UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 1−SA
☒SEMIANNUAL REPORT PURSUANT TO REGULATION A
or
☐SPECIAL FINANCIAL REPORT PURSUANT TO REGULATION A
For the fiscal semiannual period ended June 30, 2019
20/20 GeneSystems, Inc.
(Exact name of issuer as specified in its charter)
Delaware | 57-2272107 | |
(State or other jurisdiction of | (I.R.S. Employer Identification No.) |
9430 Key West Ave., Rockville, MD 20850
(Full mailing address of principal executive offices)
(240) 453-6339
(Issuer’s telephone number, including area code)
Item 1. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Use of Terms
Except as otherwise indicated by the context and for the purposes of this report only, references in this report to “we,” “us,” “our” or “our company” refer to 20/20 GeneSystems, Inc., a Delaware corporation.
Special Note Regarding Forward Looking Statements
Certain information contained in this report includes forward-looking statements. The statements herein which are not historical reflect our current expectations and projections about our company’s future results, performance, liquidity, financial condition, prospects and opportunities and are based upon information currently available to our company and our management and our interpretation of what is believed to be significant factors affecting the businesses, including many assumptions regarding future events. The following factors, among others, may affect our forward-looking statements:
● | our dependence upon external sources for the financing of our operations; |
● | our ability to successfully and profitably market our products; |
● | the acceptance of our products by patients and healthcare providers; |
● | the willingness of health insurance companies and other payors to reimburse us for our performance of our diagnostic tests; |
● | the amount and nature of competition from other cancer screening products and services; |
● | our success establishing and maintaining collaborative and licensing arrangements; |
● | our dependence on a limited number of manufacturers of molecular diagnostic equipment and related chemical reagents necessary for the provision of our diagnostic tests; |
● | our ability to obtain and enforce patents and to protect our trade secrets, others could use our technology to compete with us, which could create undue competition and pricing pressures. |
● | the effects of any healthcare reforms or changes in healthcare pricing, coverage and reimbursement; and |
● | our ability to maintain regulatory approvals and comply with applicable regulations. |
Forward-looking statements, which involve assumptions and describe our future plans, strategies, and expectations, are generally identifiable by use of the words “may,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” or “project” or the negative of these words or other variations on these words or comparable terminology. Actual results, performance, liquidity, financial condition, prospects and opportunities could differ materially from those expressed in, or implied by, these forward-looking statements as a result of various risks, uncertainties and other factors. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the risks outlined under “Risk Factors” included in our Offering Statement on Form 1-A, as amended and supplemented to date (file no. 024-11056), and matters described in this report generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this report will in fact occur.
Potential investors should not place undue reliance on any forward-looking statements. Except as expressly required by the federal securities laws, there is no undertaking to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason.
The specific discussions herein about our company include financial projections and future estimates and expectations about our company’s business. The projections, estimates and expectations are presented in this report only as a guide about future possibilities and do not represent actual amounts or assured events. All the projections and estimates are based exclusively on our management’s own assessment of our business, the industry in which we work and the economy at large and other operational factors, including capital resources and liquidity, financial condition, fulfillment of contracts and opportunities. The actual results may differ significantly from the projections.
Overview
We are an early stage digital diagnostics company with the core mission of reducing cancer mortality in the U.S. and around the world through early detection. To do so, we use machine learning and big data analytics approaches to substantially improve the accuracy of tumor biomarkers that are currently tested in millions of individuals around the world. Our products include a multi-cancer test for screening at least five types of cancer from one blood sample known as OneTest (www.OneTestforCancer.com) and a blood test for early lung cancer known as PAULA’s Test. In the second half of 2019, we expect to integrate PAULA’s Test into OneTest. As most of the biomarkers used in PAULA’s Test are part of OneTest, this integration mainly centers on using common testing instrumentation.
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Our legacy business includes a patented field test kit for screening suspicious powders for bioterror agents that is used regularly by hundreds of first responder organizations worldwide known as BioCheck (www.BioCheckInfo.com). Our BioCheck kits for screening suspicious powders remains profitable but with limited growth potential, at least in the U.S. absent a serial anthrax incident, or similar incident, like the one that occurred in the U.S. in 2001.
Principal Factors Affecting our Financial Performance
Our operating results are primarily affected by the following factors:
● | our ability to access additional capital and the size and timing of subsequent financings; |
● | the costs of acquiring additional data, technology, and/or intellectual property to successfully reach our goals and to remain competitive; |
● | personnel and facilities costs in any region in which we seek to introduce and market our products; |
● | the costs of sales, marketing, and customer acquisition; |
● | average price per test paid by consumers; |
● | the number of tests ordered per quarter; |
● | costs of third-party laboratories to run our tests; |
● | willingness of healthcare providers (including telemedicine providers) to prescribe and encourage our tests and the fees charged by them to do so; |
● | the costs of compliance with any unforeseen regulatory obstacles or governmental mandates in any states or countries in which we seek to operate; and |
● | the costs of any additional clinical studies which are deemed necessary for us to remain viable and competitive in any region of the world. |
Going Concern Assessment
Our financial statements are prepared using U.S. generally accepted accounting principles, or U.S. GAAP, applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. Throughout the next 12 months from the date of this report, we intend to fund our operations through increased revenue from operations and the remaining capital raised through the recent Regulation A offering. Based on our current capital, management believes the doubt regarding our ability to continue as a going concern has been alleviated.
Results of Operations
The following table sets forth key components of our results of operations during the six months ended June 30, 2019 and 2018, both in dollars and as a percentage of our revenues.
Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | |||||||||||||||
Amount | % of Revenues | Amount | % of Revenues | |||||||||||||
Revenues | $ | 140,150 | 100.0 | $ | 125,660 | 100.0 | ||||||||||
Cost of revenues | 136,537 | 97.4 | 86,104 | 68.5 | ||||||||||||
Gross profit | 3,613 | 2.6 | 39,556 | 31.5 | ||||||||||||
Operating expenses | ||||||||||||||||
Sales, general and administrative | 1,053,269 | 751.5 | 624,010 | 496.6 | ||||||||||||
Research and development | 109,065 | 77.8 | 150,897 | 120.1 | ||||||||||||
Total operating expenses | 1,162,334 | 829.3 | 774,907 | 616.7 | ||||||||||||
Loss from operations | (1,158,721 | ) | (812.4 | ) | (735,351 | ) | (585.2 | ) | ||||||||
Total other income (expense) | 20,040 | 13.8 | (2,371 | ) | (1.9 | ) | ||||||||||
Net loss | $ | (1,138,681 | ) | (812.4 | ) | $ | (737,722 | ) | (587.1 | ) |
Revenues. We generate revenues from sales of BioCheck and OneTest, and for past periods, from sales of PAULA’s Test. Our total revenues were $140,150 for the six months ended June 30, 2019, compared to $125,660 for the six months ended June 30, 2018, an increase of $14,490, or 11.5%.
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Revenues from sales of our cancer test (OneTest) for the six months ended June 30, 2019 amount to $18,868, compared to revenues from sales of the prior year cancer test (PAULA’s Test) of $4,160 for the six months ended June 30, 2018, an increase of $14,708, or 353.6%. Revenues from our cancer test business increased compared to the prior year as we transitioned to OneTest and identified and engaged certain new addressable market segments, including firefighters, actively seeking novel cancer detection solutions. Revenues from sales of BioCheck decreased slightly from $121,500 in six months ended June 30, 2018 to $121,282 in six months ended June 30, 2019.
Cost of revenues. Our cost of revenues includes materials, labor and laboratory costs. Our cost of revenues increased by $50,433, or 58.6%, to $136,537 for the six months ended June 30, 2019 from $86,104 for the six months ended June 30, 2018. This increase was mainly due to increased purchases of diagnostic reagent kits in connection with the OneTest sales increases.
Gross profit and gross margin. Our gross profit decreased by $35,943, or 90.9%, to $3,613 for the six months ended June 30, 2019 from $39,556 for the six months ended June 30, 2018. Gross profit as a percentage of revenues (gross margin) was 2.6% and 31.5% for the six months ended June 30, 2019 and 2018, respectively. Such decreases were primarily due to the changes in product mix, with the increase in sales of OneTest, which currently have lower margins than sales from BioCheck, due to the labor and laboratory infrastructure required.
