NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
For the Three and Nine Months Ended September
30, 2018 and 2017
1. BUSINESS DESCRIPTION
Business Description.
Precipio, Inc., and Subsidiary,
(“we”, “us”, “our”, the “Company” or “Precipio”) is a cancer diagnostics
company providing diagnostic products and services to the oncology market. We have built and continue to develop a platform designed
to eradicate the problem of misdiagnosis by harnessing the intellect, expertise and technology developed within academic institutions
and delivering quality diagnostic information to physicians and their patients worldwide. We operate a cancer diagnostic laboratory
located in New Haven, Connecticut and have partnered with the Yale School of Medicine to capture the expertise, experience and
technologies developed within academia so that we can provide a better standard of cancer diagnostics and solve the growing problem
of cancer misdiagnosis. We also operate a research and development facility in Omaha, Nebraska which will focus on further development
of ICE-COLD-PCR (“ICP”), the patented technology which was exclusively licensed by us from Dana-Farber Cancer Institute,
Inc. (“Dana-Farber”) at Harvard University (“Harvard”). The research and development center will focus
on the development of this technology, which we believe will enable us to commercialize other technologies developed by our current
and future academic partners. Our platform connects patients, physicians and diagnostic experts residing within academic institutions.
Launched in 2017, the platform facilitates the following relationships:
Patients: patients may
search for physicians in their area and consult directly with academic experts that are on the platform. Patients may also have
access to new academic discoveries as they become commercially available.
Physicians: physicians
can connect with academic experts to seek consultations on behalf of their patients and may also provide consultations for patients
in their area seeking medical expertise in that physician’s relevant specialty. Physicians will also have access to new diagnostic
solutions to help improve diagnostic accuracy.
Academic Experts: academic
experts on the platform can make themselves available for patients or physicians seeking access to their expertise. Additionally,
these experts have a platform available to commercialize their research discoveries.
We intend to continue
updating our platform to allow for patient-to-patient communications and allow individuals to share stories and provide support
for one another, to allow physicians to consult with their peers to discuss and share challenges and solutions, and to allow academic
experts to interact with others in academia on the platform to discuss their research and cross-collaborate.
ICP was developed at Harvard
and is licensed exclusively by us from Dana-Farber. The technology enables the detection of genetic mutations in liquid biopsies,
such as blood samples. The field of liquid biopsies is a rapidly growing market, aimed at solving the challenge of obtaining genetic
information on disease progression and changes from sources other than a tumor biopsy.
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:
|
·
|
Cost: surgical procedures are usually performed in a costly hospital environment. For example,
according to a recent study the mean cost of lung biopsies is greater than $14,000; surgery also involves hospitalization and recovery
time.
|
|
·
|
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.
|
|
·
|
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:
|
·
|
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 from the primary tumor site.
|
The advent of technologies
enabling liquid biopsies as an alternative to tumor biopsy and analysis is based on the fact that tumors (both primary and metastatic)
shed cells and fragments of DNA into the blood stream. These blood samples are called “liquid biopsies” that contain
circulating tumor DNA, or ctDNA, which hold the same genetic information found in the tumor(s). That tumor DNA is the target of
genetic analysis. However, since the quantity of tumor DNA is very small in proportion to the “normal” (or “healthy”)
DNA within the blood stream, there is a need to identify and separate the tumor DNA from the normal DNA.
ICP is an enrichment technology
that enables the laboratory to focus its analysis on the tumor DNA by enriching, and thereby “multiplying” the presence
of, tumor DNA, while maintaining the normal DNA at its same level. Once the enrichment process has been completed, the laboratory
genetic testing equipment is able to identify genetic abnormalities presented in the ctDNA, and an analysis can be conducted at
a higher level of sensitivity, to enable the detection of such genetic abnormalities. The technology is encapsulated into a chemical
that is provided in the form of a kit and sold to other laboratories who wish to conduct these tests in-house. The chemical within
the kit is added to the specimen preparation process, enriching the sample for the tumor DNA so that the analysis will detect those
genetic abnormalities.
Merger Transaction
On June 29, 2017,
the Company (then known as “Transgenomic, Inc.”, or “Transgenomic”), completed a reverse merger (the “Merger”)
with Precipio Diagnostics, LLC, a privately held Delaware limited liability company (“Precipio Diagnostics”) in accordance
with the terms of the Agreement and Plan of Merger (the “Merger Agreement”), dated October 12, 2016, as amended
on February 2, 2017 and June 29, 2017, by and among Transgenomic, Precipio Diagnostics and New Haven Labs Inc. (“Merger
Sub”) a wholly-owned subsidiary of Transgenomic. Pursuant to the Merger Agreement, Merger Sub merged with and into Precipio
Diagnostics, with Precipio Diagnostics surviving the Merger as a wholly-owned subsidiary of the combined company. Upon the consummation
of the Merger, the historical financial statements of Precipio Diagnostics become the Company's historical financial statements.
Accordingly, the historical financial statements of Precipio Diagnostics are included in the comparative prior periods. As a result
of the Merger, historical preferred stock, common stock, restricted units, warrants and additional paid-in capital, including share
and per share amounts, have been retroactively adjusted to reflect the equity structure of the combined company, including the
effect of the Merger exchange ratio. Pursuant to the Merger Agreement, each outstanding unit of Precipio Diagnostics was exchanged
for 10.2502 pre-reverse stock split shares of Company Common Stock.
Going Concern.
The condensed consolidated
financial statements have been prepared using accounting principles generally accepted in the United States of America (“GAAP”)
applicable for a going concern, which assume that the Company will realize its assets and discharge its liabilities in the ordinary
course of business. The Company has incurred substantial operating losses and has used cash in its operating activities for the
past few years. As of September 30, 2018, the Company had a net loss of $9.1 million, negative working capital of $8.8 million
and net cash used in operating activities of $4.8 million. The Company’s ability to continue as a going concern over the
next twelve months from the date of issuance of this Form 10-Q is dependent upon a combination of achieving 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.
Notwithstanding the aforementioned
circumstances, there remains substantial doubt about the Company’s ability to continue as a going concern over the next twelve
months from the date of issuance of the Form 10-Q. There can be no assurance that the Company will be able to successfully achieve
its initiatives summarized above in order to continue as a going concern over the next twelve months from the date of issuance
of the Form 10-Q. 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.
Nasdaq Delisting
Notice
On March 26, 2018, Precipio,
Inc. received written notice (the “Notice”) from The Nasdaq Stock Market LLC (“Nasdaq”) indicating that,
based on the closing bid price of the Company’s common stock for the preceding 30 consecutive business days, the Company
was not in compliance with the $1.00 minimum bid price requirement for continued listing on the Nasdaq Capital Market (the “Minimum
Bid Price Requirement”). In accordance with Nasdaq Listing Rule 5810(c)(3)(A), Precipio had a period of 180 calendar days,
or until September 24, 2018 to regain compliance with the Minimum Bid Price Requirement. On September 25, 2018, the Company received
a letter from Nasdaq notifying the Company that it was eligible for an additional 180 day extension, or until March 25, 2019, to
regain compliance. The Notice had no immediate effect on the listing of Precipio’s common stock, and its common stock will
continue to trade on the Nasdaq Capital Market under the symbol “PRPO” at this time. The Company intends to monitor
the closing bid price of its common stock and consider its available options to resolve its noncompliance with the Minimum Bid
Price Requirement.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation.
The accompanying condensed
consolidated financial statements are presented in conformity with GAAP. We have evaluated events occurring subsequent to September
30, 2018 for potential recognition or disclosure in the condensed consolidated financial statements and concluded that, other than
what is disclosed within the notes to unaudited condensed consolidated financial statements and in Note 12 - Subsequent Events,
there were no other subsequent events that required recognition or disclosure.
The condensed consolidated
balance sheet as of December 31, 2017 was derived from our audited balance sheet as of that date. There has been no change
in the balance sheet from December 31, 2017. The accompanying condensed consolidated financial statements as of and for the three
and nine months ended September 30, 2018 and 2017 are unaudited and reflect all adjustments (consisting of only normal recurring
adjustments) that are, in the opinion of management, necessary for a fair presentation of the financial position and operating
results for the interim periods. These unaudited condensed consolidated financial statements and notes should be read in conjunction
with the audited financial statements and notes thereto for the year ended December 31, 2017 contained in our Annual Report
Form 10-K, filed with the Securities and Exchange Commission (the “SEC”) on April 13, 2018. The results of operations
for the interim periods presented are not necessarily indicative of the results for fiscal year 2018.
