UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

Commission file number 000-56008

PREDICTIVE TECHNOLOGY GROUP, INC.

(Exact name of registrant as specified in its charter)

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

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

Indicate by check mark whether the registrant has submitted electronically 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] No [  ]

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

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

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

The number of shares of Predictive common stock outstanding as of February 14, 202015, 2021 was 295,936,766.299,596,808.

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PREDICTIVE TECHNOLOGY GROUP, INC.

QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 20192020

INDEX

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PART I - FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

PREDICTIVE TECHNOLOGY GROUP, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

 See accompanying notes 

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PREDICTIVE TECHNOLOGY GROUP, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE LOSS

See accompanying notes

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PREDICTIVE TECHNOLOGY GROUP, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Continued)

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PREDICTIVE TECHNOLOGY GROUP, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

The following is a summary of supplemental cash flow activities:

See accompanying notes

(Concluded)

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PREDICTIVE TECHNOLOGY GROUP, INC.

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UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’STOCKHOLDERS' EQUITY

See accompanying notes

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1- BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES

BUSINESS DESCRIPTION:

Predictive Technology Group, Inc., together with its subsidiaries (collectively, “PTG”, “Predictive”"PTG" or the “Company”"Company"), develops and commercializes discoveries and technologies involved in novel molecular diagnostic, therapeutic, and Human Cellular and Tissue-Based Products (“("HCT/Ps”Ps"). The Company uses this information as the cornerstone in the development of new diagnostics that assess a person’sperson's risk of disease and develop pharmaceutical therapeutics and HCT/Ps for use by healthcare professionals to improve outcomes in their patients.  The Company’sCompany's corporate headquarters are located in Salt Lake City, Utah.

SEGMENT INFORMATION:

Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker (CODM) in making decisions regarding resource allocation and assessing performance.  The Company operates in two reportable segments, which are differentiated by product.  The HCT/P segment offers minimally manipulated tissue products intended for homologous use, prepared utilizing proprietary extraction methods that reduce the loss of important scaffolding, growth factors and cytokines.  The Company’sCompany's Diagnostics and Therapeutics segment uses data analytics for disease identification and subsequent therapeutic intervention through novel gene-based diagnostics, and companion therapeutics. Lastly, the “Unallocated Corporate”"Unallocated Corporate" column in the table below represents those headquarters activities that do not qualify as operating segments and which are not allocated to operating segments in information provided to the CODM. We currently operate and sell our products exclusively in the United States.

During the fourth quarter of 2019, we realigned our segment reporting to separately present headquarters costs inSegment information available to the CODM.  The presentation of the comparative information has been recast to conform to the 2019 presentation.

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Segment revenue and operating income (loss)werewas as follows during the periods presented:

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BASIS OF PRESENTATION:

The accompanying condensed consolidated financial statements have been prepared by Predictive Technology Group, Inc. (the “Company” or “Predictive”) in accordance with U.S. generally accepted accounting principles (“GAAP”("GAAP") for financial information and pursuant to the applicable rules and regulations of the Securities and Exchange Commission (“SEC”("SEC"). The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries.  All intercompany accounts and transactions have been eliminated in consolidation. In the opinion of management, the accompanying financial statements contain all adjustments (consisting of normal and recurring accruals) necessary to present fairly all financial statements in accordance with U.S. GAAP.  

The condensed consolidated financial statements herein should be read in conjunction with the Company’sCompany's audited consolidated financial statements and notes thereto for the fiscal year ended June 30, 2019,2020, included in the Company’sCompany's Annual Report on Form 10-K for the fiscal year ended June 30, 2019.2020. Operating results for the three and six months ended December 31, 20192020 may not necessarily be indicative of results to be expected for any other interim period or for the full fiscal year.

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Fiscal YearEnd

The Company operates on a fiscal year basis with the fiscal year ending on June 30.

Consolidation

These consolidated financial statements include the financial statements of Predictive Technology Group, Inc. and its wholly owned subsidiaries.  All inter-company accounts and transactions have been eliminated in consolidation. 

Cash Equivalents

The Company considers all highly-liquid investments with a maturity of three months or less, when purchased, to be cash equivalents.  The Company places its temporary cash investments with high-quality financial institutions.  

