UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
| [X] | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
| For the quarterly period ended |
| [ ] | 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: 000-38362001-38362
PROLUNG, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 20-1922768 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| 350 W. 800 N., Suite 214 | ||
| Salt Lake City, Utah | 84103 | |
| (Address of principal executive offices) | (Zip Code) |
(801) 736–0729
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| Common | None | None |
Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ ] No [X]
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 [Yes[X] No[ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “accelerated filer”, “large accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act (Check one):
| Large accelerated filer | [ ] | Accelerated filer | [ ] | |||
| Non-accelerated filer | [X] | Smaller reporting company | [X] | |||
| Emerging growth company | [X] |
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 7(a)(2)(B) of the Securities Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X].
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of May 7,August 19, 2020 the issuer had 4,068,5574,083,557 shares of common stock, $0.001 par value, outstanding.
PROLUNG, INC.
TABLE OF CONTENTS
| 2 |
PART I – FINANCIAL INFORMATION
Condensed Consolidated Balance Sheets
(Unaudited)
| September 30, | December 31, | |||||||
| 2019 | 2018 | |||||||
| (unaudited) | ||||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash | $ | 40,385 | $ | 249,286 | ||||
| Prepaid expenses | 10,427 | 24,253 | ||||||
| Total Current Assets | 50,812 | 273,539 | ||||||
| Property and equipment, net | 25,756 | 46,699 | ||||||
| Intangible assets, net | 139,444 | 146,614 | ||||||
| Total Assets | $ | 216,012 | $ | 466,852 | ||||
| Liabilities and Stockholders’ Deficit | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | 343,240 | $ | 263,620 | ||||
| Accrued liabilities | 564,966 | 243,733 | ||||||
| Total Current Liabilities | 908,206 | 507,353 | ||||||
| Long-Term Liabilities | ||||||||
| Convertible notes payable, long-term, related party | 50,000 | - | ||||||
| Convertible notes payable, long-term, net | 4,911,247 | 3,536,868 | ||||||
| Total Long-Term Liabilities | 4,961,247 | 3,536,868 | ||||||
| Total Liabilities | 5,869,453 | 4,044,221 | ||||||
| Stockholders’ Deficit: | ||||||||
| Preferred stock, $0.001 par value; 10,000,000 shares authorized; none issued and outstanding | - | - | ||||||
| Common stock, $0.001 par value; 120,000,000 shares authorized; 3,861,849 and 3,861,849 shares issued and outstanding, respectively | 3,862 | 3,862 | ||||||
| Additional paid-in capital | 25,985,893 | 25,582,996 | ||||||
| Accumulated deficit | (31,643,196 | ) | (29,164,227 | ) | ||||
| Total Stockholders’ Deficit | (5,653,441 | ) | (3,577,369 | ) | ||||
| Total Liabilities and Stockholders’ Deficit | $ | 216,012 | $ | 466,852 | ||||
| March 31, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash | $ | 321,383 | $ | 207,421 | ||||
| Prepaid expenses | 5,427 | 5,427 | ||||||
| Total Current Assets | 326,810 | 212,848 | ||||||
| Property and equipment, net of accumulated depreciation | 119,854 | 135,633 | ||||||
| Intangible assets, net of accumulated amortization | 134,662 | 137,054 | ||||||
| Total Assets | $ | 581,326 | $ | 485,535 | ||||
| Liabilities and Stockholders’ Deficit | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | 321,180 | $ | 387,739 | ||||
| Accrued liabilities | 663,543 | 636,207 | ||||||
| Short term loans payable | 105,000 | 105,000 | ||||||
| Payable for research and development - current | 185,000 | 200,000 | ||||||
| Convertible notes payable - current, net | 1,206,931 | 1,206,931 | ||||||
| Total Current Liabilities | 2,481,654 | 2,535,877 | ||||||
| Long-Term Liabilities | ||||||||
| Payable for research and development - long term | 225,000 | 210,000 | ||||||
| Convertible notes payable, related party, net - long-term | 235,094 | 193,346 | ||||||
| Convertible notes payable, net, long-term | 4,815,299 | 4,242,966 | ||||||
| Total Long-Term Liabilities | 5,275,393 | 4,646,312 | ||||||
| Total Liabilities | 7,757,047 | 7,182,189 | ||||||
| Stockholders’ Deficit: | ||||||||
| Preferred stock, $0.001 par value; 10,000,000 shares authorized; none issued and outstanding | - | - | ||||||
| Common stock, $0.001 par value; 120,000,000 shares authorized; 4,068,557 shares issued and outstanding | 4,069 | 4,069 | ||||||
| Additional paid-in capital | 27,317,200 | 27,083,391 | ||||||
| Accumulated deficit | (34,496,990 | ) | (33,784,114 | ) | ||||
| Total Stockholders’ Deficit | (7,175,721 | ) | (6,696,654 | ) | ||||
| Total Liabilities and Stockholders’ Deficit | $ | 581,326 | $ | 485,535 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
Condensed Consolidated Statements of Operations
(Unaudited)
| For the Three Months Ended | For the Nine Months Ended | For the Three Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | March 31, | ||||||||||||||||||||||
| 2019 | 2018 | 2019 | 2018 | 2020 | 2019 | |||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||
| Revenue | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
| Total revenue | - | - | - | - | - | - | ||||||||||||||||||
| Cost of revenue: | - | - | - | - | - | - | ||||||||||||||||||
| Gross margin | - | - | - | - | - | - | ||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||
| Research and development expense | 144,817 | 412,951 | 494,745 | 1,524,767 | 191,650 | 197,151 | ||||||||||||||||||
| Selling, general and administrative expense | 407,607 | 361,876 | 1,054,278 | 2,042,167 | 379,140 | 208,602 | ||||||||||||||||||
| Total operating expenses | 552,424 | 774,827 | 1,549,023 | 3,566,934 | 570,790 | 405,753 | ||||||||||||||||||
| Loss from operations | (552,424 | ) | (774,827 | ) | (1,549,023 | ) | (3,566,934 | ) | (570,790 | ) | (405,753 | ) | ||||||||||||
| Other income (expense): | ||||||||||||||||||||||||
| Loss on debt extinguishment | - | - | (648,551 | ) | - | - | (633,628 | ) | ||||||||||||||||
| Write-off of deferred offering costs | - | - | - | (303,401 | ) | |||||||||||||||||||
| Interest expense | (100,093 | ) | (216,790 | ) | (281,395 | ) | (476,589 | ) | (142,086 | ) | (98,759 | ) | ||||||||||||
| Total other expense | (100,093 | ) | (216,790 | ) | (929,946 | ) | (779,990 | ) | (142,086 | ) | (732,387 | ) | ||||||||||||
| Net loss | $ | (652,517 | ) | $ | (991,617 | ) | $ | (2,478,969 | ) | $ | (4,346,924 | ) | $ | (712,876 | ) | $ | (1,138,140 | ) | ||||||
| Basic and diluted loss per share | $ | (0.17 | ) | $ | (0.26 | ) | $ | (0.64 | ) | $ | (1.13 | ) | $ | (0.18 | ) | $ | (0.29 | ) | ||||||
| Weighted-average common shares outstanding, basic and diluted | 3,861,849 | 3,861,848 | 3,861,849 | 3,861,848 | 4,068,557 | 3,861,848 | ||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| For the Nine Months Ended | For the Three Months Ended | |||||||||||||||
| September 30, | March 31, | |||||||||||||||
| 2019 | 2018 | 2020 | 2019 | |||||||||||||
| Cash flows from operating activities: | ||||||||||||||||
| Net loss | $ | (2,478,969 | ) | $ | (4,346,924 | ) | $ | (712,876 | ) | $ | (1,138,140 | ) | ||||
| Adjustments to reconcile net loss to net cash flows from operating activities: | ||||||||||||||||
| Depreciation and amortization | 28,113 | 29,624 | 21,759 | 9,371 | ||||||||||||
