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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
☒
☐
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2019
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
OR
PRECIPIO, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
91-1789357
(I.R.S. Employer Identification No.)
4 Science Park, New Haven, CT
(Address of principal executive offices)
06511
(Zip Code)
(203) 787-7888
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of
the Act:
Title of each class
Common Stock, $0.01 par value per share
Ticker symbol(s) Name of each exchange on which registered
PRPO
The Nasdaq Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes No X
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes No X
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required
to submit such files).
Yes X No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Emerging growth company
☐
☒
☐
Accelerated filer
Smaller reporting company
☐
☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant based on the last reported
closing price per share of Common Stock as reported on the Nasdaq Capital Market on the last business day of the registrant’s most recently
completed second quarter was approximately $19.8 million.
As of March 25, 2020, the number of shares of common stock outstanding was 8,870,129.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant’s definitive Proxy Statement for the Annual Meeting of Stockholders (the “2020 Proxy Statement”) is incorporated by
reference in Part III of this Form 10-K to the extent stated herein. The 2020 Proxy Statement, or an amendment to this Form 10-K, will be filed
with the SEC within 120 days after December 31, 2019. Except with respect to information specifically incorporated by reference in this Form
10-K, the Proxy Statement is not deemed to be filed as a part hereof.
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PRECIPIO, INC.
Annual Report on Form 10-K
For the Year Ended December 31, 2019
INDEX
PART I.
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
PART II.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Item 6. Selected Consolidated Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Price
Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2019 and 2018
Consolidated Statements of Operations for the Years Ended December 31, 2019 and 2018
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2019 and
2018
Consolidated Statements of Cash Flows for the Years Ended December 31, 2019 and 2018
Notes to the Consolidated Financial Statements for the Years Ended December 31, 2019 and
2018
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III.
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Page No.
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90
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92
92
92
92
92
Item 14. Principal Accounting Fees and Services
PART IV.
Item 15. Exhibits, Financial Statement Schedules
Item 16. Form 10-K Summary
Signatures
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PART I.
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93
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97
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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (this “Annual Report”), including the sections entitled “Risk Factors”
“Management’s Discussion & Analysis of Financial Condition and Results of Operations” and “Our Business”
contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995,
which statements involve substantial risks and uncertainties. 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, foreign currency exchange rates, 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 and key trends, 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,
projections of future earnings, revenues, synergies, accretion or other financial items, any statements of the plans,
strategies and objectives of management for future operations, retaining key employees and other risks as described
in our reports filed with the Securities and Exchange Commission (the “SEC”). 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 of such 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 these forward-looking statements for a number of
reasons, including those described in Item 1A, “Risk Factors,” and other factors identified by cautionary language
used elsewhere in this Annual Report.
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 financial statements and related notes contained
in this Annual Report. Results for the year ended December 31, 2019 are not necessarily indicative of results that may
be attained in the future.
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Item 1. Our Business
Business Description
Precipio, Inc., and its subsidiary, (collectively, “we”, “us”, “our”, the “Company” or “Precipio”) is a cancer
diagnostics company providing diagnostic products and services to the oncology market. We have built and continue
to develop a platform designed to eradicate the problem of misdiagnosis by harnessing the intellect, expertise and
technologies developed within academic institutions, and delivering quality diagnostic information to physicians and
their patients worldwide. We operate a cancer diagnostic laboratory located in New Haven, Connecticut and have
partnered with various academic institutions to capture the expertise, experience and technologies developed within
academia to provide a better standard of cancer diagnostics and aim to solve the growing problem of cancer
misdiagnosis. We also operate a research and development facility in Omaha, Nebraska which focuses
on development of various technologies, among them IV-Cell, HemeScreen and ICE-COLD-PCR, or ICP, the
patented technology, described further below, which we exclusively licensed from Dana-Farber Cancer Institute, Inc.,
or Dana-Farber, at Harvard University. The research and development center focuses on the development of these
technologies, which we believe will enable us to commercialize these and other technologies developed with our
current and future academic partners. The facility in Omaha was also recently certified as a CLIA and CAP facility,
and we have begun conducting several molecular tests internally that we had previously outsourced to other
laboratories. Our platform also connects patients, physicians and diagnostic experts residing within academic
institutions.
Industry
We believe that there is currently a significant problem with unaddressed rates of misdiagnosis across
numerous disease states (particularly in blood-related cancers) due to an inefficient and commoditized industry. We
believe that the diagnostic industry focuses primarily on competitive pricing and test turnaround times, at the expense
of quality and accuracy. Increasingly complex disease states are met with eroding specialization rather than increased
expertise. According to a study conducted by the National Coalition of Health, this results in an industry with cancer
misdiagnosis rates up to 28%, which is failing to meet the needs of physicians, patients and the healthcare system as
a whole. New technologies offer improved accuracy; however, many are either inaccessible or are not economically
practical for clinical use. Despite much publicity of the industry transitioning from fee-per-service to value-based
payments, this transition has not yet occurred in diagnostics. When a patient is misdiagnosed, physicians end up
administering incorrect treatments, often creating adverse effects rather than improving outcomes. We believe that
Insurance Providers, Medicare and Medicaid waste valuable dollars on the application of incorrect treatments and can
incur substantial downstream costs. Most importantly however, patients pay the ultimate price of misdiagnosis with
increased morbidity and mortality. According to a report by Pinnacle Health, the estimated cost of misdiagnosis within
the healthcare system is $750 billion annually. We are of the view that the academic path of specialization produces
the critical expertise necessary to correctly diagnose disease and that academic institutions have an unlocked potential
to address this problem. Our solution is to create an exclusive platform that harnesses academic expertise and
proprietary technologies to deliver the highest standard of diagnostic accuracy and patient care. Physicians, hospitals,
payers and, most importantly, patients all benefit from more accurate diagnostics.
Market
As a services and technology commercialization company, we currently participate in two components
within the U.S. domestic oncology diagnostics market. The first is the anatomic pathology services market, which is
estimated to reach a $26.1 billion annual market by 2024 with a compound annual growth rate of 6.16%. The second
component is the reagents market.
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Our Solution
3
Our Platform
Our platform is designed to provide physicians and their patients access to necessary academic expertise and
technology in order to better provide diagnoses. To our knowledge, we are the only company focused on addressing
the issue of diagnostic accuracy with an innovative, robust and scalable business model by:
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Providing physicians and their patients access to world-class academic experts and technologies;
Leveraging the largest network of academic experts by adding numerous leading academic institutions
to our platform;
Allowing payers to benefit from quality-based outcomes to their patients and increase the likelihood of
cost savings; and
Enabling cross-collaboration between physicians and academic institutions to advance research and
discovery.
Our agreements with various academic institutions are part of a unique platform that, to our knowledge, is
not offered by other commercial laboratories. Our customers are oncologists who biopsy their patients in order to
confirm or rule out the presence of cancer. After our customers send the samples to us, we conduct all the technical
tests at our New Haven facility. We then transmit the test results to the pathologists within our academic network
who have access to our laboratory information system from their respective offices, enabling them to review and
render their diagnostic interpretation of the test results for reporting. In partnership with an academic institution, we
have developed a proprietary algorithm that is applied to each sample submitted to us for testing, resulting in our
ability to render a more precise and accurate diagnosis. The final results are prepared by academic pathologists and
integrated into the final report by us, and are then delivered electronically through our portal to the referring clinician.
The patient’s insurance is billed for the services; we are paid for the technical work done at our laboratory; and
academic institutions either bill the patient insurance or are paid by us for their diagnostic interpretation.
Our Technology
1.
IV-Cell
We have developed IV-Cell, a proprietary culture media that addresses the problem of selective culturing –
by creating a universal media that enables simultaneous culturing of all 4 hematopoietic cell lineages. This ensures
that no cell lineage is missed in the diagnostic process, and the technician is able to select any of the 4 lineages during
the culturing process.
The diagnostic process of hematopoietic diseases involves chromosomal analysis by conducting cell-culture
based tests by a cytogenetics laboratory to imitate in-vivo conditions. The four groups of cell lineages cultured are:
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Myeloid cells – indicating myeloid neoplasms (MDS, AML, CML);
B-cells – indicating B-cell neoplasms (B-cell lymphoma, mantle cell lymphoma);
T-cells – indicating T-cell neoplasms (T-cell lymphoma); and
Plasma cells – indicating plasma cell neoplasms (multiple myeloma)
The cytogeneticist must decide up front which cell lineage to select to be cultured. In most cases, due to
specimen limitation, low cellularity, or cell viability, the cytogeneticist can select only one of the above cell lines to
culture. Often, the initial clinical suspicion is not in line with the final diagnosis determined by the pathologist based
on the rest of the work up. Our internal data has shown that this occurs in approximately 50% of bone marrow biopsies.
If the wrong cell lineage is selected, the diagnosis may be compromised (or return a false negative diagnosis) because
the lab will be culturing and investigating the wrong cells.
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IV-Cell was validated in our laboratory in parallel with existing commercially available reagents and has
successfully demonstrated superior results. Subsequently, IV-Cell has been used at our laboratory for the past 2 years
on >1,000 clinical specimens, producing superior diagnostic results. IV-Cell also produces chromosomes with an
average band resolution of 500, approximately 25% higher than achieved with standard culture media.
We intend to commercialize this technology by providing major laboratories with access to the media. This
can be achieved via a direct supply contract, whereby we will contract with a manufacturer (under license) to produce
the media, and supply it to laboratories.
2.
HemeScreen
Each year, an estimated 140,000 patients are diagnosed with diseases in the MPN or MDS blood cancer
categories. The National Comprehensive Cancer Network (the “NCCN”) guidelines require that these patients be
tested for genetic mutations in four key genes:
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JAK2 (V617F);
JAK2 (exon 12);
CALR; and
MPL
Precipio has developed and patented a proprietary screening panel for all 4 genes in one rapid scanning panel,
HemeScreen. The test screens for the presence of these mutations in a very economic manner. Due to the improved
economics, laboratories can reduce the batch requirements for the test while still enjoying a positive economic model
and reducing the turnaround time for results, providing improved clinical service to physicians.
The clinical significance of these mutations is substantial to patient treatment. A positive result in either of
the JAK2 mutations indicates the patient may be eligible for a targeted therapy. A positive result in the CALR or MPL
gene indicates a good prognosis, meaning the disease is less aggressive, and the physician may therefore choose to
treat the patient in a less aggressive manner. The results of these genetic tests are critical to determining a treatment
plan, and therefore the importance, and the speed of which the results are delivered, may significantly impact patient
care.
At the current reimbursement levels (approximately $600 for full panel at Medicare rates) and given the costs
to run the tests, laboratories running the test in house must either batch samples to gain efficiency, or send the test out
to another reference laboratory. Most hospital laboratories don’t have the volume and patient frequency to
economically justify running the test, and therefore they send the test out. This has created an industry average
turnaround time for results of between 2-4 weeks (depending on the lab providing the test).
Precipio offers two HemeScreen commercial options:
1. Reference the send-out to Precipio. We offer an average of a 2-day turnaround time for the test, markedly
better than the industry average of approximately 2 weeks.
2. Precipio to provide the reagents on an RUO (Research Use Only) basis, and a laboratory can set up the
test In-house test as an LDT (Laboratory Developed Test).
At an average reimbursement rate of approximately $600 per test, the US Market Revenue Potential is
approximately $84 million per year, in addition to international demand.
3.
ICE-COLD-PCR
ICP technology was developed at Harvard and is licensed exclusively to us by Dana-Farber. ICP is a unique,
proprietary, patented specimen enrichment technology that increases the sensitivity of molecular based tests from
approximately 90-95% to 99.99%. Traditional molecular testing is done on tumor biopsies. These tests are typically
conducted at disease onset, when the patient undergoes a biopsy. In the typical course of treatment, a patient is rarely
re-
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biopsied, and therefore, genetic information is based solely on the initial biopsy. Tumors are known to shed cells into
the patient’s bloodstream where they circulate alongside normal cells; however, existing testing methodologies are
not sufficiently sensitive to differentiate between tumor and normal cells. The increased sensitivity provided by ICP
allows for testing of genetic mutations that occur within tumors to be conducted on peripheral blood samples, termed
liquid biopsies. This technical capability enables physicians to test for genetic mutations through a simple blood test
rather than an invasive biopsy extracted from the actual tumor. The results of such tests can be used for diagnosis,
prognosis and therapeutic decisions. The technology is encapsulated within a chemical (reagent) used during the
specimen preparation process, which enriches (amplifies) the tumor DNA detected within the blood sample while
suppressing the normal DNA. In addition to offering this technology as a clinical service, we are developing panels
that will be sold as reagent kits to other laboratories to enable this testing in their facilities, thereby improving their
test sensitivity and more accurate diagnoses via liquid biopsies. The business model of selling reagents to other
laboratories expands the reach and impact of our technology while eliminating the reimbursement risks from running
the tests in-house.
Gene sequencing is performed on tissue biopsies taken surgically from the tumor site in order to identify
potential therapies that will be more effective in treating the patient. There are several limitations to this process.
First, surgical procedures have several limitations, including:
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Cost: surgical procedures are usually performed in a costly hospital environment;
Surgical access: various tumor sites are not always accessible (e.g. brain tumors), in which cases
no biopsy is available for diagnosis;
Risk: patient health may not permit undergoing an invasive surgery; therefore, a biopsy cannot be
obtained at all; and
Time: the process of scheduling and coordinating a surgical procedure often takes time, delaying
the start of patient treatment.
Second, there are several tumor-related limitations that provide a challenge to obtaining such genetic
information from a tumor:
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Tumors are heterogeneous by nature: a tissue sample from one area of the tumor may not properly
represent the tumor’s entire genetic composition; thus, the diagnostic results from a tumor may be
incomplete and non-representative.
Metastases: in order to accurately test a patient with metastatic disease, ideally an individual
biopsy sample should be taken from each site (if those sites are even known). These biopsies are
very difficult to obtain; therefore, physicians often rely on biopsies taken only from the primary
tumor site.
We license the ICP technology from Dana-Farber through a license agreement referred to herein as the
License Agreement. The License Agreement grants us an exclusive license to the ICP technology, subject to a non-
exclusive license granted to the U.S. government, in the areas of mutation detection using Sanger (di-deoxy)
sequencing and mitochondrial DNA analysis for all research, diagnostic, prognostic and therapeutic uses in humans,
animals, viruses, bacteria, fungi, plants or fossilized material. The License Agreement also grants us a non-exclusive
license in the areas of mutation detection using DHPLC, surveyor-endonuclease-based mutation detection and next
generation sequencing techniques. We paid Dana-Farber an initial license fee and are required to make milestone
payments with respect to the first five licensed products or services we develop using the licensed technology, as well
as royalties ranging from high single to low double digits on net sales of licensed products and services for sales made
by us and sales made to any distributors. The License Agreement remains in effect until we cease to sell licensed
products or services under said agreement. Dana-Farber has the right to immediately terminate the License Agreement
if (i) we cease to carry on our business with respect to licensed products and services, (ii) we fail to make any payments
under the License Agreement (subject to a cure period), (iii) we fail to comply with due diligence obligations under
the License Agreement (subject to a cure period), (iv) we default in our obligations to procure and maintain insurance
as required by the License Agreement, (v) any of our officers is convicted of a felony relating to the manufacture, use,
sale or importation of licensed products under the License Agreement, (vi) we materially breach any provision of the
License Agreement (subject to a cure period), or (vii) we or Dana-Farber become insolvent. We may terminate the
License Agreement for convenience upon 180 days’ prior written notice.
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Our Products & Services
Our initial product offering consists of clinical diagnostic services harnessing the expertise of pathologists
from premier academic institutions and the commercialization and application of our various technologies. Our
clinical diagnostic services focus on the diagnosis of different hematopoietic or blood-related cancers and the delivery
of an accurate diagnosis to oncologists, with demonstrated superior results through the harnessing of subspecialized
academic pathologists. We intend to enter into additional partnerships with premiere academic institutions during
2020 that will further broaden and strengthen our academic expert network. Our cutting-edge liquid biopsy
technology, ICP, enables detection of abnormalities in blood samples down to as low as .01%. Our proprietary
cytogenetics media IV-Cell enables laboratories to arrive at more accurate results while reducing inventory and other
operating costs. Our proprietary HemeScreen panel enables hospitals and laboratories to run an important genetic
mutation test at a lower cost, resulting in faster results delivered to physicians and their patients. Our customers are
oncologists, hospitals, reference laboratories, and pharma and biotech companies. These technologies enable our
customers to achieve more accurate results for their patients, with improved economics as well as clinical outcomes.
We built and obtained CLIA and CAP certifications to operate our New Haven laboratory. The laboratory is
approximately 3,000 square feet and has several sub-departments such as flow cytometry, immuno-histochemistry,
cytogenetics, and molecular testing. The laboratory is currently operated by fourteen lab technicians/technologists and
is supervised by a laboratory manager, technical director and a medical director. Our laboratory is inspected every
two years by a Connecticut state-appointed inspector and/or CAP. Furthermore, the laboratory supervisors and
medical director must conduct a self-inspection every two years (rotating with the state inspection) and must submit
those results to the state department of health.
Our Strategy
Our objective is to eradicate the problem of misdiagnosis by harnessing the intellect, expertise and
technology developed within academic institutions and to deliver quality diagnostic information to physicians and
their patients worldwide. To achieve this objective, our strategy is to focus our efforts on the following areas:
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Clinical pathology services – we intend to continue building our platform by increasing the number of
academic experts available on our platform and partnering with other academic institutions, allowing us
to expand our portfolio of services to cover additional types of cancer.
ICE-COLD PCR – we believe we can commercialize and develop new applications for our ICP
technology, including:
oDeveloping specific application panels for patient monitoring for treatment resistance and disease
recurrence;
oBuilding focused diagnostic and screening panels for initial disease identification;
oLeveraging our platform customers to generate demand for repeat, localized, in-house liquid
biopsy testing; and
oApplying ICP technology to other markets, such as pre-natal and companion diagnostics.
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New product pipeline through outsourced research and development – we plan on utilizing our
partnerships with academic institutions to gain access to newly-developed technologies. We also believe
there is an opportunity to partner with biotechnology companies to introduce their products into the U.S.
market through our platform. In the new line products the Company has developed its patented
HemeScreen proprietary assay which substantially reduces the costs for running the assay, creating two
key benefits as well as the IV-Cell.
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Academic partnerships – we intend to leverage the intellectual expertise and technologies developed
within academic institutions. We believe we have validated this model through previous partnerships
and are currently in the process of adding new academic partners.
Competition
Our principal competition in clinical pathology services comes largely from two groups. The first group
consists of companies that specialize in oncology and offer directly competing services to our diagnostic services.
These companies provide a high level of service focused on oncology and offer their services to oncologists and
pathology departments within hospitals. Competitors in this group include Neogenomics (Genoptix), GenPath
Diagnostics and Inform Diagnostics. The second group consists of large commercial companies that offer a wide
variety of laboratory tests ranging from simple chemistry tests to complex genetic testing. Competitors in this group
include LabCorp and Quest Diagnostics. We believe that companies in this industry primarily compete on price and
rapid delivery of results. We have chosen to focus on the increased quality and accuracy of the results we provide.
Within the liquid biopsy market, our competitors include Foundation Medicine, Guardant Health and Trovagene, Inc.
Competitive Advantage
We capitalize on the intellectual expertise and technologies developed by experts within academic
institutions. While several industry papers report a case misdiagnosis rate as high as 28%, we believe that leveraging
academic expertise can significantly reduce this rate. In an initial data set of over 100 clinical cases received and
processed by us and with a diagnosis rendered by academic pathologists, we believe less than 1% have resulted in
misdiagnosis. The diagnostic report provided by us was then requested by a patient or the patient’s physician for a
second opinion to be conducted by another laboratory. In these instances, less than 1% were in disagreement with our
report’s original diagnosis. Though less than 5% of all cancer patients are treated in academic centers that benefit
from this specialized expertise, the majority of patients are diagnosed by commercial reference laboratories. These
commercial laboratories and diagnostic companies have broad access to and serve over 95% of all cancer patients;
however, their lack of specialized expertise results in significantly higher misdiagnosis rates. Academic institutions
also invest heavily in the development of new technologies, most of which is used internally and does not benefit
outside or commercial lab patients. Our platform provides all patients with access to these innovative technologies
developed by us and in collaboration with other academic institutions we engage with.
Government Regulation
The healthcare industry is subject to extensive regulation by a number of governmental entities at the federal,
state and local level. Laws and regulations in the healthcare industry are extremely complex and, in many instances,
the industry does not have the benefit of significant regulatory or judicial interpretation. Our business is impacted not
only by those laws and regulations that are directly applicable to us but also by certain laws and regulations that are
applicable to our payors, vendors and referral sources. While our management believes we are in compliance with all
of the existing laws and regulations applicable to us, such laws and regulations are subject to rapid change and often
are uncertain in their application and enforcement. Further, to the extent we engage in new business initiatives, we
must continue to evaluate whether new laws and regulations are applicable to us. There can be no assurance that we
will not be subject to scrutiny or challenge under one or more of these laws or that any enforcement actions would
not be successful. Any such challenge, whether or not successful, could have a material adverse effect upon our
business and consolidated financial statements.
Our current active laboratory certifications can be found on http://www.precipiodx.com/accreditations.html.
The laboratory operations are governed by Standard Operating Procedure manuals, or SOPs, which detail each aspect
of the laboratory environment including the work flow, quality control, maintenance, and safety. These SOPs are
reviewed and approved annually and signed off by the laboratory manager and medical director.
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Among the various federal and state laws and regulations that may govern or impact our current and planned
operations are the following:
Reimbursement
As blood-related cancers are more likely to be developed later in life, the largest insurance provider is
Medicare, which constitutes approximately 50% of our patients’ cases. Non-Medicare patients are typically insured
by private insurance companies who provide patient coverage and pay for patients’ health-related costs. These private
insurance companies will often adjust their rates according to the insurance rates annually published by the Center for
Medicare and Medicaid Services, or CMS. We, and other providers, typically bill according to the codes relevant to
the tests we conduct.
Medicare and Medicaid Reimbursement
Many of the services that we provide are reimbursed by Medicare and state Medicaid programs and are
therefore subject to extensive government regulation.
Medicare is a federally funded program that provides health insurance coverage for qualified persons age 65
or older, some disabled persons, and persons with end-stage renal disease and persons with Lou Gehrig’s disease.
Medicaid programs are jointly funded by the federal and state governments and are administered by states under
approved plans.
Medicaid provides medical benefits to eligible people with limited income and resources and people with
disabilities, among others. Although the federal government establishes general guidelines for the Medicaid program,
each state sets its own guidelines regarding eligibility and covered services. Some individuals, known as “dual
eligibles”, may be eligible for benefits under both Medicare and a state Medicaid program. Reimbursement under the
Medicare and Medicaid programs is contingent on the satisfaction of numerous rules and regulations, including those
requiring certification and/or licensure. Congress often enacts legislation that affects the reimbursement rates under
government healthcare programs.
Approximately 45% of our revenue for the year ended December 31, 2019 was derived directly from
Medicare, Medicaid or other government-sponsored healthcare programs. Also, we indirectly provide services to
beneficiaries of Medicare, Medicaid and other government-sponsored healthcare programs through managed care
entities. Should there be material changes to federal or state reimbursement methodologies, regulations or policies,
our direct reimbursements from government-sponsored healthcare programs, as well as service fees that relate
indirectly to such reimbursements, could be adversely affected.
Healthcare Reform
In recent years, federal and state governments have considered and enacted policy changes designed to
reform the healthcare industry. The most prominent of these healthcare reform efforts, the Affordable Care Act, has
resulted in sweeping changes to the U.S. system for the delivery and financing of health care. As currently structured,
the Affordable Care Act increases the number of persons covered under government programs and private insurance;
furnishes economic incentives for measurable improvements in health care quality outcomes; promotes a more
integrated health care delivery system and the creation of new health care delivery.
Research and Development Expenses
For the years ended December 31, 2019 and 2018, we recorded $1.2 million and $1.1 million, respectively,
of research and development expenses. More information regarding our research and development activities can be
found in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” under Item 7 of this Annual Report.
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Employees
9
As of March 15, 2020, Precipio employed fifty (50) employees on a full-time basis and one (1) employee
on a part-time basis. Of the total, twelve (12) were in Finance, General and Administration, fifteen (15) were in
laboratory operations, twelve (12) were in Sales and Marketing, five (5) were in Customer Service and Support and
seven (7) were in Research & Development.
Executive Officers of the Registrant
Our executive officers, their ages as of March 27, 2020 and their respective positions are as follows:
Ilan Danieli, Chief Executive Officer, age 48
Mr. Danieli was the founder of Precipio Diagnostics LLC and was the Chief Executive Officer of Precipio
Diagnostics LLC since 2011. Mr. Danieli assumed the role of Chief Executive Officer of Precipio, Inc. at the time of
the Merger (as defined below). With over 20 years managing small and medium-size companies, some of his previous
experiences include COO of Osiris, a publicly-traded company based in New York City with operations in the US,
Canada, Europe and Asia; VP of Operations for Laurus Capital Management, a multi-billion dollar hedge fund; and
in various other entrepreneurial ventures. Ilan holds an MBA from the Darden School at the University of Virginia,
and a BA in Economics from Bar-Ilan University in Israel.
Carl R. Iberger, Chief Financial Officer, age 67
Mr. Iberger was named Chief Financial Officer in October 2016. For the years 1990 through 2015, Mr.
Iberger held the positions of Chief Financial Officer and Executive Vice President at Dianon Systems, DigiTrace Care
Services and SleepMed, Inc. Mr. Iberger has significant diagnostic healthcare experience in mergers and acquisitions,
private equity transactions, public offerings and executive management in high growth environments. Mr. Iberger
holds a Masters Degree in Finance from Hofstra University and a Bachelor of Science Degree in Accounting from the
University of Connecticut.
Compliance with Environmental Laws
We believe we are in compliance with current environmental protection requirements that apply to us or our
business. Costs attributable to environmental compliance are not currently material.
Intellectual Property
We license the ICP technology from Dana-Farber through the License Agreement. The License Agreement
grants us an exclusive license to the ICP technology, subject to a non-exclusive license granted to the U.S. government,
in the areas of mutation detection using Sanger (di-deoxy) sequencing and mitochondrial DNA analysis for all
research, diagnostic, prognostic and therapeutic uses in humans, animals, viruses, bacteria, fungi, plants or fossilized
material. The Company has filed provisional patents for its proprietary HemeScreen and IV-Cell technologies.
Corporate History
Precipio, Inc. was incorporated in Delaware on March 6, 1997. Our principal office is located at 4
Science Park, New Haven, Connecticut 06511.
Our internet address is www.precipiodx.com. Information found on our website is not incorporated by
reference into this report. We make available free of charge through our website our Securities and Exchange
Commission, or SEC, filings furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably
practicable after we electronically file such material with, or furnish it to, the SEC.
