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 |
2019 | |
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 | Ticker 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 X Noo
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x XNoo
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-212b‑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 o☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-212b‑2 of the Exchange Act). Yes o☐ No x☒
As of November 9, 2017,August 6, 2019, the number of shares of common stock outstanding was 10,028,763.6,093,369.
PRECIPIO, INC.
Page No. | ||||
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47 | ||||
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53 |
2
PART I.1. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements |
PRECIPIO, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
|
|
|
|
|
|
|
|
| June 30, 2019 |
|
| ||
|
| (unaudited) |
| December 31, 2018 | ||
ASSETS |
|
|
|
|
|
|
CURRENT ASSETS: |
|
|
|
|
|
|
Cash |
| $ | 1,169 |
| $ | 381 |
Accounts receivable, net |
|
| 883 |
|
| 690 |
Inventories |
|
| 189 |
|
| 197 |
Other current assets |
|
| 90 |
|
| 525 |
Total current assets |
|
| 2,331 |
|
| 1,793 |
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT, NET |
|
| 458 |
|
| 496 |
|
|
|
|
|
|
|
OTHER ASSETS: |
|
|
|
|
|
|
Operating lease right-of-use assets |
|
| 627 |
|
| — |
Intangibles, net |
|
| 18,764 |
|
| 19,291 |
Other assets |
|
| 25 |
|
| 25 |
Total assets |
| $ | 22,205 |
| $ | 21,605 |
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
CURRENT LIABILITIES: |
|
|
|
|
|
|
Current maturities of long-term debt, less debt issuance costs |
| $ | 103 |
| $ | 263 |
Current maturities of convertible notes, less debt discounts and debt issuance costs |
|
| 39 |
|
| 4,377 |
Current maturities of finance lease liabilities |
|
| 51 |
|
| 57 |
Current maturities of operating lease liabilities |
|
| 212 |
|
| — |
Accounts payable |
|
| 2,671 |
|
| 5,169 |
Accrued expenses |
|
| 1,655 |
|
| 1,940 |
Deferred revenue |
|
| 19 |
|
| 49 |
Other current liabilities |
|
| — |
|
| 1,910 |
Total current liabilities |
|
| 4,750 |
|
| 13,765 |
LONG TERM LIABILITIES: |
|
|
|
|
|
|
Long-term debt, less current maturities and debt issuance costs |
|
| 223 |
|
| 253 |
Finance lease liabilities, less current maturities |
|
| 133 |
|
| 155 |
Operating lease liabilities, less current maturities |
|
| 421 |
|
| — |
Common stock warrant liabilities |
|
| 2,336 |
|
| 1,132 |
Derivative liabilities |
|
| — |
|
| 62 |
Deferred tax liability |
|
| 70 |
|
| 70 |
Other long-term liabilities |
|
| 45 |
|
| 45 |
Total liabilities |
|
| 7,978 |
|
| 15,482 |
COMMITMENTS AND CONTINGENCIES (Note 6) |
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY: |
|
|
|
|
|
|
Preferred stock - $0.01 par value, 15,000,000 shares authorized at June 30, 2019 and December 31, 2018, 47 shares issued and outstanding at June 30, 2019 and December 31, 2018, liquidation preference at par value at June 30, 2019 and December 31, 2018 |
|
| — |
|
| — |
Common stock, $0.01 par value, 150,000,000 shares authorized at June 30, 2019 and December 31, 2018, 5,993,369 and 2,298,738 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively | (1) |
| 60 |
|
| 23 |
Additional paid-in capital | (1) |
| 69,428 |
|
| 53,796 |
Accumulated deficit |
|
| (55,261) |
|
| (47,696) |
Total stockholders’ equity |
|
| 14,227 |
|
| 6,123 |
|
| $ | 22,205 |
| $ | 21,605 |
September 30, | |||||||
2017 | December 31, | ||||||
(unaudited) | 2016 | ||||||
ASSETS | |||||||
CURRENT ASSETS: | |||||||
Cash and cash equivalents | $ | 381 | $ | 51 | |||
Accounts receivable, net | 505 | 388 | |||||
Inventories | 99 | 100 | |||||
Other current assets | 127 | 13 | |||||
Total current assets | 1,112 | 552 | |||||
PROPERTY AND EQUIPMENT, NET | 255 | 280 | |||||
OTHER ASSETS: | |||||||
Goodwill | 12,817 | — | |||||
Intangibles, net | 20,779 | — | |||||
Other assets | 14 | 10 | |||||
$ | 34,977 | $ | 842 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | |||||||
CURRENT LIABILITIES: | |||||||
Current maturities of long-term debt | $ | 42 | $ | 395 | |||
Convertible bridge notes, less debt discounts and debt issuance costs | — | 695 | |||||
Accounts payable | 10,034 | 1,084 | |||||
Current maturities of capital leases | 49 | 46 | |||||
Accrued expenses | 1,872 | 700 | |||||
Deferred revenue | 210 | 92 | |||||
Other current liabilities | 1,528 | — | |||||
Total current liabilities | 13,735 | 3,012 | |||||
LONG TERM LIABILITIES: | |||||||
Long-term debt, less current maturities and discounts | — | 4,127 | |||||
Common stock warrant liability | 618 | — | |||||
Capital leases, less current maturities | 126 | 163 | |||||
Other long-term liabilities | 92 | — | |||||
Total liabilities | 14,571 | 7,302 | |||||
STOCKHOLDERS’ EQUITY (DEFICIT): | |||||||
Preferred stock - $0.01 par value, 15,000,000 and 1,294,434 shares authorized at September 30, 2017 and December 31, 2016, respectively, 3,641 and 780,105 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively | — | 8 | |||||
Common stock, $0.01 par value, 150,000,000 and 1,806,850 shares authorized at September 30, 2017 and December 31, 2016, respectively, 9,446,878 and 449,175 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively | 94 | 4 | |||||
Additional paid-in capital | 41,879 | 4,376 | |||||
Accumulated deficit | (21,567 | ) | (10,848 | ) | |||
Total stockholders’ equity (deficit) | 20,406 | (6,460 | ) | ||||
$ | 34,977 | $ | 842 |
(1) The common stock shares and additional paid-in capital for all periods presented reflect the one-for fifteen reverse stock split, which took effect on April 26, 2019.
See notes to unaudited condensed consolidated financial statements.
3
PRECIPIO, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended June 30, |
| Six Months Ended June 30, |
| ||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| ||||
SALES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenue, net |
| $ | 1,195 |
| $ | 899 |
| $ | 2,105 |
| $ | 1,690 |
|
Clinical research grants |
|
| – |
|
| 62 |
|
| – |
|
| 62 |
|
Other |
|
| 4 |
|
| (2) |
|
| 11 |
|
| 3 |
|
Revenue, net of contractual allowances and adjustments |
|
| 1,199 |
|
| 959 |
|
| 2,116 |
|
| 1,755 |
|
less allowance for doubtful accounts |
|
| (257) |
|
| (142) |
|
| (461) |
|
| (226) |
|
Net sales |
|
| 942 |
|
| 817 |
|
| 1,655 |
|
| 1,529 |
|
COST OF SALES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenue |
|
| 770 |
|
| 585 |
|
| 1,445 |
|
| 1,273 |
|
Clinical research grants |
|
| – |
|
| 57 |
|
| – |
|
| 57 |
|
Total cost of sales |
|
| 770 |
|
| 642 |
|
| 1,445 |
|
| 1,330 |
|
Gross profit |
|
| 172 |
|
| 175 |
|
| 210 |
|
| 199 |
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
| 2,467 |
|
| 2,358 |
|
| 4,564 |
|
| 4,536 |
|
Impairment of goodwill |
|
| – |
|
| – |
|
| – |
|
| 294 |
|
TOTAL OPERATING EXPENSES |
|
| 2,467 |
|
| 2,358 |
|
| 4,564 |
|
| 4,830 |
|
OPERATING LOSS |
|
| (2,295) |
|
| (2,183) |
|
| (4,354) |
|
| (4,631) |
|
OTHER INCOME (EXPENSE): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
| (178) |
|
| (48) |
|
| (201) |
|
| (56) |
|
Warrant revaluation |
|
| (822) |
|
| 323 |
|
| (582) |
|
| 584 |
|
Loss on modification of warrants |
|
| (1,128) |
|
| – |
|
| (1,128) |
|
| – |
|
Derivative revaluation |
|
| (438) |
|
| (1) |
|
| (415) |
|
| (1) |
|
Gain on settlement of liability, net |
|
| 1,084 |
|
| 6 |
|
| 1,251 |
|
| 147 |
|
Loss on litigation |
|
| (266) |
|
| – |
|
| (266) |
|
| – |
|
Loss on issuance of convertible notes |
|
| (1,870) |
|
| (928) |
|
| (1,870) |
|
| (928) |
|
Loss on settlement of equity instruments |
|
| – |
|
| – |
|
| – |
|
| (385) |
|
|
|
| (3,618) |
|
| (648) |
|
| (3,211) |
|
| (639) |
|
LOSS BEFORE INCOME TAXES |
|
| (5,913) |
|
| (2,831) |
|
| (7,565) |
|
| (5,270) |
|
INCOME TAXES |
|
| – |
|
| – |
|
| – |
|
| – |
|
NET LOSS |
|
| (5,913) |
|
| (2,831) |
|
| (7,565) |
|
| (5,270) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deemed dividends related to beneficial conversion feature of preferred stock and fair value of consideration issued to induce conversion of preferred stock |
|
| – |
|
| (334) |
|
| – |
|
| (3,848) |
|
TOTAL DIVIDENDS |
|
| – |
|
| (334) |
|
| – |
|
| (3,848) |
|
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS |
| $ | (5,913) |
| $ | (3,165) |
| $ | (7,565) |
| $ | (9,118) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC AND DILUTED LOSS PER COMMON SHARE (1) |
| $ | (1.05) |
| $ | (2.29) |
| $ | (1.66) |
| $ | (8.20) |
|
BASIC AND DILUTED WEIGHTED-AVERAGE SHARES OF COMMON STOCK OUTSTANDING (1) |
|
| 5,655,022 |
|
| 1,382,519 |
|
| 4,554,571 |
|
| 1,111,964 |
|
(1) | Net loss per share and the number of shares used in the per share calculations for all periods presented reflect the one-for fifteen reverse stock split, which took effect on April 26, 2019. |
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
SALES | |||||||||||||||
Patient service revenue, net | $ | 327 | $ | 445 | $ | 946 | $ | 1,716 | |||||||
less provision for bad debts | (57 | ) | (80 | ) | (168 | ) | (309 | ) | |||||||
Net sales | 270 | 365 | 778 | 1,407 | |||||||||||
COST OF DIAGNOSTIC SERVICES | 347 | 231 | 813 | 710 | |||||||||||
Gross profit (loss) | (77 | ) | 134 | (35 | ) | 697 | |||||||||
OPERATING EXPENSES: | |||||||||||||||
Operating expenses | 2,541 | 497 | 3,981 | 1,573 | |||||||||||
Impairment of goodwill | 1,015 | — | 1,015 | — | |||||||||||
TOTAL OPERATING EXPENSES | 3,556 | 497 | 4,996 | 1,573 | |||||||||||
OPERATING LOSS | (3,633 | ) | (363 | ) | (5,031 | ) | (876 | ) | |||||||
OTHER INCOME (EXPENSE): | |||||||||||||||
Interest expense, net | (1,883 | ) | (136 | ) | (2,265 | ) | (378 | ) | |||||||
Warrant revaluation | — | — | (3 | ) | — | ||||||||||
Loss on extinguishment of debt and induced conversion of convertible bridge notes | (1,338 | ) | — | (1,391 | ) | — | |||||||||
Gain on settlement of liability | 647 | — | 647 | — | |||||||||||
Merger advisory fees | (73 | ) | — | (2,676 | ) | — | |||||||||
Other, net | — | — | — | 3 | |||||||||||
(2,647 | ) | (136 | ) | (5,688 | ) | (375 | ) | ||||||||
LOSS BEFORE INCOME TAXES | (6,280 | ) | (499 | ) | (10,719 | ) | (1,251 | ) | |||||||
INCOME TAX EXPENSE | — | — | — | — | |||||||||||
NET LOSS | (6,280 | ) | (499 | ) | (10,719 | ) | (1,251 | ) | |||||||
DEEMED DIVIDENDS ON ISSUANCE OR EXCHANGE OF PREFERRED UNITS | (3,764 | ) | — | (9,012 | ) | (1,422 | ) | ||||||||
PREFERRED DIVIDENDS | (84 | ) | — | (84 | ) | (433 | ) | ||||||||
TOTAL DIVIDENDS | (3,848 | ) | — | (9,096 | ) | (1,855 | ) | ||||||||
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS | $ | (10,128 | ) | $ | (499 | ) | $ | (19,815 | ) | $ | (3,106 | ) | |||
BASIC AND DILUTED LOSS PER COMMON SHARE | $ | (1.36 | ) | $ | (1.15 | ) | $ | (6.96 | ) | $ | (7.23 | ) | |||
BASIC AND DILUTED WEIGHTED-AVERAGE SHARES OF COMMON STOCK OUTSTANDING | 7,430,741 | 435,060 | 2,846,221 | 429,851 |
See notes to unaudited condensed consolidated financial statements.
4
PRECIPIO, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(Dollars in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Six Months Ended June 30, 2019 | |||||||||||||||||
|
| Preferred Stock |
| Common Stock |
| Additional |
|
|
|
|
|
| |||||||
|
| Outstanding |
| Par |
| Outstanding |
| Par |
| Paid-in |
| Accumulated |
|
|
| ||||
|
| Shares |
| Value |
| Shares (1) |
| Value (1) |
| Capital (1) |
| 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 |
Net loss |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| (5,913) |
|
| (5,913) |
Conversion of convertible notes into common stock |
| — |
|
| — |
| 1,138,310 |
|
| 12 |
|
| 4,134 |
|
| — |
|
| 4,146 |
Issuance of common stock in connection with purchase agreements |
| — |
|
| — |
| 240,000 |
|
| 2 |
|
| 682 |
|
| — |
|
| 684 |
Write-off debt discounts (net of debt premiums) in conjunction with convertible note conversions |
| — |
|
| — |
| — |
|
| — |
|
| (842) |
|
| — |
|
| (842) |
Write-off debt derivative liability in conjunction with convertible note conversions |
| — |
|
| — |
| — |
|
| — |
|
| 438 |
|
| — |
|
| 438 |
Proceeds upon issuance of common stock from exercise of warrants |
| — |
|
| — |
| 310,200 |
|
| 3 |
|
| 1,572 |
|
| — |
|
| 1,575 |
Write-off warrant liability in conjunction with warrant exercises |
| — |
|
| — |
| — |
|
| — |
|
| 2,364 |
|
| — |
|
| 2,364 |
Beneficial conversion feature on issuance of convertible notes |
| — |
|
| — |
| — |
|
| — |
|
| 1,792 |
|
| — |
|
| 1,792 |
Stock-based compensation |
| — |
|
| — |
| — |
|
| — |
|
| 151 |
|
| — |
|
| 151 |
Payment of fractional common shares in conjunction with reverse stock split |
| — |
|
| — |
| (71) |
|
| — |
|
| (1) |
|
| — |
|
| (1) |
Balance, June 30, 2019 |
| 47 |
| $ | — |
| 5,993,368 |
| $ | 60 |
| $ | 69,428 |
| $ | (55,261) |
| $ | 14,227 |
5
Preferred Stock | Common Stock | ||||||||||||||||||||||||
Outstanding Shares | Par Value | Outstanding Shares | Par Value | Additional Paid-in Capital | Accumulated Deficit | Total | |||||||||||||||||||
Balance, January 1, 2017 | 780,105 | $ | 8 | 449,175 | $ | 4 | $ | 4,376 | $ | (10,848 | ) | $ | (6,460 | ) | |||||||||||
Net loss | — | — | — | — | — | (10,719 | ) | (10,719 | ) | ||||||||||||||||
Conversion of warrants into preferred stock | 8,542 | — | — | — | 25 | — | 25 | ||||||||||||||||||
Conversion of warrants into common stock | — | — | 1,958,166 | 20 | (20 | ) | — | — | |||||||||||||||||
Conversion of preferred stock into common stock | (2,526,425 | ) | (25 | ) | 3,467,666 | 34 | (9 | ) | — | — | |||||||||||||||
Conversion of Senior and Junior debt into preferred stock and common stock | 802,920 | 8 | 1,414,700 | 14 | 4,749 | — | 4,771 | ||||||||||||||||||
Conversion of bridge notes into common stock | — | — | 515,638 | 6 | 2,732 | — | 2,738 | ||||||||||||||||||
Issuance of common stock for consulting services in connection with the merger | — | — | 321,821 | 3 | 2,186 | — | 2,189 | ||||||||||||||||||
Shares issued in connection with business combination | 802,925 | 8 | 1,255,119 | 12 | 20,078 | — | 20,098 | ||||||||||||||||||
Issuance of preferred stock | 135,574 | 1 | — | — | 5,379 | — | 5,380 | ||||||||||||||||||
Issuance of warrants in conjunction with issuance of side agreement | — | — | — | — | 487 | — | 487 | ||||||||||||||||||
Beneficial conversion feature on issuance of bridge notes | — | — | — | — | 1,856 | — | 1,856 | ||||||||||||||||||
Non-cash stock-based compensation and vesting of restricted units | 64,593 | 1 | 40 | — | 41 | ||||||||||||||||||||
Balance, September 30, 2017 | 3,641 | $ | — | 9,446,878 | $ | 94 | $ | 41,879 | $ | (21,567 | ) | $ | 20,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Six Months Ended June 30, 2018 | |||||||||||||||||
|
| Preferred Stock |
| Common Stock |
| Additional |
|
|
|
|
|
| |||||||
|
| Outstanding |
| Par |
| Outstanding |
| Par |
| Paid-in |
| Accumulated |
|
|
| ||||
|
| Shares |
| Value |
| Shares (1) |
| Value (1) |
| Capital (1) |
| Deficit |
| Total | |||||
Balance, January 1, 2018 |
| 4,935 |
| $ | — |
| 679,774 |
| $ | 7 |
| $ | 44,560 |
| $ | (31,542) |
| $ | 13,025 |
Net loss |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| (2,439) |
|
| (2,439) |
Conversion of preferred stock into common stock |
| (4,888) |
|
| — |
| 431,022 |
|
| 4 |
|
| (4) |
|
| — |
|
| — |
Issuance of common stock in connection with purchase agreements |
| — |
|
| — |
| 59,457 |
|
| 1 |
|
| 617 |
|
| — |
|
| 618 |
Issuance of common stock in exchange for cancelation of other current liabilities |
| — |
|
| — |
| 120,983 |
|
| 1 |
|
| 1,896 |
|
| — |
|
| 1,897 |
Issuance of common stock upon exercise of warrants |
| — |
|
| — |
| 20,000 |
|
| — |
|
| 225 |
|
| — |
|
| 225 |
Stock-based compensation |
| — |
|
| — |
| — |
|
| — |
|
| 82 |
|
| — |
|
| 82 |
Balance, March 31, 2018 |
| 47 |
| $ | — |
| 1,311,236 |
| $ | 13 |
| $ | 47,376 |
| $ | (33,981) |
| $ | 13,408 |
Net loss |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| (2,831) |
|
| (2,831) |
Issuance of common stock upon exercise of warrants |
| — |
|
| — |
| 192,733 |
|
| 2 |
|
| 865 |
|
| — |
|
| 867 |
Beneficial conversion feature on issuance of convertible notes |
| — |
|
| — |
| — |
|
| — |
|
| 1,076 |
|
| — |
|
| 1,076 |
Liability recorded related to equity purchase agreement repricing |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| (460) |
|
| (460) |
Stock-based compensation |
| — |
|
| — |
| — |
|
| — |
|
| 138 |
|
| — |
|
| 138 |
Balance, June 30, 2018 |
| 47 |
| $ | — |
| 1,503,969 |
| $ | 15 |
| $ | 49,455 |
| $ | (37,272) |
| $ | 12,198 |
(1) The common stock shares and additional paid-in capital for all periods presented reflect the one-for fifteen reverse stock split, which took effect on April 26, 2019.
