UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
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DOCUMENTS INCORPORATED BY REFERENCE
The Registrant’s definitive Proxy Statement for the Annual Meeting of Stockholders (the “2022 Proxy Statement”) is incorporated by reference in Part III of this Form 10-K to the extent stated herein. The 2022 Proxy Statement, or an amendment to this Form 10-K, will be filed with the SEC within 120 days after December 31, 2021. Except with respect to information specifically incorporated by reference in this Form 10-K, the Proxy Statement is not deemed to be filed as a part hereof.
PRECIPIO, INC.
Annual Report on Form 10-K
For the Year Ended December 31, 2021
INDEX
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PART I.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (this “Annual Report”), including the sections entitled “Risk Factors” “Management’s Discussion & Analysis of Financial Condition and Results of Operations” and “Our Business” contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which statements involve substantial risks and uncertainties. These statements are based on management’s current views, assumptions or beliefs of future events and financial performance and are subject to uncertainty and changes in circumstances. Readers of this report should understand that these statements are not guarantees of performance or results. Many factors could affect our actual financial results and cause them to vary materially from the expectations contained in the forward-looking statements. These factors include, among other things: the expected or potential impact of the novel coronavirus (“COVID-19”) pandemic which is highly uncertain and will depend on future developments, our expected revenue, income (loss), receivables, operating expenses, supplier pricing, availability and prices of raw materials, insurance reimbursements, product pricing, foreign currency exchange rates, sources of funding operations and acquisitions, our ability to raise funds, sufficiency of available liquidity, future interest costs, future economic circumstances, business strategy, industry conditions and key trends, our ability to execute our operating plans, the success of our cost savings initiatives, competitive environment and related market conditions, expected financial and other benefits from our organizational restructuring activities, actions of governments and regulatory factors affecting our business, projections of future earnings, revenues, synergies, accretion or other financial items, any statements of the plans, strategies and objectives of management for future operations, retaining key employees and other risks as described in our reports filed with the Securities and Exchange Commission (the “SEC”). In some cases these statements are identifiable through the use of words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “would” or the negative of such terms and other similar expressions. Some of the risks and uncertainties that may cause our actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include, among other, the following:
| ● | the progress, timing and amount of expenses associated with our development and commercialization activities; |
| ● | our plans and ability to develop and commercialize new products and services, and make improvements to our existing products and services; |
| ● | our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others; |
| ● | our ability or the amount of time it will take to achieve successful reimbursement of our existing and future products and services from third-party payors, such as commercial insurance companies and health maintenance organizations, and government insurance programs, such as Medicare and Medicaid; |
| ● | the accuracy of our estimates of the size and characteristics of the markets that may be addressed by our products; |
| ● | the success of our study to demonstrate the impact of academic pathology expertise on diagnostic accuracy, and any other studies or trials we may conduct; |
| ● | our intention to seek, and our ability to establish, strategic collaborations or partnerships for the development or sale of our products and the effectiveness of such collaborations or partnerships; |
| ● | our expectations as to future financial performance, expense levels and liquidity sources; |
| ● | our anticipated cash needs and our estimates regarding our capital requirements and our needs for additional financing, as well as our ability to obtain such additional financing on reasonable terms; |
| ● | our ability to compete with other companies that are or may be developing or selling products that are competitive with our products; |
| ● | our ability to build a sales force to market our products and services, and anticipated increases in our sales and marketing costs due to an expansion in our sales force and marketing activities; |
| ● | federal and state regulatory requirements, including potential United States Food and Drug Administration regulation of our products or future products; |
| ● | anticipated trends and challenges in our potential markets; |
| ● | our ability to attract and retain key personnel; |
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| ● | risks associated with the COVID-19 pandemic, which may adversely impact our workforce, global supply chain, business, preclinical studies, clinical trials and financial results; |
| ● | our expectations related to the use of our cash reserves; |
| ● | the impact of new laws and regulations or amendments to existing laws and regulations; |
| ● | developments and projections relating to our competitors and our industry; and |
| ● | our estimates and expectations regarding cash and expense levels, future revenue, capital requirements and needs for additional financing, including our expected use of proceeds from our public offerings, and liquidity sources. |
You are cautioned not to place undue reliance on these forward-looking statements. The forward-looking statements we make are not guarantees of future performance and are subject to various assumptions, risks and other factors that could cause actual results to differ materially from those suggested by these forward-looking statements. Actual results may differ materially from those suggested by these forward-looking statements for a number of reasons, including those described in Item 1A, “Risk Factors,” and other factors identified by cautionary language used elsewhere in this Annual Report.
We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
The following discussion should be read together with our financial statements and related notes contained in this Annual Report. Results for the year ended December 31, 2021 are not necessarily indicative of results that may be attained in the future.
Solely for convenience, trademarks and tradenames referred to in this Annual Report on Form 10-K appear (after the first usage) without the ® and ™ symbols, but those references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or that the applicable owner will not assert its rights, to these trademarks and tradenames.
