PRED Predictive Technology Group Inc (CE)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1- BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES

BUSINESS DESCRIPTION:

Predictive Technology Group, Inc., together with its subsidiaries (collectively, "PTG", "Predictive" or the "Company"), develops and commercializes discoveries and technologies involved in novel molecular diagnostic, therapeutic, and Human Cellular and Tissue-Based Products ("HCT/Ps"). The Company uses this information as the cornerstone in the development of new diagnostics that assess a person's risk of disease and develop pharmaceutical therapeutics and HCT/Ps for use by healthcare professionals to improve outcomes in their patients.  The Company's corporate headquarters are in Salt Lake City, Utah.

SEGMENT INFORMATION:

Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker (CODM) in making decisions regarding resource allocation and assessing performance.  The Company operates in two reportable segments, which are differentiated by product.  The HCT/P segment offers minimally manipulated tissue products intended for homologous use, prepared utilizing proprietary extraction methods that reduce the loss of important scaffolding, growth factors and cytokines.  The Company's Diagnostics and Therapeutics segment uses data analytics for disease identification and subsequent therapeutic intervention through novel gene-based diagnostics, and companion therapeutics. Lastly, the "Unallocated Corporate" column in the table below represents those headquarters activities that do not qualify as operating segments, and which are not allocated to operating segments in information provided to the CODM. We currently sell our products exclusively in the United States.

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Segment revenue and operating loss were as follows during the periods presented:

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BASIS OF PRESENTATION:

The accompanying condensed consolidated financial statements have been prepared by Predictive Technology Group, Inc. (the "Company" or "Predictive") in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") for financial information and pursuant to the applicable rules and regulations of the Securities and Exchange Commission ("SEC"). The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. In the opinion of management, the accompanying financial statements contain all adjustments (consisting of normal and recurring accruals) necessary to present fairly all financial statements in accordance with U.S. GAAP.

The condensed consolidated financial statements herein should be read in conjunction with the Company's audited consolidated financial statements and notes thereto for the fiscal year ended June 30, 2020, included in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2020. Operating results for the three and nine months ended March 31, 2021 may not necessarily be indicative of results to be expected for any other interim period or for the full fiscal year.

Fiscal Year End

The Company operates on a fiscal year basis with the fiscal year ending on June 30.

Consolidation

These condensed consolidated financial statements include the financial statements of Predictive Technology Group, Inc. and its wholly owned subsidiaries.  All inter-company accounts and transactions have been eliminated in consolidation.

Going Concern

The accompanying financial statements have been prepared under the assumption that the Company will continue to operate as a going concern, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts of liabilities that may result from any inability of the Company to continue as a going concern within one year from the date of issuance of these financial statements.

The Company incurred a net loss attributable to common shareholders of $29,952,038 and net cash outflows from operations of $6,338,675 for the nine months ended March 31, 2021. At March 31, 2021, the Company had $151,993 of cash and negative working capital of $21,788,457. The Company's historical and current use of cash in operations combined with limited liquidity resources raise substantial doubt regarding the Company's ability to continue as a going concern. Management may seek additional capital through debt financings, collaborative or other funding arrangements with partners, or through other sources of financing. Should the Company seek additional financing from outside sources, the Company may not be able to raise such financing on terms acceptable to the Company or at all. If the Company is unable to raise additional capital when required or on acceptable terms, this could have a material adverse effect on liquidity. In such a case, the Company may be required to scale back or to discontinue the promotion of currently available products, scale back or discontinue the advancement of product candidates, reduce headcount, file for bankruptcy, reorganize, merge with another entity, or cease operations.

Cash Equivalents

The Company considers all highly-liquid investments with a maturity of three months or less, when purchased, to be cash equivalents.  The Company places its temporary cash investments with high-quality financial institutions.  

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Accounts Receivable and Allowance for Doubtful Accounts

Trade accounts receivable are primarily comprised of amounts due from sales of the Company's HCT/P products that are recorded at the invoiced amount, and deposits in transit from credit card processors. The allowance for doubtful accounts is based on the Company's best estimate of the amount of probable losses in the Company's existing accounts receivable, which is based on historical write-off experience, customer creditworthiness, facts and circumstances specific to outstanding balances, and payment terms. Account balances are charged against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance-sheet credit exposure related to its customers and does not require collateral.

Inventory

Inventory consists primarily of HCT/Ps produced by Predictive Biotech, Inc. ("Predictive Biotech"), a wholly owned subsidiary and laboratory supplies used in genetic testing performed by Predictive Laboratories, Inc. ("Predictive Labs").  We value inventory at the lower of cost or net realizable value. We determine the cost of inventory using the standard cost method, which approximates actual cost based on a first-in, first-out method.  All other costs, including administrative costs, are expensed as incurred.

We analyze our inventory levels at least quarterly and write down inventory that has a cost basis in excess of its expected net realizable value, or that is considered in excess of normal operating levels, as determined by management.  We also reserve for the quantity of quarantined (WIP) inventory that is not expected to pass quality control based on historical averages. The related costs are recognized as cost of goods sold in the condensed consolidated statements of operations.

Prepaid Expenses

Amounts paid in advance for expenses are accounted for as prepaid expenses and classified as current assets if such amounts are to be recognized as expense within one year from the balance sheet date.

Property and Equipment

Lab equipment, furniture and computer equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method based on the lesser of estimated useful lives of the related assets or the underlying lease term. Lab equipment items have depreciable lives of 5 years, furniture items have depreciable lives of 7 years, and computer equipment items have depreciable lives of 5 years. Repair and maintenance costs are charged to expense as incurred. Amortization of assets recorded under finance leases is included in depreciation expense.

The Company reviews property and equipment for impairment. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of these assets is measured by comparison of their carrying amounts to future undiscounted cash flows the assets are expected to generate. If property and equipment are impaired, the impairment to be recognized equals the amount by which the carrying value of the assets exceeds its fair market value.

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Leases

We have entered into operating and finance lease agreements primarily for office and laboratory facilities and laboratory equipment located in Salt Lake City, Utah with lease periods expiring between 2021 and 2023.

