UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the quarterly period ended March 31, | |
OR
| o | 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: 000-36439
PRECIPIO, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 91-1789357 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| (Address of principal executive offices) | (Zip Code) | |
(203) 787-7888
(Registrant’s telephone number, including area code)
Indicate by check mark 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 x | No ¨ |
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes x No o
| Yes x | 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 | x | |||
| 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
oIndicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
o No xAs of April 30, 2017,May 18, 2018, the number of shares of common stock outstanding was 26,863,062.
PRECIPIO, INC.
INDEX
| 2 | |||
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
| March 31, | |||||||
| 2017 | December 31, | ||||||
| (unaudited) | 2016 | ||||||
| ASSETS | |||||||
| CURRENT ASSETS: | |||||||
| Cash and cash equivalents | $ | 59 | $ | 110 | |||
| Accounts receivable, net | 279 | 225 | |||||
| Inventories | 15 | 24 | |||||
| Other current assets | 190 | 105 | |||||
| Assets held for sale | 24 | 31 | |||||
| Total current assets | 567 | 495 | |||||
| PROPERTY AND EQUIPMENT, NET | 127 | 144 | |||||
| OTHER ASSETS: | |||||||
| Intangibles, net | 531 | 562 | |||||
| Other assets | 4 | 58 | |||||
| $ | 1,229 | $ | 1,259 | ||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | |||||||
| CURRENT LIABILITIES: | |||||||
| Current maturities of long-term debt | $ | 7,368 | $ | 7,814 | |||
| Accounts payable | 8,509 | 6,541 | |||||
| Accrued compensation | 192 | 224 | |||||
| Accrued expenses | 3,398 | 3,546 | |||||
| Deferred revenue | 133 | 170 | |||||
| Other current liabilities | 1,529 | 1,529 | |||||
| Total current liabilities | 21,129 | 19,824 | |||||
| LONG TERM LIABILITIES: | |||||||
| Common stock warrant liability | 615 | 582 | |||||
| Other long-term liabilities | 128 | 203 | |||||
| Total liabilities | 21,872 | 20,609 | |||||
| STOCKHOLDERS’ DEFICIT: | |||||||
| Preferred stock, $0.01 par value, 15,000,000 shares authorized, 214,705 shares issued and outstanding | 2 | 2 | |||||
| Common stock, $0.01 par value, 150,000,000 shares authorized, 26,863,062 shares at March 31, 2017 and 26,446,927 shares at December 31, 2016 issued and outstanding | 268 | 264 | |||||
| Additional paid-in capital | 206,342 | 205,877 | |||||
| Accumulated deficit | (227,255 | ) | (225,493 | ) | |||
| Total stockholders’ deficit | (20,643 | ) | (19,350 | ) | |||
| $ | 1,229 | $ | 1,259 | ||||
| March 31, 2018 (unaudited) | December 31, 2017 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | 286 | $ | 421 | ||||
| Accounts receivable, net | 552 | 730 | ||||||
| Inventories, net | 159 | 161 | ||||||
| Other current assets | 209 | 430 | ||||||
| Total current assets | 1,206 | 1,742 | ||||||
| PROPERTY AND EQUIPMENT, NET | 333 | 353 | ||||||
| OTHER ASSETS: | ||||||||
| Goodwill | 4,391 | 4,685 | ||||||
| Intangibles, net | 20,138 | 20,458 | ||||||
| Other assets | 25 | 22 | ||||||
| Total assets | $ | 26,093 | $ | 27,260 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Current maturities of long-term debt | $ | 676 | $ | 587 | ||||
| Accounts payable | 4,956 | 5,103 | ||||||
| Current maturities of capital leases | 51 | 50 | ||||||
| Accrued expenses | 1,529 | 1,248 | ||||||
| Deferred revenue | 189 | 66 | ||||||
| Other current liabilities | 1,350 | 2,982 | ||||||
| Total current liabilities | 8,751 | 10,036 | ||||||
| LONG TERM LIABILITIES: | ||||||||
| Long-term debt, less current maturities and discounts | 2,894 | 2,829 | ||||||
| Common stock warrant liability | 124 | 841 | ||||||
| Capital leases, less current maturities | 100 | 113 | ||||||
| Deferred tax liability | 349 | 349 | ||||||
| Other long-term liabilities | 467 | 67 | ||||||
| Total liabilities | 12,685 | 14,235 | ||||||
| STOCKHOLDERS’ EQUITY: | ||||||||
| Preferred stock - $0.01 par value, 15,000,000 shares authorized at March 31, 2018 and December 31, 2017, respectively, 47 and 4,935 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively | — | — | ||||||
| Common stock, $0.01 par value, 150,000,000 shares authorized at March 31, 2018 and December 31, 2017, 19,668,572 and 10,196,620 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively | 197 | 102 | ||||||
| Additional paid-in capital | 47,192 | 44,465 | ||||||
| Accumulated deficit | (33,981 | ) | (31,542 | ) | ||||
| Total stockholders’ equity | 13,408 | 13,025 | ||||||
| $ | 26,093 | $ | 27,260 | |||||
See notes to unaudited condensed consolidated financial statements.
| 3 |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
| Three Months Ended | |||||||
| March 31, | |||||||
| 2017 | 2016 | ||||||
| NET SALES | $ | 658 | $ | 236 | |||
| COST OF GOODS SOLD | 459 | 505 | |||||
| Gross profit (loss) | 199 | (269 | ) | ||||
| OPERATING EXPENSES: | |||||||
| Selling, general and administrative | 1,620 | 1,704 | |||||
| Research and development | 134 | 270 | |||||
| 1,754 | 1,974 | ||||||
| OPERATING LOSS FROM CONTINUING OPERATIONS | (1,555 | ) | (2,243 | ) | |||
| OTHER INCOME (EXPENSE): | |||||||
| Interest expense, net | (247 | ) | (169 | ) | |||
| Warrant revaluation | (33 | ) | 321 | ||||
| (280 | ) | 152 | |||||
| LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES | (1,835 | ) | (2,091 | ) | |||
| INCOME TAX EXPENSE (BENEFIT) | — | — | |||||
| LOSS FROM CONTINUING OPERATIONS | (1,835 | ) | (2,091 | ) | |||
| INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF TAXES | 73 | (1,173 | ) | ||||
| NET LOSS | (1,762 | ) | (3,264 | ) | |||
| PREFERRED STOCK DIVIDENDS | — | (393 | ) | ||||
| NET LOSS FROM CONTINUING OPERATIONS AVAILABLE TO COMMON STOCKHOLDERS | (1,835 | ) | (2,484 | ) | |||
| NET INCOME (LOSS) FROM DISCONTINUED OPERATIONS AVAILABLE TO COMMON STOCKHOLDERS | 73 | (1,173 | ) | ||||
| NET LOSS AVAILABLE TO COMMON STOCKHOLDERS | $ | (1,762 | ) | $ | (3,657 | ) | |
| BASIC AND DILUTED LOSS PER COMMON SHARE FROM CONTINUING OPERATIONS | $ | (0.07 | ) | $ | (0.12 | ) | |
| BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE FROM DISCONTINUED OPERATIONS | $ | — | $ | (0.06 | ) | ||
| BASIC AND DILUTED LOSS PER COMMON SHARE | $ | (0.07 | ) | $ | (0.18 | ) | |
| BASIC AND DILUTED WEIGHTED-AVERAGE SHARES OF COMMON STOCK OUTSTANDING | 26,779,835 | 20,323,333 | |||||
| Three Months Ended March 31, | ||||||||
| 2018 | 2017 | |||||||
| SALES | ||||||||
| Service revenue, net | $ | 791 | $ | 303 | ||||
| Other | 5 | — | ||||||
| Revenue, net of contractual allowances and adjustments | 796 | 303 | ||||||
| less allowance for doubtful accounts | (84 | ) | (55 | ) | ||||
| Net sales | 712 | 248 | ||||||
| COST OF SALES | 688 | 182 | ||||||
| Gross profit | 24 | 66 | ||||||
| OPERATING EXPENSES: | ||||||||
| Operating expenses | 2,178 | 662 | ||||||
| Impairment of goodwill | 294 | — | ||||||
| TOTAL OPERATING EXPENSES | 2,472 | 662 | ||||||
| OPERATING LOSS | (2,448 | ) | (596 | ) | ||||
| OTHER INCOME (EXPENSE): | ||||||||
| Interest expense, net | (8 | ) | (162 | ) | ||||
| Warrant revaluation | 261 | — | ||||||
| Gain on settlement of liability, net | 141 | — | ||||||
| Loss on settlement of equity instruments | (385 | ) | — | |||||
| 9 | (162 | ) | ||||||
| LOSS BEFORE INCOME TAXES | (2,439 | ) | (758 | ) | ||||
| INCOME TAX EXPENSE | — | — | ||||||
| NET LOSS | (2,439 | ) | (758 | ) | ||||
| Deemed dividends related to beneficial conversion feature of preferred stock and fair value of consideration issued to induce conversion of preferred stock | (3,514 | ) | — | |||||
| TOTAL DIVIDENDS | (3,514 | ) | — | |||||
| NET LOSS AVAILABLE TO COMMON STOCKHOLDERS | $ | (5,953 | ) | $ | (758 | ) | ||
| BASIC AND DILUTED LOSS PER COMMON SHARE | $ | (0.47 | ) | $ | (1.69 | ) | ||
| BASIC AND DILUTED WEIGHTED-AVERAGE SHARES OF COMMON STOCK OUTSTANDING | 12,576,037 | 449,726 | ||||||
See notes to unaudited condensed consolidated financial statements.
| 4 |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
| Three Months Ended March 31, | |||||||
| 2017 | 2016 | ||||||
| CASH FLOWS USED IN OPERATING ACTIVITIES: | |||||||
| Net loss | $ | (1,762 | ) | $ | (3,264 | ) | |
| Less income (loss) from discontinued operations, net of tax | 73 | (1,173 | ) | ||||
| Loss from continuing operations | (1,835 | ) | (2,091 | ) | |||
| Adjustments to reconcile net loss to net cash flows used in operating activities: | |||||||
| Depreciation and amortization | 48 | 83 | |||||
| Stock-based compensation and change in liability of stock appreciation rights | (24 | ) | 110 | ||||
| Provision for losses on doubtful accounts | 1 | 21 | |||||
| Warrant revaluation | 33 | (321 | ) | ||||
| Loss on settlement of lease termination | 358 | — | |||||
| Deferred interest | — | 17 | |||||
| Changes in operating assets and liabilities: | |||||||
| Accounts receivable | (55 | ) | 73 | ||||
| Inventories | 9 | 6 | |||||
| Other assets | (45 | ) | 41 | ||||
| Accounts payable | 1,967 | 1,230 | |||||
| Accrued expenses and other liabilities | (587 | ) | (481 | ) | |||
| Net cash used in operating activities, continuing operations | (130 | ) | (1,312 | ) | |||
| Net cash provided by (used in) operating activities, discontinued operations | 80 | (612 | ) | ||||
| Net cash used in operating activities | (50 | ) | (1,924 | ) | |||
| CASH FLOWS USED IN INVESTING ACTIVITIES: | |||||||
| Purchases of property and equipment | — | (19 | ) | ||||
| Change in other assets | — | (7 | ) | ||||
| Net cash used in investing activities | — | (26 | ) | ||||
| CASH FLOWS (USED IN) PROVIDED BY FINANCING ACTIVITIES: | |||||||
| Principal payments on capital lease obligations | (1 | ) | (1 | ) | |||
| Issuance of preferred stock and warrants, net of costs of $219 | — | 1,779 | |||||
| Proceeds from debt | — | 500 | |||||
| Principal payments on debt | — | (550 | ) | ||||
| Net cash flows (used in) provided by financing activities | (1 | ) | 1,728 | ||||
| NET CHANGE IN CASH AND CASH EQUIVALENTS | (51 | ) | (222 | ) | |||
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 110 | 444 | |||||
| CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 59 | $ | 222 | |||
| SUPPLEMENTAL CASH FLOW INFORMATION | |||||||
| Cash paid during the period for interest | $ | — | $ | — | |||
| SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION | |||||||
| Initial valuation of warrant issued in conjunction with Private Placement | $ | — | $ | 1,827 | |||
| Conversion of convertible promissory notes | 499 | — | |||||
| Debt settled with issuance of preferred stock and warrants | — | 199 | |||||
| Three Months Ended March 31, | ||||||||
| 2018 | 2017 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (2,439 | ) | $ | (758 | ) | ||
| Adjustments to reconcile net loss to net cash flows used in operating activities: | ||||||||
| Depreciation and amortization | 352 | 24 | ||||||
| Amortization of deferred financing costs and debt discount | 1 | 6 | ||||||
| Gain on settlement of liability, net | (141 | ) | — | |||||
| Loss on settlement of equity instrument | 385 | — | ||||||
| Stock-based compensation | 82 | — | ||||||
| Impairment of goodwill | 294 | — | ||||||
| Provision for losses on doubtful accounts | 84 | 55 | ||||||
| Warrant revaluation | (261 | ) | — | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable, net | 94 | (47 | ) | |||||
| Inventories, net | 2 | (6 | ) | |||||
| Other assets | 218 | 4 | ||||||
| Accounts payable | (44 | ) | 169 | |||||
| Accrued expenses and other liabilities | 228 | 227 | ||||||
| Net cash used in operating activities | (1,145 | ) | (326 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of property and equipment | (5 | ) | — | |||||
| Net cash used in investing activities | (5 | ) | — | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Principal payments on capital lease obligations | (12 | ) | (11 | ) | ||||
| Issuance of common stock, net of issuance costs | 618 | — | ||||||
| Proceeds from exercise of warrants | 225 | — | ||||||
| Proceeds from long-term debt | 300 | 265 | ||||||
| Proceeds from convertible bridge notes | — | 100 | ||||||
| Principal payments on long-term debt | (116 | ) | (46 | ) | ||||
| Net cash flows provided by financing activities | 1,015 | 308 | ||||||
| NET CHANGE IN CASH | (135 | ) | (18 | ) | ||||
| CASH AT BEGINNING OF PERIOD | 421 | 51 | ||||||
| CASH AT END OF PERIOD | $ | 286 | $ | 33 | ||||
| SUPPLEMENTAL CASH FLOW INFORMATION | ||||||||
| Cash paid during the period for interest | $ | 6 | $ | 15 | ||||
| SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION | ||||||||
| Purchases of equipment financed through accounts payable | 7 | — | ||||||
| Deferred debt issuance cost financed through accounts payable | 31 | — | ||||||
| Other current liabilities canceled in exchange for common shares | 1,897 | — | ||||||
| Warrant liability canceled due to settlement of equity instruments | 456 | — | ||||||
See notes to unaudited condensed consolidated financial statements.
