets
of $1.4 million.
The $48.6 million increase in cash and cash equivalents from December 31, 2012 to December 31, 2013, was principally the result of the
receipt of $5.0 million in proceeds received in our IPO, the receipt of $14.2 in net proceeds from our Secondary Offering, and the receipt of
$42.3 million in net proceeds from our Follow-On Offering, all of which were offset by $1.0 million paid to invest in our joint venture with
Mayo, the repayment of $3.6 million in indebtedness and the use of $8.1 million of net cash in operations.
The $1.6 million decrease in cash and cash equivalents from December 31, 2011, to December 31, 2012, was principally the result of our $7.6
million net cash used in operations, including $1.1 million in cash interest payments, payment of $1.4 million in equity issuance costs, and
$162,000 in purchases of fixed assets, offset by $7.8 million in net proceeds from borrowings under new notes payable and warrant exercises.
Cash Used in Operating Activities
Net cash used in operating activities was $12.3 million for the year ended December 31, 2014. We used $13.5 million in net cash to run our
core operations, which included $128,000 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 $1.4 million; an increase in other current assets of $53,000, which included
prepayments for our insurance policies; and a net decrease in accounts payable, accrued expenses and deferred revenue of $ 511,000. All of
these uses of cash were partially offset by the receipt of $2.4 million from the sale of certain state NOL carryforwards in January 2014 and
December 2014.
Net cash used in operating activities was $8.1 million for the year ended December 31, 2013. We used $7.1 million in net cash to run our core
operations, which included $608,000 in cash paid for interest. We incurred additional uses of cash as follows: $731,000 for a net decrease in
accounts payable, accrued expenses and deferred revenue; $375,000 to increase other current assets which included prepayments for
consumables and other supplies used to run our operations as well as prepayments for our insurance policies, and; accounts receivable
increased by $716,000. All of these uses of cash were partially offset by the receipt of $664,000 from the sale of certain state NOL
carryforwards in January 2013.
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Net cash used in operating activities was $7.6 million for the year ended December 31, 2012, consisting primarily of a $6.7 million net loss
during the period, which includes $1.1 million in cash interest payments, non-cash income from a change in fair value of warrant liability of
$7.5 million, offset by non-cash debt costs of $3.6 million, $1.9 million of non-cash loss on debt and warrant restructuring, and $900,000 in
equity and warrant-based non-cash compensatory transactions.
Cash Used in Investing Activities
Net cash used in investing activities was $11.4 million for the year ended December 31, 2014 and principally resulted from an increase in our
restricted cash of $6.0 million related to the collateralization of our line of credit with Wells Fargo; cash paid of $2.9 million in the acquisitions
of Gentris and BioServe; investment of $1.0 million in our Joint Venture with the Mayo Foundation and purchase of fixed assets of $1.4
million.
Net cash used in investing activities was $1.4 million for the year ended December 31, 2013 and principally resulted from: a $1.0 million
payment to Mayo to fund our joint venture; purchases of fixed assets of $257,000; patent application costs of $92,000, and; an increase in our
restricted cash related to a $50,000 increase in the Letter of Credit related to our lease. Pursuant to the terms of our lease for our Rutherford
facility, we were required to maintain a letter of credit in the amount of $300,000 to use as a guarantee for the security deposit.
Net cash used in investing activities was $348,000 for the year ended December 31, 2012 due to an increase in our restricted cash related to a
$50,000 increase in the Letter of Credit related to our lease as well as $135,000 in patent application costs and $162,000 in purchases of fixed
assets.
Cash Used/Provided by Financing Activities
Net cash used in financing activities was $195,000 for the year ended December 31, 2014, and primarily resulted from payments on notes
payable of $408,000; partially off-set by proceeds received from warrant and option exercises of $257,000.
Net cash provided by financing activities was $58.1 million for the year ended December 31, 2013, and primarily consisted of receipt of $61.5
million in net proceeds raised in our IPO, Secondary Offering and Follow-On Offering offset by the repayment of $3.6 million in
indebtedness.
Net cash provided by financing activities was $6.3 million for the year ended December 31, 2012, principally due to our receipt of $7.1 million
in net proceeds from various financing transactions and $635,000 in net proceeds from the exercise of certain warrants. We paid $1.4 million
in equity issuance costs related to our IPO in the year ended December 31, 2012.
Capital Resources, Acquisitions and Expenditure Requirements
We expect to continue to incur substantial operating losses in the future. It may take several years, if ever, to achieve positive operational cash
flow. Until we can generate a sufficient amount of revenue to finance our cash requirements, which we may never do, we will need to continue
to raise additional capital to fund our operations.
We also expect to use significant cash to fund acquisitions. On July 16, 2014, we purchased substantially all of the assets of Gentris
Corporation, (“Gentris”), with its principal place of business in North Carolina.
The total consideration recorded for the Gentris acquisition is as follows:
Cash paid at closing
Issuance of 147,843 common shares
Estimated fair value of contingent consideration
Total Purchase Price
Amount
3,250,000
1,271,745
293,400
4,815,145
$
$
The estimated fair value of contingent consideration is a potential earn-out which is payable in cash or shares of our common stock at our
option, and is based upon a formula that provides for additional amounts, for revenues of $4.75 million, up to revenues of $8.55 million, plus
a potential payment to be made in connection with the termination of a biorepository relationship with Gentris, based upon exit fees to be
received by Gentris. The amounts used in computing the purchase price differ from the amounts in the purchase agreements due to fair value
measurement conventions prescribed in accounting standards.
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On August 18, 2014 we acquired BioServe BioTechnologies (India) Private Limited, an Indian corporation (“BioServe”) for an aggregate
purchase price of approximately $1.1 million.
The total consideration recorded for the BioServe acquisition is as follows:
Cash paid at closing
Notes payable due 12-18 months after closing
Notes payable (value of 84,278 common shares)
Issuance of 31,370 common shares
Total Purchase Price
Amount
72,907
23,708
733,387
244,247
1,074,249
$
$
The amounts used in computing the purchase price differ from the amounts in the purchase agreements due to fair value measurement
conventions prescribed in accounting standards.
See Note 1 to the financial statements for additional information regarding the Gentris and BioServe acquisitions.
We believe our cash and cash equivalents are sufficient to satisfy our liquidity requirements at our current level of operations for at least 24
months.
We expect our operating expenses to increase as we continue investing in sales and marketing, research and development and other general
and administrative expenses.
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 achieve revenue
growth;
our ability to obtain approvals for our new diagnostic
tests;
our ability to execute on our marketing and sales strategy for our genomic tests and gain acceptance of our tests 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 and outcomes of the clinical trials of our diagnostic
tests;
the costs of operating and enhancing our laboratory
facilities;
the costs for funding the operations we recently acquired and our ability to successfully integrate those operations with and into our
own;
the costs of additional general and administrative
personnel;
the timing of and the costs involved in regulatory compliance. particularly in the regulations
change;
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 NGS panels, microarrays and FHACT®
probe;
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 international
expansion;
our ability to secure financing and the amount thereof;
and
other risks discussed in the section entitled “Risk
Factors”.
We expect that our operating expenses and capital expenditures will increase in the future as we expand our business and integrate our recent
acquisitions. We plan to increase our sales and marketing headcount to promote our new clinical tests and services and to expand into new
geographies and to increase our research and development headcount to develop and validate the proprietary tests currently in our pipeline, to
expand our pipeline and to perform work associated with our research collaborations. 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
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and $1.0 million in the third quarter of 2014. We currently anticipate that we will make capital contributions of $1.0 million in the second
quarter of 2015 and expect to make additional capital contributions of up to $3.0 million over the next eighteen months, subject to the joint
venture entity’s achievement of certain operational milestones. Until we can generate a sufficient amount of revenues to finance our cash
requirements, which we may never do, we may need to raise additional capital to fund our operations.
We may 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 limit our
research and development activities, which would have a material adverse impact on our business prospects and results of operations.
Future Contractual Obligations
The following table reflects a summary of our estimates of future contractual obligations as of December 31, 2014. The information in the
table reflects future unconditional payments and is based on the terms of the relevant agreements, appropriate classification of items under U.S.
GAAP as currently in effect and certain assumptions, such as the interest rate on our variable debt that was in effect as of December 31, 2014.
Future events could cause actual payments to differ from these amounts.
(dollars in thousands)
Principal and interest under notes payable and lines
of credit
Capital Lease obligations, including interest, for
equipment
Operating lease obligations relating to corporate
headquarters and clinical laboratories
Total
Income Taxes
Total
Less than
1 Year
2-3 Years
4-5 Years
More than
5 Years
$
6,143
$
6,143 $
412
74
136
$
3,404
9,959 $
855
929 $
1,733
8,012 $
— $
118
681
799 $
—
84
135
219
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.
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 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.
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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 contain a summary of our significant accounting policies. 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.
•
Item 7A.
Qualitative and Quantitative Disclosures about Market Risk
Not applicable.
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Item 8.
Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
Cancer Genetics, Inc. and Subsidiary
Consolidated Financial Report December 31, 2014
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Changes in Stockholders’ Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
75
F-76
F-77
F-78
F-79
F-81
F-82
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Cancer Genetics, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Cancer Genetics, Inc. and subsidiaries as of December 31, 2014 and 2013,
and the related consolidated statements of operations, changes in stockholders’ equity (deficit), and cash flows for each of the three years
ended December 31, 2014, 2013 and 2012. These financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting.
Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cancer
Genetics, Inc. and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three
years ended December 31, 2014, 2013 and 2012 in conformity with U.S. generally accepted accounting principles.
/s/ McGladrey LLP
Des Moines, Iowa
March 16, 2015
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Consolidated Balance Sheets
ASSETS
CURRENT ASSETS
CANCER GENETICS, INC. AND SUBSIDIARY
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts of 2014 $251,176; 2013 $36,000
Other current assets
Total current assets
FIXED ASSETS, net of accumulated depreciation
OTHER ASSETS
Security deposits
Restricted cash
Loan guarantee and financing fees, net of accumulated amortization of 2014 $0; 2013 $517,500
Patents
Investment in joint venture
Other investments
Goodwill
Total other assets
Total Assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses
Obligations under capital leases, current portion
Deferred revenue
Notes payable, current portion
Line of credit
Total current liabilities
Obligations under capital leases
Deferred rent payable
Line of credit
Warrant liability
Acquisition note payable
Deferred revenue, long-term
Total liabilities
STOCKHOLDERS’ EQUITY
Series A Preferred Stock, authorized 588,000 shares $0.0001 par value (converted to common stock on
April 10, 2013- Note 10)
Series B Preferred Stock, authorized 2,000,000 shares $0.0001 par value (converted to common stock
on April 10, 2013-Note 10)
Common stock, authorized 100,000,000 and 24,000,000 shares, respectively, $0.0001 par value,
9,821,169 and 9,275,384 shares issued and outstanding as of December 31, 2014 and 2013, respectively
Additional paid-in capital
Accumulated (deficit)
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
See Notes to Consolidated Financial Statements.
77
$
$
$
December 31,
2014
2013
25,554,064 $
5,028,620
1,191,214
31,773,898
4,446,593
1,564
6,300,000
—
502,767
1,047,744
38,429
2,994,135
10,884,639
47,105,130 $
3,762,567 $
58,950
544,446
—
—
4,365,963
300,385
347,840
6,000,000
52,000
560,341
924,850
12,551,379
—
—
49,459,564
1,567,039
864,616
51,891,219
1,264,624
1,564
300,000
310,500
401,709
987,657
—
—
2,001,430
55,157,273
2,346,240
51,400
199,560
22,298
6,000,000
8,619,498
309,777
170,789
—
594,000
—
—
9,694,064
—
—
982
112,520,268
(77,967,499)
34,553,751
47,105,130 $
927
106,786,862
(61,324,580)
45,463,209
55,157,273
$
Table of Contents
CANCER GENETICS, INC. AND SUBSIDIARY
Consolidated Statements of Operations
Revenue
Cost of revenues
Gross profit
Operating expenses:
Research and development
General and administrative
Sales and marketing
Total operating expenses
Loss from operations
Other income (expense):
Interest expense
Interest income
Change in fair value of warrant liability
Change in fair value of acquisition note payable
Loss on debt and warrant restructuring
Debt conversion costs
Total other income (expense)
Loss before income taxes
Income tax (benefit) provision
Net loss
Basic net loss per share
Diluted net loss per share
Basic Weighted Average Shares Outstanding
Diluted Weighted Average Shares Outstanding
See Notes to Consolidated Financial Statements.