Going Concern

The accompanying condensed consolidated financial statements have been prepared under the assumption that the Company will continue to operate as a going concern, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts of liabilities that may result from any inability of the Company to continue as a going concern.

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The Company incurred a net loss attributable to common stockholders of $33,867,276$22,564,865 and net cash outflows from operations of $2,972,152 for the six months ended December 31, 2019 and net cash outflows from operations of $9,914,968.2020. At December 31, 2019,2020, the Company had $255,502$134,376 of cash and negative working capital of $4,861,267.$23,020,768. The Company's historical and current use of cash in operations combined with limited liquidity resources raise substantial doubt regarding the Company’sCompany's ability to continue as a going concern. Management may seek additional capital through debt financings, collaborative or other funding arrangements with partners, sale of assets, or through other sources of financing. Should the Company seek additional financing from outside sources, the Company may not be able to raise such financing on terms acceptable to the Company or at all.all to mitigate the substantial doubt that exists. If the Company is unable to raise additional capital when required or on acceptable terms, this could have a material adverse effect on liquidity. In such a case, the Company may be required to scale back or to discontinue the promotion of currently available products, scale back or discontinue the advancement of product candidates, reduce headcount, file for bankruptcy, reorganize, merge with another entity, or cease operations.

Trade Accounts Receivable and Allowance for Doubtful Accounts

Trade accounts receivable are primarily comprised of amounts due from sales of the Company’sCompany's HCT/P products and sales of medical diagnostic testing services that are recorded at the invoiced amount, andas well as deposits in transit from credit card processors. The allowance for doubtful accounts is based on the Company’sCompany's best estimate of the amount of probable losses in the Company’sCompany's existing accounts receivable, which is based on historical write-off experience, customer creditworthiness, facts and circumstances specific to outstanding balances, and payment terms. Account balances are charged against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance-sheet credit exposure related to its customers and does not require collateral.

Inventories

Inventories consist primarily of HCT/Ps produced by Predictive Biotech, Inc. ("Predictive Biotech"), a wholly owned subsidiary and laboratory supplies used in genetic testing performed by Predictive Laboratories, Inc. ("Predictive Labs") and HCT/Ps produced by Predictive Biotech, Inc. ("Predictive Biotech"). We value inventory at the lower of cost or net realizable value. We determine the cost of inventory using the standard cost method, which approximates actual cost based on a first-in, first-out method.  All other costs, including administrative costs, are expensed as incurred.

We analyze our inventory levels at least quarterly and write down inventory that has a cost basis in excess of its expected net realizable value, or that is considered in excess of normal operating levels, as determined by management.  We also reserve for the quantity of quarantined (WIP) inventory that is not expected to pass quality control based on historical averages. The related costs are recognized as cost of goods sold in the condensed consolidated statements of operations.

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Stock Subscriptions Receivable

Stock subscriptions are recorded as contra-equity on the day the subscription agreement is signed and accepted by the Company.  As of December 31, 2019 and June 30, 2019, all stock subscribed has been fully paid. 

Prepaid Expenses

Amounts paid in advance for expenses are accounted for as prepaid expenses and classified as current assets if such amounts are to be recognized as expense within one year from the balance sheet date.

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Property, Plant and Equipment

Lab equipment, furniture and computer equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method based on the lesser of estimated useful lives of the related assets or the underlying lease term. Lab equipment items have depreciable lives of 5 years, furniture items have depreciable lives of 5 to 7 years, and computer equipment items have depreciable lives of 3 years. Repair and maintenance costs are charged to expense as incurred. Amortization of assets recorded under finance leases is included in depreciation expense.

The Company reviews property and equipment for impairment. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of these assets is measured by comparison of their carrying amounts to future undiscounted cash flows the assets are expected to generate. If property and equipment are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the assets exceeds its fair market value.

Leases

We have entered into operating and finance lease agreements primarily for office and laboratory facilities and laboratory equipment located in Salt Lake City, Utah with lease periods expiring between 20202021 and 2022.2023.

We determine if an arrangement is a lease at inception. For all classes of underlying assets, we elect not to recognize right of use assets or lease liabilities when a lease has a lease term of 12 months or less at the commencement date and does not include an option to purchase the underlying asset that we are reasonably certain to exercise. Operating lease assets and liabilities are included on our consolidated balance sheet beginning July 1, 2019. Finance lease assets are included in property, plant, and equipment, net.