| 5 |
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31 20172018 and 2016
1. BUSINESS DESCRIPTION
Business Description
Precipio, Inc., and Subsidiary, (“we”, “us”, “our”, the “Company” or “Transgenomic”“Precipio”) is a biotechnologycancer diagnostics company advancing personalized medicine forproviding diagnostic products and services to the detectiononcology market. We have built and treatmentcontinue to develop a platform designed to eradicate the problem of misdiagnosis by harnessing the intellect, expertise and technology developed within academic institutions and delivering quality diagnostic information to physicians and their patients worldwide. We operate a cancer diagnostic laboratory located in New Haven, Connecticut and have partnered with the Yale School of Medicine to capture the expertise, experience and technologies developed within academia so that we can provide a better standard of cancer diagnostics and integrated diseases throughsolve the growing problem of cancer misdiagnosis. We also operate a research and development facility in Omaha, Nebraska which will focus on further development of ICE-COLD-PCR (“ICP”), the patented technology which was exclusively licensed by us from Dana-Farber Cancer Institute, Inc. (“Dana-Farber”) at Harvard University (“Harvard”). The research and development center will focus on the development of this technology, which we believe will enable us to commercialize other technologies developed by our proprietary molecular technologiescurrent and clinicalfuture academic partners. Our platform connects patients, physicians and diagnostic experts residing within academic institutions. Launched in 2017, the platform facilitates the following relationships:
Patients: patients may search for physicians in their area and consult directly with academic experts that are on the platform. Patients may also have access to new academic discoveries as they become commercially available.
Physicians: physicians can connect with academic experts to seek consultations on behalf of their patients and may also provide consultations for patients in their area seeking medical expertise in that physician’s relevant specialty. Physicians will also have access to new diagnostic solutions to help improve diagnostic accuracy.
Academic Experts: academic experts on the platform can make themselves available for patients or physicians seeking access to their expertise. Additionally, these experts have a platform available to commercialize their research services. A key goaldiscoveries.
We intend to continue updating our platform to allow for patient-to-patient communications and allow individuals to share stories and provide support for one another, to allow physicians to consult with their peers to discuss and share challenges and solutions, and to allow academic experts to interact with others in academia on the platform to discuss their research and cross-collaborate.
ICP was developed at Harvard and is to bring our Multiplexed ICE COLD-PCR (“MX-ICP”) product tolicensed exclusively by us from Dana-Farber. The technology enables the clinical market through strategic partnerships and licensing agreements, enabling the use of blood and other bodily fluids for more effective and patient-friendly diagnosis, monitoring and treatment of cancer.
Gene sequencing is performed on tissue biopsies taken surgically from the tumor site in order to identify potential therapies that will be more effective in treating the patient. There are several limitations to this process. First, surgical procedures have several limitations, including:
Cost: surgical procedures are usually performed in a costly hospital environment. For example, according to a recent study the mean cost of lung biopsies is greater than $14,000; surgery also involves hospitalization and recovery time.
Surgical access: various tumor sites are not always accessible (e.g. brain tumors), in which cases no biopsy is available for diagnosis.
| 6 |
Risk: patient health may not permit undergoing an invasive surgery; therefore a biopsy cannot be obtained at all.
Time: the process of scheduling and coordinating a surgical procedure often takes time, delaying the start of patient treatment.
Second, there are several tumor-related limitations that provide a challenge to obtaining such genetic information from
a tumor:
Tumors are heterogeneous by nature: a tissue sample from one area of the tumor may not properly represent the tumor’s entire genetic composition; thus, the diagnostic results from a tumor may be incomplete and non-representative.
Metastases: in order to accurately test a patient with metastatic disease, ideally an individual biopsy sample should be taken from each site (if those sites are even known). These biopsies are very difficult to obtain; therefore physicians often rely on biopsies taken from the primary tumor site.
The advent of technologies enabling liquid biopsies as an alternative to tumor biopsy and analysis is based on the fact that tumors (both primary and metastatic) shed cells and fragments of DNA into the blood stream. These blood samples are called “liquid biopsies” that contain circulating tumor DNA, or ctDNA, which hold the same genetic information found in the tumor(s). That tumor DNA is the target of genetic analysis. However, since the quantity of tumor DNA is very small in proportion to the “normal” (or “healthy”) DNA within the blood stream, there is a need to identify and separate the tumor DNA from the normal or wild-typeDNA.
ICP is an enrichment technology that enables the laboratory to focus its analysis on the tumor DNA several benefits are provided.
Merger Transaction
On June 29, 2017, the Company (then known as “Transgenomic, Inc.”, or “Transgenomic”), completed a reverse merger (the “Merger”) with Precipio Diagnostics, LLC, a privately held Delaware limited liability company (“Precipio Diagnostics”) in accordance with the quarter ended September 30, 2015, our operations are now organizedterms of the Agreement and Plan of Merger (the “Merger Agreement”), dated October 12, 2016, as one business segment, our Laboratory Services segment,amended on February 2, 2017 and duringJune 29, 2017, by and among Transgenomic, Precipio Diagnostics and New Haven Labs Inc. (“Merger Sub”) a wholly-owned subsidiary of Transgenomic. Pursuant to the fourth quarter of 2015, we began including a portion of our Laboratory Services segment as discontinued operations, this has continued through March 31, 2017.
Going Concern
The condensed consolidated financial statements have been prepared using accounting principles generally accepted in the United States of America (“GAAP”) applicable for a going concern, which assume that wethe Company will realize ourits assets and discharge ourits liabilities in the ordinary course of business. We haveThe Company has incurred substantial operating losses and havehas used cash in ourits operating activities for the past few years. As of March 31, 2017, we2018, the Company had a net loss of $2.4 million, negative working capital of $20.6$7.5 million and we were also notnet cash used in compliance with our loan agreement due to the fact that eventsoperating activities of default existed, including our failure to make certain required monthly interest payments to the lenders.$1.1 million. The Company’s ability to continue as a going concern is dependent upon a combination of completing its planned merger with Precipio Diagnostics, LLC (“Precipio”), generating additional revenue, improving cash collections, potentially selling underutilized assets and/or product lines related to discontinued operations and, if needed, raising necessary financing to meet its obligations and pay its liabilities arising from normal business operations when they come due. Following the planned merger, Transgenomic will change its name to Precipio, Inc. (“New Precipio”). On February 17, 2017, Transgenomic received written notification from the staff of Nasdaq that, as a result of Transgenomic’s inability to maintain certain Nasdaq continued listing requirements, Nasdaq had determined to delist Transgenomic’s shares from Nasdaq. Accordingly, trading in Transgenomic’s shares was suspended, and on February 22, 2017, Transgenomic’s shares began trading on the OTCQB exchange under the ticker “TBIO”. As discussed below upon completion of the merger, the New Precipio common stock will be required to meet the Nasdaq listing standards. As a result of the merger, New Precipio is expected to meet Nasdaq's initial listing requirements. In addition, at the time of the merger the Company intends to execute a reverse stock split. The outcome of these matters cannot be predicted with any certainty at this time and raises substantial doubt that the Company will be able to continue as a going concern forover the next twelve months from the date of issuance of these condensedthis Form 10-Q is dependent upon a combination of achieving its business plan, including generating additional revenue, and raising additional financing to meet its debt obligations and paying liabilities arising from normal business operations when they come due.
| 7 |
To meet its current and future obligations the Company has taken the following steps to capitalize the business and successfully achieve its business plan:
| · | On April 13, 2018, the Company filed a Form S-1 General Registration Statement to register and offer for future sale shares of our common stock, pursuant to entering into an Equity Purchase Agreement with Leviston Resources LLC (the “Investor”) on February 8, 2018. See Note 8 – Stockholders’ Equity for further details. |
| · | On April 20, 2018, the Company entered into a securities purchase agreement (the “Agreement”) with certain investors, pursuant to which the Company will issue up to approximately $3,296,703.30 in 8% Senior Secured Convertible Promissory Notes with 100% common stock warrant coverage. See Note 12 – Subsequent Events for further details. |
Notwithstanding the aforementioned circumstances, there remains substantial doubt about the Company’s ability to continue as a going concern over the next twelve months from the date of issuance of the Form 10-Q. There can be no assurance that the Company will be able to successfully achieve its initiatives summarized above in order to continue as a going concern over the next twelve months from the date of issuance of the Form 10-Q. The accompanying financial statements. These condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern and do not include any adjustments to the amounts and classification of assets and liabilities that may be necessarymight result should the Company be unable to continue as a going concern. There is no assuranceconcern as a result of the outcome of this uncertainty.
Nasdaq Delisting Notice
On March 26, 2018, Precipio, Inc. received written notice (the “Notice”) from The Nasdaq Stock Market LLC (“Nasdaq”) indicating that, the Company will complete the merger in a timely manner or at all. The merger agreement is subject to many closing conditions and termination rights. The Company
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation.
The accompanying condensed consolidated financial statements are presented in conformity with GAAP. Supplemental cash flows from discontinued operations are presented in Note 3 - “Discontinued Operations”. We have evaluated events occurring subsequent to March 31, 20172018 for potential recognition or disclosure in the condensed consolidated financial statements and concluded that, other than what is disclosed within the notes to unaudited condensed consolidated financial statements and in Note 12 - Subsequent Events, there were no other subsequent events that required recognition or disclosure.
The condensed consolidated balance sheet as of
December 31,| 8 |
Recent Accounting Pronouncements.
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers. This guidance requiresCustomers and has subsequently issued supplemental and/or clarifying ASUs (collectively “ASC 606”). ASC 606 outlines a five-step framework that intends to clarify the principles for recognizing revenue and eliminate industry-specific guidance. In addition, ASC 606 revises current disclosure requirements in an entityeffort to recognizehelp financial statement users better understand the nature, amount, timing, and uncertainty of revenue that is recognized. ASC 606 may be applied either retrospectively to which it expectseach prior reporting period presented or use the modified retrospective transition method with the cumulative effect of initial adoption recognized at the date of initial application. We adopted this new standard as of January 1, 2018, by using the modified-retrospective method. An adjustment was not required and a change to be entitled for the transfer of promised goods or services to a customer. ASU No. 2014-09 will replace most existingprior revenue recognition guidance in generally accepted accounting principles inprocess and policy to adopt the U.S. when it becomes effective. In July 2015, the FASB decided to defer the effective date of this new accounting guidance by one year. As a result, ASU No. 2014-09 will be effective for us for all annual and interim reporting periods beginning after December 15, 2017 and early adoption would be permitted as of the original effective date. The new standard permits the use of either the retrospective or cumulative effect transition method. We dowas not expect to early adopt this guidance and we have not selected a transition method. We are currently evaluating the impact this guidance will have on our financial condition, results of operations and cash flows.
