Predictive Technology Group, Inc. together with its subsidiaries (collectively, “PTG” or the “Company”) develops and commercializes discoveries and technologies involved in novel molecular diagnostic, therapeutic, and Human Cellular and Tissue-Based Products (“HCT/Ps”). The Company uses this information as the cornerstone in the development of new diagnostics that assess a person’s risk of disease and develop pharmaceutical therapeutics and HCT/Ps for use by healthcare professionals to improve outcomes in their patients. The Company’s corporate headquarters are located in Salt Lake City, Utah.
Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker (CODM) in making decisions regarding resource allocation and assessing performance. The Company operates in two reportable segments, which are differentiated by product. The HCT/P segment offers minimally manipulated tissue products intended for homologous use, prepared utilizing proprietary extraction methods that reduce the loss of important scaffolding, growth factors and cytokines. The Company’s Diagnostics and Therapeutics segment uses data analytics for disease identification and subsequent therapeutic intervention through novel gene-based diagnostics, and companion therapeutics. Lastly, the “Unallocated Corporate” column in the table below represents those headquarters activities that do not qualify as operating segments and which are not allocated to operating segments in information provided to the CODM. We currently sell our products exclusively in the United States.
The accompanying consolidated financial statements have been prepared by Predictive Technology Group, Inc. (the “Company” or “Predictive”) in accordance with U.S. generally accepted accounting principles (“GAAP”) for financial information and pursuant to the applicable rules and regulations of the Securities and Exchange Commission (“SEC”). The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. In the opinion of management, the accompanying financial statements contain all adjustments (consisting of normal and recurring accruals) necessary to present fairly all financial statements in accordance with U.S. GAAP.
The Company operates on a fiscal year basis with the fiscal year ending on June 30.
The Company considers all highly-liquid investments with a maturity of three months or less, when purchased, to be cash equivalents.
These financial statements were prepared on a going concern basis. The going concern basis assumes that the Company will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business.
Predictive Biotech, Inc. (“Predictive Biotech”), a subsidiary of PTG, began operations during the fiscal year ended June 30, 2017. Since the inception of operations, revenues have exceeded cash expenses and the excess contributes to the overall operations of PTG.
In addition, PTG has raised sufficient capital through stock subscriptions and borrowings from accredited investors to fund its obligations under its licenses and other agreements for the development of molecular diagnostics products under license in Predictive Therapeutics, LLC (“Predictive Therapeutics”), a subsidiary of PTG.
Trade accounts receivable are primarily comprised of amounts due from sales of the Company’s HCT/P products and are recorded at the invoiced amount. The allowance for doubtful accounts is based on the Company’s best estimate of the amount of probable losses in the Company’s existing accounts receivable, which is based on historical write-off experience, customer creditworthiness, facts and circumstances specific to outstanding balances, and payment terms. Account balances are charged against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance-sheet credit exposure related to its customers and does not require collateral.
Inventories consist primarily of HCT/Ps produced by Predictive Biotech and laboratory supplies used in genetic testing performed by Predictive Labs. We value inventory at the lower of cost or net realizable value. We determine the cost of inventory using the standard cost method, which approximates actual cost based on a first-in, first-out method. All other costs, including administrative costs, are expensed as incurred.
We analyze our inventory levels at least annually and write down inventory that has a cost basis in excess of its expected net realizable value, or that is considered in excess of normal operating levels, as determined by management. We also reserve for the quantity of quarantined (WIP) inventory that is not expected to pass quality control based on historical averages. The related costs are recognized as cost of goods sold in the consolidated statements of operations.
Stock subscriptions are recorded as contra-equity on the day the subscription agreement is signed and accepted by the Company. All stock subscribed as of the date of these financial statements has been fully paid.
Amounts paid in advance for expenses are accounted for as prepaid expenses and classified as current assets if such amounts are to be recognized as expense within one year from the balance sheet date.
Lab equipment, furniture and computer equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method based on the lesser of estimated useful lives of the related assets or the underlying lease term. Lab equipment items have depreciable lives of 5 years, furniture items have depreciable lives of 5 to 7 years, and computer equipment items have depreciable lives of 3 years. Repair and maintenance costs are charged to expense as incurred. Amortization of assets recorded under capital leases is included in depreciation expense.
Intangible and other long-lived assets are comprised of acquired patents, licenses, trade secrets and other intellectual property. Acquired intangible assets are recorded at fair value and amortized over the shorter of the contractual life or the estimated useful life.
Long-lived assets, such as property, equipment, and definite-lived intangibles subject to depreciation and amortization, as well as acquisition costs of subsidiaries, are reviewed for impairment annually, typically at the beginning of the fourth fiscal quarter, or whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Such events and circumstances may include sweeping regulatory changes, shifts in market demand that would negatively impact revenue, overall industry deterioration, dramatic increase in the number of competitors, rapidly increasing costs related to production inputs, significant changes in Company management or Company strategy, or significant litigation. The Company first assesses qualitative factors above to determine whether it is necessary to perform the quantitative impairment test to identify any impairment loss.
Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset or asset group to estimated future undiscounted net cash flows, or fair value, of the related asset or group of assets over their remaining lives.
As noted in Item 3 above, certain of the Company’s patents are currently subject to litigation to determine whether the seller of the patents had satisfactory title to the patents that were then sold to the Company. These patents have a carrying value of $6,850,490 on our consolidated balance sheet as of June 30, 2019. While the litigation is in its early stages and may reach a broad range of possible outcomes, we have determined that it is at least reasonably possible that the patents may become impaired in the near term depending on the information gained during the legal discovery process and the outcome of the litigation.
We derive our revenue primarily from sales of HCT/P products to clinicians. Revenue is recognized when control of the product passes to the customer, typically upon confirmation of delivery of the product to the customer. As our products must remain frozen during transit, we typically ship our products overnight. Revenue is recognized in an amount that reflects the expected consideration to be received in exchange for such goods or services. As such, customer orders are recorded as deferred revenue prior to delivery of products or services ordered.
Generally, we require authorization from a credit card or verification of receipt of payment before we ship products to customers. From time to time we grant credit to our customers with normal credit terms (typically 30 days). We do not recognize assets associated with costs to obtain or fulfill a contract with a customer, as the amortization period for any such costs if capitalized would be one year or less.
Shipping and handling is considered a fulfillment activity, as it takes place prior to the customer obtaining control of the product, and fees charged to customers are included in net revenue upon completion of our performance obligation. Shipping and handling expenses are included in cost of sales. We present revenue net of sales taxes, discounts, and expected returns.
We recognize a contract liability when customer payment precedes the completion of our performance obligations.
The following table provides information about deferred revenue from contracts with customers, including significant changes in deferred revenue balances during the period (in thousands).
The Company maintains product liability insurance and has not experienced any liability claims from its product offerings. The Company also offers a warranty to customers providing that its products will be delivered free of any material defects. There have been no material warranty or product liability costs incurred since inception. The Company reviews the adequacy of its accrual on a quarterly basis.
Deferred tax assets and liabilities are recorded to reflect the future tax consequences attributable to the effects of differences between the carrying amounts of existing assets and liabilities for financial reporting and for income tax purposes. Deferred taxes are calculated by applying enacted statutory tax rates and tax laws to future years in which temporary differences are expected to reverse. The impact on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that the rate change is enacted.
The fair value of a financial instrument is the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. Fair value measurements do not include transaction costs. A fair value hierarchy is used to prioritize the quality and reliability of the information used to determine fair values. Categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is defined in the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or inputs that are corroborated by market data.