See notes to unaudited condensed consolidated financial statements
6
PRECIPIO, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
|
|
|
|
|
|
|
|
| Six Months Ended June 30, | ||||
|
| 2019 |
| 2018 | ||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
Net loss |
| $ | (7,565) |
| $ | (5,270) |
|
|
|
|
|
|
|
Adjustments to reconcile net loss to net cash flows used in operating activities: |
|
|
|
|
|
|
Depreciation and amortization |
|
| 560 |
|
| 680 |
Amortization of operating lease right-of-use asset |
|
| 123 |
|
| — |
Amortization of finance lease right-of-use asset |
|
| 30 |
|
| — |
(Accretion) amortization of deferred financing costs, debt discounts and debt premiums |
|
| (50) |
|
| 10 |
Gain on settlement of liability, net |
|
| (1,251) |
|
| (147) |
Loss on settlement of equity instrument |
|
| — |
|
| 385 |
Loss on litigation |
|
| 266 |
|
| — |
Loss on issuance of convertible notes |
|
| 1,870 |
|
| 928 |
Stock-based compensation |
|
| 307 |
|
| 220 |
Impairment of goodwill |
|
| — |
|
| 294 |
Provision for losses on doubtful accounts |
|
| 463 |
|
| 224 |
Warrant revaluation |
|
| 582 |
|
| (584) |
Loss on modification of warrants |
|
| 1,128 |
|
| — |
Derivative revaluation |
|
| 415 |
|
| 1 |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
Accounts receivable, net |
|
| (656) |
|
| (246) |
Inventories, net |
|
| 8 |
|
| (10) |
Other assets |
|
| 177 |
|
| 263 |
Accounts payable |
|
| (1,316) |
|
| (27) |
Operating lease liabilities |
|
| (117) |
|
| — |
Accrued expenses and other liabilities |
|
| 139 |
|
| (332) |
Net cash used in operating activities |
|
| (4,887) |
|
| (3,611) |
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
Purchase of property and equipment |
|
| (30) |
|
| (44) |
Net cash used in investing activities |
|
| (30) |
|
| (44) |
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
Principal payments on finance lease obligations |
|
| (28) |
|
| (31) |
Payment of deferred financing costs |
|
| (120) |
|
| (138) |
Payment of fractional common shares in conjunction with reverse stock split |
|
| (1) |
|
| — |
Issuance of common stock, net of issuance costs |
|
| 2,410 |
|
| 618 |
Proceeds from exercise of warrants |
|
| 1,575 |
|
| 1,092 |
Proceeds from long-term debt |
|
| — |
|
| 300 |
Proceeds from convertible notes |
|
| 2,150 |
|
| 1,660 |
Principal payments on convertible notes |
|
| (50) |
|
| — |
Principal payments on long-term debt |
|
| (231) |
|
| (196) |
Net cash flows provided by financing activities |
|
| 5,705 |
|
| 3,305 |
NET CHANGE IN CASH |
|
| 788 |
|
| (350) |
CASH AT BEGINNING OF PERIOD |
|
| 381 |
|
| 421 |
CASH AT END OF PERIOD |
| $ | 1,169 |
| $ | 71 |
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION |
|
|
|
|
|
|
Cash paid during the period for interest |
| $ | 18 |
| $ | 26 |
SUPPLEMENTAL DISCLOSURE OF CONSULTING SERVICES OR ANY OTHER NON-CASH COMMON STOCK RELATED ACTIVITY |
|
|
|
|
|
|
Purchases of equipment financed through accounts payable |
|
| — |
|
| 34 |
Equipment financed through finance lease obligations |
|
| — |
|
| 107 |
Deferred debt issuance cost financed through accounts payable |
|
| — |
|
| 57 |
Discount of 9% on issuance of convertible bridge notes |
|
| 188 |
|
| 164 |
Other current liabilities canceled in exchange for common shares |
|
| — |
|
| 1,897 |
Conversion of convertible debt plus interest into common stock |
|
| 7,272 |
|
| — |
Beneficial conversion feature on issuance of convertible notes |
|
| 1,792 |
|
| 1,076 |
Initial valuation of derivative liability recorded in conjunction with issuance of convertible notes |
|
| 1,858 |
|
| 142 |
Initial valuation of warrant liability recorded in conjunction with issuance of convertible notes |
|
| — |
|
| 1,205 |
Liabilities exchanged for convertible notes |
|
| 2,150 |
|
| — |
Liability recorded related to equity purchase agreement repricing |
|
| — |
|
| 460 |
Warrant liability canceled due to settlement of equity instruments |
|
| — |
|
| 456 |
Right-of-use assets obtained in exchange for lease obligations |
|
| 750 |
|
| — |
Amounts included in measurement of lease liabilities |
|
| 144 |
|
| — |
Write-off warrant liability in conjunction with warrant exercises |
|
| 2,364 |
|
| — |
Write-off of debt discounts (net of debt premiums) in conjunction with convertible note conversions |
|
| 527 |
|
| — |
Write-off of derivative liability in conjunction with convertible note conversions |
|
| 477 |
|
| — |
See notes to unaudited condensed consolidated financial statements.
7
PRECIPIO, INC. AND SUBSIDIARY
(Dollars in thousands)
Nine Months Ended September 30, | |||||||
2017 | 2016 | ||||||
CASH FLOWS USED IN OPERATING ACTIVITIES: | |||||||
Net loss | $ | (10,719 | ) | $ | (1,251 | ) | |
Adjustments to reconcile net loss to net cash flows used in operating activities: | |||||||
Depreciation and amortization | 395 | 99 | |||||
Amortization of deferred financing costs and debt discount | 1,898 | 31 | |||||
Loss on extinguishment of debt and induced conversion of convertible bridge notes | 1,391 | — | |||||
Gain on settlement of liability | (647 | ) | — | ||||
Stock-based compensation and change in liability of stock appreciation rights | 33 | 9 | |||||
Merger advisory fees | 2,676 | — | |||||
Impairment of goodwill | 1,015 | — | |||||
Provision for losses on doubtful accounts | 168 | 309 | |||||
Capitalized PIK interest on convertible bridge notes | — | 85 | |||||
Warrant revaluation | 3 | — | |||||
Changes in operating assets and liabilities: | |||||||
Accounts receivable | (129 | ) | (314 | ) | |||
Inventories | 15 | (12 | ) | ||||
Other assets | 30 | (27 | ) | ||||
Accounts payable | 484 | 58 | |||||
Accrued expenses and other liabilities | (1,094 | ) | 371 | ||||
Net cash used in operating activities | (4,481 | ) | (642 | ) | |||
CASH FLOWS PROVIDED BY INVESTING ACTIVITIES: | |||||||
Cash acquired in business combination | 101 | — | |||||
Net cash provided by investing activities | 101 | — | |||||
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES: | |||||||
Principal payments on capital lease obligations | (34 | ) | (29 | ) | |||
Issuance of preferred stock | 5,380 | — | |||||
Payment of deferred financing costs | (25 | ) | (10 | ) | |||
Proceeds from exercise of warrants | 25 | — | |||||
Proceeds from long-term debt | 315 | 175 | |||||
Proceeds from convertible bridge notes | 1,365 | 455 | |||||
Principal payments on convertible bridge notes | (1,500 | ) | — | ||||
Principal payments on long-term debt | (816 | ) | (116 | ) | |||
Net cash flows provided by financing activities | 4,710 | 475 | |||||
NET CHANGE IN CASH AND CASH EQUIVALENTS | 330 | (167 | ) | ||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 51 | 235 | |||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 381 | $ | 68 | |||
SUPPLEMENTAL CASH FLOW INFORMATION | |||||||
Cash paid during the period for interest | $ | 65 | $ | 48 | |||
SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION | |||||||
Purchases of equipment financed through capital lease | — | 49 | |||||
Preferred unit dividend financed through exchange agreement | — | 433 | |||||
Convertible bridge notes exchanged for long-term debt | — | 680 | |||||
Series A and B preferred exchanged for long-term debt | — | 1,715 | |||||
Conversion of bridges loans plus interest into common stock | 1,787 | — | |||||
Conversion of senior and junior notes plus interest into preferred stock and common stock | 4,771 | — |
1. BUSINESS DESCRIPTION
Business Description
Precipio, Inc., and Subsidiary,its subsidiary, (“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 technology 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 the Yale School of Medicine to capture the expertise, experience and technologies developed within academia so that we can provide a better standard of cancer diagnostics and solve the growing problem of cancer misdiagnosis. We also operate a research and development facility in Omaha, Nebraska which will focus on further development of ICE-COLD-PCR (“ICP”), the patented technology which was exclusively licensed by us from Dana-Farber Cancer Institute, Inc. (“Dana-Farber”) at Harvard University (“Harvard”). The research and development center will focus on the development of this technology, which we believe will enable us to commercialize other technologies developed by our current and future academic partners. Our platform connects patients, physicians and diagnostic experts residing within academic institutions. Launched in 2017,2018, the platform facilitates the following relationships:
· | Patients: patients may search for physicians in their area and consult directly with academic experts that are on the platform. Patients may also have access to new academic discoveries as they become commercially available. |
· | Physicians: physicians can connect with academic experts to seek consultations on behalf of their patients and may also provide consultations for patients in their area seeking medical expertise in that physician’s relevant specialty. Physicians will also have access to new diagnostic solutions to help improve diagnostic accuracy. |
· | Academic Experts: academic experts on the platform can make themselves available for patients or physicians seeking access to their expertise. Additionally, these experts have a platform available to commercialize their research discoveries. |
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 SeptemberJune 30, 2017,2019, the Company had a net loss of $10.7$7.6 million, and negative working capital of $12.6$2.4 million and net cash used in operating activities of $4.9 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 the Quarterly Report on Form 10‑Q is dependent upon a combination of achieving its business plan, including generating additional revenue, 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:
· | The Company has entered into a purchase agreement with Lincoln Park (the “LP Purchase Agreement” or “Equity Line”), 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 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 |
8
and the extent to which we are able to secure working capital from other sources. As of the date of issuance of this Form 10-Q, we have already received $4.1 million in aggregate, including approximately $1.4 million from the sale of 328,590 shares of common stock to Lincoln Park during 2018, $2.4 million from the sale of 998,076 shares of common stock to Lincoln Park during the six months ended June 30, 2019 and $0.3 million from the sale of 100,000 shares of common stock to Lincoln Park from July 1, 2019 through the date of issuance of this Form 10-Q, leaving the Company an additional $5.9 million to draw upon in the coming year. |
Notwithstanding the aforementioned circumstances, there remains substantial doubt about the Company’s ability to continue as a going concern.concern over the next twelve months from the issuance of these condensed consolidated financial statements in the Quarterly Report on Form 10‑Q. 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.concern over the next twelve months from the date of issuance of the 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.
Nasdaq Compliance
On March 26, 2019, we were notified by the Listing Qualifications Staff of The Nasdaq Stock Market LLC that we did not meet the minimum closing bid price requirement of $1 for continued listing, as set forth in Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Requirement”). On April 25, 2019 we filed a Certificate of Amendment to our Third Amended and Restated Certificate of Incorporation with the Secretary of State of Delaware, pursuant to which we effected a 1-for-15 reverse stock split (the “Reverse Stock Split”) of our issued and outstanding common stock. The Reverse Stock Split became effective as of 5:00 p.m. (Eastern Time) on April 26, 2019, and our common stock began trading on a split-adjusted basis on the Nasdaq Capital Market at the market open on April 29, 2019. On May 15, 2019, we received notification from Nasdaq that the Company’s stock price was in compliance with the Bid Price Requirement, and that the matter is now closed.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation.
The accompanying condensed consolidated financial statements are presented in conformity with GAAP. We have evaluated events occurring subsequentAs required under GAAP, pursuant to September 30, 2017 for potential recognition or disclosurethe Reverse Stock Split, unless otherwise indicated, the Company has adjusted all share amounts, per share data, share prices, exercise prices and conversion rates set forth in these notes and the accompanying condensed consolidated financial statements and concluded that, other than what is disclosed in Note 13 - Subsequent Events, there were no other subsequent events that required recognition or disclosure.
The condensed consolidated balance sheet as of December 31, 20162018 was derived from our audited balance sheet as of that date. There has been no change in the balance sheet from December 31, 2016.2018, except for the retroactive adjustment to reflect the Reverse Stock Split. The accompanying condensed consolidated financial statements as of and for the three and ninesix months ended SeptemberJune 30, 20172019 and 20162018 are unaudited and reflect all adjustments (consisting of only normal recurring adjustments) that are, in the opinion of management, 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 of Precipio Diagnostics for the year ended December 31, 20162018 contained in our current report onAnnual Report Form 8-K/A,10‑K, filed with the Securities and Exchange Commission (the “SEC”) on July 31, 2017.April 16, 2019. The results of operations for the interim periods presented are not necessarily indicative of the results for fiscal year 2017.2019.
Recently Adopted Accounting Pronouncements.
In February 2016, the FASB issued ASU No. 2016‑02, Leases-Topic 842. The new standard amends the recognition of lease assets and lease liabilities by lessees for those leases currently classified as operating leases and amends disclosure requirements associated with leasing arrangements. The new standard was adopted effective January 1, 2019, using a modified retrospective transition, and thus did not adjust comparative periods. The new standard provides a
9
number of optional practical expedients in transition. The Company has elected the “package of practical expedients”, which permits it not to reassess under the 2016 financial statementsnew standard its prior conclusions about lease identification, lease classification and initial direct costs. The Company did not elect the use-of-hindsight practical expedient. As a result of the adoption of Topic 842 the Company recognized approximately $0.7 million of lease liabilities and corresponding right-of-use (“ROU”) assets in its condensed consolidated balance sheet on the date of initial application. See Note 7 – Leases for additional information.
In June 2018, the FASB issued ASU 2018-07 “Compensation—Stock Compensation (Topic 718)”, which expands the scope of Topic 718 to conforminclude share based payment transactions for acquiring goods and services from non-employees. The Company adopted this guidance on January 1, 2019. The adoption of this guidance was not material to current year financial statement presentation. These reclassifications had no effect on previously reported net earnings.
Recent Accounting Pronouncements Not Yet Adopted
In August 2018, the accountsFASB issued ASU 2018-13 “Fair Value Measurement (Topic 820)”, which modifies certain disclosure requirements in Topic 820, such as the removal of Precipio, Inc.the need to disclose the amount of and our wholly owned subsidiary. All inter-company balancesreason for transfers between Level 1 and transactionsLevel 2 of the fair value hierarchy, and several changes related to Level 3 fair value measurements. This ASU is effective for reporting periods beginning after December 15, 2019. We are currently assessing the potential impact that the adoption of this ASU will have been eliminated in consolidation.
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. This ASU is effective for reporting periods beginning after December 15, 2019. We are currently assessing the potential impact that the adoption of this ASU will have on our condensed consolidated financial statements.
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 reporting periods beginning after December 15, 2019. 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 1,760,336 and 941,882 shares of our common stock have been excluded from the computation of diluted loss per share at June 30, 2019 and 2018, 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:
|
|
|
|
|
|
| June 30, | ||
|
| 2019 |
| 2018 |
Stock options |
| 501,242 |
| 227,337 |
Warrants |
| 909,189 |
| 460,876 |
Preferred stock |
| 20,888 |
| 10,445 |
Convertible notes |
| 329,017 |
| 243,224 |
Total |
| 1,760,336 |
| 941,882 |
10
3. LONG-TERM DEBT
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
| Dollars in Thousands | ||||
|
| June 30, 2019 |
| December 31, 2018 | ||
Department of Economic and Community Development (DECD) |
| $ | 263 |
| $ | 274 |
DECD debt issuance costs |
|
| (26) |
|
| (28) |
Financed insurance loan |
|
| 32 |
|
| 204 |
September 2018 Settlement |
|
| 57 |
|
| 66 |
Total long-term debt |
|
| 326 |
|
| 516 |
Current portion of long-term debt |
|
| (103) |
|
| (263) |
Long-term debt, net of current maturities |
| $ | 223 |
| $ | 253 |
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 approximately $2,000 for the six months ended June 30, 2019 and 2018, respectively. Net debt issuance costs were $26,000 and $28,000 at June 30, 2019 and December 31, 2018, 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.
Financed Insurance Loan.
The Company finances certain of its insurance premiums (the “Financed Insurance Loans”). In July 2017 the Company financed $0.4 million with a 4.99 % interest rate and fully paid off such loan as of May 2018. In July 2018, the Company financed $0.4 million with a 4.89% interest rate and will make monthly payments. As of June 30, 2019 and December 31, 2018, the Financed Insurance Loans outstanding balance of $0.1 million and $0.2 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 estimatesmonthly principal and assumptionsinterest 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 affectwas owed to the reportedcreditor 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 $0.1 million was included in long-term debt and accounts payable in the Company’s condensed consolidated balance sheet as of June 30, 2019 and December 31, 2018, respectively.
11
4. CONVERTIBLE NOTES
Convertible notes consist of the following:
|
|
|
|
|
|
|
|
| Dollars in Thousands | ||||
|
| June 30, 2019 |
| December 31, 2018 | ||
Convertible bridge notes |
| $ | 2,197 |
| $ | 4,294 |
Convertible bridge notes discount and debt issuance costs |
|
| (2,158) |
|
| (1,111) |
Convertible bridge notes premiums |
|
| — |
|
| 647 |
Convertible promissory notes - Exchange Notes |
|
| — |
|
| 630 |
Convertible promissory notes - Exchange notes debt issuance costs |
|
| — |
|
| (83) |
Total convertible notes |
|
| 39 |
|
| 4,377 |
Current portion of convertible notes |
|
| (39) |
|
| (4,377) |
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”), pursuant to which the Company would issue up to approximately $3,296,703 in Senior Secured Convertible Promissory Notes along with warrants (the “Transaction”). The number of warrants is equal to the number of shares of common stock issuable upon conversion of the notes based on the conversion price at the time of issuance. Some of the warrants were issued with a one-year term and some with a five-year term. The 2018 Note Agreement includes customary representations, warranties and covenants by the Company and customary closing conditions.
The Transaction consists of a series of unregistered Senior Secured Convertible Notes (the “Bridge Notes”), bearing interest at a rate of 8% annually and an original issue discount of 9%. The Bridge Notes are convertible at a price of $7.50 per share, provided that if the notes are not repaid within 180 days of the note’s issuance date, the conversion price shall be adjusted to 80% of the lowest volume weighted average price during the prior 10 days, subject to a minimum conversion price of $4.50 per share.
The Transaction consisted of a number of drawdowns. The initial closing on April 20, 2018 provided the Company with proceeds of $1,660,000, net of an original issue discount of 9% and before debt issuance costs, for the issuance of notes with an aggregate principal of $1,824,176 (the “April 2018 Bridge Notes”).
The Bridge Notes are payable by the Company on the earlier of (i) the one year anniversary after each closing date or (ii) upon the closing of a qualified offering, namely the Company raising gross proceeds of at least $7,000,000 (the “Maturity Date”). At any time, provided that the Company gives 5 business days written notice, the Company has the right to redeem the outstanding principal amount of the Bridge Notes, including accrued but unpaid interest, all liquidated damages and all other amounts due under the Bridge Notes, for cash as follows: (i) an amount which is equal to the sum of 105% if the Company exercises its right to redeem the Bridge Notes within 90 days of the initial closing, (ii) 110% if the Company exercises its right to redeem the Bridge Notes within 180 days of the initial closing, or (iii) 115% if the Company exercises its right to redeem 180 days from the initial closing.