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Operating lease assets and liabilities are recognized at the present value of the future lease payments at the lease commencement date. The interest rate used to determine the present value of the future lease payments is our incremental borrowing rate, because the interest rate implicit in most of our leases is not readily determinable. Our incremental borrowing rate is estimated to approximate the interest rate on a collateralized basis with similar terms and payments, and in economic environments where the leased asset is located. Operating lease assets also include any prepaid lease payments and lease incentives. Our lease terms include periods under options to extend or terminate the lease when it is reasonably certain that we will exercise that option. We generally use the base, non-cancelable, lease term when determining the lease assets and liabilities. Operating lease expense is recognized on a straight-line basis over the lease term.

Our lease agreements generally contain lease and non-lease components. Non-lease components primarily include payments for maintenance and utilities. We combine fixed payments for non-lease components with our lease payments and account for them together as a single lease component, which increases the amount of our lease assets and liabilities.together.

Intangible Assets and Other Long-Lived Assets

Intangible and other long-lived assets are comprised of acquired patents, licenses, trade secrets and other intellectual property.  Acquired intangible assets are recorded at fair value and amortized over the shorter of the contractual life or the estimated useful life.

The Company reviews definite-lived intangible assets for impairment. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of these assets is measured by comparison of their carrying amounts to future undiscounted cash flows the assets are expected to generate. If identifiable intangibles are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the assets exceeds its fair market value.

Indefinite-lived intangible

As of June 30, 2020, the Company had identified indicators of impairment for certain of its long-lived assets not subjectfor certain of its long-lived assets and performed an impairment test related to amortization are reviewedthose long-lived assets. An impairment charge of $10,041,556 was recorded related to assets acquired with Regenerative Medical Technologies, Inc. (see Note 3).

In October 2020, the Company stopped selling its CoreCyte product in connection with the decision to accelerate the Company's previously existing plan to file an Investigational New Drug (IND) application for impairment annually, typically atCoreCyte with the beginningFDA. The Company submitted documentation to begin the process of filing the IND on October 30, 2020, in which CoreCyte is indicated for the treatment of osteoarthritis of the fourth fiscal quarter, or wheneverknee. On December 29, 2020, the FDA completed the Pre-IND meeting. As the sequence of events or changesthat led to this decision began with the receipt of a Warning Letter from the FDA in circumstances indicateAugust 2020, it was determined that the carrying valuedecision to stop selling CoreCyte was an indicator of an asset may not be recoverable.  Such eventsimpairment as of September 30, 2020.  Impairment charges of $0 and circumstances may include sweeping regulatory changes, shifts in market demand that would negatively impact revenue, overall industry deterioration, dramatic increase$1,760,875 were recognized related to the trade secrets in the number of competitors, rapidly increasing costs related to production inputs, significant changesHCT/P segment in Company management or Company strategy, or significant litigation.  The Company first assesses qualitative factors above to determine whether it is necessary to perform the quantitative impairment test to identify any impairment loss.three and six months ended December 31, 2020, respectively (see Note 3).   There were no impairments for the three and six months ended December 31, 2019.

Recoverability of assets to be held and used is measured by a comparison

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Additional delays in the commercial launch of the carrying amount of an asset or asset group to estimated future undiscounted net cash flows, or fair value,Company's diagnostic products such as those that may result from a prolongation of the related asset or group of assets over their remaining lives.  COVID-19 pandemic would adversely affect our business and potentially lead to additional impairment charges in the future.

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Certain of the Company’sCompany's patents are currently subject to litigation (see Note 14)11) to determine whether the seller of the patents had satisfactoryfaithfully represented the nature of their ownership of patents that were sold to the Company. The seller of the patents represented that all rights, title, and interest to the patents was transferred to the Company as part of the sale.  However, the Company and its patent counsel have identified information in the US Patent and Trademark Office's (USPTO's) registry that calls into question whether the seller of the patents had all rights, title, and interest in the patents when they were then sold to the Company. The Company raised these concerns with the seller of the patents but was unable to secure clear and satisfactory proof on a voluntary basis. These patents have a carrying value of $6,468,137$5,726,034 on our condensed consolidated balance sheet as of December 31, 2019.2020. While there is some question as to whether the litigation is in its early stages and may reach a broad range of possible outcomes,Company has full title to these patents, we believe that we have at least partial ownership and can develop products based on the patents.

