UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DCWashington, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2023
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________________ to _________________________
Commission file number: 001-36790
Predictive Oncology Inc. | |
(Exact name of registrant as specified in its charter) |
Delaware |
COMMISSION FILE NUMBER: 001-36790
PREDICTIVE ONCOLOGY INC.
(Exact name of registrant as specified in its charter)
33-1007393 | ||
(State or other jurisdiction of | ( | |
incorporation or organization) | Identification No.) |
2915 Commers Drive, Suite 900
Eagan, Minnesota 55121
91 43rd Street, Suite 110 Pittsburgh, Pennsylvania 15201 | |
(Address | (Zip Code) |
Registrant’s telephone number, including area code | (412) 432-1500 |
(Registrant’s telephone number, including area code): (651) 389-4800
(Former name, former address and former fiscal year, if changed since last report) |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading symbol(s) | Name of each exchange on which registered |
Common stock, $0.01 par value | POAI | NASDAQ Capital Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by checkmark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒☒Yes ☐ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | Accelerated filer ☐ |
Non-accelerated filer ☒ | Smaller reporting company ☒ |
Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒☒.
State the aggregate market valueAs of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as ofJune 30, 2023, the last business day of the registrant’s most recently completed second fiscal quarter: $32,138,990 asquarter, the aggregate market value of June 30, 2020,common stock held by non-affiliates was $18,983,374, based upon 19,596,9453,906,044 shares at $1.64$4.86 per share as reported on the NASDAQ Capital Market.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the last practicable date: As of March 10, 2021,18, 2024, the registrant had 48,794,3204,062,853 shares of common stock, par value $.01 per share outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
PREDICTIVE ONCOLOGY INC.
TABLE OF CONTENTS
General
References in this annual report on Form 10-K to “Predictive”“Predictive”, “Company”“Company”, “we”“we”, “us”“us”, and “our”“our” refer to the business of Predictive Oncology Inc. (NASDAQ: POAI) and its wholly-owned subsidiaries.
Cautionary Statement Concerning Forward-Looking Statements
This Annual Report on Form 10-K contains various "forward-looking statements" within the meaning of Section27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements represent our expectations and beliefs concerning future results or events, based on information available to us on the date of the filing of this Form10-K, and are subject to various risks and uncertainties. Factors that could cause actual results or events to differ materially from those referenced in the forward-looking statements are listed in Part I, Item1A. Risk Factors and in Part II, Item7. Management's Discussion and Analysis of Financial Condition and Results of Operations. We disclaim any intent or obligation to update or revise any of the forward-looking statements, whether in response to new information, unforeseen events, changed circumstances or otherwise, except as required by applicable law.
Overview
We are a knowledge and science-driven company that applies artificial intelligence (“AI”) to support the discovery and development of optimal cancer therapies, which can ultimately lead to more effective treatments and improved patient outcomes. We use AI and a proprietary biobank of 150,000+ tumor samples, categorized by tumor type, to provide actionable insights about drug compounds to improve the drug discovery process and increase the probability of drug compound success. We offer a suite of solutions for oncology drug development from early discovery to clinical trials.
Our mission is to change the landscape of oncology drug discovery and enable the development of more effective therapies for the treatment of cancer. By harnessing the power of machine learning and scientific rigor, we believe that we can improve the probability of success of advancing pharmaceutical and biological drug candidates with a higher degree of confidence.
We operate in three primary business areas:areas. In our first area, we provide optimized, high-confidence drug-response predictions through the application of artificial intelligence (“AI”) inAI using our precision medicine business, to provide AI-driven predictive modelsproprietary biobank of tumor drug responsesamples to improve clinical outcomes for patientsenable a more informed selection of drug/tumor combinations and to assist pharmaceutical, diagnostic,increase the probability of success during development. We also create and biotech industries indevelop tumor-specific 3D cell culture models mimicking the developmentphysiological environment of new personalized drugs and diagnostics;human tissue enabling better-informed decision-making during development. In our second production of the United States Food and Drug Administration (“FDA”)-cleared STREAMWAY® System for automated, direct-to-drain medical fluid disposal and associated products and; third, contractbusiness area, we provide services and research focused on solubility improvements, stability studies, and protein production.
We have three reportable segments: Helomics, Skyline, and Soluble. The Helomics segment includes clinical testing and contract research services that include the application of AI. Our Soluble segment provides services using a proprietary self-contained and automated system that conducts high-throughput, self-interaction chromatography screens using additives and excipients commonly included in protein formulations resulting in soluble and physically stable formulations forof biologics. Our Skyline segment consiststhird business area produces the United States Food and Drug Administration (“FDA”)-cleared STREAMWAY® System and associated products for automated medical fluid waste management and patient-to-drain medical fluid disposal. As of the STREAMWAY System product sales, andJanuary 1, 2023, we changed our TumorGenesis® subsidiary is included within corporate. Going forward, we have determined that we will focus our resources on the Helomics segment and our primary mission of applying AIreportable segments to precision medicine and drug discovery.align with these business areas.
We have three reportable segments, which have been delineated by location and business area:
During the third quarter of 2020, there was a change in our reportable segments. As a result of the formation of the new Soluble subsidiary, we believe the Soluble business represents a reportable segment. Soluble signed its first contract during the third quarter of 2020. We also believe it is appropriate to combine our Skyline Medical and Skyline Europe entities into a single reportable segment based on the changes to our physical presence and intent to sign future contracts through the US entity. Finally, we believe the Helomics business continues to be a reportable segment of the business.
● | Pittsburgh segment: provides services that include the application of AI using its proprietary biobank of 150,000+ tumor samples. Pittsburgh also creates proprietary 3D culture models used in drug development. |
● | Birmingham segment: provides contract services and research focused on solubility improvements, stability studies, and protein production. |
● | Eagan segment: produces the FDA-cleared STREAMWAY System and associated products for automated medical fluid waste management and patient-to-drain medical fluid disposal. |
PITTSBURGH
Precision Medicine Business
Drug Discovery Solutions – PEDAL
Our precision medicine business, conducted in our Helomics division, is committed to improving the effectiveness of cancer therapyPatient-centric Drug Discovery using Active Learning (“PEDAL”™), our proprietary multi-omic tumor profilingAI-driven platform, offered by our Pittsburgh segment, is designed to provide high-confidence drug-response predictions. This platform combines our biobank of samples with a one-of-a-kind database of historical tumor data, and the power of AI to efficiently build predictive models of tumor drug response.
Helomics’ mission is to improve clinical outcomes for patients by partnering with pharmaceutical, diagnostic, and academic organizations to bring innovative clinical products and technologies to the marketplace. Our Patient-centric Drug Discovery using Active LearningPEDAL asset (PeDAL™) is a unique technology that combines our proprietary, clinically validated patientone of the largest privately held commercial biobanks of tumor cell line assay (TruTumor™), a vast knowledgebase of proprietarysamples, AI active machine learning, and publicmulti-omic historical tumor data together (TumorSpace™– complete with on-site Clinical Laboratory Improvement Amendments (“CLIA”) with active learning - the active learning allowing the efficient exploration of compound drug responses against a large diverse patient “space”. PeDALcertified lab testing capabilities to inform drug/tumor model predictions. PEDAL offers researchers the opportunity to incorporate patient diversity early, efficiently, and cost-effectively bring patient diversity much earlier ininto the drug discovery process. PeDALprocess by using data from hundreds of patient samples. PEDAL works by iterative cycles of active-learning powered Learn-Predict-Test (L-P-T)active learning to guide the testing of patient-specific compound responses using the TruTumor assay and patient cell lines to build asamples against specific compounds. This results in PEDAL efficiently building comprehensive predictive modelmodels of patient responses to compounds.drug response in a matter of weeks. This predictive model can then be used to rank compounds by the fraction of patientsagainst tumor samples of certain profiles that respond as well asto specific drugs and can also predict the set of compounds that provide the best coverage across patients. PeDAL will be used in fee-for-service projects with pharmaceutical companies.
Contract Research Organization (“CRO”) and AI-Driven Business
patient tumor samples.
We believe leveraging our unique, historical database of thetumor drug responses, ofgenomics, biomarkers, digitized pathology slides, and histopathology data with over 150,000 patient tumorstumor samples to efficiently build AI and data-driven multi-omicdriven predictive models of tumor drug response and outcome will provide actionable insights critical to both new drug development and individualizing patient treatment.development. Through the course of over 15 years of clinical testing of thepatient tumor responses of patient tumors to drugs, Helomicsour Pittsburgh lab has amassed a huge proprietary knowledgebase of 150,000 patient cases. This datadata. To provide for our patient-centric approach, this dataset has been rigorously de-identified and aggregated to build a unique,inform our proprietary modelprocess to create models of tumor drug response that we call TumorSpace. The TumorSpace model and its data provide a priori knowledge for the machine learning approaches we employ as part of the PeDAL approach.response.
TumorSpace model provides a significant competitive advantage to our business offerings. PeDAL's unique patient and tumor-centric AI-driven approachPEDAL can rapidly and cost-effectively screen hundreds of compounds in thousands of tumor cell lines, and gain valuable information about off-target effects and deliver:
PeDAL also can deliver drug candidates targeted at a specific patient profile as early assignificantly increase the hit-to-lead stage of discovery, significantly increasing the chanceprobability of clinical success leading to a dramatic improvementby introducing patient diversity early in both the success,development process, while also decreasing the time and cost of your oncology drug discovery programs. The AI-driven models will, once validated, also provide clinical decision support to help oncologists individualize treatment.
Our CRO/AI business leverages our core competence in profiling the drug response of patient tumors. Our large knowledgebase of tumor drug response and other data, together with proven AI, has created a unique capability for oncology drug discovery, that allows for theutilizing this highly efficient screening of drug responses fromagainst thousands of diverse, well-characterized patient primary tumor cell lines.samples. With each iteration of a PEDAL campaign, the program learns, predicts, and then directs the most informative wet lab experimentation, while building the predictive model. This allows for a unique and streamlined approach in which AI-driven predictions are tested against samples from this expansive and diverse biobank to more efficiently and effectively narrow down viable drug-tumor pairings. This novel disruptive patient-centric approach is ideally suited to the early part of drug discovery (especially hit-to-lead, lead optimization, and pre-clinical), resulting in betterwhile also being highly customizable to meet the needs of our collaborators. Our patient-centric drug discovery approach provides for the prioritization of compounds and better coverage ofdrug compound candidates while accounting for patient tumor diversity. This willshould dramatically improve the chances of successfully translating discoveries resulting in loweredinto successful therapies, while simultaneously lowering costs through shortened development timelines, and most importantly, enhanced “speed-to-patient” for new therapies.
A key part of our commercialization strategy is the understanding that our AI-driven models of tumor drug response serve a key unmet need of pharmaceutical, diagnostic, and biotech industries for actionable multi-omic insights into cancer. In collaboration with these companies, using the predictive models, we will accelerate the search for more effective cancer treatments through biomarker discovery, drug screening, drug repurposing, and ultimately clinical trials with higher probability of success.
PEDAL, which incorporates CORE™, our active machine learning program, with tumor profile data and human tumor samples, provides optimized, efficient, high-confidence drug-response predictions. Our platform is designed to move molecules forward with a higher probability of clinical success. The focus of our business strategy is to leverage and expand our portfolio of proprietary solutions to advance drug discovery and enable oncology drug development for our biopharma partners.
3D Modeling
Our CRO services business applies PeDAL to address a range of needs fromPittsburgh segment also develops tumor-specific in vitro models for oncology drug discovery through clinical and translational research,research. Our 3D tumor-specific models accelerate the drug development process for our clients and partners by providing drug response predictions with high correlation to clinical trialsresponse, enabling our biopharma clients to manage pipeline prioritization more efficiently.
The 3D models incorporate tissue-specific extracellular matrices and diagnostic developmenttumor-specific medium supplements allowing for a true reconstruction of tumor microenvironment. Our approach is compatible with multiple classes of immuno-oncology agents from antibody and validation as noted below:antibody-drug conjugates to bi- and tri-specific compounds and CAR-T cells. The organ-specific disease models provide 3D reconstruction of human tissues accurately representing each disease state and mimicking drug response.
Research
Development
Clinical Decision Support
Our 3D platform maintains tumor-tumor and tumor-stroma interactions and incorporates both cellular and extracellular elements of tissue microenvironment including soluble factors in an organ- and disease-specific manner. It is compatible with multiple cell types, drug classes, and downstream analysis methods. Our models support proliferation of malignant and non-malignant cellular components of tissues.
We believe this market segment has significant growth potentialApplications include providing efficacy screening of anticancer compounds, evaluation of mechanisms of drug resistance, identification of new drug combinations, rescue of failed drug candidates, assessment of off-target toxicity, target discovery and we believe we are differentiated from traditional CRO’s and other precision medicine and AI companies through these unique assets:
Industry and Market Background and Analysis – Precision Medicine Businessbiomarker discovery. Product offerings include preclinical testing services based on our proprietary models directly to clients in the biopharmaceutical industry.
Precision medicine is an emerging approach for disease treatment and prevention that considers individual variability in genes, disease, environment, and lifestyle for each case to develop effective therapies. This approach allows doctors and researchers to predict more accurately which treatment, dose, and therapeutic regimen could provide the best possible outcome. The global precision medicine market is estimated to reach $278.6 billion by 2030, up from $43.6 billion in 2016. (Source: BIS Research’s “Global Precision Medicine Market to Reach $278.6 Billion by 2030”, December 2030).
Precision medicine, precisely targeting drugs based on the genomic profile of the patient, has become the aspiration for cancer therapy. Over the past several decades, researchers have identified molecular patterns that are useful in defining the prognosis of a given cancer, determining the appropriate treatments, and designing targeted treatments to address specific molecular alterations. The objective of this precision oncology is to develop treatments tailored to the genetic changes in each person’s cancer, intended to improve the effectiveness of the therapeutic regimen, and minimize the treatment’s effects on healthy cells. However, for a majority of patients the reality is that while many mutations in the patient’s tumor can be identified most are not actionable with current protocols, due to a lack of research regarding which mutations in a tumor confer a sensitivity to a particular drug. As a result, the impact of targeted therapies is low, and uptake in clinical practice is inconsistent.
There is now a growing realization that genomics alone will not be enough to achieve the promise of personalized therapeutics, especially for cancer. A multi-omic approach (e.g., assessing the genome, transcriptome, epigenome, proteome, responseome, and microbiome) provides researchers and clinicians the comprehensive information necessary for new drug development and individualized therapy. Comparatively, the multi-omic approach provides a three-dimensional, 360-degree view of the cancer, while genomics alone is just a flat, one-dimensional view. However, multi-omic data is difficult to access quickly as it is both costly and time consuming to initiate prospective data collection, and few comprehensive, multi-omic datasets exist, especially specific to cancer. Our Helomics TumorSpace database addresses this need.
Clinical Testing
ViaThrough our wholly owned subsidiary, Helomics subsidiary,Corporation (“Helomics”), reported under our Pittsburgh segment, we offer a group of clinically relevant, cancer-related tumor profiling and biomarker tests for gynecological cancers that determine how likely the patient is to respond to various types of available chemotherapy treatments and which therapies might be indicated by relevant tumor biomarkers.
Clinical diagnostic testing is comprised of our Tumor Drug Response Testing (formerly ChemoFx) and(ChemoFx™), Genomic Profiling (formerly BioSpeciFx)Testing (BioSpeciFx), and other biomarker tests. The Tumor Drug Response Testing test determines how a patient’s tumor specimen respondsreacts to a panel of various chemotherapy drugs, while the Genomic Profilingand biomarker profiling evaluates the expression and/or status of specific genes,a particular gene or biomarkers, in the patient’s tumor. Our proprietary TruTumor tumor platform provides us with the abilityprotein related to work with actual live tumor cells to study the unique biology of thea patient’s tumor in order to understand how the patient responds to treatment.
specimen.
Testing involves obtaining tumor tissue during biopsy or surgery, which is then sent to our Clinical Laboratory Improvement Amendments (“CLIA”)CLIA certified laboratory using a special collection kit. Tumor Drug Response Testing is a fresh tissue platform that uses the patient’s own live tumor cells to help physicians identify effective treatment options for each gynecologic cancer patient.
Genomic Profiling offers a select group of clinically relevant protein expression and geneticgenomic mutation tests associated with drug response and disease prognosis. Physicians can select biomarkers for testing from carefully chosen panels of relevant tests, intuitively organized by cancer pathway and tumor type. Results for these tests are presented in a clear, easy to understand format, including summaries of the clinical relevance of each marker.
Business Strategy for Precision Medicine Business
BIRMINGHAM
We are a data and AI-driven discovery services company that provides AI-driven predictive models of tumor drug response to improve clinical outcomesDrug Development Solutions – Formulations for patients by leveraging our two primary unique assets:
Over 38,000 of the more than 150,000 clinically validated cases in our TumorSpace database are specific to ovarian cancer. The data in TumorSpace is highly differentiated, having both drug response data, biomarkers, and access to historical outcome data from those patient samples. We intend to generate additional data (genomics and transcriptomics) from these tumor samples to deliver a multi-omic approach to the pharmaceutical industry.
Through our Helomics subsidiary, we will utilize both this historical data and the TumorSpace platform to build AI-driven predictive models of tumor drug response and outcome through our CancerQuest 2020 (“CCQ2020”) initiative. Once validated, we will commercialize these AI-driven predictive models in revenue generating service projects with pharmaceutical, biotech, and diagnostic companies.
A key part of our commercialization strategy for the CCQ2020 initiative is the understanding that our AI-driven models of tumor drug response serve a key unmet need of pharmaceutical, diagnostic, and biotech industries for actionable multi-omic insights on cancer. In collaboration with these companies, using the predictive models, we will accelerate the search for more individualized and effective cancer treatments, through revenue generating projects in biomarker discovery, drug screening, drug repurposing, and clinical trials.Biologics
Our commercial strategy has identified a portfolio of revenue generating project types that leverage the predictive models, our AI expertise, PeDAL tumor profiling, and CLIA laboratory to provide custom solutions utilizing our full array of assets and expertise.
The CCQ2020 initiative focused initially on ovarian cancer, which is where we have the most expertise, samples, data, and access to outcomes. However, we intend to expand the initiative to include cancers of the lung, breast, colon, and prostate, and will actively seek partners to assist in that effort.
Within the clinical sector, we will utilize these predictive models (once validated) for new clinical decision support tools for individualizing therapy for patients with cancer. These clinical decision support tools are a longer revenue horizon than the fee-for-service research projects with pharmaceutical companies but, importantly, will provide a steady stream of additional data generation to refine the predictive models for both clinical and research applications.
Soluble Biotech
Our subsidiary, Soluble Biotech Inc. (“Soluble”),Birmingham segment focuses on contract services and research for biopharmaceutical company clients and academic collaborators, focused on solubility improvements, stability studies, and protein production and operates the assets of Soluble Therapeutics and BioDtech, which the Company acquired in May 2020.production. Specifically, SolubleBirmingham provides optimized FDA-approved formulations for vaccines, antibodies, and other protein therapeutics in a faster and lower cost basis to its customers.customers, as described below. In addition, Solubleour Birmingham segment enables protein degradation studies, which is a new and, based on current projections, potentiallycould be a substantial line of business for the Company.
The primary assetsasset of Soluble are our Birmingham segment is our proprietary automated High Throughput Self-Interaction Chromatography (HSC™(“HSC”™). platform. Our HSC platform is a self-contained, automated system that conducts high-throughput, self-interaction chromatography screens on FDAexcipients previously approved excipientsby the FDA for protein formulations. Our technology rapidly measures second virial coefficient (B22 value)the solubility of protein-protein interactions to identifyprotein in different excipients and excipient combinations that promote improved protein solubility in solutions. The data generated from HSC screens are analyzed by a proprietary AI predictive algorithm to identify the optimal combination(s) of buffers, pH, and excipients, resulting in increased solubility and physical stability of proteins. Several of our clients have seen ten-fold and hundred-fold increases in their protein’s solubility while maintaining physical stability. For biopharmaceutical clients this means faster development times and quicker progression of molecules into the clinic. For academic collaborators, this means further progression of biochemical &and biology studies necessary to advance fundamental research in areas of unmet medical need.
In addition, Solubleour Birmingham segment provides comprehensive protein stability analysis. Analysisanalyses via time-dependent shelf-life studies and forced degradation studies designed to quickly determine which of the FDAadditives previously approved additives thatby the FDA will improve the solubility and stability of proteins in solutions. Services include pre-formulation development, formulation stability assessment, and biophysical characterization, which evaluate variables including pH, temperature, humidity, light, viscosity, oxidizing agents, and mechanical stress to determine the most promising additives, formulation of B22 values and confirmation onvalidation of conformation stability. We provide clients with a list of the most promising additives from a set of over 40 different additives that can increase the solubility and stability of protein formulations.
SolubleThe Birmingham segment also offers protein solubility kits that allow rapid identification of soluble formulations. We provide four different kits to fulfill customer solubility requirements. The kits are in 96-well format and provide the tools and methods to compare relative solubility across 88 common formulations (with 8 controls). SolubleBirmingham kits utilize a simple mix and spin protocol that quickly evaluates aggregation behavior as a function of pH, salt, and additives costing significantly less than if manually determined.
In addition, we provide innovativeour Birmingham segment supplies proprietary technologies for bacterial endotoxin detection and removal. Endotoxin is an inherent byproduct of bacterial expression of therapeutic proteins. However, therapeutic proteins are required to have extremely low endotoxin levels. Our Birmingham segment provides a product to remove endotoxin that works through multiple molecular interactions for efficient removal over a wide range of buffer conditions with minimal product loss. The detection of endotoxin can also be adversely affected by the protein therapeutic itself. To address this, Birmingham provides sample treatment kits to minimize detection interference while using standard detection assays. At our Birmingham facility, we can manufacture high-quality endotoxin detection and removal in therapeutic proteins that continueproducts to be a significant issue in the pharmaceutical field.help our customers efficiently meet safety standards. We follow Good Manufacturing Practices (“GMP”), International Council for Harmonization (“ICH”) and Good Laboratory Practice (“GLP”) standards throughout to ensure consistent and standardized products and services.
Skyline Medical – The STREAMWAY System
EAGAN
Sold throughSTREAMWAY® System
Through our wholly owned subsidiary, Skyline Medical Inc. (“Skyline Medical”), reported under our Eagan segment, we sell the STREAMWAY System, as well as proprietary cleaning solution and filters for use with the STREAMWAY System. The STREAMWAY System is an FDA-cleared, automated, patient-to-drain waste fluid disposal system designed for medical environments involving potentially infectious medical waste fluids. We have been granted patents for the STREAMWAY System in the United States, Canada, and Europe. We distribute our products to medical facilities where bodily and irrigation fluids produced during medical procedures must be contained, measured, documented, and disposed of properly. Our products minimize the exposure potential to the healthcare workers who handle such fluids.
Our STREAMWAY System is a wall-mounted system that disposes of an unlimited amount of bodily and irrigation fluids providing uninterrupted performance for physicians while virtually eliminating healthcare workers’ exposure to potentially infectious fluids collected during surgical and other patient procedures. We also manufacture and sell two disposable products required for the operation of the STREAMWAY System: a bifurcated dual port procedure filter with tissue trap and a single use bottle of cleaning solution. Both items are utilized on a single procedure basis and must be discarded after use. The disposables used for operation of the STREAMWAY System are a critical component of our business model, and we expect will provide significant recurring revenues. We have exclusive distribution rights to the disposable cleaning solution.
The STREAMWAY System virtually eliminates staff exposure to blood, irrigation fluid, and other potentially infectious fluids found in the healthcare environment. Antiquated manual fluid handling methods that require hand carrying and emptying filled fluid canisters present both an exposure risk and potential liability. Skyline Medical’sThe STREAMWAY System fully automates the collection, measurement, and disposal of waste fluids and is designed to: 1) reduce overhead costs to hospitals and surgical centers; 2) improve compliance with the Occupational Safety and Health Administration (“OSHA”) and other regulatory agency safety guidelines; 3) improve efficiency in the operating room and radiology and endoscopy departments, thereby leading to greater profitability; and 4) provide greater environmental stewardship by helping to eliminate the approximately 50 million potentially disease-infected canisters that go into landfills each year in the United States.
Skyline Medical operated with reduced personnel and associated operating costs in 2020. By streamlining our production, the Company maximized efficiency attaining similar revenue to 2019. Throughout the year we continued to receive indications of interest from several parties for the possible acquisition of the Skyline division, as well as other partnership initiatives. We continue to operate the Skyline Medical business by continually improving our strategic opportunities, while focusing our resources on our precision medicine business.
Industry and Market Background and Analysis -
Drug Discovery and Development Solutions
The growing demand for the improvement in the discovery and development process of novel drug therapies is driving the demand for AI-empowered solutions. Growing partnerships and cooperation are expected to fuel global market for AI in drug development. The adoption of AI solutions in the drug development process increases efficiency, reduces cycle time, and increases the productivity and accuracy of the risky and long process. Due to these advantages, the importance of AI in drug discovery and development is expected to drive the global market. AI-powered drug discovery is an emerging approach that considers individual variability in multi-omics, including genes, disease and environment to develop effective therapies. This approach predicts more accurately which treatment, dose, and therapeutic regimen could provide the best possible clinical outcome. Biopharmaceutical companies, contract research organizations, academia, and other stakeholders began integrating AI-based solutions in their drug development processes to enhance outcomes and curb costs.
We believe we are uniquely positioned with our PEDAL platform to provide early insights that clients can use to prioritize drugs for development and identify patient-centric indications. In addition, the PEDAL platform can be used to re-purpose previously failed drug compounds. We aim to leverage the PEDAL platform for our biopharma clients and help them prioritize their oncology portfolio. The PEDAL platform supports a biopharma client’s decision on the drug molecules with a higher likelihood of clinical success. With PEDAL, we look to improve/enhance the way that the biopharma industry carries out the development of oncology drugs. We believe our platform provides unique financial- and time-saving advantages for pharmaceutical companies.
We believe the passage of the FDA Modernization Act 2.0 will increase the use of non-animal methods to study the mechanisms of diseases and to test the effectiveness of new drugs. The FDA Modernization Act 2.0 allows for alternatives to animal-testing requirements for the development of drugs and allows drug manufacturers to opt out of animal testing while utilizing other testing methods to develop drugs, such as cell-based assays, organ-on-a-chip technology, computer models, and other human biology-based test methods. We expect the market to continue to grow due to a shift towards more efficient, accurate and predictive models.
Infectious and Biohazardous Waste Management
There has long been recognition of the collective potential for ill effects to healthcare workers from exposure to infectious/biohazardous materials. Federal and state regulatory agencies have issued mandatory guidelines for the control of such materials, and in particular,particularly bloodborne pathogens. OSHA’s Bloodborne Pathogens Standard (29 CFR 1910.1030) requires employers to adopt engineering and work practice controls that would eliminate or minimize employee exposure fromto hazards associated with bloodborne pathogens. In 2001, in response to the Needlestick Safety and Prevention Act, OSHA revised the Bloodborne Pathogens Standard. The revised standard clarifies and emphasizes the need for employers to select safer needle devices and to involve employees in identifying and choosing these devices. The revised standard also calls for the use of “automated controls” as it pertains to the minimization of healthcare exposure to bloodborne pathogens.
Most surgical procedures produce potentially infectious materials that must be disposed of with the lowest possible risk of cross-contamination to healthcare workers. Current standards of care allow for these fluids to be retained in canisters and located in the operating room where they can be monitored throughout the surgical procedure. Once the procedure is complete these canisters and their contents are disposed using a variety of methods, all of which include manual handling and result in a heightened risk to healthcare workers for exposure to their contents. Canisters are the most prevalent means of collecting and disposing of infectious fluids in hospitals today. Traditional, non-powered canisters and related suction and fluid disposable products are exempt and do not require FDA clearance.
We expect the hospital surgery market to continue to increase due to population growth, the aging of the population, and expansion of surgical procedures to new areas (for example, use of the endoscope) which requires more medical fluid management and new medical technology.
Competition and Competitive Advantages
Drug Discovery Solutions – PEDAL and 3D Modeling
On average, new oncology drug compounds take 10-12 years to become approved for use, from discovery to commercial launch. Identifying those compounds is a difficult process with a significant majority of compounds failing. This failure is costly in time and resources, particularly when the compounds fail during the clinical trial stages. It is estimated that 90-95% of compounds fail between first human dose and launch. One of the reasons for this high failure rate is the inability of oncology drug compounds in clinical trials to meet the therapeutic end points in a large population.
AI companies addressing the needs in the drug discovery market are looking at the drug discovery and development challenges from different angles. However, we believe no other company has access to a comparable privately held biobank with tumor drug responses, genomics, biomarkers, digitized pathology slides, and histopathology data. The ability to pair AI with our biobank provides us with a competitive advantage and creates a barrier to entry for competitors in the drug response prediction space.
We believe this patient-derived, highly curated, multi-omic tumor model offers a better chance of generating predictive models of drug-response and outcomes than competitive approaches in the market today. The information embodied in the AI-driven predictive model provides insights into each tumor’s response to different therapeutic options, resulting in the ability to provide actionable insights critical to new drug development, individualizing patient treatment, drug repurposing, and biomarker development. Identifying cohorts of patient tumors most responsive to candidate drugs informs the early drug candidate selection process in a patient-centric manner that we do not believe is offered elsewhere. The tumor cohorts identified by our models can also be analyzed and stratified to optimize patient selection criteria for improved clinical trials. A deeper analysis of these same tumor cohorts found to be highly responsive to a particular drug candidate can be further utilized for targeted biomarker development and/or targeted assay development.
