10-Q 1 prpo-20200331x10q.htm 10-Q prpo_Current_Folio_10Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-Q


(Mark One)

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

 

For the quarterly period ended March 31, 2020

 

 

 

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: 001‑36439


PRECIPIO, INC.

(Exact name of registrant as specified in its charter)


Delaware

91‑1789357

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

 

 

4 Science Park,  New Haven,  CT

06511

(Address of principal executive offices)

(Zip Code)

 

(203)  787‑7888

(Registrant’s telephone number, including area code)


 

a

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 par value per share

PRPO

The Nasdaq Stock Market LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes      X         No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes      X           No

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

  

Smaller reporting company

Emerging growth company

 

 

 

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

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

 

As of May 13, 2020, the number of shares of common stock outstanding was 11,134,520.

 

 

 

PRECIPIO, INC. AND SUBSIDIARIES

INDEX

 

 

    

Page No.

 

 

 

 

PART I. 

Financial Information

 

3

 

 

 

 

Item 1. 

Condensed Consolidated Financial Statements

 

3

 

 

 

 

 

Condensed Consolidated Balance Sheets at March 31, 2020 (unaudited) and December 31, 2019

 

3

 

 

 

 

 

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2020 and 2019 (unaudited)

 

4

 

 

 

 

 

Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2020 and 2019 (unaudited)

 

5

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019 (unaudited)

 

6

 

 

 

 

 

Notes to the Condensed Consolidated Financial Statements (unaudited)

 

8

 

 

 

 

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

35

 

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

 

39

 

 

 

 

Item 4. 

Controls and Procedures

 

39

 

 

 

 

PART II. 

Other Information

 

41

 

 

 

 

Item 1. 

Legal Proceedings

 

41

 

 

 

 

Item 1A. 

Risk Factors

 

41

 

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

 

44

 

 

 

 

Item 3. 

Defaults Upon Senior Securities

 

44

 

 

 

 

Item 4. 

Mine Safety Disclosures

 

44

 

 

 

 

Item 5. 

Other Information

 

44

 

 

 

 

Item 6. 

Exhibits

 

44

 

 

 

 

Signatures 

 

 

46

 

 

2

PART 1.  FINANCIAL INFORMATION

Item 1.  Condensed Consolidated Financial Statements

PRECIPIO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)

 

 

 

 

 

 

 

 

 

March 31, 2020

 

 

 

    

(unaudited)

    

December 31, 2019

ASSETS

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

Cash

 

$

417

 

$

848

Accounts receivable, net

 

 

883

 

 

574

Inventories

 

 

195

 

 

184

Other current assets

 

 

197

 

 

272

Total current assets

 

 

1,692

 

 

1,878

 

 

 

 

 

 

 

PROPERTY AND EQUIPMENT, NET

 

 

415

 

 

431

 

 

 

 

 

 

 

OTHER ASSETS:

 

 

 

 

 

 

Operating lease right-of-use assets

 

 

463

 

 

519

Intangibles, net

 

 

16,400

 

 

16,658

Other assets

 

 

25

 

 

25

Total assets

 

$

18,995

 

$

19,511

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

Current maturities of long-term debt, less debt issuance costs

 

$

180

 

$

321

Current maturities of convertible notes, less debt discounts and debt issuance costs

 

 

2,292

 

 

142

Current maturities of finance lease liabilities

 

 

36

 

 

52

Current maturities of operating lease liabilities

 

 

212

 

 

209

Accounts payable

 

 

2,186

 

 

1,936

Accrued expenses

 

 

1,833

 

 

1,639

Deferred revenue

 

 

 —

 

 

35

Total current liabilities

 

 

6,739

 

 

4,334

LONG TERM LIABILITIES:

 

 

 

 

 

 

Long-term debt, less current maturities and debt issuance costs

 

 

194

 

 

198

Finance lease liabilities, less current maturities

 

 

112

 

 

119

Operating lease liabilities, less current maturities

 

 

263

 

 

317

Common stock warrant liabilities

 

 

402

 

 

1,338

Total liabilities

 

 

7,710

 

 

6,306

COMMITMENTS AND CONTINGENCIES (Note 6)

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

 

 

Preferred stock - $0.01 par value, 15,000,000 shares authorized at March 31, 2020 and December 31, 2019, 47 shares issued and outstanding at March 31, 2020 and December 31, 2019, liquidation preference of $82 at March 31, 2020

 

 

 —

 

 

 —

Common stock, $0.01 par value, 150,000,000 shares authorized at March 31, 2020 and December 31, 2019, 9,506,126 and 7,898,117 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively

 

 

95

 

 

79

Additional paid-in capital

 

 

75,334

 

 

74,065

Accumulated deficit

 

 

(64,144)

 

 

(60,939)

Total stockholders’ equity

 

 

11,285

 

 

13,205

Total liabilities and stockholders’ equity

 

$

18,995

 

$

19,511

 

 

See notes to unaudited condensed consolidated financial statements.