Years Ended December 31,
2014
2013
2012
$
10,199,387 $
8,453,671
1,745,716
6,609,957 $
4,924,626
1,685,331
4,622,526
12,368,739
3,963,537
20,954,802
(19,209,086)
(472,820)
73,802
417,000
198,000
—
—
215,982
(18,993,104)
(2,350,185)
(16,642,919) $
(1.76) $
(1.80) $
9,449,189
9,461,663
2,190,204
6,115,035
1,841,675
10,146,914
(8,461,583)
(2,387,733)
29,693
4,633,000
—
—
(6,849,830)
(4,574,870)
(13,036,453)
(663,900)
(12,372,553) $
(2.65) $
(3.64) $
4,665,316
4,675,974
$
$
$
78
4,301,563
3,928,993
372,570
2,111,947
4,502,424
1,398,786
8,013,157
(7,640,587)
(4,701,028)
—
7,538,000
—
(1,862,012)
—
974,960
(6,665,627)
—
(6,665,627)
(4.97)
(10.55)
1,342,174
1,346,161
Table of Contents
CANCER GENETICS, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders’ Equity (Deficit)
Years Ended December 31, 2014, 2013 and 2012
Preferred Stock
Series A
Preferred Stock
Series B
Common Stock
Shares
Amount
Shares
Amount Shares
Amount
Additional
Paid-in
Capital
Treasury
Stock
Accumulated
Deficit
Total
587,691
59
1,821,600
182 1,295,026
130
23,220,672
(17,442 )
(42,268,958 ) (19,065,357 )
—
—
—
—
—
—
341,996
—
—
341,996
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
54,910
—
—
—
5
—
573,365
144,000
690,222
—
—
—
—
—
—
—
—
(6,665,627 )
573,365
144,000
690,227
(6,665,627 )
587,691
59
1,821,600
182 1,349,936
135
24,970,255
(17,442 )
(48,934,585 ) (23,981,396 )
—
—
—
—
2,500
—
646,983
—
—
646,983
—
—
—
—
—
—
88,162
—
—
88,162
—
—
—
—
—
—
231,396
—
—
231,396
(587,691)
(59 ) (1,821,600)
(182 ) 1,287,325
129
112
—
—
—
—
963,430
96
12,595,970
—
—
—
—
— 12,596,066
—
—
—
—
690,000
69
3,742,574
—
—
3,742,643
—
—
—
— 1,605,000
160
14,230,212
—
— 14,230,372
—
—
—
— 3,286,700
329
42,302,267
—
— 42,302,596
—
—
—
—
2,000
—
20,000
—
—
20,000
—
—
—
—
10,000
1
175,299
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
78,329
164
—
—
—
8
—
—
—
7,170,000
611,992
1,640
—
—
—
—
—
—
—
—
175,300
7,170,000
612,000
1,640
—
—
17,442
—
(17,442 )
—
(12,372,553 ) (12,372,553 )
— $ —
— $ — 9,275,384 $
927 $106,786,862 $
— $ (61,324,580 ) $45,463,209
—
—
—
—
207,500
21
3,461,954
—
—
3,461,975
—
—
—
—
—
—
—
—
—
—
—
—
5,000
135,323
18,749
—
14
2
373,374
303,088
79,016
—
—
—
—
—
—
373,374
303,102
79,018
—
—
—
—
147,843
15
1,271,730
—
—
1,271,745
—
—
—
—
—
—
—
—
31,370
—
3
—
244,244
—
—
—
—
244,247
(16,642,919 ) (16,642,919 )
— $ —
— $ — 9,821,169 $
982 $112,520,268 $
— $ (77,967,499 ) $34,553,751
Balance, December 31,
2011
Stock based
compensation—
employees
Stock based
compensation—non-
employees
Warrant extension
Exercise of warrants
Net loss
Balance, December 31,
2012
Stock based
compensation—
employees
Stock based
compensation—non-
employees
Vesting of common
pursuant to joint
venture agreement
Conversion of
preferred stock into
common stock
Conversion of debt
into common stock
Issuance of common
stock in IPO, net of
offering costs
Issuance of common
stock in Secondary
Offering, net of
offering costs
Issuance of common
stock in Follow-On
Offering, net of
offering costs
Issuance of common
stock pursuant to
license agreement
Issuance of common
stock pursuant to
joint venture
agreement
Reclassification of
derivative warrants
Exercise of warrants
Exercise of options
Retirement of
treasury stock
Net loss
Balance, December 31,
2013
Stock based
compensation—
employees
Stock based
compensation—non-
employees
Exercise of warrants
Exercise of options
Issuance of stock -
acquisition of Gentris
Corporation
Issuance of stock -
acquisition of
BioServe
Net loss
Balance, December 31,
2014
79
Table of Contents
See Notes to Consolidated Financial Statements
80
Table of Contents
CANCER GENETICS, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation
Amortization
Provision (recovery) for bad debts
Equity-based consulting and compensation expenses
Equity-based research and development/general and administrative expenses
Change in fair value of warrant liability
Change in fair value of acquisition note payable
Extension of warrants
Amortization of loan guarantee and financing fees
Accretion of discount on debt
Deferred rent
Loss in equity-method investment
Loss on debt and warrant restructuring
Loss on conversion of debt to equity
Deferred initial public offering costs expensed
Change in working capital components, net of acquisitions:
Accounts receivable
Other current assets
Accounts payable, accrued expenses and deferred revenue
Net cash (used in) operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets
(Increase) decrease in restricted cash
Patent costs
Investment in joint venture
Cash used in acquisition of Gentris, net of cash received
Cash from acquisition of BioServe
Net cash (used in) investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on capital lease obligations
Proceeds from public offerings of common stock, net of offering costs
Payment of equity issuance costs
Proceeds from warrant exercises
Proceeds from option exercises
Principal payments on notes payable
Proceeds from borrowings on notes payable
Payments on line of credit
Proceeds from borrowings on line of credit
Net cash (used in) financing activities
Net (decrease) increase in cash and cash equivalents
CASH AND CASH EQUIVALENTS
Beginning
Ending
SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash paid for interest
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Fixed assets acquired through capital lease arrangement
Warrants issued with debt
Warrants issued for debt guarantee fee
Warrants issued for financing fees
Retirement of treasury stock
Conversion of notes payable and lines of credit to common stock
Value of shares issued as partial consideration to purchase Gentris and BioServe
Conversion of preferred stock to common stock
Reclassification of derivative warrants
Cashless exercise of derivative warrants
Offering costs discounted
Years Ended December 31,
2014
2013
2012
$
(16,642,919 ) $
(12,372,553 ) $
(6,665,627 )
810,158
28,438
215,176
3,835,349
—
(417,000 )
(198,000 )
—
310,500
—
(37,645 )
939,913
—
—
—
(1,656,658 )
(198,658 )
673,687
(12,337,659 )
(1,374,294 )
(6,000,000 )
(129,496 )
(1,000,000 )
(3,180,930 )
311,987
(11,372,733 )
(43,842 )
—
—
178,102
79,018
(408,386 )
—
—
—
(195,108 )
(23,905,500 )
311,247
15,229
—
646,983
514,858
(4,633,000 )
—
—
1,194,960
584,692
6,491
12,343
—
6,849,830
617,706
(716,494 )
(375,338 )
(731,471 )
(8,074,517 )
(257,261 )
(50,000 )
(92,174 )
(1,000,000 )
—
—
(1,399,435 )
(17,158 )
61,516,994
—
192,000
1,640
(3,579,866 )
—
—
—
58,113,610
48,639,658
338,176
15,229
(4,597 )
915,361
—
(7,538,000 )
—
144,000
1,427,296
2,212,154
7,987
—
1,862,012
—
—
(156,968 )
(220,009 )
85,134
(7,577,852 )
(162,463 )
(50,000 )
(135,306 )
—
—
—
(347,769 )
(36,120 )
—
(1,373,000 )
635,227
—
(17,836 )
7,120,000
—
—
6,328,271
(1,597,350 )
$
$
$
49,459,564
25,554,064 $
819,906
49,459,564 $
2,417,256
819,906
128,417 $
608,084 $
1,091,377
42,000 $
—
—
—
—
—
1,515,992
—
—
125,000
—
353,687 $
—
—
47,000
17,442
9,634,300
—
241
7,170,000
420,000
733,250
—
6,122,000
1,583,000
1,003,000
—
—
—
—
—
—
—
Net tangible assets acquired via acquisition
Accrued IPO costs
Accrued expenses recorded as financing fees
Accrued expenses reclassified as derivative warrant liability
Derivative warrant settled with accrued expense
See Notes to Consolidated Financial Statements.
81
1,255,084
—
—
—
—
—
—
—
221,000
—
—
1,732,016
251,000
148,000
182,500
Table of Contents
CANCER GENETICS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Note 1. Organization, Acquisitions, Description of Business, Reverse Stock Split and Charter Amendment
We are an oncology diagnostics company focused on developing, commercializing and providing DNA-based tests and services to improve
the personalization of cancer treatment and to better inform biopharmaceutical companies of genomic factors influencing subject responses to
therapeutics. Our vision is to become the oncology diagnostics partner for companies and clinicians by participating in the entire care
continuum from bench to bedside. We believe the diagnostic industry is undergoing a metamorphosis in its approach to oncology testing,
embracing individualized medicine as a means to drive higher standards of patient treatment and disease management. Similarly, biopharma
companies are increasingly engaging companies such as ours to provide information on clinical trial participants’ DNA profiles in order to
identify genomic variations that may be responsible for differing responses to pharmaceuticals, and particularly to oncology drugs, thereby
increasing the efficiency of trials while lowering related costs. We believe tailored therapeutics can revolutionize oncology medicine through
DNA-based testing services, enabling physicians and researchers to target the factors that make each patient and disease unique. We have
created a unique position in the industry by providing targeted somatic analysis of tumor sample cells alongside germline analysis of an
individuals' non-cancerous cells' DNA as we attempt to reach the next milestone in personalized medicine. Individuals are born with germline
mutations and somatic mutations arise in tissues over the course of a lifetime.
We were incorporated in the State of Delaware on April 8, 1999 and have offices and state-of-the-art laboratories located in New Jersey,
North Carolina, Shanghai (China), and Hyderabad, India. Our laboratories comply with the highest regulatory standards as appropriate for the
services they deliver including CLIA, CAP, NY State and NABL (India). We have two advisory boards to counsel our scientific and clinical
direction. Our Scientific Advisory Board is comprised of preeminent scientists and physicians from the fields of cancer biology, cancer
pathology, cancer medicine and molecular genetics. Our Clinical Advisory Board is comprised of clinicians and scientists focused on clinical
implementation of our proprietary tests and services and mapping those tests and services to patient needs. Our services are built on a
foundation of world-class scientific knowledge and intellectual property 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.
Acquisition of Gentris Corporation
On July 16, 2014, we purchased substantially all of the assets of Gentris Corporation ("Gentris"), a laboratory specializing in
pharmacogenomics profiling for therapeutic development, companion diagnostics and clinical trials. Gentris’ laboratory is located in
Morrisville, North Carolina and the company has a CLIA and FDA-compliant laboratory facility in Shanghai, China. Upon closing of the
acquisition transaction, Gentris Corporation was re-named Gentris, LLC and is now a wholly-owned subsidiary of Cancer Genetics, Inc. The
acquisition allows us to expand our biopharma services.
The assets and liabilities of Gentris were recorded in our consolidated financial statements at their estimated fair values as of the acquisition
date. The excess value of the consideration paid over the fair value of assets acquired and liabilities assumed was recorded as goodwill.
Goodwill arising from the acquisition consists largely from a trained workforce in place and expected synergies with existing operations.
Goodwill recorded in conjunction with the acquisition is deductible for income tax purposes. The total consideration for the Gentris acquisition
is as follows:
Cash paid at closing
Issuance of 147,843 common shares
Estimated fair value of contingent consideration
Total Purchase Price
$
$
Amount
3,250,000
1,271,745
293,400
4,815,145
The estimated fair value of contingent consideration is a potential earn-out which is payable in cash or shares of our common stock at our
option, and is based upon a formula that provides for additional amounts, for revenues starting at $4.75 million, up to revenues of $8.55
million, plus a potential payment to be made in connection with the termination of a biorepository relationship with Gentris, based upon exit
fees to be received by Gentris. The amounts used in computing the purchase price differ from the amounts in the purchase agreements due to
fair value measurement conventions prescribed in accounting standards.
82
Table of Contents
We incurred a finder's fee of $147,500 related to the transaction.
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 in the consolidated financial
statements is preliminary and will be adjusted upon completion of the final valuation of the assets acquired and liabilities assumed. The final
valuation of fixed assets, intangibles and deferred revenue is expected to be completed as soon as practicable but no later than twelve months
after the closing date of the acquisition.
The preliminary allocation of the total purchase price to the fair value of the assets acquired and liabilities assumed as of July 16, 2014 are as
follows:
Accounts receivable
Other current assets
Current liabilities
Deferred revenue, long-term
Fixed Assets
Goodwill
Total Purchase Price
Amount
1,869,097
265,612
(785,246)
(937,773)
1,950,885
2,452,570
4,815,145
$
$
Acquisition of BioServe Biotechnologies (India) Pvt. Ltd.
On August 18, 2014 we entered into two agreements by which we acquired BioServe Biotechnologies (India) Pvt. Ltd., a premier genomics
services provider serving both the research and clinical markets in India. This transaction was completed through a newly formed subsidiary,
Cancer Genetics (India) Pvt. Ltd.
BioServe is a leading genomic service and next-generation sequencing company serving both the research and clinical markets based in
Hyderabad, India. With the BioServe acquisition we believe we will be able to access the Indian healthcare market. The acquisition provides us
with an infrastructure in India for developing lower cost manufacturing of probes and kits including probes and kits used for our proprietary
FHACT test and access to one of the fastest-growing molecular and clinical diagnostic markets in the world. BioServe will continue to serve
biotechnology and biopharmaceutical companies, diagnostic companies and research hospitals, including those owned or operated by the
Indian government, as well as seek to expand its customer base.
The parties to the first agreement (the “India Agreement”) are the Company, Ramakishna V. Modali (the current general manager of BioServe,
“Modali”), VenturEast Trustee Company Pvt Ltd and affiliates, its principal shareholder (“VenturEast”), and certain other shareholders
residing in India all of whom in the aggregate owned approximately 74% of BioServe. The parties to the second share purchase agreement (the
“US Agreement”) are the Company and BioServe Biotechnologies LTD, a Maryland corporation and an affiliate of BioServe which owned
approximately 15% of BioServe, with the other outstanding shares held by the BioServe Employee Stock Ownership Plan which will remain
in place.
The assets and liabilities of BioServe were recorded in the Company's consolidated financial statements at their estimated fair values as of the
acquisition date. The excess value of the consideration paid over the fair value of assets acquired and liabilities assumed is recorded as
goodwill. Goodwill arising from the acquisition consists largely from a trained workforce in place and expected synergies from new lines of
business. Goodwill recorded in conjunction with the acquisition is not deductible for income tax purposes. The aggregate purchase price is as
follows:
83
Table of Contents
Cash paid at closing
Notes payable due 12-18 months after closing
Notes payable (value of 84,278 common shares)
Issuance of 31,370 common shares
Total Purchase Price
Amount
72,907
23,708
733,387
244,247
1,074,249
$
$
The ultimate payment to VenturEast will be a cash payment equal to the value of 84,278 shares of our common stock at the time of payment.
This payment will be made the earlier of 30 months from the date of the acquisition agreement (November 2016) or the date of a public
offering by us of our common stock. This liability is subject to future adjustment based upon changes to our stock price. During the year
ended December 31, 2014, we recognized a gain of $198,000 due to the decrease in value of this note. The amounts used in computing the
purchase price differ from the amounts in the purchase agreements due to fair value measurement conventions prescribed in accounting
standards.
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 in the consolidated financial
statements is preliminary and will be adjusted upon completion of the final valuation of the assets acquired and liabilities assumed. The final
valuation of fixed assets and intangibles is expected to be completed as soon as practicable but no later than twelve months after the closing
date of the acquisition.
The preliminary allocation of the total purchase price to the fair value of the assets acquired and liabilities assumed as of August 18, 2014 are
as follows:
Accounts receivable
Other current assets
Fixed Assets
Other assets
Goodwill
Current liabilities
Other liabilities
Total Purchase Price
Amount
151,002
120,528
624,948
416,869
541,565
(758,614)
(22,049)
1,074,249
$
$
The following table provides certain proforma financial information for the Company as if the acquisitions discussed above occurred on
January 1, 2012:
Revenue
Net loss
Basic net loss per share
Dilutive net loss per share
$
$
Unaudited
Year Ended December 31,
2014
14,365,402 $
(18,498,333)
2013
2012
15,767,519 $
(13,677,432)
12,528,553
(7,918,262)
(1.94) $
(1.98)
(2.82) $
(3.77)
(5.20)
(10.13)
The results of operations for the twelve months ended December 31, 2014 include the operations of Gentris from July 16, 2014 and BioServe
from August 18, 2014 and include combined revenues of $3,296,465 and a combined net loss of $1,438,118.
84
Table of Contents
Reverse Stock Splits
On February 8, 2013, we filed a charter amendment with the Secretary of State for the State of Delaware and effected a 1-for-2 reverse stock
split of our common stock. On March 1, 2013, we filed another charter amendment with the Secretary of State for the State of Delaware and
effected a 1-for-2.5 reverse stock split of our common stock. All shares and per share information referenced throughout the consolidated
financial statements have been retroactively adjusted to reflect both reverse stock splits.
Public Offerings
On April 10, 2013, we sold 690,000 shares of common stock at a public offering price of $10.00 per share and completed our initial public
offering (“IPO”) with gross proceeds of $6.9 million (net proceeds of $5 million). Upon the closing of the IPO, all shares of our then-
outstanding Series A and Series B convertible preferred stock automatically converted into an aggregate of 1,287,325 shares of common
stock. Concurrent with the IPO, certain derivative warrants with a fair value of $7.2 million were reclassified into equity due to the lapsing of
anti-dilution provisions in the warrants. Also concurrent with the IPO, $9.6 million of debt converted into 963,430 shares of common stock.
All references to our Series A convertible preferred stock refer collectively to the Series A and Series A-1 convertible preferred shares.
On August 19, 2013, we sold 1,500,000 shares of common stock at a public offering price of $10.00 per share resulting in gross proceeds of
$15.0 million (net proceeds of $13.3 million). We used $3.5 million of the proceeds to repay certain indebtedness which was due on
August 15, 2013 (see Note 6 for further discussion of the Company’s debt). On September 5, 2013, we sold 105,000 additional common
shares pursuant to partial exercise of the underwriter’s over-allotment option which resulted in gross proceeds of $1.1 million (net proceeds of
$947,000). All references to the sales of common stock mentioned in this paragraph are referred to as the “Secondary Offering.”