| Gain on sale of equipment | - | (3,294 | ) | |||||||||||||
| Stock-based compensation | 402,897 | 1,021,625 | 162,320 | 47,734 | ||||||||||||
| Loss on debt extinguishment | 648,551 | - | - | 633,628 | ||||||||||||
| Amortization of loan discount | 5,828 | 274,758 | 19,119 | 3,780 | ||||||||||||
| Write-off of deferred offering costs | - | 303,401 | ||||||||||||||
| Change in assets and liabilities: | ||||||||||||||||
| Inventory | - | (7,450 | ) | |||||||||||||
| Prepaid expenses | 13,826 | 19,671 | - | 1,350 | ||||||||||||
| Accounts payable | 79,620 | (79,258 | ) | (105,508 | ) | (16,516 | ) | |||||||||
| Accrued liabilities | 321,233 | 203,109 | 27,336 | 95,430 | ||||||||||||
| Net cash flows used in operating activities | (978,901 | ) | (2,584,738 | ) | ||||||||||||
| Net cash flows from operating activities | (587,850 | ) | (363,363 | ) | ||||||||||||
| Cash flows from investing activities: | ||||||||||||||||
| Proceeds from sale of equipment | - | 8,539 | ||||||||||||||
| Net cash flows provided by investing activities | - | 8,539 | ||||||||||||||
| Purchase of property and equipment | (3,588 | ) | - | |||||||||||||
| Net cash flows from investing activities | (3,588 | ) | - | |||||||||||||
| Cash flows from financing activities: | ||||||||||||||||
| Payment for placement of convertible notes payable | (25,000 | ) | (322,275 | ) | (35,100 | ) | - | |||||||||
| Proceeds from notes payable - related party | 50,000 | - | 50,000 | - | ||||||||||||
| Proceeds from notes payable | 745,000 | 2,982,750 | 690,500 | 150,000 | ||||||||||||
| Net cash flows provided by financing activities | 770,000 | 2,660,475 | ||||||||||||||
| Net cash flows from financing activities | 705,400 | 150,000 | ||||||||||||||
| Net increase (decrease) in cash | (208,901 | ) | 84,276 | 113,962 | (213,363 | ) | ||||||||||
| Cash at beginning of period | 249,286 | 636,639 | 207,421 | 249,286 | ||||||||||||
| Cash at end of period | $ | 40,385 | $ | 720,915 | $ | 321,383 | $ | 35,923 | ||||||||
| Supplemental disclosure of cash flow information: | ||||||||||||||||
| Cash paid for income taxes | $ | - | $ | - | ||||||||||||
| Cash paid for interest | $ | - | $ | 48,277 | $ | 72,509 | $ | - | ||||||||
| Supplemental disclosure of non-cash investing and financing activities: | ||||||||||||||||
| Beneficial conversion feature | $ | - | $ | 463,983 | ||||||||||||
| Warrants issued to convertible debt placement agent | $ | - | $ | 275,231 | ||||||||||||
| Discount recorded on convertible debt issuance | $ | 145,539 | $ | - | ||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
Condensed Consolidated Statement of Stockholders’ Deficit
For the Three and Nine Months Ended September 30, 2018March 31, 2019 and 20192020
(Unaudited)
| Additional | Total | Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ | |||||||||||||||||||||||||||||||||||
| Common Stock | Paid-in | Accumulated | Stockholders’ | |||||||||||||||||||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2017 | 3,861,849 | 3,862 | 21,387,907 | (21,454,945 | ) | (63,176 | ) | |||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | 989,635 | - | 989,635 | |||||||||||||||||||||||||||||||||||
| Warrants issued to convertible debt placement agent | - | - | 275,321 | - | 275,321 | |||||||||||||||||||||||||||||||||||
| Beneficial conversion feature | - | - | 463,983 | - | 463,983 | |||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | (3,355,307 | ) | (3,355,307 | ) | |||||||||||||||||||||||||||||||||
| Balance, June 30, 2018 | 3,861,849 | $ | 3,862 | $ | 23,116,846 | $ | (24,810,252 | ) | $ | (1,689,544 | ) | |||||||||||||||||||||||||||||
| Stock-based compensation | - | - | 31,990 | - | 31,990 | |||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | (991,617 | ) | (991,617 | ) | |||||||||||||||||||||||||||||||||
| Balance, September 30, 2018 | 3,861,849 | $ | 3,862 | $ | 23,148,836 | $ | (25,801,869 | ) | $ | (2,649,171 | ) | |||||||||||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2018 | 3,861,849 | 3,862 | 25,582,996 | (29,164,227 | ) | (3,577,369 | ) | 3,861,849 | 3,862 | 25,582,996 | (29,164,227 | ) | (3,577,369 | ) | ||||||||||||||||||||||||||
| Stock-based compensation | - | - | 204,236 | - | 204,236 | - | - | 47,734 | - | 47,734 | ||||||||||||||||||||||||||||||
| Net loss | - | - | - | (1,826,452 | ) | (1,826,452 | ) | - | - | - | (1,138,140 | ) | (1,138,140 | ) | ||||||||||||||||||||||||||
| Balance, June 30, 2019 | 3,861,849 | $ | 3,862 | $ | 25,787,232 | $ | (30,990,679 | ) | $ | (5,199,585 | ) | |||||||||||||||||||||||||||||
| Balance, March 31, 2019 | 3,861,849 | $ | 3,862 | $ | 25,630,730 | $ | (30,302,367 | ) | $ | (4,667,775 | ) | |||||||||||||||||||||||||||||
| Balance, December 31, 2019 | 4,068,557 | 4,069 | 27,083,391 | (33,784,114 | ) | (6,696,654 | ) | |||||||||||||||||||||||||||||||||
| Warrants issued to convertible debt placement agent | - | - | 71,489 | - | 71,489 | |||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | 198,661 | - | 198,661 | - | - | 162,320 | - | 162,320 | ||||||||||||||||||||||||||||||
| Net loss | - | - | - | (652,517 | ) | (652,517 | ) | - | - | - | (712,876 | ) | (712,876 | ) | ||||||||||||||||||||||||||
| Balance, September 30, 2019 | 3,861,849 | $ | 3,862 | $ | 25,985,893 | $ | (31,643,196 | ) | $ | (5,653,441 | ) | |||||||||||||||||||||||||||||
| Balance, March 31, 2020 | 4,068,557 | $ | 4,069 | $ | 27,317,200 | $ | (34,496,990 | ) | $ | (7,175,721 | ) | |||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
| 6 |
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1 – Organization and Summary of Significant Accounting Policies
Organization
ProLung, Inc. (the “Company”), is a Delaware corporation that was incorporated on November 22, 2004 and is doing business as (dba) “IONIQ Sciences” and “ProLung.” The Company’s headquarters are located in Salt Lake City, Utah. The Company’s business is the development, marketing and sales of precision predictive analytical medical devices specializing in lung cancer. The Company’s principal activities are primarily developing and testing of products, seeking FDA clearance for its products, developing markets and securing strategic alliances and obtaining financing.
The Company is closely monitoring the impact of the 2019 novel coronavirus, or COVID-19. COVID-19 was declared a global pandemic by the World Health Organization on March 11, 2020 and the President of the United States declared the COVID-19 outbreak a national emergency. The Company and its progress on trials and FDA approval process have been negatively affected by the disruptions of COVID-19. The Company is making every effort to keep moving forward dispute the disruptions. The future impacts of the pandemic and any resulting economic impact are largely unknown and evolving. It is possible that the COVID-19 pandemic, the measures taken by the governments of countries affected and the resulting economic impact may materially and adversely affect the Company’s results of operations, cash flows and financial position as well as its customers.
Principles of Consolidation
During the year ended December 31, 2012, the Company formed a wholly-owned subsidiary, Hilltop Acquisition Corporation, Inc., which has had no activity since its inception and is included in the accompanying condensed consolidated financial statements from the date of its formation.was dissolved during 2020.