 

3

PRECIPIO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share data)

(unaudited)

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

2020

    

2019

SALES:

 

 

  

 

 

  

Service revenue, net

 

$

1,458

 

$

910

Other

 

 

24

 

 

 7

Revenue, net of contractual allowances and adjustments

 

 

1,482

 

 

917

less allowance for doubtful accounts

 

 

(266)

 

 

(204)

Net sales

 

 

1,216

 

 

713

COST OF SALES:

 

 

  

 

 

  

Service revenue

 

 

1,091

 

 

675

Gross profit

 

 

125

 

 

38

OPERATING EXPENSES:

 

 

  

 

 

  

Operating expenses

 

 

2,328

 

 

2,097

OPERATING LOSS

 

 

(2,203)

 

 

(2,059)

OTHER INCOME (EXPENSE):

 

 

  

 

 

  

Interest expense, net

 

 

(713)

 

 

(23)

Warrant revaluation

 

 

936

 

 

240

Derivative revaluation

 

 

 —

 

 

23

Gain on settlement of liability, net

 

 

 —

 

 

167

Loss on extinguishment of convertible notes

 

 

(1,225)

 

 

 —

Total other expenses

 

 

(1,002)

 

 

407

LOSS BEFORE INCOME TAXES

 

 

(3,205)

 

 

(1,652)

INCOME TAX BENEFIT

 

 

 —

 

 

 —

NET LOSS

 

 

(3,205)

 

 

(1,652)

 

 

 

 

 

 

 

Deemed dividends related to beneficial conversion feature of preferred stock and fair value of warrant down round features

 

 

(3,344)

 

 

 —

TOTAL DIVIDENDS

 

 

(3,344)

 

 

 —

NET LOSS AVAILABLE TO COMMON STOCKHOLDERS

 

$

(6,549)

 

$

(1,652)

 

 

 

 

 

 

 

BASIC AND DILUTED LOSS PER COMMON SHARE

 

$

(0.78)

 

$

(0.48)

BASIC AND DILUTED WEIGHTED-AVERAGE SHARES OF COMMON STOCK OUTSTANDING

 

 

8,371,956

 

 

3,441,893

 

 

See notes to unaudited condensed consolidated financial statements.

4

PRECIPIO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Dollars in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended March 31, 2020

 

 

Preferred Stock

 

Common Stock

 

Additional

 

 

 

 

 

 

 

 

Outstanding

 

Par

    

Outstanding

    

Par

 

Paid-in

 

Accumulated

 

 

 

 

    

Shares

    

Value

    

Shares

    

Value

    

Capital

    

Deficit

    

Total

Balance, January 1, 2020

 

47

 

$

 —

 

7,898,117

 

$

79

 

$

74,065

 

$

(60,939)

 

$

13,205

Net loss

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(3,205)

 

 

(3,205)

Conversion of convertible notes into common stock

 

 —

 

 

 —

 

427,997

 

 

 4

 

 

349

 

 

 —

 

 

353

Issuance of common stock in connection with purchase agreements

 

 —

 

 

 —

 

1,180,012

 

 

12

 

 

1,338

 

 

 —

 

 

1,350

Write-off debt discounts (net of debt premiums) in conjunction with convertible note conversions

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(63)

 

 

 —

 

 

(63)

Write-off beneficial conversion feature in conjunction with convertible note extinguishment

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(523)

 

 

 —

 

 

(523)

Stock-based compensation

 

 —

 

 

 —

 

 —

 

 

 —

 

 

168

 

 

 —

 

 

168

Balance, March 31, 2020

 

47

 

$

 —

 

9,506,126

 

$

95

 

$

75,334

 

$

(64,144)

 

$

11,285

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended March 31, 2019

 

 

Preferred Stock

 

Common Stock

 

Additional

 

 

 

 

 

 

 

 

Outstanding

 

Par

    

Outstanding

    

Par

 

Paid-in

 

Accumulated

 

 

 

 

    

Shares

    

Value

    

Shares

    

Value

    

Capital

    

Deficit

    

Total

Balance, January 1, 2019

 

47

 

$

 —

 

2,298,738

 

$

23

 

$

53,796

 

$

(47,696)

 

$

6,123

Net loss

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(1,652)

 

 

(1,652)

Conversion of convertible notes into common stock

 

 —

 

 

 —

 

1,248,115

 

 

12

 

 

3,114

 

 

 —

 

 

3,126

Issuance of common stock in connection with purchase agreements

 

 —

 

 

 —

 

758,076

 

 

 8

 

 

1,718

 

 

 —

 

 

1,726

Write-off debt premiums (net of debt discounts) in conjunction with convertible note conversions

 

 —

 

 

 —

 

 —

 

 

 —

 

 

315

 

 

 —

 

 

315

Write-off debt derivative liability in conjunction with convertible note conversions

 

 —

 

 

 —

 

 —

 

 

 —

 

 

39

 

 

 —

 

 

39

Stock-based compensation

 

 —

 

 

 —

 

 —

 

 

 —

 

 

156

 

 

 —

 

 

156

Balance, March 31, 2019

 

47

 

$

 —

 

4,304,929

 

$

43

 

$

59,138

 

$

(49,348)

 

$

9,833

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to unaudited condensed consolidated financial statements

 

5

PRECIPIO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

    

2020

    

2019

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

Net loss

 

$

(3,205)

 

$

(1,652)

 

 

 

 

 

 

 

Adjustments to reconcile net loss to net cash flows used in operating activities:

 

 

  

 

 

  

Depreciation and amortization

 

 

281

 

 

277

Amortization of operating lease right-of-use asset

 

 

56

 

 

61

Amortization of finance lease right-of-use asset

 

 

17

 

 

15

Amortization (accretion) of deferred financing costs, debt discounts and debt premiums

 

 

664

 

 

(100)

Gain on settlement of liability, net

 

 

 —

 

 

(167)

Loss on extinguishment of convertible notes

 

 

1,225

 

 

 —

Stock-based compensation

 

 

168

 

 

156

Provision for losses on doubtful accounts

 

 

268

 

 

204

Warrant revaluation

 

