Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of
Precipio, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Precipio, Inc. (the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of operations, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
Explanatory Paragraph – Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 1, the Company has a significant working capital deficiency, has incurred significant losses and needs to raise additional funds to meet its obligations and sustain its operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Adoption of New Accounting Standards
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for leases in 2019 due to the adoption of ASU No. 2016-12, Leases (Topic 842), as amended, effective January 1, 2019, using the modified retrospective approach.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Marcum LLP
We have served as the Company’s auditor since 2016.
Hartford, CT
March 27, 2020
PRECIPIO, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 2019 and 2018
(Dollars in thousands, except share data)
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
ASSETS
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
Cash
|
|
$
|
848
|
|
$
|
381
|
Accounts receivable, net
|
|
|
574
|
|
|
690
|
Inventories
|
|
|
184
|
|
|
197
|
Other current assets
|
|
|
272
|
|
|
525
|
Total current assets
|
|
|
1,878
|
|
|
1,793
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT, NET
|
|
|
431
|
|
|
496
|
|
|
|
|
|
|
|
OTHER ASSETS:
|
|
|
|
|
|
|
Operating lease right-of-use assets
|
|
|
519
|
|
|
—
|
Intangibles, net
|
|
|
16,658
|
|
|
19,291
|
Other assets
|
|
|
25
|
|
|
25
|
Total assets
|
|
$
|
19,511
|
|
$
|
21,605
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
Current maturities of long-term debt, less debt issuance costs
|
|
$
|
321
|
|
$
|
263
|
Current maturities of convertible notes, less debt discounts and debt issuance costs
|
|
|
142
|
|
|
4,377
|
Current maturities of finance lease liabilities
|
|
|
52
|
|
|
57
|
Current maturities of operating lease liabilities
|
|
|
209
|
|
|
—
|
Accounts payable
|
|
|
1,936
|
|
|
5,169
|
Accrued expenses
|
|
|
1,639
|
|
|
1,940
|
Deferred revenue
|
|
|
35
|
|
|
49
|
Other current liabilities
|
|
|
—
|
|
|
1,910
|
Total current liabilities
|
|
|
4,334
|
|
|
13,765
|
LONG TERM LIABILITIES:
|
|
|
|
|
|
|
Long-term debt, less current maturities and debt issuance costs
|
|
|
198
|
|
|
253
|
Finance lease liabilities, less current maturities
|
|
|
119
|
|
|
155
|
Operating lease liabilities, less current maturities
|
|
|
317
|
|
|
—
|
Common stock warrant liabilities
|
|
|
1,338
|
|
|
1,132
|
Derivative liabilities
|
|
|
—
|
|
|
62
|
Deferred tax liability
|
|
|
—
|
|
|
70
|
Other long-term liabilities
|
|
|
—
|
|
|
45
|
Total liabilities
|
|
|
6,306
|
|
|
15,482
|
COMMITMENTS AND CONTINGENCIES (Note 9)
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY:
|
|
|
|
|
|
|
Preferred stock - $0.01 par value, 15,000,000 shares authorized at December 31, 2019 and December 31, 2018, 47 shares issued and outstanding at December 31, 2019 and December 31, 2018, liquidation preference of $42 at December 31, 2019
|
|
|
—
|
|
|
—
|
Common stock, $0.01 par value, 150,000,000 shares authorized at December 31, 2019 and December 31, 2018, 7,898,117 and 2,298,738 shares issued and outstanding at December 31, 2019 and December 31, 2018, respectively
|
|
|
79
|
|
|
23
|
Additional paid-in capital
|
|
|
74,065
|
|
|
53,796
|
Accumulated deficit
|
|
|
(60,939)
|
|
|
(47,696)
|
Total stockholders’ equity
|
|
|
13,205
|
|
|
6,123
|
Total liabilities and stockholders’ equity
|
|
$
|
19,511
|
|
$
|
21,605
|
See notes to consolidated financial statements.
PRECIPIO, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2019 and 2018
(Dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
SALES:
|
|
|
|
|
|
|
Service revenue, net
|
|
$
|
4,051
|
|
$
|
3,335
|
Clinical research grants
|
|
|
—
|
|
|
100
|
Other
|
|
|
44
|
|
|
13
|
Revenue, net of contractual allowances and adjustments
|
|
|
4,095
|
|
|
3,448
|
less allowance for doubtful accounts
|
|
|
(968)
|
|
|
(584)
|
Net sales
|
|
|
3,127
|
|
|
2,864
|
COST OF SALES:
|
|
|
|
|
|
|
Service revenue
|
|
|
2,908
|
|
|
2,549
|
Clinical research grants
|
|
|
—
|
|
|
90
|
Total cost of sales
|
|
|
2,908
|
|
|
2,639
|
Gross profit
|
|
|
219
|
|
|
225
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
Operating expenses
|
|
|
9,623
|
|
|
9,452
|
Impairment of intangible assets and goodwill
|
|
|
1,590
|
|
|
4,685
|
TOTAL OPERATING EXPENSES
|
|
|
11,213
|
|
|
14,137
|
OPERATING LOSS
|
|
|
(10,994)
|
|
|
(13,912)
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(473)
|
|
|
(269)
|
Warrant revaluation
|
|
|
416
|
|
|
1,918
|
Loss on modification of warrants
|
|
|
(1,128)
|
|
|
—
|
Derivative revaluation
|
|
|
(415)
|
|
|
267
|
Gain on settlement of liability, net
|
|
|
1,437
|
|
|
263
|
(Loss) gain on extinguishment of debt
|
|
|
(20)
|
|
|
376
|
Loss on extinguishment of convertible notes
|
|
|
—
|
|
|
(2,903)
|
Loss on litigation
|
|
|
(266)
|
|
|
—
|
Loss on issuance of convertible notes
|
|
|
(1,870)
|
|
|
(1,328)
|
Loss on settlement of equity instruments
|
|
|
—
|
|
|
(385)
|
Total other expenses
|
|
|
(2,319)
|
|
|
(2,061)
|
LOSS BEFORE INCOME TAXES
|
|
|
(13,313)
|
|
|
(15,973)
|
INCOME TAX BENEFIT
|
|
|
70
|
|
|
279
|
NET LOSS
|
|
|
(13,243)
|
|
|
(15,694)
|
|
|
|
|
|
|
|
Deemed dividends related to beneficial conversion feature of preferred stock and fair value of consideration issued to induce conversion of preferred stock
|
|
|
—
|
|
|
(4,222)
|
TOTAL DIVIDENDS
|
|
|
—
|
|
|
(4,222)
|
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS
|
|
$
|
(13,243)
|
|
$
|
(19,916)
|
|
|
|
|
|
|
|
BASIC AND DILUTED LOSS PER COMMON SHARE
|
|
$
|
(2.33)
|
|
$
|
(13.82)
|
BASIC AND DILUTED WEIGHTED-AVERAGE SHARES OF COMMON STOCK OUTSTANDING
|
|
|
5,695,159
|
|
|
1,441,113
|
See notes to consolidated financial statements.
PRECIPIO, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Years Ended December 31, 2019 and 2018
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
Common Stock
|
|
Additional
|
|
|
|
|
|
|
|
|
Outstanding
|
|
Par
|
|
Outstanding
|
|
Par
|
|
Paid-in
|
|
Accumulated
|
|
|
|
|
|
Shares
|
|
Value
|
|
Shares
|
|
Value
|
|
Capital
|
|
Deficit
|
|
Total
|
Balance, January 1, 2018
|
|
4,935
|
|
$
|
—
|
|
679,774
|
|
$
|
7
|
|
$
|
44,560
|
|
$
|
(31,542)
|
|
$
|
13,025
|
Net loss
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(15,694)
|
|
|
(15,694)
|
Conversion of preferred stock into common stock
|
|
(4,888)
|
|
|
—
|
|
431,022
|
|
|
4
|
|
|
(4)
|
|
|
—
|
|
|
—
|
Conversion of convertible notes into common stock
|
|
—
|
|
|
—
|
|
384,896
|
|
|
4
|
|
|
2,352
|
|
|
—
|
|
|
2,356
|
Issuance of common stock in connection with purchase agreements
|
|
—
|
|
|
—
|
|
428,050
|
|
|
5
|
|
|
2,003
|
|
|
—
|
|
|
2,008
|
Issuance of common stock in exchange for cancelation of other current liabilities
|
|
—
|
|
|
—
|
|
120,983
|
|
|
1
|
|
|
1,896
|
|
|
—
|
|
|
1,897
|
Issuance of common stock upon exercise of warrants
|
|
—
|
|
|
—
|
|
252,486
|
|
|
2
|
|
|
1,269
|
|
|
—
|
|
|
1,271
|
Issuance of common stock for consulting services
|
|
—
|
|
|
—
|
|
1,527
|
|
|
—
|
|
|
39
|
|
|
—
|
|
|
39
|
Warrant modification recorded as debt discount in conjunction with convertible note issuance
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
11
|
|
|
—
|
|
|
11
|
Beneficial conversion feature on issuance of convertible notes
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
2,118
|
|
|
—
|
|
|
2,118
|
Write-off beneficial conversion feature in conjunction with convertible note extinguishment
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
(1,029)
|
|
|
—
|
|
|
(1,029)
|
Write-off debt discounts (net of debt premiums) in conjunction with convertible note conversions
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
(210)
|
|
|
—
|
|
|
(210)
|
Write-off debt derivative liability in conjunction with convertible note conversions
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
301
|
|
|
—
|
|
|
301
|
Liability recorded related to equity purchase agreement repricing
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(460)
|
|
|
(460)
|
Non-cash stock-based compensation
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
490
|
|
|
—
|
|
|
490
|
Balance, December 31, 2018
|
|
47
|
|
$
|
—
|
|
2,298,738
|
|
$
|
23
|
|
$
|
53,796
|
|
$
|
(47,696)
|
|
$
|
6,123
|
Net loss
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(13,243)
|
|
|
(13,243)
|
Conversion of convertible notes into common stock
|
|
—
|
|
|
—
|
|
2,511,173
|
|
|
25
|
|
|
7,528
|
|
|
—
|
|
|
7,553
|
Issuance of common stock in connection with purchase agreements
|
|
—
|
|
|
—
|
|
2,778,077
|
|
|
28
|
|
|
6,600
|
|
|
—
|
|
|
6,628
|
Proceeds upon issuance of common stock from exercise of warrants
|
|
—
|
|
|
—
|
|
310,200
|
|
|
3
|
|
|
1,572
|
|
|
—
|
|
|
1,575
|
Write-off warrant liability in conjunction with warrant exercises
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
2,364
|
|
|
—
|
|
|
2,364
|
Beneficial conversion feature on issuance of convertible notes
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
1,792
|
|
|
—
|
|
|
1,792
|
Write-off debt discounts (net of debt premiums) in conjunction with convertible note conversions
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
(731)
|
|
|
—
|
|
|
(731)
|
Write-off debt derivative liability in conjunction with convertible note conversions
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
477
|
|
|
—
|
|
|
477
|
Non-cash stock-based compensation
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
668
|
|
|
—
|
|
|
668
|
Payment of fractional common shares in conjunction with reverse stock split
|
|
—
|
|
|
—
|
|
(71)
|
|
|
—
|
|
|
(1)
|
|
|
—
|
|
|
(1)
|
Balance, December 31, 2019
|
|
47
|
|
$
|
—
|
|
7,898,117
|
|
$
|
79
|
|
$
|
74,065
|
|
$
|
(60,939)
|
|
$
|
13,205
|
See notes to consolidated financial statements.
PRECIPIO, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2019 and 2018
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net loss
|
|
$
|
(13,243)
|
|
$
|
(15,694)
|
|
|
|
|
|
|
|
Adjustments to reconcile net loss to net cash flows used in operating activities:
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,118
|
|
|
1,265
|
Amortization of operating lease right-of-use asset
|
|
|
231
|
|
|
—
|
Amortization of finance lease right-of-use asset
|
|
|
63
|
|
|
—
|
Amortization (accretion) of deferred financing costs, debt discounts and debt premiums
|
|
|
111
|
|
|
(21)
|
Loss (gain) on extinguishment of debt
|
|
|
20
|
|
|
(376)
|
Gain on settlement of liability, net
|
|
|
(1,437)
|
|
|
(263)
|
Loss on settlement of equity instrument
|
|
|
—
|
|
|
385
|
Loss on litigation
|
|
|
266
|
|
|
—
|
Loss on issuance of convertible notes
|
|
|
1,870
|
|
|
1,328
|
Loss on extinguishment of convertible notes
|
|
|
—
|
|
|
2,903
|
Stock-based compensation
|
|
|
668
|
|
|
529
|
Impairment of intangible assets and goodwill
|
|
|
1,590
|
|
|
4,685
|
Provision for losses on doubtful accounts
|
|
|
966
|
|
|
581
|
Warrant revaluation
|
|
|
(416)
|
|
|
(1,918)
|
Loss on modification of warrants
|
|
|
1,128
|
|
|
—
|
Derivative revaluation
|
|
|
415
|
|
|
(267)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(850)
|
|
|
(541)
|
Inventories
|
|
|
13
|
|
|
(36)
|
Other assets
|
|
|
427
|
|
|
127
|
Accounts payable
|
|
|
(1,884)
|
|
|
309
|
Operating lease liabilities
|
|
|
(223)
|
|
|
—
|
Accrued expenses and other liabilities
|
|
|
26
|
|
|
250
|
Net cash used in operating activities
|
|
|
(9,141)
|
|
|
(6,754)
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(55)
|
|
|
(97)
|
Net cash used in investing activities
|
|
|
(55)
|
|
|
(97)
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
Principal payments on finance lease obligations
|
|
|
(46)
|
|
|
(58)
|
Payment of deferred financing costs
|
|
|
(120)
|
|
|
(138)
|
Payment of fractional common shares in conjunction with reverse stock split
|
|
|
(1)
|
|
|
—
|
Issuance of common stock, net of issuance costs
|
|
|
6,628
|
|
|
2,008
|
Proceeds from exercise of warrants
|
|
|
1,575
|
|
|
1,271
|
Proceeds from long-term debt
|
|
|
—
|
|
|
300
|
Proceeds from convertible notes
|
|
|
2,150
|
|
|
3,850
|
Principal payments on convertible notes
|
|
|
(50)
|
|
|
—
|
Principal payments on long-term debt
|
|
|
(473)
|
|
|
(422)
|
Net cash flows provided by financing activities
|
|
|
9,663
|
|
|
6,811
|
NET CHANGE IN CASH
|
|
|
467
|
|
|
(40)
|
CASH AT BEGINNING OF PERIOD
|
|
|
381
|
|
|
421
|
CASH AT END OF PERIOD
|
|
$
|
848
|
|
$
|
381
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
PRECIPIO, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - continued
For the Years Ended December 31, 2019 and 2018
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
SUPPLEMENTAL CASH FLOW INFORMATION
|
|
|
|
|
|
|
Cash paid during the period for interest
|
|
$
|
36
|
|
$
|
42
|
SUPPLEMENTAL DISCLOSURE OF CONSULTING SERVICES OR ANY OTHER NON-CASH COMMON STOCK RELATED ACTIVITY
|
|
|
|
|
|
|
Purchases of equipment financed through accounts payable
|
|
|
1
|
|
|
38
|
Equipment financed through finance lease obligations
|
|
|
23
|
|
|
106
|
Deferred debt issuance cost financed through accounts payable
|
|
|
—
|
|
|
57
|
Discount of 9% on issuance of convertible bridge notes
|
|
|
188
|
|
|
405
|
Other current liabilities canceled in exchange for common shares
|
|
|
—
|
|
|
1,897
|
Conversion of convertible debt plus interest into common stock
|
|
|
7,553
|
|
|
2,356
|
Beneficial conversion feature on issuance of convertible notes
|
|
|
1,792
|
|
|
2,118
|
Initial valuation of derivative liability recorded in conjunction with issuance of convertible notes
|
|
|
—
|
|
|
610
|
Initial valuation of warrant liability recorded in conjunction with issuance of convertible notes
|
|
|
1,858
|
|
|
2,665
|
Long-term debt exchanged for convertible notes
|
|
|
—
|
|
|
3,191
|
Liabilities exchanged for convertible notes
|
|
|
2,150
|
|
|
—
|
Prepaid insurance financed with loan
|
|
|
434
|
|
|
375
|
Accounts payable converted to long-term debt
|
|
|
—
|
|
|
74
|
Liability recorded related to equity purchase agreement repricing
|
|
|
—
|
|
|
460
|
Warrant liability canceled due to settlement of equity instruments
|
|
|
—
|
|
|
456
|
Issuance of common stock for consulting services
|
|
|
—
|
|
|
39
|
Modification of warrant in conjunction with convertible note issuance
|
|
|
—
|
|
|
11
|
Proceed from issuance of convertible note recorded through other current assets
|
|
|
—
|
|
|
250
|
Write-off of beneficial conversion feature in conjunction with convertible note extinguishment
|
|
|
—
|
|
|
1,029
|
Right-of-use assets obtained in exchange for lease obligations
|
|
|
750
|
|
|
—
|
Amounts included in measurement of lease liabilities
|
|
|
273
|
|
|
—
|
Write-off warrant liability in conjunction with warrant exercises
|
|
|
2,364
|
|
|
—
|
Write-off of debt discounts (net of debt premiums) in conjunction with convertible note conversions
|
|
|
731
|
|
|
210
|
Write-off of derivative liability in conjunction with convertible note conversions
|
|
|
477
|
|
|
310
|
See notes to consolidated financial statements.
PRECIPIO, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2019 and 2018
1. BUSINESS DESCRIPTION
Business Description.
Precipio, Inc., and its subsidiary, (collectively, “we”, “us”, “our”, the “Company” or “Precipio”) is a cancer diagnostics company providing diagnostic products and services to the oncology market. We have built and continue to develop a platform designed to eradicate the problem of misdiagnosis by harnessing the intellect, expertise and technologies developed within academic institutions, and delivering quality diagnostic information to physicians and their patients worldwide. We operate a cancer diagnostic laboratory located in New Haven, Connecticut and have partnered with various academic institutions to capture the expertise, experience and technologies developed within academia to provide a better standard of cancer diagnostics and aim to solve the growing problem of cancer misdiagnosis. We also operate a research and development facility in Omaha, Nebraska which focuses on development of various technologies, among them IV-Cell, HemeScreen and ICE-COLD-PCR, or ICP, the patented technology described further below, which we exclusively licensed from Dana-Farber Cancer Institute, Inc., or Dana-Farber, at Harvard University. The research and development center focuses on the development of these technologies, which we believe will enable us to commercialize these and other technologies developed with our current and future academic partners. The facility in Omaha was also recently certified as a CLIA and CAP facility, and we have begun bringing in house several molecular tests that the Company had previously referenced out to other laboratories. Our platform also connects patients, physicians and diagnostic experts residing within academic institutions.
Going Concern.
The consolidated financial statements have been prepared using accounting principles generally accepted in the United States of America (“GAAP”) applicable for a going concern, which assume that the Company will realize its assets and discharge its liabilities in the ordinary course of business. The Company has incurred substantial operating losses and has used cash in its operating activities for the past several years. As of December 31, 2019, the Company had a net loss of $13.2 million, negative working capital of $2.5 million and net cash used in operating activities of $9.1 million. The Company’s ability to continue as a going concern, for the next twelve months from the date the consolidated financial statements were issued, is dependent upon a combination of achieving its business plan, including generating additional revenue, and raising additional financing to meet its debt obligations and paying liabilities arising from normal business operations when they come due.
To meet its current and future obligations the Company has entered into a purchase agreement with Lincoln Park (the “LP Purchase Agreement” or “Equity Line”), pursuant to which Lincoln Park has agreed to purchase from the Company up to an aggregate of $10.0 million of common stock of the Company (subject to certain limitations) from time to time over the term of the LP Purchase Agreement. The extent we rely on Lincoln Park as a source of funding will depend on a number of factors including, the prevailing market price of our common stock and the extent to which we are able to secure working capital from other sources. As of the date of the consolidated financial statements were issued, we have already received approximately $9.3 million in aggregate, including approximately $1.4 million from the sale of 328,590 shares of common stock to Lincoln Park during 2018, $6.6 million from the sale of 2,778,077 shares of common stock to Lincoln Park during 2019 and $1.3 million from the sale of 900,012 shares of common stock to Lincoln Park from January 1, 2020 through the date the consolidated financial statements were issued, leaving the company an additional $0.7 million to draw upon.