Recent Accounting Pronouncements.
In May 2014, the Financial
Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts
with Customers and has subsequently issued supplemental and/or clarifying ASUs (collectively “ASC 606”). ASC 606 outlines
a five-step framework that intends to clarify the principles for recognizing revenue and eliminate industry-specific guidance.
In addition, ASC 606 revises current disclosure requirements in an effort to help financial statement users better understand the
nature, amount, timing, and uncertainty of revenue that is recognized. ASC 606 may be applied either retrospectively to each prior
reporting period presented or use the modified retrospective transition method with the cumulative effect of initial adoption recognized
at the date of initial application. We adopted this new standard as of January 1, 2018, by using the modified-retrospective method.
An adjustment was not required and a change to the prior revenue recognition process and policy to adopt the new standard was not
necessary. See Note 11 – Sales Service Revenue, Net and Accounts Receivable for further details.
In February 2016, the
FASB issued ASU No. 2016-02,
Leases
. 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 is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2018.
Early adoption is permitted. The new standard must be adopted using a modified retrospective transition, and provides for certain
practical expedients. Transition will require application of the new guidance at the beginning of the earliest comparative period
presented. We are currently assessing the impact that the adoption of this ASU will have on our consolidated financial statements.
In January 2017, FASB
issued ASU No. 2017-01,
Business Combinations
(Topic 805): Clarifying the Definition of a Business. ASU No. 2017-01
adds guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of
assets or businesses. The new guidance is effective for fiscal years beginning after December 15, 2017, and interim periods
within those fiscal years. The adoption of ASU No. 2017-01 did not have a material effect on the Company’s financial position
and results of operations.
In May 2017, the FASB
issued ASU 2017-09 “
Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting”,
which
provides clarity and reduces both diversity in practice and cost and complexity when applying guidance in Topic 718. This amendment
provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification
accounting in Topic 718. The amendments are effective for all entities for annual periods, and interim periods within those
periods, beginning after December 15, 2017. The adoption of ASU No. 2017-09 did not have a material effect on the Company’s
financial position and results of operations.
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. This ASU is effective for reporting
periods beginning after December 15, 2018. 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 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.
Property and Equipment, net.
Depreciation expense was
less than $0.1 million for the three and nine months ended September 30, 2018 and 2017. Depreciation expense during each year includes
depreciation related to equipment acquired under capital leases.
Goodwill and Intangible Assets.
As a result of the Merger,
the Company recorded goodwill and intangible assets as part of its allocation of the purchase consideration.
Goodwill
Goodwill represents
the excess of the purchase price over the fair value of identifiable net assets of the business acquired. Goodwill is tested for
impairment annually. We perform this impairment analysis during the fourth quarter of each year or when a significant event occurs
that may indicate that the assets might be impaired. During the nine months ended September 30, 2018, the Company experienced
a decline in its share price and a reduction in its market capitalization, as such the Company determined that an assessment of
goodwill should be performed using the qualitative approach. Based on the qualitative assessment, the Company concluded that it
was more likely than not that the fair value of the Company was less than its carry value. The analysis of the fair value of the
Company involved using the market capitalization and the discounted cash flow model. Based on the analysis, the Company concluded
that its carrying value exceeded its fair value and goodwill impairment in the amount of $1.6 million and 1.0 million was recorded
for the nine months ended September 30, 2018 and 2017, respectively. The Company recognized an impairment of $1.3 million and
$1.0 million for the three months ended September 30, 2018 and 2017, respectively.
Intangibles
Amortization expense for
intangible assets was $0.3 million for each of the three months ended September 30, 2018 and 2017, respectively, and $0.9 million
and $0.3 million during the nine months ended September 30, 2018 and 2017, respectively. Amortization expense for intangible assets
is expected to be $1.2 million, $1.0 million, $1.0 million, $0.9 million and $0.9 million for each of the years ending December
31, 2018, 2019, 2020, 2021 and 2022, respectively.
Debt Issuance Costs and Debt Discounts.
Debt issuance costs and
debt discounts are being amortized over the lives of the related financings on a basis that approximates the effective interest
method. Both are presented as a reduction of the related debt in the accompanying condensed consolidated balance sheets. See Note
4 – Long-Term Debt and Convertible Notes for further information.
Revenue 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 11 – 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 payors and others for services rendered, including retroactive adjustment under
reimbursement agreements with third-party payors. Revenue under third-party payor agreements is subject to audit and retroactive
adjustment. Provisions for third-party payor 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 $0.1 million as of September 30, 2018 and December 31, 2017, respectively.
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.
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 19,411,045 and 5,919,819 shares
of our common stock have been excluded from the computation of diluted loss per share at September 30, 2018 and 2017, 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:
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Stock options
|
|
|
3,399,076
|
|
|
|
236,887
|
|
Warrants
|
|
|
9,261,896
|
|
|
|
4,224,824
|
|
Preferred stock
|
|
|
156,667
|
|
|
|
1,456,400
|
|
Convertible notes
|
|
|
6,593,406
|
|
|
|
1,708
|
|
Total
|
|
|
19,411,045
|
|
|
|
5,919,819
|
|
3. REVERSE MERGER
Unaudited pro forma information
The operating results of
Transgenomic have been included in the Company's consolidated financial statements for all periods after June 29, 2017.
The following unaudited
pro forma information presents the Company's financial results as if the acquisition of Transgenomic had occurred on January 1,
2017 and combines Transgenomic’s unaudited condensed consolidated statement of operations for the nine months ended September
30, 2017 with Precipio’s unaudited condensed statement of operations for the nine months ended September 30, 2017:
Dollars in thousands, except per share amounts
|
|
September 30, 2017
|
|
|
|
Nine Months Ended
|
|
Net sales
|
|
$
|
1,742
|
|
Net loss available to common stockholders
|
|
|
(22,980
|
)
|
Loss per common share
|
|
$
|
(3.40
|
)
|
4. LONG-TERM DEBT AND CONVERTIBLE NOTES
Long-term debt consists of the following:
|
|
Dollars in Thousands
|
|
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
Department of Economic and Community Development (DECD)
|
|
$
|
280
|
|
|
$
|
-
|
|
DECD debt issuance costs
|
|
|
(29
|
)
|
|
|
-
|
|
Secured debt obligations
|
|
|
1,058
|
|
|
|
3,233
|
|
Financed insurance loan
|
|
|
306
|
|
|
|
183
|
|
Settlement Agreement
|
|
|
74
|
|
|
|
-
|
|
Total long-term debt
|
|
|
1,689
|
|
|
|
3,416
|
|
Current portion of long-term debt
|
|
|
(653
|
)
|
|
|
(587
|
)
|
Long-term debt, net of current maturities
|
|
$
|
1,036
|
|
|
$
|
2,829
|
|
Department of Economic and Community Development.
On January 8, 2018, the
Company received gross proceeds of $400,000 when it entered into an agreement with the Department of Economic and Community Development
(“DECD”) by which the Company received a grant of $100,000 and a loan of $300,000 secured by substantially all of the
Company’s assets (the “DECD 2018 Loan”.) At September 30, 2018, $25,000 of the grant is included in deferred
revenue in the accompanying condensed consolidated balance sheet and for the nine months ended September 30, 2018, $75,000 has
been recorded as clinical research grant revenue in the condensed consolidated statements of operations.
Debt issuance costs associated
with the DECD 2018 Loan were approximately $31,000. Amortization of the debt issuance cost was approximately $1,000 and $2,000
for the three and nine months ended September 30, 2018, respectively. Net debt issuance costs were $29,000 at September 30, 2018
and are presented as a reduction of the related debt in the accompanying condensed consolidated balance sheet.
Secured Debt Obligations
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 108,112 warrants to purchase shares of the Company’s common stock.
The Debt Obligations were
restructured as follows:
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·
|
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 1,814,754 shares of the Company’s
common stock with a weighted average price per share of $1.04 (the “Settlement Common Shares”). The stock was issued
in February 2018.
|
|
·
|
Warrants to purchase 108,112 shares of the Company’s common stock at an exercise price of
$7.50 per share (the “Creditor Warrants”) were issued to certain Creditors. The Creditor Warrants were issued in February
2018.
|
On September 17, 2018,
the Company entered into an Exchange Agreement (the “Exchange Agreements”) with three institutional investors (the
“Holders”) pursuant to which the Company issued or shall issue convertible promissory notes, due January 1, 2021 (the
“Exchange Notes”) in exchange (the “Exchange”) for amounts owed to the Holders pursuant to certain debt
settlement agreements, dated October 31, 2017. See Exchange Notes discussed below for further details of the notes. At the time
of the Exchange Agreements, $2.1 million of Secured Debt Obligations were exchanged for $1.8 million of Exchange Notes and the
Company recorded a $0.3 million gain on extinguishment of debt in the condensed consolidated statements of operations.