 

(936)

 

 

(240)

Derivative revaluation

 

 

 —

 

 

(23)

Changes in operating assets and liabilities:

 

 

  

 

 

  

Accounts receivable

 

 

(577)

 

 

(315)

Inventories

 

 

(11)

 

 

48

Other assets

 

 

75

 

 

86

Accounts payable

 

 

250

 

 

(425)

Operating lease liabilities

 

 

(51)

 

 

(58)

Accrued expenses and other liabilities

 

 

187

 

 

254

Net cash used in operating activities

 

 

(1,589)

 

 

(1,879)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

  

 

 

  

Purchase of property and equipment

 

 

(24)

 

 

(3)

Net cash used in investing activities

 

 

(24)

 

 

(3)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

  

 

 

  

Principal payments on finance lease obligations

 

 

(23)

 

 

(14)

Issuance of common stock, net of issuance costs

 

 

1,350

 

 

1,726

Proceeds from convertible notes

 

 

 —

 

 

250

Principal payments on convertible notes

 

 

 —

 

 

(50)

Principal payments on long-term debt

 

 

(145)

 

 

(109)

Net cash flows provided by financing activities

 

 

1,182

 

 

1,803

NET CHANGE IN CASH

 

 

(431)

 

 

(79)

CASH AT BEGINNING OF PERIOD

 

 

848

 

 

381

CASH AT END OF PERIOD

 

$

417

 

$

302

 

 

 

 

 

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

 

 

 

 

6

PRECIPIO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS- CONTINUED

(Dollars in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

2020

    

2019

SUPPLEMENTAL CASH FLOW INFORMATION

 

 

 

 

 

 

Cash paid during the period for interest

 

$

 8

 

$

 8

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF CONSULTING SERVICES OR ANY OTHER NON-CASH COMMON STOCK RELATED ACTIVITY

 

 

  

 

 

  

Conversion of convertible debt into common stock

 

 

325

 

 

2,933

Conversion of interest on convertible debt into common stock

 

 

28

 

 

193

Liabilities exchanged for convertible notes

 

 

 —

 

 

2,150

Write-off of beneficial conversion feature in conjunction with convertible note extinguishment

 

 

523

 

 

 —

Right-of-use assets obtained in exchange for lease obligations

 

 

 —

 

 

750

Write-off of debt discounts (net of debt premiums) in conjunction with convertible note conversions

 

 

63

 

 

315

Write-off of derivative liability in conjunction with convertible note conversions

 

 

 —

 

 

39

 

See notes to unaudited condensed consolidated financial statements.

7

PRECIPIO, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Three Months Ended March  31, 2020 and 2019

1. BUSINESS DESCRIPTION

Business Description.

Precipio, Inc., and its subsidiaries, (collectively, “we”, “us”, “our”, the “Company” or “Precipio”) is a cancer diagnostics company providing diagnostic products and services to the oncology market. We have built and continue to develop a platform designed to eradicate the problem of misdiagnosis by harnessing the intellect, expertise and technologies developed within academic institutions, and delivering quality diagnostic information to physicians and their patients worldwide. We operate a cancer diagnostic laboratory located in New Haven, Connecticut and have partnered with various academic institutions to capture the expertise, experience and technologies developed within academia to provide a better standard of cancer diagnostics and aim to solve the growing problem of cancer misdiagnosis. We also operate a research and development facility in Omaha, Nebraska which focuses on development of various technologies, among them IV-Cell, HemeScreen and ICE-COLD-PCR, or ICP, the patented technology described further below, which we exclusively licensed from Dana-Farber Cancer Institute, Inc., or Dana-Farber, at Harvard University. The research and development center focuses on the development of these technologies, which we believe will enable us to commercialize these and other technologies developed with our current and future academic partners. The facility in Omaha was also recently certified as a CLIA and CAP facility, and we have begun bringing in house several molecular tests that the Company had previously referred out to other laboratories. Our platform also connects patients, physicians and diagnostic experts residing within academic institutions.

Going Concern.

The condensed consolidated financial statements have been prepared using accounting principles generally accepted in the United States of America (“GAAP”) applicable for a going concern, which assume that the Company will realize its assets and discharge its liabilities in the ordinary course of business. The Company has incurred substantial operating losses and has used cash in its operating activities for the past several years. As of March 31, 2020, the Company had a net loss of $3.2 million, negative working capital of $5.0 million and net cash used in operating activities of $1.6 million. The Company’s ability to continue as a going concern over the next twelve months from the date of issuance of these condensed consolidated financial statements in this Quarterly Report on Form 10‑Q is dependent upon a combination of achieving its business plan, including generating additional revenue and avoiding potential business disruption due to the novel coronavirus (“COVID-19”) pandemic, and raising additional financing to meet its debt obligations and paying liabilities arising from normal business operations when they come due.