We determine if an arrangement is a lease at inception. For all classes of underlying assets, we elect not to recognize right of use assets or lease liabilities when a lease has a lease term of 12 months or less at the commencement date and does not include an option to purchase the underlying asset that we are reasonably certain to exercise. Operating lease assets and liabilities are included on our condensed consolidated balance sheet beginning July 1, 2019. Finance lease assets are included in property and equipment, net.

Operating lease assets and liabilities are recognized at the present value of the future lease payments at the lease commencement date. The interest rate used to determine the present value of the future lease payments is our incremental borrowing rate, because the interest rate implicit in most of our leases is not readily determinable. Our incremental borrowing rate is estimated to approximate the interest rate on a collateralized basis with similar terms and payments, and in economic environments where the leased asset is located. Operating lease assets also include any prepaid lease payments and lease incentives. Our lease terms include periods under options to extend or terminate the lease when it is reasonably certain that we will exercise that option. We generally use the base, non-cancelable, lease term when determining the lease assets and liabilities. Operating lease expense is recognized on a straight-line basis over the lease term.

Our lease agreements generally contain lease and non-lease components. Non-lease components primarily include payments for maintenance and utilities. We combine fixed payments for non-lease components with our lease payments and account for them together.

Intangible Assets and Other Long-Lived Assets

Intangible and other long-lived assets are comprised of acquired patents, licenses, trade secrets and other intellectual property.  Acquired intangible assets are recorded at fair value and amortized over the shorter of the contractual life or the estimated useful life.

The Company reviews definite-lived intangible assets for impairment. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of these assets is measured by comparison of their carrying amounts to future undiscounted cash flows the assets are expected to generate. If identifiable intangibles are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the assets exceeds its fair market value.

Indefinite-lived intangible assets not subject to amortization are reviewed for impairment annually, typically at the beginning of the fourth fiscal quarter, or whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.  Such events and circumstances may include sweeping regulatory changes, shifts in market demand that would negatively impact revenue, overall industry deterioration, dramatic increase in the number of competitors, rapidly increasing costs related to production inputs, significant changes in Company management or Company strategy, or significant litigation.  The Company first assesses qualitative factors above to determine whether it is necessary to perform the quantitative impairment test to identify any impairment loss. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset or asset group to estimated future undiscounted net cash flows, or fair value, of the related asset or group of assets over their remaining lives.

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As of June 30, 2020, the Company had identified indicators of impairment for certain of its long-lived assets and performed an impairment test related to those long-lived assets. An impairment charge of $10,041,556 was recorded related to assets acquired with Regenerative Medical Technologies, Inc. (see Note 3).

In October 2020, the Company stopped selling its CoreCyte product in connection with the decision to accelerate the Company's previously existing plan to file an Investigational New Drug (IND) application for CoreCyte with the FDA. The Company submitted documentation to begin the process of filing the IND on October 30, 2020, in which CoreCyte is indicated for the treatment of osteoarthritis of the knee. On December 29, 2020, the FDA completed the Pre-IND meeting. The Company is in the process of completing its IND application and submitting to the FDA. As the sequence of events that led to this decision began with the receipt of a Warning Letter from the FDA in August 2020, it was determined that the decision to stop selling CoreCyte was an indicator of impairment as of September 30, 2020.  Impairment charges of $0 and $1,760,875 were recognized related to the trade secrets in the HCT/P segment in the three and nine months ended March 31, 2021, respectively (see Note 3). There were no impairments for the three and nine months ended March 31, 2020.

Additional delays in the commercial launch of the Company's diagnostic products such as those that may result from a prolongation of the COVID-19 pandemic would adversely affect our business and potentially lead to additional impairment charges in the future.

Certain of the Company's patents are currently subject to litigation (see Note 11) to determine whether the seller of the patents had faithfully represented the nature of their ownership of patents that were sold to the Company. The seller of the patents represented that all rights, title, and interest to the patents was transferred to the Company as part of the sale.  However, the Company and its patent counsel have identified information in the US Patent and Trademark Office's (USPTO's) registry that calls into question whether the seller of the patents had all rights, title, and interest in the patents when they were sold to the Company. The Company raised these concerns with the seller of the patents but was unable to secure clear and satisfactory proof on a voluntary basis. These patents have a carrying value of $5,546,160 on our unaudited condensed consolidated balance sheet as of March 31, 2021. While there is some question as to whether the Company has full title to these patents, we believe that we have at least partial ownership and can develop products based on the patents.

Revenue Recognition

We derive our revenue primarily from two sources.  One source is the sales of HCT/P products to clinicians. The majority of our contracts with customers have a single performance obligation, and all of our contracts with customers have a duration of less than one year. Revenue is recognized when control of the product passes to the customer, typically upon confirmation of delivery of the product to the customer. As our products must remain frozen during transit, we typically ship our products overnight. Revenue is recognized in an amount that reflects the expected consideration to be received in exchange for such goods or services. As such, customer orders are recorded as deferred revenue prior to delivery of products or services ordered.

The other source of revenue is from the sale of our Assurance VR™ COVID-19 RT-PCR test.  Our contracts with customers have a single performance obligation, and all of our contracts with customers have a duration of less than one year. Revenue is recognized when control of the testing service has passed to the customer, typically when we report a valid test result to the customer, which is done electronically.  Revenue is recognized in an amount that reflects the expected consideration to be received in exchange for test results.

Generally, we require authorization from a credit card or verification of receipt of payment before we ship products to customers for HCT/P related revenues. From time to time, we grant credit to these customers with normal credit terms (typically 30 days). For Assurance VR™ COVID-19 RT-PCR test related revenues we typically send an invoice the same or next day once valid test results have been sent electronically.  Payment terms are based on normal credit terms (typically 10 to 30 days).  We do not recognize assets associated with costs to obtain or fulfill a contract with a customer, as the amortization period for any such costs if capitalized would be one year or less.

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Shipping and handling is considered a fulfillment activity, as it takes place prior to the customer obtaining control of the product, and fees charged to customers are included in net revenue upon completion of our performance obligation. Shipping and handling expenses are included in cost of sales. We present revenue net of sales taxes, discounts, and expected returns.