We also fulfill unmet needs in the drug discovery market with the next-generation technology of our 3D models, based on extensive knowledge of the human tumor microenvironment creating accurate reconstruction of the organ-specific 3D tissue microenvironment enabling evaluation of therapeutic agents under conditions mimicking human physiology. The main competitive advantage of our technology is the tumor-specific nature of its systems. 3D models replicate tissue heterogeneity and provide maintenance of primary human cells, organoids, and cell lines under the native conditions of human disease. The 3D models are formulated to mimic the tissue and/or disease of interest instead of pursuing a one-size-fits-all approach taken by other companies. Recreating specific tumor microenvironments enables more reliable prediction of tissue response to drugs with varying mechanisms of action. This same technology can also be used to demonstrate potential toxic drug effect on normal tissues by maintaining an accurate reconstruction of cellular and extracellular compartments of human tissues.
Drug Development Solutions – Formulations for Biologics
Our HSC platform is a self-contained, automated system that conducts high-throughput, self-interaction chromatography screens on FDA approved excipients for protein formulations. The HSC system provides clear competitive advantages. First, HSC measures the solubility in all FDA-approved excipients and excipient combinations rather than a limited subset of excipients. The HSC also requires smaller sample sizes and decreased time and manpower to optimize formulations. Using data generated from HSC screens, our proprietary predictive algorithm identifies the optimal combination(s) of buffers, pH, and excipients based on more than 4,000 possible combinations, resulting in increased solubility and physical stability of proteins. The top predictive solubilities are then validated using experimental methods in combination with the HSC to produce multiple formulations to meet customer requirements.
The HSC instrument and its technology has been validated over the past twelve years via industry and academic collaborations. Several of our clients have seen ten-fold and hundred-fold increases in their protein’s solubility while maintaining physical stability. For biopharmaceutical clients this means faster development times and quicker progression of molecules into the clinic. Our technologies and services help expedite and streamline biologics development—improving yield with expression and purification services; helping prepare for clinical trials with ICH stability profiles; meeting safety standards with endotoxin detection and removal; and manufacturing at our GMP facility.
Infectious and Biohazardous Waste Management
We believe that the STREAMWAY System is unique to the infectious and biohazardous waste management industry because it allows continuous suction but also provides for unlimited capacity, eliminating the need to interrupt a procedure to change canisters. To our knowledge, the STREAMWAY System is the only known automated fully closed direct‐to‐drain system that is wall‐mounted and able to collect, measure, and dispose of an unlimited amount of waste fluid without interruption.
We believe that our virtually hands free direct-to-drain technology (1) significantly reduces the risk of healthcare worker exposure to these infectious fluids by replacing canisters, (2) further reduces the risk of worker exposure when compared to powered canister technology that requires transport to and from the operating room, (3) reduces the cost per procedure for handling these fluids, and (4) enhances the surgical team’s ability to collect data to accurately assess the patient’s status during and after procedures. In addition to the traditional canister method of waste fluid disposal, several other powered medical devices have been developed that address some of the deficiencies described above. Most of these competing products continue to utilize some variation on the existing canister technology, and while not directly addressing the canister, most have been successful in eliminating the need for an expensive gel and its associated handling and disposal costs. Our existing competitors with products already on the market have a clear competitive advantage over us in terms of brand recognition and market exposure. In addition, many of our competitors have extensive marketing and development budgets that could overpower an emerging growth company like ours.
We expect the hospital surgery market to continue to increase due to population growth, the aging of the population, and expansion of surgical procedures to new areas (for example, use of the endoscope) which requires more fluid management and new medical technology.
STREAMWAY System Product Sales
Our Skyline Medical division consists primarily of sales of the STREAMWAY System, as well as sales of the proprietary cleaning fluid and filters for use with the STREAMWAY System. We manufacture an environmentally conscious system for the collection and disposal of infectious fluids resulting from surgical and other medical procedures. We have been granted patents for the STREAMWAY System in the United States, Canada, and Europe. We distribute our products to medical facilities where bodily and irrigation fluids produced during medical procedures must be contained, measured, documented, and disposed. Our products minimize the exposure potential to the healthcare workers who handle such fluids.
The STREAMWAY System is a wall-mounted fully automated system that disposes of an unlimited amount of suction fluid providing uninterrupted performance for physicians while virtually eliminating healthcare workers’ exposure to potentially infectious fluids collected during surgical and other patient procedures. We also manufacture and sell two disposable products required for the operation of the STREAMWAY System: a bifurcated dual port procedure filter with tissue trap and a single use bottle of cleaning solution. Both items are utilized on a single procedure basis and must be discarded after use. The STREAMWAY disposables are a critical component of our business model. Recurring revenues from the sale of the disposables are expected to be significantly higher over time than the revenues from the initial sale of the unit. We have exclusive distribution rights to the disposable solution.
TumorGenesis
Our subsidiary, TumorGenesis, is pursuing a new rapid approach to growing tumors in the laboratory, which essentially “fools” the cancer cells into thinking they are still growing inside the patient. We have also announced a proposed joint venture with GLG Pharma focused on using their combined technologies to bring personalized medicines and testing to ovarian and breast cancer patients, especially those who present with ascites fluid (over one-third of patients).
Competition and Competitive Advantages
Precision Medicine Business. We presently have clinical information, including tumor drug response data and an in-house bioinformatics AI platform. Cancer treatments require at least 5 years of testing to see progression-free survival rates. While competitors must wait for this data, we can leverage that data today. Other companies within our market segment are spending significant investment dollars to generate this data which they cannot leverage until the future. We can leverage the data today by sequencing the tumors and gathering the outcome data which is measured in months instead of years. In addition, the following points detail the key differentiators in our model building approach.
Soluble. HSC Technology is a self-contained, automated system that conducts high-throughput, self-interaction chromatography screens on FDA approved excipients for protein formulations. The HSC Instrument and its technology has been validated over the past twelve years via industry and academic collaborations. The data generated from HSC screens are analyzed by a proprietary predictive algorithm to identify the optimal combination(s) of buffers, pH, and excipients, resulting in increased solubility and physical stability of proteins. Several of our clients have seen ten-fold and hundred-fold increases in their protein’s solubility while maintaining physical stability. For biopharmaceutical clients this means faster development times and quicker progression of molecules into the clinic.
Skyline Medical. We further believe that the STREAMWAY System is unique to the industry in that it not only allows continuous suction but also provides for unlimited capacity, eliminating the need to interrupt a procedure to change canisters. To our knowledge, the STREAMWAY System is the only known fully automated direct-to-drain system that is wall-mounted and able to collect, measure, and dispose of an unlimited amount of waste fluid without interruption.
Suppliers
We buy our raw materials from several suppliers and, except as set forth below, the loss of any one supplier would not materially adversely affect our business. We currently have a single supplierrely on sole suppliers for certain materials and reagents that our Helomics subsidiary usesused to perform itsour molecular diagnostic tests. We also purchase reagents used in our molecular diagnostic tests from sole-source suppliers. While we have developed alternate sourcing strategies for these materials and vendors, we cannot be certain that these strategies will be effective or that the alternative sources will be available in a timely manner. If our current suppliers can no longer provide us with the materials that we need to perform molecular diagnostic tests, if the materials do not meet our quality specifications, or if we cannot obtain acceptable substitute materials, there could be an interruption in molecular diagnostic test processing. In the event of the loss of these suppliers, we could experience delays and interruptions that might adversely affect the financial performance of our business.
We also have single suppliers for the manufacturing of certain of our Skyline Medical products. Alternative suppliers are available in the market; however, we could experience delays and interruptions that might adversely affect the financial performance of our business including time for machine tooling specific to our products.
We have existing and good relationships with our service vendors.
Research and Development (“(“R&D”&D”)
We spent $372,710$188,305 and $422,964$320,320 in 20202023 and 2019,2022, respectively, on R&D.
Intellectual Property
We believe that to maintain a competitive advantage in the marketplace, we must develop and maintain protection of the proprietary aspects of our technology. We rely on a combination of patent, trade secret intellectual property rights, and other measures to protect our intellectual property to develop and maintain our competitive position. We seek to protect our trade secrets and proprietary know-how, in part, with confidentiality agreements with employees, although we cannot be certain that the agreements will not be breached, or that we will have adequate remedies if a breach were to occur.
CORE™
We have been granted an exclusive world-wide license to CORE, our computational drug discovery platform that can predict the main effects of drugs on disease-associated targets. The licensed technology is protected by PCT/US2012/025029, U.S. Patent Application Number 16/296,088, China Patent Number 201280013276.2, Japan Patent Number 6133789, and Hong Kong Patent Number 1193197.
Skyline Medical3D Modeling.
Our technology is a patient-derived 3D culture platform that recreates the complex human organ microenvironment thereby preserving the critical interactions between a tumor and its surroundings. Our models replicate the extracellular matrix of individual organs and disease-specific soluble microenvironment mimicking the biology of human disease, and as such, demonstrate high correlation with clinical response. Patents include US10,501,717 and US11,124,756.
STREAMWAY® System
In general, our patents are directed to a system and method for collecting waste fluid from a surgical procedure while ensuring there is no interruption of suction during the surgical procedure and no limit on the volume of waste fluid that can be collected. We hold the following granted patents in the United States and a pending application in the United States on our earlier STREAMWAY System models: US7469727, US8123731,US7,469,727 and US Publication No. US20090216205US8,123,731 (collectively, the “Patents”“First Generation Patents”). The First Generation Patents will begin to expire on August 8, 2023.
April 17, 2024.
On January 25, 2014, we filed a non-provisional Patent Cooperation Treaty (“PCT”) Application No. PCT/US2014/013081 claiming priority from the U.S. Provisional Patent Application, number 61756763 which was filed on January 25, 2013. The PCT allows an applicant to file a single patent application to seek patent protection for an invention simultaneously in each of the 148-member countries of the PCT, including the United States. The United States Patent Office has assigned application #14/763,459 to our previouslyWe filed both U.S. and European national stage applications from this PCT application.
We have two issued U.S. patents claiming priority from the PCT application: US10,253,792 and US10,954,975 (collectively, the “Second Generation Patents”). The Second Generation Patents will begin to expire on January 25, 2034.
As of November 22, 2017, we were informed that the European Patent Office allowed all our claims for application #14743665.3-1651 and on as of July 11, 2018, we were informed that the European Patent #EP2948200 was granted and published validatinggranted. European Patent #EP2948200 in the following countries: Belgium, Germany, Spain, France, United Kingdom, Ireland, Italy, Netherlands, Norway, Poland, and Sweden. Further, we filed a European divisional application, which was granted as European Patent #EP3437666 on March 26, 2020. European Patent #EP3437666 was validated in the following countries: Belgium, Switzerland, Cyprus, Germany, Spain, France, United Kingdom, Hungary, Ireland, Italy, Liechtenstein, North Macedonia, Malta, Netherlands, Norway, Poland, Sweden, and Turkey. Our PCT patent application is for an enhanced model of the surgical fluid waste management system. We utilize this enhanced technology in the updated version of the STREAMWAY System unit we began selling in 2014.
Government Regulation
Our businesses are subject to or impacted by extensive and frequently changing laws and regulations in the United States (at both the federal and state levels) and the other jurisdictions in which we conduct business, including some specific to our business, some specific to our industry, and others relating to conducting business generally (e.g., U.S. Foreign Corrupt Practices Act). We also are subject to inspections and audits by governmental agencies. The table below highlights key regulatory schemes applicable to our businesses:
CLIA and State Clinical Laboratory Licensing | CLIA regulates the operations of virtually all clinical laboratories, requiring that they be certified by the federal government and that they comply with various technical, operational, personnel, and quality requirements intended to ensure that the services provided are accurate, reliable, and timely.
State laws may require additional personnel qualifications or licenses, quality control, record maintenance, proficiency testing, or detailed review of our scientific method validations and technical procedures for certain tests.
Violations of these laws and regulations may result in monetary fines, criminal and civil penalties and/or suspension or exclusion from participation in Medicare, Medicaid, and other federal or state healthcare programs. |
Medicare and Medicaid; Fraud and Abuse | Diagnostic testing services provided under Medicare and Medicaid programs are subject to complex, evolving, stringent, and frequently ambiguous federal and state laws, and regulations, including those relating to billing, coverage, and reimbursement.
Anti-kickback laws and regulations prohibit making payments or furnishing other benefits to influence the referral of tests billed to Medicare, Medicaid, or certain other federal or state healthcare programs. In addition, federal and state anti-self-referral laws generally prohibit Medicare and Medicaid payments for clinical tests referred by physicians who have an ownership or investment interest in, or a compensation arrangement with, the testing laboratory, unless specific exceptions are met.
Federal substance abuse legislation enacted in 2018 contains anti-kickback provisions that are, by their terms, applicable to laboratory testing paid for by all payers. Upon full review of the legislation, we were in compliance at that time and continue to maintain compliance. We monitor regularly and reflect this in our annual compliance report.
Some states have similar laws that are not limited in applicability to only Medicare and Medicaid referrals and could also affect tests that are paid for by health plans and other non-governmental payers. Violations of these laws and regulations may result in monetary fines, criminal and civil penalties and/or suspension or exclusion from participation in Medicare, Medicaid, and other federal or state healthcare programs. |
FDA | The FDA has potential regulatory responsibility over, among other areas, instruments, software, test kits, reagents and other devices used by clinical laboratories to perform diagnostic testing in the United States. The FDA may assert regulatory oversight over these areas, and legislative proposals addressing FDA oversight of laboratory developed tests have been introduced in the past and may be enacted in the future. See “Item 1A. Risk Factors” for a discussion of the possible impact of such regulatory or legislative developments. |
Environmental, Health and Safety | We are subject to laws and regulations related to the protection of the environment, the health and safety of employees, and the handling, transportation, and disposal of medical specimens, infectious and hazardous waste, radioactive materials, various aspects of pertinent technologies and methods of protection.
Several organizations maintain oversight function including:
• OSHA (Occupational Safety and Health Administration) • EPA (Environmental Protection Agency) • DOT (Department of Transportation) • USPS (US Postal Service) • US Public Health Service • JCAHO (Joint Commission on Accreditation of Healthcare Organizations) • NFPA (National Fire Protection Association) • AIA (American Institute of Architects) • AORN (Association of Operating Room Nurses) |
Privacy and Security of Health and Personal Information | We are subject to laws and regulations regarding protecting the security and privacy of certain healthcare and personal information, including: (1) the federal Health Insurance Portability and Accountability Act and the regulations thereunder, which establish (a) a complex regulatory framework including requirements for safeguarding protected health information and (b) comprehensive federal standards regarding the uses and disclosures of protected health information; (2) state laws; and (3) the European Union's General Data Protection Regulation.
A healthcare provider may be subject to penalties for non-compliance and may be required to notify individuals or state, federal, or county governments if the provider discovers certain breaches of personal information or protected health information. |
To date, no regulatory agency has established exclusive jurisdiction over the area of biohazardous and infectious waste in healthcare facilities.
FDA Clearance of STREAMWAY® System under Section 510(k).
The FDA Center for Devices and Radiological Health requires 510(k) submitters to provide information that compares its new device to a marketed device of a similar type, in order to determine whether the device is substantially equivalent.
We filed the 510(k) submission for clearance of the STREAMWAY System device on March 14, 2009, and received written confirmation on April 1, 2009 that our 510(k) has been cleared by the FDA.
Our 510(k) number is K090759.
Following thisthese 510(k) clearanceclearances by the FDA, we continue to be subject to the normal ongoing audits and reviews by the FDA and other governing agencies. These audits and reviews are standard and typical in the medical device industry, and we do not anticipate being affected by any extraordinary guidelines or regulations.
Our subsidiary, Skyline Medical, has successfully passed FDA audits in the past, with no observations or 483 warning letters issued.
Application for Electrical Safety Testing and Certification for STREAMWAY System
We sought and achieved testing and certification to the IEC 60606-1 and IEC 60606-1-2, two internationally recognized standards.
The 60601-1 3rd3rd edition certification for our STREAMWAY System is valid and enables us to continue to market and sell our product domestically and internationally.
We have contracted with TUV, a nationally recognized testing laboratory-NRTL, to certify our STREAMWAY System to the new 60601-1 3rd3rd Edition in late 2016. We attained certification to the new standard, and then submitted it to our Notified Body (BSI) for recommendation for our CE Mark, which we received in June 2017, allowing us to sell products outside of the United States.
Effective November 21, 2016, we received a Medical Device Establishment License to sell the STREAMWAY System and related disposables in Canada.
Our Health Canada Medical Device Establishment License number is 7202.
ISO Certification
Our subsidiary, Skyline Medical, hired BSI (British Standards Institute) to be its Notified Body and to perform audits to ISO 13485:2003 Standards. On June 1, 2016, we successfully passed the audit of our Quality Management System and received our Certificate of Registration for ISO 13485:2016. Our certificate number is FM 649810.
Employees and Human Capital Resources
Employees
We have 22had 34 full-time employees and 1 part-time employee as of December 31, 2020.
2023. None of our employees are subject to a collective bargaining agreement and we believe our relations with our employees are satisfactory. Our human capital resources objectives include identifying, recruiting, retaining, incentivizing and integrating our existing and additional employees, and we recruit people for positions regardless of gender, ethnicity or other protected traits.
Executive Offices
Our principal executive offices are located at 2915 Commers Drive;91 43rd Street, Suite 900; Eagan, Minnesota 55121110 Pittsburgh, Pennsylvania and our telephone number is (651) 389-4800.
(412) 432-1500.
Corporate History
We were originally incorporated in Minnesota on April 23, 2002, and reincorporated in Delaware in 2013. We changed our name from Skyline Medical Inc. to Precision Therapeutics Inc. on February 1, 2018 and to Predictive Oncology Inc. on June 13, 2019.
Available Information
Our website address is http:https://www.predictive-oncology.com.predictive-oncology.com. Information contained on our website is not incorporated by reference into this Annual Report on Form 10-K unless expressly noted.
We file reports with the Securities and Exchange Commission (“SEC”), which we make available on our website free of charge at http:https://investors.predictive-oncology.com/financial-informationfinancial-information. These reports include Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, each of which is provided on our website as soon as reasonably practicable after we electronically file such materials with, or furnish them to, the SEC. We also make, or will make, available through our website other reports filed with or furnished to the SEC under the Securities Exchange Act of 1934, as amended, including our proxy statements and reports filed by officers and directors under Section 16(a) of that Act. You can also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a website (http:(https://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us.
You can obtain copies of exhibits to our filings electronically at the SEC’s website at www.sec.gov or by mail from the Public Reference Section of the SEC at 100 F Street, N.E., Washington, D.C. 20549 at prescribed rates. The exhibits are also available as part of the Annual Report on Form 10-K for the year ended December 31, 2020, which is available on our corporate website.
You should carefully consider the risks described below before making an investment decision.Our business could be harmed by any of these risks.The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment.The risks described below are not the only ones that we may face. Additional risks that are not currently known to us or that we currently consider immaterial may also impair our business, financial condition or results of operations. In assessing these risks, you should also refer to the other information contained in this Form 10-K, including our financial statements and related notes.
Risk Factors RelatingRelated to Our Business
There is substantial doubt about our ability to continue as a going concern. We will require significant additional financing to fund operating expenses and implement our business plan. Such financing, if available, may be dilutive.
We have incurred significant and recurring losses from operations for the past several years and had an accumulated deficit of $167,761,883 as of December 31, 2023. We had cash and cash equivalents of $8,728,660 as of December 31, 2023 and need to raise significant additional capital to meet our operating needs. Our short-term obligations as of December 31, 2023 were $3,951,031, consisting primarily of aggregate accounts payable and accrued expenses of $2,973,729 and operating lease obligations of $517,427. As of December 31, 2023, we also had a short-term note payable of $150,408 that bears interest at an annual percentage rate of 9.25% and long-term operating lease obligations of $2,188,979 with a weighted average remaining lease term of 3.99 years. We do not expect to generate sufficient operating revenue to sustain our operations in the near term. During the year ended December 31, 2023, we incurred negative cash flows from operations of $13,189,390. Although we have attempted to improve our operating margin by bolstering revenues and curtailing expenses and continue to seek ways to generate revenue through business development activities, there is no guarantee that we will be able to improve our operating margin sufficiently or achieve profitability in the near term. These conditions raise substantial doubt about our ability to continue as a going concern within one year after the date our consolidated financial statements included in this annual report on Form 10-K are issued. We are evaluating alternatives to obtain the required additional funding to maintain future operations. These alternatives may include, but are not limited to, equity financing, issuing debt, entering into other financing arrangements, or monetizing operating businesses or assets. These possibilities, to the extent available, may be on terms that result in significant dilution to our existing stockholders or that result in our existing stockholders losing part or all of their investment. Despite these potential sources of funding, we may be unable to access financing or obtain additional liquidity under acceptable terms, if at all. If such financing or adequate funds from operations are not available, we would be forced to limit our business activities and we could default on existing payment obligations, which would have a material adverse effect on our financial condition and results of operations, and may ultimately be required to cease our operations and liquidate our business.
The use of AI in our business is subject to risks associated with new and rapidly evolving technologies and industries, may result in reputational harm or liability, and may not result in the development of commercially viable therapies, drugs or treatments.
Our business model relies on the use of AI to support the development of optimal cancer therapies. Using AI and our proprietary biobank of 150,000+ tumor samples, categorized by patient type, we make optimized, high-confidence drug-response predictions regarding drug compounds to enable a more informed selection of drug/tumor combinations. While we believe that AI may potentially enable more efficient drug research and clinical development than the conventional model, our approach is novel and has not yet been widely studied. Our use of AI is subject to risks and challenges associated with new, disruptive, and rapidly evolving technologies and industries, which may affect its adoption and the success of our business. The algorithms we use may be flawed, our datasets may be insufficient or contain biased information, and inappropriate or controversial data practices by us or others could impair the acceptance of AI solutions. These deficiencies could undermine the predictions or analysis that AI applications produce, subjecting us to competitive harm, legal liability, and brand or reputational harm. Additionally, changes in laws and regulations could impact the usefulness of our solution and could necessitate modifications in our business to accommodate such changes. The regulatory landscape for AI is continually evolving, and both the FDA and the European Medicines Agency are in the process of issuing comprehensive guidance on AI software which may change how our product is regulated.
Our approach may not result in time savings, higher success rates or reduced costs as we expect it to, and if not, we may not attract collaborators or develop new drugs as quickly or cost-effectively as expected and, therefore, we may not be able to commercialize our approach as expected at this time.
We have entered into, and may enter into additional, collaborations, in-licensing arrangements, joint ventures, strategic alliances or partnerships with third parties that may not result in the development of commercially viable products or the generation of significant future revenues.
We may enter into collaborations, in-licensing arrangements, joint ventures, strategic alliances, partnerships or other arrangements to develop products and to pursue new markets. Proposing, negotiating and implementing collaborations, in-licensing arrangements, joint ventures, strategic alliances or partnerships may be a lengthy and complex process. Other companies, including those with substantially greater financial, marketing, sales, technology or other business resources, may compete with us for these opportunities or arrangements. We may not identify, secure, or complete any such transactions or arrangements in a timely manner, on a cost-effective basis, on acceptable terms or at all. We have limited institutional knowledge and experience with respect to these business development activities, and we may also not realize the anticipated benefits of any such transaction or arrangement. In particular, these collaborations may not result in the development of products that achieve commercial success or result in significant revenues and could be terminated prior to developing any products. Our ability to generate revenues from these arrangements will depend in part on our collaborators’ abilities to successfully perform the functions assigned to them in these arrangements.
Additionally, we may not be in a position to exercise sole decision-making authority regarding the transaction or arrangement, which could create the potential risk of creating impasses on decisions, and our future collaborators may have economic or business interests or goals that are, or that may become, inconsistent with our business interests or goals. It is possible that conflicts may arise with our collaborators, such as conflicts concerning the achievement of performance milestones, or the interpretation of significant terms under any agreement, such as those related to financial obligations or the ownership or control of intellectual property developed during the collaboration. If any conflicts arise with any future collaborators, they may act in their self-interest, which may be adverse to our best interests, and they may breach their obligations to us. In addition, we may have limited control over the amount and timing of resources that any future collaborators devote to our or their future products. Disputes between us and our collaborators may result in litigation or arbitration which would increase our expenses and divert the attention of our management. Further, these transactions and arrangements will be contractual in nature and will generally be terminable under the terms of the applicable agreements and, in such event, we may not continue to have rights to the products relating to such transaction or arrangement or may need to purchase such rights at a premium.
If we enter into in-bound intellectual property license agreements, we may not be able to fully protect the licensed intellectual property rights or maintain those licenses. Future licensors could retain the right to prosecute and defend the intellectual property rights licensed to us, in which case we would depend on the ability of our licensors to obtain, maintain and enforce intellectual property protection for the licensed intellectual property. These licensors may determine not to pursue litigation against other companies or may pursue such litigation less aggressively than we would. Further, entering into such license agreements could impose various due diligence, commercialization, royalty or other obligations on us. Future licensors may allege that we have breached our license agreement with them, and accordingly seek to terminate our license, which could adversely affect our competitive business position and harm our business prospects.
Our limited operating history with respect to our precision medicine servicesdrug discovery solutions makes evaluation of our business difficult.
Our precision medicinedrug discovery, drug development and clinical research services were launched with the initial investment in Helomics during the first quarter of 2018 and have not generated significant revenue to date. Our ability to implement a successful business plan with respect to precision medicinedrug discovery, drug development and clinical research services remains unproven, and no assurance can be given that we willmay not ever generate sufficient revenues to sustain our business. We have a limited operating history which makes it difficult to evaluate our performance. Our prospects should be considered in light of these risks, and the expenses, technical obstacles, difficulties, market penetration rate, and delays frequently encountered in connection with the development of new businesses. These factors include uncertainty as to whether we will be able to:
• | Succeed in uncertain markets; | |
• | Respond effectively to competitive pressures; | |
• | Successfully address intellectual property issues of others; | |
• | Protect and expand our intellectual property rights; and | |
• | Continue to develop and upgrade our products. |
In connection with developing our CRO business,drug discovery solutions, we have committed and will continue to commit significant capital to investments in early-stage companies, all of which may be lost, and which mayour ability to continue to commit capital in other early-stage companies will require us to raise significant additional capital, and ourcapital. Our entering into new lines of business willcould result in significant diversion of management resources, all of which may result in failure of our business.
We have committed significant capital and management resources to developing our CRO businessdrug discovery solutions and other new business areas, and we intend to continue to devote significant capital and management resources to new businesses. Therefore, we could invest significant capital in business enterprises with no certainty when or whether we will realize a return on these investments. InvestmentsAny investments using cash will deplete our capital resources, meaning we will be required to raise significant amounts of new capital. There is no assurance that we willWe may not be successful in raising sufficient capital, and the terms of any such financing willmay be dilutive to our stockholders. We may also acquire technologies or companies by issuing stock or other equity securities rather than, or in addition to, payment of cash, which may have the result of diluting our stockholders’ investments. Further, the energy and resources of our officers and personnel may be substantially diverted to new lines of business, which are unproven. If these businesses are unsuccessful or require too great of a financial investment to be profitable, our business may fail.
We rely on sole suppliers for some of the materials used in our molecular diagnostic tests,business, and we may not be able to find replacements or transition to alternative suppliers in a timely manner.
We rely on sole suppliers for certain materials used to perform our molecular diagnostic tests. We also purchase reagents used in our molecular diagnostic tests from sole-source suppliers.business. While we have developed alternate sourcing strategies for these materials and vendors, we cannot be certain whether these strategies will be effective, or the alternative sources will be available in a timely manner. If these suppliers can no longer provide us with the materials needed to performused in our molecular diagnostic tests,business, if the materials do not meet required quality specifications, or if we cannot obtain acceptable substitute materials, an interruption in molecular diagnostic test processingour products and services provided to customers could occur. Any such interruption may directly impact our revenue and cause us to incur higher costs.
If we are sued for product liability or errors and omissions liability, we could face substantial liabilities that exceed our resources.
The marketing, sale, and use of our molecular diagnostic testsproducts could lead to product liability claims. These claims if someone were tocould allege that the molecular diagnostic testproducts failed to perform as it wasthey were designed. We may also be subject to liability for errors in the results we provide to physicians or for a misunderstanding of, or inappropriate reliance upon, the information we provide. A product liability or errors and omissions liability claim could result in substantial damages and be costly and time consuming for us to defend. Although we maintain product liability and errors and omissions insurance, we cannot be certain that our insurance would fully protect us from the financial impact of defending against these types of claims or any judgments, fines, or settlement costs arising out of such claims. Any product liability or errors and omissions liability claim brought against us, with or without merit, could increase our insurance rates or prevent us from securing insurance coverage in the future. Additionally, any product liability lawsuit could cause injury to our reputation or cause us to suspend sales of our products and solutions. The occurrence of any of these events could have a material adverse effect on our business, financial condition, and results of operations.
If our R&D and commercialization efforts for our TruTumor and PeDAL platformsPEDAL platform take longer than expected, the commercial revenues from the service offerings that use these platformsthis platform could also be delayed.
Our CROdrug discovery solutions business offers various services to pharma, diagnostics, and biotech companies. These services use our TruTumor tumorPEDAL platform. This platform and our PeDAL platform. These platforms areis the subject of active R&D to further improve and validate them for commercial use in order to help our clients in their drug discovery, biomarker, and clinical trial activities. We could face delays in this R&D, for&D. For example:
• | we may not be able to secure access to and approval to use clinical data from academic hospital partners |
• | clinical testing volume (number of specimens coming to us for testing) may not grow sufficiently to drive additional data generation as well as further development of the |
• | patient consent to use the patient’s data and tumor material for R&D may not be sufficient to support R&D; and |
• | we may not be able to attract and retain the appropriately qualified staff to perform the necessary R&D. |
We have a limited operating history with the CROdrug discovery solutions business, particularly in connection with services using our PeDAL,PEDAL platform, as these are new to the market, which makes it difficult to forecast our future revenues. WhileAlthough we are committed to the buildout of the CRO servicesthis business for the long term, we cannot predict at this time, with any certainty, the future viability of eitherthis business unit.