Financed Insurance Loan.
The Company finances certain
of its insurance premiums (the “Financed Insurance Loans”). In July 2017 the Company financed $0.4 million with a 4.99
% interest rate and fully paid off such loan as of May 2018. In July 2018, the Company financed $0.4 million with a 4.89% interest
rate and will make monthly payments through June 2019. As of September 30, 2018 and December 31, 2017, the Financed Insurance Loans
outstanding balance of $0.3 million and $0.2 million, respectively, was included in current maturities of long-term debt in the
Company’s condensed consolidated balance sheet. A corresponding prepaid asset was included in other current assets.
Settlement Agreement.
On September 21, 2018,
the Company entered into a settlement and forbearance agreement with a creditor (the “Settlement Agreement”) 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 Settlement Agreement. The settlement amount will accrue interest at the rate of 10% per annum until paid in full. The
Settlement Agreement outstanding balance of $0.1 million was included in long-term debt and accounts payable in the Company’s
condensed consolidated balance sheet as of September 30, 2018 and December 31, 2017, respectively.
Convertible notes consist of the following:
|
|
Dollars in Thousands
|
|
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
Convertible bridge notes
|
|
$
|
3,297
|
|
|
$
|
-
|
|
Convertible bridge notes discount and debt issuance costs
|
|
|
(3,093
|
)
|
|
|
-
|
|
Convertible promissory notes
|
|
|
1,823
|
|
|
|
-
|
|
Convertible promissory notes debt issuance costs
|
|
|
(241
|
)
|
|
|
-
|
|
Total convertible notes
|
|
|
1,786
|
|
|
|
-
|
|
Current portion of convertible notes
|
|
|
(256
|
)
|
|
|
-
|
|
Convertible notes, net of current maturities
|
|
$
|
1,530
|
|
|
$
|
-
|
|
Convertible Bridge Notes.
On
April 20, 2018, the Company entered into a securities purchase agreement (the “2018 Note Agreement”) with certain investors
(the “April 2018 Investors”), pursuant to which the Company would issue up to approximately $3,296,703 in Senior Secured
Convertible Promissory Notes along with warrants. (the “Transaction”). The number of warrants will be 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. Half
of the warrants will have a one-year term and half will have a five-year term (the “Transaction”). The 2018 Note Agreement
includes customary representations, warranties and covenants by the Company and customary closing conditions.
The
Transaction consists 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 shall be convertible at a price of $0.50 per share,
provided that if the notes are not repaid within 180 days of the initial Bridge Notes issuance date of April 20, 2018, 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 $0.30 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”). During the three months ended September 30, 2018, 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 on notes with an aggregate principal of $1.5 million. 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”).
The
Bridge Notes are payable by the Company on the earlier of (i) the one year anniversary after the initial 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 stipulates that upon written demand by one of the April 2018 Investors after August 22, 2018,
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 of the filing of this Quarterly Report on Form 10-Q, the Company
has not filed a registration statement related to the April 2018 Note Agreement and no demand to file a registration statement
has been made by the April 2018 Investors.
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 3,648,352 warrants to purchase shares of common stock of the Company
(the “April 2018 Warrants”) exercisable at a 150% premium to the April 2018 Bridge Notes conversion price or $0.75.
Half of such April 2018 Warrants have a five-year term and half have 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 2,945,055 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 $0.75. Half of such Q3 2018 Warrants have a five-year term and
half have 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 9 –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 $0.75 to $0.50. The Company reviewed this repricing to determine the appropriate
account 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 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 and modification in the unaudited condensed 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 232,000 warrants to purchase
shares of common stock of the Company with an exercise price of $0.75 (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
9 –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 less
than $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 9 –Fair Value for further discussion.
As detailed above, debt
discounts and debt issuance costs related to the April 2018 Bridge Notes totaled $2.7 million. 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 in the accompanying condensed consolidated balance sheet with the excess $0.9 million expensed as a loss on issuance
of convertible notes in the condensed consolidated statements of operations.
During the three months
ended September 30, 2018, 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 in the accompanying
condensed consolidated balance sheet with $0.1 million expensed as a loss on issuance of convertible notes in the condensed 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 total debt discount
and debt issuance costs of $3.1 million for all Bridge Notes will be amortized to interest expense over the life of the Bridge
Notes on a basis that approximates the effective interest method. Amortization of the discounts was approximately $59,000 and $68,000
for the three and nine months ended September 30, 2018 and is included in interest expense in the unaudited condensed consolidated
statements of operations.
Convertible Promissory Notes – Exchange
Notes.
As
discussed above, On September 17, 2018, the Company entered into Exchange Agreements whereby $2.1 million of Secured Debt Obligations
were exchanged for $1.8 million of Exchange Notes. Pursuant to the terms of the Exchange Notes, the Company shall pay to the Holders
the aggregate principal amount of the Exchange Notes in eighteen equal installments beginning on August 1, 2019 and ending on January
1, 2021. 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) $1.00 (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 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. See Secured Debt Obligations discussed above.
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
$0.2 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 9 –Fair Value for further discussion.
The Company reviewed
the Company Put Option and concluded that it meets the criteria for derivative accounting and requires bifurcation and separate
accounting as a derivative. The Company determined the initial fair value of the derivative at the time of issuance to be immaterial.
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.
The total debt discounts
of $0.2 million for all Exchange Notes will be amortized to interest expense over the life of the Exchange Notes on a basis that
approximates the effective interest method. As of September 30, 2018, the $1.6 million outstanding balance of the Exchange Notes,
net of discounts, was included in convertible notes in the Company’s condensed consolidated balance sheet.
5. OTHER CURRENT
LIABILITIES.
Other current liabilities
are as follows:
(dollars in thousands)
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
Obligation to issue common shares
|
|
$
|
-
|
|
|
$
|
1,897
|
|
Liability related to equity purchase agreement
|
|
|
460
|
|
|
|
-
|
|
Liability for settlement of equity instrument
|
|
|
1,450
|
|
|
|
1,085
|
|
|
|
$
|
1,910
|
|
|
$
|
2,982
|
|
As of December 31, 2017, the Company had recorded
a liability related to its obligation to issue shares of its common stock in the future. On February 12, 2018, the Company issued
1,814,754 Settlement Common Shares with a fair value of approximately $1.9 million.
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 have also executed
and delivered to Crede an affidavit of confession of judgment. As of December 31, 2017, the Company had recorded liabilities relating
to Crede of $1.1 million included in other current liabilities on the accompanying condensed consolidated balance sheets and $0.6
million included in common stock warrant liability on the accompanying condensed consolidated balance sheets related to warrants
classified as liabilities that Crede is the holder of.
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 unaudited condensed consolidated statement of operations
during the nine months ended September 30, 2018. See Note 9 – Fair Value for further discussion. At the time of the Crede
Agreement, the Company recorded $1.5 million in other current liabilities and $0.4 million in other long-term liabilities, thus
replacing its $1.1 million liability for settlement of equity instrument and $0.4 million common stock warrant liability. This
resulted in the Company recording an additional loss of $0.4 million, which is included in loss on settlement of equity instruments
in the unaudited condensed consolidated statement of operations. During the nine months ended September 30, 2018, the Company paid
approximately $0.5 million to Crede. The remaining amount due to Crede will be paid per the Crede Agreement payment schedule with
the final installment due in May 2019.
As of September 30, 2018,
the Company had recorded a liability of approximately $0.5 million related to an equity purchase agreement. The Company is currently
in negotiations with the investor with regards to this liability. See Note 8 Stockholders’ Equity for further discussion.
6. CONTINGENCIES
The Company is involved
in legal proceedings related to matters, which are incidental to its business. The Company has also assumed a number of claims
as a result of the Merger. See below for a discussion on these matters.
The healthcare industry
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 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.
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.