Item 1A. Risk Factors
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The following risks and uncertainties, together with all other information in this Annual Report on
Form 10-K, including our consolidated financial statements and related notes, should be considered carefully. Any of
the risk factors we describe below could adversely affect our business, financial condition or results of operations,
and could cause the market price of our common stock to fluctuate or decline.
Risks Related to Our Business and Strategy
There is substantial doubt about our ability to continue as a going concern.
Our independent registered public accounting firm has issued an opinion on our consolidated financial
statements included in this Annual Report on Form 10-K that states that the consolidated financial statements were
prepared assuming we will continue as a going concern. Our consolidated financial statements have been prepared
using accounting principles generally accepted in the United States of America applicable for a going concern, which
assume that we will realize our assets and discharge our liabilities in the ordinary course of business. We have incurred
substantial operating losses and have used cash in our operating activities for the past few years. For the year ended
December 31, 2019, we had a net loss of $13.2 million, negative working capital of $2.5 million and net cash used in
operating activities of $9.1 million. We are not current in making payments to all lenders and vendors. Our
consolidated financial statements do not include any adjustments to the amounts and classification of assets and
liabilities that may be necessary should we be unable to continue as a going concern. We also cannot be certain that
additional financing, if needed, will be available on acceptable terms, or at all, and our failure to raise capital when
needed could limit our ability to continue our operations. There remains substantial doubt about the Company’s ability
to continue as a going concern for the next twelve months from the date the consolidated financial statements were
issued.
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 require significant additional financing to sustain our operations and without it we will not be able to
continue operations.
At December 31, 2019, we had a working capital deficit of $2.5 million. We had an operating cash flow
deficit of $9.1 million for the year ended December 31, 2019 and a net loss of $13.2 million for the year ended
December 31, 2019. We do not currently have sufficient financial resources to fund our operations or those of our
subsidiary. Therefore, we need additional funds to continue these operations.
To facilitate ongoing operations and product development, on September 7, 2018, the Company entered into
a purchase agreement with Lincoln Park (the “LP Purchase Agreement” or “Equity Line”), pursuant to which Lincoln
Park has agreed to purchase 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.
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On December 20, 2018 the Company obtained shareholder approval of the $10,000,000 Lincoln Park
Purchase Agreement. Per the terms of the LP Purchase Agreement, we may direct Lincoln Park to purchase up to
$10,000,000 worth of shares of our common stock under our agreement over a 24-month period generally in amounts
up to 30,000 shares of our common stock, which may be increased to up to 36,666 shares of our common stock
depending on the market price of our common stock at the time of sale and subject to a maximum commitment by
Lincoln Park of $1,000,000 per regular purchase, on any business day on which the closing price of our common
stock is not less than the Floor Price, defined as the lower of (i) $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) and (ii) $0.10 per share.
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. If obtaining sufficient funding from Lincoln Park were to prove unavailable or prohibitively dilutive, we will
need to secure another source of funding in order to satisfy our working capital needs. Even if we sell all $10,000,000
under the Purchase Agreement to Lincoln Park, we may still need additional capital to fully implement our business,
operating and development plans. Should the financing we require to sustain our working capital needs be unavailable
or prohibitively expensive when we require it, the consequences could be a material adverse effect on our business,
operating results, financial condition and prospects. As of the date the consolidated financial statements were issued,
we have already received an aggregate of $9.3 million, including approximately $1.4 million from the sale of 328,590
shares of common stock to Lincoln Park during 2018, $6.6 million from the sale of 2,778,077 shares of common stock
to Lincoln Park during 2019, and $1.3 million from the sale of 900,012 shares of common stock to Lincoln Park from
January 1, 2020 through the date the consolidated financial statements were issued.
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 December 31, 2019, we had cash of $0.8 million and our working capital was approximately negative
$2.5 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 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 December 31,
2019, we had a net loss of $13.2 million, negative working capital of $2.5 million and net cash used in operating
activities of $9.1 million. For the year ended December 31, 2019, 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.
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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 are subject to concentrations of revenue risk and concentrations of credit risk in accounts receivable.
We have had several customers who have individually represented 10% or more of our total revenue, or
whose accounts receivable balances individually represented 10% or more of our total accounts receivable.
For the year ended December 31, 2019, two customers represented approximately 30% of our total revenue
and for the year ended December 31, 2018 one customer accounted for 33% of our total revenue. 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 a material adverse effect on our business, results of operations and financial condition.
At December 31, 2019, two customers accounted for approximately 29% of our total accounts receivable
and at December 31, 2018 one customer accounted for 23% of our total accounts receivable. The business risks
associated with this concentration, including increased credit risks for these 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 sales to such a customer, could result in
a decrease of the Company’s future sales, earnings and cash flows. Generally, we do not require collateral or other
securities to support our accounts receivable and while we are directly affected by the financial condition of our
customers, management does not believe significant credit risks exist at December 31, 2019.
We have been, and may continue to be, subject to costly litigation.
We have been, and may continue to be, subject to legal proceedings. Due to the nature of our business and
our lack of sufficient capital resources to pay our obligations on a timely basis, we may be subject to a variety of
regulatory investigations, claims, lawsuits and other proceedings in the ordinary course of our business. The results
of these legal proceedings cannot be predicted with certainty due to the uncertainty inherent in litigation, including
the effects of discovery of new evidence or advancement of new legal theories, the difficulty of predicting decisions
of judges and juries and the possibility that decisions may be reversed on appeal. Such litigation has been, and in the
future, could be, costly, time-consuming and distracting to management, result in a diversion of resources and could
materially adversely affect our business, financial condition and operating results.
In addition, we may settle some litigation through the issuance of equity securities which may result in
significant dilution to our stockholders.
The commercial success of our product candidates will depend upon the degree of market acceptance of these
products among physicians, patients, health care payers and the medical community and on our ability to
successfully market our product candidates.
Our products may never gain significant acceptance in the marketplace and, therefore, may never generate
substantial revenue or profits for us. Our ability to achieve commercial market acceptance for our existing and future
products will depend on several factors, including:
·
·
our ability to convince the medical community of the clinical utility of our products and their potential
advantages over existing diagnostics technology;
the willingness of physicians and patients to utilize our products; and
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·
the agreement by commercial third-party payers and government payers to reimburse our products, the
scope and amount of which will affect patients’ willingness or ability to pay for our products and will
likely heavily influence physicians’ decisions to recommend our products.
In addition, physicians may rely on guidelines issued by industry groups, such as the NCCN, medical
societies, such as the College of American Pathologists, or CAP, or other key oncology-related organizations before
utilizing any diagnostic test. Although we have a study underway to demonstrate the clinical utility of our existing
products, none of our products are, and may never be, listed in any such guidelines.
We believe that publications of scientific and medical results in peer-reviewed journals and presentations at
leading conferences are critical to the broad adoption of our products. Publication in leading medical journals is
subject to a peer-review process, and peer reviewers may not consider the results of studies involving our products
sufficiently novel or worthy of publication. The failure to be listed in physician guidelines or to be published in peer-
reviewed journals could limit the adoption of our products. Failure to achieve widespread market acceptance of our
products would materially harm our business, financial condition, and results of operations.
If we cannot compete successfully with our competitors, including new entrants in the market, we may be unable
to increase or sustain our revenue or achieve and sustain profitability.
The medical diagnostic industry is intensely competitive and characterized by rapid technological
progress. We face significant competition from competitors ranging in size from diversified global companies with
significant research and development resources to small, specialized firms whose narrower product lines may allow
them to be more effective in deploying related PCR technology in the genetic diagnostic industry. Our closest
competitors fall largely into two groups, consisting of companies that specialize in oncology and offer directly
competing services to our diagnostic services, offering their services to oncologists and pathology departments within
hospitals, as well as large commercial companies that offer a wide variety of laboratory tests that range from simple
chemistry tests to complex genetic testing. The technologies associated with the molecular diagnostics industry are
evolving rapidly and there is intense competition within such industry. Certain molecular diagnostics companies have
established technologies that may be competitive to our product candidates and any future tests that we develop. Some
of these tests may use different approaches or means to obtain diagnostic results, which could be more effective or
less expensive than our tests for similar indications. Moreover, these and other future competitors have or may have
considerably greater resources than we do in terms of technology, sales, marketing, commercialization and capital
resources. These competitors may have substantial advantages over us in terms of research and development expertise,
experience in clinical studies, experience in regulatory issues, brand name exposure and expertise in sales and
marketing as well as in operating central laboratory services. Many of these organizations have financial, marketing
and human resources greater than ours; therefore, there can be no assurance that we can successfully compete with
present or potential competitors or that such competition will not have a materially adverse effect on our business,
financial position or results of operations.
We are currently engaged in a study, which commenced in July 2017, to demonstrate the impact of academic
pathology expertise on diagnostic accuracy. There is no assurance that this study, or other studies or trials we may
conduct, will demonstrate favorable results. If the results of this study, or other studies or trials we may conduct,
demonstrate unfavorable or inconclusive results, customers may choose our competitors’ products over our products
and our commercial opportunities may be reduced or eliminated.
We believe that many of our competitors spend significantly more on research and development-related
activities than we do. Our competitors may discover new diagnostic tools or develop existing technologies to compete
with our diagnostic technology. Our commercial opportunities will be reduced or eliminated if these competing
products are more effective, are more convenient or are less expensive than our product candidates.
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We may not be able to develop new products or enhance the capabilities of our systems to keep pace with rapidly
changing technology and customer requirements, which could have a material adverse effect on our business and
operating results.
Our success depends on our ability to develop new products and applications for our diagnostic technology
in existing and new markets, while improving the performance and cost-effectiveness of our systems. New
technologies, techniques or products could emerge that might offer better combinations of price and performance than
our current or future products and systems. Existing or future markets for our products, as well as potential markets
for our diagnostic product candidates, are characterized by rapid technological change and innovation. It is critical to
our success that we anticipate changes in technology and customer requirements and successfully introduce new,
enhanced and competitive technologies to meet our customers’ and prospective customers’ needs on a timely and
cost-effective basis. At the same time, however, we must carefully manage the introduction of new products. If
customers believe that such products will offer enhanced features or be sold for a more attractive price, they may
delay purchases until such products are available. We may also have excess or obsolete inventory of older products
as we transition to new products and our experience in managing product transitions is very limited. If we do not
successfully innovate and introduce new technology into our product lines or effectively manage the transitions to
new product offerings, our revenues and results of operations will be adversely impacted.
Competitors may respond more quickly and effectively than we do to new or changing opportunities,
technologies, standards or customer requirements. We anticipate that we will face increased competition in the future
as existing companies and competitors develop new or improved products and as new companies enter the market
with new technologies.
We currently depend on the services of pathologists at a single academic partner and the loss of the services of
these pathologists would adversely impact our ability to develop, commercialize and deliver our products.
We currently depend on the services of pathologists at a single academic partner to review and render their
diagnostic interpretation of our test results and to prepare the final diagnostic results that we integrate into our final
report for our customers. Although we are in the process of adding new academic partners, it would be difficult to
replace the services provided by the pathologists at our current partner if their services became unavailable to us for
any reason prior to adding other academic partners. If this academic partner does not successfully carry out its
contractual duties or obligations and meet expected deadlines; if this partner needs to be replaced, or if the quality or
accuracy of the services provided by the pathologists at this partner were compromised for any reason, we would
likely not be able to provide our services in a manner expected by our customers, and our financial results and the
commercial prospects for our products could be harmed. The loss of the services of these pathologists would severely
harm our ability to develop, commercialize and deliver our products, and our business, financial condition and
operating results would be materially adversely affected.
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We face risks related to health pandemics and other widespread outbreaks of contagious disease, including the
novel coronavirus, COVID-19, which could significantly disrupt our operations and impact our financial results.
Our business could be disrupted and materially adversely affected by the recent outbreak of COVID-19. In
December 2019, an outbreak of respiratory illness caused by a strain of novel coronavirus, COVID-19, began in
China. As of March 2020, that outbreak has led to numerous confirmed cases worldwide, including in the United
States. The outbreak and government measures taken in response have also had a significant impact, both direct and
indirect, on businesses and commerce. Global health concerns, such as coronavirus, could also result in social,
economic, and labor instability in the countries in which we or the third parties with whom we engage operate. The
future progression of the outbreak and its effects on our business and operations are uncertain. We cannot presently
predict the scope and severity of any potential business shutdowns or disruptions. There can be no assurance that we
will be able to avoid any impact from the spread of COVID-19 or its consequences, including downturns in global
economies and financial markets that could affect our future operating results.
We may experience temporary disruptions and delays in processing biological samples at our facilities.
We may experience delays in processing biological samples caused by software and other errors. Any delay
in processing samples could have an adverse effect on our business, financial condition and results of operations.
We depend upon a limited number of key personnel, and if we are not able to retain them or recruit additional
qualified personnel, the commercialization of our product candidates and any future tests that we develop could
be delayed or negatively impacted.
Our success is largely dependent upon the continued contributions of our officers and employees. Our
success also depends in part on our ability to attract and retain highly qualified scientific, commercial and
administrative personnel. In order to pursue our test development and commercialization strategies, we will need to
attract and hire additional personnel with specialized experience in a number of disciplines, including assay
development, laboratory and clinical operations, sales and marketing, billing and reimbursement. There is intense
competition for personnel in the fields in which we operate. If we are unable to attract new employees and retain
existing employees, the development and commercialization of our product candidates and any future tests could be
delayed or negatively impacted. If any of them becomes unable or unwilling to continue in their respective positions,
and we are unable to find suitable replacements, our business and financial results could be materially negatively
affected.
We will need to increase the size of our organization, and we may experience difficulties in managing growth.
We are a small company with 50 full-time employees as of March 15, 2020. Future growth will impose
significant added responsibilities on members of management, including the need to identify, attract, retain, motivate
and integrate highly skilled personnel. We may increase the number of employees in the future depending on the
progress of our development of diagnostic technology. Our future financial performance and our ability to
commercialize our product candidates and to compete effectively will depend, in part, on our ability to manage any
future growth effectively. To that end, we must be able to:
·
·
·
integrate additional management, administrative, manufacturing and regulatory personnel;
maintain sufficient administrative, accounting and management information systems and controls; and
hire and train additional qualified personnel.
We may not be able to accomplish these tasks, and our failure to accomplish any of them could harm our
financial results.
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We currently have limited experience in marketing products. If we are unable to establish marketing and sales
capabilities and retain the proper talent to execute on our sales and marketing strategy, we may not be able to
generate product revenue.
We have developed limited experience in marketing our products and services. We intend to continue to
develop our in-house marketing organization and sales force, which will require significant capital expenditures,
management resources and time. We will have to compete with other diagnostic companies to recruit, hire, train and
retain marketing and sales personnel.
If we are unable to further grow our internal sales, marketing and distribution capabilities, we may pursue
collaborative arrangements regarding the sales and marketing of our product candidates or future products, however,
we may not be able to establish or maintain such collaborative arrangements, or if we are able to do so, they may not
have effective sales forces. Any revenue we receive will depend upon the efforts of such third parties, which may not
be successful. We may have little or no control over the marketing and sales efforts of such third parties and our
revenue from product sales may be lower than if we had commercialized our product candidates ourselves. We also
face competition in our search for third parties to assist us with the sales and marketing efforts of our product
candidates.
Cybersecurity risks could compromise our information and expose us to liability, which may harm our ability to
operate effectively and may cause our business and reputation to suffer.
Cybersecurity refers to the combination of technologies, processes and procedures established to protect
information technology systems and data from unauthorized access, attack, or damage. We rely on our information
systems to provide security for processing, transmission and storage of confidential information about our patients,
customers and personnel, such as names, addresses and other individually identifiable information protected by the
Health Insurance Portability and Accountability Act, (“HIPAA”), other privacy laws. Cyber-attacks are increasingly
more common, including in the health care industry. The regulatory environment surrounding information security
and privacy is increasingly demanding, with the frequent imposition of new and changing requirements. Compliance
with changes in privacy and information security laws and with rapidly evolving industry standards may result in our
incurring significant expense due to increased investment in technology and the development of new operational
processes.
We have not experienced any known attacks on our information technology systems that compromised any
confidential information. We maintain our information technology systems with safeguard protection against cyber-
attacks including passive intrusion protection, firewalls and virus detection software. However, these safeguards do
not ensure that a significant cyber-attack could not occur. Although we have taken steps to protect the security of our
information systems and the data maintained in those systems, it is possible that our safety and security measures will
not prevent the systems’ improper functioning or damage or the improper access or disclosure of personally
identifiable information such as in the event of cyber-attacks.
Security breaches, including physical or electronic break-ins, computer viruses, attacks by hackers and
similar breaches can create system disruptions or shutdowns or the unauthorized disclosure of confidential
information. If personal information or protected health information is improperly accessed, tampered with or
disclosed as a result of a security breach, we may incur significant costs to notify and mitigate potential harm to the
affected individuals, and we may be subject to sanctions and civil or criminal penalties if we are found to be in
violation of the privacy or security rules under HIPAA or other similar federal or state laws protecting confidential
personal information. In addition, a security breach of our information systems could damage our reputation, subject
us to liability claims or regulatory penalties for compromised personal information and could have a material adverse
effect on our business, financial condition and results of operations.
Our ability to use net operating loss carryforwards to offset future taxable income for U.S. federal tax purposes is
subject to limitation and risk that could further limit our ability to utilize our net operating losses.
Under U.S. federal income tax law, a corporation’s ability to utilize its net operating losses, or NOLs, to
offset future taxable income may be significantly limited if it experiences an “ownership change” as defined in
Section 382 of
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the Internal Revenue Code, as amended. In general, an ownership change will occur if there is a cumulative change
in a corporation’s ownership by “5-percent shareholders” that exceeds 50 percentage points over a rolling three-year
period. A corporation that experiences an ownership change will generally be subject to an annual limitation on the
use of its pre-ownership change NOLs equal to the value of the corporation immediately before the ownership change,
multiplied by the long-term tax-exempt rate (subject to certain adjustments). The annual limitation for a taxable year
generally is increased by the amount of any “recognized built-in gains” for such year and the amount of any unused
annual limitation in a prior year. On December 22, 2017, a law commonly known as the Tax Cuts and Jobs Act, or
the TCJ Act, was enacted in the United States. Certain provisions of the TCJ Act impact the ability to utilize NOLs
generated in 2018 and forward; any limitation to our annual use of NOLs could require us to pay a greater amount of
U.S. federal (and in some cases, state) income taxes, which could reduce our after-tax income from operations for
future taxable years and adversely impact our financial condition. Beginning in 2018, under the Act, federal loss
carryforwards have an unlimited carryforward period, however such losses can only offset 80% of taxable income in
any one year.
Reimbursement and Regulatory Risks Relating to Our Business
Governmental payers and health care plans have taken steps to control costs.
Medicare, Medicaid and private insurers have increased their efforts to control the costs of health care
services, including clinical testing services. They may reduce fee schedules or limit/exclude coverage for certain types
of tests that we perform. Medicaid reimbursement varies by state and is subject to administrative and billing
requirements and budget pressures. We expect efforts to reduce reimbursements, impose more stringent cost controls
and reduce utilization of testing services will continue. These efforts, including changes in laws or regulations, may
have a material adverse impact on our business.
Changes in payer mix could have a material adverse impact on our net sales and profitability.
Testing services are billed to physicians, patients, government payers such as Medicare, and insurance
companies. Tests may be billed to different payers depending on a particular patient’s medical insurance coverage.
Government payers have increased their efforts to control the cost, utilization and delivery of health care services as
well as reimbursement for laboratory testing services. Further reductions of reimbursement for Medicare and Medicaid
services or changes in policy regarding coverage of tests or other requirements for payment, such as prior authorization
or a physician or qualified practitioner’s signature on test requisitions, may be implemented from time to time.
Reimbursement for the laboratory services component of our business is also subject to statutory and regulatory
reduction. Reductions in the reimbursement rates and changes in payment policies of other third party payers may
occur as well. Such changes in the past have resulted in reduced payments as well as added costs and have decreased
test utilization for the clinical laboratory industry by adding more complex new regulatory and administrative
requirements. As a result, increases in the percentage of services billed to government payers could have an adverse
impact on our net sales.
Our laboratories require ongoing CLIA certification.
The Clinical Laboratory Improvement Amendments of 1988, or CLIA, extended federal oversight to virtually
all clinical laboratories by requiring that they be certified by the federal government or by a federally-approved
accreditation agency. The CLIA requires that all clinical laboratories meet quality assurance, quality control and
personnel standards. Laboratories must also undergo proficiency testing and are subject to inspections.
The sanctions for failure to comply with the CLIA requirements include suspension, revocation or limitation
of a laboratory’s CLIA certificate, which is necessary to conduct business, cancellation or suspension of the
laboratory’s approval to receive Medicare and/or Medicaid reimbursement, as well as significant fines and/or criminal
penalties. The loss or suspension of a CLIA certification, imposition of a fine or other penalties, or future changes in
the CLIA law or regulations (or interpretation of the law or regulations) could have a material adverse effect on us.
We believe that we are in compliance with all applicable laboratory requirements, but no assurances can be
given that our laboratories will pass all future certification inspections.
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Failure to comply with HIPAA could be costly.
HIPAA and associated regulations protect the privacy and security of certain patient health information and
establish standards for electronic health care transactions in the United States. These privacy regulations establish
federal standards regarding the uses and disclosures of protected health information. Our laboratories are subject to
HIPAA and its associated regulations. If we fail to comply with these laws and regulations we could suffer civil and
criminal penalties, fines, exclusion from participation in governmental health care programs and the loss of various
licenses, certificates and authorizations necessary to operate our patient testing business. We could also incur liabilities
from third party claims.
Our failure to comply with any applicable government laws and regulations or otherwise respond to claims relating
to improper handling, storage or disposal of hazardous chemicals that we use may adversely affect our results of
operations.
Our research and development and commercial activities involve the controlled use of hazardous materials
and chemicals. We are subject to federal, state, local and international laws and regulations governing the use, storage,
handling and disposal of hazardous materials and waste products. If we fail to comply with applicable laws or
regulations, we could be required to pay penalties or be held liable for any damages that result and this liability could
exceed our financial resources. We cannot be certain that accidental contamination or injury will not occur. Any such
accident could damage our research and manufacturing facilities and operations, resulting in delays and increased
costs.
We may become subject to the Anti-Kickback Statute, Stark Law, False Claims Act, Civil Monetary Penalties Law
and may be subject to analogous provisions of applicable state laws and could face substantial penalties if we fail
to comply with such laws.
There are several federal laws addressing fraud and abuse that apply to businesses that receive reimbursement
from a federal health care program. There are also a number of similar state laws covering fraud and abuse with
respect to, for example, private payers, self-pay and insurance. Currently, we receive a substantial percentage of our
revenue from private payers and from Medicare. Accordingly, our business is subject to federal fraud and abuse laws,
such as the Anti-Kickback Statute, the Stark Law, the False Claims Act, the Civil Monetary Penalties Law and other
similar laws. Moreover, we are already subject to similar state laws. We believe we have operated, and intend to
continue to operate, our business in compliance with these laws. However, these laws are subject to modification and
changes in interpretation, and are enforced by authorities vested with broad discretion. Federal and state enforcement
entities have significantly increased their scrutiny of healthcare companies and providers which has led to
investigations, prosecutions, convictions and large settlements. We continually monitor developments in this area. If
these laws are interpreted in a manner contrary to our interpretation or are reinterpreted or amended, or if new
legislation is enacted with respect to healthcare fraud and abuse, illegal remuneration, or similar issues, we may be
required to restructure our affected operations to maintain compliance with applicable law. There can be no assurances
that any such restructuring will be possible or, if possible, would not have a material adverse effect on our results of
operations, financial position, or cash flows.
Anti-Kickback Statute
A federal law commonly referred to as the “Anti-Kickback Statute” prohibits the knowing and willful offer,
payment, solicitation or receipt of remuneration, directly or indirectly, in return for the referral of patients or arranging
for the referral of patients, or in return for the recommendation, arrangement, purchase, lease or order of items or
services that are covered, in whole or in part, by a federal healthcare program such as Medicare or Medicaid. The term
“remuneration” has been broadly interpreted to include anything of value such as gifts, discounts, rebates, waiver of
payments or providing anything at less than its fair market value. The Patient Protection and Affordable Care Act, as
amended by the Health Care and Education Reconciliation Act, or the PPACA, amended the intent requirement of the
Anti-Kickback Statute such that a person or entity can be found guilty of violating the statute without actual knowledge
of the statute or specific intent to violate the statute. Further, the PPACA now provides that claims submitted in
violation of the Anti-Kickback Statute constitute false or fraudulent claims for purposes of the federal False Claims
Act, or FCA, including the failure to timely return an overpayment. Many states have adopted similar prohibitions
against kickbacks
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and other practices that are intended to influence the purchase, lease or ordering of healthcare items and services
reimbursed by a governmental health program or state Medicaid program. Some of these state prohibitions apply to
remuneration for referrals of healthcare items or services reimbursed by any third-party payor, including commercial
payors and self-pay patients.
Stark Law
Section 1877 of the Social Security Act, or the Stark Law, prohibits a physician from referring a patient to
an entity for certain “designated health services” reimbursable by Medicare if the physician (or close family members)
has a financial relationship with that entity, including an ownership or investment interest, a loan or debt relationship
or a compensation relationship, unless an exception to the Stark Law is fully satisfied. The designated health services
covered by the law include, among others, laboratory and imaging services. Some states have self-referral laws similar
to the Stark Law for Medicaid claims and commercial claims.
Violation of the Stark Law may result in prohibition of payment for services rendered, a refund of any
Medicare payments for services that resulted from an unlawful referral, $15,000 civil monetary penalties for specified
infractions, criminal penalties, and potential exclusion from participation in government healthcare programs, and
potential false claims liability. The repayment provisions in the Stark Law are not dependent on the parties having an
improper intent; rather, the Stark Law is a strict liability statute and any violation is subject to repayment of all amounts
arising out of tainted referrals. If physician self-referral laws are interpreted differently or if other legislative
restrictions are issued, we could incur significant sanctions and loss of revenues, or we could have to change our
arrangements and operations in a way that could have a material adverse effect on our business, prospects, damage to
our reputation, results of operations and financial condition.
False Claims Act
The FCA prohibits providers from, among other things, (1) knowingly presenting or causing to be presented,
claims for payments from the Medicare, Medicaid or other federal healthcare programs that are false or fraudulent;
(2) knowingly making, using or causing to be made or used, a false record or statement to get a false or fraudulent
claim paid or approved by the federal government; or (3) knowingly making, using or causing to be made or used, a
false record or statement to avoid, decrease or conceal an obligation to pay money to the federal government. The
“qui tam” or “whistleblower” provisions of the FCA allow private individuals to bring actions under the FCA on
behalf of the government. These private parties are entitled to share in any amounts recovered by the government,
and, as a result, the number of “whistleblower” lawsuits that have been filed against providers has increased
significantly in recent years. Defendants found to be liable under the FCA may be required to pay three times the
actual damages sustained by the government, plus civil penalties ranging between $5,500 and $11,000 for each
separate false claim.