Goodwill

In October 2020, the Company stopped selling its CoreCyte product in connection with the decision to accelerate the Company's previously existing plan to file an IND application for CoreCyte with the FDA. The Company submitted documentation to begin the process of filing the IND on October 30, 2020, in which CoreCyte is indicated for the treatment of osteoarthritis of the knee. On December 29, 2020, the FDA completed the Pre-IND meeting. The Company is in the process of completing its IND application and submitting to the FDA. As the sequence of events that led to this decision began with the receipt of a Warning Letter from the FDA in August 2020, it was determined that the decision to stop selling CoreCyte was an indicator of impairment as of September 30, 2020.  Impairment charges of $0 and $5,254,451 were recognized related to the goodwill in the HCT/P segment in the three and nine months ended March 31, 2021, respectively (see Note 3). There were no impairment charges for the three and nine months ended March 31, 2020.

Equity Method Investment

We apply the equity method of accounting for investments in which we have significant influence but not a controlling interest. The Company reviews equity method investments for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment may not be recoverable in accordance with generally accepted accounting principles. This determination requires significant judgment. In making this judgment, the Company considers available quantitative and qualitative evidence in evaluating potential impairment of these investments. If it is determined that an indicator of impairment exists, the Company assesses whether the carrying value exceeds the fair value of the asset. If the carrying value of the investment exceeds its fair value, the Company will evaluate, among other factors, general market conditions, the duration and extent to which the carrying value is greater than the fair value, and the Company's intent and ability to hold, or plans to sell, the investment. The Company also considers specific adverse conditions related to the financial health of and business outlook for the investee, including industry and sector performance, changes in technology, and operational and financing cash flow factors. Once a decline in fair value is determined to be other-than-temporary, an impairment charge will be recorded and a new carrying basis in the investment will be established. The Company recorded impairment charges totaling $37,907,283 related to our equity method investment in Juneau Biosciences, LLC for the year ended June 30, 2020 (see Note 4). There were no impairments for the three and nine months ended March 31, 2021.  The Company recorded an impairment loss of $0 and $15,932,106 for the three and nine months ended March 31, 2020, respectively.

Paycheck Protection Program Loan

On May 6, 2020, the Company received loan proceeds of $1,665,985 under the Paycheck Protection Program ("PPP") under a promissory note from a commercial bank (the "PPP Loan"). On February 11, 2021 the Company received additional loan proceeds of $1,665,980 under the PPP under a new promissory note from a commercial bank (the "PPP Second Loan"). The PPP, established as part of the CARES Act, provides for loans to qualifying businesses for amounts up to 2.5 times the average monthly payroll expenses of the qualifying business. As amended, the CARES act provides that the loans and accrued interest are forgivable after twenty-four weeks as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The PPP Loans are included in notes payable in the condensed consolidated balance sheets. Should all or part of the PPP Loans be forgiven, the amount forgiven will be derecognized through other income in the period when forgiveness is granted by the governing authority.

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Deferred Revenue

We recognize a contract liability when customer payment precedes the completion of our performance obligations. The following table provides information about deferred revenue from contracts with customers, including significant changes in deferred revenue balances during the period.

Research and Product Development Costs

The Company expenses research and product development costs as incurred.

Product Liability and Warranty Costs

The Company maintains product liability insurance and has not experienced any related claims from its product offerings. The Company also offers a warranty to customers providing that its products will be delivered free of any material defects.  There have been no material costs incurred since inception based on estimated return rates.  The Company reviews the adequacy of its accrual on a quarterly basis.

Share-Based Compensation

The Company issues share-based compensation awards in the form of stock option grants. We use the Black-Scholes-Merton option pricing model to estimate the fair value of options granted under our equity incentive plans. The Black-Scholes-Merton option valuation model requires the use of assumptions, including the expected term of the award and the expected share price volatility. The Company uses the "simplified" method to estimate the expected option term. Stock-based compensation is measured at the grant date for all stock-based awards made to employees and non-employees based on the fair value of the awards. Stock-based compensation is recognized as expense on a straight-line basis over the requisite service period, which is generally the vesting period.

The estimated fair value of performance-contingent equity awards is expensed using an accelerated method over the term of the award once we have determined that it is probable that performance milestones will be achieved. Compensation expense for equity awards that contain performance conditions is based on the grant date fair value of the award. Compensation expense is recorded over the requisite service period based on management's best estimate as to whether it is probable that the shares awarded are expected to vest. We assess the probability of the performance milestones being met on a continuous basis.

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Income Taxes

In order to determine the Company's quarterly provision for income taxes, the Company uses an estimated annual effective tax rate that is based on expected annual income and applicable federal and state tax rates.  Deferred tax assets and liabilities are recorded to reflect the future tax consequences attributable to the effects of differences between the carrying amounts of existing assets and liabilities for financial reporting and for income tax purposes. Deferred taxes are calculated by applying enacted statutory tax rates and tax laws to future years in which temporary differences are expected to reverse. The impact on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that the rate change is enacted.

Other Comprehensive Loss

Comprehensive loss is comprised of net loss and other comprehensive loss. Other comprehensive loss is equal to net loss for the three and nine months ended March 31, 2021 and 2020.

Measurement of Fair Value

The fair value of a financial instrument is the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. Fair value measurements do not include transaction costs. A fair value hierarchy is used to prioritize the quality and reliability of the information used to determine fair values. Categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is defined in the following three categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market-based inputs or inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

During the three and nine months ended March 31, 2021 and 2020, we did not have any remeasurements of non-financial assets measured at fair value on a non-recurring basis subsequent to their initial recognition.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the reporting periods. Key estimates in the accompanying unaudited condensed consolidated financial statements include, among others, revenue recognition, allowances for doubtful accounts and product returns, provisions for obsolete inventory, valuation of long-lived assets, and deferred income tax asset valuation allowances.  Actual results could differ materially from these estimates.