12
The terms of the 2018 Note Agreement also stipulate that upon written demand by one of the April 2018 Investors, for any of their draws throughout the year associated with the 2018 Note Agreement after a period of time as defined within the 2018 Note Agreement, the Company shall file a registration statement within thirty (30) days after written demand covering the resale of all or such portion of the conversion shares for an offering to be made on a continuous basis pursuant to Rule 415. The registration statement filed shall be on Form S‑3 or Form S‑1, at the option of the Company. If the Company does not file a registration statement in accordance with the terms of the 2018 Note Agreement, then on the business day following the applicable filing date and on each monthly anniversary of the business day following the applicable filing date (if no registration statement shall have been filed by the Company in accordance herewith by such date), the Company shall pay to the April 2018 Investors an amount in cash, as partial liquidated damages, equal to 1% per month (pro-rata for partial months) based upon the gross purchase price of the Bridge Notes (calculated on a daily basis) under the 2018 Note Agreement. As requested by certain April 2018 investors, conversion shares related to the April 2018 Note Agreement were included in a registration statement on Form S-3 that the Company filed with the SEC on February 6, 2019 and which became effective with the SEC on February 13, 2019.
The obligations under the Bridge Notes are secured, subject to certain exceptions and other permitted payments by a perfected security interest on the assets of the Company.
The 9% discount associated with the April 2018 Bridge Notes was approximately $164,000 and liabilitieswas recorded as a debt discount. The Company also incurred legal and disclosureadvisory fees associated with the April 2018 Bridge Notes of contingent assetsapproximately $164,000 and liabilitiesthese were recorded as debt issuance costs.
As part of the initial closing, the April 2018 Investors received 243,224 warrants to purchase shares of common stock of the Company (the “April 2018 Warrants”). The April 2018 Warrants had an initial value of approximately $1.1 million at the date of issuance and were recorded as a liability with an offset to debt discount.
Pursuant to a letter agreement, dated as of April 20, 2018 (the “Letter Agreement”), the Company engaged a registered broker dealer as a financial advisor (the “Financial Advisor”). Pursuant to the Letter Agreement, the Company paid the Financial Advisor a fee of $116,000, approximately 7% of the proceeds from the sale of the April 2018 Bridge Notes. This is included in the debt issuance costs discussed above. Per the Letter Agreement, the Company also issued to the Financial Advisor 15,466 warrants to purchase shares of common stock of the Company with an exercise price of $11.25 (the “Advisor Warrants”) which were classified as a liability. See Note 9 –Fair Value for further discussion.
The April 2018 Bridge Notes contained a beneficial conversion feature valued at $1.1 million which was recorded as a debt discount with an offset to additional paid in capital at the note issuance date.
The Company reviewed the redemption features of the Bridge Notes and determined that there is a redemption feature (the “Bridge Notes Redemption Feature”) that qualifies as an embedded derivative. For the April 2018 Bridge Notes, the Company determined the initial fair value of the derivative at the time of issuance to be approximately $0.1 million which was recorded as a debt discount with an offset to derivative liability. See Note 9 –Fair Value for further discussion.
As detailed above, debt discounts and debt issuance costs related to the April 2018 Bridge Notes totaled $2.7 million. During the six months ended June 30, 2018, since the costs exceeded the $1.8 million face amount of the debt, the Company recorded $1.8 million of debt discount and debt issuance costs as a reduction of the related debt with the excess $0.9 million expensed as a loss on issuance of convertible notes in the consolidated statements of operations. The debt discount and debt issuance costs will be amortized to interest expense over the reported amountslife of net salesthe April 2018 Bridge Notes on a basis that approximates the effective interest method. Amortization of the discount was zero for the three and expenses duringsix months ended June 30, 2019. Amortization of the reporting period. In addition, estimatesdiscount was $9,000 for the three and assumptionssix months ended June 30, 2018 and is included in interest expense in the unaudited condensed consolidated statements of operations.
On April 16, 2019, the Company entered into an amendment and restatement agreement (“Amendment No.2 Agreement”) amending and restating the terms of the 2018 Note Agreement (as first amended pursuant to the amendment agreement in November 2018 (the Amendment Agreement”)). The Amendment No. 2 Agreement provided the Company with approximately $900,000 of gross proceeds for the issuance of notes with an aggregate principal of $989,011 (the
13
“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 determinationApril 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 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 April 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.
Debt discounts and debt issuance costs related to the April 2019 Bridge Notes totaled $2.0 million. Since the costs exceeded the $1.0 million face amount of the debt at issuance, the Company recorded $1.0 million of debt discount and debt issuance costs as a reduction of the related debt in the accompanying consolidated balance sheet with the excess $1.0 million expensed as a loss on issuance of convertible notes in the consolidated statements of operations during the three and six months ended June 30, 2019.
Pursuant to the Amendment No.2 Agreement, previously issued warrants were amended such that the exercise price of such warrants was amended from $7.50 to $5.40 and any warrant that had a one-year term was amended to have a five-year term. The Company reviewed the amendments to the warrants and determined that they will be treated as a modification of an outstanding equity instrument at the time of the Amendment No.2 Agreement. Management calculated the change in fair value due to the modifications to be an expense of approximately $1.1 million which is included in loss on modification of warrants in the condensed consolidated statements of operations.
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
14
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.
Debt discounts and debt issuance costs related to the May 2019 Bridge Notes totaled $2.0 million. Since the costs exceeded the $1.1 million face amount of the debt, the Company recorded $1.1 million of debt discount and debt issuance costs as a reduction of the related debt in the accompanying consolidated balance sheet with the excess $0.9 million expensed as a loss on issuance of convertible notes in the consolidated statements of operations during the three and six months ended June 30, 2019.
Since the issuance of all the 2018 and 2019 Bridge Notes, $4.4 million of the total $6.6 million of convertible bridge notes, plus interest, have been converted into a total of 1,869,352 shares of common stock of the Company. This included the conversion of approximately $2.1 million and $4.2 million of Bridge Notes, plus interest, converted into 756,588 and 1,776,018 shares of common stock of the Company during the three and six months ended June 30, 2019, respectively.
As a result of the bridge note conversions, the Company wrote off approximately $0.4 million of derivative liability, with an offset to additional paid-in capital, during the three and six months ended June 30, 2019.
During the three and six months ended June 30, 2019 and 2018, the change in Bridge Note debt discounts and debt premiums was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
| For the Three Months Ended June 30, | ||||||||||
|
| 2019 |
| 2018 | ||||||||
|
|
| Debt Discounts |
|
| Debt Premiums |
|
| Debt Discounts |
|
| Debt Premiums |
Beginning balance at April 1 |
| $ | (1,053) |
| $ | 91 |
| $ | — |
| $ | — |
Additions: |
|
| (2,086) |
|
| — |
|
| (1,824) |
|
| — |
Deductions: |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization (accretion) (1) |
|
| 55 |
|
| (7) |
|
| 9 |
|
| — |
Write-off related to note conversions (2) |
|
| 926 |
|
| (84) |
|
| — |
|
| — |
Balance at June 30 |
| $ | (2,158) |
| $ | — |
| $ | (1,815) |
| $ | — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Six Months Ended June 30, | ||||||||||
|
| 2019 |
| 2018 | ||||||||
|
|
| Debt Discounts |
|
| Debt Premiums |
|
| Debt Discounts |
|
| Debt Premiums |
Beginning balance at January 1 |
| $ | (1,111) |
| $ | 647 |
| $ | — |
| $ | — |
Additions: |
|
| (2,086) |
|
| — |
|
| (1,824) |
|
| — |
Deductions: |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization (accretion) (1) |
|
| 113 |
|
| (167) |
|
| 9 |
|
| — |
Write-off related to note conversions (2) |
|
| 926 |
|
| (480) |
|
| — |
|
| — |
Balance at June 30 |
| $ | (2,158) |
| $ | — |
| $ | (1,815) |
| $ | — |
(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. |
The remaining debt discounts of $2.2 million, as of June 30, 2019, are expected to be fully amortized by the end of the second quarter of 2020.
15
Convertible Promissory Notes – Exchange Notes.
In 2017, the Company entered into Debt Settlement Agreements (the “Settlement Agreements”) with certain of its accounts payable and accrued liability vendors (the “Creditors”) pursuant to which the Creditors, who were owed $6.3 million (the “Debt Obligations”) by the Company, agreed to reduce and exchange the Debt Obligations for a secured obligation in the amount of $3.2 million, $1.9 million in shares of the Company’s common stock and 7,207 warrants to purchase shares of the Company’s common stock (“Creditor Warrants”).
During 2018, the Company entered into Exchange Agreements (the “Exchange Agreements”) with three institutional investors (the “Holders”)pursuant to which the Company issued or shall issue convertible promissory notes, due January 1, 2021 (the “Exchange Notes”) in exchange (the “Exchange”) for amounts owed to the Holders pursuant to certain debt settlement agreements, dated October 31, 2017. At the time of the Exchange Agreements, $3.2 million of Secured Debt Obligations were exchanged for $2.8 million of Exchange Notes (the “Exchange Notes”). Pursuant to the terms of the Exchange Notes, the Company shall pay to the Holders the aggregate principal amount of the Exchange Notes in eighteen equal installments beginning on August 1, 2019 and ending on January 1, 2021.
The Company reviewed the Conversion Option and concluded that it meets the criteria for derivative accounting and requires bifurcation and separate accounting as a derivative. The Company determined the initial fair value of the derivative at the time of issuance to be approximately $0.4 million which was recorded as a debt discount with an offset to derivative liability. See Note 9 –Fair Value for further discussion.
The Company reviewed the Company Put Option and concluded that it meets the criteria for derivative accounting and requires bifurcation and separate accounting as a derivative. The Company determined the initial fair value of the derivative at the time of issuance to be immaterial.
Since the issuance of the Exchange Notes, the Holders have converted all $2.8 million into a total of 446,913 shares of common stock of the Company. This included the conversion of approximately zero and $0.6 million of Exchange Notes converted into zero and 155,351 shares of common stock of the Company during the three and six months ended June 30, 2019, respectively.
As of June 30, 2019 and December 31, 2018, the outstanding balance of the Exchange Notes, net of discounts, was zero and $0.6 million, respectively, and was presented within convertible notes in the Company’s condensed consolidated balance sheets.
There was no Exchange Note activity during the three months ended June 30, 2019. During the six months ended June 30, 2019, the change in Exchange Note debt discounts was as follows:
(Dollars in thousands) | 2019 | ||
Beginning balance at January 1 | $ | (83) | |
Deductions: | |||
Amortization (1) | 2 | ||
Write-off related to note conversions (2) | 81 | ||
Balance at June 30 | $ | — |
(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. |
As a result of the conversions, the Company has also written off approximately $0.4 million of derivative liability with an offset to additional paid-in capital, of which less than $0.1 million was during the six months ended June 30, 2019.
16
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, See Note 5 – Accrued Expenses and Other Current Liabilities, 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 and six months ended June 30, 2019, the Company made no payments on 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 June 30, 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”), see Note 8 – Stockholders Equity for details of the 2018 Purchase Agreement. 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. The Leviston Note is payable by the Company (i) in fourteen equal monthly installments commencing on the earlier to occur of (x) the last day of the month upon which a registration statement to be filed by the Company covering the resale of the shares of common stock underlying the Leviston Note is declared effective by the Securities and Exchange Commission and (y) the six month anniversary of the date of issuance, (ii) upon the closing of a qualified offering, namely the Company raising gross proceeds of at least $4.0 million or (iii) such earlier date as the Leviston Note is required or permitted to be repaid pursuant to its terms. The Company, at its option, may redeem some or the entire then outstanding principal amount of the Leviston Note for cash.
The conversion price in effect on any conversion date shall equal the VWAP of the common stock on such Conversion Date. The Leviston Note may not be converted if, after giving effect to the conversion, Leviston together with its affiliates, would beneficially own in excess of 4.99% of the outstanding shares of the Company’s common stock.
In accordance with the terms of the Leviston Settlement, during the period commencing on the issuance date of the Leviston Note and ending on the date Leviston no longer beneficially owns any shares of common stock issuable upon conversion of the Leviston Note, Leviston 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.
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.
17
During the three and six months ended June 30, 2019, the Company made cash payments of zero and less than $0.1 million, respectively, on the Leviston Note. During the three and six months ended June 30, 2019, $0.5 million and $0.7 million of the Leviston note was converted into 111,023 and 184,357 shares of common stock of the Company, respectively. As of June 30, 2019, the remaining amount due on the Leviston Note was zero. As of December 31, 2018, the Company had recorded liabilities related to Leviston of $0.5 million and $0.2 million which were included in other current liabilities and accrued expenses, respectively, in the condensed consolidated balance sheet.
5. ACCRUED EXPENSES OTHER CURRENT LIABILITIES.
Accrued expenses at June 30, 2019 and December 31, 2018 are as follows:
|
|
|
|
|
|
|
(dollars in thousands) |
| June 30, 2019 |
| December 31, 2018 | ||
Accrued expenses |
| $ | 1,325 |
| $ | 1,583 |
Accrued compensation |
|
| 277 |
|
| 118 |
Accrued interest |
|
| 53 |
|
| 239 |
|
| $ | 1,655 |
| $ | 1,940 |
The Company was able to reduce certain accrued expense and accounts payable amounts through negotiations with certain vendors to settle outstanding liabilities and the Company recorded these amounts as gains which are included in gain on settlement of liability, net. During the three and six months ended June 30, 2019, approximately $1.1 million and $1.3 million, respectively, was recorded as a gain. Similarly, the Company recorded a net gain of less than $0.1 million and $0.1 million during the three and six months ended June 30, 2018, respectively.
Other current liabilities are as follows:
|
|
|
|
|
|
|
(dollars in thousands) |
| June 30, 2019 |
| December 31, 2018 | ||
Liability related to equity purchase agreement |
|
| — |
|
| 460 |
Liability for settlement of equity instrument |
|
| — |
|
| 1,450 |
|
| $ | — |
| $ | 1,910 |
On February 20, 2018, Crede filed a lawsuit against the Company in the Supreme Court of the State of New York for Summary Judgment in Lieu of Complaint requiring the Company to pay cash owed to Crede. On March 12, 2018, Precipio entered into a settlement agreement (the “Crede Agreement”) with Crede pursuant to which Precipio agreed to pay Crede a total sum of $1.925 million over a period of 16 months payable in cash, or at the Company’s discretion, in stock, in accordance with terms contained in the Crede Agreement.
As of the date of the Crede Agreement, the fair value of certain assets andthe common stock warrant liability related impairments require considerable judgment by management. Actual results could differ from the estimates and assumptions usedto Crede was revalued to approximately $0.4 million, resulting in preparing these condensed consolidated financial statements.
As of December 31, 2018, the Company had recorded a liability of approximately $0.5 million related to an equity purchase agreement with Leviston, which is included in other current liabilities on our condensed consolidated balance sheet. On January 29, 2019, the Company entered into the Leviston Settlement pursuant to which the Company issued the Leviston Note in full satisfaction of the $0.5 million discussed above along with approximately $0.2 million of other obligations owed to Leviston which are included in accrued expenses in our condensed consolidated balance sheet at December 31, 2018. See Note 4 – Convertible Notes.
18
6. COMMITMENTS AND CONTINGENCIES
The Company operatesis 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
On February 21, 2017, XIFIN, Inc. (“XIFIN”) filed a lawsuit against us in the District Court for the Southern District of California alleging breach of written contract and seeking recovery of approximately $0.27 million owed by us to XIFIN for damages arising from a breach of our obligations pursuant to a Systems Services Agreement between us and XIFIN, dated as of February 22, 2013, as amended and restated on September 1, 2014. A liability of $0.1 million was reflected in accounts payable within the accompanying condensed consolidated balance sheet at December 31, 2018. On April 19, 2019, the Company executed a settlement agreement with XIFIN pursuant to which the Company paid to XIFIN an agreed amount of $40,000 as settlement in consideration for total release from all outstanding amounts due and payable by the Company to XIFIN. The settlement amount was paid in full by the Company on April 19, 2019.
CPA Global provides us with certain patent management services. On February 6, 2017, CPA Global claimed that we owe 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 June 30, 2019 and December 31, 2018.
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. As a result, Campbell alleges that we have violated Sections 14(a) and 20(a) of the Exchange Act and Rule 14a‑9 promulgated thereafter. The Company filed a motion to dismiss all claims, which motion was fully briefed on November 27, 2017. The Court granted the Company’s motion in full on May 3, 2018 and dismissed the lawsuit. The Eighth Circuit reversed the decision of the District Court and remanded the case back to the District Court. The parties filed a notice with the Court on May 22, 2019, announcing that they had reached a settlement in principle. 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, which will be primarily funded by our insurance. On July 10, 2019, the Court entered an order preliminarily approving the settlement. The settlement remains subject to final approval by the Court. The Company’s insurance policy includes a deductible of approximately $0.8 million and the Company has previously paid approximately $0.5 million in legal fees in connection with the litigation which have been applied to the deductible leaving approximately $0.3 million to be paid by the Company and approximately $1.7 million to be paid by the insurance company. A liability of approximately $0.3 million has been recorded and is reflected in accrued expenses within the accompanying condensed consolidated balance sheets at June 30, 2019.
On March 21, 2018, Bio-Rad Laboratories filed a lawsuit against us in the Superior Court Judicial Branch of the State of Connecticut for Summary Judgment in Lieu of Complaint requiring us to pay cash owed to Bio-Rad in the amount of $39,000 that was recorded in accounts payable within the accompanying condensed consolidated balance sheet at December 31, 2018. Subsequently, the obligation was paid in full during the second quarter 2019 resulting in no remaining amount due to Bio-Rad as of the filing of this Quarterly Report on Form 10-Q.
OTHER COMMITMENTS
On January 2, 2019, the Company entered into a settlement agreement with a third party service provider pursuant to which we agreed to pay the service provider an aggregate amount of approximately $0.6 million, plus accrued interest at a rate of 8%, pursuant to an agreed upon payment schedule, ending in September 2019, in consideration for the cancellation of an outstanding debt owed by the Company to the service provider in the aggregate amount of approximately $1.5 million (the “Owed Amount”) which was recorded in accounts payable at December 31, 2018. During the three and
19
six months ended June 30, 2019, the Company made payments of $0.4 million and $0.6 million, respectively, to the service provider as payment in full of the agreed upon payment schedule. The service provider waived the difference between the settlement amount and the Owed Amount and, as such, the Company recorded a gain on settlement of approximately $0.9 million which is included in gain on settlement of liability, net in the condensed consolidated statements of operations for the three and six months ended June 30, 2019. There was no remaining balance due on the Owed Amount at June 30, 2019.
LEGAL AND REGULATORY ENVIRONMENT
The healthcare industry which is subject to numerous laws and regulations of federal, state and local governments. These laws and regulations include, but are not necessarily limited to, matters such as licensure, accreditation, government healthcare program participation requirements,requirement, reimbursement for patient services and Medicare and Medicaid fraud
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 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 stock warrant liabilityarea 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 recordedtypically at fair value. See Note 11 - Fair Value for additional information.
Operating leases result in the recognition of threeROU 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. 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.
20
The balance sheet presentation of our operating and finance leases is as follows:
|
|
|
|
|
(dollars in thousands) | Classification on the Condensed Consolidated Balance Sheet |
| June 30, 2019 | |
|
|
|
|
|
Assets: |
|
|
|
|
Operating lease assets | Operating lease right-of-use assets |
| $ | 627 |
Finance lease assets | Property and equipment, net |
|
| 193 |
Total lease assets |
|
| $ | 820 |
|
|
|
|
|
Liabilities: |
|
|
|
|
Current: |
|
|
|
|
Operating lease obligations | Current maturities of operating lease liabilities |
| $ | 212 |
Finance lease obligations | Current maturities of finance lease liabilities |
|
| 51 |
Noncurrent: |
|
|
|
|
Operating lease obligations | Operating lease liabilities, less current maturities |
|
| 421 |
Finance lease obligations | Finance lease liabilities, less current maturities |
|
| 133 |
Total lease liabilities |
|
| $ | 817 |
As of June 30, 2019, the estimated future minimum lease payments, excluding non-lease components, are as follows:
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
| Operating Leases |
| Finance Leases |
| Total | |||
Remainder of 2019 |
| $ | 129 |
| $ | 35 |
| $ | 164 |
2020 |
|
| 242 |
|
| 46 |
|
| 288 |
2021 |
|
| 241 |
|
| 38 |
|
| 279 |
2022 |
|
| 48 |
|
| 32 |
|
| 80 |
2023 |
|
| 35 |
|
| 27 |
|
| 62 |
Thereafter |
|
| 17 |
|
| 41 |
|
| 58 |
Total lease obligations |
|
| 712 |
|
| 219 |
|
| 931 |
Less: Amount representing interest |
|
| (79) |
|
| (35) |
|
| (114) |
Present value of net minimum lease obligations |
|
| 633 |
|
| 184 |
|
| 817 |
Less, current portion |
|
| (212) |
|
| (51) |
|
| (263) |
Long term portion |
| $ | 421 |
| $ | 133 |
| $ | 554 |
Other current assetsinformation as of SeptemberJune 30, 2017 of $0.1 million includes prepaid2019:
Weighted-average remaining lease term (years): | |
Operating leases | 3.0 |
Finance leases | 4.8 |
Weighted-average discount rate: | |
Operating leases | 8.00% |
Finance leases | 7.25% |
During the six months ended June 30, 2019, operating cash flows from operating leases was $144,000 and ROU assets of less thanobtained in exchange for operating lease liabilities was $750,000.