There are many potential bases for liability under the FCA. The government has used the FCA to prosecute
Medicare and other government healthcare program fraud such as coding errors, billing for services not provided, and
providing care that is not medically necessary or that is substandard in quality. The PPACA also provides that claims
submitted in connection with patient referrals that result from violations of the Anti-Kickback Statute constitute false
claims for the purpose of the FCA, and some courts have held that a violation of the Stark law can result in FCA
liability, as well. In addition, a number of states have adopted their own false claims and whistleblower provisions
whereby a private party may file a civil lawsuit in state court. We are required to provide information to our employees
and certain contractors about state and federal false claims laws and whistleblower provisions and protections.
Civil Monetary Penalties Law
The Civil Monetary Penalties Law prohibits, among other things, the offering or giving of remuneration to a
Medicare or Medicaid beneficiary that the person or entity knows or should know is likely to influence the
beneficiary’s selection of a particular provider or supplier of items or services reimbursable by a federal or state
healthcare program. This broad provision applies to many kinds of inducements or benefits provided to patients,
including complimentary items, services or transportation that are of more than a nominal value. This law could affect
how we have to structure our operations and activities.
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Intellectual Property Risks Related to Our Business
We cannot be certain that measures taken to protect our intellectual property will be effective.
We rely upon trade secrets, copyright and trademark laws, non-disclosure agreements and other contractual
confidentiality provisions to protect our confidential and proprietary information that we are not seeking patent
protection for various reasons. Such measures, however, may not provide adequate protection for our trade secrets or
other proprietary information. If such measures do not protect our rights, third parties could use our technology and
our ability to compete in the market would be reduced.
We depend on certain technologies that are licensed to us. We do not control these technologies and any loss of
our rights to them could prevent us from selling some of our products.
We have entered into license agreements with third parties for certain licensed technologies that are, or may
become, relevant to the products we market, or plan to market, including our license agreement with Dana-Farber
pursuant to which we license our ICP technology. In addition, we may in the future elect to license third party
intellectual property to further our business objectives and/or as needed for freedom to operate for our products. We
do not and will not own the patents, patent applications or other intellectual property rights that are the subject of
these licenses. Our rights to use these technologies and employ the inventions claimed in the licensed patents, patent
applications and other intellectual property rights are or will be subject to the continuation of and compliance with the
terms of those licenses.
We might not be able to obtain licenses to technology or other intellectual property rights that we require.
Even if such licenses are obtainable, they may not be available at a reasonable cost or multiple licenses may be needed
for the same product (e.g., stacked royalties). We could therefore incur substantial costs related to royalty payments
for licenses obtained from third parties, which could negatively affect our gross margins. Further, we could encounter
delays in product introductions, or interruptions in product sales, as we develop alternative methods or products.
In some cases, we do not or may not control the prosecution, maintenance, or filing of the patents or patent
applications to which we hold licenses, or the enforcement of these patents against third parties. As a result, we cannot
be certain that drafting or prosecution of the licensed patents and patent applications by the licensors have been or
will be conducted in compliance with applicable laws and regulations or will result in valid and enforceable patents
and other intellectual property rights.
Third parties may assert ownership or commercial rights to inventions we develop.
Third parties may in the future make claims challenging the inventorship or ownership of our intellectual
property. For example, third parties that have been introduced to or have benefited from our inventions may attempt
to replicate or reverse engineer our products and circumvent ownership of our inventions. In addition, we may face
claims that our agreements with employees, contractors, or consultants obligating them to assign intellectual property
to us are ineffective, or in conflict with prior or competing contractual obligations of assignment, which could result
in ownership disputes regarding intellectual property we have developed or will develop and interfere with our ability
to capture the commercial value of such inventions. Litigation may be necessary to resolve an ownership dispute, and
if we are not successful, we may be precluded from using certain intellectual property, or may lose our exclusive
rights in that intellectual property. Either outcome could have an adverse impact on our business.
Third parties may assert that our employees or consultants have wrongfully used or disclosed confidential
information or misappropriated trade secrets.
Although we try to ensure that our employees and consultants do not use the proprietary information or
know-how of others in their work for us, we may be subject to claims that we or our employees, consultants or
independent contractors have inadvertently or otherwise used or disclosed intellectual property, including trade secrets
or other proprietary information, of a former employer or other third parties. Litigation may be necessary to defend
against these claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose
valuable
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intellectual property rights or personnel. Even if we are successful in defending against such claims, litigation could
result in substantial costs and be a distraction to management and other employees.
The testing, manufacturing and marketing of medical diagnostic devices entails an inherent risk of product
liability and personal injury claims.
To date, we have experienced no product liability or personal injury claims, but any such claims arising in
the future could have a material adverse effect on our business, financial condition and results of operations. Potential
product liability or personal injury claims may exceed the amount of our insurance coverage or may be excluded from
coverage under the terms of our policy or limited by other claims under our umbrella insurance policy. Additionally,
our existing insurance may not be renewed by us at a cost and level of coverage comparable to that presently in effect,
if at all. In the event that we are held liable for a claim against which we are not insured or for damages exceeding the
limits of our insurance coverage, such claim could have a material adverse effect on our cash flow and thus potentially
a materially adverse effect on our business, financial condition and results of operations.
All of our diagnostic technology development and our clinical services are performed at two laboratories, and in
the event either or both of these facilities were to be affected by a termination of the lease or a man-made or
natural disaster, our operations could be severely impaired.
We are performing all of our diagnostic services in our CLIA laboratory located in New Haven, Connecticut
and our research and development operations are based in our facility in Omaha, Nebraska. Despite precautions taken
by us, any future natural or man-made disaster at these laboratories, such as a fire, earthquake or terrorist activity,
could cause substantial delays in our operations, damage or destroy our equipment and testing samples or cause us to
incur additional expenses.
In addition, we are leasing the facilities where our laboratories operate. We are currently in compliance with
all and any lease obligations, but should the leases terminate for any reason, or if at any time either of the laboratories
is moved due to conditions outside our control, it could cause substantial delay in our diagnostics operations, damage
or destroy our equipment and biological samples or cause us to incur additional expenses. In the event of an extended
shutdown of either laboratory, we may be unable to perform our services in a timely manner or at all and therefore
would be unable to operate in a commercially competitive manner. This could harm our operating results and financial
condition.
Further, if we have to use a substitute laboratory while our facilities were shut down, we could only use
another facility with established state licensure and accreditation under CLIA. We may not be able to find another
CLIA-certified facility and comply with applicable procedures, or find any such laboratory that would be willing to
perform the tests for us on commercially reasonable terms. Additionally, any new laboratory opened by us would be
subject to certification under CLIA and licensure by various states, which would take a significant amount of time
and result in delays in our ability to continue our operations.
An impairment in the carrying value of our intangible assets could negatively affect our results of operations.
A significant portion of our assets are intangible assets which are reviewed at least annually for impairment.
If we do not realize our business plan, our intangible assets may become impaired resulting in an impairment loss in
our results of operations.
Risks Related to Our Common Stock
The price of our common stock may fluctuate significantly, which could negatively affect us and holders of our
common stock.
There has been, and continues to be, a limited public market for our common stock, and an active trading
market for our common stock has not and may never develop or, if developed, be sustained. The trading price of our
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common stock may be highly volatile and could be subject to wide fluctuations in response to various factors, some
of which are beyond our control. These factors include:
These factors include:
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actual or anticipated fluctuations in our financial condition and operating results:
actual or anticipated changes in our growth rate relative to our competitors;
competition from existing products or new products that may emerge;
announcements by us, our academic institution partners, or our competitors of significant acquisitions,
strategic partnerships, joint ventures, collaborations, or capital commitments;
failure to meet or exceed financial estimates and projections of the investment community or that we
provide to the public and the revision of any financial estimates and projections that we provide to the
public;
issuance of new or updated research or reports by securities analysts;
fluctuations in the valuation of companies perceived by investors to be comparable to us;
share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;
additions, transitions or departures of key management or scientific personnel;
disputes or other developments related to proprietary rights, including patents, litigation matters, and our
ability to obtain patent protection for our technologies;
changes to reimbursement levels by commercial third-party payors and government payors, including
Medicare, and any announcements relating to reimbursement levels;
Government shut-down or partial shut-downs impacting the financial markets, the United States
Securities and Exchange Commission and other related agencies;
announcement or expectation of additional debt or equity financing efforts;
sales of our common stock by us, our insiders, or our other stockholders; and
general economic and market conditions
These and other market and industry factors may cause the market price and demand for our common stock
to fluctuate substantially, regardless of our actual operating performance, which may limit or prevent investors from
readily selling their shares of our common stock and may otherwise negatively affect the liquidity of our common
stock. In addition, the stock market in general has experienced price and volume fluctuations that have often been
unrelated or disproportionate to the operating performance of these companies. In the past, when the market price of
a stock has been volatile, holders of that stock have instituted securities class action litigation against the company
that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending
the lawsuit. Such a lawsuit could also divert the time and attention of our management.
The price of our stock may be vulnerable to manipulation.
We believe our common stock has been the subject of significant short selling by certain market participants.
Short sales are transactions in which a market participant sells a security that it does not own. To complete the
transaction, the market participant must borrow the security to make delivery to the buyer. The market participant is
then obligated to replace the security borrowed by purchasing the security at the market price at the time of required
replacement. If the price at the time of replacement is lower than the price at which the security was originally sold
by the market participant, then the market participant will realize a gain on the transaction. Thus, it is in the market
participant’s interest for the market price of the underlying security to decline as much as possible during the period
prior to the time of replacement.
Because our unrestricted public float has been small relative to other issuers, previous short selling efforts
have impacted, and may in the future continue to impact, the value of our stock in an extreme and volatile manner to
our detriment and the detriment of our shareholders. Efforts by certain market participants to manipulate the price of
our common stock for their personal financial gain may cause our stockholders to lose a portion of their investment,
may make it more difficult for us to raise equity capital when needed without significantly diluting existing
stockholders, and may reduce demand from new investors to purchase shares of our stock.
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If we cannot continue to satisfy NASDAQ listing maintenance requirements and other rules, our securities may be
delisted, 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 continue to
satisfy the listing maintenance requirements and rules. If we are unable to satisfy The NASDAQ Stock Market, or
NASDAQ, criteria for maintaining our listing, our securities could be subject 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 a 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 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.
If NASDAQ delists our securities, we could face significant consequences, including:
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a limited availability for market quotations for our securities;
reduced liquidity with respect to our securities;
a determination that our common stock is a “penny stock,” which will require brokers trading in our
common stock to adhere to more stringent rules and possibly result in reduced trading;
activity in the secondary trading market for our common stock;
limited amount of news and analyst coverage; and
a decreased ability to issue additional securities or obtain additional financing in the future.
In addition, we would no longer be subject to NASDAQ rules, including rules requiring us to have a certain
number of independent directors and to meet other corporate governance standards.
Increased costs associated with corporate governance compliance may significantly impact our results of
operations.
As a public company, we incur significant legal, accounting, and other expenses due to our compliance with
regulations and disclosure obligations applicable to us, including compliance with the Sarbanes-Oxley Act of 2002,
or the Sarbanes-Oxley Act, as well as rules implemented by the SEC, and NASDAQ. The SEC and other regulators
have continued to adopt new rules and regulations and make additional changes to existing regulations that require
our compliance. In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank
Act, was enacted. There are significant corporate governance and executive compensation related provisions in the
Dodd-Frank Act that have required the SEC to adopt additional rules and regulations in these areas. Stockholder
activism, the current political environment, and the current high level of government intervention and regulatory
reform may lead to substantial new regulations and disclosure obligations, which may lead to additional compliance
costs and impact, in ways we cannot currently anticipate, the manner in which we operate our business. Our
management and other personnel devote a substantial amount of time to these compliance programs and monitoring
of public company reporting obligations, and as a result of the new corporate governance and executive compensation
related rules, regulations, and guidelines prompted by the Dodd-Frank Act, and further regulations and disclosure
obligations expected in the future, we will likely need to devote additional time and costs to comply with such
compliance programs and rules. These rules and regulations will cause us to incur significant legal and financial
compliance costs and will make some activities more time-consuming and costly.
The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal
control over financial reporting. We are continuing to develop and refine our disclosure controls and other procedures
that are designed to ensure that information required to be disclosed by us in the reports that we file with the SEC is
recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that
information required to be disclosed in reports under the Exchange Act is accumulated and communicated to our
principal executive and financial officers. Our current controls and any new controls that we develop may become
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inadequate, and weaknesses in our internal control over financial reporting may be discovered in the future. Any
failure to develop or maintain effective controls could adversely affect the results of periodic management evaluations
and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal
control over financial reporting, which we may be required to include in our periodic reports that we file with the SEC
under Section 404 of the Sarbanes-Oxley Act, and could harm our operating results, cause us to fail to meet our
reporting obligations, or result in a restatement of our prior period financial statements. If we are not able to
demonstrate compliance with the Sarbanes-Oxley Act, that our internal control over financial reporting is perceived
as inadequate, or that we are unable to produce timely or accurate financial statements, investors may lose confidence
in our operating results, and the price of our common stock could decline.
We are required to comply with certain of the SEC rules that implement Section 404 of the Sarbanes-Oxley
Act, which requires management to certify financial and other information in our quarterly and annual reports and
provide an annual management report on the effectiveness of our internal control over financial reporting. This
assessment needs to include the disclosure of any material weaknesses in our internal control over financial reporting
identified by our management or our independent registered public accounting firm. During the evaluation and testing
process, if we identify one or more material weaknesses in our internal control over financial reporting or if we are
unable to complete our evaluation, testing, and any required remediation in a timely fashion, we will be unable to
assert that our internal control over financial reporting is effective.
These developments could make it more difficult for us to retain qualified members of our Board of Directors,
or qualified executive officers. We are presently evaluating and monitoring regulatory developments and cannot
estimate the timing or magnitude of additional costs we may incur as a result. To the extent these costs are significant,
our general and administrative expenses are likely to increase.
We have not paid dividends on our common stock in the past and do not expect to pay dividends on our common
stock for the foreseeable future. Any return on investment may be limited to the value of our common stock.
No cash dividends have been paid on our common stock. We expect that any income received from
operations will be devoted to our future operations and growth. We do not expect to pay cash dividends on our
common stock in the near future. Payment of dividends would depend upon our profitability at the time, cash available
for those dividends, and other factors as our board of directors may consider relevant. If we do not pay dividends,
our common stock may be less valuable because a return on an investor’s investment will only occur if our stock price
appreciates. Investors in our common stock should not rely on an investment in our company if they require dividend
income.
If securities or industry analysts do not publish research or reports about our business, or if they change their
recommendations regarding our stock adversely, our stock price and trading volume could decline.
The trading market for our common stock relies in part on the research and reports that equity research
analysts publish about us and our business. We do not control these analysts. The price of our common stock could
decline if one or more equity research analysts downgrade our common stock or if they issue other unfavorable
commentary or cease publishing reports about us or our business.
The sale or issuance of our common stock to Lincoln Park may cause significant dilution and the sale of the
shares of common stock acquired by Lincoln Park, or the perception that such sales may occur, could cause the
price of our common stock to fall.
On September 7, 2018, we entered into the LP Purchase Agreement pursuant to which Lincoln Park has
agreed to purchase up to an aggregate of $10,000,000 of our common stock (subject to certain limitations) from time
to time over the term of the LP Purchase Agreement.
On December 20, 2018 we obtained shareholder approval of the $10,000,000 Lincoln Park Purchase
Agreement. Per the terms of the LP Purchase Agreement, we may direct Lincoln Park to purchase up to $10,000,000
worth of shares of our common stock under our agreement over a 24-month period
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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. The purchase price for the shares that we may sell to Lincoln Park under the Purchase Agreement will
fluctuate based on the price of our common stock. Depending on market liquidity at the time, sales of such shares may
cause the trading price of our common stock to fall. We generally have the right to control the timing and amount of
any future sales of our shares to Lincoln Park. Additional sales of our common stock, if any, to Lincoln Park will
depend upon market conditions and other factors to be determined by us. We may ultimately decide to sell to Lincoln
Park all, some or none of the additional shares of our common stock that may be available for us to sell pursuant to
the Purchase Agreement. If and when we do sell shares to Lincoln Park, after Lincoln Park has acquired the shares,
Lincoln Park may resell all, some or none of those shares at any time or from time to time in its discretion. Therefore,
sales to Lincoln Park by us could result in substantial dilution to the interests of other holders of our common stock.
Additionally, the sale of a substantial number of shares of our common stock to Lincoln Park, or the anticipation of
such sales, could make it more difficult for us to sell equity or equity-related securities in the future at a time and at a
price that we might otherwise wish to effect sales.
As of the date the consolidated financial statements were issued, we have already received an aggregate
of $9.3 million, including approximately $1.4 million from the sale of 328,590 shares of common stock to Lincoln
Park during 2018, $6.6 million from the sale of 2,778,077 shares of common stock to Lincoln Park during 2019, and
$1.3 million from the sale of 900,012 shares of common stock to Lincoln Park from January 1, 2020 through the date
the consolidated financial statements were issued.
The issuance of our common stock to creditors or litigants may cause significant dilution to our stockholders and
cause the price of our common stock to fall
We may seek to settle outstanding obligations to vendors, debtholders or litigants in any litigation through
the issuance of our common stock or other security to such persons. Such issuances may cause significant dilution to
our stockholders and cause the price of our common stock to fall.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We currently lease approximately 7,630 square feet of laboratory and office space in New Haven,
Connecticut, which we occupy under a lease expiring in December 2021 with annual rental payments of $0.2 million.
We also lease approximately 5,300 square feet of laboratory space in Omaha, Nebraska, which we occupy under a
lease expiring in May 2022 with annual rental payments of less than $0.1 million. We believe that these facilities are
adequate to meet our current and planned needs. We believe that if additional space is needed in the future, we could
find alternate space at competitive market rates as needed.
Item 3. Legal Proceedings
The healthcare industry is subject to numerous laws and regulations of federal, state and local governments.
These laws and regulations include, but are not limited to, matters such as licensure, accreditation, government
healthcare program participation requirement, reimbursement for patient services and Medicare and Medicaid fraud
and abuse. Government activity has increased with respect to investigations and allegations concerning possible
violations of fraud and abuse statutes and regulations by healthcare providers.
Violations of these laws and regulations could result in expulsion from government healthcare programs
together with the imposition of significant fines and penalties, as well as significant repayments for patient services
previously billed. Management believes that the Company is in compliance with fraud and abuse regulations, as well
as other applicable government laws and regulations. While no material regulatory inquiries have been made,
compliance
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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.
The outcome of legal proceedings and claims brought against us are subject to significant uncertainty.
Therefore, although management considers the likelihood of such an outcome to be remote, if one or more of these
legal matters were resolved against us in the same reporting period for amounts in excess of management’s
expectations, our financial statements for such reporting period could be materially adversely affected. In general, the
resolution of a legal matter could prevent us from offering our services or products to others, could be material to our
financial condition or cash flows, or both, or could otherwise adversely affect our operating results.
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.
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 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 less than $0.1 million has been recorded and is
reflected in accounts payable within the accompanying consolidated balance sheet at December 31, 2019 and 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. During the third quarter of 2019, both the Company and the insurance company paid their
respective amounts to an escrow account where the funds will be held until they are approved for distribution at a
fairness hearing of the Court which took place on November 4, 2019. As of the date of this Annual Report on Form
10-K, the Company is waiting for the Court to render its judgement which is still outstanding.
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 consolidated balance sheet at
December 31, 2018. The obligation was paid in full during the second quarter 2019, resulting in no remaining amount
due to Bio-Rad.
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Item 4. Mine Safety Disclosures
Not Applicable.
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28
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Market Information. Since June 30, 2017, the trading date following the consummation of the Merger, our
common stock has traded on the NASDAQ Capital Market under the symbol “PRPO.”
The following table sets forth the high and low closing prices for our common stock during each of the
quarters of 2019 and 2018 as reported on the market exchange noted above.
Quarter Ended March 31, 2020
First Quarter (through March 25, 2020)
High
Low
$ 2.29 $ 0.68
Year Ended December 31, 2019
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year Ended December 31, 2018
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$ 3.90 $ 1.83
$ 9.15 $ 1.89
$ 4.08 $ 2.18
$ 2.60 $ 1.81
$ 19.50 $ 7.15
$ 8.19 $ 5.43
$ 7.58 $ 4.92
$ 6.03 $ 2.25
Performance Graph. We are a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act,
and are not required to provide the information required under this item.
Holders. At March 25, 2020, there were 8,870,129 shares of our common stock outstanding and
approximately 57 holders of record.
Dividends. No cash dividends have been paid on our common stock. We expect that any income received
from operations will be devoted to our future operations and growth. We do not expect to pay cash dividends on our
common stock in the near future. Payment of dividends would depend upon our profitability at the time, cash available
for those dividends, and other factors as our board of directors may consider relevant. If we do not pay dividends, our
common stock may be less valuable because a return on an investor’s investment will only occur if our stock price
appreciates. Investors in our common stock should not rely on an investment in our company if they require dividend
income.
Issuer Purchases of Equity Securities. We made no purchases of our common stock during the year ended
December 31, 2019. Therefore, tabular disclosure is not presented.
Recent Sales of Unregistered Securities. Not applicable.
Item 6. Selected Financial Data
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.
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29
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Information
This Annual Report on Form 10-K, 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 I, Item 1A, “Risk Factors,” of this Annual Report on Form 10-K.
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.
Overview
We are a cancer diagnostics company providing diagnostic products and services to the oncology market.
We have built and continue to develop a platform designed to eradicate the problem of misdiagnosis by harnessing
the intellect, expertise and technologies developed within academic institutions, and delivering quality diagnostic
information to physicians and their patients worldwide. We operate a cancer diagnostic laboratory located in New
Haven, Connecticut and have partnered with various academic institutions to capture the expertise, experience and
technologies developed within academia to provide a better standard of cancer diagnostics and aim to solve the
growing problem of cancer misdiagnosis. We also operate a research and development facility in Omaha, Nebraska
which focuses on development of various technologies, among them IV-Cell, HemeScreen and ICE-COLD-PCR, or
ICP, the patented technology described further below, which we exclusively licensed from Dana-Farber Cancer
Institute, Inc., or Dana-Farber, at Harvard University. The research and development center focuses on the
development of these technologies, which we believe will enable us to commercialize these and other technologies
developed with our current and future academic partners. The facility in Omaha was also recently certified as a CLIA
and CAP facility, and we have begun bringing in house several molecular tests that the Company had previously
referenced out to other laboratories. Our platform also connects patients, physicians and diagnostic experts residing
within academic institutions.
The following discussion should be read together with our financial statements and related notes contained
in this Annual Report. Results for the year ended December 31, 2019 are not necessarily indicative of results that
may be attained in the future.
Recent Developments
On March 16, 2020, the Company announced that it had completed a non-cash transaction with Poplar
Healthcare to establish a strategic partnership that includes the acquisition of the customer base OncoMetrix, Poplar’s
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30
hematopathology division. Precipio will assume responsibility for OncoMetrix’s customer base and associated
revenues which should provide a substantial improvement to the Company’s laboratory economies of scale. As part
of the transaction, three sales representatives of OncoMetrix have transitioned to Precipio. The transition of the
customer base involved no exchange of cash or equity with Poplar Healthcare.
Going Concern
The 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 December 31, 2019, the
Company had a net loss of $13.2 million, negative working capital of $2.5 million and net cash used in operating
activities of $9.1 million. The Company’s ability to continue as a going concern over the next twelve months from
the date the consolidated financial statements were issued 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 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 the consolidated financial statements
were issued, we have already received approximately $9.3 million in aggregate, including approximately $1.4 million
from the sale of 328,590 shares of common stock to Lincoln Park during 2018, $6.6 million from the sale of 2,778,077
shares of common stock to Lincoln Park during 2019 and $1.3 million from the sale of 900,012 shares of common
stock to Lincoln Park from January 1, 2020 through the date the consolidated financial statements were issued, leaving
the company an additional $0.7 million to draw upon.
Notwithstanding the aforementioned circumstances, there remains substantial doubt about the Company’s
ability to continue as a going concern for the next twelve months from the date the consolidated financial statements
were issued. There can be no assurance that the Company will be able to successfully achieve its initiatives
summarized above in order to continue as a going concern. The accompanying 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.
Results of Operations for the Years Ended December 31, 2019 and 2018
Net Sales. Net sales were as follows:
Dollars in Thousands
Service revenue, net, less allowance for doubtful accounts
Clinical research grants
Other
Net Sales
Year Ended
December 31,
2019
2018
$ 3,083 $ 2,751 $
100
13
$ 3,127 $ 2,864 $
—
44
Change
%
$
332
(100)
31
263
12 %
(100) %
238 %
9 %
Net sales for the year ended December 31, 2019 were $3.1 million, an increase of $0.3 million, or 9%, as
compared to the same period in 2018. During the year ended December 31, 2019, patient diagnostic service revenue
had an increase of $0.9 million as compared to the same period in 2018 due to an increase in cases processed. We
billed 1,672 cases during the year ended December 31, 2019 as compared to 1,345 cases during the same period in
2018, or a 24% increase in cases. The increase in volume is the result of increased sales personnel. This increase was
offset by a
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31
decrease of $0.5 million in contract diagnostic service revenue and a decrease of $0.1 million in clinical research
grants and other revenue for the year ended December 31, 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 increased by $0.3 million for
the year ended December 31, 2019 as compared to the same period in 2018. The increase 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 Profit. Gross profit and gross margins were as follows:
Gross Profit
Dollars in Thousands
Year Ended
December 31,
Margin %
2019
2018
2019
2018
$
219 $
225
7 %
8 %
Gross margin was 7% of total net sales, for the year ended December 31, 2019, compared to 8% of total net
sales for the same period in 2018 and the gross profit was approximately $0.2 million during the year ended
December 31, 2019 and 2018, respectively.
Operating Expenses. Operating expenses primarily consist of personnel costs, professional fees, travel costs,
facility costs and depreciation and amortization, including any goodwill or intangible asset impairment. Our operating
expenses decreased by $2.9 million to $11.2 million for the year ended December 31, 2019 as compared to $14.1
million for the year ended December 31, 2018. This decrease is the result of a decrease in goodwill and intangible
asset impairment of $3.1 million, a decrease in legal and other professional fees of $1.0 million and a decrease in
amortization of acquired intangibles of $0.1 million. The decreases were partially offset by a $0.7 million increase in
sales and marketing costs, which is primarily increased personnel costs related to our increase in patient diagnostic
service revenues, an increase of $0.2 million in stock compensation costs and an increase of $0.2 million in other
general and administrative costs.