Basis of Presentation
The accompanying condensed consolidated financial statements are unaudited and have been prepared by management in accordance with rules and regulations promulgated by the U.S. Securities and Exchange Commission and therefore certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments necessary for them to be presented fairly, with those adjustments consisting only of normal recurring adjustments. These interim financial statements should be read in conjunction with the Company’s annual consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.2019. The results of operations for the three and nine months ended September 30, 2019March 31, 2020 may not be indicative of the results to be expected for the year ending December 31, 2019.2020.
Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has generated minimal revenues thus far from its operations and no revenue during the current period. Until the Company receives FDAFood and Drug Administration (“FDA”) approval, the Company will not achieve its planned level of operations in the United States. The Company does have a Conformité Européene or CE mark for Europe and has licensed a portion of its technology to an entity located in China. The Company has incurred substantial and recurring losses to date from operations, continues to have a stockholders’ deficit and is currently dependent on debt and equity financing. These conditions raise substantial doubt about the Company’s ability to continue as a going concern for a period of one year from the issuance of these financial statements. The accompanying condensed consolidated financial statements do not include any adjustments that might result relating to the recoverability and classification of the asset carrying amounts or the amount and classification of liabilities that might result from the outcome of this risk and uncertainty.
The ability of the Company to continue as a going concern is dependent on the Company successfully obtaining additional funding, developing products that can be sold profitably, and generating cash through operating activities. Management’s plans include issuing equity or debt securities to fund capital requirements and developing ongoing operations.
Basic and Diluted Loss Per Share
The Company computes basic loss per share by dividing net loss by the weighted-average number of common shares outstanding during the period. The Company computes diluted loss per share by dividing net loss by the sum of the weighted-average number of common shares outstanding and the weighted-average dilutive common share equivalents outstanding. The computation of diluted loss per share does not assume exercise or conversion of securities that would have an anti-dilutive effect. For the threeAs of March 31, 2020, and nine months ended September 30, 2019, and 2018, the following items were excluded from the computation of diluted net loss per common share as their effect is anti-dilutive:
| For the Three Months Ended | ||||||||||||||||
| September 30, | March 31, | |||||||||||||||
| 2019 | 2018 | 2020 | 2019 | |||||||||||||
| Warrants to purchase shares | 1,228,434 | 1,231,559 | 1,284,442 | 1,225,934 | ||||||||||||
| Stock options | 508,135 | 283,417 | 544,135 | 310,635 | ||||||||||||
| Convertible notes | 1,515,961 | 698,919 | 2,028,103 | 853,044 | ||||||||||||
| 7 |
ProLung, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Convertible Debt
The Company records a beneficial conversion feature (“BCF”) related to the issuance of convertible debt that has conversion features at fixed or adjustable rates that are in-the-money when issued. The BCF for the convertible instruments is recognized equal to the intrinsic value of the conversion features which is credited to additional paid-in capital.
Adoption of New Accounting Policies
Stock Compensation – In May 2014,June 2018, the Financial Accounting Standards Board (the “FASB”)FASB issued Accounting Standards Update (“ASU”) No. 2014-09,Revenue from Contracts with Customers (Topic 606), which was amended with ASU No. 2015-14, ASU No. 2016-08, ASU No. 2016-10, ASU No. 2016-11, ASU No. 2016-12 and ASU No. 2016-20. These new standards supersede all existing revenue recognition requirements, including most industry specific guidance.2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The new ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost. Since the Company is an Emerging Growth Company this standard requires a company to recognize revenue when it transfers goods or services to customers in an amount that reflects the consideration that the company expects to receive for those goods or services.is applicable fiscal years beginning after December 15, 2019. The Company currently has no revenue and the implementation ofadopted this standard on January 1, 2020 and has no current effect.not materially impacted the Company.
Recent Accounting Pronouncements
Emerging Growth Company– We are an “emerging growth company” under the federal securities laws and will be subject to reduced public company reporting requirements. In addition, Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.
Leases-– In February 2016, the FASB issued ASU No. 2016-02:LeasesASU 2016-02 requires companies to generally recognize on the balance sheet operating and financing lease liabilities and corresponding right-of-use assets. ASU 2016-02 would be effective for the Company’s 2019 fiscal year; however, since the Company is an Emerging Growth Company and has made the election to adopt certain accounting standards when they would be applicable for private companies which is the fiscal year beginning January 1, 2020.2022. The Company will use the modified retrospective basis. The Company entered into a three year lease agreement in May 2019 and management is evaluating how the implementation of this standard will affect its 2020 balance sheet and statement operations.
Stock Compensation - In June 2018, the FASB issued ASU No. 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The new ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost. Since the Company is an Emerging Growth Company this standard is applicable fiscal years beginning after December 15, 2019. The Company is evaluating the effect that the updated standard will have on its financial statements and related disclosures.
The Company has reviewed other recent accounting pronouncements and has determined that they will not significantly impact the Company’s results of operations or financial position.
ProLung, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 2 – Research and Development Agreement
On July 29, 2019, the Company amended a license agreement dated April 10, 2013 between the Company and ProLung Biotech Wuxi / ProLung China (Wuxi). The original agreement allowed Wuxi to utilize the Company’s technology in China in return for royalty payments based on ProLung China’s revenues. Wuxi has yet to earn any revenue but has been conducting clinical trials. The license agreement was amended whereby Wuxi will provide the Company its clinical trial data, know-how and improvements which the Company will use outside the greater China area. This amendment further requires full collaboration (i.e., protocols and methodologies) between the two entities. In consideration for such trial data and know-how, the Company will make cash payments to Wuxi of up to $575,000$560,000 and issue up to 347,566 shares of common stock upon the completion of certain events.
ProLung, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Through December 31, 2019, 278,053 shares had been issued based on conditions being met. The final 69,513 shares will be issued once the final milestone is met. Through March 31, 2020 the Company has made $150,000 in cash payments arewith the remaining $410,000 payable as follows: $150,000 in October 2019; $100,000$85,000 in April 2020 (which has subsequently been reduced to $85K);pending ProLung China achieving certain mutually-agreed upon deliverables; $100,000 in October 2020; $100,000 in April 2021; $100,000 in October 2021; and $25,000 in April 2022. The Company made a $5,000 advance payment during the nine months ended September 30, 2019. Once the milestones begin to be met the Company will accrue the amount owed.
The Company will issue and value the shares as the following conditions are met:
The Company will record as research and development expense the cash amounts owed when the common stock milestones are reached and in proportion to the common stock issued to the total shares to be issued. At September 30, 2019, no expense had been recorded. However, through the end of 2019 all but 69,513 shares had been issued and earned.
Note 3 – Accrued Liabilities
Accrued liabilities consisted of the following at September 30, 2019March 31, 2020 and December 31, 2018:2019:
| September 30, | December 31, | |||||||
| 2019 | 2018 | |||||||
| Accrued interest | $ | 463,346 | $ | 187,779 | ||||
| Accrued royalties | 17,873 | 17,873 | ||||||
| Accrued settlement | 55,000 | - | ||||||
| Accrued payroll and payroll taxes | 28,747 | 38,081 | ||||||
| Accrued liabilities | $ | 564,966 | $ | 243,733 | ||||
As disclosed in Note 8, in January 2020 the Company settled with the Utah Division of Securities for $55,000. The Company was aware of this situation at September 30, 2019 and has accrued the settlement amount.
| March 31, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Accrued interest | $ | 574,593 | $ | 524,136 | ||||
| Accrued royalties | 17,873 | 17,873 | ||||||
| Accrued settlement | 30,625 | 55,000 | ||||||
| Accrued payroll and payroll taxes | 40,452 | 39,198 | ||||||
| Accrued liabilities | $ | 663,543 | $ | 636,207 | ||||
Note 4 –Convertible Notes–Notes Payable
TheDuring the three months ended March 31, 2020, the Company received $250,000issued $740,500 in convertible notes from certain current and former Board Members during 2019 ($50,000notes; $50,000 of which from a current board member). Through September 30, 2019 the Company also received $545,000 in convertible notes from certain individuals.member. These notes are unsecured, bear interest at 8% and are convertible at $3.20 per share. The notes are due March 2022. If at any time prior to the maturity date, the Company completes an initial registered public offering (IPO) of its common stock, all unpaid amounts shall automatically be converted into common stock at the lower of (i) $3.20 per share and (ii) 90% of the IPO price. Since these notes had a conversion price that was not “in the money” upon issuance there was no BCFbeneficial conversion feature recorded. On the date of issuance, the Company also assessed the conversion feature for possible derivative treatment (under ASC 815) and determined the conversion feature was indexed to the Company’s common stock and thus not a derivative.