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Recently Issued Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments – Credit Losses (Topic 326)" which introduces new guidance for the accounting for credit losses on instruments within its scope. The new guidance, as amended by subsequent ASUs, introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. For trade receivables, the Company will be required to use a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses which reflects losses that are probable. For public business entities that meet the definition of a U.S. Securities and Exchange Commission (SEC) filer, excluding entities eligible to be smaller reporting companies as defined by the SEC, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.  Early adoption is permitted. Application of the amendments is through a cumulative-effect adjustment to retained earnings as of the effective date. The Company is currently evaluating the impact of this update on its consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes" (ASU 2019-12), which eliminates certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocation and calculating income taxes in interim periods. This ASU also includes guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. ASU 2019-12 is effective for annual and interim periods in fiscal years beginning after December 15, 2020. Early adoption is permitted. The Company is currently assessing the impact of ASU 2019-12 on its consolidated financial statements.

In August 2020, the FASB issued ASU 2020-06, "Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity's own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity". This ASU simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument and more convertible preferred stock as a single equity instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. The ASU also simplifies the diluted earnings per share calculation in certain areas. This ASU is effective for public business entities that meet the definition of a SEC filer, excluding entities eligible to be smaller reporting companies as defined by the SEC, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, the standard will be effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption will be permitted. The Company is currently evaluating the impact of this update on its consolidated financial statements but does not expect the impact to be material.

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Depreciation and amortization expense for the three-month periods ended March 31, 2021 and 2020 was $555,012 and $510,473, respectively. Depreciation and amortization expense for the nine-month periods ended March 31, 2021 and 2020 was $1,630,045 and $1,439,074, respectively.

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Estimated future amortization expense related to intangible assets consists of the following as of March 31, 2021:

Total amortization expense for the three months ended March 31, 2021 and 2020 was $1,215,031 and $2,227,692 respectively. Total amortization expense for the nine months ended March 31, 2021 and 2020 was $4,375,643 and $6,684,410 respectively.

Impairment of Trade Secrets

As of June 30, 2020, the Company identified indicators of impairment related to the assets acquired with Regenerative Medical Technologies, Inc. Specifically, development of the assets acquired has proceeded significantly more slowly than originally planned due to the departure of key personnel and related difficulties in obtaining patient consent required to use the acquired assets in the Company's research activities. The Company determined the fair value of the assets acquired to be $334,000 using the cost to recreate method, which resulted in an impairment charge of $10,041,556 for the year ended June 30, 2020. This valuation approach uses inputs that qualify as Level 3 in the fair value hierarchy. The impaired assets and the related impairment charge are included in the Diagnostics and Therapeutics segment.

In October 2020, the Company stopped selling its CoreCyte product in connection with the decision to accelerate the Company's previously existing plan to file an IND application for CoreCyte with the FDA. The Company submitted documentation to begin the process of filing the IND on October 30, 2020 in which CoreCyte is indicated for the treatment of osteoarthritis of the knee. On December 29, 2020, the FDA completed the Pre-IND meeting. The Company is in the process of completing its IND application and submitting to the FDA. As the sequence of events that led to this decision began with the receipt of a Warning Letter from the FDA in August 2020, it was determined that the decision to stop selling CoreCyte was an indicator of impairment as of September 30, 2020. The Company estimated the fair value of the reporting unit using the discounted cash flow method, as the forecasted cash flows during the remaining economic life of the trade secrets (less than one year) were forecasted to be negative. This valuation approach uses inputs that qualify as Level 3 in the fair value hierarchy. As a result, impairment charges of $0 and $1,760,875 were recognized related to the trade secrets in the HCT/P segment in loss on impairment in the condensed consolidated statement of operations and comprehensive loss for the three and nine months ended March 31, 2021, respectively. There were no impairment charges for the three and nine months ended March 31, 2020.

Endometriosis license

On December 28, 2016, Predictive Therapeutics and Juneau amended and restated the license agreement dated July 9, 2015. The license granted the Company the right to market the Company's diagnostic testing products in the field of fertility and use the patents underlying those products. The license was subsequently amended in March 2018 to expand the scope of the license to include the entire field of endometriosis and pelvic pain. The term of the license is equal to the life of the licensed patents.

An additional license fee of $2,000,000 is due and payable once the Company has received profits of $25,000,000 related to the intellectual property licensed under the agreement.

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Under the license, as amended, (i) upon the commercial sale of the rights to the ARTguide™ or a license thereof we are required to issue to Juneau common stock with a market value of $2,500,000, (ii) Juneau receives a royalty of 50% of net profits as defined in the license agreement, (iii) we must have minimum sales of $12.5 million in the twelve month period beginning nine months after commercial launch, (iv) during the second year following launch we must have minimum sales of $30 million, and (v) during the third year following launch and each year thereafter we must have minimum annual sales of $60 million. If we fail to meet these metrics the license is null and void unless Predictive (a) presents a written plan to Juneau describing how Predictive will use reasonable commercial efforts to improve sales and (b) Predictive agrees to spend an amount equal to the difference between the projected minimum sales and actual sales on an enhanced sales and marketing effort over the next year.

Companion diagnostic license

In addition to the license for the commercialization of assays and related services for the prognosis and monitoring of endometriosis in the infertility market, the Company entered into a license agreement with Juneau to use the assay as a companion diagnostic test in conjunction with endometriosis therapeutics that may be developed from intellectual property owned by the Company and Juneau. This license agreement was amended and restated on August 1, 2016.

The agreement initially required a $250,000 license fee which was paid during 2013 and 2014.  A subsequent milestone payment of 250,000 shares of Company stock was paid to Juneau on October 19, 2016. If FDA approval is granted on any companion diagnostic test, a final milestone payment of $250,000 is due.

The agreement requires a 2% royalty to be paid to Juneau on the sale of patented therapeutic products specifically covered by the agreement. The Company amortizes the licenses over the life of the underlying patent.

Goodwill

The Company recorded goodwill of $5,254,451 from the acquisition of Predictive Biotech, Inc. (formerly Renovo Biotech, Inc.) that was completed on March 28, 2016.