Operating Lease Costs
Operating lease costs were $0.1 million and other receivables of less than $0.1$0.2 million during the three and consisted of primarily prepaid assets as of December 31, 2016.
21
Finance Lease Costs
Finance leases currently classified as operating leases and amends disclosure requirements associated with leasing arrangements. The new standard is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2018. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition, and provides for certain practical expedients. Transition will require application of the new guidance at the beginning of the earliest comparative period presented. We are currently assessing the impact that the adoption of this ASU will have on our consolidated financial statements.
(dollars in thousands) | |||
Legacy Transgenomic common stock | $ | 6,088 | |
Fair value of preferred stock converted to common stock | 49 | ||
Fair value of debt converted to common stock | 2,398 | ||
Fair value of debt converted to preferred stock | 9,796 | ||
Fair value of existing bridge notes | 1,275 | ||
Fair value of warrants | 1,996 | ||
Purchase consideration | $ | 21,602 |
(dollars in thousands) | |||
Current and other assets | $ | 419 | |
Property and equipment | 29 | ||
Goodwill | 13,832 | ||
Other intangible assets(1) | 21,100 | ||
Total assets | 35,380 | ||
Current liabilities | 13,604 | ||
Other liabilities | 174 | ||
Total liabilities | 13,778 | ||
Net assets acquired | $ | 21,602 |
(dollars in thousands) | |||
Acquired technology | $ | 18,990 | |
Customer relationships | 250 | ||
Non-compete agreements | 30 | ||
Trademark and trade name | 40 | ||
Backlog | 200 | ||
In-process research and development | 1,590 | ||
Total intangibles | $ | 21,100 |
Dollars in thousands, except per share amounts | |||||||
Nine months ended September 30, | |||||||
2017 | 2016 | ||||||
Net sales | $ | 1,742 | $ | 2,605 | |||
Net loss available to common stockholders | (22,980 | ) | (15,838 | ) | |||
Loss per common share | $ | (3.40 | ) | $ | (2.48 | ) | |
Dollars in Thousands | |||||||||||
September 30, 2017 | |||||||||||
Cost | Accumulated Amortization | Net Book Value | |||||||||
Technology | $ | 18,990 | $ | 237 | $ | 18,753 | |||||
Customer relationships | 250 | 21 | 229 | ||||||||
Backlog | 200 | 50 | 150 | ||||||||
Covenants not to compete | 30 | 8 | 22 | ||||||||
Trademark | 40 | 5 | 35 | ||||||||
IPR&D | 1,590 | — | 1,590 | ||||||||
$ | 21,100 | $ | 321 | $ | 20,779 |
Dollars in Thousands | ||||||||
September 30, 2017 | December 31, 2016 | |||||||
Senior Notes | $ | — | $ | 3,270 | ||||
Senior Note debt issuance costs | — | (9 | ) | |||||
Junior Notes | — | 584 | ||||||
Connecticut Innovations - line of credit | — | 162 | ||||||
Department of Economic and Community Development (DECD) | — | 243 | ||||||
DECD debt issuance costs | — | (30 | ) | |||||
Webster Bank | — | 328 | ||||||
Webster Bank debt discounts and issuance costs | — | (26 | ) | |||||
Convertible promissory notes | 42 | — | ||||||
Total long-term debt | 42 | 4,522 | ||||||
Current portion of long-term debt | (42 | ) | (395 | ) | ||||
Long-term debt, net of current maturities | $ | — | $ | 4,127 |
September 30, 2017 | December 31, 2016 | |||||||
Accrued expenses | $ | 1,323 | $ | 50 | ||||
Accrued compensation | 529 | 155 | ||||||
Accrued interest | 20 | 495 | ||||||
$ | 1,872 | $ | 700 |
8. STOCKHOLDERS’ EQUITY (DEFICIT)
Common Stock.
Pursuant to our Third Amended and Restated Certificate of Incorporation, as amended, we currently have 150,000,000
On February 12, 2018, the Company issued 359,999120,983 shares of its common stock upon conversionin exchange for approximately $1.9 million of $900,000 of its New Bridge Notes (Seedebt obligations. See Note 6 -4 – Convertible Bridge Notes) and 1,735,419 shares of its common stock upon conversion of its Series A Senior stock (see below - Series A Senior Preferred Stock).
During the threesix months ended SeptemberJune 30, 2017,2018, the Company issued 943,600208,000 shares of its common stock in connection with conversions of its Series B Preferred Stock and 223,022 shares of its common stock in connection with conversions of its Series C Preferred Stock. Aside from 4,000 shares of common stock issued in connection with conversions of its Series C Preferred Stock, all of the shares of common stock issued for the six months ended June 30, 2018 in connection with conversions of its Series B Preferred Stock and Series C Preferred Stock (together the “Preferred Stock”) were issued after the Company induced the holders of its Preferred Stock to convert their shares of Preferred Stock to shares of the company’s common stock (see below - Series B Preferred Stock)Stock induced conversions).
During the three and Series B Preferred Stock.
During the three and six months ended June 30, 2019, the Company issued 310,200 shares of its common stock in connection with the exercise of 310,200 warrants. The warrant exercises resulted in net cash proceeds to the Company of approximately $1.6 million during the six months ended June 30, 2019.
Also, during the three and six months ended June 30, 2019, the Company issued 1,138,310 and 2,386,425 shares, respectively, of its common stock in connection with the conversion of convertible notes, plus interest, totaling $4.1 million and $7.3 million, respectively. See Note 4 – Convertible Notes.
2018 Purchase Agreement
On February 8, 2018 the Company entered into an equity purchase agreement (the “2018 Purchase Agreement”) with Leviston for the purchase of up to $8,000,000 (the “Aggregate Amount”) of shares (the “Shares”) of the Company’s common stock from time to time, at the Company’s option. Shares offered and sold prior to February 13, 2018 were issued pursuant to the Company’s shelf registration statement on Form S‑3 (and the related prospectus) that the Company filed with the Securities and Exchange Commission (the “SEC”) and which was declared effective by the SEC on February 13, 2015 (the “Shelf Registration Statement”).
Leviston purchased 48,076 shares (the “Investor Shares”) of the Company’s common stock following the close of business on February 9, 2018, subject to customary closing conditions, at a price per share of $15.60 for approximately $750,000. The shares were sold pursuant to the Shelf Registration Statement. The Company incurred approximately
22
$132,000 in costs which have been treated as issuance costs within additional paid-in capital in the accompanying unaudited condensed consolidated balance sheet.
As required by the terms of the 2018 Purchase Agreement, the Company timely filed an S-1 on April 16, 2018. The S-1 Registration Statement was not declared effective by the SEC and on August 10, 2018 the Company filed a withdrawal request with the SEC. No securities had outstanding preferred unitsbeen issued or sold under this Registration Statement. The Company determined not to proceed with the offering as the Company sought to re-negotiate the terms of 367,299 for Series Athe equity purchase agreement in order to comply with the requirements of the SEC pursuant to a letter from the SEC dated August 7, 2018.
In consideration of Leviston’s agreement to enter into the 2018 Purchase Agreement, the Company agreed to pay to Leviston a commitment fee in shares of the Company’s common stock equal in value to 5.25% of the total Aggregate Amount (the “Leviston Commitment Shares”), payable in three installments upon achieving certain milestones. The first installment of 1.75% was due on or before February 12, 2018 and 412,806 for Series Bthis amount, of $140,000, was paid to Leviston through the issuance of 11,381 shares of the Company’s common stock on February 12, 2018.
In accordance with the terms of the 2018 Purchase Agreement, the Company provided Leviston with a price protection provision, if the Company issues any warrants in connection with issuances, sales or an agreement in writing to issue common stock or common stock equivalents by the Company, Leviston will have the right to receive a proportionate amount of such warrants, cash or shares, at Leviston’s sole election, valued using the Black Scholes formula. As a result of 2018 Note Agreement and the April 2018 Warrants issued, the Company was required to provide Leviston with a proportionate and equivalent coverage in the form of warrants, stock or cash in the amount of approximately $460,000. As Leviston has the ability to elect the form of compensation, the Company has recorded the $460,000 as a liability as of December 31, 2016. These units2018, within the other current liabilities line of the accompanying condensed consolidated balance sheet.
As of December 31, 2018, the Company had a total of $0.7 million in accruals (see Note 5 – Accrued Expenses and Other Current Liabilities) for potential obligations to Leviston, but had not issued any additional shares or made any payments to Leviston. On January 29, 2019, the Company entered into the Leviston Settlement pursuant to which the Company issued to Leviston the Leviston Note in full satisfaction of all obligations owed to Leviston. See Note 4 – Convertible Notes for further details of the Leviston Note.
LP Purchase Agreement
On September 7, 2018, the Company entered into the LP Purchase Agreement, pursuant to which Lincoln Park has agreed to purchase from the Company up to an aggregate of $10,000,000 of common stock of the Company (subject to certain limitations) from time to time over the term of the LP Purchase Agreement. Pursuant to the terms of the LP Purchase Agreement, on the agreement date, the Company issued 40,000 shares of its common stock to Lincoln Park as consideration for its commitment to purchase shares of common stock of the Company under the LP Purchase Agreement (the “LP Commitment Shares”). Also on September 7, 2018, the Company entered into a registration rights agreement with Lincoln Park (the “LP Registration Rights Agreement”), pursuant to which on September 14, 2018, the Company filed with the SEC a registration statement on Form S-1 to register for resale under the Securities Act of 1933, as amended, or the Securities Act, 466,666 shares of common stock, which includes the LP Commitment Shares, that have been recapitalized and are included in preferred stock.or may be issued to Lincoln Park under the LP Purchase Agreement. The Form S-1 was declared effective by the SEC on September 28, 2018. As of January 16, 2019, all shares registered under this S-1 had been sold and/or issued to Lincoln Park. On February 1, 2019, the Closing Date, the outstanding preferred units for Series A and Series B, alongCompany filed with the related accumulated dividends, were convertedSEC a registration statement on Form S-1 to register for resale under the Securities Act of 1933, as amended, or the Securities Act, an additional 1,000,000 shares of common stock that have been or may be issued to Lincoln Park under the LP Purchase Agreement. The Form S-1 was declared effective by the SEC on February 12, 2019.
Under the LP Purchase Agreement, the Company may, from time to time and at its sole discretion, on any single business day on which the closing price of its common stock is not less than $1.50 per share (subject to adjustment for any reorganization, recapitalization, non-cash dividend, stock split, reverse stock split or other similar transaction as provided in the LP Purchase Agreement), direct Lincoln Park to purchase shares of its common stock in amounts up to 30,000 shares, which amounts may be increased to up to 36,666 shares depending on the market price of its common stock at the time of sale and subject to a maximum commitment by Lincoln Park of $1,000,000 per single purchase, which the
23
Company refers to as “regular purchases”, plus other “accelerated amounts” and/or “additional accelerated amounts” under certain circumstances. The Company will control the timing and amount of any sales of its common stock to Lincoln Park. The purchase price of the shares that may be sold to Lincoln Park in regular purchases under the LP Purchase Agreement will be based on the market price of the common stock of the Company preceding the time of sale as computed under the LP Purchase Agreement. The purchase price per share will be equitably adjusted for any reorganization, recapitalization, non-cash dividend, stock split, or other similar transaction occurring during the business days used to compute such price. The Company may at any time in its sole discretion terminate the LP Purchase Agreement without fee, penalty or cost upon one business day notice. There are no restrictions on future financings, rights of first refusal, participation rights, penalties or liquidated damages in the LP Purchase Agreement or LP Registration Rights Agreement, other than a prohibition on the Company entering into certain types of transactions that are defined in the LP Purchase Agreement as “Variable Rate Transactions”. Lincoln Park may not assign or transfer its rights and obligations under the Purchase Agreement.
Under applicable rules of The Nasdaq Capital Market, in no event may the Company issue or sell to Lincoln Park under the LP Purchase Agreement more than 19.99% of the shares of its common stock outstanding immediately prior to the execution of the LP Purchase Agreement (which is 308,590 shares based on 1,543,724 shares outstanding immediately prior to the execution of the LP Purchase Agreement), which limitation the Company refers to as the Exchange Cap, unless (i) the Company obtains stockholder approval to issue shares of common stock in excess of the Exchange Cap or (ii) the average price of all applicable sales of the Company’s common stock to Lincoln Park under the LP Purchase Agreement equals or exceeds $7.05 (which represents the closing consolidated bid price of the Company’s common stock on September 7, 2018, plus an incremental amount to account for the issuance of the LP Commitment Shares to Lincoln Park), such that issuances and sales of the Company’s common stock to Lincoln Park under the LP Purchase Agreement would be exempt from the Exchange Cap limitation under applicable Nasdaq rules. In any event, the LP Purchase Agreement specifically provides that the Company may not issue or sell any shares of its common stock under the LP Purchase Agreement if such issuance or sale would breach any applicable Nasdaq rules. The Company received shareholder approval on December 20, 2018.
The LP Purchase Agreement also prohibits the Company from directing Lincoln Park to purchase any shares of common stock if those shares, when aggregated with all other shares of the Company.
As of the date of issuance of this Form 10-Q, we have already received $4.1 million in aggregate, including approximately $1.4 million from the sale of 328,590 shares of common stock to Lincoln Park during 2018, $0.7 million and $2.4 million from the sale of 240,000 and 998,076 shares of common stock to Lincoln Park during the three and six months ended June 30, 2019, respectively, and $0.3 million from the sale of 100,000 shares of common stock to Lincoln Park from July 1, 2019 through the date of issuance of this Form 10-Q.
Preferred Stock.
The Company’s Board of Directors is authorized to issue up to 15,000,000 shares of preferred stock in one or more series, from time to time, with such designations, powers, preferences and rights and such qualifications, limitations and restrictions as may be provided in a resolution or resolutions adopted by the Board of Directors. The authority of the Board of Directors includes, but is not limited to, the determination or fixing of the following with respect to shares of such class or any series thereof: (i) the number of shares; (ii) the dividend rate, whether dividends shall be cumulative and, if so, from which date; (iii) whether shares are to be redeemable and, if so, the terms and amount of any sinking fund providing for the purchase or redemption of such shares; (iv) whether shares shall be convertible and, if so, the terms and provisions thereof; (v) what restrictions are to apply, if any, on the issue or reissue of any additional preferred stock; and (vi) whether shares have voting rights. The preferred stock may be issued with a preference over the common stock as to the payment of dividends. We have no current plans to issue any additional preferred stock. Classes of stock such as the preferred stock may be used, in certain circumstances, to create voting impediments on extraordinary corporate transactions or to frustrate persons seeking to effect a merger or otherwise to gain control of the Company. For the foregoing reasons, any additional preferred stock issued by the Company could have an adverse effect on the rights of the holders of the common stock.
Series A SeniorB Preferred Stock.
On August 25, 2017, the Company filed a Certificate of Designation with the Secretary of StatePreferences, Rights and Limitations of Series B Convertible Preferred Stock (“Series B Preferred Stock”) with the State of Delaware on June 29, 2017, designating 4,100,000which designates 6,900 shares of the Company’sour preferred stock as Series B Preferred Stock. The Series B Preferred Stock has a stated value of $1,000 per share and a par value of $0.01 per share, asshare. The Series A Senior ConvertibleB Preferred Stock ("Series A Senior") and establishingincludes a beneficial ownership blocker but has no dividend rights (except to the rights, preferences and privilegesextent dividends are also paid on the common stock).
24
The 2018 Purchase Agreement triggered the new preferred stock. Generally, the holdersdown round feature of the Series A Senior stock are entitled to vote as a single voting group with the holders of the Company's common stock, and the holders of the Series A Senior stock are generally entitled to that number of votes as is equal to the number of whole shares of the Company's common stock into which the Series A Senior stock may be converted as of the record date of such vote or consent.
The 2018 Inducement Agreement, discussed below, triggered the down round feature of $5.2the Series B Preferred Stock and, as a result, the conversion price of the Company’s Series B Convertible Preferred Stock was automatically adjusted from $15.60 per share to $11.25 per share. In connection with the down round adjustment, the Company calculated an incremental beneficial conversion feature of approximately $40,000 which was recognized as a deemed dividend during the six months ended June 30, 2018 (“Deemed Dividend B”).
The 2018 Note Agreement, see Note 4 – Convertible Notes, triggered the down round feature of the Series B Preferred Stock and, as a result, the conversion price of the Company’s Series B Convertible Preferred Stock was automatically adjusted from $11.25 per share to $4.50 per share. In connection with the down round adjustment, the Company calculated an incremental beneficial conversion feature of approximately $0.2 million which was recognized as a deemed dividend at the time of issuance.
During the August 2017 Offering, all of the Company’s outstanding Series A Senior stock converted into an aggregate of 1,712,901 shares of the Company's common stock, at the existing conversion rate of one share of Common Stock for one share of Series A Senior stock (the “Conversion”). The Company also issued an aggregate of 22,518six months ended June 30, 2018, 2,340 shares of Series A Senior stock to these holders, whichB Preferred Stock were converted into 208,000 shares representedof our common stock.
At June 30, 2019 and December 31, 2018, the Company had 6,900 shares of Series AB designated and issued and 47 shares of Series B outstanding.
Series C Preferred Payment (as defined inStock
On November 6, 2017, the Company’sCompany filed a Certificate of Designation of Preferences, Rights and Limitations of Series A SeniorC Convertible Preferred Stock) accrued throughStock (“Series C Preferred Stock”) with the dateState of Conversion and immediately converted into an aggregate of 22,518Delaware which designates 2,748 shares of our preferred stock as Series C Preferred Stock. The Series C Preferred Stock has a stated value of $1,000 per share and a par value of $0.01 per share.
The conversion price of the Company's common stock inSeries C Preferred Stock contains a down round feature. The 2018 Purchase Agreement triggered the down round feature of the Series C Preferred Stock and, as a result, the conversion price of the Company’s Series C Convertible Preferred Stock was automatically adjusted from $21.00 per share to $15.60 per share. In connection with the Conversion. Thedown round adjustment, the Company issued warrants (the “Series A Conversion Warrants”) to purchasecalculated an aggregateincremental beneficial conversion feature of 856,446 shares of Common Stock to these former holders of Series A Senior stock as consideration for the conversion of their shares of Series A Senior stock into shares of Common Stock. The Company treated this as an induced conversion of the Series A Senior stock.
During the Conversion.
At June 30, 2019 and was recorded as a deemed dividend on preferred shares.
Preferred Stock.