Revenue Recognition

We derive our revenue primarily from two sources.  One source is the sales of HCT/P products to clinicians. The majority of our contracts with customers have a single performance obligation, and all of our contracts with customers have a duration of less than one year. Revenue is recognized when control of the product passes to the customer, typically upon confirmation of delivery of the product to the customer. As our products must remain frozen during transit, we typically ship our products overnight. Revenue is recognized in an amount that reflects the expected consideration to be received in exchange for such goods or services. As such, customer orders are recorded as deferred revenue prior to delivery of products or services ordered.

The other source of revenue is from the sale of our Assurance VR™ COVID-19 RT-PCR test.  Our contracts with customers have a single performance obligation, and all of our contracts with customers have a duration of less than one year. Revenue is recognized when a valid test result is passed to the customer, which is done electronically.  Revenue is recognized in an amount that reflects the expected consideration to be received in exchange for test results. 

Generally, we require authorization from a credit card or verification of receipt of payment before we ship products to customers for HCT/P related revenues. From time to time we grant credit to these customers with normal credit terms (typically 30 days). For Assurance VR™ COVID-19 RT-PCR test related revenues we typically send an invoice the same or next day once valid test results have been sent electronically.  Payment terms are based on normal credit terms (typically 10 to 30 days).  We do not recognize assets associated with costs to obtain or fulfill a contract with a customer, as the amortization period for any such costs if capitalized would be one year or less.

Shipping and handling is considered a fulfillment activity, as it takes place prior to the customer obtaining control of the product, and fees charged to customers are included in net revenue upon completion of our performance obligation. Shipping and handling expenses are included in cost of sales. We present revenue net of sales taxes, discounts, and expected returns.

Goodwill

In October 2020, the Company stopped selling its CoreCyte product in connection with the decision to accelerate the Company's previously existing plan to file an Investigational New Drug (IND) application for CoreCyte with the FDA. The Company submitted documentation to begin the process of filing the IND on October 30, 2020, in which CoreCyte is indicated for the treatment of osteoarthritis of the knee. On December 29, 2020, the FDA completed the Pre-IND meeting. As the sequence of events that led to this decision began with the receipt of a Warning Letter from the FDA in August 2020, it was determined that it is at least reasonably possible that the patents may become impaireddecision to stop selling CoreCyte was an indicator of impairment as of September 30, 2020.  Impairment charges of $0 and $5,254,451 were recognized related to the goodwill in the near term depending onHCT/P segment in the information gained duringthree and six months ended December 31, 2020, respectively (see Note 3).   There were no impairment charges for the legal discovery processthree and six months ended December 31, 2019.

Equity Method Investment

We apply the outcomeequity method of the litigation.

accounting for investments in which we have significant influence but not a controlling interest. The Company reviews equity method investments for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment may not be recoverable in accordance with generally accepted accounting principles. This determination requires significant judgment. In making this judgment, the Company considers available quantitative and qualitative evidence in evaluating potential impairment of these investments. If it is determined that an indicator of impairment exists, the Company assesses whether the carrying value exceeds the fair value of the asset. If the carrying value of the investment exceeds its fair value, the Company will evaluate, among other factors, general market conditions, the duration and extent to which the carrying value is greater than the fair value, and the Company’sCompany's intent and ability to hold, or plans to sell, the investment. The Company also considers specific adverse conditions related to the financial health of and business outlook for the investee, including industry and sector performance, changes in technology, and operational and financing cash flow factors. Once a decline in fair value is determined to be other-than-temporary, an impairment charge will be recorded and a new carrying basis in the investment will be established. The Company recorded an impairment charge of $15,932,016charges totaling $37,907,283 related to our equity method investment in Juneau Biosciences, LLC for the year ended June 30, 2020 (see Note 7)4). There were no impairments for the three and six months ended December 31, 2020.  The Company recorded an impairment loss of $15,932,106 for the three and six months ended December 31, 2019.