Other Income (Expense). Other expense, net was $2.3 million and $2.1 million for the year ended December
31, 2019 and 2018, respectively, and included interest expense of $0.5 million and $0.3 million, respectively, income
from warrant revaluations of $0.4 million and $1.9 million, respectively, derivative revaluations expense of $0.4
million and income of $0.3 million, respectively, a loss on modification of warrants $1.1 million and zero, respectively
and a loss on litigation of $0.3 million and zero respectively. Additionally, the Company had a loss on issuance of
convertible notes of $1.9 million and $1.3 million, respectively, gains on settlements of liabilities of $1.4 million and
$0.3 million, respectively, and a loss on extinguishment of debt of less than $0.1 million and a gain
from extinguishment of debt of $0.4 million, respectively.
During the year ended December 31 2018, other expense also included a loss on extinguishment of
convertible notes of $2.9 million and a loss on settlement of equity instruments of $0.4 million.
Liquidity and Capital Resources
The 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 we will realize our assets
and discharge our liabilities in the ordinary course of business. We have incurred substantial operating losses and have
used cash in our operating activities for the past several years. For the year ended December 31, 2019, we had a net
loss of $13.2 million and negative working capital of $2.5 million. Our ability to continue as a going concern is
dependent upon a combination of achieving our business plan, including generating additional revenue, and raising
additional financing to meet our debt obligations and paying liabilities arising from normal business operations when
they come due.
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32
Our working capital positions at December 31, 2019 and 2018 were as follows:
Dollars in Thousands
Current assets (including cash of $848 and $381 respectively)
Current liabilities
Working capital
December 31, 2019 December 31, 2018 Change
1,793 $
85
$
13,765 (9,431)
(11,972) $ 9,516
1,878 $
4,334
(2,456) $
$
During the year ended December 31, 2019 we received gross proceeds of $6.6 million from sale of
2,778,077 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 $7.6 million of convertible notes, including interest, into 2,511,173
shares of our common stock.
Notwithstanding the aforementioned circumstances, there remains substantial doubt about our ability to
continue as a going concern for the next twelve months from the date the consolidated financial statements were
issued. There can be no assurance that we will be able to successfully achieve our initiatives summarized above in
order to continue as a going concern. The accompanying financial statements have been prepared assuming we will
continue as a going concern and do not include any adjustments that might result should we be unable to continue as
a going concern as a result of the outcome of this uncertainty.
Analysis of Cash Flows - Years Ended December 31, 2019 and 2018
Net Change in Cash. Cash increased by $0.5 million during the year ended December 31, 2019, compared
to a decrease of less than $0.1 million during the year ended December 31, 2018.
Cash Flows Used in Operating Activities. The cash flows used in operating activities of $9.1 million during
the year ended December 31, 2019 included a net loss of $13.2 million, an increase in accounts receivable of $0.8
million, a decrease in accounts payable of $1.9 million and a decrease in operating lease liabilities of $0.2 million.
These were partially offset by a decrease in other assets of $0.4 million and non-cash adjustments of $6.6 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, impairment of intangible assets and losses on the issuance of convertible notes. The cash flows used in
operating activities in the year ended December 31, 2018 included net loss of $15.7 million, an increase in accounts
receivable of $0.5 million and an increase in inventories of less than $0.1 million. These were partially offset a
decrease in other assets of $0.1 million, an increase in accounts payable, accrued expenses and other liabilities of $0.6
million and by non-cash adjustments of $8.8 million. The non-cash adjustments to net loss include, among other
things, depreciation and amortization, impairment of goodwill, changes in provision for losses on doubtful accounts,
warrant and derivative revaluations, stock based compensation, and gains or losses on settlements of liabilities or debt
and extinguishments of debt and convertible notes.
Cash Flows Used In Investing Activities. Cash flows used in investing activities were $0.1 million for the
year ended December 31, 2019 and 2018, respectively, resulting from purchases of property and equipment.
Cash Flows Provided by Financing Activities. Cash flows provided by financing activities totaled $9.7
million for the year ended December 31, 2019, which included proceeds of $6.6 million from the issuance of common
stock, $1.6 million from the exercise of warrants and $2.1 million from the issuance of convertible notes. These
proceeds were partially offset by payments on our long-term debt and convertible notes of $0.5 million and payments
for our finance lease obligations and deferred financing costs of approximately $0.1 million. Cash flows provided by
financing activities totaled $6.8 million for the year ended December 31, 2018, which included proceeds of $2.0
million from the issuance of common stock, $0.3 million from the issuance of long-term debt, $3.8 million from the
issuance of convertible notes and $1.3 million from the exercise of warrants. These proceeds were partially offset by
payments on our long-term debt of $0.4 million and payments for our capital lease obligations and deferred financing
costs of $0.2 million.
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Off-Balance Sheet Arrangements
At each of December 31, 2019 and December 31, 2018, we did not have any off-balance sheet arrangements
that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Contractual Obligations and Commitments
At December 31, 2019, our contractual obligations and other commitments were as follows:
Payments Due By Period
(in thousands)
Long term debt and convertible notes(1)
Finance lease obligations(2)
Operating lease obligations(2)
Purchase obligations(3)
More
than 5
Years
Less
Than 1
Year
1-3
3-5
Years
Years
Total
70 $ 105
70 $
$ 2,676 $ 2,431 $
13
55
200
70
62
—
583 242 289
52
1,229 341 470 368
50
$ 4,688 $ 3,076 $ 899 $ 545 $ 168
(1) See Note 5 - "Long-Term Debt" and Note 6 – “Convertible Notes” to our accompanying consolidated financial
statements included with this Annual Report on Form 10-K.
(2) See Note 8 - "Leases" to our accompanying consolidated financial statements included with this Annual Report
(3) These amounts represent purchase commitments, including all open purchase orders.
on Form 10-K.
Critical Accounting Policies and Estimates
The following discussion and analysis of financial condition and results of operations are based upon the
Company’s consolidated financial statements, which have been prepared in conformity with accounting principles
generally accepted in the United States of America. The Company’s significant accounting policies are more fully
described in Note 2 of the notes to Consolidated Financial Statements included with this Annual Report on Form 10-
K. Certain accounting estimates are particularly important to the understanding of the Company’s financial position
and results of operations and require the application of significant judgment by the Company’s management and can
be materially affected by changes from period to period in economic factors or conditions that are outside the control
of management. The Company’s management uses its judgment to determine the appropriate assumptions to be used
in the determination of certain estimates. Those estimates are based on historical operations, future business plans and
projected financial results, the terms of existing contracts, the observance of trends in the industry, information
provided by customers and information available from other outside sources, as appropriate. The following discusses
the Company’s critical accounting policies and estimates:
Revenue Recognition
The Company derives its revenues from diagnostic testing - histology, flow cytometry, cytology and
molecular testing; clinical research from bio-pharma customers, state and federal grant programs; and from biomarker
testing from bio-pharma customers.
Service revenues are comprised of patient diagnostic services for cancer as well as contract diagnostic
services for pharmacogenomics trials. Service revenue is recognized upon completion of the testing process and
when the diagnostic result is delivered to the ordering physician and/or customer. Net patient service revenue is
reported at the estimated net realizable amounts from patients, third-party payers and others for services rendered,
including retroactive adjustment under reimbursement agreements with third-party payers. Revenue under third-party
payer agreements is
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subject to audit and retroactive adjustment. Provisions for third-party payer settlements are provided in the period in
which the related services are rendered and adjusted in the future periods, as final settlements are determined.
Revenue from clinical research grant is recognized over time as the service is being performed using a
proportional performance method. The Company uses an "efforts based" method of assessing performance. If the
arrangement requires the performance of a specified number of similar acts (i.e. test), then revenue is recognized in
equal amounts as each act is completed.
Other revenues are comprised of the Company’s ICP technology kits sales to bio-pharma customers and
contracted project based technology evaluations.
For the year ended December 31, 2019, service revenue represented 99% of our consolidated revenues and
other revenues represented 1%. There was no revenue attributable to clinical grants during 2019. For the year ended
December 31, 2018, service revenue represented 96% of our consolidated revenues, the revenue attributable to
clinical grants represented 3% and other revenues represented 1%.
Allowance for Contractual Discounts
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 revenue recognition date to properly account for anticipated
differences between amounts estimated in our billing system and amounts ultimately reimbursed by payers.
Accordingly, the total revenue and receivables reported in our financial statements are recorded at the amounts
expected to be 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 our
revenue are contracted and fixed fees for specific services and are recorded without an allowance for contractual
discounts.
Allowance for Doubtful Accounts
The allowance for doubtful accounts is based on estimates of losses related to receivable balances. The risk
of collection varies based upon the service, the payer (commercial health insurance and government) and the patient’s
ability to pay the amounts not reimbursed by the payer. We estimate the allowance for doubtful accounts based upon
several factors including the age of the outstanding receivables, the historical experience of collections, adjusting for
current economic conditions and, in some cases, evaluating specific customer accounts for the ability to pay.
Collection agencies are employed and legal action is taken when we determine that taking collection actions is
reasonable relative to the probability of receiving payment on amounts owed. Management judgment is used to assess
the collectability of accounts and the ability of our customers to pay. Judgment is also used to assess trends in
collections and the effects of systems and business process changes on our expected collection rates. We review the
estimation process quarterly and make changes to the estimates as necessary. When it is determined that a customer
account is uncollectible, that balance is written off against the existing allowance.
Accounts Receivable
Accounts Receivable results from diagnostic services provided to self-pay and insured patients, project based
testing services and clinical research. The services provided by the Company are generally due within 30 days from
the invoice date. Accounts receivable are reduced by an allowance for doubtful accounts. In evaluating the
collectability of accounts receivable, the Company analyzes and identifies trends for each of its sources of revenue to
estimate the appropriate allowance for doubtful accounts. For receivables associated with self-pay patients, including
patients with insurance and a deductible and copayment, the Company records an allowance for doubtful accounts in
the period of services on the basis of past experience of patients unable or unwilling to pay for service fee for which
they are financially responsible. For receivables associated with services provided to patients with third-party
coverage, the Company analyzes contractually due amounts and provides an allowance, if necessary. The difference
between the standard rates and the amounts actually collected after all reasonable collection efforts have been
exhausted is charged
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against the allowance for doubtful accounts. Service revenues account for all reported accounts receivable as of
December 31, 2019 and 2018.
Stock-Based Compensation
Stock-based compensation cost is measured at the grant date, based on the estimated fair value of the award,
and is recognized as expense over the grantee’s requisite vesting period on a straight-line basis. For the purpose of
valuing stock options granted to our employees, directors and officers, we use the Black-Scholes option pricing model.
We granted options to purchase an aggregate of 292,604 and 224,365 shares of common stock during the years ended
December 31, 2019 and 2018, respectively. To determine the risk-free interest rate, we utilized the U.S. Treasury
yield curve in effect at the time of the grant with a term consistent with the expected term of our awards. The expected
term of the options granted is in accordance with Staff Accounting Bulletins 107 and 110, and is based on the average
between vesting terms and contractual terms. The expected dividend yield reflects our current and expected future
policy for dividends on our common stock. The expected stock price volatility for our stock options was calculated
by examining the trading history for our common stock. We will continue to analyze the expected stock price volatility
and expected term assumptions and will adjust our Black-Scholes option pricing assumptions as appropriate
Impairment of Long-Lived Assets and Goodwill
We assess the recoverability of our long-lived assets, which include property and equipment and definite-
lived intangible assets, whenever significant events or changes in circumstances indicate impairment may have
occurred. If indicators of impairment exist, projected future undiscounted cash flows associated with the asset are
compared to our carrying amount to determine whether the asset’s value is recoverable. Any resulting impairment is
recorded as a reduction in the carrying value of the related asset in excess of fair value and a charge to operating
results. We did not recognize any impairment charges related to definite-lived intangible assets for the years ending
December 31, 2019 and 2018. During the year ended December 31, 2019, we recorded impairment of $1.6 million
related to in-process research and development which had been accounted for as an indefinite-lived intangible asset.
Goodwill is not amortized, but is assessed for impairment on an annual basis or more frequently if impairment
indicators exist. We have the option to perform a qualitative assessment of goodwill to determine whether it is more
likely than not that the fair value of its reporting unit is less than its carrying amount, including goodwill and other
intangible assets. If we were to conclude that this is the case, then we must perform a goodwill impairment test by
comparing the fair value of the reporting unit to its carrying value. An impairment charge is recorded to the extent the
reporting unit’s carrying value exceeds its fair value, with the impairment loss recognized not to exceed the total
amount of goodwill allocated to that reporting unit. For the year ended December 31, 2018, goodwill impairment
charges were $4.7 million, resulting in no goodwill outstanding at December 31, 2019 and 2018.
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 number of optional practical expedients in transition. The Company has elected the “package of
practical expedients”, which permits it not to reassess under the new 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 consolidated balance sheet on the date of initial
application. See Note 8 – Leases for additional information, included with this Annual Report on Form 10-K.
In June 2018, the FASB issued ASU 2018-07 “Compensation—Stock Compensation (Topic 718)”, which
expands the scope of Topic 718 to include 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 our consolidated financial statements.
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Recently Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13 “Measurement of Credit Losses on Financial Instruments”,
which replaces current methods for evaluating impairment of financial instruments not measured at fair value,
including trade accounts receivable and certain debt securities, with a current expected credit loss model. This ASU
is effective for the Company for reporting periods beginning after December 15, 2022. We are currently assessing the
potential impact that the adoption of this ASU will have on our consolidated financial statements
In August 2018, the FASB issued ASU 2018-15 “Intangibles—Goodwill and Other—Internal Use Software
(Subtopic 350-40)”, which aligns the requirements for capitalizing implementation costs incurred in a cloud
computing hosting arrangement that is a service contract with the requirements for capitalizing implementation costs
incurred to develop or obtain internal use software. 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
consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13 “Fair Value Measurement (Topic 820)”, which modifies
certain disclosure requirements in Topic 820, such as the removal of the need to disclose the amount of and reason
for transfers between Level 1 and Level 2 of the fair value hierarchy, and several changes related to Level 3 fair value
measurements. 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 consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12 “Income Taxes (Topic 740): Simplifying the Accounting
for Income Taxes”, which is intended to improve consistent application and simplify the accounting for income taxes.
This ASU removes certain exceptions to the general principles in Topic 740 and clarifies and amends existing
guidance. This standard is effective for annual reporting periods beginning after December 15, 2020, including interim
reporting periods within those annual reporting periods, with early adoption permitted. The Company is currently
evaluating the impact of adoption of this ASU and does not expect the adoption of this new standard to have a material
impact on its consolidated financial statements.
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 7A. Quantitative and Qualitative Disclosure 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.
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37
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of
Precipio, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Precipio, Inc. (the “Company”) as of December 31,
2019 and 2018, the related consolidated statements of operations, stockholders’ equity and cash flows for each of the two years in
the period ended December 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). In
our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as
of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the two years in the period ended
December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
Explanatory Paragraph – Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a
going concern. As more fully described in Note 1, the Company has a significant working capital deficiency, has incurred
significant losses and needs to raise additional funds to meet its obligations and sustain its operations. These conditions raise
substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are
also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome
of this uncertainty.
Adoption of New Accounting Standards
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for
leases in 2019 due to the adoption of ASU No. 2016-12, Leases (Topic 842), as amended, effective January 1, 2019, using the
modified retrospective approach.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm
registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent
with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether
due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but
not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Marcum LLP
We have served as the Company’s auditor since 2016.
38
PRECIPIO, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 2019 and 2018
(Dollars in thousands, except share data)
Hartford, CT
March 27, 2020
Table of Contents
ASSETS
CURRENT ASSETS:
Cash
Accounts receivable, net
Inventories
Other current assets
Total current assets
PROPERTY AND EQUIPMENT, NET
OTHER ASSETS:
Operating lease right-of-use assets
Intangibles, net
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt, less debt issuance costs
Current maturities of convertible notes, less debt discounts and debt issuance costs
Current maturities of finance lease liabilities
Current maturities of operating lease liabilities
Accounts payable
Accrued expenses
Deferred revenue
Other current liabilities
Total current liabilities
LONG TERM LIABILITIES:
Long-term debt, less current maturities and debt issuance costs
Finance lease liabilities, less current maturities
Operating lease liabilities, less current maturities
Common stock warrant liabilities
Derivative liabilities
Deferred tax liability
Other long-term liabilities
Total liabilities
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS’ EQUITY:
$
$
$
2019
2018
$
$
$
848
574
184
272
1,878
431
519
16,658
25
19,511
321
142
52
209
1,936
1,639
35
—
4,334
198
119
317
1,338
—
—
—
6,306
381
690
197
525
1,793
496
—
19,291
25
21,605
263
4,377
57
—
5,169
1,940
49
1,910
13,765
253
155
—
1,132
62
70
45
15,482
Preferred stock - $0.01 par value, 15,000,000 shares authorized at December 31, 2019
and December 31, 2018, 47 shares issued and outstanding at December 31, 2019 and
December 31, 2018, liquidation preference of $42 at December 31, 2019
Common stock, $0.01 par value, 150,000,000 shares authorized at December 31, 2019
and December 31, 2018, 7,898,117 and 2,298,738 shares issued and outstanding at
December 31, 2019 and December 31, 2018, respectively
Additional paid-in capital
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
—
—
79
74,065
(60,939)
13,205
19,511
$
23
53,796
(47,696)
6,123
21,605
$
See notes to consolidated financial statements.
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39
PRECIPIO, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2019 and 2018
(Dollars in thousands, except per share data)
SALES:
Service revenue, net
Clinical research grants
Other
Revenue, net of contractual allowances and adjustments
less allowance for doubtful accounts
Net sales
COST OF SALES:
Service revenue
Clinical research grants
Total cost of sales
Gross profit
OPERATING EXPENSES:
Operating expenses
Impairment of intangible assets and goodwill
TOTAL OPERATING EXPENSES
OPERATING LOSS
OTHER INCOME (EXPENSE):
Interest expense, net
Warrant revaluation
Loss on modification of warrants
Derivative revaluation
Gain on settlement of liability, net
(Loss) gain on extinguishment of debt
Loss on extinguishment of convertible notes
Loss on litigation
Loss on issuance of convertible notes
Loss on settlement of equity instruments
Total other expenses
LOSS BEFORE INCOME TAXES
INCOME TAX BENEFIT
NET LOSS
$
2019
2018
4,051 $
—
44
4,095
(968)
3,127
2,908
—
2,908
219
3,335
100
13
3,448
(584)
2,864
2,549
90
2,639
225
9,623
1,590
11,213
(10,994)
9,452
4,685
14,137
(13,912)
(473)
416
(1,128)
(415)
1,437
(20)
—
(266)
(1,870)
—
(2,319)
(13,313)
70
(13,243)
(269)
1,918
—
267
263
376
(2,903)
—
(1,328)
(385)
(2,061)
(15,973)
279
(15,694)
Deemed dividends related to beneficial conversion feature of preferred stock and fair value of
consideration issued to induce conversion of preferred stock
TOTAL DIVIDENDS
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS
BASIC AND DILUTED LOSS PER COMMON SHARE
BASIC AND DILUTED WEIGHTED-AVERAGE SHARES OF COMMON STOCK
OUTSTANDING
—
—
(13,243) $
(4,222)
(4,222)
(19,916)
(2.33) $
(13.82)
$
$
5,695,159 1,441,113
See notes to consolidated financial statements.
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40
PRECIPIO, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Years Ended December 31, 2019 and 2018
(Dollars in thousands)
Preferred Stock
Common Stock
Additional
Outstanding Par Outstanding Par Paid-in Accumulated
Shares
Value Capital Deficit
Value Shares
Total
Balance, January 1, 2018
Net loss
Conversion of preferred stock into common
stock
Conversion of convertible notes into common
stock
Issuance of common stock in connection with
purchase agreements
Issuance of common stock in exchange for
cancelation of other current liabilities
Issuance of common stock upon exercise of
warrants
Issuance of common stock for consulting
services
Warrant modification recorded as debt
discount in conjunction with convertible note
issuance
Beneficial conversion feature on issuance of
convertible notes
Write-off beneficial conversion feature in
conjunction with convertible note
extinguishment
Write-off debt discounts (net of debt
premiums) in conjunction with convertible
note conversions
Write-off debt derivative liability in
conjunction with convertible note conversions
Liability recorded related to equity purchase
agreement repricing
Non-cash stock-based compensation
Balance, December 31, 2018
Net loss
Conversion of convertible notes into common
stock
4,935 $ —
— —
679,774 $ 7 $ 44,560 $
—
— —
(31,542) $ 13,025
(15,694) (15,694)
(4,888) —
431,022
4
(4)
—
—
— —
384,896
4 2,352
— 2,356
— —
428,050
5 2,003
— 2,008
— —
120,983
1 1,896
— 1,897
— —
252,486
2 1,269
— 1,271
— —
1,527 —
39
—
39
— —
— —
11
—
11
— —
— — 2,118
— 2,118
— —
— — (1,029)
— (1,029)
— —
— —
(210)
—
(210)
— —
— —
301
—
301
— —
— —
47 $ — 2,298,738
— —
— —
— —
—
490
$ 23 $ 53,796 $
—
— —
(460)
—
(460)
490
(47,696) $ 6,123
(13,243) (13,243)
— — 2,511,173 25 7,528
— 7,553
Issuance of common stock in connection with
purchase agreements
Proceeds upon issuance of common stock
from exercise of warrants
Write-off warrant liability in conjunction with
warrant exercises
Beneficial conversion feature on issuance of
convertible notes
Write-off debt discounts (net of debt
premiums) in conjunction with convertible
note conversions
Write-off debt derivative liability in
conjunction with convertible note conversions
Non-cash stock-based compensation
Payment of fractional common shares in
conjunction with reverse stock split
Balance, December 31, 2019
— — 2,778,077 28 6,600
— 6,628
— —
310,200
3 1,572
— 1,575
— —
— — 2,364
— 2,364
— —
— — 1,792
— 1,792
— —
— —
(731)
—
(731)
— —
— —
— —
— —
477
668
—
—
477
668
— —
47 $ — 7,898,117
(71) —
(1)
$ 79 $ 74,065 $
—
(1)
(60,939) $ 13,205
See notes to consolidated financial statements.
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41
PRECIPIO, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2019 and 2018
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss
2019
2018
$
(13,243) $
(15,694)
Adjustments to reconcile net loss to net cash flows used in operating activities:
Depreciation and amortization
Amortization of operating lease right-of-use asset
Amortization of finance lease right-of-use asset
Amortization (accretion) of deferred financing costs, debt discounts and debt premiums
Loss (gain) on extinguishment of debt
Gain on settlement of liability, net
Loss on settlement of equity instrument
Loss on litigation
Loss on issuance of convertible notes
Loss on extinguishment of convertible notes
Stock-based compensation
Impairment of intangible assets and goodwill
Provision for losses on doubtful accounts
Warrant revaluation
Loss on modification of warrants
Derivative revaluation
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Other assets
Accounts payable
Operating lease liabilities
Accrued expenses and other liabilities
Net cash used in operating activities
1,118
231
63
111
20
(1,437)
—
266
1,870
—
668
1,590
966
(416)
1,128
415
(850)
13
427
(1,884)
(223)
26
(9,141)
1,265
—
—
(21)
(376)
(263)
385
—
1,328
2,903
529
4,685
581
(1,918)
—
(267)
(541)
(36)
127
309
—
250
(6,754)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on finance lease obligations
Payment of deferred financing costs
Payment of fractional common shares in conjunction with reverse stock split
Issuance of common stock, net of issuance costs
Proceeds from exercise of warrants
Proceeds from long-term debt
Proceeds from convertible notes
Principal payments on convertible notes
Principal payments on long-term debt
Net cash flows provided by financing activities
NET CHANGE IN CASH
CASH AT BEGINNING OF PERIOD
CASH AT END OF PERIOD
(55)
(55)
(46)
(120)
(1)
6,628
1,575
—
2,150
(50)
(473)
9,663
467
381
848 $
(97)
(97)
(58)
(138)
—
2,008
1,271
300
3,850
—
(422)
6,811
(40)
421
381
$
See notes to consolidated financial statements.
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42
PRECIPIO, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - continued
For the Years Ended December 31, 2019 and 2018
(Dollars in thousands)
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for interest
SUPPLEMENTAL DISCLOSURE OF CONSULTING SERVICES OR ANY OTHER
NON-CASH COMMON STOCK RELATED ACTIVITY
Purchases of equipment financed through accounts payable
Equipment financed through finance lease obligations
Deferred debt issuance cost financed through accounts payable
Discount of 9% on issuance of convertible bridge notes
Other current liabilities canceled in exchange for common shares
Conversion of convertible debt plus interest into common stock
Beneficial conversion feature on issuance of convertible notes
Initial valuation of derivative liability recorded in conjunction with issuance of convertible
notes
Initial valuation of warrant liability recorded in conjunction with issuance of convertible
notes
Long-term debt exchanged for convertible notes
Liabilities exchanged for convertible notes
Prepaid insurance financed with loan
Accounts payable converted to long-term debt
Liability recorded related to equity purchase agreement repricing
Warrant liability canceled due to settlement of equity instruments
Issuance of common stock for consulting services
Modification of warrant in conjunction with convertible note issuance
Proceed from issuance of convertible note recorded through other current assets
2019
2018
$
36 $
42
1
23
—
188
—
7,553
1,792
—
1,858
—
2,150
434
—
—
—
—
—
—
38
106
57
405
1,897
2,356
2,118
610
2,665
3,191
—
375
74
460
456
39
11
250
Write-off of beneficial conversion feature in conjunction with convertible note
extinguishment
Right-of-use assets obtained in exchange for lease obligations
Amounts included in measurement of lease liabilities
Write-off warrant liability in conjunction with warrant exercises
Write-off of debt discounts (net of debt premiums) in conjunction with convertible note
conversions
Write-off of derivative liability in conjunction with convertible note conversions
—
750
273
2,364
731
477
1,029
—
—
—
210
310
See notes to consolidated financial statements.
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43
PRECIPIO, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2019 and 2018
1. BUSINESS DESCRIPTION
Business Description.