On August 28, 2017,March 21, 2018, the Company completed the August 2017 Offeringentered into a letter agreement (the “2018 Inducement Agreement”) with certain holders of 6,000 units consisting of one shareshares of the Company’s Series B Preferred Stock par value $0.01 per share (“and Series BC Preferred Stock (together the “Preferred Stock”), which is convertible into 400and warrants (the “Warrants”) to purchase shares of the Company’s common stock issued in the Company’s public offering in August 2017 and registered direct offering in November 2017. Pursuant to the 2018 Inducement Agreement, the Company and the investors agreed that, as a result of the issuance of shares of common stock par value $0.01pursuant to that Purchase Agreement, dated February 8, 2018, by and between the Company and the investor named therein, and effective as of the time of execution of the 2018 Inducement Agreement, the exercise price of the Warrants was reduced to $11.25 per share at a(the “Exercise Price Reduction”) and the conversion price of $2.50 per share,the Preferred Stock was reduced to $11.25
25
(the “Conversion Price Reduction”). As consideration for the Company’s agreement to the Exercise Price Reduction and one warrantthe Conversion Price Reduction, (i) each investor agreed to purchase up to 400convert the shares of Preferred Stock held by such investor into shares of Common Stock and (ii) one investor agreed to exercise 44,444 Warrants and another investor agreed to exercise 33,333 Warrants all as of the date of the 2018 Inducement Agreement. As discussed above, as of June 30, 2019, all shares of Preferred Stock, except 47 shares of Series B Preferred Stock, were converted to shares of our common stock (the “August 2017 Offering Warrants”) at a combined public offering price of $1,000 per unit. The August 2017 Offering included the sale of 280,000 August 2017 Offering Warrants pursuant to the over-allotment option exercised by Aegis Capital Corp. (“Aegis”) for $0.01 per share or $2,800. The Offering was completed pursuant to the terms of the 2018 Inducement Agreement and 20,000 Warrants were exercised at the $11.25 exercise price.
The 2018 Inducement Agreement represented an underwriting agreement dated as of August 22, 2017 (the “Underwriting Agreement”) between the Company and Aegis. The net proceeds
Common Stock Warrants.
The following represents a summary of the warrants outstanding as of June 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Underlying |
| Exercise | |
|
| Issue Year |
| Expiration |
| Shares |
| Price | |
Warrants Assumed in Merger |
|
|
|
|
|
|
|
|
|
(1) |
| 2014 |
| April 2020 |
| 832 |
| $ | 1,800.00 |
(2) |
| 2015 |
| February 2020 |
| 1,588 |
| $ | 1,008.00 |
(3) |
| 2015 |
| December 2020 |
| 272 |
| $ | 747.00 |
(4) |
| 2016 |
| January 2021 |
| 596 |
| $ | 544.50 |
|
|
|
|
|
|
|
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
(5) |
| 2017 |
| June 2022 |
| 2,540 |
| $ | 41.25 |
(5) |
| 2017 |
| June 2022 |
| 500 |
| $ | 7.50 |
(6) |
| 2017 |
| June 2022 |
| 6,095 |
| $ | 105.00 |
(7) |
| 2017 |
| August 2022 |
| 25,201 |
| $ | 2.25 |
(8) |
| 2017 |
| August 2022 |
| 4,000 |
| $ | 46.88 |
(9) |
| 2017 |
| August 2022 |
| 47,995 |
| $ | 150.00 |
(9) |
| 2017 |
| August 2022 |
| 9,101 |
| $ | 7.50 |
(10) |
| 2017 |
| August 2022 |
| 16,664 |
| $ | 2.25 |
(10) |
| 2017 |
| August 2022 |
| 7,335 |
| $ | 2.25 |
(11) |
| 2017 |
| October 2022 |
| 666 |
| $ | 2.25 |
(12) |
| 2017 |
| May 2023 |
| — |
| $ | 2.25 |
(13) |
| 2018 |
| October 2022 |
| 7,207 |
| $ | 112.50 |
(14) |
| 2018 |
| April 2023 |
| 69,964 |
| $ | 5.40 |
(14) |
| 2018 |
| April 2023 |
| 121,552 |
| $ | 5.40 |
(15) |
| 2018 |
| October 2022 |
| 15,466 |
| $ | 11.25 |
(16) |
| 2018 |
| July 2023 |
| 14,671 |
| $ | 5.40 |
(16) |
| 2018 |
| July 2023 |
| 14,672 |
| $ | 5.40 |
(16) |
| 2018 |
| August 2023 |
| 36,334 |
| $ | 5.40 |
(16) |
| 2018 |
| August 2023 |
| 36,334 |
| $ | 5.40 |
(16) |
| 2018 |
| September 2023 |
| 19,816 |
| $ | 5.40 |
(16) |
| 2018 |
| September 2023 |
| 20,903 |
| $ | 5.40 |
(17) |
| 2018 |
| November 2023 |
| 75,788 |
| $ | 5.40 |
(17) |
| 2018 |
| December 2023 |
| 51,282 |
| $ | 5.40 |
(18) |
| 2019 |
| April 2024 |
| 147,472 |
| $ | 5.40 |
(19) |
| 2019 |
| May 2024 |
| 154,343 |
| $ | 9.56 |
|
|
|
|
|
| 909,189 |
|
|
|
26
(1) | These warrants were issued in connection with a private placement which was completed in October 2014. |
(2) | These warrants were issued in connection with an offering which was completed in February 2015. |
(3) | These warrants were issued in connection with an offering which was completed in July 2015. |
(4) | These warrants were issued in connection with an offering which was completed in January 2016. Of the remaining outstanding warrants as of June 30, 2019, 357 warrants are recorded as a liability, See Note 9 – Fair Value for further discussion, and 239 are treated as equity. |
(5) | These warrants were issued in connection with a June 2017 merger transaction (the “Merger”). |
(6) | These warrants were issued in connection with the Merger. |
(7) | These warrants were issued in connection with an underwritten public offering completed on August 28, 2017 (the “August 2017 Offering”) and are the August 2017 Offering Warrants discussed below. |
(8) | These warrants were issued in connection with the August 2017 Offering. |
(9) | These warrants were issued in connection with the conversion of our Series A Senior stock, at the time of the closing of the August 2017 Offering. |
(10) | These warrants were issued in connection with the conversion of convertible bridge notes, at the time of the closing of the August 2017 Offering, and are the Note Conversion Warrants discussed below. |
(11) | These warrants were issued in connection with the waiver of default the Company received in the fourth quarter of 2017 in connection with the Convertible Promissory Notes and are the Convertible Promissory Note Warrants discussed below. |
(12) | These warrants were issued in connection with the Series C Preferred Offering and are the Series C Warrants discussed below. |
(13) | These warrants were issued in connection with the Debt Obligation settlement agreements and are the Creditor Warrants discussed below. |
(14) | These warrants were issued in connection with the 2018 Note Agreement and are the April 2018 Warrants discussed below. |
(15) | These warrants were issued in connection with the 2018 Note Agreement and are the Advisor Warrants discussed below. |
(16) | These warrants were issued in connection with the 2018 Note Agreement and are the Q3 2018 Warrants discussed below. |
(17) | These warrants were issued in connection with the 2018 Note Agreement and subsequent Amendment Agreement and are the Q4 2018 Warrants discussed below. |
(18) | These warrants were issued in connection with the 2018 Note Agreement and subsequent Amendment No. 2 Agreement and are the April 2019 Warrants discussed below. |
(19) | These warrants were issued in connection with the May 2019 Bridge Notes and are the May 2019 Warrants discussed below. |
August 2017 Offering Warrants
In connection with the line of credit with Connecticut Innovations,August 2017 Offering, the Company issued 178,666 warrants to purchase 8,542 Series A Preferred shares of the Company, which were classified as an equity warrant, at an exercise price of $2.93 per unit, subject to adjustments as defined in the warrant agreement.$45.00, which contain a down round provision (the “August 2017 Offering Warrants”). The warrantsAugust 2017 Offering Warrants were valued at $6,000 at theexercisable immediately and expire 5 years from date of the grant utilizing the Black-Sholes model (volatility 40%, expected life 7 years, and risk free rate .36%). The value of the warrants was treated as a debt discount. At the Merger date, the warrants were exercised and then converted into shares of Precipio common stock.
In connection with the Merger, the holders of the 2017 Bridge Notes, the 2017 Bridge Warrants and the Aegis Warrants agreed to exchange the 2017 Bridge Notes, the 2017 Bridge Warrants and the Aegis Warrants for 2017 New Bridge Notes and the 2017 New Bridge Warrants to acquire 45,600 shares of our common stock. (See Note 6 - Convertible Bridge Notes). The initial exercise price of the 2017 New Bridge Warrants was $7.50 (subject to adjustments). These warrants had a provision that if the Company completed a Qualified Offering (as defined in the 2017 New Bridge Warrants), the exercise price of the 2017 New Bridge Warrants would become the lower of (i) $7.50 or (ii) 110% of the per share offering price in the Qualified Offering, but in no event lower than $1.50 per share. As a result of the Series BC Preferred Stock issued inOffering, the exercise price of the August 2017 Offering the exercise price of the 2017 New Bridge Warrants was adjusted to$2.75 $21.00 per share.
In February 2018, as a debt discountresult of 2018 Purchase Agreement, the exercise price of the August 2017 Offering Warrants was adjusted to the related 2017 New Bridge Notes I, with the corresponding entry to additional paid in capital as the warrants were considered classified as equity in accordance with GAAP.
In April 2018, as a result of the 2018 Note Agreement, the exercise price of the August 2017 Offering Warrants was adjusted to $4.50. At the time the exercise price was adjusted, the Company calculated the fair value of the down
27
round provision on the warrants to be approximately $63,000 and recorded this as a deemed dividend (“Deemed Dividend L”).
There were 6,800 and 141,400 August 2017 Offering Warrants exercised during the six months ended June 30, 2019 and 2018, respectively, for proceeds to the Company of approximately $15,000 and $771,000, respectively. During the six months ended June 30, 2019 and 2018, the intrinsic value of the August 2017 Offering Warrants exercised was $36,000 and $406,000, respectively.
Note Conversion Warrants
Upon the closing of the August 2017 Offering, the Company issued 23,999 warrants to purchase the Company’s common stock (the “Note Conversion Warrants”). The Note Conversion Warrants have an exercise price of $45.00 per share and contain a down round provision. As a result of the Series C Preferred Offering, the exercise price of the Note Conversion Warrants was adjusted to $21.00 per share.
In February 2018, as a result of 2018 Purchase Agreement, the exercise price of the Note Conversion Warrants was adjusted to $15.60. At the time the exercise price was adjusted, the Company calculated the fair value of the down round provision on the warrants to be approximately $12,000$8,000 and recorded this as a deemed dividend.dividend (“Deemed Dividend F”). In addition, as a result of the 2018 Inducement Agreement, the exercise price of the Note Conversion Warrants was further adjusted to $11.25. At the time the exercise price was adjusted, the Company calculated the fair value of the down round provision on the warrants to be approximately $5,000 and recorded this as a deemed dividend (“Deemed Dividend G”).
In April 2018, as a result of the 2018 Note Agreement, the exercise price
Convertible Promissory Note Warrants
The Convertible Promissory Note Warrants had an original exercise price of $45.00 per share and contain a down round provision. As a result of the Series C Preferred Offering, the exercise price of the Convertible Promissory Note Warrants was adjusted to $21.00 per share.
In February 2018, as a result of 2018 Purchase Agreement, the exercise price of the Convertible Promissory Note Warrants was adjusted to $15.60. At the time the exercise price was adjusted, the Company calculated the fair value of the down round provision on the warrants to be less than $1,000 and recorded this as a deemed dividend (“Deemed Dividend H”). In addition, as a result of the 2018 Inducement Agreement, the exercise price of the Convertible Promissory Note Warrants was further adjusted to $11.25. At the time the exercise price was adjusted, the Company calculated the fair value of the down round provision on the warrants to be less than $1,000 and recorded this as a deemed dividend (“Deemed Dividend I”).
In April 2018, as a result of the 2018 Note Agreement, the exercise price of the Convertible Promissory Note Warrants was adjusted to $4.50. At the time the exercise price was adjusted, the Company calculated the fair value of the down round provision on the warrants to be less than $1,000 and recorded this as a deemed dividend (“Deemed Dividend N”).
Series C Warrants
In connection with the bridge financing and the assumption of certain obligations by an entity controlled by Mark Rimer (a director of the Company), the Company issued to that entity Side Warrants to purchase an aggregate of 91,429 shares of the Company's common stock at an exercise price of $7.00 per share (subject to adjustment), with a fair value of $487,000 at the date of issuance. The Side Warrants have a term of 5 years and are exercisable as to 22,857 shares of the Company's common stock upon grant and as to 68,572 shares of the Company's common stock upon the entity’s performance of the assumed obligations. All performance obligations have been met and the Company has recorded merger advisory expense of $73,000 and $487,000 related to the Side Warrants during the three and nine months ended September 30, 2017, respectively.
28
provided that, at the election of a holder and notice to the Company, such beneficial ownership limitation may be increased to 9.99% of the Company’s outstanding shares of common stock after giving effect to such exercise.
In accordance withFebruary 2018, as a result of the underwriting agreement for2018 Purchase Agreement, the August 2017 Offering, the underwriter purchased 60,000 warrants, with an exercise price of $3.125, for an aggregatethe Series C Warrants was adjusted to $15.60. At the time the exercise price of $100. The Representative Warrants are exercisable beginning one year afterwas adjusted, the date ofCompany calculated the prospectus for the August 2017 Offering and expiring on a date which is no more than five years from the date of the prospectus for the August 2017 Offering. The fair value of the down round provision on the warrants at dateto be approximately $58,000 and recorded this as a deemed dividend (“Deemed Dividend J”). In addition, as a result of issuancethe 2018 Inducement Agreement, the exercise price of the Series C Warrants was further adjusted to $11.25 as a result of the Exercise Price Reduction discussed above.
In April 2018, as a result of the 2018 Note Agreement, the exercise price of the Series C Warrants was adjusted to $4.50. At the time the exercise price was adjusted, the Company calculated the fair value of the down round provision on the warrants to be approximately $45,000 and recorded this as a deemed dividend (“Deemed Dividend O”).
There were 25,037 Series C Warrants exercised during both the three and six months ended June 30, 2019 for proceeds to the Company of approximately $113,000$56,000. During the six months ended June 30, 2019, the intrinsic value of the Series C Warrants exercised was treated as a stock issuance costapproximately $43,000. There were 71,333 Series C Warrants exercised during both the three and recorded as a reductionsix months ended June 30, 2018 for proceeds to additional paid in capital.
Creditor Warrants
In the fourth quarter of 2017, the Company issued Series A Conversionentered into Settlement Agreements with the Creditors pursuant to which the Company agreed to issue, to certain of its Creditors, 7,207 Creditor Warrants to purchase an aggregate of 856,4467,207 shares of the Company'sCompany’s common stock at an exercise price of $10.00$112.50 per share, whichshare. The Creditor Warrants were issued in February 2018. See Note 4 – Convertible Notes.
April 2018 Warrants
In connection with the issuance of the April 2018 Bridge Notes, the Company issued 243,224 warrants at an exercise price of $11.25 at time of issuance. At issuance, half of these April 2018 Warrants had a five-year term and half had a one-year term. In September 2018, the exercise price was amended to $7.50. At the time of issuance, as discussed in Note 4 - Convertible Notes, the April 2018 Warrants had a fair value of approximately $1.1 million and were recorded as a liability with an offset to debt discount.
In April 2019, as a result of the Amendment No.2 Agreement, the exercise price of the April 2018 Warrants was adjusted to $5.40 and all April 2018 Warrants that had a one-year term were amended to have a five-year term. Due to these modifications, the change in fair value of the April 2018 Warrants was calculated to be an expense of approximately $0.7 million which is included in warrant revaluation and modification in the consolidated statements of operations for the three and six months ended June 30, 2019.
There were 51,708 April 2018 Warrants exercised during the three and six months ended June 30, 2019 for proceeds to the Company of approximately $279,000. During the six months ended June 30, 2019, the intrinsic value of the April 2018 Warrants exercised was approximately $128,000.
Advisor Warrants
At the time of the 2018 Note Agreement, the Company issued 15,466 warrants with an exercise price of $11.25 to a financial advisor. At the time of issuance, as discussed in Note 4 - Convertible Notes, the Advisor Warrants had a fair value of approximately $0.1 million and were recorded as a liability with an offset to debt discount.
Q3 2018 Warrants
In connection with the issuance of bridge notes during the third quarter of 2018, the Company issued 196,340 warrants with an exercise price of $11.25 at time of issuance (the “Q3 2018 Warrants”). At the time of issuance, half of
29
these Q3 2018 Warrants had a five-year term and half had a one-year term. The Q3 2018 Warrants had a fair value of 5 years.approximately $0.7 million and were recorded as a liability with an offset to debt discount.
In April 2019, as a result of the Amendment No.2 Agreement, the exercise price of the Q3 2018 Warrants was adjusted to $5.40 and all Q3 2018 Warrants that had a one-year term were amended to have a five-year term. Due to these modifications, the change in fair value of the Q3 2018 Warrants was calculated to be an expense of approximately $0.4 million which is included in warrant revaluation and modification in the consolidated statements of operations for the three and six months ended June 30, 2019.
There were 53,610 Q3 2018 Warrants exercised during the three and six months ended June 30, 2019 for proceeds to the Company of approximately $289,000. During the six months ended June 30, 2019, the intrinsic value of the Q3 2018 Warrants exercised was approximately $133,382.
Q4 2018 Warrants
In connection with the issuance bridge notes during the fourth quarter of 2018, the Company issued 300,115 warrants with an exercise price of $5.40 at time of issuance and a five-year term (the “Q4 208 Warrants”). At the time of issuance, the Series A ConversionQ4 2018 Warrants had a fair value of $1.4approximately $0.7 million and as discussed in the Series A Senior Preferred Stock section above, these were issued and recorded as deemed dividends.
There were 173,045 Q4 2018 Warrants
April 2019 Warrants
In connection with the issuance of the Company’s NewApril 2019 Bridge Notes, were converted into an aggregate of 359,999 shares of the Company's common stock and 359,999 Note Conversion Warrants. The Note Conversion Warrants haveCompany issued 147,472 warrants with an exercise price of $3.00 per share$5.40 and a five yearfive-year term. The exercise price containsAt the time of issuance, as discussed in Note 4 - Convertible Notes, the April 2019 Warrants had a down round provision. The conversion of the Company's New Bridge Notes was treated as an induced conversion and at the date of the conversion the Company recorded an expensefair value of approximately $1.0 million which is includedand were recorded as a liability with an offset to debt discount.
May 2019 Warrants
In connection with the issuance of the May 2019 Bridge Notes, the Company issued 154,343 warrants with an exercise price of $5.40 and a five-year term. At the time of issuance, as discussed in loss on extinguishment of debt and induced conversion of convertible bridge notes in our unaudited condensed consolidated statements of operations (See Note 64 - Convertible Bridge Notes).Notes, the May 2019 Warrants had a fair value of approximately $0.9 million and were recorded as a liability with an offset to debt discount.
Deemed Dividends
As discussed above, certain of our preferred stock and warrant issuances contain down round provisions which require us to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS.
30
There were no deemed dividends during the six months ended June 30, 2019. The following represents a summary of the warrants outstanding as of Septemberdividends recorded for the six months ended June 30, 2017:2018:
|
|
|
|
|
| Amount Recorded | |
Deemed Dividends |
| (in thousands) | |
|
|
|
|
Dividends resulting from the 2018 Purchase Agreement |
|
|
|
Deemed Dividend A |
| $ | 1,358 |
Deemed Dividend C |
|
| 829 |
Deemed Dividend E |
|
| 62 |
Deemed Dividend F |
|
| 8 |
Deemed Dividend H |
|
| * |
Deemed Dividend J |
|
| 58 |
|
|
|
|
Dividends resulting from the 2018 Inducement Agreement |
|
|
|
Deemed Dividend B |
|
| 40 |
Deemed Dividend D |
|
| 1,154 |
Deemed Dividend G |
|
| 5 |
Deemed Dividend I |
|
| * |
|
|
|
|
Dividends resulting from the 2018 Note Agreement |
|
|
|
Deemed Dividend K |
|
| 216 |
Deemed Dividend L |
|
| 63 |
Deemed Dividend O |
|
| 45 |
Deemed Dividend M |
|
| 10 |
Deemed Dividend N |
|
| * |
|
|
|
|
For the six months ended June 30, 2018 |
| $ | 3,848 |
|
|
|
|
Issue Year | Expiration | Underlying Shares | Exercise Price | ||||
Warrants Assumed in Merger | |||||||
(1) | 2013 | January 2018 | 23,055 | $270.00 | |||
(2) | 2014 | April 2020 | 12,487 | $120.00 | |||
(3) | 2015 | February 2020 | 23,826 | $67.20 | |||
(4) | 2015 | December 2020 | 4,081 | $49.80 | |||
(5) | 2015 | January 2021 | 38,733 | $36.30 | |||
(6) | 2016 | January 2021 | 29,168 | $36.30 | |||
Warrants | |||||||
(7) | 2017 | June 2022 | 45,600 | $2.75 | |||
(8) | 2017 | June 2022 | 91,429 | $7.00 | |||
(9) | 2017 | August 2022 | 2,680,000 | $3.00 | |||
(10) | 2017 | August 2022 | 60,000 | $3.125 | |||
(11) | 2017 | August 2022 | 856,446 | $10.00 | |||
(12) | 2017 | August 2022 | 359,999 | $3.00 | |||
4,224,824 |
* Represents less than one thousand dollars
9. FAIR VALUE
FASB guidance on fair value measurements, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements for our financial assets and liabilities, as well as for other assets and liabilities that are carried at fair value on a recurring basis in our condensed consolidated financial statements.