On October 28, 2013, we sold 3,286,700 shares of common stock, (including the underwriter’s overallotment of 428,700 shares), at a public
offering price of $14.00 per share resulting in gross proceeds of $46.0 million (net proceeds of $42.3 million). All references to the sales of
common stock mentioned in this paragraph are referred to as the “Follow-On Offering.”
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Table of Contents
Note 2. Significant Accounting Policies
Basis of presentation: We prepare our financial statements on the accrual basis of accounting in accordance with accounting principles
generally accepted in the United States of America.
Segment Reporting: Operating segments are defined as components of an enterprise about which separate discrete information is used by the
chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. We view our
operations and manage our business in one operating segment, which is the business of developing and selling diagnostic tests.
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 our customers; (ii) grants from the National Institutes of Health and (iii)
the sale of State of New Jersey net operating loss carryforwards.
Principles of consolidation: The accompanying consolidated financial statements include the accounts of Cancer Genetics, Inc. and our wholly
owned subsidiaries, Cancer Genetics Italia S.r.l (“CGI Italia”), Gentris LLC (from July 16, 2014) and CGI India (BioServe) (from August 18,
2014).
All significant intercompany account balances and transactions have been eliminated in consolidation.
Use of estimates and assumptions: The preparation of financial statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period. Significant estimates made by management include, among others, realization of amounts billed, realization of long-lived
assets, realization of intangible assets, accruals for litigation and registration payments, assumptions used to value stock options, warrants and
goodwill and the valuation of assets acquired and liabilities assumed from acquisitions. Actual results could differ from those estimates.
Risks and uncertainties: We operate in an industry that is subject to intense competition, government regulation and rapid technological change.
Our operations are subject to significant risk and uncertainties including financial, operational, technological, regulatory, foreign operations,
and other risks, including the potential risk of business failure.
Cash and cash equivalents: Highly liquid investments with original maturities of three months or less when purchased are considered to be
cash equivalents. Financial instruments which potentially subject us to concentrations of credit risk consist primarily of cash and cash
equivalents. We maintain cash and cash equivalents with high-credit quality financial institutions. At times, such amounts may exceed insured
limits. We have not experienced any losses in such accounts and believe we are not exposed to any significant credit risk on our cash and cash
equivalents.
Restricted cash: Represents cash held at financial institutions which we may not withdraw and which collateralizes certain of our financial
commitments. All of our restricted cash is invested in interest bearing certificates of deposit. Our restricted cash collateralizes a fully-
utilized $6.0 million line of credit with Wells Fargo Bank and a $300,000 letter of credit in favor of our landlord, pursuant to the terms of the
lease for our Rutherford facility.
Revenue recognition: Revenue is recognized in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) 605, Revenue Recognition, and ASC 954-605 Health Care Entities, Revenue Recognition which requires that four basic
criteria must be met before revenue can be recognized: (1) persuasive evidence that an arrangement exists; (2) delivery has occurred and title
and the risks and rewards of ownership have been transferred to the customer or services have been rendered; (3)the price is fixed or
determinable; and (4) collectability is reasonably assured. In determining whether the price is fixed or determinable, we consider payment
limits imposed by insurance carriers and Medicare and the amount of revenue recorded takes into account the historical percentage of revenue
we have collected for each type of test for each payor category. Periodically, an adjustment is made to revenue to record differences between
our anticipated cash receipts from insurance carriers and Medicare and actual receipts from such payors. For the periods presented, such
adjustments were not significant. For some Clinical Service and Biopharma customers billed directly, revenue is recorded based upon the
contractually agreed upon fee schedule. When assessing collectability, we consider whether we have sufficient payment history to reliably
estimate a payor’s individual payment patterns. For new tests where there is no evidence of payment history at the time the tests are completed,
we only recognize revenues once reimbursement experience can be established. We then recognize revenue equal to the amount of cash
received. We do not bill customers for shipping and handling fees and do not collect any sales or other taxes.
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Revenues from grants to support product development are recognized when costs and expenses under the terms of the grant have been
incurred and payments under the grants become contractually due.
Accounts receivable: Accounts receivable are carried at original invoice amount less an estimate for contractual adjustments and doubtful
receivables, the amounts of which are determined by an analysis of individual accounts. Our policy for assessing the collectability of
receivables is dependent upon the major payor source of the underlying revenue. For direct bill clients, an assessment of credit worthiness is
performed prior to initial engagement and is reassessed periodically. If deemed necessary, an allowance is established on receivables from
direct bill clients. For insurance carriers where there is not an established pattern of collection, revenue is not recorded until cash is received.
For receivables where insurance carriers have made payments to patients instead of directing payments to the Company, an allowance is
established for a portion of such receivables. After reasonable collection efforts are exhausted, amounts deemed to be uncollectible are written
off against the allowance for doubtful accounts. Since the Company only recognizes revenue to the extent it expects to collect such amounts,
bad debt expense related to receivables from patient service revenue is recorded in general and administrative expense in the consolidated
statement of operations. Recoveries of accounts receivable previously written off are recorded when received.
Deferred revenue: Payments received in advance of services rendered are recorded as deferred revenue and are subsequently recognized as
revenue in the period in which the services are performed.
Fixed assets: Fixed assets consist of diagnostic equipment, furniture and fixtures and leasehold improvements. Fixed assets are carried at cost
and are depreciated using the straight-line method over the estimated useful lives of the assets, which generally range from five to seven years.
Leasehold improvements are depreciated over the lesser of the lease term or the estimated useful lives of the improvements using the straight-
line method. Repairs and maintenance are charged to expense as incurred while improvements are capitalized. Upon sale, retirement or
disposal of fixed assets, the accounts are relieved of the cost and the related accumulated depreciation with any gain or loss recorded to the
consolidated statement of operations.
Fixed assets are reviewed for impairment whenever changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. These computations utilize judgments and assumptions inherent in our estimate of future cash flows to determine recoverability of
these assets. If our assumptions about these assets were to change as a result of events or circumstances, we may be required to record an
impairment loss.
Goodwill: Goodwill resulted from the purchases of Gentris and BioServe in 2014 as described in Note 1. In accordance with ASC
350, Intangibles - Goodwill and Other, we are required to test goodwill for impairment and adjust for impairment losses, if any, at least
annually and on an interim basis if an event or circumstance indicates that it is likely impairment has occurred. Our annual goodwill
impairment testing date is October 1 of each year. No such losses were incurred during the year ended December 31, 2014.
Goodwill
Balance, December 31, 2013
Purchased through acquisitions
Balance, December 31, 2014
$
$
—
2,994,135
2,994,135
Loan guarantee and financing fees: Loan guarantee fees are amortized on a straight-line basis over the term of the guarantee. Financing fees are
amortized using the effective interest method over the term of the related debt.
Warrant liability: We have issued certain warrants which contain an exercise price adjustment feature in the event we issue additional equity
instruments at a price lower than the exercise price of the warrant. The warrants are described herein as derivative warrants. We account for
these derivative warrants as liabilities. These common stock purchase warrants do not trade in an active securities market, and as such, we
estimate the fair value of these warrants using the binomial lattice valuation pricing model with the assumptions as follows: The risk-free
interest rate for periods within the contractual life of the warrant is based on the U.S. Treasury yield curve. The expected life of the warrants is
based upon the contractual life of the warrants. Volatility is estimated based on an average of the historical volatilities of the common stock of
four entities with characteristics similar to those of the Company. Prior to our IPO, the measurement date fair value of the underlying common
shares was based upon an external valuation of our shares. (See Notes 12 and 13). Subsequent to the IPO and Secondary Offering, we used
the closing price of our shares on the OTC Bulletin Board and the NASDAQ Capital Market, respectively.
We compute the fair value of the warrant liability at each reporting period and the change in the fair value is recorded as non-cash expense or
non-cash income. The key component in the value of the warrant liability is our stock price, which is subject to
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significant fluctuation and is not under our control. The resulting effect on our net income (loss) is therefore subject to significant fluctuation
and will continue to be so until the warrants are exercised, amended or expire. Assuming all other fair value inputs remain constant, we will
record non-cash expense when the stock price increases and non-cash income when the stock price decreases.
Income taxes: Income taxes are provided for the tax effects of transactions reported in the consolidated financial statements and consist of
taxes currently due plus deferred income taxes. Deferred income taxes are recognized for temporary differences between the financial
statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future. Deferred income taxes are also
recognized for net operating loss carryforwards that are available to offset future taxable income and research and development credits.
Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. We have established
a full valuation allowance on our deferred tax assets as of December 31, 2014 and 2013, therefore we have not recognized any tax benefit or
expense in the periods presented.
ASC 740, Income Taxes, clarifies the accounting for uncertainty in income taxes recognized in the financial statements. ASC 740 provides that
a tax benefit from uncertain tax positions may be recognized when it is more-likely-than-not that the position will be sustained upon
examination, including resolutions of any related appeals or litigation processes, based on the technical merits of the position. Income tax
positions must meet a more-likely-than-not recognition threshold to be recognized. ASC 740 also provides guidance on measurement, de-
recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. At December 31, 2014 and 2013 we
had no uncertain tax positions.
Our policy is to recognize interest and/or penalties related to income tax matters in income tax expense. There is no accrual for interest or
penalties on our consolidated balance sheets at December 31, 2014 or 2013, and we have not recognized interest and/or penalties in the
consolidated statements of operations for the years ended December 31, 2014, 2013 or 2012.
Patents: We account for intangible assets under ASC 350-30. Patents consist of legal fees incurred and are recorded at cost and amortized over
the useful lives of the assets, using the straight-line method. Certain patents are in the legal application process and therefore are not currently
being amortized. We review the carrying value of patents at the end of each reporting period. Based upon our review, there were no intangible
asset impairments in 2014, 2013 or 2012. Accumulated amortization of patents as of December 31, 2014 and 2013 was approximately
$84,000 and $56,000, respectively. Future amortization expense for legally approved patents (excluding patent applications in progress), is
estimated at $34,900 per year through 2018, approximately $31,600 for 2019 and $93,400 thereafter.
Research and development: Research and development costs associated with service and product development include direct costs of payroll,
employee benefits, stock-based compensation and supplies and an allocation of indirect costs including rent, utilities, depreciation and repairs
and maintenance. All research and development costs are expensed as they are incurred.
Registration payment arrangements: We account for our obligations under registration payment arrangements in accordance with ASC 825-20,
Registration Payment Arrangements. ASC 825-20 requires us to record a liability if we determine a registration payment is probable and if it
can reasonably be estimated. As of both December 31, 2014 and 2013, we have an accrued liability of $300,000.
Stock-based compensation: Stock-based compensation is accounted for in accordance with the provisions of ASC 718, Compensation-Stock
Compensation, which requires the measurement and recognition of compensation expense for all stock-based awards made to employees and
directors based on estimated fair values on the grant date. We estimate the fair value of stock-based awards on the date of grant using the
Black-Scholes option pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the
requisite service periods using the straight-line method. See additional information in Note 11.
All issuances of stock options or other issuances of equity instruments to employees as the consideration for services received by us are
accounted for based on the fair value of the equity instrument issued.
We account for stock-based compensation awards to non-employees in accordance with ASC 505-50, Equity Based Payments to Non-
Employees. Under ASC 505-50, we determine the fair value of the warrants or stock-based compensation awards granted as either the fair
value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. Stock-based
compensation awards issued to non-employees are recorded in expense and additional paid-in capital in stockholders’ equity (deficit) over the
applicable service periods based on the fair value of the awards or consideration received at the vesting date.
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Fair value of financial instruments: The carrying amount of cash and cash equivalents, restricted cash, accounts receivable, accounts payable
and accrued expenses, approximate their estimated fair values due to the short term maturities of those financial instruments. These financial
instruments are considered Level 1 measurements under the fair value hierarchy. The fair values of our notes payable, lines of credit and
capital leases approximate carrying value under Level 2 of the fair value hierarchy. The fair value of warrants recorded as derivative liabilities,
contingent consideration and note payable to VenturEast are described in Note 14.
Joint venture accounted for under the equity method: The Company records its joint venture investment following the equity method of
accounting, reflecting its initial investment in the joint venture and its share of the joint venture’s net earnings or losses and distributions. The
Company’s share of the joint venture’s net loss was approximately $940,000 in 2014 and $12,000 in 2013 (the first year of the joint venture’s
operations) and is included in Research and development expense on the Consolidated Statement of Operations. The Company has a net
receivable due from the joint venture of approximately $10,000 and $24,000 in 2014 and 2013, respectively, which is included in other assets
in the Consolidated Balance Sheet. See additional information in Note 16.
Subsequent events: We have evaluated potential subsequent events through the date the financial statements were issued.
Recent Accounting Pronouncements: In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606),
requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to
customers. The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and
permits the use of either a full retrospective or retrospective with cumulative effect transition method. Early adoption is not permitted. The
updated standard becomes effective for the Company in the first quarter of fiscal year 2017. The Company has not yet selected a transition
method and is currently evaluating the effect that the updated standard will have on the consolidated financial statements.
Earnings (loss) per share: Basic earnings (loss) per share is computed by dividing net income (loss) available to common stockholders by the
weighted average number of common shares assumed to be outstanding during the period of computation. Diluted earnings per share is
computed similar to basic earnings per share except that the numerator is adjusted for the change in fair value of the warrant liability (only if
dilutive) and the denominator is increased to include the number of dilutive potential common shares outstanding during the period using the
treasury stock method.
Basic net loss and diluted net loss per share data were computed as follows:
Numerator:
Net (loss) for basic earnings per share
Less change in fair value of warrant liability
Net (loss) for diluted earnings per share
Denominator:
Weighted-average basic common shares outstanding
Assumed conversion of dilutive securities:
Common stock purchase warrants
Potentially dilutive common shares
2014
2013
2012
$
$
(16,642,919) $
417,000
(17,059,919) $
(12,372,553) $
4,633,000
(6,665,627)
7,538,000
(17,005,553) $
(14,203,627)
9,449,189
4,665,316
1,342,174
12,474
12,474
10,658
10,658
3,987
3,987
Denominator for diluted earnings per share—adjusted weighted-average
shares
Basic net loss per share
Diluted net loss per share
9,461,663
4,675,974
1,346,161
$
$
(1.76) $
(1.80) $
(2.65) $
(3.64) $
(4.97)
(10.55)
The following table summarizes potentially dilutive adjustments to the weighted average number of common shares which were excluded from
the calculation:
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Common stock purchase warrants
Stock options
Restricted shares of common stock
Common shares issuable upon conversion of Series A Preferred Stock
Common shares issuable upon conversion of Series B Preferred Stock
2014
2013
2012
1,060,863 $
1,839,458
132,500
—
—
3,032,821 $
1,701,984 $
1,102,176
873,542
7,500
—
—
553,340
—
352,614
364,320
2,583,026 $
2,372,450
$
$
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Note 3. Revenue and Accounts Receivable
Revenue by service type for each of the years ended December 31 is comprised of the following:
Biopharma Services
Clinical Services
Discovery Services
Grants
2014
2013
2012
$
5,605,780 $
4,432,272
161,335
—
$
10,199,387 $
2,650,285 $
3,662,795
—
296,877
6,609,957 $
578,505
3,166,118
—
556,940
4,301,563
Accounts receivable by service type at December 31, 2014 and 2013 consists of the following:
Biopharma Services
Clinical Services
Discovery Services
Allowance for doubtful accounts
2014
2013
3,203,335 $
1,925,176
151,285
(251,176)
5,028,620 $
428,341
1,174,698
—
(36,000)
1,567,039
$
$
Allowance for Doubtful Accounts
Balance, December 31, 2012
Additions to Allowance for doubtful accounts
Deductions to Allowance for doubtful accounts
Balance, December 31, 2013
Additions to Allowance for doubtful accounts
Deductions to Allowance for doubtful accounts
Balance, December 31, 2014
$
$
36,000
—
—
36,000
215,176
—
251,176
Revenue for Biopharma Services are customized solutions for patient stratification and treatment selection through an extensive suite of DNA-
based testing services. Clinical Services are tests performed to provide information on diagnosis, prognosis and theranosis of cancers to guide
patient management. These tests can be billed to Medicare, another third party insurer or the referring community hospital or other healthcare
facility. Discovery Services are services that provide the tools and testing methods for companies and researchers seeking to identify new
DNA-based biomarkers for disease. Grants includes revenue from grants. The breakdown of our Clinical Services revenue (as a percent of
total revenue) is as follows:
Medicare
Other insurers
Other healthcare facilities
Total Clinical Services
2014
2013
2012
11%
16%
16%
43%
13%
25%
18%
55%
18%
32%
24%
74%
We have historically derived a significant portion of our revenue from a limited number of test ordering sites. The test ordering sites are largely
hospitals, cancer centers, reference laboratories, physician offices and clinical trial clients. 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.