We face significant competition to our STREAMWAY System in the surgical fluid waste management industry, including competition from companies with considerably greater resources than ours, and if we are unable to compete effectively with these companies, our market share may decline, and our business could be harmed.
The surgical fluid waste management industry is highly competitive, with numerous competitors ranging from well-established manufacturers to innovative start-ups. Several of our competitors have significantly greater financial, technological, engineering, manufacturing, marketing, and distribution resources than we do. Their greater capabilities in these areas may enable them to compete more effectively on the basis of price and production and more quickly develop new products and technologies.
Companies with significantly greater resources than ours may be able to reverse engineer our products and/or circumvent our intellectual property position. Such action, if successful, would greatly reduce our competitive advantage in the marketplace.
We believe our ability to compete successfully with our STREAMWAY System depends on a number of factors, including, without limitation, our technical innovations of unlimited suction and unlimited capacity capabilities, our innovative and advanced research and development capabilities, strength of our intellectual property rights, sales and distribution channels, and advanced manufacturing capabilities. We plan to employ these and other elements as we develop our products and technologies, but there are many other factors beyond our control. We may not be able to compete successfully in the future, and increased competition may result in price reductions, reduced profit margins, loss of market share, and an inability to generate cash flows that are sufficient to maintain or expand our development and marketing of new products, which could adversely impact the trading price of the shares of our common stock.
If demand for our STREAMWAY System or molecular diagnostic tests is unexpectedly high or if we experience problems in scaling our operations, there is no assurance that there will notmay be supply interruptions or delays that could limit the growth of our revenue.
We are currently manufacturing the STREAMWAY System, following GMP compliance regulations of the FDA, at our own facility and anticipate having the capability of producing the STREAMWAY System in sufficient quantities for future near-term sales. We have contracted with a manufacturing company that follows ISO compliance regulations of the FDA and that can manufacture products at higherhigh volumes. However, if demand for our product is higher than anticipated, there is no assurance thatthen we or our manufacturing partners willmay not be able to produce the product in sufficiently higher quantity to satisfy demands.demand.
Likewise, as demand for our molecular diagnostic tests grow,grows, we will need to continue to scale our testing capacity and processing technology to expand our customer service, billing, and systems processes and to enhance our internal quality assurance program. We will also need additional certified laboratory scientists and other scientific and technical personnel to process higher volumes of our molecular diagnostic tests. We cannot guarantee that increases in scale, related improvements, and quality assurance will be implemented successfully or that appropriate personnel will be available. Failure to implement necessary procedures, transition to new processes, or hire the necessary personnel could result in higher costs of processing tests or an inability to meet demand. There can be no assurance that we willWe may not be able to perform our testing on a timely basis at a level consistent with demand, or thatand our efforts to scale our operations will notmay negatively affect the quality of test results.
If we encounter difficulties in scaling our operations as a result of, among other things, quality control and quality assurance issues and availability of reagents and raw material supplies, we wouldwill likely experience reduced sales, increased repair or re-engineering costs, defects, and increased expenses due to switching to alternate suppliers. Any of these results would reduce our revenues and gross margins. Although we attempt to match our capabilities to estimates of marketplace demand, to the extent demand materially varies from our estimates, we may experience constraints in our operations and delivery capacity, which could adversely impact revenue in a given fiscal period. Any supply interruptions or inadequate supply would have a material adverse effect on our results of operations.
If we encounter difficulty meeting market demand or quality standards, our reputation could be harmed, and our future prospects and business could suffer, causing a material adverse effect on our business, financial condition, and results of operations.
We may require additional financing to finance operating expenses and fulfill our business plan. Such financing, if available, will be dilutive.
We have not achieved profitability and anticipate that we will continue to incur net losses at least through the remainder of 2021. While we have received approximately $34.4 million in new investment during the first quarter of 2021 and are attempting to curtail our expenses, we may need to raise additional capital to finance operating expenses, invest in our sales organization and new product development, compete in the international marketplace, and develop the strategic assets of our Helomics businesses, especially over the longer term. We would attempt to raise these funds through equity or debt financing that may include public offerings, private placements, alternative offerings, further draws on our equity line with Oasis Capital, LLC, or other means. Such additional financing would be dilutive to existing stockholders, and there is no assurance that such financing would be available upon acceptable terms. If such financing or adequate funds from operations are not available, we would be forced to limit our business activities, which would have a material adverse effect on our results of operations and financial condition. These possibilities, to the extent available, may be on terms that result in significant dilution to our existing shareholders or that result in our existing shareholders losing part or all of their investment.
Our business and operations have been and will likely continue to be materially and adversely affected by the COVID-19 pandemic.
In March 2020, the World Health Organization declared the recent spread of COVID-19 to be a global pandemic. In response to the crisis, emergency measures have been imposed by governments worldwide, including mandatory social distancing and the shutdown of non-essential businesses. These measures have adversely impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial markets, and our business and operations have been and will likely continue to be materially and adversely affected. For example, our contract manufacturer for the STREAMWAY® System has been forced to change locations, thereby delaying our order fulfillment for parts. We have also reduced on-site staff at several of our facilities, resulting in delayed production, less efficiency, and our sales staff is unable to visit with hospital administrators who are our customers and potential customers. In addition, COVID-19 has impacted the Company’s capital and financial resources, including our overall liquidity position and outlook. For instance, our accounts receivable has slowed while our suppliers continue to ask for pre-delivery deposits. Ultimately, the extent of the impact of the COVID-19 pandemic on our future operational and financial performance will depend on, among other matters, the duration and intensity of the pandemic; the level of success of global vaccination efforts; governmental and private sector responses to the pandemic and the impact of such responses on us; and the impact of the pandemic on our employees, customers, suppliers, operations and sales, all of which are uncertain and cannot be predicted. These factors may remain prevalent for a significant period of time even after the pandemic subsides, including due to a continued or prolonged recession in the U.S. or other major economies. The impacts of the COVID-19 pandemic, as with any adverse public health developments, could have a material adverse effect on our business, results of operations, liquidity or financial condition and heighten or exacerbate risks described in this Annual Report on Form 10-K.
We are dependent on a few key executive officers for our success. Our inability to retain those officers would impede our business plan and growth strategies, which would have a negative impact on our business, financial condition, and the valueresults of an investment.operations.
Our success depends on the skills, experience, and performance of key members of our management team. We heavily depend on our management team: Carl Schwartz, our Chief Executive Officer (“CEO”), and Bob Myers, our Chief Financial Officer (“CFO”). We have entered into employment agreements with the CEO and the CFO and may expand the relatively small number of executives. Were we to lose one or more members of these key individuals,our management team for any reason, we would be forcedrequired to expend significant time and money in the pursuit ofto find a replacement, which could result in both a delay in the implementation of our business plan and the diversion of our limited working capital. We can give no assurance that we wouldmay not be able to find satisfactory replacements for these key individualsmembers of our management team at all, or on terms that are not unduly expensive or burdensome to us.
If we are required to further write down goodwill and other intangible assets, Such loss of a key member or members of our management team without adequate replacements would have a negative impact on our business, financial condition, and operating results would be negatively affected.of operations.
When we acquire a business, a substantial portion of the purchase price of the acquisition is allocated to goodwill and other identifiable intangible assets. The amount of the purchase price which is allocated to goodwill and other intangible assets is determined by the excess of the purchase price over the net identifiable assets acquired. For example, when we acquired Helomics, we acquired $3,725,000 in intangible assets and $23,790,290 in goodwill, which represented the excess of the consideration transferred over the fair values of assets acquired and liabilities assumed and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. We test intangible assets and goodwill for impairment at least annually. During the year ended December 31, 2019, we recorded an impairment of goodwill of $8,100,000 and during the year ended December 31, 2020 we recorded an impairment of goodwill of $12,876,498. During 2019, we also recorded an impairment of our intangible asset associated with our license agreements of $770,250. Under current accounting standards, if we determine that intangible assets or goodwill are impaired in the future, we will be required to further write down these assets. Any write-downs that may be required to be recorded would adversely affect our financial condition and operating results.
RisksRisk Factors Related to Our Intellectual Property
Our business is dependent upon proprietary intellectual property rights, which if we were unable to protect, could have a material adverse effect on our business.
We rely on a combination of patent, trade secret and other intellectual property rights, contractual restrictions, and other measures to protect our intellectual property. We currently own and may in the future own or license additional patent rights or trade secrets in the U.S., with non-provisional patents elsewhere in the world that cover certain of our products. We rely on patent laws and other intellectual property laws, nondisclosure and other contractual provisions, and technical measures to protect our products and intangible assets.
If we fail to protect our intellectual property, third parties may be able to compete more effectively against us and we may incur substantial litigation costs in our attempts to recover or restrict use of our intellectual property. While we apply for patents covering our products and technologies and uses thereof, we may fail to apply for patents on important products and technologies in a timely fashion, or at all, or we may fail to apply for patents in relevant jurisdictions. Others could seek to design around our current or future patented technologies. These intellectual property rights are important to our ongoing operations and no assurance can be given that any measure we implement willmay not be sufficient to protect our intellectual property rights.
Further, competitors could willfully infringe upon our intellectual property rights, design around our protected technology, or develop their own competitive technologies that arguably fall outside of our intellectual property rights. Others may independently develop similar or alternative products and technologies or replicate any of our products and technologies. Also, with respect to our trade secrets and proprietary know-how, we cannot be certain that the confidentiality agreements we have entered into with employees will not be breached, or that we will have adequate remedies for any breach. In addition, we may lose the protection afforded by these rights through patent expirations, legal challenges, or governmental action. If our intellectual property does not adequately protect us against competitors’ products and methods, our competitive position could be adversely affected, as could our business and the results of our operations. To the extent our intellectual property offers inadequate protection, or is found to be invalid or unenforceable, we would be exposed to a greater risk of competition. If our intellectual property does not provide adequate coverage of our competitors’ products, our competitive position could be adversely affected, as could our overall business.
If we become subject to intellectual property actions, it could hinder our ability to deliver our products and services and our business could be negatively impacted.
We could be subject to legal or regulatory actions alleging intellectual property infringement or similar claims against us. Companies may apply for or be awarded patents or have other intellectual property rights covering aspects of our technologies or businesses. Litigation may be necessary for us to enforce our patents and proprietary rights or to determine the scope, coverage, and validity of the proprietary rights of others. The outcome of any litigation or other proceeding is inherently uncertain and might not be favorable to us, and we might not be able to obtain licenses to technology that we require on acceptable terms, or at all. Moreover, if it is determined that our products infringe on the intellectual property rights of third parties, we could be prevented from marketing our products. While we are currently not subject to any material intellectual property litigation, any future litigation alleging intellectual property infringement could be costly, particularly in light of our limited resources. Similarly, if we determine that third parties are infringing on our patents or other intellectual property rights, our limited resources may prevent us from litigating or otherwise taking actions to enforce our rights. Any such litigation or inability to enforce our rights could require us to change our business practices, hinder or prevent our ability to deliver our products and services, and result in a negative impact to our business. Expansion of our business via product line enhancements or new product lines to drive increased growth in current or new markets may be inhibited by the intellectual property rights of our competitors and/or suppliers. Our inability to successfully mitigate those factors may significantly reduce our market opportunity and subsequent growth. Any litigation that may be necessary in the future could result in substantial costs and diversion of resources and could have a material adverse effect on our business, financial condition, and operating results.
If we breach our license agreements it could have a material adverse effect on our commercialization efforts for our product candidates.
A portion of our patent portfolio is in-licensed. As such, we are a party to license agreements and certain aspects of our business depend on patents and/or patent applications owned by other companies or institutions. The license agreements impose specified diligence, milestone payment, royalty, and other obligations on us and requires that we meet development timelines, or to exercise diligent or commercially reasonable efforts to develop and commercialize licensed products, in order to maintain the license. Our rights with respect to in-licensed patents and patent applications may be lost if the applicable license agreement expires or is terminated or if we fail to satisfy the obligations under the License Agreement. We are likely to enter into additional license agreements to in-license patents and patent applications as part of the development of our business in the future, under which we may not retain control of the preparation, filing, prosecution, maintenance, enforcement, and defense of such patents. If we are unable to maintain these patent rights for any reason, our ability to develop and commercialize our product candidates could be materially harmed.
Our licensors may not successfully prosecute certain patent applications, the prosecution of which they control, under which we are licensed and on which our business depends. Even if patents issue from these applications, our licensors may fail to maintain these patents, may decide not to pursue litigation against third-party infringers, may fail to prove infringement, or may fail to defend against counterclaims of patent invalidity or unenforceability.
Risks with respect to parties from whom we have obtained intellectual property rights may also arise out of circumstances beyond our control. In spite of our best efforts, our licensors might conclude that we have materially breached our intellectual property agreements and might therefore terminate the intellectual property agreements, thereby removing our ability to market products covered by these intellectual property agreements. If our intellectual property agreements are terminated, or if the underlying patents fail to provide the intended market exclusivity, competitors would have the freedom to seek regulatory approval of, and to market, products similar or identical to ours. Moreover, if our intellectual property agreements are terminated, our former licensors and/or assignors may be able to prevent us from utilizing the technology covered by the licensed or assigned patents and patent applications. This could have a material adverse effect on our competitive business position and our financial condition, results of operations and our business prospects.
Patent term may be inadequate to protect our competitive position on our products for an adequate amount of time.
Given the amount of time required for the development, testing and regulatory review of new product candidates, patents protecting such candidates might expire before or shortly after such candidates are commercialized. Depending upon the timing, duration, and conditions of FDA marketing approval of our product candidates, one or more of our United States patents may be eligible for limited patent term extension under the Drug Price Competition and Patent Term Restoration Act of 1984, referred to as the Hatch-Waxman Amendments, and similar legislation in the European Union. The Hatch-Waxman Amendments permit a patent term extension of up to five years for a patent covering an approved product as compensation for effective patent term lost during product development and the FDA regulatory review process. A patent term extension cannot extend the remaining term of a patent beyond a total of 14 years from the date of product approval. Only one patent may be extended, and only those claims covering the approved drug, a method for using it, or a method for manufacturing it may be extended. However, we may not receive an extension if we fail to apply within applicable deadlines, fail to apply prior to expiration of relevant patents or otherwise fail to satisfy applicable requirements. Moreover, the length of the extension could be less than we request. If we are unable to obtain patent term extension or the term of any such extension is less than we request, the period during which we can enforce our patent rights for that product will be shortened and our competitors may obtain approval to market competing products sooner. As a result, our revenue from applicable products could be reduced and could have a material adverse effect on our business.
Further, recent judicial decisions in the U.S. raised questions regarding the award of patent term adjustment (PTA) for patents in families where related patents have issued without PTA. Thus, it cannot be said with certainty how PTA will be viewed in the future and whether patent expiration dates may be impacted.
Changes in patent law, including recent patent reform legislation, could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents.
In September 2011, the America Invents Act (AIA) was enacted in the United States, resulting in significant changes to the U.S. patent system. An important change introduced by the AIA was a transition to a “first-to-file” system for deciding which party should be granted a patent when two or more patent applications are filed by different parties claiming the same invention, which went into effect on March 16, 2013. Therefore, a third party that now files a patent application in the USPTO before we do could be awarded a patent covering an invention of ours even if we created the invention before it was created by the third party. While we are cognizant of the time from invention to filing of a patent application, circumstances could prevent us from promptly filing patent applications for our inventions.
Among some of the other changes introduced by the AIA were changes that limit where a patentee may file a patent infringement suit and providing opportunities for third parties to challenge any issued patent in the USPTO. This applies to all of our U.S. patents, even those issued before March 16, 2013. Because of a lower burden of proof in USPTO proceedings compared to the burden of proof in U.S. federal courts necessary to invalidate a patent claim, a third party could potentially provide evidence in a USPTO proceeding sufficient for the USPTO to hold a claim invalid even though the same evidence would be insufficient to invalidate the claim if first presented in a district court action. Accordingly, a third party may attempt to use the USPTO procedures to invalidate our patent claims that would not have been invalidated if first challenged by the third party as a defendant in a district court action. The AIA and its continued implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications, and the patent applications of our existing and future collaborators or licensors and the enforcement or defense of our issued patents.
Depending on decisions by the U.S. Congress, the federal courts, and the USPTO, the laws and regulations governing patents could change in unpredictable ways that could weaken our ability to obtain new patents or to enforce our existing patents and patents that we might obtain in the future. Similarly, there is complexity and uncertainty related to European patent laws. For example, the European Patent Convention was amended in April 2010 to limit the time permitted for filing divisional applications. In addition, the EPO patent system is relatively stringent in the type of amendments that are allowed during prosecution. These limitations and requirements could adversely affect our ability to obtain new patents in the future that may be important for our business.
We may be subject to claims that our employees, consultants, or independent contractors have wrongfully used or disclosed confidential information of third parties.
We employ individuals who were previously employed at other biotechnology or biopharmaceutical companies. Although we try to ensure that our employees, consultants and advisors do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we or our employees, consultants, or independent contractors have inadvertently or otherwise used or disclosed confidential information of our employees’ former employers or other third parties. We may also be subject to claims that former employers or other third parties have an ownership interest in our future patents. Litigation may be necessary to defend against these claims. There is no guarantee of success in defending these claims, and even if we are successful, litigation could result in substantial cost and be a distraction to our management and other employees. Even if we are successful in defending against these types of claims, litigation or other legal proceedings relating to intellectual property claims may cause us to incur significant expenses and could distract our technical and management personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments, and, if securities analysts or investors perceive these results to be negative, that perception could have a substantial adverse effect on the price of our common stock. This type of litigation or proceeding could substantially increase our operating losses and reduce our resources available for development activities. Some of our competitors may be able to sustain the costs of this type of litigation or proceedings more effectively than we can because of their substantially greater financial resources. Uncertainties resulting from the initiation and continuation of intellectual property litigation or other intellectual property related proceedings could adversely affect our ability to compete in the marketplace.
We may not be able to enforce our intellectual property rights throughout the world.
The laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the United States, and many companies have encountered significant challenges in establishing and enforcing their proprietary rights outside of the United States. These challenges can be caused by the absence of rules and methods for the establishment and enforcement of intellectual property rights outside of the United States. In addition, the legal systems of some countries, particularly developing countries, do not favor the enforcement of patents and other intellectual property protection, especially those relating to healthcare. This could make it difficult for us to stop the infringement of our patents, if obtained, or the misappropriation of our other intellectual property rights. For example, many foreign countries have compulsory licensing laws under which a patent owner must grant licenses to third parties. In addition, many countries limit the enforceability of patents against third parties, including government agencies or government contractors. In these countries, patents may provide limited or no benefit. Patent protection must ultimately be sought on a country-by-country basis, which is an expensive and time-consuming process with uncertain outcomes. Accordingly, we may choose not to seek patent protection in certain countries, and we will not have the benefit of patent protection in such countries. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business. Accordingly, our efforts to protect our intellectual property rights in such countries may be inadequate. In addition, changes in the law and legal decisions by courts in the United States and foreign countries may affect our ability to obtain adequate protection for our technology and the enforcement of intellectual property.
Beginning June 1, 2023, European patent applications and patents may be subjected to the jurisdiction of the Unified Patent Court (UPC). Under the unitary patent system, European applications will have the option, upon grant of a patent, of becoming a Unitary Patent which will be subject to the jurisdiction of the UPC. As the UPC is a new court system, there is no precedent for the court, increasing the uncertainty of any litigation. Patents that remain under the jurisdiction of the UPC will be potentially vulnerable to a single UPC-based revocation challenge that, if successful, could invalidate the patent in all countries who are signatories to the UPC. We cannot predict with certainty the long-term effects of any potential changes.
Risk Factors RelatingRelated to Regulation
Our business is subject to intense governmental regulation and scrutiny, both in the U.S. and abroad.
The production, marketing, and R&D of our products is subject to extensive regulation and review by the FDA and other governmental authorities both in the United States and abroad. In addition to testing and approval procedures, extensive regulations also govern marketing, manufacturing, distribution, labeling, and record keeping. If we do not comply with applicable regulatory requirements, violations could result in warning letters, non-approvals, suspensions of regulatory approvals, civil penalties and criminal fines, product seizures and recalls, operating restrictions, injunctions, and criminal prosecution.
Periodically, legislative or regulatory proposals are introduced that could alter the review and approval process relating to medical products. It is possible that the FDA will issue additional regulations further restricting the sale of our present or proposed products. Any change in legislation or regulations that governs the review and approval process relating to our current and future products could make it more difficult and costlier to obtain approval for new products, or to produce, market, and distribute existing products. Any such change could also result in a failure to obtain necessary approvals for our current or future products, which would negatively impact our financial condition and results of operations.
If the FDA begins to enforce regulation of our molecular diagnostic tests, we could incur substantial costs and delays associated with trying to obtain pre-market clearance or approval and costs associated with complying with post-market requirements.
Clinical laboratory tests like our molecular diagnostic tests are regulated under CLIA as well as by applicable state laws. MostThe FDA has historically taken the position that it has the authority to regulate Laboratory Developed Tests (“LDTs”) are currentlyas medical devices under the Federal Food, Drug, and Cosmetic Act, but it has a long-standing policy of not exercising general enforcement discretion with regard to LDTs. Accordingly, LDTs have effectively not been subject to the FDA’s regulation (although reagents, instruments, software, or components provided by third parties and used to perform LDTs may be subject to regulation). In October 2014,However, in September 2023, the FDA issued two draft guidance documents: “Framework for Regulatory Oversightpublished a proposed rule on LDTs that would end the FDA’s prior policy of Laboratory Developed Tests”enforcement discretion with respect to LDTs. The proposed rule would phase out the FDA’s enforcement discretion policy in five stages over a four-year period from the effective date of the rule. In Phase 1 (effective one year after the rule is finalized), which provides an overview of how the FDAenforcement discretion would regulate LDTs through a risk-based approach, and “FDA Notification and Medical Device Reporting for Laboratory Developed Tests”, which provides guidance on how the FDA intends to collect information on existing LDTs, including adverse event reports. On January 13, 2017, the FDA also issued a discussion paper on LDTs. Pursuant to the Framework for Regulatory Oversight draft guidance, LDT manufacturers would be subjectend with respect to medical device registration, listing,reporting and adverse eventcorrection and removal reporting requirements. The risk-based classification considers the LDT’s intended use, technological characteristics,In Phase 2 (effective two years post-finalization), enforcement discretion would end with regard to other device requirements, including registration and the risklisting, labeling, and investigational devices, except for quality systems and premarket review. In Phase 3 (effective three years post-finalization), enforcement discretion would end with regard to patients if the LDT werequality systems requirements. In Phase 4 (effective three and a half years post-finalization, but not before October 1, 2027), enforcement discretion would end with regard to fail. The FDA has indicated in its guidance that screening devices for malignant cancers are LDTs of higher concern to the FDA and for which enforcement of pre-market and post-marketcompliance with premarket review requirements for high-risk tests (i.e., tests subject to premarket approval). Finally, in Phase 5 (effective four years post-finalization, but not before April 1, 2028), enforcement discretion would likely commence before other LDT types.end with regard to premarket review requirements for moderate-risk and low-risk tests. Unlike previous proposals, the proposed rule does not “grandfather in” any existing tests. At this time, the proposed rule has not been finalized, and its ultimate content (including whether the rule will go into effect at all) remains unknown.
Pursuant to the Framework for Regulatory Oversight draft guidance, LDT manufacturers would be required to either submit a pre-market application and receive the FDA’s approval before an LDT may be marketed or submit a pre-market notification in advance of marketing. These requirements would be phased in, starting with higher risk LDTs, following the issuance of the FDA’s final guidance on this topic, which the FDA has identified as a priority. The draft guidance provides that LDTs that are already marketed at the time the final guidance is issued would not be withdrawn from the market during the FDA’s review process.
There is no timeframe within which the FDA must issue its final guidance, but issuance of this final guidance has been identified among a list of the FDA’s priorities. As of the date of this filing, the FDA has not issued its final guidance. In August 2020, however, the U.S. Department of Health and Human Services – the parent agency for FDA – announced that the FDA “will not require premarket review of LDTs absent notice-and-comment rulemaking, as opposed to through guidance documents, compliance manuals, website statements, or other informal issuances.” It is unclear at this time whether the Biden Administration will rescind or reverse this policy. It is also unclear at this time when, or if, the FDA will finalize its plans to end enforcement discretion (e.g., via notice and comment rulemaking or otherwise), and even then, the new regulatory requirements are expected to be phased-in over time. Nevertheless, the FDA may attempt to regulate certain LDTs on a case-by-case basis at any time.
Legislative proposals addressing the FDA’s oversight of LDTs have been introduced in previous Congresses, including the “Verifying Accurate Leading-edge IVCT Development Act,” or VALID Act, and we expect that new legislative proposals will be introduced from time-to-time.time‑to‑time. The likelihood that Congress will pass such legislation and the extent to which such legislation may affect the FDA’s plans to regulate certain LDTs as medical devices is difficult to predict at this time. If the FDA ultimately regulates certain LDTs, whether via final guidance, final regulation, or as instructed by Congress, our molecular diagnostic tests may be subject to certain additional regulatory requirements. The cost of conducting clinical trials and otherwise developing data and information to support pre-market applications may be significant. If we are required to submit applications for our currently marketed tests, we may be required to conduct additional studies, which may be time-consuming and costly and could result in our currently marketed tests being withdrawn from the market. If our tests are allowed to remain on the market, but there is uncertainty in the marketplace about our tests, and if we are required by the FDA to label them investigational, or if labeling claims the FDA allows us to make are limited, orders may decline, and reimbursement may be adversely affected. Continued compliance with the FDA’s regulations would increase the cost of conducting our business, and subject us to heightened regulation by the FDA and penalties for failure to comply with these requirements.
Likewise, if we voluntarily pursue the FDA’s pre-market review of our tests, there can be no assurance that our molecular diagnostic tests or any tests we may develop or acquire in the future will be cleared or approved on a timely basis, if at all, nor can there be assurance that labeling claims will be consistent with our current claims or adequate to support continued adoption of and reimbursement for our tests.
In sum, we cannot predict the timing or form of any such guidance or regulation, or the potential effect on our existing molecular diagnostic tests or our tests in development, or the potential impact of such guidance or regulation on our business, financial condition, and results of operations.
If we fail to comply with Federal, State, and foreign laboratory licensing requirements, we could lose the ability to perform our tests or experience disruptions to our business.
We are subject to CLIA, a Federalfederal law that regulates clinical laboratories that perform testing on specimens derived from humans for the purpose of providing information for the diagnosis, prevention, or treatment of disease. CLIA regulations mandate specific standards in the areas of personnel qualifications, administration, and participation in proficiency testing, patient test management, and quality assurance. CLIA certification is also required in order for our business to be eligible to bill Federal and State healthcare programs, as well as many private third-party payors, for our molecular diagnostic tests. To renew these certifications, we are subject to survey and inspection every two years. Moreover, CLIA inspectors may make random inspections of our clinical reference laboratories. Pennsylvania laws also require that we maintain a license and establish standards for the day-to-day operation of our clinical reference laboratory in Pittsburgh, Pennsylvania. In addition, our Pittsburgh laboratory is required to be licensed on a test-specific basis by certain other states. If we were unable to obtain or lose our CLIA certificate or State licenses for our laboratories, whether as a result of revocation, suspension, or limitation, we would no longer be able to perform our molecular diagnostic tests, which could have a material adverse effect on our business, financial condition, and results of operations. If we were to lose our licenses issued by the States in which we are required to hold licenses, we would not be able to test specimens from those States. New molecular diagnostic tests we may develop may be subject to new approvals by governmental bodies, and we may not be able to offer our new molecular diagnostic tests to patients in such jurisdictions until such approvals are received.
Complying with numerous statutes and regulations pertaining to our molecular diagnostics business is an expensive and time-consuming process, and any failure to comply could result in substantial penalties.