Sales, general and administrative expenses. Our sales, general and administrative expenses include sales, marketing, office leases, overhead, executive compensation, legal, regulatory, government relations, and similar expenses. Our sales, general and administrative expenses increased by $429,259, or 68.8%, to $1,053,269 for the six months ended June 30, 2019, from $624,010 for the six months ended June 30, 2018. Such increase was primarily due to an increase in sales and marketing related costs compared to the prior year period, primarily resulting from overseas business development initiatives in East Asia and the Middle East. As a percentage of revenues, sales, general and administrative expenses increased to 751.5% for the six months ended June 30, 2019 from 496.6% for the six months ended June 30, 2018.
Research and development expenses. Our research and development expenses include principally clinical data acquisitions, laboratory validation and bridging studies, data analysis algorithms and non-capitalizable machine learning software development. Our research and development expenses decreased by $41,832, or 27.7%, to $109,065 for the six months ended June 30, 2019 from $150,897 for the six months ended June 30, 2018. The decrease was due to the allocation of resources related to operations in the first half of 2019 compared to the prior year, as a result of increased sales. As a percentage of revenues, research and development expenses decreased to 77.8% for the six months ended June 30, 2019 from 120.1% for the six months ended June 30, 2018.
Net loss. As a result of the cumulative effect of the factors described above, our net loss increased by $400,959, or 54.4%, to $1,138,681 for the six months ended June 30, 2019 from $737,722 for the six months ended June 30, 2018.
Liquidity and Capital Resources
Historically, we have financed our operations from private placements of equity securities and cash generated from revenues. Our historical cash outflows have primarily been associated with cash used for operating activities such as research and development activities and other working capital needs; the acquisition of clinical data, patient samples (blood, tissue), intellectual property; and expenditures related to equipment and improvements used for our laboratory facility.
Summary of Cash Flows
As of June 30, 2019, we had approximately $1,079,738 in cash and cash equivalents. The following table presents a summary of our cash flows for the periods indicated:
Six Months Ended June 30, | ||||||||
2019 | 2018 | |||||||
Net cash used in operating activities | $ | (1,143,239 | ) | $ | (623,874 | ) | ||
Net cash used in investing activities | (2,200,000 | ) | (221,838 | ) | ||||
Net cash provided by financing activities | 1,149,483 | 180,657 | ||||||
Net decrease in cash and cash equivalents | (2,193,756 | ) | (655,055 | ) | ||||
Cash and cash equivalents at beginning of period | 3,273,494 | 1,040,083 | ||||||
Cash and cash equivalent at end of period | $ | 1,079,738 | $ | 375,028 |
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Net cash used in operating activities was $1,143,239 for the six months ended June 30, 2019, as compared to $623,874 for the six months ended June 30, 2018. The principal use of cash in operating activities was to fund our net loss. Cash flows from operations can vary significantly due to various factors, including changes in our operations, accounts receivable, prepaid expenses, accounts payable and accrued expenses.
Net cash used in investing activities was $2,200,000 for the six months ended June 30, 2019, as compared to $221,838 for the six months ended June 30, 2018. Net cash used in investing activities in the six months ended June 30, 2019 consisted of investments in certificate of deposits, while net cash used in investing activities for the six months ended June 30, 2018 mainly related to patent costs, license agreement and medical equipment purchases.
Net cash provided by financing activities for the six months ended June 30, 2019 was $1,149,483, as compared to $180,657 for the six months ended June 30, 2018. These amounts are mainly $1,149,483 and $390,657 of net proceeds from the issuance of preferred stock for the six months ended June 30, 2019 and 2018, respectively, and repayment advances of $210,000 in the six months ended June 30, 2018.
We completed an equity crowdfunding offering under Section 4(a)(6) of the Securities Act of 1933, as amended, or the Securities Act, and Regulation Crowdfunding promulgated thereunder. On December 29, 2017, we completed an initial closing in which we raised $1,018,297 in gross proceeds through the sale of 312,361 shares of our Series A-2 Preferred Stock. On January 23, 2018, we completed a second and final closing in which we raised $48,988 in gross proceeds through the sale of 15,027 shares of our Series A-2 Preferred Stock.
From time to time, investors in our company are directed to deposit funds in a limited liability company, or an Investment LLC, set up by us for the purposes of managing investments seeking the advantages of the Maryland Biotechnology Investor Tax Credit program. On January 9, 2018 and March 16, 2018, we issued 11,380 and 94,785 shares of Series A-2 Preferred Stock at $3.26 per share for gross proceeds of $37,100 and $309,000 to an Investment LLC, respectively.
On August 17, 2018, we launched an offering under Regulation A of Section 3(6) of the Securities Act for Tier 2 offerings, pursuant to which we offered a minimum of 127,479 shares of Series B Preferred Stock and a maximum of 3,399,433 shares of Series B Preferred Stock at an offering price of $3.53 per share, or a minimum of $450,000 of shares and a maximum of $12,000,000 of shares, on a “best efforts” basis. As of June 30, 2019, we have raised approximately $5.2 million in gross proceeds through the sale of 1,471,487 shares of our Series B Preferred Stock. As a result, we have received net proceeds of approximately $4.7 million.
Capital Expenditures
We incurred no capital expenditures in the six months ended June 30, 2019 and 2018, respectively. We estimate that our total capital expenditures in fiscal year 2019 will reach approximately $130,000. Such funds will be used primarily to expand office and laboratory facilities by the end of 2019 in or around our location in Rockville, MD.
Contractual Obligations
In November 2000, we entered into a licensing agreement with the United States Public Health Service, or PHS, that gave us exclusive rights to use several patents owned by PHS. The agreement was subsequently amended in 2005 and 2011. Under the most current agreement, we were required to pay minimum annual royalty fees of $7,500 due and payable on January 1 of each calendar year from 2003 through 2011. Further payment of the minimum annual royalty has been deferred until January 1 of the calendar year following the first year we achieve annual net sales of the licensed product equal to or greater than $1,000,000. The minimum annual royalty will be due January 1 of each calendar year thereafter. The PHS agreement also calls for us to pay other royalties, including earned royalties, benchmark royalties, and sublicensing royalties. In addition, the agreement requires us to reimburse PHS for patent expenses incurred. Reimbursement is due on January 1 of each calendar year beginning in 2013. Minimum reimbursement of $10,000 is due until we have achieved $500,000 in net sales of licensed products, $20,000 once we have achieved between $500,000 and $1,000,000 in net sales of licensed products, and the balance of the remaining unreimbursed patent expenses due in full once we achieve net sales of licensed products of $1,000,000 or upon termination or expiration of the license, whichever comes first. In addition, PHS continues to submit annual requests for reimbursement of patent expenses incurred throughout the preceding year. Unreimbursed patent expenses are included in accrued expenses and were $195,794 at June 30, 2019 and December 31, 2018, respectively.
In July 2002, we entered into an award and royalty agreement with MdBio, Inc. Under this agreement, we received $150,000 in funding and are to make payments of 3% of gross sales revenues beginning in June 2003 and ending when a total of $450,000 has been repaid. The remaining maximum contingent liability was $299,400 at June 30, 2019.
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During 2010, we entered into a licensing agreement with Abbott Molecular, Inc., or Abbott. Under this agreement, we retained exclusive rights to use certain processes and know-how for which Abbott has a patent pending. Under this agreement, we are to pay royalties equal to 9% of the service revenue and net sales of each licensed product sold or otherwise disposed of prior to the issuance of the related patents and 18% of sales revenue or net sales of each licensed product sold or otherwise disposed of once the related patents are issued. Royalties will be deferred until either our lung cancer testing business is acquired by Abbott or another third party or the value of the royalties exceeds $1,000,000. The agreement also allows Abbott first right to acquire our lung cancer testing business at various intervals.