LITIGATIONS
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 June 23, 2016, the
Icahn School of Medicine at Mount Sinai (“Mount Sinai”) filed a lawsuit against Transgenomic in the Supreme Court of
the State of New York, County of New York, alleging, among other things, breach of contract and, alternatively, unjust enrichment
and quantum merit, and seeking recovery of $0.7 million owed by us to Mount Sinai for services rendered. We and Mount Sinai entered
into a settlement agreement dated October 27, 2016, which included, among other things, a mutual general release of claims, and
our agreement to pay approximately $0.7 million to Mount Sinai in installments over a period of time. Effective as of October 31,
2017, we and Mount Sinai agreed to enter into a new settlement agreement to restructure these liabilities into a secured, long-term
debt obligation of $0.5 million which includes accrued interest at 10% with monthly principal and interest payments of $9,472 beginning
in July 2018 and continuing over 48 months and we issued warrants in the amount of 24,900 shares, that are exercisable for shares
of our common stock, on a 1-for-1 basis, with an exercise price of $7.50 per share, exercisable on the date of issuance with a
term of 5 years. We do not plan to apply to list the warrants on the NASDAQ Capital Market, any other national securities exchange
or any other nationally recognized trading system. During the three months ended September 30, 2018, the Company made one payment
of $9,472 to Mount Sinai. On September 17, 2018, the remaining amount due to Mount Sinai was part of the Exchange, as discussed
in Note 4 Long-Term Debt And Convertible Notes, whereby our debt obligation to Mount Sinai was exchanged for a new convertible
note with new investors and the new investors assumed and settled the debt with Mount Sinai. A zero and $0.5 million liability
has been recorded and is reflected in long-term debt within the accompanying condensed consolidated balance sheet at September
30, 2018 and December 31, 2017.
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. On April 5, 2017, the court clerk entered default against the Company. On May 5, 2017, XIFIN filed an application
for entry of default judgment against us. A liability of $0.1 million and $0.2 million is reflected in accounts payable within
the accompanying condensed consolidated balance sheet at September 30, 2018 and December 31, 2017, respectively.
CPA Global provides us with
certain patent management services. On February 6, 2017, CPA Global claimed that we owe approximately $0.2 million for certain
patent maintenance services rendered. CPA Global has not filed claims against us in connection with this allegation. A liability
of approximately less than $0.1 million has been recorded and is reflected in accounts payable within the accompanying condensed
consolidated balance sheet at September 30, 2018 and December 31, 2017.
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.
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. We are currently in discussions with Bio-Rad
to reach payment conditions. A liability of less than $0.1 million has been recorded in accounts payable within the accompanying
condensed consolidated balance sheet at September 30, 2018 and December 31, 2017.
7. INCOME TAXES
Income tax expense for the
three and nine months ended September 30, 2018 and 2017 was zero as a result of recording a full valuation allowance against the
deferred tax asset generated during the periods, which are predominantly net operating losses.
We had no material interest
or penalties during fiscal 2018 or fiscal 2017, and we do not anticipate any such items during the next twelve months. Our policy
is to record interest and penalties directly related to uncertain tax positions as income tax expense in the condensed consolidated
statements of operations.
8. 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 February 8, 2018 the
Company entered into an equity purchase agreement (the “2018 Purchase Agreement”) with Leviston Resources LLC (“Leviston”
or the “Investor”) 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 721,153 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 $1.04 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 unaudited condensed consolidated balance sheet. As required by the terms of the 2018 Purchase Agreement,
the Company timely filed an S-1 on April 16, 2018. Subsequent to this filing, the S-1 Registration Statement was not declared effective
by the SEC. 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 has determined at this time not to proceed with the offering because the Company is seeking
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 “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 170,711 shares of the Company’s common stock on February 12, 2018.
In accordance with the
terms of the 2018 Purchase Agreement, the Company provided the Investor with a price protection against their initial investment
of Investor Shares at the $1.04 price and the commitment fee at a price of $0.82. The provision states that until the effective
date of a registration statement, on the occasion the Company sells, or agrees in writing to issue any common stock or common stock
equivalents and any of the terms and conditions appurtenant to such issuance or sale are more favorable to the new investors than
are the terms and conditions granted the Investor for less than the purchase price at any time, the Company shall amend the terms
of the 2018 Purchase Agreement so as to give the Investor the benefit of such more favorable terms or conditions. Due to the Company
entering into the 2018 Note Agreement and accepting the exercise of warrants outstanding at a conversion price of $0.30, the Company
is required to reprice the initial investment and the commitment fee at $0.30. As such, at the triggering date of April 20, 2018,
the total number of shares that the Company is required to issue to the Investor in relation to the repricing of their initial
investment and commitment fee is approximately 3.0 million shares of which 0.9 million were issued at the time of the 2018 Purchase
Agreement.
In addition, within the
price protection provision, if the Company issues any warrants in connection with issuances, sales or an agreement in writing to
issue common stock or common stock equivalents by the Company, the Investor will have the right to receive a proportionate amount
of such warrants, cash or shares, at Investor’s sole election, valued using the Black Scholes formula. As a result of
2018 Note Agreement and the April 2018 Warrants issued, the Company is required to provide the Investor with a proportionate and
equivalent coverage in the form of warrants, stock or cash in the amount of approximately $460,000. As the Investor has the ability
to elect the form of compensation, the Company has recorded the $460,000 as a liability within the other current liabilities line
of the accompanying condensed consolidated balance sheet and has recorded a corresponding dividend.
As of September 30, 2018, the Company has
an accrual for, but has not issued any additional shares or made any payments to the Investor and is negotiating to agree on a
mutually acceptable settlement.
During the nine months
ended September 30, 2018, the Company issued 3,120,000 shares of its common stock in connection with conversions of its Series
B Preferred Stock and 3,345,334 shares of its common stock in connection with conversions of its Series C Preferred Stock. Aside
from 60,000 shares of common stock issued in connection with conversions of its Series C Preferred Stock, all of the shares of
common stock issued in the nine months ended September 30, 2018 in connection with conversions of its Series B Preferred Stock
and Series C Preferred Stock (together the “Preferred Stock”) were issued after the Company induced the holders of
its Preferred Stock to convert their shares of Preferred Stock to shares of the company’s common stock (see below - Preferred
Stock induced conversions).
During the nine months
ended September 30, 2018, the Company issued 3,787,300 shares of its common stock in connection with the exercise of 3,787,300
warrants. The warrant exercises resulted in net cash proceeds to the Company of approximately $1.3 million during the nine months
ended September 30, 2018.
On September 7, 2018, the
Company entered into a purchase agreement with Lincoln Park (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 600,000 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 “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, 7,000,000 shares of common stock, which
includes the 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.
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 $0.10 per share (subject to adjustment for any reorganization, recapitalization, non-cash dividend, stock
split, reverse stock split or other similar transaction as provided in the LP Purchase Agreement), direct Lincoln Park to purchase
shares of its common stock in amounts up to 450,000 shares, which amounts may be increased to up to 550,000 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 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
4,628,859 shares based on 23,155,872 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 $0.47 (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 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 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.
For the nine months ended
September 30, 2018, no shares of the Company’s common stock were sold pursuant to the LP Purchase agreement.
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.
Series B Preferred Stock.
On August 25, 2017,
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 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 the August 2017 Offering of 6,000 units consisting of one share of the Company’s Series B Preferred
Stock, which was initially convertible into 400 shares of common stock, par value $0.01 per share, at a conversion price of $2.50
per share, and one warrant to purchase up to 400 shares of common stock (the “August 2017 Offering Warrants”) at a
combined public offering price of $1,000 per unit. The August 2017 Offering included the sale of 280,000 August 2017 Offering Warrants
pursuant to the over-allotment option exercised by Aegis Capital Corp. (“Aegis”) for $0.01 per share or $2,800.
In November 2017, the
down round feature of the Series B Preferred Stock was triggered at the time of the Company’s issuance of its Series C Preferred
Stock and, as a result, the conversion price of the Series B Preferred Stock was reduced from $2.50 per share to $1.40 per share.
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 from the reduced $1.40 per share price, related to the 2017 Series
C issuance, to $1.04 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.
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 $1.04 per share to $0.75 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.
The 2018 Note Agreement,
see Note 4 – Long-Term Debt And 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 $0.75
per share to $0.30 per share. In connection with the down round adjustment, the Company calculated an incremental beneficial conversion
feature of approximately $216,000 which was recognized as a deemed dividend at time of the down round adjustment.
During the nine months
ended September 30, 2018, 2,340 shares of Series B Preferred Stock that were outstanding at December 31, 2017 were converted into
3,120,000 shares of our common stock.
At September 30, 2018,
the Company had 6,900 shares of Series B designated and 47 shares of Series B issued and outstanding.