Concentrations
The Company sells its HCT/P products through its sales force and through a network of distributors. For the years ended June 30, 2019 and 2018, the following distributors’ sales to end customers comprised more than 10% of total sales:
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|
|
|
|
|
|
For the year ended
|
|
Distributor
|
|
June 30, 2019
|
|
June 30, 2018
|
|
Distributor A
|
|
16.1%
|
|
*
|
|
Distributor B
|
|
11.0%
|
|
*
|
|
Distributor C
|
|
*
|
|
10.1%
|
|
* Provided less than 10% for the period
|
There were no end customers comprising more than 10% of sales.
The Company obtains birthing tissue raw materials for its HCT/P products from several third party suppliers and its wholly-owned subsidiary, Cellsure L3C. The following suppliers provided more than 10% of birthing tissues processed by our HCT/P segment:
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|
|
|
|
|
|
|
|
For the year ended
|
|
Distributor
|
|
June 30, 2019
|
|
June 30, 2018
|
|
Supplier A
|
|
37.1%
|
|
19.8%
|
|
Supplier B
|
|
33.7%
|
|
64.1%
|
|
Supplier C
|
|
12.4%
|
|
*
|
|
Cellsure, L3C
|
|
11.7%
|
|
*
|
|
* Provided less than 10% for the period
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Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the reporting periods. Key estimates in the accompanying consolidated financial statements include, among others, revenue recognition, allowances for doubtful accounts and product returns, provisions for obsolete inventory, valuation of long-lived assets, and deferred income tax asset valuation allowances. Actual results could differ materially from these estimates.
-56-
Correction of immaterial errors
During the financial close for the year ended June 30, 2019, the Company discovered an immaterial error in the valuation of capital lease assets and lease obligations reported on the balance sheet as of March 31, 2019 in the Company’s third quarter 10-Q. Specifically, the leasing arrangement was determined to contain elements that were improperly included in the minimum lease payments used to value the leased assets and capital lease obligation; and that are properly accounted for under other guidance. We corrected the error by making certain reclassifications to our consolidated balance sheet as of June 30, 2019. As a result, our Property, plant, and equipment balance was reduced by $508,360, Other current assets was reduced by $988,284, Accrued liabilities increased by $386,204, and our Capital lease obligation decreased by $1,882,848 on our consolidated balance sheet. As the equipment had not been placed in service and no periodic payments had been made as of March 31, 2019, there was no impact to the consolidated statement of operations, the consolidated statement of cash flows, or the consolidated statement of stockholders’ equity as of and for the year ended June 30, 2019.
During the fourth fiscal quarter of the year ended June 30, 2019, the Company completed a valuation of the assets acquired from our purchase of InceptionDX, LLC, with the assistance of third-party valuation experts. The acquisition of InceptionDX, LLC was accounted for as an asset acquisition, because it was determined not to meet the definition of a business under the applicable accounting guidance. Under the guidance, any difference between the purchase consideration for assets acquired in an asset acquisition and the fair values of those assets is allocated to the acquired assets on a relative fair value basis. The fair values determined by the third-party valuation experts resulted in an immaterial classification difference between property, plant, and equipment and trade secrets on our consolidated balance sheets, as reported in our interim consolidated balance sheets on Form 10-Q. As there is no measurement period allowed for asset acquisitions, the company determined that this classification difference was an error. The error was corrected by reclassifying $477,750 from trade secrets to property, plant, and equipment on our consolidated balance sheet as of June 30, 2019. The Company recognized an additional $13,472 of depreciation and amortization expense on our consolidated statement of operations for the year ended June 30, 2019, resulting from the difference in estimated useful lives assigned to the two asset classes.
During the financial close for the year ended June 30, 2019, the Company discovered an immaterial error in its income tax accounting related to the acquisition of Trade Secrets from Taueret Laboratories, LLC (see Note 2) in August 2018. The trade secrets were purchased with common stock warrants. The Company should have recognized an increase in the carrying amount of the trade secrets and a deferred tax liability of $4,620,000 on the consolidated balance sheet resulting from the difference in book and tax basis in the trade secrets. The Company should also have recognized additional amortization expense and income tax benefit on the consolidated statement of operations for the three months ended September 30, 2018 of 38,500; for the three months ended December 31, 2018 of $77,000; and for the three months ended March 31, 2019 of $77,000, totaling $192,500 for the nine months ended March 31, 2019. The error was corrected by recording the increase in the carrying amount of trade secrets, the deferred tax liability, and related amortization and income tax benefit in the fourth quarter of fiscal 2019, which was determined not to be material to the fourth quarter results.
During the financial close for the year ended June 30, 2019, the Company discovered an immaterial error in its income tax accounting related to the acquisition of a license from Juneau in March 2018 (see Note 5). The license was purchased in part with common stock warrants. The Company should have recognized an increase in the carrying amount of the licenses and a deferred tax liability of $3,536,404 on the consolidated balance sheet as of June 30, 2018. The Company should also have recognized additional amortization expense and income tax benefit on the statement of operations of $100,629 for the year ended June 30, 2018 and $258,761 for the nine months ended March 31, 2019. The error was corrected by recording the increased carrying amount of licenses, the deferred tax liability, and related amortization and income tax benefit of $359,391 the fourth quarter of fiscal 2019, which was determined not to be material to the fourth quarter results.
We based our conclusion that the corrections described above are immaterial both individually and in the aggregate on an analysis performed in accordance with the guidance provided by SEC Staff Accounting Bulletins No. 99 – Materiality and No. 108 – Considering the Effects of Prior Year Misstatements.
-57-
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326)” which introduces new guidance for the accounting for credit losses on instruments within its scope. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. For trade receivables, the Company will be required to use a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses which reflects losses that are probable. The guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those years. Early application of the guidance is permitted for all entities for fiscal years beginning after December 15, 2018, including the interim periods within those fiscal years. Application of the amendments is through a cumulative-effect adjustment to retained earnings as of the effective date. The Company is currently evaluating the impact of this update on the consolidated financial statements.
In February 2016, the FASB established Topic 842, Leases, by issuing Accounting Standards Update (ASU) No. 2016-02, which requires lessees to recognize leases on the balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.
The new standard is effective for us on July 1, 2019, with early adoption permitted. We expect to adopt the new standard on its effective date. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. If an entity chooses the second option, the transition requirements for existing leases also apply to leases entered into between the date of initial application and the effective date. The entity must also recast its comparative period financial statements and provide the disclosures required by the new standard for the comparative periods. We expect to adopt the new standard on July 1, 2019 and use the effective date as our date of initial application. Consequently, financial information will not be updated, and the disclosures required under the new standard will not be provided for dates and periods before July 1, 2019.
The new standard provides a number of optional practical expedients in transition. We expect to elect the ‘package of practical expedients’, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. We expect to elect all of the new standard’s available transition practical expedients that are applicable.
The new standard also provides practical expedients for an entity’s ongoing accounting. We currently expect to elect the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, we will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. We also currently expect to elect the practical expedient to not separate lease and non-lease components for all of our leases.
We expect to recognize a right of use asset for operating leases existing on the transition date of approximately $360,000.
-58-
Recently Adopted Accounting Standards
In June 2018, the FASB issued ASU 2018-07, “Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting” (“ASU 2018-07”). ASU 2018-07 supersedes Subtopic 505-50, “Equity—Equity-Based Payments to Non-Employees,” and is effective for all public entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, but no earlier than a company’s adoption date of Topic 606, Revenue from Contracts with Customers. The Company early adopted ASU 2018-07 commencing January 1, 2019, with no material impact on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, “Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” This standard aligns the requirements for capitalizing implementation costs in a cloud computing arrangement service contract with the requirements for capitalizing implementation costs incurred for internal-use software. The new guidance also prescribes the balance sheet, income statement and cash flow classification of the capitalized implementation costs and related amortization expense, and requires additional quantitative and qualitative disclosures. The Company early adopted ASU 2018-15 commencing January 1, 2019, with no material impact on its consolidated financial statements.