In May 2011, we received a grant from the Maryland Biotechnology Center, or MBC. Under this grant agreement, we were to receive $200,000 in funding. Per the agreement, beginning January 31 of the year after the completion of the project, we are to repay MBC in payments equal to 3% of total sales revenues (excluding revenues relating to our BioCheck® product). If the grant is not repaid in full by one year after the first payment date, the total repayment will equal 150% of the award, or $300,000. If the grant is not repaid in full by two years after the first payment date, the total repayment will equal 175% of the award, or $350,000. If the grant is not repaid in full by three years after the first payment date, the total repayment will equal 200% of the award, or $400,000. The remaining maximum contingent liability was $392,013 at June 30, 2019.
In February 2016, we entered into a collaboration agreement with National Foundation for Cancer Research, Inc., or NFCR, a tax exempt 501(c)(3) organization, for the development of a cloud accessible algorithm to assist physicians in the Peoples Republic of China, or PRC, to interpret test results, and to support refinements of PAULA’s Test+™. The NFCR will assist us in obtaining blood test data from the PRC. Upon execution of the agreement, we issued NFCR 19,157 shares of Common Stock. We issued an additional 19,157 shares of Common Stock in 2016 based on the first milestone of receiving data from the first 1,000 patients located in the PRC. Per the agreement, after we have analyzed data from the initial population, we may seek additional data from more patients which can trigger an additional 38,315 shares of Common Stock being issued. To date, this provision has not yet been triggered. If, upon seeking and receiving this additional patient data as set forth in the agreement, and immediately after issuing the requisite shares, for five (5) years we shall pay to NFCR two percent (2%) of gross sales we derive from the sale, licensing and other dispositions of the developed algorithm, payable quarterly.
Effective April 17, 2017, we entered into a six-month option agreement with Chang Gung Memorial Hospital (CGMH) of Taiwan to obtain and secure an exclusive license to certain technology, intellectual property, and data relating to our pan-cancer test. The option period was extended through February 28, 2018 through an amendment executed in November 2017. The option was exercised in a timely manner, payments were made, data was transferred to us and was verified by us and we entered an exclusive license to the technology until the last patent included in the specified technology expires, or 20 years. As consideration for this option, we paid an option fee of $75,000. Once the option was exercised in February 2018, we paid an additional license fee of $150,000 in cash and $300,000 in Common Stock (through the issuance of 92,025 shares of Common Stock), which were released from escrow upon verification of the viability of the data. We have amortized the license agreement over the term amounting to an amortization expense of $29,250 and $19,071 as of June 30, 2019 and December 31, 2018, respectively.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. GAAP requires our management to make assumptions, estimates and judgments that affect the amounts reported, including the notes thereto, and related disclosures of commitments and contingencies, if any. We have identified certain accounting policies that are significant to the preparation of our financial statements. These accounting policies are important for an understanding of our financial condition and results of operation. Critical accounting policies are those that are most important to the portrayal of our financial condition and results of operations and require management’s difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly from management’s current judgments. We believe the following critical accounting policies involve the most significant estimates and judgments used in the preparation of our financial statements:
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Revenue Recognition. Effective January 1, 2018, we adopted ASC Topic 606, Revenue from Contracts with Customers, using the modified retrospective method. We determined that the adoption of ASC 606 had no material impact to our financial statements. In accordance with ASC Topic 606, we recognize revenue when the customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods and services. To determine revenue recognition for arrangements that we deem are within the scope of ASC Topic 606, we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) calculate transfer price; (iv) allocate the transaction price to the performance obligation in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. We recognize revenue from the sale of BioCheck when purchase orders are processed, and kits are shipped to customers. Revenue from the sale of OneTest and PAULA’s Test is recognized when returned testing kits are processed in the laboratory and the results are reported. Due to the nature of OneTest and PAULA’s Test, revenue per test is recorded based on historical average receipts from patients.
Inventories. Inventories are stated at the lower of cost or market using the first-in, first out (FIFO) method. Inventories consisted entirely of finished goods as of June 30, 2019 and December 31, 2018.
Intangible Assets – Patents. We capitalize patent filing fees, and we expense legal fees, in connection with internally developed pending patents. We also will capitalize patent defense costs to the extent these costs enhance the economic value of an existing patent. We evaluate the capitalized costs annually to determine if any amounts should be written down. Patent costs begin amortizing upon approval by the corresponding government and are generally amortized over the expected period to be benefitted, not to exceed the patent lives, which may be as long as 20 years.
Impairment of Long-Lived Assets. The long-lived assets held and used by us are reviewed for impairment no less frequently than annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In the event that facts and circumstances indicate that the cost of any long-lived assets may be impaired, an evaluation of recoverability is performed. There were no impairment losses during the six months ended June 30, 2019 and 2018. There can be no assurance, however, that market conditions will not change or demand for our products and services will continue, which could result in impairment of long-lived assets in the future.
Offering Costs. We comply with the requirements of Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, 340 with regards to offering costs. Prior to the completion of an offering, offering costs will be capitalized as deferred offering costs on the balance sheet. The deferred offering costs will be charged to stockholders’ equity upon the completion of an offering or to expense if the offering is not completed.
Preferred Stock. ASC 480, Distinguishing Liabilities from Equity, includes standards for how an issuer of equity (including equity shares issued by consolidated entities) classifies and measures on its balance sheet certain financial instruments with characteristics of both liabilities and equity. Management is required to determine the presentation for the preferred stock as a result of the redemption and conversion provisions, among other provisions in the agreement. Specifically, management is required to determine whether the embedded conversion feature in the preferred stock is clearly and closely related to the host instrument, and whether the bifurcation of the conversion feature is required and whether the conversion feature should be accounted for as a derivative instrument. If the host instrument and conversion feature are determined to be clearly and closely related (both more akin to equity), derivative liability accounting under ASC 815, Derivatives and Hedging, is not required. Management determined that the host contract of the preferred stock is more akin to equity, and accordingly, derivative liability accounting is not required by our company. Costs incurred directly for the issuance of the preferred stock are recorded as a reduction of gross proceeds received by us.
Research and Development. We incur research and development costs during the process of researching and developing our technologies and future manufacturing processes. Our research and development costs consist primarily of materials and services. We expense these costs as incurred until the resulting product has been completed, tested, and made ready for commercial use.
Stock-Based Compensation. We account for stock options issued to employees under ASC 718, Share-Based Payment. Under ASC 718, share-based compensation cost to employees is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the employee’s requisite vesting period. The fair value of each stock option or warrant award is estimated on the date of grant using the Black-Scholes option valuation model. We measure compensation expense for our non-employee stock-based compensation under ASC 505, Equity. The fair value of the option issued or committed to be issued is used to measure the transaction, as this is more reliable than the fair value of the services received. The fair value is measured based on the value of our Common Stock, along with other variables as applicable, on the date that the commitment for performance by the counterparty has been reached or the counterparty’s performance is complete. The fair value of the equity instrument is charged directly to stock-based compensation expense and credited to additional paid-in capital.
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Recently Issued Accounting Pronouncements
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the update requires only a single-step quantitative test to identify and measure impairment based on the excess of a reporting unit’s carrying amount over its fair value. A qualitative assessment may still be completed first for an entity to determine if a quantitative impairment test is necessary. The update is effective for fiscal year 2021 and is to be adopted on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We are currently evaluating the impact of the adoption of this guidance on our financial condition, results of operations and cash flows.
In February 2016, the FASB issued ASU 2016-02, Leases. This ASU is a comprehensive new leases standard that amends various aspects of existing guidance for leases and requires additional disclosures about leasing arrangements. It will require companies to recognize lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. Topic 842 retains a distinction between finance leases and operating leases. The classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the previous lease’s guidance. The ASU is effective for annual periods beginning January 1, 2019 for public companies and January 1, 2021 for non-public companies, including interim periods within those fiscal years; earlier adoption is permitted. In the financial statements in which the ASU is first applied, leases shall be measured and recognized at the beginning of the earliest comparative period presented with an adjustment to equity. Practical expedients are available for election as a package and if applied consistently to all leases. We are currently evaluating the impact of the adoption of this guidance on our financial condition, results of operations and cash flows.
In June 2016, the FASB issued ASU 2016-13 Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. ASU 2016-13 is effective for annual reporting periods, and interim periods within those years beginning January 1, 2020 for public companies and January 1, 2023 for non-public companies. We are currently in the process of evaluating the impact of the adoption of ASU 2016-13 on our financial statements.