Series C Preferred Stock
On November 6, 2017, 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 entered into a Placement Agency Agreement (the “Placement Agreement”) with Aegis Capital Corp. for the sale
on a reasonable best efforts basis of 2,748 units, each consisting of one share of the Company’s Series C Preferred Stock,
convertible into a number of shares of the Company’s common stock equal to $1,000 divided by $1.40 and warrants to purchase
up to 1,962,857 shares of common stock with an exercise price of $1.63 per share (the “Series C Warrants”) at a combined
offering price of $1,000 per unit, in a registered direct offering (the “Series C Preferred Offering”). The Series
C Preferred Stock includes a beneficial ownership blocker but has no dividend rights (except to the extent dividends are also paid
on the common stock). The securities comprising the units are immediately separable and were issued separately.
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 $1.40 per share to $1.04 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 down round adjustment. The 2018 Note Agreement did not trigger any down round adjustment to the conversion price of the Series
C Preferred stock because all of the Series C Preferred Stock had been converted by March 31, 2018.
During the nine months
ended September 30, 2018, 2,548 shares of Series C Preferred Stock that were outstanding at December 31, 2017 were converted into
3,345,334 shares of our common stock.
At September 30, 2018,
the Company had 2,748 shares of Series C designated and zero shares of Series C issued and outstanding.
Preferred Stock induced conversions
On March 21, 2018, the
Company entered into a letter agreement (the “2018 Inducement Agreement”) with certain holders (the “Investors”)
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, par value $0.01 per share (“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 $0.75 per share
(the “Exercise Price Reduction”) and the conversion price of the Preferred Stock was reduced to $0.75 (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 666,666 Warrants and another Investor agreed to exercise 500,000 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 September 30, 2018, 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 300,000 Warrants were exercised at the $0.75 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
was reduced from $1.04 per share to $0.75 per share and the exercise price of the Warrants was reduced from $1.04 per share to
$0.75 per share. The Company calculated the fair value of the additional securities and consideration to be approximately $1.2
million. 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 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 September 30, 2018:
|
|
|
|
|
|
Underlying
|
|
|
Exercise
|
|
|
|
Issue Year
|
|
Expiration
|
|
Shares
|
|
|
Price
|
|
Warrants Assumed in Merger
|
|
|
|
|
|
|
|
|
(1)
|
|
2014
|
|
April 2020
|
|
|
12,487
|
|
|
$
|
120.00
|
|
(2)
|
|
2015
|
|
February 2020
|
|
|
23,826
|
|
|
$
|
67.20
|
|
(3)
|
|
2015
|
|
December 2020
|
|
|
4,081
|
|
|
$
|
49.80
|
|
(4)
|
|
2016
|
|
January 2021
|
|
|
8,952
|
|
|
$
|
36.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
|
|
|
|
|
|
(5)
|
|
2017
|
|
June 2022
|
|
|
45,600
|
|
|
$
|
2.75
|
|
(6)
|
|
2017
|
|
June 2022
|
|
|
91,429
|
|
|
$
|
7.00
|
|
(7)
|
|
2017
|
|
August 2022
|
|
|
480,000
|
|
|
$
|
0.30
|
|
(8)
|
|
2017
|
|
August 2022
|
|
|
60,000
|
|
|
$
|
3.125
|
|
(9)
|
|
2017
|
|
August 2022
|
|
|
856,446
|
|
|
$
|
10.00
|
|
(10)
|
|
2017
|
|
August 2022
|
|
|
359,999
|
|
|
$
|
0.30
|
|
(11)
|
|
2017
|
|
October 2022
|
|
|
10,000
|
|
|
$
|
0.30
|
|
(12)
|
|
2017
|
|
May 2023
|
|
|
375,557
|
|
|
$
|
0.30
|
|
(13)
|
|
2018
|
|
October 2022
|
|
|
108,112
|
|
|
$
|
7.50
|
|
(14)
|
|
2018
|
|
April 2019
|
|
|
1,824,176
|
|
|
$
|
0.50
|
|
(14)
|
|
2018
|
|
April 2023
|
|
|
1,824,176
|
|
|
$
|
0.50
|
|
(15)
|
|
2018
|
|
October 2022
|
|
|
232,000
|
|
|
$
|
0.75
|
|
(16)
|
|
2018
|
|
July 2019
|
|
|
382,526
|
|
|
$
|
0.50
|
|
(16)
|
|
2018
|
|
July 2023
|
|
|
382,526
|
|
|
$
|
0.50
|
|
(16)
|
|
2018
|
|
August 2019
|
|
|
545,000
|
|
|
$
|
0.50
|
|
(16)
|
|
2018
|
|
August 2023
|
|
|
545,000
|
|
|
$
|
0.50
|
|
(16)
|
|
2018
|
|
September 2019
|
|
|
545,002
|
|
|
$
|
0.50
|
|
(16)
|
|
2018
|
|
September 2023
|
|
|
545,001
|
|
|
$
|
0.50
|
|
|
|
|
|
|
|
|
9,261,896
|
|
|
|
|
|
|
(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 March 31, 2018, 5,368 warrants are recorded as a liability, See Note 9 – Fair
Value for further discussion, and 3,584 are treated as equity.
|
|
(5)
|
These warrants were issued in connection with the Merger and are the 2017 New Bridge Warrants.
|
|
(6)
|
These warrants were issued in connection with the Merger and are considered Side Warrants.
|
|
(7)
|
These warrants were issued in connection with the August 2017 Offering and are the August 2017
Offering Warrants discussed below.
|
|
(8)
|
These warrants were issued in connection with the August 2017 Offering and are considered Representative
Warrants.
|
|
(9)
|
These warrants were issued in connection with the conversion of our Series A Senior stock, at the
time of the closing of the August 2017 Offering, 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.
|
|
(11)
|
These warrants were issued in connection with the waiver of default the Company received in the
fourth quarter of 2017 in connection with the Convertible Promissory Notes and are the Convertible Promissory Note Warrants discussed
below.
|
|
(12)
|
These warrants were issued in connection with the Series C Preferred Offering and are the Series
C Warrants discussed below.
|
|
(13)
|
These warrants were issued in connection with the Debt Obligation settlement agreements and are
the Creditor Warrants discussed below.
|
|
(14)
|
These warrants were issued in connection with the 2018 Note Agreement and are the April 2018 Warrants
discussed below.
|
|
(15)
|
These warrants were issued in connection with the 2018 Note Agreement and are the Advisor Warrants
discussed below.
|
|
(16)
|
These warrants were issued in connection with the 2018 Note Agreement and are the Q3 2018 Warrants
discussed below.
|
Warrants Assumed in Merger
At the time of the Merger,
Transgenomic had a number of outstanding warrants related to various financing transactions that occurred between 2013-2016. Details
related to year issued, expiration date, amount of underlying common shares and exercise price are included in the table above.
During the nine months ended
September 30, 2018, 23,055 of the warrants assumed in the Merger expired and are no longer outstanding.
August 2017 Offering
Warrants
In connection with the August
2017 Offering, the Company issued 2,680,000 warrants at an exercise price of $3.00, which contain a down round provision. As a
result of the Series C Preferred Offering, the exercise price
of the August 2017 Offering
Warrants was adjusted to $1.40 per share.
In
February 2018, as a result of 2018 Purchase Agreement, the exercise price of the August 2017 Offering Warrants was adjusted to
$1.04. 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. In addition, as a result of the 2018 Inducement Agreement,
the exercise price of the August 2017 Offering Warrants was further adjusted to $0.75 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 August 2017 Offering Warrants was adjusted
to $0.30. 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.
There
were 79,000 and 2,200,000 August 2017 Offering Warrants exercised during the three and nine months ended September 30, 2018, respectively,
for proceeds to the Company of approximately $24,000 and $795,000, respectively. During the three and nine months ended September
30, 2018, the intrinsic value of the August 2017 Offering Warrants exercised was approximately $14,000 and $420,000, respectively.
Series A Conversion Warrants
The Company issued Series
A Conversion Warrants to purchase an aggregate of 856,446 shares of the Company's common stock at an exercise price of $10.00 per
share, which have a term of 5 years.
Note Conversion Warrants
Upon the closing of the
August 2017 Offering, the Company issued 359,999 warrants to purchase the Company’s common stock (the “Note Conversion
Warrants”). The Note Conversion Warrants have an exercise price of $3.00 per share and contain a down round provision. As
a result of the Series C Preferred Offering, the exercise price
of the Note Conversion Warrants
was adjusted to $1.40 per share.