Precipio, Inc., and its subsidiary, (collectively, “we”, “us”, “our”, the “Company” or “Precipio”) is a cancer
diagnostics company providing diagnostic products and services to the oncology market. We have built and continue
to develop a platform designed to eradicate the problem of misdiagnosis by harnessing the intellect, expertise and
technologies developed within academic institutions, and delivering quality diagnostic information to physicians and
their patients worldwide. We operate a cancer diagnostic laboratory located in New Haven, Connecticut and have
partnered with various academic institutions to capture the expertise, experience and technologies developed within
academia to provide a better standard of cancer diagnostics and aim to solve the growing problem of cancer
misdiagnosis. We also operate a research and development facility in Omaha, Nebraska which focuses on
development of various technologies, among them IV-Cell, HemeScreen and ICE-COLD-PCR, or ICP, the patented
technology described further below, which we exclusively licensed from Dana-Farber Cancer Institute, Inc., or Dana-
Farber, at Harvard University. The research and development center focuses on the development of these technologies,
which we believe will enable us to commercialize these and other technologies developed with our current and future
academic partners. The facility in Omaha was also recently certified as a CLIA and CAP facility, and we have begun
bringing in house several molecular tests that the Company had previously referenced out to other laboratories. Our
platform also connects patients, physicians and diagnostic experts residing within academic institutions.
Going Concern.
The 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 December 31, 2019, the
Company had a net loss of $13.2 million, negative working capital of $2.5 million and net cash used in operating
activities of $9.1 million. The Company’s ability to continue as a going concern, for the next twelve months from the
date the consolidated financial statements were issued, 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 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 the consolidated financial
statements were issued, we have already received approximately $9.3 million in aggregate, including approximately
$1.4 million from the sale of 328,590 shares of common stock to Lincoln Park during 2018, $6.6 million from the
sale of 2,778,077 shares of common stock to Lincoln Park during 2019 and $1.3 million from the sale of 900,012
shares of common stock to Lincoln Park from January 1, 2020 through the date the consolidated financial statements
were issued, leaving the company an additional $0.7 million to draw upon.
Notwithstanding the aforementioned circumstances, there remains substantial doubt about the Company’s
ability to continue as a going concern for the next twelve months from the date the consolidated financial statements
were issued. There can be no assurance that the Company will be able to successfully achieve its initiatives
summarized above in order to continue as a going concern. The accompanying 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.
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44
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation.
The consolidated financial statements include the accounts of Precipio, Inc. and our wholly owned
subsidiaries. All inter-company balances and transactions have been eliminated in consolidation.
Use of Estimates.
The preparation of the consolidated financial statements in conformity with GAAP requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during
the reporting period. The most significant estimates and assumptions with regard to these consolidated financial
statements relate to the allowance for doubtful accounts, assumptions used within the fair value of debt and equity
transactions, contractual allowances and related impairments. These assumptions require considerable judgment by
management. Actual results could differ from the estimates and assumptions used in preparing these consolidated
financial statements.
Risks and Uncertainties.
Certain risks and uncertainties are inherent in our day-to-day operations and in the process of preparing our
financial statements. The more significant of those risks are presented below and throughout the notes to the
consolidated financial statements.
The Company operates in 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, reimbursement for patient
services, and Medicare and Medicaid fraud and abuse. Government activity has increased with respect to
investigations and allegations concerning possible violations of fraud and abuse statutes and regulations by healthcare
providers. Violations of these laws and regulations could result in expulsion from government healthcare programs
together with the imposition of significant fines and penalties, as well as significant repayments for patient services
previously billed. Management believes that the Company is in compliance with fraud and abuse regulations, as well
as other applicable government laws and regulations. While no material regulatory inquiries have been made,
compliance 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.
Fair Value.
Unless otherwise specified, book value approximates fair value. The common stock warrant liabilities and
derivative liabilities are recorded at fair value. See Note 12 - Fair Value for additional information.
Other Current Assets.
Other current assets of $0.3 million as of December 31, 2019 include prepaid insurance of $0.2 million and
prepaid assets and other receivables of $0.1 million. Other current assets of $0.5 million as of December 31, 2018
include prepaid assets of less than $0.1 million, prepaid insurance of $0.2 million and other receivables of $0.3 million.
Concentrations of Risk.
From time to time, we may maintain a cash position with financial institutions in amounts that exceed Federal
Deposit Insurance Corporation insured limits of up to $250,000 per depositor per financial institution. We have not
experienced any losses on such accounts as of December 31, 2019.
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45
Service companies in the health care industry typically grant credit without collateral to patients. The
majority of these patients are insured under third-party insurance agreements. The services provided by the Company
are routinely billed utilizing the Current Procedural Terminology (CPT) code set designed to communicate uniform
information about medical services and procedures among physicians, coders, patients, accreditation organizations,
and payers for administrative, financial, and analytical purposes. CPT codes are currently identified by the Centers
for Medicare and Medicaid Services and third-party payers. The Company utilizes CPT codes for Pathology and
Laboratory Services contained within codes 80000-89398.
Inventories.
Inventories consist of laboratory supplies and are valued at cost (determined on an average cost basis, which
approximates the first-in, first-out method) or net realizable value, whichever is lower. We evaluate inventory for
items that are slow moving or obsolete and record an appropriate reserve for obsolescence if needed. We determined
that no allowance for slow moving or obsolete inventory was necessary at December 31, 2019 and 2018.
Property and Equipment, net.
Property and equipment are carried at cost, net of accumulated depreciation and amortization. Expenditures
for maintenance and repairs are expensed as incurred. Depreciation and amortization are computed by the straight-
line method over the estimated useful lives of the related assets as follows:
Furniture and fixtures
Laboratory equipment
Computer equipment and software
5 to 7 years
3 to
10 years
3 to 7 years
For assets sold or otherwise disposed of, the cost and related accumulated depreciation and amortization are
removed from the accounts, and any related gain or loss is reflected in operations for the period. Expenditures for
major betterments that extend the useful lives of property and equipment are capitalized.
Goodwill and Intangible Assets.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of identifiable net assets of a business
acquired and is tested for impairment annually, as of October 1st, or when impairment triggering events may occur
during a quarterly reporting period. Throughout the year ended December 31, 2018, at certain quarterly reporting
periods, the Company experienced a decline in its share price and a significant reduction in its market capitalization,
indicating that it was more likely than not that the fair value of the Company was less than its carry value. Through
valuation analysis of the fair value of the Company using the market capitalization, the discounted cash flow model
and market analysis, the Company concluded that its carrying value exceeded its fair value and goodwill impairment
in the amount of $4.7 million was recorded for the year ended December 31, 2018. As of December 31, 2018, goodwill
was fully written off and no balance remained.
Intangibles
We review our amortizable long-lived assets for impairment annually or whenever events indicate that the
carrying amount of the asset (group) may not be recoverable. An impairment loss may be needed if the sum of the
future undiscounted cash flows is less than the carrying amount of the asset (group). The amount of the loss would be
determined by comparing the fair value of the asset to the carrying amount of the asset (group). There were no
impairment charges on our amortizable long-lived assets during the years ended December 31, 2019 and 2018.
In-process research and development (“IPR&D”) represents the fair value assigned to research and
development assets that were not fully developed when acquired. Until the IPR&D projects are completed, the assets
are accounted for as indefinite-lived intangible assets and subject to impairment testing. The IPR&D principally
related to
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46
research projects that were not related to IV-Cell, HemeScreen or ICP. During 2019, the Company made a
determination to suspend further research and analysis of these projects, and, as a result, it was more likely than not
that the IPR&D was fully impaired, resulting in an impairment charge of $1.6 million in 2019. There was no
impairment of IPR&D during the year ended December 31, 2018.
Debt Issuance Costs, Debt Discounts and Debt Premiums.
Debt issuance costs, debt discounts and debt premiums are being amortized or accreted over the lives of the
related financings on a basis that approximates the effective interest method. Costs and discounts are presented as a
reduction of the related debt and premiums are presented as an increase to the related debt in the accompanying
balance sheets. The amortization amount recorded was expense, net of income, of $0.1 million in 2019 and income,
net of expense, of less than $0.1 million in 2018. Debt discounts and debt premiums are amortized or accreted to
interest expense and interest income on the consolidated statement of operations, respectively. See Note 5 – Long
Term Debt and Note 6 – Convertible Notes for further discussion.
Stock-Based Compensation.
All stock-based awards to date have exercise prices equal to the market price of our common stock on the
date of grant and have ten-year contractual terms. Stock-based compensation cost is based on the fair value of the
portion of stock-based awards that is ultimately expected to vest. The Company utilizes the Black-Scholes option
pricing model for determining the estimated fair value for stock-based awards. Unvested awards as of December 31,
2019 had vesting periods of up to four years from the date of grant. At December 31, 2019, 53,334 unvested awards
outstanding are subject to performance vesting conditions and no awards are subject to market-based vesting
conditions. No awards outstanding at December 31, 2018 were subject to performance or market-based vesting.
Net Sales Recognition.
Revenue recognition occurs when a customer obtains control of the promised goods and service. Revenue
assigned to the goods and services reflects the consideration which the Company expects to receive in exchange for
those goods and services.
The Company derives its revenues from diagnostic testing - histology, flow cytometry, cytology and molecular
testing; clinical research from bio-pharma customers, state and federal grant programs; and from biomarker testing
from bio-pharma customers. All sources of revenue are recorded net of accruals for estimated chargebacks, rebates,
cash discounts, other allowances, and returns. Due to differences in the substance of these revenue types, the
transactions require, and the Company utilizes, different revenue recognition policies for each. See more detailed
information on revenue in Note 14 – Sales Service Revenue, Net And Accounts Receivable.
The Company recognizes revenue utilizing the five-step framework of ASC 606. Control of the laboratory
testing services is transferred to the customer at a point in time. As such, the Company recognizes revenue for
diagnostic testing at a point in time based on the delivery method (web-portal access or fax) for a patient’s laboratory
report. Diagnostic testing service revenue is reported at the estimated net realizable amounts from patients, third-party
payers and others for services rendered, including retroactive adjustment under reimbursement agreements with third-
party payers. Provisions for third-party payer settlements are provided in the period in which the related services are
rendered and adjusted in the future periods, as final settlements are determined. For clinical research and biomarker
services, 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 per the contract. When we receive
payment in advance, we initially defer the revenue and recognize it when we deliver the service.
Deferred net sales included in the balance sheet as deferred revenue was approximately $0.1 million as of
December 31, 2019 and 2018.
Taxes collected from customers and remitted to government agencies for specific net sales producing
transactions are recorded net with no effect on the income statement.
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Accounts Receivable
47
Accounts Receivable result from diagnostic services provided to self-pay and insured patients, project based
testing services and clinical research. The payment for services provided by the Company are generally due within
30 days from the invoice date. Accounts receivable are reduced by an allowance for doubtful accounts. In evaluating
the collectability of accounts receivable, the Company analyzes and identifies trends for each of its sources of revenue
to estimate the appropriate allowance for doubtful accounts. For receivables associated with self-pay patients,
including patients with insurance and a deductible and copayment, the Company records an allowance for doubtful
accounts in the period of services on the basis of past experience of patients unable or unwilling to pay for service fee
for which they are financially responsible. For receivables associated with services provided to patients with third-
party coverage, the Company analyzes contractually due amounts and provides an allowance, if necessary. The
difference between the standard rates and the amounts actually collected after all reasonable collection efforts have
been exhausted is charged against the allowance for doubtful accounts.
Presentation of Insurance Claims and Related Insurance Recoveries.
The Company accounts for its insurance claims and related insurance recoveries at their gross values as
standards for health care entities do not allow the Company to net insurance recoveries against the related claim
liabilities. There were no insurance claims or insurance recoveries recorded during the years ended December 31,
2019 and 2018.
Advertising Costs.
Advertising costs are expensed as incurred and are included in operating expenses on the consolidated
statement of operations. Advertising costs charged to operations totaled less than $0.1 million in 2019 and 2018,
respectively.
Research and Development Costs.
All costs associated with internal research and development are expensed as incurred. These costs include
salaries and employee related expenses, operating supplies and facility-related expenses. Research and development
costs charged to operations totaled $1.2 million and $1.1 million for the years ended December 31, 2019 and 2018,
respectively.
Income Taxes.
Deferred tax assets and liabilities are determined based on the differences between the financial reporting
and tax basis of assets and liabilities at each balance sheet date using tax rates expected to be in effect in the year the
differences are expected to reverse. The effect on the deferred tax assets and liabilities of a change in tax rates is
recognized in the period when the change in tax rates is enacted.
A valuation allowance is established when it is determined that it is more likely than not that some portion
or all of the deferred tax assets will not be realized. A full valuation allowance has been applied against the Company’s
net deferred tax assets as of December 31, 2019 and 2018, due to projected losses and because it is not more likely
than not that the Company will realize future benefits associated with these deferred tax assets.
Management’s conclusions regarding uncertain tax positions may be subject to review and adjustment at a
later date based upon ongoing analysis of, or changes in tax laws, regulations and interpretations thereof as well as
other factors. The Company’s policy is to record interest and penalties directly related to income taxes as income tax
expense in the accompanying consolidated statements of operations, of which there was none for the years ended
December 31, 2019 and 2018.
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Common Stock Warrants.
48
The Company classifies the issuance of common stock warrants as equity any contracts that (i) require
physical settlement or net-stock settlement or (ii) gives the Company a choice of net-cash settlement or settlement in
its own stocks (physical settlement or net-stock settlement). The Company classifies as assets or liabilities any
contracts that (i) require net-cash settlement (including a requirement to net-cash settle the contract if an event occurs
and if that event is outside of the Company’s control), or (ii) gives the counterparty a choice of net-cash settlement or
settlement in stock (physical settlement or net-stock settlement).
Certain of our issued and outstanding warrants to purchase common stock do not qualify to be treated as
equity and accordingly, are recorded as a liability (“Common Stock Warrant Liability”). We are required to present
these instruments at fair value at each reporting date and any changes in fair values are recorded as an adjustment to
earnings.
Beneficial Conversion Features.
The intrinsic value of a beneficial conversion feature (“BCF”) inherent to a convertible note payable, which
is not bifurcated and accounted for separately from the convertible note payable and may not be settled in cash upon
conversion, is treated as a discount to the convertible note payable. This discount is amortized over the period from
the date of issuance to the first conversion date using the effective interest method. If the note payable is retired prior
to the end of its contractual term, the unamortized discount is expensed in the period of retirement to interest expense.
In general, the BCF is measured by comparing the effective conversion price, after considering the relative fair value
of detachable instruments included in the financing transaction, if any, to the fair value of the common shares at the
commitment date to be received upon conversion.
Deemed dividends are also recorded for the intrinsic value of conversion options embedded in preferred
shares based upon the differences between the fair value of the underlying common stock at the commitment date of
the transaction and the effective conversion price embedded in the preferred shares. When the preferred shares are
non-redeemable the BCF is fully amortized into additional paid-in capital and preferred discount. If the preferred
shares are redeemable, the discount is amortized from the commitment date to the first conversion date.
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 2,281,701 and 2,517,675 shares of our common stock have been
excluded from the computation of diluted loss per share at December 31, 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:
Stock options
Warrants
Preferred stock
Convertible notes
Total
December 31,
2018
2019
224,895
490,330
917,573
909,189
20,888
20,888
861,294 1,354,319
2,281,701 2,517,675
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
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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 number of optional practical expedients in transition. The Company has elected the “package of
practical expedients”, which permits it not to reassess under the new 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 consolidated balance sheet on the date of initial
application. See Note 8 – 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 include 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 our consolidated financial statements.
Recent Accounting Pronouncements Not Yet Adopted.
In December 2019, the FASB issued ASU 2019-12 “Income Taxes (Topic 740): Simplifying the Accounting
for Income Taxes”, which is intended to improve consistent application and simplify the accounting for income taxes.
This ASU removes certain exceptions to the general principles in Topic 740 and clarifies and amends existing
guidance. This standard is effective for annual reporting periods beginning after December 15, 2020, including interim
reporting periods within those annual reporting periods, with early adoption permitted. The Company is currently
evaluating the impact of adoption of this ASU and does not expect the adoption of this new standard to have a material
impact on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13 “Fair Value Measurement (Topic 820)”, which modifies
certain disclosure requirements in Topic 820, such as the removal of the need to disclose the amount of and reason
for transfers between Level 1 and Level 2 of the fair value hierarchy, and several changes related to Level 3 fair value
measurements. 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 consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15 “Intangibles—Goodwill and Other—Internal Use Software
(Subtopic 350-40)”, which aligns the requirements for capitalizing implementation costs incurred in a cloud
computing hosting arrangement that is a service contract with the requirements for capitalizing implementation costs
incurred to develop or obtain internal use software. 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
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 the Company for reporting periods beginning after December 15, 2022. We are currently assessing
the potential impact that the adoption of this ASU will have on our consolidated financial statements.
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50
3. PROPERTY AND EQUIPMENT, NET
A summary of property and equipment at December 31, 2019 and 2018 is as follows:
Furniture and fixtures
Laboratory equipment
Computer equipment and software
Equipment under finance leases
Construction in process
$
2019
2018
12 $
299
463
425
23
1,222
12
299
369
402
67
1,149
Less—accumulated depreciation and amortization
Total
$
(791)
431 $
(653)
496
Depreciation expense was approximately $0.1 million for both the years ended December 31, 2019 and 2018.
Depreciation expense during each year includes depreciation related to equipment acquired under finance leases.
4. INTANGIBLES
Intangible assets consist of the following:
Dollars in Thousands
December 31, 2019
Technology
Customer relationships
Backlog
Covenants not to compete
Trademark
IPR&D
Technology
Customer relationships
Backlog
Covenants not to compete
Trademark
IPR&D
Technology
Customer relationships
Backlog
Covenants not to compete
Trademark
Cost
$ 18,990 $
250
200
30
40
1,590
$ 21,100 $
Accumulated Impairment Net Book
Amortization
Charge
Value
2,374 $
208
200
30
40
—
— $ 16,616
42
—
—
—
—
—
—
—
—
1,590
2,852 $ 1,590 $ 16,658
Dollars in Thousands
December 31, 2018
Accumulated Impairment Net Book
Amortization
Charge
Value
Cost
$ 18,990 $
250
200
30
40
1,590
$ 21,100 $
1,424 $
125
200
30
30
—
1,809 $
— $ 17,566
125
—
—
—
—
—
—
10
— 1,590
— $ 19,291
Estimated Useful Life
20 years
3 years
1 year
1 year
2 years
Our IPR&D projects were accounted for as indefinite-lived intangible assets and subject to impairment
testing. During 2019, the Company reviewed its IPR&D for impairment and determined that it was more likely than
not that the
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IPR&D was fully impaired, resulting in an impairment charge of $1.6 million in 2019. For the year ended
December 31, 2018, there was no impairment of IPR&D.
Amortization expense for intangible assets was $1.0 million during the year ended December 31, 2019 and
$1.2 million during the year ended December 31, 2018. Amortization expense for intangible assets is expected to be
$1.0 million, $0.9 million, $0.9 million, $0.9 million and $0.9 million for each of the years ending December 31,
2020, 2021, 2022, 2023 and 2024, respectively.
5. LONG-TERM DEBT
Long-term debt consists of the following:
Department of Economic and Community Development (DECD)
DECD debt issuance costs
Financed insurance loan
September 2018 Settlement
Total long-term debt
Current portion of long-term debt
Long-term debt, net of current maturities
Department of Economic and Community Development
Dollars in Thousands
December 31, 2019 December 31, 2018
274
249 $
$
(28)
(24)
204
260
66
34
516
519
(263)
(321)
253
198 $
$
On January 8, 2018, the Company received gross proceeds of $400,000 when it entered into an agreement
with 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”.) For the year ended December 31, 2018, $100,000 has been
recorded as clinical research grant revenue in the consolidated statements of operations. 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 $3,000 for the years ended December 31, 2019 and 2018, respectively. Net debt
issuance costs were approximately $24,000 and $28,000 at December 31, 2019 and 2018, respectively, and are
presented as a reduction of the related debt in the accompanying 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 2018,
the Company financed $0.4 million with a 4.89% interest rate and fully paid off such loan as of July 2019. In July
2019, the Company financed $0.4 million with a 5.0% interest rate and will make monthly payments through May of
2020. As of December 31, 2019 and 2018, the Financed Insurance Loan outstanding balance of $0.3 million and $0.2
million, respectively, was included in current maturities of long-term debt in the Company’s consolidated balance
sheets. A corresponding prepaid asset was included in other current assets.
Settlement Agreement.
On September 21, 2018, the Company entered into a settlement and forbearance agreement with a creditor
(the “September 2018 Settlement”) pursuant to which, the Company agreed to make monthly principal and interest
payments to the creditor over a two year period, from November 1, 2018 to November 1, 2020, in full and final
settlement of $0.1 million of indebtedness that was owed to the creditor on the date of the September 2018 Settlement.
The settlement amount will accrue interest at the rate of 10% per annum until paid in full. The September 2018
Settlement outstanding balance of approximately $0.1 million was included in current maturities of long-term debt in
the Company’s
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52
consolidated balance sheet as of December 31, 2019 and in long-term debt and accounts payable in the Company’s
consolidated balance sheet as of December 31, 2018.
The aggregate future maturities required on gross long-term debt at December 31, 2019 are as follows:
DECD loan
Financed Insurance Loan
September 2018 Settlement
2021 2022 2023 2024
2025 and
2020
thereafter Total
$ 30 $ 28 $ 30 $ 30 $ 31 $ 100 $ 249
— 260
260
34
—
34
$ 324 $ 28 $ 30 $ 30 $ 31 $ 100 $ 543
— — —
— — —
—
—
6. CONVERTIBLE NOTES.
Convertible notes consists of the following:
Convertible bridge notes
Convertible bridge notes discount and debt issuance costs
Convertible bridge notes premiums
Convertible promissory notes - Exchange Notes
Convertible promissory notes - Exchange notes debt issuance costs
Total convertible notes
Current portion of convertible notes
Convertible notes, net of current maturities
Convertible Bridge Notes.
Dollars in Thousands
December 31, 2019 December 31, 2018
4,294
1,938 $
$
(1,111)
(1,796)
647
—
630
—
(83)
—
4,377
142
(4,377)
(142)
—
— $
$
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 consisted of a series 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 Company completed
three additional drawdowns for aggregate proceeds of $1.3 million, net of an original issue discount of 9% and before
debt issuance cost, for the issuance of notes with an aggregate principal of $1.5 million, during the third quarter
2018. Drawdowns included the following funding from the April 2018 Investors (i) $348,104 in July 2018 for Bridge
Notes with an aggregate principal of $382,526, (ii) $495,955 in August 2018 for Bridge Notes with an aggregate
principal of $545,005 and (iii) $495,941 in September 2018 for Bridge Notes with an aggregate principal of $544,990
(collectively, the “Q3 2018 Bridge Notes”).
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53
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.
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 was recorded
as a debt discount. The Company also incurred legal and advisory fees associated with the April 2018 Bridge Notes
of approximately $164,000 and these were recorded as debt issuance costs. The 9% discount associated with the Q3
2018 Bridge Notes was approximately $133,000 and was recorded as a debt discount.
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”) that are exercisable at a 150% premium to the April 2018
Bridge Notes conversion price or $11.25. Half of such April 2018 Warrants had a five-year term and half had a one-
year term. The Company reviewed the provisions of the April 2018 Warrants to determine the balance sheet
classification of the April 2018 Warrants. The Company concluded that there is an obligation to repurchase the April
2018 Warrants by transferring assets and accordingly the warrants were classified as a liability. The April 2018
Warrants were valued using a Black-Scholes option pricing model with 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. The April 2018 Investors
received 196,340 warrants to purchase shares of common stock of the Company in connection with the Q3 Bridge
Note issuances (the “Q3 2018 Warrants”) with an initial exercise price of $11.25. Half of such Q3 2018 Warrants
had a five-year term and half had a one-year term. The terms of the Q3 2018 Warrants are the same as the April 2018
Warrants and, as such, were classified as liabilities. The Q3 2018 Warrants were valued using a Black-Scholes option
pricing model with an initial value of approximately $0.7 million at the date of issuance and were recorded as a
liability with an offset to debt discount. See Note 12 – Fair Value for further discussion.
On September 20, 2018, immediately after the final drawdown of the Bridge Notes, the Company entered
into an agreement with the April 2018 Investors whereby the exercise price of all warrants issued to the April 2018
Investors in connection with both the 2018 Note Agreement and the Q3 Bridge Notes were amended from $11.25 to
$7.50. The Company reviewed this repricing to determine the appropriate accounting treatment and concluded that
the repricing would be treated as a modification of the warrant agreements. As the warrants related to the Bridge
Notes are classified as liabilities, the change in fair value attributable to the repricing would be reflected in the
subsequent measurement on
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the warrants. Management calculated the change in fair value due to repricing to be an expense of approximately $0.1
million which is included in warrant revaluation in the consolidated statements of operations.
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”). The Advisor Warrants are exercisable at any time and
from time to time, in whole or in part, during the four-year period commencing six months from the date of the Letter
Agreement. Like the April 2018 Warrants and like the Q3 2018 Warrants, the Advisor Warrants met the criteria to be
classified as a liability. The Advisor Warrants were valued using a Black-Scholes option pricing model with an initial
value of approximately $0.1 million at the date of issuance and were recorded as a liability with an offset to debt
discount. See Note 12 – Fair Value for further discussion.
The Company reviewed the conversion option of the April 2018 Bridge Notes and determined that there was
a beneficial conversion feature in connection with the issuance of the April 2018 Bridge Notes since the calculated
effective conversion price was at a discount to the fair market value of the Company's common stock at issuance date.
For purposes of calculating the beneficial conversion feature, the proceeds of $1.7 million from the April 2018 Bridge
Notes were allocated to the notes and warrants based on their relative fair values at the date of issuance. The portion
allocated to the April 2018 Bridge Notes was $0.6 million with the remaining $1.1 million allocated to the April 2018
Warrants. As a result of the allocation of the proceeds, the Company calculated a beneficial conversion feature of
approximately $1.1 million which was recorded as a debt discount with an offset to additional paid in capital. The Q3
2018 Bridge Notes also contained beneficial conversion features. For purposes of calculating the beneficial
conversion features, the net proceeds of $1.3 million from the Q3 2018 Bridge Notes were allocated to the notes and
warrants based on their relative fair values at the date of issuance. The portion allocated to the Q3 2018 Bridge Notes
was $0.6 million with the remaining $0.7 million allocated to the Q3 2018 Warrants. As a result of the allocation of
the proceeds, the Company calculated a beneficial conversion feature of approximately $0.5 million which was
recorded as a debt discount with an offset to additional paid in capital.
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 instrument
which is required to be separated from the debt host contract and accounted for separately as a 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. For the Q3
2018 Bridge Notes, the Company determined the initial fair value of the derivatives at the time of issuance to be
approximately $0.1 million which was recorded as a debt discount with an offset to derivative liability. 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 12 –
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. 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 total debt discounts and debt
issuance costs related to the Q3 2018 Bridge Notes totaled $1.4 million, of which the Company recorded $1.3 million
of debt discount and debt issuance costs as a reduction of the related debt with $0.1 million expensed as a loss on
issuance of convertible notes in the consolidated statements of operations. The $0.1 million recorded as a loss on
issuance of convertible notes was due to the fact that one of the drawdowns during the third quarter of 2018 had debt
discount and debt issuance costs in excess of the face amount of the related debt. The debt discount and debt issuance
costs will be amortized to interest expense over the life of the respective April 2018 Bridge Notes and Q3 2018 Bridge
Notes on a basis that approximates the effective interest method.