To meet its current and future obligations the Company has taken the following steps to capitalize the business and successfully achieve its business plan:

·

On March 26, 2020, the Company entered into a second purchase agreement (the “LP 2020 Purchase Agreement”) with Lincoln Park Capital Fund LLC (“Lincoln Park”), pursuant to which Lincoln Park has agreed to purchase from the Company up to an aggregate of $10.0 million of common stock of the Company (subject to certain limitations) from time to time over the term of the LP 2020 Purchase Agreement. The extent we rely on Lincoln Park as a source of funding will depend on a number of factors including, the prevailing market price of our common stock and the extent to which we are able to secure working capital from other sources. As of the date of issuance of this Quarterly Report on Form 10-Q, we have already received $0.3 million from the LP 2020 Purchase Agreement from the sale of 500,000 shares of common stock to Lincoln Park from April 1, 2020 through the date of issuance of this Form 10-Q, leaving the Company an additional $9.7 million to draw upon in the coming year; and

·

The Company filed with the SEC a registration statement on Form S-3 on March 27, 2020, as amended on April 9, 2020, to register an indeterminate number of shares of common stock and preferred stock, such indeterminate principal amount of debt securities and such indeterminate number of warrants to

8

purchase common stock, preferred stock or debt securities as shall have an aggregate initial offering price not to exceed $50 million. This registration statement was declared effective by the SEC on April 13, 2020 and allows the Company, from time to time, to offer up to $50 million of any combination of the securities described in the Form S-3 in one or more offerings. In order for the Company to utilize the effective S-3, it will have to file subsequent prospectus supplement(s) with regard to the securities it will offer, as applicable from time to time. As of the date of issuance of this Form 10-Q, no subsequent prospectus supplements to this effect have been filed by the Company.

 

Notwithstanding the aforementioned circumstances, there remains substantial doubt about the Company’s ability to continue as a going concern for the next twelve months from the date these condensed consolidated financial statements were issued. There can be no assurance that the Company will be able to successfully achieve its initiatives summarized above in order to continue as a going concern over the next twelve months from the date of issuance of this Quarterly Report Form 10‑Q. The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern and do not include any adjustments that might result should the Company be unable to continue as a going concern as a result of the outcome of this uncertainty.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation.

The accompanying condensed consolidated financial statements are presented in conformity with GAAP and, as of March 31, 2020 and for the three months ended March 31, 2020 and 2019, are unaudited and reflect all adjustments (consisting of only normal recurring adjustments) that are necessary for a fair presentation of the financial position and operating results for the interim periods. These unaudited condensed consolidated financial statements and notes should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2019 contained in our Annual Report on Form 10‑K, filed with the Securities and Exchange Commission (the “SEC”) on March 27, 2020, and as amended on April 7, 2020. The results of operations for the interim periods presented are not necessarily indicative of the results for fiscal year 2020.

Recently Adopted Accounting Pronouncements.

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-13 “Fair Value Measurement (Topic 820)”, which modifies certain disclosure requirements in Topic 820, such as the removal of the need to disclose the amount of and reason for transfers between Level 1 and Level 2 of the fair value hierarchy, and several changes related to Level 3 fair value measurements. The Company adopted this guidance on January 1, 2020. The adoption of this guidance was not material to our condensed consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15 “Intangibles—Goodwill and Other—Internal Use Software (Subtopic 350-40)”, which aligns the requirements for capitalizing implementation costs incurred in a cloud computing hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal use software. The Company adopted this guidance on January 1, 2020. The adoption of this guidance was not material to our condensed consolidated financial statements.

Recent Accounting Pronouncements Not Yet Adopted

In December 2019, the FASB issued ASU 2019-12 “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”, which is intended to improve consistent application and simplify the accounting for income taxes. This ASU removes certain exceptions to the general principles in Topic 740 and clarifies and amends existing guidance. This standard is effective for annual reporting periods beginning after December 15, 2020, including interim reporting periods within those annual reporting periods, with early adoption permitted. The Company is currently evaluating the impact of adoption of this ASU and does not expect the adoption of this new standard to have a material impact on its condensed consolidated financial statements.

9

In June 2016, the FASB issued ASU 2016-13 “Measurement of Credit Losses on Financial Instruments”, which replaces current methods for evaluating impairment of financial instruments not measured at fair value, including trade accounts receivable and certain debt securities, with a current expected credit loss model. This ASU is effective for the Company for reporting periods beginning after December 15, 2022. We are currently assessing the potential impact that the adoption of this ASU will have on our condensed consolidated financial statements.

 

Loss Per Share.

Basic loss per share is calculated based on the weighted-average number of common shares outstanding during each period. Diluted loss per share includes shares issuable upon exercise of outstanding stock options, warrants or conversion rights that have exercise or conversion prices below the market value of our common stock. Options, warrants and conversion rights pertaining to 5,859,495 and 3,100,043 shares of our common stock have been excluded from the computation of diluted loss per share at March 31, 2020 and 2019, respectively, because the effect is anti-dilutive due to the net loss.

The following table summarizes the outstanding securities not included in the computation of diluted net loss per share:

 

 

 

 

 

 

 

March 31, 

 

    

2020

    

2019

Stock options

 

802,113

 

498,262

Warrants

 

907,601

 

917,563

Preferred stock

 

117,500

 

20,888

Convertible notes

 

4,032,281

 

1,663,330

Total

 

5,859,495

 

3,100,043

 

 

3. LONG-TERM DEBT

Long-term debt consists of the following:

 

 

 

 

 

 

 

 

 

Dollars in Thousands

 

    

March 31, 2020

    

December 31, 2019

Department of Economic and Community Development (DECD)

 

$

242

 

$

249

DECD debt issuance costs

 

 

(24)

 

 

(24)

Financed insurance loan

 

 

131

 

 

260

September 2018 Settlement

 

 

25

 

 

34

Total long-term debt

 

 

374

 

 

519

Current portion of long-term debt

 

 

(180)

 

 

(321)

Long-term debt, net of current maturities

 

$

194

 

$

198

 

Department of Economic and Community Development.