NOTE 2 BUSINESS COMBINATIONS AND EQUITY METHOD INVESTMENTS
Predictive Therapeutics, LLC
On April 15, 2015, Global Enterprises Group, Inc. (“GLHO”) acquired 100% of Predictive Therapeutics, LLC. After the acquisition, GLHO changed its name to Predictive Technology Group, Inc. On October 31, 2015, the initial agreement was modified to make certain technical corrections and adjustments for contingencies which were not met at that date. The Company issued a total of 131,058,458 shares of common stock in this transaction. Under this merger agreement, there was a change in control which has been treated for accounting purposes as a reverse recapitalization.
LifeCode Genetics, Inc.,
On November 6, 2015, the Company announced the acquisition of LifeCode Genetics, Inc. (“LifeCode”) as its wholly owned subsidiary. LifeCode held a strategic equity investment of 2,792,292 units of Juneau Biosciences, LLC (“Juneau”). In addition to the development of an assay and related services for the prognosis and monitoring of endometriosis in the infertility market which the Company has licensed, Juneau is developing technologies for the diagnosis of other women’s health conditions.
The Company issued 6,561,870 common shares to acquire LifeCode with an acquisition date fair value of $16,404,675 based on our stock price.
A share exchange agreement was entered into on September 22, 2015 that required the Company to issue an additional 5,718,372 shares to former LifeCode shareholders to meet the terms of the exchange agreement. Using the OTC value (defined as the share price listed on the date of the transaction in the over-the-counter dealer markets and networks) for the additional shares issued results in an increase of the purchase price to $30,700,605, an increase of $14,295,930. A valuation performed by an external valuation specialist supports a September 22, 2015 value of the interest in Juneau of $16,520,150, which resulted in a day one impairment of $14,180,455. Net of the impact of the impairment, the Company recognized a deferred tax liability of $9,827,777 related to differences between book and tax basis arising from the acquisition of Lifecode.
The fair value of the purchase consideration issued to the sellers of LifeCode was allocated to the units of equity acquired, which are included in equity method investments on the consolidated balance sheets.
Juneau reports to its members on a calendar year basis and LifeCode records its distributable share of such reported income using the equity method.
-59-
ReNovo Biotech, Inc.
On March 28, 2016, the Company announced the acquisition of ReNovo Biotech, Inc. as its wholly owned subsidiary. The acquisition provided the Company access to ReNovo Biotech’s cellular, tissue, biomaterial and regenerative medicine products and product candidates. This subsidiary is operated under the name Predictive Biotech, Inc. The Company issued 9,500,000 common shares to effect the acquisition, which was recorded at a fair value of $14,087,000. The fair value of the trade secrets was determined to approximate the value of the common stock paid as consideration. The Company also recognized deferred tax liabilities and goodwill of $5,254,451.
The purchase price was allocated to “trade secrets” including protocols to develop an amniotic allografts and umbilical cord allograft line of products in accordance with the provisions of ASC 805, Business Combinations. Such trade secrets were determined to be recognizable apart from any form of goodwill and are “technology-based”.
Inception DX, LLC
On August 22, 2018, the Company entered into an agreement captioned “Securities Purchase Agreement” with the members of Inception DX, LLC (“Inception”), a Utah limited liability company. Under the terms of the agreement, the Company acquired Inception for 15,500,000 shares of common stock. Inception owns laboratory equipment, partial interest in database records for over 31,900,000 individuals for use in genetics research, 400,000 units in Juneau Biosciences, LLC, initial CLIA registration, CLIA lab protocols, and other assets. Once the CLIA registration is completed, Inception will be used as a CLIA-certified laboratory by Predictive Technology Group, Inc. and its affiliates.
The stock issued was for cash, laboratory equipment, membership units in Juneau Biosciences, LLC (“Juneau units”), and trade secrets related to the DNA database and protocols related to a future use as a CLIA laboratory. The Juneau units were valued based on the value assigned when the Company entered into a subscription to purchase units of Juneau ($1.10 per unit). The equipment will be depreciated over 5 years. The proprietary data, DNA library, protocols, research and methods are classified as trade secrets in our industry. The Company will amortize the trade secrets over an estimated useful life of 15 years.
The stock price on August 22, 2018 was $0.92 per share, indicating a purchase price of $14,260,000 requiring allocation:
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|
|
|
|
|
|
|
|
Assets:
|
|
Amount
|
|
Cash
|
$
|
799,980
|
|
Lab equipment
|
|
1,177,750
|
|
Investment in non-controlling interest
|
|
440,000
|
|
Trade secrets
|
|
11,842,270
|
|
Total purchase price
|
$
|
14,260,000
|
-60-
Taueret Laboratories, LLC Asset Purchase
On August 22, 2018, the Company entered into an agreement captioned “Asset Purchase Agreement” (the “Purchase Agreement”) with Taueret Laboratories, LLC and its members. Under the terms of the Purchase Agreement, the Company issued warrants exercisable for 16,500,000 shares of the Company’s common stock. The warrants were exercisable at fair market value of the Company’s common stock on the closing date. In consideration for the warrants, the Company acquired (i) approximately 1,000 degenerative disc disease related DNA samples, related family records, relevant clinical records (including approximately 600 affected probands) and 800 ancestry matched control samples, (ii) whole exome sequencing data on approximately 300 degenerative disc disease samples, over 800 local controls, and published reference populations, together with initial analysis of the markers, (iii) project plan, study paperwork, promotional study and materials used in the research study, (iv) exclusive use of a DNA biobank that has a collection of over 300,000 samples for multiple diseases that the Company may target, (v) the remaining interest in database records for over 31,900,000 individuals for use in genetics research, and (vi) other assets.
The warrants issued are for proprietary data and methods that are otherwise a trade secret in our industry. Therefore, the Company determined to classify the assets purchased as trade secrets with a 15-year life. The Company used a Black Scholes calculation to determine the valuation of the warrants of $13,860,000. As the purchase of the trade secrets with common stock warrants resulted in a difference between book and tax basis in the trade secrets, the carrying amount of the trade secrets was increased to $18,480,000 to reflect the deferred tax liability of $4,620,000 assumed in the transaction.
The fair value of the warrants was determined using the following inputs to the Black Scholes model:
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|
|
|
|
|
Risk-free interest rate
|
|
2.7%
|
|
|
Expected dividend yield
|
|
0%
|
|
|
Expected life (in years)
|
|
5.0
|
|
|
Expected volatility
|
|
150%
|
|
Expected volatility was calculated from the historical volatility of the Company’s common stock.
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Regenerative Medical Technologies, Inc.
On December 19, 2018 the Company executed a merger with the shareholders of Regenerative Medical Technologies, Inc. (“RMT”), a Utah corporation. The Company acquired RMT for 10,000,000 shares of common stock. RMT holds various assets including (i) models, methods and protocols for collection of birthing tissue and DNA samples, (ii) patient registry models, methods and protocols to collect clinical outcomes and electronic medical records, and (iii) designs and methodologies relating to many initiatives that are complementary to anticipated product offerings and ongoing research, and (iv) other assets.