We are subject to regulation by both the Federal government and the States in which we conduct our molecular diagnostics business, including:
• | The Food, Drug, and Cosmetic Act, as supplemented by various other statutes; | |
• | The Prescription Drug Marketing Act of 1987, the amendments thereto, and the regulations promulgated thereunder and contained in 21 C.F.R. Parts 203 and 205; | |
• | CLIA and State licensing requirements; | |
• | Manufacturing and promotion laws; | |
• | Medicare and Medicaid billing and payment regulations applicable to clinical laboratories; | |
• | The Federal Anti-Kickback Statute, which prohibits knowingly and willfully offering, paying, soliciting, or receiving remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual, or the furnishing, arranging for, or recommending of an item or service that is reimbursable, in whole or in part, by a | |
• | The Federal Stark physician self-referral law (and | |
• | The Federal Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), which established comprehensive federal standards with respect to the privacy and security of protected health information and requirements for the use of certain standardized electronic transactions, and amendments made in 2013 to HIPAA under the Health Information Technology for Economic and Clinical Health Act, which strengthen and expand HIPAA privacy and security compliance requirements, increase penalties for violators, extend enforcement authority to state attorneys general, and impose requirements for breach notification; | |
• | The Federal Civil Monetary Penalties Law, which prohibits, among other things, the offering or transfer of remuneration to a Medicare or | |
• | The Federal False Claims Act, which imposes liability on any person or entity that, among other things, knowingly presents, or causes to be presented, a false or fraudulent claim for payment to the | |
• | Other Federal and State fraud and abuse laws, prohibitions on self-referral, fee-splitting restrictions, prohibitions on the provision of products at no or discounted cost to induce physician or patient adoption, and false claims acts, which may extend to services reimbursable by any third-party payor, including private insurers; | |
• | The prohibition on reassignment of Medicare claims, which, subject to certain exceptions, precludes the reassignment of Medicare claims to any other party; | |
• | The rules regarding billing for diagnostic tests reimbursable by the Medicare program, which prohibit a physician or other supplier from marking up the price of the technical component or professional component of a diagnostic test ordered by the physician or other supplier and supervised or performed by a physician who does not “share a practice” with the billing physician or supplier; and | |
• | State laws that prohibit other specified practices related to billing, such as billing physicians for testing that they order, waiving coinsurance, co-payments, deductibles, and other amounts owed by patients, and |
We have implemented policies and procedures designed to comply with these laws and regulations. We periodically conduct internal reviews of our compliance with these laws. Our compliance is also subject to governmental review. The growth of our business may increase the potential of violating these laws, regulations, or our internal policies and procedures. The risk that we are found in violation of these, or other laws and regulations is further increased by the fact that many have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. ViolationsPossible violations of Federal or State regulations may incur investigationspur investigations or enforcement actionactions by the FDA, Department of Justice, State agencies, or other legal authorities, and confirmed violations may result in substantial civil, criminal, or other fees, penalties or sanctions. Any action brought against us for violation of these or other laws or regulations, even if we successfully defend against it, could cause us to incur significant legal expenses and divert managements’ attention from the operation of our business. If our operations are found to be in violation of any of these laws and regulations, we may be subject to civil and criminal penalties, damages, and fines, we could be required to refund payments we received, by it, we could face possible exclusion from Medicare, Medicaid and other Federal or State healthcare programs, and we could even be required to cease operations. Any of the foregoing consequences could have a material adverse effect on our business, financial condition, and results of operations.
If we use hazardous materials in a manner that causes contamination or injury, we could be liable for resulting damages.
We are subject to Federal, State, and local laws, rules and regulations governing the use, discharge, storage, handling, and disposal of biological material, chemicals, and waste. We cannot eliminate the risk of accidental contamination or injury to employees or third parties from the use, storage, handling, or disposal of these materials. In the event of contamination or injury, we could be held liable for any resulting damages, remediation costs, and any related penalties or fines. This liability could exceed our resources or any applicable insurance coverage we may have. The cost of compliance with these laws and regulations may become significant, and our failure to comply may result in substantial fines or other consequences, and either could have a significant impact on our operating results.
The healthcare regulatory and political framework is uncertain and evolving.
Healthcare laws and regulations are rapidly evolving and may change significantly in the future, which could adversely affect our financial condition and results of operations. For example, in March 2010, the Patient Protection and Affordable Care Act, (“ACA”), was adopted, which is a healthcare reform measure that provided healthcare insurance for approximately 30 million additional Americans. The ACA includes a variety of healthcare reform provisions and requirements that became effective at varying times through 2018 and substantially changed the way healthcare is financed by both governmental and private insurers, which may significantly impact our industry and our business. For instance, the ACA requires “Applicable Manufacturers” to disclose to the Secretary of the Department of Health & Human Services drug sample distributions and certain payments or transfers of value to covered recipients (physicians and teaching hospitals) on an annual basis. “Applicable Manufacturers” and “Applicable Group Purchasing Organizations” must also disclose certain physician ownership or investment interests. The data submitted will ultimately be made available on a public website. Based upon the structure of our relationship with our clients, we may be included in the definition of “Applicable Manufacturer” for purposes of the disclosure requirements or may provide services that include the transfer of drug samples and/or other items of value to covered recipients. As such, we may be required to disclose or provide information that is subject to disclosure. There may be certain risks and penalties associated with the failure to properly make such disclosures, including but not limited to the specific civil liabilities set forth in the ACA, which allows for a maximum civil monetary penalty per “Applicable Manufacturer” of $1,150,000 per year. There may be additional risks and claims made by third parties derived from an improper disclosure that are difficult to ascertain at this time.
We cannot predict whether future healthcare initiatives will be implemented at the federal or state level, or how any future legislation or regulation may affect us. The U.S. Supreme Court is currently reviewing the constitutionality of the ACA, although it is unclear when a decision will be made. Further, it is possible that additional governmental action will be taken in response to the COVID-19 pandemic.
Risks
Risk Factors Related to the Securities Markets and Ownership of Our Common Stock
Our certificate of incorporation, as amended, provides that, to the fullest extent permitted by law, the Court of Chancery of the State of Delaware will be the exclusive forum for certain legal actions between us and our stockholders, which could limit our stockholders’stockholders’ ability to obtain a judicial forum viewed by the stockholders as more favorable for disputes with us or our directors, officers, or employees.
Our certificate of incorporation, as amended, provides that, to the fullest extent permitted by law, the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for (1) any derivative action or proceeding brought on behalf of the corporation, (2) any action asserting a claim of breach of a fiduciary duty owed by any director or officer of the corporation to the corporation or the corporation’s stockholders, (3) any action asserting a claim against the corporation arising pursuant to any provision of the General Corporation Law or the corporation’s Certificatecertificate of Incorporationincorporation or Bylaws,bylaws, or (4) any action asserting a claim against the corporation governed by the internal affairs doctrine. This exclusive forum provision does not apply to suits brought to enforce a duty or liability created by the Securities Exchange Act of 1934. It could apply, however, to a suit that falls within one or more of the categories enumerated in the exclusive forum provision and asserts claims under the Securities Act, as amended, inasmuch as Section 22 of the Securities Act creates concurrent jurisdiction for federalFederal and stateState courts over all suits brought to enforce any duty or liability created by the Securities Act or the rule and regulations thereunder. There is uncertainty as to whether a court would enforce such provision with respect to claims under the Securities Act, and our stockholders will not be deemed to have waived our compliance with the federalFederal securities laws and the rules and regulations thereunder.
Any person or entity purchasing or otherwise acquiring any interest in any of our securities shall be deemed to have notice of and consented to these provisions. These exclusive-forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum of their choosing for disputes with us or our directors, officers, or other employees, which may discourage lawsuits against us and our directors, officers, and other employees.
If a court were to find the choice of forum provision contained in our certificate of incorporation, as amended, to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, financial condition, and results of operations, and financial condition.operations. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management.our management team.
Our common stock could be delisted from the Nasdaq Capital Market, which delisting could hinder your ability to obtain accurate quotations on the price of our common stock or dispose of our common stock in the secondary market.
On May 13, 2022, we received a letter from the Listing Qualifications Department of Nasdaq informing us that because the closing bid price for our common stock listed on Nasdaq was below $1.00 for 30 consecutive trading days, we did not comply with the minimum closing bid price requirement for continued listing on the Nasdaq Capital Market under NASDAQ Marketplace Rule 5550(a)(2), requiring a minimum bid price of $1.00 per share (the “Minimum Bid Price Requirement”). The letter stated that we had 180 days, or until November 9, 2022, to regain compliance by maintaining a closing bid price of at least $1.00 for a minimum of 10 consecutive trading days. This deadline was subsequently extended by Nasdaq to May 8, 2023.
On April 23, 2023, we effected a 20-for-1 reverse stock split to cure this deficiency. As a result, our stock price increased significantly, and we regained compliance with the Minimum Bid Price Requirement. However, since the reverse stock split, our stock price has declined and, as of March 18, 2024, our closing stock price was $2.70 per share. If we subsequently fail to meet the Minimum Bid Price Requirement or another requirement for continued listing on Nasdaq, we could be delisted.
In the event our common stock is delisted from the Nasdaq Capital Market and we are also unable to maintain listing on another alternate exchange, trading in our common stock could thereafter be conducted through one or more over-the-counter markets. In such event, the liquidity of our common stock would likely be impaired, not only in the number of shares which could be bought and sold, but also through delays in the timing of the transactions, and there would likely be a reduction in our coverage by security analysts and the news media, thereby resulting in lower prices for our common stock than might otherwise prevail.
Limitations on director and officer liability and indemnification of our officers and directors by us may discourage stockholders from bringing a suit against a director.
Our Certificatecertificate of Incorporationincorporation and Bylawsbylaws provide, with certain exceptions as permitted by governing state law, that a director or officer shall not be personally liable to us or our stockholders for breach of fiduciary duty as a Director,director, except for acts or omissions whichthat involve intentional misconduct, fraud, knowing violation of law, or unlawful payments of dividends. These provisions may discourage stockholders from bringing a suit against a director for breach of fiduciary duty and may reduce the likelihood of derivative litigation brought by stockholders on our behalf against a director. In addition, our certificate of incorporation and bylaws may provide for mandatory indemnification of directors and officers to the fullest extent permitted by governing state law.
You may experience dilution as a result of future equity offerings.
We may in the future offer additional shares of our common stock or other securities convertible into or exchangeable for our common stock. Although no assurances can be given that we will consummate a future financing, in the event we do, or in the event we sell shares of common stock or other securities convertible into shares of our common stock in the future, additional and potentially substantial dilution could occur.
The exercise of outstanding warrants, and issuance of equity awards may have a dilutive effect on our stock, and negatively impact the price of our common stock.
As of December 31, 2023, we had 1,806,589 warrants outstanding at a weighted average exercise price of $21.52 per share. We are able to grant stock options, restricted stock, restricted stock units, stock appreciation rights, bonus stock, and performance awards under our 2012 Stock Incentive Plan. Under the 2012 Stock Incentive Plan, 47,664 shares were issuable under outstanding incentive awards at December 31, 2023, and 94,878 shares remained available for issuance pursuant to future incentive grants. The exercise of outstanding warrants, and issuance of equity awards may have a dilutive effect on our stock, and negatively impact the price of our common stock.
We do not expect to pay cash dividends for the foreseeable future, and we may never pay dividends; investors must rely on stock appreciation, if any, for any return on investment in our common stock.
We currently intend to retain any future earnings to support the development and expansion of our business and do not anticipate paying cash dividends in the foreseeable future. Our payment of any future dividends will be at the discretion of our Boardboard of Directorsdirectors after taking into accountconsidering various factors, including but not limited to, our financial condition, operating results, cash needs, growth plans, and the terms of any credit agreements that we may be a party to at the time. In addition, our ability to pay dividends on our common stock may beis limited by state law.the Delaware General Corporation Law, which provides that dividends may only be lawfully paid out of a corporation’s “surplus,” which is generally defined as the amount by which total assets exceed total liabilities. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, and the availability of a liquid trading market in our shares as the only way to realize certain returns on their investment. As a result, investors must rely on stock appreciation and a liquid trading market for any return on investment in our common stock.
Our Boardboard of Directors’directors’ ability to issue undesignated preferred stock and the existence of anti-takeover provisions may depress the value of our common stock.
Our authorized capital includes 20 million shares of preferred stock. Of this amount, and 2,300,000 shares have been designated as series B convertible preferred stock, and theof which 79,246 shares are outstanding. The remaining authorized shares are undesignated preferred stock. Our Boardboard of Directorsdirectors has the power to issue any or all of the shares of undesignated preferred stock, including the authority to establish one or more series and to fix the powers, preferences, rights, and limitations of such class or series, without seeking stockholder approval. Further, as a Delaware corporation, we are subject to provisions of the Delaware General Corporation Law regarding business combinations. We may, in the future, consider adopting additional anti-takeover measures. The authority of our Boardboard of Directorsdirectors to issue undesignated stock and the anti-takeover provisions of Delaware law, as well as any future anti-takeover measures adopted by us, may, in certain circumstances, delay, deter, or prevent takeover attempts and other changes in control not approved by our Boardboard of Directors.directors. As a result, our stockholders may lose opportunities to dispose of their shares at favorable prices generally available in takeover attempts or that may be available under a merger proposal and the market price, voting, and other rights of the holders of common stock may also be affected.
Our stock price may be volatile, and you could lose all or part of your investment.
The trading price of our common stock may fluctuate substantially and will depend on several factors, including those described in this “Risk Factors” section, many of which are beyond our control and may not be related to our operating performance. These fluctuations could cause you to lose all or part of your investment in our securities.
In addition, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors, as well as general economic, political and market conditions such as recessions or interest rate changes, may seriously affect the market price of our common stock, regardless of our actual operating performance.
Further, in the past, following periods of volatility in the overall market and the market prices of particular companies’ securities, securities class action litigations have often been instituted against these companies. Litigation of this type, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources. Any adverse determination in any such litigation or any amounts paid to settle any such actual or threatened litigation could require that we make significant payments.
General Risk Factors
Business disruptions could harm our operations, lead to a decline in revenue and increase our costs.
Our operations could be disrupted by political and/or civil unrest, acts of war or other military actions, such as recent and ongoing conflicts in Israel/Gaza and Ukraine, epidemics or pandemics, such as a potential resurgence of the COVID-19 pandemic, and other natural or man-made disasters and catastrophic events. Geopolitical and domestic political developments and other events beyond our control, can increase economic volatility globally and disrupt supply chains we rely on. Our operations could be harmed and our costs could increase if manufacturing, logistics or other operations are disrupted for any reason, including economic, business, labor, environmental, public health, or political issues. We monitor and act as necessary to mitigate potential risks of shortages and delays that may impact our ability to obtain new contracts, fulfill product demands and meet our contract obligations. The extent to which business disruptions may impact our financial condition and results of operations remains uncertain and is dependent on numerous evolving factors.
Our success is dependent on our ability to attract and retain technical personnel, sales and marketing personnel, and other skilled management.
Our success depends to a significant degree on our ability to attract, retain, and motivate highly skilled and qualified personnel. Failure to attract and retain necessary technical, sales and marketing personnel, and skilled management could adversely affect our business. If we fail to attract, train, and retain sufficient numbers of these highly qualified people, our business, financial condition, and results of operations could be materially and adversely affected.
Our ability to use net operating loss and tax credit carryforwards and certain built-in losses to reduce future tax payments is limited by provisions of the Internal Revenue Code and may be subject to further limitation because of prior or future offerings of our stock or other transactions.
Sections 382 and 383 of the United States Internal Revenue Code of 1986, as amended (the “Code”) contain rules that limit the ability of a company that undergoes an ownership change, which is generally an increase in the ownership percentage of certain stockholders in the stock of a company by more than 50% over a three-year period, to utilize its net operating loss and tax credit carryforwards and certain built-in losses recognized in years after the ownership change. These rules generally operate by focusing on ownership changes involving stockholders owning directly or indirectly 5% or more of the stock of a company and any change in ownership arising from a new issuance of stock by that company. Generally, if an ownership change, as defined by Section 382 of the Code, occurs, the yearly taxable income limitation on the use of net operating loss and tax credit carryforwards and certain built-in losses is equal to the product of the applicable long-term tax-exempt rate and the value of stock immediately before the ownership change. The Company performed a Section 382 analysis as of December 31, 2023 which resulted in the limitation and expiration of a substantial portion of the Company’s loss carryforwards. In addition, the current net operating loss (“NOL”) carryforwards might be further limited by future issuances of our common stock.
Costs incurred because we are a public company may affect our profitability.
As a public company, we incur significant legal, accounting, and other expenses and are subject to the SEC’s rules and regulations relating to public disclosure that generally involve a substantial expenditure of financial resources. In addition, the Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC, require changes in corporate governance practices of public companies. Full compliance with such rules and regulations requires significant legal and financial compliance costs and makes some activities more time-consuming and costlier, which may negatively impact our financial results. To the extent our earnings suffer as a result of the financial impact of our SEC reporting or compliance costs, our ability to develop an active trading market for our securities could be harmed.
Shares eligible for future sale may adversely affect the market.
From time to time, certain stockholders may be eligible to sell some or all of their shares of common stock pursuant to Rule 144, promulgated under the Securities Act, subject to certain limitations. In general, pursuant to Rule 144 as in effect as of the date of this filing, a stockholder (or stockholders whose shares are aggregated) who has satisfied the applicable holding period and is not deemed to have been one of our affiliates at the time of sale, or at any time during the three months preceding a sale, may sell their shares of common stock. Any substantial sale, or cumulative sales, of our common stock pursuant to Rule 144 or pursuant to any resale prospectus may have a material adverse effect on the market price of our securities.
We expect volatilitymay be unable to provide stock-based incentives to our employees without an increase in the price of our common stock, which may subject us to securities litigation.shares available for issuance.
The marketDue to the low number of shares remaining available for our common stockissuance, we may be characterized by significant price volatility when comparedunable to seasoned issuers, and we expect thatprovide stock-based incentives to our share priceemployees. Any increase in shares issuable will be subject to stockholder approval, which may not be obtained. Not obtaining stockholder approval could materially impact our ability to provide stock-based incentives to our employees, which could mean that we have to pay more volatile than a seasoned issuer for the indefinite future. In the past, plaintiffs have often initiated securities class action litigation against companies following periods of volatility in the market price of their securities. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and liabilities and could divert management’s attention and resources.cash, which is currently limited.
Acquisitions involve risks that could result in adverse changes to operating results, cash flows, and liquidity.
We may desire to make strategic acquisitions in the future. However, we may not be able to identify suitable acquisition opportunities, or we may be unable to obtain the consent of our stockholders and therefore, may not be able to complete such acquisitions. We may pay for acquisitions with our common stock or with convertible securities, which may dilute shareholders’stockholders’ investment in our common stock, or we may decide to pursue acquisitions that our investors may not agree with. In connection with potential acquisitions, we may agree to substantial earn-out arrangements. To the extent we defer the payment of the purchase price for any acquisition through a cash earn-out arrangement, cash flows willcould be reduced in subsequent periods.
In addition, acquisitions may expose us to operational challenges and risks, including:
• | the ability to profitably manage acquired businesses or successfully integrate the operations of acquired businesses, as well as the acquired business’s financial reporting and accounting control systems into our existing platforms; | |
• | increased indebtedness and contingent purchase price obligations associated with an acquisition; | |
• | the ability to fund cash flow shortages that may occur if anticipated revenue is not realized or is delayed, whether by general economic or market conditions, or unforeseen internal difficulties; | |
• | the availability of funding sufficient to meet increased capital needs; | |
• | diversion of management’s time and attention from existing operations; and | |
• | the ability to retain or hire qualified personnel required for expanded operations. |
Completing acquisitions may require significant management time and financial resources because we may need to assimilate widely dispersed operations with different corporate cultures. In addition, acquired companies may have liabilities that we failed to or were unable to discover in the course of performing due diligence investigations. We cannot assure the shareholders’ thatAlso, the indemnification granted by sellers of acquired companies willmay not be sufficient in amount, scope, or duration to fully offset the possible liabilities associated with businesses or properties we assume upon consummation of an acquisition. We may learn additional information about our acquired businesses that could have a material adverse effect on us, such as unknown or contingent liabilities and liabilities related to compliance with applicable laws. Any such liabilities, individually or in the aggregate, could have a material adverse effect on our business. Failure to successfully manage the operational challenges and risks associated with, or resulting from, acquisitions could adversely affect our results of operations, cash flows, and liquidity. Borrowings or issuances of convertible securities associated with these acquisitions may also result in higher levels of indebtedness, which could adversely impact our ability to service our debt within the scheduled repayment terms.
Security breaches, loss of data, and other disruptions to our business or the business of our third-party service providers could compromise sensitive information related to our business or prevent us from accessing critical information and expose us to liability, which could adversely affect our business and reputation.
Our business requires that we collect and store sensitive data, including protected health and credit card information and proprietary business and financial information. We face a number of risks relative to the protection of, and the service providers’ protection of, this critical information, including loss of access, inappropriate disclosure, and inappropriate access, as well as risks associated with our ability to identify and audit such events. The secure processing, storage, maintenance, and transmission of this critical information are vital to our operations and business strategy, and we devote significant resources to protecting such information. Although we take measures to protect sensitive information from unauthorized access or disclosure, our information technology and infrastructure may be vulnerable to attacks by hackers or viruses or otherwise breached due to employee error, malfeasance, or other activities. While we do not believe we have not experienced any such attack or breach, if such event would occur and cause interruptions in our operations, our networks could be compromised and the information we store on those networks could be accessed by unauthorized parties, publicly disclosed, lost, or stolen. Unauthorized access, loss, or dissemination could disrupt our operations, including collecting, processing, and preparing company financial information, managing the administrative aspects of our business, and damaging our reputation, any of which could adversely affect our business. In addition, the interpretation and application of consumer, health-related, and general data protection laws in the United States are often uncertain, contradictory, and in flux. It is possible that these laws may be interpreted and applied in a manner that is inconsistent with our practices. If so, this could result in government-imposed fines or orders requiring that we change our practices, which could adversely affect our business. Complying with these various laws could cause us to incur substantial costs or require us to change our business practices, systems, and compliance procedures in a manner adverse to our business. Additionally, many of our employees have the ability to work remotely, which may increase the risk of security breaches, loss of data, and other disruptions as a consequence of more employees accessing sensitive and critical information from remote locations.
If we are unable to prevent such security breaches or privacy violations or implement satisfactory remedial measures in connection with security incidents, we may suffer loss of reputation, financial loss, and civil or criminal fines or other penalties. In addition, these breaches and other forms of inappropriate access can be difficult to detect, and any delay in identifying them may lead to increased harm of the type described above.
If our information technology and communications systems fail or we experience a significant interruption in our operation,operations, our reputation, business, and results of operations could be materially and adversely affected.
The efficient operation of our business is dependent on information technology and communications systems. The failure of these systems to operate as anticipated could disrupt our business and result in decreased revenue and increased overhead costs. In addition, we do not have complete redundancy for all of our systems and our disaster recovery planning cannot account for all eventualities. Our information technology and communications systems, including the information technology systems and services that are maintained by third-party vendors, are vulnerable to damage or interruption from natural disasters, fire, terrorist attacks, malicious attacks by computer viruses or hackers, and power loss or failure of computer systems, Internet, telecommunications or data networks. If these systems or services become unavailable or suffer a security breach, we may expend significant resources to address these problems, and our reputation, business, and results of operations could be materially and adversely affected.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not applicable.
Our Board of Directors (the “Board”) recognizes the critical importance of maintaining the trust and confidence of our customers, clients, business partners and employees. The Board exercises oversight of our risk management program, and cybersecurity represents an important component of our overall approach to enterprise risk management (“ERM”). Our cybersecurity policies, standards, processes, and practices are integrated into our ERM program and are based on frameworks established by the National Institute of Standards and Technology (“NIST”) and other applicable industry standards. In general, we seek to address cybersecurity risks through a cross-functional approach that is focused on preserving the confidentiality, security, and availability of the information that we collect and store by identifying, preventing, and mitigating cybersecurity threats and effectively responding to cybersecurity incidents when they occur.
Risk Management and Strategy
As one of the critical elements of our overall ERM approach, our cybersecurity program is focused on the following key areas:
● | Governance. As discussed in more detail under the heading “Governance,” the Board maintains an active role concerning cybersecurity risk management including oversight of the Company’s employee personnel with extensive experience in the field. |
● | Technical Safeguards and Risk Management Processes. We have implemented a risk management framework to identify, evaluate, and address cybersecurity risks. This framework includes the deployment of tools to detect potential threats, the maintenance of detailed incident logs, and the development of risk mitigation strategies. Our cybersecurity measures and policies are subject to regular testing and continuous improvement to adapt to new threats as they arise. |
● | Education and Incident Reporting. We have instituted a company-wide security awareness training program to educate employees about cybersecurity risks and their role in maintaining our security posture. Continuous education and testing support our workforce in remaining knowledgeable and vigilant to cybersecurity threats. Employees are instructed to report all cybersecurity concerns directly to our internal information technology (“IT”) team for immediate assessment and response. |
● | Cybersecurity Incident Response Plan. We maintain a comprehensive incident response plan designed to mitigate the impact of a cybersecurity incident. This plan includes protocols for internal response, external communication, and remediation efforts to minimize the impact on our operations and stakeholders. |
● | Third-Party Risk Management. We maintain a risk-based approach to identifying and overseeing cybersecurity risks presented by third parties, including vendors, service providers and other external users of our systems, as well as the systems of third parties that could adversely impact our business in the event of a cybersecurity incident affecting those third-party systems. |
We engage in the periodic assessment and testing of our policies, standards, processes, and practices that are designed to address cybersecurity threats and incidents. These efforts include a range of activities, including audits, assessments, vulnerability testing, and other exercises focused on evaluating the effectiveness of our cybersecurity measures and planning. We engage third parties to perform assessments on our cybersecurity measures, including information security maturity assessments, audits, and independent reviews of our information security control environment and operating effectiveness. The results of such assessments, audits, and reviews are reported to the Board, and we adjust our cybersecurity policies, standards, processes, and practices as necessary based on the information provided by these assessments, audits, and reviews.
Governance
The Board oversees the Company’s ERM process, including the management of risks arising from cybersecurity threats. The Board receives reports on cybersecurity risks, which address a wide range of topics including recent developments, evolving standards, vulnerability assessments, third-party and independent reviews, the threat environment, technological trends, and information security considerations arising with respect to the Company’s peers and third parties. The Board also receives prompt and timely information regarding any cybersecurity incident that meets established reporting thresholds, as well as ongoing updates regarding any such incident until it has been addressed.
The Senior Director of IT and Cybersecurity, in coordination with our executive officers, work collaboratively across the Company to implement a program designed to protect the Company’s information systems from cybersecurity threats and to promptly respond to any cybersecurity incidents in accordance with the Company’s incident response plan. To facilitate the Company’s cybersecurity risk management program, the Company’s internal IT team is deployed to work with business functions across the Company to address cybersecurity threats and to respond to cybersecurity incidents. The Senior Director of IT and Cybersecurity, as leader of the internal IT team, monitors the prevention, detection, mitigation, and remediation of cybersecurity threats and incidents in real time, and reports such threats and incidents to the executive officers and Board when appropriate.
The Senior Director of IT and Cybersecurity has served in various roles in information technology and information security for more than two decades with a track record of managing systems compliant with relevant security standards. The Senior Director of IT and Cybersecurity has industry experience and education aligned with the Company’s work and the data we maintain. The Senior Director of IT and Cybersecurity’s expertise is complemented by that of the Company’s CEO and Interim CFO, each with degrees in their respective fields and extensive leadership experience including experience managing risks at similar companies.
We face a number of cybersecurity risks in connection with our business. Such risks have not materially affected us, including our business strategy, results of operations or financial condition, to date. For more information about the cybersecurity risks we face, see the risk factor entitled “Security breaches, loss of data, and other disruptions to our business or the business of our third-party service providers could compromise sensitive information related to our business or prevent us from accessing critical information and expose us to liability, which could adversely affect our business and reputation.” in Item 1A. Risk Factors.
Our corporate offices are located in Eagan, Minnesota. We lease 5,773 square feet at this location, of which 2,945 square feet is used for office space and 2,828 is used for manufacturing. The lease as amended has a one-year term ending January 31, 2022.
The offices of our Helomics subsidiary are located in Pittsburgh, Pennsylvania. We lease 17,417 square feet at this location, of which approximately 1,000 square feet are usedhave leases for office and laboratory space and 16,417 square feet is used for laboratory operations. The lease, as amended, has a two-year term endingthat are effective through February 28, 2023.
29, 2028.
Soluble Biotech’s offices are locatedWe lease office and laboratory space in Birmingham, Alabama. We lease approximately 4,314 square feet at this location. TheThis lease is effective through August 25,31, 2025.
We lease office and manufacturing space in Eagan, Minnesota. This lease is effective through May 31, 2025.
We expect that the current space will be adequate for our current office and laboratory needs.
Not applicable.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. MARKET FOR REGISTRANT’SREGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information
Effective June 13, 2019, our common stock was listed on the NASDAQ Capital Market under the symbol “POAI”. Prior to this, effective February 2, 2018, our common stock was listed on the NASDAQ Capital Market under the symbol “AIPT”. Prior to February 2, 2018, our common stock was listed on The NASDAQ Capital Market under the symbol “SKLN”.
Holders
As of March 10, 2021,18, 2024, there were approximately 236155 stockholders of record of our common stock.
Dividend Policy
We follow a policy of retaining earnings, if any, to finance the expansion of our business. We have not paid, andnor do notwe expect to declare or pay, cash dividends on common stock in the foreseeable future.
Securities Authorized for Issuance under Equity Compensation Plans
The information required by this Item 5 regarding securities authorized for issuance under equity compensation plans is incorporated herein by reference to Item 12 below.
Recent Sales of Unregistered Securities
Information regarding sales of unregistered securities during the periods covered hereby has been included in previous reports on Form 8-K or 10-Q. For additional information on such sales, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Financing Transactions.”
ITEM 6. SELECTED FINANCIAL DATA.[RESERVED]
Not Required.