The Company incurred $25,000$74,050 of loan costs and issued 23,150 warrants to a broker related to these loans whichloans. These warrants are exercisable at $3.20 and expire in ten years. The value of the warrants was $71,489 ($3.09 per warrant), derived utilizing the Black-Scholes Pricing Model with the following weighted average assumptions:
| Expected life | 5 years | |||
| Exercise price | $ | 3.20 | ||
| Expected volatility | 188% - 201 | % | ||
| Weighted average volatility | 188 | % | ||
| Expected dividends | n/a | |||
| Risk-free interest rate | 0.38% - 1.57 | % | ||
The total loan costs incurred of $145,539 will be amortized as a component of interest expense over the periodterm of the loans are outstanding. At September 30, 2019, $23,434convertible notes. During the three months ended March 31, 2020, the Company recognized interest expense of $19,119 related to the amortization of the loan costs. As of March 31, 2020, the unamortized balance loan costs were netted against the convertible loan balance.is $228,660.
ProLung, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
In March 2018, the Company began issuing 8% convertible promissory notes (the “convertible notes”). The convertible notes are unsecured. Principal and accrued interest were originally due two years from the date of issuance. The original terms of the convertible entitled the holder, at its option, to convert all, or any portion of the outstanding principal and interest, into shares of the Company’s common stock at a conversion price of $6.30 per share. In January 2019, the Board proposed, and a majority of the note holders agreed, to a modification to the convertible notes by extending the maturity date to March 2022 and decreasing the conversion price to $5.20 per share which was deemed to be the fair value of the common stock on the date of the modification. Due to the significance of the change in conversion price $2,862,750 of notes payable were considered extinguished and reissued. The Company recognized a loss of $633,628 as a result of this deemed extinguishment.
On April 15, 2019, the Board agreed to decrease the conversion rate of certain convertible notes to $3.20 per share. Due to the significance of the change in conversion price $3,282,750 of notes payable were considered extinguished and reissued. The Company recognized an additional loss of $14,923 as a result of this deemed extinguishment. These modifications did not require recording a BCF.
Notes payable are summarized as follows:
| September 30, | December 31, | |||||||
| 2019 | 2018 | |||||||
| Convertible notes payable; unsecured; interest at 8%; due March 2020; balance transferred to March 2022 notes | $ | - | $ | 2,982,750 | ||||
| Convertible notes payable; unsecured; interest at 8%; due March 2022 (includes related party amount of $50,000) | 3,777,750 | - | ||||||
| Convertible notes payable; unsecured; interest at 8.00%; due November 2020 | 1,206,931 | 1,206,931 | ||||||
| Unamortized discount and loan costs | (23,434 | ) | (652,813 | ) | ||||
| Notes payable, net | $ | 4,961,247 | $ | 3,536,868 | ||||
| Less: current portion, net | - | - | ||||||
| Convertible notes payable - long term, net | $ | 4,961,247 | $ | 3,536,868 | ||||
Note 5 – Equity Based Compensation
Total stock-based compensation expense from all sources for the three and nine months ended September 30, 2019 and 2018, including stock-based compensation for the options and warrants discussed in Note 6 and Note 7, has been included in the condensed consolidated statements of operations as follows:
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Research and development expense | $ | 30,139 | $ | 99,129 | $ | 84,799 | $ | 579,754 | ||||||||
| Selling, general and administrative expense | 168,522 | (67,139 | ) | 318,098 | 441,871 | |||||||||||
| Total share-based compensation | $ | 198,661 | $ | 31,990 | $ | 402,897 | $ | 1,021,625 | ||||||||
ProLung, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
| March 31, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Convertible notes payable; unsecured; interest at 8%; due March 2022 (includes related party amount of $250,000 and $200,000, respectively) | 5,279,053 | 4,538,553 | ||||||
| Convertible notes payable; unsecured; interest at 8.00%; due November 2020 | 1,206,931 | 1,206,931 | ||||||
| Unamortized discount and loan costs (includes related party amounts of $14,906 and $6,654, respectively) | (228,660 | ) | (102,241 | ) | ||||
| Notes payable, net | $ | 6,257,324 | $ | 5,643,243 | ||||
| Less: current portion, net | (1,206,931 | ) | (1,206,931 | ) | ||||
| Convertible notes payable - long term, net | $ | 5,050,393 | $ | 4,436,312 | ||||
Note 65 – Common Stock Options
Equity Incentive Plan
In April 2017, the Board, contingent on shareholder approval, approved the ProLung, Inc. Stock Incentive Plan (the “Plan”). The shareholders approved the Plan in July 2017. The Plan authorizes the Board compensation Committee to grant incentive stock options, non-incentive stock options, stock bonuses, restricted stock, and performance-based awards to directors, officers and employees and non-employee agents, consultants, advisers and independent contractors of the Company or any parent or subsidiary of the Company. In May 2020, the Plan was modified by the Board.
2020 Board and Employee Option Grants
In June 2019, the Board’s approved the issuance of 135,000 options to employees of the Company at an exercise price of $3.20 per option. These options vest monthly over one year. The fair value of these options was $2.87 per option or $387,730 and will be expensed over the relative vesting period. During 2019, 2,500 of these options have been forfeited.
As part of an agreement for their service during September 20192020 current Board members accepted the issuance of 65,00018,000 options to Board members at an exercise prices ranging fromprice of $3.20 to $5.20 per option. These options vested upon issuance. The fair value of these options was $2.79$3.12 per option or $181,187$56,204 and was expensed upon grant.
The fair value was computed using the Black Scholes method using the following weighted-average assumptions:
| 2020 | ||||
| Expected life | 5.0 years | |||
| Exercise price | $ | 3.20 | ||
| Expected volatility | 201 | % | ||
| Weighted average volatility | 201 | % | ||
| Expected dividends | n/a | |||
| Risk-free interest rate | 0.37 | % | ||
ProLung, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
A summary of option activity for the ninethree months ended September 30, 2019March 31, 2020 is presented below:
| Weighted | Aggregate | |||||||||||||
| Weighted | Average | Intrinsic | ||||||||||||
| Shares | Average | Remaining | Value of | |||||||||||
| Under | Exercise | Contractual | Vested | |||||||||||
| Options | Price | Life | Options | |||||||||||
| Outstanding at December 31, 2018 | 310,635 | $ | 7.41 | 9.2 years | ||||||||||
| Issued | 200,000 | $ | 3.63 | |||||||||||
| Adjustment | - | $ | - | |||||||||||
| Forfeited/Expired | (2,500 | ) | $ | - | ||||||||||
| Outstanding at September 30, 2019 | 508,135 | $ | 5.93 | 6.3 years | $ | - | ||||||||
| Vested at September 30, 2019 | 426,886 | $ | 6.44 | 7.5 years | $ | - | ||||||||
| Weighted | Aggregate | |||||||||||||
| Weighted | Average | Intrinsic | ||||||||||||
| Shares | Average | Remaining | Value of | |||||||||||
| Under | Exercise | Contractual | Vested | |||||||||||
| Options | Price | Life | Options | |||||||||||
| Outstanding at December 31, 2019 | 526,135 | $ | 5.85 | 8.7 years | ||||||||||
| Issued | 18,000 | $ | 3.20 | |||||||||||
| Exercised | - | $ | - | |||||||||||
| Forfeited/Expired | - | $ | - | |||||||||||
| Outstanding at March 31, 2020 | 544,135 | $ | 5.75 | 8.5 years | $ | - | ||||||||
| Vested at March 31, 2020 | 511,635 | $ | 5.91 | 8.4 years | $ | - | ||||||||
The Company recorded an expense of $162,320 and $47,734 for the three months ended March 31, 2020 and 2019 related to the amortization of options issued under the plan. The remaining unrecognized expense of $258,092$71,408 will be recognized through June 2020 with a weighted average term of 0.480.25 years.