The fair value of consideration paid was determined based on our stock price of $0.92 on the date of acquisition. In addition, the Company recognized a deferred tax liability of $3,066,667 related to the differences between book and tax basis arising from the acquisition, resulting in a total purchase price of 12,266,667. The Company determined that the assets acquired qualify for treatment as trade secrets within the industry. The trade secrets will be amortized over an estimated useful life of 10 years.
Aggregate amortization expense related to RMT for the year ended June 30, 2019 was $664,444.
Estimated amortization expense for the assets acquired with RMT consists of the following as of June 30, 2019:
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|
|
|
|
Year Ending June 30,
|
|
|
|
2020
|
$
|
1,226,667
|
|
2021
|
|
1,226,667
|
|
2022
|
|
1,226,667
|
|
2023
|
|
1,226,667
|
|
2024
|
|
1,226,667
|
|
Thereafter
|
|
5,468,888
|
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Taueret Laboratories, LLC Acquisition
On March 22, 2019, the Company completed the acquisition of Taueret Laboratories, LLC (“Taueret”) pursuant to the Securities Purchase Agreement (as amended, the “Purchase Agreement”), dated January 1, 2019. Pursuant to the terms of the Purchase Agreement, the Company acquired all of the outstanding units of Taueret. The Company and its affiliates plan to use Taueret’s CLIA-certified laboratory to perform diagnostic testing services.
The Purchase Agreement also specifies that the Company may, at its sole discretion, put certain patents related to the diagnosis and treatment of Preeclampsia (the “Preeclampsia IP”) back to the members of Taueret at any time prior to December 31, 2020 (the “Preeclampsia Option”). On December 31, 2020, an additional payment of $8,547,000 in cash will become due if the Company has not exercised the Preeclampsia Option. After considering the relevant accounting guidance, we determined that the Preeclampsia Option was not part of the business combination with Taueret, because the Preeclampsia Option was included in the Purchase Agreement primarily to benefit the acquirer.
The Company acquired Taueret and the Preeclampsia Option for total consideration of $931,817, net of cash acquired of $85,964. The consideration was paid as 552,995 shares of the Company’s common stock. The common stock was valued at the closing price on the date of the closing of the merger, adjusted for a 20% discount for lack of marketability related to a contractually stipulated lockup provision with a period of one year. The consideration was allocated between the business combination and the Preeclampsia Option on a relative fair value basis with $917,511 allocated to the business combination and $100,000 allocated to the Preeclampsia Option. The Preeclampsia Option was recorded in intangible assets and will be amortized on a straight-line basis over the period the option is exercisable.
Total consideration transferred was allocated to tangible and intangible assets acquired and liabilities assumed based on their fair values as of the acquisition date.
Management estimated the fair value of tangible and intangible assets and liabilities in accordance with the applicable accounting guidance for business combinations and utilized the services of third-party valuation consultants. These amounts are provisional and may be adjusted during the measurement period, which expires no later than one year from the acquisition date, if new information is obtained that, if known, would have affected the amounts recognized as of the acquisition date.
|
|
|
|
|
|
|
Assets:
|
Fair Value
|
|
Current assets
|
$
|
663,262
|
|
Laboratory equipment
|
190,397
|
|
Software
|
239,000
|
|
Intangible Assets
|
311,000
|
|
Total assets acquired
|
1,403,659
|
|
Liabilities:
|
|
|
Accrued liabilities
|
(68,181)
|
|
Capital lease obligation
|
(54,291)
|
|
Total liabilities assumed
|
(122,472)
|
|
Bargain purchase gain
|
(363,676)
|
|
Total fair value of purchase price
|
$
|
917,511
|
|
Consideration allocated to Preeclampsia Option
|
|
100,000
|
|
Total consideration
|
$
|
1,017,511
|
|
Less: Cash acquired
|
|
(85,694)
|
|
Total consideration transferred
|
$
|
931,817
|
-63-
Identifiable intangible assets
The Company acquired intangible assets that consisted of an internally developed laboratory information management system which had an estimated fair value of $239,000, CLIA regulatory licenses with a fair value of $295,000, and customer relationships with a fair value of $16,000. The fair value of the software was determined using the replacement cost method. The fair value of the CLIA licenses were estimated using the excess earnings method. The estimated net cash flows were discounted using a discount rate of 22%, which is based on the estimated internal rate of return for the acquisition and represents the rate that market participants might use to value the intangible assets. The projected cash flows were based on key assumptions such as estimates of revenues and operating profits. The Company will amortize the intangible assets on a straight-line basis over their estimated useful lives of 15 years for the CLIA license and 5 years for the software and customer relationships. This amortization is deductible for income tax purposes.
Bargain purchase gain
Any excess of fair value of acquired net assets over the purchase price (negative goodwill) has been recognized as a gain in the period the acquisition was completed. We have reassessed whether all acquired assets and assumed liabilities have been identified and recognized and performed remeasurements to verify that the consideration paid, assets acquired, and liabilities assumed have been properly valued. The remaining excess has been recognized as a gain in other income and expense in the consolidated statement of operations. The bargain purchase gain partly resulted from the allocation of the total consideration between the business combination and the Preeclampsia Option. We also believe we were able to negotiate a bargain price due to the desire of the sellers to induce the Company to purchase the Preeclampsia Option contemporaneously with the business combination.
Pro forma information
The unaudited pro-forma results presented below include the effects of the Taueret acquisition as if it had been consummated as of July 1, 2017, with adjustments to give effect to pro forma events that are directly attributable to the acquisition which includes adjustments related to the amortization of acquired intangible assets and elimination of transactions related to laboratory services between the Company and Taueret. These unaudited pro forma results are presented for informational purposes only and are not necessarily indicative of what the actual results of operation of the combined company would have been if the acquisition had occurred at the beginning of the period presented nor are they indicative of future results of operations and are not necessarily indicative of results that might have been achieved had the acquisition been consummated as of July 1, 2017.
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30,
|
|
|
|
2019
|
|
2018
|
|
Revenue
|
|
$
|
45,319,882
|
|
$
|
19,670,014
|
|
Loss from operations
|
|
|
(19,975,893)
|
|
|
(12,646,122)
|
|
Net loss
|
|
|
(15,459,895)
|
|
|
(6,381,045)
|
To complete the purchase transaction, the Company incurred immaterial acquisition costs, which were recorded as general and administrative expense. The post-acquisition operations of Taueret did not materially impact the consolidated statement of operations for year ended June 30, 2019.
-64-
NOTE 3 INVENTORIES
|
|
|
|
|
|
|
|
|
As of
|
|
As of
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2019
|
|
2018
|
|
Finished goods
|
$
|
918,199
|
$
|
1,621,745
|
|
Work-in-process
|
|
4,485,349
|
|
2,148,989
|
|
Raw materials and supplies
|
|
371,637
|
|
20,640
|
|
Total inventory on hand
|
$
|
5,775,185
|
$
|
$ 3,791,374
|
NOTE 4 PROPERTY, PLANT AND EQUIPMENT, NET
|
|
|
|
|
|
|
|
|
As of
|
|
As of
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2019
|
|
2018
|
|
Computer equipment
|
$
|
530,815
|
$
|
154,132
|
|
Furniture
|
|
224,324
|
|
36,942
|
|
Lab equipment
|
|
2,469,652
|
|
504,203
|
|
Software
|
|
923,369
|
|
-
|
|
Leasehold improvements
|
|
870,098
|
|
-
|
|
Other fixed assets in progress
|
|
69,886
|
|
234,460
|
|
Lab equipment subject to capital lease
|
|
2,774,907
|
|
-
|
|
Total property, plant, and equipment
|
|
7,863,051
|
|
929,737
|
|
|
|
|
|
|
|
Accumulated depreciation
|
|
(862,851)
|
|
(155,867)
|
|
Accumulated depreciation – leased assets
|
|
(25,759)
|
|
-
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
$
|
6,974,441
|
$
|
773,870
|
Depreciation expense for the years ended June 30, 2019 and 2018 was $731,976 and $150,644, respectively, of which $25,759 and none related to the amortization of assets recorded under capital leases.