ITEM 7. MANAGEMENT’SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Information Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains “forward-looking statements” that indicate certain risks and uncertainties, many of which are beyond our control. Actual results could differ materially and adversely from those anticipated in such forward-looking statements as a result of certain factors, including but not limited to those set forth below and elsewhere in this report. Important factors that may cause actual results to differ from projections include:
• | Our ability to continue operating beyond twelve months without additional financing; | |
• | Continued negative operating cash flows; | |
• | Our capital needs to accomplish our goals, including any further financing, which may be highly dilutive and may include onerous terms; | |
• | Risks related to recent and future acquisitions, including |
• | Risks related to our partnerships with other companies, including the need to negotiate the definitive agreements; possible failure to realize anticipated benefits of these partnerships; and costs of providing funding to our partner companies, which may never be repaid or provide anticipated returns; | |
• | Risks related to the initiation, formation, or success of our collaboration arrangements, commercialization activities and product sales levels by our collaboration partners and future payments that may come due to us under these arrangements, | |
• | Risk that we will be unable to protect our intellectual property or claims that we are infringing on others’ intellectual property; | |
• | The impact of competition; |
• |
Acquisition and maintenance of any necessary regulatory clearances applicable to applications of our technology; | ||
• | Inability to attract or retain qualified senior management personnel, including sales and marketing personnel; | |
• | Risk that we never become profitable if our products and services are not accepted by potential customers; | |
• | Possible impact of government regulation and scrutiny; | |
• | Unexpected costs and operating deficits, and lower than expected sales and revenues, if any; | |
• | Adverse results of any legal proceedings; | |
• | The volatility of our operating results and financial condition, | |
• | Management of growth; | |
• | Risk that our business and operations | |
• | Other specific risks that may be alluded to in |
All statements, other than statements of historical facts, included in this report regarding our growth strategy, future operations, financial position, estimated revenue or losses, projected costs, prospects and plans, and objectives of management are forward-looking statements. When used in this report, the words “will,” “may,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project,” “plan,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. All forward-looking statements speak only as of the date of this report. We do not undertake any obligation to update any forward-looking statements or other information contained herein. Potential investors should not place undue reliance on these forward-looking statements. Although we believe that our plans, intentions, and expectations reflected in or suggested by the forward-looking statements in this report are reasonable, we cannot assure potential investors that these plans, intentions or expectations will be achieved. We disclose important factors that could cause actual results to differ materially from expectations in the “Risk Factors” section and elsewhere in this report. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.
Overview
Information regarding marketWe are a knowledge and industry statistics contained in this reportscience-driven company that applies artificial intelligence (“AI”) to support the discovery and development of optimal cancer therapies, which can ultimately lead to more effective treatments and improved patient outcomes. We use AI and a proprietary biobank of 150,000+ tumor samples, categorized by tumor type, to provide actionable insights about drug compounds to improve the drug discovery process and increase the probability of drug compound success. We offer a suite of solutions for oncology drug development from early discovery to clinical trials.
Our mission is included based on information available to uschange the landscape of oncology drug discovery and enable the development of more effective therapies for the treatment of cancer. By harnessing the power of machine learning and scientific rigor, we believe that we believe is accurate. It is generally based on academiccan improve the probability of success of advancing pharmaceutical and other publications that are not produced for purposesbiological drug candidates with a higher degree of securities offerings or economic analysis. We have not reviewed or included data from all sources, and we cannot assure potential investors of the accuracy or completeness of the data included in this report. Forecasts and other forward-looking information obtained from these sources are subject to the same qualifications and the additional uncertainties accompanying any estimates of future market size, revenue, and market acceptance of products and services. We have no obligation to update forward-looking information to reflect actual results or changes in assumptions or other factors that could affect those statements.
Overview
confidence.
We operate in three primary business areas:areas. In our first area, we provide optimized, high-confidence drug-response predictions through the application of artificial intelligence (“AI”) inAI using our precision medicine business, to provide AI-driven predictive modelsproprietary biobank of tumor drug responsesamples to improve clinical outcomes for patientsenable a more informed selection of drug/tumor combinations and to assist pharmaceutical, diagnostic,increase the probability of success during development. We also create and biotech industriesdevelop tumor-specific 3D cell culture models mimicking the physiological environment of human tissue enabling better-informed decision-making during development. In our second business area, we provide services and research using a proprietary self-contained and automated system that conducts high-throughput, self-interaction chromatography screens using additives and excipients commonly included in the development of new personalized drugs and diagnostics; second, a provider ofprotein formulations resulting in soluble and physically stable formulations for proteins andof biologics. Our third production ofbusiness area produces the United States Food and Drug Administration (“FDA”) - cleared STREAMWAY-cleared STREAMWAY® System and associated products for automated direct-to-drain medical fluid disposalwaste management and associated products.patient-to-drain medical fluid disposal. As of January 1, 2023, we changed our reportable segments to align with these business areas.
We have three reportable segments: Helomics, Soluble,segments, which have been delineated by location and Skyline. The Helomics segment includes clinical testing and contract research services that include the application of AI. Soluble segment consists of contract services and research focused on solubility improvements, stability studies, and protein production. Skyline consists of the STREAMWAY System product sales. The Helomics segment consists of clinical testing and contract research. Our TumorGenesis subsidiary specializes in media that help cancer cells grow and retain their DNA/RNA and proteomic signatures and is included within corporate. Going forward, we have determined that we will focus our resources on the Helomics segment and our primary mission of applying AI to precision medicine and drug discovery.business area:
● | Pittsburgh segment: provides services that include the application of AI using its proprietary biobank of 150,000+ tumor samples. Pittsburgh also creates proprietary 3D culture models used in drug development. |
● | Birmingham segment: provides contract services and research focused on solubility improvements, stability studies, and protein production. |
● | Eagan segment: produces the FDA-cleared STREAMWAY System and associated products for automated medical fluid waste management and patient-to-drain medical fluid disposal. |
Capital Requirements
Since inception, we have been unprofitable. We incurred net losses of $25,884,397$13,983,967 and $19,390,766$25,737,634 for the years ended December 31, 2020,2023, and December 31, 2019,2022, respectively. As of December 31, 2020,2023, and December 31, 2019,2022, we had an accumulated deficit of $108,383,108$167,761,883 and $82,498,711,$153,777,916, respectively.
We have never generated sufficient revenues to fund our capital requirements. We have funded our operations through a variety of debt and equity instruments. Since 2017, we have diversified our business by investing in ventures, including making significant loans and investments in early-stage companies. These activities led to the acquisition of Helomics Corporation in April 2019, and the purchase oftwo transactions to acquire the assets of twothree businesses in 2020, and the acquisition of zPREDICTA Inc. (“zPREDICTA”) in November 2021, each of which have accelerated our capital needs further. We have funded our operations through a variety of debt and equity instruments.needs. See “Liquidity and Capital Resources – Liquidity and Plan of Financing”Financing; Going Concern” and “Liquidity and Capital Resources – Financing Transactions” below.
Our future cash requirements and the adequacy of available funds depend on our ability to generate revenues from our Helomics segment;oncology businesses located in Pittsburgh and Birmingham; our ability to continue to sell our Skyline Medical products and services and to reach profitability in the Skyline Medical business,all our ability to generate revenue from our Soluble reportable segmentbusinesses; and the availability of future financing to fulfill our business plans. See “Liquidity and Capital Resources – Liquidity and Plan of Financing”Financing; Going Concern” below.
Our limited history of operations, especially in our precision medicinedrug discovery business, and our change in the emphasis of our business, starting in 2017, makes prediction of future operating results difficult. We believe that period-to-period comparisons of our operating results should not be relied on as predictive of our future results.
Results of Operations
Comparison of Year Ended December 31, 20202023, with Year Ended December 31, 20192022
2023 | 2022 | Difference | ||||||||||
Revenue | $ | 1,780,093 | $ | 1,505,459 | $ | 274,634 | ||||||
Cost of sales | 634,796 | 505,107 | (129,689 | ) | ||||||||
General and administrative expense | 9,428,496 | 11,110,735 | 1,682,239 | |||||||||
Operations expense | 4,127,268 | 3,798,425 | (328,843 | ) | ||||||||
Sales and marketing expense | 1,510,861 | 1,358,907 | (151,954 | ) |
2020 | 2019 | Difference | ||||||||||
Revenue | $ | 1,252,272 | $ | 1,411,565 | $ | 159,293 | ||||||
Cost of goods sold | 447,192 | 531,810 | 84,618 | |||||||||
General and administrative expense | 10,351,973 | 9,781,218 | (570,755 | ) | ||||||||
Operations expense | 2,351,709 | 2,960,131 | 608,422 | |||||||||
Sales and marketing expense | 584,937 | 1,912,899 | 1,327,962 |
Revenue. We recorded revenue of $1,252,272$1,780,093 in 2020,2023, compared to $1,411,565$1,505,459 in 2019. Our Skyline division was responsible2022. Revenues for the majority of the revenue, with Helomics generating $64,188 and $48,447 in revenue in the years ended December 31, 20202023, and 2019,December 31, 2022, were primarily derived from our Eagan operating segment. The Eagan operating segment contributed $1,135,101 and $1,063,493 for the years ended December 31, 2023, and December 31, 2022, respectively, while the Pittsburgh operating segment contributed $492,596 and $358,776, respectively. We sold 25 STREAMWAY System units in 2020 and 41 STREAMWAY System units in 2019.
Cost of sales. Cost of sales was $447,192$634,796 and $531,810 in 2020$505,107 for the years ended December 31, 2023, and 2019,December 31, 2022, respectively. Cost of sales increased primarily due to costs associated with Pittsburgh contracted services. The gross profit margin wasdeclined to 64% in 2020 compared to 62%2023 from 66% in 2019. Our margins increased 20202022. The decline in gross profit margin was primarily due to decreased costs associated with supporting our maintenance contracts, offset by increased cost of sales related to sales in the Skyline Medical business in 2020 as a result of lower number of units, average cost increased slightly.contracted services provided by our Pittsburgh operating segment.
General and Administrativeadministrative expense. General and administrative (“G&A”) expenseexpenses primarily consistsconsist of management salaries, professional fees, consulting fees, travel expense, administrative feesdepreciation and amortization, office rents, and general office expenses.
G&A expense increasedexpenses decreased by $570,755$1,682,239 to $10,351,973$9,428,496 in 20202023 from $9,781,218$11,110,735 in 2019.2022. The increase isdecrease was primarily due to increasesdecreases in staffstaff-related expenses of approximately $1,980,000. Additional decreases included lower amortization expense related to acquired intangible assets impaired in the prior year. These decreases were offset by higher professional fees including consultants supporting our management team and related expenses due to additional headcount including new employees for our Soluble Biotech subsidiary, the assets of which we acquired in 2020,investor relations as well as certain one-time expenses related to severance incurred as part of our cost cutting measures. Also, increased depreciation is driven by newly added assets resulting from our asset purchase agreements for the assets of Soluble division and those of Quantitative Medicine LLC (“QM”), which we acquired in 2020.other G&A expenses.
Operations expense. Operations expense in our current stageexpenses primarily consistsconsist of expenses related to product development, prototyping and testing including staff relatedtesting. Operations expenses for individuals performing this work.
Operations expense decreasedincreased by $608,422$328,843 to $2,351,709$4,127,268 in 20202023 compared to $2,960,131$3,798,425 in 2019.2022. The decreaseincrease in operations expenseexpenses in 20202023 was primarily due to lower payroll costshigher cloud computing expenses and employee stock option vestingother expenses related to our AI business provided by our Pittsburgh operating segment, offset by increased costs associated with cloud computing.
lower research and development expenses related to office closures.
Sales and marketing expense. Sales and marketing expense consistsexpenses consist of expenses required to market and sell our products through independent reps, attendance at trade shows, product literature and other sales and marketing activities.
including staff-related expenses for individuals performing this work. Sales and marketing expenses decreasedincreased by $1,327,962$151,954 to $584,937$1,510,861 in 20202023 compared to $1,912,899$1,358,907 in 2019. Such2022. The increase in 2023 was primarily due to approximately $209,000 higher staff-related expenses related almost exclusively toresulting from the Skyline Medical business. The decrease in 2020 was a direct resultaddition of the strategic decision focus on the precision medicine businessheadcount supporting our sales and reduce the emphasis on expenditures in the Skyline Medical business. These factors decreased our expenses for payroll and bonus expense for sales staff as well as travel related costs, web development, public relations, and market research.
Impact of minority investment on net loss. The net loss for 2019 includes a loss on equity method investment of $439,637. The 2019 loss represented a portion of Helomics’ net loss from continuing operations of $1,555,542 prior to the merger on April 4, 2019 and resulted from our ownership of 25% of Helomics’ capital stock before the merger. This net loss wasmarketing efforts, offset by the gain of $6,164,260 in 2019lower spend on revaluation upon the initial acquisition of Helomics. Commencing with the merger effective April 4, 2019, we own 100% of the Helomics business, which is included in the consolidated financial statements.
other marketing activities.
Loss on goodwill and intangible impairment. We incurred a lossUpon closing our acquisition of zPREDICTA on impairment ofNovember 24, 2021, we recorded related goodwill of $12,876,498 during 2020. We incurred impairments charges of $8,100,000 and $770,250 on goodwill and intangibles, respectively during 2019.
Goodwill is calculated as$7,231,093. During the difference betweenyear ended December 31, 2022, we determined that the acquisition date fair value of the consideration transferred and the fair value of net assets acquired in the Helomics acquisition and represents the future economic benefits that we expect to achieve as a result of the acquisition that are not individually identified and separately recognized. Goodwill is tested for impairment annually at the reporting unit level, or whenever events or circumstances present an indication of impairment. The primary items that generate goodwill include the value of the synergies between the acquired company and the Company and the acquired assembled workforce, neither of which qualifies for recognition as an intangible asset.
Based upon our annual and interim goodwill impairment tests in each 2020 and 2019, we concluded that goodwill was impaired asprimarily due to declines in our market capitalization and recorded an impairment loss of the testing dates. Pursuant$7,231,093. Accordingly, goodwill related to Accounting Standards Update No, 2017-04, Simplifying the Test for Goodwill Impairment, the single step is to determine the estimated fair value of our reporting unit and compare it to the carrying value of the reporting unit, including goodwill. To the extent the carrying amount of goodwill exceeds the implied goodwill, the difference is the amount of the goodwill impairment. Our goodwill following the impairmentzPREDICTA was $2,813,792 and $15,690,290$0 at both December 31, 20202023, and December 31, 2019, respectively. We will continue to monitor our reporting unit in an effort to determine whether events2022. zPREDICTA was merged with Predictive Oncology at the end of 2022 and circumstances warrant further impairment testing in future periods, which may include interim periods. The cumulative losses on goodwill are $20,976,498is now reported as part of December 31, 2020. Please see the Pittsburgh operating segment. See Note 115 – Intangible Assets to our audited consolidated financial statements included in this annual report for further information.on Form 10-K.
Loss on finite-lived intangible asset impairment. During the year ended December 31, 2023, we incurred no losses on impairment of finite-lived intangible assets. During the year ended December 31, 2022, we incurred a loss on impairment of finite-lived intangible assets of $3,349,375. The impairment recorded related to the finite-lived intangible assets obtained with our acquisition of zPREDICTA in 2021 and was primarily due to declines in projected future cash flows. The value of the intangible assets of zPREDICTA following the impairment was $0 at December 31, 2022. zPREDICTA was merged with Predictive Oncology at the end of 2022 and is now reported as part of the Pittsburgh operating segment. See Note 5 – Intangible Assets to our audited consolidated financial statements included in this annual report on Form 10-K.
Loss on impairment of tangible long-lived assets. We recorded a loss on impairment of property and equipment of $162,905 during the year ended December 31, 2023. We prepared an undiscounted cash flow for our Birmingham asset group as of June 30, 2023, to evaluate long-lived assets, then completed a fair value assessment which resulted in the impairment. We then allocated the impairment to the assets of the affected asset group. We recorded a loss on impairment of property and equipment of $185,469 during the year ended December 31, 2022. The impairment was primarily due to a decline in projected future cash flows. We completed a fair value assessment which resulted in an impairment. We then allocated the impairment to the assets of each of the affected asset groups. See Note 4 – Property and Equipment to our audited consolidated financial statements included in this annual report on Form 10-K.
Other income. We earned other income of $843,440$152,776 in 20202023 compared to $65,300$185,646 in 2019.2022. Other income was comprisedprimarily consists of gaininterest income and, in the year ended December 31, 2022, gains associated with equipment abandoned in connection with a sublease and losses on the forgiveness of the Paycheck Protection Program loan of $541,867 and gains on settlement of outstanding payables during 2020. 2019asset disposals. The decrease in other income included gains on settlement of outstanding payables and dividendwas primarily due to lower interest income.
Other expense. We incurred other expenses of $2,427,026$64,967 in 20202023 compared to $3,466,696$5,275 in 2019.2022. Other expenses consisted primarily consist of interest expense payment penalties and, amortizationin the year ended December 31, 2023, losses on a note receivable deemed uncollectible. The increase in other expenses was primarily due to writing off a note receivable deemed uncollectible.
Gain on derivative instruments. We recorded a gain of original issue discounts.$12,457 in 2023 compared to a gain of $115,647 in 2022, primarily related to the changes in fair market value on derivatives.
Income Taxes. We have not recognized anyincurred zero income tax benefitexpense in our statement of operations related2023 and 2022 due to our U.S. operating losses as all tax benefits are fully reserved.
in both years.
Liquidity and Capital Resources
Cash Flows
On December 31, 2023, we had $8,728,660 in cash and cash equivalents. Cash and cash equivalents decreased by $13,342,863 from the prior year due to the following factors.
Net cash used in operating activities was $12,257,732$13,189,390 in 2020,2023, compared withto net cash used of $8,732,451$12,370,800 in 2019.2022. Cash used in operating activities increased in 20202023 primarily due to increasedcash operating losses as well as increased outflows related to payments on accounts payables and payments forchanges in working capital including decreases in accrued expenses inventories and prepaid expenses.contract liabilities, offset by an increase in accounts payable.
Cash flowsNet cash used in investing activities were $167,456was $302,371 in 2020 and $599,0872023, compared to $475,697 in 2019.2022. Cash flows used in investing activities decreased in 2020 were2023 primarily purchases of fixed assets, offset by disposals of fixed assets. Cash flows useddue to a decrease in investing activities in 2019 were primarily for loans made to Helomics, partially offset by cash received from Helomics on the acquisition date.
of property and equipment.
Net cash provided by financing activities was $12,952,689$148,898 in 20202023 compared to net cash provided of $9,320,217$6,715,405 in 2019.2022. Cash flows provided by financing activities in 2020 were2023 was primarily duerelated to proceeds from proceeds of common stock issuances of $4,891,348,financing insurance premiums over the insured period with a short-term note payable while the cash provided in 2022 was primarily proceeds from the issuance of common stock prefunded warrants, warrants and the exchange of warrants of $5,057,919 and the exercise of warrants of $1,935,855. In 2019, we received proceeds from debt issuance of $2,690,000, including $1,920,000 from our CEO, proceeds from the issuance of preferred stock due to a private placement of $2,338,840, and proceeds of common stock issuances of $5,323,018.
warrants.
Liquidity and Plan of FinancingFinancing; Going Concern
Since our inception, weWe have incurred significant and recurring losses from operations for the past several years and, our accumulated deficit was $108,383,108 as of December 31, 2020. We have committed significant capital and management resources to develop our CRO business and other new business areas and intend to continue to devote significant resources to the Helomics business and other new businesses in this market. To fund this, we have significantly decreased our salary and benefits expenses, particularly in our Skyline Medical business unit, through reductions in personnel and other measures. We continue to focus on reducing expenses. Our businesses will need to generate significantly more revenue to sufficiently fund our operations without external financing. Our operations from inception have been funded with private placements2023, had an accumulated deficit of convertible debt securities and equity securities, public offerings, and loan agreements. We have not achieved profitability and anticipate that we will continue to incur net losses at least through the remainder of 2021.$167,761,883. We had revenuescash and cash equivalents of $1,252,272 and $1,411,565 in 2020 and 2019, respectively, but we had negative operating cash flows of $12,257,732 and $8,732,451 in 2020 and 2019, respectively. Our cash balance was $678,332$8,728,660 as of December 31, 2020,2023, and need to raise significant additional capital to meet our operating needs. Our short-term obligations as of December 31, 2023, were $3,951,031, consisting primarily of aggregate accounts payable and accrued expenses wereof $2,973,729 and operating lease obligations of $517,427. As of December 31, 2023, we also had a short-term note payable of $150,408 that bears interest at an aggregate $3,960,117.annual percentage rate of 9.25% and long-term operating lease obligations of $2,188,979 with a weighted average remaining lease term of 3.99 years. We do not expect to generate sufficient operating revenue to sustain our operations in the near term. During the year ended December 31, 2023, we incurred negative cash flows from operations of $13,189,390. Although we have attempted to improve our operating margin by bolstering revenues and curtailing expenses and continue to seek ways to generate revenue through business development activities, there is no guarantee that we will be able to improve our operating margin sufficiently or achieve profitability in the near term. These matters are indicators ofconditions raise substantial doubt and were alleviatedabout our ability to continue as noted below duea going concern within one year after the date our consolidated financial statements included in this annual report on Form 10-K are issued. We are evaluating alternatives to obtain the required additional funding to maintain future operations. These alternatives may include, but are not limited to, equity financing, issuing debt, entering into other financing arrangements, or monetizing operating businesses or assets. These possibilities, to the registered direct offeringsextent available, may be on terms that result in significant dilution to our existing stockholders or that result in our existing stockholders losing part or all of their investment. Despite these potential sources of funding, we may be unable to access financing or obtain additional liquidity when needed or under acceptable terms, if at all. If such financing or adequate funds from operations are not available, we would be forced to limit our business activities and private placementwe could default on existing payment obligations, which would have a material adverse effect on our financial condition and results of operations, and may ultimately be required to cease our operations and liquidate our business. The consolidated financial statements for the year ended December 31, 2023, included in January and February 2021. Additionally, all amounts payable related to outstanding debt agreementsthis annual report on Form 10-K have been subsequently repaid. See “Financing Transactions” below.
prepared assuming we will continue as a going concern and do not include any adjustments that might result from the outcome of this uncertainty.
Since January 2019, we have raised capital in a variety of private sales and public offerings of debt and equity securities. See “Financing Transactions” below. We have also issued equity securities in several acquisitions of other companies in 2019 and 2020. See “Issuances of Securities in Acquisitions” below. In January and February 2021, we received aggregate net proceeds of $31,077,232 in a series of registered direct offerings and a private placement of equity securities. On March 1, 2021, we used $5,906,802 of the net proceeds from the private placement to pay the remaining principal and interest on the loans originally issued in September 2018, September 2019 and February 2020 and to pay premium payable upon such repayment. The remaining net proceeds of the 2021 transactions have been or will be used for working capital.
We believe that our existing capital resources will be sufficient to support our operating plan at least through March 31, 2022. However, we may also seek to raise additional capital to support our growth through additional debt, equity or other alternatives or a combination thereof. We would raise such capital through equity or debt financing to fund our capital and equipment investments and our operations.
Financing Transactions
We have funded our operations through a combination of debt and equity instruments including an early bank loan (since repaid),short-term borrowings, and a variety of debt and equity offerings. Since late 2018, theseWe have no off-balance sheet transactions. There were no financing transactions have consisted of (1) secured convertible notes to private investors starting in late 2018, the remaining amount of which was repaid on March 1, 2021; (2) a series of loans from Dr. Carl Schwartz, our CEO, starting in late 2018, which were exchanged for common stock in 2020; and (3) a number of public offerings, registered direct offerings and private placements, including an equity line arrangement (offerings), since 2019.
Secured Notes and Repayment in Full
In September 2018, the Company issued convertible secured promissory notes to two private investors in the original principal amount of an aggregate $2,297,727 (together, the “2018 Investor Note”) in exchange for cash proceeds of $2,000,000. As additional consideration for the 2018 Investor Note, the Company issued an aggregate 65,000 shares of its common stock as inducement shares plus warrants to acquire up to an aggregate 107,178 shares of common stock at an exercise price of $11.55 per share. Pursuant to a security agreement between the Company and the investors, the Company granted to the investors a security interest in its assets to secure repayment of the note. The 2018 Investor Note accrued interest at a rate of 8% per annum. In February 2019, the Company entered into a forbearance agreement with the 2018 Investor Note investors pursuant to which, among other things, the investors agreed to forbear on their rights to accelerate the 2018 Investor Note based on an event of default and a claimed event of default. In connection with such forbearance, an additional $344,659 in principal and an additional 16,667 common shares were issued to the investors. In September 2019, the 2018 Investor Note of one investor was paid in full. On March 19, 2020, the Company and the L2 Capital, LLC (“L2”) agreed to extend the note maturity to June 28, 2020. The Company and L2 further agreed to extend the due date to July 15, 2020 and then in July 2020 agreed to extend to September 30, 2020. Effective September 30, 2020, L2 and the Company agreed to extend to March 31, 2021.
No payment penalties were paid in relation to payments on the 2018 Investor Note during the year ended December 31, 2020 and $525,926 in payment penalties were accrued but not paid as of December 31, 2020. The outstanding principal balance of the 2018 Investor Note as of December 31, 2020 was $1,721,776, with an unamortized discount of $0.
2023.
Each investor received the right to convert all or any part of its portion of the 2018 Promissory Note into shares of the Company’s common stock at a discounted price, subject to certain limitations. During the year ended December 31, 2020 and 2019, L2 converted $267,328 and $140,000 of the principal balance, respectively and received 170,000 and 47,556 shares of the Company’s common stock, respectively.
May 2022 Offerings
During September 2019,On May 16, 2022, the Company issued a secured promissory note with a principal amount of $847,500 (the “2019 Investor Note”) to Oasis Capital, LLC (“Oasis”), an affiliate of L2, in exchange for cash proceeds of $700,000. As additional consideration for the loan, the Company issuedand sold an aggregate 8,857of 191,864 shares of its common stock, to Oasis plus warrants to acquire up to 68,237 shares of the Company’s common stock at an exercisea purchase price of $6.21 per share. The warrants are exercisable beginning on the sixth month anniversary of the effective date through the fifth-year anniversary thereof. The 2019 Investor Note accrued interest at a rate of 8% per annum. On March 19, 2020, the Company entered into an agreement to extend the due date the 2019 Investor Note from March 2020 to June 27, 2020. The Company increased the principal amount due on the 2019 Investor Note by $300,000 and issued 30,000 shares of its common stock as consideration for the extension. The change in value resulting from the extension exceeded 10% and as a result the extension was accounted for as an extinguishment under ASC 470, Debt. During the first quarter of 2020, the Company incurred a $300,000 loss on debt extinguishment related to the extension of the note. The Company and Oasis further agreed to extend the due date of the note to July 15, 2020 and then agreed to extend to September 30, 2020. The change in value resulting from the extension to September 30, 2020 exceeded 10% and as a result the extension was accounted for as an extinguishment under ASC 470, Debt. During the third quarter of 2020, the Company incurred a $345,000 loss on debt extinguishment related to the extension of the 2019 Investor Note to September 30, 2020. Effective September 30, 2020, Oasis and the Company agreed to further extend the maturity date of the 2019 Investor Note to March 31,2021. The change in value resulting from the extension to March 31, 2021 exceeded 10% and as a result the extension was accounted for as an extinguishment under ASC 470, Debt. During the third quarter of 2020, the Company incurred a $690,000 loss on debt extinguishment related to the extension of the note to March 31, 2021. Further, the parties agreed that the note shall be convertible into shares of the Company’s common stock, at a conversion price equal to the lesser of (i) $1.00 and (ii) 70% of the lowest VWAP (as defined in the note) of the Company’s common stock during the twenty (20) Trading Day (as defined) period ending on either (i) the last complete Trading Day prior to the conversion date or (ii) the conversion date, as determined by the holder in its sole discretion upon such conversion (subject to adjustment). During the fourth quarter of 2020, Oasis converted $525,000 in outstanding principal of the 2019 Investor Note in exchange for 1,136,448 shares of the Company’s common stock. No payment penalties were paid in relation to payments on this promissory note during the year ended December 31, 2020 and $320,542 in payment penalties were accrued but not paid as of December 31, 2020. As of December 31, 2020, the remaining balance on the promissory note was $1,490,833 with $244,830 unamortized discount.
On February 5, 2020, the Company issued a secured promissory note with a principal amount of $1,450,000 (the “2020 Investor Note”) to Oasis. Net proceeds of $400,000 were received for each of the first, second, and third tranches on February 5, 2020, March 5, 2020, and April 5, 2020, respectively. The Company granted to Oasis a security interest in its assets to secure repayment of the note. The 2020 Investor Note accrued interest at a rate of 8% per annum. Subject to certain limitations, the outstanding principal amount of the note and interest thereon were convertible at the election of the investor into shares of the Company’s common stock at a conversion price equal to $2.589. The conversion price was amended effective September 30, 2020 to a variable price equal to 70% of the lowest volume weighted average price (“VWAP”) (as defined in the note) of Company’s common stock during the twenty (20) Trading Day (as defined in the note) period ending on either (i) the last complete Trading Day prior to the conversion date or (ii) the conversion date, as determined by the holder in its sole discretion upon such conversion (subject to adjustment). The note contains a conversion feature and a put which were determined to be derivatives and are discussed further below. Effective July 15, 2020, the Company and Oasis agreed to amend the maturity date of the note to September 30, 2020. The change in value resulting from the amendment to maturity to September 30, 2020 exceeded 10% and as a result the amendment was accounted for as an extinguishment under ASC 470, Debt. During the third quarter of 2020, the Company incurred a $172,500 loss on debt extinguishment related to the amendment of the note to September 30, 2020. Effective September 30, 2020, the investor and the Company agreed to further extend the maturity date of the 2020 Investor Note to March 31, 2021. The change in value resulting from the extension to March 31, 2021 exceeded 10% and as a result the extension was accounted for as an extinguishment under ASC 470, Debt. During the third quarter of 2020, the Company incurred a $345,000 loss on debt extinguishment related to the extension of the note to March 31, 2021. As additional consideration, the Company issued to Oasis warrants to purchase 94,631, 92,700 and 92,700 shares of the Company’s common stock at the closing of the first, second and third tranches, respectively. The warrants are exercisable beginning on the sixth month anniversary of the issuance date at an exercise price equal $2.992 per share. The Company also issued 46,875 shares of its common stock to Oasis at the closing of the first tranche. During the fourth quarter of 2020, Oasis converted $503,354 in outstanding principal in exchange for 1,075,911 shares of the Company’s common stock. No payment penalties were paid in relation to payments on this promissory note during the year ended December 31, 2020 and $314,011 in payment penalties were accrued but not paid as of December 31, 2020. As of December 31, 2020, the outstanding balance on the promissory note was $1,464,146 with no remaining unamortized discount.