In February 2016, the FASB issued ASU No. 2016-02, Leases.Leases. The new standard amends the recognition of lease assets and lease liabilities by lessees for those leases currently classified as operating leases and amends disclosure requirements associated with leasing arrangements. The new standard is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2018. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition, and provides for certain practical expedients. Transition will require application of the new guidance at the beginning of the earliest comparative period presented. We are currently assessing the impact that the adoption of this ASU will have on our consolidated financial statements.
In January 2017, FASB issued ASU No. 2017-01,Business Combinations (Topic 805): Clarifying the Definition of a Business. ASU No. 2017-01adds2017-01 adds guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The new guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company does not believeadoption of ASU No. 2017-01 willdid not have a material effect on itsthe Company’s financial position and results of operations.
In May 2017, the FASB issued ASU 2017-09 “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting”,which provides clarity and reduces both diversity in practice and cost and complexity when applying guidance in Topic 718. This amendment provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The amendments are effective for all entities for annual periods, and interim periods within those periods, beginning after December 15, 2017. The adoption of ASU No. 2017-09 did not have a material effect on the Company’s financial position and results of operations.
Property and Equipment, net.
Depreciation expense was less than $0.1 million for both the three months March 2016, we halted testing services in our Patient Testing laboratory in New Haven, Connecticut. 31, 2018 and 2017. Depreciation expense during each year includes depreciation related to equipment acquired under capital leases.
Goodwill and Intangible Assets.
As a result of this action,the Merger, the Company recorded goodwill and intangible assets as part of December 31, 2015, our Patient Testing business met the criteria to be reported as discontinued operations. The related assets, liabilities, results of operations and cash flows for the Patient Testing business are classified as assets held for sale, liabilities held for sale and discontinued operations for all periods presented.
Goodwill
Goodwill represents the excess of the following:
| Three months ended March 31, | |||||||
| (Dollars in thousands) | 2017 | 2016 | |||||
| Net sales | $ | 68 | $ | 1,103 | |||
| Cost of goods sold | 15 | 1,183 | |||||
| Gross profit (loss) | 53 | (80 | ) | ||||
| Selling, general and administrative expense | (65 | ) | 1,025 | ||||
| Research and development expense | — | 68 | |||||
| Operating income (loss) from discontinued operations | 118 | (1,173 | ) | ||||
| Loss on settlement of liability | (45 | ) | — | ||||
| Income (loss) from discontinued operations before income taxes | 73 | (1,173 | ) | ||||
| Income tax expense | — | — | |||||
| Income (loss) from discontinued operations, net of taxes | $ | 73 | $ | (1,173 | ) | ||
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Intangibles
Amortization expense for intangible assets was $0.3 million and zero during the three months ended March 31, 2018 and 2017, respectively. Amortization expense for intangible assets is expected to be $1.2 million, $1.0 million, $1.0 million, $0.9 million and $0.9 million for each of the years ending December 31, 2018, 2019, 2020, 2021 and 2022, respectively.
Revenue Recognition.
Revenue recognition occurs when a customer obtains control of the promised goods and service. Revenue assigned to the goods and services reflects the consideration which the Company expects to receive in exchange for those goods and services.
The Company derives its revenues from Diagnostic Testing - histology, flow cytometry, cytology and molecular testing; Clinical Research from bio-pharma customers, state and federal grant programs; and from Biomarker Testing from bio-pharma customers. All sources of revenue are recorded net of accruals for estimated chargebacks, rebates, cash discounts, other allowances, and returns. Due to differences in the substance of these revenue types, the transactions require, and the Company utilizes, different revenue recognition policies for each. See more detailed information on revenue in Note 11 – Sales Service Revenue, Net And Accounts Receivable.
The Company recognizes revenue utilizing the five-step framework of ASC 606. Control of the laboratory testing services is transferred to the customer at a point in time. As such, the Company recognizes revenue for diagnostic testing at a point in time based on the delivery method (web-portal access or fax) for a patient’s laboratory report. Diagnostic testing service revenue is reported at the estimated net realizable amounts from patients, third-party payors and others for services rendered, including retroactive adjustment under reimbursement agreements with third-party payors. Revenue under third-party payor agreements is subject to audit and retroactive adjustment. Provisions for third-party payor settlements are provided in the period in which the related services are rendered and adjusted in the future periods, as final settlements are determined. For clinical research and biomarker services, the Company utilizes an “effort based” method of assessing performance and measures progress towards satisfaction of the performance obligation based upon the delivery of results per the contract.
When we receive payment in advance, we initially defer the revenue and recognize it when we deliver the service. Deferred net sales included in the balance sheet as deferred revenue was $0.2 million and less than $0.1 million which were classified as assets held for sale in the condensed consolidated balance sheets.
| Dollars in Thousands | ||||||||
| March 31, 2017 | December 31, 2016 | |||||||
Revolving Line of Credit(1) | $ | 3,243 | $ | 3,243 | ||||
Term Loan(2) | 4,000 | 4,000 | ||||||
Convertible Promissory Notes (3) | 125 | 571 | ||||||
| Total debt | 7,368 | 7,814 | ||||||
| Current portion of long-term debt | (7,368 | ) | (7,814 | ) | ||||
| Long-term debt, net of current maturities | $ | — | $ | — | ||||
Taxes collected from customers and remitted to government agencies for specific net sales producing transactions are recorded net with no effect on the Term Loan prior to maturity, we will payincome statement.
Loss Per Share.
Basic loss per share is calculated based on the Lenders a prepayment penaltyweighted-average number of
The following table summarizes the outstanding securities not included in the computation of diluted net loss per share:
| March 31, | ||||||||
| 2018 | 2017 | |||||||
| Stock options | 3,520,059 | 2,651 | ||||||
| Warrants | 5,923,789 | 1,971,058 | ||||||
| Preferred stock | 62,667 | 780,105 | ||||||
| Total | 9,506,515 | 2,753,814 | ||||||
3. REVERSE MERGER
Unaudited pro forma information
The operating results of Transgenomic have been included in the Company's consolidated financial statements for all periods after June 29, 2017.
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The following unaudited pro forma information presents the Company's financial results as if the acquisition of Transgenomic had occurred on January 1, 2017 and combines Transgenomic’s unaudited condensed consolidated statement of operations for the three months ended March 31, 2017 with Precipio’s unaudited condensed statement of operations for the three months ended March 31, 2017:
| Dollars in thousands, except per share amounts | ||||||||
| For the Three Months Ended March 31, | ||||||||
| 2018 | 2017 | |||||||
| Net sales | $ | 712 | $ | 907 | ||||
| Net loss available to common stockholders | (5,953 | ) | (2,778 | ) | ||||
| Loss per common share | $ | (0.47 | ) | $ | (0.42 | ) | ||
4. LONG-TERM DEBT
Long-term debt consists of the following:
| Dollars in Thousands | ||||||||
| March 31, 2018 | December 31, 2017 | |||||||
| Department of Economic and Community Development (DECD) | $ | 293 | $ | — | ||||
| DECD debt issuance costs | (30 | ) | — | |||||
| Secured debt obligations | 3,233 | 3,233 | ||||||
| Financed insurance loan | 74 | 183 | ||||||
| Total long-term debt | 3,570 | 3,416 | ||||||
| Current portion of long-term debt | (676 | ) | (587 | ) | ||||
| Long-term debt, net of current maturities | $ | 2,894 | $ | 2,829 | ||||
Department of Economic and Community Development.
On January 8, 2018, the Company received gross proceeds of $400,000 when it entered into an agreement with the Department of Economic and Community Development (“DECD”) by which the Company received a grant of $100,000 and a loan of $300,000 secured by substantially all of the Company’s assets (the “DECD 2018 Loan”.) The grant is included in deferred revenue in the accompanying condensed consolidated balance sheet.
Debt issuance costs associated with the DECD 2018 Loan were approximately $31,000. Amortization of the debt issuance cost was approximately $1,000 for the three months ended March 31, 2018. Net debt issuance costs were $30,000 at March 31, 2018 and are presented as a reduction of the related debt in the accompanying condensed consolidated balance sheet.
Secured Debt Obligations
In 2017, the Company entered into Debt Settlement Agreements (the “Settlement Agreements”) with certain of its accounts payable and accrued liability vendors (the “Creditors”) pursuant to which the Creditors, who were owed $6.3 million (the “Debt Obligations”) by the Company, agreed to reduce and exchange the Debt Obligations for a secured obligation in the amount of $3.2 million, $1.9 million in shares of the Company’s common stock and 108,112 warrants to purchase shares of the Company’s common stock.
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The Debt Obligations were restructured as follows:
| · | The Company entered into a scheduled long-term debt repayment agreement of approximately $3.2 million, which includes interest of approximately $0.6 million, to be paid in forty-eight equal monthly installments beginning in July 2018 (the “Secured Debt Obligations”). |
| · | Debt Obligations of $1.9 million were canceled in exchange for 1,814,754 shares of the Company’s common stock with a weighted average price per share of $1.04 (the “Settlement Common Shares”). The stock was issued in February 2018. |
| · | Warrants to purchase 108,112 shares of the Company’s common stock at an exercise price of $7.50 per share (the “Creditor Warrants”) were issued to certain Creditors. The Creditor Warrants were issued in February 2018. |
Financed Insurance Loan.
During 2017, the Company financed certain of its insurance premiums (the “Financed Insurance Loan”). The original amount financed in July 2017 was $0.4 million with a 4.99 % interest rate. The Company will make monthly payments through May 2018. As of March 31, 2018 and December 31, 2017, the Financed Insurance Loan outstanding balance of $0.1 million and $0.2 million, respectively, is included in current maturities of long-term debt in the Company’s condensed consolidated balance sheet. A corresponding prepaid asset is included in other current assets.
5. OTHER CURRENT LIABILITIES.
Other current liabilities are as follows:
| (dollars in thousands) | March 31, 2018 | December 31, 2017 | ||||||
| Obligation to issue common shares | $ | — | $ | 1,897 | ||||
| Liability for settlement of equity instrument | 1,350 | 1,085 | ||||||
| $ | 1,350 | $ | 2,982 | |||||
As of December 31, 2017, the Company had recorded a liability related to its obligation to issue shares of its common stock in the future. On February 12, 2018, the Company issued 1,814,754 Settlement Common Shares with a fair value of approximately $1.9 million.
On February 20, 2018, Crede Capital Group LLC (“Crede”) filed a lawsuit against the Company in the Supreme Court of the State of New York for Summary Judgment in Lieu of Complaint requiring the Company to pay cash owed to Crede. Crede claimed that Precipio had breached a Securities Purchase Agreement and Warrant that Crede entered into in connection with an investment in Transgenomic and that pursuant to those agreements, Precipio owed Crede approximately $2.2 million. On March 12, 2018, Precipio entered into a settlement agreement (the “Crede Agreement”) with Crede pursuant to which Precipio agreed to pay Crede a total sum of $1.925 million over a period of 16 months payable in cash, or at the Company’s discretion, in stock, in accordance with terms contained in the Crede Agreement. In accordance with the terms of the Initial Note.
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As of the date such payment is due will constitute an event of default (the “Prospective Event of Default”).
6. CONTINGENCIES
The Company is involved in legal proceedings related to occur of the close of the Company’s merger with Precipio Diagnostics, LLC or June 16, 2017 (such applicable date, the “Deferred Maturity Date”).matters, which are incidental to its business. The remaining one-third of the principal amount outstanding on the Additional Note must be paid on the six month anniversary of the Deferred Maturity Date (the “Extended Maturity Date”).
The healthcare industry is subject to numerous laws and regulations of federal, state and local governments. These laws and regulations include, but are not necessarily limited to, matters such as licensure, accreditation, government healthcare program participation requirement, reimbursement for patient services and Medicare and Medicaid fraud and abuse. Government activity has increased with respect to investigations and allegations concerning possible violations of fraud and abuse statutes and regulations by healthcare providers.
Violations of these laws and regulations could result in expulsion from government healthcare programs together with the imposition of significant fines and penalties, as well as significant repayments for patient services previously billed. Management believes that the Company is in compliance with fraud and abuse regulations, as well as other applicable government laws and regulations. While no material regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretation, as well as regulatory actions unknown or unasserted at this time.
The outcome of legal proceedings and claims brought against us are subject to significant uncertainty. Therefore, although management considers the likelihood of such an outcome to be remote, if one or more of these legal matters were resolved against us in the same reporting period for amounts in excess of management’s expectations, our business.financial statements for such reporting period could be materially adversely affected. In additiongeneral, the resolution of a legal matter could prevent us from offering our services or products to the claims described in this Note, we areothers, could be material to our financial condition or cash flows, or both, or could otherwise adversely affect our operating results.