Notwithstanding the aforementioned circumstances, there remains substantial doubt about the Company’s ability to continue as a going concern for the next twelve months from the date the consolidated financial statements were issued. There can be no assurance that the Company will be able to successfully achieve its initiatives summarized above in order to continue as a going concern. The accompanying financial statements have been prepared assuming the Company will continue as a going concern and do not include any adjustments that might result should the Company be unable to continue as a going concern as a result of the outcome of this uncertainty.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation.
The consolidated financial statements include the accounts of Precipio, Inc. and our wholly owned subsidiaries. All inter-company balances and transactions have been eliminated in consolidation.
Use of Estimates.
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. The most significant estimates and assumptions with regard to these consolidated financial statements relate to the allowance for doubtful accounts, assumptions used within the fair value of debt and equity transactions, contractual allowances and related impairments. These assumptions require considerable judgment by management. Actual results could differ from the estimates and assumptions used in preparing these consolidated financial statements.
Risks and Uncertainties.
Certain risks and uncertainties are inherent in our day-to-day operations and in the process of preparing our financial statements. The more significant of those risks are presented below and throughout the notes to the consolidated financial statements.
The Company operates in the healthcare industry which is subject to numerous laws and regulations of federal, state and local governments. These laws and regulations include, but are not necessarily limited to, matters such as licensure, accreditation, government healthcare program participation requirements, reimbursement for patient services, and Medicare and Medicaid fraud and abuse. Government activity has increased with respect to investigations and allegations concerning possible violations of fraud and abuse statutes and regulations by healthcare providers. Violations of these laws and regulations could result in expulsion from government healthcare programs together with the imposition of significant fines and penalties, as well as significant repayments for patient services previously billed. Management believes that the Company is in compliance with fraud and abuse regulations, as well as other applicable government laws and regulations. While no material regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretation as well as regulatory actions unknown or unasserted at this time.
Fair Value.
Unless otherwise specified, book value approximates fair value. The common stock warrant liabilities and derivative liabilities are recorded at fair value. See Note 12 - Fair Value for additional information.
Other Current Assets.
Other current assets of $0.3 million as of December 31, 2019 include prepaid insurance of $0.2 million and prepaid assets and other receivables of $0.1 million. Other current assets of $0.5 million as of December 31, 2018 include prepaid assets of less than $0.1 million, prepaid insurance of $0.2 million and other receivables of $0.3 million.
Concentrations of Risk.
From time to time, we may maintain a cash position with financial institutions in amounts that exceed Federal Deposit Insurance Corporation insured limits of up to $250,000 per depositor per financial institution. We have not experienced any losses on such accounts as of December 31, 2019.
Service companies in the health care industry typically grant credit without collateral to patients. The majority of these patients are insured under third-party insurance agreements. The services provided by the Company are routinely billed utilizing the Current Procedural Terminology (CPT) code set designed to communicate uniform information about medical services and procedures among physicians, coders, patients, accreditation organizations, and payers for administrative, financial, and analytical purposes. CPT codes are currently identified by the Centers for Medicare and Medicaid Services and third-party payers. The Company utilizes CPT codes for Pathology and Laboratory Services contained within codes 80000‑89398.
Inventories.
Inventories consist of laboratory supplies and are valued at cost (determined on an average cost basis, which approximates the first-in, first-out method) or net realizable value, whichever is lower. We evaluate inventory for items that are slow moving or obsolete and record an appropriate reserve for obsolescence if needed. We determined that no allowance for slow moving or obsolete inventory was necessary at December 31, 2019 and 2018.
Property and Equipment, net.
Property and equipment are carried at cost, net of accumulated depreciation and amortization. Expenditures for maintenance and repairs are expensed as incurred. Depreciation and amortization are computed by the straight-line method over the estimated useful lives of the related assets as follows:
|
|
|
|
Furniture and fixtures
|
|
5 to 7
|
years
|
Laboratory equipment
|
|
3 to 10
|
years
|
Computer equipment and software
|
|
3 to 7
|
years
|
For assets sold or otherwise disposed of, the cost and related accumulated depreciation and amortization are removed from the accounts, and any related gain or loss is reflected in operations for the period. Expenditures for major betterments that extend the useful lives of property and equipment are capitalized.
Goodwill and Intangible Assets.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of identifiable net assets of a business acquired and is tested for impairment annually, as of October 1st, or when impairment triggering events may occur during a quarterly reporting period. Throughout the year ended December 31, 2018, at certain quarterly reporting periods, the Company experienced a decline in its share price and a significant reduction in its market capitalization, indicating that it was more likely than not that the fair value of the Company was less than its carry value. Through valuation analysis of the fair value of the Company using the market capitalization, the discounted cash flow model and market analysis, the Company concluded that its carrying value exceeded its fair value and goodwill impairment in the amount of $4.7 million was recorded for the year ended December 31, 2018. As of December 31, 2018, goodwill was fully written off and no balance remained.
Intangibles
We review our amortizable long-lived assets for impairment annually or whenever events indicate that the carrying amount of the asset (group) may not be recoverable. An impairment loss may be needed if the sum of the future undiscounted cash flows is less than the carrying amount of the asset (group). The amount of the loss would be determined by comparing the fair value of the asset to the carrying amount of the asset (group). There were no impairment charges on our amortizable long-lived assets during the years ended December 31, 2019 and 2018.
In-process research and development (“IPR&D”) represents the fair value assigned to research and development assets that were not fully developed when acquired. Until the IPR&D projects are completed, the assets are accounted for as indefinite-lived intangible assets and subject to impairment testing. The IPR&D principally related to
research projects that were not related to IV-Cell, HemeScreen or ICP. During 2019, the Company made a determination to suspend further research and analysis of these projects, and, as a result, it was more likely than not that the IPR&D was fully impaired, resulting in an impairment charge of $1.6 million in 2019. There was no impairment of IPR&D during the year ended December 31, 2018.
Debt Issuance Costs, Debt Discounts and Debt Premiums.
Debt issuance costs, debt discounts and debt premiums are being amortized or accreted over the lives of the related financings on a basis that approximates the effective interest method. Costs and discounts are presented as a reduction of the related debt and premiums are presented as an increase to the related debt in the accompanying balance sheets. The amortization amount recorded was expense, net of income, of $0.1 million in 2019 and income, net of expense, of less than $0.1 million in 2018. Debt discounts and debt premiums are amortized or accreted to interest expense and interest income on the consolidated statement of operations, respectively. See Note 5 – Long Term Debt and Note 6 – Convertible Notes for further discussion.
Stock-Based Compensation.
All stock-based awards to date have exercise prices equal to the market price of our common stock on the date of grant and have ten-year contractual terms. Stock-based compensation cost is based on the fair value of the portion of stock-based awards that is ultimately expected to vest. The Company utilizes the Black-Scholes option pricing model for determining the estimated fair value for stock-based awards. Unvested awards as of December 31, 2019 had vesting periods of up to four years from the date of grant. At December 31, 2019, 53,334 unvested awards outstanding are subject to performance vesting conditions and no awards are subject to market-based vesting conditions. No awards outstanding at December 31, 2018 were subject to performance or market-based vesting.
Net Sales Recognition.
Revenue recognition occurs when a customer obtains control of the promised goods and service. Revenue assigned to the goods and services reflects the consideration which the Company expects to receive in exchange for those goods and services.
The Company derives its revenues from diagnostic testing - histology, flow cytometry, cytology and molecular testing; clinical research from bio-pharma customers, state and federal grant programs; and from biomarker testing from bio-pharma customers. All sources of revenue are recorded net of accruals for estimated chargebacks, rebates, cash discounts, other allowances, and returns. Due to differences in the substance of these revenue types, the transactions require, and the Company utilizes, different revenue recognition policies for each. See more detailed information on revenue in Note 14 – Sales Service Revenue, Net And Accounts Receivable.
The Company recognizes revenue utilizing the five-step framework of ASC 606. Control of the laboratory testing services is transferred to the customer at a point in time. As such, the Company recognizes revenue for diagnostic testing at a point in time based on the delivery method (web-portal access or fax) for a patient’s laboratory report. Diagnostic testing service revenue is reported at the estimated net realizable amounts from patients, third-party payers and others for services rendered, including retroactive adjustment under reimbursement agreements with third-party payers. Provisions for third-party payer settlements are provided in the period in which the related services are rendered and adjusted in the future periods, as final settlements are determined. For clinical research and biomarker services, the Company utilizes an “effort based” method of assessing performance and measures progress towards satisfaction of the performance obligation based upon the delivery of results per the contract. When we receive payment in advance, we initially defer the revenue and recognize it when we deliver the service.
Deferred net sales included in the balance sheet as deferred revenue was approximately $0.1 million as of December 31, 2019 and 2018.
Taxes collected from customers and remitted to government agencies for specific net sales producing transactions are recorded net with no effect on the income statement.
Accounts Receivable
Accounts Receivable result from diagnostic services provided to self-pay and insured patients, project based testing services and clinical research. The payment for services provided by the Company are generally due within 30 days from the invoice date. Accounts receivable are reduced by an allowance for doubtful accounts. In evaluating the collectability of accounts receivable, the Company analyzes and identifies trends for each of its sources of revenue to estimate the appropriate allowance for doubtful accounts. For receivables associated with self-pay patients, including patients with insurance and a deductible and copayment, the Company records an allowance for doubtful accounts in the period of services on the basis of past experience of patients unable or unwilling to pay for service fee for which they are financially responsible. For receivables associated with services provided to patients with third-party coverage, the Company analyzes contractually due amounts and provides an allowance, if necessary. The difference between the standard rates and the amounts actually collected after all reasonable collection efforts have been exhausted is charged against the allowance for doubtful accounts.
Presentation of Insurance Claims and Related Insurance Recoveries.
The Company accounts for its insurance claims and related insurance recoveries at their gross values as standards for health care entities do not allow the Company to net insurance recoveries against the related claim liabilities. There were no insurance claims or insurance recoveries recorded during the years ended December 31, 2019 and 2018.
Advertising Costs.
Advertising costs are expensed as incurred and are included in operating expenses on the consolidated statement of operations. Advertising costs charged to operations totaled less than $0.1 million in 2019 and 2018, respectively.
Research and Development Costs.
All costs associated with internal research and development are expensed as incurred. These costs include salaries and employee related expenses, operating supplies and facility-related expenses. Research and development costs charged to operations totaled $1.2 million and $1.1 million for the years ended December 31, 2019 and 2018, respectively.
Income Taxes.
Deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax basis of assets and liabilities at each balance sheet date using tax rates expected to be in effect in the year the differences are expected to reverse. The effect on the deferred tax assets and liabilities of a change in tax rates is recognized in the period when the change in tax rates is enacted.
A valuation allowance is established when it is determined that it is more likely than not that some portion or all of the deferred tax assets will not be realized. A full valuation allowance has been applied against the Company’s net deferred tax assets as of December 31, 2019 and 2018, due to projected losses and because it is not more likely than not that the Company will realize future benefits associated with these deferred tax assets.
Management’s conclusions regarding uncertain tax positions may be subject to review and adjustment at a later date based upon ongoing analysis of, or changes in tax laws, regulations and interpretations thereof as well as other factors. The Company’s policy is to record interest and penalties directly related to income taxes as income tax expense in the accompanying consolidated statements of operations, of which there was none for the years ended December 31, 2019 and 2018.
Common Stock Warrants.
The Company classifies the issuance of common stock warrants as equity any contracts that (i) require physical settlement or net-stock settlement or (ii) gives the Company a choice of net-cash settlement or settlement in its own stocks (physical settlement or net-stock settlement). The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net-cash settle the contract if an event occurs and if that event is outside of the Company’s control), or (ii) gives the counterparty a choice of net-cash settlement or settlement in stock (physical settlement or net-stock settlement).
Certain of our issued and outstanding warrants to purchase common stock do not qualify to be treated as equity and accordingly, are recorded as a liability (“Common Stock Warrant Liability”). We are required to present these instruments at fair value at each reporting date and any changes in fair values are recorded as an adjustment to earnings.
Beneficial Conversion Features.
The intrinsic value of a beneficial conversion feature (“BCF”) inherent to a convertible note payable, which is not bifurcated and accounted for separately from the convertible note payable and may not be settled in cash upon conversion, is treated as a discount to the convertible note payable. This discount is amortized over the period from the date of issuance to the first conversion date using the effective interest method. If the note payable is retired prior to the end of its contractual term, the unamortized discount is expensed in the period of retirement to interest expense. In general, the BCF is measured by comparing the effective conversion price, after considering the relative fair value of detachable instruments included in the financing transaction, if any, to the fair value of the common shares at the commitment date to be received upon conversion.
Deemed dividends are also recorded for the intrinsic value of conversion options embedded in preferred shares based upon the differences between the fair value of the underlying common stock at the commitment date of the transaction and the effective conversion price embedded in the preferred shares. When the preferred shares are non-redeemable the BCF is fully amortized into additional paid-in capital and preferred discount. If the preferred shares are redeemable, the discount is amortized from the commitment date to the first conversion date.
Loss Per Share.
Basic loss per share is calculated based on the weighted-average number of common shares outstanding during each period. Diluted loss per share includes shares issuable upon exercise of outstanding stock options, warrants or conversion rights that have exercise or conversion prices below the market value of our common stock. Options, warrants and conversion rights pertaining to 2,281,701 and 2,517,675 shares of our common stock have been excluded from the computation of diluted loss per share at December 31, 2019 and 2018, respectively, because the effect is anti-dilutive due to the net loss.
The following table summarizes the outstanding securities not included in the computation of diluted net loss per share:
|
|
|
|
|
|
|
December 31,
|
|
|
2019
|
|
2018
|
Stock options
|
|
490,330
|
|
224,895
|
Warrants
|
|
909,189
|
|
917,573
|
Preferred stock
|
|
20,888
|
|
20,888
|
Convertible notes
|
|
861,294
|
|
1,354,319
|
Total
|
|
2,281,701
|
|
2,517,675
|
Recently Adopted Accounting Pronouncements.
In February 2016, the FASB issued ASU No. 2016‑02, Leases-Topic 842. The new standard amends the recognition of lease assets and lease liabilities by lessees for those leases currently classified as operating leases and
amends disclosure requirements associated with leasing arrangements. The new standard was adopted effective January 1, 2019, using a modified retrospective transition, and thus did not adjust comparative periods. The new standard provides a number of optional practical expedients in transition. The Company has elected the “package of practical expedients”, which permits it not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. The Company did not elect the use-of-hindsight practical expedient. As a result of the adoption of Topic 842 the Company recognized approximately $0.7 million of lease liabilities and corresponding right-of-use (“ROU”) assets in its consolidated balance sheet on the date of initial application. See Note 8 – Leases for additional information.
In June 2018, the FASB issued ASU 2018-07 “Compensation—Stock Compensation (Topic 718)”, which expands the scope of Topic 718 to include share based payment transactions for acquiring goods and services from non-employees. The Company adopted this guidance on January 1, 2019. The adoption of this guidance was not material to our consolidated financial statements.
Recent Accounting Pronouncements Not Yet Adopted.
In December 2019, the FASB issued ASU 2019-12 “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”, which is intended to improve consistent application and simplify the accounting for income taxes. This ASU removes certain exceptions to the general principles in Topic 740 and clarifies and amends existing guidance. This standard is effective for annual reporting periods beginning after December 15, 2020, including interim reporting periods within those annual reporting periods, with early adoption permitted. The Company is currently evaluating the impact of adoption of this ASU and does not expect the adoption of this new standard to have a material impact on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13 “Fair Value Measurement (Topic 820)”, which modifies certain disclosure requirements in Topic 820, such as the removal of the need to disclose the amount of and reason for transfers between Level 1 and Level 2 of the fair value hierarchy, and several changes related to Level 3 fair value measurements. This ASU is effective for reporting periods beginning after December 15, 2019. We are currently assessing the potential impact that the adoption of this ASU will have on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15 “Intangibles—Goodwill and Other—Internal Use Software (Subtopic 350-40)”, which aligns the requirements for capitalizing implementation costs incurred in a cloud computing hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal use software. This ASU is effective for reporting periods beginning after December 15, 2019. We are currently assessing the potential impact that the adoption of this ASU will have on our consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13 “Measurement of Credit Losses on Financial Instruments”, which replaces current methods for evaluating impairment of financial instruments not measured at fair value, including trade accounts receivable and certain debt securities, with a current expected credit loss model. This ASU is effective for the Company for reporting periods beginning after December 15, 2022. We are currently assessing the potential impact that the adoption of this ASU will have on our consolidated financial statements.
3. PROPERTY AND EQUIPMENT, NET
A summary of property and equipment at December 31, 2019 and 2018 is as follows:
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Furniture and fixtures
|
|
$
|
12
|
|
$
|
12
|
Laboratory equipment
|
|
|
299
|
|
|
299
|
Computer equipment and software
|
|
|
463
|
|
|
369
|
Equipment under finance leases
|
|
|
425
|
|
|
402
|
Construction in process
|
|
|
23
|
|
|
67
|
|
|
|
1,222
|
|
|
1,149
|
Less—accumulated depreciation and amortization
|
|
|
(791)
|
|
|
(653)
|
Total
|
|
$
|
431
|
|
$
|
496
|
Depreciation expense was approximately $0.1 million for both the years ended December 31, 2019 and 2018. Depreciation expense during each year includes depreciation related to equipment acquired under finance leases.
4. INTANGIBLES
Intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollars in Thousands
|
|
|
December 31, 2019
|
|
|
|
|
|
Accumulated
|
|
Impairment
|
|
Net Book
|
|
|
Cost
|
|
Amortization
|
|
Charge
|
|
Value
|
Technology
|
|
$
|
18,990
|
|
$
|
2,374
|
|
$
|
—
|
|
$
|
16,616
|
Customer relationships
|
|
|
250
|
|
|
208
|
|
|
—
|
|
|
42
|
Backlog
|
|
|
200
|
|
|
200
|
|
|
—
|
|
|
—
|
Covenants not to compete
|
|
|
30
|
|
|
30
|
|
|
—
|
|
|
—
|
Trademark
|
|
|
40
|
|
|
40
|
|
|
—
|
|
|
—
|
IPR&D
|
|
|
1,590
|
|
|
—
|
|
|
1,590
|
|
|
—
|
|
|
$
|
21,100
|
|
$
|
2,852
|
|
$
|
1,590
|
|
$
|
16,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollars in Thousands
|
|
|
December 31, 2018
|
|
|
|
|
|
Accumulated
|
|
Impairment
|
|
Net Book
|
|
|
Cost
|
|
Amortization
|
|
Charge
|
|
Value
|
Technology
|
|
$
|
18,990
|
|
$
|
1,424
|
|
$
|
—
|
|
$
|
17,566
|
Customer relationships
|
|
|
250
|
|
|
125
|
|
|
—
|
|
|
125
|
Backlog
|
|
|
200
|
|
|
200
|
|
|
—
|
|
|
—
|
Covenants not to compete
|
|
|
30
|
|
|
30
|
|
|
—
|
|
|
—
|
Trademark
|
|
|
40
|
|
|
30
|
|
|
—
|
|
|
10
|
IPR&D
|
|
|
1,590
|
|
|
—
|
|
|
—
|
|
|
1,590
|
|
|
$
|
21,100
|
|
$
|
1,809
|
|
$
|
—
|
|
$
|
19,291
|
|
|
|
|
|
|
Estimated Useful Life
|
|
Technology
|
|
20
|
years
|
Customer relationships
|
|
3
|
years
|
Backlog
|
|
1
|
year
|
Covenants not to compete
|
|
1
|
year
|
Trademark
|
|
2
|
years
|
Our IPR&D projects were accounted for as indefinite-lived intangible assets and subject to impairment testing. During 2019, the Company reviewed its IPR&D for impairment and determined that it was more likely than not that the
IPR&D was fully impaired, resulting in an impairment charge of $1.6 million in 2019. For the year ended December 31, 2018, there was no impairment of IPR&D.
Amortization expense for intangible assets was $1.0 million during the year ended December 31, 2019 and $1.2 million during the year ended December 31, 2018. Amortization expense for intangible assets is expected to be $1.0 million, $0.9 million, $0.9 million, $0.9 million and $0.9 million for each of the years ending December 31, 2020, 2021, 2022, 2023 and 2024, respectively.