On March 1, 2021, the Company used $5,906,802 of the proceeds of the private placement on February 23, 2021, described below under “2021 Offerings”, to repay in full the outstanding principal and interest and applicable premium amounts under the 2018 Investor Note, the 2019 Investor Note and the 2020 Investor Note.
Dr. Schwartz Notes
In November 2018, Dr. Schwartz made a loan to the Company with a principal balance of $370,000. As of December 31, 2018, one promissory note was held with a principal balance of $370,000 and an unamortized discount of $63,028. From November 30, 2018 through July 15, 2019, Dr. Schwartz made numerous loans to the Company in the total amount of $1,920,000 under two promissory notes. As consideration for these amounts, Dr. Schwartz received promissory notes and warrants to purchase 22,129 shares of the Company’s common stock at $8.36 per share. Further, beginning on February 1, 2019 and the first day of each calendar month thereafter while the note remained outstanding, a number of additional warrants were issued. Beginning in October 2019, the Company and Dr Schwartz began to renegotiate the note. Due to the negotiations, the Company did not issue any additional warrants because they would be cancelled under the new deal.
During January 2020, the Company entered into an exchange agreement with Dr. Schwartz. Under the exchange agreement, the two outstanding notes were cancelled and in exchange a new combined promissory note in the amount of $2,115,000 (the “2020 Schwartz Note”) bearing 12% interest per annum and maturing on September 30, 2020 was issued. In addition to the 2020 Schwartz Note, Dr. Schwartz received 50,000 shares of the Company’s common stock. All warrants issued under the prior promissory notes were cancelled under the exchange agreement; no rights and obligations remain under the cancelled notes. The Company determined that the exchange agreement had, in substance, occurred at December 31, 2019.
Effective as of April 21, 2020, the Company and Dr. Schwartz, entered into an exchange agreement relating to the 2020 Schwartz Note. The 2020 Schwartz Note bore twelve percent (12%) interest per annum and had a maturity date of September 30, 2020. The accrued interest on the note through April 21, 2020 was $77,878, resulting in a total balance of $2,192,878 in principal and accrued interest on the 2020 Schwartz Note as of such date. Dr. Schwartz and the Company agreed to exchange the 2020 Schwartz Note for newly issued shares of common stock of the Company at market value. Pursuant to the exchange agreement, Dr. Schwartz was issued 1,533,481 shares of newly issued common stock at an exchange rate of $1.43$12.00 per share equal to the closing price of the common stock on April 21, 2020. Dr. Schwartz agreed (1) not to sell or otherwise transfer 766,740 shares for three months after the date of the exchange agreement,several institutional and (2) not to sell or otherwise transfer the remaining 766,741 shares for six months after the date of the exchange agreement. In 2021, the Company determined that due to a calculation error, the balance of the 2020 Schwartz Note should have been higher by $143,574 at the time of the exchange agreement, and on February 24, 2021, the Company issued an additional 100,401 shares to Dr. Schwartz.
2019 Offerings
On February 27, 2019, we entered into a placement agency agreement foraccredited investors in a registered direct offering in which we sold 138,500 shares of common stock and warrants to purchase up to 69,250 shares of common stock. The common stock and warrants were sold in units, with each unit consisting of 0.1 share of common stock and a Warrant to purchase 0.05 of a share of our common stock at an exercise price of $10.00 per whole share. The Warrants are exercisable at any time on or after the date of issuance and expire on the fifth anniversary of issuance. The units were sold at a price of $9.00 per unit, resulting in gross proceeds of $1,246,608 and net offering proceeds, after deducting the placement agent’s fees and other estimated offering expenses, were $1,111,888. The closing of this offering occurred on March 1, 2019. We granted the placement agent or its assigns the right to purchase up to an aggregate of 6,925 units at an exercise price of $11.25 per unit. The unit purchase options shall expire on February 27, 2024.
On March 26, 2019, we entered into a placement agency agreement for a registered direct offering in which we sold 147,875 shares of common stock and warrants to purchase up to 73,938 shares of common stock. The common stock and warrants were sold in units, with each unit consisting of 0.1 share of common stock and a warrant to purchase 0.05 shares of our common stock at an exercise price of $10.00 per whole share. The warrants are exercisable at any time on or after the date of issuance and expire on the fifth anniversary of issuance. The units were sold at a price of $8.00 per unit, resulting in gross proceeds of $1,183,101, before deducting placement agent fees and estimated offering expenses. The net offering proceeds were $1,053,460. The closing of this offering occurred on March 29, 2019.(the “First Offering”). Pursuant to the placement agent agreement, we granted the placement agency or its assigns the right to purchase up to an aggregate of 73,938 units at an exercise price of $10.00 per unit. The unit purchase options shall expire on March 29, 2024.
In June through September 2019, the Company entered into a private placement securities purchase agreement, with investors for shares of Series E convertible preferred stock. The Company issued 258 preferred shares. Each preferred shareholder had the right to convert each Series E convertible preferred share into 0.056857% of the issued and outstanding shares of common stock immediately prior to conversion for each share of Series E convertible stock, beginning six months after the initial close date of June 13, 2019. On the date that is 12 months after the initial closing date, the Company has the optionalso agreed to convert the preferred shares into common stock upon the same terms and limitations as the above optional conversion. The preferred shares included a contingent beneficial conversion amount of $289,935, representing the intrinsic value of the shares at the time of issuance. The Company determined the Series E convertible preferred stock should be classified as permanent equity and the beneficial conversion feature amount was accreted through the earliest redemption date of December 13, 2019.
In May 2020, we notified the holders of our Series E Convertible Preferred Stock of our electionissue to convert the outstanding shares of Series E Stock into common stock effective on June 13, 2020 pursuant to the terms of the Series E Stock. Prior to the conversion, there were 207.7 shares of Series E Stock outstanding. Each share of Series E Stock converted into 0.056857% of the issued and outstanding shares of common stock immediately prior to conversion; therefore, the 207.7 outstanding shares of Series E Stock on June 13, 2020 converted into 1,257,416 shares of common stock equal to 11.8% of the outstanding shares of common stock as of June 12, 2020.
On October 4, 2019, we sold 633,554 shares of our common stock in a public offering. The common stock was sold at a price of $5.00 per share, resulting in gross proceeds to the Company of $3,167,769 and net offering proceeds, after deducting the placement agents’ fees and other estimated offering expenses, were $2,811,309. The closing of the offering occurred on October 4, 2019. Pursuant to the placement agency agreement, we granted warrants to the placement agents to purchase up to 63,355 shares of common stock, at an exercise price of $6.25 per share. The warrants include a cashless exercise provision and will have piggy-back registration rights.
On October 24, 2019, we entered into an equity purchase agreement with Oasis, providing for an equity line financing facility. Upon the terms and subject to the conditions in the purchase agreement, the investor is committed to purchase shares having an aggregate value of up to $15,000,000 of our common stock for a period of up to three years. We issued to Oasis 104,651 commitment shares for entering into the agreement. From time to time during the three-year commitment period, provided that the closing conditions are satisfied, we may provide Oasis with put notices to purchase a specified number of shares subject to certain limitations and conditions and at specified prices, which generally represent discounts to the market price of the common stock.
From the date of the agreement through December 31, 2019, we sold an aggregate 122,356 shares of common stock to Oasis for proceeds of $319,195.
2020 Paycheck Protection Program Loan and Forgiveness
On April 20, 2020, the Company entered into a promissory note with Park State Bank, which provides for an unsecured loan of $541,867 pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security Act and applicable regulations (the “CARES Act”). The promissory note has a term of 2 years with a 1% per annum interest rate. Payments are deferred for 6 months from the date of the promissory note and the Company can apply for forgiveness of all or a portion of the promissory note after 60 days for covered use of funds.
Pursuant to the terms of the PPP, the promissory note, or a portion thereof, may be forgiven if proceeds are used for qualifying expenses as described in the CARES Act, such as payroll costs, costs used to continue group health care benefits, mortgage interest payments, rent and utilities. The Company has used all proceeds for qualifying expenses. The Company received forgiveness for the loan under the Paycheck Protection Program and recognized a gain in other income for the full amount of the loan during the fourth quarter of 2020.
2020 Offerings
On March 19, 2020, in a private placement we sold and issued (1) 260,000 shares of common stock, at a sale price of $2.121 per share; (2) prefunded warrants to acquire 1,390,166 shares of common stock, sold at $2.12 per share and exercisable at an exercise price of $0.001 per share; (3) warrants to acquire 1,650,166 shares of common stock at $1.88 per share, exercisable immediately and terminating five and one-half years after the date of issuance; and (4) warrants to acquire 1,650,166 shares of common stock at $1.88 per share, exercisable immediately and terminating two years after the date of issuance. The sale resulted in gross proceeds of $3,498,612 and net proceeds of $3,127,112. The Company paid the Placement Agent an aggregate fee equal to 7.5% of the aggregate gross proceeds received by the Company in the offering. The Company also paid the Placement Agent a management fee equal to 1% of the aggregate gross aggregate gross proceeds received by the Company in the offering and reimbursed the Placement Agent for $25,000 in non-accountable expenses and up to $40,000 in legal and other out-of-pocket expenses. In addition, the Company granted to the Placement Agent or its assignsthese purchasers unregistered warrants to purchase up to an aggregate of 123,762191,864 shares of its common stock (which represents 7.5% of the Shares sold to investors(the “Warrants”) in thea concurrent private placement) atplacement. The Warrants have an exercise price equal to 125% of the price of the Shares in the private placement, or $2.65125. These placement agent warrants will expire on March 18, 2025.
During May 2020, the Company sold 1,396,826 shares of common stock in a registered direct offering under its shelf registration statement. In a concurrent private placement, the Company also issued such investors warrants to purchase up to an aggregate of 1,396,826 shares of our common stock. The Shares and the Warrants were sold at a combined offering price of $1.575 per Share and associated Warrant. Each Warrant is exercisable immediately upon issuance at an exercise price of $1.45$14.00 per share, and will expire five and one-half yearsbecome exercisable six months from the issue date. The saledate of the offering shares and associated warrants resulted in gross proceeds of $2,200,001 and net proceeds of $1,930,100 after deducting the placement agent fees and estimated offering expenses payable by the Company. The Company granted to the placement agent or its assigns warrants to purchase up to an aggregate of 104,762 shares of its common stock at an exercise price of $1.9688.
On June 25, 2020, the Company entered into agreements with the holders of an aggregate of 1,396,826 of the warrants issued in connection with the May 2020 registered direct offering, under which the investors exercised the warrants and received the same number new warrants. The investors paid an exercise price of $1.45 per share plus an additional $0.125 for each new warrant. The Company issued 1,396,826 shares and issued new warrants which are exercisable immediately and have a term of five and one-half years and an exercise price per share equal to $1.80. The Company received $2,130,701 in gross proceeds and net proceeds of $1,865,800 after deducting the placement agent fees and estimated offering expenses payable by the Company. Before deducting placement agent fees and expenses, the Company received approximately $2,200,000 from the transactions. Pursuant to an engagement letter, the Company agreed to pay the Placement Agent a cash fee equal to 7.5% of the gross proceeds received from the exercise and the sale of the New Warrants. The Company also paid the Placement Agent a management fee equal to 1% of the aggregate gross aggregate gross proceeds received by the Company in the offering and reimbursed the Placement Agent for $25,000 in non-accountable expenses and up to $40,000 in legal and other out-of-pocket expenses. In addition, the Company granted to the Placement Agent or its assigns warrants to purchase up to an aggregate of 104,763 shares of its common stock (which represents 7.5% of the shares sold to investors in the exercise transaction) at an exercise price equal to 125% of the exercise price of the New Warrants, or $2.25.
In connection with the equity line arrangement entered into with Oasis in October 2019, during the year ended December 31, 2020, we issued an aggregate 4,231,073 shares of common stock to Oasis for net proceeds of $4,891,348.
2021 Offerings
In January and February 2021, the Company completed a series of five offerings, all of which were priced at-the-market under applicable NASDAQ rules. The first four offerings were registered direct offerings of common stock under its shelf registration statement, and in each such case, in a concurrent private placement, the Company also issued such investors one warrant to purchase common stock for each two shares purchased in the transaction. Following those four offerings, the Company completed a private placement of common stock, with each investor receiving one warrant to purchase common stock for each two shares purchased in the transaction. In each case, each such investor warrant is exercisable immediately upon issuance, and will expire five and one-half years from the issue date. date of issuance.
In addition, in a concurrent registered direct offering (the “Second Offering”), on May 16, 2022, the Company issued and sold to several institutional and accredited investors an aggregate of 408,136 shares of its common stock, at a purchase price of $12.00 per share. The Company also entered into a warrant amendment agreement (the “Warrant Amendment”) with each of the purchasers in the Second Offering. Under the Warrant Amendment, the Company agreed to amend certain existing warrants to purchase up to 816,272 shares of common stock that were previously issued in 2020 and 2021 to those purchasers, with exercise prices ranging from $20.00 to $40.00 per share (the “Existing Warrants”), were amended to: (i) lower the exercise price of the Existing Warrants to $14.00 per share, (ii) provide that the Existing Warrants, as amended, will not be exercisable until six months following the closing date of the Second Offering, and (iii) extend the original expiration date of the Existing Warrants by five and one-half years following the close of the Second Offering.
In each case, the Company paid to the placement agent an aggregate fee equal to 7.5% of the aggregate gross proceeds received by the Company in the offering and a management fee equal to 1% of the aggregate gross proceeds received by the Company in the offering and reimbursedprovided the placement agent expense allowance of $65,000 for certain non-accountable and other out-of-pocket expenses. In addition, the Company granted to the placement agent or its assigns warrants to purchase 7.5% of the shares sold to investors in the offering at an exercise price equal to 125% of the price of the shares in the transaction, or $15.00 per share, with a term of five years for the registered direct offerings or five and one-half years for the private placement. These offerings were as follows:
Offering Closing Date | Shares | Sale Price per Share* | Investor Warrants | Exercise Price per Share – investor Warrants | Placement Agent Warrants | Exercise Price per Share – Placement Agent Warrants | Gross Proceeds of Offering | Net Proceeds of Offering |
January 12, 2021 (registered direct) | 3,655,840 | $0.842 | 1,825,420 | $0.80 | 273,813 | $1.0525 | $3,074,007 | $2,731,767 |
January 21, 2021 (registered direct) | 2,200,000 | $1.00 | 1,100,000 | $1.00 | 165,000 | $1.25 | $2,200,000 | $1,932,050 |
January 26, 2021 (registered direct) | 3,414,970 | $1.20 | 1,707,485 | $1.20 | 256,123 | $1.50 | $4,097,964 | $3,668,687 |
February 16, 2021 (registered direct) | 4,222,288 | $1.75 | 2,111,144 | $2.00 | 316,672 | $2.1875 | $7,389,004 | $6,679,989 |
February 23, 2021 (private placement) | 9,043,766 | $1.95 | 4,521,883 | $2.00 | 678,282 | $2.4375 | $17,635,344 | $16,064,739 |
Total | 22,536,864 | 11,265,932 | 1,689,890 | $34,396,319 | $31,077,232 |
* Sale price includes one share and a warrant to purchase one-half share.
(the “Agent Warrants”). The Agent Warrants become exercisable six months after issuance.
2021 Warrant ExercisesEquity Line
During the period January 1, 2021 through February 25, 2021, the holders of outstanding investor warrants have exercised such warrants for the total purchase of 4,964,994 shares at a weighted average exercise price of $0.63 per share, for total proceeds of $ 4,269,617.
Issuances of Securities in Acquisitions
On April 4,October 24, 2019, the Company completed a forward triangular merger with Helomics Acquisition Inc., a wholly-owned subsidiary of the Company and Helomics, acquiring the remaining 75% of the capital stock of Helomics not already held by the Company. Upon the acquisition, all outstanding shares of Helomics stock not already held by the Company were converted into the right to receive a proportionate share of 400,000 shares of common stock and 3,500,000 shares of Series D convertible preferred stock of the Company. On April 4, 2020, the 3,500,000 shares of Series D convertible preferred stock were converted into 350,004 shares of common stock. Also, on April 4, 2019, the Company completed an exchange offer with the holders of certain notes and warrants of Helomics, in which the Company issued 863,732 shares of common stock to the noteholders in exchange for their notes and issued warrants to purchase up to 1,425,506 warrants of the Company at an exercise price of $10.00 per share in exchange for the Helomics warrants held by the noteholders. An additional 59,700 Company warrants at an exercise price of $0.10 per share were exchanged for Helomics warrants held by other parties. On September 14, 2020, the Company agreed to amend the Company warrants at $10.00 per share to allow the holders to exercise the warrants at an exercise price of $0.845 per share, equal to the then-current market value of the common stock. See Notes 2 and 5 to the Consolidated Financial Statements.
On May 27, 2020, the Company entered into an Asset Purchase Agreementequity purchase agreement with InventaBioTech, Inc. (“InventaBioTech”)an investor, providing for an equity financing facility. According to the terms and twosubject to the conditions in the purchase agreement, the investor was committed to purchase shares having an aggregate value of its subsidiaries, Soluble Therapeutics, Inc. (“Soluble”),up to $15,000,000 of the Company’s common stock for a period of up to three years. The Company issued to the investor 5,233 commitment shares at a fair market value of $450,000 for entering into the agreement. From time to time during the three-year commitment period, provided that the closing conditions were satisfied, the Company could provide the investor with put notices to purchase a specified number of shares subject to certain limitations and BioDtech, Inc. (“BioDtech”),conditions and simultaneously completedat specified prices, which generally represent discounts to the acquisitionmarket price of substantially all of Soluble’s and BioDtech’s assets. In exchange,the common stock. During the year ended December 31, 2022, the Company issued 125,00015,750 shares of its common stock and waived all existing claims thatvalued at $236,009 pursuant to the equity line. In connection with the May 2022 offerings, the Company has or may have against InventaBioTech (f/k/a CytoBioscience, Inc.), including the nonpayment of $1,290,000 owed by InventaBioTechagreed not to the Company. See Note 5 to the Consolidated Financial Statements.
On July 1, 2020, the Company entered into an Asset Purchase Agreement with Quantitative Medicine LLC (“Seller”), a Delaware limited liability company and its owners and simultaneously completed the acquisition of substantially all of the assets owned by Seller. Quantitative Medicine is a biomedical analytics and computational biology company that developed a novel, computational drug discovery platform called CoRE. CoRE is designed to dramatically reduce the time, cost, and financial risk of discovering new therapeutic drugs by predicting the main effects of drugs on target molecules that mediate disease. In exchange for Seller’s assets, including CoRE, the Company provided consideration in the form of 954,719 shares of common stock, which, when issued, had a fair value of $1,470,267. One half of the shares issued, or 477,359 shares were deposited and held in escrow upon issuance, while 207,144 ofaccess the remaining shares were issued to Carnegie Mellon University (“CMU”) in satisfactionbalance for a period of all pre-closing amounts owed to CMU under a technology licensing agreement that was assumed by the Company on the closing date. Half of the shares held in escrow will be released on the six-month anniversary ofone year after the closing date, and the other half will be releasedor May 18, 2022. The equity line expired on the one-year anniversary of the closing date; provided, however, that all or some of the escrow shares may be released and returned to the Company for reimbursement in the event that the Company suffers a loss against which the Selling Parties have indemnified the Company pursuant to the Agreement. See Note 5 to the Consolidated Financial Statements.October 23, 2022.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based upon our audited consolidated Financial Statements, which have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of our financial statements, the reported amounts of revenues and expenses during the reporting periods presented, as well as our disclosures of contingent assets and liabilities. On an on-going basis, weWe evaluate our estimates and assumptions including, but not limited to, fair value of stock-based compensation, fair value of acquired intangible assets and goodwill, useful lives of intangible assets and fixed assets, income taxes, and contingencies and litigation.on an on-going basis.
We base our estimates and assumptions on our historical experience and on various other information available to us at the time that these estimates and assumptions are made. We believe that these estimates and assumptions are reasonable under the circumstances and form the basis for our making judgments about the carrying values of our assets and liabilities that are not readily apparent from other sources. Actual results and outcomes could differ from our estimates primarily due to incorrect sales forecasting. We utilize a pipeline generated by our sales team and speak directly with all departments regarding estimates and assumptions. If, for any reason, those estimates, and assumptions vary substantially it would also impact our cost of goods and associated operating expenses. The other volatile area for estimates and assumptions is determining financing needs. Depending on how we choose to fund will affect numerous expense categories so the potential for underestimating those expenses is a viable concern.
estimates.
Our significant accounting policies are described in “NoteNote 1 – Summary of Significant Accounting Policies” in Notes to Consolidated Financial Statements of this Annual Report on Form 10-K. We believe that the following discussion addresses our critical accounting policiesestimates and reflects those areas that require more significant judgments and use of estimates and assumptions in the preparation of our audited consolidated Financial Statements.
Revenue Recognition. We recognize revenue in accordance with ASC 606, Revenue Recognition.
Effective January 1, 2018, we adopted Accounting Standards Update (“ASU”) No.2014-09,Revenue from Contracts with Customers (Topic 606), which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The standard’s core principle is that an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
Revenue from Product Sales. We have medical device revenue consisting primarily of sales of the STREAMWAY System, as well as sales of the proprietary cleaning fluid and filters for use with the STREAMWAY System. This revenue stream is reported within both the domestic and international revenue segments. We sell our medical device products directly to hospitals and other medical facilities using employed sales representatives and independent contractors. Purchase orders, which are governed by sales agreements in all cases, state the final terms for unit price, quantity, shipping and payment terms. The unit price is considered the observable stand-alone selling price for the arrangements. Our sales agreement, Terms and Conditions, is a dually executed contract providing explicit criteria supporting the sale of the STREAMWAY System. We consider the combination of a purchase order and acceptance of our Terms and Conditions to be a customer’s contract in all cases.
Product sales for medical devices consist of a single performance obligation that we satisfy at a point in time. We recognize product revenue when the following events have occurred: (1) we have transferred physical possession of the products, (2) we have a present right to payment, (3) the customer has legal title to the products, and (d) the customer bears significant risks and rewards of ownership of the products. Based on the shipping terms specified in the sales agreements and purchase orders, these criteria are generally met when the products are shipped from our facilities (“FOB origin,” which is our standard shipping terms). As a result, we determined that the customer is able to direct the use of, and obtain substantially all of the benefits from, the products at the time the products are shipped. We may, at our discretion, negotiate different shipping terms with customers which may affect the timing of revenue recognition. Our standard payment terms for customers are generally 30 to 60 days after we transfer control of the product to the customer. We allow returns of defective disposable merchandise if the customer requests a return merchandise authorization from us.
Customers may also purchase a maintenance plan for the medical devices from us, which requires us to service the STREAMWAY System for a period of one year subsequent to the one-year anniversary date of the original STREAMWAY System invoice. The maintenance plan is considered a separate performance obligation from the product sale, is charged separately from the product sale, and is recognized over time (ratably over the one-year period) as maintenance services are earned and provided. A time-elapsed output method is used to measure progress because we transfer control evenly by providing a stand-ready service. We have determined that this method provides a faithful depiction of the transfer of services to our customers.
All amounts billed to a customer in a sales transaction for medical devices related to shipping and handling, if any, represent revenues earned for the goods provided, and these amounts have been included in revenue. Costs related to such shipping and handling billing are classified as cost of goods sold.
Revenue from Clinical Testing. The Precision Oncology Insights are clinic diagnostic testing comprised of our Tumor Drug Response Testing (formerly ChemoFx) and Genomic Profiling (formerly BioSpeciFx) tests. The Tumor Drug Response Testing test determines how a patient’s tumor specimen reacts to a panel of various chemotherapy drugs, while the Genomic Profiling test evaluates the expression of a particular gene related to a patient’s tumor specimen. Revenues are recognized when control of the promised goods or services is transferred to customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. The estimated uncollectible amounts are generally considered implicit price concessions that are a reduction in revenue. Payments terms vary for contracts and services sold by our Helomics subsidiary. Our performance obligations are satisfied at one point in time when test reports are delivered and studies are completed.
For service revenues, we estimate the transaction price which is the amount of consideration we expect to be entitled to receive in exchange for providing services based on our historical collection experience using a portfolio approach as a practical expedient to account for patient contracts as collective groups rather than individually. We monitor our estimates of transaction price to depict conditions that exist at each reporting date. If we subsequently determine that we will collect more consideration than we originally estimated for a contract with a patient, we will account for the change as an increase to the estimate of the transaction price, provided that such downward adjustment does not result in a significant reversal of cumulative revenue recognized.
We recognize revenuegenerate revenues from these patients when contracts as defined in ASC 606, Revenue from Contracts with Customers are established at the amount of consideration to which we expect to be entitled or when we receive substantially all of the consideration subsequentContract Research Organization (“CRO”) services related to the development of 3D tumor-specific in vitro models for oncology drug discovery and research. We also generate revenues from CRO services related to development of protein formulations and performance obligations being satisfied.
CRO Revenue. Contract revenues are generally derived from studies conducted with biopharmaceutical and pharmaceutical companies.of protein stability analyses. The specific methodologypattern of revenue recognition for revenue recognitionCRO services is determined on a case-by-case basis according to the facts and circumstances applicable to a given contract. We typically use an input methodevaluate each product or service promised in a contract to determine whether it represents a distinct performance obligation. Determining whether services are considered distinct performance obligations that recognizes revenue based on our efforts to satisfy theshould be accounted for separately versus together may require significant judgment. Contracts for CRO services generally contain one performance obligation relative to perform research and deliver appropriate data or reporting. Revenues from CRO services are generally recognized at the total expected inputspoint in time when data and reports are provided to the satisfactioncustomers. See Note 1 – Summary of that performance obligation. For contracts with multiple performance obligations, we allocate the contract’s transaction priceSignificant Accounting Policies in Notes to each performance obligationConsolidated Financial Statements of this Annual Report on the basisForm 10-K for further details of the standalone-selling price of each distinct good or service in the contract. Advance payments received in excess of revenues recognized are classified as deferred revenue until such time as theour revenue recognition criteria have been met. Payment terms are net 30 from the invoice date, which is sent to the customer as we satisfy the performance obligation relative to the total expected inputs to the satisfaction of that performance obligation.
policies.
Variable Consideration. We recordalso have a collaboration arrangement, under which we have utilized our active learning technology, proprietary biobank, and know-how to provide predictive models of tumor responses to various drug compounds. This collaboration arrangement includes sales-based royalties, under which our collaboration partner is obligated to pay us revenue from distributors and direct end customers in an amountsharing fees that reflects the transaction price we expect to be entitled to after transferring control of those goods or services. Our current contracts do not contain any features that create variability in the amount or timing of revenue to be earned.
Warranty. We generally provide one-year warranties against defects in materials and workmanship on product sales and will either repair the products or provide replacements at no charge to customers. As they are considered assurance-type warranties, we do not account for them as separate performance obligations. Warranty reserve requirements are based on a specific assessmentthe net revenue from the collaboration partner’s commercialized drugs. The percentage of net revenue varies depending on the products sold with warranties where a customer asserts a claim for warranty or a product defect.
Contract Balances. We record a receivable when we have an unconditional right to receivestage of development. The revenue sharing fees represent variable consideration, after the performance obligations are satisfied. Our deferred revenues relate primarily to maintenance plans and CRO revenue.
Practical Expedients. We have elected the practical expedient not to determine whether contracts with customers contain significant financing components as well as the practical expedient to recognize shipping and handling costs at point of sale.
Stock-Based Compensation. We account for share-based compensation expense in accordance with ASC 718, Compensation—Stock Compensation, which requires us to measureestimate the expected value of revenue sharing fees and recognizeextent to which those estimates are constrained. These estimates are reassessed at each reporting period. To date, we have not recognized revenues related to revenue sharing fees pursuant to our collaboration arrangement. See Note 11 – Collaborative Agreement in Notes to Consolidated Financial Statements of this Annual Report on Form 10-K for further details of our collaboration arrangement.
Stock-Based Compensation.
We account for stock-based compensation expense in our financial statements based onunder the fair value at the daterecognition and measurement provisions for share-based payments of grant for our share-based awards. U.S. GAAP. We recognize compensation expense for these service-based equity-classified awards over their requisite service period and adjust for forfeitures as they occur.
ASC 718 requires companies to We estimate the fair value of stock-based payment awards on the date of grant using an option-pricing model. We use the Black-Scholes option-pricing model which requires the input of significant assumptions including an estimate of the average period of time employees and directors will retain vested stock options before exercising them, the estimated volatility of our common stock price over the expected term, the number of options that will ultimately be forfeited before completing vesting requirements and the risk-free interest rate.
When an option or warrant is granted in place of cash compensation for services, we deem the value of the service rendered to be the value of the option or warrant. In most cases, however, an option or warrant is granted in addition to other forms of compensation and its separate value is difficult to determine without utilizing an option pricing model. For that reason, we also use the Black-Scholes option-pricing model to value options and warrants granted to non-employees, which requires the input of significant assumptions including an estimate of the average period that investors or consultants will retain vested stock options and warrants before exercising them, the estimated volatility of our common stock price over the expected term, the number of options and warrants that will ultimately be forfeited before completing vesting requirements and the risk-free interest rate. In the case of options to employees, we estimated the life to be the legal term.