In
February 2018, as a result of 2018 Purchase Agreement, the exercise price of the Note Conversion Warrants was adjusted to $1.04.
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. In addition, as a result of the 2018 Inducement Agreement, the
exercise price of the Note Conversion Warrants was further adjusted to $0.75. 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.
In April 2018, as a result
of the 2018 Note Agreement, the exercise price
of the Note Conversion Warrants was adjusted
to $0.30. 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.
Convertible Promissory
Note Warrants
The Convertible Promissory
Note Warrants had an original exercise price of $3.00 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 $1.40 per share.
In
February 2018, as a result of 2018 Purchase Agreement, the exercise price of the Convertible Promissory Note Warrants was adjusted
to $1.04. 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. In addition, as a result of the 2018 Inducement Agreement,
the exercise price of the Convertible Promissory Note Warrants was further adjusted to $0.75. 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.
In April 2018, as a result
of the 2018 Note Agreement, the exercise price
of the Convertible Promissory Note Warrants
was adjusted to $0.30. 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.
Series C Warrants
In connection with the Series
C Preferred Offering, the Company issued 1,962,857 warrants at an exercise price of $1.63, which contain a down round provision.
In
February 2018, as a result of 2018 Purchase Agreement, the exercise price of the Series C Warrants was adjusted to $1.04. 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. In addition, as a result of the 2018 Inducement Agreement, the exercise price of
the Series C Warrants was further adjusted to $0.75 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 $0.30.
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.
There
were 517,300 and 1,587,300 Series C Warrants exercised during the three and nine months ended September 30, 2018, respectively,
for proceeds to the Company of approximately $155,000 and $476,000, respectively. During the three and nine months ended September
30, 2018, the intrinsic value of the Series C Warrants exercised was approximately $92,000 and $294,000, respectively.
Creditor Warrants
In the fourth quarter of
2017, the Company entered into Settlement Agreements with certain of its accounts payable and accrued liability vendors (the “Creditors”)
pursuant to which the Company agreed to issue, to certain of its Creditors, 108,112 warrants to purchase 108,112 shares of the
Company’s common stock at an exercise price of $7.50 per share. The warrants were issued in February 2018. See Note 4 –
Long-Term Debt.
April 2018 Warrants
In connection with the issuance
of the April 2018 Bridge notes, the Company issued 3,648,352 warrants at an exercise price of $0.75 at time of issuance. In September
2018, the exercise price was amended to $0.50. Half of these April 2018 Warrants have a five-year term and half have a one-year
term. At the time of issuance, as discussed in Note 4 Long-Term Debt And 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.
Advisor Warrants
At the time of the 2018
Note Agreement, the Company issued 232,000 warrants with an exercise price of $0.75 to a financial advisor. At the time of issuance,
as discussed in Note 4 Long-Term Debt And 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 2,945,055 warrants with an exercise price of $0.75
at time of issuance. Half of these Q3 2018 Warrants have a five-year term and half have a one-year term. At the time of issuance,
as discussed in Note 4 Long-Term Debt And 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 $0.50.
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 and modification in the unaudited condensed consolidated statements of operations.
9. FAIR VALUE
FASB guidance on fair
value measurements, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair
value measurements for our financial assets and liabilities, as well as for other assets and liabilities that are carried at fair
value on a recurring basis in our condensed consolidated financial statements.
FASB guidance establishes
a three-level fair value hierarchy based upon the assumptions (inputs) used to price assets or liabilities. The three levels of
inputs used to measure fair value are as follows:
Level 1—Unadjusted
quoted prices in active markets for identical assets or liabilities;
Level 2—Observable
inputs other than those included in Level 1, such as quoted prices for similar assets and liabilities in active markets or
quoted prices for identical assets or liabilities in inactive markets; and
Level 3—Unobservable
inputs reflecting our own assumptions and best estimate of what inputs market participants would use in pricing the asset or liability.
Common Stock Warrant Liabilities.
Certain of our issued
and outstanding warrants to purchase shares of common stock do not qualify to be treated as equity and, accordingly, are recorded
as a liability. 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 condensed
consolidated statement of operations.
2016 Warrant Liability
The Company assumed the
2016 Warrant Liability in the Merger and it represents the fair value of Transgenomic warrants issued in January 2016, of which,
5,368 warrants remain outstanding as of September 30, 2018.
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 20,216 warrants, was canceled
on the date of the settlement agreement and replaced by and amounts now recorded as other current liabilities or other long-term
liabilities. For further detail, see discussion of the Crede Agreement in Note 5 – Other Current Liabilities.
The 2016 Warrant Liability
is considered a Level 3 financial instrument and was valued using the Monte Carlo methodology. As of September 30, 2018, assumptions
and inputs used in the valuation of the 2016 Warrant Liability include: remaining life to maturity of 2.25 years; annual volatility
of 188%; and a risk-free interest rate of 2.81%.
2018 Warrant Liabilities
In April 2018, the Company
issued 3,648,352 of April 2018 Warrants and 232,000 of Advisor Warrants and in the third quarter of 2018, the Company issued 2,945,055
of Q3 2018 Warrants. All of these warrants issuances were classified as warrant liabilities (the “2018 Warrant Liabilities”).
See Note 4 Long-Term Debt And Convertible Notes for further discussion of each warrant.
The 2018 Warrant Liabilities
are considered Level 3 financial instruments and were valued using the Black Scholes model. As of September 30, 2018, assumptions
used in the valuation of the 2018 Warrant Liabilities include: remaining life to maturity of 0.55 to 4.97 years; annual volatility
of 96% to 155%; and risk free rate of 2.36% to 2.94%
During the three and nine
months ended September 30, 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
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2018
|
|
|
|
2016 Warrant
Liability
|
|
|
2018 Warrant
Liabilities
|
|
|
Total Warrant
Liabilities
|
|
Beginning balance at July 1
|
|
$
|
124
|
|
|
$
|
882
|
|
|
$
|
1,006
|
|
Additions:
|
|
|
-
|
|
|
|
720
|
|
|
|
720
|
|
Total (gain) loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revaluation recognized in earnings
|
|
|
-
|
|
|
|
(176
|
)
|
|
|
(176
|
)
|
Modification recognized in earnings
|
|
|
-
|
|
|
|
143
|
|
|
|
143
|
|
Deductions – warrant liability settlement
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance at September 30
|
|
$
|
124
|
|
|
$
|
1,569
|
|
|
$
|
1,693
|
|
Dollars in Thousands
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2018
|
|
|
|
2016 Warrant
Liability
|
|
|
2018 Warrant
Liabilities
|
|
|
Total Warrant
Liabilities
|
|
Beginning balance at January 1
|
|
$
|
841
|
|
|
$
|
-
|
|
|
$
|
841
|
|
Additions:
|
|
|
-
|
|
|
|
1,925
|
|
|
|
1,925
|
|
Total (gain) loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revaluation recognized in earnings
|
|
|
(261
|
)
|
|
|
(499
|
)
|
|
|
(760
|
)
|
Modification recognized in earnings
|
|
|
-
|
|
|
|
143
|
|
|
|
143
|
|
Deductions – warrant liability settlement
|
|
|
(456
|
)
|
|
|
-
|
|
|
|
(456
|
)
|
Balance at September 30
|
|
$
|
124
|
|
|
$
|
1,569
|
|
|
$
|
1,693
|
|
Derivative Liabilities.
Certain of our issued and
outstanding convertible notes contain features that are considered derivative instruments and are required to bifurcated from the
debt host and accounted for separately as derivative liabilities. The estimated fair value of the derivatives will be remeasured
at each reporting date and any change in estimated fair value of the derivatives will be recorded as non-cash adjustments to earnings.
The gains or losses included in earnings are reported in other income (expense) in our condensed consolidated statement of operations.
Bridge Notes Redemption
Feature
At the time of the April
2018 Bridge Note issuance, the Company recorded a derivative instrument as a liability with an initial fair value of approximately
$0.1 million. At the time of the Q3 2018 Bridge Note issuances, the Company recorded additional derivative instruments as liabilities
with initial fair values totaling $0.1 million. The valuations were performed using the “with and without” approach,
whereby the Bridge Notes were valued both with the embedded derivative and without, and the difference in values was recorded as
the derivative liability. See Note 4 Long-Term Debt And Convertible Notes for further discussion.