5. LONG-TERM DEBT
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
Dollars in Thousands
|
|
|
December 31, 2019
|
|
December 31, 2018
|
Department of Economic and Community Development (DECD)
|
|
$
|
249
|
|
$
|
274
|
DECD debt issuance costs
|
|
|
(24)
|
|
|
(28)
|
Financed insurance loan
|
|
|
260
|
|
|
204
|
September 2018 Settlement
|
|
|
34
|
|
|
66
|
Total long-term debt
|
|
|
519
|
|
|
516
|
Current portion of long-term debt
|
|
|
(321)
|
|
|
(263)
|
Long-term debt, net of current maturities
|
|
$
|
198
|
|
$
|
253
|
Department of Economic and Community Development
On January 8, 2018, the Company received gross proceeds of $400,000 when it entered into an agreement with DECD by which the Company received a grant of $100,000 and a loan of $300,000 secured by substantially all of the Company’s assets (the “DECD 2018 Loan”.) For the year ended December 31, 2018, $100,000 has been recorded as clinical research grant revenue in the consolidated statements of operations. The DECD 2018 Loan is a ten-year loan due on December 31, 2027 and includes interest paid monthly at 3.25%.
Debt issuance costs associated with the DECD 2018 Loan were approximately $31,000. Amortization of the debt issuance cost was approximately $3,000 for the years ended December 31, 2019 and 2018, respectively. Net debt issuance costs were approximately $24,000 and $28,000 at December 31, 2019 and 2018, respectively, and are presented as a reduction of the related debt in the accompanying consolidated balance sheets. Amortization for each of the next five years is expected to be approximately $3,000.
Financed Insurance Loan.
The Company finances certain of its insurance premiums (the “Financed Insurance Loans”). In July 2018, the Company financed $0.4 million with a 4.89% interest rate and fully paid off such loan as of July 2019. In July 2019, the Company financed $0.4 million with a 5.0% interest rate and will make monthly payments through May of 2020. As of December 31, 2019 and 2018, the Financed Insurance Loan outstanding balance of $0.3 million and $0.2 million, respectively, was included in current maturities of long-term debt in the Company’s consolidated balance sheets. A corresponding prepaid asset was included in other current assets.
Settlement Agreement.
On September 21, 2018, the Company entered into a settlement and forbearance agreement with a creditor (the “September 2018 Settlement”) pursuant to which, the Company agreed to make monthly principal and interest payments to the creditor over a two year period, from November 1, 2018 to November 1, 2020, in full and final settlement of $0.1 million of indebtedness that was owed to the creditor on the date of the September 2018 Settlement. The settlement amount will accrue interest at the rate of 10% per annum until paid in full. The September 2018 Settlement outstanding balance of approximately $0.1 million was included in current maturities of long-term debt in the Company’s
consolidated balance sheet as of December 31, 2019 and in long-term debt and accounts payable in the Company’s consolidated balance sheet as of December 31, 2018.
The aggregate future maturities required on gross long-term debt at December 31, 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
2025 and thereafter
|
|
Total
|
DECD loan
|
|
$
|
30
|
|
$
|
28
|
|
$
|
30
|
|
$
|
30
|
|
$
|
31
|
|
$
|
100
|
|
$
|
249
|
Financed Insurance Loan
|
|
|
260
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
260
|
September 2018 Settlement
|
|
|
34
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
34
|
|
|
$
|
324
|
|
$
|
28
|
|
$
|
30
|
|
$
|
30
|
|
$
|
31
|
|
$
|
100
|
|
$
|
543
|
6. CONVERTIBLE NOTES.
Convertible notes consists of the following:
|
|
|
|
|
|
|
|
|
Dollars in Thousands
|
|
|
December 31, 2019
|
|
December 31, 2018
|
Convertible bridge notes
|
|
$
|
1,938
|
|
$
|
4,294
|
Convertible bridge notes discount and debt issuance costs
|
|
|
(1,796)
|
|
|
(1,111)
|
Convertible bridge notes premiums
|
|
|
—
|
|
|
647
|
Convertible promissory notes - Exchange Notes
|
|
|
—
|
|
|
630
|
Convertible promissory notes - Exchange notes debt issuance costs
|
|
|
—
|
|
|
(83)
|
Total convertible notes
|
|
|
142
|
|
|
4,377
|
Current portion of convertible notes
|
|
|
(142)
|
|
|
(4,377)
|
Convertible notes, net of current maturities
|
|
$
|
—
|
|
$
|
—
|
Convertible Bridge Notes.
On April 20, 2018, the Company entered into a securities purchase agreement (the “2018 Note Agreement”) with certain investors (the “April 2018 Investors”), pursuant to which the Company would issue up to approximately $3,296,703 in Senior Secured Convertible Promissory Notes along with warrants (the “Transaction”). The number of warrants is equal to the number of shares of common stock issuable upon conversion of the notes based on the conversion price at the time of issuance. Some of the warrants were issued with a one-year term and some with a five-year term. The 2018 Note Agreement includes customary representations, warranties and covenants by the Company and customary closing conditions.
The Transaction consisted of a series unregistered Senior Secured Convertible Notes (the “Bridge Notes”), bearing interest at a rate of 8% annually and an original issue discount of 9%. The Bridge Notes are convertible at a price of $7.50 per share, provided that if the notes are not repaid within 180 days of the note’s issuance date, the conversion price shall be adjusted to 80% of the lowest volume weighted average price during the prior 10 days, subject to a minimum conversion price of $4.50 per share.
The Transaction consisted of a number of drawdowns. The initial closing on April 20, 2018 provided the Company with proceeds of $1,660,000, net of an original issue discount of 9% and before debt issuance costs, for the issuance of notes with an aggregate principal of $1,824,176 (the “April 2018 Bridge Notes”). The Company completed three additional drawdowns for aggregate proceeds of $1.3 million, net of an original issue discount of 9% and before debt issuance cost, for the issuance of notes with an aggregate principal of $1.5 million, during the third quarter 2018. Drawdowns included the following funding from the April 2018 Investors (i) $348,104 in July 2018 for Bridge Notes with an aggregate principal of $382,526, (ii) $495,955 in August 2018 for Bridge Notes with an aggregate principal of $545,005 and (iii) $495,941 in September 2018 for Bridge Notes with an aggregate principal of $544,990 (collectively, the “Q3 2018 Bridge Notes”).
The Bridge Notes are payable by the Company on the earlier of (i) the one year anniversary after each closing date or (ii) upon the closing of a qualified offering, namely the Company raising gross proceeds of at least $7,000,000 (the “Maturity Date”). At any time, provided that the Company gives 5 business days written notice, the Company has the right to redeem the outstanding principal amount of the Bridge Notes, including accrued but unpaid interest, all liquidated damages and all other amounts due under the Bridge Notes, for cash as follows: (i) an amount which is equal to the sum of 105% if the Company exercises its right to redeem the Bridge Notes within 90 days of the initial closing, (ii) 110% if the Company exercises its right to redeem the Bridge Notes within 180 days of the initial closing, or (iii) 115% if the Company exercises its right to redeem 180 days from the initial closing.
The terms of the 2018 Note Agreement also stipulate that upon written demand by one of the April 2018 Investors, for any of their draws throughout the year associated with the 2018 Note Agreement after a period of time as defined within the 2018 Note Agreement, the Company shall file a registration statement within thirty (30) days after written demand covering the resale of all or such portion of the conversion shares for an offering to be made on a continuous basis pursuant to Rule 415. The registration statement filed shall be on Form S-3 or Form S-1, at the option of the Company. If the Company does not file a registration statement in accordance with the terms of the 2018 Note Agreement, then on the business day following the applicable filing date and on each monthly anniversary of the business day following the applicable filing date (if no registration statement shall have been filed by the Company in accordance herewith by such date), the Company shall pay to the April 2018 Investors an amount in cash, as partial liquidated damages, equal to 1% per month (pro-rata for partial months) based upon the gross purchase price of the Bridge Notes (calculated on a daily basis) under the 2018 Note Agreement. As requested by certain April 2018 Investors, conversion shares related to the April 2018 Note Agreement were included in a registration statement on Form S-3 that the Company filed with the SEC on February 6, 2019 and which became effective with the SEC on February 13, 2019.
The obligations under the Bridge Notes are secured, subject to certain exceptions and other permitted payments by a perfected security interest on the assets of the Company.
The 9% discount associated with the April 2018 Bridge Notes was approximately $164,000 and was recorded as a debt discount. The Company also incurred legal and advisory fees associated with the April 2018 Bridge Notes of approximately $164,000 and these were recorded as debt issuance costs. The 9% discount associated with the Q3 2018 Bridge Notes was approximately $133,000 and was recorded as a debt discount.
As part of the initial closing, the April 2018 Investors received 243,224 warrants to purchase shares of common stock of the Company (the “April 2018 Warrants”) that are exercisable at a 150% premium to the April 2018 Bridge Notes conversion price or $11.25. Half of such April 2018 Warrants had a five-year term and half had a one-year term. The Company reviewed the provisions of the April 2018 Warrants to determine the balance sheet classification of the April 2018 Warrants. The Company concluded that there is an obligation to repurchase the April 2018 Warrants by transferring assets and accordingly the warrants were classified as a liability. The April 2018 Warrants were valued using a Black-Scholes option pricing model with an initial value of approximately $1.1 million at the date of issuance and were recorded as a liability with an offset to debt discount. The April 2018 Investors received 196,340 warrants to purchase shares of common stock of the Company in connection with the Q3 Bridge Note issuances (the “Q3 2018 Warrants”) with an initial exercise price of $11.25. Half of such Q3 2018 Warrants had a five-year term and half had a one-year term. The terms of the Q3 2018 Warrants are the same as the April 2018 Warrants and, as such, were classified as liabilities. The Q3 2018 Warrants were valued using a Black-Scholes option pricing model with an initial value of approximately $0.7 million at the date of issuance and were recorded as a liability with an offset to debt discount. See Note 12 – Fair Value for further discussion.
On September 20, 2018, immediately after the final drawdown of the Bridge Notes, the Company entered into an agreement with the April 2018 Investors whereby the exercise price of all warrants issued to the April 2018 Investors in connection with both the 2018 Note Agreement and the Q3 Bridge Notes were amended from $11.25 to $7.50. The Company reviewed this repricing to determine the appropriate accounting treatment and concluded that the repricing would be treated as a modification of the warrant agreements. As the warrants related to the Bridge Notes are classified as liabilities, the change in fair value attributable to the repricing would be reflected in the subsequent measurement on
the warrants. Management calculated the change in fair value due to repricing to be an expense of approximately $0.1 million which is included in warrant revaluation in the consolidated statements of operations.
Pursuant to a letter agreement, dated as of April 20, 2018 (the “Letter Agreement”), the Company engaged a registered broker dealer as a financial advisor (the “Financial Advisor”). Pursuant to the Letter Agreement, the Company paid the Financial Advisor a fee of $116,000, approximately 7% of the proceeds from the sale of the April 2018 Bridge Notes. This is included in the debt issuance costs discussed above. Per the Letter Agreement, the Company also issued to the Financial Advisor 15,466 warrants to purchase shares of common stock of the Company with an exercise price of $11.25 (the “Advisor Warrants”). The Advisor Warrants are exercisable at any time and from time to time, in whole or in part, during the four-year period commencing six months from the date of the Letter Agreement. Like the April 2018 Warrants and like the Q3 2018 Warrants, the Advisor Warrants met the criteria to be classified as a liability. The Advisor Warrants were valued using a Black-Scholes option pricing model with an initial value of approximately $0.1 million at the date of issuance and were recorded as a liability with an offset to debt discount. See Note 12 – Fair Value for further discussion.
The Company reviewed the conversion option of the April 2018 Bridge Notes and determined that there was a beneficial conversion feature in connection with the issuance of the April 2018 Bridge Notes since the calculated effective conversion price was at a discount to the fair market value of the Company's common stock at issuance date. For purposes of calculating the beneficial conversion feature, the proceeds of $1.7 million from the April 2018 Bridge Notes were allocated to the notes and warrants based on their relative fair values at the date of issuance. The portion allocated to the April 2018 Bridge Notes was $0.6 million with the remaining $1.1 million allocated to the April 2018 Warrants. As a result of the allocation of the proceeds, the Company calculated a beneficial conversion feature of approximately $1.1 million which was recorded as a debt discount with an offset to additional paid in capital. The Q3 2018 Bridge Notes also contained beneficial conversion features. For purposes of calculating the beneficial conversion features, the net proceeds of $1.3 million from the Q3 2018 Bridge Notes were allocated to the notes and warrants based on their relative fair values at the date of issuance. The portion allocated to the Q3 2018 Bridge Notes was $0.6 million with the remaining $0.7 million allocated to the Q3 2018 Warrants. As a result of the allocation of the proceeds, the Company calculated a beneficial conversion feature of approximately $0.5 million which was recorded as a debt discount with an offset to additional paid in capital.
The Company reviewed the redemption features of the Bridge Notes and determined that there is a redemption feature (the “Bridge Notes Redemption Feature”) that qualifies as an embedded derivative instrument which is required to be separated from the debt host contract and accounted for separately as a derivative. For the April 2018 Bridge Notes, the Company determined the initial fair value of the derivative at the time of issuance to be approximately $0.1 million which was recorded as a debt discount with an offset to derivative liability. For the Q3 2018 Bridge Notes, the Company determined the initial fair value of the derivatives at the time of issuance to be approximately $0.1 million which was recorded as a debt discount with an offset to derivative liability. The valuations were performed using the “with and without” approach, whereby the Bridge Notes were valued both with the embedded derivative and without, and the difference in values was recorded as the derivative liability. See Note 12 – Fair Value for further discussion.
As detailed above, debt discounts and debt issuance costs related to the April 2018 Bridge Notes totaled $2.7 million. Since the costs exceeded the $1.8 million face amount of the debt, the Company recorded $1.8 million of debt discount and debt issuance costs as a reduction of the related debt with the excess $0.9 million expensed as a loss on issuance of convertible notes in the consolidated statements of operations. The total debt discounts and debt issuance costs related to the Q3 2018 Bridge Notes totaled $1.4 million, of which the Company recorded $1.3 million of debt discount and debt issuance costs as a reduction of the related debt with $0.1 million expensed as a loss on issuance of convertible notes in the consolidated statements of operations. The $0.1 million recorded as a loss on issuance of convertible notes was due to the fact that one of the drawdowns during the third quarter of 2018 had debt discount and debt issuance costs in excess of the face amount of the related debt. The debt discount and debt issuance costs will be amortized to interest expense over the life of the respective April 2018 Bridge Notes and Q3 2018 Bridge Notes on a basis that approximates the effective interest method.
On November 29, 2018, the Company entered into an amendment and restatement agreement (the “Amendment Agreement”) amending and restating the terms of the 2018 Note Agreement. The Amendment Agreement provided for
the issuance of up to $1,318,681 of additional Bridge Notes together with applicable warrants, in one or more tranches, with substantially the same terms and conditions as the previously issued Bridge Notes and related warrants. The conversion price of the notes was amended so that it shall be equal to the greater of $3.75 or $0.75 above the closing bid price of our common stock on the date prior to the original issue date. In the event the notes are not paid in full prior to 180 days after the original issue date, the conversion price shall be equal to 80% of the lowest volume weighted average price (“VWAP”) in the 10 trading days prior to the date of the notice of conversion, but in no event below the floor price of $2.25.
In connection with the Amendment Agreement, during the fourth quarter of 2018, the Company completed two additional drawdowns for aggregate proceeds of $1.1 million, net of an original issue discount of 9% and before debt issuance costs, for the issuance of notes with an aggregate principal of $1.2 million (collectively, the “Q4 2018 Bridge Notes”). Approximately $0.3 million of the $1.1 million of proceeds was received after December 31, 2018 and is included in other current assets on our consolidated balance sheet at December 31, 2018. The 9% discount associated with the Q4 2018 Bridge Notes was approximately $108,000 and was recorded as a debt discount. In connection with the Q4 2018 Bridge Note issuances, the Company issued to the investors 300,115 warrants to purchase shares of common stock of the Company (the “Q4 2018 Warrants”) with an initial exercise price of $5.40 and a five-year term. The terms of the Q4 2018 Warrants are the same as the April 2018 Warrants and, as such, were classified as liabilities. The Q4 2018 Warrants were valued using a Black-Scholes option pricing model with an initial value of approximately $0.7 million at the date of issuance and were recorded as a liability with an offset to debt discount. See Note 12 – Fair Value for further discussion.
The Company reviewed the conversion option of the Q4 2018 Bridge Notes and determined that there was a beneficial conversion feature in connection with the issuance of the Q4 2018 Bridge Notes, as there was with the previously issued Bridge Notes. For purposes of calculating the beneficial conversion features, the net proceeds of $1.1 million from the Q4 2018 Bridge Notes were allocated to the notes and warrants based on their relative fair values at the date of issuance. The portion allocated to the Q4 2018 Bridge Notes was $0.4 million with the remaining $0.7 million allocated to the Q4 2018 Warrants. As a result of the allocation of the proceeds, the Company calculated a beneficial conversion feature of approximately $0.5 million which was recorded as a debt discount with an offset to additional paid in capital. The Q4 2018 Bridge Notes contain the Bridge Notes Redemption Feature that qualifies as an embedded derivative instrument which is required to be separated from the debt host contract and accounted for separately as a derivative. For the Q4 2018 Bridge Notes, the Company determined the initial fair value of the derivatives at the time of issuance to be approximately $15,000 which was recorded as a debt discount with an offset to derivative liability. See Note 12 – Fair Value for further discussion.
The total debt discounts and debt issuance costs related to the Q4 2018 Bridge Notes totaled $1.4 million, of which the Company recorded $1.1 million of debt discount and debt issuance costs as a reduction of the related debt in the accompanying consolidated balance sheet with $0.3 million expensed as a loss on issuance of convertible notes in the consolidated statements of operations. The $0.3 million recorded as a loss on issuance of convertible notes was due to the fact that one of the drawdowns during the fourth quarter of 2018 had debt discount and debt issuance costs in excess of the face amount of the related debt.
At the time of the Amendment Agreement, the conversion price related to $3.3 million of previously issued Bridge Notes, the April 2018 Bridge Notes and Q3 2018 Bridge Notes, was amended. The Company reviewed the modification to the conversion price and concluded that the amendment will be treated as an extinguishment of the related Bridge Notes. The difference between the carrying value of the notes just prior to modification (the “Old Debt”) and the fair value of the notes just after modification (the “New Debt”) would be recorded as a gain or loss on extinguishment in the consolidated statements of operations. The Company removed the carrying value of the Old Debt which included $3.1 million of unamortized debt discounts, beneficial conversion features of $1.0 million and less than $0.1 million in derivative liabilities. The Company calculated the fair value of the New Debt to be $4.2 million. The Company reviewed whether or not a beneficial conversion feature existed on the New Debt but the calculation resulted in zero intrinsic value to the conversion options so no new beneficial conversion feature was recorded. Management also reviewed the Bridge Notes Redemption Feature of the New Notes but their fair value was zero so no derivative liability was recorded at the time of modification, however this will be reassessed at the end of each reporting period. As a result,
the Company recorded a debt premium on the New Debt of $0.9 million and a loss on extinguishment of convertible notes of $2.9 million in the consolidated statements of operations during the year ended December 31, 2018.
On April 16, 2019, the Company entered into an amendment and restatement agreement (“Amendment No.2 Agreement”) amending and restating the terms of the 2018 Note Agreement (as first amended pursuant to the amendment agreement in November 2018 (the Amendment Agreement”)). The Amendment No. 2 Agreement provided the Company with approximately $0.9 million of gross proceeds for the issuance of notes with an aggregate principal of $1.0 million (the “April 2019 Bridge Notes”) together with applicable warrants, with substantially the same terms and conditions as the previously issued Bridge Notes and related warrants. The 9% discount associated with the April 2019 Bridge Notes was approximately $0.1 million and was recorded as a debt discount. In connection with the April 2019 Bridge Note issuances, the Company issued to the investors 147,472 warrants to purchase shares of common stock of the Company with a five year term and exercise price of $5.40 (the “April 2019 Warrants”). The April 2019 Warrants had an initial value of approximately $1.0 million at the date of issuance and were recorded as a liability with an offset to debt discount. See Note 12 – Fair Value for further discussion. The April 2019 Bridge Notes were issued to investors that previously participated in the 2018 Note Agreement.
The conversion price of the April 2019 Bridge Notes shall be equal to the greater of $3.75 or $0.75 above the closing bid price of our common stock on the date prior to the original issue date. In the event the notes are not paid in full prior to 180 days after the original issue date, the conversion price shall be equal to 80% of the lowest volume weighted average price (“VWAP”) in the 10 trading days prior to the date of the notice of conversion, but in no event below the floor price of $2.25.