In October 2020, the Company stopped selling its CoreCyte product in connection with the decision to accelerate the Company's previously existing plan to file an IND application for CoreCyte with the FDA. The Company submitted documentation to begin the process of filing the IND on October 30, 2020, in which CoreCyte is indicated for the treatment of osteoarthritis of the knee. On December 29, 2020, the FDA completed the Pre-IND meeting. The Company is in the process of completing its IND application and submitting to the FDA. As the sequence of events that led to this decision began with the receipt of a Warning Letter from the FDA in August 2020, it was determined that the decision to stop selling CoreCyte was an indicator of impairment as of September 30, 2020.  The Company estimated the fair value of the reporting unit using the discounted cash flow method. This valuation approach uses inputs that qualify as Level 3 in the fair value hierarchy.  The fair value of the reporting unit was determined to have fallen below its carrying value, which resulted in impairment charges of $0 and $5,254,451 that were recognized in the HCT/P segment in loss on impairment in the condensed consolidated statement of operations and comprehensive loss for the three and nine months ended March 31, 2021, respectively. There were no impairments of goodwill for the three and nine months ended March 31, 2020.

Changes in the goodwill balance during the nine months ended March 31, 2021 were as follows.

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NOTE 4 EQUITY METHOD INVESTMENT

Juneau Biosciences, LLC

The Company's investment in Juneau is accounted for under the equity method. The following table summarizes the investment:

In December 2017, the Company and Juneau reached verbal agreement on a stock subscription arrangement. The Company agreed to purchase 15,681,818 Class A Units of Juneau at a price of $1.10 per unit. In early 2018, the terms were finalized and memorialized in a subscription agreement executed by the Company and Juneau. Under the terms of the agreement (as amended), the subscription is to be paid in installments through September 30, 2021. The Company has the option to cancel the subscription.  If this option is exercised, any units of Juneau issued to the Company but not paid will be cancelled. The agreement includes certain restrictions on the use of funds provided under the subscription agreement and grants the Company the right to appoint a minority of Juneau's Board of Managers. Should the Company elect not to fund the entire subscription, Juneau's obligations to the Company that are not related to the license agreements (see Note 3) will terminate.

On September 25, 2019, the Company and Juneau executed an amendment to the subscription agreement. The amendment reduced the total number of Class A Units purchased to 13,000,000 and changed the schedule of payments due under the subscription agreement. In addition, a receivable due from Juneau in the amount of $184,443 was applied to the subscription payable balance.

On February 10, 2020, the Company and Juneau Biosciences, LLC, its equity method investee, executed an amendment to the agreement captioned "Third Amended and Restated Subscription Agreement." Under the terms of the agreement, the Company issued common stock, par value $0.001, with a value of $2,430,000 (the "Equity Payment") based on the closing market price on the agreement date that was applied against the subscription payable. The amendment also changed the schedule of cash payments due under the subscription agreement to purchase units of Juneau. The schedule of payments due as of March 31, 2021 under the amended agreement is as follows:

The Company is currently $3,610,000 in arrears on payment on the subscription. Should Juneau declare the Company in default and cancel the subscription, our unpaid units of Juneau would be cancelled.

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Impairment

The Company reviews its equity method investment on a quarterly basis to determine whether a triggering event has occurred that could necessitate an impairment test. During the three months ended December 31, 2019, the Company's stock price declined from $1.67 per share to $0.73 per share, which was determined to qualify as a triggering event for impairment tests of our reporting units, intangible assets, and equity method investments. In addition, there had been delays in the commercialization of product licensed from Juneau. At June 30, 2020, the COVID-19 pandemic caused impediments to clinical research which are expected to further delay the commercialization of our genetic testing products. These factors triggered a second impairment test as of June 30, 2020.

For each of the impairment tests as of December 31, 2019 and June 30, 2020, we engaged a third-party valuation firm to assist us in determining whether the carrying value of our equity method investment had fallen below the carrying value. The valuations were performed using a combination of the cost approach, the income approach, and calibration of the fair values of the Company's operating segments and equity method investment to the Company's overall market capitalization. These valuation approaches use inputs that qualify as Level 3 in the fair value hierarchy. As a result of the valuation, it was determined that the fair value of our equity method investment had fallen to $35,329,167 at December 31, 2019, necessitating an impairment charge of $15,932,016 during the three months ended December 31, 2019.  At June 30, 2020, it was determined that the fair value of our equity method investment had fallen to $12,731,383, necessitating a further impairment charge of $21,975,267. The total impairment charges of $37,907,283 are included in loss on equity method investment in the condensed consolidated statement of operations and comprehensive loss for the year ended June 30, 2020. The impairments were determined to be other than temporary based on the magnitude of the decline in fair value. 

There were no impairments during the three and nine months ended March 31, 2021.

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The customer deposit of $5,000,000 relates to a partial deposit received from the distributor of the Company's Assurance AB™ product. Under the terms of the agreement with the distributor, the purchase order may not be cancelled, and product may only be returned if damaged in transit or subject to a recall order. In an effort to expeditiously satisfy the Company's obligations under the agreement with the distributor, the Company paid the full amount of the partial deposit to the Company's U.S. supplier. The deposit paid to the supplier is included in other current assets on the condensed consolidated balance sheets. As of the date of this filing, the Company has withdrawn its original EUA application and has determined not to move forward with seeking the EUA application given changes in the market caused by adoption of other testing methods and the distribution of vaccinations in the United States.  As of the date of the financial statements, no additional deposits have been made. The customer has requested a refund of the deposit. See further discussion in Note 11.

Future maturities of notes payable are as follows:

Promissory notes

As of March 31, 2021, unsecured promissory notes with a face value of $2,800,000 were outstanding. The notes bear 12% simple interest and mature from November 2021 to March 2022.  

On June 4, 2020, trade payables due to a vendor in the amount of $705,234 were converted into an unsecured note payable due on November 15, 2020. The note bears interest at 3% per annum, increasing to 5% if the note is not paid when otherwise due. As of March 31, 2021 the note holder has increased the interest to 5% and has not declared the note as default.