On January 8, 2018, the Company received gross proceeds of $400,000 when it entered into an agreement with the Department of Economic and Community Development (“DECD”) by which the Company received a grant of $100,000 and a loan of $300,000 secured by substantially all of the Company’s assets (the “DECD 2018 Loan”). The DECD 2018 Loan is a ten-year loan due on December 31, 2027 and includes interest paid monthly at 3.25%.  

Debt issuance costs associated with the DECD 2018 Loan were approximately $31,000. Amortization of the debt issuance cost was less than $1,000 for the three months ended March 31, 2020 and 2019, respectively. Net debt issuance costs were approximately $24,000 at March 31, 2020 and December 31, 2019, respectively and are presented as a reduction of the related debt in the accompanying condensed consolidated balance sheets. Amortization for each of the next five years is expected to be approximately $3,000.

10

Financed Insurance Loan.

The Company finances certain of its insurance premiums (the “Financed Insurance Loans”). In July 2018, the Company financed $0.4 million with a 4.89% interest rate and fully paid off such loan as of July 2019. In July 2019, the Company financed $0.4 million with a 5.0% interest rate and will make monthly payments through May of 2020. As of March 31, 2020 and December 31, 2019, the Financed Insurance Loans outstanding balance of $0.1 million and $0.3 million, respectively, was included in current maturities of long-term debt in the Company’s condensed consolidated balance sheet. A corresponding prepaid asset was included in other current assets.

Settlement Agreement.

On September 21, 2018, the Company entered into a settlement and forbearance agreement with a creditor (the “September 2018 Settlement”) pursuant to which, the Company agreed to make monthly principal and interest payments to the creditor over a two year period, from November 1, 2018 to November 1, 2020, in full and final settlement of $0.1 million of indebtedness that was owed to the creditor on the date of the September 2018 Settlement. The settlement amount will accrue interest at the rate of 10% per annum until paid in full. The September 2018 Settlement outstanding balance of approximately $0.1 million was included in current maturities of long-term debt in the Company’s condensed consolidated balance sheet as of March 31, 2020 and December 31, 2019, respectively.

 

 

4. CONVERTIBLE NOTES

Convertible notes consist of the following:

 

 

 

 

 

 

 

 

 

Dollars in Thousands

 

    

March 31, 2020

    

December 31, 2019

Convertible bridge notes

 

$

1,613

 

$

1,938

Convertible bridge notes discount and debt issuance costs

 

 

 —

 

 

(1,796)

Convertible bridge notes premiums

 

 

679

 

 

 —

Total convertible notes

 

 

2,292

 

 

142

Current portion of convertible notes

 

 

(2,292)

 

 

(142)

Convertible notes, net of current maturities

 

$

 —

 

$

 —

 

Convertible Bridge Notes.

On April 20, 2018, the Company entered into a securities purchase agreement (the “2018 Note Agreement”) with certain investors (the “April 2018 Investors”), as amended on November 29, 2018 (the “Amendment Agreement”) and amended on April 16, 2019 (“Amendment No.2 Agreement”). During 2018, pursuant to the 2018 Note Agreement, the Company issued approximately $4.5 million in Senior Secured Convertible Promissory Notes (the “Bridge Notes”) along with warrants.

On April 16, 2019, the Company entered into the Amendment No.2 Agreement which provided the Company with approximately $900,000 of gross proceeds for the issuance of notes with an aggregate principal of $989,011 (the “April 2019 Bridge Notes”) together with applicable warrants, with substantially the same terms and conditions as the previously issued Bridge Notes and related warrants. The 9% discount associated with the April 2019 Bridge Notes was approximately $89,000 and was recorded as a debt discount. In connection with the April 2019 Bridge Note issuances, the Company issued to the investors 147,472 warrants to purchase shares of common stock of the Company with a five year term and exercise price of $5.40 (the “April 2019 Warrants”). The April 2019 Warrants had an initial value of approximately $1.0 million at the date of issuance and were recorded as a liability with an offset to debt discount. See Note 9 – Fair Value for further discussion. The April 2019 Bridge Notes were issued to investors that previously participated in the 2018 Note Agreement. 

 

The conversion price of the April 2019 Bridge Notes shall be equal to the greater of $3.75 or $0.75 above the closing bid price of our common stock on the date prior to the original issue date. In the event the notes are not paid in full prior to 180 days after the original issue date, the conversion price shall be equal to 80% of the lowest volume

11

weighted average price (“VWAP”) in the 10 trading days prior to the date of the notice of conversion, but in no event below the floor price of $2.25.

 

The Company reviewed the conversion option of the April 2019 Bridge Notes and determined that there was a beneficial conversion feature with a value of approximately $0.9 million which was recorded as a debt discount with an offset to additional paid in capital. The Company also reviewed the redemption features of the April 2019 Bridge Notes and determined that there is a redemption feature (the “Bridge Notes Redemption Feature”) that qualifies as an embedded derivative. The Company performed a valuation at the time of issuance which resulted in zero value, at that time, due to the high value of the conversion feature and a limited upside from the redemption premium.

 

On May 14, 2019, the Company entered into a securities purchase agreement pursuant to which, the Company was provided with $1,000,000 of gross proceeds for the issuance of notes with an aggregate principal of $1,098,901 (the “May 2019 Bridge Notes”) together with applicable warrants, with substantially the same terms and conditions as the previously issued Bridge Notes and related warrants.  The 9% discount associated with the May 2019 Bridge Notes was approximately $99,000 and was recorded as a debt discount. In connection with the May 2019 Bridge Note issuances, the Company issued to the investors 154,343 warrants to purchase shares of common stock of the Company with a five year term and exercise price of $9.56 (the “May 2019 Warrants”). The May 2019 Warrants had an initial value of approximately $0.9 million at the date of issuance and were recorded as a liability with an offset to debt discount. See Note 9 – Fair Value for further discussion. The May 2019 Bridge Notes were issued to investors that previously participated in the 2018 Note Agreement. 