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Revenue RecognitionPaycheck Protection Program Loan

We derive our revenue primarily

On May 6, 2020, Company received loan proceeds of $1,665,985 under the Paycheck Protection Program ("PPP") under a promissory note from sales of HCT/P products to clinicians.a commercial bank (the "PPP Loan"). The majority of our contracts with customers have a single performance obligation, and all of our contracts with customers have a duration of less than one year. Revenue is recognized when controlPPP, established as part of the product passesCARES Act, provides for loans to qualifying businesses for amounts up to 2.5 times the customer, typically upon confirmation of deliveryaverage monthly payroll expenses of the product toqualifying business. As amended, the customer. As our products must remain frozen during transit, we typically ship our products overnight. Revenue is recognized in an amountCARES act provides that reflects the expected consideration to be received in exchange for such goods or services. As such, customer ordersloans and accrued interest are recordedforgivable after twenty-four weeks as deferred revenue prior to delivery of products or services ordered.

Generally, we require authorization from a credit card or verification of receipt of payment before we ship products to customers. From time to time we grant credit to our customers with normal credit terms (typically 30 days). We do not recognize assets associated with costs to obtain or fulfill a contract with a customer,long as the amortization periodborrower uses the loan proceeds for any such costs if capitalized would be one yeareligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The PPP Loan is included in notes payable in the condensed consolidated balance sheets. Should all or less.

Shipping and handling is considered a fulfillment activity, as it takes place prior to the customer obtaining controlpart of the product, and fees charged to customers are includedPPP Loan be forgiven, the amount forgiven will be derecognized through other income in net revenue upon completion of our performance obligation. Shipping and handling expenses are included in cost of sales. We present revenue net of sales taxes, discounts, and expected returns.the period when forgiveness is granted by the governing authority.

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Deferred Revenue

We recognize a contract liability when customer payment precedes the completion of our performance obligations.

The following table provides information about deferred revenue from contracts with customers, including significant changes in deferred revenue balances during the period (in thousands).period.

Research and Product Development Costs

The Company expenses research and product development costs as incurred.

Product Liability and Warranty Costs

The Company maintains product liability insurance and has not experienced any related claims from its product offerings. The Company also offers a warranty to customers providing that its products will be delivered free of any material defects.  There have been no material costs incurred since inception based on estimated return rates.  The Company reviews the adequacy of its accrual on a quarterly basis.

Share-Based Compensation

The Company issues share-based compensation awards in the form of stock option grants. We use the Black-Scholes-Merton option pricing model to estimate the fair value of options granted under our equity incentive plans. The Black-Scholes-Merton option valuation model requires the use of assumptions, including the expected term of the award and the expected share price volatility. The Company uses the "simplified" method to estimate the expected option term. Stock-based compensation is measured at the grant date for all stock-based awards made to employees and non-employees based on the fair value of the awards. Stock-based compensation is recognized as expense on a straight-line basis over the requisite service period, which is generally the vesting period.

The estimated fair value of performance-contingent equity awards is expensed using an accelerated method over the term of the award once we have determined that it is probable that performance milestones will be achieved. Compensation expense for equity awards that contain performance conditions is based on the grant date fair value of the award. Compensation expense is recorded over the requisite service period based on management's best estimate as to whether it is probable that the shares awarded are expected to vest. We assess the probability of the performance milestones being met on a continuous basis.

Income Taxes

In order to determine the Company’sCompany's quarterly provision for income taxes, the Company uses an estimated annual effective tax rate that is based on expected annual income and applicable federal and state tax rates.  Deferred tax assets and liabilities are recorded to reflect the future tax consequences attributable to the effects of differences between the carrying amounts of existing assets and liabilities for financial reporting and for income tax purposes. Deferred taxes are calculated by applying enacted statutory tax rates and tax laws to future years in which temporary differences are expected to reverse. The impact on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that the rate change is enacted.  

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Other Comprehensive Loss

Comprehensive loss is comprised of net loss and other comprehensive loss. Other comprehensive loss is equal to net loss for the three and six months ended December 31, 20192020 and 2018.2019.

Measurement of Fair Value

The fair value of a financial instrument is the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. Fair value measurements do not include transaction costs. A fair value hierarchy is used to prioritize the quality and reliability of the information used to determine fair values.  Categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is defined in the following three categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market-based inputs or inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

During the three and six months ended December 31, 20192020 and 2018,2019, we did not have any remeasurements of non-financial assets measured at fair value on a non-recurring basis subsequent to their initial recognition.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the reporting periods.  Key estimates in the accompanying unaudited condensed consolidated financial statements include, among others, revenue recognition, allowances for doubtful accounts and product returns, provisions for obsolete inventory, valuation of long-lived assets, and deferred income tax asset valuation allowances.  Actual results could differ materially from these estimates.