Changes in the assumptions can materially affect the estimate of fair value of stock-based compensation and, consequently, the related expense recognizes that. We have been traded on the NASDAQ Capital Market exchange since 2015 and has had a volatilehave experienced significant volatility in our stock including reverse stock splits.price. The assumptions we use in calculating the fair value of stock-based payment awards represent our best estimates, which involve inherent uncertainties and the application of management's judgment. As a result, if factors change and we use different assumptions, our equity-based consulting and intereststock-based compensation expense could be materially different in the future. See Note 9 – Stockholders’ Equity, Stock Options, and Warrants in Notes to Consolidated Financial Statements of this Annual Report on Form 10-K for further details of our stock-based compensation.
Goodwill Impairment
In the case of standard options to employees we determined the expected life to be the midpoint between the vesting term and the legal term. In the case of options or warrants granted to non-employees, we estimated the life to be the legal term unless there was a compelling reason to make it shorter.
Business Combination. We accounted for the Helomics merger as a business combination, using the acquisition method of accounting. This method requires, among other things, that assets acquired and liabilities assumed be recognized at fair value as of the acquisition date. The fair value for the assets acquired and the liabilities assumed are based on information knowable and determined by management as of the date of this filing. We allocate the purchase price to tangible and intangible assets acquired and liabilities assumed, based on their estimated fair values. The excess of the purchase price, if any, over the aggregate fair value of assets acquired and liabilities assumed is allocated to goodwill.
Fixed Assets. We account for assets acquired at fair value as of the acquisition date. The fair value for assets acquired are based on their estimated fair values. Fixed assets are stated at cost less accumulated depreciation. Depreciation of fixed assets is computed using the straight-line method over the estimated useful lives of the respective assets.
Goodwill and Other Intangible Impairment. In accordance with ASC 350, Intangibles – Goodwill and Other, goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the fair value of net assets acquired. Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination. Goodwill is an indefinite-lived intangible asset and is not amortized.
Goodwill is tested on an annual basis for impairment annually at the reporting unit level as of December 31, or whenever events or changes in circumstances present an indication of impairment.
Inindicate that the Helomics acquisition, the Company recordedcarrying amount may not be fully recoverable. To determine whether goodwill of $23,790,290. The goodwill was recorded to the Helomics segment which representsis impaired, annually or more frequently if needed, we perform a single reporting unit. As a part of the annualmulti-step impairment testing, the Company hadtest. We first have the option to assess qualitative factors to determine if it wasis more likely than not that the carrying value of a reporting unit exceededexceeds its estimated fair value. The Company believed aWe may also elect to skip the qualitative testing approach was not appropriate and therefore, proceededproceed directly to the quantitative testing. When performing quantitative testing, the Companywe first estimatedestimate the fair valuevalues of the Helomicsour reporting unitunits using discounted cash flows. To determine fair values, the Company waswe are required to make assumptions about a wide variety of internal and external factors. Significant assumptions used in the impairment analysis includedinclude financial projections of free cash flow (including significant assumptions about operations including the rate of future revenue growth, capital requirements, and income taxes), long-term growth rates for determining terminal value and discount rates for the Helomics reporting unit.rates. Comparative market multiples were alsoare used to corroborate the results of the discounted cash flow test. These assumptions requiredrequire significant judgment and actual results may differ from assumed and estimated amounts.
In testing goodwill for impairment as of December 31, 2019, the Company performed a quantitative impairment test, including computing the fair value of the Helomics reporting unit and comparing that value to its carrying value. Based upon the Company’s annual goodwill impairment test, the Company concluded that goodwill was impaired as of the testing date of December 31, 2019. Pursuant to ASU 2017-04, Simplifying the Test for Goodwill Impairment, the single step is to determine the estimated fair value of the reporting unit and compare it to the carrying value of the reporting unit, including goodwill. To the extent the carrying amount of goodwill exceeds the implied goodwill, the difference is the amount of the goodwill impairment. The Company’s annual impairment test as of December 31, 2019 resulted in $8,100,000 of impairment expense related to goodwill.
When evaluating the fair value of Helomics reporting unit the Company used a discounted cash flow model. Key assumptions used to determine the estimated fair value included: (a) expected cash flow for the 20-year period following the testing date (including net revenues, costs of revenues, and operating expenses as well as estimated working capital needs and capital expenditures); (b) an estimated terminal value using a terminal year growth rate of 3.0% determined based on the growth prospects of the reporting unit; and (c) a discount rate of 18.3% based on management’s best estimate of the after-tax weighted average cost of capital. The discount rate included a company specific risk premium of 7% for risks related to the term of the forecasts. During the third quarter of 2020, the Company’s share price experienced a sustained reduction in trading values. This was also reflective of broader difficulties in the general economic conditions due to the COVID pandemic. Based on our examination of these and other qualitative factors at September 30, 2020, the Company concluded that that potential impairment indicators were present and that an impairment assessment was warranted for goodwill.
In testing goodwill for impairment as of September 30, 2020, the Company performed a quantitative impairment test, including computing the fair value of the Helomics reporting unit and comparing that value to its carrying value. Based upon the Company’s quantitative goodwill impairment test, the Company concluded that goodwill was impaired as of the testing date of September 30, 2020. The quantitative review as of September 30, 2020 resulted in $2,997,000 of impairment expense related to goodwill.
When evaluating the fair value of Helomics reporting unit the Company used a discounted cash flow model and market comparisons. Key assumptions used to determine the estimated fair value included: (a) expected cash flow for the 20-year period following the testing date (including net revenues, costs of revenues, and operating expenses as well as estimated working capital needs and capital expenditures); (b) an estimated terminal value using a terminal year growth rate of 3.0% determined based on the growth prospects of the reporting unit; and (c) a discount rate of 25% based on management’s best estimate of the after-tax weighted average cost of capital. The discount rate included a Company specific risk premium of 10% for risks related to the term of the forecasts.
In testing goodwill for impairment as of December 31, 2020, the Company performed a quantitative impairment test, including computing the fair value of the Helomics reporting unit and comparing that value to its carrying value. Based upon the Company’s annual goodwill impairment test, the Company concluded that goodwill was impaired as of the testing date of December 31, 2020.judgement. Pursuant to ASU 2017-04, Simplifying the Test for Goodwill Impairment, the single step is to determine the estimated fair value of the reporting unit and compare it to the carrying value of the reporting unit, including goodwill. To the extent the carrying amount of goodwill exceeds the implied goodwill, the difference is the amount of the goodwill impairment. We also complete a reconciliation between the implied equity valuation prepared and our market capitalization. The Company’s annual impairment test asmajority of December 31, 2020 resulted in $9,879,458 of impairment expense related to goodwill. A decreasethe inputs used in the growth rate of 0.5% or an increase of 0.5% to the discount rate would reduce the fair value of Helomics reporting unit by approximately an additional $588,000 and $988,000, respectively. As of December 31, 2020, the cumulative impairment recorded was $20,976,498.
When evaluating the fair value of Helomics reporting unit the Company used a discounted cash flow model. Key assumptions usedmodel are unobservable and thus are considered to determine the estimated fair value in 2020 included: (a) expected cash flowbe Level 3 inputs. The inputs for the 10-year period following the testing date (including net revenues, costs of revenues, and operating expenses as well as estimated working capital needs and capital expenditures); (b) an estimated terminal value using a terminal year growth rate of 5.0% determined based on the growth prospects of the reporting unit; and (c) a discount rate of 14.0% based on management’s best estimate of the after-tax weighted average cost of capital. The discount rate included a Company specific risk premium of 1.0% for risks related to the term of the forecasts. The Company further used a probability weighting of various forecasts to address forecast risk.market capitalization calculation are considered Level 1 inputs.
Long-lived AssetsAsset Impairment
The Company reviewsWe review long-lived assets, including finite-lived identifiable intangible assets and long-lived tangible assets, for impairment in accordance with ASC 360, Property, Plant and Equipment, whenever events or changes in circumstances indicate the carrying amount may not be recoverable. Identifying and evaluating such events or changes in circumstances involves judgment. Events or changes in circumstances that indicate the carrying amount may not be recoverable include, but are not limited to, a significant change in the medical device marketplace and a significant adverse change in the business climate in which the Company operates.we operate.
Because evaluationThe recoverability of other long-lived assetsan asset to be held and used is necessary based on a triggering event,determined by comparing the Company preparedcarrying amount to the estimated undiscounted future cash flows per ASC 360. The Company concluded thatexpected to be generated by the asset. If the carrying amount of the asset exceeds its estimated undiscounted future cash flows, we record an impairment charge in the amount by which the carrying amount of the long-lived assets exceeded the carrying values. The Company concluded there was no impairment ofasset exceeds its finite lived assets as of December 31, 2020.fair value, which is determined by either a quoted market price, if any, or a value determined utilizing discounted cash flow techniques. See Note 4 – Property and Equipment and Note 5 – Intangible Assets to our audited consolidated financial statements included in this annual report on Form 10-K.
Income Taxes. Income Taxes
Deferred income taxes are provided on a liability method, whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards. Deferred tax liabilities are recognized for taxable temporary differences, which are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred income taxes are subject to certain limitations under Section 382. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the consolidated financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.
Recent Accounting Developments
See “Note“Recent Accounting Pronouncements” and “Recently Adopted Accounting Standards” under Note 1 - Summary of Significant Accounting Policies - Recently Adopted Accounting Standards” in Notes to Consolidated Financial Statements of this Annual Report on Form 10-K.
Off-Balance Sheet Transactions
We have no off-balance sheet transactions.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not required.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our financial statements and supplementary data are included beginning on pages F-1 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act), defines the term “disclosure controls and procedures” as those controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Management, with the participation of our Chief Executive Officer and Interim Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as of December 31, 2020.2023. Based on that evaluation, our Chief Executive Officer and Interim Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were not effective as of December 31, 2020 due to the material weakness in internal controls regarding adequate accounting resources, as described below:2023.
Management’sManagement’s Report on Internal Control Over Financial Reporting
We are responsible for establishing and maintaining adequate internal control over financial reporting. As defined in the securities laws, internal control over financial reporting is a process designed by, or under the supervision of, our principal executive and principal financial officer and effected by our Board of Directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the acquisitions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Interim Chief Financial Officer, we carried out an evaluation of the effectiveness of our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) as of December 31, 20202023 based on the criteria in “Internal Control - Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in 2013. Based upon this evaluation, we concluded that our internal control over financial reporting was not effective as of December 31, 2020 due to2023.
The rules of the following material weakness identified first identified during the second quarterSEC do not require, and this Annual Report on Form 10-K does not include, an attestation report of 2019.
an independent registered public accounting firm regarding internal control over financial reporting.
Material Weakness in Internal ControlsRemediation Activities. Management has
In connection with management’s assessment of controls over financial reporting during the year ended December 31, 2022, we determined that we havehad not maintained adequate accounting resources with a sufficient understanding of U.S. GAAP to allow us to properly identify and account for new complex transactions. Management has determined thatTo remediate this represents a material weakness, in our internal control over financial reporting. Notwithstanding the material weakness in our internal control over financial reporting, we have concluded that the consolidated financial statements and other financial information included in our annual and quarterly filings fairly present in all material respects our financial condition, results of operations and cash flows as of, and for, the periods presented.
Material Weakness Remediation Activities
To remediate the material weakness in our internal control over financial reporting described above, we have reevaluated our overall staffing levels within the accounting department and, as a result, during the fourthsecond quarter of 20192023 we hired an additional resourcesresource with qualifications that include a high level of experience with complex technical accounting transactions and application of U.S. GAAP. InWe have improved our procedures for evaluating complex accounting transactions as well as our reporting procedures through the firstinvolvement of this additional resource.
During the quarter ended September 30, 2023, we determined that we had a material weakness as we had not maintained effective information technology general controls in the areas of user access management, administrative user access, and segregation of duties within our financial information systems and other financial reporting controls that are relevant to our preparation of financial statements. As a result of those segregation of duties deficiencies, the related manual business process controls were determined to be ineffective. To remediate this material weakness, we evaluated logical access, including administrative user access, eliminated certain segregation of duties conflicts, and implemented additional compensating controls. During the fourth quarter of 2020,2023, we designed, implemented, and tested logical access controls to monitor user access and manage changes to user access. We also engaged an external accounting consultantdesigned, implemented, and tested information technology application controls to assistenforce proper segregation of duties.
Remediation of Material Weaknesses
During the fourth quarter of 2023, with the assessmentassistance of new complex transactions, which has been ongoing to date. We have completed internal control remediation testing utilizing an external consulting company. We have also re-evaluated the trainingcompany, we tested and ongoing professional education that is providedadopted changes to and required of, our accounting personnel.
Once the above actions and processes have been in operation for a sufficient period of time for our management to conclude that the material weakness has been fully remediated and our internal controlscontrol over financial reporting related to our remediation efforts described above that materially affected, or are effective, we will consider this material weakness fully addressed.
This annual report does not include an attestation report of Baker Tilly US, LLP,reasonably likely to materially affect, our independent registered public accounting firm, regarding internal control over financial reporting. Our management report was not subject to attestation by our independent registered public accounting firm pursuant to Section 989GBased on the actions taken, as well as the evaluation of the Dodd-Frank Wall Street Reformdesign, implementation, and Consumer Protection Act, which exempts nonaccelerated filers fromoperating effectiveness of the independent registered public accounting firm attestation requirement.new controls, we determined that the material weaknesses have been remediated as of December 31, 2023.
Changes in Internal Control Over Financial Reporting
ThereExcept for the changes described above, there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during the three months ended December 31, 20202023, that has materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS.
None.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The Board may be increased or decreased from time to time by resolution of the stockholders or the Board. Our Board presently consists of seven directors. Directors are elected at each annual meeting, and each director shall serve until his or her term expires, his or her earlier death, or a successor is elected and qualified or until the director resigns or is removed. Directors are elected by the highest numbera plurality of votes cast at a meeting at which a quorum is present. Any vacancies may be filled by the vote of a majority of the Board of Directors, although less than a quorum, and any such person elected to fill a vacancy shall serve as a director untilfor a term that coincides with the next annual meetingterm of stockholders.
the class to which such director shall have been elected. See “Classified Board of Directors” below.
The Board does not intend to alter the manner in which it evaluates candidates for the Board based on whether or not the candidate was recommended by a stockholder. To submit a candidate for consideration for nomination, stockholders must submit such nomination in writing to our Secretary at 2915 Commers Drive,91 43rd Street, Suite 900, Eagan, MN 55121.110, Pittsburgh, PA 15201.
Executive Officers and Directors of the Registrant
The following table identifies the individuals who serve as our executive officers and directors for the year ended December 31, 2020:as of March 18, 2024:
Name | Age | Position Held | ||
Carl Schwartz | (4) (5) | 80 | Chief Executive Officer and Director | |
Bob Myers | 66 | Chief Financial Officer | ||
J. Melville Engle | (1) (2) (3) | 71 | Director | |
Nancy Chung-Welch, Ph.D. | (2) (4) (7) | 60 | Director | |
Richard L. Gabriel | (4) | 72 | Director | |
Daniel E. Handley, Ph.D. | (3) (6) | 61 | Director | |
Chuck Nuzum | (1) (2) (8) | 72 | Director | |
Gregory S. St.Clair | (1) (9) | 55 | Director | |
Thomas J. McGoldrick | (2) (3) (4) (10) | 79 | Director | |
Gerald J. Vardzel, Jr. | (11) | 55 | Director | |
Pamela S. Prior | (1) (12) | 59 | Director | |
Andrew P. Reding | (1) (13) | 51 | Director |
Name
There are no family relationships among our directors and executive officers. Our executive officers are appointed by our Board of Directors and serve at the Board’s discretion. 43
Classified Board of Directors
The Board of Directors met eight times in fiscal year 2023. Business Experience
Josh Blacher. Mr. Blacher was appointed as our Interim Chief Financial Officer effective September 30, 2023. Mr. Blacher has served as a consultant with Danforth Advisors, LLC since September 2022 and as Managing Partner of Columbus Circle Capital LLC (“Columbus Circle Capital”) since August 2019. During his tenure at Columbus Circle Capital, Mr. Blacher has served as CFO at several public and private companies. Prior to his tenure at Columbus Circle Capital, Mr. Blacher served as Chief Business Officer at Inmed Pharmaceuticals (Nasdaq: INM) from April 2018 to August 2019, as Chief Financial Officer of Daniel E. HandleyM.S., Ph.D. Dr. Handley was appointed to the Board on February 19, 2020. He serves as a Professor and the Director of the Clinical and Translational Genome Research Institute of Southern California University of Health Sciences. Previously, he was the Chief Scientific Officer of the Clinical and Translational Genome Research Institute, a Florida 501(c)3 non-profit corporation. During that time, he also held a courtesy faculty appointment in the Department of Biological Sciences at Florida Gulf Coast University. He previously served as the Chief Scientific Officer for Advanced Healthcare Technology Solutions, Inc., Life-Seq, LLC, as a senior researcher at the Procter & Gamble Co., a senior administrator, researcher, and laboratory manager at the David Geffen UCLA School of Medicine, and as a founding biotechnology inventor for the National Genetics Institute. He holds a B.A. in Biophysics from Johns Hopkins University, an M.S. in Logic and Computation from Carnegie Mellon University, a Ph.D. in Human Genetics from the University of Pittsburgh. He completed his post-doctoral training at Magee-Women’s Research Institute researching advanced genomic technologies applied to fetal and maternal health. He is a decorated veteran of the U.S. Navy, having served as a nuclear propulsion instructor and a submarine nuclear reactor operator. 44 Chuck Nuzum. Mr. Nuzum was appointed to the Board on July 9, 2020. Mr. Nuzum has extensive experience as a CFO Gregory S. St. Clair. Mr. St. Clair was appointed to the Board on July 9, 2020. Mr. St. Clair is the Founder and Managing Member of SunStone Consulting, LLC, a Huntington, Pennsylvania.
Nancy Chung-Welch, Ph.D. Dr. Chung-Welch was appointed to the Board on July 9, 2020. Dr. Chung-Welch is currently an independent consultant advising life science companies and their institutional investors on life science companies, technologies and industries with an emphasis on the research product/tools market. Previously she was a Director, Business Development at Cell Signaling Technology and was Director, Business Development at Thermo Fisher Scientific and Technical Marketing Manager for Fisher Scientific. She has over 25 years of marketing and business development experience in the life sciences market. Dr. Chung-Welch has a balanced blend of business and technical/analytical strengths to provide sound foundation for technology/IP assessments and external partnerships. She has a strong record of domestic and international experience in business and customer needs analysis, technology assessment, licensing, distribution deals, partnerships, strategic alliances, strategic customer relationships, mergers/acquisitions. She previously served as Instructor in Surgery and Assistant in Physiology at Harvard Medical School and the Massachusetts General Hospital with expertise in basic science research, including cell biology, tissue culture, vascular physiology, genomics, proteomics, and lab automation applications. She is also a hands-on marketing executive and has conceptualized, launched, and managed products and services in the laboratory, medical, biotech/pharma, academic and government markets. She received her Ph.D. in Vascular Physiology and Cell Biology from Boston University.
45
The Board of Directors has a standing Audit Committee, Compensation Committee, Nominating and Below is a description of each committee of the Board of Directors as such committees are presently constituted.
Financial Expert
The Audit Committee
Both our independent registered public accounting firm and Committee. Our Audit Committee currently consists of Mr. Nuzum, as the chairperson, Dr. Chung-Welch, Mr. St. Clair, and
Rule 5605(a)(2) of the NASDAQ listing standards). The Board has determined that Mr. Nuzum meets the criteria as an “audit committee financial expert,” as defined in Item 407(d)(5)(ii) of Regulation S-K under the Securities Act of 1933, as amended. The Audit Committee met seven times in fiscal year 2023.
46 Compensation Committee
The Compensation Committee of the Board of Directors currently consists of The functions of the Compensation Committee include, among other things:
All Compensation Committee approvals regarding compensation to be paid or awarded to our executive officers are rendered with the full power of the Board, though not necessarily reviewed by the full Board.
Our Chief Executive Officer may not be present during any Board or Compensation Committee voting or deliberations with respect to his compensation. Our Chief Executive Officer may, however, be present during any other voting or deliberations regarding compensation of our other executive officers but may not vote on such items of business.
Compensation Committee Interlocks and Insider Participation
The
during fiscal year 2023.
In furtherance of its
47
In addition, the Committee, if and when deemed appropriate by the Board or the Committee, develops and recommends to the Board a set of corporate governance principles applicable to the Company, and reviews and reassesses the adequacy of such guidelines annually and recommends to the Board any changes deemed appropriate. The Committee also advises the Board on (1) committee member qualifications, (2) appointments, removals and rotation of committee members, (3) committee structure and operations (including authority to delegate to subcommittees), and (4) committee reporting to the Board. Finally, the Committee performs any other activities consistent with
The Committee has the authority to obtain advice and seek assistance from internal or external legal, accounting or other advisors. The Committee has the sole authority to retain and terminate any search firm to be used to identify director candidates, including sole authority to approve such search firm’s fees and other retention terms.
Merger & Acquisition Committee
The Merger & Acquisition Committee of the Board of Directors currently consists of Mr.
Diversity
The Nominating and Governance Committee of the Board of Directors basis of their sex, ethnicity, religion, disability, national origin, sexual orientation or identification, veteran status, race or age). Pursuant to Rules 5605(f) and 5606 of the NASDAQ listing standards, we have made our board diversity matrix available on our website at https://predictive-oncology.com/ under the “For Investors” and “Corporate Governance” tabs.
Delinquent Section 16(a)
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our officers and directors, and persons who own more than ten percent of a registered class of our equity securities, to file reports of ownership and changes in ownership of such securities with the Securities and Exchange Commission.
48 Code of Ethics
We have adopted a Code of Ethics that applies to all Recoupment of Incentive Compensation Policy We have adopted a Recoupment of Incentive Compensation Policy that applies to certain executive compensation in the event of an accounting restatement to correct a material error. Our policy satisfies the requirements as defined in Rule 5608(d) of the Nasdaq Marketplace Rules and is included as an exhibit to this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
Overview
This section describes the material elements of the compensation awarded to, earned by or paid to (i) each individual who served as our
We did not have any other executive officers, as determined in accordance with SEC rules, during 2023.
Summary Compensation Table for Fiscal 2022
The following table provides information regarding the compensation awarded to or earned by each of the Named Executive Officers during the fiscal years ended December 31,
49
Outstanding Equity Awards at Fiscal Year-end for Fiscal 2023
The following table sets forth certain information regarding outstanding equity awards held by the named executive officers as of December 31,
Executive Compensation Components for Fiscal 2023
Base Salary. Base salary is an important element of our executive compensation program as it provides executives with a fixed, regular, non-contingent earnings stream to support annual living and other expenses. As a component of total compensation, we generally set base salaries at levels believed to attract and retain an experienced management team that will successfully grow our business and create stockholder value. We also utilize base salaries to reward individual performance and contributions to our overall business objectives but seek to do so in a manner that does not detract from the executives’ incentive to realize additional compensation through our
The Compensation Committee reviews the Chief Executive Officer’s salary at least annually. The Compensation Committee may recommend adjustments to the Chief Executive Officer’s base salary based upon the Compensation Committee’s review of his current base salary, incentive cash compensation and equity-based compensation, as well as his performance and comparative market data. The Compensation Committee also reviews other executives’ salaries throughout the year, with input from the Chief Executive Officer. The Compensation Committee may recommend adjustments to other executives’ base salary based upon the Chief Executive Officer’s recommendation and the reviewed executives’ responsibilities, experience, and performance, as well as comparative market data. 50
In utilizing comparative data, the Compensation Committee seeks to recommend salaries for each executive at a level that is appropriate after giving consideration to experience for the relevant position and the executive’s performance. The Compensation Committee reviews performance for both our Company (based upon achievement of strategic initiatives) and each individual executive. Based upon these factors, the Compensation Committee may recommend adjustments to base salaries to better align individual compensation with comparative market compensation, to provide merit-based increases based upon individual or company achievement, or to account for changes in roles and responsibilities.
Bonuses.
Directors based on the Compensation Committee’s determination of the performance of the executive officer.
Stock Options and Other Equity Grants. Consistent with our compensation philosophies related to performance-based compensation, long-term stockholder value creation and alignment of executive interests with those of stockholders, we may make periodic grants of long-term incentive compensation in the form of stock options or other equity-based incentive award to our executive officers, directors, and others in the organization.
Stock options provide executive officers, directors, and other employees with the opportunity to purchase common stock at a price fixed on the grant date regardless of future market price. A stock option becomes valuable only if the common stock price increases above the option exercise price and the holder of the option remains employed or appointed during the period required for the option shares to vest. This provides an incentive for an option holder to remain employed or appointed by us. In addition, stock options link
awards.
Limited Perquisites; Other Benefits. We provide our employees, including our executive officers, with a full complement of employee benefits, including health and dental insurance, short term and long-term disability insurance, life insurance, a 401(k) plan, FSA flex plan and Section 125 plan. Long Term Incentive Plan for Executive Officers
On May 17, 2021, the Committee adopted and approved a 2021 Long Term Incentive Plan (the “LTIP”) to provide incentives to the Company’s executive officers over the three-year performance period consisting of fiscal years 2021, 2022 and 2023. Under the LTIP, in May 2021, the Company granted restricted stock units (“RSUs”) to the Company’s then-current CFO, Bob Myers, under the 2012 Plan. The LTIP awards consisted of 7,500 RSUs (target). These RSUs required continued employment of the executive through January 1, 2024, and therefore were terminated before vesting as a result of Mr. Myers’ departure from the Company in 2023. 51 Employment Contracts
Employment Agreement with Current Chief Executive
On Under the Agreement, Mr. Vennare’s employment The Agreement also contains customary provisions with respect to confidentiality and intellectual property, in addition to ones prohibiting Mr. Vennare from soliciting the Company’s employees and from engaging in certain activities that are competitive with the Company for a period of 12 months after termination of his employment. Employment Agreement with former Chief Financial Officer. Effective September 30, 2023, Mr. Bob Myers resigned as the Chief Financial Officer. Mr. Myers served as Chief
$380,880. On September 23, 2020,
objectives.
Mr. Myers 52
disease.
Potential Payments Upon Termination or Change of Control
Most of our stock option agreements provide for an acceleration of vesting in the event of a change in control as defined in the agreements and in the 2012 Director Compensation
Effective June 17, 2021 the Board adopted a Director Compensation Program under which the members of the Board of Directors receive quarterly awards of common stock and cash as compensation for their services as directors and annual awards of common stock and cash for services as committee members. These awards were implemented to replace a previous program of quarterly stock option grants to directors. The June 2020 annual common stock award remains in place as described below.
The compensation program pays all of the compensation in the form of stock and cash awards (with the cash component payable in additional shares at the election of the director. The cash component is equal to 28% of the total value of the award (or 38.9% of the share component of the award), intended to pay the tax on the full award. Each director receives a quarterly award of $8,333 payable on the last day of the quarter, consisting of (i) shares with a value of $6,000 and (ii) $2,333 in cash (or additional shares). For each board committee, each director receives an additional annual award of $11,112, consisting of (i) shares with a value of $8,000 and (ii) $3,112 in cash (or additional shares), payable on December 31. Starting in 2022, director compensation became limited to Non-Employee Directors (directors who are not employees of Predictive Oncology or any subsidiary and who do not receive regular long-term cash compensation as consultants). Effective as of January 25, 2023, under an Amended and Restated Director Compensation Program, the Lead Independent Director, will also receive an annual award of $11,112, consisting of (i) shares with a value of $8,000 and (ii) $3,112 in cash (or additional shares).
Effective on June 16, 2020, the Board instituted an annual common stock award for all the directors under which they will receive $7,000 in value of newly issued shares of common stock, par value $0.01 per year annually for three years,
53
Director Compensation Table for Fiscal 2023
The following table summarizes the compensation paid to each 2023:
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
Equity Compensation Plan Information
The following table presents the equity compensation plan information as of December 31, 2023:
54
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth as of
We have determined beneficial ownership in accordance with Rule 13d-3 under the Exchange Act. Beneficial ownership generally means having sole or shared voting or investment power with respect to securities. We are not aware of any beneficial owners of more than 5% of our issued and outstanding common stock as of March 8, 2024. Unless otherwise indicated in the footnotes to the table, each stockholder named in the table has sole voting and investment power with respect to the shares of common stock set forth opposite the stockholder’s name. We have based our calculation of the percentage of beneficial ownership on 110 Pittsburgh, Pennsylvania 15201.
55
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The Audit Committee has the responsibility to review and approve all transactions to which a related party and we may be a party prior to their implementation, to assess whether such transactions meet applicable legal requirements. Pursuant to the Charter of the Audit Committee, every transaction that must be disclosed pursuant to Item 404(a) of Regulation S-K promulgated under the Exchange Act must be reviewed and approved by the Audit Committee.
During
Information regarding director independence is disclosed under Item 10, above.
ITEM 14. PRINCIPAL
In connection with the audit of the fiscal
The following table represents aggregate fees billed to us by BDO USA, P.C. (“BDO”), the Company’s independent public accounting firm for the fiscal
56
ITEM 15.
The following exhibits and financial statements are filed as part of, or are incorporated by reference into, this report:
(1)Financial Statements
The following financial statements are filed with this Annual Report on Form 10-K and can be found beginning at page F-1 of this report:
(2) Financial Statement Schedules
All schedules for which provision is made in the applicable accounting regulations of the SEC have been omitted because the information required to be shown in the schedules is not applicable or is included elsewhere in the financial statements and Notes to Consolidated Financial Statements.