LITIGATIONS
The Company is delinquent on the payment of outstanding accounts payable amounting to approximately $0.6 million withfor certain of our vendors and suppliers who have taken or have threatened to take legal action to collect such outstanding amounts.
On June 23, 2016, the Icahn School of Medicine at Mount Sinai (“Mount Sinai”) filed a lawsuit against usTransgenomic in the Supreme Court of the State of New York, County of New York, alleging, among other things, breach of contract and, alternatively, unjust enrichment and quantum merit, and seeking recovery of $0.7 million owed by us to Mount Sinai for services rendered. We and Mount Sinai entered into a settlement agreement dated October 27, 2016, which included, among other things, a mutual general release of claims, and our agreement to pay approximately $0.7 million to Mount Sinai in installments over a period of time. Effective as of October 31, 2017, we and Mount Sinai agreed to enter into a new settlement agreement to restructure these liabilities into a secured, long-term debt obligation of $0.5 million which includes accrued interest at 10% with monthly principal and interest payments of $9,472 beginning in July 2018 and continuing over 48 months and we issued warrants in the amount of 24,900 shares, that are exercisable for shares of our common stock, on a 1-for-1 basis, with an exercise price of $7.50 per share, exercisable on the date of issuance with a term of 5 years. We do not plan to apply to list the warrants on the NASDAQ Capital Market, any other national securities exchange or any other nationally recognized trading system. A $0.7$0.5 million liability has been recorded and is reflected in accrued expenseslong-term debt within the accompanying condensed consolidated balance sheet at March 31, 20172018 and December 31, 2016. Effective as of February 1, 2017, we and Mount Sinai agreed to amend the terms of our settlement agreement to extend the date of the initial payment due to Mount Sinai.2017.
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On February 21, 2017, XIFIN, Inc. (“XIFIN”) filed a lawsuit against us in the District Court for the Southern District of California alleging breach of written contract and seeking recovery of approximately $0.27 million owed by us to XIFIN for damages arising from a breach of our obligations pursuant to a Systems Services Agreement between us and XIFIN, dated as of February 22, 2013, as amended and restated on September 1, 2014. On April 5, 2017, the court clerk entered default against us.the Company. On May 5, 2017, XIFIN filed an application for entry of default judgment against us. A $0.3liability of $0.1 million and $0.2 million liability has been recorded and is reflected in accrued expensesaccounts payable within the accompanying condensed consolidated balance sheet at March 31, 20172018 and December 31, 2016,2017, respectively.
CPA Global provides us with certain patent management services. On February 6, 2017, CPA Global claimed that we owe approximately $0.2 million for certain patent maintenance services rendered. CPA Global has not filed claims against us in connection with this allegation. A liability of approximately $0.2 million has been recorded and is reflected in accrued expenses at March 31, 2017 and December 31, 2016.
On February 17, 2017, Jesse Campbell (“Campbell”) filed a lawsuit individually and on behalf of others similarly situated against us in the District Court for the District of Nebraska alleging we havehad a materially incomplete and misleading proxy relating to a potential merger and that the merger agreement’s deal protection provisions deter superior offers. As a result, heCampbell alleges that we have violated Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9 promulgated thereafter. Although we intendThe Company filed a motion to defenddismiss all claims, which motion was fully briefed on November 27, 2017. The Court granted the Company’s motion in full on May 3, 2018 and dismissed the lawsuit.
On March 21, 2018, Bio-Rad Laboratories filed a lawsuit there can be no assurance regardingagainst us in the ultimate outcomeSuperior Court Judicial Branch of this case. Given the uncertaintyState of litigation, the legal standards that must be metConnecticut for among other things, class certification and success on the merits, we are unableSummary Judgment in Lieu of Complaint requiring us to estimatepay cash owed to Bio-Rad in the amount of loss, or range$39,000. We are currently in discussions with Bio-Rad to reach payment conditions. A liability of possible loss,less than $0.1 million has been recorded in accounts payable within the accompanying condensed consolidated balance sheet at this time that may result from this action. In the event that a settlement is reached related to these matters, the amount of such settlement may be material to our results of operationsMarch 31, 2018 and financial condition and may have a material adverse impact on our liquidity.
7. INCOME TAXES
Income tax expense from continuing operations was zero for both the three months ended March 31, 2018 and 2017 and 2016. We maintainwas zero as a result of recording a full valuation allowance on our netagainst the deferred tax assets, having concluded that weasset generated during the periods, which are not more likely than not going to realize the benefit of our deferred tax assets, including ourpredominantly net operating loss carryforwards.
We had no material interest or penalties during fiscal 2018 or fiscal 2017, and 2016
8. STOCKHOLDERS’ EQUITY
Common Stock.
Pursuant to our Third Amended and Restated Certificate of Incorporation, as amended, we currently have
150,000,000shares of common stock authorized for issuance.
On January 6, 2016, weFebruary 8, 2018 the Company entered into a Securitiesan equity purchase agreement (the “2018 Purchase Agreement (the “SPA”Agreement”) with certain accredited investorsLeviston Resources LLC (“Leviston”) for the purchase of up to $8,000,000 (the “2016 Investors”“Aggregate Amount”), of shares (the “Shares”) of the Company’s common stock from time to time, at the Company’s option. Shares offered and sold prior to February 13, 2018 were issued pursuant to which,the Company’s shelf registration statement on January 8, 2016, we sold toForm S-3 (and the 2016 Investors, andrelated prospectus) that the 2016 Investors purchased from us (the “January 2016 Offering”), an aggregate of approximately $2.2 million of units (the “Units”) consisting of (a) an aggregate of 2,365,243 shares (the “A-1 Preferred Shares”) of our Series A-1 Convertible Preferred Stock (the “A-1 Preferred”), and (b) warrants (the “2016 Warrants”) to purchase up to an aggregate of 1,773,929 shares of our common stock, with an initial value of $1.8 million. The gross amount of $2.2 million included $2.0 million of cash proceeds and $0.2 million of debt settled with the issuance of preferred stock and warrants. Each Unit was sold to the 2016 Investors at a purchase price of $0.93 per Unit. The A-1 Preferred Shares are convertible into shares of our common stock at an initial rate of 1-for-1, which conversion rate is subject to further adjustment as set forth in our Certificate of Designation of Series A-1 Convertible Preferred Stock, which wasCompany filed with the Secretary of StateSecurities and Exchange Commission (the “SEC”) and which was declared effective by the SEC on February 13, 2015 (the “Shelf Registration Statement”).
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Sales of the State of Delaware on January 8, 2016 (the “Series A-1 Certificate of Designation”). We determined there was a beneficial conversion feature (“BCF”) in connection with this issuance and valued the BCF at $0.4 million. The holders of the A-1 Preferred were able to convert at any time following the issuance. Accordingly, we recorded a dividend totaling $0.4 million during 2016 related to this beneficial conversion, which was recorded against additional paid in capital. Pursuant to the terms of the Series A-1 Certificate of Designation, the holders of the A-1 Preferred Shares will generally be entitled to that number of votes as is equal to the product obtained by multiplying: (i) the number of whole shares of ourCompany’s common stock, into which the A-1 Preferredif any, may be converted as of the record date of such vote or consent, by (ii) 0.93, rounded down to the nearest whole number. Therefore, every 1.075269 shares of A-1 Preferred will generally initially be entitled to one vote. In May 2016, 2,150,538 of the A-1 Preferred Shares were converted into 2,150,538 shares of our common stock. At March 31, 2017, there were 214,705 A-1 Preferred Shares outstanding.
Leviston purchased 721,153 shares (the “Investor Shares”) of the Securities Act and/or Regulation D promulgated thereunder andCompany’s common stock following the close of business on February 9, 2018, subject to customary closing conditions, at a price per share of $1.04. The shares were sold pursuant to the Shelf Registration Statement. The net proceeds to the Company from this sale were approximately $744,000. In addition to the $6,000 fee (0.75% fee discussed below), the Company incurred approximately $136,000 of additional costs, both of which have been treated as issuance costs within additional paid-in capital in reliance on similar exemptions under applicable state laws. The offeringthe accompanying unaudited condensed consolidated balance sheet.
In consideration of Leviston’s agreement to enter into the 2018 Purchase Agreement, the Company agreed to pay to Leviston a commitment fee in shares of the Company’s common stock equal in value to 5.25% of the total Aggregate Amount (the “Commitment Shares”), payable as follows: 1.75% on or before February 12, 2018. This amount, of $140,000, was paid to Leviston through the issuance of 170,711 shares of the Company’s common stock on February 12, 2018; 1.75% on the third calendar day after the date on which the registration statement on Form S-1 filed on April 16, 2018 is declared effective by the SEC; and 1.75% on the thirtieth calendar day after the date on which such registration statement on Form S-1 is declared effective by the SEC.
The Company agreed to pay to Leviston, on each day that Leviston receives a capital call from the Company, all expenses associated with depositing, clearing, selling and mailing of the stock certificates, a fee of 0.75% of any amount purchased by Leviston. Also, the Company paid $35,000 to Leviston for a documentation fee for preparing the 2018 Purchase Agreement. This was recorded in additional paid-in-capital as an off-set to the vendors didproceeds received. Leviston will refund the Company $15,000 if certain future conditions are met. Such conditions have not involve a public offering, and no general solicitation or advertisement was made in connection with the offeringbeen met as of the shares todate of issuance of this Form 10-Q.
Because the vendors.
During the three months ended March 31, 2017, we did not issue any warrants, no warrants were exercised2018, the Company issued 3,120,000 shares of its common stock in connection with conversions of its Series B Preferred Stock and 3,362,276 warrants expired. During the three months ended March 31, 2016, we issued warrants to purchase 2,933,1063,345,334 shares of its common stock in connection with conversions of its Series C Preferred Stock. Aside from 60,000 shares of common stock and no warrants were exercised. The warrantsissued in connection with conversions of its Series C Preferred Stock, all of the shares of common stock issued in the three months ended March 31, 2016 included 1,051,650 warrants2018 in connection with conversions of its Series B Preferred Stock and Series C Preferred Stock (together the “Preferred Stock”) were issued dueafter the Company induced the holders of its Preferred Stock to repricing requirementsconvert their shares of Preferred Stock to shares of the Private Placement and 1,881,456 warrantscompany’s common stock (see below - Preferred Stock induced conversions).
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During the three months ended March 31, 2018, the Company issued 300,000 shares of its common stock in connection with the January 2016 Offering. Warrantsexercise of 300,000 warrants. The warrant exercise resulted in net cash proceeds to purchase an aggregatethe Company of 3,334,011 shares of common stock were outstanding at March 31, 2017.
| Warrant Holder | Issue Year | Expiration | Underlying Shares | Exercise Price | ||||
Various Institutional Holders(1) | 2013 | January 2018 | 441,655 | $9.00 | ||||
Affiliates of Third Security, LLC(1) | 2013 | January 2018 | 250,000 | $9.00 | ||||
Various Institutional Holders(2) | 2014 | April 2020 | 374,618 | $4.00 | ||||
Various Institutional Holders(3) | 2015 | February 2020 | 714,780 | $2.24 | ||||
Various Institutional Holders(4) | 2015 | December 2020 | 122,433 | $1.66 | ||||
Various Institutional Holders(5) | 2015 | January 2021 | 1,161,972 | $1.21 | ||||
Affiliates of Third Security, LLC(6) | 2016 | January 2021 | 161,026 | $1.21 | ||||
Various Institutional Holders(6) | 2016 | January 2021 | 107,527 | $1.21 | ||||
| 3,334,011 | ||||||||
Preferred Stock Series A.
The Company’s Board of Directors is authorized to issue up to 15,000,000 shares of preferred stock in one or more series, from time to time, with such designations, powers, preferences and rights and such qualifications, limitations and restrictions as may be provided in a resolution or resolutions adopted by the Board of Directors. The authority of
Series B Preferred Stock.
On August 25, 2017, the Board of Directors includes, but is not limited to, the determination or fixing of the following with respect to shares of such class or any series thereof: (i) the number of shares; (ii) the dividend rate, whether dividends shall be cumulative and, if so, from which date; (iii) whether shares are to be redeemable and, if so, the terms and amount of any sinking fund providing for the purchase or redemption of such shares; (iv) whether shares shall be convertible and, if so, the terms and provisions thereof; (v) what restrictions are to apply, if any, on the issue or reissue of any additional preferred stock; and (vi) whether shares have voting rights. The preferred stock may be issued with a preference over the common stock as to the payment of dividends. We have no current plans to issue any additional preferred stock. Classes of stock such as the preferred stock may be used, in certain circumstances, to create voting impediments on extraordinary corporate transactions or to frustrate persons seeking to effect a merger or otherwise to gain control of the Company. For the foregoing reasons, any additional preferred stock issued by the Company could have an adverse effect on the rights of the holders of the common stock.