Item 2. | Other Information |
We have no information to disclose that was required to be in a report on Form 1-U during the semiannual period covered by this Form 1-SA, but was not reported.
Item 3. | Financial Statements |
INDEX TO FINANCIAL STATEMENTS OF 20/20 GENESYSTEMS, INC.
Page | |
Unaudited Financial Statements for the Six Months Ended June 30, 2019 and 2018 | |
Balance Sheets as of June 30, 2019 and December 31, 2018 | F-1 |
Statements of Operations for the Six Months Ended June 30, 2019 and 2018 | F-2 |
Statements of Stockholders’ Equity for the Six Months Ended June 30, 2019 and 2018 | F-3 |
Statements of Cash Flows for the Six Months Ended June 30, 2019 and 2018 | F-4 |
Notes to the Unaudited Financial Statements | F-5 |
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BALANCE SHEETS
JUNE 30, 2019 AND DECEMBER 31, 2018
(UNAUDITED)
June 30, | December 31, 2018 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 1,079,738 | $ | 3,273,494 | ||||
Accounts receivable, net | 31,414 | 15,488 | ||||||
Inventory | 22,182 | 26,298 | ||||||
Short-term investment (certificates of deposit) | 1,218,458 | - | ||||||
Prepaid expenses | 47,825 | 16,478 | ||||||
Total current assets | 2,399,617 | 3,331,758 | ||||||
License agreement, net | 420,750 | 430,929 | ||||||
Property and equipment, net | 52,365 | 60,994 | ||||||
Intangible assets, net | 210,270 | 211,066 | ||||||
Due from affiliated entities | 57,667 | 57,667 | ||||||
Long-term investment (certificates of deposit) | 1,000,000 | - | ||||||
Other assets | 12,949 | 12,795 | ||||||
Total assets | $ | 4,153,618 | $ | 4,105,209 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 430,298 | $ | 327,668 | ||||
Accrued liabilities | 421,729 | 492,874 | ||||||
Deferred revenue | 6,122 | - | ||||||
Total current liabilities | 858,149 | 820,542 | ||||||
Commitments and contingencies (Note 6) | - | - | ||||||
Stockholders’ equity: | ||||||||
Series B preferred stock, $0.01 par value; 3,569,405 authorized; 1,471,487 and 1,110,216 shares issued and outstanding, respectively | 14,715 | 11,102 | ||||||
Series A-2 preferred stock, $0.01 par value; 800,000 authorized; 442,402 and 442,402 shares issued and outstanding, respectively | 4,424 | 4,424 | ||||||
Series A-1 preferred stock, $0.01 par value; 978,000 authorized; 651,465 and 651,465 shares issued and outstanding, respectively | 6,515 | 6,515 | ||||||
Series A preferred stock, $0.01 par value; 1,303,000 authorized; 846,368 and 846,368 shares issued and outstanding, respectively | 8,464 | 8,464 | ||||||
Common stock, $0.01 par value; 25,000,000 authorized; 4,725,633 and 4,725,633 shares issued and outstanding, respectively | 47,256 | 47,256 | ||||||
Additional paid-in capital | 21,729,686 | 20,583,816 | ||||||
Accumulated deficit | (18,515,591 | ) | (17,376,910 | ) | ||||
Total stockholders’ equity | 3,295,469 | 3,284,667 | ||||||
Total liabilities and stockholders’ equity | $ | 4,153,618 | $ | 4,105,209 |
See accompanying notes to the financial statements
F-1
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2019 AND 2018
(UNAUDITED)
2019 | 2018 | |||||||
Revenues | $ | 140,150 | $ | 125,660 | ||||
Cost of revenues | 136,537 | 86,104 | ||||||
Gross profit | 3,613 | 39,556 | ||||||
Operating expenses: | ||||||||
Sales, general and administrative | 1,053,269 | 624,010 | ||||||
Research and development | 109,065 | 150,897 | ||||||
Total operating expenses | 1,162,334 | 774,907 | ||||||
Operating loss | (1,158,721 | ) | (735,351 | ) | ||||
Other income (expense): | ||||||||
Interest income | 26,940 | 1,529 | ||||||
Other expense | (6,900 | ) | (8,900 | ) | ||||
Other income | - | 5,000 | ||||||
Total other (income) expense | (20,040 | ) | (2,371 | ) | ||||
Net loss | $ | (1,138,681 | ) | $ | (737,722 | ) | ||
Basic and diluted net loss per common share | $ | (0.24 | ) | $ | (0.16 | ) | ||
Weighted-average common shares outstanding, basic and diluted | 4,725,633 | 4,697,178 |
See accompanying notes to the financial statements
F-2
STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2019 AND 2018
(UNAUDITED)
Six Months Ended June 30, 2018
Series B Preferred Stock | Series A-2 Preferred Stock | Series A-1 Preferred Stock | Series A Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ | |||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2017 | - | $ | - | 312,361 | $ | 3,124 | 651,465 | $ | 6,515 | 846,368 | $ | 8,464 | 4,632,608 | $ | 46,326 | $ | 16,305,560 | $ | (15,913,805 | ) | $ | 456,184 | ||||||||||||||||||||||||||||||
Stock compensation | - | - | 2,301 | 23 | - | - | - | - | - | - | 7,477 | - | 7,500 | |||||||||||||||||||||||||||||||||||||||
Issuance of shares for license agreement | - | - | - | - | - | - | - | - | 92,025 | 920 | 299,080 | - | 300,000 | |||||||||||||||||||||||||||||||||||||||
Issuance of preferred stock, net of offering costs | - | - | 148,445 | 1,484 | - | - | - | - | - | - | 389,173 | - | 390,657 | |||||||||||||||||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | - | - | - | - | - | (737,722 | ) | (737,722 | ) | |||||||||||||||||||||||||||||||||||||
Balance, June 30, 2018 | - | $ | - | 463,107 | $ | 4,631 | 651,465 | $ | 6,515 | 846,368 | $ | 8,464 | 4,724,633 | $ | 47,246 | $ | 17,001,290 | $ | (16,651,527 | ) | $ | 416,619 |
Six Months Ended June 30, 2019
Series B Preferred Stock | Series A-2 Preferred Stock | Series A-1 Preferred Stock | Series A Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ | |||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2018 | 1,110,216 | $ | 11,102 | 442,402 | $ | 4,424 | 651,465 | $ | 6,515 | 846,368 | $ | 8,464 | 4,725,633 | $ | 47,256 | $ | 20,583,816 | $ | (17,376,910 | ) | $ | 3,284,667 | ||||||||||||||||||||||||||||||
Issuance of preferred stock, net of offering costs | 361,271 | 3,613 | - | - | - | - | - | - | - | - | 1,145,870 | - | 1,149,483 | |||||||||||||||||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | - | - | - | - | - | (1,138,681 | ) | (1,138,681 | ) | |||||||||||||||||||||||||||||||||||||
Balance, June 30, 2019 | 1,471,487 | $ | 14,715 | 442,402 | $ | 4,424 | 651,465 | $ | 6,515 | 846,368 | $ | 8,464 | 4,725,633 | $ | 47,256 | $ | 21,729,686 | $ | (18,515,591 | ) | $ | 3,295,469 |
See accompanying notes to the financial statements
F-3
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2019 AND 2018
(UNAUDITED)
2019 | 2018 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net loss | $ | (1,138,681 | ) | $ | (737,722 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation and amortization | 9,424 | 2,826 | ||||||
Stock issued for services | - | 7,500 | ||||||
Amortization of license fees | 10,179 | 8,900 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (15,926 | ) | 22,450 | |||||
Inventory | 4,116 | (6,484 | ) | |||||
Prepaid expenses and other | (49,959 | ) | 1,236 | |||||
Accounts payable | 102,630 | 85,420 | ||||||
Accrued liabilities | (69,809 | ) | (6,500 | ) | ||||
Deferred revenue | 4,787 | - | ||||||
Other liabilities | - | (1,500 | ) | |||||
Net cash used in operating activities | (1,143,239 | ) | (623,874 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Purchase of intangible assets | - | (59,626 | ) | |||||
Related party advances | - | (113 | ) | |||||
Investments in certificates of deposit | (2,200,000 | ) | - | |||||
Investment in license fee | - | (150,000 | ) | |||||
Investment in intangibles | - | (12,099 | ) | |||||
Net cash used in investing activities | (2,200,000 | ) | (221,838 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Repayment of investor advances, net | - | (210,000 | ) | |||||
Proceeds from sale of preferred stock, net of offering costs | 1,149,483 | 390,657 | ||||||
Net cash provided by financing activities | 1,149,483 | 180,657 | ||||||
Increase (decrease) in cash and cash equivalents | (2,193,756 | ) | (665,055 | ) | ||||
Cash and cash equivalents, beginning of year | 3,273,494 | 1,040,083 | ||||||
Cash and cash equivalents, end of year | $ | 1,079,738 | $ | 375,028 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid for interest | $ | - | $ | - | ||||
Cash paid for income taxes | $ | - | $ | - |
See accompanying notes to the financial statements
F-4
NOTES TO UNAUDITED FINANCIAL STATEMENTS
JUNE 30, 2019 AND 2018
NOTE 1 – BUSINESS AND NATURE OF OPERATIONS
20/20 GeneSystems, Inc. (the “Company”) was founded in May 2000 to develop and commercialize innovative, proprietary diagnostics tests that aid in the fight against cancer.