(3) Exhibits
57 58 59 60
**Compensatory Plan or arrangement required to be filed pursuant to Item 15(b) of ***Furnished herewith.
None.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 28, 2024
Predictive Oncology Inc.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
The audited consolidated financial statements for the periods ended December 31,
INDEX TO FINANCIAL STATEMENTS
63
Stockholders and Board of Directors Predictive Oncology Inc. Pittsburgh, Pennsylvania Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheet of Predictive Oncology Inc. (the “Company”) as of December 31, 2023, the related consolidated statements of net loss, stockholders’ equity, and cash flows for the year then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2023, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. We also have audited the adjustments to the 2022 consolidated financial statements to retrospectively apply the changes in the share and per share amounts to reflect the reverse stock split and in the change in the reportable segments, as discussed in Notes 1 and 14, respectively. In our opinion, such adjustments are appropriate and have been properly applied. We were not engaged to audit, review, or apply any procedures to the 2022 consolidated financial statements of the Company other than with respect to the adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2022 consolidated financial statements taken as a whole. Going Concern Uncertainty The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations and has an accumulated deficit that raises substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates. Revenue Recognition – Evaluation of Contract Terms in Certain Contracts with Customers The Company has revenues of $1,780,093 for the year ended December 31, 2023. As described in Note 1 of the consolidated financial statements, the Company derives its revenues primarily from Contract Research Organization (“CRO”) services, sales of medical device products, or maintenance plan services. The Company recognizes revenue in accordance with the five-step process outlined in ASC 606. We identified the evaluation of contract terms in certain contracts with customers as a critical audit matter, due to the significant judgment by management in identifying and evaluating terms and conditions in contracts that impact revenue recognition. Auditing these elements involved especially subjective and complex auditor judgments due to the nature and extent of audit effort required. The primary procedures we performed to address this critical audit matter included:
/s/ BDO USA, P.C. We have served as the Company's auditor since 2023. Minneapolis, Minnesota March 28, 2024 Report Of Independent Registered Public Accounting Firm To the shareholders and the board of directors of Predictive Oncology Inc.:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit
/s/ Baker Tilly US, LLP
We
Minneapolis, Minnesota March
F-3 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS
See accompanying notes to CONSOLIDATED STATEMENTS OF NET LOSS
See accompanying notes to consolidated CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY FOR THE YEAR ENDED DECEMBER 31, 2023
See accompanying notes to consolidated financial statements. PREDICTIVE ONCOLOGY INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY FOR THE YEAR ENDED DECEMBER 31, 2022
See accompanying notes to consolidated financial statements. F-7 CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to unaudited consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations Predictive Oncology Inc. Predictive Oncology’s mission is to change the landscape of oncology drug discovery and The Company operates in three business areas. In its first area, the
Going Concern
The
F-9 Reverse Stock Split On April 19, 2023, the Company completed a one-for-twenty reverse stock split that was effective for trading purposes on April 24, 2023. All numbers of shares and per-share amounts in this report have been adjusted to reflect the reverse stock split (“Reverse Split”). Accounting Policies and Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities at the date of the financial statements and during the reporting period. Actual results could materially differ from those estimates. Principles of Consolidation The Company has two wholly owned subsidiaries, Helomics Corporation and Skyline Medical, Inc., as of and for the year ended December 31, 2023. The Company had multiple wholly owned subsidiaries for the year ended December 31, 2022. The consolidated financial statements include the accounts of the Company and these wholly owned subsidiaries after elimination of intercompany transactions and balances as of and for the years ended December 31, 2023, and 2022. Reclassifications Certain reclassifications have been made to the prior year’s consolidated financial statements to conform to the current year presentation. The reclassifications had no effect on previously reported results of operations, cash flows
Recent Accounting Pronouncements The Company considers the applicability and impact of all Accounting Standards Updates (“ASUs”) issued by the Financial Accounting Standards Board (the “FASB”). Recently issued ASUs not listed below either were assessed and determined to be not applicable or are currently expected to have no impact on the consolidated financial statements of the Company. In November 2023, the FASB issued ASU 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures.” This ASU updates reportable segment disclosures by expanding the frequency and extent of segment disclosures. This ASU will become effective for the Company’s fiscal year beginning January 1, 2024, and for the Company’s interim periods beginning in the Company’s fiscal year 2025. Early adoption is permitted and requires the retrospective adoption method. Management is currently evaluating this ASU to determine its impact on the Company’s disclosures. F-10 In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” This ASU requires more detailed income tax disclosures. The guidance requires entities to disclose disaggregated information about their effective tax rate reconciliation as well as expanded information on income taxes paid by jurisdiction. The disclosure requirements will be applied on a prospective basis, with the option to apply them retrospectively. The standard is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. Management is currently evaluating this ASU to determine its impact on the Company’s disclosures. Recently Adopted Accounting Standards
In In August 2020, the FASB issued ASU 2020-06, “Debt – Debt with Conversion and Other Options and Derivatives and Hedging – Contracts in Entity’s Own Equity” (“ASU 2020-06”). ASU 2020-06 eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of In September 2022, the FASB issued ASU 2022-04, “Liabilities – Supplier Finance Programs” (“ASU 2022-04”). ASU 2022-04 was issued to enhance the transparency of supplier finance programs used by an entity in connection with the purchase of goods and services. The standard requires entities that use supplier finance programs to disclose the key terms, including a description of payment terms, the confirmed amount outstanding under the program at the end of each reporting period, a description of where those obligations are presented on the balance sheet, and an annual rollforward, including the amount of obligations confirmed and the amount paid during the period. The guidance does not affect the recognition, measurement, or financial statement presentation of obligations covered by supplier finance programs. ASU 2022-04 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, except for the required rollforward information, which is effective for fiscal years beginning after December 15, 2023. The Company adopted ASU 2022-04 on January 1, 2023, using the retrospective approach, and its adoption did not have a material impact on the Company’s financial statements. Cash
The Company Federal Deposit Insurance Corporation.
F-11
Receivables
Receivables are reported at the amount the Company expects to collect on balances outstanding. The Company provides for probable uncollectible amounts through charges to earnings and credits to the valuation allowance based on management’s assessment of the
Amounts recorded in accounts receivable on the consolidated balance
Fair Value Measurements
As outlined in
Level 1 – Observable inputs such as quoted prices in active markets;
Level 2 – Inputs other than quoted prices in active markets, that are observable either directly or indirectly; and
Level 3 – Unobservable inputs where there is little or no market data, which requires the reporting entity to develop its own assumptions.
The Company uses observable market data
The fair
When comparing the carrying amount of an asset group to its fair value as part of a long-lived asset impairment analysis, the Company estimates the fair value of the asset group by making assumptions about the long-lived assets comprising the asset group. The majority of the inputs used by the Company to estimate the fair value of the long-lived assets are unobservable and thus are considered to be Level 3 inputs. See Note 4 – Property and Equipment and Note 5 – Intangible Assets.
When performing quantitative testing related to goodwill impairment analysis, the Company estimates the fair values of its reporting units using discounted cash flows. To determine fair values, the Company is required to make assumptions about a wide variety of internal and external factors. Significant assumptions used in the impairment analysis include financial projections of free cash flow (including significant assumptions about operations including the rate of future revenue growth, capital requirements, and income taxes), long-term growth rates for determining terminal value and discount rates. The majority of the inputs used in the discounted cash flow model are unobservable and thus are considered to be Level 3 inputs. See Note 5 – Intangible Assets. Inventories
Inventories are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis.
F-12
Upon retirement or sale of
Finite-lived intangible assets consist of patents and trademarks, licensing fees, developed technology,
Long-lived Assets The Company reviews
The recoverability of an asset to be held and used is determined by comparing the carrying amount to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated undiscounted future cash flows, the Company
Goodwill
In accordance with ASC 350, Intangibles – Goodwill and Other, goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the fair value of net assets acquired. Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination. Goodwill is not amortized but
To determine whether goodwill is impaired, F-13 Leases
ROU assets represent our right to use an underlying asset for the duration of the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Recognition on the commencement date is based on the present value of lease payments over the lease term using an incremental borrowing rate. Leases with a term of 12 months or less at the commencement date are not recognized on the consolidated balance sheet and are expensed as incurred.
The Company has lease agreements with lease and non-lease components, which are accounted for as a single lease component for all asset classes. Variable lease payments generally represent the Company’s share of the landlord’s expenses and are recorded when incurred. Leases are accounted for at a portfolio level when similar in nature with identical or nearly identical provisions and similar effective dates and lease terms.
Collaboration Arrangements
The Company enters into collaboration arrangements with oncology drug development partners, under which the Company utilizes its active learning technology, proprietary biobank, and know-how to provide predictive models of tumor responses to various drug compounds and treatments of partners. Consideration under these contracts may include an upfront payment, development and regulatory milestones and other contingent payments, expense reimbursements, royalties based on net sales of approved drugs, and commercial sales milestone payments. The Company analyzes its collaboration arrangements to assess whether they are within the scope of ASC 808, Collaborative Arrangements, which includes determining whether such arrangements involve joint operating activities performed by parties that are both active participants in the activities and exposed to significant risks and rewards dependent on the commercial success of such activities. To the extent that the arrangement falls within the scope of ASC 808, the Company assesses whether the payments between the Company and its collaboration partner fall within the scope of other accounting literature. If the Company concludes that payments from the collaboration partner to the Company would represent consideration from a customer, the Company accounts for those payments within the scope of Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. However, if the Company concludes that its collaboration partner is not a customer for certain activities and associated payments, the Company presents such payments as a reduction of research and development expense or general and administrative expense, based on where the Company presents the underlying expense. F-14 Revenue Recognition
The Company recognizes revenue when it satisfies a performance obligation by transferring control of the promised goods or services to its customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The Company recognizes revenue in accordance with the five-step process outlined in ASC 606: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. Sales taxes are imposed on the Company’s sales to nonexempt customers. The Company collects the taxes from the customers and remits the entire
Revenues from Services The Company generates revenues from Contract Research Organization (“CRO”) services related to the development of 3D tumor-specific in vitro models for oncology drug discovery and research. The organ-specific disease models provide 3D reconstruction of human tissues accurately representing each disease state and mimicking drug response. Revenue from development of 3D models is reported under the Pittsburgh reportable segment. The Company also generates revenues from CRO services related to development of protein formulations and performance of protein stability analyses. Using the Company’s proprietary High Throughput Self-Interaction Chromatography (“HSC”) platform, the Company conducts screens on excipients previously approved by the FDA to develop protein formulations with increased solubility and physical stability. The Company also provides comprehensive protein stability analyses via time-dependent shelf-life studies and forced degradation studies designed to quickly determine which of the additives previously approved by the FDA will improve the solubility and stability of proteins in solutions. Revenues from development of protein formulations and performance of protein stability analyses are reported under the Birmingham reportable segment. The specific pattern of revenue recognition for CRO services is determined on a case-by-case basis according to the facts and circumstances applicable to a given contract. The Company may execute a master service agreement with a customer that provides terms and conditions for the relationship between the Company and the customer. Detailed Statements of Work (SOWs) are then prepared to outline the specific services to be provided. The SOW and master service agreement, if applicable, form the contract with the customer under ASC 606. The Company evaluates each product or service promised in a contract to determine whether it represents a distinct performance obligation. Determining whether services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Contracts for CRO services generally contain one performance obligation to perform research and deliver appropriate data or reporting. The Company typically requires partial payment for CRO services prior to performance of the research service with the remainder of the transaction price due 30 days after delivery of data or reporting. Revenues from CRO services are generally recognized at the point in time when data and reports are provided to customers. The Company also generates revenues from services provided under maintenance plans related to the Company’s STREAMWAY System. Customers may purchase maintenance plans, which require the Company to service the customer’s STREAMWAY System for a period of one year. Payment due under the maintenance plan is typically due at the start of the service period. The maintenance plan is considered a separate performance obligation from the sale of the STREAMWAY System, is charged separately from the product sale, and is recognized over time (ratably over the one-year period) as maintenance services are provided. A time-elapsed output method is used to measure progress toward complete satisfaction of the performance obligation because the Company transfers control evenly by providing a stand-ready service. The Company has determined that this method provides a faithful depiction of the transfer of services to its customers. Revenues from maintenance plans related to the Company’s STREAMWAY System are reported under the Eagan reportable segment. F-15
The Company
Product sales for medical devices consist of a single performance obligation that the Company satisfies at a point in
All amounts billed to a customer in a sales transaction for medical devices related to shipping and handling, if any, represent revenues earned for the goods provided, and these amounts have been included in revenue. Costs related to such shipping and handling billing are classified as cost of goods sold.
Royalty Revenue
Variable Consideration
The Company
its collaboration arrangement. See
Warranty
The Company generally provides one-year warranties against defects in materials and workmanship on product sales and will either repair the products or provide replacements at no charge to customers. As they are considered assurance-type warranties, the Company does not account for them as separate performance obligations. Warranty reserve requirements are based on a specific assessment of the products sold with warranties where a customer asserts a claim for warranty or a product defect.
Contract Balances
The Company records a receivable when it has an unconditional right to receive consideration after the performance obligations are satisfied. As of December 31,
Advance payments received in excess of revenues recognized are classified as contract liabilities until such time as the revenue recognition criteria have been met. The Company’s
F-16 Practical Expedients
The Company has elected
Stock-Based Compensation
The Company accounts for stock-based compensation expense in accordance with ASC 718, Compensation—Stock Compensation, which requires the Company to measure and recognize compensation expense in the financial statements based on the fair value at the date of grant for stock-based awards. The Company recognizes compensation expense for service-based equity-classified awards over their requisite service period and adjusts for forfeitures as they occur.
ASC 718 requires companies to estimate the fair value of stock-based payment awards on the date of grant using an option-pricing model. The Company uses the Black-Scholes option-pricing model which requires the input of significant assumptions including an estimate of the average period of time employees and When an option or warrant is granted in place of cash compensation for services, the Company deems the value of the service rendered to be the value of the option or warrant. In most cases, however, an option or warrant is granted in addition to other forms of compensation and its separate value is difficult to determine without utilizing an option pricing model. For that reason the Company also uses the Black-Scholes option-pricing model to value options and warrants granted to non-employees, which requires the input of significant assumptions including an estimate of the average period that investors or consultants will retain vested stock options and warrants before exercising them, the estimated volatility of the Company’s common stock price over the expected term, and the risk-free interest rate. In the case of options granted to employees, the Company estimates the life to be the legal term.
The Company also has certain awards which vest upon a combination of the satisfaction of service-based and performance-based conditions. The performance-based conditions generally are satisfied upon achieving specified performance targets, such as financial or operating metrics, and/or market performance of the Company’s common stock. For performance-based awards, the Company generally recognizes expense over the requisite service period unless there is a compelling reason to make it shorter and when performance-based conditions are considered probable to be satisfied. For market-based awards, the Company determines the Changes in the assumptions can materially affect the estimate of fair value of
On January 1, 2023, the Company adopted a sequencing policy under ASC 815-40-35 (“ASC 815”) that will apply if reclassification of contracts from equity to liabilities is earliest financial instruments receiving the first allocation of shares. Pursuant to ASC 815, stock-based awards issued to the Company’s employees are not subject to the sequencing policy.
F-17
Research and Development
Research and development costs are charged to operations as incurred. Research and development costs, included within operations expense in the accompanying consolidated statements of net loss were
Income Taxes
The Company accounts for income taxes in accordance with ASC 740, Income Taxes (“ASC 740”). Under ASC 740, deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and net operating loss and credit carryforwards using enacted tax rates in effect for the year in which the differences are expected to impact taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.
The Company reviews income tax positions expected to be taken in income tax returns to determine if there are any income tax uncertainties. The Company recognizes tax benefits from uncertain tax positions only if it is more likely than not that the tax positions will be sustained on examination by taxing authorities, based on technical merits of the positions. The Company has identified no income tax uncertainties.
Under Internal Revenue Code Section 382, certain stock transactions See Note 10 – Income Taxes.
Tax years
Credit Risk
Financial instruments
Risks and Uncertainties
The Company is subject to risks common to companies in the medical device and biopharmaceutical industries, including, but not limited to, development by the Company or its competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, and compliance with regulations of the Food and Drug Administration, Clinical Laboratory Improvement Amendments, and other governmental agencies.
The Company is also subject to general economic and geopolitical uncertainties caused by inflation, rising interest rates, supply chain disruptions, tight labor markets, wage inflation, pricing volatility for certain goods and services, banking and financial sector disruptions, instability and volatility in the global markets, disruptions from a global pandemic, and geopolitical conflict. The impacts of economic and other global events could have a material adverse effect on our business, results of operations, liquidity or financial condition and heighten or exacerbate risks related to the Company. The Company has evaluated all
F-18 NOTE 2 –
NOTE 3 – INVENTORIES Inventory balances consist of the
NOTE 4 – PROPERTY AND EQUIPMENT The Company’s property and equipment consist of the
In the second quarter of 2023, the Company identified a change in future projected cash flows related to its Birmingham asset group. The Company prepared an undiscounted cash flow for its Birmingham asset group as of June 30, 2023, as required under ASC 360 and determined the carrying amount of the asset group exceeded its estimated undiscounted future cash flows. The Company determined the fair value of the In the fourth quarter of 2022, the Company identified a
2022. The Company F-19 Depreciation expense was $711,890 and $898,369 in 2023 and 2022, respectively. NOTE 5 – INTANGIBLE ASSETS
Finite-lived Intangible Assets
Finite-lived intangible assets
The components of intangible assets were as follows:
The following table outlines the estimated future amortization expense related to intangible assets held as of December 31, 2023:
No impairment charges related to finite-lived intangible assets were incurred during the year ended December 31, 2023. In the fourth quarter of 2022, the Company identified a change in its future projected cash flows related to certain of its asset groups. The Company prepared an undiscounted cash flow for these asset groups as of December 31, 2022 as required under ASC 360 and determined the carrying amounts exceeded the estimated undiscounted future cash flows for those asset groups. The Company determined the fair value of the asset groups and concluded that the finite-lived intangible assets of its former zPREDICTA asset group, which is now reported within the Pittsburgh operating segment, were fully impaired as of December 31, 2022, and recognized an impairment loss of $3,349,375 on those finite-lived intangible assets during the fourth quarter of 2022. The Company also recognized an impairment loss on its property and equipment in the Soluble and Corporate asset groups during the fourth quarter of 2022. See Note 4 – Property and Equipment. F-20 Goodwill Goodwill of
Pittsburgh operating segment.
NOTE 6 – LEASES The Company’s corporate offices and other offices are in Pittsburgh, Pennsylvania. Upon expiration of previous leases for office space and laboratory operations, the Company entered two new leases for office space and laboratory operations on January 4, 2023. The leases each have an approximate five-year term ending February 29, 2028, and the Company recorded corresponding right of use (“ROU”) assets and liabilities of $2,922,365.
The Company has an effective through August 31, 2025.
The Company
The following table
F-21 The Company’s operating lease obligation as of December 31,
In
NOTE 8 – DERIVATIVES Certain warrants issued to
The fair value of The fair value of the
May 2025.
The table below discloses changes in value of the Company’s embedded derivative liabilities discussed above.
F-22 NOTE 9 – STOCKHOLDERS’ EQUITY, STOCK OPTIONS AND WARRANTS Series F Preferred Stock Dividend and Reverse Stock Split On March 16, 2023, the Board of Directors of the Company authorized the issuance of 80,000 shares of Series F Preferred Stock, par value $0.01 per share. On March 16, 2023, the Board of Directors of the Company declared a dividend of one one-thousandth of a share of Series F Preferred Stock, par value $0.01 per share, for each outstanding share of the Company’s common stock held on record as of March 27, 2023. 79,404 shares of Series F Preferred Stock were issued pursuant to the stock dividend. Each share of Series F Preferred Stock entitled the holder thereof to 1,000,000 votes per share to vote together with the outstanding shares of common stock of the Company as a single class to adopt an amendment to the Company’s Certificate of Incorporation to affect a reverse stock split. On April 19, 2023, the Company completed a one-for-twenty reverse stock split that was effective for trading purposes on April 24, 2023. No fractional shares were issued as a result of the reverse stock split. Any fractional shares that would otherwise have resulted from the reverse stock split were rounded up to the next whole number. The number of authorized shares of common stock under the Company’s certificate of incorporation, as amended, remained unchanged at 200,000,000 shares. All numbers of shares and per-share amounts in this report have been adjusted to reflect the reverse split. Proportionate reductions were made to the number of shares of common stock reserved for future issuance under our 2012 Equity Incentive Plan and the number of shares of common stock that may be issued upon exercise or vesting of outstanding equity incentive awards and warrants, and proportionate increases were made to the exercise price or share-based performance criteria, if any, applicable to such awards and warrants. Redemption of Series F Preferred Stock On April 17, 2023, the Company convened a special meeting of stockholders, which was adjourned due to the lack of a quorum and reconvened on April 19, 2023 (the “Special Meeting”), at which the Company’s stockholders approved a proposal to amend the Company’s certificate of incorporation to effect a reverse stock split of the Company’s common stock at a ratio in the range of 1-for-2 to 1-for-25, with such ratio to be determined by the Company’s Board of Directors (the “Reverse Split Proposal”). All shares of Series F Preferred Stock that were not present in person or by proxy at the Special Meeting as of immediately prior to the opening of the polls (the “Initial Redemption Time”) were automatically redeemed (the “Initial Redemption”). All outstanding shares of Series F Preferred Stock that were not redeemed pursuant to the Initial Redemption were redeemed automatically upon the approval by the Company’s stockholders of the Reverse Split Proposal (the “Subsequent Redemption” and, together with the Initial Redemption, the “Redemption”). Both the Initial Redemption and the Subsequent Redemption occurred on April 19, 2023. As a result, no shares of Series F Preferred Stock remain outstanding. May 2022 Offerings On May 16, 2022, the Company issued and sold an aggregate of 191,864 shares of its common stock, at a purchase price of $12.00 per share to several institutional and accredited investors in a registered direct offering (the “First Offering”). Pursuant to the securities purchase agreement, the Company also agreed to issue to these purchasers unregistered warrants to purchase up to an aggregate of 191,864 shares of common stock (the “Warrants”) in a concurrent private placement. The Warrants have an exercise price equal to $14.00 per share, will become exercisable six months from the date of issuance, and will expire five and one-half years from the date of issuance. In addition, in a concurrent registered direct offering (the “Second Offering”), on May 16, 2022, the Company issued and sold to several institutional and accredited investors an aggregate of 408,136 shares of its common stock, at a purchase price of $12.00 per share. The Company also entered into a warrant amendment agreement (the “Warrant Amendment”) with each of the purchasers in the Second Offering. Under the Warrant Amendment, the Company agreed to amend certain existing warrants to purchase up to 816,272 shares of common stock that were previously issued in 2020 and 2021 to those purchasers, with exercise prices ranging from $20.00 to $40.00 per share (the “Existing Warrants”), were amended to: (i) lower the exercise price of the Existing Warrants to $14.00 per share, (ii) provide that the Existing Warrants, as amended, will not be exercisable until six months following the closing date of the Second Offering, and (iii) extend the original expiration date of the Existing Warrants by five and one-half years following the close of the Second Offering.
F-23
Equity Line On October 24, 2019, the Company entered into an equity purchase agreement with an investor, providing for an equity financing facility. According to the terms and subject to the conditions in the purchase agreement, the investor was committed to purchase shares having an aggregate value of up to $15,000,000 of the Company’s common stock for a period of up to three years. The Company issued to the investor 5,233 commitment shares at a fair market value of $450,000 for entering into the agreement. From time to time during the three-year commitment period, provided that the closing conditions were satisfied, the Company could provide the investor with put notices to purchase a specified number of shares subject to certain limitations and conditions and at specified prices, which generally represent discounts to the market price of the common stock. During the year ended December 31, 2022, the Company issued 15,750 shares of its common stock valued at $236,009 pursuant to the equity line. In connection with the May 2022 offerings, the Company agreed not to access the remaining balance for a period of one year after the closing date, or May 18, 2022. The equity line expired on October 23, 2022. Series B Convertible Preferred Stock As of December 31, 2023, and December 31, 2022, there were 79,246 shares of Series B Convertible Preferred Stock outstanding. The conversion rate of Series B Convertible Preferred Stock to Common Stock is subject to appropriate adjustment in the event of stock dividends, stock splits, reorganizations, or similar events. The 79,246 shares of Series B Convertible Preferred Stock outstanding at December 31, 2023 were convertible to 16 shares of common stock. In addition, the Series B Convertible Preferred Stock will automatically convert into shares of common stock upon the occurrence of a fundamental transaction, as described in the certificate of designations for the Series B Convertible Preferred Stock including mergers, sales of the company’s assets, changes in control and similar transactions. The Series B Convertible Preferred Stock is not convertible by the holder of such preferred stock to the extent (and only to the extent) that the holder or any of its affiliates would beneficially own in excess of 4.99% of the common stock of the Company. The Series B Convertible Preferred Stock has no voting rights, except for the right to approve certain amendments to the certificate of designations or similar actions. With respect to payment of dividends and distribution of assets upon liquidation or dissolution or winding up of the Company, the Series B Convertible Preferred Stock shall rank equal to the common stock of the Company. No sinking fund has been established for the retirement or redemption of the Series B Convertible Preferred Stock. Equity Incentive Plan The Company’s Amended and Restated 2012 Stock Incentive Plan (the “2012 Plan”) allows for the issuance of incentive and non-qualified stock options, stock appreciation rights, stock awards, restricted stock, restricted stock units (“RSUs”) and performance awards to employees, directors, and consultants of the Company, where permitted under the plan. The exercise price for each stock option is determined by the market price on the date of issuance. Vesting requirements are determined by the Board of Directors when granted and currently range from immediate to three years. Options outstanding under this plan have a contractual life of ten years. On December 1, 2022, during the 2022 annual meeting of stockholders (the “Annual Meeting”), the stockholders approved a proposal to increase the reserve shares of common stock authorized for issuance under the Amended and Restated 2012 Stock Incentive Plan by 162,500 to 287,500 reserve shares. F-24 ASC 718, Compensation – Stock Compensation (“ASC 718”), requires that a company that issues equity as compensation needs to record compensation expense on its statements of net loss that corresponds to the estimated cost of those equity grants. ASC 718 requires companies to estimate the fair value of stock-based payment awards on the date of grant using an option-pricing model or other acceptable means. During the year ended December 31, 2021, the Company issued 22,500 RSUs under the plan which had market, performance, and service vesting conditions through January 1, 2024. 16,667 RSUs became vested during the year ended December 31, 2022. At December 31, 2022, there were 4,167 RSUs outstanding under the plan. At December 31, 2023, there were no RSUs outstanding under the plan. Valuation and Accounting for Stock Options and Warrants The Company determines the grant date fair value of options and warrants using a Black-Scholes option valuation model based upon assumptions regarding risk-free interest rate, expected dividend rate, volatility, and estimated term. See Note 1 – Summary of Significant Accounting Policies. The fair value of each option and warrant grant is estimated on the grant date using the Black-Scholes option valuation model with the following assumptions:
Stock Options and Warrants Granted by the Company The following summarizes transactions for stock options and warrants for the periods indicated:
At December 31, 2023, 46,814 stock options were fully vested and currently exercisable with a weighted average exercise price of $83.61 and a weighted average remaining term of 5.56 years. At December 31, 2023, there were 1,806,589 warrants that were fully vested and currently exercisable. F-25 At December 31, 2022, 47,682 stock options were fully vested and exercisable with a weighted average exercise price of $93.80 and a weighted average remaining term of 6.54 years. At December 31, 2022, there were 1,816,437 warrants that were fully vested and currently exercisable. Stock-based compensation recognized in 2023 and 2022 was $2,038 and $108,596, respectively. The Company has $1,644 of unrecognized compensation expense related to non-vested stock options that are expected to be recognized over the next 16 months. The following summarizes the status of options and warrants outstanding at December 31, 2023:
Stock options and warrants expire on various dates from February 2024 to July 2033. The following table
Stock Options:
Warrants:
F-26
NOTE 10 – INCOME TAXES
The provision for income taxes consists of an amount for taxes currently payable and a provision for tax consequences deferred to future periods. Deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
Actual income tax benefit differs from statutory federal income tax benefit as follows:
F-27
Deferred taxes consist of the following:
During the year-ended December 31, 2023, the Company completed an assessment of the available NOL and tax credit carryforwards under Section 382 and 383 and determined that the Company underwent several ownership adjustments noted above in 2023 as an out-of-period adjustment and concluded that the adjustments were not material to the 2022 consolidated financial statements and evaluated the recording of this prior year item in the current period and concluded that the net accounting impact is not material to the 2023 consolidated financial statements.
F-28
As of December 31,
Tax years The Company reviews income tax positions expected to be taken in income tax returns to determine if there are any income tax uncertainties. The Company recognizes tax benefits from uncertain tax positions only if it is more likely than not that the tax positions will be sustained on examination by taxing authorities, based on technical merits of the positions. The Company has identified no income tax uncertainties. Due to the existence of the valuation allowance, changes in the Company’s unrecognized tax benefits are not expected to impact the Company’s effective tax rate.
The Company recognizes interest and penalties on unrecognized tax benefits as well as interest received from favorable tax settlements within income tax expense. NOTE 11 – COLLABORATIVE AGREEMENT
consolidated Statements of Net Loss.
NOTE 12 – RETIREMENT SAVINGS PLANS
F-29
NOTE 13 – LOSS PER SHARE
The following table shares used in the basic and diluted loss per common share computations:
NOTE 14 – SEGMENTS
The Company has determined its
information for all periods presented for consistency.
The Company has three reportable
See discussion of revenue recognition in Note 1 – Summary of Significant Accounting Policies for a description of the products and services recognized in each segment. The
F-30 The
In
NOTE 15 –
Departure of Chief Business Officer
On February 2, 2024, the Company
$410,000 over the subsequent twelve months.
F-30 |