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In July and August 2020, the Company issued promissory notes to Prophase Labs, Inc. in the amount of $1,000,000. The notes bear interest at 15% per annum and mature on September 21, 2020. The notes are secured by the revenues arising from the Company's Assurance VR™ COVID-19 RT-PCR test.

On September 25, 2020, the Company and Prophase Labs, Inc. amended and restated the outstanding notes and increased the principal amount by $2,000,000 to a total of $3,000,000. The amended promissory note bears 15% simple interest. No payments on the amended promissory note are due until September 2021, at which time monthly payments equal to 1/36^th of the outstanding principal and interest amount shall commence. Interest accruing prior to September 2021 will be added to the principal amount. Any remaining principal and interest shall be due on September 30, 2022. The amended promissory note is secured by the revenues arising from the Company's Assurance VR™ COVID-19 RT-PCR test and may be prepaid without penalty.

On January 14, 2021, the Company entered into an amended and restated Promissory Note and Security Agreement with Prophase Labs, Inc.  This amendment modified the terms as described in Note 6 above. The Company received additional proceeds in the amount of $1,000,000, which raised the outstanding amount to $4,000,000, less $250,000, recognized as earned under the consulting agreement, for a total outstanding amount of $3,750,000. The amended promissory note bears 15% simple interest. Payments are to be made on a per test basis based on volume starting the 10^th of the following month after recording a monthly sales volume, beginning March 10^th for February sales.  Payments will not exceed the aggregate amounts due on the note, and will be applied first to interest, then principal. No other payments are due on the promissory note until September 2021, at which time monthly payments equal to 1/36^th of the outstanding principal and interest amount shall commence.  If payments being made based on testing volume are greater, those will govern repayment. Unpaid interest accruing prior to September 2021 will be added to the principal amount. Any remaining principal and interest shall be due on September 30, 2022. The amended promissory note is secured by the revenues arising from the Company's Assurance VR™ COVID-19 RT-PCR test and may be prepaid without penalty.

On December 18, 2020, the Company issued a promissory note with a face value of $405,000. The note is secured by the revenues arising from the Company's Assurance VR™ COVID-19 RT-PCR test.  The note bears interest at 5% per annum and matures sixty days from execution.

On March 4, 2021 the Company issued a convertible promissory note with a face value of $500,000. The note bears interest at 12% per annum, compounded annually, and matures on September 4, 2021. The note incurred closing costs of 10% of the face value of the note which is due on the maturity date. The closing costs may be paid in Company common stock or in cash at the sole election of the holder. The holder has the option to convert the principal balance and accrued interest of the note into unregistered shares of Company common stock at the conversion price of fifteen cents ($0.15) per share of common stock.

On March 15, 2021 the Company issued a promissory note with a face value of $575,000. The note bears interest at 10% per annum until the note has been paid in full. The note becomes due and payable on March 15, 2022.  

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Paycheck Protection Program Loan

On May 6, 2020, Company received PPP Loan proceeds of $1,665,985 under the PPP under a promissory note from a commercial bank. On February 11, 2021, the company received PPP Second Loan proceeds of $1,665,980 under the PPP under a new promissory note from a commercial bank. The PPP, established as part of the CARES Act, provides for loans to qualifying businesses for amounts up to 2.5 times the average monthly payroll expenses of the qualifying business. The loans and accrued interest are forgivable after eight weeks as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels.

The application for these funds requires the Company to, in good faith, certify that the current economic uncertainty made the loan request necessary to support the ongoing operations of the Company. Some of the uncertainties related to the Company's operations that are directly related to COVID-19 include, but are not limited to, the severity of the virus, the duration of the outbreak, governmental, business or other actions (which could include limitations on operations or mandates to provide products or services), impacts on the supply chain, and the effect on customer demand or changes to operations. In addition, the health of the Company's workforce and its ability to meet staffing needs are uncertain and is vital to its operations.

The PPP Loan certification further requires the Company to take into account our current business activity and our ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business. The Company has a lack of history of being able to access the capital markets. As a result, the Company believes it meets the certification requirements.

The receipt of these funds, and the forgiveness of the loan attendant to these funds, is dependent on the Company having initially qualified for the loan and qualifying for the forgiveness of such loan based on our future adherence to the forgiveness criteria.

The term of the Company's first PPP Loan is two years and the term of the second PPP loan is five years. The annual interest rate on both PPP Loans is 1% and no payments of principal or interest are due during the six-month period beginning on the date of each PPP Loan.  Both PPP Loans are subject to any new guidance and new requirements released by the Department of the Treasury.

Fair value

The fair value of the Company's outstanding debt obligations as of March 31, 2021 was $10,525,000, which was determined based on a discounted cash flow model using an estimated market rate of interest of 15.00%, which is classified as Level 2 within the fair value hierarchy.

NOTE 7 INCOME TAXES

The Company recognized income tax expense (benefit) of $21,660 and $1,257,868 for the three-month periods ended March 31, 2021 and 2020, respectively, and income tax expense (benefit) of $27,712 and ($8,190,327) for the nine-month periods ended March 31, 2021 and 2020, respectively. For the nine months ended March 31, 2021, no benefit from income taxes was recorded due to the Company being in a full valuation allowance position, resulting in an effective tax rate of 0.0%. The Company's recognized effective tax rate differs from the U.S. federal statutory rate for the nine months ended March 31, 2020 primarily due to state income taxes, share based compensation, excess tax benefits arising from the exercise of commons stock warrants during the period,as well as an increase in the valuation allowance on deferred tax assets.

NOTE 8 STOCKHOLDER'S EQUITY

The Company has issued various warrants exercisable for our common stock outside of the 2015 Stock Option Plan (see Note 10). The warrants were issued to raise capital, as compensation for acquisitions of intellectual property, and as compensation for services.

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The following is a summary of warrant activity from June 30, 2020 through March 31, 2021:

The Company recognizes expense for warrants issued for services that are subject to graded vesting on a straight-line basis. Share based compensation expense related to warrants issued for services for the three months ended March 31, 2021 and 2020 was $16,500 and $257,573, respectively.  Share based compensation expense related to warrants issued for services for the nine months ended March 31, 2021 and 2020 was $474,691 and $3,508,957, respectively.  