The Company reviewed the conversion option of the April 2019 Bridge Notes and determined that there was a beneficial conversion feature with a value of approximately $0.9 million which was recorded as a debt discount with an offset to additional paid in capital. The April 2019 Bridge Notes also contain the Bridge Notes Redemption Feature and the Company performed a valuation at the time of issuance which resulted in zero value, at that time, due to the high value of the conversion feature and a limited upside from the redemption premium.
Debt discounts and debt issuance costs related to the April 2019 Bridge Notes totaled $2.0 million. Since the costs exceeded the $1.0 million face amount of the debt at issuance, the Company recorded $1.0 million of debt discount and debt issuance costs as a reduction of the related debt in the accompanying consolidated balance sheet with the excess $1.0 million expensed as a loss on issuance of convertible notes in the consolidated statements of operations during the year ended December 31, 2019.
Pursuant to the Amendment No.2 Agreement, previously issued warrants were amended such that the exercise price of such warrants was amended from $7.50 to $5.40 and any warrant that had a one-year term was amended to have a five-year term. The Company reviewed the amendments to the warrants and determined that they will be treated as a modification of an outstanding equity instrument at the time of the Amendment No.2 Agreement. Management calculated the change in fair value due to the modifications to be an expense of approximately $1.1 million which is included in loss on modification of warrants in the consolidated statements of operations.
On May 14, 2019, the Company entered into a securities purchase agreement pursuant to which, the Company was provided with $1.0 million of gross proceeds for the issuance of notes with an aggregate principal of $1.1 million (the “May 2019 Bridge Notes”) together with applicable warrants, with substantially the same terms and conditions as the previously issued Bridge Notes and related warrants. The 9% discount associated with the May 2019 Bridge Notes was approximately $0.1 million and was recorded as a debt discount. In connection with the May 2019 Bridge Note issuances, the Company issued to the investors 154,343 warrants to purchase shares of common stock of the Company with a five year term and exercise price of $9.56 (the “May 2019 Warrants”). The May 2019 Warrants had an initial value of approximately $0.9 million at the date of issuance and were recorded as a liability with an offset to debt discount. See Note 12 – Fair Value for further discussion. The May 2019 Bridge Notes were issued to investors that previously participated in the 2018 Note Agreement.
The conversion price of the May 2019 Bridge Notes is $7.12, provided that a) in the event the notes are not paid in full prior to 180 days after the original issue date or b) upon a registration statement (as defined in the purchase
agreement) being declared effective, whichever occurs earlier, the conversion price shall be equal to 80% of the lowest VWAP in the 10 trading days prior to the date of the notice of conversion, but in no event below the floor price of $2.25.
The Company reviewed the conversion option of the May 2019 Bridge Notes and determined that there was a beneficial conversion feature with a value of approximately $0.9 million which was recorded as a debt discount with an offset to additional paid in capital. The May 2019 Bridge Notes also contain the Bridge Notes Redemption Feature and the Company performed a valuation at the time of issuance which resulted in zero value, at that time, due to the high value of the conversion feature and a limited upside from the redemption premium.
Debt discounts and debt issuance costs related to the May 2019 Bridge Notes totaled $2.0 million. Since the costs exceeded the $1.1 million face amount of the debt, the Company recorded $1.1 million of debt discount and debt issuance costs as a reduction of the related debt in the accompanying consolidated balance sheet with the excess $0.9 million expensed as a loss on issuance of convertible notes in the consolidated statements of operations during the year ended December 31, 2019.
During the years ended December 31, 2019 and 2018, $4.4 million and $0.2 million, respectively, of Bridge Notes, plus interest, were converted into 1,900,766 and 93,334 shares of common stock of the Company, respectively. As a result of the conversions, the Company wrote-off approximately $0.5 million of derivative liability, with an offset to additional paid-in capital, during the year ended December 31, 2019 and approximately $0.1 million of debt premium with an offset to additional paid in capital during the year ended December 31, 2018.
During the years ended December 31, 2019 and 2018, the change in Bridge Note debt discounts and debt premiums was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2019
|
|
2018
|
|
|
|
Debt Discounts
|
|
|
Debt Premiums
|
|
|
Debt Discounts
|
|
|
Debt Premiums
|
Beginning balance at January 1
|
|
$
|
(1,111)
|
|
$
|
647
|
|
$
|
—
|
|
$
|
—
|
Additions:
|
|
|
(2,088)
|
|
|
—
|
|
|
(4,275)
|
|
|
879
|
Deductions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization (accretion) (1)
|
|
|
273
|
|
|
(167)
|
|
|
118
|
|
|
(170)
|
Write-off related to note conversions (2)
|
|
|
1,130
|
|
|
(480)
|
|
|
—
|
|
|
(62)
|
Write-off related to note extinguishment (3)
|
|
|
—
|
|
|
—
|
|
|
3,046
|
|
|
—
|
Balance at December 31
|
|
$
|
(1,796)
|
|
$
|
—
|
|
$
|
(1,111)
|
|
$
|
647
|
|
(1)
|
|
Amortization/accretion is recognized as interest expense/income within the consolidated statements of operations based on the effective interest method.
|
|
(2)
|
|
Write-offs associated with note conversions are recognized as an offset to additional paid-in capital at the time of the conversion.
|
|
(3)
|
|
Write-offs associated with note extinguishment are recognized as a loss and included in loss on extinguishment of convertible notes in the consolidated statements of operations.
|
The remaining debt discounts of $1.8 million, as of December 31, 2019, are expected to be fully amortized by the end of the second quarter of 2020.
Convertible Promissory Notes – Exchange Notes.
In 2017, the Company entered into Debt Settlement Agreements (the “Settlement Agreements”) with certain of its accounts payable and accrued liability vendors (the “Creditors”) pursuant to which the Creditors, who were owed $6.3 million (the “Debt Obligations”) by the Company, agreed to reduce and exchange the Debt Obligations for a secured obligation in the amount of $3.2 million, $1.9 million in shares of the Company’s common stock and warrants, with a fair value of approximately $0.2 million, to purchase shares of the Company’s common stock.
The Debt Obligations were restructured as follows:
|
·
|
|
The Company entered into a scheduled long-term debt repayment agreement of approximately $3.2 million, which includes interest of approximately $0.6 million, to be paid in forty-eight equal monthly installments beginning in July 2018 (the “Secured Debt Obligations”).
|
|
·
|
|
Debt Obligations of $1.9 million were canceled in exchange for 120,983 shares of the Company’s common stock with a weighted average price per share of $15.60 (the “Settlement Common Shares”). The stock was issued in February 2018.
|
|
·
|
|
Warrants to purchase 7,207 shares of the Company’s common stock at an exercise price of $112.50 per share (the “Creditor Warrants”) were issued to certain Creditors. The Creditor Warrants were issued in February 2018.
|
During 2018, the Company entered into an Exchange Agreement (the “Exchange Agreements”) with three institutional investors (the “Holders”) pursuant to which the Company issued convertible promissory notes, due January 1, 2021 (the “Exchange Notes”) in exchange (the “Exchange”) for amounts owed to the Holders pursuant to certain debt settlement agreements, dated October 31, 2017. For the year ended December 31, 2018, $3.2 million of Secured Debt Obligations were exchanged for $2.8 million of Exchange Notes. The Company considered the appropriate accounting treatment of the Exchange and determined that the Exchange will be treated as a debt extinguishment and the difference between the carrying amount of the Secured Debt Obligations and the face value of the Exchange Notes will be treated as a gain on extinguishment. The Company recorded a $0.4 million gain on extinguishment of debt in the consolidated statements of operations for the year ending December 31, 2018.
Pursuant to the terms of the Exchange Notes, the Company shall pay to the Holders the aggregate principal amount of the Exchange Notes in eighteen equal installments beginning on August 1, 2019 and ending on January 1, 2021. In accordance with the terms of the Exchange Notes, the Holder shall have the right, to convert at the then applicable conversion price any amount of the Exchange Notes up to $300,000 on any given Trading Day, with a maximum conversion amount up to $500,000 during a period of five Trading Days (the “Conversion Option”). The conversion price shall be the lesser of (i) the average volume weighted average price for the five trading days prior to the date of conversion multiplied by 1.65 and (ii) $15.00 (the “Conversion Price”). At any time at which there is no Equity Conditions Failure, as defined in the terms of the Exchange Note, and only once every ten trading days, the Company shall have the right, but not the obligation, to direct the Holders to convert up to 20% of the then outstanding principal amount of the Exchange Notes under specified conditions (the “Company Put Option”). The Company will be subject to certain restrictive covenants pursuant to the Notes, including limitations on (i) amending its certificate of incorporation and bylaws (ii) indebtedness, (iii) asset sales or leases, (iv) restricted payments and investments, (v) redemptions or repurchases of capital stock and (vi) transactions with affiliates, and the conversion price of the Exchange Notes shall be subject to certain customary adjustments in the event of stock splits, dividends, rights offerings or other pro rata distributions to holders of the Company’s common stock.
The Company reviewed the Conversion Option and concluded that it meets the criteria for derivative accounting and requires bifurcation and separate accounting as a derivative. The Company determined the initial fair value of the derivative at the time of issuance to be approximately $0.4 million which was recorded as a debt discount with an offset to derivative liability. The valuation was performed using a Monte Carlo Simulation. See Note 12 – Fair Value for further discussion.
The Company reviewed the Company Put Option and concluded that it meets the criteria for derivative accounting and requires bifurcation and separate accounting as a derivative. The Company determined the initial fair value of the derivative at the time of issuance to be immaterial. The valuation was performed using a Monte Carlo Simulation.
The Company also reviewed certain redemption provisions and call options that exist in the terms of the Exchange Notes and determined that neither require bifurcation or separate accounting.
During the year ended December 31, 2019 and 2018, Exchange Notes of approximately $0.6 million and $2.2 million, respectively, were converted into 155,351 and 291,562 shares of common stock of the Company, respectively.
As of December 31, 2019 and 2018, the outstanding balance of the Exchange Notes, net of discounts, was zero and $0.6 million, respectively, and was presented within convertible notes in the Company’s consolidated balance sheet.
During the year ended December 31, 2019 and 2018, the change in Exchange Note debt discounts was as follows:
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
For the Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
Beginning balance at January 1
|
|
$
|
(83)
|
|
$
|
—
|
Additions:
|
|
|
—
|
|
|
(383)
|
Deductions:
|
|
|
|
|
|
|
Amortization (1)
|
|
|
2
|
|
|
28
|
Write-off related to note conversions (2)
|
|
|
81
|
|
|
272
|
Balance at December 31
|
|
$
|
—
|
|
$
|
(83)
|
|
(1)
|
|
Amortization is recognized as interest expense within the condensed consolidated statements of operations based on the effective interest method.
|
|
(2)
|
|
Write-offs associated with note conversions are recognized as an offset to additional paid-in capital at the time of the conversion.
|
As a result of the Exchange Note conversions, during the years ended December 31, 2019 and 2018, the Company wrote-off approximately $0.1 million and $0.3 million, respectively, of derivative liability with an offset to additional paid-in capital.
Convertible Promissory Notes – Crede Note.
On January 15, 2019, the Company and Crede Capital Group LLC (“Crede”) entered into an amendment and restatement agreement (the “Crede Amendment Agreement”) in order to enable the Company to provide Crede with an alternative means of payment of a previous settlement amount, See Note 7 – Accrued Expenses and Other Current Liabilities, by issuing to Crede a convertible note in the amount of $1.45 million (the “Crede Note”). The conversion price of the Crede Note shall equal 90% of the closing bid price of the Company’s common stock on the date prior to each conversion date. The Crede Note is payable by the Company on the earlier of (i) January 15, 2021 or (ii) upon the closing of a qualified offering in which the Company receives gross proceeds of at least $4.0 million. The Crede Note may not be converted if, after giving effect to the conversion, Crede together with its affiliates would beneficially own in excess of 4.99% of the outstanding shares of the Company’s common stock. The Company, at its option, may redeem some or all of the then outstanding principal amount of the Crede Note for cash.
In accordance with the terms of the Crede Amendment Agreement, during the period commencing on the date of issuance of the Crede Note and ending on the date Crede no longer beneficially owns any portion of the Crede Note, Crede shall not sell, on any given trading day, more than the greater of (i) $10,000 of common stock (subject to adjustment for any stock splits or combinations, stock dividends, recapitalizations or similar event after the date hereof) and (ii) 10% of the daily average composite trading volume of the Company’s common stock as reported by Bloomberg, LP (subject to adjustment for any stock splits or combinations, stock dividends, recapitalizations or similar event after the date hereof) for such trading day.
On April 16, 2019, the entire outstanding amount of $1.45 million was converted into 270,699 shares of common stock of the Company and as of December 31, 2019 the remaining amount due on the Crede Note was zero.
Convertible Promissory Notes – Leviston Note
On February 8, 2018, the Company entered into an equity purchase agreement (the “2018 Purchase Agreement”) with Leviston Resources LLC (“Leviston”), see Note 11 – Stockholders Equity for details of the 2018 Purchase Agreement. On January 29, 2019, the Company entered into a settlement agreement (the “Leviston
Settlement”) with Leviston pursuant to which the Company issued to Leviston a convertible note in the amount of $0.7 million (the “Leviston Note”) in full satisfaction of certain obligations to Leviston. The Leviston Note is payable by the Company (i) in fourteen equal monthly installments commencing on the earlier to occur of (x) the last day of the month upon which a registration statement to be filed by the Company covering the resale of the shares of common stock underlying the Leviston Note is declared effective by the Securities and Exchange Commission and (y) the six month anniversary of the date of issuance, (ii) upon the closing of a qualified offering, namely the Company raising gross proceeds of at least $4.0 million or (iii) such earlier date as the Leviston Note is required or permitted to be repaid pursuant to its terms. The Company, at its option, may redeem some or the entire then outstanding principal amount of the Leviston Note for cash.
The conversion price in effect on any conversion date shall equal the VWAP of the common stock on such Conversion Date. The Leviston Note may not be converted if, after giving effect to the conversion, Leviston together with its affiliates, would beneficially own in excess of 4.99% of the outstanding shares of the Company’s common stock.
In accordance with the terms of the Leviston Settlement, during the period commencing on the issuance date of the Leviston Note and ending on the date Leviston no longer beneficially owns any shares of common stock issuable upon conversion of the Leviston Note, Leviston shall not sell, on any given trading day, more than the greater of (i) $10,000 of common stock (subject to adjustment for any stock splits or combinations, stock dividends, recapitalizations or similar event after the date hereof) and (ii) 10% of the daily average composite trading volume of the Company’s common stock as reported by Bloomberg, LP (subject to adjustment for any stock splits or combinations, stock dividends, recapitalizations or similar event after the date hereof) for such trading day.
In addition to the Leviston Settlement and the Leviston Note, the Company and Leviston have each executed a release pursuant to which each of the Company and Leviston agreed to release the other party from their respective obligations arising from or concerning the Obligations.
During the year ended December 31, 2019, the Company made cash payments of less than $0.1 million on the Leviston Note and $0.7 million of the Leviston note was converted into 184,357 shares of common stock of the Company. As of December 31, 2019, the remaining amount due on the Leviston Note was zero. As of December 31, 2018, the Company had recorded liabilities related to Leviston of $0.5 million and $0.2 million which were included in other current liabilities and accrued expenses, respectively, in the consolidated balance sheet.
7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES.
Accrued expenses at December 31, 2019 and 2018 are as follows:
|
|
|
|
|
|
|
(dollars in thousands)
|
|
December 31, 2019
|
|
December 31, 2018
|
Accrued expenses
|
|
$
|
1,268
|
|
$
|
1,583
|
Accrued compensation
|
|
|
247
|
|
|
118
|
Accrued interest
|
|
|
124
|
|
|
239
|
|
|
$
|
1,639
|
|
$
|
1,940
|
The Company was able to reduce certain accrued expense and accounts payable amounts through negotiations with certain vendors to settle outstanding liabilities and the Company recorded these amounts as gains which are included in gain on settlement of liability, net in the consolidated statements of operations. During the years ended December 31, 2019 and 2018, approximately $1.4 million and $0.3 million, respectively, was recorded as a gain.
Other current liabilities at December 31, 2019 and 2018 are as follows:
|
|
|
|
|
|
|
(dollars in thousands)
|
|
December 31, 2019
|
|
December 31, 2018
|
Liability related to equity purchase agreement
|
|
|
—
|
|
|
460
|
Liability for settlement of equity instrument
|
|
|
—
|
|
|
1,450
|
|
|
$
|
—
|
|
$
|
1,910
|
On February 20, 2018, Crede Capital Group LLC (“Crede”) filed a lawsuit against the Company in the Supreme Court of the State of New York for Summary Judgment in Lieu of Complaint requiring the Company to pay cash owed to Crede. Crede claimed that Precipio had breached a Securities Purchase Agreement and Warrant that Crede entered into in connection with an investment in Transgenomic and that pursuant to those agreements, Precipio owed Crede approximately $2.2 million. On March 12, 2018, Precipio entered into a settlement agreement (the “Crede Agreement”) with Crede pursuant to which Precipio agreed to pay Crede a total sum of $1.925 million over a period of 16 months payable in cash, or at the Company’s discretion, in stock, in accordance with terms contained in the Crede Agreement. In accordance with the terms of the agreement and in addition to the agreement to pay, we also executed and delivered to Crede an affidavit of confession of judgment.
As of the date of the Crede Agreement, the fair value of the common stock warrant liability related to Crede was revalued to approximately $0.4 million, resulting in a gain of $0.2 million included in warrant revaluation in the consolidated statement of operations during the year ended December 31, 2018. See Note 12 – Fair Value for further discussion. At the time of the Crede Agreement, the Company recorded an additional loss of $0.4 million, which is included in loss on settlement of equity instruments in the consolidated statement of operations during the year ended December 31, 2018. During 2018, the Company paid approximately $0.5 million to Crede, with a remaining balance of $1.45 million as of December 31, 2018. On January 15, 2019, the $1.45 million liability was replaced with the Crede Note.
As of December 31, 2018, the Company had recorded a liability of approximately $0.5 million related to an equity purchase agreement with Leviston, which is included in other current liabilities on our consolidated balance sheet. On January 29, 2019, the Company entered into the Leviston Settlement pursuant to which the Company issued the Leviston Note in full satisfaction of the $0.5 million discussed above along with approximately $0.2 million of other obligations owed to Leviston which are included in accrued expenses in our consolidated balance sheet at December 31, 2018. See Note 6 – Convertible Notes.
8. LEASES
On January 1, 2019, the Company recorded initial ROU assets and corresponding operating lease liabilities of approximately $750,000 and a reversal of deferred rent and prepaid expenses of approximately $6,000 resulting in no cumulative effect adjustment upon adoption of Topic 842. The Company leases administrative facilities and laboratory equipment through operating lease agreements. In addition we rent various equipment used in our diagnostic lab and in our administrative offices through finance lease arrangements. Our operating leases include both lease (e.g., fixed payments including rent) and non-lease components (e.g., common area or other maintenance costs). The facility leases include one or more options to renew, from 1 to 5 years or more. The exercise of lease renewal options is typically at our sole discretion, therefore, the renewals to extend the lease terms are not included in our ROU assets and lease liabilities as they are not reasonably certain of exercise. We regularly evaluate the renewal options and, when they are reasonably certain of exercise, we include the renewal period in our lease term. As our leases do not provide an implicit rate, we use our collateralized incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments.
Operating leases result in the recognition of ROU assets and lease liabilities on the balance sheet. ROU assets represent our right to use the leased asset for the lease term and lease liabilities represent our obligation to make lease payments. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Lease expense is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The primary leases we enter into with initial terms of 12 months or less are for equipment.
Upon the adoption of Topic 842, our accounting for finance leases, previously referred to as capital leases, remains substantially unchanged from prior guidance.