The top five test ordering clients during 2014, 2013 and 2012 accounted for 56%, 69% and 58% respectively, of our testing volumes, with
38%, 36% and 46% respectively, of the test volume coming from community hospitals. During the year ended
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December 31, 2014, two Biopharma clients accounted for approximately 23% and 12% respectively of our revenue. During the year ended
December 31, 2013 there was one Biopharma client that accounted for approximately 40% of our revenue. During 2012 there were three
clients, that each accounted for more than 10% of our revenue: a Biopharma client accounted for approximately 13%, a university teaching
center accounted for approximately 11% and a community hospital accounted for approximately 10% of our revenue.
Note 4. Other Current Assets
At December 31, 2014 and 2013, other current assets consisted of the following:
Inventory
Prepaid expenses
Grants receivable
Note 5. Lease Commitments
2014
2013
$
279,894 $
911,320
—
$
1,191,214 $
198,789
593,950
71,877
864,616
We lease our laboratory, research facility and administrative office space under various operating leases. We have approximately 17,900
square feet of office and laboratory space in Rutherford, New Jersey, 24,900 square feet in Morrisville, North Carolina, 10,000 square feet in
Hyderabad, India and 2,700 square feet in Shanghai, China. We have escalating lease agreements for both our New Jersey and North Carolina
spaces which expire February 2018 and May 2020, respectively. These leases require monthly rent with periodic rent increases that vary from
$1 to $2 per square foot of the rented premises per year. The difference between minimum rent and straight-line rent is recorded as deferred
rent payable. The terms of our New Jersey lease require that a $300,000 security deposit for the facility be held in a stand by letter of credit in
favor of the landlord (see Note 7).
We acquired office and scientific equipment under long term leases which have been capitalized at the present value of the minimum lease
payments. The equipment under these capital leases had a cost of $395,687 and accumulated depreciation of $29,936, as of December 31,
2014.
Minimum future lease payments under all capital and operating leases as of December 31, 2014 are as follows:
December 31,
2015
2016
2017
2018
2019
Thereafter
Total minimum lease payments
Less amount representing interest
Present value of net minimum obligations
Less current obligation under capital lease
Long-term obligation under capital lease
Capital
Leases
Operating
Leases
Total
854,195 $
862,957
870,407
360,140
320,885
135,075
3,403,659 $
928,475
937,237
932,032
419,234
379,979
218,875
3,815,832
$
$
$
74,280 $
74,280
61,625
59,094
59,094
83,800
412,173 $
52,838
359,335
58,950
300,385
Rent expense for the years ended December 31, 2014, 2013 and 2012 was $692,324, $550,882, and $516,173, respectively.
Note 6. Notes Payable and Lines of Credit
Below is a summary of our short-term and long-term debt obligations as of December 31, 2014 and 2013:
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Secured Note Payable, short-term
Notes Payable, Current Portion
Line of Credit, Current Portion
Lines of Credit, Current Portion
Lines of Credit, Long-Term
Lines of Credit, Long-Term
Business Line of Credit — Wells Fargo
December 31,
2014
December 31,
2013
$
$
$
$
$
$
— $
— $
— $
— $
6,000,000
6,000,000 $
22,298
22,298
6,000,000
6,000,000
—
At December 31, 2014 and 2013, we have fully utilized a line of credit with Wells Fargo Bank which provides for maximum borrowings of
$6 million. On April 1, 2014 we entered into a credit agreement and re-negotiated the terms of our fully utilized line of credit with Wells Fargo
Bank. The line of credit was extended through April 1, 2016 at a rate of interest equal to the Daily One Month LIBOR rate plus 1.75% (1.91%
at December 31, 2014). The facility requires monthly interest payments.
The line of credit is collateralized with $6 million in cash. Additionally, we are required to maintain limits on capital spending and are restricted
as to the amount we may pledge as collateral for additional borrowings from any source. The line of credit requires the repayment of principal,
and any unpaid interest, in a single payment due upon maturity.
Conversion of Debt concurrent with IPO
On April 10, 2013, we completed our IPO and converted the following indebtedness into shares of common stock at the IPO price of $10.00
per share:
December 2011 Financing Transaction
2012 Convertible Debt Financing Transaction
December 2012 Bridge Financing Transaction
Business Lines of Credit (DAM)
Other Note Payable and accrued interest
Converted Amount
Common Shares
$
$
4,500,000
3,000,000
1,000,000
1,000,000
134,300
9,634,300
450,000
300,000
100,000
100,000
13,430
963,430
In connection with the conversion of debt into common stock, we expensed the applicable remaining debt discounts of $3.5 million, financing
fees of $419,000 and a contingently recognizable beneficial conversion feature in the converted debt of $3 million.
December 2011 Financing Transaction
The December 2011 Credit Agreement was with John Pappajohn and Andrew Pecora (indirectly through an investment company), both then
members of our board of directors, and NNJCA Capital, LLC (“NNJCA”), a limited liability company of which Dr. Pecora is a member.
Mr. Pappajohn originally provided $4.0 million of financing, NNJCA originally provided $1.5 million of financing and Dr. Pecora provided
$500,000 of financing under the Credit Agreement. On April 10, 2013, Mr. Pappajohn converted $4.0 million and Dr. Pecora converted
$500,000 into 450,000 shares of our common stock at the IPO price of $10.00 per share concurrent with our IPO. The remaining outstanding
balance of $1.5 million was repaid on August 19, 2013 using a portion of the proceeds from our Secondary Offering.
2012 Convertible Debt Financing Transaction
On April 10, 2013, the entire $3 million outstanding under a Restated Credit Agreement dated as of August 27, 2012, as amended and restated
as of October 17, 2012, ($1,750,000 provided by Mr. Pappajohn and $1,250,000 provided by Mr. Mark Oman) was converted into 300,000
shares of common stock at the IPO price of $10 per share.
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December 2012 Bridge Financing Transaction
On April 10, 2013, the entire $1 million outstanding under a credit agreement dated as of December 7, 2012, (all of which was provided by
Mr. Pappajohn), was converted into 100,000 shares of common stock at the IPO price of $10.00 per share.
Business Line of Credit – DAM
On April 10, 2013, $1 million of indebtedness under this line was converted into 100,000 shares of common stock at the IPO price of $10 per
share. The remaining outstanding balance of $2.0 million was repaid on August 19, 2013 using a portion of the proceeds from our Secondary
Offering.
Other Note Payable
On April 10, 2013, a $100,000 note payable and accrued interest payable to Dr. Chaganti was converted into 13,430 shares of common stock
at the IPO price of $10.00 per share.
Loss on Debt and Warrant Restructuring
We entered into a Restated Credit Agreement with Mr. Pappajohn and Mr. Oman in October 2012 to provide for additional borrowing of
$1,000,000, which agreement also removed the conversion price adjustment of a 20% discount to the IPO or merger price if the IPO or
merger price is less than $53.12 per share. We evaluated the application of ASC 470-50, Modifications and Extinguishments and ASC 470-
60, Troubled Debt Restructurings by Debtors and concluded that the revised terms constituted a debt extinguishment, rather than a debt
modification or troubled debt restructuring.
We cancelled certain warrants with an exercise price adjustment of a 20% discount to the IPO or merger price if the IPO or merger price is less
than $53.13 per share and issued warrants without an exercise price adjustment to a 20% discount to the IPO or merger price if the IPO or
merger price is less than $53.13 per share as compensation. In connection with these transactions, we recognized a loss on debt and warrant
restructuring during 2012 as presented below:
Restated 2012 convertible debt financing transaction
Amend warrants granted for guarantee of business line of credit
Amend warrants granted for 2011 convertible debt financing transaction
Settle warrants granted for guarantee of business line of credit
Settle warrants granted for 2011 convertible debt financing transaction
Loss on debt and warrant restructuring - 2012
$
$
1,506,512
268,000
545,000
(129,500 )
(328,000 )
1,862,012
Note 7. Letter of Credit
We maintain a $300,000 letter of credit in favor of our landlord pursuant to the terms of the lease for our Rutherford facility. At December 31,
2014 the letter of credit was fully secured by the restricted cash disclosed on our Consolidated Balance Sheet.
Note 8. Fixed Assets
Fixed assets are summarized by major classifications as follows:
Equipment
Furniture and fixtures
Leasehold improvements
Less accumulated depreciation
Net fixed assets
2014
2013
$
$
5,913,928 $
548,093
869,578
7,331,599
(2,885,006 )
4,446,593 $
2,513,066
461,119
595,689
3,569,874
(2,305,250 )
1,264,624
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Note 9. Income Taxes
The provision for income taxes for the years ended December 31, 2014, 2013 and 2012 differs from the approximate amount of income tax
benefit determined by applying the U.S. federal income tax rate to pre-tax loss, due to the following:
For the Year Ended
December 31, 2014
For the Year Ended
December 31, 2013
For the Year Ended
December 31, 2012
% of
Pretax
Loss
% of
Pretax
Loss
Amount
Amount
35.0 % $ (4,563,000)
4.2 %
(359,000)
0.8 %
(126,000)
35.0 % $ (2,333,000)
(661,000)
2.8 %
(82,000)
1.0 %
Amount
$ (6,648,000)
(807,000)
(154,000)
207,000
(146,000)
-1.1 %
0.8 %
229,000
(1,622,000)
-1.8 %
12.4 %
85,000
(1,926,000)
% of
Pretax
Loss
35.0 %
9.5 %
1.1 %
-1.2 %
26.0 %
(69,000)
0.4 %
—
— %
—
— %
—
5,255,000
12,000
$ (2,350,000)
— %
-27.7 %
— %
12.4 % $
3,454,000
2,356,000
(33,000)
-26.5 %
-18.1 %
0.3 %
—
4,858,000
59,000
(664,000)
5.1 % $
—
— %
-70.2 %
-0.2 %
— %
Income tax benefit at federal statutory rate
State tax provision, net of federal tax benefit
Tax credits
Stock based compensation permanent
differences
Derivative warrant permanent differences
Investor consideration permanent differences
Debt and warrant conversion costs
permanent difference
Change in valuation allowance
Other
Income tax (benefit) provision
During January and December 2014, we sold $28,640,223 of gross State of New Jersey NOL carryforwards relating to tax years 2009
through 2012, resulting in the receipt of $2,350,185. During 2013, we sold $8,018,107 of gross State of New Jersey NOL carryforwards,
resulting in the receipt of $663,900.
We transferred the NOL carryforwards through the Technology Business Tax Certificate Transfer Program sponsored by the New Jersey
Economic Development Authority.
Approximate deferred taxes consist of the following components as of December 31, 2014 and 2013:
Deferred tax assets:
Net operating loss carryforwards
Accruals and reserves
Non-qualified stock options
Research and development tax credits
Derivative warrant liability
Investment in joint venture
Goodwill
Other
Total deferred tax assets
Less valuation allowance
Net deferred tax assets
Deferred tax liabilities:
Fixed assets
Net deferred taxes
2014
2013
$
$
20,982,000 $
773,000
1,912,000
758,000
26,000
163,000
23,000
6,000
24,643,000
(24,558,000 )
85,000
(85,000 )
— $
17,140,000
509,000
877,000
603,000
26,000
163,000
—
5,000
19,323,000
(19,303,000 )
20,000
(20,000 )
—
F-95
Table of Contents
Due to a history of losses we have generated since inception, we believe it is more-likely-than-not that all of the deferred tax assets will not be
realized as of December 31, 2014 and 2013. Therefore, we have recorded a full valuation allowance on our deferred tax assets. We have net
operating loss carryforwards for federal income tax purposes of approximately $57,000,000 as of December 31, 2014. The net operating loss
carryforwards will begin to expire in 2027. Utilization of these carryforwards is subject to limitation due to ownership changes that may delay
the utilization of a portion of the carryforwards.
Note 10. Capital Stock
IPO
On April 10, 2013, we completed our IPO in which we issued and sold 690,000 shares of common stock (including the underwriter’s
overallotment of 90,000 shares) at a public offering price of $10.00 per share resulting in gross proceeds of $6.9 million. In connection with
the offering, all outstanding shares of Series A preferred stock were converted into 376,525 shares of common stock, and all outstanding
shares of Series B preferred stock were converted into 910,800 shares of common stock. Concurrent with the IPO, we issued 2,000 shares of
common stock to Cleveland Clinic pursuant to our license agreement with Cleveland Clinic.
Secondary Offering
On August 19, 2013, we sold 1,500,000 shares of common stock at a public offering price of $10.00 per share resulting in gross proceeds of
$15.0 million ($13.3 million of net proceeds after offering expenses and underwriting discounts).
On September 5, 2013, we sold 105,000 additional common shares pursuant to the underwriter’s partial exercise of the over-allotment option
which resulted in gross proceeds of $1.1 million ($947,000 of net proceeds after offering expenses and underwriting discounts).
Follow-On Offering
On October 28, 2013, we sold 3,286,700 shares of common stock, (including the underwriter’s overallotment of 428,700 shares), at a public
offering price of $14.00 per share resulting in gross proceeds of $46.0 million (net proceeds of $42.3 million).
Preferred Stock
We are currently authorized to issue up to 9,764,000 shares of preferred stock.
Note 11. Stock Option Plans
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.
The Board of Directors adopted the 2011 Plan on June 30, 2011 and reserved 350,000 shares of common stock for issuance under the 2011
Plan. On May 22, 2014, the stockholders voted to increase the number of shares reserved by the plan to 2,000,000 shares of common stock
under several types of equity awards including stock options, stock appreciation rights, restricted stock awards and other awards defined in the
2011 Plan.
The Board of Directors adopted the 2008 Plan on April 29, 2008 and reserved 251,475 shares of common stock for issuance under the plan.
On April 1, 2010, the stockholders voted to increase the number of shares reserved by the plan to 550,000. We are authorized to issue
incentive stock options or non-statutory stock options to eligible participants.
We have also issued 48,000 options outside of the Stock Option Plans.
At December 31, 2014, 386,044 shares remain available for future awards under the 2011 Plan and 89,051 shares remain available for future
awards under the 2008 Plan.
As of December 31, 2014, no stock appreciation rights and 227,500 shares of restricted stock had been awarded under the Stock Option
Plans.