Total stock-based compensation expense from options and warrants (Note 6) and related amortization have been included in the statements of operations as follows:
ProLung, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2020 | 2019 | |||||||
| Research and development expense | $ | 12,496 | $ | 36,339 | ||||
| Selling, general and administrative expense | 149,824 | 11,395 | ||||||
| Total share-based compensation | $ | 162,320 | $ | 47,734 | ||||
Note 76 – Common Stock Warrants
The Company has issued warrants to purchase its common stock for equity, debt and compensation reasons. See Note 4 for 23,150 warrants issued as part of loan issuance costs during the three months ended March 31, 2020.
In August 2019 the Company and a former consultant reinstated a consulting agreement whereby this consultant, based on services rendered, will receive 1,875 warrants a month through May 2020. A member of this consulting firm is also onDuring the Board. Through September 30, 2019, 3,750three months ended March 31, 2020, 5,625 warrants had been issued. The warrants have an exercise price of $4.00 and vest upon issuance and expire October 2024. The fair value of the warrant shares issued through September 30, 2019 was $8,290$13,284 and recorded as an expense during the period. The weighted-average assumptions used for these warrant shares were risk-free interest rate of 1.53%0.26% to 0.81%, expected volatility of 136%143% to 163% (weighted average 150%), expected life of 2.5 years, and expected dividend yield of zero.
ProLung, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
A summary of warrant activity for the ninethree months ended September 30, 2019March 31, 2020 is presented below:
| Weighted | Aggregate | |||||||||||||
| Weighted | Average | Intrinsic | ||||||||||||
| Shares | Average | Remaining | Value of | |||||||||||
| Under | Exercise | Contractual | Vested | |||||||||||
| Warrants | Price | Life | Warrants | |||||||||||
| Outstanding at December 31, 2018 | 1,227,809 | $ | 5.21 | 3.4 years | ||||||||||
| Issued | 3,750 | $ | 4.00 | |||||||||||
| Exercised | - | |||||||||||||
| Expired/Forfeited | (3,125 | ) | $ | 4.00 | ||||||||||
| Outstanding at September 30, 2019 | 1,228,434 | $ | 5.21 | 2.7 years | $ | - | ||||||||
The intrinsic value at September 30, 2019 is zero and is calculated at $3.20 per share less the exercise price, based on management’s latest estimate of the fair value of the shares of common stock, which is the latest price the Board valued the convertible debt.
| Weighted | Aggregate | |||||||||||||
| Weighted | Average | Intrinsic | ||||||||||||
| Shares | Average | Remaining | Value of | |||||||||||
| Under | Exercise | Contractual | Vested | |||||||||||
| Warrants | Price | Life | Warrants | |||||||||||
| Outstanding at December 31, 2019 | 1,255,667 | $ | 5.17 | 2.5 years | ||||||||||
| Issued | 28,775 | $ | 3.36 | 4.9 years | ||||||||||
| Exercised | - | |||||||||||||
| Expired/Forfeited | - | $ | 4.00 | |||||||||||
| Outstanding at March 31, 2020 | 1,284,442 | $ | 5.13 | 2.3 years | $ | - | ||||||||
| Vested at March 31, 2020 | 1,284,442 | $ | 5.13 | 2.3 years | $ | - | ||||||||
Note 87 – Commitments and Contingencies
LeaseResearch and Development Agreement
In May 2019 the Company entered intoSee Note 2 Research and Development Agreement for commitment to ProLung China under a new lease agreement for its office space. The lease amount is $3,600 per monthresearch and expires in April 2022. The Company inhabited the office in September and incurred $3,600 in lease expense as it relates to this lease.development agreement.
Utah Division of Securities
On April 23, 2019, the Utah Division of Securities (the “Division”) filed a Notice of Agency Action and an Order to Show Cause before the Division of Securities of the Department of Commerce of the State of Utah against the Company, Jared Bauer (Bauer) and former Board Members (Clark Campbell, Tim Treu, Todd Morgan and Robert Raybould).
In January 2020, the Division issued a Stipulation and Consent Order which set forth the following: 1) the Company agrees to settle the matter with the Division by way of the Stipulation and Consent Order; 2) the Stipulation and Consent Order fully resolves all claims the Division has against the Company pertaining to the Order to Show Cause; 3) the Division, ProLungthe Company and Bauer, agree to promptly file a stipulation and joint motion to dismiss ProLungthe Company and Bauer from this administrative action, with respect to Count 1 against ProLungthe Company and Bauer (the only claim brought against Bauer); 4) In or about April 2014, the Company Board of Directors circulated a consent agreement regarding the issuance of 582,102 (72,763 post-split) ProLung72,763 Company stock certificates to select members of the ProLungCompany Board of Directors in connection with “financing services provided” by those members; 5) In or about April 2014, ProLungthe Company issued stock grants of 216,000 (27,000 post-split)27,000 shares to Robert W. Raybould, 16,350 (2,044 post-split)2,044 shares to Steve Eror, 63,750 (7,969 post-split)7,969 shares to Tim Treu; 193,500 (24,188 post-split)24,188 shares to Clark Campbell; and 97,500 (12,188 post-split)12,188 shares to Todd Morgan; 6) Subsequent to issuance of those shares, ProLung was informed by counsel of potential consequences for ProLungPro Lung employing unlicensed agents and individuals receiving the shares as compensation directly for sale of securities without a securities license, as opposed to receiving shares as compensation for generalized board service. Subsequently, no further shares were issued as compensation for fundraising. Mr. Eror returned his shares to the Company. However, Raybould, Treu, Campbell and Morgan did not return their shares to the Company. ProLungThe Company did not disclose the potential licensing violation until on or about December 3, 2018, in its Note Purchase Agreements.
ProLung, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
As set forth by the Company in its Form 8-K dated November 27, 2019, Campbell, Treu, Morgan, and Raybould entered into Stipulation and Consent Orders wherein they returned shares of stock to the Company’s treasury and paid fines to the Division of Securities.
On January 9, 2020, the Division entered an order as follows: 1) entering certain Findings and Conclusions by the Division, which ProLung admitted via a Stipulation and Consent Order; 2) ordering ProLung to cease and desist from violating Utah Uniform Securities Act (the “Act”)and to comply with the requirements of the Act in all future business in the state of Utah; 3) ordering ProLung to disclose the contents of the order to investors and prospective investors in all future capital raising efforts and disclosure documents of ProLung; and 4) Ordering ProLung to pay a fine of $55,000 to the Division. Through March 31, 2020, the Company had paid $24,375 toward the fine leaving $30,625 still owed at March 31, 2020
| 12 |
ProLung, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 98 – Subsequent Events
Subsequent to September 30, 2019,March 31, 2020, the Company has raised approximately $1.6M$1,054,000 in convertible notes. These notes are convertible at $3.20 per share bear interest at 8% and mature in March 2022. As part of the proceeds the Company incurred $95,400 in loan fees and issued 29,818 warrants to a broker as part of loan issuance costs.
In April 2020, the Company applied for and received funding from the Payroll Protection Program (the “PPP Loan”) in the amount of $126,000 under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The PPP Loan matures in 2022 and bears interest at a rate of 1.0% per annum. Monthly amortized principal and interest payments are deferred for six months after the date of disbursement. The Promissory Note contains events of default and other provisions customary for a loan of this type. The Paycheck Protection Program provides that the use of PPP Loan amount shall be limited to certain qualifying expenses and may be partially or wholly forgiven in accordance with the requirements set forth in the CARES Act.
In May 2020, the Company issued 15,000 shares to a consultant for services rendered.
On June 30, 2020 the Company issued 13,000 options to Directors for their services rendered. These options have an exercise price of $2.47 per share.