The balance sheet presentation of our operating and finance leases is as follows:
|
|
|
|
|
(dollars in thousands)
|
Classification on the Condensed Consolidated Balance Sheet
|
|
December 31, 2019
|
|
|
|
|
|
Assets:
|
|
|
|
|
Operating lease assets
|
Operating lease right-of-use assets, net
|
|
$
|
519
|
Finance lease assets
|
Property and equipment, net
|
|
|
184
|
Total lease assets
|
|
|
$
|
703
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Current:
|
|
|
|
|
Operating lease obligations
|
Current maturities of operating lease liabilities
|
|
$
|
209
|
Finance lease obligations
|
Current maturities of finance lease liabilities
|
|
|
52
|
Noncurrent:
|
|
|
|
|
Operating lease obligations
|
Operating lease liabilities, less current maturities
|
|
|
317
|
Finance lease obligations
|
Finance lease liabilities, less current maturities
|
|
|
119
|
Total lease liabilities
|
|
|
$
|
697
|
As of December 31, 2019, the estimated future minimum lease payments, excluding non-lease components, are as follows:
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Operating Leases
|
|
Finance Leases
|
|
Total
|
2020
|
|
$
|
242
|
|
$
|
62
|
|
$
|
304
|
2021
|
|
|
241
|
|
|
38
|
|
|
279
|
2022
|
|
|
48
|
|
|
32
|
|
|
80
|
2023
|
|
|
35
|
|
|
28
|
|
|
63
|
2024
|
|
|
17
|
|
|
27
|
|
|
44
|
Thereafter
|
|
|
—
|
|
|
13
|
|
|
13
|
Total lease obligations
|
|
|
583
|
|
|
200
|
|
|
783
|
Less: Amount representing interest
|
|
|
(57)
|
|
|
(29)
|
|
|
(86)
|
Present value of net minimum lease obligations
|
|
|
526
|
|
|
171
|
|
|
697
|
Less, current portion
|
|
|
(209)
|
|
|
(52)
|
|
|
(261)
|
Long term portion
|
|
$
|
317
|
|
$
|
119
|
|
$
|
436
|
Other information as of December 31, 2019:
|
|
Weighted-average remaining lease term (years):
|
|
Operating leases
|
2.8
|
Finance leases
|
4.3
|
Weighted-average discount rate:
|
|
Operating leases
|
8.00%
|
Finance leases
|
7.25%
|
During the year ended December 31, 2019, operating cash flows from operating leases was $144,000 and ROU assets obtained in exchange for operating lease liabilities was $750,000.
Operating Lease Costs
Operating lease costs were $0.3 million during the year ended December 31, 2019 and 2018, respectively. These costs are primarily related to long-term operating leases for the Company’s facilities and laboratory equipment. Short-term and variable lease costs were less than $0.1 million for the years ended December 31, 2019 and 2018, respectively.
Finance Lease Costs
Finance leases are included in property and equipment, net and finance lease liabilities, less current maturities on the consolidated balance sheets. The associated amortization expense and interest included in the consolidated statements of operations for the year ended December 31, 2019 and 2018 is less than $0.1 million, respectively.
9. COMMITMENTS AND CONTINGENCIES
PURCHASE COMMITMENTS
The Company has entered into purchase commitments for reagents from suppliers. These agreements started in 2011 and run through 2025. The Company and the suppliers will true up the amounts on an annual basis. The future minimum purchase commitments under these and other purchase agreements are as follows:
|
|
|
|
Years ending December 31,
|
|
|
(dollars in thousands)
|
2020
|
|
$
|
341
|
2021
|
|
|
242
|
2022
|
|
|
228
|
2023
|
|
|
219
|
2024
|
|
|
149
|
Thereafter
|
|
|
50
|
|
|
$
|
1,229
|
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 February 21, 2017, XIFIN, Inc. (“XIFIN”) filed a lawsuit against us in the District Court for the Southern District of California alleging breach of written contract and seeking recovery of approximately $0.27 million owed by us to XIFIN for damages arising from a breach of our obligations pursuant to a Systems Services Agreement between us and XIFIN, dated as of February 22, 2013, as amended and restated on September 1, 2014. A liability of $0.1 million was reflected in accounts payable within the accompanying consolidated balance sheet at December 31, 2018. On April 19, 2019, the Company executed a settlement agreement with XIFIN pursuant to which the Company paid to XIFIN an agreed amount of $40,000 as settlement in consideration for total release from all outstanding amounts due and payable by the Company to XIFIN. The settlement amount was paid in full by the Company on April 19, 2019.
CPA Global provides us with certain patent management services. On February 6, 2017, CPA Global claimed that we owe approximately $0.2 million for certain patent maintenance services rendered. CPA Global has not filed claims against us in connection with this allegation. A liability of less than $0.1 million has been recorded and is reflected in accounts payable within the accompanying consolidated balance sheet at December 31, 2019 and 2018.
On February 17, 2017, Jesse Campbell (“Campbell”) filed a lawsuit individually and on behalf of others similarly situated against us in the District Court for the District of Nebraska alleging we had a materially incomplete and misleading proxy relating to a potential merger and that the merger agreement’s deal protection provisions deter superior offers. As a result, Campbell alleges that we have violated Sections 14(a) and 20(a) of the Exchange Act and Rule 14a‑9 promulgated thereafter. The Company filed a motion to dismiss all claims, which motion was fully briefed
on November 27, 2017. The Court granted the Company’s motion in full on May 3, 2018 and dismissed the lawsuit. The Eighth Circuit reversed the decision of the District Court and remanded the case back to the District Court. The parties filed a notice with the Court on May 22, 2019, announcing that they had reached a settlement in principle. On June 21, 2019, the parties filed a stipulation of settlement, in which defendants are released from all claims and expressly deny that that they have committed any act or omission giving rise to any liability. The stipulation includes a settlement payment of $1.95 million, which will be primarily funded by our insurance. On July 10, 2019, the Court entered an order preliminarily approving the settlement. The settlement remains subject to final approval by the Court. The Company’s insurance policy includes a deductible of approximately $0.8 million and the Company has previously paid approximately $0.5 million in legal fees in connection with the litigation which have been applied to the deductible leaving approximately $0.3 million to be paid by the Company and approximately $1.7 million to be paid by the insurance company. During the third quarter of 2019, both the Company and the insurance company paid their respective amounts to an escrow account where the funds will be held until they are approved for distribution at a fairness hearing of the Court which took place on November 4, 2019. As of the date the consolidated financial statements were issued, the Company is waiting for the Court to render its judgement which is still outstanding.
On March 21, 2018, Bio-Rad Laboratories filed a lawsuit against us in the Superior Court Judicial Branch of the State of Connecticut for Summary Judgment in Lieu of Complaint requiring us to pay cash owed to Bio-Rad in the amount of $39,000 that was recorded in accounts payable within the accompanying consolidated balance sheet at December 31, 2018. The obligation was paid in full during the second quarter 2019, resulting in no remaining amount due to Bio-Rad.
LEGAL AND REGULATORY ENVIRONMENT
The healthcare industry is subject to numerous laws and regulations of federal, state and local governments. These laws and regulations include, but are not limited to, matters such as licensure, accreditation, government healthcare program participation requirement, reimbursement for patient services and Medicare and Medicaid fraud and abuse. Government activity has increased with respect to investigations and allegations concerning possible violations of fraud and abuse statutes and regulations by healthcare providers.
Violations of these laws and regulations could result in expulsion from government healthcare programs together with the imposition of significant fines and penalties, as well as significant repayments for patient services previously billed. Management believes that the Company is in compliance with fraud and abuse regulations, as well as other applicable government laws and regulations. While no material regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretation, as well as regulatory actions unknown or unasserted at this time.
10. INCOME TAXES
The Company recorded a deferred tax liability of $0.1 million as of December 31, 2018, related to the acquisition of IPR&D through the Merger. This deferred tax liability was recorded to account for the book versus tax basis difference related to the IPR&D intangible asset. This deferred tax liability was excluded from sources of future taxable income, as the timing of its reversal cannot be predicted due to the indefinite life of this IPR&D. As such, this deferred tax liability cannot be used to offset the valuation allowance. As a result of the write-off of the IPR&D in 2019, the related deferred tax liability of $0.1 million was eliminated and is included in income tax benefit in the consolidated statements of operations for the year ended December 31, 2019.
Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company’s net deferred tax assets relate primarily to its net operating loss carryforwards and stock based compensation, offset by property and equipment and intangible assets. With the exception of the IPR&D, the Company has recorded a full valuation allowance to offset the net deferred tax assets, because it is not more likely than not that the Company will realize future benefits associated with these net deferred tax assets at December 31, 2019 and 2018.
At December 31, 2019 and 2018, the Company had net deferred tax assets of $10.7 million and $8.7 million, respectively, against which a valuation allowance of $10.7 million and $8.8 million, respectively, had been recorded. The valuation allowance excluded the deferred tax liability for IPR&D assigned as an indefinite life intangible asset for book purposes, also known as a “naked credit” in the amount of $0.1 million at December 31, 2018. The increase in the valuation allowance for the year ended December 31, 2019 is $1.9 million, resulting from additional net operating losses generated in the year. The deferred tax liabilities associated with the book versus tax basis difference of intangible assets are the result of an asset step-up pursuant to the Merger. Significant components of the Company’s deferred tax assets at December 31, 2019 and 2018 are as follows:
|
|
|
|
|
|
|
|
|
Dollars in Thousands
|
|
|
2019
|
|
2018
|
Deferred tax assets:
|
|
|
|
|
|
|
Net operating loss and credit carryforwards
|
|
$
|
13,989
|
|
$
|
10,202
|
Stock-based compensation
|
|
|
292
|
|
|
192
|
Other
|
|
|
666
|
|
|
426
|
Gross deferred tax assets
|
|
|
14,947
|
|
|
10,820
|
Deferred tax liabilities:
|
|
|
|
|
|
|
Property and equipment
|
|
|
(95)
|
|
|
42
|
Intangible assets
|
|
|
(4,148)
|
|
|
(2,084)
|
IPR&D intangible assets
|
|
|
—
|
|
|
(70)
|
Gross deferred tax liabilities
|
|
|
(4,243)
|
|
|
(2,112)
|
Net deferred tax assets
|
|
|
10,704
|
|
|
8,708
|
Less valuation allowance
|
|
|
(10,704)
|
|
|
(8,778)
|
Net deferred liability
|
|
$
|
—
|
|
$
|
(70)
|
The Company’s provision for income taxes for the year ended December 31, 2019 and December 31, 2018 relates to income taxes in states and other jurisdictions and differs from the amounts determined by applying the statutory federal income tax rate to the loss before income taxes for the following reasons:
|
|
|
|
|
|
|
|
|
Dollars in Thousands
|
|
|
2019
|
|
2018
|
Benefit at federal rate
|
|
$
|
(2,796)
|
|
$
|
(3,354)
|
Increase (decrease) resulting from:
|
|
|
|
|
|
|
State income taxes—net of federal benefit
|
|
|
(517)
|
|
|
(633)
|
Miscellaneous permanent differences
|
|
|
78
|
|
|
—
|
Warrant liability revaluation
|
|
|
(104)
|
|
|
(479)
|
Impairment of goodwill
|
|
|
—
|
|
|
1,170
|
Impairment of in-process research and development
|
|
|
(70)
|
|
|
—
|
Other
|
|
|
—
|
|
|
14
|
Change in valuation allowance
|
|
|
3,339
|
|
|
3,003
|
Total income tax benefit
|
|
$
|
(70)
|
|
$
|
(279)
|
The income tax expense consists of the following at December 31, 2019 and 2018.
|
|
|
|
|
|
|
|
|
Dollars in Thousands
|
|
|
2019
|
|
2018
|
Federal:
|
|
|
|
|
|
|
Current
|
|
$
|
—
|
|
$
|
—
|
Deferred
|
|
|
(70)
|
|
|
(279)
|
Total Federal
|
|
$
|
(70)
|
|
$
|
(279)
|
State:
|
|
|
|
|
|
|
Current
|
|
$
|
—
|
|
$
|
—
|
Deferred
|
|
|
—
|
|
|
—
|
Total State
|
|
$
|
—
|
|
$
|
—
|
Foreign:
|
|
|
|
|
|
|
Current
|
|
$
|
—
|
|
$
|
—
|
Deferred
|
|
|
—
|
|
|
—
|
Total Foreign
|
|
$
|
—
|
|
$
|
—
|
Total Tax Provision
|
|
$
|
(70)
|
|
$
|
(279)
|
The Company had approximately $61 million and $39 million of available gross federal and state net operating loss (“NOL”) carryforwards as of December 31, 2019 and 2018, respectively. Beginning in 2018, under the Act, federal loss carryforwards have an unlimited carryforward period, however such losses can only offset 80% of taxable income in any one year. Included in the total NOLs for 2019 are $31 million of federal losses that fall under these new rules. Section 382 of the Internal Revenue Code, and similar state regulations, contain provisions that may limit the NOL carryforwards available to be used to offset income in any given year upon the occurrence of certain events, including changes in the ownership interests of significant stockholders. In the event of a cumulative change in ownership in excess of 50% over a three-year period, the amount of the NOL carryforwards that the Company may utilize in any one year may be limited. The Company reduced its tax attributes (NOLs and tax credits) and generated a limitation on utilization of such attributes resulting from the Merger.
At December 31, 2019 and 2018, and as a result of the limitations under Section 382 of the Internal Revenue Code, the Company had a total of unused federal tax net operating loss carryforwards with expiration dates as follows:
|
|
|
|
|
|
|
|
|
Dollars in Thousands
|
|
|
2019
|
|
2018
|
2036
|
|
$
|
13,470
|
|
$
|
13,470
|
2037
|
|
|
3,441
|
|
|
3,441
|
Unlimited life
|
|
|
42,100
|
|
|
21,138
|
Total Federal
|
|
$
|
59,011
|
|
$
|
38,049
|
The Company has adopted guidance on accounting for uncertainty in income taxes which clarified the accounting for income taxes by prescribing the minimum threshold a tax position is required to meet before being recognized in the financial statements as well as guidance on de-recognition, measurement, classification and disclosure of tax positions. There are no material uncertain tax positions that would require recognition in the financial statements. The Company is obligated to file income tax returns in the U.S. federal jurisdiction and various U.S. states. Since the Company had losses in the past, all prior years that generated NOLs are open and subject to audit examination in relation to the NOL generated from those years. Our evaluation of uncertain tax positions was performed for the tax years ended December 31, 2014 and forward.
11. STOCKHOLDERS’ EQUITY
Common Stock
Pursuant to our Third Amended and Restated Certificate of Incorporation, as amended, we currently have 150,000,000 shares of common stock authorized for issuance. On December 20, 2018, the Company’s shareholders
approved the proposal to authorize the Company’s Board of Directors to, in its discretion, to amend the Company’s Third Amended and Restated Certificate of Incorporation to increase the total number of authorized shares of common stock from 150,000,000 shares to 250,000,000 shares. The Company has not yet affected this increase.
On February 12, 2018, the Company issued 120,983 shares of its common stock in exchange for approximately $1.9 million of debt obligations. See Note 6 – Convertible Notes.
During the year ended December 31, 2018, the Company issued 208,000 shares of its common stock in connection with conversions of its Series B Preferred Stock and 223,022 shares of its common stock in connection with conversions of its Series C Preferred Stock. Aside from 4,000 shares of common stock issued in connection with conversions of its Series C Preferred Stock, all of the shares of common stock issued for the year ended December 31, 2018 in connection with conversions of its Series B Preferred Stock and Series C Preferred Stock (together the “Preferred Stock”) were issued after the Company induced the holders of its Preferred Stock to convert their shares of Preferred Stock to shares of the company’s common stock (see below - Preferred Stock induced conversions).
During the years ended December 31, 2019 and 2018, the Company issued 310,200 and 252,486 shares of its common stock, respectively, in connection with the exercise of 310,200 and 252,486 warrants, respectively. The warrant exercises resulted in net cash proceeds to the Company of approximately $1.6 million and $1.3 million during the years ended December 31, 2019 and 2018, respectively.
Also during the years ended December 31, 2019 and 2018, the Company issued 2,511,173 and 384,896 shares of its common stock, respectively, in connection with the conversion of convertible notes, plus interest, totaling $7.6 million and $2.4 million, respectively. See Note 6 – Convertible Notes.
2018 Purchase Agreement
On February 8, 2018 the Company entered into an equity purchase agreement (the “2018 Purchase Agreement”) with Leviston for the purchase of up to $8,000,000 (the “Aggregate Amount”) of shares (the “Shares”) of the Company’s common stock from time to time, at the Company’s option. Shares offered and sold prior to February 13, 2018 were issued pursuant to the Company’s shelf registration statement on Form S-3 (and the related prospectus) that the Company filed with the Securities and Exchange Commission (the “SEC”) and which was declared effective by the SEC on February 13, 2015 (the “Shelf Registration Statement”).
Leviston purchased 48,076 shares (the “Investor Shares”) of the Company’s common stock following the close of business on February 9, 2018, subject to customary closing conditions, at a price per share of $15.60 for approximately $750,000. The shares were sold pursuant to the Shelf Registration Statement. The Company incurred approximately $132,000 in costs which have been treated as issuance costs within additional paid-in capital in the accompanying consolidated balance sheet.
As required by the terms of the 2018 Purchase Agreement, the Company timely filed an S-1 on April 16, 2018. The S-1 Registration Statement was not declared effective by the SEC and on August 10, 2018 the Company filed a withdrawal request with the SEC. No securities had been issued or sold under this Registration Statement. The Company determined not to proceed with the offering as the Company sought to re-negotiate the terms of the equity purchase agreement in order to comply with the requirements of the SEC pursuant to a letter from the SEC dated August 7, 2018.
In consideration of Leviston’s agreement to enter into the 2018 Purchase Agreement, the Company agreed to pay to Leviston a commitment fee in shares of the Company’s common stock equal in value to 5.25% of the total Aggregate Amount (the “Leviston Commitment Shares”), payable in three installments upon achieving certain milestones. The first installment of 1.75% was due on or before February 12, 2018 and this amount, of $140,000, was paid to Leviston through the issuance of 11,381 shares of the Company’s common stock on February 12, 2018.
In accordance with the terms of the 2018 Purchase Agreement, the Company provided Leviston with a price protection provision, if the Company issues any warrants in connection with issuances, sales or an agreement in writing to issue common stock or common stock equivalents of the Company, Leviston will have the right to receive a
proportionate amount of such warrants, cash or shares, at Leviston’s sole election, valued using the Black Scholes formula. As a result of 2018 Note Agreement and the April 2018 Warrants issued, the Company was required to provide Leviston with a proportionate and equivalent coverage in the form of warrants, stock or cash in the amount of approximately $460,000. As Leviston has the ability to elect the form of compensation, the Company has recorded the $460,000 as a liability as of December 31, 2018, within the other current liabilities line of the accompanying consolidated balance sheet.
As of December 31, 2018, the Company had a total of $0.7 million in accruals (see Note 7 – Accrued Expenses and Other Current Liabilities) for potential obligations to Leviston, but had not issued any additional shares or made any payments to Leviston. On January 29, 2019, the Company entered into the Leviston Settlement pursuant to which the Company issued to Leviston the Note in full satisfaction of all obligations owed to Leviston. See Note 6 – Convertible Notes for further details of the Leviston Note.
LP Purchase Agreement
On September 7, 2018, the Company entered the LP Purchase Agreement, pursuant to which Lincoln Park has agreed to purchase from the Company up to an aggregate of $10,000,000 of common stock of the Company (subject to certain limitations) from time to time over the term of the LP Purchase Agreement. Pursuant to the terms of the LP Purchase Agreement, on the agreement date, the Company issued 40,000 shares of its common stock to Lincoln Park as consideration for its commitment to purchase shares of common stock of the Company under the LP Purchase Agreement (the “LP Commitment Shares”). Also on September 7, 2018, the Company entered into a registration rights agreement with Lincoln Park (the “LP Registration Rights Agreement”), pursuant to which on September 14, 2018, the Company filed with the SEC a registration statement on Form S-1 to register for resale under the Securities Act of 1933, as amended, or the Securities Act, 466,667 shares of common stock, which includes the LP Commitment Shares, that have been or may be issued to Lincoln Park under the LP Purchase Agreement. The Form S-1 was declared effective by the SEC on September 28, 2018. As of January 16, 2019, all shares registered under this S-1 had been sold and/or issued to Lincoln Park. On February 1, 2019, the Company filed with the SEC a registration statement on Form S-1 to register for resale under the Securities Act of 1933, as amended, or the Securities Act, an additional 1,000,000 shares of common stock that have been or may be issued to Lincoln Park under the LP Purchase Agreement. The Form S-1 was declared effective by the SEC on February 12, 2019. As of August 5, 2019, all shares registered under this S-1 had been sold and/or issued to Lincoln Park. On August 9, 2019, the Company filed with the SEC a registration statement on Form S-1 to register for resale under the Securities Act of 1933, as amended, or the Securities Act, an additional 1,800,000 shares of common stock that have been or may be issued to Lincoln Park under the LP Purchase Agreement. As of December 31, 2019, 1,680,000 shares registered under this S-1 had been sold and/or issued to Lincoln Park and 120,000 were sold and/or issued to Lincoln Park in January 2020. On January 14, 2020, the Company filed with the SEC a registration statement on Form S-1 to register for resale under the Securities Act of 1933, as amended, or the Securities Act, an additional 920,654 shares of common stock that have been or may be issued to Lincoln Park under the LP Purchase Agreement. From January 1, 2020 through the date the consolidated financial statements were issued, 780,012 shares registered under this S-1 had been sold and/or issued to Lincoln Park.