 

The conversion price of the May 2019 Bridge Notes is $7.12, provided that a) in the event the notes are not paid in full prior to 180 days after the original issue date or b) upon a registration statement (as defined in the purchase agreement) being declared effective, whichever occurs earlier, the conversion price shall be equal to 80% of the lowest VWAP in the 10 trading days prior to the date of the notice of conversion, but in no event below the floor price of $2.25.

 

The Company reviewed the conversion option of the May 2019 Bridge Notes and determined that there was a beneficial conversion feature with a value of approximately $0.9 million which was recorded as a debt discount with an offset to additional paid in capital. The May 2019 Bridge Notes also contain the Bridge Notes Redemption Feature and the Company performed a valuation at the time of issuance which resulted in zero value, at that time, due to the high value of the conversion feature and a limited upside from the redemption premium.

 

On March 26, 2020, the Company entered into an amendment agreement (the “March 2020 Amendment”) amending the terms of that certain Amendment No. 2 Agreement dated April 16, 2019 and the securities purchase agreement dated May 14, 2019.  As a result of the March 2020 Amendment, (i) the maturity date of the April 2019 Bridge Notes and the May 2019 Bridge Notes was extended three months from April 16, 2020 to July 16, 2020, (ii) the floor price at which conversions may occur under the April 2019 Bridge Notes and the May 2019 Bridge Notes was amended from $2.25 to $0.40, and (iii) guaranteed interest on the April 2019 Bridge Notes and the May 2019 Bridge Notes was amended from twelve months to eighteen months.

 

The Company reviewed the modifications and concluded that the March 2020 Amendment will be treated as an extinguishment of the related April 2019 Bridge Notes and May 2019 Bridge Notes. The difference between the carrying value of the notes just prior to modification (the “Pre-modification Debt”) and the fair value of the notes just after modification (the “Post-modification Debt”) would be recorded as a gain or loss on extinguishment in the condensed consolidated statements of operations. The Company removed the carrying value of the Pre-modification Debt which included $1.0 million of unamortized debt discounts and beneficial conversion features of $0.5 million. The Company calculated the fair value of the Post-modification Debt to be $2.6 million. The Company reviewed whether or not a beneficial conversion feature existed on the Post-modification Debt but the calculation resulted in zero intrinsic value so no new beneficial conversion feature was recorded. Management also reviewed the Bridge Notes Redemption Feature of the post-modification notes but their fair value was zero so no derivative liability was recorded at the time of modification, however this will be reassessed at the end of each reporting period. As a result, the Company recorded a debt premium on the Post-modification Debt of $0.8 million and a loss on extinguishment of convertible notes of $1.2 million in the condensed consolidated statements of operations during the three months ended March 31, 2020.

 

12

During the three months ended March 31, 2020 and 2019, $0.3 million and $2.1 million, respectively, of bridge notes, plus interest, were converted into 427,997 and 1,019,430 shares of common stock of the Company, respectively.

 

During the three months ended March 31, 2020 and 2019, the change in Bridge Note debt discounts and debt premiums was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended March 31,

 

 

2020

 

2019

 

 

 

Debt Discounts

 

 

Debt Premiums

 

 

Debt Discounts

 

 

Debt Premiums

Beginning balance at January 1

 

$

(1,796)

 

$

 —

 

$

(1,111)

 

$

647

Additions:

 

 

 —

 

 

793

 

 

 —

 

 

 —

Deductions:

 

 

 

 

 

 

 

 

 

 

 

 

Amortization (accretion)  (1)

 

 

703

 

 

(39)

 

 

58

 

 

(160)

Write-off related to note conversions  (2)

 

 

138

 

 

(75)

 

 

 —

 

 

(396)

Write-off related to note extinguishment  (3)

 

 

955

 

 

 —

 

 

 —

 

 

 —

Balance at March 31

 

$

 —

 

$

679

 

$

(1,053)

 

$

91

(1)

Amortization/accretion is recognized as interest expense/income within the condensed consolidated statements of operations based on the effective interest method.

(2)

Write-offs associated with note conversions are recognized as an offset to additional paid-in capital at the time of the conversion.

(3)

Write-offs associated with note extinguishment are recognized as a loss and included in loss on extinguishment of convertible notes in the condensed consolidated statements of operations.

 

The remaining debt premium of $0.7 million, as of March 31, 2020, is expected to be fully amortized by the end of 2020.

Convertible Promissory Notes – Exchange Notes.

During the three months ended March 31, 2019, $0.6 million of previously issued convertible promissory notes (the “Exchange Notes”) were converted into 155,352 shares of common stock of the Company.

As of March 31, 2020 and December 31, 2019, the outstanding balance of the Exchange Notes, net of discounts, was zero, respectively.

During the three months ended March 31, 2019, the change in Exchange Note debt discounts was as follows:

 

 

 

(Dollars in thousands)

 

 

 

For the Three Months Ended March 31, 2019

Beginning balance at January 1

$

(83)

Deductions:

 

 

Amortization  (1)

 

 2

Write-off related to note conversions  (2)

 

81

Balance at March 31

$

 —

 

(1)

Amortization is recognized as interest expense within the condensed consolidated statements of operations based on the effective interest method.

(2)

Write-offs associated with note conversions are recognized as an offset to additional paid-in capital at the time of the conversion.