As of March 31, 2021, unrecognized compensation cost related to warrants issued for services was $49,500 and is expected to be recognized over a weighted average period of 0.83 years

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Potentially dilutive securities that would be excluded from the calculation of diluted net loss per common share because to include them would be anti-dilutive are as follows:

NOTE 10 STOCK OPTION PLAN

In 2015, a Stock Option Plan was adopted to advance the interests of the Company and its shareholders by helping the Company obtain and retain the services of employees, officers, consultants, independent contractors and directors, upon whose judgment, initiative and efforts the Company is substantially dependent, and to provide those persons with further incentives to advance the interests of the Company. Eligible participants include employees, officers, certain consultants, or directors of the Company or its subsidiaries.  

The number of shares, terms, and vesting periods are determined by the Company's Board of Directors or a committee thereof on an award-by-award basis. Awards provided under the Plan generally vest in three equal annual installments. The maximum term of options issued under the plan is 10 years from the date of grant. The aggregate number of shares of Option Stock that may be issued pursuant to the exercise of Options granted under this Plan will not exceed fifteen percent (15%) of the total outstanding shares of the Company's common stock. The Company settles exercises of stock option awards by issuing new shares. Forfeitures are recognized as they occur.

A summary of option activity is as follows for the nine months ended March 31, 2021:

Share based compensation expense related to options issued under the 2015 Plan for the three months ended March 31, 2021 and 2020 was $1,391,223 and $3,747,445, respectively, and for the nine months ended March 31, 2021 and 2020 was $6,519,501 and $9,854,730, respectively.

The Company recognizes expense for awards subject to graded vesting on a straight-line basis. As of March 31, 2021, there was $9,337,317 of total unrecognized share-based compensation expense related to stock options issued under the 2015 Stock Option Plan that will be recognized over a weighted-average period of 1.33 years.

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NOTE 11 COMMITMENTS AND CONTINGENCIES

Licenses

The Company has commitments under license agreements which are described in Note 3.

Leases

On October 10, 2019, substantially all of the Company's operating leases of office and laboratory space were amended to extend the expiration dates of the leases to September 30, 2021. The Company also leased an additional 6,711 square feet of office and storage space that commenced on November 1, 2019 and expires on September 30, 2021.

In March 2019, the Company entered into finance leases of laboratory equipment.  The validation process for the leased equipment was completed and payments commenced in October 2019.  The leases expire in September 2023, at which time the Company has the option to purchase the leased equipment for one dollar.  

The table below presents the future maturities of lease obligations under operating and finance leases:

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Lease information for the three and nine months ended March 31, 2021 and 2020 is as follows:

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Purchase commitments

In March 2019, in connection with the lease of laboratory equipment described above, the Company agreed to purchase a fixed quantity of the consumables used by the equipment for a total of $1,386,710. The Company is obligated to pay for the consumables in twelve fixed monthly installments beginning in October 2019. At March 31, 2021, the Company had taken delivery of consumables worth $93,909 in excess of the installment amounts paid. The amount due for goods that have been delivered is included in accrued liabilities on the condensed consolidated balance sheet. Remaining payments due under the purchase commitment total $577,795 during the year ending June 30, 2021.

Legal proceedings

On or about July 13, 2018, RTJ, LLC and two of its principals filed a lawsuit against Predictive Therapeutics LLC, Predictive Biotech, Inc., both subsidiaries of Predictive Technology Group, Inc., and Jack Turner, Jr., an employee of Predictive Biotech, Inc. The plaintiffs had acted in a distributor capacity. The relationship was terminated. Plaintiffs are alleging breach of contract, promissory estoppel, unjust enrichment, fraud, breach of fiduciary duty, defamation, false light, and tortious interference. Based on the information available to us, we do not believe any of the RTJ proceedings will have a material adverse effect on our business, results of operations, financial position, or liquidity. Further, we deny the allegations in the complaint, have not discovered any evidence of wrongdoing with respect to the allegations and will vigorously defend against these allegations.

On or about May 1, 2019, Surgenex, LLC and one of its principals filed a lawsuit against Predictive Therapeutics LLC, Predictive Biotech, Inc., both subsidiaries of Predictive Technology Group, Inc., and Doug Schmid, an employee of Predictive Biotech, Inc. In 2014 Surgenex contracted with Utah Cord Bank, Inc., a former employer of Doug Schmid, to assist Surgenex in doing work relating to allograft tissue. Schmid was later hired by Predictive Biotech, Inc. In connection with Schmid's employment with Predictive Biotech, Surgenex has filed a lawsuit alleging unjust enrichment, conspiracy, conversion, tortious interference with contractual and business relations, violations of trade secrets act, and other claims. Based on the information available to us, we do not believe the Surgenex proceedings will have a material adverse effect on our business, results of operations, financial position, or liquidity. Further, we deny the allegations in the complaint, have not discovered any evidence of wrongdoing with respect to the allegations and will vigorously defend against these allegations.

On or about July 12, 2019, Predictive Technology Group, Inc. and Predictive Therapeutics, LLC, a subsidiary of Predictive Technology Group, Inc. filed a lawsuit against Michael Schramm (Schramm). Schramm entered into an agreement to sell us certain patents and patent applications in consideration for equity securities. Schramm represented that he owned all rights, title, and interest in and to the intellectual property. We were subsequently advised by our patent counsel that, while the patents are registered with the US Patent and Trademark Office in the Company's name, the Company may not have a full interest in the patents. An unrelated third-party law firm placed a lien on the patents due to non-payment of legal fees by a third-party entity to whom certain assets were sold by another third-party entity that originally owned the patents.  The Company raised these concerns with Schramm, who did not provide satisfactory evidence confirming that the Company had sole title to the patents.  We sued Schramm for breach of contract, conversion and on other legal theories and are seeking, among other things, rescission of the purchase and sale transaction. While there is some question as to whether the Company has full title to these patents, we believe that we have at least partial ownership and can develop products based on the said patents. Schramm filed a counterclaim against us and Bradley C. Robinson, our Chief Executive Officer and Transfer Online, Inc., our transfer agent. Schramm is alleging he did not make any false representations. He is alleging, among other things, that various parties involved in the transaction committed breach of contract, conversion, violations of Nevada state law for failure to transfer securities, breach of fiduciary duty, tortious interference, and civil conspiracy.  Based on the information available to us, we do not believe the Schramm proceedings will have a material adverse effect on our business, results of operations, financial position, or liquidity. Further, we deny the allegations in the counterclaim, have not discovered any evidence of wrongdoing with respect to the allegations in the counterclaim and will vigorously prosecute our claims against Schramm.