Under the LP Purchase Agreement, the Company may, from time to time and at its sole discretion, on any single business day on which the closing price of its common stock is not less than the Floor Price, defined as the lower of (i) $1.50 per share (subject to adjustment for any reorganization, recapitalization, non-cash dividend, stock split, reverse stock split or other similar transaction as provided in the LP Purchase Agreement) and (ii) $0.10 per share, direct Lincoln Park to purchase shares of its common stock in amounts up to 30,000 shares, which amounts may be increased to up to 36,666 shares depending on the market price of its common stock at the time of sale and subject to a maximum commitment by Lincoln Park of $1,000,000 per single purchase, which the Company refers to as “regular purchases”, plus other “accelerated amounts” and/or “additional accelerated amounts” under certain circumstances. The Company will control the timing and amount of any sales of its common stock to Lincoln Park. The purchase price of the shares that may be sold to Lincoln Park in regular purchases under the LP Purchase Agreement will be based on the market price of the common stock of the Company preceding the time of sale as computed under the LP Purchase Agreement. The purchase price per share will be equitably adjusted for any reorganization, recapitalization, non-cash dividend, stock split, or other similar transaction occurring during the business days used to compute such price. The Company may at any time in its sole discretion terminate the LP Purchase Agreement without fee, penalty or cost upon one business day
notice. There are no restrictions on future financings, rights of first refusal, participation rights, penalties or liquidated damages in the LP Purchase Agreement or LP Registration Rights Agreement, other than a prohibition on the Company entering into certain types of transactions that are defined in the LP Purchase Agreement as “Variable Rate Transactions”. Lincoln Park may not assign or transfer its rights and obligations under the Purchase Agreement.
Under applicable rules of The Nasdaq Capital Market, in no event may the Company issue or sell to Lincoln Park under the LP Purchase Agreement more than 19.99% of the shares of its common stock outstanding immediately prior to the execution of the LP Purchase Agreement (which is 308,590 shares based on 1,543,724 shares outstanding immediately prior to the execution of the LP Purchase Agreement), which limitation the Company refers to as the Exchange Cap, unless (i) the Company obtains stockholder approval to issue shares of common stock in excess of the Exchange Cap or (ii) the average price of all applicable sales of the Company’s common stock to Lincoln Park under the LP Purchase Agreement equals or exceeds $7.05 (which represents the closing consolidated bid price of the Company’s common stock on September 7, 2018, plus an incremental amount to account for the issuance of the LP Commitment Shares to Lincoln Park), such that issuances and sales of the Company’s common stock to Lincoln Park under the LP Purchase Agreement would be exempt from the Exchange Cap limitation under applicable NASDAQ rules. In any event, the LP Purchase Agreement specifically provides that the Company may not issue or sell any shares of its common stock under the LP Purchase Agreement if such issuance or sale would breach any applicable NASDAQ rules. The Company received shareholder approval on December 20, 2018.
The LP Purchase Agreement also prohibits the Company from directing Lincoln Park to purchase any shares of common stock if those shares, when aggregated with all other shares of the Company’s common stock then beneficially owned by Lincoln Park and its affiliates, would result in Lincoln Park and its affiliates having beneficial ownership, at any single point in time, of more than 4.99% of the then total outstanding shares of the Company’s common stock, as calculated pursuant to Section 13(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and Rule 13d-3 thereunder, which limitation the Company refers to as the Beneficial Ownership Cap as defined in the LP Agreement.
As of the date the consolidated financial statements were issued, we have already received $9.3 million in aggregate, including approximately $1.4 million from the sale of 328,590 shares of common stock to Lincoln Park during 2018, $6.6 million from the sale of 2,778,077 shares of common stock to Lincoln Park during 2019, and $1.3 million from the sale of 900,012 shares of common stock to Lincoln Park from January 1, 2020 through the date the consolidated financial statements were issued.
Preferred Stock
The Company’s Board of Directors is authorized to issue up to 15,000,000 shares of preferred stock in one or more series, from time to time, with such designations, powers, preferences and rights and such qualifications, limitations and restrictions as may be provided in a resolution or resolutions adopted by the Board of Directors. The authority of the Board of Directors includes, but is not limited to, the determination or fixing of the following with respect to shares of such class or any series thereof: (i) the number of shares; (ii) the dividend rate, whether dividends shall be cumulative and, if so, from which date; (iii) whether shares are to be redeemable and, if so, the terms and amount of any sinking fund providing for the purchase or redemption of such shares; (iv) whether shares shall be convertible and, if so, the terms and provisions thereof; (v) what restrictions are to apply, if any, on the issue or reissue of any additional preferred stock; and (vi) whether shares have voting rights. The preferred stock may be issued with a preference over the common stock as to the payment of dividends. We have no current plans to issue any additional preferred stock. Classes of stock such as the preferred stock may be used, in certain circumstances, to create voting impediments on extraordinary corporate transactions or to frustrate persons seeking to effect a merger or otherwise to gain control of the Company. For the foregoing reasons, any additional preferred stock issued by the Company could have an adverse effect on the rights of the holders of the common stock.
Series B Preferred Stock
The Company filed a Certificate of Designation of Preferences, Rights and Limitations of Series B Convertible Preferred Stock (“Series B Preferred Stock”) with the State of Delaware which designates 6,900 shares of our preferred
stock as Series B Preferred Stock. The Series B Preferred Stock has a stated value of $1,000 per share and a par value of $0.01 per share. The Series B Preferred Stock includes a beneficial ownership blocker but has no dividend rights (except to the extent dividends are also paid on the common stock). On August 28, 2017, the Company completed an underwritten public offering (the “August 2017 Offering”) consisting of the Company’s Series B Preferred Stock and warrants.
The conversion price of the Series B Preferred Stock contains a down round feature. The Company will recognize the effect of the down round feature when it is triggered. At that time, the effect would be treated as a deemed dividend and as a reduction of income available to common shareholders in our basic earnings per share calculation.
The 2018 Purchase Agreement triggered the down round feature of the Series B Preferred Stock and, as a result, the conversion price of the Company’s Series B Convertible Preferred Stock was automatically adjusted to $15.60 per share. In connection with the down round adjustment, the Company calculated an incremental beneficial conversion feature of approximately $1.4 million which was recognized as a deemed dividend at time of the down round adjustment (“Deemed Dividend A”).
The 2018 Inducement Agreement, discussed below, triggered the down round feature of the Series B Preferred Stock and, as a result, the conversion price of the Company’s Series B Convertible Preferred Stock was automatically adjusted from $15.60 per share to $11.25 per share. In connection with the down round adjustment, the Company calculated an incremental beneficial conversion feature of approximately $40,000 which was recognized as a deemed dividend at time of the down round adjustment (“Deemed Dividend B”).
The 2018 Note Agreement, see Note 6 – Convertible Notes, triggered the down round feature of the Series B Preferred Stock and, as a result, the conversion price of the Company’s Series B Convertible Preferred Stock was automatically adjusted from $11.25 per share to $4.50 per share. In connection with the down round adjustment, the Company calculated an incremental beneficial conversion feature of approximately $0.2 million which was recognized as a deemed dividend at time of the down round adjustment (“Deemed Dividend C”).
On November 29, 2018, the Amendment Agreement triggered the down round feature of the Series B Preferred Stock and, as a result, the conversion price of the Company’s Series B Convertible Preferred Stock was automatically adjusted from $4.50 per share to $2.25 per share. In connection with the down round adjustment, the Company calculated an incremental beneficial conversion feature of approximately $0.3 million which was recognized as a deemed dividend at time of the down round adjustment (“Deemed Dividend D”).
During the year ended December 31, 2018, 2,340 shares of Series B Preferred Stock, that were outstanding, were converted into 208,000 shares of our common stock.
At December 31, 2019 and 2018, the Company had 6,900 shares of Series B designated and issued and 47 shares of Series B outstanding.
Series C Preferred Stock
The Company filed a Certificate of Designation of Preferences, Rights and Limitations of Series C Convertible Preferred Stock (“Series C Preferred Stock”) with the State of Delaware which designates 2,748 shares of our preferred stock as Series C Preferred Stock. The Series C Preferred Stock has a stated value of $1,000 per share and a par value of $0.01 per share. On November 2, 2017, the Company completed a registered direct offering consisting of the Company’s Series C Preferred Stock and warrants (the “Series C Preferred Offering”). The conversion price of the Series C Preferred Stock contains a down round feature.
The 2018 Purchase Agreement triggered the down round feature of the Series C Preferred Stock and, as a result, the conversion price of the Company’s Series C Convertible Preferred Stock was automatically adjusted from $21.00 per share to $15.60 per share. In connection with the down round adjustment, the Company calculated an incremental beneficial conversion feature of approximately $0.8 million which was recognized as a deemed dividend at time of the
down round adjustment (“Deemed Dividend E”). There were no further adjustments to the conversion price of the Series C Preferred stock because all of the Series C Preferred Stock was converted in 2018.
During the year ended December 31, 2018, 2,548 shares of Series C Preferred Stock were converted into 223,022 shares of our common stock.
At December 31, 2019 and 2018, the Company had 2,748 shares of Series C designated and issued and zero shares of Series C outstanding.
Liquidation Preferences
The following is the liquidation preferences for the Company’s preferred stock;
The Series B Preferred Stock and Series C Preferred Stock have identical terms regarding liquidation preferences. Upon any liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary, the holders shall be entitled to receive out of the assets of the Corporation an amount equal to the par value, plus any accrued and unpaid dividends thereon, for each share of Preferred Stock before any distribution or payment shall be made to the holders of the Common Stock, and if the assets of the Corporation shall be insufficient to pay in full such amounts, then the entire assets to be distributed to the holders shall be ratably distributed among the holders in accordance with the respective amounts that would be payable on such shares. If all amounts were paid in full; and thereafter, the holders shall be entitled to receive out of the assets, whether capital or surplus, of the Corporation the same amount that a holder of Common Stock would receive if the Preferred Stock were fully converted to Common Stock which amount shall be paid pari passu with all holders of Common Stock.
Preferred Stock induced conversions
On March 21, 2018, the Company entered into a letter agreement (the “2018 Inducement Agreement”) with certain holders of shares of the Company’s Series B Preferred Stock and Series C Preferred Stock (together the “Preferred Stock”), and warrants (the “Warrants”) to purchase shares of the Company’s common stock, issued in the Company’s public offering in August 2017 and registered direct offering in November 2017. Pursuant to the 2018 Inducement Agreement, the Company and the Investors agreed that, as a result of the issuance of shares of common stock pursuant to that Purchase Agreement, dated February 8, 2018, by and between the Company and the investor named therein, and effective as of the time of execution of the 2018 Inducement Agreement, the exercise price of the Warrants was reduced to $11.25 per share (the “Exercise Price Reduction”) and the conversion price of the Preferred Stock was reduced to $11.25 (the “Conversion Price Reduction”). As consideration for the Company’s agreement to the Exercise Price Reduction and the Conversion Price Reduction, (i) each investor agreed to convert the shares of Preferred Stock held by such investor into shares of Common Stock in increments of up to 4.99% of the shares of common stock outstanding as of the date of the 2018 Inducement Agreement and (ii) one investor agreed to exercise 44,444 Warrants and another investor agreed to exercise 33,333 Warrants in increments of up to 4.99% of the shares of common stock outstanding as of the date of the 2018 Inducement Agreement, in each case in accordance with the beneficial ownership limitations set forth in the Company’s Certificate of Designation of Preferences, Rights and Limitations of Series B Convertible Preferred Stock, the Company’s Certificate of Designation of Preferences, Rights and Limitations of Series C Convertible Preferred Stock and the Warrants. As discussed above, as of December 31, 2019, all shares of Preferred Stock, except 47 shares of Series B Preferred Stock, were converted to shares of our common stock pursuant to the terms of the 2018 Inducement Agreement and 20,000 Warrants were exercised at the $11.25 exercise price.
The 2018 Inducement Agreement represented an inducement by the Company to convert shares of the Preferred Stock. The conversion price of the Preferred Stock and the exercise price of the Warrants were reduced from $15.60 per share to $11.25 per share, respectively. The Company calculated the fair value of the additional securities and consideration to be approximately $1.2 million (“Deemed Dividend F”). During the year ended December 31, 2018, this amount was recorded as a charge to additional paid-in-capital and as a deemed dividend resulting in a reduction of income available to common shareholders in our basic earnings per share calculation. The $1.2 million is comprised of two components: 1) $1.1 million related to the fair value of the additional common shares issued upon conversion of the
Preferred Stock due to the reduced conversion price and 2) $0.1 million in incremental fair value of the Warrants resulting from the reduction of the exercise price.
Common Stock Warrants.
The following represents a summary of the warrants outstanding as of December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underlying
|
|
Exercise
|
|
|
Issue Year
|
|
Expiration
|
|
Shares
|
|
Price
|
Warrants
|
|
|
|
|
|
|
|
|
|
(1)
|
|
2014
|
|
April 2020
|
|
832
|
|
$
|
1,800.00
|
(2)
|
|
2015
|
|
February 2020
|
|
1,588
|
|
$
|
1,008.00
|
(3)
|
|
2015
|
|
December 2020
|
|
272
|
|
$
|
747.00
|
(4)
|
|
2016
|
|
January 2021
|
|
596
|
|
$
|
544.50
|
(5)
|
|
2017
|
|
June 2022
|
|
2,540
|
|
$
|
41.25
|
(5)
|
|
2017
|
|
June 2022
|
|
500
|
|
$
|
7.50
|
(6)
|
|
2017
|
|
June 2022
|
|
6,095
|
|
$
|
105.00
|
(7)
|
|
2017
|
|
August 2022
|
|
25,201
|
|
$
|
2.25
|
(8)
|
|
2017
|
|
August 2022
|
|
4,000
|
|
$
|
46.88
|
(9)
|
|
2017
|
|
August 2022
|
|
47,995
|
|
$
|
150.00
|
(9)
|
|
2017
|
|
August 2022
|
|
9,101
|
|
$
|
7.50
|
(10)
|
|
2017
|
|
August 2022
|
|
16,664
|
|
$
|
2.25
|
(10)
|
|
2017
|
|
August 2022
|
|
7,335
|
|
$
|
2.25
|
(11)
|
|
2017
|
|
October 2022
|
|
666
|
|
$
|
2.25
|
(12)
|
|
2017
|
|
May 2023
|
|
—
|
|
$
|
2.25
|
(13)
|
|
2018
|
|
October 2022
|
|
7,207
|
|
$
|
112.50
|
(14)
|
|
2018
|
|
April 2023
|
|
69,964
|
|
$
|
5.40
|
(14)
|
|
2018
|
|
April 2023
|
|
121,552
|
|
$
|
5.40
|
(15)
|
|
2018
|
|
October 2022
|
|
15,466
|
|
$
|
11.25
|
(16)
|
|
2018
|
|
July 2023
|
|
14,671
|
|
$
|
5.40
|
(16)
|
|
2018
|
|
July 2023
|
|
14,672
|
|
$
|
5.40
|
(16)
|
|
2018
|
|
August 2023
|
|
36,334
|
|
$
|
5.40
|
(16)
|
|
2018
|
|
August 2023
|
|
36,334
|
|
$
|
5.40
|
(16)
|
|
2018
|
|
September 2023
|
|
19,816
|
|
$
|
5.40
|
(16)
|
|
2018
|
|
September 2023
|
|
20,903
|
|
$
|
5.40
|
(17)
|
|
2018
|
|
November 2023
|
|
75,788
|
|
$
|
5.40
|
(17)
|
|
2018
|
|
December 2023
|
|
51,282
|
|
$
|
5.40
|
(18)
|
|
2019
|
|
April 2024
|
|
147,472
|
|
$
|
5.40
|
(19)
|
|
2019
|
|
May 2024
|
|
154,343
|
|
$
|
9.56
|
|
|
|
|
|
|
909,189
|
|
|
|
|
(1)
|
|
These warrants were issued in connection with a private placement which was completed in October 2014.
|
|
(2)
|
|
These warrants were issued in connection with an offering which was completed in February 2015.
|
|
(3)
|
|
These warrants were issued in connection with an offering which was completed in July 2015.
|
|
(4)
|
|
These warrants were issued in connection with an offering which was completed in January 2016. Of the remaining outstanding warrants as of December 31, 2019, 357 warrants are recorded as liability, See Note 12 – Fair Value for further discussion, and 239 warrants are treated as equity.
|
|
(5)
|
|
These warrants were issued in connection with a June 2017 merger transaction (the “Merger”) and are the 2017 New Bridge Warrants.
|
|
(6)
|
|
These warrants were issued in connection with the Merger and are considered the Side Warrants.
|
|
(7)
|
|
These warrants were issued in connection with an underwritten public offering consisting of the Company’s Series B Preferred Stock and warrants (the “August 2017 Offering”) and are the August 2017 Offering Warrants discussed below.
|
|
(8)
|
|
These warrants were issued in connection with the August 2017 Offering and are the Representative Warrants discussed below.
|
|
(9)
|
|
These warrants were issued 2017 and are the Series A Conversion Warrants discussed below.
|
|
(10)
|
|
These warrants were issued in connection with the conversion of convertible bridge notes, at the time of the closing of the August 2017 Offering, and are the Note Conversion Warrants discussed below.
|
|
(11)
|
|
These warrants were issued in connection with a waiver of default the Company received in the fourth quarter of 2017 in connection with certain convertible promissory notes and are the Convertible Promissory Note Warrants discussed below.
|
|
(12)
|
|
These warrants (the “Series C Warrants’) were issued in connection with the Series C Preferred Offering and are discussed below.
|
|
(13)
|
|
These warrants were issued in connection with the Settlement Agreements and are the Creditor Warrants discussed below.
|
|
(14)
|
|
These warrants were issued in connection with the 2018 Note Agreement and are the April 2018 Warrants discussed below.
|
|
(15)
|
|
These warrants were issued in connection with the 2018 Note Agreement and are the Advisor Warrants discussed below.
|
|
(16)
|
|
These warrants were issued in connection with the 2018 Note Agreement and are the Q3 2018 Warrants discussed below.
|
|
(17)
|
|
These warrants were issued in connection with the 2018 Note Agreement, and subsequent Amendment Agreement, and are the Q4 2018 Warrants discussed below.
|
|
(18)
|
|
These warrants were issued in connection with the 2018 Note Agreement and subsequent Amendment No. 2 Agreement and are the April 2019 Warrants discussed below.
|
|
(19)
|
|
These warrants were issued in connection with the May 2019 Bridge Notes and are the May 2019 Warrants discussed below.
|
2017 New Bridge Warrants
The initial exercise price of the 2017 New Bridge Warrants was $112.50 (subject to adjustments). These warrants had a one-time down round provision. As a result of the August 2017 Offering, the exercise price of the 2017 New Bridge Warrants was adjusted to $41.25 per share, and the down round provision for these warrants no longer exists after this adjustment.
At the time of the Amendment Agreement in 2018, the exercise price of 500 of the 2017 New Bridge Warrants was modified so that the exercise price became $7.50 per share. The fair value of this warrant modification was calculated to be less than $1,000 which was recorded as a debt discount in conjunction with the issuance of the Q4 2018 Bridge Notes with an offset to additional paid-in-capital.
Side Warrants
The Company issued warrants to purchase an aggregate of 6,095 shares of the Company’s common stock at an exercise price of $105.00 per share (subject to adjustment). The warrants (“Side Warrants”) have a term of 5 years.
August 2017 Offering Warrants
In connection with the August 2017 Offering, the Company issued 178,667 warrants at an exercise price of $45.00, which contain a down round provision. The August 2017 Offering Warrants were exercisable immediately and expire 5 years from date of issuance.