-65-
NOTE 5 GOODWILL & INTANGIBLE ASSETS
Intangible assets primarily consist of amortizable purchased licenses, patents, and trade secrets. The following summarizes the amounts reported as intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Amount
|
|
Accumulated Amortization
|
|
|
Net
|
|
Weighted Average Remaining Amortization Period (Years)
|
|
At June 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
Licenses
|
|
$
|
21,337,981
|
|
$
|
(3,275,666)
|
|
$
|
18,062,315
|
|
9.0
|
|
Patents
|
|
|
9,750,000
|
|
|
(2,899,510)
|
|
|
6,850,490
|
|
9.0
|
|
Trade Secrets
|
|
|
56,675,936
|
|
|
(11,339,601)
|
|
|
45,336,335
|
|
8.9
|
|
Other
|
|
|
411,000
|
|
|
(27,069)
|
|
|
383,931
|
|
11.0
|
|
Goodwill
|
|
|
5,254,451
|
|
|
N/A
|
|
|
5,254,451
|
|
N/A
|
|
Total intangible assets
|
|
$
|
93,416,368
|
|
$
|
(17,541,846)
|
|
$
|
75,887,522
|
|
9.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Amount
|
|
Accumulated Amortization
|
|
|
Net
|
|
Weighted Average Remaining Amortization Period (Years)
|
|
At June 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
Licenses
|
|
$
|
21,960,525
|
|
$
|
(997,905)
|
|
$
|
20,962,620
|
|
10.1
|
|
Patents
|
|
|
9,896,050
|
|
|
(2,134,863)
|
|
|
7,761,187
|
|
10.0
|
|
Trade Secrets
|
|
|
14,087,686
|
|
|
(5,991,375)
|
|
|
8,096,311
|
|
2.9
|
|
Goodwill
|
|
|
5,241,451
|
|
|
N/A
|
|
|
5,254,451
|
|
N/A
|
|
Total intangible assets
|
|
$
|
51,185,712
|
|
$
|
(9,124,143)
|
|
$
|
42,074,569
|
|
7.9
|
-66-
Estimated future amortization expense related to intangible assets consists of the following as of June 30, 2019:
|
|
|
|
|
Year Ending June 30
|
|
Amount
|
|
2020
|
$
|
8,908,766
|
|
2021
|
|
8,514,306
|
|
2022
|
|
6,022,890
|
|
2023
|
|
6,022,890
|
|
2024
|
|
6,022,890
|
|
Thereafter
|
|
35,141,328
|
Total amortization expense for the years ended June 30, 2019 and June 30, 2018, was $8,418,388 and $4,422,889 respectively.
Endometriosis license
On December 28, 2016, Predictive Therapeutics and Juneau amended and restated the license agreement dated July 9, 2015. The amended license fees associated with this agreement required minimum monthly payments of $100,000 through April 2017. Beginning in May 2017, minimum monthly payments of $120,000 were required through August 2017, and subsequent payments of $500,000 for the next four consecutive months. The term of the license is equal to the life of the licensed patents.
An additional license fee of $2,000,000 is due and payable once the Company has received profits of $25,000,000 related to the intellectual property licensed under the agreement.
-67-
Upon first commercial sale of the licensed assay, the Company will issue to Juneau common shares with a market value of $2,500,000. Juneau is entitled to a royalty equal to 50% of net sales, adjusted to exclude certain costs and fees, and subject to certain minimums.
In March of 2018, the Company’s licenses with Juneau were amended to reduce the royalty rate and expand the scope of the licenses to include the entire field of endometriosis and pelvic pain in consideration for the issuance of 1,000,000 shares of the Company’s common stock and warrants exercisable for 14,000,000 shares of common stock at $0.80 per share.
In December of 2018 the Company and Juneau agreed to renegotiate the price paid for the license. The warrants issued initially for this license agreement were cancelled, and a new round of warrants was issued with an increased exercise price of $0.90 per share, resulting in a decrease in the value assigned to the license agreement of approximately $4,449,211. The replacement of the warrants resulted in an additional deferred tax liability of $290,263, resulting in a net decrease in carrying value of the licenses of $4,158,948. There was an associated adjustment to amortization expense. The fair value of the replacement warrants were determined using the following inputs to the Black Scholes model:
|
|
|
|
|
|
Risk-free interest rate
|
|
2.7%
|
|
|
Expected dividend yield
|
|
0%
|
|
|
Expected life (in years)
|
|
5.0
|
|
|
Expected volatility
|
|
150%
|
|
Companion diagnostic license
In addition to the license for the commercialization of assays and related services for the prognosis and monitoring of endometriosis in the infertility market, the Company entered into a license agreement with Juneau to use the assay as a companion diagnostic test in conjunction with endometriosis therapeutics that may be developed from intellectual property owned by the Company and Juneau. This license agreement was amended and restated on December 28, 2016.
The agreement initially required a $250,000 license fee which was paid during 2013 and 2014. A subsequent milestone payment of 250,000 shares of Company stock was paid to Juneau on October 19, 2016. Once FDA approval is granted on any companion diagnostic test, a final milestone payment of $250,000 is due.
The agreement requires a 2% royalty to be paid to Juneau on the sale of patented therapeutic products specifically covered by the agreement.
The Company has elected to capitalize the periodic payments when paid, through the development stage, and amortizes the licenses over the life of the underlying patents.
-68-
Patents
On September 22, 2015 certain patents were acquired in exchange for 541,325 Class A Units of Predictive Therapeutics, LLC. There were no contingencies or royalty obligations associated with the purchase of the patents. These patents were recorded on Predictive Therapeutics, LLC’s books at a fair value of $9,750,000.
NOTE 6 EQUITY METHOD INVESTMENT
Juneau Biosciences, LLC
The Company’s investment in Juneau is accounted for under the equity method. The following table summarizes the investment:
|
|
|
|
|
|
|
|
|
|
|
|
As of
June 30, 2019
|
|
|
As of
June 30, 2018
|
|
Carrying amount
|
|
$
|
51,717,719
|
|
|
$
|
55,392,625
|
|
Ownership percentage
|
|
|
48.4
|
%
|
|
|
49.6%
|
On November 6, 2015, the Company acquired 2,792,292 units of Juneau through its acquisition of LifeCode Genetics, Inc. (See Note 2).
On August 1, 2016, the Company entered into agreements to acquire unsecured convertible notes receivable from Juneau from existing noteholders in exchange for common stock of the Company. The face amount of the notes acquired was $2,870,380 and 5,740,760 shares of Company common stock were issued in exchange for the notes. The notes bear interest payable in Juneau units at 12% per annum and were convertible into Class A Units of Juneau at the rate of $1.00 per unit.
-69-
On August 3, 2017, the Company lent Juneau an additional $300,000 pursuant to an unsecured loan agreement. The loan was convertible into Class A Units of Juneau at the rate of $1.00 per unit. On August 8, 2017, the principal was increased. On December 31, 2017, total principal and accrued interest in the amount of $3,685,308 was converted into 3,685,308 Class A Units of Juneau.