On August 28, 2017, the Company completed the August 2017 Offering of 6,000 units consisting of one share of the Company’s Series AB Preferred Stock, are entitled to receive quarterly dividends, which accrue at the rate of 10% of the original price per share per annum, whether or not declared, and which shall compound annually and shall be cumulative. In any calendar quarter in which we have positive distributable cash flow as defined in the Series A Purchase Agreement, we are required to pay from funds legally available a cash dividend in the amount equal to the lesser of 50% of such distributable cash flow or the aggregate amount of dividends accrued on the Series A Preferred Stock.
In November 2017, the holdersdown round feature of the Series B Preferred Stock also are entitled to elect or appoint,was triggered at the time of the Company’s issuance of its Series C Preferred Stock and, as a single group, two directorsresult, the conversion price of the Company.
The 2018 Purchase Agreement triggered the down round feature of the Series B Preferred Stock and, as a result, the conversion price of the Company’s Series B Convertible Preferred Stock was automatically adjusted from $1.40 per share to $1.04 per share. In connection with the down round adjustment, the Company calculated an incremental beneficial conversion feature of approximately $1.4 million which was recognized as a deemed dividend at time of the down round adjustment.
The 2018 Inducement Agreement, discussed below, triggered the down round feature of the Series A financing, we alsoB Preferred Stock and, as a result, the conversion price of the Company’s Series B Convertible Preferred Stock was automatically adjusted from $1.04 per share to $0.75 per share. In connection with the down round adjustment, the Company calculated an incremental beneficial conversion feature of approximately $40,000 which was recognized as a deemed dividend at time of the down round adjustment.
During the three months ended March 31, 2018, 2,340 shares of Series B Preferred Stock that were outstanding at December 31, 2017 were converted into 3,120,000 shares of our common stock.
At March 31, 2018, the Company had 6,900 shares of Series B designated and 47 shares of Series B issued and outstanding.
Series C Preferred Stock
On November 6, 2017, the Company filed a Certificate of Designation of Preferences, Rights and Limitations of Series C Convertible Preferred Stock (“Series C Preferred Stock”) with the State of Delaware which designates 2,748 shares of our preferred stock as Series C Preferred Stock. The Series C Preferred Stock has a stated value of $1,000 per share and a par value of $0.01 per share.
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On November 2, 2017, the Company entered into a registrationPlacement Agency Agreement (the “Placement Agreement”) with Aegis Capital Corp. for the sale on a reasonable best efforts basis of 2,748 units, each consisting of one share of the Company’s Series C Preferred Stock, convertible into a number of shares of the Company’s common stock equal to $1,000 divided by $1.40 and warrants to purchase up to 1,962,857 shares of common stock with an exercise price of $1.63 per share (the “Series C Warrants”) at a combined offering price of $1,000 per unit, in a registered direct offering (the “Series C Preferred Offering”). The Series C Preferred Stock includes a beneficial ownership blocker but has no dividend rights agreement(except to the extent dividends are also paid on the common stock). The securities comprising the units are immediately separable and were issued separately.
The conversion price of the Series C Preferred Stock contains a down round feature. The 2018 Purchase Agreement triggered the down round feature of the Series C Preferred Stock and, as a result, the conversion price of the Company’s Series B Convertible Preferred Stock was automatically adjusted from $1.40 per share to $1.04 per share. In connection with the Third Security Investorsdown round adjustment, the Company calculated an incremental beneficial conversion feature of approximately $0.8 million which was recognized as a deemed dividend at time of the down round adjustment.
During the three months ended March 31, 2018, 2,548 shares of Series C Preferred Stock that were outstanding at December 31, 2017 were converted into 3,345,334 shares of our common stock.
At March 31, 2018, the Company had 2,748 shares of Series C designated and zero shares of Series C issued and outstanding.
Preferred Stock induced conversions
On March 21, 2018, the Company entered into a Letter Agreement (the “Registration Rights“2018 Inducement Agreement”). with certain holders (the “Investors”) of shares of the Company’s Series B Preferred Stock and Series C Preferred Stock (together the “Preferred Stock”), and warrants (the “Warrants”) to purchase shares of the Company’s common stock, par value $0.01 per share (“Common Stock”), issued in the Company’s public offering in August 2017 and registered direct offering in November 2017. Pursuant to the terms of the Registration Rights2018 Inducement Agreement, the Company has granted certain demand, “piggyback” and S-3 registration rights covering the resaleInvestors agreed that, as a result of the issuance of shares of Common Stock pursuant to that Purchase Agreement, dated February 8, 2018, by and between the Company and the investor named therein, and effective as of the time of execution of the 2018 Inducement Agreement, the exercise price of the Warrants was reduced to $0.75 per share (the “Exercise Price Reduction”) and the conversion price of the Preferred Stock was reduced to $0.75 (the “Conversion Price Reduction”). As consideration for the Company’s agreement to the Exercise Price Reduction and the Conversion Price Reduction, (i) each Investor agreed to convert the shares of Preferred Stock held by such Investor into shares of Common Stock in increments of up to 4.99% of the shares of common stock underlying the
The 2018 Inducement Agreement represented an inducement by the Company to convert shares of Series Bthe Preferred Stock. The conversion price of the Preferred Stock outstanding, which were converted into 1,443,297was reduced from $1.04 per share to $0.75 per share and the exercise price of the Warrants was reduced from $1.04 per share to $0.75 per share. The Company calculated the fair value of the additional securities and consideration to be approximately $1.2 million. This amount was recorded as a charge to additional paid-in-capital and as a deemed dividend resulting in a reduction of income available to common shareholders in our basic earnings per share calculation. The $1.2 million is comprised of two components: 1) $1.1 million related to the fair value of the additional common shares of our common stock, for an aggregate of 2,305,354 shares of our common stock issued upon conversion of the Series A Preferred Stock due to the reduced conversion price and Series B Preferred2) $0.1 million in incremental fair value of the Warrants resulting from the reduction of the exercise price.
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Common Stock (the “Conversion Shares”). Warrants.
The following represents a summary of the warrants outstanding as of March 31, 2018:
| Issue Year | Expiration | Underlying Shares | Exercise Price | |||||||||
| Warrants Assumed in Merger | ||||||||||||
| (1) | 2014 | April 2020 | 12,487 | $ | 120.00 | |||||||
| (2) | 2015 | February 2020 | 23,826 | $ | 67.20 | |||||||
| (3) | 2015 | December 2020 | 4,081 | $ | 49.80 | |||||||
| (4) | 2016 | January 2021 | 8,952 | $ | 36.30 | |||||||
| Warrants | ||||||||||||
| (5) | 2017 | June 2022 | 45,600 | $ | 2.75 | |||||||
| (6) | 2017 | June 2022 | 91,429 | $ | 7.00 | |||||||
| (7) | 2017 | August 2022 | 2,380,000 | $ | 0.75 | |||||||
| (8) | 2017 | August 2022 | 60,000 | $ | 3.125 | |||||||
| (9) | 2017 | August 2022 | 856,446 | $ | 10.00 | |||||||
| (10) | 2017 | August 2022 | 359,999 | $ | 0.75 | |||||||
| (11) | 2017 | October 2022 | 10,000 | $ | 0.75 | |||||||
| (12) | 2017 | May 2023 | 1,962,857 | $ | 0.75 | |||||||
| (13) | 2018 | October 2022 | 108,112 | $ | 7.50 | |||||||
| 5,923,789 | ||||||||||||
| (1) | These warrants were issued in connection with a private placement which was completed in October 2014. |
| (2) | These warrants were issued in connection with an offering which was completed in February 2015. |
| (3) | These warrants were issued in connection with an offering which was completed in July 2015. |
| (4) | These warrants were issued in connection with an offering which was completed in January 2016. Of the remaining outstanding warrants as of March 31, 2018, 5,368 warrants are recorded as a liability, See Note 9 – Fair Value for further discussion, and 3,584 are treated as equity. |
| (5) | These warrants were issued in connection with the Merger and are the 2017 New Bridge Warrants. |
| (6) | These warrants were issued in connection with the Merger and are considered Side Warrants. |
| (7) | These warrants were issued in connection with the August 2017 Offering and are the August 2017 Offering Warrants discussed below. |
| (8) | These warrants were issued in connection with the August 2017 Offering and are considered Representative Warrants. |
| (9) | These warrants were issued in connection with the conversion of our Series A Senior stock, at the time of the closing of the August 2017 Offering, and are the Series A Conversion Warrants discussed above. |
| (10) | These warrants were issued in connection with the conversion of convertible bridge notes, at the time of the closing of the August 2017 Offering, and are the Note Conversion Warrants discussed below. |
| (11) | These warrants were issued in connection with the waiver of default the Company received in the fourth quarter of 2017 in connection with the Convertible Promissory Notes and are the Convertible Promissory Note Warrants discussed below. |
| (12) | These warrants were issued in connection with the Series C Preferred Offering and are the Series C Warrants discussed below. |
| (13) | These warrants were issued in connection with the Debt Obligation settlement agreements and are the Creditor Warrants discussed below. |
Warrants Assumed in Merger
At the time of the entry intoMerger, Transgenomic had a number of outstanding warrants related to various financing transactions that occurred between 2013-2016. Details related to year issued, expiration date, amount of underlying common shares and exercise price are included in the Conversion Agreement, there were $3.7 million in accrued and unpaid dividends on the outstanding shares of Series A Preferred Stock, which were converted, in accordance with the Conversion Agreement, into 3,681,590 shares of our common stock, and $0.8 million in accrued and unpaid dividends on the outstanding shares of Series B Preferred Stock, which were converted, in accordance with the terms of the Conversion Agreement, into 793,235 shares of our common stock, for an aggregate of 4,474,825 shares of our common stock issued pursuant to the accrued and unpaid dividends on the Series A Preferred Stock and Series B Preferred Stock. Therefore, in connection with the full conversion of the Series A Preferred Stock and Series B Preferred Stock, plus the conversion of all accrued and unpaid dividends thereon, we issued an aggregate of 6,780,179 shares of our common stock to the Preferred Holders on January 6, 2016.table above.
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During the three months ended March 31, 2017. For2018, 23,055 of the warrants assumed in the Merger expired and are no longer outstanding.
August 2017 Offering Warrants
In connection with the August 2017 Offering, the Company issued 2,680,000 warrants at an exercise price of $3.00, which contain a down round provision. As a result of the Series C Preferred Offering, the exercise priceof the August 2017 Offering Warrants was adjusted to $1.40 per share.
During the three months ended March 31, 2016, we2018, as a result of 2018 Purchase Agreement, the exercise price of the August 2017 Offering Warrants was adjusted to $1.04. At the time the exercise price was adjusted, the Company calculated the fair value of the down round provision on the warrants to be approximately $62,000 and recorded this as a deemed dividend. In addition, as a result of the 2018 Inducement Agreement, the exercise price of the August 2017 Offering Warrants was further adjusted to $0.75 as a result of the Exercise Price Reduction discussed above.
During the three months ended March 31, 2018, 300,000 of the August 2017 Offering Warrants were exercised for $0.75 per share.
Note Conversion Warrants
Upon the closing of the August 2017 Offering, the Company issued 359,999 warrants to purchase the Company’s common stock (the “Note Conversion Warrants”). The Note Conversion Warrants have an exercise price of $3.00 per share and contain a down round provision. As a result of the Series C Preferred Offering, the exercise priceof the Note Conversion Warrants was adjusted to $1.40 per share.
During the three months ended March 31, 2018, as a result of 2018 Purchase Agreement, the exercise price of the Note Conversion Warrants was adjusted to $1.04. At the time the exercise price was adjusted, the Company calculated the fair value of the down round provision on the warrants to be approximately $8,000 and recorded this as a deemed dividend. In addition, as a result of the 2018 Inducement Agreement, the exercise price of the Note Conversion Warrants was further adjusted to $0.75. At the time the exercise price was adjusted, the Company calculated the fair value of the down round provision on the warrants to be approximately $5,000 and recorded this as a deemed dividend.
Convertible Promissory Note Warrants
The Convertible Promissory Note Warrants had undeclared dividends.an original exercise price of $3.00 per share and contain a down round provision. As a result of the Series C Preferred Offering, the exercise priceof the Convertible Promissory Note Warrants was adjusted to $1.40 per share.