Recently Issued Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, “Financial"Financial Instruments – Credit Losses (Topic 326)”" which introduces new guidance for the accounting for credit losses on instruments within its scope. The new guidance as amended by subsequent ASUs, introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. For trade receivables, the Company will be required to use a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses which reflects losses that are probable. For public business entities that meetAfter the definitionissuance of a U.S. Securities and Exchange Commission (SEC) filer, excluding entities eligible to beASU 2019-10, the guidance is effective for smaller reporting companies as defined by the SEC, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoptionapplication of the guidance is permitted.permitted for all entities for fiscal years beginning after December 15, 2018, including the interim periods within those fiscal years. Application of the amendments is through a cumulative-effect adjustment to retained earnings as of the effective date. The Company is currently evaluating the impact of this update on the condensed consolidated financial statements.

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In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes" (ASU 2019-12), which eliminates certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocation and calculating income taxes in interim periods. This ASU also includes guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. ASU 2019-12 is effective for annual and interim periods in fiscal years beginning after December 15, 2020. Early adoption is permitted. The Company is currently assessing the impact of ASU 2019-12 on its consolidated financial statements.

Recently Adopted Accounting Standards

In February 2016, the FASB established Topic 842, Leases, by issuing Accounting Standards Update (ASU) No. 2016-02, which requires lessees to recognize leases on the balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.-13-

The new standard was effective for us on July 1, 2019. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. If an entity chooses the second option, the transition requirements for existing leases also apply to leases entered into between the date of initial application and the effective date. The entity must also recast its comparative period financial statements and provide the disclosures required by the new standard for the comparative periods. We used the effective date as our date of initial application. Consequently, financial information was not updated, and the disclosures required under the new standard were not provided for dates and periods before July 1, 2019.

The new standard provides a number of optional practical expedients in transition. We elected the ‘package of practical expedients’, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. We elected all of the new standard’s available transition practical expedients that are applicable.

The new standard also provides practical expedients for an entity’s ongoing accounting. We elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, we will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. We also elected the practical expedient to not separate lease and non-lease components for all of our leases, other than for leases of real estate.

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NOTE 2 CORRECTION OF PREVIOUSLY-ISSUED UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Subsequent to the issuance of the Company's condensed consolidated financial statements for the three and six months ended December 31, 2018, the Company discovered (i) an error in the Company's accounting for income taxes, primarily with regard to the impact of income taxes on the Company's accounting for business combinations and asset acquisitions, and (ii) a clerical error in the calculation of volatility used as an input to the Black-Scholes model used to value the warrants issued as consideration for the acquisition of certain intellectual property.  As a result, the Company has corrected the accompanying condensed consolidated statements of operations and comprehensive loss and the statements of stockholders' equity for the three and six months ended December 31, 2018 from amounts previously reported to (i) record a benefit from income taxes of $713,526 and $1,325,978 for the three and six months, respectively, and (ii) record $358,333 and $632,233 in share based compensation expense for the three and six months, respectively , and (iii) record amortization expense related to intangible assets by $42,826 and $36,118 for the three and six months, respectively.

Additionally, the Company identified the following errors in the calculation of weighted average shares outstanding underlying the calculation of earnings per share for the three and six months ended December 31, 2018.  Common shares in the amount of 23,127,666 issued prior to the 2017 fiscal year were thought to have been cancelled, when in fact they remain legally outstanding.  The weighted average shares outstanding used to calculate earnings per share were also calculated incorrectly, such that the total corrected weighted average shares outstanding increased by 33,167,000 and 28,561,565 for the three and six months, respectively, from amounts previously reported. The error did not affect reported earnings per share in any period.

The condensed consolidated statement of cash flows for the six months ended December 31, 2018 has also been corrected for the adjustments to the condensed consolidated statement of operations discussed above, and to correct the presentation of certain investing and financing activities as follows. First, cash acquired from the acquisition of InceptionDX, LLC was reclassified from financing to investing activities.  Second, the amount of cash paid under our subscription payable previously incorrectly reported as $1,142,089 and incorrectly included in financing activities. The cash paid under our subscription has been corrected to $1,184,392 by reclassifying certain immaterial noncash activity to operating activities and has been reclassified to investing activities.