In December 2017, the Company and Juneau reached verbal agreement on a stock subscription arrangement. The Company agreed to purchase 15,681,818 Class A Units of Juneau at a price of $1.10 per unit. In early 2018, the terms were finalized and memorialized in a subscription agreement executed by the Company and Juneau. Under the terms of the agreement (as amended), the subscription is to be paid in installments through January 31, 2021. The Company has the right to stop funding the subscription at any time at its sole discretion. Should the Company stop funding the subscription, any units of Juneau issued to the Company but not paid will be cancelled. The agreement includes certain restrictions on the use of funds provided to Juneau under the subscription agreement and grants the Company the right to appoint a minority of Juneau’s Board of Managers. Should the Company elect not to fund the entire subscription, Juneau’s obligations to the Company that are not related to the license agreements (see Note 5) will terminate.
During fiscal 2018, the Company paid invoices for R&D supplies amounting to $184,443 on Juneau’s behalf. The outstanding balance was applied to the Company’s subscription payable to Juneau subsequent to the balance sheet date.
On October 8, 2018, Juneau and the Company agreed to reduce the number of units purchased under the subscription agreement from 15,681,818 to 14,000,000. As a result, 1,681,818 issued but unpaid units were cancelled.
On March 15, 2019, Juneau and the Company agreed to further reduce the number of units purchased under the subscription agreement from 14,000,000 to 13,000,000. As a result, 1,000,000 issued but unpaid units were cancelled.
Amounts due under the subscription agreement are as follows:
|
|
|
|
|
Year Ending June 30,
|
|
2020
|
$
|
6,300,000
|
|
2021
|
|
4,040,610
|
-70-
Summarized financial information for the Company’s equity method investee as of and for its fiscal year end is presented in the following tables:
|
|
|
|
|
|
|
|
Juneau Biosciences, LLC
|
|
|
Year ended December 31, 2018
|
|
Year ended December 31, 2017
|
|
|
|
|
Audited
|
|
Audited
|
|
Revenue (related party)
|
|
$
|
2,554,037
|
$
|
2,443,677
|
|
Gross profit
|
|
|
2,554,037
|
|
2,443,677
|
|
Loss from operations
|
|
|
(2,419,890)
|
|
(45,744)
|
|
Net loss
|
|
|
(2,419,824)
|
|
(45,398)
|
|
Net loss attributable to Predictive Technology Group, Inc.
|
|
|
(1,200,238)
|
|
(22,054)
|
NOTE 7 ACCRUED LIABILITIES
|
|
|
|
|
|
|
|
|
As of
|
|
As of
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2019
|
|
2018
|
|
Employee compensation and benefits
|
$
|
816,451
|
$
|
262,255
|
|
Other
|
|
1,041,320
|
|
772,650
|
|
Total accrued liabilities
|
$
|
1,857,771
|
$
|
1,034,905
|
-71-
NOTE 8 PROMISSORY NOTE
On June 28, 2019, the Company issued an unsecured Promissory Note to an accredited investor in the amount of $400,000. The Promissory Note bears 12% simple interest and matures on June 28, 2021. The Promissory Note may be repaid at any time.
NOTE 9 INCOME TAXES
Income tax benefit consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
58,499
|
|
|
|
-
|
|
Total Current
|
|
|
58,499
|
|
|
|
-
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(4,562,066)
|
|
|
|
(6,301,108)
|
|
State
|
|
|
(853,846)
|
|
|
|
(593,299)
|
|
Total Deferred
|
|
|
(5,415,912)
|
|
|
|
(6,894,407)
|
|
Total income tax benefit
|
|
$
|
(5,357,413)
|
|
|
$
|
(6,894,407)
|
The differences between income taxes at the statutory federal income tax rate and income taxes reported in the consolidated statements of operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Federal income tax benefit at the statutory rate (21% and 28% for the years ended June 30, 2019 and 2018, respectively)
|
|
$
|
(4,364,157)
|
|
|
$
|
(3,647,049)
|
|
|
State income taxes, net of federal benefit
|
|
|
(591,094)
|
|
|
|
(432,582)
|
|
|
Federal tax credits
|
|
|
(90,938)
|
|
|
|
(31,924)
|
|
|
Share based compensation
|
|
|
(88,400)
|
|
|
|
307,252
|
|
|
Bargain purchase gain
|
|
|
(76,372)
|
|
|
|
-
|
|
|
Tax Cut and Jobs Act Impact
|
|
|
-
|
|
|
|
(3,107,428)
|
|
|
Other, net
|
|
|
(146,452)
|
|
|
|
17,324
|
|
|
|
|
$
|
(5,357,413)
|
|
|
$
|
(6,894,407)
|
|
-72-
The significant components of the Company’s deferred tax assets and liabilities were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30,
|
|
|
|
2019
|
|
2018
|
|
Deferred tax assets, net:
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
2,421,965
|
|
$
|
533,586
|
|
Stock compensation expense
|
|
|
4,846,769
|
|
|
2,944,710
|
|
Federal tax credits
|
|
|
90,938
|
|
|
34,861
|
|
Other, net
|
|
|
320,086
|
|
|
-
|
|
Total deferred tax assets
|
|
|
7,679,758
|
|
|
3,513,157
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
(1,451,262)
|
|
|
(91,847)
|
|
Intangible assets
|
|
|
(11,935,159)
|
|
|
(2,024,078)
|
|
Equity method investments
|
|
|
(5,308,082)
|
|
|
(6,314,556)
|
|
Total deferred tax liabilities
|
|
|
(18,694,503)
|
|
|
(8,430,481)
|
|
Net deferred tax liability
|
|
|
(11,014,745)
|
|
|
(4,917,324)
|
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted. The Tax Act made broad and complex changes to the U.S. tax code that affect the Company, including, but not limited to (1) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; (2) requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries; (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations; (5) creating the base erosion anti-abuse tax (BEAT), a new minimum tax; (6) creating a new limitation on deductible interest expense; (7) revising the rules that limit the deductibility of compensation to certain highly compensated executives, and (8) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017.
-73-
In connection with the Company’s analysis of the impact of the Tax Act, the Company recorded a discrete income tax benefit during the quarter ended December 31, 2017 of $3,107,428. This consisted of a net benefit for the corporate rate reduction due to the revaluing of net deferred tax liabilities as a result of the reduction in the federal corporate tax rates. The Company’s net deferred tax liabilities represent temporary differences between the book bases of assets which are greater than their tax bases. Upon the reversal of those temporary differences, the future tax impact will be based on the lower federal corporate tax rate enacted by the Tax Act. The Company has now completed its accounting of the income tax effects of the Tax Act.
As a result of changes made by the Tax Act, Section 162(m) will limit the deduction of compensation, including performance-based compensation, in excess of $1,000,000 paid to anyone who, for tax years beginning after January 1, 2018, serves as the Chief Executive Officer or Chief Financial Officer, or who is among the three most highly compensated executive officers for any fiscal year. The only exception to this rule is for compensation that is paid pursuant to a binding written contract in effect on November 2, 2017 that would have otherwise been deductible under the prior Section 162(m) rules. Accordingly, any compensation paid in the future pursuant to new compensation arrangements entered into after November 2, 2017, even if performance-based, will count towards the $1,000,000 fiscal year deduction limit if paid to a covered executive. There was no impact during the fiscal year ended June 30, 2018, as the law is effective for tax years beginning after January 1, 2018. The Company evaluated its binding contracts entered into prior to November 2, 2017, and determined there is no impact for adjustments related to deferred equity compensation currently carried as a deferred tax asset on the Company’s balance sheet. For the fiscal year ended June 30, 2019, the Company realized a material impact due to compensation in excess of $1,000,000, which has been reflected in the effective tax rate.