Conversion Option
The Company recorded
derivative liabilities related to the Conversion Option of the Exchange Notes issued in September 2018 with an initial fair value
of approximately $0.2. The valuations were performed using the Monte Carlo methodology. See Note 4 Long-Term Debt And Convertible
Notes for further discussion.
During the three and nine
months ended September 30, 2018, the change in the fair value of the derivative liabilities were comprised of the following:
|
|
Three Months Ended September 30, 2018
|
|
|
|
Bridge Notes
Redemption
Feature
|
|
|
Conversion
Option
|
|
|
Total
Derivative
Liabilities
|
|
Beginning balance at July 1
|
|
$
|
143
|
|
|
$
|
-
|
|
|
$
|
143
|
|
Additions:
|
|
|
69
|
|
|
|
241
|
|
|
|
310
|
|
Total (gain) loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revaluation recognized in earnings
|
|
|
(96
|
)
|
|
|
(20
|
)
|
|
|
(116
|
)
|
Balance at September 30
|
|
$
|
116
|
|
|
$
|
221
|
|
|
$
|
337
|
|
|
|
Nine Months Ended September 30, 2018
|
|
|
|
Bridge Notes
Redemption
Feature
|
|
|
Conversion
Option
|
|
|
Total
Derivative
Liabilities
|
|
Beginning balance at January 1
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Additions:
|
|
|
212
|
|
|
|
241
|
|
|
|
453
|
|
Total (gain) loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revaluation recognized in earnings
|
|
|
(96
|
)
|
|
|
(20
|
)
|
|
|
(116
|
)
|
Balance at September 30
|
|
$
|
116
|
|
|
$
|
221
|
|
|
$
|
337
|
|
10. EQUITY INCENTIVE PLAN
The Company's 2006 Equity
Incentive Plan (the "2006 Plan") was terminated as to future awards on July 12, 2016. The Company's 2017 Stock Option
and Incentive Plan (the "2017 Plan") was adopted by the Company's stockholders on June 5, 2017 and there were 666,666
shares of common stock reserved for issuance under the 2017 Plan. The 2017 Plan will expire on June 5, 2027.
Amendment of the
2017 Stock Option and Incentive Plan
On January 31, 2018,
at a special meeting of the stockholders of the Company, the stockholders approved an amendment and restatement of the 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 5,389,500
shares to 6,056,166 shares and cumulatively increased on January 1, 2019 and on each January 1 thereafter by the lesser of the
annual increase for such year or 500,000 shares;
|
|
·
|
increase the maximum number of shares that may be granted in the form of stock options or stock
appreciation rights to any one individual in any one calendar year and the maximum number of shares underlying any award intended
to qualify as performance-based compensation to any one individual in any performance cycle, in each case to 1,000,000 shares of
Common Stock; and
|
|
·
|
add an “evergreen” provision, pursuant to which the aggregate number of shares authorized
for issuance under the 2017 Plan will be automatically increased each year beginning on January 1, 2019 by 5% of the number of
shares of Common Stock issued and outstanding on the immediately preceding December 31, or such lesser number of shares determined
by the Company’s Board of Directors or Compensation Committee.
|
Stock Options.
During the nine months ended September 30,
2018, the Company granted stock options to employees and directors to purchase up to 3,365,488 shares of common stock at a weighted
average exercise price of $0.70. These awards have vesting periods of one to four years and had a weighted average grant date fair
value of $0.64. The fair value calculation of options granted during the nine months ended September 30, 2018 used the follow assumptions:
risk free interest rates between 2.63% and 2.88% based on the U.S. Treasury yield in effect at the time of grant; expected life
of six years; and volatility of 135%.
The following table summarizes stock option
activity under our plans during the nine months ended September 30, 2018:
|
|
Number of
|
|
|
Weighted-Average
|
|
|
|
Options
|
|
|
Exercise Price
|
|
Outstanding at January 1, 2018
|
|
|
236,484
|
|
|
$
|
7.12
|
|
Granted
|
|
|
3,365,488
|
|
|
|
0.70
|
|
Forfeited
|
|
|
(202,896
|
)
|
|
|
2.16
|
|
Outstanding at September 30, 2018
|
|
|
3,399,076
|
|
|
$
|
1.06
|
|
Exercisable at September 30, 2018
|
|
|
260,201
|
|
|
$
|
4.66
|
|
As of September 30, 2018,
there were 2,614,237 options that were vested or expected to vest with an aggregate intrinsic value of zero and a remaining weighted
average contractual life of 9.3 years.
For the three and nine
months ended September 30, 2018, we recorded compensation expense for all stock awards of $0.1 million and $0.3 million, respectively,
within operating expense in the accompanying statements of operations. For both the three and nine months ended September 30, 2017,
we recorded compensation expense for all stock awards of less than $0.1 million. As of September 30, 2018, the unrecognized compensation
expense related to unvested stock awards was $2.0 million, which is expected to be recognized over a weighted-average period of
3.0 years.
11. SALES SERVICE REVENUE, NET
AND ACCOUNTS RECEIVABLE
Adoption of 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.
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 three and nine months ended September 30, 2018 and 2017 were as
follows (prior-period amounts are not adjusted under the modified-retrospective method of adoption):
|
|
For the Three Months Ended September 30,
|
|
(dollars in thousands)
|
|
Diagnostic Testing
|
|
|
Biomarker Testing
|
|
|
Total
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Medicaid
|
|
$
|
15
|
|
|
$
|
4
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
15
|
|
|
$
|
4
|
|
Medicare
|
|
|
288
|
|
|
|
165
|
|
|
|
-
|
|
|
|
-
|
|
|
|
288
|
|
|
|
165
|
|
Self-pay
|
|
|
48
|
|
|
|
33
|
|
|
|
-
|
|
|
|
-
|
|
|
|
48
|
|
|
|
33
|
|
Third party payers
|
|
|
289
|
|
|
|
114
|
|
|
|
-
|
|
|
|
-
|
|
|
|
289
|
|
|
|
114
|
|
Contract diagnostics
|
|
|
-
|
|
|
|
-
|
|
|
|
168
|
|
|
|
-
|
|
|
|
168
|
|
|
|
-
|
|
Revenues, net of contractual allowances
|
|
$
|
640
|
|
|
$
|
316
|
|
|
$
|
168
|
|
|
$
|
-
|
|
|
$
|
808
|
|
|
$
|
316
|
|
|
|
For the Nine Months Ended September 30,
|
|
(dollars in thousands)
|
|
Diagnostic Testing
|
|
|
Biomarker Testing
|
|
|
Total
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Medicaid
|
|
$
|
38
|
|
|
$
|
24
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
38
|
|
|
$
|
24
|
|
Medicare
|
|
|
703
|
|
|
|
454
|
|
|
|
-
|
|
|
|
-
|
|
|
|
703
|
|
|
|
454
|
|
Self-pay
|
|
|
94
|
|
|
|
87
|
|
|
|
-
|
|
|
|
-
|
|
|
|
94
|
|
|
|
87
|
|
Third party payers
|
|
|
639
|
|
|
|
370
|
|
|
|
-
|
|
|
|
-
|
|
|
|
639
|
|
|
|
370
|
|
Contract diagnostics
|
|
|
-
|
|
|
|
-
|
|
|
|
1,024
|
|
|
|
-
|
|
|
|
1,024
|
|
|
|
-
|
|
Revenues, net of contractual allowances
|
|
$
|
1,474
|
|
|
$
|
935
|
|
|
$
|
1,024
|
|
|
$
|
-
|
|
|
$
|
2,498
|
|
|
$
|
935
|
|
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, 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.
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. For the period ended September 30, 2018 and December 31, 2017, the deferred revenue was $94,000 and $66,000,
respectively.