The Company is a digital diagnostics company with the core mission of reducing cancer mortality in the U.S. and around the world through early detection. To do so, the Company uses machine learning and big data analytics approaches to substantially improve the accuracy of tumor biomarkers that are currently tested in millions of individuals around the world. The Company’s products include a multi-cancer test for screening at least five types of cancer from one blood sample known as OneTest and a blood test for early lung cancer known as PAULA’s Test. In the second half of 2019, the Company expects to integrate PAULA’s Test into OneTest. The Company’s legacy business includes a patented field test kit for screening suspicious powders for bioterror agents that is used regularly by hundreds of first responder organizations worldwide known as BioCheck.
Going Concern
We have incurred operating losses since inception and historically relied on debt and equity financing for working capital, which raise substantial doubt about the Company’s ability to continue as a going concern. Throughout the next 12 months, the Company intends to fund its operations through increased revenue from operations and the remaining capital raised through its recent Regulation A offering. Based on the Company’s current capital, management believes the doubt regarding the Company’s ability to continue as a going concern has been alleviated.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) for interim financial information and in accordance with Rule 8-03 of Regulation S-X per Regulation A requirements. Certain information and disclosures normally included in the annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments, consisting of normal recurring adjustments considered necessary for a fair presentation, have been included. These interim consolidated financial statements should be read in conjunction with the audited annual consolidated financial statements of the Company for the years ended December 31, 2018 and 2017. The results of operations for the six months ended June 30, 2019 and 2018 are not necessarily indicative of the results that may be expected for the full year.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amount of revenues and expenses during the reporting periods. Actual results could materially differ from these estimates. It is reasonably possible that changes in estimates will occur in the near term.
F-5
20/20 GENESYSTEMS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
JUNE 30, 2019 AND 2018
Fair Value of Financial Instruments
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants as of the measurement date. Applicable accounting guidance provides an established hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors that market participants would use in valuing the asset or liability. There are three levels of inputs that may be used to measure fair value:
Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 - Include other inputs that are directly or indirectly observable in the marketplace.
Level 3 - Unobservable inputs which are supported by little or no market activity.
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of June 30, 2019 and December 31, 2018. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. These financial instruments include cash, accounts payable and accrued liabilities. Fair values for these items were assumed to approximate carrying values because of their short-term nature or they are payable on demand.
Cash and Cash Equivalents
The Company considers time deposits, certificates of deposit, and certain investments with an original maturity of three months or less to be cash equivalents.
Accounts Receivable
Accounts receivable represent amounts due from commercial customers. On June 30, 2019 and December 31, 2018, customer accounts receivable totaled $31,414 and $15,488, respectively. Management reviews open accounts monthly and takes appropriate steps for collection. When needed, an allowance for doubtful accounts is recorded to reflect management’s determination of the amount deemed uncollectable. An allowance for doubtful accounts of $1,479 is included in accounts receivable at June 30, 2019 and December 31, 2018.
Offering Costs
The Company complies with the requirements of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 340 with regards to offering costs. Prior to the completion of an offering, offering costs will be capitalized as deferred offering costs on the balance sheet. The deferred offering costs will be charged to stockholders’ equity upon the completion of an offering or to expense if the offering is not completed.
F-6
20/20 GENESYSTEMS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
JUNE 30, 2019 AND 2018
Per Share Information
Basic per share information is computed based upon the weighted average number of common shares outstanding during the period. Diluted per share information consists of the weighted average number of common shares outstanding, plus the dilutive effects of potential common shares, including convertible preferred shares, and options and warrants calculated using the treasury stock method. In loss periods, dilutive common equivalent shares are excluded as the effect would be anti-dilutive. During the six months ended June 30, 2019 and 2018, the Company excluded the outstanding securities summarized below from its calculation of diluted loss per share, as their effects would have been anti-dilutive.
2019 | 2018 | |||||||
Warrants to purchase Common Stock | 116,906 | 116,906 | ||||||
Options to purchase Common Stock | 202,917 | 202,917 | ||||||
Series B Preferred Stock | 1,471,487 | 1,110,216 | ||||||
Series A-2 Preferred Stock | 442,402 | 442,402 | ||||||
Series A-1 Preferred Stock | 651,465 | 651,465 | ||||||
Series A Preferred Stock | 846,368 | 846,368 | ||||||
3,731,545 | 3,370,274 |
Revenue Recognition
Effective January 1, 2018, the Company adopted ASC Topic 606, Revenue from Contracts with Customers, using the modified retrospective method. The Company determined that the adoption of ASC 606 had no material impact to the Company’s financial statements. In accordance with ASC Topic 606, the Company recognizes revenue when the customer obtains control of promised goods or services, in an amount that reflects the consideration which it expects to receive in exchange for those goods and services. To determine revenue recognition for arrangements that the Company deems are within the scope of ASC Topic 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) calculate transfer price; (iv) allocate the transaction price to the performance obligation in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation.
The Company recognizes revenue from the sale of BioCheck when purchase orders are processed, and kits are shipped to customers. Revenue from the sale of OneTest and PAULA’s Test is recognized when returned testing kits are processed in the laboratory and the results are reported. Due to the nature of OneTest and PAULA’s Test, revenue per test is recorded based on historical average receipts from patients.
Disaggregated Revenue ‒ The Company disaggregates revenue from contracts with customers by contract type, as it believes it best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
The Company’s revenue by contract type is as follows:
For the Six Months Ended June 30, | ||||||||
2019 | 2018 | |||||||
Revenues | ||||||||
BioCheck | $ | 121,282 | $ | 121,500 | ||||
Cancer Test (OneTest/PAULA’s Test) | 18,868 | 4,160 | ||||||
Total revenues | $ | 140,150 | $ | 125,660 |
Performance Obligations‒ Performance obligations for two different types of services are discussed below:
● | BioCheck ‒ Revenues for kits is recognized when purchase orders are processed and kits are shipped to customers. |
● | OneTest/PAULA’s Test ‒ Revenue from the sale of OneTest and PAULA’s Test is recognized when returned testing kits are processed in the laboratory and the results are reported. Due to the nature of OneTest and PAULA’s Test, revenue per test is recorded based on historical average receipts from patients and insurance companies. |
F-7
20/20 GENESYSTEMS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
JUNE 30, 2019 AND 2018
Concentrations
The Company maintains its cash at various financial institutions located in the United States of America which it believes to be credit worthy. Balances are insured by the Federal Deposit Insurance Corporation up to $250,000. At times, the Company maintains balances in excess of the federally insured limits. The Company has not experienced any losses with respect to its cash balances.
As of June 30, 2019, approximately 58% of total accounts receivable were due from three sources. As of December 31, 2018, approximately 34% of total accounts receivable were due from two sources. During the six months ended June 30, 2019, approximately 11.4% of total revenues were received from one source. During the six months ended June 30, 2018, approximately 52.5% of total revenues were received from four sources. Management believes the loss of one or more of these customers may have an effect on the Company’s financial condition.