FASB guidance establishes a three-level fair value hierarchy based upon the assumptions (inputs) used to price assets or liabilities. The three levels of inputs used to measure fair value are as follows:
Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2—Observable inputs other than those included in Level 1, such as quoted prices for similar assets and liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets; and
Level 3—Unobservable inputs reflecting our own assumptions and best estimate of what inputs market participants would use in pricing the asset or liability.
Common Stock Warrant Liabilities.
Certain of our issued and outstanding warrants to purchase shares of common stock do not qualify to be treated as equity and, accordingly, are recorded as a liability.
31
reporting date and changes are recorded as a non-cash adjustment to earnings. The gains or losses included in earnings are reported in other income (expense) in our condensed consolidated Statementstatement of Operations.
2016 Warrant Liability
In the Merger, the Company assumed a warrant liability related to warrants issued in January 2016 (the “2016 Warrant Liability”) and it represents the fair value of such warrants, of which, 357 warrants remain outstanding as of June 30, 2019.
In March 2018, a portion of the 2016 Warrant Liability was part of a settlement agreement pursuant to a lawsuit that was filed against the Company by one of the warrant holders. As such, approximately $0.4 million of the warrant liability, representing 1,347 warrants, was canceled on the date of the settlement agreement and replaced by and amounts now recorded as other current liabilities or other long-term liabilities. For further detail, see discussion of the Crede Agreement in Note 5 – Accrued Expenses And Other Current Liabilities.
The 2016 Warrant Liability is considered a Level 3 financial instrument and iswas valued using a binomial lattice simulation model. This method is well suited to valuing options with non-standard features. Assumptionsthe Monte Carlo methodology. As of June 30, 2019, assumptions and inputs used in the valuation of the common stock warrants2016 Warrant Liability include: our equity value, which was estimated using our stock priceremaining life to maturity of $2.16 as of September 30, 2017;1.5 years; annual volatility of 137%141%; and a risk-free interest rate of 1.20%1.84%.
Bridge Note Warrant Liabilities
During 2018 and 2019, the Company issued 243,224 of April 2018 Warrants, 15,466 of Advisor Warrants, 196,340 of Q3 2018 Warrants, 300,115 of Q4 2018 Warrants, 147,472 of April 2019 Warrants and 154,343 of May 2019 Warrants. All of these warrants issuances were classified as warrant liabilities (the “Bridge Note Warrant Liabilities”). See Note 4 - Convertible Notes for further discussion of each warrant.
The Bridge Note Warrant Liabilities are considered Level 3 financial instruments and were valued using the Black Scholes model. As of June 30, 2019, assumptions used in the valuation of the Bridge Note Warrant Liabilities include: remaining life to maturity of 2.81 to 4.88 years; annual volatility of 147% to 173%; and risk free rate of 1.71% to 1.76%.
During the three and ninesix months ended SeptemberJune 30, 2017,2019 and 2018, the changeschange in the fair value of the liabilitywarrant liabilities measured using significant unobservable inputs (Level 3) were comprised of the following:
|
|
|
|
|
|
|
|
|
|
Dollars in Thousands |
|
| |||||||
|
| Three Months Ended June 30, 2019 | |||||||
|
| 2016 Warrant |
| Bridge Note |
| Total Warrant | |||
|
| Liability |
| Warrant Liabilities |
| Liabilities | |||
Beginning balance at April 1 |
| $ | 93 |
| $ | 799 |
| $ | 892 |
Additions: |
|
| – |
|
| 1,858 |
|
| 1,858 |
Total (gains) losses: |
|
|
|
|
|
|
|
|
|
Revaluation recognized in earnings |
|
| (7) |
|
| 829 |
|
| 822 |
Modification recognized in earnings |
|
| – |
|
| 1,128 |
|
| 1,128 |
Deductions – warrant exercises |
|
| – |
|
| (2,364) |
|
| (2,364) |
Balance at June 30 |
| $ | 86 |
| $ | 2,250 |
| $ | 2,336 |
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended June 30, 2018 | |||||||
|
| 2016 Warrant |
| Bridge Note |
| Total Warrant | |||
|
| Liability |
| Warrant Liabilities |
| Liabilities | |||
Beginning balance at April 1 |
| $ | 124 |
| $ | – |
| $ | 124 |
Additions: |
|
| – |
|
| 1,205 |
|
| 1,205 |
Total gains: |
|
|
|
|
|
|
|
|
|
Revaluation recognized in earnings |
|
| – |
|
| (323) |
|
| (323) |
Balance at June 30 |
| $ | 124 |
| $ | 882 |
| $ | 1,006 |
32
Dollars in Thousands | ||||
For the Three Months Ended | ||||
September 30, 2017 | ||||
Beginning balance at July 1 | $ | 618 | ||
Additions - liability assumed in the Merger | — | |||
Total (gains) or losses: | ||||
Recognized in earnings | — | |||
Balance at September 30 | $ | 618 |
|
|
|
|
|
|
|
|
|
|
|
Dollars in Thousands |
|
|
| |||||||
|
| Six Months Ended June 30, 2019 |
| |||||||
|
| 2016 Warrant |
| Bridge Note |
| Total Warrant |
| |||
|
| Liability |
| Warrant Liabilities |
| Liabilities |
| |||
Beginning balance at January 1 |
| $ | 116 |
| $ | 1,016 |
| $ | 1,132 |
|
Additions: |
|
| – |
|
| 1,858 |
|
| 1,858 |
|
Total (gains) losses: |
|
|
|
|
|
|
|
|
|
|
Revaluation recognized in earnings |
|
| (30) |
|
| 612 |
|
| 582 |
|
Modification recognized in earnings |
|
| – |
|
| 1,128 |
|
| 1,128 |
|
Deductions – warrant exercises |
|
| – |
|
| (2,364) |
|
| (2,364) |
|
Balance at June 30 |
| $ | 86 |
| $ | 2,250 |
| $ | 2,336 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Six Months Ended June 30, 2018 |
| |||||||
|
| 2016 Warrant |
| Bridge Note |
| Total Warrant |
| |||
|
| Liability |
| Warrant Liabilities |
| Liabilities |
| |||
Beginning balance at January 1 |
| $ | 841 |
| $ | – |
| $ | 841 |
|
Additions: |
|
| – |
|
| 1,205 |
|
| 1,205 |
|
Total gains: |
|
|
|
|
|
|
|
|
|
|
Revaluation recognized in earnings |
|
| (261) |
|
| (323) |
|
| (584) |
|
Deductions – warrant liability settlement |
|
| (456) |
|
| – |
|
| (456) |
|
Balance at June 30 |
| $ | 124 |
| $ | 882 |
| $ | 1,006 |
|
Derivative Liabilities.
Certain of our issued and outstanding convertible notes contain features that are considered derivative instruments and are required to bifurcated from the debt host and accounted for separately as derivative liabilities. The estimated fair value of the derivatives will be remeasured at each reporting date and any change in estimated fair value of the derivatives will be recorded as non-cash adjustments to earnings. The gains or losses included in earnings are reported in other income (expense) in our condensed consolidated statement of operations.
Bridge Notes Redemption Feature
At the time of the Bridge Note issuances, the Company recorded derivative instruments as liabilities with an initial fair value of approximately $0.3 million. The valuations were performed using the “with and without” approach, whereby the Bridge Notes were valued both with the embedded derivative and without, and the difference in values was recorded as the derivative liability. See Note 4 - Convertible Notes for further discussion.
Conversion Option
The Company recorded derivative liabilities related to the Conversion Option of the Exchange Notes issued during 2018 with an initial fair value of approximately $0.4 million. The valuations were performed using the Monte Carlo methodology. See Note 4 - Convertible Notes for further discussion.
33
Dollars in Thousands | ||||
For the Nine Months Ended | ||||
September 30, 2017 | ||||
Beginning balance at January 1 | $ | — | ||
Additions - liability assumed in the Merger | 615 | |||
Total (gains) or losses: | ||||
Recognized in earnings | 3 | |||
Balance at September 30 | $ | 618 |
During the three and six months ended June 30, 2019 and 2018, the change in the fair value of the derivative liabilities measured using significant unobservable inputs (Level 3) was comprised of the following:
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
| Three Months Ended June 30, 2019 | |||||||
|
| Bridge Notes |
|
|
|
|
|
| |
|
| Redemption |
| Conversion |
| Total Derivative | |||
|
| Feature |
| Option |
| Liabilities | |||
Beginning balance at April 1 |
| $ | — |
| $ | — |
| $ | — |
Deductions: |
|
| (438) |
|
| — |
|
| (438) |
Total loss: |
|
|
|
|
|
|
|
|
|
Revaluation recognized in earnings |
|
| 438 |
|
| — |
|
| 438 |
Balance at June 30 |
| $ | — |
| $ | — |
| $ | — |
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended June 30, 2018 | ||||||
|
| Bridge Notes |
|
|
|
|
|
| |
|
| Redemption |
| Conversion |
| Total Derivative | |||
|
| Feature |
| Option |
| Liabilities | |||
Beginning balance at April 1 |
| $ | — |
| $ | — |
| $ | — |
Additions: |
|
| 142 |
|
| — |
|
| 142 |
Total loss: |
|
|
|
|
|
|
|
|
|
Revaluation recognized in earnings |
|
| 1 |
|
| — |
|
| 1 |
Balance at June 30 |
| $ | 143 |
| $ | — |
| $ | 143 |
|
|
|
|
|
|
|
|
|
|
|
| Six Months Ended June 30, 2019 | |||||||
|
| Bridge Notes |
|
|
|
|
|
| |
|
| Redemption |
| Conversion |
| Total Derivative | |||
|
| Feature |
| Option |
| Liabilities | |||
Beginning balance at January 1 |
| $ | 30 |
| $ | 32 |
| $ | 62 |
Deductions: |
|
| (438) |
|
| (39) |
|
| (477) |
Total loss: |
|
|
|
|
|
|
|
|
|
Revaluation recognized in earnings |
|
| 408 |
|
| 7 |
|
| 415 |
Balance at June 30 |
| $ | — |
| $ | — |
| $ | — |
|
|
|
|
|
|
|
|
|
|
|
| Six Months Ended June 30, 2018 | |||||||
|
| Bridge Notes |
|
|
|
|
|
| |
|
| Redemption |
| Conversion |
| Total Derivative | |||
|
| Feature |
| Option |
| Liabilities | |||
Beginning balance at January 1 |
| $ | — |
| $ | — |
| $ | — |
Additions: |
|
| 142 |
|
| — |
|
| 142 |
Total loss: |
|
|
|
|
|
|
|
|
|
Revaluation recognized in earnings |
|
| 1 |
|
| — |
|
| 1 |
Balance at June 30 |
| $ | 143 |
| $ | — |
| $ | 143 |
10. EQUITY INCENTIVE PLAN
The Company's 2006 Equity Incentive Plan (the "2006 Plan") was terminated as to future awards on July 12, 2016. The Company's 2017 Stock Option and Incentive Plan (the "2017 Plan") was adopted by the Company's stockholders on June 5, 2017 and there were 44,444 shares of common stock reserved for issuance under the 2017 Plan. The 2017 Plan will expire on June 5, 2027.
Amendment of the 2017 Stock Option and Incentive Plan
On January 31, 2018, at a special meeting of the stockholders of the Company, the stockholders approved an amendment and restatement of the 2017 Plan to:
· | increase the aggregate number of shares authorized for issuance under the 2017 Plan by 359,300 shares to 403,744 shares; |
· | increase the maximum number of shares that may be granted in the form of stock options or stock appreciation rights to any one individual in any one calendar year and the maximum number of shares underlying any award intended to qualify as performance-based compensation to any one individual in any performance cycle, in each case to 66,666 shares of common stock; and |
· | add an “evergreen” provision, pursuant to which the aggregate number of shares authorized for issuance under the 2017 Plan will be automatically increased each year beginning on January 1, 2019 by 5% of the number of shares of common stock issued and outstanding on the immediately preceding December 31, or such lesser number of shares determined by the Company’s Board of Directors or Compensation Committee. |
Stock Options.
The Company accounts for all stock-based compensation payments to employees and directors, including grants of employee stock options, at fair value and expenses the benefit in operating expense in the condensed consolidated statements of operations over the service period of the awards. The Company records the expense for stock-based compensation awards subject to performance-based milestone vesting over the remaining service period when management determines that achievement of the milestone is probable. Management evaluates when the achievement of a performance-based milestone is probable based on the expected satisfaction of the performance conditions as of the reporting date. The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option pricing model, which requires various assumptions including estimating stock price volatility, expected life of the stock option, risk free interest rate and estimated forfeiture rate.
During the six months ended June 30, 2019, the Company granted stock options to purchase up to 285,364 shares of common stock at a weighted average exercise price of $2.37. 100,000 of the stock options granted during the six months ended June 30, 2019 were awards subject to performance-based milestone vesting.
The following table summarizes stock option activity under our plans during the
|
|
|
|
|
|
|
| Number of |
| Weighted-Average | |
|
| Options |
| Exercise Price | |
Outstanding at January 1, 2019 |
| 224,895 |
| $ | 15.90 |
Granted |
| 285,364 |
|
| 2.37 |
Forfeited |
| (9,017) |
|
| 6.92 |
Outstanding at June 30, 2019 |
| 501,242 |
| $ | 8.29 |
Exercisable at June 30, 2019 |
| 99,047 |
| $ | 20.22 |
Number of Options | Weighted-Average Exercise Price | |||||
Outstanding at January 1, 2017 | 24,600 | $ | 107.83 | |||
Granted | 225,332 | 1.87 | ||||
Forfeited | (13,044 | ) | 103.13 | |||
Outstanding at September 30, 2017 | 236,888 | $ | 7.30 | |||
Exercisable at September 30, 2017 | 10,284 | $ | 121.97 |
As of SeptemberJune 30, 2017,2019, there were 236,590400,693 options that were vested or expected to vest with an aggregate intrinsic value of approximately one hundred thousand with$0.2 million and a remaining weighted average contractual life of 9.99.2 years. The weighted-average grant date fair values, based on
35
During the Black-Scholes option model, ofsix months ended June 30, 2018, there were 219,101 options granted during the nine months ended September 30, 2017 was $1.63.
For the three and ninesix months ended both SeptemberJune 30, 2017 and 2016,2019, we recorded compensation expense for all stock awards of less than $0.1 million and $0.3 million, respectively, within operating expense. expense in the accompanying statements of operations. For the three and six months ended June 30, 2018, we recorded compensation expense for all stock awards of $0.1 million and $0.2 million, respectively. As of SeptemberJune 30, 2017,2019, the unrecognized compensation expense related to unvested stock awards was $0.4$2.2 million, which is expected to be recognized over a weighted-average period of 3.82.5 years.
11. SALES SERVICE REVENUE, NET AND ACCOUNTS RECEIVABLE
ASC Topic 606, “Revenue from contracts with customers”
The Company follows the guidance of September 30, 2017, zero SARs shares were outstanding. DuringASC 606 for the nine months ended September 30, 2017, the SARs liability decreased approximately $1,000recognition of revenue from contracts with customers to transfer goods and at September 30, 2017, no liability was recorded in accrued expenses since there were no shares outstanding.
Step 1: Identification of the contract with the customer. Sub-steps include determining the customer in a contract; Initial contract identification and determine if multiple contracts should be combined and accounted for as a single transaction.
Step 2: Identify the performance obligation in the contract. Sub-steps include identifying the promised goods and services in the contract and identifying which performance obligations within the contract are distinct.
Step 3: Determine the transaction price. Sub-steps include variable consideration, constraining estimates of variable consideration, the existence of a significant financing component in the contract, noncash consideration and consideration payable vendors (the “Creditors”) pursuant to which the Creditors agreed to a reductioncustomer.
Step 4: Allocate transaction price. Sub-steps include assessing the amount of approximately $5.0 million in currently due vendor liabilities. The Company and the Creditors agreed to restructure these liabilities into approximately $2.5 million in secured, long-term vendor obligations with payments beginning in July 2018 and continuing over 48 months. In connection with the settlement, the Company agreed to issue to certain of the Creditors warrants (the “Creditor Warrants”) to purchase approximately 86,000 shares of the Company’s common stock at an exercise price of $7.50 per share.
Step 5: Satisfaction of performance obligations. Sub-steps include ascertaining the point in time when an asset is transferred to the customer and the customer obtains control of the asset upon which time the Company recognizes revenue.
Nature of Contracts and Customers
The Company’s contracts and related performance obligations are similar for its customers and the sales process for all customers starts upon the receipt of requisition forms from the customers for patient diagnostic testing and the execution of contracts for biomarker testing and clinical research. Payment terms for the benefitservices provided are 30 days, unless separately negotiated.
Diagnostic testing
Control of the Creditors,laboratory testing services is transferred to the customer at a security interestpoint in certain propertytime. As such, the Company recognizes revenue for laboratory testing services at a point in time based on the delivery method (web-portal access or fax) for the patient’s laboratory report, per the contract.
Clinical research grants
Control of the clinical research services are transferred to the customer over time. The Company will recognize revenue utilizing the “effort based” method, measuring its progress toward complete satisfaction of the performance obligation.
36
Biomarker testing and clinical project services
Control of the biomarker testing and clinical project services are transferred to secure its obligationsthe customer over time. The Company utilizes an “effort based” method of assessing performance and measures progress towards satisfaction of the performance obligation based upon the delivery of results.
The Company generates revenue from the provision of diagnostic testing provided to patients, biomarker testing provided to bio-pharma customers and clinical research grants funded by both bio-pharma customers and government health programs.
Disaggregation of Revenues by Transaction Type
We operate in one business segment and, therefore, the results of our operations are reported on a consolidated basis for purposes of segment reporting, consistent with internal management reporting. Service revenue, net for the three and six months ended June 30, 2019 and 2018 were as follows (prior-period amounts are not adjusted under the Settlement Agreement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Three Months Ended June 30, | ||||||||||||||||
(dollars in thousands) |
| Diagnostic Testing |
| Biomarker Testing |
| Total | ||||||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||||
Medicaid |
| $ | 9 |
| $ | 11 |
| $ | — |
| $ | — |
| $ | 9 |
| $ | 11 |
Medicare |
|
| 450 |
|
| 281 |
|
| — |
|
| — |
|
| 450 |
|
| 281 |
Self-pay |
|
| 11 |
|
| 20 |
|
| — |
|
| — |
|
| 11 |
|
| 20 |
Third party payers |
|
| 451 |
|
| 219 |
|
| — |
|
| — |
|
| 451 |
|
| 219 |
Contract diagnostics |
|
| — |
|
| — |
|
| 274 |
|
| 368 |
|
| 274 |
|
| 368 |
Service revenue, net |
| $ | 921 |
| $ | 531 |
| $ | 274 |
| $ | 368 |
| $ | 1,195 |
| $ | 899 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Six Months Ended June 30, | ||||||||||||||||
(dollars in thousands) |
| Diagnostic Testing |
| Biomarker Testing |
| Total | ||||||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||||
Medicaid |
| $ | 12 |
| $ | 23 |
| $ | — |
| $ | — |
| $ | 12 |
| $ | 23 |
Medicare |
|
| 844 |
|
| 415 |
|
| — |
|
| — |
|
| 844 |
|
| 415 |
Self-pay |
|
| 15 |
|
| 46 |
|
| — |
|
| — |
|
| 15 |
|
| 46 |
Third party payers |
|
| 807 |
|
| 350 |
|
| — |
|
| — |
|
| 807 |
|
| 350 |
Contract diagnostics |
|
| — |
|
| — |
|
| 427 |
|
| 856 |
|
| 427 |
|
| 856 |
Service revenue, net |
| $ | 1,678 |
| $ | 834 |
| $ | 427 |
| $ | 856 |
| $ | 2,105 |
| $ | 1,690 |
Revenue from the date of issuance.