In addition to the impact of the corrections described above, the condensed consolidated statements of operations for the six months ended December 31, 2018 includes certain insignificant corrections in presentation that were made to conform to the fiscal 2019 annual financial statements.

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The following tables present the effects of the corrections to the condensed consolidated statements of operations and comprehensive loss for the three and six months ended December 31, 2018 and the statement of cash flows for the six months ended December 31, 2018.

Unaudited consolidated statement of operations

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Unaudited consolidated statement of cash flows

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NOTE 3 BUSINESS COMBINATIONS AND ASSET ACQUISITIONS

Inception DX, LLC

On August 22, 2018, the Company entered into an agreement captioned “Securities Purchase Agreement” with the members of Inception DX, LLC (“Inception”), a Utah limited liability company. Under the terms of the agreement, the Company acquired Inception for 15,500,000 shares of common stock. Inception owns laboratory equipment, partial interest in database records for over 31,900,000 individuals for use in genetics research, 400,000 units in Juneau Biosciences, LLC, initial CLIA registration, CLIA lab protocols, and other assets. Once the CLIA registration is completed, Inception will be used as a CLIA-certified laboratory by Predictive Technology Group, Inc. and its affiliates.

The stock issued was for cash, laboratory equipment, membership units in Juneau Biosciences, LLC (“Juneau units”), and trade secrets related to the DNA database and protocols related to a future use as a CLIA laboratory. The Juneau units were valued based on the value assigned when the Company entered into a subscription to purchase units of Juneau ($1.10 per unit).  The equipment will be depreciated over 5 years.  The proprietary data, DNA library, protocols, research and methods are classified as trade secrets in our industry.  The Company will amortize the trade secrets over an estimated useful life of 15 years.   

The stock price on August 22, 2018 was $0.92 per share, indicating a purchase price of $14,260,000 requiring allocation:

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Taueret Laboratories, LLC Asset Purchase

On August 22, 2018, the Company entered into an agreement captioned “Asset Purchase Agreement” (the “Purchase Agreement”) with Taueret Laboratories, LLC and its members. Under the terms of the Purchase Agreement, the Company issued warrants exercisable for 16,500,000 shares of the Company’s common stock. The warrants were exercisable at fair market value of the Company’s common stock on the closing date. In consideration for the warrants, the Company acquired (i) approximately 1,000 degenerative disc disease related DNA samples, related family records, relevant clinical records (including approximately 600 affected probands) and 800 ancestry matched control samples, (ii) whole exome sequencing data on approximately 300 degenerative disc disease samples, over 800 local controls, and published reference populations, together with initial analysis of the markers, (iii) project plan, study paperwork, promotional study and materials used in the research study, (iv) exclusive use of a DNA biobank that has a collection of over 300,000 samples for multiple diseases that the Company may target, (v) the remaining interest in database records for over 31,900,000 individuals for use in genetics research, and (vi) other assets.

The warrants issued are for proprietary data and methods that are otherwise a trade secret in our industry.  Therefore, the Company determined to classify the assets purchased as trade secrets with a 15-year life.  The Company used a Black Scholes calculation to determine valuation of the warrants of $13,860,000. As the purchase of the trade secrets with common stock warrants resulted in a difference between book and tax basis in the trade secrets, the carrying amount of the trade secrets was increased to $18,480,000 to reflect the deferred tax liability of $4,620,000 assumed in the transaction.

The fair value of the warrants was determined using the following inputs to the Black Scholes model:

Expected volatility was calculated from the historical volatility of the Company’s common stock.

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Regenerative Medical Technologies, Inc.

On December 19, 2018 the Company executed a merger with the shareholders of Regenerative Medical Technologies, Inc. (“RMT”), a Utah corporation. The Company acquired RMT for 10,000,000 shares of common stock. RMT holds various assets including (i) models, methods and protocols for collection of birthing tissue and DNA samples, (ii) patient registry models, methods and protocols to collect clinical outcomes and electronic medical records, and (iii) designs and methodologies relating to many initiatives that are complementary to anticipated product offerings and ongoing research, and (iv) other assets.