The Company evaluated its deferred tax assets and, based on future reversals of taxable temporary differences, concluded at June 30, 2019 that it is more likely than not that all of its deferred tax assets will be realized.
At June 30, 2019, the Company had federal net operating loss carryforwards of $10,550,116 that do not expire and state net operating loss carryforwards of $4,162,326. Of the total state net operating losses, $1,123,399 is attributable to Utah, which do not expire. The remaining state net operating losses relate to various states that, if not utilized, will begin to expire in 2029
Accounting guidance regarding the accounting for uncertain tax positions requires that the impact of a tax position be recognized in the financial statements if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The Company evaluates all significant tax positions and has not recorded a liability for unrecognized tax assets at June 30, 2019 and expects no significant change during the next twelve months. Interest and penalties related to uncertain tax positions are included as a component of income tax expense and all other interest and penalties are included as a component of other income (expense).
The Company files U.S. and state income tax returns in jurisdictions with various statutes of limitations. The Company is currently not under audit by any tax jurisdiction. Annual tax provisions include amounts considered necessary to pay assessments that may result from examination of prior year tax returns; however, the amount ultimately paid upon resolution of issues may differ materially from the amount accrued
-74-
NOTE 10 WARRANTS & STOCKHOLDERS’ EQUITY
The Company has issued various warrants exercisable for our common stock outside of the 2015 Stock Option Plan (see Note 12). The warrants were issued to raise capital, as compensation for acquisitions of intellectual property, and as compensation for services.
In May 2018, the Company issued 727,919 shares to a consultant in exchange for services related to research and development. The Company recognized $866,221 in research and development expense for these services based on the closing stock price on the date the shares were issued.
On August 30, 2018, the Company entered into an agreement captioned “Consulting Agreement” with Avira Financial, LLC whereby Avira will be performing various business development, marketing and consulting services for the Company. In consideration for these services, the Company granted warrants to Avira exercisable for 5,250,000 shares of the Company’s common stock with a strike price of $0.92. Warrants to acquire 250,000 shares vested upon issuance and the remainder of the warrants vest in three equal annual installments, subject to accelerated vesting upon the occurrence of certain events. The warrants expire on the earlier of (i) the five year anniversary of the date of issuance or (ii) the date the Consulting Agreement is terminated.
On January 18, 2019 the Company entered into an agreement with a fertility clinic for services related to the development of our gene-based diagnostic tests. In consideration for these services, the company granted 900,000 warrants with a strike price of $1.01, 250,000 of which vested immediately. The remainder vest based on various performance milestones set forth in the agreement.
On March 7, 2019, The Company entered into an agreement with a consultant for business development services. In consideration for these services, the Company granted warrants to the consultant exercisable for 3,500,000 shares of the Company’s common stock with a strike price of $1.35. Warrants to acquire 1,000,000 shares vested upon issuance, and 750,000 warrants vest upon the Company’s listing on a major stock exchange. The remaining 1,750,000 warrants vest in five equal quarterly tranches of 350,000 options starting on September 1, 2019. The warrants expire five years from the date of issuance.
The following is a summary of warrant activity from June 30, 2018 through June 30, 2019:
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Weighted
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Number of
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Weighted Average
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Average
Remaining
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Aggregate
Intrinsic
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Warrants
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Exercise Price
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Contractual Life
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Value
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Warrant:
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Outstanding June 30, 2018
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42,943,520
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$0.61
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4.0
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$
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16,105,390
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Granted
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40,700,000
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0.95
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4.3
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Exercised
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(1,229,891)
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0.50
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2.7
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Forfeited/ Cancelled
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(14,160,109)
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0.80
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3.7
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Outstanding June 30, 2019
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68,253,520
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0.78
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3.6
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$
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261,010,432
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Exercisable June 30, 2019
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48,533,520
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0.79
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3.6
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$
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184,819,932
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-75-
Net tax benefits from warrants issued for services that were exercised during the year ended June 30, 2019 of $862,500 are included in benefit from income taxes on the consolidated statement of operations.
Following the adoption of ASU 2018-07, compensation expense for warrants issued in exchange for services are recognized in a manner consistent with employee options granted under the 2015 Stock Option Plan (see Note 12) and measured using the Black-Scholes option pricing model. Share based compensation expense related to warrants and shares issued outside of the 2015 Stock Option Plan for the years ended June 30, 2019 and 2018 was $4,643,861 and $8,546,570, respectively, recognized in the statement of operations as follows:
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Years Ended June 30,
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2019
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2018
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Cost of goods sold
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$
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-
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$
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-
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Selling and marketing
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-
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7,189,099
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General and administrative
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4,212,486
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491,250
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Research and development
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431,375
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866,221
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Total share-based compensation expense
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$
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4,643,861
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$
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8,546,570
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Unrecognized compensation cost related to warrants issued for services was $5,410,939 and is expected to be recognized over a weighted average period of 1.46 years.
NOTE 11 EARNINGS PER COMMON SHARE (EPS)
The computation of weighted average shares outstanding and the basic and diluted earnings per common share for the following periods consisted of the following:
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Net Loss
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Weighted Average Shares Outstanding
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Per Share Amount
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Year ended June 30, 2018
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Basic and diluted loss per share
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(6,067,356)
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240,781,490
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(0.03)
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Year ended June 30, 2019
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Basic and diluted loss per share
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(15,305,170)
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265,526,265
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(0.06)
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Potentially dilutive securities not included in the calculation of diluted net loss per common share because to do so would be anti-dilutive are as follows:
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As of June 30,
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2019
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2018
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Warrants for common stock
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33,570,112
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15,880,650
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Options issued pursuant to the 2015 Stock Option Plan
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6,024,158
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1,848,770
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39,594,270
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17,729,420
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The number of potentially dilutive shares presented in the table above was calculated using the treasury stock method.
-76-
NOTE 12 STOCK OPTION PLAN
In 2015 a Stock Option Plan was adopted to advance the interests of the Company and its shareholders by helping the Company obtain and retain the services of employees, officers, consultants, independent contractors and directors, upon whose judgment, initiative and efforts the Company is substantially dependent, and to provide those persons with further incentives to advance the interests of the Company. Eligible participants include employees, officers, certain consultants, or directors of the Company or its subsidiaries.
The number of shares, terms, and vesting periods are determined by the Company’s Board of Directors or a committee thereof on an award-by-award basis. Awards provided under the Plan generally vest in three equal annual installments. The maximum term of options issued under the plan is 10 years from the date of grant. The aggregate number of shares of Option Stock that may be issued pursuant to the exercise of Options granted under this Plan will not exceed fifteen percent (15%) of the total outstanding shares of the Company's common stock. The Company settles exercises of stock option awards by issuing new shares. Forfeitures are recognized as they occur.
The Company uses the Black-Scholes option pricing model to determine the fair value of stock option awards. The assumptions used in the model were as follows:
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Years Ended
June 30,
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2019
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2018
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Risk–free interest rate
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2.1-2.9%
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1.3-2.8%
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Expected volatility
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144.6-158.0%
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161.0-180.0%
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Expected term (in years)
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5.3-6.3
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2.6-6.0
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Expected dividend yield
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0.0%
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0.0%
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Risk-free interest rate. The Company bases the risk-free interest rate assumption on observed interest rates appropriate for the expected term of the stock option grants.
Expected dividend yield. The Company bases the expected dividend yield assumption on the fact that it has never paid cash dividends and has no present intention to pay cash dividends.