Revenue Recognition
Revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price using the expected value $0.01 per share (the “Series C Preferred Stock”method based on historical experience. The Company does not typically enter arrangements where multiple contracts can be combined as the terms regarding services are generally found within a single agreement/requisition form. The Company derives its revenues from three types of transactions: diagnostic testing (“Diagnostic”), convertible intoand clinical research grants from state and federal research programs, and other revenues from the Company’s ICP technology and bio-pharma projects encompassing genetic diagnostics (collectively “Biomarker”).
37
Deferred revenue
Deferred revenue, or unearned revenue, refers to advance payments for products or services that are to be delivered in the future. The Company records such prepayment of unearned revenue as a numberliability, as revenue that has not yet been earned, but represents products or services that are owed to a customer. As the product or service is delivered over time, the Company recognizes the appropriate amount of sharesrevenue from deferred revenue. For the period ended June 30, 2019 and December 31, 2018, the deferred revenue was $19,000 and $49,000, respectively.
Contractual Allowances and Adjustments
We are reimbursed by payers for services we provide. Payments for services covered by payers average less than billed charges. We monitor revenue and receivables from payers and record an estimated contractual allowance for certain revenue and receivable balances as of the Company’s common stock equalrevenue recognition date to $1,000 dividedproperly account for anticipated differences between amounts estimated in our billing system and amounts ultimately reimbursed by $1.40payers. Accordingly, the total revenue and warrantsreceivables reported in our condensed consolidated financial statements are recorded at the amounts expected to purchase up to 1,962,857 sharesbe received from these payers. For service revenue, the contractual allowance is estimated based on several criteria, including unbilled claims, historical trends based on actual claims paid, current contract and reimbursement terms and changes in customer base and payer/product mix. The billing functions for the remaining portion of common stock withour revenue are contracted and fixed fees for specific services and are recorded without an exercise priceallowance for contractual discounts. The following table presents our revenues initially recognized for each associated payer class during the three and six months ended June 30, 2019 and 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Three Months Ended June 30, | ||||||||||||||||
(dollars in thousands) |
|
|
| Contractual Allowances and |
| Revenues, net of Contractual | ||||||||||||
|
| Gross Revenues |
| adjustments |
| Allowances and adjustments | ||||||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||||
Medicaid |
| $ | 12 |
| $ | 26 |
| $ | (3) |
| $ | (15) |
| $ | 9 |
| $ | 11 |
Medicare |
|
| 467 |
|
| 292 |
|
| (17) |
|
| (11) |
|
| 450 |
|
| 281 |
Self-pay |
|
| 11 |
|
| 20 |
|
| — |
|
| — |
|
| 11 |
|
| 20 |
Third party payers |
|
| 1,571 |
|
| 531 |
|
| (1,120) |
|
| (312) |
|
| 451 |
|
| 219 |
Contract diagnostics |
|
| 274 |
|
| 368 |
|
| — |
|
| — |
|
| 274 |
|
| 368 |
|
|
| 2,335 |
|
| 1,237 |
|
| (1,140) |
|
| (338) |
|
| 1,195 |
|
| 899 |
Clinical research grants and other |
|
| 4 |
|
| 60 |
|
| — |
|
| — |
|
| 4 |
|
| 60 |
|
| $ | 2,339 |
| $ | 1,297 |
| $ | (1,140) |
| $ | (338) |
| $ | 1,199 |
| $ | 959 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
| For the Six Months Ended June 30, | ||||||||||||||||
|
|
|
| Contractual Allowances and |
| Revenues, net of Contractual | ||||||||||||
|
| Gross Revenues |
| adjustments |
| Allowances and adjustments | ||||||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||||
Medicaid |
| $ | 15 |
| $ | 41 |
| $ | (3) |
| $ | (18) |
| $ | 12 |
| $ | 23 |
Medicare |
|
| 861 |
|
| 429 |
|
| (17) |
|
| (14) |
|
| 844 |
|
| 415 |
Self-pay |
|
| 15 |
|
| 46 |
|
| — |
|
| — |
|
| 15 |
|
| 46 |
Third party payers |
|
| 2,588 |
|
| 848 |
|
| (1,781) |
|
| (498) |
|
| 807 |
|
| 350 |
Contract diagnostics |
|
| 427 |
|
| 856 |
|
| — |
|
| — |
|
| 427 |
|
| 856 |
|
|
| 3,906 |
|
| 2,220 |
|
| (1,801) |
|
| (530) |
|
| 2,105 |
|
| 1,690 |
Clinical research grants and other |
|
| 11 |
|
| 65 |
|
| — |
|
| — |
|
| 11 |
|
| 65 |
|
| $ | 3,917 |
| $ | 2,285 |
| $ | (1,801) |
| $ | (530) |
| $ | 2,116 |
| $ | 1,755 |
Allowance for Doubtful Accounts
The Company provides for a general allowance for collectability of $1.63 per share (the “Warrants”) at a combined offering priceservices when recording net sales. The Company has adopted the policy of $1,000 per unit, in a registered direct offering (the “Series C Preferred Offering”). The Series C Preferred Stock includes a beneficial ownership blocker but has no dividend rights (exceptrecognizing net sales to the extent dividendsit expects to collect that amount. Reference FASB 954‑605‑45‑5 and ASU 2011‑07, Health Care Entities: Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debt, and the Allowance for Doubtful Accounts. The change in the allowance for doubtful accounts is directly
38
related to the increase in patient service revenues. The following table presents our reported revenues net of the collection allowance and adjustments for the three and six months ended June 30, 2019 and 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Three Months Ended June 30, | ||||||||||||||||
|
| Revenues, net of |
|
|
|
| ||||||||||||
(dollars in thousands) |
| Contractual Allowances |
| Allowances for doubtful |
|
| ||||||||||||
|
| and adjustments |
| accounts |
| Total | ||||||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||||
Medicaid |
| $ | 9 |
| $ | 11 |
| $ | (9) |
| $ | (12) |
| $ | — |
| $ | (1) |
Medicare |
|
| 450 |
|
| 281 |
|
| (68) |
|
| (42) |
|
| 382 |
|
| 239 |
Self-pay |
|
| 11 |
|
| 20 |
|
| — |
|
| — |
|
| 11 |
|
| 20 |
Third party payers |
|
| 451 |
|
| 219 |
|
| (180) |
|
| (88) |
|
| 271 |
|
| 131 |
Contract diagnostics |
|
| 274 |
|
| 368 |
|
| — |
|
| — |
|
| 274 |
|
| 368 |
|
|
| 1,195 |
|
| 899 |
|
| (257) |
|
| (142) |
|
| 938 |
|
| 757 |
Clinical research grants and other |
|
| 4 |
|
| 60 |
|
| — |
|
| — |
|
| 4 |
|
| 60 |
|
| $ | 1,199 |
| $ | 959 |
| $ | (257) |
| $ | (142) |
| $ | 942 |
| $ | 817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Six Months Ended June 30, | ||||||||||||||||
|
| Revenues, net of |
|
|
|
| ||||||||||||
(dollars in thousands) |
| Contractual Allowances |
| Allowances for doubtful |
|
| ||||||||||||
|
| and adjustments |
| accounts |
| Total | ||||||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||||
Medicaid |
| $ | 12 |
| $ | 23 |
| $ | (12) |
| $ | (23) |
| $ | — |
| $ | — |
Medicare |
|
| 844 |
|
| 415 |
|
| (127) |
|
| (62) |
|
| 717 |
|
| 353 |
Self-pay |
|
| 15 |
|
| 46 |
|
| — |
|
| — |
|
| 15 |
|
| 46 |
Third party payers |
|
| 807 |
|
| 350 |
|
| (322) |
|
| (141) |
|
| 485 |
|
| 209 |
Contract diagnostics |
|
| 427 |
|
| 856 |
|
| — |
|
| — |
|
| 427 |
|
| 856 |
|
|
| 2,105 |
|
| 1,690 |
|
| (461) |
|
| (226) |
|
| 1,644 |
|
| 1,464 |
Clinical research grants and other |
|
| 11 |
|
| 65 |
|
| — |
|
| — |
|
| 11 |
|
| 65 |
|
| $ | 2,116 |
| $ | 1,755 |
| $ | (461) |
| $ | (226) |
| $ | 1,655 |
| $ | 1,529 |
Costs to Obtain or Fulfill a Customer Contract
Sales commissions are also paidexpensed when incurred because the amortization period would have been one year or less. These costs are recorded in operating expenses in the condensed consolidated statements of operations.
Shipping and handling costs are comprised of inbound and outbound freight and associated labor. The Company accounts for shipping and handling activities related to contracts with customers as fulfillment costs which are included in cost of sales in the condensed consolidated statements of operations.
Accounts Receivable
The Company has provided an allowance for potential credit losses, which has been determined based on management’s industry experience. The Company grants credit without collateral to its patients, most of who are insured under third party payer agreements.
39
The following summarizes the common stock). mix of receivables:
|
|
|
|
|
|
|
(dollars in thousands) |
| June 30, 2019 |
| December 31, 2018 | ||
Medicaid |
| $ | 90 |
| $ | 82 |
Medicare |
|
| 770 |
|
| 633 |
Self-pay |
|
| 73 |
|
| 108 |
Third party payers |
|
| 1,852 |
|
| 1,382 |
Contract diagnostic services |
|
| 269 |
|
| 193 |
Other |
|
| — |
|
| — |
|
| $ | 3,054 |
| $ | 2,398 |
Less allowance for doubtful accounts |
|
| (2,171) |
|
| (1,708) |
Accounts receivable, net |
| $ | 883 |
| $ | 690 |
The securities comprisingfollowing table presents the units are immediately separableroll-forward of the allowance for doubtful accounts for the six months ended June 30, 2019.
Allowance for | ||||||
Doubtful | ||||||
(dollars in thousands) | Accounts | |||||
Balance, January 1, 2019 | $ | (1,708) | ||||
Collection Allowance: | ||||||
Medicaid | $ | (12) | ||||
Medicare | (127) | |||||
Third party payers | (322) | |||||
(461) | ||||||
Bad debt expense | $ | (2) | ||||
Total charges | (463) | |||||
Balance, June 30, 2019 | $ | (2,171) |
Customer Revenue and Accounts Receivable Concentration
Customer revenue and accounts receivable concentration amounted to the following for the identified periods.
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
| Six Months Ended |
| ||||
|
| June 30, |
|
| June 30, |
| ||||
|
| 2019 |
| 2018 |
|
| 2019 |
| 2018 |
|
Percentage of net sales by customer: |
|
|
|
|
|
|
|
|
|
|
Customer A |
| 29 | % | 40 | % |
| 26 | % | 44 | % |
Customer B |
| 11 | % | * |
|
| * |
| * |
|
|
|
|
|
|
|
|
|
|
|
|
* represents less than 10% |
|
|
|
|
|
|
|
|
|
|
40
|
|
|
|
|
|
|
|
| June 30, |
|
| December 31, |
|
|
| 2019 |
|
| 2018 |
|
Percentage of total accounts receivable by customer: |
|
|
|
|
|
|
Customer A |
| 28 | % |
| 23 | % |
Customer B |
| * |
|
| * |
|
|
|
|
|
|
|
|
* represents less than 10% |
|
|
|
|
|
|
12. SUBSEQUENT EVENTS
The Company has evaluated events and transactions subsequent to June 30, 2019 through the date the condensed consolidated financial statements were issued separately.and there are no other events to report other than what has been disclosed in the condensed consolidated financial statements.
41
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Forward-Looking Information
This Quarterly Report on Form 10-Q, including this Management’s Discussion and Analysis, contains forward-looking statements. These statements are based on management’s current views, assumptions or beliefs of future events and financial performance and are subject to uncertainty and changes in circumstances. Readers of this report should understand that these statements are not guarantees of performance or results. Many factors could affect our actual financial results and cause them to vary materially from the expectations contained in the forward-looking statements. These factors include, among other things: our expected revenue, income (loss), receivables, operating expenses, supplier pricing, availability and prices of raw materials, insurance reimbursements, product pricing, sources of funding operations, and acquisitions, our ability to raise funds, sufficiency of available liquidity, future interest costs, future economic circumstances, business strategy, industry conditions, our ability to execute our operating plans, the success of our cost savings initiatives, competitive environment and related market conditions, expected financial and other benefits from our organizational restructuring activities, actions of governments and regulatory factors affecting our business, retaining key employees and other risks as described in our reports filed with the Securities and Exchange Commission. In some cases these statements are identifiable through the use of words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “would” or the negative versions of these terms and other similar expressions.
You are cautioned not to place undue reliance on these forward-looking statements. The forward-looking statements we make are not guarantees of future performance and are subject to various assumptions, risks and other factors that could cause actual results to differ materially from those suggested by these forward-looking statements. Actual results may differ materially from those suggested by the forward-looking statements that we make for a number of reasons, including those described in Part II, Item 1A, “Risk Factors,” of this Quarterly Report on Form 10-Q.
We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
The following discussion should be read together with our condensed consolidated financial statements and related notes contained in this Quarterly Report on Form 10-Q and with the audited financial statements, related notes and notes thereto of Precipio DiagnosticsManagement’s Discussion and Analysis included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 contained in our current report on Form 8-K/A,2018, which we filed with the Securities and Exchange Commission (the
Overview
Precipio, Inc., and Subsidiary,its subsidiary, (“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 technology 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 the Yale School of Medicine to capture the expertise, experience and technologies developed within academia so that we can provide a better standard of cancer diagnostics and solve the growing problem of cancer misdiagnosis. We also operate a research and development facility in Omaha, Nebraska which will focus on further development of ICE-COLD-PCR or ICP,(“ICP”), the patented technology which was exclusively licensed by us from Dana-Farber Cancer Institute, Inc., or Dana-Farber, (“Dana-Farber”) at Harvard University.University (“Harvard”). The research and development center will focus on the development of this technology, which we believe will enable us to commercialize other technologies developed by our current and future academic
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partners. Our platform connects patients, physicians and diagnostic experts residing within academic institutions. Launched in 2017, theThe platform facilitates the following relationships:
· | Patients: patients may search for physicians in their area and consult directly with academic experts that are on the platform. Patients may also have access to new academic discoveries as they become commercially available. |
· | Physicians: physicians can connect with academic experts to seek consultations on behalf of their patients and may also provide consultations for patients in their area seeking medical expertise in that physician’s relevant specialty. Physicians will also have access to new diagnostic solutions to help improve diagnostic accuracy. |
· | Academic Experts: academic experts |
Recent Developments
Nasdaq Compliance
On March 26, 2019, we were notified by the platform. Patients may also have access to new academic discoveries as they become commercially available.
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Total Net Sales | $ | 270 | $ | 365 | $ | (95 | ) | (26 | )% |
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Gross (Loss) Profit | $ | (77 | ) | $ | 134 | (29 | )% | 35 | % |
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Total Net Sales | $ | 778 | $ | 1,407 | $ | (629 | ) | (45 | )% |
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Gross (Loss) Profit | $ | (35 | ) | $ | 697 | (5 | )% | 49 | % |
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 wethe Company will realize ourits assets and discharge ourits liabilities in the ordinary course of business. We haveThe Company has incurred substantial operating losses and havehas used cash in ourits operating activities for the past several years. As of SeptemberJune 30, 2017, we2019, the Company had a net loss of $10.7$7.6 million, and negative working capital of $12.6$2.4 million and net cash used in operating activities of $4.9 million. OurThe Company’s ability to continue as a going concern over the next twelve months from the date of issuance of this form 10-Q is dependent upon a combination of achieving ourits business plan, including generating additional revenue, and raising additional financing to meet ourits debt obligations and paying liabilities arising from normal business operations when they come due.
To meet ourits current and future obligations we havethe Company has taken the following steps to capitalize the business and successfully achieve ourits business plan:
· | The Company has entered into a purchase agreement with Lincoln Park (the “LP Purchase Agreement” or “Equity Line”), 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 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 Form 10-Q, we have already received $4.1 million in aggregate, including approximately $1.4 million from the sale of 328,590 shares of common stock to Lincoln Park during 2018, $2.4 million from the sale of 998,076 shares of common stock to Lincoln Park during the six months ended June 30, 2019 and $0.3 million from the sale of 100,000 shares of common stock to Lincoln Park from July 1, |
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September 30, 2017 | December 31, 2016 | Change | |||||||||
Current assets (including cash and cash equivalents of $381 and $51, respectively) | $ | 1,112 | $ | 552 | $ | 560 | |||||
Current liabilities | 13,735 | 3,012 | 10,723 | ||||||||
Working capital | $ | (12,623 | ) | $ | (2,460 | ) | $ | (10,163 | ) |
2019 through the date of issuance of this Form 10-Q, leaving the Company an additional $5.9 million to draw upon in the coming year. |
Notwithstanding the aforementioned circumstances, there remains substantial doubt about ourthe Company’s ability to continue as a going concern.concern over the next twelve months from the date of issuance of this Quarterly Report on Form 10-Q. There can be no assurance that wethe Company will be able to successfully achieve ourits initiatives summarized above in order to continue as a going concern. The accompanying condensed consolidated financial statements have been prepared assuming wethe Company will continue as a going concern and do not include any adjustments that might result should wethe Company be unable to continue as a going concern as a result of the outcome of this uncertainty.
Results of Operations for the Three Months Ended June 30, 2019 and 2018
Net Sales. Net sales were as follows:
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| $ | 757 |
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Net Sales |
| $ | 942 |
| $ | 817 |
| $ | 125 |
| 15 | % |
Net sales for the three months ended June 30, 2019 were approximately $0.9 million, an increase of $0.1 million as compared to the same period in 2018. During the three months ended June 30, 2019, patient diagnostic service revenue had an increase of $0.3 million as compared to the same period in 2018 due to an increase in cases processed. We processed 445 cases during the three months ended June 30, 2019 as compared to 383 cases during the same period in 2018, or a 16% increase in cases. The increase in volume is the result of increased sales personnel. This increase was offset by a decrease of $0.1 million in contract diagnostic service revenue and a decrease of $0.1 million in clinical research grants for the three months ended June 30, 2019 as compared to 2018.
Cost of Sales. Cost of sales includes material and supply costs for the patient tests performed and other direct costs (primarily personnel costs and rent) associated with the operations of our laboratory and the costs of projects related to clinical research grants (personnel costs and operating supplies). Cost of sales was $0.8 million and $0.7 million for the three months ended June 30, 2019 and 2018, respectively. Cost of sales in the current year period, as compared to prior year, included an increase in patient diagnostic costs offset by a decrease in contract diagnostic and clinical grant costs which are in line with the changes in related revenues discussed above.
Gross Loss. Gross loss and gross margins were as follows:
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Gross Profit |
| $ | 172 |
| $ | 175 |
| 18 | % | 21 | % |
Gross margin was 18% of total net sales, for the three months ended June 30, 2019, compared to 21% of total net sales for the same period in 2018. The gross profit was approximately $0.2 million during the three months ended June 30, 2019 and 2018, respectively.
Operating Expenses. Operating expenses primarily consist of personnel costs, professional fees, travel costs, facility costs and depreciation and amortization. Our operating expenses increased by $0.1 million to $2.5 million for the three months ended June 30, 2019 as compared to the same period in 2018. This increase is a result of an increase in selling
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expenses of $0.2 million due to increased headcount partially offset by a decrease of $0.1 million in amortization of acquired intangibles.