96
Table of Contents
Prior to our IPO in April 2013, the Board of Directors authorized an offer to certain employee and non-employee options holders on the
following terms: those holding stock options with a strike price of $25.00 or more had the opportunity to exchange their options for 60% of
the number of options currently held with an exercise price equal to the IPO price, which was $10.00 per share, and those holding stock
options with a strike price of $12.50 had the opportunity to exchange their options for 80% of the number of options currently held with an
exercise price equal to the IPO price which was $10.00 per share. On April 5, 2013, our initial public offering became effective and 336,300
options with exercise prices ranging from $12.50 to $33.80 were exchanged for 242,070 options with an exercise price of $10.00. The options
did not result in the recognition of incremental compensation cost. In addition, 53,500 options which were approved to be issued and priced at
the IPO price were issued to employees with an exercise price of $10.00 per share.
A summary of employee and non-employee stock option activity for the years ended December 31, 2014, 2013 and 2012 is as follows:
Outstanding January 1, 2012
Granted
Cancelled or expired
Outstanding December 31, 2012
Granted
Exercised
Cancelled or expired
Outstanding December 31, 2013
Granted
Exercised
Cancelled or expired
Outstanding December 31, 2014
Exercisable, December 31, 2014
Options Outstanding
Number of
Shares
Weighted-
Average
Exercise
Price
559,990 $
2,400
(9,050)
553,340 $
426,762
(164)
(106,396)
873,542 $
1,154,800 $
(30,083) $
(158,801) $
1,839,458 $
635,435 $
12.85
33.80
23.43
12.76
14.57
10.00
20.46
10.83
10.41
6.61
11.45
10.58
9.14
Weighted-
Average
Remaining
Contractual
Term (in years)
8.10 $
Aggregate
Intrinsic
Value
11,737,710
7.13 $
1,142,432
7.75 $
3,138,539
8.49 $
6.72 $
618,250
478,219
Aggregate intrinsic value represents the difference between the fair value of our common stock and the exercise price of outstanding, in-the-
money options. The fair value of our common stock was $6.68 and $13.78 as of December 31, 2014 and 2013, respectively, and the estimated
fair value of our common stock was $9.60 as of December 31, 2012. During the year ended December 31, 2014 and 2013, we received
$79,018 and $1,640, respectively from the exercise of options. Also during the year ended December 31, 2014, an option holder exercised
options to purchase 12,000 shares of common stock with an exercise price of $10.00 per share using the net issue exercise method whereby
the option holder surrendered 11,429 shares in payment in full of the exercise price resulting in net issuance of 571 shares of common stock.
The options exercised in 2014 and 2013 had a total intrinsic value of $120,510 and $1,630, respectively. Options were not exercised in 2012.
As of December 31, 2014, total unrecognized compensation cost related to non-vested stock options granted to employees was $6,058,774,
which we expect to recognize over the next 3.70 years.
As of December 31, 2014 and 2013, total unrecognized compensation cost related to non-vested stock options granted to non-employees was
$645,739 and $94,359, respectively, which we expect to recognize over the next 2.95 and 1.78 years, respectively. The estimate of
unrecognized non-employee compensation is based on the fair value of the non-vested options as of December 31, 2014 and 2013.
The following table summarizes information about outstanding and vested stock options granted to employees and non-employees as of
December 31, 2014 as follows:
97
Table of Contents
Exercise Price
4.00
4.80
6.30
7.44
9.09
10.00
11.70 - 11.75
12.50 - 14.18
15.39
15.89
17.38
Total
Options Outstanding
Options Vested and Exercisable
Weighted-
Average
Remaining
Contractual
Life (in years)
Weighted-
Average
Exercise
Price
Number of
Shares
Outstanding
Number of
Shares
Weighted-
Average
Exercise Price
145,000
30,914
451,400
7,500
223,400
230,788
50,400
105,700
304,356
200,000
90,000
1,839,458
4.22 $
5.05
9.95
9.98
9.74
5.65
9.30
9.01
8.78
9.40
9.22
8.49 $
4.00
4.80
6.30
7.44
9.09
10.00
11.70
13.99
15.39
15.89
17.38
10.58
145,000 $
30,432
85,280
—
20,681
209,395
2,066
1,351
90,230
37,500
13,500
635,435 $
4.00
4.80
6.30
—
9.09
10.00
11.74
13.98
15.39
15.89
17.38
9.14
The fair value of options granted to employees is estimated on the grant date using the Black-Scholes option valuation model. This valuation
model for stock-based compensation expense requires us to make assumptions and judgments about the variables used in the calculation,
including the fair value of our common stock (see Note 13), 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. We also estimate forfeitures of unvested
stock options. To the extent actual forfeitures differ from the estimates, the difference will be recorded as a cumulative adjustment in the period
estimates are revised. 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 an average of the historical
volatilities of the common stock of three entities with characteristics similar to those of the Company. 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. Expected forfeitures are assumed to be zero due to the
plan design which has monthly vesting after an initial cliff vesting period.
The following table presents the weighted-average assumptions used to estimate the fair value of options granted to employees during the
periods presented:
Volatility
Risk free interest rate
Dividend yield
Term (years)
Weighted-average fair value of options granted during the period
$
Year Ended December 31,
2014
2013
2012
70.17%
1.78%
—
5.98
5.29
$
76.60%
1.79%
—
6.14
9.85
$
77.39%
1.43%
—
6.50
23.35
In 2010, we issued an aggregate of 80,000 options to non-employees with an exercise price of $25.00. As described above, on April 5, 2013,
these options were exchanged for 48,000 options with an exercise price of $10.00. In October 2013, we issued 10,000 options to a non-
employee with an exercise price of $15.39. In May 2014, we issued 200,000 options to a Director, with an exercise price of $15.89. See Note
17 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:
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Table of Contents
Volatility
Risk free interest rate
Dividend yield
Term (years)
Year Ended December 31,
2014
2013
2012
71.76%
2.44%
—
9.68
75.68%
1.53%
—
7.68
75.01%
1.26%
—
8.28
Starting in 2013, restricted stock awards have been granted to employees, directors and consultants as compensation for services. At
December 31, 2014, there was $852,206 of unrecognized compensation cost related to non-vested restricted stock granted to employees; we
expect to recognize the cost over 3 years. At December 31, 2014, there was $12,948 of unrecognized compensation cost related to non-vested
restricted stock granted to non-employees, which we expect to recognize over 0.78 years.
The following table summarizes the activities for our non-vested restricted stock awards for the years ended December 31, 2014 and 2013:
Non-vested Restricted Stock Awards
Non-vested at January 1, 2013
Granted
Vested
Non-vested at December 31, 2013
Granted
Vested
Forfeited/canceled
Non-vested at December 31, 2014
Number of Shares
$
Weighted-Average
Grant Date Fair Value
—
13.50
15.39
12.55
9.01
10.19
12.04
8.14
— $
7,500
(2,500 )
5,000 $
220,000
(80,000 )
(12,500 )
132,500 $
$
$
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 Statement of Operations during the periods presented:
Cost of revenues
Research and development
General and administrative
Sales and marketing
Total stock-based compensation
Year Ended December 31,
2014
2013
2012
148,852 $
472,573
3,058,465
155,459
3,835,349 $
41,470 $
114,189
516,127
63,359
735,145 $
11,753
460,321
297,175
146,112
915,361
$
$
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Note 12. Warrants
We have issued certain warrants which contain an exercise price adjustment feature in the event we issue additional equity instruments at a
price lower than the exercise price of the warrant. The warrants are described herein as derivative warrants. For all derivative warrants, in the
event equity instruments are issued at a price lower than the exercise price of the warrant, the exercise price is adjusted to the price of the new
equity instruments issued (price adjustment feature). For certain of these warrants, the number of shares underlying the warrant is also
adjusted to an amount computed by dividing the proceeds of the warrant under its original terms by the revised exercise price (share
adjustment feature). These warrants are initially recorded as a warrant liability at fair value with a corresponding entry to the loan guarantee fee
asset, debt discount, additional paid-in capital or expense dependent upon the service provided in exchange for the warrant grant.
Subsequently, any change in fair value is recognized in earnings until such time as the warrants are exercised, amended or expire. As of
December 31, 2014 all warrants with a share adjustment feature have either expired or have been exercised.
In connection with debt guarantees and extensions, we issued 1,051,506 warrants to Mr. Pappajohn, a member of our Board of Directors and
stockholder, at various dates (see Note 17). These warrants were initially recorded at fair value as a loan guarantee fee amortized over the
period of the guarantee to interest expense. The aggregate issue date fair value of the debt guarantee warrants was $1,555,000 in 2012, and
$831,000 in 2011. There were no debt guarantee warrants issued in 2014 or 2013.
In connection with the acquisition of a line of credit, we issued 60,000 warrants to DAM in March 2011 with an initial estimated fair value of
$1,019,000. In March 2012 in exchange for an extension of that line, we issued 15,000 warrants with an initial estimated fair value of
$306,000. See Note 6.
We issued 200 warrants to a consultant for services provided in February and March 2011 and 4,000 warrants to a member of our Board of
Directors in connection with the March 2011 line of credit agreement with DAM. These warrants were recorded as consulting expense at an
initial estimated fair value of $69,000 and expire in March 2016.
In connection with the December 2011 Financing Transaction we granted a total of 112,940 warrants at various dates to Mr. Pappajohn,
Dr. Pecora and NNJCA. The aggregate issue date fair value of these financing fee warrants was $1,522,000 in 2012 and $951,000 in 2011. In
October 2012, 37,646 of these warrants were surrendered in exchange for an increase to the prepayment penalty, and 75,294 were amended in
exchange for 20,669 additional warrants with an initial estimated fair value of $606,000. Also in October 2012, Mr. Pappajohn agreed to
extend a portion of the debt’s maturity date and in exchange we issued 9,412 additional warrants with an initial estimated fair value of
$267,000. See Note 6.
In connection with the 2012 Convertible Debt Financing Transaction, we granted a total of 28,235 warrants to Mr. Pappajohn and Mr. Oman
with an initial estimated fair value of $1,107,000. In October 2012, these warrants were surrendered in exchange for additional financing and
114,510 new warrants with an initial estimated fair value of $4,090,000. See Note 6.
On September 6, 2012, we extended the maturity date of warrants to purchase 70,598 shares of our common stock which were due to expire
on September 10, 2012 to September 28, 2012. On September 27, 2012, we extended the maturity date of 65,328 of these warrants to
September 10, 2013. In exchange, the warrants became subject to a lock-up agreement for 180 days after the consummation of an IPO on the
same terms as other lock-up agreements in favor of the underwriters of an offering. We determined the fair value of the warrant extensions to
be approximately $144,000, which was recorded as general and administrative expense.
On October 22, 2012, in exchange for amending warrants issued in connection with his guarantee of the Wells Fargo debt, we issued warrants
to purchase 10,157 shares of our common stock to Mr. Pappajohn with an exercise price equal to the lesser of (i) $42.50 per share and (ii) the
IPO or merger price per share. These warrants were recorded as a financing fee expense at an estimated fair value of $298,000.
In connection with the December 2012 Bridge Financing transaction, we granted 23,529 warrants to Mr. Pappajohn with an initial estimated
fair value of $837,000. See Note 6.
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Table of Contents
During 2012, warrants to purchase 54,910 shares were exercised and $690,227 was received and recorded as increases to common stock and
additional paid-in capital. An additional 15,164 warrants expired unexercised. In connection with the 2012 Convertible Debt Financing
Transaction, we granted 4,118 warrants to Mr. Pappajohn and 2,941 warrants to Mr. Oman on February 22, 2013. The warrants have a ten-
year term and an exercise price equal to the IPO price of $10.00 per share. Pursuant to a subsequent agreement, the warrants held by
Mr. Pappajohn have an exercise price of $15.00 per share. These warrants were initially recorded at fair value as a financing fee asset and
were amortized over the period of the note to interest expense. The issue date fair value of these warrants was $221,000.
In connection with the December 2012 Bridge Financing Transaction, we granted 2,353 ten-year warrants with an exercise price equal to the
IPO price of $10.00 per share to Mr. Pappajohn on March 7, 2013. Mr. Pappajohn subsequently agreed that if our final IPO price was below
$15.00, there would be no further adjustment to the price or number of shares covered by the warrants held by him. These warrants were
initially recorded at fair value as a financing fee asset and were amortized over the period of the note to interest expense. The issue date fair
value of these warrants was $47,000.
On February 11, 2013, John Pappajohn agreed to limit certain anti-dilution rights in his warrants to purchase shares of the Company’s
common stock. Subject to the consummation of an IPO prior to April 13, 2013, Mr. Pappajohn agreed that if the final IPO price was below
$15.00, the exercise price of the warrants held by him would adjust to $15.00 and the number of shares underlying the warrants would be
adjusted as if the IPO price were $15.00 and then there would be no further adjustment to the price or number of shares covered by warrants
held by him. In February 2013, certain warrant holders agreed to waive the price and share adjustment provisions of their warrants, except for
the anti-dilution provisions related to stock splits, subdivisions and combinations, with respect to an aggregate of 114,030 shares of common
stock underlying such warrants, effective immediately following the consummation of our IPO on April 10, 2013 at $10.00 per share.
On April 10, 2013, the Company completed the IPO at $10.00 per share. The shares of common stock issuable upon the exercise of warrants
increased by 838,889 shares and the exercise prices of 1,656,860 warrants were adjusted as a result of share and exercise price adjustment
features in certain warrants.
On April 29, 2013, the Company received $96,000 from shareholders who exercised warrants to purchase 24,000 shares of common stock at
$4.00 per share.
On July 6, 2013, a warrant holder exercised a warrant to purchase 6,000 shares of common stock at an exercise price of $4.00 per share using
the net issuance exercise method whereby 2,072 shares were surrendered as payment in full of the exercise price resulting in a net issuance of
3,928 shares.
On July 8, 2013, the Company received $96,000 from shareholders who exercised warrants to purchase 24,000 shares of common stock at
$4.00 per share.
On September 10, 2013 and September 27, 2013, the Company extended the expiration date of 42,468 warrants for 17 days and 11 days
respectively.
On September 30, 2013, warrant holders exercised warrants to purchase 30,034 shares of common stock at an exercise price of $10.00 per
share using the net issuance exercise method whereby 14,313 shares were surrendered as payment in full of the exercise price resulting in a
net issuance of 15,721 shares.
On October 7, 2013 and October 8, 2013, warrant holders exercised warrants to purchase 33,868 shares of common stock, at exercise prices
ranging from $10.00 – $14.10 per share, using the net issuance exercise method whereby 23,188 shares were surrendered as payment in full
of the exercise price resulting in a net issuance of 10,680 shares.
In January 2014, the Company received $950 from a warrant holder who exercised warrants to purchase 95 shares of common stock
at $10.00 per share. In February 2014 a warrant holder exercised warrants to purchase 3,320 shares of common stock at an exercise price
of $10.00 per share using the net issuance exercise method whereby 1,661 shares were surrendered in payment in full of the exercise price
resulting in a net issuance of 1,659 shares. In March 2014 a warrant holder exercised warrants to purchase 12,500 shares of common stock at
an exercise price of $10.00 per share using the net issuance exercise method whereby 7,230 shares were surrendered in payment in full of the
exercise price resulting in a net issuance of 5,270 shares. In June 2014, we received $177,154 from Mr. Pappajohn who exercised warrants to
purchase 44,288 shares of common stock at an exercise price of $4.00 per share.
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Table of Contents
In July 2014, warrant holders exercised warrants to purchase 130,000 shares of common stock at an exercise price of $4.00 per share using
the net issuance exercise method whereby 45,894 shares were surrendered in payment in full of the exercise price resulting in a net issuance
of 84,106 shares.
In October 2014, 470,833 warrants expired unexercised, of which 233,333 were warrants held by Mr. Pappajohn.