 

13

As a result of Exchange Note conversions, during the three months ended March 31, 2019, the Company wrote off less than $0.1 million of derivative liability with an offset to additional paid-in capital.

 

Convertible Promissory Notes – Crede Note.

On January 15, 2019, the Company and Crede Capital Group LLC (“Crede”) entered into an amendment and restatement agreement (the “Crede Amendment Agreement”) in order to enable the Company to provide Crede with an alternative means of payment of a previous settlement amount, by issuing to Crede a convertible note in the amount of $1.45 million (the “Crede Note”). The conversion price of the Crede Note shall equal 90% of the closing bid price of the Company’s common stock on the date prior to each conversion date. The Crede Note is payable by the Company on the earlier of (i) January 15, 2021 or (ii) upon the closing of a qualified offering in which the Company receives gross proceeds of at least $4.0 million. The Crede Note may not be converted if, after giving effect to the conversion, Crede together with its affiliates would beneficially own in excess of 4.99% of the outstanding shares of the Company’s common stock. The Company, at its option, may redeem some or all of the then outstanding principal amount of the Crede Note for cash.

 

In accordance with the terms of the Crede Amendment Agreement, during the period commencing on the date of issuance of the Crede Note and ending on the date Crede no longer beneficially owns any portion of the Crede Note, Crede shall not sell, on any given trading day, more than the greater of (i) $10,000 of common stock (subject to adjustment for any stock splits or combinations, stock dividends, recapitalizations or similar event after the date hereof) and (ii) 10% of the daily average composite trading volume of the Company’s common stock as reported by Bloomberg, LP (subject to adjustment for any stock splits or combinations, stock dividends, recapitalizations or similar event after the date hereof) for such trading day.

 

During the three months ended March 31, 2019, the Company made no payments on, and there were no conversions of, the Crede Note. On April 16, 2019, the entire outstanding amount of $1.45 million was converted into 270,699 shares of common stock of the Company and as of March 31, 2020 and December 31, 2019, the remaining amount due on the Crede note was zero.

 

Convertible Promissory Notes – Leviston Note

 

On February 8, 2018, the Company entered into an equity purchase agreement (the “2018 Purchase Agreement”) with Leviston Resources LLC (“Leviston”). On January 29, 2019, the Company entered into a settlement agreement (the “Leviston Settlement”) with Leviston pursuant to which the Company issued to Leviston a convertible note in the amount of $0.7 million (the “Leviston Note”) in full satisfaction of certain obligations to Leviston.

 

In addition to the Leviston Settlement and the Leviston Note, the Company and Leviston have each executed a release pursuant to which each of the Company and Leviston agreed to release the other party from their respective obligations arising from or concerning the Obligations.

 

During the three months ended March 31, 2019, the Company made cash payments of less than $0.1 million on the Leviston Note and $0.2 million of the Leviston Note was converted into 73,333 shares of common stock of the Company. During 2019, the remaining $0.5 million of the Leviston note was converted into 111,024 shares of common stock of the Company.

 

The remaining amount due on the Leviston Note was zero as of March 31, 2020 and December 31, 2019, respectively.

 

 

14

5. ACCRUED EXPENSES OTHER CURRENT LIABILITIES.

Accrued expenses at March 31, 2020 and December 31, 2019 are as follows:

 

 

 

 

 

 

 

(dollars in thousands)

    

March 31, 2020

    

December 31, 2019

Accrued expenses

 

$

1,289

 

$

1,268

Accrued compensation

 

 

407

 

 

247

Accrued interest

 

 

137

 

 

124

 

 

$

1,833

 

$

1,639

 

During the three months ended March 31, 2020 and 2019, the Company recorded gain on settlement of liability, net of zero and $0.2 million, respectively, from the settlement of obligations with certain vendors.

6. COMMITMENTS AND CONTINGENCIES

The Company is involved in legal proceedings related to matters, which are incidental to its business. Also, the Company is delinquent on the payment of outstanding accounts payable for certain vendors and suppliers who have taken or have threatened to take legal action to collect such outstanding amounts. See below for a discussion on these matters.

LITIGATIONS

CPA Global provides us with certain patent management services. On February 6, 2017, CPA Global claimed that we owed approximately $0.2 million for certain patent maintenance services rendered. CPA Global has not filed claims against us in connection with this allegation. A liability of approximately less than $0.1 million has been recorded and is reflected in accounts payable within the accompanying condensed consolidated balance sheets at March 31, 2020 and December 31, 2019.

On February 17, 2017, Jesse Campbell (“Campbell”) filed a lawsuit individually and on behalf of others similarly situated against us in the District Court for the District of Nebraska alleging we had a materially incomplete and misleading proxy relating to a potential merger and that the merger agreement’s deal protection provisions deter superior offers.  On June 21, 2019, the parties filed a stipulation of settlement, in which defendants are released from all claims and expressly deny that that they have committed any act or omission giving rise to any liability.  The stipulation includes a settlement payment of $1.95 million.  On July 10, 2019, the Court entered an order preliminarily approving the settlement.  The settlement remains subject to final approval by the Court. During the third quarter of 2019, both the Company and its insurance company paid their respective amounts of $0.27 million and $1.68 million, respectively, to an escrow account where the funds are being held until they are approved for distribution. A fairness hearing of the Court took place on November 4, 2019 and as of the date the condensed consolidated financial statements were issued, the Company was waiting for the Court to render its judgement which was still outstanding.  