As mentioned in Note 8, certain former directors of the Company returned 71,345 shares of common stock as part of a settlement withconsulting agreement discussed in Note 6 the Utah Division of Securities. There was no consideration givenCompany issued 3,750 warrants at $4.00 per share through May 2020 to these shareholders for the return of the shares.satisfy this agreement.
Subsequent to September 30, 2019In May 2020, the Company has issued 278,053 shares73,887 options to ProLung China for achieving certainemployees at an exercise price of the milestones mentioned$2.47. These options vest over four years and expire in Note 2 above. These shares will be valued at $3.20 per share and will be recorded as research and development expense.10 years.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the financial statements and related notes that appear elsewhere in this Quarterly Report on Form 10-Q (this “Report”) and the Annual Report on Form 10-K for the year ended December 31, 20182019 (the “2018“2019 Form 10-K”) of ProLung, Inc. (the “Company”).
The statements contained in this Report that are not purely historical are forward-looking statements. Our forward-looking statements include, but are not limited to, statements regarding our expectations, hopes, beliefs, intentions, or strategies regarding the future. In addition, any statements that refer to projections, forecasts, or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words “anticipates,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “should” and “would,” as well as similar expressions, may identify forward-looking statements, but the absence of these words does not mean a statement is not forward looking. The forward-looking statements contained in this Report are based on our current expectations and beliefs concerning future developments and their potential effects on us. There can be no assurance that future developments affecting us will be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties, or assumptions, many of which are beyond our control that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. Important factors that could cause these differences include the following:
| ● | We are a development stage company with limited revenue and no assurance of earning significant revenue over the long term. |
| ● | We will need significant capital to execute our business plan, particularly as we continue to seek clearance from the FDA to market our IONIQ ProLung Test. |
| ● | We are dependent upon financings to fund our operations and may be unable to continue as a going concern. |
| ● | We have issued indebtedness and, if we are unable to repay or refinance it, our creditors could foreclose on our assets and force us into bankruptcy. |
| ● | We are in the early stages of commercialization, and our IONIQ ProLung Test may never receive marketing approval from the FDA or achieve commercial market acceptance. |
| ● | Our future growth depends, in part, on our ability to penetrate foreign markets, where we would be subject to additional regulatory burdens and other risks and uncertainties. |
| ● | We are reliant on a single product and if we are not successful in commercializing the IONIQ ProLung Test and are unable to develop additional products, our business will not succeed. |
| ● | We are subject to litigation risk for product liability if our IONIQ ProLung Test is not effective. |
| ● | We may incur substantial product liability expenses due to manufacturing or design defects, or the use or misuse of our products. |
| ● | We are subject to the risk of product recalls if our products are defective. |
| ● | We may not obtain any, or adequate, third-party coverage and reimbursement for our prospective customers. |
| ● | The absence of, or limits on, reimbursements may affect our revenues and our ability to achieve profitability. |
| ● | If the IONIQ ProLung Test is not accepted by physicians and patients, we will be unable to achieve market acceptance. |
| ● | We are a small company and may be unable to compete with competitive technologies. |
| ● | We are dependent upon our suppliers to safely and timely manufacture our products. |
| ● | We are dependent upon third parties for marketing and other aspects of our business. |
| ● | Any clinical trials that we conduct, including our ongoing trial, may not be completed on schedule, or at all, or may be more expensive than we expect, which could prevent or delay regulatory authorization(s) of our products or impair our financial position. |
| ● | We engage in related party transactions, which result in a conflict of interest involving our management. |
| ● | Our clinical studies, including our ongoing clinical study, may produce unfavorable results. |
| ● | Our success depends upon our ability to effectively market our products. |
| ● | We are dependent on key personnel, whose employment may be terminated by the Company or the employee at any time, which could cause significant disruption in our business and lead to significant expenses. |
| ● | We must obtain regulatory clearance or approval in the US and other non-European Union markets to be able to commence marketing and sales in those markets. |
| ● | Even if we receive regulatory clearance or approval for the IONIQ ProLung Test, we still may not be able to successfully commercialize it and the revenue that we generate from its sales, if any, may be limited. |
| ● | If we obtain FDA clearance or approval, we will be subject to Medical Device Reporting. |
| ● | Recently proposed healthcare reform measures could hinder or prevent the commercial success of our products. |
| ● | We will be subject to healthcare fraud and abuse law regulations. |
| ● | Our business is subject to complex and evolving U.S. and international laws and regulation regarding privacy and data protection. Many of these laws and regulations are subject to change and uncertain interpretation and could result in claims, changes to our business practices, penalties, increased cost of operations, or declines in user growth or engagement, or otherwise harm our business. |
| ● | ProLung clinical study designs have not been reviewed by the FDA, and there is a risk that the FDA will not agree with our study designs or results. |
| ● | We may be unable to protect our intellectual property rights, which are important to the potential value of our products and company. |
| ● | We rely on an exclusive license maintained by the licensor, and if the licensor does not adequately defend the license our business may be harmed. |
| ● | We may incur significant costs and liability if we infringe, or are accused of infringing on, the intellectual property rights of others. |
| ● | We may need to market the IONIQ ProLung Test under a different name in the EU to avoid the risk of infringement. |
| ● | If outstanding warrants are exercised, or Convertible Debentures are converted, stockholders will be diluted. |
| ● | Our officers and directors have significant voting power and may take actions that may not be in the best interests of other stockholders. |
| ● | Our common stock is not quoted or traded in any market, limiting liquidity opportunities for investors. |
| ● | Provisions in our charter documents and under Delaware law could discourage a takeover that stockholders may consider favorable and may lead to entrenchment of management. |
| ● | We are subject to various regulatory regimes, and may be adversely affected by inquiries, investigations and allegations that we have not complied with governing rules and laws. |
| ● | If a market develops for our common stock, we expect the market price to be volatile and trading in our common stock to be of limited volume. |
| ● | We have never paid, and do not intend to pay in the future, dividends on our common stock. |
| ● | We are uncertain when or if full clinical results will be complete and when they will be submitted to the FDA. |
| ● | Although we are capable of internally manufacturing to meet foreseeable demand, we may at some time be dependent upon contract manufacturers to safely and timely manufacture our products. |
| ● | While we have completed the on-site procedures for the clinical trials, the statistical plan has not yet been reviewed by the FDA and will likely require up to three months for their review, but there can be no assurance of that timeline. |
| ● | If we receive FDA approval of our statistical plan, of which there can be no assurance, we will then need to complete the analysis of the study results; we anticipate this will take one month, but can provide no assurance as to this timing. |
| ● | There is no guarantee that FDA approval will lead to the IONIQ ProLung Test being approved by payors for reimbursement. |
| ● | Our IONIQ ProLung Test may produce false positive and false negative results. |
In addition, please review the other, and more detailed, risk factors discussed in our 20182019 Form 10-K.
Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements.
Forward-looking statements speak only as of the date they are made. You should not put undue reliance on any forward-looking statements. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions, or changes in other factors affecting forward-looking information, except to the extent required by applicable securities laws. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.
Overview
We are a medical technology company specializingwith a mission to dramatically improve cancer outcomes by the development of our modern screening technology for the early detection of multiple cancers, which has the potential to expand therapeutic windows, significantly improve survivability, and reduce treatment costs. Half of all Americans will be diagnosed with cancer during their lifetimes and one in predictivefive of those diagnosed with cancer will die from it. Clinical literature shows that early detection can save lives and money. The first planned product utilizing our proprietary analytic early stageplatform, the IONIQ ProLung Test™ for lung cancer, has been designated a Breakthrough Device by the U.S. FDA. We remain fully committed to gaining U.S. FDA regulatory de novo clearance and subsequently commercializing the IONIQ ProLung Test for lung cancer.