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Table of Contents
The following table summarizes the warrant activity for the years ending December 31, 2014, 2013 and 2012:
Warrants
Outstanding
January 1,
2012
Exercise
Price
2012
Warrants
Issued
2012
Warrants
Exercised
2012
Warrants
Surrendered
2012
Warrants
Expired
Warrants
Outstanding
December 31,
2012
2013
Warrants
Issued
2013
Warrants
Exercised
2013
Warrants
Expired
IPO
Adjustments
(E)
Warrants
Outstanding
December 31,
2013
2014
Warrants
Exercised
2014
Warrants
Expired
Warrants
Outstanding
December 31,
2014
$
Issued With / For
Non-Derivative
Warrants:
Financing
Financing
Financing
Debt Guarantee
Debt Guarantee
Debt Guarantee
Series A Pref. Stock
Series A Pref. Stock
Consulting
Derivative
Warrants:
Series A Pref. Stock
Financing
Financing
Financing
Financing
Financing
Debt Guarantee
Debt Guarantee
Debt Guarantee
Debt Guarantee
Debt Guarantee
Debt Guarantee
Series B Pref. Stock
Series B Pref. Stock
Consulting
Consulting
Consulting
Consulting
Consulting
10.00
14.10
15.00
4.00
10.00
15.00
10.75
14.10
10.00
13.72 F
—
8,865
—
228,288
—
—
30,000
89,214
—
356,367
—
—
—
—
—
—
—
—
—
—
—
(2,482 )
—
—
—
—
(30,000 )
(18,616 )
—
(51,098 )
—
—
—
—
—
—
—
—
—
—
—
(6,383 )
—
—
—
—
—
(5,269 )
—
(11,652 )
4.00 A
10.00 B
25.00 B
42.50 BCD
42.50 AD
42.50
ACD
10.00 A
25.00
ACD
25.00 AD
32.45 AC
42.50 ACD
42.50 BCD
10.00 B
25.00 B
10.00 B
12.50 AD
14.10 AD
25.00 BD
25.00 AD
10.00 F
13.47 F
7,325
—
60,000
42,353
—
—
—
—
189,117
54,314
(3,812 )
—
—
—
—
—
—
—
(156,176 )
—
(3,513 )
—
—
—
—
—
—
120,865
—
—
—
—
—
—
—
212,000
100,000
40,000
—
—
—
52,464
—
4,030
10,000
200
4,000
532,372
888,739
—
—
—
75,392
37,000
—
—
—
—
—
—
—
476,688
476,688
—
—
—
—
—
—
—
—
—
—
—
—
(3,812 )
(54,910 )
—
—
—
(37,000 )
—
—
—
—
—
—
—
—
(193,176 )
(193,176 )
—
—
—
—
—
—
—
—
—
—
—
—
(3,513 )
(15,165 )
—
—
—
228,288
—
—
—
65,329
—
293,617
—
—
60,000
75,294
54,314
120,865
—
212,000
100,000
40,000
38,392
37,000
—
52,464
—
4,030
10,000
200
4,000
808,559
1,102,176
—
—
—
—
—
—
—
—
—
—
—
—
—
(54,000 )
—
—
—
(29,868 )
—
(83,868 )
—
—
—
—
—
—
—
(35,461 )
—
(35,461 )
243,334
—
436,079
—
237,500
585,645
—
—
29,138
1,531,696
—
243,334
—
—
436,079
—
174,288 (174,288 )
237,500
585,645
—
—
29,138
—
—
—
—
— (237,500 )
— (233,333 )
—
—
—
—
—
—
1,705,984 (174,288 ) (470,833 )
—
—
—
—
2,941
6,471
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(34,034 )
—
—
—
—
—
—
—
—
—
—
—
—
—
9,412
(34,034 )
9,412 (117,902 )
—
—
—
—
—
—
—
—
—
—
—
—
—
(35,461 )
—
60,000
(60,000 )
(75,294 )
(57,255 )
(127,336 )
12,500
(212,000 )
(100,000 )
(40,000 )
(38,392 )
(37,000 )
52,464
(52,464 )
200
(4,030 )
(10,000 )
(200 )
(4,000 )
(692,807 )
838,889
—
60,000
—
—
—
—
—
—
—
—
—
12,500
—
(12,500 )
—
—
—
—
—
—
—
—
—
—
—
—
18,430
—
200
—
—
—
—
91,130
—
—
—
—
—
—
—
—
—
—
—
(3,415 )
—
—
—
—
—
—
—
—
—
—
—
—
—
(15,915 )
1,797,114 (190,203 ) (470,833 )
243,334
—
436,079
—
—
352,312
—
—
29,138
1,060,863
—
60,000
—
—
—
—
—
—
—
—
—
—
15,015
—
200
—
—
—
—
75,215
1,136,078
_________________________
A
These warrants are subject to fair value accounting and contain exercise price and number of share adjustment features. See Note
13.
These warrants are subject to fair value accounting and contain an exercise price adjustment feature. See Note
13.
On February 11, 2013, these warrants held by John Pappajohn were amended to limit the adjustment feature(s) to $15.00 per share in an initial public offering (totaling 530,022
warrants).
The exercise price and/or number of share adjustment features of these warrants expired and are no longer subject to fair value accounting after our initial public
offering.
On April 10, 2013 the Company completed the IPO at $10.00 per share. The shares of common stock issuable upon the exercise of warrants outstanding as of April 10, 2013 increased by 838,889
shares and the exercise prices of 1,656,860 warrants were adjusted as a result of the share and exercise price adjustment features described above.
Weighted average exercise prices are as of December 31,
2014.
B
C
D
E
F
103
Table of Contents
Note 13. Fair Value of Warrants
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 during the years ended December 31, 2014, 2013 and 2012 and at December 31, 2014, December 31, 2013 and April 5, 2013
(IPO valuation date). In computing the fair value of the warrants, if the stated exercise price of the warrants exceeded the assumed value of the
Company stock at the date the fair value was being computed, the exercise price and number of shares (if applicable) underlying the warrants
were adjusted to reflect an assumed trigger of the price and/or share adjustment features related to the applicable warrants. Such adjustments
were only applicable to 2012 and 2013 due to the relative price of the warrants and the assumed Company stock price:
Debt Guarantee
Exercise Price
Expected life (years)
Expected volatility
Risk-free interest rate
Expected dividend yield
Series B
Exercise Price
Expected life (years)
Expected volatility
Risk-free interest rate
Expected dividend yield
Consulting
Exercise Price
Expected life (years)
Expected volatility
Risk-free interest rate
Expected dividend yield
Financing
Exercise Price
Expected life (years)
Expected volatility
Risk-free interest rate
Expected dividend yield
Exercised During
the year ended
December 31,
2014
$
10.00
0.60
49.01%
0.08%
0.00%
Issued During the
year ended
December 31, 2012
$
$
As of December
31, 2013
IPO Date
April 5, 2013
$
10.00
0.83
57.33%
0.13%
0.00%
13.56
2.42
66.37%
0.32%
0.00%
9.60
4.66
80.05%
0.82%
0.00%
Exercised During
the Year Ended
December 31,
2014
As of December 31,
2014
2013
$
$
$
10.00
1.72
46.60%
0.33%
0.00%
$
10.00
0.88
49.95%
0.25%
0.00%
10.00
1.92
59.26 %
0.38 %
0.00 %
As of December 31,
2014
2013
IPO Date
April 5, 2013
$
10.00
1.14
49.25%
0.25%
0.00%
$
10.00
2.14
62.63%
0.38%
0.00%
10.00
2.33
63.20%
0.27%
0.00%
Issued During
the Year Ended
December 31,
As of December 31,
$
2014
— $
0
—%
—%
0.00%
104
$
2013
13.34
9.78
74.70%
1.95%
0.00%
$
2014
10.00
1.23
50.23%
0.25%
0.00%
$
2013
10.00
2.25
64.40%
0.38%
0.00%
IPO Date
April 5,
2013
13.21
8.30
73.22%
1.44%
0.00%
Table of Contents
The assumed ranges of Company stock prices used in computing the warrant fair value for warrants issued during the year is as follows: in
2014, $6.68—$19.86; in 2013, $9.60—$20.26; in 2012, $9.60—$33.80. In determining the fair value of warrants issued at each reporting
date, the assumed Company stock price was $6.68 and $13.78 (the closing price on the NASDAQ Capital Market) at December 31, 2014 and
2013.
The following table summarizes the derivative warrant activity subject to fair value accounting for the years ended December 31, 2014, 2013
and 2012:
Issued with
Series A
Preferred
Stock
Issued with
Series B
Preferred
Stock
Issued For
Debt
Guarantee
Issued For
Consulting
Issued For
Financing
Total
$
220,000 $
1,160,000 $ 6,993,000 $
—
(55,000)
—
(165,000)
—
—
—
(930,000)
1,583,000
—
268,000
(3,165,000)
447,000 $ 2,293,000 $ 11,113,000
6,544,000
4,961,000
(55,000)
—
2,485,000
2,217,000
(7,538,000)
(2,978,000)
—
—
—
(300,000)
—
—
—
—
—
—
—
—
230,000
—
(420,000)
—
307,000
5,679,000
—
—
(2,514,000)
(3,101,000)
147,000
—
—
(108,000)
(38,000)
6,493,000
268,000
—
(4,548,000)
(1,801,000)
12,549,000
268,000
(420,000)
(7,170,000)
(4,633,000)
117,000
(38,000)
(71,000)
64,000
(87,000)
23,000
1,000
—
(1,000)
412,000
—
(368,000)
594,000
(125,000)
(417,000)
$
— $
8,000 $
— $
— $
44,000 $
52,000
Fair value of warrants outstanding as
of January 1, 2012
Fair value of warrants issued
Fair value of warrants exercised
Warrant restructuring
Change in fair value of warrants
Fair value of warrants outstanding as
of December 31, 2012
Fair value of warrants issued
Fair value of warrants exercised
Reclassification to equity in IPO
Change in fair value of warrants
Fair value of warrants outstanding as
of December 31, 2013
Fair value of warrants exercised
Change in fair value of warrants
Fair value of warrants outstanding as
of December 31, 2014
Note 14. 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 Accounting Standards Codification 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.
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Table of Contents
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:
Warrant liability
Gentris contingent consideration
Notes payable to VenturEast
Total
52,000
293,400
534,828
880,228
$
$
2014
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
—
—
—
—
2013
— $
—
—
— $
52,000
293,400
534,828
880,228
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Warrant liability
$
594,000
—
— $
594,000
The warrant liability consists of stock warrants we issued that contain an exercise price adjustment feature. In accordance with derivative
accounting for warrants, we calculated the fair value of warrants and the assumptions used are described in Note 13, “Fair Value of Warrants”.
Realized and unrealized gains and losses related to the change in fair value of the warrant liability are included in other income (expense) on
the Consolidated Statement of Operations.
The value of the Gentris contingent consideration was determined using a discounted cash flow of the expected payments required by the
purchase agreement.
The ultimate payment to VenturEast will be the value of 84,278 shares of 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 less a discount for credit risk. During the year ended December 31,
2014 we recognized a gain of $198,000 due to the decrease in value of the note. Realized and unrealized gains and losses related to the change
in fair value of the note are included in other income (expense) on the Consolidated Statement of Operations.
A table summarizing the activity for the derivative warrant liability which is measured at fair value using Level 3 inputs is presented in Note
13. The following table summarizes the activity of the notes payable to VenturEast and Gentris contingent consideration which were measured
at fair value using Level 3 inputs:
Note Payable
to VenturEast
Gentris Contingent
Consideration
Fair value at January 1, 2014
Fair value at issuance
Change in fair value
Fair value at December 31, 2014
$
$
— $
733,387
(198,559)
534,828 $
—
293,400
—
293,400
Note 15. Contingencies
In the normal course of business, the Company is involved in various claims and legal proceedings. In the opinion of management, the
ultimate liability or disposition thereof is not expected to have a material adverse effect on our financial condition, results of operations or
liquidity.
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Table of Contents
Note 16. 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”). In exchange for our membership interest in the JV,
we made an initial capital contribution of $1.0 million in October 2013. In addition, we issued 10,000 shares of our common stock to Mayo
pursuant to our affiliation agreement and recorded an expense of approximately $175,000. We also recorded additional expense of
approximately $231,000 during the fourth quarter of 2013 related to shares issued to Mayo in November of 2011 as the JV achieved certain
performance milestones. In the third quarter of 2014 we made an additional $1.0 million capital contribution.
The agreement also requires aggregate total capital contributions by us of up to an additional $4.0 million. We currently anticipate that we will
make capital contributions of $1.0 million in the second quarter of 2015. 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 will take 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.
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 joint venture 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 17. Related Party Transactions
John Pappajohn, a member of the Board of Directors and stockholder, had personally guaranteed our revolving line of credit with Wells Fargo
Bank through March 31, 2014. As consideration for his guarantee, as well as each of the eight extensions of this facility through March 31,
2014, Mr. Pappajohn received warrants to purchase an aggregate of 1,051,506 shares of common stock of which Mr. Pappajohn assigned
warrants to purchase 284,000 shares of common stock to certain third parties. Through December 31, 2014, warrants to purchase 440,113
shares of common stock have been exercised by Mr. Pappajohn and 233,333 warrants to purchase common stock have expired. After
adjustment pursuant to the terms of the warrants in conjunction with our IPO, the number of these warrants outstanding retained by
Mr. Pappajohn was 352,312 at $15.00 per share on December 31, 2014.
In addition, John Pappajohn also had loaned us an aggregate of $6,750,000 (all of which was converted into 675,000 shares of common stock
at the IPO price of $10.00 per share). In connection with these loans, Mr. Pappajohn received warrants to purchase an aggregate of 202,630
shares of common stock. After adjustment pursuant to the terms of the warrants in conjunction with our IPO, the number of warrants
outstanding was 436,079 at $15.00 per share at December 31, 2014.
Effective January 6, 2014, the board of directors appointed John Pappajohn to serve as the Chairman of the Board, a position previously held
by Dr. Raju S.K. Chaganti. As compensation for serving as the Chairman of the Board, the Company will pay Mr. Pappajohn $100,000 per
year and granted to Mr. Pappajohn 25,000 restricted shares of the Company's common stock, and options to purchase an aggregate of 100,000
shares of the Company's common stock. The options have a term of ten years from the date on which they were granted. The restricted stock
and the options each vest in two equal installments on the one year anniversary and the two year anniversary of the date on which Mr.
Pappajohn became the Chairman of the Board.
In August 2010, we entered into a consulting agreement with Equity Dynamics, Inc. (“EDI”), an entity controlled by John Pappajohn,
pursuant to which EDI received a monthly fee of $10,000. The consulting agreement was terminated effective March 31, 2014. Subsequently
the Company entered into a new consulting agreement with EDI effective April 1, 2014 pursuant to which it will receive a monthly fee of
$10,000. We expensed $120,000 annually for the years ended December 31, 2014, 2013 and 2012 related to this agreement.
On May 19, 2006, we issued a convertible promissory note in favor of our then Chairman and founder, Dr. Chaganti, the holder, which
obligated us to pay the holder the sum of $100,000, together with interest at the rate of 8.5% per annum, due April 1, 2014. Interest expense
was $2,400 and $8,400 for the years ended December 31, 2013 and 2012, respectively. On April 10, 2013 the note and accrued interest
converted into 13,430 shares of common stock at the IPO price of $10.00 per share. Pursuant to a consulting and advisory agreement,
Dr. Chaganti also received options to purchase a total of 36,000 shares of common stock at a price of $10.00 per share which vested over a
two year period. Total non-cash stock-based compensation recognized under the consulting agreement for the years ended December 31,
2014, 2013 and 2012 was $0, $76,220 and $430,600, respectively. Additionally, on September 15, 2010, we entered into a three year
consulting agreement with Dr. Chaganti which was subsequently renewed through December 31, 2016 pursuant to which Dr. Chaganti
receives $5,000 per month for providing consulting and technical support services. Total expenses for each of the years ended December 31,
2014, 2013 and 2012 were $60,000. Pursuant
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Table of Contents
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 this
consulting agreement for the years ended December 31, 2014, 2013 and 2012 were $341,000, $0 and $0. 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 2014 we paid Dr. Chaganti $150,000 which was recognized as an expense in fiscal 2013 when three patents were issued. Also
in February 2015, we paid Dr. Chaganti $150,000 for which was recognized as an expense in 2014 when three additional patents were issued.