During the three months ended March 31, 2018, as a result of 2018 Purchase Agreement, the exercise price of the Convertible Promissory Note Warrants was adjusted to $1.04. At the time the exercise price was adjusted, the Company calculated the fair value of the down round provision on the warrants to be less than $1,000 and recorded this as a deemed dividend. In accordanceaddition, as a result of the 2018 Inducement Agreement, the exercise price of the Convertible Promissory Note Warrants was further adjusted to $0.75. At the time the exercise price was adjusted, the Company calculated the fair value of the down round provision on the warrants to be less than $1,000 and recorded this as a deemed dividend.
Series C Warrants
In connection with the FASB’s Accounting Standards Codification Topic 260-10-45-11, “
During the three months ended March 31, 2018, as a result of 2018 Purchase Agreement, the exercise price of the Series C Warrants was adjusted to $1.04. At the time the exercise price was adjusted, the Company calculated the fair value of the down round provision on the warrants to be approximately $58,000 and recorded this as a deemed dividend. In addition, as a result of the 2018 Inducement Agreement, the exercise price of the Series C Warrants was further adjusted to $0.75 as a result of the Exercise Price Reduction discussed above.
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Creditor Warrants
In the fourth quarter of 2017, the Company entered into Settlement Agreements with certain of its accounts payable and accrued liability vendors (the “Creditors”) pursuant to which the Company agreed to issue, to certain of its Creditors, 108,112 warrants to purchase 108,112 shares of the Company’s common stock at an exercise price of $7.50 per Share
9. FAIR VALUE
FASB guidance on fair value measurements, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements for our financial assets and liabilities, as well as for other assets and liabilities that are carried at fair value on a recurring basis in our condensed consolidated financial statements.
FASB guidance establishes a three-level fair value hierarchy based upon the assumptions (inputs) used to price assets or liabilities. The three levels of inputs used to measure fair value are as follows:
Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2—Observable inputs other than those included in Level 1, such as quoted prices for similar assets and liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets; and
Level 3—Unobservable inputs reflecting our own assumptions and best estimate of what inputs market participants would use in pricing the asset or liability.
Common Stock Warrant Liabilities.
Certain of our issued and outstanding warrants to purchase shares of common stock do not qualify to be treated as equity and, accordingly, are recorded as a liability.
2016 Warrant Liability
The 2012Company assumed the 2016 Warrant Liability in the Merger and it represents the fair value of the 3.4 millionTransgenomic warrants issued in February 2012 (as adjusted pursuant to the termsJanuary 2016, of the 2012 Warrants).which, 5,368 warrants remain outstanding as of March 31, 2018. We are required to record these instruments at fair value at each reporting date and changes are recorded as a non-cash adjustment to earnings. The gains or losses included in earnings are reported in other income (expense) in our condensed consolidated Statementstatement of Operations. Management does not believe that this liability will be settled byoperations.
During the three months ended March 31, 2018, a useportion of cash. The 2012 Warrants expired in February 2017 and, as such, the 20122016 Warrant Liability no longer exists at March 31, 2017.
The 20122016 Warrant Liability is considered a Level 3 financial instrument and iswas valued using athe Monte Carlo simulation model. This method is well suited to valuing options with non-standard features, such as anti-dilution protection. A Monte Carlo simulation model uses repeated random sampling to simulate significant uncertainty in inputs. Assumptionsmethodology. As of March 31, 2018, assumptions and inputs used in the valuation of the common stock warrants are broken down into four sections: Static Business Inputs; Static Technical Inputs; Simulated Business Inputs;include: remaining life to maturity of 2.75 years; annual volatility of 167%; and Simulated Technical Inputs.
During the three months ended
March 31,| 20 |
| Dollars in Thousands | ||||
| For the Three Months Ended | ||||
| March 31, 2018 | ||||
| Beginning balance at January 1 | $ | 841 | ||
| Total gains: | ||||
| Recognized in earnings | (261 | ) | ||
| Deductions – warrant liability settlement | (456 | ) | ||
| Balance at March 31 | $ | 124 | ||
10. EQUITY INCENTIVE PLAN
The Company's 2006 Equity Incentive Plan (the "2006 Plan") was terminated as to future awards on July 12, 2016. The Company's 2017 Stock Option and Incentive Plan (the "2017 Plan") was adopted by the Company's stockholders on June 5, 2017 and 2016
| Dollars in Thousands | ||||||||
| For the Three Months Ended | ||||||||
| March 31, 2017 | March 31, 2016 | |||||||
| Beginning balance at January 1 | $ | — | $ | 350 | ||||
| Total (gains) or losses: | ||||||||
| Recognized in earnings | — | (330 | ) | |||||
| Balance at March 31 | $ | — | $ | 20 | ||||
Amendment of the 1.8 million warrants issued in2017 Stock Option and Incentive Plan
On January 2016, of which, 0.8 million warrants remain outstanding as of March 31, 2017. We are required to record these instruments2018, at fair value at each reporting date and changes are recorded as a non-cash adjustment to earnings. The gains or losses included in earnings are reported in other income (expense) in our condensed consolidated Statement of Operations.
| · | increase the aggregate number of shares authorized for issuance under the 2017 Plan by 5,389,500 shares to 6,056,166 shares and cumulatively increased on January 1, 2019 and on each January 1 thereafter by the lesser of the annual increase for such year or 500,000 shares; |
| · | increase the maximum number of shares that may be granted in the form of stock options or stock appreciation rights to any one individual in any one calendar year and the maximum number of shares underlying any award intended to qualify as performance-based compensation to any one individual in any performance cycle, in each case to 1,000,000 shares of Common Stock; and |
| · | add an “evergreen” provision, pursuant to which the aggregate number of shares authorized for issuance under the 2017 Plan will be automatically increased each year beginning on January 1, 2019 by 5% of the number of shares of Common Stock issued and outstanding on the immediately preceding December 31, or such lesser number of shares determined by the Company’s Board of Directors or Compensation Committee. |
Stock Options.
During the three months ended March 31, 20172018, the Company granted stock options to employees and 2016, the changes in thedirectors to purchase up to 3,286,528 shares of common stock at a weighted average exercise price of $0.71. These awards have vesting periods of one to four years and had a weighted average grant date fair value of $0.65. The fair value calculation of options granted during the liability measured using significant unobservable inputs (Level 3) were comprisedthree months ended March 31, 2018 used the follow assumptions: risk free interest rate of 2.63% based on the following:
| Dollars in Thousands | |||||||||
| For the Three Months Ended | |||||||||
| March 31, 2017 | March 31, 2016 | ||||||||
| Beginning balance at January 1 | $ | 582 | $ | — | |||||
| Additions | — | 1,437 | |||||||
| Total (gains) or losses: | |||||||||
| Recognized in earnings | 33 | 9 | |||||||
| Balance at March 31 | $ | 615 | $ | 1,446 | |||||
The following table summarizes stock option activity under our 2006 Equity Incentive Plan (the "Plan")plans during the
Number of Options | Weighted-Average Exercise Price | |||||||
| Outstanding at January 1, 2018 | 236,484 | $ | 7.12 | |||||
| Granted | 3,286,528 | 0.71 | ||||||
| Forfeited | (2,953 | ) | 110.23 | |||||
| Outstanding at March 31, 2018 | 3,520,059 | $ | 1.06 | |||||
| Exercisable at March 31, 2018 | 42,249 | $ | 22.75 | |||||
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Number of Options | Weighted-Average Exercise Price | |||||
| Outstanding at January 1, 2017 | 738,026 | $ | 3.59 | |||
| Granted | — | — | ||||
| Forfeited | (62,739 | ) | 2.12 | |||
| Outstanding at March 31, 2017 | 675,287 | $ | 3.73 | |||
| Exercisable at March 31, 2017 | 547,957 | $ | 4.25 | |||
As of March 31, 2017,2018, there were 661,9142,650,694 options that were vested or expected to vest with an aggregate intrinsic value of zero withand a remaining weighted average contractual life of 7.29.8 years.
For the three months ended March 31, 2018 and 2017, we recorded compensation expense for all stock awards of $0.1 million and zero, respectively, within operating expense in the accompanying statements of operations. As of March 31, 2017, 83,333 outstanding and exercisable SARs shares were vested or2018, the unrecognized compensation expense related to unvested stock awards was $2.4 million, which is expected to vest. All outstanding SARsbe recognized over a weighted-average period of 3.6 years.
11. SALES SERVICE REVENUE, NET AND ACCOUNTS RECEIVABLE
Adoption of ASC Topic 606, “Revenue from contracts with customers”
On January 1, 2018, the Company adopted ASC 606 that amends the guidance for the recognition of revenue from contracts with customers to transfer goods and services by using the modified-retrospective method applied to any contracts that were issued solelynot completed as of January 1, 2018. The Company performed a comprehensive review of its existing revenue arrangements following the five-step model:
Step 1: Identification of the contract with the customer. Sub-steps include determining the customer in a contract; Initial contract identification and determine if multiple contracts should be combined and accounted for as a single transaction.
Step 2: Identify the performance obligation in the contract. Sub-steps include identifying the promised goods and services in the contract and identifying which performance obligations within the contract are distinct.
Step 3: Determine the transaction price. Sub-steps include variable consideration, constraining estimates of variable consideration, the existence of a significant financing component in the contract, noncash consideration and consideration payable to our chief executive officer. The weighted-average exercise pricea customer.
Step 4: Allocate transaction price. Sub-steps include assessing the amount of these SARs was $4.32 per shareconsideration to which the Company expects to be entitled in exchange for transferring the promised goods or services to the customer.
Step 5: Satisfaction of performance obligations. Sub-steps include ascertaining the point in time when an asset is transferred to the customer and the aggregate intrinsiccustomer obtains control of the asset upon which time the Company recognizes revenue.
Based on the Company's analysis, there were no changes identified that impacted the amount or timing of revenues recognized under the new guidance as compared to the previous guidance (ASC 605). Additionally, the Company's analysis indicated that there were no changes to how costs to obtain and fulfill our customer contracts would be recognized under the new guidance as compared to the previous guidance. Accordingly, the initial application of the new revenue standard did not result in the recognition of a cumulative effect adjustment to the opening balance of accumulated deficit as of January 1, 2018.
Nature of Contracts and Customers
The Company’s contracts and related performance obligations are similar for its customers and the sales process for all customers start upon the receipt of requisition forms from the customers for patient diagnostic testing and the execution of contracts for biomarker testing and clinical research. Payment terms for the services provided are 30 days, unless separately negotiated.
Diagnostic testing
Control of the laboratory testing services is transferred to the customer at a point in time. As such, the Company recognizes revenue for laboratory testing services at a point in time based on the delivery method (web-portal access or fax) for the patient’s laboratory report, per the contract.
Clinical research grants
Control of the clinical research services are transferred to the customer over time. The Company will recognize revenue utilizing the “effort based” method, measuring its progress toward complete satisfaction of the performance obligation.
Biomarker testing and clinical project services
Control of the biomarker testing and clinical project services are transferred to the customer over time. The Company utilizes an “effort based” method of assessing performance and measures progress towards satisfaction of the performance obligation based upon the delivery of results.
The Company generates revenue from the provision of diagnostic testing provided to patients, biomarker testing provided to bio-pharma customers and clinical research grants funded by both bio-pharma customers and government health programs.
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Disaggregation of Revenues by Transaction Type
We operate in one business segment and, therefore, the results of our operations are reported on a consolidated basis for purposes of segment reporting, consistent with internal management reporting. Revenues, net of contractual allowances and adjustments for the three months ended March 31, 2018 and 2017 were as follows (prior-period amounts are not adjusted under the modified-retrospective method of adoption):
| (dollars in thousands) | Diagnostic Testing | Biomarker Testing | Total | |||||||||||||||||||||
| 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||
| Medicaid | $ | 12 | $ | 12 | $ | — | $ | — | $ | 12 | $ | 12 | ||||||||||||
| Medicare | 134 | 158 | — | — | 134 | 158 | ||||||||||||||||||
| Self-pay | 26 | 20 | — | — | 26 | 20 | ||||||||||||||||||
| Third party payers | 131 | 113 | — | — | 131 | 113 | ||||||||||||||||||
| Contract diagnostics | — | — | 488 | — | 488 | — | ||||||||||||||||||
| Revenues, net of contractual allowances | $ | 303 | $ | 303 | $ | 488 | $ | — | $ | 791 | $ | 303 | ||||||||||||
Revenue from the Medicare and Medicaid programs account for a portion of the Company’s patient diagnostic service revenue. Laws and regulations governing those programs are extremely complex and subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates will change by a material amount in the near term.