Other Income (Expense). Other expense, net was $3.4 million and $0.6 million for the three months ended June 30, 2019 and 2018, respectively, and included expense from warrant and derivative revaluations of $2.4 million and income from warrant and derivative revaluations $0.3 million, respectively, and a loss on issuance of convertible notes of $1.9 million and $0.9 million, respectively. During the three months ended June 30, 2019, the other expense items were partially offset by gains on settlements of liabilities of $1.1 million.
Results of Operations for the Six Months Ended June 30, 2019 and 2018
Net Sales. Net sales were as follows:
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Service revenue, net |
| $ | 1,644 |
| $ | 1,464 |
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Net Sales |
| $ | 1,655 |
| $ | 1,529 |
| $ | 126 |
| 8 | % |
Net sales for the six months ended June 30, 2019 were approximately $1.6 million, an increase of $0.1 million as compared to the same period in 2018. During the six months ended June 30, 2019, patient diagnostic service revenue had an increase of $0.6 million as compared to the same period in 2018 due to an increase in cases processed. We processed 805 cases during the six months ended June 30, 2019 as compared to 523 cases during the same period in 2018, or a 54% increase in cases. The increase in volume is the result of increased sales personnel. This increase was offset by a decrease of $0.4 million in contract diagnostic service revenue and a decrease of $0.1 million in clinical research grants for the six months ended June 30, 2019 as compared to 2018.
Cost of Sales. Cost of sales includes material and supply costs for the patient tests performed and other direct costs (primarily personnel costs and rent) associated with the operations of our laboratory and the costs of projects related to clinical research grants (personnel costs and operating supplies). Cost of sales was $1.4 million and $1.3 million for the six months ended June 30, 2019 and 2018, respectively. Cost of sales in the current year period, as compared to prior year, included an increase in patient diagnostic costs offset by a decrease in contract diagnostic and clinical grant costs which are in line with the changes in related revenues discussed above
Gross Loss. Gross loss and gross margins were as follows:
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Gross Profit (Loss) |
| $ | 210 |
| $ | 199 |
| 13 | % | 13 | % |
Gross margin was 13% of total net sales, for the six months ended June 30, 2019 and 2018, respectively, and the gross profit was approximately $0.2 million during the six months ended June 30, 2019 and 2018, respectively.
Operating Expenses. Operating expenses primarily consist of personnel costs, professional fees, travel costs, facility costs and depreciation and amortization. Our operating expenses decreased by $0.2 million to $4.6 million for the six months ended June 30, 2019 as compared to the same period in 2018. This decrease is a result of a decrease in impairment of goodwill of $0.3 million, a decrease in legal and other professional fees of $0.4 million and a decrease in
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amortization of acquired intangibles of $0.1 million. The decreases were partially offset by a $0.5 million increase in selling, general and administrative personnel costs due to a higher headcount and an increase of $0.1 million in stock compensation costs.
Other Income (Expense). Other expense, net was $2.9 million and $0.6 million for the six months ended June 30, 2019 and 2018, respectively, and included expense from warrant and derivative revaluations of $2.1 million and income from warrant and derivative revaluations $0.6 million, respectively, a loss on issuance of convertible notes of $1.9 million and $0.9 million, respectively, and a loss recorded on settlement of equity instruments of zero and $0.4 million respectively.
During the six months ended June 30, 2019 and 2018, the other expense items were partially offset by gains on settlements of liabilities of $1.3 million and $0.1 million, respectively.
Liquidity and Capital Resources
Our working capital positions were as follows:
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Current assets (including cash of $1,169 and $381 respectively) |
| $ | 2,331 |
| $ | 1,793 |
| $ | 538 |
Current liabilities |
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| 4,750 |
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| 13,765 |
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Working capital |
| $ | (2,419) |
| $ | (11,972) |
| $ | 9,553 |
During the first half of 2019 we received gross proceeds of $2.4 million from sale of 998,076 shares of our common stock, $1.6 million from the exercise of 310,200 warrants and $2.1 million from the issuance of convertible notes. We also converted $7.3 million of convertible notes, including interest, into 2,386,425 shares of our common stock.
Analysis of Cash Flows - Nine– Six Months Ended SeptemberJune 30, 20172019 and 2016
Net Change in Cash and Cash Equivalents.Cash. Cash and cash equivalents increased by $0.3$0.8 million during the ninesix months ended SeptemberJune 30, 2017, compared to a decrease of $0.2 million during the nine months ended September 30, 2016.2019 and 2018, respectively.
Cash Flows Used in Operating Activities. The cash flows used in operating activities of $4.5approximately $4.9 million during the ninesix months ended SeptemberJune 30, 20172019 included a net loss of $10.7$7.6 million, an increase in accounts receivable of $0.7 million, a decrease in accrued expenses and other liabilitiesaccounts payable of $1.1$1.3 million and an increasea decrease in accounts receivableoperating lease liabilities of $0.1 million. These were partially offset by an increase in accounts payableaccrued expenses and other liabilities of $0.5$0.1 million, a decrease in inventories of $0.2 million and non-cash adjustments of $5.9$4.5 million. The non-cash adjustments to net loss include, among other things, depreciation and amortization, changes in provision for losses on doubtful accounts, warrant and derivative revaluations, stock based compensation, gains on settlements of liabilities and losses on the issuance of convertible notes. The cash flows used in operating activities in the first ninesix months of 2016ended June 30, 2018 included the net loss of $1.3$5.3 million and an increase in accounts receivable of $0.2 million and a decrease in accrued expenses and other liabilities of $0.3 million. These were partially offset by an increasea decrease in accounts payable, accrued expenses and other liabilitiesassets of $0.5$0.2 million and non-cash adjustments of $0.5$2.0 million.
Cash Flows Provided byUsed In Investing Activities. Cash flows provided byused in investing activities were $0.1 million$30,000 and zero$44,000 for the ninesix months ended SeptemberJune 30, 20172019 and 2016, respectively. The $0.1 million for the nine months ended September 30, 2017 was cash acquired as part2018, respectively, resulting from purchases of the merger transaction.property and equipment.
Cash Flows Provided by Financing Activities. Cash flows provided by financing activities totaled $4.7$5.7 million for the ninesix months ended SeptemberJune 30, 2017,2019, which included proceeds of $0.3$2.4 million from the issuance of senior notes, $1.4common stock, $1.6 million from the exercise of warrants and $2.1 million from the issuance of convertible notes and $5.4 million from the issuance of preferred stock.notes. These proceeds were partially offset by payments on our long-term debt of $0.8 million, payments on our convertible bridge notes of $1.5$0.2 million and payments of capitalfor our finance lease obligations and deferred financing costs of $0.1$0.2 million. Cash flows provided by financing activities duringtotaled $3.3 million for the ninesix months ended SeptemberJune 30, 20162018, which included proceeds of $0.6 million from the issuance of common stock, $0.3 million from the issuance of long-term debt, $1.7 million from the issuance of convertible notes and other debtproceeds of $1.1 million from the exercise of
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warrants. These were partially offset by $0.1 million of payments on our long-term debt of $0.2 million and payments for our capital lease obligations and for deferred financing costs.costs of $0.2 million
Off-Balance Sheet Arrangements
At each of
Contractual Obligations and Commitments
No significant changes to unaudited condensed consolidated financial statements for additional information regarding our contractual obligations and commitments
Critical Accounting Policies and Estimates
Accounting policies used in the preparation of our financial statements may involve the use of management judgments and estimates. Certain of our accounting policies are considered critical as they are both important to the portrayal of our financial statements and require significant or complex judgments on the part of management. Our judgments and estimates are based on experience and assumptions that we believe are reasonable under the circumstances. Further, we evaluate our judgments and estimates from time to time as circumstances change. Actual financial results based on judgments or estimates may vary under different assumptions or circumstances. For additional information regarding ourOur critical accounting policies and estimates, see the accompanying unaudited condensed consolidated financial statements and Note 2 - “Summary of Significant Accounting Policies”are discussed in the Notes to unaudited condensed consolidated Financial Statements and Note 1 of the audited financial statements and notes thereto of Precipio Diagnosticsour Annual Report on Form 10-K for the fiscal year ended December 31, 2016 contained in our current report on Form 8-K/A,2018, filed with the Securities and Exchange Commission (the “SEC”) on July 31, 2017.
Recently Issued Accounting Pronouncements
See the accompanying unaudited condensed consolidated financial statements and Note 2 - “Summary of Significant Accounting Policies” in the Notes to unaudited condensed financial statements for additional information regarding recently issued accounting pronouncements.
Impact of Inflation
We do not believe that price inflation or deflation had a material adverse effect on our financial condition or results of operations during the periods presented.
Item 3. Quantitative and Qualitative Disclosures AboutDisclosure about Market Risk
We are a smaller reporting company, as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended, and are not required to provide the information required under this item.
As of the end of the period covered by this Quarterly Report on Form 10-Q, management performed, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluatedan evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of September 30, 2017. Our management recognizes that neither our disclosure controls and procedures nor our internal controls over financial reporting will prevent all fraud and material error.the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the “SEC”), and that such information is accumulated and communicated to management including our Chief Executive Officer and our Chief Financial Officer, to allow timely decisions regarding required disclosures. In
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designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving our objectives. Further, the design of adesired control system must reflect the fact that there are resource constraints,objectives, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls and procedures can provide absolute assurance that all control issues and instances of fraud, if any, within the Companya company have been detected. The designManagement is required to apply its judgment in evaluating the cost-benefit relationship of any system ofpossible controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.procedures. Based on the evaluation, of our disclosure controls and procedures as of September 30, 2017, ourthe Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are notwere effective at a reasonable assurance level.
Changes in Internal Control over Financial Reporting
We have evaluated the changes in our internal control over financial reporting that occurred during the three months ended SeptemberJune 30, 20172019 and concluded that there have not been any changes that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
On February 21, 2017, XIFIN, Inc. (“XIFIN”) filed a lawsuit against us in the District Court for the Southern District of California alleging breach of written contract and seeking recovery of approximately $0.27 million owed by us to XIFIN for damages arising from a breach of our obligations pursuant to a Systems Services Agreement between us and XIFIN, dated as of February 22, 2013, as amended and restated on September 1, 2014. A liability of $0.1 million was reflected in accounts payable within the accompanying unaudited condensed consolidated financial statementsbalance sheet at December 31, 2018. On April 19, 2019, the Company executed a settlement agreement with XIFIN pursuant to which the Company paid to XIFIN an agreed amount of $40,000 as settlement in consideration for total release from all outstanding amounts due and Note 8 - “Contingencies”payable by the Company to XIFIN. The settlement amount was paid in full by the Company on April 19, 2019.
CPA Global provides us with certain patent management services. On February 6, 2017, CPA Global claimed that we owe 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 June 30, 2019 and December 31, 2018.
On February 17, 2017, Jesse Campbell (“Campbell”) filed a lawsuit individually and on behalf of others similarly situated against us in the NotesDistrict Court for the District of Nebraska alleging we had a materially incomplete and misleading proxy relating to unauditeda potential merger and that the merger agreement’s deal protection provisions deter superior offers. As a result, Campbell alleges that we have violated Sections 14(a) and 20(a) of the Exchange Act and Rule 14a‑9 promulgated thereafter. The Company filed a motion to dismiss all claims, which motion was fully briefed on November 27, 2017. The Court granted the Company’s motion in full on May 3, 2018 and dismissed the lawsuit. The Eighth Circuit reversed the decision of the District Court and remanded the case back to the District Court. The parties filed a notice with the Court on May 22, 2019, announcing that they had reached a settlement in principle. 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], which will be primarily funded by our insurance. On July 10, 2019, the Court entered an order preliminarily approving the settlement. The settlement remains subject to final approval by the Court. The Company’s insurance policy includes a deductible of approximately $0.8 million and the Company has previously paid approximately $0.5 million in legal fees in connection with the litigation which have been applied to the deductible, leaving approximately $0.3 million to be paid by the Companyand approximately $1.7 million to be paid by the insurance company. A liability of approximately $0.3 million has been recorded and is reflected in accrued expenses within the accompanying condensed consolidated financial statementsbalance sheets at June 30, 2019.
On March 21, 2018, Bio-Rad Laboratories filed a lawsuit against us in the Superior Court Judicial Branch of the State of Connecticut for additional information regarding legal proceedings.Summary Judgment in Lieu of Complaint requiring us to pay cash owed to Bio-Rad in the amount of $39,000 that was recorded in accounts payable within the accompanying condensed consolidated balance sheet at December 31, 2018. Subsequently, the obligation was paid in full during the second quarter 2019 resulting in no remaining amount due to Bio-Rad as of the filing of this Quarterly Report on Form 10-Q.
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
49
applicable government laws and regulations. While no material regulatory inquiries have been made, compliance 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.
As disclosed in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018, there are a number of risks and uncertainties that may have a material effect on the operating results of our business and our financial condition. The following information updates, and should be read in conjunction with, the factors discussed in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016,2018, which could materially affect our business, financial condition or future results. The risks described in this Quarterly Report and our Annual Report on Form 10-K as updated in our Quarterly Report for the quarter ended June 30, 2017 and this Quarterly Report, are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results.
We have incurred losses since our inception and expect to incur losses for the foreseeable future. We cannot be certain that we will achieve or sustain profitability.
We have incurred losses since our inception and expect to incur losses in the future. As of SeptemberJune 30, 2017 and December 31, 2016, we have an accumulated total deficit of approximately $21.5 million and $10.8 million, respectively. For the nine months ended September 30, 2017 and the fiscal year ended December 31, 2016,2019, we had a net loss and comprehensive loss attributable to common stockholders of approximately $19.8$7.6 million, negative working capital of $2.4 million and $4.1 million, respectively.net cash used in operating activities of $4.9 million. To date, we have experienced negative cash flow from development of our diagnostic technology, as well as from the costs associated with establishing a laboratory and building a sales force to market our products and services. We expect to incur substantial net losses for the foreseeable future to further develop and commercialize our diagnostic technology. We also expect that our selling, general and administrative expenses will continue to increase due to the additional costs associated with market development activities and expanding our staff to sell and support our products. Our ability to achieve or, if achieved, sustain profitability is based on numerous factors, many of which are beyond our control, including the market acceptance of our products, competitive product development and our market penetration and margins. We may never be able to generate sufficient revenue to achieve or, if achieved, sustain profitability.
Because of the numerous risks and uncertainties associated with further development and commercialization of our diagnostic technology and any future tests, we are unable to predict the extent of any future losses or when we will become profitable, if ever. We may never become profitable and you may never receive a return on an investment in our securities. An investor in our securities must carefully consider the substantial challenges, risks and uncertainties inherent in the development and commercialization of tests in the medical diagnostic industry. We may never successfully commercialize our diagnostic technology or any future tests, and our business may fail.
We will need to raise substantial additional capital to commercialize our diagnostic technology, and our failure to obtain funding when needed may force us to delay, reduce or eliminate our product development programs or collaboration efforts or force us to restrict or cease operations.
As of SeptemberJune 30, 2017,2019, our cash balance was $0.4$1.2 million and our working capital was approximately negative $12.6$2.4 million. Due to our recurring losses from operations and the expectation that we will continue to incur losses in the future, we will be required to raise additional capital to complete the development and commercialization of our current product candidates and to pay off our obligations. To date, to fund our operations and develop and commercialize our products, we have relied primarily on equity and debt financings. When we seek additional capital, we may seek to sell additional equity and/or debt securities or to obtain a credit facility, which we may not be able to do on favorable terms, or at all. Our ability to obtain additional financing will be subject to a number of factors, including market conditions, our operating performance and investor sentiment. If we are unable to raise additional capital when required or on acceptable terms, we may have to significantly delay, scale back or discontinue the development and/or commercialization of one or more of our product candidates, restrict or cease our operations or obtain funds by entering into agreements on unattractive terms.
We will need to obtain stockholder approval of the shares issued and issuable in our November 2017 registered direct offering before we can raise additional capital.
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We have filed a proxy statement under Section 14(a) of the Exchange Act or information statement pursuant to Section 14(c) of the Exchange Act with the SEC and obtained approval of our November 2017 registered direct offering from our stockholders, or the Stockholder Approval, including approval of issuances in excess of the maximum number of shares issuable under the rules and regulations of the Nasdaq Capital Market. In addition, pursuant to the placement agency agreement for our November 2017 registered direct offering, or the November Offering, we have agreed, until the later of (i) 90 days after the closing date of the November Offering, and (ii) the date on which Stockholder Approval has been obtained, not to issue, enter into any agreement to issue or announce the issuance or proposed issuance of any shares of common stock or securities convertible or exercisable into common stock, subject tohad certain exceptions; provided that the foregoing restriction under the placement agency agreement will lapse at such time as each holder of Series C Preferred Stock owns less than 20% of the number of shares of Series C Preferred Stock originally purchased in the November Offering and less than 20% of the warrants (based on the number of shares underlying the warrants) originally purchased in the November Offering. If we are not able to obtain Stockholder Approval or a waiver of the foregoing restriction under the placement agency agreement, we will not be able to raise additional capital and we may have to significantly delay, scale back or discontinue the development and/or commercialization of onecustomers whose revenue individually represented 10% or more of our product candidatestotal revenue, or restrictwhose accounts receivable balances individually represented 10% or ceasemore of our operations.
For the three months ended June 30, 2019, two customers represented approximately 40% of our total revenue and for the three months ended June 30, 2018 one customer accounted for 40% of our total revenue. For the six months ended June 30, 2019 and 2018, one customer accounted for 26% and 44% of our total revenue, respectively. We expect to maintain the relationship with these customers, however, the loss of, or significant decrease in demand from, any of our top customers could have identifieda material weaknessesadverse effect on our business, results of operations and financial condition.
At June 30, 2019 and December 31, 2018, one customer accounted for 28% and 23% of our total accounts receivable, respectively. The business risks associated with this concentration, including increased credit risks for this and other customers and the possibility of related bad debt write-offs, could negatively affect our margins and profits. Additionally, the loss of any of our top customers, whether through competition or consolidation, or a disruption in our internal control over financial reporting thatsales to such a customer, could if not remediated, result in material misstatements in our financial statements.
If we cannot continue to successfully remediate these material weaknessessatisfy Nasdaq listing maintenance requirements and if we are unable to produce accurate and timely financial statements,other rules, our common stock price may be materially adversely affected anddelisted, which could negatively impact the price of our securities.
Although our common stock is listed on the Nasdaq Capital Market, we may be unable to maintain compliance with applicable stock exchangecontinue to satisfy the listing requirements. Effective internal controls are necessary for us to produce reliable financial reportsmaintenance requirements and are important to helping prevent financial fraud.rules. If we cannot provide reliable financial reportsare unable to satisfy the Nasdaq Stock Market, or prevent fraud,Nasdaq, criteria for maintaining our business and operating resultslisting, our securities could be harmed, investors could lose confidencesubject to delisting.
On March 26, 2019, we were notified by the Listing Qualifications Staff of The Nasdaq Stock Market LLC that we did not meet the minimum closing bid price requirement of $1 for continued listing, as set forth in Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Requirement”). On April 25, 2019 we filed the Certificate of Amendment with the Secretary of State of Delaware, pursuant to which we effected a 1-for-15 reverse stock split (the “Reverse Stock Split”) of our reported financial information,issued and the trading priceoutstanding common stock. The Reverse Stock Split became effective as of 5:00 p.m. (Eastern Time) on April 26, 2019, and our common stock could drop significantly.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
None.
(a) | Exhibits |
31.1 | |||
31.2 | |||
32.1* | |||
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32.2* | |||
101.INS | XBRL Instance Document | ||
101.SCH | XBRL Taxonomy Extension Schema Document | ||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | ||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | ||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | ||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | ||
*This certification is not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Registrant specifically incorporates it by reference
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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.
PRECIPIO, INC. | |||
Date: August 9, 2019 | By: | /S/ ILAN DANIELI | |
Ilan Danieli | |||
Chief Executive Officer (Principal Executive | |||
Date: August 9, 2019 | By: | / | |
Carl Iberger | |||
Chief Financial Officer (Principal Financial | |||
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