Recent Accounting Pronouncements
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the update requires only a single-step quantitative test to identify and measure impairment based on the excess of a reporting unit’s carrying amount over its fair value. A qualitative assessment may still be completed first for an entity to determine if a quantitative impairment test is necessary. The update is effective for fiscal year 2021 and is to be adopted on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of the adoption of this guidance on its financial condition, results of operations and cash flows.
In February 2016, the FASB issued ASU 2016-02, Leases. This ASU is a comprehensive new leases standard that amends various aspects of existing guidance for leases and requires additional disclosures about leasing arrangements. It will require companies to recognize lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. Topic 842 retains a distinction between finance leases and operating leases. The classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the previous lease’s guidance. The ASU is effective for annual periods beginning January 1, 2019 for public companies and January 1, 2021 for non-public companies, including interim periods within those fiscal years; earlier adoption is permitted. In the financial statements in which the ASU is first applied, leases shall be measured and recognized at the beginning of the earliest comparative period presented with an adjustment to equity. Practical expedients are available for election as a package and if applied consistently to all leases. The Company is currently evaluating the impact of the adoption of this guidance on its financial condition, results of operations and cash flows.
In June 2016, the FASB issued ASU 2016-13 Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. ASU 2016-13 is effective for annual reporting periods, and interim periods within those years beginning January 1, 2020 for public companies and January 1, 2023 for non-public companies. The Company is currently in the process of evaluating the impact of the adoption of ASU 2016-13 on its financial statements.
NOTE 3 – PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at June 30, 2019 and December 31, 2018:
2019 | 2018 | |||||||
Office equipment | $ | 79,661 | $ | 79,661 | ||||
Furniture and fixtures | 17,132 | 17,132 | ||||||
Laboratory equipment | 383,516 | 383,516 | ||||||
Leasehold improvements | 5,700 | 5,700 | ||||||
Total property and equipment | 486,009 | 486,009 | ||||||
Less accumulated depreciation | (433,644 | ) | (425,015 | ) | ||||
$ | 52,365 | $ | 60,994 |
Depreciation expense was $8,629 and $2,030 for the six months ended June 30, 2019 and 2018, respectively.
F-8
20/20 GENESYSTEMS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
JUNE 30, 2019 AND 2018
NOTE 4 – INTANGIBLE ASSETS
Intangible assets consisted of the following at June 30, 2019 and December 31, 2018:
2019 | 2018 | |||||||
Issued patents (amortized) | $ | 31,840 | $ | 31,840 | ||||
Unissued patents (unamortized) | 201,514 | 201,514 | ||||||
Total patents | 233,354 | 233,354 | ||||||
Less accumulated amortization | (23,084 | ) | (22,288 | ) | ||||
$ | 210,270 | $ | 211,066 |
Amortization expense for intangible assets for the six months ended June 30, 2019 and 2018 was $796. Estimated amortization expense on issued patents for the years ending December 31 are as follows:
2019 (remainder of year) | $ | 796 | ||
2020 | 1,592 | |||
2021 | 1,592 | |||
2022 | 1,592 | |||
2023 | 3,184 | |||
$ | 8,756 |
NOTE 5 – COMMITMENTS AND CONTINGENCIES
Leases
In August 2011, the Company entered into a lease commencing in December 2011 which expired in November 2016. Under the lease agreement, the Company was to pay an annual rent of $134,975, plus additional operating expenses. The agreement included a 3% annual increase and an option to expand office space. Upon expiration, this lease has continued on a month-to-month basis. Total rent expense, including additional operating expenses related to this property, was $68,160 and $62,205 for the six months ended June 30, 2019 and 2018, respectively.
Royalties and License Agreements
The Company has entered into various agreements related to fundraising and other consulting services that commits the Company to paying certain additional fees contingent upon certain milestones and/or events. The amount of liability, if any, cannot be reasonably estimated. Hence, no liability has been recorded in the accompanying financial statements.
In 2008, the Company entered into three deferred bonus agreements and agreed to pay deferred bonus payments of approximately $500,000 if certain events related to stock options were triggered. The related stock options expired in February 2018. Upon expiration of these options, the contingency related to this deferred bonus also expired.
In November 2000, the Company entered into a licensing agreement with the United States Public Health Service (“PHS”) that gave the Company exclusive rights to use several patents owned by PHS. The agreement was subsequently amended in 2005 and 2011. Under the most current agreement, the Company was required to pay minimum annual royalty fees of $7,500 due and payable on January 1 of each calendar year from 2003 through 2011. Further payment of the minimum annual royalty has been deferred until January 1 of the calendar year following the first year the Company achieves annual net sales of the licensed product equal to or greater than $1,000,000. The minimum annual royalty will be due January 1 of each calendar year thereafter. The PHS agreement also calls for the Company to pay other royalties, including earned royalties, benchmark royalties, and sublicensing royalties. In addition, the agreement requires the Company to reimburse PHS for patent expenses incurred. Reimbursement is due on January 1 of each calendar year beginning in 2013. Minimum reimbursement of $10,000 is due until the Company has achieved $500,000 in net sales of licensed products, $20,000 once the Company has achieved between $500,000 and $1,000,000 in net sales of licensed products, and the balance of the remaining unreimbursed patent expenses due in full once the Company achieves net sales of licensed products of $1,000,000 or upon termination or expiration of the license, whichever comes first. In addition, PHS continues to submit annual requests for reimbursement of patent expenses incurred throughout the preceding year. Unreimbursed patent expenses are included in accrued expenses and were $195,794 at June 30, 2019 and December 31, 2018, respectively.
F-9
20/20 GENESYSTEMS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
JUNE 30, 2019 AND 2018
In July 2002, the Company entered into an award and royalty agreement with MdBio, Inc. Under this agreement, the Company received $150,000 in funding and is to make payments of 3% of gross sales revenues beginning in June 2003 and ending when a total of $450,000 has been repaid. The remaining maximum contingent liability was $299,400 at June 30, 2019.
During 2010, the Company entered into a licensing agreement with Abbott Molecular, Inc. (“Abbott”). Under this agreement, the Company retained exclusive rights to use certain processes and know-how for which Abbott has a patent pending. Under this agreement, the Company is to pay royalties equal to 9% of the service revenue and net sales of each licensed product sold or otherwise disposed of prior to the issuance of the related patents and 18% of sales revenue or net sales of each licensed product sold or otherwise disposed of once the related patents are issued. Royalties will be deferred until either the Company's lung cancer testing business is acquired by Abbott or another third party or the value of the royalties exceeds $1,000,000. The agreement also allows Abbott first right to acquire the Company’s lung cancer testing business at various intervals.
In May 2011, the Company received a grant from the Maryland Biotechnology Center (“MBC”). Under this grant agreement, the Company was to receive $200,000 in funding. Per the agreement, beginning January 31 of the year after the completion of the project, the Company is to repay MBC in payments equal to 3% of total sales revenues (excluding revenues relating to the Company's BioCheck® suspicious powder screening kit). If the grant is not repaid in full by one year after the first payment date, the total repayment will equal 150% of the award, or $300,000. If the grant is not repaid in full by two years after the first payment date, the total repayment will equal 175% of the award, or $350,000. If the grant is not repaid in full by three years after the first payment date, the total repayment will equal 200% of the award, or $400,000. The remaining maximum contingent liability was $392,013 at June 30, 2019.
In February 2016, the Company entered into a collaboration agreement with National Foundation for Cancer Research, Inc. (“NFCR”), a tax exempt 501(c)(3) organization, for the development of a cloud accessible algorithm to assist physicians in the Peoples Republic of China (“PRC”) to interpret test results, and to support refinements of the Company’s PAULAs test. The NFCR will assist the Company in obtaining blood test data from the PRC. Upon execution of the agreement, the Company issued NFCR 19,157 shares of Common Stock. The Company issued an additional 19,157 shares of Common Stock in 2016 based on the first milestone of receiving data from the first 1,000 patients located in the PRC. These shares are included in the statement of stockholders’ equity as shares issued for services. Per the agreement, after the Company has analyzed data from the initial population, it may seek additional data from more patients which can trigger an additional 38,315 shares of Common Stock being issued. To date, this provision has not yet been triggered. If upon seeking and receiving this additional patient data as set forth in the agreement, and immediately after issuing the requisite shares, the Company for five (5) years shall pay to NFCR two percent (2%) of gross sales the Company derives from the sale, licensing and other dispositions of the developed algorithm, payable quarterly.