On November 29, 2018, the Company entered into an amendment and restatement agreement (the
“Amendment Agreement”) amending and restating the terms of the 2018 Note Agreement. The Amendment
Agreement provided for
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the issuance of up to $1,318,681 of additional Bridge Notes together with applicable warrants, in one or more tranches,
with substantially the same terms and conditions as the previously issued Bridge Notes and related warrants. The
conversion price of the notes was amended so that it 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.
In connection with the Amendment Agreement, during the fourth quarter of 2018, the Company completed
two additional drawdowns for aggregate proceeds of $1.1 million, net of an original issue discount of 9% and before
debt issuance costs, for the issuance of notes with an aggregate principal of $1.2 million (collectively, the “Q4 2018
Bridge Notes”). Approximately $0.3 million of the $1.1 million of proceeds was received after December 31, 2018
and is included in other current assets on our consolidated balance sheet at December 31, 2018. The 9% discount
associated with the Q4 2018 Bridge Notes was approximately $108,000 and was recorded as a debt discount. In
connection with the Q4 2018 Bridge Note issuances, the Company issued to the investors 300,115 warrants to
purchase shares of common stock of the Company (the “Q4 2018 Warrants”) with an initial exercise price of $5.40
and a five-year term. The terms of the Q4 2018 Warrants are the same as the April 2018 Warrants and, as such, were
classified as liabilities. The Q4 2018 Warrants were valued using a Black-Scholes option pricing model with an initial
value of approximately $0.7 million at the date of issuance and were recorded as a liability with an offset to debt
discount. See Note 12 – Fair Value for further discussion.
The Company reviewed the conversion option of the Q4 2018 Bridge Notes and determined that there was a
beneficial conversion feature in connection with the issuance of the Q4 2018 Bridge Notes, as there was with the
previously issued Bridge Notes. For purposes of calculating the beneficial conversion features, the net proceeds of
$1.1 million from the Q4 2018 Bridge Notes were allocated to the notes and warrants based on their relative fair
values at the date of issuance. The portion allocated to the Q4 2018 Bridge Notes was $0.4 million with the remaining
$0.7 million allocated to the Q4 2018 Warrants. As a result of the allocation of the proceeds, the Company calculated
a beneficial conversion feature of approximately $0.5 million which was recorded as a debt discount with an offset to
additional paid in capital. The Q4 2018 Bridge Notes contain the Bridge Notes Redemption Feature that qualifies as
an embedded derivative instrument which is required to be separated from the debt host contract and accounted for
separately as a derivative. For the Q4 2018 Bridge Notes, the Company determined the initial fair value of the
derivatives at the time of issuance to be approximately $15,000 which was recorded as a debt discount with an offset
to derivative liability. See Note 12 – Fair Value for further discussion.
The total debt discounts and debt issuance costs related to the Q4 2018 Bridge Notes totaled $1.4 million, of
which 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 $0.3 million expensed as a loss on issuance of convertible notes
in the consolidated statements of operations. The $0.3 million recorded as a loss on issuance of convertible notes was
due to the fact that one of the drawdowns during the fourth quarter of 2018 had debt discount and debt issuance costs
in excess of the face amount of the related debt.
At the time of the Amendment Agreement, the conversion price related to $3.3 million of previously issued
Bridge Notes, the April 2018 Bridge Notes and Q3 2018 Bridge Notes, was amended. The Company reviewed the
modification to the conversion price and concluded that the amendment will be treated as an extinguishment of the
related Bridge Notes. The difference between the carrying value of the notes just prior to modification (the “Old
Debt”) and the fair value of the notes just after modification (the “New Debt”) would be recorded as a gain or loss on
extinguishment in the consolidated statements of operations. The Company removed the carrying value of the Old
Debt which included $3.1 million of unamortized debt discounts, beneficial conversion features of $1.0 million and
less than $0.1 million in derivative liabilities. The Company calculated the fair value of the New Debt to be $4.2
million. The Company reviewed whether or not a beneficial conversion feature existed on the New Debt but the
calculation resulted in zero intrinsic value to the conversion options so no new beneficial conversion feature was
recorded. Management also reviewed the Bridge Notes Redemption Feature of the New Notes but their fair value was
zero so no derivative liability was recorded at the time of modification, however this will be reassessed at the end of
each reporting period. As a result,
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56
the Company recorded a debt premium on the New Debt of $0.9 million and a loss on extinguishment of convertible
notes of $2.9 million in the consolidated statements of operations during the year ended December 31, 2018.
in November 2018
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
(the Amendment Agreement”)). The Amendment No. 2
Agreement provided the Company with approximately $0.9 million of gross proceeds for the issuance of notes with
an aggregate principal of $1.0 million (the “April 2019 Bridge Notes”) together with applicable warrants, with
substantially the same terms and conditions as the previously issued Bridge Notes and related warrants. The 9%
discount associated with the April 2019 Bridge Notes was approximately $0.1 million 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 12 – 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 year ended December 31, 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 consolidated statements of operations.
On May 14, 2019, the Company entered into a securities purchase agreement pursuant to which, the
Company was provided with $1.0 million of gross proceeds for the issuance of notes with an aggregate principal of
$1.1 million (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 $0.1 million 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 12 – 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
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57
agreement) being declared effective, whichever occurs earlier, the conversion price shall be equal to 80% of the lowest
VWAP in the 10 trading days prior to the date of the notice of conversion, but in no event below the floor price of
$2.25.
The Company reviewed the conversion option of the May 2019 Bridge Notes and determined that there was
a beneficial conversion feature with a value of approximately $0.9 million which was recorded as a debt discount with
an offset to additional paid in capital. The May 2019 Bridge Notes also contain the Bridge Notes Redemption Feature
and the Company performed a valuation at the time of issuance which resulted in zero value, at that time, due to the
high value of the conversion feature and a limited upside from the redemption premium.
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
year ended December 31, 2019.
During the years ended December 31, 2019 and 2018, $4.4 million and $0.2 million, respectively, of Bridge
Notes, plus interest, were converted into 1,900,766 and 93,334 shares of common stock of the Company, respectively.
As a result of the conversions, the Company wrote-off approximately $0.5 million of derivative liability, with an
offset to additional paid-in capital, during the year ended December 31, 2019 and approximately $0.1 million of debt
premium with an offset to additional paid in capital during the year ended December 31, 2018.
During the years ended December 31, 2019 and 2018, the change in Bridge Note debt discounts and debt
premiums was as follows:
For the Year Ended December 31,
Beginning balance at January 1
Additions:
Deductions:
2019
Debt
Discounts
$
(1,111) $
(2,088)
2018
Debt
Premiums
647
—
Debt
Discounts
$
— $
(4,275)
Debt
Premiums
—
879
Amortization (accretion) (1)
Write-off related to note conversions (2)
Write-off related to note extinguishment (3)
(170)
(62)
—
647
(1) Amortization/accretion is recognized as interest expense/income within the consolidated statements of
118
—
3,046
(1,111) $
273
1,130
—
(1,796) $
(167)
(480)
—
—
$
Balance at December 31
$
operations based on the effective interest method.
(2) Write-offs associated with note conversions are recognized as an offset to additional paid-in capital at the time
of the conversion.
(3) Write-offs associated with note extinguishment are recognized as a loss and included in loss on extinguishment
of convertible notes in the consolidated statements of operations.
The remaining debt discounts of $1.8 million, as of December 31, 2019, are expected to be fully amortized
by the end of the second quarter of 2020.
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
warrants, with a fair value of approximately $0.2 million, to purchase shares of the Company’s common stock.
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58
The Debt Obligations were restructured as follows:
·
·
·
The Company entered into a scheduled long-term debt repayment agreement of approximately $3.2
million, which includes interest of approximately $0.6 million, to be paid in forty-eight equal monthly
installments beginning in July 2018 (the “Secured Debt Obligations”).
Debt Obligations of $1.9 million were canceled in exchange for 120,983 shares of the Company’s
common stock with a weighted average price per share of $15.60 (the “Settlement Common Shares”).
The stock was issued in February 2018.
Warrants to purchase 7,207 shares of the Company’s common stock at an exercise price of $112.50 per
share (the “Creditor Warrants”) were issued to certain Creditors. The Creditor Warrants were issued in
February 2018.
During 2018, the Company entered into an Exchange Agreement (the “Exchange Agreements”) with three
institutional investors (the “Holders”) pursuant to which the Company issued 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. For the year ended December 31, 2018, $3.2 million of
Secured Debt Obligations were exchanged for $2.8 million of Exchange Notes. The Company considered the
appropriate accounting treatment of the Exchange and determined that the Exchange will be treated as a debt
extinguishment and the difference between the carrying amount of the Secured Debt Obligations and the face value
of the Exchange Notes will be treated as a gain on extinguishment. The Company recorded a $0.4 million gain on
extinguishment of debt in the consolidated statements of operations for the year ending December 31, 2018.
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. In accordance with the terms of the Exchange Notes, the Holder shall have the right, to convert at the then
applicable conversion price any amount of the Exchange Notes up to $300,000 on any given Trading Day, with a
maximum conversion amount up to $500,000 during a period of five Trading Days (the “Conversion Option”). The
conversion price shall be the lesser of (i) the average volume weighted average price for the five trading days prior to
the date of conversion multiplied by 1.65 and (ii) $15.00 (the “Conversion Price”). At any time at which there is no
Equity Conditions Failure, as defined in the terms of the Exchange Note, and only once every ten trading days, the
Company shall have the right, but not the obligation, to direct the Holders to convert up to 20% of the then outstanding
principal amount of the Exchange Notes under specified conditions (the “Company Put Option”). The Company will
be subject to certain restrictive covenants pursuant to the Notes, including limitations on (i) amending its certificate
of incorporation and bylaws (ii) indebtedness, (iii) asset sales or leases, (iv) restricted payments and investments,
(v) redemptions or repurchases of capital stock and (vi) transactions with affiliates, and the conversion price of the
Exchange Notes shall be subject to certain customary adjustments in the event of stock splits, dividends, rights
offerings or other pro rata distributions to holders of the Company’s common stock.
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. The valuation was performed using a Monte Carlo Simulation. See Note 12 –
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. The valuation was performed using a Monte Carlo
Simulation.
The Company also reviewed certain redemption provisions and call options that exist in the terms of the
Exchange Notes and determined that neither require bifurcation or separate accounting.
During the year ended December 31, 2019 and 2018, Exchange Notes of approximately $0.6 million and
$2.2 million, respectively, were converted into 155,351 and 291,562 shares of common stock of the Company,
respectively.
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59
As of December 31, 2019 and 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 consolidated balance sheet.
During the year ended December 31, 2019 and 2018, the change in Exchange Note debt discounts was as
follows:
(Dollars in thousands)
Beginning balance at January 1
$
Additions:
Deductions:
Amortization (1)
For the Year Ended December 31,
2019
2018
(83) $
—
2
—
(383)
28
Balance at December 31
Write-off related to note conversions (2)
272
(83)
(1) Amortization is recognized as interest expense within the condensed consolidated statements of
81
— $
$
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 Exchange Note conversions, during the years ended December 31, 2019 and 2018, the
Company wrote-off approximately $0.1 million and $0.3 million, respectively, of derivative liability with an offset to
additional paid-in capital.
Convertible Promissory Notes – Crede Note.
On January 15, 2019, the Company and Crede Capital Group LLC (“Crede”) entered into an amendment and
restatement agreement (the “Crede Amendment Agreement”) in order to enable the Company to provide Crede with
an alternative means of payment of a previous settlement amount, See Note 7 – 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.
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 December 31, 2019 the remaining amount due on the Crede Note was zero.
Convertible Promissory Notes – Leviston Note
On February 8, 2018, the Company entered into an equity purchase agreement (the “2018 Purchase
Agreement”) with Leviston Resources LLC (“Leviston”), see Note 11 – Stockholders Equity for details of the 2018
Purchase Agreement. On January 29, 2019, the Company entered into a settlement agreement (the “Leviston
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60
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.
During the year ended December 31, 2019, the Company made cash payments of less than $0.1 million on
the Leviston Note and $0.7 million of the Leviston note was converted into 184,357 shares of common stock of the
Company. As of December 31, 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 consolidated balance sheet.
7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES.
Accrued expenses at December 31, 2019 and 2018 are as follows:
(dollars in thousands)
Accrued expenses
Accrued compensation
Accrued interest
December 31, 2019 December 31, 2018
1,583
$
118
239
1,940
1,268 $
247
124
1,639 $
$
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 in the consolidated statements of operations. During the years
ended December 31, 2019 and 2018, approximately $1.4 million and $0.3 million, respectively, was recorded as a
gain.
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61
Other current liabilities at December 31, 2019 and 2018 are as follows:
(dollars in thousands)
Liability related to equity purchase agreement
Liability for settlement of equity instrument
December 31, 2019 December 31, 2018
460
—
1,450
—
1,910
— $
$
On February 20, 2018, Crede Capital Group LLC (“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. Crede claimed that Precipio had breached a Securities Purchase Agreement and Warrant that
Crede entered into in connection with an investment in Transgenomic and that pursuant to those agreements, Precipio
owed Crede approximately $2.2 million. 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. In accordance with the terms of the agreement and in addition to the agreement to pay, we also
executed and delivered to Crede an affidavit of confession of judgment.
As of the date of the Crede Agreement, the fair value of the common stock warrant liability related to Crede
was revalued to approximately $0.4 million, resulting in a gain of $0.2 million included in warrant revaluation in the
consolidated statement of operations during the year ended December 31, 2018. See Note 12 – Fair Value for further
discussion. At the time of the Crede Agreement, the Company recorded an additional loss of $0.4 million, which is
included in loss on settlement of equity instruments in the consolidated statement of operations during the year ended
December 31, 2018. During 2018, the Company paid approximately $0.5 million to Crede, with a remaining balance
of $1.45 million as of December 31, 2018. On January 15, 2019, the $1.45 million liability was replaced with the
Crede Note.
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 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 consolidated balance sheet at
December 31, 2018. See Note 6 – Convertible Notes.
8. LEASES
On January 1, 2019, the Company recorded initial ROU assets and corresponding operating lease liabilities
of approximately $750,000 and a reversal of deferred rent and prepaid expenses of approximately $6,000 resulting in
no cumulative effect adjustment upon adoption of Topic 842. The Company leases administrative facilities and
laboratory equipment through operating lease agreements. In addition we rent various equipment used in our
diagnostic lab and in our administrative offices through finance lease arrangements. Our operating leases include
both lease (e.g., fixed payments including rent) and non-lease components (e.g., common area or other maintenance
costs). The facility leases include one or more options to renew, from 1 to 5 years or more. The exercise of lease
renewal options is typically at our sole discretion, therefore, the renewals to extend the lease terms are not included
in our ROU assets and lease liabilities as they are not reasonably certain of exercise. We regularly evaluate the
renewal options and, when they are reasonably certain of exercise, we include the renewal period in our lease term. As
our leases do not provide an implicit rate, we use our collateralized incremental borrowing rate based on the
information available at the lease commencement date in determining the present value of the lease payments.
Operating leases result in the recognition of ROU assets and lease liabilities on the balance sheet. ROU assets
represent our right to use the leased asset for the lease term and lease liabilities represent our obligation to make lease
payments. Operating lease ROU assets and liabilities are recognized at commencement date based on the present
value of lease payments over the lease term. Lease expense is recognized on a straight-line basis over the lease term.
Leases with an initial term of 12 months or less are not recorded on the balance sheet. The primary leases we enter
into with initial terms of 12 months or less are for equipment.
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62
Upon the adoption of Topic 842, our accounting for finance leases, previously referred to as capital leases,
remains substantially unchanged from prior guidance.
The balance sheet presentation of our operating and finance leases is as follows:
(dollars in thousands)
Classification on the Condensed Consolidated Balance Sheet
December 31, 2019
Assets:
Operating lease assets
Finance lease assets
Total lease assets
Liabilities:
Current:
Operating lease right-of-use assets, net
Property and equipment, net
Operating lease obligations
Finance lease obligations
Current maturities of operating lease liabilities
Current maturities of finance lease liabilities
Noncurrent:
Operating lease obligations
Finance lease obligations
Total lease liabilities
Operating lease liabilities, less current maturities
Finance lease liabilities, less current maturities
$
$
$
$
519
184
703
209
52
317
119
697
As of December 31, 2019, the estimated future minimum lease payments, excluding non-lease components,
are as follows:
(dollars in thousands)
2020
2021
2022
2023
2024
Thereafter
Total lease obligations
Less: Amount representing interest
Present value of net minimum lease obligations
Less, current portion
Long term portion
Other information as of December 31, 2019:
Weighted-average remaining lease term (years):
Operating leases
Finance leases
Weighted-average discount rate:
Operating leases
Finance leases
$
Operating Leases
$
242 $
241
48
35
17
—
583
(57)
526
(209)
317 $
Finance Leases
Total
62 $
38
32
28
27
13
200
(29)
171
(52)
119 $
304
279
80
63
44
13
783
(86)
697
(261)
436
2.8
4.3
8.00%
7.25%
During the year ended December 31, 2019, operating cash flows from operating leases was $144,000 and
ROU assets obtained in exchange for operating lease liabilities was $750,000.
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Operating Lease Costs
63
Operating lease costs were $0.3 million during the year ended December 31, 2019 and 2018, respectively.
These costs are primarily related to long-term operating leases for the Company’s facilities and laboratory equipment.
Short-term and variable lease costs were less than $0.1 million for the years ended December 31, 2019 and 2018,
respectively.
Finance Lease Costs
Finance leases are included in property and equipment, net and finance lease liabilities, less current maturities
on the consolidated balance sheets. The associated amortization expense and interest included in the consolidated
statements of operations for the year ended December 31, 2019 and 2018 is less than $0.1 million, respectively.
9. COMMITMENTS AND CONTINGENCIES
PURCHASE COMMITMENTS
The Company has entered into purchase commitments for reagents from suppliers. These agreements started
in 2011 and run through 2025. The Company and the suppliers will true up the amounts on an annual basis. The future
minimum purchase commitments under these and other purchase agreements are as follows:
Years ending December 31,
2020
2021
2022
2023
2024
Thereafter
LITIGATIONS
(dollars in
thousands)
341
242
228
219
149
50
1,229
$
$
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.
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 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 less than $0.1 million has been recorded and is
reflected in accounts payable within the accompanying consolidated balance sheet at December 31, 2019 and 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
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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. During the third quarter of 2019, both the Company and the insurance company paid their
respective amounts to an escrow account where the funds will be held until they are approved for distribution at a
fairness hearing of the Court which took place on November 4, 2019. As of the date the consolidated financial
statements were issued, the Company is waiting for the Court to render its judgement which is still outstanding.
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 consolidated balance sheet at
December 31, 2018. The obligation was paid in full during the second quarter 2019, resulting in no remaining amount
due to Bio-Rad.
LEGAL AND REGULATORY ENVIRONMENT
The healthcare industry is subject to numerous laws and regulations of federal, state and local governments.
These laws and regulations include, but are not limited to, matters such as licensure, accreditation, government
healthcare program participation requirement, reimbursement for patient services and Medicare and Medicaid fraud
and abuse. Government activity has increased with respect to investigations and allegations concerning possible
violations of fraud and abuse statutes and regulations by healthcare providers.
Violations of these laws and regulations could result in expulsion from government healthcare programs
together with the imposition of significant fines and penalties, as well as significant repayments for patient services
previously billed. Management believes that the Company is in compliance with fraud and abuse regulations, as well
as other applicable government laws and regulations. While no material regulatory inquiries have been made,
compliance 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.
10. INCOME TAXES
The Company recorded a deferred tax liability of $0.1 million as of December 31, 2018, related to the
acquisition of IPR&D through the Merger. This deferred tax liability was recorded to account for the book versus tax
basis difference related to the IPR&D intangible asset. This deferred tax liability was excluded from sources of future
taxable income, as the timing of its reversal cannot be predicted due to the indefinite life of this IPR&D. As such, this
deferred tax liability cannot be used to offset the valuation allowance. As a result of the write-off of the IPR&D in
2019, the related deferred tax liability of $0.1 million was eliminated and is included in income tax benefit in the
consolidated statements of operations for the year ended December 31, 2019.
Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company’s net
deferred tax assets relate primarily to its net operating loss carryforwards and stock based compensation, offset by
property and equipment and intangible assets. With the exception of the IPR&D, the Company has recorded a full
valuation allowance to offset the net deferred tax assets, because it is not more likely than not that the Company will
realize future benefits associated with these net deferred tax assets at December 31, 2019 and 2018.
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At December 31, 2019 and 2018, the Company had net deferred tax assets of $10.7 million and $8.7 million,
respectively, against which a valuation allowance of $10.7 million and $8.8 million, respectively, had been recorded.
The valuation allowance excluded the deferred tax liability for IPR&D assigned as an indefinite life intangible asset
for book purposes, also known as a “naked credit” in the amount of $0.1 million at December 31, 2018. The increase
in the valuation allowance for the year ended December 31, 2019 is $1.9 million, resulting from additional net
operating losses generated in the year. The deferred tax liabilities associated with the book versus tax basis difference
of intangible assets are the result of an asset step-up pursuant to the Merger. Significant components of the Company’s
deferred tax assets at December 31, 2019 and 2018 are as follows:
Deferred tax assets:
Net operating loss and credit carryforwards
Stock-based compensation
Other
Gross deferred tax assets
Deferred tax liabilities:
Property and equipment
Intangible assets
IPR&D intangible assets
Gross deferred tax liabilities
Net deferred tax assets
Less valuation allowance
Net deferred liability
Dollars in Thousands
2018
2019
$ 13,989 $ 10,202
192
426
10,820
292
666
14,947
(95)
(4,148)
—
(4,243)
10,704
(10,704)
$
— $
42
(2,084)
(70)
(2,112)
8,708
(8,778)
(70)
The Company’s provision for income taxes for the year ended December 31, 2019 and December 31, 2018
relates to income taxes in states and other jurisdictions and differs from the amounts determined by applying the
statutory federal income tax rate to the loss before income taxes for the following reasons:
Benefit at federal rate
Increase (decrease) resulting from:
State income taxes—net of federal benefit
Miscellaneous permanent differences
Warrant liability revaluation
Impairment of goodwill
Impairment of in-process research and development
Other
Change in valuation allowance
Total income tax benefit
Dollars in Thousands
2019
2018
$ (2,796) $ (3,354)
(517)
78
(104)
(633)
—
(479)
— 1,170
—
(70)
—
14
3,339 3,003
(279)
(70) $
$
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66
The income tax expense consists of the following at December 31, 2019 and 2018.
Federal:
Current
Deferred
Total Federal
State:
Current
Deferred
Total State
Foreign:
Current
Deferred
Total Foreign
Total Tax Provision
Dollars in Thousands
2019
2018
$
$
$
$
$
$
$
— $
(70)
(70) $
—
(279)
(279)
— $
—
— $
—
—
—
— $
—
— $
(70) $
—
—
—
(279)
The Company had approximately $61 million and $39 million of available gross federal and state net
operating loss (“NOL”) carryforwards as of December 31, 2019 and 2018, respectively. Beginning in 2018, under the
Act, federal loss carryforwards have an unlimited carryforward period, however such losses can only offset 80% of
taxable income in any one year. Included in the total NOLs for 2019 are $31 million of federal losses that fall under
these new rules. Section 382 of the Internal Revenue Code, and similar state regulations, contain provisions that may
limit the NOL carryforwards available to be used to offset income in any given year upon the occurrence of certain
events, including changes in the ownership interests of significant stockholders. In the event of a cumulative change
in ownership in excess of 50% over a three-year period, the amount of the NOL carryforwards that the Company may
utilize in any one year may be limited. The Company reduced its tax attributes (NOLs and tax credits) and generated
a limitation on utilization of such attributes resulting from the Merger.
At December 31, 2019 and 2018, and as a result of the limitations under Section 382 of the Internal Revenue
Code, the Company had a total of unused federal tax net operating loss carryforwards with expiration dates as follows:
2036
2037
Unlimited life
Total Federal
Dollars in Thousands
2019
2018
$ 13,470 $ 13,470
3,441 3,441
42,100 21,138
$ 59,011 $ 38,049
The Company has adopted guidance on accounting for uncertainty in income taxes which clarified the
accounting for income taxes by prescribing the minimum threshold a tax position is required to meet before being
recognized in the financial statements as well as guidance on de-recognition, measurement, classification and
disclosure of tax positions. There are no material uncertain tax positions that would require recognition in the financial
statements. The Company is obligated to file income tax returns in the U.S. federal jurisdiction and various U.S. states.
Since the Company had losses in the past, all prior years that generated NOLs are open and subject to audit
examination in relation to the NOL generated from those years. Our evaluation of uncertain tax positions was
performed for the tax years ended December 31, 2014 and forward.
11. STOCKHOLDERS’ EQUITY
Common Stock
Pursuant to our Third Amended and Restated Certificate of Incorporation, as amended, we currently have
150,000,000 shares of common stock authorized for issuance. On December 20, 2018, the Company’s shareholders
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approved the proposal to authorize the Company’s Board of Directors to, in its discretion, to amend the Company’s
Third Amended and Restated Certificate of Incorporation to increase the total number of authorized shares of common
stock from 150,000,000 shares to 250,000,000 shares. The Company has not yet affected this increase.
On February 12, 2018, the Company issued 120,983 shares of its common stock in exchange for
approximately $1.9 million of debt obligations. See Note 6 – Convertible Notes.
During the year ended December 31, 2018, the Company issued 208,000 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 year ended December
31, 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 - Preferred Stock induced conversions).
During the years ended December 31, 2019 and 2018, the Company issued 310,200 and 252,486 shares of
its common stock, respectively, in connection with the exercise of 310,200 and 252,486 warrants, respectively. The
warrant exercises resulted in net cash proceeds to the Company of approximately $1.6 million and $1.3 million during
the years ended December 31, 2019 and 2018, respectively.
Also during the years ended December 31, 2019 and 2018, the Company issued 2,511,173 and 384,896
shares of its common stock, respectively, in connection with the conversion of convertible notes, plus interest, totaling
$7.6 million and $2.4 million, respectively. See Note 6 – 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 $132,000 in costs which have been treated as issuance costs within additional paid-in capital in the
accompanying 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 been 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 the 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 this 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 of the Company, Leviston will have the right to receive
a
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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, 2018, within the other current liabilities line of the accompanying
consolidated balance sheet.
As of December 31, 2018, the Company had a total of $0.7 million in accruals (see Note 7 – 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 Note in full satisfaction of all obligations owed to Leviston. See Note 6
– Convertible Notes for further details of the Leviston Note.