In February 2018, as a result of 2018 Purchase Agreement, the exercise price of the August 2017 Offering Warrants was adjusted to $15.60. At the time the exercise price was adjusted, the Company calculated the fair value of the down round provision on the warrants to be approximately $62,000 and recorded this as a deemed dividend (“Deemed Dividend G”) during 2018. In addition, as a result of the 2018 Inducement Agreement, the exercise price of the August 2017 Offering Warrants was further adjusted to $11.25 as a result of the Exercise Price Reduction discussed above.
In April 2018, as a result of the 2018 Note Agreement, the exercise price of the August 2017 Offering Warrants was adjusted to $4.50. At the time the exercise price was adjusted, the Company calculated the fair value of the down round provision on the warrants to be approximately $63,000 and recorded this as a deemed dividend (“Deemed Dividend H”).
In November 2018, as a result of the Amendment Agreement, the exercise price of the August 2017 Offering Warrants was adjusted to $2.25. At the time the exercise price was adjusted, the Company calculated the fair value of the down round provision on the warrants to be approximately $5,000 and recorded this as a deemed dividend (“Deemed Dividend I”).
There were 6,800 and 146,666 August 2017 Offering Warrants exercised during the year ended December 31, 2019 and 2018, respectively, for proceeds to the Company of approximately $15,000 and $795,000, respectively. During the year ended December 31, 2019 and 2018, the intrinsic value of the August 2017 Offering Warrants exercised was approximately $36,000 and $420,000.
Representative Warrants
The Representative Warrants are exercisable beginning one year after the date of the prospectus for the August 2017 Offering and expiring on a date which is no more than five years from the date of the prospectus for the August 2017 Offering.
Series A Conversion Warrants
These warrants were issued in connection with the conversion of our Series A Senior stock, at the time of the closing of the August 2017 Offering, and have a term of 5 years.
At the time of the Amendment Agreement in 2018, the exercise price of 9,101 of the Series A Conversion Warrants was modified so that the exercise price became $7.50 per share. The fair value of this warrant modification was calculated to be approximately $10,000 which was recorded as a debt discount in conjunction with the issuance of the Q4 2018 Bridge Notes with an offset to additional paid-in-capital.
Note Conversion Warrants
Upon the closing of the August 2017 Offering, the Company issued 23,999 warrants to purchase the Company's common stock (the “Note Conversion Warrants”). The Note Conversion Warrants have an exercise price of $45.00 per share, a five year term and contain a down round provision. As a result of the Series C Preferred Offering in 2017, the exercise price of the Note Conversion Warrants was adjusted to $21.00 per share.
In February 2018, as a result of 2018 Purchase Agreement, the exercise price of the Note Conversion Warrants was adjusted to $15.60 per share. At the time the exercise price was adjusted, the Company calculated the fair value of the down round provision on the warrants to be approximately $8,000 and recorded this as a deemed dividend (“Deemed Dividend J”). In addition, as a result of the 2018 Inducement Agreement, the exercise price of the Note Conversion Warrants was further adjusted to $11.25. At the time the exercise price was adjusted, the Company calculated the fair value of the down round provision on the warrants to be approximately $5,000 and recorded this as a deemed dividend (“Deemed Dividend K”).
In April 2018, as a result of the 2018 Note Agreement, the exercise price of the Note Conversion Warrants was adjusted to $4.50. At the time the exercise price was adjusted, the Company calculated the fair value of the down round provision on the warrants to be approximately $10,000 and recorded this as a deemed dividend (“Deemed Dividend L”).
In November 2018, as a result of the Amendment Agreement, the exercise price of the Note Conversion Warrants was adjusted to $2.25. At the time the exercise price was adjusted, the Company calculated the fair value of the down round provision on the warrants to be approximately $4,000 and recorded this as a deemed dividend (“Deemed Dividend M”).
Convertible Promissory Note Warrants
The Convertible Promissory Note Warrants had an original exercise price of $45.00 per share and contain a down round provision. As a result of the Series C Preferred Offering, the exercise price of the Convertible Promissory Note Warrants was adjusted to $21.00 per share.
In February 2018, as a result of 2018 Purchase Agreement, the exercise price of the Convertible Promissory Note Warrants was adjusted to $15.60. At the time the exercise price was adjusted, the Company calculated the fair value of the down round provision on the warrants to be less than $1,000 and recorded this as a deemed dividend (“Deemed Dividend N”). In addition, as a result of the 2018 Inducement Agreement, the exercise price of the Convertible Promissory Note Warrants was further adjusted to $11.25. At the time the exercise price was adjusted, the Company calculated the fair value of the down round provision on the warrants to be less than $1,000 and recorded this as a deemed dividend (“Deemed Dividend O”).
In April 2018, as a result of the 2018 Note Agreement, the exercise price of the Convertible Promissory Note Warrants was adjusted to $4.50. At the time the exercise price was adjusted, the Company calculated the fair value of the down round provision on the warrants to be less than $1,000 and recorded this as a deemed dividend (“Deemed Dividend P”).
In November 2018, as a result of the Amendment Agreement, the exercise price of the Convertible Promissory Note Warrants was adjusted to $2.25. At the time the exercise price was adjusted, the Company calculated the fair value of the down round provision on the warrants to be less than $1,000 and recorded this as a deemed dividend (“Deemed Dividend Q”).
Series C Warrants
In connection with the Series C Preferred Offering, the Company issued 130,857 warrants at an exercise price of $24.45, which contain a down round provision. Series C Warrants are exercisable on the six-month anniversary of the date of issuance and expire 5 years from date they are initially exercisable. The terms of the Series C Warrants prohibit a holder from exercising its Series C Warrants if doing so would result in such holder (together with its affiliates) beneficially owning more than 4.99% of the Company’s outstanding shares of common stock after giving effect to such exercise, provided that, at the election of a holder and notice to the Company, such beneficial ownership limitation may be increased to 9.99% of the Company’s outstanding shares of common stock after giving effect to such exercise.
In February 2018, as a result of 2018 Purchase Agreement, the exercise price of the Series C Warrants was adjusted to $15.60. At the time the exercise price was adjusted, the Company calculated the fair value of the down round provision on the warrants to be approximately $58,000 and recorded this as a deemed dividend (“Deemed Dividend R”). In addition, as a result of the 2018 Inducement Agreement, the exercise price of the Series C Warrants was further adjusted to $11.25 as a result of the Exercise Price Reduction discussed above.
In April 2018, as a result of the 2018 Note Agreement, the exercise price of the Series C Warrants was adjusted to $4.50. At the time the exercise price was adjusted, the Company calculated the fair value of the down round provision on the warrants to be approximately $45,000 and recorded this as a deemed dividend (“Deemed Dividend S”).
In November 2018, as a result of the Amendment Agreement, the exercise price of the Series C Warrants was adjusted to $2.25. At the time the exercise price was adjusted, the Company calculated the fair value of the down round provision on the warrants to be approximately $4,000 and recorded this as a deemed dividend (“Deemed Dividend T”).
There were 25,037 and 105,820 Series C Warrants exercised during the year ended December 31, 2019 and 2018, respectively, for proceeds to the Company of approximately $56,000 and $476,000, respectively. During the year ended December 31, 2019 and 2018, the intrinsic value of the Series C Warrants exercised was approximately $443,000 and $294,000, respectively.
Creditor Warrants
In the fourth quarter of 2017, the Company entered into Settlement Agreements with the Creditors pursuant to which the Company agreed to issue, to certain of its Creditors, warrants to purchase 7,207 shares of the Company’s common stock at an exercise price of $112.50 per share. The warrants were issued in February 2018. See Note 5 – Long-Term Debt.
April 2018 Warrants
In connection with the issuance of the April 2018 Bridge Notes, the Company issued 243,224 warrants at an exercise price of $11.25 at time of issuance. At issuance, half of these April 2018 Warrants had a five-year term and half had a one-year term. In September 2018, the exercise price was amended to $7.50. At the time of issuance, as discussed in Note 7 - Convertible Notes, the April 2018 Warrants had a fair value of approximately $1.1 million and were recorded as a liability with an offset to debt discount.
In April 2019, as a result of the Amendment No.2 Agreement, the exercise price of the April 2018 Warrants was adjusted to $5.40 and all April 2018 Warrants that had a one-year term were amended to have a five-year term. Due to these modifications, the change in fair value of the April 2018 Warrants was calculated to be an expense of approximately $0.7 million which is included in loss on modification of warrants in the consolidated statements of operations for the year ended December 31, 2019.
During the year ended December 31, 2019, 51,708 April 2018 Warrants were exercised for proceeds to the Company of $279,000. During the year ended December 31, 2019, the intrinsic value of the April 2018 Warrants exercised was approximately $128,000.
Advisor Warrants
At the time of the 2018 Note Agreement, the Company issued 15,466 warrants with an exercise price of $11.25 to a financial advisor. At the time of issuance, as discussed in Note 7 - Convertible Notes, the Advisor Warrants had a fair value of approximately $0.1 million and were recorded as a liability with an offset to debt discount.
Q3 2018 Warrants
In connection with the issuance of the Q3 2018 Bridge Notes, the Company issued 196,340 warrants with an exercise price of $11.25 at time of issuance. Half of these Q3 2018 Warrants were issued with a five-year term and half with a one-year term. At the time of issuance, as discussed in Note 7 - Convertible Notes, the Q3 2018 Warrants had a fair value of approximately $0.7 million and were recorded as a liability with an offset to debt discount. In September 2018, the exercise price was modified to $7.50. The Company calculated the change in fair value due to repricing to be an expense of approximately $0.1 million which is included in warrant revaluation in the consolidated statements of operations for the year ended December 31, 2018.
In April 2019, as a result of the Amendment No.2 Agreement, the exercise price of the Q3 2018 Warrants was adjusted to $5.40 and all Q3 2018 Warrants that had a one-year term were amended to have a five-year term. Due to these modifications, the change in fair value of the Q3 2018 Warrants was calculated to be an expense of approximately $0.4 million which is included in loss on modification of warrants in the consolidated statements of operations for the year ended December 31, 2019.
There were 53,610 Q3 2018 Warrants exercised during the year ended December 31, 2019 for proceeds to the Company of $289,000. During the year ended December 31, 2019, the intrinsic value of the Q3 2018 Warrants exercised was approximately $133,382.
Q4 2018 Warrants
In connection with the issuance of the Q4 2018 Bridge Notes, the Company issued 300,115 warrants with an exercise price of $5.40 at time of issuance and a five-year term. At the time of issuance, as discussed in Note 7 -
Convertible Notes, the Q4 2018 Warrants had a fair value of approximately $0.7 million and were recorded as a liability with an offset to debt discount.
There were 173,045 Q4 2018 Warrants exercised during the year ended December 31, 2019 for proceeds to the Company of $934,000. During the year ended December 31, 2019, the intrinsic value of the Q4 2018 Warrants exercised was approximately $489,000.
April 2019 Warrants
In connection with the issuance of the April 2019 Bridge Notes, the Company issued 147,472 warrants with an exercise price of $5.40 and a five-year term. At the time of issuance, as discussed in Note 7 - Convertible Notes, the April 2019 Warrants had a fair value of approximately $1.0 million and were recorded as a liability with an offset to debt discount.
May 2019 Warrants
In connection with the issuance of the May 2019 Bridge Notes, the Company issued 154,343 warrants with an exercise price of $5.40 and a five-year term. At the time of issuance, as discussed in Note 7 - Convertible Notes, the May 2019 Warrants had a fair value of approximately $0.9 million and were recorded as a liability with an offset to debt discount.
Deemed Dividends
As discussed above, certain of our preferred stock and warrant issuances contain down round provisions which require us to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS.
There were no dividends recorded in 2019. The following represents a summary of the dividends recorded for the year ended December 31, 2018:
|
|
|
|
|
|
Amount Recorded
|
Deemed Dividends
|
|
(in thousands)
|
|
|
|
|
Dividends resulting from the 2018 Purchase Agreement
|
|
|
|
Deemed Dividend A
|
|
$
|
1,358
|
Deemed Dividend E
|
|
|
829
|
Deemed Dividend G
|
|
|
62
|
Deemed Dividend J
|
|
|
8
|
Deemed Dividend N
|
|
|
*
|
Deemed Dividend R
|
|
|
58
|
|
|
|
|
Dividends resulting from the 2018 Inducement Agreement
|
|
|
|
Deemed Dividend B
|
|
|
40
|
Deemed Dividend F
|
|
|
1,154
|
Deemed Dividend K
|
|
|
5
|
Deemed Dividend O
|
|
|
*
|
|
|
|
|
Dividends resulting from the 2018 Note Agreement
|
|
|
|
Deemed Dividend C
|
|
|
216
|
Deemed Dividend H
|
|
|
63
|
Deemed Dividend L
|
|
|
10
|
Deemed Dividend P
|
|
|
*
|
Deemed Dividend S
|
|
|
45
|
|
|
|
|
Dividends resulting from the Amendment Agreement
|
|
|
|
Deemed Dividend D
|
|
|
361
|
Deemed Dividend I
|
|
|
5
|
Deemed Dividend M
|
|
|
4
|
Deemed Dividend Q
|
|
|
*
|
Deemed Dividend T
|
|
|
4
|
|
|
|
|
Total 2018 Deemed Dividends
|
|
$
|
4,222
|
|
|
|
|
* Represents less than one thousand dollars
12. FAIR VALUE
FASB guidance on fair value measurements, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements for our financial assets and liabilities, as well as for other assets and liabilities that are carried at fair value on a recurring basis in our consolidated financial statements.
FASB guidance establishes a three-level fair value hierarchy based upon the assumptions (inputs) used to price assets or liabilities. The three levels of inputs used to measure fair value are as follows:
Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2—Observable inputs other than those included in Level 1, such as quoted prices for similar assets and liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets; and
Level 3—Unobservable inputs reflecting our own assumptions and best estimate of what inputs market participants would use in pricing the asset or liability.
Common Stock Warrant Liabilities.
Certain of our issued and outstanding warrants to purchase shares of common stock do not qualify to be treated as equity and, accordingly, are recorded as a liability. We are required to record these instruments at fair value at each reporting date and changes are recorded as a non-cash adjustment to earnings. The gains or losses included in earnings are reported in other income (expense) in our consolidated statement of operations.
2016 Warrant Liability
The Company has a warrant liability related to warrants issued in January 2016 (the “2016 Warrant Liability”) and it represents the fair value of such warrants, of which, 357 warrants remain outstanding as of December 31, 2019.
In March 2018, a portion of the 2016 Warrant Liability was part of a settlement agreement pursuant to a lawsuit that was filed against the Company by one of the warrant holders. As such, approximately $0.4 million of the warrant liability, representing 1,347 warrants, was canceled on the date of the settlement agreement and replaced by amounts that were recorded as other current liabilities. For further detail, see discussion of the Crede Agreement in Note 8 – Accrued Expenses and Other Current Liabilities.
The 2016 Warrant Liability is considered a Level 3 financial instrument and was valued using the Monte Carlo methodology. As of December 31, 2019, assumptions and inputs used in the valuation of the common stock warrants include: remaining life to maturity of one year; annual volatility of 140%; and a risk-free interest rate of 1.59%. As of December 31, 2018, assumptions and inputs used in the valuation of the 2016 Warrant Liability include: remaining life to maturity of two years; annual volatility of 176%; and a risk-free interest rate of 2.48%
Bridge Note Warrant Liabilities
During 2019 and 2018, the Company issued 154,343 of May 2019 Warrants, 147,472 of April 2019 Warrants, 243,224 of April 2018 Warrants, 15,466 of Advisor Warrants, 196,340 of Q3 2018 Warrants and 300,115 of Q4 2018 Warrants. All of these warrants issuances were classified as warrant liabilities (the “Bridge Note Warrant Liabilities”). See Note 6 - Convertible Notes for further discussion of each warrant.
The Bridge Note Warrant Liabilities are considered Level 3 financial instruments and were valued using the Black Scholes model. As of December 31, 2019, assumptions used in the valuation of the Bridge Note Warrant Liabilities include: remaining life to maturity of 2.3 to 4.4 years; annual volatility of 141% to 163%; and risk free rate of 1.58% to 1.65%. As of December 31, 2018, assumptions used in the valuation of the Bridge Note Warrant Liabilities include: remaining life to maturity of 0.3 to 5.0 years; annual volatility of 85% to 162%; and risk free rate of 2.45% to 2.63%.
During the years ended December 31, 2019 and 2018, the change in the fair value of the warrant liabilities measured using significant unobservable inputs (Level 3) were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
Dollars in Thousands
|
|
|
|
|
|
Year Ended December 31, 2019
|
|
|
|
2016 Warrant
|
|
Bridge Note
|
|
Total Warrant
|
|
|
|
Liability
|
|
Warrant Liabilities
|
|
Liabilities
|
|
Beginning balance at January 1
|
|
$
|
116
|
|
$
|
1,016
|
|
$
|
1,132
|
|
Additions:
|
|
|
–
|
|
|
1,858
|
|
|
1,858
|
|
Total (gains) losses:
|
|
|
|
|
|
|
|
|
|
|
Revaluation recognized in earnings
|
|
|
(46)
|
|
|
(370)
|
|
|
(416)
|
|
Modification recognized in earnings
|
|
|
–
|
|
|
1,128
|
|
|
1,128
|
|
Deductions – warrant exercises
|
|
|
–
|
|
|
(2,364)
|
|
|
(2,364)
|
|
Balance at December 31
|
|
$
|
70
|
|
$
|
1,268
|
|
$
|
1,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
|
|
2016 Warrant
|
|
Bridge Note
|
|
Total Warrant
|
|
|
|
Liability
|
|
Warrant Liabilities
|
|
Liabilities
|
|
Beginning balance at January 1
|
|
$
|
841
|
|
$
|
–
|
|
$
|
841
|
|
Additions:
|
|
|
–
|
|
|
2,665
|
|
|
2,665
|
|
Total (gains) losses:
|
|
|
|
|
|
|
|
|
|
|
Revaluation recognized in earnings
|
|
|
(269)
|
|
|
(1,792)
|
|
|
(2,061)
|
|
Modification recognized in earnings
|
|
|
–
|
|
|
143
|
|
|
143
|
|
Deductions – warrant liability settlement
|
|
|
(456)
|
|
|
–
|
|
|
(456)
|
|
Balance at December 31
|
|
$
|
116
|
|
$
|
1,016
|
|
$
|
1,132
|
|
Derivative Liabilities.
Certain of our issued and outstanding convertible notes contain features that are considered derivative instruments and are required to bifurcated from the debt host and accounted for separately as derivative liabilities. The estimated fair value of the derivatives will be remeasured at each reporting date and any change in estimated fair value of the derivatives will be recorded as non-cash adjustments to earnings. The gains or losses included in earnings are reported in other income (expense) in our consolidated statement of operations.
Bridge Notes Redemption Feature
At the time of the Bridge Note issuances, the Company recorded derivative instruments as liabilities with an initial fair value of approximately $0.3 million. The valuations were performed using the “with and without” approach, whereby the Bridge Notes were valued both with the embedded derivative and without, and the difference in values was recorded as the derivative liability. In November 2018, the conversion price of the April 2018 Bridge Note and the Q3 2018 Bridge Note was amended. The amendment was treated as an extinguishment which resulted in less than $0.1 million of derivative liabilities being written off in November 2018. See Note 6 - Convertible Notes for further discussion.
Conversion Option
The Company recorded derivative liabilities related to the Conversion Option of the Exchange Notes issued during the year ended December 31, 2018 with an initial fair value of approximately $0.4 million. The valuations were performed using the Monte Carlo methodology. Approximately $0.1 million and $0.3 million of Conversion Option derivative liabilities were written off due to Exchange Note conversions during the years ended December 31, 2019 and 2018, respectively. See Note 6 - Convertible Notes for further discussion.