LEGAL AND REGULATORY ENVIRONMENT

The healthcare industry is subject to numerous laws and regulations of federal, state and local governments. These laws and regulations include, but are not limited to, matters such as licensure, accreditation, government healthcare program participation requirement, reimbursement for patient services and Medicare and Medicaid fraud and abuse. Government activity has increased with respect to investigations and allegations concerning possible violations of fraud and abuse statutes and regulations by healthcare providers.

Violations of these laws and regulations could result in expulsion from government healthcare programs together with the imposition of significant fines and penalties, as well as significant repayments for patient services previously billed. Management believes that the Company is in compliance with fraud and abuse regulations, as well as other applicable government laws and regulations. While no material regulatory inquiries have been made, compliance

15

with such laws and regulations can be subject to future government review and interpretation, as well as regulatory actions unknown or unasserted at this time.

7. LEASES

On January 1, 2019, the Company recorded initial ROU assets and corresponding operating lease liabilities of approximately $750,000 and a reversal of deferred rent and prepaid expenses of approximately $6,000 resulting in no cumulative effect adjustment upon adoption of Topic 842. The Company leases administrative facilities and laboratory equipment through operating lease agreements. In addition we rent various equipment used in our diagnostic lab and in our administrative offices through finance lease arrangements. Our operating leases include both lease (e.g., fixed payments including rent) and non-lease components (e.g., common area or other maintenance costs). The facility leases include one or more options to renew, from 1 to 5 years or more. The exercise of lease renewal options is typically at our sole discretion, therefore, the renewals to extend the lease terms are not included in our ROU assets and lease liabilities as they are not reasonably certain of exercise. We regularly evaluate the renewal options and, when they are reasonably certain of exercise, we include the renewal period in our lease term.  As our leases do not provide an implicit rate, we use our collateralized incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments.

Operating leases result in the recognition of ROU assets and lease liabilities on the balance sheet. ROU assets represent our right to use the leased asset for the lease term and lease liabilities represent our obligation to make lease payments. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Lease expense is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The primary leases we enter into with initial terms of 12 months or less are for equipment.

Upon the adoption of Topic 842, our accounting for finance leases, previously referred to as capital leases, remains substantially unchanged from prior guidance.

The balance sheet presentation of our operating and finance leases is as follows:

 

 

 

 

 

 

 

 

(dollars in thousands)

Classification on the Condensed Consolidated Balance Sheet

 

March 31, 2020

 

December 31, 2019

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

Operating lease assets

Operating lease right-of-use assets, net

 

$

463

 

$

519

Finance lease assets

Property and equipment, net

 

 

167

 

 

184

Total lease assets

 

 

$

630

 

$

703

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Current:

 

 

 

 

 

 

 

Operating lease obligations

Current maturities of operating lease liabilities

 

$

212

 

$

209

Finance lease obligations

Current maturities of finance lease liabilities

 

 

36

 

 

52

Noncurrent:

 

 

 

 

 

 

 

Operating lease obligations

Operating lease liabilities, less current maturities

 

 

263

 

 

317

Finance lease obligations

Finance lease liabilities, less current maturities

 

 

112

 

 

119

Total lease liabilities

 

 

$

623

 

$

697

 

16

As of March 31, 2020 and December 31, 2019, the estimated future minimum lease payments, excluding non-lease components, are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands)

    

Operating Leases

 

Finance Leases

 

 

 

March 31,

 

 

December 31,

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

2020

 

$

181

 

$

242

 

$

36

 

$

62

2021

 

 

241

 

 

241

 

 

38

 

 

38

2022

 

 

48

 

 

48

 

 

32

 

 

32

2023

 

 

35

 

 

35

 

 

28

 

 

28

2024

 

 

17

 

 

17

 

 

27

 

 

27

Thereafter

 

 

 —

 

 

 —

 

 

13

 

 

13

Total lease obligations

 

 

522

 

 

583

 

 

174

 

 

200

Less: Amount representing interest

 

 

(47)

 

 

(57)

 

 

(26)

 

 

(29)

Present value of net minimum lease obligations

 

 

475

 

 

526

 

 

148

 

 

171

Less, current portion

 

 

(212)

 

 

(209)

 

 

(36)

 

 

(52)

Long term portion

 

$

263

 

$

317

 

$

112

 

$

119

 

Other information as of March 31, 2020 and December 31, 2019:

 

 

 

 

 

March 31,

 

December 31,

 

2020

 

2019

Weighted-average remaining lease term (years):

 

 

 

Operating leases

2.4

 

2.8

Finance leases

4.5

 

4.3

Weighted-average discount rate:

 

 

 

Operating leases

8.00%

 

8.00%

Finance leases

7.25%

 

7.25%

 

During the three months ended March 31, 2020 and 2019, operating cash flows from operating leases was $0.1 million, respectively, and ROU assets obtained in exchange for operating lease liabilities was zero and $0.8 million, respectively.

Operating Lease Costs

Operating lease costs were $0.1 million during the three months ended March 31, 2020 and 2019, respectively. These costs are primarily related to long-term operating leases for the Company’s facilities and laboratory equipment. Short-term and variable lease costs were less than $0.1 million for the three months ended March 31, 2020 and 2019, respectively. Cash paid for amounts included in the measurement of operating lease liabilities was less than $0.1 million in operating cash flows for the three months ended March 31, 2020 and 2019, respectively.

Finance Lease Costs

Finance leases are included in property and equipment, net and finance lease liabilities, less current maturities on the condensed consolidated balance sheets. The associated amortization expense and interest expense are included in the condensed consolidated statements of operations fo