LP Purchase Agreement
On September 7, 2018, the Company entered 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, 466,667 shares of common stock, which
includes the LP Commitment Shares, 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 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 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, 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. As of August 5, 2019, all shares registered under this S-1 had been sold and/or issued to Lincoln Park. On
August 9, 2019, 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, an additional 1,800,000 shares of common stock that
have been or may be issued to Lincoln Park under the LP Purchase Agreement. As of December 31, 2019,
1,680,000 shares registered under this S-1 had been sold and/or issued to Lincoln Park and 120,000 were sold and/or
issued to Lincoln Park in January 2020. On January 14, 2020, 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, an
additional 920,654 shares of common stock that have been or may be issued to Lincoln Park under the LP Purchase
Agreement. From January 1, 2020 through the date the consolidated financial statements were issued, 780,012
shares registered under this S-1 had been sold and/or issued to Lincoln Park.
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 the Floor Price, defined as the
lower of (i) $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) and (ii) $0.10 per
share, 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 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
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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’s common stock
then beneficially owned by Lincoln Park and its affiliates, would result in Lincoln Park and its affiliates having
beneficial ownership, at any single point in time, of more than 4.99% of the then total outstanding shares of the
Company’s common stock, as calculated pursuant to Section 13(d) of the Securities Exchange Act of 1934, as
amended, or the Exchange Act, and Rule 13d-3 thereunder, which limitation the Company refers to as the Beneficial
Ownership Cap as defined in the LP Agreement.
As of the date the consolidated financial statements were issued, we have already received $9.3 million in
aggregate, including approximately $1.4 million from the sale of 328,590 shares of common stock to Lincoln
Park during 2018, $6.6 million from the sale of 2,778,077 shares of common stock to Lincoln Park during 2019, and
$1.3 million from the sale of 900,012 shares of common stock to Lincoln Park from January 1, 2020 through the date
the consolidated financial statements were issued.
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 B Preferred Stock
The Company filed a Certificate of Designation of Preferences, Rights and Limitations of Series B
Convertible Preferred Stock (“Series B Preferred Stock”) with the State of Delaware which designates 6,900 shares
of our preferred
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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. The Series B Preferred Stock includes a beneficial ownership blocker but has no dividend rights
(except to the extent dividends are also paid on the common stock). On August 28, 2017, the Company completed an
underwritten public offering (the “August 2017 Offering”) consisting of the Company’s Series B Preferred Stock and
warrants.
The conversion price of the Series B Preferred Stock contains a down round feature. The Company will
recognize the effect of the down round feature when it is triggered. At that time, the effect would be treated as a
deemed dividend and as a reduction of income available to common shareholders in our basic earnings per share
calculation.
The 2018 Purchase Agreement 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 to
$15.60 per share. In connection with the down round adjustment, the Company calculated an incremental beneficial
conversion feature of approximately $1.4 million which was recognized as a deemed dividend at time of the down
round adjustment (“Deemed Dividend A”).
The 2018 Inducement Agreement, discussed below, 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 $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 at time of the down round adjustment (“Deemed Dividend B”).
The 2018 Note Agreement, see Note 6 – 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 time of the down round adjustment (“Deemed Dividend C”).
On November 29, 2018, the Amendment Agreement 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 $4.50 per share to $2.25 per share. In connection with the down round adjustment, the
Company calculated an incremental beneficial conversion feature of approximately $0.3 million which was
recognized as a deemed dividend at time of the down round adjustment (“Deemed Dividend D”).
During the year ended December 31, 2018, 2,340 shares of Series B Preferred Stock, that were outstanding,
were converted into 208,000 shares of our common stock.
At December 31, 2019 and 2018, the Company had 6,900 shares of Series B designated and issued and 47
shares of Series B outstanding.
Series C Preferred Stock
The Company filed a Certificate of Designation of Preferences, Rights and Limitations of Series C
Convertible Preferred Stock (“Series C Preferred Stock”) with the State of Delaware 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. On November 2, 2017, the Company completed a registered direct offering
consisting of the Company’s Series C Preferred Stock and warrants (the “Series C Preferred Offering”). The
conversion price of the Series 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 down round adjustment, the Company calculated an
incremental beneficial conversion feature of approximately $0.8 million which was recognized as a deemed dividend
at time of the
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down round adjustment (“Deemed Dividend E”). There were no further adjustments to the conversion price of the
Series C Preferred stock because all of the Series C Preferred Stock was converted in 2018.
During the year ended December 31, 2018, 2,548 shares of Series C Preferred Stock were converted into
223,022 shares of our common stock.
At December 31, 2019 and 2018, the Company had 2,748 shares of Series C designated and issued and zero
shares of Series C outstanding.
Liquidation Preferences
The following is the liquidation preferences for the Company’s preferred stock;
The Series B Preferred Stock and Series C Preferred Stock have identical terms regarding liquidation
preferences. Upon any liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary,
the holders shall be entitled to receive out of the assets of the Corporation an amount equal to the par value, plus any
accrued and unpaid dividends thereon, for each share of Preferred Stock before any distribution or payment shall be
made to the holders of the Common Stock, and if the assets of the Corporation shall be insufficient to pay in full such
amounts, then the entire assets to be distributed to the holders shall be ratably distributed among the holders in
accordance with the respective amounts that would be payable on such shares. If all amounts were paid in full; and
thereafter, the holders shall be entitled to receive out of the assets, whether capital or surplus, of the Corporation the
same amount that a holder of Common Stock would receive if the Preferred Stock were fully converted to Common
Stock which amount shall be paid pari passu with all holders of Common Stock.
Preferred Stock induced conversions
On March 21, 2018, the Company entered into a letter agreement (the “2018 Inducement Agreement”) with
certain holders of shares of the Company’s Series B Preferred Stock and Series C Preferred Stock (together the
“Preferred Stock”), and 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 pursuant 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 (the “Exercise Price Reduction”) and the conversion price of the Preferred
Stock was reduced to $11.25 (the “Conversion Price Reduction”). As consideration for the Company’s agreement to
the Exercise Price Reduction and the Conversion Price Reduction, (i) each investor agreed to convert the shares of
Preferred Stock held by such investor into shares of Common Stock in increments of up to 4.99% of the shares of
common stock outstanding as of the date of the 2018 Inducement Agreement and (ii) one investor agreed to exercise
44,444 Warrants and another investor agreed to exercise 33,333 Warrants in increments of up to 4.99% of the shares
of common stock outstanding as of the date of the 2018 Inducement Agreement, in each case in accordance with the
beneficial ownership limitations set forth in the Company’s Certificate of Designation of Preferences, Rights and
Limitations of Series B Convertible Preferred Stock, the Company’s Certificate of Designation of Preferences, Rights
and Limitations of Series C Convertible Preferred Stock and the Warrants. As discussed above, as of December 31,
2019, all shares of Preferred Stock, except 47 shares of Series B Preferred Stock, were converted to shares of our
common stock 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 inducement by the Company to convert shares of the Preferred
Stock. The conversion price of the Preferred Stock and the exercise price of the Warrants were reduced from $15.60
per share to $11.25 per share, respectively. The Company calculated the fair value of the additional securities and
consideration to be approximately $1.2 million (“Deemed Dividend F”). During the year ended December 31, 2018,
this amount was recorded as a charge to additional paid-in-capital and as a deemed dividend resulting in a reduction
of income available to common shareholders in our basic earnings per share calculation. The $1.2 million is comprised
of two components: 1) $1.1 million related to the fair value of the additional common shares issued upon conversion
of the
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72
Preferred Stock due to the reduced conversion price and 2) $0.1 million in incremental fair value of the Warrants
resulting from the reduction of the exercise price.
Common Stock Warrants.
The following represents a summary of the warrants outstanding as of December 31, 2019:
Warrants
(1)
(2)
(3)
(4)
(5)
(5)
(6)
Issue Year
Expiration
Shares
Price
Underlying Exercise
2014
2015
2015
2016
2017
2017
2017
April 2020
February 2020
December
2020
January 2021
June 2022
June 2022
June 2022
832 $ 1,800.00
1,588 $ 1,008.00
272 $ 747.00
596 $ 544.50
41.25
7.50
6,095 $ 105.00
2,540 $
500 $
(7)
(8)
(9)
(9)
(10)
(10)
(11)
(12)
(13)
(14)
(14)
(15)
(16)
(16)
(16)
(16)
(16)
(16)
(17)
(17)
(18)
(19)
2017
2017
2017
2017
2017
2017
2017
2017
2018
2018
2018
2018
2018
2018
2018
2018
2018
2018
2018
2018
2019
2019
August 2022
August 2022
August 2022
August 2022
August 2022
August 2022
October 2022
May 2023
October 2022
April 2023
April 2023
October 2022
July 2023
July 2023
August 2023
August 2023
September
2023
September
2023
November
2023
December
2023
April 2024
May 2024
2.25
25,201 $
4,000 $
46.88
47,995 $ 150.00
7.50
9,101 $
2.25
16,664 $
2.25
7,335 $
2.25
666 $
2.25
— $
7,207 $ 112.50
5.40
69,964 $
5.40
121,552 $
11.25
15,466 $
5.40
14,671 $
5.40
14,672 $
5.40
36,334 $
5.40
36,334 $
19,816 $
5.40
20,903 $
5.40
75,788 $
5.40
51,282 $
147,472 $
154,343 $
5.40
5.40
9.56
909,189
(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 December 31, 2019, 357 warrants are recorded as liability, See Note 12 –
Fair Value for further discussion, and 239 warrants are treated as equity.
New Bridge Warrants.
(5) These warrants were issued in connection with a June 2017 merger transaction (the “Merger”) and are the 2017
(6) These warrants were issued in connection with the Merger and are considered the Side Warrants.
(7)
These warrants were issued in connection with an underwritten public offering consisting of the Company’s
Series B Preferred Stock and warrants (the “August 2017 Offering”) and are the August 2017 Offering Warrants
discussed below.
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73
discussed below.
(8) These warrants were issued in connection with the August 2017 Offering and are the Representative Warrants
(9) These warrants were issued 2017 and are the Series A Conversion Warrants discussed below.
(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.
These warrants were issued in connection with a waiver of default the Company received in the fourth quarter of
2017 in connection with certain convertible promissory notes and are the Convertible Promissory Note Warrants
discussed below.
(11)
(12) These warrants (the “Series C Warrants’) were issued in connection with the Series C Preferred Offering and are
discussed below.
(13) These warrants were issued in connection with the 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.
2017 New Bridge Warrants
The initial exercise price of the 2017 New Bridge Warrants was $112.50 (subject to adjustments). These
warrants had a one-time down round provision. As a result of the August 2017 Offering, the exercise price of the 2017
New Bridge Warrants was adjusted to $41.25 per share, and the down round provision for these warrants no longer
exists after this adjustment.
At the time of the Amendment Agreement in 2018, the exercise price of 500 of the 2017 New Bridge
Warrants was modified so that the exercise price became $7.50 per share. The fair value of this warrant modification
was calculated to be less than $1,000 which was recorded as a debt discount in conjunction with the issuance of the
Q4 2018 Bridge Notes with an offset to additional paid-in-capital.
Side Warrants
The Company issued warrants to purchase an aggregate of 6,095 shares of the Company’s common stock at
an exercise price of $105.00 per share (subject to adjustment). The warrants (“Side Warrants”) have a term of 5 years.
August 2017 Offering Warrants
In connection with the August 2017 Offering, the Company issued 178,667 warrants at an exercise price of
$45.00, which contain a down round provision. The August 2017 Offering Warrants were exercisable immediately
and expire 5 years from date of issuance.
In February 2018, as a result of 2018 Purchase Agreement, the exercise price of the August 2017 Offering
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 $62,000 and recorded this as a deemed dividend
(“Deemed Dividend G”) during 2018. In addition, as a result of the 2018 Inducement Agreement, the exercise price
of the August 2017 Offering Warrants was further adjusted to $11.25 as a result of the Exercise Price Reduction
discussed above.
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74
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 round provision on the warrants to be approximately $63,000 and recorded this as a deemed dividend
(“Deemed Dividend H”).
In November 2018, as a result of the Amendment Agreement, the exercise price of the August 2017 Offering
Warrants was adjusted to $2.25. 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 I”).
There were 6,800 and 146,666 August 2017 Offering Warrants exercised during the year ended December
31, 2019 and 2018, respectively, for proceeds to the Company of approximately $15,000 and $795,000, respectively.
During the year ended December 31, 2019 and 2018, the intrinsic value of the August 2017 Offering Warrants
exercised was approximately $36,000 and $420,000.
Representative Warrants
The Representative Warrants are exercisable beginning one year after the date of 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.
Series A Conversion Warrants
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, and have a term of 5 years.
At the time of the Amendment Agreement in 2018, the exercise price of 9,101 of the Series A Conversion
Warrants was modified so that the exercise price became $7.50 per share. The fair value of this warrant modification
was calculated to be approximately $10,000 which was recorded as a debt discount in conjunction with the issuance
of the Q4 2018 Bridge Notes with an offset to additional paid-in-capital.
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, a five year term and contain a down round provision. As a result of the Series C Preferred Offering
in 2017, 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 per share. 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 $8,000 and recorded this as a deemed
dividend (“Deemed Dividend J”). 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 K”).
In April 2018, as a result of the 2018 Note Agreement, the exercise price of the Note Conversion 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 $10,000 and recorded this as a deemed dividend (“Deemed
Dividend L”).
In November 2018, as a result of the Amendment Agreement, the exercise price of the Note Conversion
Warrants was adjusted to $2.25. 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 $4,000 and recorded this as a deemed dividend
(“Deemed Dividend M”).
75
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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 N”). 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 O”).
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 P”).
In November 2018, as a result of the Amendment Agreement, the exercise price of the Convertible
Promissory Note Warrants was adjusted to $2.25. 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 Q”).
Series C Warrants
In connection with the Series C Preferred Offering, the Company issued 130,857 warrants at an exercise
price of $24.45, which contain a down round provision. Series C Warrants are exercisable on the six-month
anniversary of the date of issuance and expire 5 years from date they are initially exercisable. The terms of the Series C
Warrants prohibit a holder from exercising its Series C Warrants if doing so would result in such holder (together
with its affiliates) beneficially owning more than 4.99% of the Company’s outstanding shares of common stock after
giving effect to such exercise, 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 February 2018, as a result of 2018 Purchase Agreement, the exercise price of the Series C 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 $58,000 and recorded this as a deemed dividend (“Deemed
Dividend R”). In addition, as a result of the 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 S”).
In November 2018, as a result of the Amendment Agreement, the exercise price of the Series C Warrants
was adjusted to $2.25. 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 $4,000 and recorded this as a deemed dividend (“Deemed
Dividend T”).
There were 25,037 and 105,820 Series C Warrants exercised during the year ended December 31, 2019 and
2018, respectively, for proceeds to the Company of approximately $56,000 and $476,000, respectively. During the
year ended December 31, 2019 and 2018, the intrinsic value of the Series C Warrants exercised was approximately
$443,000 and $294,000, respectively.
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Creditor Warrants
76
In the fourth quarter of 2017, the Company entered into Settlement Agreements with the Creditors pursuant
to which the Company agreed to issue, to certain of its Creditors, warrants to purchase 7,207 shares of the Company’s
common stock at an exercise price of $112.50 per share. The warrants were issued in February 2018. See Note 5 –
Long-Term Debt.
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 7 - 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 loss on modification of warrants in the consolidated statements of
operations for the year ended December 31, 2019.
During the year ended December 31, 2019, 51,708 April 2018 Warrants were exercised for proceeds to the
Company of $279,000. During the year ended December 31, 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 7 - 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 the Q3 2018 Bridge Notes, the Company issued 196,340 warrants with an
exercise price of $11.25 at time of issuance. Half of these Q3 2018 Warrants were issued with a five-year term and
half with a one-year term. At the time of issuance, as discussed in Note 7 - Convertible Notes, the Q3 2018 Warrants
had a fair value of approximately $0.7 million and were recorded as a liability with an offset to debt discount. In
September 2018, the exercise price was modified to $7.50. The Company calculated the change in fair value due to
repricing to be an expense of approximately $0.1 million which is included in warrant revaluation in the consolidated
statements of operations for the year ended December 31, 2018.
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 loss on modification of warrants in the consolidated statements of
operations for the year ended December 31, 2019.
There were 53,610 Q3 2018 Warrants exercised during the year ended December 31, 2019 for proceeds to
the Company of $289,000. During the year ended December 31, 2019, the intrinsic value of the Q3 2018 Warrants
exercised was approximately $133,382.
Q4 2018 Warrants
In connection with the issuance of the Q4 2018 Bridge Notes, the Company issued 300,115 warrants with an
exercise price of $5.40 at time of issuance and a five-year term. At the time of issuance, as discussed in Note 7 -
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77
Convertible Notes, the Q4 2018 Warrants had a fair value of approximately $0.7 million and were recorded as a
liability with an offset to debt discount.
There were 173,045 Q4 2018 Warrants exercised during the year ended December 31, 2019 for proceeds to
the Company of $934,000. During the year ended December 31, 2019, the intrinsic value of the Q4 2018 Warrants
exercised was approximately $489,000.
April 2019 Warrants
In connection with the issuance of the April 2019 Bridge Notes, the Company issued 147,472 warrants with
an exercise price of $5.40 and a five-year term. At the time of issuance, as discussed in Note 7 - Convertible Notes,
the April 2019 Warrants had a fair value of approximately $1.0 million and 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 Note 7 - Convertible 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.
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78
There were no dividends recorded in 2019. The following represents a summary of the dividends recorded
for the year ended December 31, 2018:
Deemed Dividends
Dividends resulting from the 2018 Purchase Agreement
Deemed Dividend A
Amount Recorded
(in thousands)
$
1,358
Deemed Dividend E
Deemed Dividend G
Deemed Dividend J
Deemed Dividend N
Deemed Dividend R
Dividends resulting from the 2018 Inducement Agreement
Deemed Dividend B
Deemed Dividend F
Deemed Dividend K
Deemed Dividend O
Dividends resulting from the 2018 Note Agreement
Deemed Dividend C
Deemed Dividend H
Deemed Dividend L
Deemed Dividend P
Deemed Dividend S
Dividends resulting from the Amendment Agreement
Deemed Dividend D
Deemed Dividend I
Deemed Dividend M
Deemed Dividend Q
Deemed Dividend T
829
62
8
*
58
40
1,154
5
*
216
63
10
*
45
361
5
4
*
4
Total 2018 Deemed Dividends
$
4,222
* Represents less than one thousand dollars
12. 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 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.
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79
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. We are required to record these instruments at fair value
at each 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 consolidated statement of operations.
2016 Warrant Liability
The Company has 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
December 31, 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
amounts that were recorded as other current liabilities. For further detail, see discussion of the Crede Agreement in
Note 8 – Accrued Expenses and Other Current Liabilities.
The 2016 Warrant Liability is considered a Level 3 financial instrument and was valued using the Monte
Carlo methodology. As of December 31, 2019, assumptions and inputs used in the valuation of the common stock
warrants include: remaining life to maturity of one year; annual volatility of 140%; and a risk-free interest rate of
1.59%. As of December 31, 2018, assumptions and inputs used in the valuation of the 2016 Warrant Liability include:
remaining life to maturity of two years; annual volatility of 176%; and a risk-free interest rate of 2.48%
Bridge Note Warrant Liabilities
During 2019 and 2018, the Company issued 154,343 of May 2019 Warrants, 147,472 of April 2019
Warrants, 243,224 of April 2018 Warrants, 15,466 of Advisor Warrants, 196,340 of Q3 2018 Warrants and 300,115
of Q4 2018 Warrants. All of these warrants issuances were classified as warrant liabilities (the “Bridge Note Warrant
Liabilities”). See Note 6 - 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 December 31, 2019, assumptions used in the valuation of the Bridge Note Warrant
Liabilities include: remaining life to maturity of 2.3 to 4.4 years; annual volatility of 141% to 163%; and risk free rate
of 1.58% to 1.65%. As of December 31, 2018, assumptions used in the valuation of the Bridge Note Warrant Liabilities
include: remaining life to maturity of 0.3 to 5.0 years; annual volatility of 85% to 162%; and risk free rate of 2.45%
to 2.63%.
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80
During the years ended December 31, 2019 and 2018, the change in the fair value of the warrant liabilities
measured using significant unobservable inputs (Level 3) were comprised of the following:
Dollars in Thousands
Year Ended December 31, 2019
Beginning balance at January 1
Additions:
Total (gains) losses:
Revaluation recognized in earnings
Modification recognized in earnings
Deductions – warrant exercises
2016
Warrant
Liability
$
116
–
Bridge Note
Total
Warrant
Warrant Liabilities Liabilities
1,132
1,016
1,858
1,858
$
$
(46)
–
–
(370)
1,128
(2,364)
(416)
1,128
(2,364)
Balance at December 31
$
70
$
1,268
$
1,338
Year Ended December 31, 2018
Beginning balance at January 1
Additions:
Total (gains) losses:
2016
Warrant
Liability
$
841
–
Bridge Note
Total
Warrant
Warrant Liabilities Liabilities
841
2,665
–
2,665
$
$
Revaluation recognized in earnings
Modification recognized in earnings
Deductions – warrant liability settlement
Balance at December 31
$
(269)
–
(456)
$
116
(1,792)
143
–
1,016
$
(2,061)
143
(456)
1,132
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 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. In November 2018, the conversion price of the April 2018 Bridge Note and
the Q3 2018 Bridge Note was amended. The amendment was treated as an extinguishment which resulted in less than
$0.1 million of derivative liabilities being written off in November 2018. See Note 6 - Convertible Notes for further
discussion.
Conversion Option
The Company recorded derivative liabilities related to the Conversion Option of the Exchange Notes issued
during the year ended December 31, 2018 with an initial fair value of approximately $0.4 million. The valuations
were performed using the Monte Carlo methodology. Approximately $0.1 million and $0.3 million of Conversion
Option derivative liabilities were written off due to Exchange Note conversions during the years ended December 31,
2019 and 2018, respectively. See Note 6 - Convertible Notes for further discussion.
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81
During the years ended December 31, 2019 and 2018, the change in the fair value of the derivative liabilities
was comprised of the following:
Beginning balance at January 1
Deductions - write-off in conjunction with convertible note
conversions
Total loss:
Year Ended December 31, 2019
Bridge Notes
Redemption
Conversion
Feature
Option
Total Derivative
Liabilities
$
30 $
32 $
62
(438)
(39)
(477)
Revaluation recognized in earnings
Balance at December 31
$
408
— $
7
— $
415
—
Beginning balance at January 1
Additions:
Deductions - write-off in conjunction with convertible note
conversions
Total gain:
Extinguishment recognized in earnings
Revaluation recognized in earnings
Balance at December 31
13. EQUITY INCENTIVE PLAN
Year Ended December 31, 2018
Bridge Notes
Redemption
Conversion
Feature
Option
Total Derivative
Liabilities
$
— $
269
— $
383
—
652
—
(301)
(301)
(22)
(217)
30 $
—
(50)
32 $
(22)
(267)
62
$
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.
The Plan is administered by the Compensation Committee of the Board of Directors (the “Committee”),
which has the authority to set the number, exercise price, term and vesting provisions of the awards granted under the
Plan, subject to the terms thereof. Either incentive or non-qualified stock options may be granted to employees of the
Company, but only non-qualified stock options may be granted to non-employee directors and advisors. However, in
either case, the Plan requires that stock options must be granted at exercise prices not less than the fair market value
of the common stock on the date of the grant. Options issued under the plan vest over periods as determined by the
Committee and expire 10 years after the date the option was granted.
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 consolidated
statements of operations over the service period of the awards. 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.
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 Company’s 2017 Stock Option and Incentive Plan (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;
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·
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 66,667 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 on January 1st, beginning on January 1,
2019, by 5% of the number of shares of common stock issued and outstanding on the immediately
preceding December 31st, 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 at the date of grant 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 year ended December 31, 2019, The Company granted stock options to employees and directors
to purchase up to 292,604 shares of common stock at a weighted average exercise price of $2.36. These awards have
vesting periods of up to four years and had a weighted average grant date fair value of $2.15. The fair value calculation
of options granted during 2019 used the follow assumptions: risk free interest rates of 1.60% to 2.53%, based on the
U.S. Treasury yield in effect at the time of grant; expected life of six years; and volatility of 133% to 139% based on
historical volatility of the Company’s common stock over a time that is consistent with the expected life of the option.
The following table summarizes stock option activity under our plans during the year ended December 31,
2019:
Outstanding at January 1, 2019
Granted
Forfeited
Outstanding at December 31, 2019
Exercisable at December 31, 2019
Number of
Options
224,895 $
292,604
(27,169)
490,330 $
181,705 $
Weighted-
Average
Exercise Price
15.90
2.36
6.03
8.30
13.48
As of December 31, 2019, there were 413,174 options that were vested or expected to vest with an aggregate
intrinsic value of zero and a remaining weighted average contractual life of 8.7 years.
During the year ended December 31, 2018, there were 224,365 options granted with a weighted average
exercise price of $10.50 and 15,236 options forfeited with a weighted average exercise price of $29.94.
During the years ended December 31, 2019 and 2018, we recorded compensation expense for all stock
awards of $0.7 million and $0.5 million, respectively, within operating expense in the accompanying statements of
operations. As of December 31, 2019, the unrecognized compensation expense related to unvested stock awards was
$1.7 million, which is expected to be recognized over a weighted-average period of 2.0 years.
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83
14. SALES SERVICE REVENUE, NET AND ACCOUNTS RECEIVABLE
ASC Topic 606, “Revenue from contracts with customers”
On January 1, 2018, the Company adopted ASC 606 that amends the guidance for the recognition of revenue
from contracts with customers to transfer goods and services by using the modified-retrospective method applied to
any contracts that were not completed as of January 1, 2018. The Company performed a comprehensive review of its
existing revenue arrangements following the five-step model:
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 to a customer.
Step 4: Allocate transaction price. Sub-steps include assessing the amount of consideration to which the
Company expects to be entitled in exchange for transferring the promised goods or services to the customer.
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.
Based on the Company's analysis, there were no changes identified that impacted the amount or timing of
revenues recognized under the new guidance as compared to the previous guidance (ASC 605). Additionally, the
Company's analysis indicated that there were no changes to how costs to obtain and fulfill our customer contracts
would be recognized under the new guidance as compared to the previous guidance. Accordingly, the initial
application of the new revenue standard did not result in the recognition of a cumulative effect adjustment to the
opening balance of accumulated deficit as of January 1, 2018.
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 services provided
are 30 days, unless separately negotiated.
Diagnostic testing
Control of the laboratory testing services is transferred to the customer at a point in time. 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.