Effective April 17, 2017, the Company entered into a six-month option agreement with Chang Gung Memorial Hospital (CGMH) of Taiwan to obtain and secure an exclusive license to certain technology, intellectual property, and data relating to our pan-cancer test. The option period was extended through February 28, 2018 through an amendment executed in November 2017. The option was exercised in a timely manner, payments were made, data was transferred to the Company and was verified by it and the Company entered an exclusive license to the technology until the last patent included in the specified technology expires, or 20 years. As consideration for this option, the Company paid an option fee of $75,000. Once the option was exercised in February 2018, the Company paid an additional license fee of $150,000 in cash and $300,000 in Common Stock (through the issuance of 92,025 shares of Common Stock), which were released from escrow upon verification of the viability of the data. The Company has amortized the license agreement over the term amounting to an amortization expense of $29,250 and $19,071 as of June 30, 2019 and December 31, 2018, respectively.
NOTE 6 – STOCKHOLDERS’ EQUITY
Preferred Stock
The Company has authorized the issuance of 10,000,000 shares of Preferred Stock with par value of $0.01, of which 1,303,000 have been designated as Series A Preferred Stock, 978,000 have been designated as Series A-1 Preferred Stock, 800,000 shares have been designated as Series A-2 Preferred Stock and 3,569,405 shares have been designated as Series B Preferred Stock (collectively, the “Designated Preferred Stock”). Below is a summary of the terms of the Designated Preferred Stock.
Ranking.With respect to dividend rights and rights on liquidation, winding up and dissolution, shares of Designated Preferred Stock rankpari passu to each other and senior to all shares of Common Stock.
F-10
20/20 GENESYSTEMS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
JUNE 30, 2019 AND 2018
Voting Rights.Shares of Designated Preferred Stock vote together with the holders of Common Stock on an as-converted basis on all matters for which the holders of Common Stock vote at an annual or special meeting of stockholders or act by written consent, except as required by law. For so long as shares of Designated Preferred Stock are outstanding, the holders of such shares vote together, as a separate class, to elect one director to the Company’s board, and for so long as shares of Series A-1 Preferred Stock are outstanding, the holders of Series A-1 Preferred Stock vote together, as a separate class, to elect one director to the Company’s board.
Conversion Rights. Each share of Designated Preferred Stock is convertible at any time at the option of the holder at the then current conversion rate. The conversion rate for the Designated Preferred Stock is currently one share of Common Stock for each share of Designated Preferred Stock, calculated by dividing the liquidation preference of such share by the conversion price then in effect. In addition, all outstanding shares of Designated Preferred Stock, plus accrued but unpaid dividends thereon, shall automatically be converted into shares of Common Stock, at the then effective conversion rate, upon the earlier to occur of (a) the closing of the sale of shares of Common Stock to the public at a price of at least $8.15 per share (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the Common Stock), in a public offering pursuant to an effective registration statement or offering statement under the Securities Act of 1933, as amended (the “Securities Act”), resulting in at least $5,000,000 of gross proceeds to the Company, (b) the date on which the shares of Common Stock are listed on a national stock exchange, including without limitation the New York Stock Exchange or the Nasdaq Stock Market, or (c) the date and time, or the occurrence of an event, specified by vote or written consent of the holders of at least 67% of the then outstanding shares of Designated Preferred Stock, voting together on an as-converted to Common Stock basis (which vote or consent shall include the holders of at least 67% of the shares of Series A-1 Preferred Stock outstanding voting as a separate class).
Liquidation Rights. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company or a deemed liquidation event, each holder of Designated Preferred Stock then outstanding shall be entitled to be paid out of the cash and other assets of the Company available for distribution to its stockholders, prior and in preference to all shares of Common Stock, an amount in cash equal to the aggregate liquidation preference of all shares held by such holder. The shares of Series A Preferred Stock, Series A-1 Preferred Stock, Series A-2 Preferred Stock and Series B Preferred Stock have a liquidation preference of $3.07, $3.07, $3.26 and $3.53, respectively (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization) plus any accrued and unpaid dividends. If upon any liquidation or deemed liquidation event the remaining assets available for distribution are insufficient to pay the holders of Designated Preferred Stock the full preferential amount to which they are entitled, the holders of Designated Preferred Stock shall share ratably in any distribution of the remaining assets and funds in proportion to the respective full preferential amounts which would otherwise be payable, and the Company shall not make or agree to make any payments to the holders of Common Stock. A “deemed liquidation event” means, unless otherwise determined by the holders of at least a majority of the Designated Preferred Stock then outstanding (voting together as a single class on an as-converted basis), (a) a sale of all or substantially all of the Company’s assets to a non-affiliate of the Company, (b) a merger, acquisition, change of control, consolidation or other transactions or series of transactions in which stockholders prior to such transaction or series of transactions do not retain a majority of the voting power of the surviving entity immediately following such transaction or series of transactions, or (c) the grant of an exclusive license to all or substantially all of the Company’s technology or intellectual property rights except where such exclusive license is made to one or more wholly-owned subsidiaries of the Company.
Dividends. The Designated Preferred Stock will not be entitled to dividends or distributions unless and until the board declares a dividend or distribution in cash or other property to holders of outstanding shares of Common Stock, in which event, the aggregate amount of such each distribution shall be distributed as follows: (a) first, seventy percent (70%) of the distribution amount to the holders of shares of Designated Preferred Stock, on a pro rata basis, until such time as such holders have received an aggregate amount in distributions or other payments in respect of such holder’s shares that is equal to the number of shares owned by such holders multiplied by the liquidation preference stated above, and (b) second, thirty percent (30%) of the distribution amount to the holders of shares of Common Stock, on a pro rata basis. Notwithstanding the foregoing, at such time as the holders of Designated Preferred Stock and Common Stock have received the amounts described above, the holders of the Designated Preferred Stock shall receive Distributionspari passu with the holders of the Common Stock on an as-converted basis, using the then-current conversion rate of such shares of Designated Preferred Stock.
F-11
20/20 GENESYSTEMS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
JUNE 30, 2019 AND 2018
Preemptive Rights. Until the Company’s initial public offering of Common Stock occurs and unless otherwise waived by the prior express written consent of the holders of the majority of the voting power of all then outstanding Designated Preferred Stock, voting together on an as-converted to Common Stock basis, in the event that the Company proposes to issue any Common Stock or shares convertible or exercisable for Common Stock, except for excluded issuances, the Company must first offer those additional equity securities to holders of Designated Preferred Stock for a period of no less than thirty (30) days prior to selling or issuing any such additional equity securities to any person, in accordance with the procedures set forth in the Company’s certificate of incorporation, as amended. For purposes hereof, “excluded securities” means the issuance of shares of Common Stock or securities convertible into shares of Common Stock (a) granted pursuant to or issued upon the exercise of stock options granted under an equity incentive plan to employees, officers, directors, consultants or strategic partners, (b) granted to employees, officers, directors, consultants or strategic partners for services, including in connection with an incentive plan, or other fair value received or committed, (c) in consideration for a transaction approved by the board which does not result in the issuance for cash of more than five percent (5%) of the outstanding shares of Common Stock, (d) in connection with an acquisition transaction approved by the board, (e) to vendors, commercial partners, financial institutions or lessors in connection with commercial credit transactions, equipment financings or similar transaction approved by the board (provided that such securities do not exceed 10% of the consideration in such transaction), (f) pursuant to conversion or exchange rights included in securities previously issued by the Company or (g) in connection with a stock split, stock division, reclassification, stock dividend or other recapitalization.