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On or about March 18, 2020, Predictive Biotech, Inc. filed a lawsuit in the Utah District Court against Auxocell Laboratories, Inc. ("Auxocell") for breach of contract, product liability, breach of warranty, negligent misrepresentation and other claims relating to defects in laboratory equipment Auxocell sold to Predictive Biotech. Alleged damages include wasted umbilical cord tissue, lost inventory, costs associated with particulate testing, reputational injury, and related claims. On or about August 24, 2020, Auxocell answered the Complaint by denying the claims and asserting counterclaims of its own for breach of a confidentiality clause and failure to pay for devices. The Company answered and denied the counterclaims on December 14, 2020. Initial discovery has commenced and the current schedule has a fact discovery cut-off date of June 21, 2021. The litigation is still in discovery and as such we provide no opinion or assessment of the likely outcome of the litigation.

On or about November 11, 2020, Mackey Investment, LLLP ("Mackey") filed a lawsuit in Utah District Court against Predictive Technology Group, Inc and several officers of the Company. Mackey subscribed for and purchased 500,000 shares of Predictive common stock for $480,000 on or about January 29, 2020. Mackey was given all of the Company's SEC filings as part of his due diligence. Mackey is alleging that Predictive failed to disclose material information in connection with its investment and is alleging breach of contract, fraudulent inducement, violations of the Utah Uniform Securities Act, and conspiracy. The suit also seeks civil penalties and treble and punitive damages. The Company filed an answer denying the claims in the Complaint on or about December 4, 2020. Discovery has commenced, but we have not received discovery responses. We deny the allegations in the complaint and will vigorously defend against these allegations.

On or about April 30, 2020, Equitas Bio/Pharma Solutions, LLC ("Equitas") filed a lawsuit against Predictive Technology Group in New York District Court alleging nonpayment of "at least $551,080" in amounts owing under Master Service Agreement and Project Work Orders as of the date of filing. The claims are for breach of contract, breach of covenant of good faith and fair dealing and fraud. The basis of the fraud claim alleges that Predictive "made specific statements to Equitas that it was able to and intend to perform its obligations under the agreements" and at "the time Predictive made these promises it had no intention of keeping them." We agree that amounts are owed under the agreements, but we deny all allegations in the complaint relating to breach of covenant of good faith and fraud. Amounts due as of March 31, 2021 are included in accounts payable in the condensed consolidated balance sheets.

In June 2020, Wellgistics, LLC, the distributor of the Company's Assurance AB product, requested that the partial deposit paid on their non-cancellable purchase order of $5 million (see Note 5) be returned. As the purchase order is contractually non-cancellable and the Company performed on the order in good faith by transmitting the deposit to the Company's supplier, the request to return the deposit was not honored. To date there has been no legal action taken by either party.

As of March 31, 2021, we did not record a liability related to these matters (other than amounts recorded in accounts payable as described above) as it was determined that an unfavorable resolution is either not currently probable or that an amount or relevant range is not reasonably estimable, or both. However, litigation is inherently unpredictable and it is possible that losses may occur. Any unfavorable resolution of any of these matters could materially affect our condensed consolidated financial position, cash flows, or results of operations. All legal costs associated with litigation are expensed as incurred.

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COVID-19

On March 11, 2020, the World Health Organization declared the novel coronavirus ("COVID-19"), a respiratory illness first identified in Wuhan, China, a pandemic. The global spread of COVID-19 has created significant volatility, uncertainty, and economic disruption. Governments in affected regions have implemented, and may continue to implement, safety precautions which include quarantines, travel restrictions, business closures, cancellations of public gatherings and other measures as they deem necessary. Many organizations and individuals, including the Company and its employees, are taking additional steps to avoid or reduce infection, including limiting travel and working from home. These measures are disrupting normal business operations both in and outside of affected areas and have had significant negative impacts on businesses and financial markets worldwide.

The Company experienced operational and financial impacts from the COVID-19 pandemic beginning late in the third quarter of fiscal 2020, including the impact of stay-at-home mandates and related safety measures such as the delay of elective medical procedures, resulting in a decline in the volume of procedures using the Company's products.

The long- term severity of the material impact of the COVID-19 pandemic on the Company's business will continue to depend on a number of factors, including, but not limited to, the further duration and severity of the pandemic, including the effects of the new COVID-19 variants, and the continued extent and severity of the impact on the Company's customers and suppliers, all of which are uncertain and cannot be predicted. The impact of COVID-19 on the Company's results of operations and cash flows has been material and is expected to continue to be material for the remainder of this fiscal year. Given the dynamic nature of this situation, the Company is currently unable to accurately predict the impact of COVID-19 on its future operations and financial results or cash flows for the foreseeable future and whether the impact of COVID-19 could lead to potential impairments.

FDA Warning Letter

We received a Warning Letter from the FDA on August 17, 2020 regarding the marketing of our allograft product, CoreCyte. The letter alleges inappropriate marketing of CoreCyte as a treatment for COVID-19 and challenges the eligibility of CoreCyte for regulation under section 361 of the Public Health Service Act. Products regulated solely under section 361 of the Public Health Service Act do not require premarket approval. The Company is currently working with the FDA to address the concerns raised in the Warning Letter to the FDA's satisfaction. The Company believes that it has complied with all applicable regulations to date.

Past due payments

As of March 31, 2021, many of the Company's obligations were significantly past due. As a result, our creditors may have grounds to take adverse action against the Company, including but not limited to lawsuits and seizure of collateral. Any such actions taken by our creditors could have material adverse impact on our operations or financial condition.