Andrew Pecora (indirectly through an investment company), when a member of our board of directors, and NNJCA, a limited liability
company of which Dr. Pecora is a member originally provided $0.5 and $1.5 million of financing, respectively, under a Credit Agreement
dated as of December 21, 2011, as amended and restated as of February 13, 2012. On April 10, 2013, NNJCA converted $0.5 million of its
outstanding indebtedness into 50,000 shares of our common stock at the IPO price of $10.00 per share concurrent with our IPO. On
August 19, 2013, the remaining principal under these notes were repaid to Dr. Pecora and NNJCA using a portion of the proceeds from our
Secondary Offering. The loan bore an annual interest rate equal to the prime rate plus 6.25% (9.50% at August 19, 2013). We paid a pre-
payment penalty due to Pecora and NNJCA of $130,000 of which $32,667 was paid upon conversion of the notes and the remaining balance
paid on August 19, 2013.
On August 15, 2010, we entered into a two-year consulting agreement with Dr. Pecora, then a member of our board of directors, pursuant to
which Dr. Pecora received $5,000 per month for providing consulting and advisory services. The cash component of this agreement was
terminated by mutual consent in August 2011. Dr. Pecora also received stock options under the consulting and advisory agreement to
purchase a total of 12,000 shares of common stock at price of $25.00 per share which vested over a two year period. Total expenses for 2014,
2013 and 2012 under the consulting agreement were $0 , $0, $142,740, respectively, expensed under the stock option plan.
In February 2012, we granted 28,235 warrants proportionately to Pecora and NNJCA upon their funding of $0.5 million and $1.5 million,
respectively, under a new Credit Agreement. (See Notes 6 and 12). On May 15, 2012 and on August 14, 2012, we issued 4,706 of these
warrants proportionately to Pecora and NNJCA (Notes 6 and 12). On October 15, 2012, Dr. Pecora and NNJCA agreed to surrender
warrants to purchase an aggregate of 37,646 shares of our common stock issued in connection with this transaction in exchange for an
amendment to increase the pre-payment penalties by $130,000.
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Table of Contents
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Controls and Procedures.
Evaluation of Disclosure Controls and Procedures.
We evaluated, under the supervision and with the participation of the Chief Executive Officer and Chief 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 December 31, 2014, the end of the period covered by this report on Form 10-
K. Based on this evaluation, our President and Chief Executive Officer (principal executive officer) and our Chief Financial Officer (principal
accounting and financial officer) have concluded that our disclosure controls and procedures were effective at December 31, 2014. Disclosure
controls and procedures are designed to ensure 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 were
operating in an effective manner for the period covered by this report, and (ii) is accumulated and communicated to management, including the
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Management’s Report on Internal Control Over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f)
and 15d-15(f) under the Securities Exchange Act of 1934.
The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles and includes those policies and procedures that:
•
•
•
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the Company;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance
with authorizations of our management and directors; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the
Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions or
because of declines in the degree of compliance with policies or procedures.
We completed an acquisition of Gentris Corporation on July 16, 2014 and of BioServe Biotechnologies (India) Pvt. Ltd on August 18, 2014.
Management's assessment of and conclusion on the effectiveness of our internal control over financial reporting excludes the internal controls
over the financial reporting of these entities. These acquisitions contributed approximately 32 percent of our net sales for the year ended
December 31, 2014 and accounted for approximately 15 percent of our total assets as of December 31, 2014. Registrants are permitted to
exclude acquisitions from their assessment of internal controls over financial reporting during the first year if, among other circumstances and
factors, there is not adequate time between the consummation date of the acquisition and the assessment date for assessing internal controls.
Our management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2014. In making
this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”) in Internal Control-Integrated Framework (1992).
Based on management’s assessment, as of December 31, 2014, the Company’s internal control over financial reporting was effective.
Item 9B.
Other Information.
None.
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PART III
Item 10.
Directors, Executive Officers and Corporate Governance.
The information required by this item will be contained in the Proxy Statement for our 2015 Annual Meeting of Stockholders, which we
anticipate will be filed no later than 120 days after the end of our fiscal year ended December 31, 2014 and is incorporated herein by reference
herein.
Item 11.
Executive Compensation.
The information required by this item will be contained in the Proxy Statement for our 2015 Annual Meeting of Stockholders, which we
anticipate will be filed no later than 120 days after the end of our fiscal year ended December 31, 2014 and is incorporated by reference herein.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this item will be contained in the Proxy Statement for our 2015 Annual Meeting of Stockholders, which we
anticipate will be filed no later than 120 days after the end of our fiscal year ended December 31, 2014 and is incorporated by reference herein.
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
The information required by this item will be contained in the Proxy Statement for our 2015 Annual Meeting of Stockholders, which we
anticipate will be filed no later than 120 days after the end of our fiscal year ended December 31, 2014 and is incorporated by reference herein.
Item 14.
Principal Accounting Fees and Services.
The information required by this item will be contained in the Proxy Statement for our 2015 Annual Meeting of Stockholders, which we
anticipate will be filed no later than 120 days after the end of our fiscal year ended December 31, 2014 and is incorporated by reference herein.
110
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PART IV
Item 15.
Exhibits, Financial Statement Schedules.
(a)(1) Financial Statements. The financial statements filed as part of this report are listed on the Index to the Consolidated Financial
Statements.
(a)(2) Financial Statement Schedules. Schedules are omitted because they are not applicable or the required information is shown in the
consolidated financial statements or notes thereto.
(a)(3) Exhibits. Reference is made to the Exhibit Index. The exhibits are included, or incorporated by reference, in this annual report on
Form 10-K and are numbered in accordance with Item 601 of Regulation S-K.
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SIGNATURES
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.
Date: March 16, 2015
Date: March 16, 2015
Cancer Genetics, Inc.
(Registrant)
/s/ Panna L. Sharma
Panna L. Sharma
President and Chief Executive Officer
(Principal Executive Officer and duly authorized signatory)
/s/ Edward J. Sitar
Edward J. Sitar
Chief Financial Officer
(Principal Financial and Accounting Officer)
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SIGNATURES AND POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Panna Sharma
and Edward Sitar, and each of them, his true and lawful agent, proxy and attorney-in-fact, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to (i) act on, sign and file with the Securities and Exchange Commission any
and all amendments to this annual report on Form 10-K together with all schedules and exhibits thereto, (ii) act on, sign and file such
certificates, instruments, agreements and other documents as may be necessary or appropriate in connection therewith and, (iii) take any and all
actions which may be necessary or appropriate to be done, as fully for all intents and purposes as he might or could do in person, hereby
approving, ratifying and confirming all that such agent, proxy and attorney-in-fact or any of his substitutes may lawfully do or cause to be
done by virtue thereof.
Pursuant to the requirements of the Securities Act, this annual report on Form 10-K has been signed by the following persons in the
capacities and on the dates indicated.
Signature
Title
Date
President, Chief Executive Officer and Director
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
March 16, 2015
March 16, 2015
Chairman of the Board of Directors
March 16, 2015
/s/ Panna L. Sharma
Panna L. Sharma
/s/ Edward J. Sitar
Edward J. Sitar
/s/ John Pappajohn
John Pappajohn
/s/ Geoffrey Harris
Geoffrey Harris
/s/ Edmund Cannon
Edmund Cannon
/s/ Howard McLeod
Howard McLeod
/s/ Michael J. Welsh
Michael J. Welsh
/s/ Raju S. K. Chaganti
Raju S. K. Chaganti, Ph.D.
Director
Director
Director
Director
Director
/s/ Franklyn G. Prendergast
Franklyn G. Prendergast, M.D., Ph.D.
Director
113
March 16, 2015
March 16, 2015
March 16, 2015
March 16, 2015
March 16, 2015
March 16, 2015
Table of Contents
Exhibit
No.
INDEX TO EXHIBITS
Description
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
10.1
10.2
10.3
10.4
10.5
10.6
10.7
Third Amended and Restated Certificate of Incorporation of Cancer Genetics, Inc., filed as Exhibit 3.1 to quarterly report on
Form 10-Q filed on May 15, 2013 and incorporated herein by reference.
Amended and Restated Bylaws of Cancer Genetics, Inc., filed as Exhibit 3.4 to Form S-1/A filed on April 30, 2012 (File No.
333-178836) and incorporated herein by reference.
Specimen Common Stock certificate of Cancer Genetics, Inc., filed as Exhibit 4.1 to Form S-1/A filed on May 16, 2012 (File
No. 333-178836) and incorporated herein by reference.
Form of Short Form Cashless Exercise Warrant, filed as Exhibit 4.9 to Form S-1 filed on December 30, 2011 (File No. 333-
178836) and incorporated herein by reference.
Form of Medium Form Warrant, filed as Exhibit 4.10 to Form S-1 filed on December 30, 2011 (File No. 333-178836) and
incorporated herein by reference.
Form of Long Form Warrant, filed as Exhibit 4.11 to Form S-1 filed on December 30, 2011 (File No. 333-178836) and
incorporated herein by reference.
Form of Bridge Financing Warrant issued by Cancer Genetics, Inc. to John Pappajohn, NNJCA Capital, LLC, Pecora and
Company and DAM Holdings, LLC, filed as Exhibit 10.36 to Form S-1/A filed on March 13, 2012 (File No. 333-178836) and
incorporated herein by reference.
Form of Modified Bridge Warrant issued by Cancer Genetics, Inc. to John Pappajohn and Mark Oman, filed as Exhibit 10.50
to Form S-1/A filed on October 23, 2012 (File No. 333-178836) and incorporated herein by reference.
Form of October 2012 Warrant issued by Cancer Genetics, Inc. to John Pappajohn and Mark Oman, filed as Exhibit 10.53 to
Form S-1/A filed on October 23, 2012 (File No. 333-178836) and incorporated herein by reference.
Asset Purchase Agreement, by and among Cancer Genetics, Inc., Gentris, LLC and Gentris Corporation, dated July 15, 2014
(incorporated by reference to Exhibit 4.1 of the Company’s current report on Form 8-K filed on July 22, 2014 with the
Securities and Exchange Commission).
Share Purchase Agreement, by and among Cancer Genetics (India) Private Limited, Cancer Genetics, Inc., BioServe
Biotechnologies (India) Pvt. Ltd., BioServe Biotechnologies Ltd., and each of the Selling Shareholders named therein, dated
May 12, 2014 (incorporated by reference to Exhibit 4.1 of the Company’s current report on Form 8-K filed on August 18,
2014 with the Securities and Exchange Commission).
Stock Purchase Agreement, by and between Cancer Genetics, Inc. and BioServe Biotechnologies Ltd., dated May 12, 2014
(incorporated by reference to Exhibit 4.2 of the Company’s current report on Form 8-K filed on August 18, 2014 with the
Securities and Exchange Commission).
Amended and Restated 2008 Stock Option Plan, filed as Exhibit 10.1 to Form S-1/A filed on October 23, 2012 (File No. 333-
178836) and incorporated herein by reference.
Form of Notice of Stock Option Grant under 2008 Stock Option Plan, filed as Exhibit 10.2 to Form S-1 filed on December 30,
2011 (File No. 333-178836) and incorporated herein by reference.
Form of Stock Option Grant Agreement under 2008 Stock Option Plan, filed as Exhibit 10.3 to Form S-1 filed on December
30, 2011 (File No. 333-178836) and incorporated herein by reference.
Form of Exercise Notice and Restricted Stock Purchase Agreement under 2008 Stock Option Plan, filed as Exhibit 10.4 to
Form S-1 filed on December 30, 2011 (File No. 333-178836) and incorporated herein by reference.
Amended and Restated 2011 Equity Compensation Plan, dated May 22, 2014 (incorporated by reference to Exhibit 10.1 to the
Company's current report on Form 8-K filed on May 22, 2014 with the Securities and Exchange Commission)
Form of Stock Option Grant Agreement under 2011 Stock Option Plan, filed as Exhibit 10.6 to Form S-1 filed on December
30, 2011 (File No. 333-178836) and incorporated herein by reference.
Form of Indemnification Agreement, filed as Exhibit 10.7 to Form S-1 filed on December 30, 2011 (File No. 333-178836) and
incorporated herein by reference.
114
Table of Contents
Exhibit
No.
Description
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
Medical Director Agreement, between Cancer Genetics, Inc. and Lan Wang, M.D., dated October 9, 2009, filed as Exhibit 10.9
to Form S-1 filed on December 30, 2011 (File No. 333-178836) and incorporated herein by reference.
Consulting Agreement, between Cancer Genetics, Inc. and R.S.K. Chaganti, dated September 15, 2010, filed as Exhibit 10.15
to Form S-1 filed on December 30, 2011 (File No. 333-178836) and incorporated herein by reference.
Employment Agreement, between Panna Sharma and Cancer Genetics, Inc., effective as of April 1, 2010, filed as Exhibit 10.17
to Form S-1/A filed on February 14, 2012 (File No. 333-178836) and incorporated herein by reference.
Employment Agreement, between Elizabeth Czerepak and Cancer Genetics, Inc., effective as of January 1, 2012, filed as
Exhibit 10.18 to Form S-1/A filed on February 14, 2012 (File No. 333-178836) and incorporated herein by reference.
Employment Agreement, between Jane Houldsworth El Naggar, Ph.D. and Cancer Genetics, Inc., effective as of January 1,
2012, filed as Exhibit 10.19 to Form S-1/A filed on February 14, 2012 (File No. 333-178836) and incorporated herein by
reference.
Office Lease Agreement, between Cancer Genetics, Inc. and Onyx Equities, LLC, dated October 9, 2007, filed as Exhibit 10.20
to Form S-1/A filed on April 23, 2012 (File No. 333-178836) and incorporated herein by reference.
Credit Agreement, between Cancer Genetics, Inc. and Wells Fargo Bank, N.A., dated April 29, 2008, filed as Exhibit 10.21 to
Form S-1 filed on December 30, 2011 (File No. 333-178836) and incorporated herein by reference.
Security Agreement, between Cancer Genetics, Inc. and Wells Fargo Bank, N.A., dated April 29, 2008, filed as Exhibit 10.22
to Form S-1 filed on December 30, 2011 (File No. 333-178836) and incorporated herein by reference.
First Addendum to Credit Agreement, between Cancer Genetics, Inc. and Wells Fargo Bank, N.A., dated July 7, 2008, filed as
Exhibit 10.23 to Form S-1 filed on December 30, 2011 (File No. 333-178836) and incorporated herein by reference.
Second Addendum to Credit Agreement, between Cancer Genetics, Inc. and Wells Fargo Bank, N.A., dated March 30, 2009,
filed as Exhibit 10.24 to Form S-1 filed on December 30, 2011 (File No. 333-178836) and incorporated herein by reference.