Revenue Recognition
Revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price using the expected value method based on historical experience. The Company does not typically enter arrangements where multiple contracts can be combined as the terms regarding services are generally found within a single agreement/requisition form. The Company derives its revenues from three types of transactions: diagnostic testing, clinical research grants from state and federal research programs, and other revenues from the Company’s ICP technology and bio-pharma projects encompassing genetic diagnostics.
Deferred revenue
Deferred revenue, or unearned revenue, refers to advance payments for products or services that are to be delivered in the future. The Company records such prepayment of unearned revenue as a liability, as revenue that has not yet been earned, but represents products or services that are owed to a customer. As the product or service is delivered over time, the Company recognizes the appropriate amount of revenue from deferred revenue. For the period ended March 31, 2018 and December 31, 2017, the deferred revenue was zero$189,000 and $66,000, respectively.
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Contractual Allowances and Adjustments
We are reimbursed by payors for services we provide. Payments for services covered by payors average less than billed charges. We monitor revenue and receivables from payors and record an estimated contractual allowance for certain revenue and receivable balances as of the revenue recognition date to properly account for anticipated differences between amounts estimated in our billing system and amounts ultimately reimbursed by payors. Accordingly, the total revenue and receivables reported in our financial statements are recorded at the amounts expected to be received from these payors. For service revenue, the contractual allowance is estimated based on several criteria, including unbilled claims, historical trends based on actual claims paid, current contract and reimbursement terms and changes in customer base and payor/product mix. The billing functions for the remaining portion of our revenue are contracted and fixed fees for specific services and are recorded without an allowance for contractual discounts. The following table presents our revenues initially recognized for each associated payor class during the three months ended March 31, 2018 and 2017.
| Gross Revenues | Contractual Allowances and adjustments | Revenues, net of Contractual Allowances and adjustments | ||||||||||||||||||||||
| 2018 | �� | 2017 | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||
| Medicaid | $ | 15 | $ | 24 | $ | (3 | ) | $ | (12 | ) | $ | 12 | $ | 12 | ||||||||||
| Medicare | 137 | 166 | (3 | ) | (8 | ) | 134 | 158 | ||||||||||||||||
| Self-pay | 26 | 20 | — | — | 26 | 20 | ||||||||||||||||||
| Third party payers | 317 | 295 | (186 | ) | (182 | ) | 131 | 113 | ||||||||||||||||
| Contract diagnostics | 488 | — | — | — | 488 | — | ||||||||||||||||||
| 983 | 505 | (192 | ) | (202 | ) | 791 | 303 | |||||||||||||||||
| Other | 5 | — | — | — | 5 | — | ||||||||||||||||||
| $ | 988 | $ | 505 | $ | (192 | ) | $ | (202 | ) | $ | 796 | $ | 303 | |||||||||||
Allowance for Doubtful Accounts
The Company provides for a general allowance for collectability of services when recording net sales. The Company has adopted the policy of recognizing net sales to the extent it expects to collect that amount. Reference FASB 954-605-45-5 and ASU 2011-07, Health Care Entities: Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debt, and the Allowance for Doubtful Accounts. The change in the allowance for doubtful accounts is directly related to the increase in patient service revenues. The following table presents our reported revenues net of the collection allowance and adjustments for the three months ended March 31, 2018 and 2017.
| (dollars in thousands) | Revenues, net of Contractual Allowances and adjustments | Allowances for doubtful accounts | Total | |||||||||||||||||||||
| 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||
| Medicaid | $ | 12 | $ | 12 | $ | (11 | ) | $ | (2 | ) | $ | 1 | $ | 10 | ||||||||||
| Medicare | 134 | 158 | (20 | ) | (30 | ) | 114 | 128 | ||||||||||||||||
| Self-pay | 26 | 20 | — | (4 | ) | 26 | 16 | |||||||||||||||||
| Third party payers | 131 | 113 | (53 | ) | (19 | ) | 78 | 94 | ||||||||||||||||
| Contract diagnostics | 488 | — | — | — | 488 | — | ||||||||||||||||||
| 791 | 303 | (84 | ) | (55 | ) | 707 | 248 | |||||||||||||||||
| Other | 5 | — | — | — | 5 | — | ||||||||||||||||||
| $ | 796 | $ | 303 | $ | (84 | ) | $ | (55 | ) | $ | 712 | $ | 248 | |||||||||||
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Costs to Obtain or Fulfill a Customer Contract
Sales commissions are expensed when incurred because the amortization period would have been one year or less. These costs are recorded in operating expenses in the condensed consolidated statements of operations.
Shipping and handling costs are comprised of inbound and outbound freight and associated labor. The Company accounts for shipping and handling activities related to contracts with a remaining weighted average contractual lifecustomers as fulfillment costs which are included in cost of 6.5 years.sales in the condensed consolidated statements of operations.
Accounts Receivable
The Company has provided an allowance for potential credit losses, which has been determined based on management’s industry experience. The Company grants credit without collateral to its patients, most of who are insured under third party payer agreements.
The following summarizes the mix of receivables:
| March 31, 2018 | December 31, 2017 | |||||||
| Medicaid | $ | 33 | $ | 37 | ||||
| Medicare | 611 | 256 | ||||||
| Self-pay | 102 | 53 | ||||||
| Third party payers | 768 | 1,066 | ||||||
| Contract diagnostic services | 246 | 445 | ||||||
| Other | — | — | ||||||
| 1,760 | 1,857 | |||||||
| Less allowance for doubtful accounts | (1,208 | ) | (1,127 | ) | ||||
| Accounts receivable, net | $ | 552 | $ | 730 | ||||
The following table presents the roll-forward of the allowance for doubtful accounts for the three months ended March 31, 2018.
| (dollars in thousands) | Allowance for Doubtful Accounts | |||||||
| Balance, January 1, 2018 | $ | (1,127 | ) | |||||
| Collection Allowance: | ||||||||
| Medicaid | $ | (11 | ) | |||||
| Medicare | (20 | ) | ||||||
| Third party payers | (53 | ) | ||||||
| Service revenue, net | (84 | ) | ||||||
| Bad debt expense | $ | 3 | ||||||
| Total charges | (81 | ) | ||||||
| Balance, March 31, 2018 | $ | (1,208 | ) | |||||
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12. SUBSEQUENT EVENTS
Issuance of Convertible Notes
On April 13, 2017, Transgenomic completed20, 2018, the sale of an aggregate of $1.15 million of promissory notes (the “Bridge Notes”) in a bridge financing pursuant toCompany entered into a securities purchase agreement (the “Purchase Agreement”). Transgenomic may receive additional investments ofwith certain investors, pursuant to which the Company will issue up to $100,000approximately $3,296,703 in connection8% Senior Secured Convertible Promissory Notes with 25% common stock warrant coverage. The initial closing provided the bridge financing. The financing is intended to help facilitate the completionCompany with $1,660,000 of Transgenomic’s merger with Precipio, which is expected to close during the second quarter of 2017. Transgenomic received netgross proceeds of $1,031,000 from the sale of the Bridge Notes.
Forward-Looking Information
This Quarterly Report on Form 10-Q, including this Management’s Discussion and Analysis, contains forward-looking statements. These statements are based on management’s current views, assumptions or beliefs of future events and financial performance and are subject to uncertainty and changes in circumstances. Readers of this report should understand that these statements are not guarantees of performance or results. Many factors could affect our actual financial results and cause them to vary materially from the expectations contained in the forward-looking statements. These factors include, among other things: our expected revenue, income (loss), receivables, operating expenses, supplier pricing, availability and prices of raw materials, insurance reimbursements, product pricing, sources of funding operations and acquisitions, our ability to raise funds, sufficiency of available liquidity, future interest costs, future economic circumstances, business strategy, industry conditions, our ability to execute our operating plans, the success of our cost savings initiatives, competitive environment and related market conditions, expected financial and other benefits from our organizational restructuring activities, actions of governments and regulatory factors affecting our business, retaining key employees and other risks as described in our reports filed with the Securities and Exchange Commission. In some cases these statements are identifiable through the use of words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “would” or the negative versions of these terms and other similar expressions.
You are cautioned not to place undue reliance on these forward-looking statements. The forward-looking statements we make are not guarantees of future performance and are subject to various assumptions, risks and other factors that could cause
We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
The following discussion should be read together with our financial statements and related notes contained in this Quarterly Report on Form 10-Q and with the financial statements, related notes and Management’s Discussion and Analysis included in our Annual Report on Form 10-K for the fiscal year ended
December 31,| 26 |
Overview
Precipio, Inc., and Subsidiary, (“we”, “us”, “our”, the “Company” or “Transgenomic”“Precipio”) is a biotechnologycancer diagnostics company advancing personalized medicine forproviding diagnostic products and services to the detectiononcology market. We have built and treatmentcontinue to develop a platform designed to eradicate the problem of misdiagnosis by harnessing the intellect, expertise and technology developed within academic institutions and delivering quality diagnostic information to physicians and their patients worldwide. We operate a cancer diagnostic laboratory located in New Haven, Connecticut and have partnered with the Yale School of Medicine to capture the expertise, experience and technologies developed within academia so that we can provide a better standard of cancer diagnostics and integrated diseases through our proprietary molecular technologiessolve the growing problem of cancer misdiagnosis. We also operate a research and clinical and research services. A key goal is to bring our Multiplexed ICE COLD-PCR (“MX-ICP”) product to the clinical market through strategic partnerships and licensing agreements, enabling the use of blood and other bodily fluids for more effective and patient-friendly diagnosis, monitoring and treatment of cancer.
Recent Developments
During the first quarter of 2018, we continued to further demonstrate the power of our value proposition. In a study conducted with Yale, preliminary results showed a 4-fold superiority in arriving at accurate diagnostic results, compared with the diagnoses conducted by outside pathology laboratories. Additionally, we partnered with the molecular laboratory at the University of Pennsylvania to conduct a parallel study to demonstrate the efficacy of IV-Cell, a proprietary reagent developed and patented by Precipio.
As part of our ongoing work to further develop our product line, we launched several new products and product-improvements related to oncology and pharmacogenomics research services supporting Phase II and Phase III clinical trials conducted by pharmaceutical and biotechnology companies. Our laboratory employs a variety of genomic testing service technologies, including our proprietary MX-ICP technology. ICE COLD-PCR isliquid biopsy technology, ICE-COLD PCR (ICP). Among them, we launched our first lung cancer treatment resistance panel, both as a proprietary ultra-high sensitivity platformkit, and in our laboratory. Additionally, we integrated a unique technology called High-Resolution Melt (HRM) into our ICP kits, enabling a quick and cost-effective screen for the presence of mutations. HRM-enabled ICP kits further improve ICP’s value proposition by both rapidly improving the potential turnaround time for testing results, as well as substantially reducing the costs of testing.
These efforts drove further expansion on the commercial side of the business. During the first quarter we established distribution partnerships with breakthrough potentialkey local players in the Japanese, Brazilian, and Indian markets. We believe these markets provide a tremendous opportunity for Precipio to expand into the international markets where many patients pay out-of-pocket for their healthcare costs, thus rendering an effective, low-cost technology for the monitoring of the tumor genetics. Additionally, we hired an experienced VP of Sales to lead the domestic pathology sales team, and over the next several quarters we plan to double our sales force to expand into other regions in the US.
From a corporate and financial perspective, this quarter saw us settle our final outstanding creditor claims that carried over from the Transgenomic merger in mid-2017. We settled our claims with Crede Capital, which joins other creditors who will be receiving payments over time, to enable wide adoptionus to manage cash outlays while growing our business.
On March 26, 2018, we received written notice (or the Notice) from The Nasdaq Stock Market LLC (or the Nasdaq) indicating that we are not in compliance with the minimum bid price requirement for continued listing on the Nasdaq Capital Market. The Notice has no immediate effect on the listing of personalized, precision medicine in cancerour common stock, and other diseases. It can be run in any laboratory that contains standard PCR systems. MX-ICP enables detection of multiple known and unknown mutations from virtually any sample type, including tissue biopsies, blood, urine, saliva, cell-free DNA (“cfDNA”) and circulating tumor cells (“CTCs”) at levels greater than 1,000-fold higher than standard DNA sequencing techniques. It is easyour common stock will continue to implement and use within existing workflows. Our laboratory in Omaha is certifiedtrade on the Nasdaq Capital Market under the Clinical Laboratory Improvement Amendments (“CLIA”) assymbol “PRPO” at this time. In accordance with Nasdaq Listing rules, we have a high complexity laboratory and is accredited byperiod of 180 calendar days, or until September 24, 2018 to regain compliance. To regain compliance, the Collegeclosing bid price of American Pathologists.our common stock must meet or exceed $1.00 per share for at least ten consecutive business days during this 180 calendar day period.