Lung cancer is the leading cause of cancer death in the US and the world according to American Cancer Society and World Health Organization. Current statistics reflect an average 17% survival rate at five years for those diagnosed with lung cancer. Early detection substantially improves rates of survival. Patients at high risk testing, which we referof lung cancer are recommended to asundergo regular Computed Tomography “CT” chest scans to detect nodules. Due to the “ProLung Test.”risks and costs associated with assessing malignancy by current technology, patients now normally wait from three months to 3.5 years to have the risk of malignancy assessed upon detection of a nodule by CT chest scan. Our non-invasive, rapid and radiation-freeIONIQ ProLung Test was developed to assessprovide a non-invasive, rapid and radiation-free option for assessing the risk of malignancy in lung nodules found in the chest by a Computed Tomography (“CT”) scan, which is currently the primary method used for the early detection of lung cancer. As lung cancer is the leading cause of cancer death, early detection makes a substantial improvement in survival in a large population group. Timely identification of malignancy is essential for patients and their families. Currently, patients often wait from three months to three and one-half years to have the risk of malignancy assessed through periodic CT scan surveillance. Until malignancy is determined to be likely, invasive biopsy and treatment are significantly delayed. Current statistics reflect a 17% survival rate at five years for those diagnosed with lung cancer.
scans.
We believe the IONIQ ProLung Test, in conjunction with the discovery of a nodule by CT scan, provides a more rapid assessment of the risk of malignancy, which must be determined prior to biopsy. Since a lung biopsy is invasive and may require life threatening thoracic surgery, physicians, patients, and insurance companies typically delay biopsy and therapy until the risk of malignancy outweighs the risk of further diagnostic procedures. For these patients, the delay reducescan reduce the treatment opportunity windowtime available to treat the tumor and may cause sustained emotional trauma.
In February 2020, the FDA designated the IONIQ ProLung Test a Breakthrough Device. Through the Breakthrough Device program, the FDA will provide ProLung with expedited reviews and the Centers for Medicare & Medicaid Services (CMS) has provisions for a simpler and faster pathway to reimbursement. This is not a marketing clearance.
We are an “emerging growth company” and a “smaller reporting company” under the federal securities laws and will be subject to reduced public company reporting requirements.
Results of Operations
The following discussion is included to describe our consolidated financial position and results of operations. The consolidated financial statements and notes thereto contain detailed information that should be referred to in conjunction with this discussion.
Three Months Ended September 30, 2019 compared to the Three Months Ended September 30, 2018
Revenues and Cost of Revenue. During the three months ended September 30,March 31, 2020 and March 31, 2019 and 2018 we had no revenues or cost of revenues.
Operating Expenses. Total operating expense for the three months ended September 30, 2019March 31, 2020 was $552,424$570,790 compared to the total operating expenses for the three months ended September 30, 2018March 31, 2019 of $774,827,$405,753, representing a decreasean increase of $222,403.$165,037. Operating expenses have been classified by management as either research and development or selling, general and administrative based on an assignment of certain expenses directly to these classifications or based on management’s allocation of certain expenses between these classifications.
The overall decreaseincrease in operating expense is primarily due to an increase in stock based compensation. In June 2019 we issued stock options to certain employees that vested over one year thereby having an amortization during the three months ended March 31, 2020 which was much larger than the amortization during the same period in 2019. Also, expenses were lower in 2019 due to us having a severe cash shortage and eliminatingcutting all unnecessarynon-essential expenses. During the same period of 2018 we incurred significant costs related to fundraising, business development and administrative costs. Due to various resignations and reductions in force our amortization of stock based compensation was much higher in 2018 compared to 2019.
Research and Development Expense. Research and development expense for the three months ended September 30, 2019,March 31, 2020, was $144,817,$191,650, compared to research and development expense of $412,951$197,151 for the three months ended September 30, 2018;March 31, 2019; representing a nominal decrease of $268,134.$5,501. This decrease was mostly due to our elimination of non-essential labor and other costs. Due to the decrease in employees we also experienced a decrease in ourless amortization of stock-basedstock based compensation. We would expect ourThe stock options issued in 2019 and resulting amortization were mostly to general and administration personnel. The stock based compensation in 2019 related to a 2017 grant which had a higher allocation to research and development costs to remain relatively constant fordevelopment. Our overall cash expenses were similar during the remainder of 2019 unless we receive additional funding.three months ended March 31, 2020 and 2019.
Selling, General and Administrative Expense.Selling, general and administrative expense for the three months ended September 30, 2019March 31, 2020 was $407,607$379,140 compared to selling, general and administrative of $361,876$208,602 for the three months ended September 30, 2018;March 31, 2019; representing an increase of $45,731.$170,538. This increase was primarily due to the substantial decrease in amortization of stock based compensation in 2018 because of various resignation of Board members who had unvested options; during 2019, we issued options to various key employees and board members which increased the stock based compensation. This increase during 2019 was offset by us allocatingAlso, due to our limited cash resourcesposition improving slightly we were able to essential activities and eliminating all non-essentialcatch up on some administrative activities.issues that had been delayed.
Other Expense. Other expense for the three months ended September 30, 2019March 31, 2020 was $100,093$142,086 as compared to $216,790$732,387 for the three months ended September 30, 2018 representing an increase of $116,697. This increase was due to the amortization of debt discount during 2018. During 2018, we pursued debt funds that had both loan costs and a discount that was to be amortized over the term of the loan. DuringMarch 31, 2019 as part of changing the note terms these loan costs were fully expensed with no amortization of costs during the three month period. The convertible promissory notes issued outstanding will have similar accrued interest throughout 2019.
Nine Months Ended September 30, 2019 compared to the Nine Months Ended September 30, 2018
Revenues and Cost of Revenue. During the nine months ended September 30, 2019 and 2018 we had no revenues or cost of revenues.
Operating Expenses. Total operating expenses for the nine months ended September 30, 2019 were $1,549,023 compared to the total operating expenses for the nine months ended September 30, 2018 of $3,566,934 representing a decrease of $2,017,911. Operating expenses have been classified by management as either research and development or selling, general and administrative based on an assignment of certain expenses directly to these classifications or based on management’s allocation of certain expenses between these classifications.
The overall decrease in operating expense is primarily due to us having a cash shortage and eliminating all unnecessary expenses. During the same period of 2018 we incurred significant costs related to fundraising, business development and administrative costs. Due to various resignations and reductions in force our amortization of stock based compensation was much higher in 2018 to 2019.
Research and Development Expense. Research and development expense for the nine months ended September 30, 2019, was $494,745, compared to research and development expense of $1,524,767 for the nine months ended September 30, 2018; representing an decrease of $1,030,022.$590,301. This decrease during 2019 was mostly due to our elimination of non-essential labor and other costs. Due to the decrease in employees we also experienced a decrease our amortization of stock-based compensation. We would expect our research and development costs to remain relatively constant for the remainder of 2019 unless we receive additional funding.
Selling, General and Administrative Expense.Selling, general and administrative expense for the nine months ended September 30, 2019, was $1,054,278 compared to selling, general and administrative of $2,042,167 for the nine months ended September 30, 2018; representing a decrease of $987,889. This significant decrease was due to allocating our limited cash resources to essential activities and eliminating all non-essential administrative activities. During the nine months ended September 30, 2018 we incurred significant travel, legal, professional and consulting expense related to investor relations, public relations, company awareness and indirect costs incurred as we concluded the public offering process. However, in February 2018, we elected to terminate our relationship with our underwriters and cancelled the offering.
Other Expense. Other expense for the nine months ended September 30, 2019 was $929,946 as compared to $779,990 for the nine months ended September 30, 2018 representing an increase of $149,956. This increase was primarily due to our loss on debt extinguishment.extinguishment during 2019. In January 2019, the holders of certain convertible debt were given the opportunity to extend the maturity date of their notes and receive a lower conversion rate. Since the adjustment was so significant we considered the notes extinguished and subsequently reissued. As a result, we recognized a $648,551$633,628 loss on the extinguishment. This was offset with an increase is offset byin interest expense. Due to higher debt amounts at March 31, 2020 compared to 2019 our write off of deferred offering costs and one-time loan costs incurred during April and May of 2018.interest expense was higher.