Expected volatility. Expected volatility is based on the actual historical annual volatility of the Company’s common stock.
Expected term. The expected term represents the period of time that options are expected to be outstanding. As the Company does not have sufficient historical exercise behavior, it determines the expected life assumption using the simplified method, which is an average of the contractual term of the option and its vesting period.
-77-
A summary of option activity is as follows for the fiscal period ended June 30, 2019 and the fiscal year ended June 30, 2018:
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June 30, 2019
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June 30, 2018
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Number of shares
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Weighted average exercise price
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Number of shares
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Weighted average exercise price
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Options outstanding at beginning of period
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4,938,500
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$
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0.78
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300,000
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$
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1.00
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Options granted
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20,565,500
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1.93
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4,638,500
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0.77
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Less:
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Options exercised
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(5,000)
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0.94
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-
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-
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Options canceled or expired
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(1,091,250)
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0.95
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-
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-
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Options outstanding at end of period
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24,407,750
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$
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1.74
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4,938,500
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$
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0.78
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Options exercisable at end of period
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5,319,583
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$
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1.21
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2,495,250
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$
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0.70
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The following table summarizes information about stock options outstanding at June 30, 2019:
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Options outstanding
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Options exercisable
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Number
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Weighted
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Number
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outstanding
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average
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Weighted
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exercisable
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Weighted
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Range of
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at
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remaining
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average
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at
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average
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exercise
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June 30,
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contractual
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exercise
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June 30,
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exercise
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Prices
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2019
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life (years)
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price
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2019
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price
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$0.50 – 1.00
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6,146,250
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7.49
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$
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0.80
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3,339,583
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$
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0.73
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1.01 - 1.47
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467,000
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9.64
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1.31
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100,000
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1.31
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2.07 – 3.30
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17,794,500
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9.78
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2.08
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1,880,000
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2.07
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24,407,750
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9.20
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$
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1.74
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5,319,583
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$
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1.21
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-78-
The total intrinsic value, which is the amount by which the exercise price was exceeded by the price of the Company’s common stock on the date of exercise, of stock options exercised during the year ended June 30, 2019 was $4,850. There were no exercises prior to fiscal year 2019.
As of June 30, 2019, the aggregate intrinsic value of outstanding options was $69,752,580. The aggregate intrinsic value of exercisable options was $18,012,892.
The Company recognizes expense for awards subject to graded vesting on a straight-line basis. Share based compensation expense for awards issued under the 2015 Stock Option Plan for the years ended June 30, 2019 and 2018 was $7,011,634 and $1,980,857, respectively.
For the years ended June 30, 2019 and 2018, the Company granted 20,565,500 and 4,638,500 stock options, respectively, at a weighted-average grant date fair value per option equal to $1.80 and $0.96, respectively.
As of June 30, 2019, there was $31,318,878 of total unrecognized share-based compensation expense related to stock options issued under the 2015 Stock Option Plan that will be recognized over a weighted-average period of 2.87 years.
Share-based compensation expense for awards issued under the 2015 Stock Option Plan recognized and included in the consolidated statements of operations for the fiscal years ended June 30, 2019 and 2018 were as follows:
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Year ended June 30,
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2019
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2018
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Cost of goods sold
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$
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1,340,689
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$
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-
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Selling and marketing
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401,036
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297,469
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General and administrative
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4,668,242
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1,683,388
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Research and development
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601,667
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-
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Total share-based compensation expense
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$
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7,011,634
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$
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1,980,857
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NOTE 13 COMMITMENTS AND CONTINGENCIES
Licenses
The Company has commitments under license agreements which are described in Note 5.
-79-
Leases
The table below presents the future minimum lease payments under operating and capital leases:
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Year Ending June 30
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Operating
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Capital
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2020
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$
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364,767
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$
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618,460
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2021
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|
97,576
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748,361
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2022
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-
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740,797
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2023
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-
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167,719
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2024
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|
-
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-
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Total
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$
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462,343
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2,275,337
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Less: Imputed interest
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(259,745)
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$
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2,015,592
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Operating lease payments primarily relate to the Company’s lease of laboratory and office space expiring in October 2020.
In March 2019, the Company entered into capital leases of laboratory equipment. The validation process for the leased equipment was completed subsequent to the balance sheet date and payments commence in October 2019. The lease expires in September 2022, at which time the Company has the option to purchase the leased equipment for one dollar.
Rent expense under operating leases was $648,932 and $121,451 for the years ended June 30, 2019 and 2018, respectively.
Purchase commitments
In March 2019, in connection with the lease of laboratory equipment described above, the Company agreed to purchase a fixed quantity of the consumables used by the equipment for a total of $1,386,710. The Company is obligated to pay for the consumables in twelve fixed monthly installments beginning in October 2019. At June 30, 2019, the Company had taken delivery of consumables worth $386,204. The amount due for goods that have been delivered is included in accrued liabilities on the consolidated balance sheet. The following table presents the payments due under the purchase commitment:
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Year Ending June 30
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Amount
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2020
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$
|
1,040,033
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2021
|
|
346,677
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2022
|
|
-
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|
2023
|
|
-
|
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2024
|
|
-
|
|
|
$
|
1,386,710
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-80-
NOTE 14 EMPLOYEE DEFERRED SAVINGS PLAN
The Company has a deferred savings plan which qualifies under Section 401(k) of the Internal Revenue Code. Substantially all of the Company’s employees are covered by the plan. The Company makes matching contributions with the employer’s contribution not to exceed 4% of the employee’s compensation. Costs related to these plans were $105,348 and $27,975 for the years ended June 30, 2019 and 2018, respectively.
NOTE 15 SUBSEQUENT EVENTS
Management has evaluated subsequent events through September 30, 2019, the date on which the financial statements were available to be issued.
On June 28, 2019, the Company issued an unsecured promissory note to an accredited investor in the amount of $400,000. Subsequent to the balance sheet date, the company issued additional promissory notes with a total face value of $2,500,000 to the same private investor. The promissory notes bear 12% simple interest and mature on the two year anniversary of each note. The notes may be repaid at any time.
On September 26, 2019, the Company and the accredited investor entered into a Revolving Loan Agreement whereby the accredited investor agreed to lend the Company up to an additional $3,000,000. Amounts drawn under the revolving loan will be charged interest at a rate of 12% and shall be repayable at any time. All amounts outstanding under the revolving loan are due upon the expiration of the revolving loan facility on September 30, 2021.
In September 2019, the Company issued unsecured promissory notes to a second accredited investor in the amount of $3,600,000. The promissory notes bear 12% simple interest and mature on the two year anniversary of the notes. The notes may be repaid at any time.
On July 16, 2019 and August 1, 2019, a total of 11,000,000 common stock warrants issued to FlagshipSailsRx, LLC, our former sales and marketing contractor, were exercised pursuant to a cashless exercise feature. The cashless exercise resulted in the issuance of 9,172,157 shares of common stock and the cancellation of 1,827,843 warrants in consideration for the exercise price.
On September 25, 2019, the Company and Juneau Biosciences, LLC, it’s equity method investee, executed an amendment to the agreement captioned “Second Amended and Restated Subscription Agreement.” The amendment changed the schedule of payments due under the subscription agreement to purchase units of Juneau. The schedule of payments as of June 30, 2019 under the amended agreement is as follows:
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Year Ending June 30
|
|
Amount
|
|
2020
|
$
|
1,984,000
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|
2021
|
|
1,800,000
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2022
|
|
5,300,000
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2023
|
|
1,256,610
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|
2024
|
|
-
|
|
|
$
|
10,340,610
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-81-