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Going Concern
The following discussion should be read together with ourcondensed consolidated financial statements have been prepared using accounting principles generally accepted in the United States of America (“GAAP”) applicable for a going concern, which assume that the Company will realize its assets and related notes containeddischarge its liabilities in this Quarterly Report. Resultsthe ordinary course of business. The Company has incurred substantial operating losses and has used cash in its operating activities for the three months endedpast several years. As of March 31, 2017 are not necessarily indicative2018, the Company had a net loss of results that may be attained$2.4 million, negative working capital of $7.5 million and net cash used in the future.
To meet its current and raisesfuture obligations the Company has taken the following steps to capitalize the business and successfully achieve its business plan:
| · | On April 16, 2018, we filed a Form S-1 General Registration Statement to register and offer for future sale shares of our common stock, pursuant to entering into an Equity Purchase Agreement with Leviston Resources LLC on February 8, 2018. See Note 8 – Stockholders’ Equity of the notes to unaudited condensed consolidated financial statements. |
| · | On April 20, 2018, we entered into a securities purchase agreement with certain investors, pursuant to which we will issue up to approximately $3,296,703.30 in 8% Senior Secured Convertible Promissory Notes with 100% common stock warrant coverage. |
Notwithstanding the aforementioned circumstances, there remains substantial doubt that we will be ableabout the Company’s ability to continue as a going concern.
Results of Continuing Operations for Thethe Three Months Ended
Net Sales.
Net sales were as follows:| Dollars in Thousands | ||||||||||||||
| Three Months Ended | ||||||||||||||
| March 31, | Change | |||||||||||||
| 2017 | 2016 | $ | % | |||||||||||
| Total Net Sales | $ | 658 | $ | 236 | $ | 422 | 179 | % | ||||||
| Dollars in Thousands | ||||||||||||||||
| Three Months Ended | ||||||||||||||||
| March 31, | Change | |||||||||||||||
| 2018 | 2017 | $ | % | |||||||||||||
| Service revenue, net | $ | 707 | $ | 248 | $ | 459 | 185 | % | ||||||||
| Other | 5 | — | 5 | — | ||||||||||||
| Net Sales | 712 | 248 | 464 | 187 | % | |||||||||||
Net sales increased by $0.4 million, or
Cost of Goods Sold.
| Dollars in Thousands | |||||||||||||
| Three Months Ended | |||||||||||||
| March 31, | Margin % | ||||||||||||
| 2017 | 2016 | 2017 | 2016 | ||||||||||
| Gross Profit (Loss) | $ | 199 | $ | (269 | ) | 30 | % | (114 | )% | ||||
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Gross Profit. Gross profit and 114%gross margins were as follows:
| Dollars in Thousands | ||||||||||||||||
| Three Months Ended | ||||||||||||||||
| March 31, | Margin % | |||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| Gross Profit | $ | 24 | $ | 66 | 3 | % | 27 | % | ||||||||
Gross margin was 3% of total net sales, during the three months ended
| Three months ended March 31, | |||||||
| (Dollars in thousands) | 2016 | 2016 | |||||
| Net sales | $ | 68 | $ | 1,103 | |||
| Net income (loss) from discontinued operations, before tax | $ | 73 | $ | (1,173 | ) | ||
| Income tax expense | — | — | |||||
| Income (loss) from discontinued operations, net of tax | $ | 73 | $ | (1,173 | ) | ||
| Dollars in Thousands | |||||||||||
| March 31, 2017 | December 31, 2016 | Change | |||||||||
| Current assets (including cash and cash equivalents of $59 and $110, respectively) | $ | 567 | $ | 495 | $ | 72 | |||||
| Current liabilities | 21,129 | 19,824 | 1,305 | ||||||||
| Working capital | $ | (20,562 | ) | $ | (19,329 | ) | $ | (1,233 | ) | ||
Operating Expenses. Operating expenses primarily consist of personnel costs, professional fees, travel costs, facility costs and depreciation and amortization. Our operating expenses increased by $1.8 million during the three months ended March 31, 2016. These amounts include cash provided by discontinued operations of $0.1 million and cash used in discontinued operations of $0.6to $2.5 million for the three months ended March 31, 2018 as compared to the same period in 2017. The increase in operating expenses reflects increased compensation and other costs of $0.3 million associated with increased headcount and additional facility costs of $0.1 million resulting from the Merger and increased expenses of $0.3 million related to operating as a public company which did not exist in the first quarter of 2017. Additional increases in our general and administrative expenses resulted from increased amortization of $0.3 million related to acquired intangibles from the Merger, increased stock compensation costs of $0.1 million and increased professional fees and other expenses of $0.4 million. The increase during the three months ended March 31, 2018 also included a $0.3 million impairment of goodwill charge resulting from impairment testing of goodwill during the quarter.
Other Income (Expense). Other expense for the three months ended March 31, 2018 and 2017 includes interest expense of less than $0.1 million and 2016,$0.2 million, respectively.
Liquidity and Capital Resources
Our working capital positions were as follows:
| Dollars in Thousands | ||||||||||||
| March 31, 2018 | December 31, 2017 | Change | ||||||||||
| Current assets (including cash of $286 and $421 respectively) | $ | 1,206 | $ | 1,742 | $ | (536 | ) | |||||
| Current liabilities | 8,751 | 10,036 | (1,285 | ) | ||||||||
| Working capital | $ | (7,545 | ) | $ | (8,294 | ) | $ | 749 | ||||
During the first quarter of 2018 we received gross proceeds of $400,000 when we entered into an agreement with the Connecticut Department of Economic and Community Development by which we received a grant of $100,000 and a loan of $300,000 with a payment term of ten years and we entered into an equity purchase agreement for the purchase of up to $8,000,000 of shares of our common stock from time to time, at our option. The initial sale of 721,153 shares of our common stock resulted in net proceeds to us of approximately $709,000.
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Analysis of Cash Flows From Continuing Operations
Net Change in Cash.Cash Flows Used in Operating Activities.
Cash Flows Used in Operating Activities. The cash flows used in operating activities of approximately $1.1 million during the three months ended March 31, 2018 included a net loss of $1.8$2.4 million. These were partially offset by an increase in accrued expenses and other liabilities of $0.2 million, anda decrease accounts receivable of $0.2 million, a decrease in accrued expensesother assets of $0.6$0.2 million and non-cash adjustments of $0.7 million. The cash flows used in operating activities in the three months ended March 31, 2017 included the net loss of $0.8 million and an increase in accounts receivable of less than $0.1 million. These were partially offset by an increase in accounts payable, of $2.0 million and non-cash adjustments of $0.4 million. The cash flows used in operating activities in the first three months of 2016 included the net loss of $2.1 million and a decrease in accrued expenses and other liabilities of $0.5$0.4 million and non-cash adjustments of $0.1 million. These were partially offset by an increase in accounts receivable of $1.2 million.
Cash Flows Used inIn Investing Activities.
Cash Flows Provided by Financing Activities.
Off-Balance Sheet Arrangements
At each of
March 31,Contractual Obligations and Commitments
No significant changes to our contractual obligations outsideand commitments occurred during the normal course of businessthree months ended March 31, 2018, as compared to those disclosed in our Annual Report on Formform 10-K for the fiscal year ended December 31, 2016,2017, filed with theSecurities and Exchange Commission on April 13, 2017 except for the following.
Critical Accounting Policies and Estimates
Accounting policies used in the preparation of our consolidated financial statements may involve the use of management judgments and estimates. Certain of our accounting policies are considered critical as they are both important to the portrayal of our financial statements and require significant or complex judgments on the part of management. Our judgments and estimates are based on experience and assumptions that we believe are reasonable under the circumstances. Further, we evaluate our judgments and estimates from time to time as circumstances change. Actual financial results based on judgments or estimates may vary under different assumptions or circumstances. OurOur critical accounting policies are discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2017, filed with the Securities and Exchange Commission on April 13, 2017.2018.
Recently Issued Accounting Pronouncements
See the fiscal year ended
Impact of Inflation
We do not believe that price inflation or deflation had a material adverse effect on our financial condition or results of operations during the periods presented.
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We are a smaller reporting company, as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended, and are not required to provide the information required under this item.
ManagementAs of the end of the period covered by this Quarterly Report on Form 10-Q, management performed, with the participation of our Chief Executive Officer and Interim Chief Financial Officer, an evaluation of 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 amended (the “Exchange Act”). Our disclosure controls and procedures are designed to ensureprovide reasonable assurance that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission’s rules and forms,Commission (the “SEC”), and that such information is accumulated and communicated to our management including our Chief Executive Officer and Interimour Chief Financial Officer, to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and no evaluation of controls and procedures can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. Management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation, ourthe Chief Executive Officer and Interim Chief Financial Officer concluded that as of March 31, 2017, our disclosure controls and procedures were effective at the reasonable assurance level.as of March 31, 2018
Changes in Internal Control over Financial Reporting
We have evaluated the changes in our internal control over financial reporting that occurred during the three months ended
March 31,See the normal course of our business. In addition to the claims described in this Item 1, we are delinquent on the payment of outstanding accounts payable amounting to approximately $0.6 million with certain of our vendorsaccompanying unaudited condensed consolidated financial statements and suppliers who have taken or have threatened to take legal action to collect such outstanding amounts.
As disclosed in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016,2017, there are a number of risks and uncertainties that may have a material effect on the operating results of our business and our financial condition. There are no additional materialThe following information updates, or changes to our riskand should be read in conjunction with, the factors since the filing ofdiscussed in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016.2017, which could materially affect our business, financial condition or future results. The risks described in this Quarterly Report and our Annual Report on Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results.
We have incurred losses since our inception and expect to incur losses for the foreseeable future. We cannot be certain that we will achieve or sustain profitability.
We have incurred losses since our inception and expect to incur losses in the future. As of March 31, 2018, we had a net loss of $2.4 million, negative working capital of $7.5 million and net cash used in operating activities of $1.1 million. To date, we have experienced negative cash flow from development of our diagnostic technology, as well as from the costs associated with establishing a laboratory and building a sales force to market our products and services. We expect to incur substantial net losses for the foreseeable future to further develop and commercialize our diagnostic technology. We also expect that our selling, general and administrative expenses will continue to increase due to the additional costs associated with market development activities and expanding our staff to sell and support our products. Our ability to achieve or, if achieved, sustain profitability is based on numerous factors, many of which are beyond our control, including the market acceptance of our products, competitive product development and our market penetration and margins. We may never be able to generate sufficient revenue to achieve or, if achieved, sustain profitability.
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Because of the numerous risks and uncertainties associated with further development and commercialization of our diagnostic technology and any future tests, we are unable to predict the extent of any future losses or when we will become profitable, if ever. We may never become profitable and you may never receive a return on an investment in our securities. An investor in our securities must carefully consider the substantial challenges, risks and uncertainties inherent in the development and commercialization of tests in the medical diagnostic industry. We may never successfully commercialize our diagnostic technology or any future tests, and our business may fail.
We will need to raise substantial additional capital to commercialize our diagnostic technology, and our failure to obtain funding when needed may force us to delay, reduce or eliminate our product development programs or collaboration efforts or force us to restrict or cease operations.
As of March 31, 2018, our cash balance was $0.3 million and our working capital was approximately negative $7.5 million. Due to our recurring losses from operations and the expectation that we will continue to incur losses in the future, we will be required to raise additional capital to complete the development and commercialization of our current product candidates and to pay off our obligations. To date, to fund our operations and develop and commercialize our products, we have relied primarily on equity and debt financings. When we seek additional capital, we may seek to sell additional equity and/or debt securities or to obtain a credit facility, which we may not be able to do on favorable terms, or at all. Our ability to obtain additional financing will be subject to a number of factors, including market conditions, our operating performance and investor sentiment. If we are unable to raise additional capital when required or on acceptable terms, we may have to significantly delay, scale back or discontinue the development and/or commercialization of one or more of our product candidates, restrict or cease our operations or obtain funds by entering into agreements on unattractive terms.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
| (a) | |
| Exhibits |
10.1 | |||
10.2 | |||
31.1* | |||
31.2** | |||
| Certification of | |||
32.1** | Certification of | ||
| 32.2** | Certification of Principal Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended. | ||
| 101.INS | XBRL Instance Document | ||
| 101.SCH | XBRL Taxonomy Extension Schema Document | ||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | ||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | ||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | ||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | ||
| * | Filed herewith | ||
| ** | Furnished herewith | ||
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| PRECIPIO, INC. | |||
| Date: | May 21, 2018 | By: | /S/ ILAN DANIELI |
Ilan Danieli Chief Executive Officer (Principal Executive | |||
| Date: | May 21, 2018 | By: | /S/ CARL IBERGER |
Carl Iberger Chief Financial Officer (Principal | |||
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