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84
Biomarker testing and clinical project services
Control of the biomarker testing and clinical project services are transferred to the 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 years ended December 31, 2019 and 2018 was as follows (prior-period amounts are not adjusted under the
modified-retrospective method of adoption):
(dollars in thousands)
Medicaid
Medicare
Self-pay
Third party payers
Contract diagnostics
Service revenue, net
Diagnostic Testing
2018
2019
For the Year Ended December 31,
Biomarker Testing
2018
2019
Total
2018
2019
50 $
28 $
$
1,669
34
1,725
—
50
1,000
138
960
1,187
$ 3,456 $ 2,148 $ 595 $ 1,187 $ 4,051 $ 3,335
— $
— 1,669
—
34
— 1,725
595
— $
—
—
—
595
1,000
138
960
—
1,187
28 $
Revenue from the Medicare and Medicaid programs account for a portion of the Company’s patient
diagnostic service revenue. Laws and regulations governing those programs are extremely complex and subject to
interpretation. As a result, there is at least a reasonable possibility that recorded estimates will change by a material
amount in the near term.
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 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”), and 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”).
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 liability, 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 revenue from deferred revenue. As of
December 31, 2019 and 2018, the deferred revenue was $35,000 and $49,000, respectively.
85
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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 revenue recognition date to properly account for anticipated
differences between amounts estimated in our billing system and amounts ultimately reimbursed by payers.
Accordingly, the total revenue and receivables reported in our consolidated financial statements are recorded at the
amounts expected to be 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 our revenue are contracted and fixed fees for specific services and are recorded without an allowance for
contractual discounts. The following table presents our revenues initially recognized for each associated payer class
during the year ended December 31, 2019 and 2018.
(dollars in thousands)
For the Year Ended December 31,
Medicaid
Medicare
Self-pay
Third party payers
Contract diagnostics
Clinical research grants and other
Allowance for Doubtful Accounts
Contractual Allowances and Revenues, net of Contractual
Allowances and adjustments
adjustments
31 $
Gross Revenues
2019
2018
$
86 $
1,686 1,019
34 138
5,785 2,358
595 1,187
8,131 4,788
44 113
$ 8,175 $ 4,901 $
2019
2018
2019
2018
(3) $
(17)
—
(4,060)
—
(4,080)
—
(36) $
(19)
—
(1,398)
—
(1,453)
—
(4,080) $ (1,453) $
28 $
1,669
34
1,725
595
4,051
44
4,095 $
50
1,000
138
960
1,187
3,335
113
3,448
The Company provides for a general allowance for collectability of services when recording net sales. The
Company has adopted the policy of recognizing net sales to the extent it 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 related to the increase in patient service revenues. The following table presents our reported revenues net
of the collection allowance and adjustments for the year ended December 31, 2019 and 2018.
(dollars in thousands)
Contractual Allowances
Allowances for doubtful
Revenues, net of
For the Year Ended December 31,
and adjustments
2019
2018
accounts
Total
2019
2018
2019
2018
Medicaid
Medicare
Self-pay
Third party payers
Contract diagnostics
Clinical research grants and other
$
28 $
1,669
34
1,725
595
4,051
44
50 $
1,000
138
960
1,187
3,335
113
$ 4,095 $ 3,448 $
(28) $
(251)
—
(689)
—
(968)
—
(968) $
Costs to Obtain or Fulfill a Customer Contract
(50) $
(150)
—
(384)
—
(584)
—
—
850
138
576
1,187
2,751
113
(584) $ 3,127 $ 2,864
— $
1,418
34
1,036
595
3,083
44
Sales commissions are expensed when incurred because the amortization period would have been one year
or less. These costs are recorded in operating expenses in the consolidated statements of operations.
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86
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 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.
The following summarizes the mix of receivables for the years ended December 31, 2019 and 2018:
(dollars in thousands)
Medicaid
Medicare
Self-pay
Third party payers
Contract diagnostic services
Less allowance for doubtful accounts
Accounts receivable, net
December 31, 2019 December 31, 2018
82
107 $
$
633
814
108
88
1,382
2,203
193
36
2,398
3,248 $
(1,708)
(2,674)
690
574 $
$
$
The following table presents the roll-forward of the allowance for doubtful accounts for the year ended
December 31, 2019:
(dollars in thousands)
Balance, January 1, 2019
Collection Allowance:
Medicaid
Medicare
Third party payers
Bad debt expense
Total charges
Balance, December 31, 2019
Allowance for
Doubtful
Accounts
$
(1,708)
$
$
(28)
(251)
(689)
(968)
2
$
(966)
(2,674)
Customer Revenue and Accounts Receivable Concentration
Customer revenue and accounts receivable concentration amounted to the following for the identified
periods.
Year Ended
December 31,
Percentage of net sales by customer:
Customer A
Customer B
Customer C
* represents less than 10%
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87
Percentage of total accounts receivable by customer:
Customer A
Customer B
Customer C
* represents less than 10%
15. SUBSEQUENT EVENTS
2019
2018
19 %
11
*
33 %
*
*
December 31,
2019
December 31,
2018
*
17 %
12 %
23 %
*
*
The Company has evaluated events and transactions subsequent to December 31, 2019 through the date the
consolidated financial statements were issued.
Strategic Partnership
On March 16, 2020, the Company announced that it had completed a non-cash transaction with Poplar
Healthcare to establish a strategic partnership that includes the acquisition of the customer base OncoMetrix, Poplar’s
hematopathology division. Precipio will assume responsibility for OncoMetrix’s customer base and associated
revenues which should provide a substantial improvement to the Company’s laboratory economies of scale. As part
of the transaction, three sales representatives of OncoMetrix have transitioned to Precipio. The transition of the
customer based involved no exchange of cash or equity with Poplar Healthcare.
Purchase Agreement
On March 26, 2020, the Company entered into a purchase agreement (the “LP 2020 Purchase Agreement”)
and a registration rights agreement (the “LP 2020 Registration Rights Agreement”) with Lincoln Park pursuant to
which Lincoln Park has agreed to purchase from us, from time to time, up to $10,000,000 of our common stock,
subject to certain limitations, during the 24 month term of the LP 2020 Purchase Agreement. Pursuant to the terms of
the LP 2020 Registration Rights Agreement, we will file with the SEC the registration statement on form S-1 in order
to register for resale under the Securities Act the shares that have been or may be issued to Lincoln Park under the LP
2020 Purchase Agreement.
As consideration for its commitment to purchase shares of our common stock under the LP 2020 Purchase
Agreement, we agreed to issue 250,000 commitment shares to Lincoln Park as a commitment fee.
We do not have the right to commence any sales to Lincoln Park under the LP 2020 Purchase Agreement
until certain conditions set forth in the LP 2020 Purchase Agreement, all of which are outside of Lincoln Park’s
control, have been satisfied, including the registration statement on form S-1 being declared effective by the SEC.
Thereafter, under the LP 2020 Purchase Agreement, on any business day selected by us, we may direct Lincoln Park
to purchase up to 50,000 shares of our common stock on any such business day, which we refer to as a Regular
Purchase in the LP 2020 Purchase Agreement, provided, however, that (i) the Regular Purchase may be increased to
up to 80,000 shares, provided that the closing sale price is not below $1.00 on the purchase date and (ii) the Regular
Purchase may be increased to up to 100,000 shares, provided that the closing sale price is not below $1.50 on the
purchase date. In each case, the maximum amount of any single Regular Purchase may not exceed $1,000,000 per
purchase. Lincoln Park has no right to require the Company to sell any shares of common stock to Lincoln Park, but
Lincoln Park is obligated to make purchases as we direct, subject to certain conditions. The purchase price for Regular
Purchases shall be equal to the lesser of: (i) the lowest sale price of the common shares during the purchase date, or
(ii) the average of the three (3) lowest closing sale prices of the common shares during the ten (10) business days prior
to the purchase date.
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Convertible Note Amendment
On March 26, 2020, the Company entered into an amendment agreement (the “March 2020 Amendment”)
amending the terms of that certain Amendment No. 2 Agreement dated April 16, 2019 and the securities purchase
agreement dated May 14, 2019. As a result of the March 2020 amendment, (i) the maturity date of the April 2019
Bridge Notes and the May 2019 Bridge Notes was extended three months from April 16, 2020 to July 16, 2020, (ii)
the floor price at which conversions may occur under the April 2019 Bridge Notes and the May 2019 Bridge Notes
was amended from $2.25 to $0.40, and (iii) guaranteed interest on the April 2019 Bridge Notes and the May 2019
Bridge Notes was amended from twelve months to eighteen months.
The Company is currently reviewing the appropriate accounting treatment related to the March 2020
Amendment and will record the necessary accounting in the first quarter 2020.
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
We maintain a system of disclosure controls and procedures that are designed to ensure that information
required to be disclosed by is in the reports we file or submit under the Act is recorded, processed, summarized, and
reported within the time periods specified in the Commission’s rules and forms, and to ensure that such information
is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial
Officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required
disclosure.
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that
our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act)
(“Disclosure Controls”) will prevent all errors and all fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are resource constraints, 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 can provide absolute assurance that all control issues and instances of fraud, if any, within the
Company have been detected. These inherent limitations include the realities that judgments in decision-making can
be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more people, or by management override
of the control. The design of any system of controls also is 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. Because of the inherent limitations in a cost-effective control system, misstatements due
to error or fraud may occur and not be detected. We monitor our Disclosure Controls and make modifications as
necessary; our intent in this regard is that the Disclosure Controls will be modified as systems change and conditions
warrant.
An evaluation of the effectiveness of the design and operation of our Disclosure Controls was performed as
of the end of the period covered by this Report. This evaluation was performed under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based on this
evaluation, we concluded that our disclosure controls and procedures were effective at a reasonable assurance level
as of December 31, 2019.
(b) Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). In order to evaluate the effectiveness of
internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002, our
management, with the participation of our principal executive officer and principal financial officer has conducted an
assessment, including testing, using the criteria in Internal Control – Integrated Framework, issued by the Committee
of Sponsoring Organizations of the Treadway Commission (“COSO”) (2013). Our system of internal control over
financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
This assessment included review of the documentation of controls, evaluation of the design effectiveness of controls,
testing of the operating effectiveness of controls and a conclusion on this evaluation.
Based on this evaluation, management concluded that our internal control over financial reporting was
effective as of December 31, 2019.
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(c) Changes in internal control over financial reporting
There were no changes in our internal control over financial reporting during the fiscal quarter ended
December 31, 2019, that has materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
As a smaller reporting company, the Company is not required to include in this Annual Report a report on
the effectiveness of internal control over financial reporting by the Company’s independent registered public
accounting firm.
Item 9B. Other Information
None.
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91
Part III
Item 10. Directors, Executive Officers and Corporate Governance
We intend to file with the Securities and Exchange Commission a definitive Proxy Statement, which we refer
to herein as the 2020 Proxy Statement, not later than 120 days after the close of the fiscal year ended December 31,
2019. The information required by this item is incorporated herein by reference to the 2020 Proxy Statement. The
information required by this item related to the executive officers can be found in the section captioned
“Executive Officers of the Registrant” under Part I, “Item 1. Our Business” of this Annual Report on Form 10-K,
and is also incorporated herein by reference.
Item 11. Executive Compensation
The information required by this item is incorporated herein by reference to the 2020 Proxy Statement to be
filed with the SEC within 120 days after the year ended December 31, 2019.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The information required by this item is incorporated herein by reference to the 2020 Proxy Statement to be
filed with the SEC within 120 days after the year ended December 31, 2019.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated herein by reference to the 2020 Proxy Statement to be
filed with the SEC within 120 days after the year ended December 31, 2019.
Item 14. Principal Accountant Fees and Services
The information required by this item is incorporated herein by reference to the 2020 Proxy Statement to be
filed with the SEC within 120 days after the year ended December 31, 2019.
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Part IV
Item 15. Exhibits, Financial Statement Schedules
(a) The following documents are filed as part of this report:
1 Financial Statements. The following financial statements of the Registrant are included in response t
o Item 8 of this report:
Report of Independent Registered Public Accounting Firm.
Consolidated Balance Sheets of the Registrant and Subsidiary as of December 31, 2019 and 2018.
Consolidated Statements of Operations of the Registrant and Subsidiary for the years ended December 31,
2019 and 2018.
Consolidated Statements of Stockholders’ Equity of the Registrant and Subsidiary for the years ended
December 31, 2019 and 2018.
Consolidated Statements of Cash Flows of the Registrant and Subsidiary for the years ended December 31,
2019 and 2018.
Notes to Consolidated Financial Statements of the Registrant and Subsidiary.
2 Financial Statement Schedules.
All financial statement schedules are omitted because the information is inapplicable or presented in the
notes to the financial statements.
3 Exhibits. The following exhibits are filed as required by Item 15(a)(3) of this report. Exhibit numbers
refer to the paragraph numbers under Item 601 of Regulation S-K:
2.1 Agreement and Plan of Merger, dated October 12, 2016 by and among Transgenomic, Inc., New Haven
Labs Inc. and Precipio Diagnostics, LLC (incorporated by reference to Exhibit 2.1 of the Company’s
Form 8-K filed on October 13, 2016).
2.2 First Amendment to Agreement and Plan of Merger, dated as of February 3, 2017 by and among
Transgenomic, Inc., New Haven Labs Inc. and Precipio Diagnostics, LLC (incorporated by reference to
Exhibit 2.1 of the Company’s Form 8-K filed on February 2, 2017).
2.3 Second Amendment to Agreement and Plan of Merger, dated as of June 27, 2017 by and among
Transgenomic, Inc., New Haven Labs Inc. and Precipio Diagnostics, LLC (incorporated by reference to
Exhibit 2.1 of the Company’s Form 8-K filed on June 30, 2017).
3.1 Third Amended and Restated Certificate of Incorporation, as amended (incorporated by reference to
Exhibit 3.1 of the Company’s 8-K filed on June 30, 2017).
3.2 Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 of the Company’s Form 8-K filed
on June 30, 2017).
3.3 Certificate of Elimination (incorporated by reference to Exhibit 3.3 of the Company’s Form 8-K filed on
June 30, 2017).
3.4 Certificate of Designation for Series B Preferred Stock (incorporated by reference to Exhibit 3.1 of the
Company’s Form 8-K filed on August 31, 2017).
3.5 Certificate of Designation for Series C Preferred Stock (incorporated by reference to Exhibit 3.1 of the
Company’s Form 8-K filed on November 6, 2017).
3.6 Certificate of Amendment to the Third Amended and Restated Certificate of Incorporation, dated April
25, 2019 (incorporated by reference to Exhibit 3.1 of the Company's Form 8-K filed on April 26, 2019).
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93
4.1 Form of Certificate of the Company’s Common Stock (incorporated by reference to Exhibit 4 of the
Company’s Registration Statement on Form S-1 (Registration No. 333-32174) filed on March 10, 2000).
4.2 Form of Offering Warrant (incorporated by reference to Exhibit 4.1 of the Company’s Form 8-K filed on
August 23, 2017).
4.3 Form of Underwriter Warrant (incorporated by reference to Exhibit 4.2 of the Company’s Form 8-K filed
on August 23, 2017).
4.4 Form of Conversion Warrant (incorporated by reference to Exhibit 4.3 of the Company’s Form 8-K filed
on August 23, 2017).
4.5 Form of Warrant (incorporated by reference to Exhibit 4.1 of the Company’s Form 8-K filed on
November 6, 2017).
4.6 Form of Warrant (incorporated by reference to Exhibit 4.1 of the Company’s Form 8-K filed on
November 13, 2017).
4.7 Description of Securities of the Registrant.
10.1 License Agreement between the Company and Dana-Farber Cancer Institute dated October 8, 2009
(incorporated by reference to Exhibit 10.1 of the Company’s Form 10-Q filed on November 5, 2009).
10.2 Waiver Letter Agreement by and among the Company, Potomac Capital Partners, L.P., MAZ Partners, LP,
David Wambeke and Craig-Hallum Capital Group, LLC dated as of January 10, 2017 (incorporated by
reference to Exhibit 10.1 of the Company’s Form 8-K filed on January 17, 2017).
10.3 First Amendment to Unsecured Convertible Promissory Note by and among the Company and MAZ
Partners LP, dated as of January 17, 2017 (incorporated by reference to Exhibit 10.1 of the Company’s
Form 8-K filed on January 20, 2017).
10.4 Termination and Tenth Amendment to Loan and Security Agreement, dated as of February 3, 2017, by
and among Third Security Senior Staff 2008 LLC, as administrative agent and a lender, the other lenders
party thereto and the Company (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K
filed on February 2, 2017).
10.5 Promissory Note, dated February 2, 2017 between the Company and Precipio Diagnostics, LLC
(incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K filed on February 3, 2017).
10.6 Securities Purchase Agreement, dated as of April 13, 2017 by and between the Company and the investors
set forth on Schedule A attached thereto (incorporated by reference to Exhibit 10.1 of the Company’s
Form 8-K filed on April 17, 2017).
10.7 Form of Promissory Note, issued by the Company to certain investors, dated as of April 13, 2017
(incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on April 17, 2017).
10.8 Form of Warrant to Purchase Common Stock, issued by the Company to certain investors, dated as of
April 13, 2017 (incorporated by reference to Exhibit 10.3 of the Company’s Form 8-K filed on April 17,
2017).
10.9 Precipio Diagnostics, LLC Subordinated Promissory Note, issued by Precipio to the Company, dated as of
April 13, 2017 (incorporated by reference to Exhibit 10.4 of the Company’s Form 8-K filed on April 17,
2017).
10.10 Subordination Agreement, dated as of April 13, 2017, by and between the Company and Webster Bank,
National Association (incorporated by reference to Exhibit 10.5 of the Company’s Form 8-K filed on
April 17, 2017).
10.11 Side Letter to extend Maturity Date of Unsecured Convertible Promissory Note by and between the
Company and MAZ Partners LP, dated as of June 21, 2017 (incorporated by reference to Exhibit 10.1 of
the Company’s Form 8-K filed on June 27, 2017).
10.12† Amended and Restated 2017 Stock Option and Incentive Plan (incorporated by reference to Annex D of
the Company’s Definitive Proxy Statement on Schedule 14A filed on December 29, 2017).
10.13† Form of Non-Qualified Stock Option Agreement for Non-Employee Directors (incorporated by reference
to Exhibit 10.2 of the Company’s Form 8-K filed on June 28, 2017).
10.14† Form of Non-Qualified Stock Option Agreement for Company Employees (incorporated by reference to
Exhibit 10.3 of the Company’s Form 8-K filed on June 28, 2017).
10.15† Form of Incentive Stock Option Agreement (incorporated by reference to Exhibit 10.4 of the Company’s
Form 8-K filed on June 28, 2017).
10.16 Securities Purchase Agreement with the Private Placement Purchasers (incorporated by reference to
Exhibit 10.1 of the Company’s Form 8-K filed on June 30, 2017).
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10.17 Investors’ Rights Agreement (incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K filed
on June 30, 2017).
10.18 Exchange Agreement (incorporated by reference to Exhibit 10.3 of the Company’s Form 8-K filed on
June 30, 2017).
10.19 New Bridge Securities Purchase Agreement (incorporated by reference to Exhibit 10.4 of the Company’s
Form 8-K filed on June 30, 2017).
10.20 Form of New Bridge Promissory Note (incorporated by reference to Exhibit 10.5 of the Company’s
Form 8-K filed on June 30, 2017).
10.21 Form of New Bridge Warrant (incorporated by reference to Exhibit 10.6 of the Company’s Form 8-K filed
on June 30, 2017).
10.22 Form of Side Warrant (incorporated by reference to Exhibit 10.7 of the Company’s Form 8-K filed on
June 30, 2017).
10.23# Amended and Restated Pathology Services Agreement, dated March 21, 2017, by and between the
Company and Yale University (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K/A
filed on July 31, 2017).
10.24 Lease, dated July 11, 2017, by and between the Company and Science Park Development Corporation
(incorporated by reference to Exhibit 10.2 of the Company’s Form 8K/A filed on July 31, 2017).
10.25 Underwriting Agreement, dated August 22, 2017, by and among the Company and the underwriters party
thereto (incorporated by reference to Exhibit 1.1 of the Company’s Form 8-K filed on August 23, 2017).
10.26 Placement Agency Agreement, dated as of November 2, 2017, by and between Precipio, Inc. and Aegis
Capital Corp. (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on November 3,
2017).
10.27 Debt Settlement Agreement, dated October 31, 2017, by and among Precipio, Inc., the Creditors and
Collateral Services, LLC (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on
November 6, 2017).
10.28 Security Agreement, dated October 31, 2017, by and between Precipio, Inc. and Collateral Services LLC,
in its capacity as collateral agent for the Vendors (as defined therein) (incorporated by reference to
Exhibit 10.2 of the Company’s Form 8-K filed on November 6, 2017).
10.29 Amendment, dated November 9, 2017, to Placement Agency Agreement, dated November 2, 2017, by and
between Precipio, Inc. and Aegis Capital Corp. (incorporated by reference to Exhibit 10.1 of the
Company’s Form 8-K filed on November 13, 2017).
10.30 Form of 8% Senior Secured Convertible Promissory Note (incorporated by reference to Exhibit 10.1 of
the Company’s Form 8-K filed on April 23, 2018).
10.31 Form of Warrant to Purchase Common Stock (incorporated by reference to Exhibit 10.2 of the Company’s
Form 8-K filed on April 23, 2018).
10.32 Form of Security Agreement by and among the Company and the investors named therein, dated April 20,
2018 (incorporated by reference to Exhibit 10.3 of the Company’s Form 8-K filed on April 23, 2018).
10.33 Securities Purchase Agreement by and among the Company and the Purchasers named therein, dated April
20, 2018 (incorporated by reference to Exhibit 10.4 of the Company’s Form 8-K filed on April 23, 2018).
10.34 Purchase Agreement by and among the Company and Lincoln Park Capital Fund LLC dated September 7,
2018 (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on September 13, 2018).
10.35 Registration Rights Agreement, dated September 7, 2018, by and between Precipio, Inc. and Lincoln Park
Capital Fund, LLC (incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K filed on
September 13, 2018).
10.36 Exchange Agreement by and among the Company and the Purchasers named therein dated September 17,
2018 (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on September 20, 2018).
10.37 Form of Promissory Note (incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K filed on
September 20, 2018).
10.38 Form of Letter Agreement by and among the Company and the Investors named therein (incorporated by
reference to Exhibit 10.1 of the Company’s form 8-K filed on September 25, 2018).
10.39 Amendment Agreement by and among the Company and the Purchasers named therein, dated November
29, 2018 (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on December 3,
2018).
10.40 Form of 8% Senior Secured Convertible Promissory Note (incorporated by reference to Exhibit 10.3 of the
Company’s Form 8-K filed on December 3, 2018).
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95
10.41 Form of Letter Agreement regarding repricing of warrants (incorporated by reference to Exhibit 10.3 of the
Company’s Form 8-K filed on December 3, 2018).
10.42 Form of Warrant to Purchase Common Stock (incorporated by reference to Exhibit 10.4 of the Company’s
Form 8-K filed on December 3, 2018).
10.43 Amendment No. 2 Agreement by and among the Company and the Purchasers named therein, dated April
16, 2019 (incorporated by reference to Exhibit 10.43 of the Company’s Form 10-K filed on April 16, 2019).
10.44 Form of 8% Senior Secured Convertible Promissory Note relating to Amendment No. 2 Agreement
(incorporated by reference to Exhibit 10.44 of the Company’s Form 10-K filed on April 16, 2019).
10.45 Form of Warrant to Purchase Common Stock relating to Amendment No. 2 Agreement (incorporated by
reference to Exhibit 10.45 of the Company’s Form 10-K filed on April 16, 2019).
10.46 Form of Settlement Agreement, dated January 2, 2019 (incorporated by reference to Exhibit 10.1 of the
Company’s Form 8-K filed on January 7, 2019).
10.47 Form of Amendment and Restatement Agreement, dated January 15, 2019 (incorporated by reference to
Exhibit 10.1 of the Company's Form 8-K filed on January 22, 2019).
10.48 Form of Convertible Note, dated January 15, 2019 (incorporated by reference to Exhibit 10.2 of the
Company's Form 8-K filed on January 22, 2019).
10.49 Form of Convertible Note, dated January 29, 2019 (incorporated by reference to Exhibit 3.1 of the
Company's Form 8-K filed on January 30, 2019).
10.50 Form of Settlement Agreement, dated January 29, 2019 (incorporated by reference to Exhibit 10.1 of the
Company's Form 8-K filed on January 30, 2019).
10.51 Form of Release, dated January 29, 2019 (incorporated by reference to Exhibit 10.2 of the Company's Form
8-K filed on January 30, 2019).
10.52 Form of Amendment Agreement No.1, dated March 26, 2020.
10.53 Form of 8% Senior Secured Convertible Promissory Note, dated May 14, 2019 (incorporated by reference
to Exhibit 10.1 of the Company’s Form 10-Q filed on May 16, 2019).
10.54 Form of Warrant to Purchase Common Stock dated May 14, 2019 (incorporated by reference to Exhibit
10.2 of the Company’s Form 10-Q filed on May 16, 2019).
10.55 Form of Security Agreement by and among the Company and the investors named therein, dated May 14,
2019 (incorporated by reference to Exhibit 10.3 of the Company’s Form 10-Q filed on May 16, 2019).
10.56 Form of Securities Purchase Agreement by and among the Company and the Purchasers named therein,
dated May 14, 2019 (incorporated by reference to Exhibit 10.4 of the Company’s Form 10-Q filed on May
16, 2019).
21.1 Subsidiaries of the Company.
23.1 Consent of Marcum LLP.
31.1 Certification of Principal Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002,
as amended.
31.2 Certification of Principal Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002,
as amended.
32.1* Certification of Principal Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
as amended.
32.2* Certification of Principal Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
as amended.
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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96
# Confidential treatment has been requested or granted for certain information contained in this exhibit. Such
information has been omitted and filed separately with the Securities and Exchange Commission.
† Indicates a management contract or any compensatory plan, contract or arrangement.
Item 16. Form 10-K Summary
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on this 27th day of
March 2020.
Precipio, Inc.
By:
/s/ ILAN DANIELI
Ilan Danieli,
Chief Executive Officer (Principal Executive Officer)
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Ilan Danieli
Ilan Danieli
Director and Chief Executive Officer
(Principal Executive Officer)
/s/ Carl Iberger
Carl Iberger
Chief Financial Officer
(Principal Financial and Accounting Officer)
March 27, 2020
March 27, 2020
/s/ Douglas Fisher, M.D.
Douglas Fisher, M.D.
Chairman of the Board of Directors
March 27, 2020
/s/ Kathleen LaPorte
Kathleen LaPorte
Director
/s/ Mark Rimer
Mark Rimer
/s/ Richard Sandberg
Richard Sandberg
Director
Director
/s/ Jeffrey Cossman, M.D.
Director
March 27, 2020
March 27, 2020
March 27, 2020
March 27, 2020
Jeffrey Cossman, M.D.
/s/ David Cohen
David Cohen
Director
March 27, 2020
97