Third Addendum to Credit Agreement, between Cancer Genetics, Inc. and Wells Fargo Bank, N.A., dated July 2, 2009, filed as
Exhibit 10.25 to Form S-1 filed on December 30, 2011 (File No. 333-178836) and incorporated herein by reference
Fourth Addendum to Credit Agreement, between Cancer Genetics, Inc. and Wells Fargo Bank, N.A., dated October 21, 2009,
filed as Exhibit 10.26 to Form S-1 filed on December 30, 2011 (File No. 333-178836) and incorporated herein by reference.
Fifth Addendum to Credit Agreement, between Cancer Genetics, Inc. and Wells Fargo Bank, N.A., dated July 29, 2010, filed
as Exhibit 10.27 to Form S-1 filed on December 30, 2011 (File No. 333-178836) and incorporated herein by reference.
Credit Agreement, between Cancer Genetics, Inc. and DAM Holdings, LLC, dated March 23, 2011, filed as Exhibit 10.28 to
Form S-1 filed on December 30, 2011 (File No. 333-178836) and incorporated herein by reference.
Inter-creditor Agreement, between Cancer Genetics, Inc., John Pappajohn and DAM Holdings, LLC, dated March 23, 2011,
filed as Exhibit 10.29 to Form S-1 filed on December 30, 2011 (File No. 333-178836) and incorporated herein by reference.
General Business Security Agreement, between Cancer Genetics, Inc. and DAM Holdings, LLC, dated March 23, 2011, filed
as Exhibit 10.30 to Form S-1 filed on December 30, 2011 (File No. 333-178836) and incorporated herein by reference.
Promissory Note, issued by Cancer Genetics, Inc. to DAM Holdings, LLC, dated March 23, 2011, filed as Exhibit 10.31 to
Form S-1 filed on December 30, 2011 (File No. 333-178836) and incorporated herein by reference.
Sixth Addendum to Credit Agreement, between Cancer Genetics, Inc. and Wells Fargo Bank, N.A., dated June 6, 2011, filed
as Exhibit 10.32 to Form S-1 filed on December 30, 2011 (File No. 333-178836) and incorporated herein by reference.
115
Table of Contents
Exhibit
No.
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
10.38
10.39
10.40
10.41
10.42
10.43
10.44
Description
Amended and Restated Credit Agreement, by and among Cancer Genetics, Inc., John Pappajohn, Pecora and Company and
NNJCA Capital, LLC dated February 13, 2012, filed as Exhibit 10.33 to Form S-1/A filed on March 13, 2012 (File No. 333-
178836) and incorporated herein by reference.
Form of Promissory Note issued by Cancer Genetics, Inc. to John Pappajohn, filed as Exhibit 10.34 to Form S-1/A filed on
March 13, 2012 (File No. 333-178836) and incorporated herein by reference.
Form of Promissory Note issued by Cancer Genetics, Inc. to NNJCA Capital, LLC and Pecora and Company, filed as Exhibit
10.35 to Form S-1/A filed on March 13, 2012 (File No. 333-178836) and incorporated herein by reference.
Inter-Creditor Agreement, between Cancer Genetics, Inc., John Pappajohn, DAM Holdings, LLC, Pecora and Company,
NNJCA Capital, LLC and Equity Dynamics, Inc., dated February 13, 2012, filed as Exhibit 10.37 to Form S-1/A filed on
March 13, 2012 (File No. 333-178836) and incorporated herein by reference.
Seventh Addendum to Credit Agreement, between Cancer Genetics, Inc. and Wells Fargo Bank, N.A., dated February 15,
2012, filed as Exhibit 10.38 to Form S-1/A filed on March 13, 2012 (File No. 333-178836) and incorporated herein by
reference.
Amendment to Credit Agreement, between Cancer Genetics, Inc. and DAM Holdings, LLC, dated March 9, 2012, filed as
Exhibit 10.33 to Form S-1/A filed on March 13, 2012 (File No. 333-178836) and incorporated herein by reference.
Affiliation Agreement, between Cancer Genetics, Inc. and Mayo Foundation for Medical Education and Research dated
November 7, 2011, filed as Exhibit 10.35 to Form S-1 filed on December 30, 2011 (File No. 333-178836) and incorporated
herein by reference.
Consulting Agreement with Equity Dynamics, Inc., filed as Exhibit 10.38 to Form S-1/A filed on February 14, 2012 (File No.
333-178836) and incorporated herein by reference.
Letter Agreement, between Meadows Office, L.L.C. and Cancer Genetics, Inc., dated January 10, 2008, filed as Exhibit 10.44
to Form S-1/A filed on April 23, 2012 (File No. 333-178836) and incorporated herein by reference.
Letter of Credit from JPMorgan Chase Bank, N.A., dated April 19, 2012, filed as Exhibit 10.46 to Form S-1/A filed on April
30, 2012 (File No. 333-178836) and incorporated herein by reference.
Letter Agreement between Cancer Genetics, Inc. and John Pappajohn, filed as Exhibit 10.47 to Form S-1/A filed on May 7,
2012 (File No. 333-178836) and incorporated herein by reference.
Amendment No. 1 to Affiliation Agreement, between Cancer Genetics, Inc. and Mayo Foundation for Medical Education and
Research, dated September 29, 2012, filed as Exhibit 10.49 to Form S-1/A filed on October 23, 2012 (File No. 333-178836)
and incorporated herein by reference.
Restated Credit Agreement, between Mark Oman and John Pappajohn and Cancer Genetics, Inc., dated October 17, 2012, filed
as Exhibit 10.51 to Form S-1/A filed on October 23, 2012 (File No. 333-178836) and incorporated herein by reference.
Form of Restated Promissory Note issued by Cancer Genetics, Inc. to John Pappajohn and Mark Oman, filed as Exhibit 10.52
to Form S-1/A filed on October 23, 2012 (File No. 333-178836) and incorporated herein by reference.
Restated Registration Rights Agreement, between Cancer Genetics, Inc., Mark Oman and John Pappajohn, dated October 17,
2012, filed as Exhibit 10.54 to Form S-1/A filed on October 23, 2012 (File No. 333-178836) and incorporated herein by
reference.
Letter Agreement between Cancer Genetics, Inc. and Pecora, filed as Exhibit 10.55 to Form S-1/A filed on October 23, 2012
(File No. 333-178836) and incorporated herein by reference.
Letter Agreement between Cancer Genetics, Inc. and NNJCA Capital, LLC, filed as Exhibit 10.56 to Form S-1/A filed on
October 23, 2012 (File No. 333-178836) and incorporated herein by reference.
Letter Agreement between Cancer Genetics, Inc. and DAM Holdings, Inc., filed as Exhibit 10.57 to Form S-1/A filed on
October 23, 2012 (File No. 333-178836) and incorporated herein by reference.
Eighth Addendum to Credit Agreement, between Cancer Genetics, Inc. and Wells Fargo Bank, N.A., dated October 18, 2012,
filed as Exhibit 10.58 to Form S-1/A filed on November 16, 2012 (File No. 333-178836) and incorporated herein by reference.
116
Table of Contents
Exhibit
No.
Description
10.45
10.46
10.47
10.48
10.49
10.50
10.51
10.52
10.53
10.54
10.55
10.56
10.57
10.58
10.59
10.60
10.61
10.62
Credit Agreement between John Pappajohn and Cancer Genetics, Inc. dated December 4, 2012, filed as Exhibit 10.59 to Form
S-1/A filed on December 14, 2012 (File No. 333-178836) and incorporated herein by reference.
Promissory Note issued by Cancer Genetics, Inc. to John Pappajohn dated December 4, 2012, filed as Exhibit 10.60 to Form
S-1/A filed on December 14, 2012 (File No. 333-178836) and incorporated herein by reference.
Amendment No. 2 to Affiliation Agreement between Cancer Genetics, Inc. and Mayo Foundation for Medical Education and
Research, dated January 4, 2013, filed as Exhibit 10.61 to Form S-1/A filed on January 8, 2013 (File No. 333-178836) and
incorporated herein by reference.
Letter Agreement between Cancer Genetics, Inc. and John Pappajohn dated February 11, 2013, filed as Exhibit 10.63 to Form
S-1/A filed on February 12, 2013 (File No. 333-178836) and incorporated herein by reference.
Letter Agreement between Cancer Genetics, Inc. and John Pappajohn (on behalf of his spouse) dated February 13, 2013, filed
as Exhibit 10.64 to Form S-1/A filed on February 14, 2013 (File No. 333-178836) and incorporated herein by reference.
Letter Agreement between Cancer Genetics, Inc. and NNJCA Capital, LLC dated as of February 13, 2013, filed as Exhibit
10.65 to Form S-1/A filed on February 14, 2013 (File No. 333-178836) and incorporated herein by reference.
Letter Agreement between Cancer Genetics, Inc. and DAM Holdings, LLC dated February 13, 2013, filed as Exhibit 10.66 to
Form S-1/A filed on February 14, 2013 (File No. 333-178836) and incorporated herein by reference.
Letter Agreement between Cancer Genetics, Inc. and R.S.K. Chaganti, dated February 13, 2013, filed as Exhibit 10.67 to Form
S-1/A filed on March 4, 2013 (File No. 333-178836) and incorporated herein by reference.
Form of Letter Agreement between Cancer Genetics, Inc. and certain warrant holders waiving certain anti-dilution rights, filed
as Exhibit 10.68 to Form S-1/A filed on March 4, 2013 (File No. 333-178836) and incorporated herein by reference.
Letter Amendment dated March 20, 2013 to Letter Agreement, between Meadows Office, L.L.C. and Cancer Genetics, Inc.,
dated April 6, 2012, filed as Exhibit 10.72 to Form S-1/A filed on March 22, 2013 (File No. 333-178836) and incorporated
herein by reference.
Amendment No. 3 to Affiliation Agreement between the Company and Mayo Foundation for Medical Education and Research,
dated May 21, 2013, filed as Exhibit 10.73 to Form S-1 filed on June 5, 2013 (File No. 333-189117) and incorporated herein
by reference.
Limited Liability Company Agreement of OncoSpire Genomics, LLC, dated May 21, 2013, filed as Exhibit 10.74 to Form S-
1/A filed on July 12, 2013 (File No. 333-189117) and incorporated herein by reference.
Joint Development Intellectual Property Agreement, among the Company, Mayo Foundation for Medical Education and
Research and OncoSpire Genomics, LLC, dated May 21, 2013, filed as Exhibit 10.75 to Form S-1/A filed on July 12, 2013
(File No. 333-189117) and incorporated herein by reference.
Letter Agreement, between Cancer Genetics, Inc. and Andrew L. Pecora, effective February 18, 2014 (incorporated by
reference to Exhibit 10.66 of the Company's Annual Report on Form 10-K for the year ended December 31, 2013).
Consulting Agreement, between Cancer Genetics, Inc. and R.S.K. Chaganti, dated February 19, 2014 (incorporated by
reference to Exhibit 10.67 of the Company's Annual Report on Form 10-k for the year ended December 31, 2013).
Separation and General Release Agreement, between Cancer Genetics, Inc. and Elizabeth Czerepak, effective March 31, 2014
(incorporated by reference to Exhibit 10.68 of the Company's Annual Report on Form 10-K for the year ended December 31,
2013).
Employment Agreement, between Cancer Genetics, Inc. and Edward J. Sitar, dated March 17, 2014 (incorporated by reference
to Exhibit 10.69 of the Company's Annual Report on Form 10-K for the year ended December 31, 2013).
Credit Agreement, between Cancer Genetics, Inc. and Wells Fargo Bank, N.A., dated April 1, 2014 (incorporated by reference
to Exhibit 10.1 of the Company’s current report on Form 8-K filed on April 4, 2014 with the Securities and Exchange
Commission).
117
Table of Contents
Exhibit
No.
10.63
10.64
10.65
10.66
Revolving Line of Credit Note, between Cancer Genetics, Inc. and Wells Fargo Bank, N.A., dated April 1, 2014 (incorporated
by reference to Exhibit 10.2 of the Company’s current report on Form 8-K filed on April 4, 2014 with the Securities and
Exchange Commission).
Description
Consulting Agreement, between Cancer Genetics Inc. and Equity Dynamics, dated November 6, 2014 and effective as of April
1, 2014 (incorporated by reference to Exhibit 10.4 of the Company’s quarterly report on Form 10-Q for the period ended
September 30, 2014 with the Securities and Exchange Commission).
Security Agreement, between Cancer Genetics, Inc. and Wells Fargo Bank, N.A., dated November 12, 2014 (incorporated by
reference to Exhibit 10.5 of the Company’s quarterly report on Form 10-Q for the period ended September 30, 2014 with the
Securities and Exchange Commission).
First Amendment to Credit Agreement, between Cancer Genetics, Inc. and Wells Fargo Bank, N.A., dated November 12, 2014.
(incorporated by reference to Exhibit 10.6 of the Company’s quarterly report on Form 10-Q for the period ended September 30,
2014 with the Securities and Exchange Commission).
21.1*
Subsidiaries of Cancer Genetics, Inc.
23.1*
Consent of McGladrey LLP.
24.1
Power of attorney (included on the signature page).
31.1*
31.2*
32.1**
32.2**
101*
Certification of Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities and
Exchange Act of 1934, as amended.
Certification of Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities and
Exchange Act of 1934, as amended.
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
The following financial statements from this annual report on Form 10-K of Cancer Genetics, Inc. for the year-ended December
31, 2014, filed on March 16, 2015, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated
Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Cash, (iv) the Consolidated
Statements of Stockholders' Equity and (v) the Notes to the Consolidated Financial Statements.
*
**
Filed herewith.
Furnished herewith.
118
Subsidiaries of Cancer Genetics, Inc.
Exhibit 21.1
State of Incorporation
Name or Organization
Cancer Genetics Italia, S.r.l. Italy
Cancer Genetics (India) Private Limited India
Gentris, LLC Delaware
BioServe Biotechnologies (India) Private Limited India
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in Registration Statement Nos. 333-191520, 333-191521 and 333-196198 on Form S-8 and in
Registration Statement No.333-196374 on Form S-3 of Cancer Genetics, Inc. and subsidiaries of our report dated March 16, 2015, relating to
our audits of the consolidated financial statements appearing in the Annual Report on Form 10-K of Cancer Genetics, Inc. and subsidiaries for
the year ended December 31, 2014.
Exhibit 23.1
/s/ McGladrey LLP
Des Moines, Iowa
March 16, 2015
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Panna L. Sharma, certify that:
1. I have reviewed this annual report on Form 10-K of Cancer Genetics, Inc. (the “Registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-
15(f) and 15d-15(f)) for the Registrant and have:
a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
c. evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
and
d. disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the
Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and
5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent
functions):
a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s
internal control over financial reporting.
Date: March 16, 2015
/s/ Panna L. Sharma
Panna L. Sharma
President, Chief Executive Officer and
Director
(Principal Executive Officer)
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Edward J. Sitar, certify that:
1. I have reviewed this annual report on Form 10-K of Cancer Genetics, Inc. (the “Registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-
15(f) and 15d-15(f)) for the Registrant and have:
a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
c. evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
and
d. disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the
Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and
5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent
functions):
a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s
internal control over financial reporting.
Date: March 16, 2015
/s/ Edward J. Sitar
Edward J. Sitar
Chief Financial Officer
(Principal Financial Officer)
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the annual report of Cancer Genetics, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2014 as
filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Panna L. Sharma, President, Chief Executive Officer
and Director of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that, to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of
1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Company.
Date: March 16, 2015
The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a
separate disclosure document.
/s/ Panna L. Sharma
Panna L. Sharma
President, Chief Executive Officer and Director
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the annual report of Cancer Genetics, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2014 as
filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Edward J. Sitar, Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my
knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of
1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Company.
Date: March 16, 2015
The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a
separate disclosure document.
/s/ Edward J. Sitar
Edward J. Sitar
Chief Financial Officer