Redemption. Shares of Series A Preferred Stock, Series A-1 Preferred Stock, Series A-2 Preferred Stock and Series B Preferred Stock are not redeemable without the prior express written consent of the holders of the majority of the voting power of all then outstanding shares of such Series A Preferred Stock, Series A-1 Preferred Stock, Series A-2 Preferred Stock and Series B Preferred Stock, as applicable.
Protective Rights. So long as at least twenty-five percent (25%) of the Designated Preferred Stock collectively remains outstanding, in addition to any other vote or consent of stockholders required by law, the vote or consent of the holders of at least a majority of all shares of Designated Preferred Stock then outstanding and entitled to vote thereon, voting together and on an as-converted to Common Stock basis, given in person or by proxy, either in writing without a meeting or by vote at any meeting called for the purpose, including the consent of the holders of Series A-1 Preferred Stock, shall be necessary for effecting or validating, either directly or indirectly by amendment, merger, consolidation or otherwise:
(a) the authorization, creation and/or issuance of any equity security, other than shares of Common Stock or options to purchase Common Stock issued to investors, employees, managers, officers or directors of, or consultants or advisors to, the Company or any of its subsidiaries pursuant to a plan, agreement or arrangement approved by the board;
(b) the amendment, alteration or repeal of any provision of the certificate of incorporation or bylaws or otherwise alter or change any right, preference or privilege of any Designated Preferred Stock in a manner adverse to the holders thereof;
(c) any increase or decrease in the size of the board;
(d) the purchase, redemption, or acquisition of any shares other than from a selling holder pursuant to the provisions of the certificate of incorporation or any other restriction provisions applicable to any shares in agreements approved by the board or in the operating agreement of any limited liability company utilized for the purpose of facilitating investment in the Company;
(e) the liquidation or dissolution of the Company or the sale, lease, pledge, mortgage, or other disposal of all or substantially all of its assets;
(f) any election to engage in any business that deviates in any material respect from the Company’s business as contemplated under any operating plan approved by the board;
(g) the waiver of any adjustment to the conversion price applicable to the Designated Preferred Stock; or
(h) any declaration or payment of any cash dividend or other cash distribution to any holders of capital stock.
F-12
20/20 GENESYSTEMS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
JUNE 30, 2019 AND 2018
Series A Preferred Stock
The Company has issued 846,368 shares of Series A Preferred Stock. The issued shares were outstanding as of June 30, 2019 and December 31, 2018.
Series A-1 Preferred Stock
The Company has issued 651,465 shares of Series A-1 Preferred Stock. The issued shares were outstanding as of June 30, 2019 and December 31, 2018.
Series A-2 Preferred Stock
On December 29, 2017, the Company issued 312,361 shares of Series A-2 Preferred Stock at $3.26 per share for proceeds of $936,017, net of $82,280 of offering cost fees, to investors an equity crowdfunding offering under Section 4(a)(6) of the Securities Act and Regulation Crowdfunding promulgated thereunder. On January 23, 2018, the Company completed a second and final closing of this equity crowdfunding offering and issued 15,027 shares of Series A-2 Preferred Stock for gross proceeds of $48,988. In connection with this offering, the Company also issued 6,548 shares of Series A-2 Preferred Stock to First Democracy VC, the platform for the offering, as partial consideration for their services.
On January 9, 2018 and March 16, 2018, the Company issued 106,165 and 94,785 shares, respectively, of Series A-2 Preferred Stock at $3.26 per share for gross proceeds of $346,100 to an Investment LLC (as defined below).
On February 15, 2018, the Company issued 2,301 shares of Series A-2 Preferred Stock to a consultant as partial compensation for services provide by such consultant.
At June 30, 2019 and December 31, 2018, there were 442,402 shares of Series A-2 Preferred Stock issued and outstanding.
Series B Preferred Stock
On August 17, 2018, the Company launched its offering under Regulation A of Section 3(6) of the Securities Act for Tier 2 offerings, pursuant to which the Company offered a minimum of 127,479 shares of Series B Preferred Stock and a maximum of 3,399,433 shares of Series B Preferred Stock at an offering price of $3.53 per share, or a minimum of $450,000 of shares and a maximum of $12,000,000 of shares, on a “best efforts” basis.
As of December 31, 2018, the Company has raised approximately $3,919,062 in gross proceeds through the sale of 1,110,216 shares of Series B Preferred Stock for net proceeds of $3,593,419.
In the six months ended June 30, 2019, the Company has raised approximately $1,275,175 in gross proceeds through the sale of 361,271 shares of Series B Preferred Stock for net proceeds of $1,149,483.
As of June 30, 2019 and December 31, 2018, there were 1,471,487 and 1,110,216 shares of Series B Preferred Stock issued and outstanding, respectively.
Common Stock
As of June 30, 2019 and December 31, 2018, the Company had 25,000,000 authorized shares of Common Stock, 4,725,633 shares of which were issued and outstanding.
Stock Options
No options were granted during the six months ended June 30, 2019 and 2018, respectively. Total stock-based compensation for the six months June 30, 2019 and 2018 was $0.
F-13
20/20 GENESYSTEMS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
JUNE 30, 2019 AND 2018
NOTE 7 – RELATED PARTY TRANSACTIONS
The Company has historically employed or contracted with immediate family members of the Chief Executive Officer. Such arrangements are under compensation arrangements for services provided in the normal course of business. As of June 30, 2019 and December 31, 2018, the Company has an outstanding balance due to Barry Cohen, the Chief Executive Officer’s brother, in the amount of $32,957 and $27,832 for professional services, respectively.
From time-to-time, investors in the Company are directed to deposit funds in a Limited Liability Company (“Investment LLC”) set up by the Company for the purposes of managing investments seeking the advantages of the Maryland Biotechnology Investor Tax Credit program. Funds from those Investment LLCs either have been or will be transferred to the Company pursuant to the rules and procedures of the tax credit program. Shares of the Company will be issued to investors in those Investment LLCs in the same manner as if they invested directly in the Company. While the Company performs the administrative tasks for the Investment LLC when they are active, the Company has no ownership, requirement to fund, or voting privileges within these entities.
As of June 30, 2019 and December 31, 2018, the Company has approximately $57,000, respectively, due from various Investment LLCs controlled by certain shareholders of the Company as a result of funds advanced to them by the Company as it relates to the expected tax refunds under the Maryland Biotechnology Investor Tax Credit program.
During 2017, an Investment LLC received approximately $240,000 in funds for investment in the Company, pending application of the Maryland Biotechnology Investor Tax Credit. In November and December 2017, the Investment LLC lent the Company $210,000 which the Company subsequently repaid in 2018 upon the investment LLC receiving the requisite initial tax credit certificate. Furthermore, the $240,000 investment was made by the Investment LLC as part of a total investment of $309,000 for shares of Series A-2 Preferred Stock in 2018.
NOTE 8 – SUBSEQUENT EVENTS
On July 16, 2019, the Company’s board of directors adopted the 20/20 GeneSystems, Inc. 2019 Stock Incentive Plan (the “Plan”). The Plan provides for the grant of incentive stock options as described in section 422(b) of the Internal Revenue Code of 1986, as amended, non-qualified stock options (i.e., options that are not incentive stock options) and awards of restricted stock to employees, consultants, advisors and outside directors of the Company and its subsidiaries. The maximum number of shares of Common Stock that may be issued under the Plan is 2,000,000, subject to adjustment for certain corporate changes affecting the shares, such as stock splits. The Plan is administered by the compensation committee of the board of directors and expires ten years after adoption.
On August 1, 2019, the Company granted options for the purchase of an aggregate of 292,680 shares of Common Stock to outside directors. These options fully vested on the date of grant and have an exercise price of $0.82 per share.
The Company has evaluated subsequent events that occurred after June 30, 2019 through September 30, 2019, the issuance date of these financial statements. There have been no other events or transactions during this time which would have a material effect on these financial statements.
F-14
Item 4. | Exhibits |
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SIGNATURES
Pursuant to the requirements of Regulation A, the issuer has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: September 30, 2019 | 20/20 GENESYSTEMS, INC. | |
/s/ Jonathan Cohen | ||
Name: | Jonathan Cohen | |
Title: | Chief Executive Officer | |
(Principal Executive Officer and Principal Financial and Accounting Officer) |
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