The fair value of consideration paid was determined based on our stock price of $0.92 on the date of acquisition. In addition, the Company recognized a deferred tax liability of $3,066,667 related to the differences between book and tax basis arising from the acquisition, resulting in a total purchase price of $12,266,667. The Company determined that the assets acquired qualify for treatment as trade secrets within industry.  The trade secrets will be amortized over an estimated useful life of 10 years.  

Taueret Laboratories, LLC Acquisition

On March 22, 2019, the Company completed the acquisition of Taueret Laboratories, LLC (“Taueret”) pursuant to the Securities Purchase Agreement (as amended, the “Purchase Agreement”), dated January 1, 2019. Pursuant to the terms of the Purchase Agreement, the Company acquired all of the outstanding units of Taueret. The Company and its affiliates plan to use Taueret’s CLIA-certified laboratory to perform diagnostic testing services.

The Purchase Agreement also specifies that the Company may, at its sole discretion, put certain patents related to the diagnosis and treatment of Preeclampsia (the “Preeclampsia IP”) back to the members of Taueret at any time prior to December 31, 2020 (the “Preeclampsia Option”). On December 31, 2020, an additional payment of $8,547,000 in cash will become due if the Company has not exercised the Preeclampsia Option. After considering the relevant accounting guidance, we determined that the Preeclampsia Option was not part of the business combination with Taueret, because the Preeclampsia Option was included in the Purchase Agreement primarily to benefit the acquirer.

The Company acquired Taueret and the Preeclampsia Option for total consideration of $931,817, net of cash acquired of $85,964. The consideration was paid as 552,995 shares of the Company’s common stock. The common stock was valued at the closing price on the date of the closing of the merger, adjusted for a 20% discount for lack of marketability related to a contractually stipulated lockup provision with a period of one year. The consideration was allocated between the business combination and the Preeclampsia Option on a relative fair value basis with $917,511 allocated to the business combination and $100,000allocated to the Preeclampsia Option. The Preeclampsia Option was recorded in intangible assets and will be amortized on a straight-line basis over the period the option is exercisable.

Total consideration transferred was allocated to tangible and intangible assets acquired and liabilities assumed based on their fair values as of the acquisition date.  

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Management estimated the fair value of tangible and intangible assets and liabilities in accordance with the applicable accounting guidance for business combinations and utilized the services of third-party valuation consultants.  These amounts are provisional and may be adjusted during the measurement period, which expires no later than one year from the acquisition date, if new information is obtained that, if known, would have affected the amounts recognized as of the acquisition date.

Identifiable intangible assets

The Company acquired intangible assets that consisted of an internally developed laboratory information management system which had an estimated fair value of $239,000, CLIA regulatory licenses with a fair value of $295,000, and customer relationships with a fair value of $16,000. The fair value of the software was determined using the replacement cost method.  The fair value of the CLIA licenses were estimated using the excess earnings method. The estimated net cash flows were discounted using a discount rate of 22%, which is based on the estimated internal rate of return for the acquisition and represents the rate that market participants might use to value the intangible assets. The projected cash flows were based on key assumptions such as estimates of revenues and operating profits. The Company will amortize the intangible assets on a straight-line basis over their estimated useful lives of 15 years for the CLIA license and 5 years for the software and customer relationships. This amortization is deductible for income tax purposes.  

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Bargain purchase gain

Any excess of fair value of acquired net assets over the purchase price (negative goodwill) has been recognized as a gain in the period the acquisition was completed. We have reassessed whether all acquired assets and assumed liabilities have been identified and recognized and performed remeasurements to verify that the consideration paid, assets acquired, and liabilities assumed have been properly valued. The remaining excess has been recognized as a gain in other income and expense in the consolidated statement of operations. The bargain purchase gain partly resulted from the allocation of the total consideration between the business combination and the Preeclampsia Option. We also believe we were able to negotiate a bargain price due to the desire of the sellers to induce the Company to purchase the Preeclampsia Option contemporaneously with the business combination.

NOTE 4 INVENTORIES

The composition of inventories is as follows:

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NOTE 52 PROPERTY, PLANT AND EQUIPMENT, NET

The composition of property, plant, and equipment is as follows: