UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 1−SA
☒ SEMIANNUAL
REPORT PURSUANT TO REGULATION A
or
☐ SPECIAL
FINANCIAL REPORT PURSUANT TO REGULATION A
For the fiscal semiannual period ended June
30, 2023
20/20
GeneSystems, Inc.
(Exact name of issuer as specified in its charter)
Delaware |
|
57-2272107 |
(State or other jurisdiction of
incorporation or organization) |
|
(I.R.S. Employer
Identification No.) |
15810 Gaither Road, Suite 235, Gaithersburg,
MD 20877
(Full mailing address of principal executive offices)
(240) 453-6339
(Issuer’s telephone number, including area
code)
| Item 1. | Management’s Discussion and Analysis of Financial
Condition and Results of Operations |
Use of Terms
Except as otherwise indicated by the context
and for the purposes of this report only, references in this report to “we,” “us,” “our” or “our
company” refer to 20/20 GeneSystems, Inc., a Delaware corporation.
Special Note Regarding Forward-Looking Statements
Certain information contained in this report
includes forward-looking statements. The statements herein which are not historical reflect our current expectations and projections
about our future results, performance, liquidity, financial condition, prospects and opportunities and are based upon information currently
available to us and our interpretation of what is believed to be significant factors affecting the businesses, including many assumptions
regarding future events.
Forward-looking statements are generally identifiable
by use of the words “may,” “should,” “expect,” “anticipate,” “estimate,”
“believe,” “intend,” or “project” or the negative of these words or other variations on these words
or comparable terminology. Actual results, performance, liquidity, financial condition, prospects and opportunities could differ materially
from those expressed in, or implied by, these forward-looking statements as a result of various risks, uncertainties and other factors.
Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including,
without limitation, the risks outlined under “Item 1. Business-Risk Factors” included in our Annual Report on Form 1-K, and
matters described in this report generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking
statements contained in this report will in fact occur.
Potential investors should not place undue reliance
on any forward-looking statements. Except as expressly required by the federal securities laws, there is no undertaking to publicly update
or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason.
Overview
We are a commercial-stage diagnostics company
with the core mission of developing and commercializing clinical laboratory tests for early disease detection and prevention and associated
software that is powered by machine learning and real-world data to improve diagnostic accuracy and clinical utility.
Our lead tests currently focus on early cancer
detection. Of the ten deadliest cancers in the U.S., only three—breast, colon, and prostate—have widely adopted screening
modalities. This is despite growing evidence that early detection saves or extends lives for cancers of the lung, liver, pancreas, esophagus,
and ovaries which are not yet the subject of widespread asymptomatic screening. To address this deficiency, we are offering what
we believe to be one of the first multi-cancer early detection, or MCED, blood tests to enter the American market. Known as OneTest,
we believe our test may be the first and only MCED test to enter the U.S. market based on the levels of tumor antigens rather than circulating
tumor DNA. Tumor antigen measurement is a widely deployed technology (see “Carcinoembryonic Antigen, Carbohydrate Antigen 19-9,
Cancer Antigen 125, Prostate-Specific Antigen and Other Cancer Markers: A Primer on Commonly Used Cancer Markers” World Journal
of Oncology (2023) 14(1):4-14; “Clinically Meaningful Use of Blood Tumor Markers in Oncology” (2016) BioMed Research International,
2016:9795269, doi:10.1155/2016/9795269). Throughout East Asia, these biomarkers are used for screening as part of yearly health checkups.
In the U.S. and other Western nations, tumor antigens are widely used to monitor therapy responses or disease recurrence in persons being
treated for cancer. Furthermore, each of the biomarkers detected in the OneTest panel uses an existing in vitro diagnostic test
platform that has been cleared or approved by the U.S. Food and Drug Administration for at least one disease indication and is automated,
easy to use and widely available. This proteomic approach permits significantly lower costs and easier access as compared to DNA based
testing with little if any demonstrable loss in test accuracy, especially for early-stage detection of the major cancers for which there
is no widespread screening.
To increase our menu of innovative tests faster
and at a lower cost and risk than through internal development, in 2021 we established our Clinical Laboratory Innovation Accelerator,
or CLIAx, which permits diagnostics start-up companies from around the world to launch their laboratory-developed tests in our CLIA (Clinical
Laboratory Improvement Amendments) licensed laboratory using shared equipment and laboratory personnel. To date, we have enrolled one
company in our CLIAx, Minomic International, and helped it validate and launch its blood test to help determine whether prostate-specific
antigen levels should be followed up with a biopsy. Our CLIAx, which we believe to be the first such shared CLIA laboratory facility
in the U.S., reduces the costs and expenses for start-up companies to launch their novel tests in the American market while providing
us with sales and marketing rights to additional products. In 2022, it earned an “Honorable Mention” in Fast Company
magazine’s list of “World Changing Ideas.”
In response to the novel coronavirus pandemic
that began in early 2020, we expanded our business and offered several COVID-19 testing solutions, both rapid kits and laboratory-based
tests. In the third quarter of 2020, in response to substantial and urgent demand for expanded viral testing in Maryland, we also began
to provide COVID-19 viral testing using polymerase chain reaction (PCR) analytical equipment in our clinical laboratory. This pandemic-associated
testing resulted in several years of profitability and forged business alliances that are being leveraged to support our core business.
However, following the expiration of the public health emergency in May 2023, all testing from both the State of Maryland and the Montgomery
County Health Department has ceased, although we may continue to receive some tests each month through our relationship with Giant Foods.
We expect that revenues from COVID-19 testing will be very limited for the remainder of 2023 absent the emergence of a new variant resulting
in a significant increase in cases.
Our legacy business also includes a pioneering
field test kit for screening suspicious powders for bioterror agents known as BioCheck that is used regularly by hundreds of first responder
organizations worldwide. Our BioCheck kits for screening suspicious powders remains profitable, but with limited growth potential.
Principal Factors Affecting our Financial
Performance
Our operating results are primarily affected
by the following factors:
| ● | our
ability to access additional capital and the size and timing of subsequent financings; |
| ● | the
costs of acquiring additional data, technology, and/or intellectual property to successfully
reach our goals and to remain competitive; |
| ● | personnel
and facilities costs in any region in which we seek to introduce and market our products; |
| ● | the
costs of sales, marketing, and customer acquisition; |
| ● | the
average price per test paid by consumers; |
| ● | the
number of tests ordered per quarter; |
| ● | the
costs of third-party laboratories to run our tests; |
| ● | the
willingness of healthcare providers (including telemedicine providers) to prescribe and encourage
our tests and the fees charged by them to do so; |
| ● | the
costs of compliance with any unforeseen regulatory obstacles or governmental mandates in
any states or countries in which we seek to operate; |
| ● | the
costs of any additional clinical studies which are deemed necessary for us to remain viable
and competitive in any region of the world; |
| ● | the
extent and duration of demand for COVID-19 viral and serology testing; and |
| ● | our
ability to identify additional tests and revenue sources to make up for the anticipated drop
in COVID-19 testing. |
Results of Operations
The following table sets forth key components
of our results of operations during the six months ended June 30, 2023 and 2022, both in dollars and as a percentage of our revenues.
| |
June 30, 2023 | | |
June 30, 2022 | |
| |
Amount | | |
% of Revenues | | |
Amount | | |
% of Revenues | |
Revenues | |
$ | 755,317 | | |
| 100.00 | % | |
$ | 9,091,632 | | |
| 100.00 | % |
Cost of revenues | |
| 714,338 | | |
| 94.57 | % | |
| 4,233,485 | | |
| 46.56 | % |
Gross profit | |
| 40,979 | | |
| 5.43 | % | |
| 4,858,147 | | |
| 53.44 | % |
Operating expenses: | |
| | | |
| | | |
| | | |
| | |
Sales, general and administrative | |
| 3,014,253 | | |
| 399.07 | % | |
| 1,424,712 | | |
| 15.67 | % |
Loss on impairment of fixed assets | |
| 209,073 | | |
| 27.68 | % | |
| - | | |
| - | |
Research and development | |
| 629,247 | | |
| 83.31 | % | |
| 50,010 | | |
| 0.55 | % |
Total operating expenses | |
| 3,852,573 | | |
| 510.06 | % | |
| 1,474,722 | | |
| 16.22 | % |
Operating income (loss) | |
| (3,811,594 | ) | |
| (504.64 | )% | |
| 3,383,425 | | |
| 37.21 | % |
Other income (expense): | |
| | | |
| | | |
| | | |
| | |
Interest expense | |
| (14,243 | ) | |
| (1.89 | )% | |
| (5,336 | ) | |
| (0.06 | )% |
Interest income | |
| 117,524 | | |
| 15.56 | % | |
| 7,218 | | |
| 0.08 | % |
Gain on sale of asset | |
| - | | |
| - | | |
| 2,371 | | |
| 0.03 | % |
Other expense, net | |
| (3,228 | ) | |
| (0.43 | )% | |
| - | | |
| - | |
Total other (income) expense | |
| 100,053 | | |
| 13.25 | % | |
| 4,253 | | |
| 0.05 | % |
Net income (loss) | |
$ | (3,711,541 | ) | |
| (491.39 | )% | |
$ | 3,387,678 | | |
| 37.26 | % |
Revenues. We generated revenues
from sales of COVID-19 tests, OneTest, BioCheck and from our CLIAx during the six months ended June 30, 2023 and 2022. Our total revenues
decreased by $8,336,315, or 91.69%, to $755,317 for the six months ended June 30, 2023 from $9,091,632 for the six months ended June
30, 2022. Such decrease was due to a significant decrease in revenues from sales of our COVID-19 tests and a decrease in revenues from
our CLIAx, offset by increases in revenues from sales of OneTest and BioCheck. The following table summarizes our revenues by product:
| |
June 30, 2023 | | |
June 30, 2022 | |
| |
Amount | | |
% of Revenues | | |
Amount | | |
% of Revenues | |
COVID-19 PCR Tests | |
$ | 250,145 | | |
| 33.12 | % | |
$ | 8,729,633 | | |
| 96.02 | % |
COVID-19 Antibody/Antigen Tests | |
| 2,375 | | |
| 0.31 | % | |
| 56,127 | | |
| 0.62 | % |
OneTest | |
| 360,070 | | |
| 47.67 | % | |
| 186,392 | | |
| 2.05 | % |
BioCheck | |
| 108,858 | | |
| 14.41 | % | |
| 74,362 | | |
| 0.82 | % |
CLIAx | |
| 33,869 | | |
| 4.48 | % | |
| 45,118 | | |
| 0.50 | % |
Total revenues | |
$ | 755,317 | | |
| | | |
$ | 9,091,632 | | |
| | |
Revenues from our COVID-19 tests are derived
from two classes of tests: (i) rapid point-of-care tests (antibody and antigen) that we distributed after validating and (ii) lab-based
PCR testing of nasal swabs sent to our CLIA lab from area nursing homes, numerous county school systems in the State of Maryland and
the Montgomery County Health Department. Revenues from our COVID-19 tests decreased by $8,533,240, or 97.13%, to $252,520 for the six
months ended June 30, 2023 from $8,785,760 for the six months ended June 30, 2022. Such decrease was due to the significant decrease
in demand for COVID-19 testing as the pandemic has subsided. As of the date of this report, all testing has ceased at both the State
of Maryland and Montgomery County Health Departments, although we may continue to receive some tests each month through our relationship
with Giant Foods.
Revenues from sales of OneTest increased by $173,678,
or 93.18%, to $360,070 for the six months ended June 30, 2023 from $186,392 for the six months ended June 30, 2022. Such an increase
was the result of adding additional sales leadership and personnel over the last year and increased digital advertising during the past
twelve months.
Revenues from sales of BioCheck increased by
$34,496, or 46.39%, to $108,858 for the six months ended June 30, 2023 from $74,362 for the six months ended June 30, 2022. Such an increase
was due to our efforts to re-engage past customers to order the product again.
Revenues from our CLIAx decreased by $11,249, or 24.93%, to $33,869 for the six months ended June 30, 2023 from
$45,118 for the six months ended June 30, 2022. Such decrease was due to the shift from tech transfer activities to ongoing laboratory
activities for the processing of tests. The revenue for the six month period ended June 30, 2022 was predominantly for tech transfer of
their lab developed test which yielded slightly higher revenue than the period ended June 30, 2023 which was for ongoing laboratory activities
both of which were billed to them monthly. The agreement with the CLIAx customer includes future revenue sharing and co-marketing of their
test into the US market if we are involved in the selling of these tests.
Cost of revenues. Our cost of revenues
includes materials, labor, and laboratory expenses. Our cost of revenues decreased by $3,519,147, or 83.13%, to $714,338 for the six
months ended June 30, 2023 from $4,233,485 for the six months ended June 30, 2022. As a percentage of revenues, cost of revenues was
94.57% and 46.56% for the six months ended June 30, 2023 and 2022, respectively. This significant decrease was due to the significant
decrease in COVID-19 test revenue as detailed in the table below. The cost to provide COVID-19 testing through June 30, 2023 exceeded
the revenue generated and as a result we assessed the viability of generating revenue on COVID-19 related equipment and remaining inventory
as described further under loss on impairment of fixed assets below.
| |
June 30, 2023 | | |
June 30, 2022 | |
| |
Revenues | | |
Cost of
Revenues | | |
Gross
Profit | | |
Gross
Margin | | |
Revenues | | |
Cost of
Revenues | | |
Gross
Profit | | |
Gross
Margin | |
COVID-19 Tests | |
$ | 252,520 | | |
$ | 306,571 | | |
$ | (54,051 | ) | |
| (21.40 | )% | |
$ | 8,785,760 | | |
$ | 4,026,586 | | |
$ | 4,759,173 | | |
| 54.17 | % |
OneTest | |
| 360,070 | | |
| 320,087 | | |
| 39,983 | | |
| 11.10 | % | |
| 186,392 | | |
| 157,554 | | |
| 28,838 | | |
| 15.47 | % |
BioCheck | |
| 108,858 | | |
| 72,698 | | |
| 36,160 | | |
| 33.22 | % | |
| 74,362 | | |
| 29,515 | | |
| 44,848 | | |
| 60.31 | % |
CLIAx | |
| 33,869 | | |
| 14,982 | | |
| 18,887 | | |
| 55.76 | % | |
| 45,118 | | |
| 19,830 | | |
| 25,288 | | |
| 56.05 | % |
| |
$ | 755,317 | | |
$ | 714,338 | | |
$ | 40,979 | | |
| 5.43 | % | |
$ | 9,091,632 | | |
$ | 4,233,485 | | |
$ | 4,858,147 | | |
| 53.44 | % |
Gross profit and gross margin.
Our gross profit decreased by $4,817,168, or 99.16%, to $40,979 for the six months ended June 30, 2023 from $4,858,147 for the six months
ended June 30, 2022. Gross profit as a percentage of revenues (gross margin) was 5.43% and 53.44% for the six months ended June 30, 2023
and 2022, respectively. From the table above, it is evident that the costs to provide COVID-19 testing exceeded the revenue earned during
that period. Fixed lab costs are allocated on a percent of revenue by product type basis thus putting downward pressure on all gross
margins as COVID-19 revenue declined.
Sales, general and administrative expenses.
Our sales, general and administrative expenses include sales, marketing, office leases, overhead, executive compensation, legal, regulatory,
government relations, and similar expenses. Our sales, general and administrative expenses increased by $1,589,541, or 111.57%, to $3,014,253
for the six months ended June 30, 2023 from $1,424,712 for the six months ended June 30, 2022. As a percentage of revenues, sales, general
and administrative expenses were 399.07% and 15.67% for the six months ended June 30, 2023 and 2022, respectively. Such increase was
primarily due to the recognition of $915,590 in stock compensation expense recorded upon the granting of stock options in 2023 as compared
to $130,153 in 2022. Other attributors to the increase include sales and marketing costs for hiring of additional salespeople and advertising
activities in excess of the prior year by $206,881 and $417,327, respectively, as well as professional fees for accounting, legal, regulatory
and business development activities in excess of 2022 by $179,896 related to increased regulatory filings and negotiation of license
agreements for technology to enhance our product offering.
Loss on impairment of fixed assets.
In the six months ended June 30, 2023, we performed an impairment analysis of laboratory equipment utilized in COVID-19 testing
due to the significant material decrease in revenue and cash flow related to the COVID-19 testing and recorded an impairment charge of $209,073.
The total laboratory equipment used in the PCR testing activities had a net book value of $415,131. It was determined after discussion
with lab personnel that certain PCR laboratory equipment could be repurposed for potential future products and would be retained for
research and development. The net book value of this equipment that remains in fixed assets equals $161,136 and will continue to be depreciated
to research and development costs. As of June 30, 2023, we had approximately $26,393 in PCR testing inventory and will expense as used
throughout the remainder of 2023 for research and development activities.
Research and development expenses.
Our research and development expenses include clinical data acquisitions, laboratory validation and bridging studies, data analysis algorithms,
and non-capitalizable machine learning software development. It also includes laboratory test validation and technical consultation.
Our research and development expenses increased by $579,237, or 1,158.24%, to $629,247 for the six months ended June 30, 2023 from $50,010
for the six months ended June 30, 2022. As a percentage of revenues, research and development expenses were 83.31% and 0.55% for the
six months ended June 30, 2023 and 2022, respectively. Approximately 90%, or $567,860, of the expenses in 2023 were due to a focus on
the LDT validation of OneTest Premium (BioInfra I-Finder) technology and the remaining $61,387 distributed equally across the tech transfer
of LungSPOT (lung cancer test), cardiovascular disease algorithms development and a capillary blood collection method study.
Total other income (expense). We
had total other income, net, of $100,053 for the six months ended June 30, 2023, as compared to other income, net, of $4,253 for the
six months ended June 30, 2022. Total other income, net, for the six months ended June 30, 2023 consisted of interest income of $117,524,
offset by interest expense of $14,243 and other expense, net, of $3,228, while total other income, net, for the six months ended June
30, 2022 consisted of interest income of $7,218 and a gain on sale of asset of $2,371, offset by interest expense of $5,336.
Net income (loss). As a result
of the cumulative effect of the factors described above, we generated a net loss of $3,711,541 for the six months ended June 30, 2023,
as compared to a net income of $3,387,678 for the six months ended June 30, 2022.
Liquidity and Capital Resources
As of June 30, 2023, we had cash and cash equivalents
of $6,212,756. Historically, our sources of cash have included private placements of equity securities and cash generated from revenues.
Management has prepared estimates of operations
believes that sufficient funds will be generated from operations to fund our operations and to service our debt obligations for at least
the next twelve months. We may, however, in the future require additional cash resources due to changing business conditions, implementation
of our strategy to expand our business, or investments or acquisitions we may decide to pursue. If our own financial resources are insufficient
to satisfy our capital requirements, we may seek to sell additional equity or debt securities or obtain additional credit facilities.
The sale of additional equity securities could result in dilution to our stockholders. The incurrence of indebtedness would result in
increased debt service obligations and could require us to agree to operating and financial covenants that would restrict our operations.
Financing may not be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional funds on terms
favorable to us, or at all, could limit our ability to expand our business operations and could harm our overall business prospects.
Summary of Cash Flows
The following table presents a summary of our
cash flows for the periods indicated:
| |
Six Months Ended
June 30, | |
| |
2023 | | |
2022 | |
Net cash provided by (used in) operating activities | |
$ | (2,435,434 | ) | |
$ | 4,739,343 | |
Net cash used in investing activities | |
| (22,264 | ) | |
| (245,241 | ) |
Net cash used in financing activities | |
| (137,121 | ) | |
| (28,963 | ) |
Net increase (decrease) in cash and cash equivalents | |
| (2,594,819 | ) | |
| 4,465,139 | |
Cash and cash equivalents at beginning of period | |
| 8,807,575 | | |
| 3,354,469 | |
Cash and cash equivalent at end of period | |
$ | 6,212,756 | | |
$ | 7,819,608 | |
Net cash used in operating activities was $2,435,434
for the six months ended June 30, 2023, as compared to net cash provided operating activities of $4,739,343 for the six months ended
June 30, 2022. Cash used in operating activities for the six months ended June 30, 2023 was mainly attributed to the $3,711,541 net loss
for the period, net of the non-cash adjustments of $915,590 for stock based compensation, a $209,073 impairment charge and $96,463 depreciation
and amortization charges yielding a net use of cash from the net loss of $982,365. The remaining $54,981 in additional cash used is related
to the following negative impacts to operating cash flows from changes in the balance sheet: a net decrease in accounts payable and accrued
liabilities of $529,557, and a net increase in prepaid expenses and other assets of $15,587, offset by a net increase in accounts receivable
and inventory of $540,973 and $13,374, respectively, and net cash provided by an increase in interest payable of $8,211 and deferred
revenue of $37,567. For the six months ended June 30, 2022, the cash provided by operating activities was mainly gained through the net
income for the period of $3,387,678 plus the add-back of the non-cash adjustments of $130,152 for stock-based compensation and $174,503
for depreciation and amortization charges with an offset of a small loss on a sale of asset of $2,371. The remaining net cash increases
to operating cash flow were from the following changes to assets and liabilities during the period: net cash of $1,430,922 received during
the period on accounts receivable and $98,112 on net reductions of inventory, increases in prepaid expenses of $10,251 and payments exceeding
increases to accounts payable and accrued expenses of $525,878, offset finally by net cash on deferred revenue of $56,475.
Net cash used in investing activities was $22,264
for the six months ended June 30, 2023, as compared to $245,241 for the six months ended June 30, 2022. The net cash used in investing
activities for the six months ended June 30, 2023 consisted of an acquisition of technology under a license agreement and related validation
costs of $17,582 and purchases of property and equipment of $4,682, while the net cash used in investing activities for the six months
ended June 30, 2022 consisted of purchases of property and equipment of $242,347 and an acquisition of technology under a license agreement
and related validation costs of $8,644, offset by process from the sale of equipment of $5,750.
Net cash used in financing activities was $137,121
for the six months ended June 30, 2023, as compared to $28,963 for the six months ended June 30, 2022. The net cash used in financing
activities for the six months ended June 30, 2023 consisted of deferred financing costs of $106,256 related to fundraising activities
and principal payments on financing lease liabilities of $30,870, offset by proceeds from a warrant exercise of $5, while the net cash
used in financing activities for the six months ended June 30, 2022 consisted entirely of principal payments on financing lease liabilities.
Convertible Note Offering
On August 15, 2022, we launched an equity crowdfunding
offering under Section 4(a)(6) of the Securities Act of 1933, as amended, and Regulation Crowdfunding promulgated thereunder, pursuant
to which we offered convertible promissory notes. As of June 30, 2023, we issued convertible promissory notes in the aggregate principal
amount of $213,010. The notes bear interest at rates ranging from 6% to 11.10% and are due and payable twenty-four (24) months after
the date of issuance. The notes are unsecured, contain customary events of default and are convertible into common stock upon certain
events. As of June 30, 2023, the outstanding balance of these notes is $218,061 consisting of principal of $213,010, net of unamortized
debt issuance cost of $7,583 and an accrued interest balance of $12,634.
Off-Balance Sheet Arrangements
We did not have during the periods presented,
and we do not currently have, any off-balance sheet arrangements.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity
with United States generally accepted accounting principles requires our management to make assumptions, estimates and judgments that
affect the amounts reported, including the notes thereto, and related disclosures of commitments and contingencies, if any. We have identified
certain accounting policies that are significant to the preparation of our financial statements. These accounting policies are important
for an understanding of our financial condition and results of operation. Critical accounting policies are those that are most important
to the portrayal of our financial condition and results of operations and require management’s difficult, subjective, or complex
judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in
subsequent periods. Certain accounting estimates are particularly sensitive because of their significance to financial statements and
because of the possibility that future events affecting the estimate may differ significantly from management’s current judgments.
We believe the following critical accounting policies involve the most significant estimates and judgments used in the preparation of
our financial statements:
Revenue Recognition. In accordance
with Accounting Standards Codification, or ASC, Topic 606, Revenue from Contracts with Customers, we recognize revenue when the
customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange
for those goods and services. To determine revenue recognition for arrangements that we deem are within the scope of ASC Topic 606, we
perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in
the contract; (iii) calculate transfer price; (iv) allocate the transaction price to the performance obligation in the contract;
and (v) recognize revenue when (or as) the entity satisfies a performance obligation. Performance obligations for four different
types of services are discussed below:
| ● | OneTest
‒ Revenues from the sale of OneTest are recognized when returned serum specimens are
analyzed in our CLIA laboratory and the results are reported to the customer. The specific
transaction price is provided to the customer at the time of purchase either through the
on-line portal or via a sales quote for commercial clients, which may be discounted from
list price based on volume of tests ordered. Periodically, discounts are provided to individuals
when purchased through our online portal. No estimates or adjustments are made to the transaction
price for returns or refunds, since these events rarely occur. There are three customer groups:
(i) individuals who purchase tests through our online portal; (ii) commercial clients that
pay upfront for test kits and (iii) professional health organizations that purchase collection
kits and are all billed upon completion of testing and when results are reported to the customer.
Contracts with customers do not contain significant financing components based on the typical
period between performance of services and collection of consideration. There are very little
requests for returns or refunds. |
| ● | BioCheck
‒ Revenues for kits are recognized when kits are shipped to the customer. The specific
transaction price is provided to the customer at the time of purchase, which may be discounted
from list price based on the volume of tests ordered. No estimates or adjustments are made
to the transaction price for returns or refunds, since these events rarely occur. Customers’
payment terms are due upon receipt and are not provided significant financing components
based on the typical period between shipment of the product and collection of consideration.
There are no requests for returns or refunds. |
| o | Point-of-Care
(POC) Test Kits ‒ Revenues for COVID-19 distributed test kits for use at the POC (i.e.,
rapid antigen and antibody tests) are recognized when test kits are shipped to the customer
based on negotiated prices per individual contracts. Customers’ payment terms are due
upon receipt of the invoice and are not provided significant financing components based on
the typical period between shipment of the product and collection of consideration. There
are no requests for returns or refunds. |
| o | COVID-19
Lab Tests (PCR) ‒ Revenues from the sale of COVID-19 viral (PCR) tests are recognized
when returned nasal swabs are analyzed in our CLIA laboratory and the results are reported
to the customer. |
| § | For
direct billing to customers, revenue is recorded based on the agreed contracted amount for
each test completed. Customers’ payment terms are net 30 days and are not provided
significant financing components based on the typical period between completed tests and
collection of consideration. |
| § | For
insurance, we estimate the amount of consideration we expect to be entitled to receive from
customer groups in exchange for providing services using the portfolio approach practical
expedient. The use of the expedient is not expected to differ materially from applying the
guidance to an individual contract. These estimates are based on utilizing the expected value
method and include the impact of contractual allowances (including payer denials). The portfolios
determined using the portfolio approach consist of the following groups of customers which
are similar since they are all insurance providers with similar reimbursement practices:
healthcare insurers and government payers (Medicare and Medicaid programs). The process for
estimating revenues and the ultimate collection of accounts receivable involves significant
judgment and estimation. We follow a standard process, which considers historical denial
and collection experience and other factors (including the period of time that the receivables
have been outstanding), to estimate contractual allowances and recording adjustments in the
current period as changes in estimates. Further adjustments to the allowances, based on actual
receipts, may be recorded upon settlement. We rely on a third part billing company to process
all claims to be paid by insurance providers. As a result, the average days to receive payment
on these types of claims exceeds ninety days in some cases. As of June 30, 2023, we were
owed $353,316 from insurance companies. These claims, if denied by the insurance provider,
can be billed directly to the customer contracted with us to provide the service. We have
successfully billed back to the customer all denied claims to date related to COVID-19 testing. |
| ● | CLIAx
– Contractually, we can earn revenue in two ways: (i) by providing laboratory services
and (ii) through co-marketing activities of the CLIAx clients laboratory developed tests.
Revenue for laboratory services is recognized monthly based on agreed laboratory activities
for space, equipment use and contracted personnel. The revenue that can be earned through
co-marketing activities would be recognized if we sell any of the customer’s products.
As of June 30, 2023, the CLIAx customer is working through its marketing plan and we have
not yet performed any co-marketing activities and as a result have not sold any CLIAx products
or recognized any related revenue. |
Impairment of Long-Lived Assets.
The long-lived assets held and used by us are reviewed for impairment no less frequently than annually or whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be recoverable. In the event that facts and circumstances indicate
that the cost of any long-lived assets may be impaired, an evaluation of recoverability is performed. The impairment losses for the six
months ended June 30, 2023 and 2022 were $209,073 and $0 for certain fixed assets, respectively. There can be no assurance, however,
that market conditions will not change or demand for our products and services will continue, which could result in impairment of long-lived
assets in the future.
Preferred Stock.
ASC 480, Distinguishing Liabilities from Equity, includes standards for how an issuer of equity (including equity shares issued
by consolidated entities) classifies and measures on its balance sheet certain financial instruments with characteristics of both liabilities
and equity. Management is required to determine the presentation for the preferred stock as a result of the redemption and conversion
provisions, among other provisions in the agreement. Specifically, management is required to determine whether the embedded conversion
feature in the preferred stock is clearly and closely related to the host instrument, and whether the bifurcation of the conversion feature
is required and whether the conversion feature should be accounted for as a derivative instrument. If the host instrument and conversion
feature are determined to be clearly and closely related (both more akin to equity), derivative liability accounting under ASC 815, Derivatives
and Hedging, is not required. Management determined that the host contract of the preferred stock is more akin to equity, and accordingly,
derivative liability accounting is not required by us. Costs incurred directly for the issuance of the preferred stock are recorded as
a reduction of gross proceeds received by us.
Research and Development. We incur
research and development costs during the process of researching and developing our laboratory tests, algorithms, information technologies,
and other intellectual properties. Our research and development costs consist primarily of data acquisition and personnel costs of scientists
and laboratory technicians. We expense these costs as incurred until the resulting product has been completed, tested, validated, and
made ready for commercial use.
Stock-Based Compensation. We account
for stock awards issued under ASC 718, Compensation – Stock Compensation. Under ASC 718, stock-based compensation cost is
measured at the grant date, based on the estimated fair value of the award. Stock-based compensation is recognized as an expense over
the employee’s requisite vesting period and over the nonemployee’s period of providing goods or services. The fair value
of each stock option or warrant award is estimated on the date of grant using the Black-Scholes option valuation model. Restricted shares
are measured based on the fair market value of the underlying stock on the grant date.
Recently Issued Accounting Pronouncements
Management does not believe any other recently
issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying consolidated
financial statements.
We have no information to disclose that was required
to be in a report on Form 1-U during the semiannual period covered by this Form 1-SA, but was not reported.
| Item 3. | Financial Statements |
INDEX TO FINANCIAL STATEMENTS OF 20/20
GENESYSTEMS, INC.
20/20 GENESYSTEMS, INC.
BALANCE SHEETS
JUNE 30, 2023 AND DECEMBER 31, 2022
(UNAUDITED)
| |
June 30, 2023 | | |
December 31, 2022 | |
Assets | |
| | |
| |
Current assets: | |
| | |
| |
Cash and cash equivalents | |
$ | 6,212,756 | | |
$ | 8,807,575 | |
Accounts receivable, net | |
| 223,951 | | |
| 764,924 | |
Inventory | |
| 73,700 | | |
| 87,074 | |
Prepaid expenses | |
| 162,134 | | |
| 72,270 | |
Total current assets | |
| 6,672,541 | | |
| 9,731,843 | |
License agreement, net | |
| 329,679 | | |
| 340,929 | |
Property and equipment, net | |
| 296,516 | | |
| 580,911 | |
Intangible assets, net | |
| 195,628 | | |
| 179,403 | |
Right of use assets | |
| 1,011,763 | | |
| 1,088,783 | |
Due from affiliated entities | |
| 2,699 | | |
| 2,699 | |
Deferred financing costs | |
| 106,256 | | |
| - | |
Other assets | |
| 216,177 | | |
| 290,453 | |
Total assets | |
$ | 8,831,259 | | |
$ | 12,215,021 | |
| |
| | | |
| | |
Liabilities and Stockholders’ Equity | |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Accounts payable | |
$ | 419,014 | | |
$ | 464,282 | |
Accrued liabilities | |
| 165,507 | | |
| 649,795 | |
Deferred revenue | |
| 353,789 | | |
| 316,222 | |
Financing lease liabilities – current | |
| 15,705 | | |
| 46,575 | |
Lease liability – current | |
| 158,481 | | |
| 153,297 | |
Total current liabilities | |
| 1,112,496 | | |
| 1,630,171 | |
| |
| | | |
| | |
Long-term liabilities: | |
| | | |
| | |
Convertible note payable, net of unamortized debt discount | |
| 218,061 | | |
| 207,246 | |
Lease liability – long term | |
| 922,382 | | |
| 1,003,338 | |
Total long-term liabilities | |
| 1,140,443 | | |
| 1,210,584 | |
| |
| | | |
| | |
Total liabilities | |
| 2,252,939 | | |
| 2,840,755 | |
| |
| | | |
| | |
Commitments and contingencies (Note 8) | |
| | | |
| | |
| |
| | | |
| | |
Stockholders’ equity: | |
| | | |
| | |
Series C preferred stock, $0.01 par value; 3,340,909 authorized; 1,204,040
shares issued and outstanding as of June 30, 2023 and December 31, 2022; liquidation preference of $5,297,776 | |
| 12,043 | | |
| 12,043 | |
Series B preferred stock, $0.01 par value; 3,569,405 authorized; 1,471,487
shares issued and outstanding as of June 30, 2023 and December 31, 2022; liquidation preference of $5,194,349 | |
| 14,715 | | |
| 14,715 | |
Series A-2 preferred stock, $0.01 par value; 800,000 authorized; 442,402
shares issued and outstanding as of June 30, 2023 and December 31, 2022; liquidation preference of $1,442,231 | |
| 4,424 | | |
| 4,424 | |
Series A-1 preferred stock, $0.01 par value; 978,000 authorized; 651,465
shares issued and outstanding as of June 30, 2023 and December 31, 2022; liquidation preference of $1,999,998 | |
| 6,515 | | |
| 6,515 | |
Series A preferred stock, $0.01 par value; 1,303,000 authorized; 846,368
shares issued and outstanding as of June 30, 2023 and December 31, 2022; liquidation preference of $2,598,350 | |
| 8,464 | | |
| 8,464 | |
Common stock, $0.01 par value; 25,000,000 authorized; 4,765,311 and
4,764,811 shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively | |
| 47,653 | | |
| 47,648 | |
Additional paid-in capital | |
| 27,761,469 | | |
| 26,845,879 | |
Accumulated deficit | |
| (21,276,963 | ) | |
| (17,565,422 | ) |
Total stockholders’ equity | |
| 6,578,320 | | |
| 9,374,266 | |
Total liabilities and stockholders’ equity | |
$ | 8,831,259 | | |
$ | 12,215,021 | |
See accompanying notes to the financial statements
20/20 GENESYSTEMS, INC.
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2023 AND
2022
(UNAUDITED)
| |
2023 | | |
2022 | |
Revenues | |
$ | 755,317 | | |
$ | 9,091,632 | |
| |
| | | |
| | |
Cost of revenues | |
| 714,338 | | |
| 4,233,485 | |
| |
| | | |
| | |
Gross profit | |
| 40,979 | | |
| 4,858,147 | |
| |
| | | |
| | |
Operating expenses: | |
| | | |
| | |
Sales, general and administrative | |
| 3,014,253 | | |
| 1,424,712 | |
Loss on impairment of fixed assets | |
| 209,073 | | |
| - | |
Research and development | |
| 629,247 | | |
| 50,010 | |
Total operating expenses | |
| 3,852,573 | | |
| 1,474,722 | |
| |
| | | |
| | |
Operating income (loss) | |
| (3,811,594 | ) | |
| 3,383,425 | |
| |
| | | |
| | |
Other income (expense): | |
| | | |
| | |
Interest expense | |
| (14,243 | ) | |
| (5,336 | ) |
Interest income | |
| 117,524 | | |
| 7,218 | |
Gain on sale of asset | |
| - | | |
| 2,371 | |
Other expense, net | |
| (3,228 | ) | |
| - | |
Total other income (expense) | |
| 100,053 | | |
| 4,253 | |
| |
| | | |
| | |
Provision for income taxes | |
| - | | |
| - | |
| |
| | | |
| | |
Net income (loss) | |
$ | (3,711,541 | ) | |
$ | 3,387,678 | |
| |
| | | |
| | |
Basic net income (loss) per common share | |
$ | (0.78 | ) | |
$ | 0.71 | |
Diluted net income (loss) per common share | |
$ | (0.78 | ) | |
$ | 0.36 | |
Weighted-average common shares outstanding, basic | |
| 4,765,242 | | |
| 4,763,180 | |
Weighted-average common shares outstanding, diluted | |
| 4,765,242 | | |
| 9,520,888 | |
See accompanying notes to the financial statements
20/20 GENESYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2023 AND
2022
(UNAUDITED)
| |
Series
C Preferred Stock | | |
Series
B Preferred Stock | | |
Series
A-2 Preferred Stock | | |
Series
A-1 Preferred Stock | | |
Series
A Preferred Stock | | |
Common
Stock | | |
Additional
Paid-in | | |
Accumulated | | |
Total
Stockholders’ | |
| |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Capital | | |
Deficit | | |
Equity | |
Balance,
December 31, 2022 | |
| 1,204,040 | | |
$ | 12,043 | | |
| 1,471,487 | | |
$ | 14,715 | | |
| 442,402 | | |
$ | 4,424 | | |
| 651,465 | | |
$ | 6,515 | | |
| 846,368 | | |
$ | 8,464 | | |
| 4,764,811 | | |
$ | 47,648 | | |
$ | 26,845,879 | | |
$ | (17,565,422 | ) | |
$ | 9,374,266 | |
Stock
option expense | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 915,590 | | |
| - | | |
| 915,590 | |
Exercise
of warrants | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 500 | | |
| 5 | | |
| - | | |
| - | | |
| 5 | |
Net
loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (3,711,541 | ) | |
| (3,711,541 | ) |
Balance,
June 30, 2023 | |
| 1,204,040 | | |
$ | 12,043 | | |
| 1,471,487 | | |
$ | 14,715 | | |
| 442,402 | | |
$ | 4,424 | | |
| 651,465 | | |
$ | 6,515 | | |
| 846,368 | | |
$ | 8,464 | | |
| 4,765,311 | | |
$ | 47,653 | | |
$ | 27,761,469 | | |
$ | (21,276,963 | ) | |
$ | 6,578,320 | |
| |
Series
C Preferred Stock | | |
Series
B Preferred Stock | | |
Series
A-2 Preferred Stock | | |
Series
A-1 Preferred Stock | | |
Series
A Preferred Stock | | |
Common
Stock | | |
Additional
Paid-in | | |
Accumulated | | |
Total
Stockholders’ | |
| |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Capital | | |
Deficit | | |
Equity | |
Balance,
December 31, 2021 | |
| 1,205,069 | | |
$ | 12,051 | | |
| 1,471,487 | | |
$ | 14,715 | | |
| 442,402 | | |
$ | 4,424 | | |
| 651,465 | | |
$ | 6,515 | | |
| 846,368 | | |
$ | 8,464 | | |
| 4,762,572 | | |
$ | 47,626 | | |
$ | 26,548,299 | | |
$ | (19,752,297 | ) | |
$ | 6,889,797 | |
Stock
based compensation | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 130,153 | | |
| - | | |
| 130,153 | |
Conversion
of preferred stock | |
| (1,029 | ) | |
| (11 | ) | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 1,029 | | |
| 10 | | |
| | | |
| - | | |
| (1 | ) |
Net
income | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 3,387,678 | | |
| 3,387,678 | |
Balance,
June 30, 2022 | |
| 1,204,040 | | |
$ | 12,040 | | |
| 1,471,487 | | |
$ | 14,715 | | |
| 442,402 | | |
$ | 4,424 | | |
| 651,465 | | |
$ | 6,515 | | |
| 846,368 | | |
$ | 8,464 | | |
| 4,763,601 | | |
$ | 47,636 | | |
$ | 26,678,452 | | |
$ | (16,364,619 | ) | |
$ | 10,407,627 | |
See accompanying notes to the financial statements
20/20 GENESYSTEMS, INC.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2023 AND
2022
(UNAUDITED)
| |
2023 | | |
2022 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | |
| | |
| |
Net income (loss) | |
$ | (3,711,541 | ) | |
$ | 3,387,678 | |
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities: | |
| | | |
| | |
Depreciation and amortization | |
| 81,361 | | |
| 93,003 | |
Stock based compensation | |
| 915,590 | | |
| 130,153 | |
Amortization of license fees | |
| 11,250 | | |
| 11,250 | |
Amortization of ROU assets, net of liabilities | |
| 1,248 | | |
| 70,250 | |
Amortization of debt discount | |
| 2,604 | | |
| - | |
Loss on sale of asset | |
| - | | |
| (2,371 | ) |
Impairment of fixed assets | |
| 209,073 | | |
| - | |
Changes in operating assets and liabilities: | |
| | | |
| | |
Accounts receivable | |
| 540,973 | | |
| 1,430,922 | |
Inventory | |
| 13,374 | | |
| 98,112 | |
Prepaid expenses and other assets | |
| (15,587 | ) | |
| (10,251 | ) |
Accounts payable | |
| (45,269 | ) | |
| (315,796 | ) |
Accrued liabilities | |
| (484,288 | ) | |
| (210,082 | ) |
Interest payable | |
| 8,211 | | |
| - | |
Deferred revenue | |
| 37,567 | | |
| 56,475 | |
Net cash provided by (used in) operating activities | |
| (2,435,434 | ) | |
| 4,739,343 | |
| |
| | | |
| | |
CASH FLOWS FROM INVESTING ACTIVITIES: | |
| | | |
| | |
Purchase of property and equipment | |
| (4,682 | ) | |
| (242,347 | ) |
Proceeds from sale of equipment | |
| - | | |
| 5,750 | |
Acquisition of license agreement and patent cost | |
| (17,582 | ) | |
| (8,644 | ) |
Net cash used in investing activities | |
| (22,264 | ) | |
| (245,241 | ) |
| |
| | | |
| | |
CASH FLOWS FROM FINANCING ACTIVITIES: | |
| | | |
| | |
Principal payments on financing lease liabilities | |
| (30,870 | ) | |
| (28,963 | ) |
Deferred financing costs | |
| (106,256 | ) | |
| - | |
Proceeds from exercise of warrant | |
| 5 | | |
| - | |
Net cash used in financing activities | |
| (137,121 | ) | |
| (28,963 | ) |
| |
| | | |
| | |
Increase (decrease) in cash and cash equivalents | |
| (2,594,819 | ) | |
| 4,465,139 | |
Cash and cash equivalents, beginning of period | |
| 8,807,575 | | |
| 3,354,469 | |
Cash and cash equivalents, end of period | |
$ | 6,212,756 | | |
$ | 7,819,608 | |
| |
| | | |
| | |
Supplemental disclosures of cash flow information: | |
| | | |
| | |
Cash paid for interest | |
$ | - | | |
$ | 3,334 | |
Cash paid for income taxes | |
$ | - | | |
$ | - | |
| |
| | | |
| | |
Non-cash disclosures of cash flow information: | |
| | | |
| | |
Conversion of Series C Preferred Stock to Common Stock | |
$ | - | | |
$ | 11 | |
See accompanying notes to the financial statements
20/20 GENESYSTEMS, INC.
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
JUNE 30, 2023 AND 2022
NOTE 1 – BUSINESS AND NATURE OF OPERATIONS
20/20 GeneSystems, Inc. (the “Company”),
founded in May 2000, is a commercial stage diagnostics company with the core mission of developing and commercializing clinical laboratory
tests for early disease detection and prevention and associated software that is powered by machine learning and real-world data to improve
diagnostic accuracy and clinical utility.
For early cancer detection, the Company uses
machine learning and real-world data analytics approaches to substantially improve the accuracy of tumor biomarkers that are currently
tested in millions of individuals around the world. The Company’s cancer product, known as OneTest, is a multi-cancer test for
screening at least five types of cancer from one blood sample.
In response to the novel coronavirus pandemic
that began in early 2020, the Company expanded its business and acquired and commercialized several COVID-19 serology (antibody) and
viral (RT-PCR) tests, both rapid kits and laboratory-based tests.
The Company’s legacy business includes
a patented field test kit for screening suspicious powders for bioterror agents that is used regularly by hundreds of first responder
organizations worldwide, known as BioCheck.
To increase its menu of innovative tests faster
and at a lower cost and risk than through internal development, in 2021, the Company established its Clinical Laboratory Innovation Accelerator
(“CLIAx”), which permits diagnostics start-up companies from around the world to launch their laboratory developed tests
in the Company’s CLIA (Clinical Laboratory Improvement Amendments) licensed laboratory using shared equipment and laboratory personnel.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying interim unaudited condensed
consolidated financial statements and footnotes of the Company have been prepared in accordance with generally accepted accounting principles
in the United States of America (“GAAP”) for interim financial information and the instructions to Rule 10-01 of
Regulation S-X of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include
all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, these unaudited
consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, considered necessary for a fair
presentation of the results of the interim periods, but are not necessarily indicative of the results of operations
to be anticipated for the full year ending December 31, 2023. These consolidated financial statements should be read
in conjunction with the audited financial statements and the notes thereto included in the Company’s Annual Report on Form 1-K
for the year ended December 31, 2022.
Use of Estimates
The preparation of financial statements in conformity
with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements, and the reported amount of revenues and expenses during the reporting periods. Actual results could
materially differ from these estimates. It is reasonably possible that changes in estimates will occur in the near term. The use of estimates
includes revenue recognition, impairment of long-lived assets, stock-based compensation and expense accruals.
Business Segments
The Company has determined that its current business
and operations consist of one reporting segment.
Reclassifications
The Company has reclassified, combined or separately
disclosed certain amounts in the prior years’ financial statements and accompanying footnotes to conform with the current year’s
presentation. On the Balance Sheet, prior period presentation of $206,509 of “License Agreements, net” is now contained within
“Other Assets”.
20/20 GENESYSTEMS, INC.
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
JUNE 30, 2023 AND 2022
Fair Value of Financial Instruments
Fair value is defined as the exchange price that
would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset
or liability in an orderly transaction between market participants as of the measurement date. Applicable accounting guidance provides
an established hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of
unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants
would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company.
Unobservable inputs are inputs that reflect the Company’s assumptions about the factors that market participants would use in valuing
the asset or liability. There are three levels of inputs that may be used to measure fair value:
Level 1 – Observable
inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 – Include
other inputs that are directly or indirectly observable in the marketplace.
Level 3 – Unobservable
inputs which are supported by little or no market activity.
The fair value hierarchy
also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
Fair value estimates
discussed herein are based upon certain market assumptions and pertinent information available to management as of June 30, 2023 and
December 31, 2022. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. These
financial instruments include cash, accounts payable and accrued liabilities. Fair values for these items were assumed to approximate
carrying values because of their short-term nature or they are payable on demand.
Cash and Cash Equivalents
The Company considers
time deposits, certificates of deposit, and certain investments with an original maturity of three months or less to be cash equivalents.
Accounts Receivable
Accounts receivable
represent amounts due from commercial customers. On June 30, 2023 and December 31, 2022, customer accounts receivable totaled $223,951
and $764,924, respectively. The receivables consist of customer receivables of $257,366 and $279,541 and receivables through a third-party
provider for insurance claims of $60,696 and $547,843 are included in this balance at June 30, 2023 and December 31, 2022, respectively.
The payment of consideration related to these third-party receivables is subject only to the passage of time. Management reviews open
accounts monthly and takes appropriate steps for collection. When needed, an allowance for doubtful accounts is recorded to reflect management’s
determination of the amount deemed uncollectable. An allowance for doubtful accounts of $94,111 and $62,460 is included in accounts receivable
at June 30, 2023 and December 31, 2022, respectively.
Inventories
Inventories are stated at the lower of cost or
market using the first-in, first-out (FIFO) method. Inventories consisted entirely of finished goods as of June 30, 2023 and December
31, 2022.
Internal Use Software
The Company incurs software
development costs to develop software programs to be used solely to meet its internal needs and cloud-based applications used to deliver
its services. In accordance with Accounting Standards Codification (“ASC”) 350-40, Internal-Use Software, the Company
capitalizes development costs related to these software applications once the preliminary project stage is complete and it is probable
that the project will be completed, the software will be used to perform the function intended, and the value will be recoverable. Reengineering
costs, minor modifications and enhancements that do not significantly improve the overall functionality of the software are expensed
as incurred.
20/20 GENESYSTEMS, INC.
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
JUNE 30, 2023 AND 2022
Property and Equipment
Property and equipment
are stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful
life of three (3) to seven (7) years. Significant renewals and betterments are capitalized while maintenance and repairs are charged
to expense as incurred. Leasehold improvements are amortized on the straight-line basis over the lesser of their estimated useful lives
or the term of the related lease, whichever is shorter. Gains or losses on dispositions of assets are reflected in other income or expense.
Intangible Assets – Patents
The Company capitalizes
patent filing fees, and it expenses legal fees, in connection with internally developed pending patents. The Company also will capitalize
patent defense costs to the extent these costs enhance the economic value of an existing patent. The Company evaluates the capitalized
costs annually to determine if any amounts should be written down. Patent costs begin amortizing upon approval by the corresponding government
and are generally amortized over the expected period to be benefitted, not to exceed the patent lives, which may be as long as 20 years.
License Agreements
In accordance with ASC 730-10-25-2.c, Topic 350-30
paragraph 805-50-30-2, license fees incurred through license agreements for technology supporting specific products to be sold are either
expensed for use in research and development or recognized as intangible assets if they have alternative future uses. The Company recognizes
intangible assets when the following criteria are met: (1) the asset is identifiable to have an alternative future use, (2) the Company
has control over the asset, (3) the cost of the asset can be measured reliably, and (4) it is probable that economic benefits will flow
to the Company. In accordance with Topic 350-30 paragraph 805-50-30-2, the costs that are capitalized are measured by the cash paid to
the licensor for the licensing of their technology in accordance with the license agreement. Any costs incurred during the validation
of the technology are expensed to research and development once incurred. The license fees are amortized either beginning when the technology
is validated internally and is ready to be included within the Company’s product offerings over the period covered by the agreement
which might include extensions or based on other terms specific to the agreement.
Impairment of Long-Lived Assets
The long-lived assets
held and used by the Company are reviewed for impairment no less frequently than annually or whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. In the event that facts and circumstances indicate that the cost
of any long-lived assets may be impaired, an evaluation of recoverability is performed. The impairment losses for the six months ended
June 30, 2023 and 2022 were $209,073 and $0 for certain fixed assets, respectively (see footnote 3). There can be no assurance, however,
that market conditions will not change or demand for the Company’s products and services will continue, which could result in impairment
of long-lived assets in the future.
Offering Costs
The Company complies with the requirements of
ASC 340 with regards to offering costs. Prior to the completion of an offering, offering costs will be capitalized as deferred offering
costs on the balance sheet. The deferred offering costs will be charged to stockholders’ equity upon the completion of an offering
or to expense if the offering is not completed. The total deferred offering costs at June 30, 2023 and December 31, 2022 was $106,256
and $0, respectively.
Preferred Stock
ASC 480, Distinguishing
Liabilities from Equity, includes standards for how an issuer of equity (including equity shares issued by consolidated entities)
classifies and measures on its balance sheet certain financial instruments with characteristics of both liabilities and equity.
20/20 GENESYSTEMS, INC.
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
JUNE 30, 2023 AND 2022
Management is required
to determine the presentation for the Preferred Stock as a result of the redemption and conversion provisions, among other provisions
in the agreement. Specifically, management is required to determine whether the embedded conversion feature in the Preferred Stock is
clearly and closely related to the host instrument, and whether the bifurcation of the conversion feature is required and whether the
conversion feature should be accounted for as a derivative instrument. If the host instrument and conversion feature are determined to
be clearly and closely related (both more akin to equity), derivative liability accounting under ASC 815, Derivatives and Hedging,
is not required. Management determined that the host contract of the Preferred Stock is more akin to equity, and accordingly, derivative
liability accounting is not required by the Company.
Costs incurred directly
for the issuance of the Preferred Stock are recorded as a reduction of gross proceeds received by the Company.
Basic and Diluted
Loss Per Share
The Company follows
Financial Accounting Standards Board (“FASB”) ASC 260, Earnings per Share, to account for earnings per share. Basic
earnings per share calculations are determined by dividing net loss by the weighted average number of shares of common stock outstanding
during the year. Diluted earnings per share calculations are determined by dividing net income by the weighted average number of common
shares and dilutive common share equivalents outstanding. Dilutive common share equivalents include the dilutive effect of in-the-money
share equivalents, which are calculated, based on the average share price for each period using the treasury stock method. Under the
treasury stock method, the exercise price of an award, if any, the amount of compensation cost, if any, for future service that the Company
has not yet recognized, and the estimated tax benefits that would be recorded in paid-in capital, if any, when an award is settled are
assumed to be used to repurchase shares in the current period. During periods when common stock equivalents, if any, are anti-dilutive
they are not considered in the computation.
The following is a summary
of outstanding securities which have been included in the calculation of diluted net income (loss) per share and reconciliation of net
income (loss) to net income (loss) available to common stockholders for the six months ended June 30, 2023 and 2022.
| |
2023 | | |
2022 | |
Weighted average common shares outstanding used in calculating basic earnings per share | |
| 4,765,242 | | |
| 4,763,180 | |
Warrants to purchase Common Stock | |
| — | | |
| 88,632 | |
Options to purchase Common Stock | |
| — | | |
| 53,311 | |
Series C Preferred Stock | |
| — | | |
| 1,204,040 | |
Series B Preferred Stock | |
| — | | |
| 1,471,487 | |
Series A-2 Preferred Stock | |
| — | | |
| 442,402 | |
Series A-1 Preferred Stock | |
| — | | |
| 651,465 | |
Series A Preferred Stock | |
| — | | |
| 846,368 | |
Weighted average common shares outstanding used in calculating diluted earnings
per share | |
| 4,765,242 | | |
| 9,520,885 | |
The Company excluded 2,418,777 options, 71,660 warrants,
1,204,040 shares of Series C Preferred Stock, 1,471,487 shares of Series B Preferred Stock, 442,402 shares of Series A-2
Preferred Stock, 651,465 shares of Series A-1 Preferred Stock and 846,368 shares of Series A Preferred Stock from the computation
of diluted net income (loss) per share for the six months ended June 30, 2023 as they would be anti-dilutive due to the net loss.
The Company excluded 15,096 warrants and 180,917 options
from the computation of diluted net income per share for the six months ended June 30, 2022 as their exercise prices were in excess
of the most recent valuation of the Company’s common stock during that period. There are no material reconciling items to net income
to diluted net income for common shareholders.
20/20 GENESYSTEMS, INC.
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
JUNE 30, 2023 AND 2022
Revenue Recognition
In accordance with ASC
Topic 606, Revenue from Contracts with Customers, the Company recognizes revenue when the customer obtains control of promised
goods or services, in an amount that reflects the consideration which it expects to receive in exchange for those goods and services.
To determine revenue recognition for arrangements that the Company deems are within the scope of ASC Topic 606, the Company performs
the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract;
(iii) calculate transfer price; (iv) allocate the transaction price to the performance obligation in the contract; and (v) recognize
revenue when (or as) the entity satisfies a performance obligation.
Disaggregated Revenue ‒
The Company disaggregates revenue from contracts with customers by contract type, as it believes it best depicts how the nature, amount,
timing and uncertainty of revenue and cash flows are affected by economic factors.
The Company’s revenue by contract type
is as follows:
| |
For the Six Months Ended June
30, | |
| |
2023 | | |
2022 | |
Revenues | |
| | |
| |
BioCheck | |
$ | 108,858 | | |
$ | 74,362 | |
OneTest | |
| 360,070 | | |
| 186,392 | |
COVID-19 PCR Tests | |
| 250,145 | | |
| 8,729,633 | |
COVID-19 Antibody/Antigen Tests | |
| 2,375 | | |
| 56,127 | |
CLIAx | |
| 33,869 | | |
| 45,118 | |
Total revenues | |
$ | 755,317 | | |
$ | 9,091,632 | |
Performance Obligations — Performance
obligations for four different types of services are discussed below:
| ● | OneTest
— Revenues from the sale of OneTest are recognized when returned serum specimens are
analyzed in the Company’s CLIA laboratory and the results are reported to the customer.
The specific transaction price is provided to the customer at the time of purchase either
through the on-line portal or via a sales quote for commercial clients which may be discounted
from list price based on volume of tests ordered. Periodically discounts are provided to
individuals when purchased through our online portal. No estimates or adjustments are made
to the transaction price for returns or refunds, since these events rarely occur. There are
three customer groups: (i) individuals who purchase tests through the Company’s online
portal; (ii) commercial clients that pay upfront for test kits and (iii) professional health
organizations that purchase collection kits and are all billed upon completion of testing
and when results are reported to the customer. Contracts with customers do not contain significant
financing components based on the typical period between performance of services and collection
of consideration. There are very little requests for returns or refunds. |
| ● | BioCheck
— Revenues for kits are recognized when kits are shipped to the customer. The specific
transaction price is provided to the customer at the time of purchase which may be discounted
from list price based on the volume of tests ordered. No estimates or adjustments are made
to the transaction price for returns or refunds, since these events rarely occur. Customers’
payment terms are due upon receipt and are not provided significant financing components
based on the typical period between shipment of the product and collection of consideration.
There are no requests for returns or refunds. |
20/20 GENESYSTEMS, INC.
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
JUNE 30, 2023 AND 2022
| o | Point-of-Care
(POC) Test Kits ‒ Revenues for COVID-19 distributed test kits for use at the POC (i.e.,
rapid antigen and antibody tests) are recognized when test kits are shipped to the customer
based on negotiated prices per individual contracts. Customers’ payment terms are due
upon receipt of the invoice and are not provided significant financing components based on
the typical period between shipment of the product and collection of consideration. There
are no requests for returns or refunds. |
| o | COVID-19
Lab Tests (PCR) ‒ Revenues from the sale of COVID-19 viral (PCR) tests is recognized
when returned nasal swabs are analyzed in the Company’s CLIA laboratory and the results
are reported to the customer. |
| § | For
direct billing to customers, revenue is recorded based on the agreed contracted amount for
each test completed. Customers’ payment terms are net 30 days and are not provided
significant financing components based on the typical period between completed tests and
collection of consideration. |
| § | For
insurance, the Company estimates the amount of consideration it expects to be entitled to
receive from customer groups in exchange for providing services using the portfolio approach
practical expedient. The use of the expedient is not expected to differ materially from applying
the guidance to an individual contract. These estimates are based on utilizing the expected
value method and include the impact of contractual allowances (including payer denials).
The portfolios determined using the portfolio approach consist of the following groups of
customers which are similar since they are all insurance providers with similar reimbursement
practices: healthcare insurers and government payers (Medicare and Medicaid programs). The
process for estimating revenues and the ultimate collection of accounts receivable involves
significant judgment and estimation. The Company follows a standard process, which considers
historical denial and collection experience and other factors (including the period of time
that the receivables have been outstanding), to estimate contractual allowances and recording
adjustments in the current period as changes in estimates. Further adjustments to the allowances,
based on actual receipts, may be recorded upon settlement. The Company relies on a third
part billing company to process all claims to be paid by insurance providers. As a result,
the average days to receive payment on these types of claims exceeds ninety days in some
cases. As of June 30, 2023, the Company was owed $49,651 from insurance companies. These
claims, if denied by the insurance provider, can be billed directly to the customer contracted
with the Company to provide the service. The Company has successfully billed back to the
customer all denied claims to date related to COVID-19 testing. |
| o | CLIAx
– Contractually, the Company can earn revenue in two ways: (i) by providing laboratory
services and (ii) through co-marketing activities of the CLIAx clients laboratory developed
tests. Revenue for laboratory services is recognized monthly based on agreed laboratory activities
for space, equipment use and contracted personnel. The revenue that can be earned through
co-marketing activities would be recognized if the Company sells any of the customer’s
products. As of June 30, 2023, the CLIAx customer is working through its marketing plan and
the Company has not yet performed any co-marketing activities and as a result has not sold
any CLIAx products or recognized any related revenue. |
Deferred revenue represents contract liabilities
that are recorded when cash payments are received or are due in advance of the Company’s satisfaction of performance obligations.
The deferred revenue as of June 30, 2023 and December 31, 2022 is $353,789 and $316,222, respectively, and are related to OneTest.
Seasonality
The Company’s significant fluctuation in
COVID-19 viral testing solutions is affected by the pattern of seasonality subject to the unpredictable demand for viral testing
in Maryland. With the significant decline in incidences and requirement for testing, the Company has anticipated the material decrease
in revenue and cash flow related to the COVID-19 testing.
Shipping and Handling
Amounts billed to a
customer for shipping and handling are reported as revenues. Costs related to shipments to customers are classified as cost of sales
and totaled $79,273 and $141,864 for the six months ended June 30, 2023 and 2022, respectively.
20/20 GENESYSTEMS, INC.
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
JUNE 30, 2023 AND 2022
Research and Development
The Company incurs research
and development costs during the process of researching and developing the Company’s laboratory tests, algorithms, information
technologies, and other intellectual properties. The Company’s research and development costs consist primarily of data acquisition
and personnel costs of scientists and laboratory technicians. The Company expenses these costs as incurred until the resulting product
has been completed, tested, validated, and made ready for commercial use.
Advertising
The Company expenses
advertising costs as incurred. Advertising expenses were $331,616 and $84,329 for the six months ended June 30, 2023 and 2022, respectively.
Stock-Based Compensation
The Company accounts
for stock awards issued under ASC 718, Compensation – Stock Compensation. Under ASC 718, stock-based compensation cost is
measured at the grant date, based on the estimated fair value of the award. Stock-based compensation is recognized as an expense over
the employee’s requisite vesting period and over the non-employee’s period of providing goods or services. The fair value
of each stock option or warrant award is estimated on the date of grant using the Black-Scholes option valuation model. Restricted shares
are measured based on the fair market value of the underlying stock on the grant date.
Income Taxes
The Company applies
ASC 740, Income Taxes. Deferred income taxes are recognized for the tax consequences in future years of differences between the
tax bases of assets and liabilities and their financial statement reported amounts at each period end, based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The provision for income taxes represents
the tax expense for the period, if any, and the change during the period in deferred tax assets and liabilities. As of June 30, 2023,
and December 31, 2022, the Company has a valuation allowance on the net deferred assets due to the continued likelihood that realization
of any future benefit from deductible temporary differences and net operating loss carryforwards cannot be sufficiently assumed.
ASC 740 also provides
criteria for the recognition, measurement, presentation, and disclosure of uncertain tax positions. A tax benefit from an uncertain position
is recognized only if it is “more likely than not” that the position is sustainable upon examination by the relevant taxing
authority based on its technical merit. Interest and penalties, if any, are accrued as a component of operating expenses when assessed.
Concentrations
The Company maintains
its cash at various financial institutions located in the United States of America which it believes to be credit worthy. Balances are
insured by the Federal Deposit Insurance Corporation up to $250,000. At times, the Company maintains balances in excess of the federally
insured limits. The Company has not experienced any losses with respect to its cash balances.
As of June 30, 2023,
approximately 31% of total accounts receivable were due from two sources. As of December 31, 2022, approximately 51% of total accounts
receivable were due from one source. During the six months ended June 30, 2023, approximately 56% of total revenues was received from
one source. During the six months ended June 30, 2022, approximately 97% of total revenues were received from two sources. With the decline
in COVID-19 incidences, one of the Company’s customers stopped testing in September 2022 and the other has ceased their COVID-19
testing in May 2023. The Company anticipated the significant impact of the slow-down in demand for this testing in its 2023 forecasted
revenue and cash flow.
20/20
GENESYSTEMS, INC.
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
JUNE 30, 2023 AND 2022
Risks and Uncertainties
In response to the novel coronavirus pandemic
that began in early 2020, the Company expanded its business and offered several COVID-19 testing solutions, both rapid kits and laboratory-based
tests. In the fourth quarter of 2022 and through 2023, revenues from COVID-19 have decreased substantially.
Recent Accounting Pronouncements
Management does not believe that any recently
issued, but not yet effective, authoritative guidance, if currently adopted, would have a material impact on the Company’s financial
statement presentation or disclosures.
NOTE 3 – PROPERTY AND EQUIPMENT
Property and equipment
consisted of the following:
| |
June 30,
2023 | | |
December 31,
2022 | |
Office equipment | |
$ | 160,669 | | |
$ | 160,669 | |
Furniture and fixtures | |
| 58,794 | | |
| 54,112 | |
Laboratory equipment | |
| 610,550 | | |
| 896,636 | |
Vehicles | |
| 40,555 | | |
| 40,555 | |
Leasehold improvements | |
| 12,221 | | |
| 12,221 | |
Total property and equipment | |
| 882,789 | | |
| 1,164,193 | |
Less accumulated depreciation | |
| (586,273 | ) | |
| (583,282 | ) |
| |
$ | 296,516 | | |
$ | 580,911 | |
In the six
months ended June 30, 2023, the Company performed an impairment analysis of laboratory equipment due to an anticipated material
decrease in revenue and cash flow related to the COVID-19 testing and, consequently, the ceasing of testing contracts in May 2023
and, in accordance with the FASB guidance, recorded an impairment charge of $209,073. The fixed asset
impairment charges are included as a component of operating expenses in a separate line on the accompanying statements of
operations. The total laboratory equipment used in the PCR testing activities had a net book value of $415,131. It was determined
after discussion with lab personnel that certain PCR laboratory equipment could be repurposed for potential future products and
would be retained for research and development. The net book value of this equipment that remains in fixed assets equals $161,136
and will continue to be depreciated to research and development costs. As of June 30, 2023, the Company had approximately $26,393 in
PCR testing inventory and will expense as used throughout the remainder of 2023 for research and development activities.
Depreciation expenses were $80,005 and $84,611 for the six months ended June 30, 2023 and 2022, respectively.
NOTE 4 – INTANGIBLE ASSETS
Intangible assets consisted
of the following:
| |
June 30,
2023 | | |
December 31,
2022 | |
Issued patents (amortized) | |
$ | 31,840 | | |
$ | 31,840 | |
Unissued patents (unamortized) | |
| 195,005 | | |
| 177,423 | |
Software development costs | |
| - | | |
| 45,575 | |
Total patents | |
| 226,845 | | |
| 254,838 | |
Less accumulated amortization | |
| (31,217 | ) | |
| (75,435 | ) |
| |
$ | 195,628 | | |
$ | 179,403 | |
Amortization expense
for intangible assets was $1,356 and $8,392 for the six months ended June 30, 2023 and 2022, respectively. Unissued patents represent
the legal fees incurred to file and prosecute patents prior to issuance. The unissued patents are for active pending patents only, any
accumulated legal fees associated with abandoned unissued patents are expensed in the period they are abandoned.
20/20
GENESYSTEMS, INC.
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
JUNE 30, 2023 AND 2022
NOTE 5 – FINANCING LEASES
In January 2021, the Company leased certain equipment
under separate non-cancelable equipment loan and security agreements. The agreements mature in December 2023. The agreements
require various monthly payments of principal and interest through maturity and are secured by the assets under lease. As of June
30, 2023, $173,915 of financing lease equipment and $98,457 of accumulated depreciation are included in property and equipment on the
balance sheets. The weighted average interest rate was 6.2% at June 30, 2023 and December 31, 2022.
Future minimum lease payments under the leases
as of June 30, 2023 are as follows:
2023 (remainder) | |
$ | 27,083 | |
Total lease payments | |
| 27,083 | |
Less: amount representing interest | |
| (594 | ) |
Less: lease deposit | |
| (10,784 | ) |
Total lease payments | |
$ | 15,705 | |
As of June 30, 2023, the weighted-average remaining
lease term for all finance leases is six months.
NOTE 6 – OPERATING LEASES
On March 18, 2021, the Company entered into a
lease agreement with Shady Grove Development Park IX L.L.L.P. for a new office and laboratory space totaling 5,511 square feet in Gaithersburg,
Maryland. The term of the lease commenced on December 1, 2021 and shall expire 88 months thereafter. The initial monthly rent is $10,676
with annual increases to $17,308 for the final year of the lease. The Company will also pay its 7.75% pro rata portion of the property
taxes, operating expenses and insurance costs and is also responsible to pay for the utilities used on the premises.
On September 29, 2022, the Company entered into
a lease agreement with Abbott Laboratories, Inc. for laboratory equipment (analyzer). The term of the lease commenced on December 1,
2022 and shall expire 84 months thereafter. The monthly rental payments are $1,488 throughout the term of the lease. The Company also
has a commitment to purchase $86,000 of consumables annually during the term of the lease.
Supplemental balance sheet information related
to this lease is as follows:
| |
June 30,
2023 | |
Operating lease right-of-use lease asset | |
$ | 1,242,936 | |
Accumulated amortization | |
| (231,173 | ) |
Net balance | |
$ | 1,011,763 | |
| |
| | |
Lease liability, current portion | |
| 158,481 | |
Lease liability, long term | |
| 922,382 | |
Total operating lease liabilities | |
$ | 1,080,863 | |
| |
| | |
Weighted Average Remaining Lease Term – operating leases | |
| 73 months | |
| |
| | |
Weighted Average Discount Rate – operating leases | |
| 9.026 | % |
Future minimum lease payments under this operating
lease as of June 30, 2023, were as follows:
2023 (Remainder of year) | |
$ | 97,582 | |
2024 | |
| 199,629 | |
2025 | |
| 204,632 | |
2026 | |
| 209,767 | |
Thereafter | |
| 503,790 | |
Total lease payments | |
| 1,215,400 | |
Less imputed interest | |
| (134,537 | ) |
Maturities of lease liabilities | |
$ | 1,080,863 | |
20/20 GENESYSTEMS, INC.
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
JUNE 30, 2023 AND 2022
NOTE 7 – CONVERTIBLE NOTE PAYABLE
On August 15, 2022, the Company launched an equity
crowdfunding offering under Section 4(a)(6) of the Securities Act of 1933, as amended (the “Securities Act”), and Regulation
Crowdfunding promulgated thereunder, pursuant to which the Company offered convertible promissory notes. As of June 30, 2023 and December
31, 2022, the Company had outstanding convertible promissory notes in the aggregate principal amount of $213,010. The notes bear interest
at rates ranging from 6% to 11.10%, cannot be prepaid without a majority investor vote and are due and payable twenty-four (24) months
after the date of issuance. The notes are unsecured, contain customary events of default and are convertible into Common Stock as follows:
| ● | In the event that the Company issues
and sells Common Stock or Preferred Stock to investors in a transaction or series of transactions
resulting in gross proceeds of at least $100,000, excluding debt or the issuance of Common
Stock or Preferred Stock in asset purchase or strategic merger or acquisition (a “Qualified
Financing”), then the entire unpaid principal amount and all accrued, but unpaid interest
shall convert into Common Stock at conversion price equal to the lesser of (i) 90% of the
per share price paid by such investors or (ii) the price equal to the quotient of $58,400,000
divided by the aggregate number of outstanding shares of Common Stock as of immediately prior
to the initial closing of the Qualified Financing (assuming full conversion or exercise of
all convertible and exercisable securities then outstanding other than these notes); |
| ● | In the event the Company completes
an equity financing in which it sells Common Stock or Preferred Stock in a transaction that
does not constitute a Qualified Financing, then the note holder has the option to treat such
equity financing as a Qualified Financing on the same terms set forth above; |
| ● | Upon the earlier to occur of (i)
the closing of the sale of Common Stock to the public at a price of at least $8.15 per share
(subject to appropriate adjustment in the event of any stock dividend, stock split, combination
or other similar recapitalization with respect to the Common Stock) in a public offering
pursuant to an effective registration statement or offering statement (Regulation A) under
the Securities Act resulting in at least $5,000,000 of gross proceeds, (ii) the date on which
the Company’s Common Stock is listed on a national stock exchange, including without
limitation, NYSE American or the Nasdaq Capital Market, or (iii) the date and time, or the
occurrence of an event, specified by vote or written consent of the holders of at least a
majority in principal amount of the then outstanding notes, then the entire unpaid principal
amount and all accrued, but unpaid interest shall convert into Common Stock at conversion
price equal to the quotient of $58,400,000 divided by the aggregate number of outstanding
shares of Common Stock as of immediately prior to the consummation of the event described
above; and |
| ● | The entire outstanding principal
balance and all unpaid accrued interest shall automatically be converted into Common Stock
at a conversion price equal to the quotient of $58,400,000 divided by the aggregate number
of outstanding shares of Common Stock as of immediately prior to the conversion (assuming
full conversion or exercise of all convertible and exercisable securities then outstanding
other than these notes) as soon as reasonably practicable following the maturity date. |
As of June 30, 2023 and December 31, 2022, the
outstanding balance of these notes is $218,061 and $207,246, respectively, net of unamortized debt issuance cost of $7,583 and $10,187
and an accrued interest balance of $12,634 and $4,423, respectively.
20/20 GENESYSTEMS, INC.
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
JUNE 30, 2023 AND 2022
Interest expense on the notes totaled $8,211 for
the six months ended June 30, 2023, and the Company recorded amortization of debt discount in the amount of $2,604 during the six
months ended June 30, 2023.
NOTE 8 – COMMITMENTS AND CONTINGENCIES
Royalties and License Agreements
License agreements consisted of the following:
| |
June 30,
2023 | | |
December 31,
2022 | |
International license agreement | |
$ | 450,008 | | |
$ | 450,008 | |
Total license agreements | |
| 450,008 | | |
| 450,008 | |
Less accumulated amortization | |
| (120,329 | ) | |
| (109,079 | ) |
| |
$ | 329,679 | | |
$ | 340,929 | |
The Company has amortized the license agreement
over the term amounting to an amortization expense of $11,250 for the six months ended June 30, 2023 and 2022.
In November 2017, the Company executed a
license agreement with a foreign entity to obtain and secure an exclusive license to certain technology, intellectual property, and data
relating to the Company’s OneTest in exchange for $150,000 of certain up-front fees and $300,008 in Common Stock and ongoing royalty
fees. In accordance with ASC 730-10-25-2.c, Topic 350-30-25-1, the Company recognized the $150,000 in up-front fees paid and the $300,008
in Common Stock as a non-current asset identified as a license fee since the technology has an alternative future use when combined with
other biomarkers specific to certain cancer types such as Lung or Pancreas. The Company entered an exclusive license to the technology
until the last patent included in the specified technology expires, or 20 years. The Company has amortized the license agreement over
the term amounting to an accumulative amortization of $120,329 and $109,079 as of June 30, 2023 and December 31, 2022, respectively.
On a semi-annual basis, the Company expenses a royalty fee owed to the licensor as a percentage of OneTest revenue net of certain cost
of revenues.
In August 2022, the Company entered into a three-year
agreement to obtain and secure an exclusive license to certain multi-cancer diagnostic testing technology that incorporates additional
biomarkers not currently part of the Company’s OneTest. This product once validated will be marketed as OneTest Premium. In addition
to OneTest Premium, the license agreement provides access to other technology for tests that assess various chronic diseases such as
immune function, cardiovascular function and diabetic propensity that utilize measurement of additional biomarkers. In accordance with
ASC 730-10-25-2.c, Topic 350-30-25-1, the Company paid $300,000 in license fees; $150,000 upon signing, and $150,000 upon validation
of the test. The initial $150,000 paid up-front has been capitalized in other assets as a prepaid royalty which will be expensed through
the recognition of royalty fees incurred on each sale. The second fee of $150,000 paid upon validation of the product was expensed when
paid to research and development costs since this payment was specifically for help in validating the test in the Company’s laboratory.
Upon validation, the Company will recognize future per-test royalty fees in the range of $12-$25 per test sold.
On January 6, 2023, the Company entered into
an option agreement to license certain proprietary technology from a leading cancer research institute for their in vitro diagnostics
in the field of lung cancer blood-based predisposition evaluation tool. The initial six-month option costs the Company $70,000 and a
portion of the patent fees. The agreement was not extended on July 6, 2023 and as a result, the $70,000 upfront fee was expensed to research
and development costs as of June 30, 2023 as there was not alterative use for the license fee paid.
NOTE 9 – STOCKHOLDERS’ EQUITY
Preferred Stock
The Company has authorized the issuance of 10,000,000
shares of Preferred Stock with par value of $0.01, of which 1,303,000 have been designated as Series A Preferred Stock, 978,000 have
been designated as Series A-1 Preferred Stock, 800,000 shares have been designated as Series A-2 Preferred Stock, 3,569,405 shares have
been designated as Series B Preferred Stock and 3,340,909 shares have been designated as Series C Preferred Stock.
20/20
GENESYSTEMS, INC.
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
JUNE 30, 2023 AND 2022
Series A Preferred Stock
As of June 30, 2023 and December 31, 2022, there
were 846,368 shares of Series A Preferred Stock issued and outstanding. No shares of Series A Preferred Stock were issued during the
six months ended June 30, 2023 and 2022.
Series A-1 Preferred Stock
As of June 30, 2023 and December 31, 2022, there
were 651,465 shares of Series A-1 Preferred Stock issued and outstanding. No shares of Series A-1 Preferred Stock were issued during
the six months ended June 30, 2023 and 2022.
Series A-2 Preferred Stock
As of June 30, 2023 and December 31, 2022, there
were 442,402 shares of Series A-2 Preferred Stock issued and outstanding. No shares of Series A-2 Preferred Stock were issued during
the six months ended June 30, 2023 and 2022.
Series B Preferred Stock
As of June 30, 2023 and December 31, 2022, there
were 1,471,487 shares of Series B Preferred Stock issued and outstanding. No shares of Series B Preferred Stock were issued during the
six months ended June 30, 2023 and 2022.
Series C Preferred Stock
As of June 30, 2023 and December 31, 2022, there
were 1,204,040 shares of Series C Preferred Stock issued and outstanding. In March 2022, an aggregate of 1,029 shares of Series C
Preferred Stock were converted into 1,029 shares of Common Stock.
Common Stock
As of June 30, 2023 and December 31, 2022, there
were 4,765,311 and 4,764,811 shares of Common Stock and outstanding, respectively.
During the six months ended June 30, 2023, the
Company issued 500 shares of Common Stock upon the exercise of warrants for proceeds of $5.
During the six months ended June 30, 2022, the
Company issued 1,029 shares of Common Stock upon the conversion of 1,029 shares of Series C Preferred Stock.
Stock Options
In 2007, the board of directors adopted the 20/20
GeneSystems, Inc. 2007 Equity Compensation Plan (the “2007 Plan”). The 2007 Plan provided for the grant of equity awards
to employees and non-employees, including stock options and stock-based awards. Up to 500,000 shares of Common Stock could be issued
pursuant to awards granted under the 2007 Plan. The 2007 Plan was administered by the board of directors and expired in 2017, ten years
after adoption.
On January 26, 2022, the board of directors
adopted the 20/20 GeneSystems, Inc. 2022 Stock Incentive Plan (the 2022 Plan”), which was approved by stockholders on June 15,
2022. Awards that may be granted include incentive stock options as described in section 422(b) of Internal Revenue Code of 1986,
as amended, non-qualified stock options (i.e., options that are not incentive stock options) and awards of restricted stock. Up to 3,000,000
shares of Common Stock may be issued under the 2022 Plan.
On April 1, 2023, the Company issued a non-qualified
stock option for the purchase of 50,000 shares at an exercise price of $1.74 per share to an officer under the 2022 Plan which vests
25% on the first anniversary of the date of grant and monthly thereafter for remaining 36 months. Management determines the value
of options granted using the calculated value method and the Black-Scholes option pricing model. The fair value of the stock options
issued in 2023 was determined using the Black Scholes option pricing model with the following assumptions: dividend yield: 0%; volatility:
82.8%; risk free rate 3.6%; estimated term five years for a total fair market value of $58,560.
20/20 GENESYSTEMS, INC.
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
JUNE 30, 2023 AND 2022
On January 1, 2023, the Company issued non-qualified
stock options for the purchase of an aggregate of 1,485,000 shares of Common Stock at an exercise price of $1.74 per share, which represented
the fair market value of the Company’s Common Stock on date of grant, under the 2022 Plan, which 1,130,000 options issued to certain
employees and officers vest 50% upon the date of grant and the remainder vest over 24 months, 235,000 options issued to certain
employees and officers vest 25% on the first anniversary of the date of grant and monthly thereafter for remaining 36 months, and
120,000 options to certain directors that vest over a term of one year. Management determines the value of options granted using the
calculated value method and the Black-Scholes option pricing model. The fair value of the stock options issued in 2023 was determined
using the Black Scholes option pricing model with the following assumptions: dividend yield: 0%; volatility: 79.7% to 92.7%; risk free
rate: 3.99% to 4.73%; estimated term of five years for a total fair market value of $1,734,060.
On February 1, 2022, the Company granted
non-qualified stock options for the purchase of 300,668 shares of Common Stock at an exercise price of $1.0643 per share, which represented
the fair market value of the Company’s Common Stock on date of grant, to certain directors of the Company. An aggregate of 150,332
shares vested in full on the date of grant and an aggregate of 150,336 shares vest monthly over one year. Management determines the value
of options granted using the calculated value method and the Black-Scholes option pricing model. The fair value of the stock options
issued in 2022 was determined using the Black Scholes option pricing model with the following assumptions: dividend yield: 0%; volatility:
68.5%; risk free rate: 1.63%; estimated term of five years for a total fair market value of $183,708.
With the assistance of third parties, the Company
determined the fair market value of its Common Stock underlying the stock options comparing a market approach through analysis of comparable
public companies and a venture funding approach taking into account the senior terms of the Company’s Preferred Stock as compared
to the Common Stock to arrive at a fair market value per share estimate for a common share. Once calculated, the Company applied a discount
of 27% to account for the lack of marketability.
The risk-free interest rate assumption for options
granted is based upon observed interest rates on the United States government securities appropriate for the expected term of the Company’s
employee stock options.
The expected term of employee stock options is
calculated using the simplified method which takes into consideration the contractual life and vesting terms of the options.
The Company determined the expected volatility
assumption for options granted using the historical volatility of comparable public companies’ common stock. The Company will continue
to monitor peer companies and other relevant factors used to measure expected volatility for future stock option grants, until such time
that the Company’s Common Stock has enough market history to use historical volatility.
The dividend yield assumption for options granted
is based on the Company’s history and expectation of dividend payouts. The Company has never declared or paid any cash dividends
on its Common Stock, and the Company does not anticipate paying any cash dividends in the foreseeable future.
The Company recognizes stock option forfeitures
as they occur as there is insufficient historical data to accurately determine future forfeitures rates.
At times, the Company granted stock options under
the 2007 Plan in excess of the authorized shares under the plan. However, as of June 30, 2023 and December 31, 2022, due to forfeitures
the number of options outstanding under the 2007 Plan are less than the authorized shares. The Company does not believe that such non-compliance
with the 2007 Plan limits causes significant exposure to the Company as any options in excess have been forfeited and any such compensation
expense has been recognized in historical financial information in compliance with applicable accounting standards. In 2017, the 2007
Plan expired.
During the six months ended June 30, 2023
and 2022, the Company recorded stock-based compensation of $915,590 and $130,153, respectively, recorded within the sales, general and
administrative expenses. As of June 30, 2023, there was approximately $821,285 of total unrecognized share-based compensation related
to unvested stock options, which the Company expects to recognize over five years.
20/20 GENESYSTEMS, INC.
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
JUNE 30, 2023 AND 2022
A summary of the incentive stock option activity
is as follows:
| |
Total Options | | |
Weighted Average Exercise
Price Per Share | | |
Total Weighted Average Remaining
Contractual Life | |
Options outstanding, January 1, 2023 | |
| 21,362 | | |
$ | 4.50 | | |
| 0.83 | |
Granted | |
| - | | |
| - | | |
| - | |
Exercised | |
| - | | |
| - | | |
| - | |
Expired | |
| - | | |
| - | | |
| - | |
Options outstanding, June 30, 2023 | |
| 21,362 | | |
$ | 4.50 | | |
| 0.34 | |
| |
| | | |
| | | |
| | |
Options exercisable, June 30, 2023 | |
| 21,362 | | |
$ | 4.50 | | |
| 0.34 | |
There is no remaining unvested expense related
to these stock options.
A summary of the Company’s non-qualified
stock option activity is as follows:
| |
Total Options | | |
Weighted
Average Exercise
Price Per Share | | |
Total Weighted
Average
Remaining
Contractual Life | |
Options outstanding, January 1, 2023 | |
| 927,415 | | |
$ | 1.08 | | |
| 7.72 | |
Granted | |
| 1,535,000 | | |
| 1.74 | | |
| 10.0 | |
Exercised | |
| - | | |
| - | | |
| - | |
Expired | |
| - | | |
| - | | |
| - | |
Forfeited | |
| (65,000 | ) | |
| 1.74 | | |
| 9.75 | |
Options outstanding, June 30, 2023 | |
| 2,397,415 | | |
$ | 1.49 | | |
| 8.63 | |
| |
| | | |
| | | |
| | |
Options exercisable, June 30, 2023 | |
| 1,619,536 | | |
$ | 1.36 | | |
| 8.21 | |
Warrants
On April 19, 2022, the Company issued a five-year
warrant for the purchase of 91 shares of Common Stock at an exercise price of $4.40 (subject to standard adjustments) to a consultant
for a value of $28 as partial compensation for services rendered and recorded in general and administrative costs.
NOTE 10 – RELATED PARTY TRANSACTIONS
The Company utilizes the services of the brother
of the Chief Executive Officer, who is trained as a computer engineer and has over seven years’ experience with clinical lab operations,
to oversee the Company’s laboratory information systems and patient/physician portals. During the six months ended June 30, 2023
and 2022, the Company paid $61,624 and $57,790, respectively, to this related party.
The Chief Executive Officer founded an organization
in January 2021 to create an alliance of clinical labs, entrepreneurs, scientists, healthcare providers, and concerned citizens who oppose
Congressional legislation to require FDA pre-approval for new laboratory tests, known as the VALID Act. The Company contributed $22,000
and $0 in the six months ending June 30, 2023 and 2022, respectively, to this organization.
NOTE 11 – SUBSEQUENT EVENTS
The Company has evaluated subsequent events that
occurred after July 1, 2023 through September 8, 2023, the issuance date of these financial statements. Except as set forth below, there
have been no events or transactions during this time which would have a material effect on these financial statements.
On July 18, 2023, the Company filed a Certificate
of Amendment of Second Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware, pursuant
to which the authorized Common Stock was increased from 25,000,000 shares to 50,000,000 shares and the authorized Preferred Stock was
increased from 10,000,000 shares to 20,000,000 shares.
Exhibit No. |
|
Description |
2.1 |
|
Second Amended and Restated Certificate of Incorporation of 20/20 GeneSystems, Inc. (incorporated by reference to Exhibit 2.1 to the Semiannual Report on Form 1-SA filed on November 15, 2018) |
2.2 |
|
Certificate of Amendment to Second Amended and Restated Articles of Incorporation of 20/20 GeneSystems, Inc. |
2.3 |
|
Certificate of Designation of Series C Preferred Stock (incorporated by reference to Exhibit 2.2 to the Annual Report on Form 1-K filed on July 6, 2020) |
2.4 |
|
Amended and Restated Bylaws of 20/20 GeneSystems, Inc. (incorporated by reference to Exhibit 2.3 to the Annual Report on Form 1-K filed on July 6, 2020) |
6.1 |
|
Lease Agreement, dated March 18, 2021, between Shady Grove Development Park IX L.L.L.P. and 20/20 GeneSystems, Inc. (incorporated by reference to Exhibit 6.11 to the Annual Report on Form 1-K filed on April 30, 2021) |
6.2 |
|
Employment Agreement, dated May 5, 2019, between 20/20 GeneSystems, Inc. and Jonathan Cohen (incorporated by reference to Exhibit 6.8 to the Offering Statement on Form 1-A filed on August 12, 2019) |
6.3 |
|
20/20 GeneSystems, Inc. 2022 Stock Incentive Plan (incorporated by reference to Exhibit 6.3 to the Annual Report on Form 1-K filed on May 26, 2022) |
6.4 |
|
Form of Stock Option Agreement (incorporated by reference to Exhibit 6.4 to the Annual Report on Form 1-K filed on May 26, 2022) |
6.5 |
|
Form of Restricted Stock Award Agreement (incorporated by reference to Exhibit 6.5 to the Annual Report on Form 1-K filed on May 26, 2022) |
SIGNATURES
Pursuant to the requirements
of Regulation A, the issuer has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: September 8, 2023 |
20/20 GENESYSTEMS, INC. |
|
|
|
/s/ Jonathan Cohen |
|
Name: Jonathan Cohen |
|
Title: Chief Executive Officer |
|
(Principal Executive Officer) |
|
|
|
/s/ Anne Shiflett |
|
Name: Anne Shiflett |
|
Title: Acting Chief Financial Officer |
|
(Principal Financial and Accounting Officer) |
29
Exhibit 2.2
20 20 GeneSystems (GM) (USOTC:TWTG)
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