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Liquidity and Capital Resources
The following is a summary of our key liquidity measures at September 30, 2019March 31, 2020 and December 31, 2018:2019:
| September 30, | December 31, | March 31, | December 31, | |||||||||||||
| 2019 | 2018 | 2020 | 2019 | |||||||||||||
| Cash | $ | 40,385 | $ | 249,286 | $ | 321,383 | $ | 207,421 | ||||||||
| Current assets | 50,812 | 273,539 | 326,810 | 212,848 | ||||||||||||
| Current liabilities | (908,206 | ) | (507,353 | ) | (2,481,654 | ) | (2,535,877 | ) | ||||||||
| Working (deficit) capital | $ | (857,394 | ) | $ | (233,814 | ) | $ | (2,154,844 | ) | $ | (2,323,029 | ) | ||||
We need additional capital to continue our operations. We issued $795,000$740,500 in convertible notes during the ninethree months ended September 30, 2019.March 31, 2020. In order for us to continue operations we will need additional capital which will require us to issue equity securities, debt securities and rights to acquire equity securities. We have no existing commitment to provide capital, and given our early stage of development, we may be unable to raise sufficient capital when needed and, in any case, will likely be required to pay a high price for capital.
Our future capital requirements and adequacy of available funds will depend on many factors including:
Cash provided by (used in) operating, investing and financing activities
Cash provided by (used in) operating, investing and financing activities for the three months ended September 30,March 31, 2020 and 2019 and 2018 is as follows:
| Nine Months Ending September 30, | Three Months Ending | |||||||||||||||
| 2019 | 2018 | 2020 | 2019 | |||||||||||||
| Operating activities | $ | (978,901 | ) | $ | (2,584,738 | ) | $ | (587,850 | ) | $ | (363,363 | ) | ||||
| Investing activities | - | 8,539 | (3,588 | ) | - | |||||||||||
| Financing activities | 770,000 | 2,660,475 | 705,400 | 150,000 | ||||||||||||
| Net increase (decrease) in cash | $ | (208,901 | ) | $ | 84,276 | $ | 113,962 | $ | (213,363 | ) | ||||||
Operating Activities
For the ninethree months ended September 30,March 31, 2020, the differences between our net loss and net cash used in operating activities were due to net non-cash charges totaling $203,198 for stock-based compensation, amortization of debt discount and depreciation.
For the three months ended March 31, 2019, the differences between our net loss and net cash used in operating activities were due to net non-cash charges totaling $1,085,389$694,513 for loss on debt extinguishment, stock-based compensation, amortization of debt discount and depreciation.
For the nine months ended September 30, 2018, the differences between our net loss and net cash used in operating activities were due to net non-cash charges totaling $1,626,114 for stock-based compensation, write-off of deferred offering costs, amortization of debt discount and depreciation.
Investing Activities
During the ninethree months ended September 30, 2019 we had paid no amounts for licensing fees.March 31, 2020 the Company purchased equipment totaling $3,588. During the ninethree months ended September 30, 2018 we sold certain equipment for $8,539.March 31, 2019 the Company had no activities classified as investing activities.
Financing Activities
During the ninethree months ended September 30, 2019,March 31, 2020, cash flows from financing activities totaled $770,000.$705,400. The cash flows were related to proceeds received from the issuance of convertible notes net of placementoffering costs.
During the ninethree months ended September 30, 2018,March 31, 2019, cash flows from financing activities totaled $2,660,475.$150,000. The cash flows were related to proceeds received from the issuance of convertible notes net of loan costs paid.to current Board Members.
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Critical Accounting Policies and Estimates
The accompanying discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (GAAP). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and contingencies as of the date of the financial statements and reported amounts of revenues and expenses during the reporting periods. We evaluate our estimates on an on-going basis. We base our estimates on historical experience and on other assumptions that are believed to be reasonable under the circumstances. However, future events may cause us to change our assumptions and estimates, which may require adjustment. Actual results could differ from these estimates. We have determined that for the periods reported in this Quarterly Annual Report on Form 10-Q the following accounting policies and estimates are critical in understanding our financial condition and results of operations.
Long-lived Assets – Long-lived assets, including property and equipment, and intangible assets are tested for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. When such events occur, we compare the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group to the carrying amount of the long-lived asset or asset group. If this comparison indicates that there is an impairment, the amount of the impairment is calculated based on fair value.
Convertible Debt – The Company records a beneficial conversion feature (“BCF”) related to the issuance of convertible debt that has conversion features at fixed or adjustable rates that are in-the-money when issued. The BCF for the convertible instruments is recognized as a discount equal to the intrinsic value of the conversion features, which is also recorded as an increase to additional paid-in capital.
Stock-based Compensation – The Company measures the cost of employee and consulting services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The awards issued are valued using a fair value-based measurement method. The resulting cost is recognized over the period during which an employee or consultant is required to provide services in exchange for the award, usually the vesting period.
Emerging Growth Company– We are an “emerging growth company” under the federal securities laws and will be subject to reduced public company reporting requirements. In addition, Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. Although we have not delayed the adoption of any accounting standards, we may choose to take advantage of the extended transition period for complying with new or revised accounting standards in the future.
Off Balance Sheet Arrangements
The Company has not had any off-balance sheet arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This item is not applicable to the Company because the Company is a smaller reporting company.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of September 30, 2019.March 31, 2020. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Based on that evaluation, our interim chief executive officer concluded as of September 30, 2019March 31, 2020 that our disclosure controls and procedures were not effective to ensure that the information required to be disclosed in the reports filed or submitted by us under the Exchange Act was recorded, processed, summarized and reported within the requisite time periods and that such information was accumulated and communicated to our interim chief executive officer, as appropriate to allow for timely decisions regarding required disclosure.
The Company did not maintain effective disclosure controls and procedures as defined by the framework issued by COSO. Specifically, the Company did not effectively segregate certain accounting duties due to the small size of the Company’s accounting staff. In order to mitigate these material weaknesses regular meetings are held with the audit committee and the audit committee approves all audit functions. If at any time, we determine a new control can be implemented to mitigate these risks at a reasonable cost, it is implemented as soon as possible.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting that occurred in the three months ended September 30, 2019March 31, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
None.
We are a smaller reporting company and, as a result, are not required to provide the information under this item.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
The offer and sale of the Notes, and shares of common stock issuable upon conversion of the Note (the “Conversion Shares”) have been effected in reliance upon the exemptions for sales of securities set forth in Rule 506(c) under the Securities Act, based upon the following: (a) we have confirmed in a manner consistent with the requirements of Rule 506(c) that each investor is an “accredited investor,” as defined in Rule 501 promulgated under the Securities Act, (b) each investor has represented to us that the investor has such background, education and experience in financial and business matters as to be able to evaluate the merits and risks of an investment in the securities; (c) the investors have been provided with certain disclosure materials and all other information requested with respect to our company; (d) the investors have acknowledge that all Notes and Conversion Shares being purchased are “restricted securities” for purposes of the Securities Act, and agreed to transfer such securities only in a transaction registered under the Securities Act or exempt from registration under the Securities Act; (e) there are restrictions on transfer on the Notes, and any Conversion Shares are subject to restrictions and a legend, providing that the respective security can be transferred only if subsequently registered under the Securities Act or in a transaction exempt from registration under the Securities Act; and (f) a Form D has been filed with respect to the offering.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
None
Exhibit Number | Description | |
| 3.1 | Third Amended and Restated Certificate of Incorporation, as amended by Certificate of Amendment dated October 10, 2017(1) | |
| 3.2 | Amended and Restated By-Laws(1) | |
| 31.1 | Certification Pursuant to Rule 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as Amended* | |
| 32.1 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* | |
| 101 INS | XBRL Instance Document* | |
| 101 SCH | XBRL Schema Document* | |
| 101 CAL | XBRL Calculation Linkbase Document* | |
| 101 LAB | XBRL Labels Linkbase Document* | |
| 101 PRE | XBRL Presentation Linkbase Document* | |
| 101 DEF | XBRL Definition Linkbase Document* |
* Filed herewith
(1) Incorporated by reference from our Current Report on Form 8-K filed with the SEC on July 19, 2017.
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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.
| PROLUNG, Inc. | |||
| By: | /s/ Jared Bauer | ||
| Date | Jared Bauer, | ||
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