Contractual Allowances
and Adjustments
We are reimbursed by payors
for services we provide. Payments for services covered by payors average less than billed charges. We monitor revenue and receivables
from payors 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 payors. Accordingly, the total revenue and receivables reported in our financial statements are recorded at the amounts expected
to be received from these payors. 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 payor/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 payor class during the three and nine months ended September 30, 2018 and 2017.
|
|
For the Three Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
Contractual Allowances and
|
|
|
Revenues, net of Contractual
|
|
|
|
Gross Revenues
|
|
|
adjustments
|
|
|
Allowances and adjustments
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Medicaid
|
|
$
|
30
|
|
|
$
|
7
|
|
|
$
|
(15
|
)
|
|
$
|
(3
|
)
|
|
$
|
15
|
|
|
$
|
4
|
|
Medicare
|
|
|
293
|
|
|
|
128
|
|
|
|
(5
|
)
|
|
|
37
|
|
|
|
288
|
|
|
|
165
|
|
Self-pay
|
|
|
48
|
|
|
|
37
|
|
|
|
-
|
|
|
|
(4
|
)
|
|
|
48
|
|
|
|
33
|
|
Third party payers
|
|
|
713
|
|
|
|
323
|
|
|
|
(424
|
)
|
|
|
(209
|
)
|
|
|
289
|
|
|
|
114
|
|
Contract diagnostics
|
|
|
168
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
168
|
|
|
|
-
|
|
|
|
|
1,252
|
|
|
|
495
|
|
|
|
(444
|
)
|
|
|
(179
|
)
|
|
|
808
|
|
|
|
316
|
|
Clinical research grants and other
|
|
|
15
|
|
|
|
11
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15
|
|
|
|
11
|
|
|
|
$
|
1,267
|
|
|
$
|
506
|
|
|
$
|
(444
|
)
|
|
$
|
(179
|
)
|
|
$
|
823
|
|
|
$
|
327
|
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
Contractual Allowances and
|
|
|
Revenues, net of Contractual
|
|
|
|
Gross Revenues
|
|
|
adjustments
|
|
|
Allowances and adjustments
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Medicaid
|
|
$
|
71
|
|
|
$
|
72
|
|
|
$
|
(33
|
)
|
|
$
|
(48
|
)
|
|
$
|
38
|
|
|
$
|
24
|
|
Medicare
|
|
|
722
|
|
|
|
422
|
|
|
|
(19
|
)
|
|
|
32
|
|
|
|
703
|
|
|
|
454
|
|
Self-pay
|
|
|
94
|
|
|
|
115
|
|
|
|
-
|
|
|
|
(28
|
)
|
|
|
94
|
|
|
|
87
|
|
Third party payers
|
|
|
1,561
|
|
|
|
918
|
|
|
|
(922
|
)
|
|
|
(548
|
)
|
|
|
639
|
|
|
|
370
|
|
Contract diagnostics
|
|
|
1,024
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,024
|
|
|
|
-
|
|
|
|
|
3,472
|
|
|
|
1,527
|
|
|
|
(974
|
)
|
|
|
(592
|
)
|
|
|
2,498
|
|
|
|
935
|
|
Clinical research grants and other
|
|
|
80
|
|
|
|
11
|
|
|
|
-
|
|
|
|
-
|
|
|
|
80
|
|
|
|
11
|
|
|
|
$
|
3,552
|
|
|
$
|
1,538
|
|
|
$
|
(974
|
)
|
|
$
|
(592
|
)
|
|
$
|
2,578
|
|
|
$
|
946
|
|
Allowance for Doubtful Accounts
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 three and nine months ended September 30, 2018 and 2017.
|
|
For the Three Months Ended September 30,
|
|
|
|
Revenues, net of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Contractual Allowances
|
|
|
Allowances for doubtful
|
|
|
|
|
|
|
|
|
|
and adjustments
|
|
|
accounts
|
|
|
Total
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Medicaid
|
|
$
|
15
|
|
|
$
|
4
|
|
|
$
|
(15
|
)
|
|
$
|
(1
|
)
|
|
$
|
-
|
|
|
$
|
3
|
|
Medicare
|
|
|
288
|
|
|
|
165
|
|
|
|
(43
|
)
|
|
|
(30
|
)
|
|
|
245
|
|
|
|
135
|
|
Self-pay
|
|
|
48
|
|
|
|
33
|
|
|
|
-
|
|
|
|
(6
|
)
|
|
|
48
|
|
|
|
27
|
|
Third party payers
|
|
|
289
|
|
|
|
114
|
|
|
|
(115
|
)
|
|
|
(20
|
)
|
|
|
174
|
|
|
|
94
|
|
Contract diagnostics
|
|
|
168
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
168
|
|
|
|
-
|
|
|
|
|
808
|
|
|
|
316
|
|
|
|
(173
|
)
|
|
|
(57
|
)
|
|
|
635
|
|
|
|
259
|
|
Clinical research grants and other
|
|
|
15
|
|
|
|
11
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15
|
|
|
|
11
|
|
|
|
$
|
823
|
|
|
$
|
327
|
|
|
$
|
(173
|
)
|
|
$
|
(57
|
)
|
|
$
|
650
|
|
|
$
|
270
|
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
Revenues, net of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Contractual Allowances
|
|
|
Allowances for doubtful
|
|
|
|
|
|
|
|
|
|
and adjustments
|
|
|
accounts
|
|
|
Total
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Medicaid
|
|
$
|
38
|
|
|
$
|
24
|
|
|
$
|
(38
|
)
|
|
$
|
(5
|
)
|
|
$
|
-
|
|
|
$
|
19
|
|
Medicare
|
|
|
703
|
|
|
|
454
|
|
|
|
(105
|
)
|
|
|
(83
|
)
|
|
|
598
|
|
|
|
371
|
|
Self-pay
|
|
|
94
|
|
|
|
87
|
|
|
|
-
|
|
|
|
(16
|
)
|
|
|
94
|
|
|
|
71
|
|
Third party payers
|
|
|
639
|
|
|
|
370
|
|
|
|
(256
|
)
|
|
|
(64
|
)
|
|
|
383
|
|
|
|
306
|
|
Contract diagnostics
|
|
|
1,024
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,024
|
|
|
|
-
|
|
|
|
|
2,498
|
|
|
|
935
|
|
|
|
(399
|
)
|
|
|
(168
|
)
|
|
|
2,099
|
|
|
|
767
|
|
Clinical research grants and other
|
|
|
80
|
|
|
|
11
|
|
|
|
-
|
|
|
|
-
|
|
|
|
80
|
|
|
|
11
|
|
|
|
$
|
2,578
|
|
|
$
|
946
|
|
|
$
|
(399
|
)
|
|
$
|
(168
|
)
|
|
$
|
2,179
|
|
|
$
|
778
|
|
Costs to Obtain or
Fulfill a Customer Contract
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 condensed consolidated statements of operations.
Shipping and handling
costs are comprised of inbound and outbound freight and associated labor. The Company accounts for shipping and handling activities
related to contracts with customers as fulfillment costs which are included in cost of sales in the condensed consolidated statements
of operations.
Accounts Receivable
The Company has provided
an allowance for potential credit losses, which has been determined based on management’s industry experience. The Company
grants credit without collateral to its patients, most of who are insured under third party payer agreements.
The following summarizes the mix of receivables:
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
Medicaid
|
|
$
|
113
|
|
|
$
|
37
|
|
Medicare
|
|
|
631
|
|
|
|
256
|
|
Self-pay
|
|
|
81
|
|
|
|
53
|
|
Third party payers
|
|
|
1,215
|
|
|
|
1,066
|
|
Contract diagnostic services
|
|
|
139
|
|
|
|
445
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
2,179
|
|
|
$
|
1,857
|
|
Less allowance for doubtful accounts
|
|
|
(1,521
|
)
|
|
|
(1,127
|
)
|
Accounts receivable, net
|
|
$
|
658
|
|
|
$
|
730
|
|
The following table presents
the roll-forward of the allowance for doubtful accounts for the nine months ended September 30, 2018.
|
|
|
|
|
Allowance for
|
|
|
|
|
|
|
Doubtful
|
|
(dollars in thousands)
|
|
|
|
|
Accounts
|
|
Balance, January 1, 2018
|
|
|
|
|
|
$
|
(1,127
|
)
|
Collection Allowance:
|
|
|
|
|
|
|
|
|
Medicaid
|
|
$
|
(38
|
)
|
|
|
|
|
Medicare
|
|
|
(105
|
)
|
|
|
|
|
Third party payers
|
|
|
(256
|
)
|
|
|
|
|
Service revenue, net
|
|
|
(399
|
)
|
|
|
|
|
Bad debt expense
|
|
$
|
5
|
|
|
|
|
|
Total charges
|
|
|
|
|
|
|
(394
|
)
|
Balance, September 30, 2018
|
|
|
|
|
|
$
|
(1,521
|
)
|
12. SUBSEQUENT EVENTS
In October and November
2018, the Company exchanged its remaining $1.1 million of Secured Debt Obligations that were outstanding as of September 30, 2018
for Exchange Notes of approximately $0.9 million. The exchange was in connection with the Exchange Agreement discussed in Note
4 Long-Term Debt And Convertible Notes.