During the years ended December 31, 2019 and 2018, the change in the fair value of the derivative liabilities was comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
|
|
Bridge Notes
|
|
|
|
|
|
|
|
|
Redemption
|
|
Conversion
|
|
Total Derivative
|
|
|
Feature
|
|
Option
|
|
Liabilities
|
Beginning balance at January 1
|
|
$
|
30
|
|
$
|
32
|
|
$
|
62
|
Deductions - write-off in conjunction with convertible note conversions
|
|
|
(438)
|
|
|
(39)
|
|
|
(477)
|
Total loss:
|
|
|
|
|
|
|
|
|
|
Revaluation recognized in earnings
|
|
|
408
|
|
|
7
|
|
|
415
|
Balance at December 31
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
|
Bridge Notes
|
|
|
|
|
|
|
|
|
Redemption
|
|
Conversion
|
|
Total Derivative
|
|
|
Feature
|
|
Option
|
|
Liabilities
|
Beginning balance at January 1
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
Additions:
|
|
|
269
|
|
|
383
|
|
|
652
|
Deductions - write-off in conjunction with convertible note conversions
|
|
|
—
|
|
|
(301)
|
|
|
(301)
|
Total gain:
|
|
|
|
|
|
|
|
|
|
Extinguishment recognized in earnings
|
|
|
(22)
|
|
|
—
|
|
|
(22)
|
Revaluation recognized in earnings
|
|
|
(217)
|
|
|
(50)
|
|
|
(267)
|
Balance at December 31
|
|
$
|
30
|
|
$
|
32
|
|
$
|
62
|
13. EQUITY INCENTIVE PLAN
The Company’s 2006 Equity Incentive Plan (the "2006 Plan") was terminated as to future awards on July 12, 2016. The Company’s 2017 Stock Option and Incentive Plan (the "2017 Plan") was adopted by the Company’s stockholders on June 5, 2017 and there were 44,444 shares of common stock reserved for issuance under the 2017 Plan. The 2017 Plan will expire on June 5, 2027.
The Plan is administered by the Compensation Committee of the Board of Directors (the “Committee”), which has the authority to set the number, exercise price, term and vesting provisions of the awards granted under the Plan, subject to the terms thereof. Either incentive or non-qualified stock options may be granted to employees of the Company, but only non-qualified stock options may be granted to non-employee directors and advisors. However, in either case, the Plan requires that stock options must be granted at exercise prices not less than the fair market value of the common stock on the date of the grant. Options issued under the plan vest over periods as determined by the Committee and expire 10 years after the date the option was granted.
The Company accounts for all stock-based compensation payments to employees and directors, including grants of employee stock options, at fair value and expenses the benefit in operating expense in the consolidated statements of operations over the service period of the awards. The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option pricing model, which requires various assumptions including estimating stock price volatility, expected life of the stock option, risk free interest rate and estimated forfeiture rate.
Amendment of the 2017 Stock Option and Incentive Plan
On January 31, 2018, at a special meeting of the stockholders of the Company, the stockholders approved an amendment and restatement of the Company’s 2017 Stock Option and Incentive Plan (the “2017 Plan”) to:
|
·
|
|
increase the aggregate number of shares authorized for issuance under the 2017 Plan by 359,300 shares to 403,744 shares;
|
|
·
|
|
increase the maximum number of shares that may be granted in the form of stock options or stock appreciation rights to any one individual in any one calendar year and the maximum number of shares underlying any award intended to qualify as performance-based compensation to any one individual in any performance cycle, in each case to 66,667 shares of common stock; and
|
|
·
|
|
add an “evergreen” provision, pursuant to which the aggregate number of shares authorized for issuance under the 2017 Plan will be automatically increased each year on January 1st, beginning on January 1, 2019, by 5% of the number of shares of common stock issued and outstanding on the immediately preceding December 31st, or such lesser number of shares determined by the Company’s Board of Directors or Compensation Committee.
|
Stock Options.
The Company accounts for all stock-based compensation payments to employees and directors, including grants of employee stock options, at fair value at the date of grant and expenses the benefit in operating expense in the condensed consolidated statements of operations over the service period of the awards. The Company records the expense for stock-based compensation awards subject to performance-based milestone vesting over the remaining service period when management determines that achievement of the milestone is probable. Management evaluates when the achievement of a performance-based milestone is probable based on the expected satisfaction of the performance conditions as of the reporting date. The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option pricing model, which requires various assumptions including estimating stock price volatility, expected life of the stock option, risk free interest rate and estimated forfeiture rate.
During the year ended December 31, 2019, The Company granted stock options to employees and directors to purchase up to 292,604 shares of common stock at a weighted average exercise price of $2.36. These awards have vesting periods of up to four years and had a weighted average grant date fair value of $2.15. The fair value calculation of options granted during 2019 used the follow assumptions: risk free interest rates of 1.60% to 2.53%, based on the U.S. Treasury yield in effect at the time of grant; expected life of six years; and volatility of 133% to 139% based on historical volatility of the Company’s common stock over a time that is consistent with the expected life of the option.
The following table summarizes stock option activity under our plans during the year ended December 31, 2019:
|
|
|
|
|
|
|
|
Number of
|
|
Weighted-Average
|
|
|
Options
|
|
Exercise Price
|
Outstanding at January 1, 2019
|
|
224,895
|
|
$
|
15.90
|
Granted
|
|
292,604
|
|
|
2.36
|
Forfeited
|
|
(27,169)
|
|
|
6.03
|
Outstanding at December 31, 2019
|
|
490,330
|
|
$
|
8.30
|
Exercisable at December 31, 2019
|
|
181,705
|
|
$
|
13.48
|
As of December 31, 2019, there were 413,174 options that were vested or expected to vest with an aggregate intrinsic value of zero and a remaining weighted average contractual life of 8.7 years.
During the year ended December 31, 2018, there were 224,365 options granted with a weighted average exercise price of $10.50 and 15,236 options forfeited with a weighted average exercise price of $29.94.
During the years ended December 31, 2019 and 2018, we recorded compensation expense for all stock awards of $0.7 million and $0.5 million, respectively, within operating expense in the accompanying statements of operations. As of December 31, 2019, the unrecognized compensation expense related to unvested stock awards was $1.7 million, which is expected to be recognized over a weighted-average period of 2.0 years.
14. SALES SERVICE REVENUE, NET AND ACCOUNTS RECEIVABLE
ASC Topic 606, “Revenue from contracts with customers”
On January 1, 2018, the Company adopted ASC 606 that amends the guidance for the recognition of revenue from contracts with customers to transfer goods and services by using the modified-retrospective method applied to any contracts that were not completed as of January 1, 2018. The Company performed a comprehensive review of its existing revenue arrangements following the five-step model:
Step 1: Identification of the contract with the customer. Sub-steps include determining the customer in a contract; Initial contract identification and determine if multiple contracts should be combined and accounted for as a single transaction.
Step 2: Identify the performance obligation in the contract. Sub-steps include identifying the promised goods and services in the contract and identifying which performance obligations within the contract are distinct.
Step 3: Determine the transaction price. Sub-steps include variable consideration, constraining estimates of variable consideration, the existence of a significant financing component in the contract, noncash consideration and consideration payable to a customer.
Step 4: Allocate transaction price. Sub-steps include assessing the amount of consideration to which the Company expects to be entitled in exchange for transferring the promised goods or services to the customer.
Step 5: Satisfaction of performance obligations. Sub-steps include ascertaining the point in time when an asset is transferred to the customer and the customer obtains control of the asset upon which time the Company recognizes revenue.
Based on the Company's analysis, there were no changes identified that impacted the amount or timing of revenues recognized under the new guidance as compared to the previous guidance (ASC 605). Additionally, the Company's analysis indicated that there were no changes to how costs to obtain and fulfill our customer contracts would be recognized under the new guidance as compared to the previous guidance. Accordingly, the initial application of the new revenue standard did not result in the recognition of a cumulative effect adjustment to the opening balance of accumulated deficit as of January 1, 2018.
Nature of Contracts and Customers
The Company’s contracts and related performance obligations are similar for its customers and the sales process for all customers starts upon the receipt of requisition forms from the customers for patient diagnostic testing and the execution of contracts for biomarker testing and clinical research. Payment terms for the services provided are 30 days, unless separately negotiated.
Diagnostic testing
Control of the laboratory testing services is transferred to the customer at a point in time. As such, the Company recognizes revenue for laboratory testing services at a point in time based on the delivery method (web-portal access or fax) for the patient’s laboratory report, per the contract.
Clinical research grants
Control of the clinical research services are transferred to the customer over time. The Company will recognize revenue utilizing the “effort based” method, measuring its progress toward complete satisfaction of the performance obligation.
Biomarker testing and clinical project services
Control of the biomarker testing and clinical project services are transferred to the customer over time. The Company utilizes an “effort based” method of assessing performance and measures progress towards satisfaction of the performance obligation based upon the delivery of results.
The Company generates revenue from the provision of diagnostic testing provided to patients, biomarker testing provided to bio-pharma customers and clinical research grants funded by both bio-pharma customers and government health programs.
Disaggregation of Revenues by Transaction Type
We operate in one business segment and, therefore, the results of our operations are reported on a consolidated basis for purposes of segment reporting, consistent with internal management reporting. Service revenue, net for the years ended December 31, 2019 and 2018 was as follows (prior-period amounts are not adjusted under the modified-retrospective method of adoption):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
(dollars in thousands)
|
|
Diagnostic Testing
|
|
Biomarker Testing
|
|
Total
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Medicaid
|
|
$
|
28
|
|
$
|
50
|
|
$
|
—
|
|
$
|
—
|
|
$
|
28
|
|
$
|
50
|
Medicare
|
|
|
1,669
|
|
|
1,000
|
|
|
—
|
|
|
—
|
|
|
1,669
|
|
|
1,000
|
Self-pay
|
|
|
34
|
|
|
138
|
|
|
—
|
|
|
—
|
|
|
34
|
|
|
138
|
Third party payers
|
|
|
1,725
|
|
|
960
|
|
|
—
|
|
|
—
|
|
|
1,725
|
|
|
960
|
Contract diagnostics
|
|
|
—
|
|
|
—
|
|
|
595
|
|
|
1,187
|
|
|
595
|
|
|
1,187
|
Service revenue, net
|
|
$
|
3,456
|
|
$
|
2,148
|
|
$
|
595
|
|
$
|
1,187
|
|
$
|
4,051
|
|
$
|
3,335
|
Revenue from the Medicare and Medicaid programs account for a portion of the Company’s patient diagnostic service revenue. Laws and regulations governing those programs are extremely complex and subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates will change by a material amount in the near term.
Revenue Recognition
Revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price using the expected value method based on historical experience. The Company does not typically enter arrangements where multiple contracts can be combined as the terms regarding services are generally found within a single agreement/requisition form. The Company derives its revenues from three types of transactions: diagnostic testing (“Diagnostic”), and clinical research grants from state and federal research programs, and other revenues from the Company’s ICP technology and bio-pharma projects encompassing genetic diagnostics (collectively “Biomarker”).
Deferred revenue
Deferred revenue, or unearned revenue, refers to advance payments for products or services that are to be delivered in the future. The Company records such prepayment of unearned revenue as a liability, as revenue that has not yet been earned, but represents products or services that are owed to a customer. As the product or service is delivered over time, the Company recognizes the appropriate amount of revenue from deferred revenue. As of December 31, 2019 and 2018, the deferred revenue was $35,000 and $49,000, respectively.
Contractual Allowances and Adjustments
We are reimbursed by payers for services we provide. Payments for services covered by payers average less than billed charges. We monitor revenue and receivables from payers and record an estimated contractual allowance for certain revenue and receivable balances as of the revenue recognition date to properly account for anticipated differences between amounts estimated in our billing system and amounts ultimately reimbursed by payers. Accordingly, the total revenue and receivables reported in our consolidated financial statements are recorded at the amounts expected to be received from these payers. For service revenue, the contractual allowance is estimated based on several criteria, including unbilled claims, historical trends based on actual claims paid, current contract and reimbursement terms and changes in customer base and payer/product mix. The billing functions for the remaining portion of our revenue are contracted and fixed fees for specific services and are recorded without an allowance for contractual discounts. The following table presents our revenues initially recognized for each associated payer class during the year ended December 31, 2019 and 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
For the Year Ended December 31,
|
|
|
|
|
Contractual Allowances and
|
|
Revenues, net of Contractual
|
|
|
Gross Revenues
|
|
adjustments
|
|
Allowances and adjustments
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Medicaid
|
|
$
|
31
|
|
$
|
86
|
|
$
|
(3)
|
|
$
|
(36)
|
|
$
|
28
|
|
$
|
50
|
Medicare
|
|
|
1,686
|
|
|
1,019
|
|
|
(17)
|
|
|
(19)
|
|
|
1,669
|
|
|
1,000
|
Self-pay
|
|
|
34
|
|
|
138
|
|
|
—
|
|
|
—
|
|
|
34
|
|
|
138
|
Third party payers
|
|
|
5,785
|
|
|
2,358
|
|
|
(4,060)
|
|
|
(1,398)
|
|
|
1,725
|
|
|
960
|
Contract diagnostics
|
|
|
595
|
|
|
1,187
|
|
|
—
|
|
|
—
|
|
|
595
|
|
|
1,187
|
|
|
|
8,131
|
|
|
4,788
|
|
|
(4,080)
|
|
|
(1,453)
|
|
|
4,051
|
|
|
3,335
|
Clinical research grants and other
|
|
|
44
|
|
|
113
|
|
|
—
|
|
|
—
|
|
|
44
|
|
|
113
|
|
|
$
|
8,175
|
|
$
|
4,901
|
|
$
|
(4,080)
|
|
$
|
(1,453)
|
|
$
|
4,095
|
|
$
|
3,448
|
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 year ended December 31, 2019 and 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
Revenues, net of
|
|
|
|
|
(dollars in thousands)
|
|
Contractual Allowances
|
|
Allowances for doubtful
|
|
|
|
|
and adjustments
|
|
accounts
|
|
Total
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Medicaid
|
|
$
|
28
|
|
$
|
50
|
|
$
|
(28)
|
|
$
|
(50)
|
|
$
|
—
|
|
$
|
—
|
Medicare
|
|
|
1,669
|
|
|
1,000
|
|
|
(251)
|
|
|
(150)
|
|
|
1,418
|
|
|
850
|
Self-pay
|
|
|
34
|
|
|
138
|
|
|
—
|
|
|
—
|
|
|
34
|
|
|
138
|
Third party payers
|
|
|
1,725
|
|
|
960
|
|
|
(689)
|
|
|
(384)
|
|
|
1,036
|
|
|
576
|
Contract diagnostics
|
|
|
595
|
|
|
1,187
|
|
|
—
|
|
|
—
|
|
|
595
|
|
|
1,187
|
|
|
|
4,051
|
|
|
3,335
|
|
|
(968)
|
|
|
(584)
|
|
|
3,083
|
|
|
2,751
|
Clinical research grants and other
|
|
|
44
|
|
|
113
|
|
|
—
|
|
|
—
|
|
|
44
|
|
|
113
|
|
|
$
|
4,095
|
|
$
|
3,448
|
|
$
|
(968)
|
|
$
|
(584)
|
|
$
|
3,127
|
|
$
|
2,864
|
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 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 consolidated statements of operations.
Accounts Receivable
The Company has provided an allowance for potential credit losses, which has been determined based on management’s industry experience. The Company grants credit without collateral to its patients, most of who are insured under third party payer agreements.
The following summarizes the mix of receivables for the years ended December 31, 2019 and 2018:
|
|
|
|
|
|
|
(dollars in thousands)
|
|
December 31, 2019
|
|
December 31, 2018
|
Medicaid
|
|
$
|
107
|
|
$
|
82
|
Medicare
|
|
|
814
|
|
|
633
|
Self-pay
|
|
|
88
|
|
|
108
|
Third party payers
|
|
|
2,203
|
|
|
1,382
|
Contract diagnostic services
|
|
|
36
|
|
|
193
|
|
|
$
|
3,248
|
|
$
|
2,398
|
Less allowance for doubtful accounts
|
|
|
(2,674)
|
|
|
(1,708)
|
Accounts receivable, net
|
|
$
|
574
|
|
$
|
690
|
The following table presents the roll-forward of the allowance for doubtful accounts for the year ended December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for
|
|
|
|
|
|
Doubtful
|
(dollars in thousands)
|
|
|
|
|
Accounts
|
Balance, January 1, 2019
|
|
|
|
|
$
|
(1,708)
|
Collection Allowance:
|
|
|
|
|
|
|
Medicaid
|
|
$
|
(28)
|
|
|
|
Medicare
|
|
|
(251)
|
|
|
|
Third party payers
|
|
|
(689)
|
|
|
|
|
|
|
(968)
|
|
|
|
Bad debt expense
|
|
$
|
2
|
|
|
|
Total charges
|
|
|
|
|
|
(966)
|
Balance, December 31, 2019
|
|
|
|
|
$
|
(2,674)
|
Customer Revenue and Accounts Receivable Concentration
Customer revenue and accounts receivable concentration amounted to the following for the identified periods.
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Year Ended
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December 31,
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2019
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|
2018
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|
Percentage of net sales by customer:
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|
|
|
|
|
Customer A
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|
19
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%
|
33
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%
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Customer B
|
|
11
|
|
*
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|
Customer C
|
|
*
|
|
*
|
|
|
|
|
|
|
|
* represents less than 10%
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Percentage of total accounts receivable by customer:
|
|
|
|
|
|
|
Customer A
|
|
*
|
|
|
23
|
%
|
Customer B
|
|
17
|
%
|
|
*
|
|
Customer C
|
|
12
|
%
|
|
*
|
|
|
|
|
|
|
|
|
* represents less than 10%
|
|
|
|
|
|
|
15. SUBSEQUENT EVENTS
The Company has evaluated events and transactions subsequent to December 31, 2019 through the date the consolidated financial statements were issued.
Strategic Partnership
On March 16, 2020, the Company announced that it had completed a non-cash transaction with Poplar Healthcare to establish a strategic partnership that includes the acquisition of the customer base OncoMetrix, Poplar’s hematopathology division. Precipio will assume responsibility for OncoMetrix’s customer base and associated revenues which should provide a substantial improvement to the Company’s laboratory economies of scale. As part of the transaction, three sales representatives of OncoMetrix have transitioned to Precipio. The transition of the customer based involved no exchange of cash or equity with Poplar Healthcare.
Purchase Agreement
On March 26, 2020, the Company entered into a purchase agreement (the “LP 2020 Purchase Agreement”) and a registration rights agreement (the “LP 2020 Registration Rights Agreement”) with Lincoln Park pursuant to which Lincoln Park has agreed to purchase from us, from time to time, up to $10,000,000 of our common stock, subject to certain limitations, during the 24 month term of the LP 2020 Purchase Agreement. Pursuant to the terms of the LP 2020 Registration Rights Agreement, we will file with the SEC the registration statement on form S-1 in order to register for resale under the Securities Act the shares that have been or may be issued to Lincoln Park under the LP 2020 Purchase Agreement.
As consideration for its commitment to purchase shares of our common stock under the LP 2020 Purchase Agreement, we agreed to issue 250,000 commitment shares to Lincoln Park as a commitment fee.
We do not have the right to commence any sales to Lincoln Park under the LP 2020 Purchase Agreement until certain conditions set forth in the LP 2020 Purchase Agreement, all of which are outside of Lincoln Park’s control, have been satisfied, including the registration statement on form S-1 being declared effective by the SEC. Thereafter, under the LP 2020 Purchase Agreement, on any business day selected by us, we may direct Lincoln Park to purchase up to 50,000 shares of our common stock on any such business day, which we refer to as a Regular Purchase in the LP 2020 Purchase Agreement, provided, however, that (i) the Regular Purchase may be increased to up to 80,000 shares, provided that the closing sale price is not below $1.00 on the purchase date and (ii) the Regular Purchase may be increased to up to 100,000 shares, provided that the closing sale price is not below $1.50 on the purchase date. In each case, the maximum amount of any single Regular Purchase may not exceed $1,000,000 per purchase. Lincoln Park has no right to require the Company to sell any shares of common stock to Lincoln Park, but Lincoln Park is obligated to make purchases as we direct, subject to certain conditions. The purchase price for Regular Purchases shall be equal to the lesser of: (i) the lowest sale price of the common shares during the purchase date, or (ii) the average of the three (3) lowest closing sale prices of the common shares during the ten (10) business days prior to the purchase date.
Convertible Note Amendment
On March 26, 2020, the Company entered into an amendment agreement (the “March 2020 Amendment”) amending the terms of that certain Amendment No. 2 Agreement dated April 16, 2019 and the securities purchase agreement dated May 14, 2019. As a result of the March 2020 amendment, (i) the maturity date of the April 2019 Bridge Notes and the May 2019 Bridge Notes was extended three months from April 16, 2020 to July 16, 2020, (ii) the floor price at which conversions may occur under the April 2019 Bridge Notes and the May 2019 Bridge Notes was amended from $2.25 to $0.40, and (iii) guaranteed interest on the April 2019 Bridge Notes and the May 2019 Bridge Notes was amended from twelve months to eighteen months.
The Company is currently reviewing the appropriate accounting treatment related to the March 2020 Amendment and will record the necessary accounting in the first quarter 2020.