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Item 1. Our Business
Business Description
Precipio, Inc., and its subsidiaries, (collectively, “we”, “us”, “our”, the “Company” or “Precipio”) is a healthcare solutions company focused on cancer diagnostics. Our business mission is to address the pervasive problem of cancer misdiagnoses by developing solutions to mitigate the root causes of this problem in the form of diagnostic products, reagents and services. Misdiagnoses originate from aged commercial diagnostic cancer testing technologies, lack of subspecialized expertise, and sub-optimal laboratory processes that are needed in today’s diagnostic cancer testing in order to provide accurate, rapid, and resource-effective results to treat patients. Industry studies estimate 1 in 5 blood-cancer patients are misdiagnosed. As cancer diagnostic testing has evolved from cellular to molecular (genes and exons), laboratory testing has become extremely complex, requiring even greater diagnostic precision, attention to process and a more appropriate evaluation of the abundance of genetic data to effectively gather, consider, analyze and present information for the physician for patient treatment. We see cancer diagnostics as requiring a holistic approach to improve diagnostic data for improved interpretations with the intent to reduce misdiagnoses. We deliver diagnostic products, reagents and services that improve the accuracy and efficiency of diagnostics, which leads to fewer misdiagnoses. We believe patient outcomes can be improved through the selection of appropriate therapeutic options based on more accurate diagnostic testing. Furthermore, we believe that better patient outcomes will have a positive impact on healthcare expenses as misdiagnoses are reduced. We believe our platform delivers better diagnostic accuracy than industry peers because of our academic expertise and cutting edge technology. We are a laboratory focused on delivering specialized diagnostic services to physicians and their patients to better ensure they receive accurate results thus resulted in fewer misdiagnoses and allows them to achieve cost savings. Better Diagnostic Results – Better Patient Outcome – Lower Healthcare Expenditures.
To deliver our strategy, we have structured our organization in order to drive development of diagnostic products. Laboratory and R&D facilities located in New Haven, Connecticut and Omaha, Nebraska house development teams that collaborate on new products and services. We operate Clinical Laboratory Improvement Amendments, or CLIA, laboratories in both the New Haven, Connecticut and Omaha, Nebraska locations providing essential blood cancer diagnostics to office-based oncologists in many states nationwide. To deliver on our strategy of mitigating misdiagnoses we rely heavily on our CLIA laboratories to support R&D beta-testing of the products we develop, in a clinical environment.
Our operating structure promotes the harnessing of our proprietary technology and genetic diagnostic expertise to bring to market our robust pipeline of innovative solutions designed to address the root causes of misdiagnoses.
Industry
We believe that there is currently a significant problem with unaddressed rates of misdiagnosis across numerous disease states (particularly in blood-related cancers) due to an inefficient and commoditized industry. We believe that the diagnostic industry focuses primarily on competitive pricing and test turnaround times, at the expense of quality and accuracy. Increasingly complex disease states are met with eroding specialization rather than increased subspecialized expertise. According to a study conducted by the National Coalition of Health, this results in an industry with blood cancer misdiagnosis rates as high as 28%, which is failing to meet the needs of physicians, patients and the healthcare system as a whole. New technologies offer improved accuracy; however, many are either inaccessible or are not economically practical for clinical use. Despite much publicity of the industry transitioning from fee-per-service to value-based payments, this transition has not yet occurred in diagnostics. When a patient is misdiagnosed, physicians end up administering incorrect treatments, often creating adverse effects rather than improving outcomes. We believe that Insurance Providers, Medicare and Medicaid waste valuable dollars on the application of incorrect treatments and can incur substantial downstream costs. According to a report by Pinnacle Health, the estimated cost of misdiagnosis within the healthcare system is $750 billion annually. Most importantly however, patients pay the ultimate price of misdiagnosis with increased morbidity and mortality. We are of the view that the academic path of specialization produces the critical expertise necessary to correctly diagnose disease, and that academic institutions have an untapped potential to address this problem. Our solution is to create a unique platform that harnesses sub-specialist expertise and proprietary technologies to
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deliver the highest standard of diagnostic accuracy and patient care. Physicians, hospitals, payers and, most importantly, patients all benefit from more accurate diagnostic outcomes.
Market
Our market is the United States domestic oncology market where we participate as a commercial diagnostic laboratory and market our products. The oncology total available market, or TAM, is estimated to exceed $20 billion in 2022, with a compound annual growth rate exceeding 5%. We also provide new technologies to the oncology diagnostic laboratory market in the form of HemeScreen and IV-Cell product offerings. The diagnostics product market is estimated to have annual revenues exceeding $14 billion. The annual growth rate of each market segment is estimated at 5%. Successful deployment within the United States will be closely followed by international marketing where the same product opportunities exist for our products.
From our New Haven, Connecticut commercial lab, we currently provide diagnostic blood cancer testing services to oncology practices in 14 states. Building on our commercial laboratory expertise, we have developed several impactful diagnostic technologies that are more cost effective than current industry alternatives, which reduces the diagnostic testing time and improves efficiencies to perform such tests. We anticipate gaining a share of the oncology diagnostic product market as commercial diagnostic laboratories and oncology practices adopt these new cost effective technologies.
Our Technology
| 1. | IV-CellTM |
IV-Cell is a proprietary cell culture media that addresses the problem of selective and serial culturing. IV-Cell is a universal media that enables simultaneous culturing of all 4 hematopoietic cell lineages. This is a significant breakthrough in processing work required by laboratories worldwide. Internally developed by Precipio, the culturing technology ensures that no cell lineage is missed in the diagnostic process. IV-Cell allows the laboratory technician to select any of the 4 lineages during the culturing process for analysis.
Hematopoietic Diseases: The diagnostic process of hematopoietic diseases involves chromosomal analysis by conducting cell-culture based tests by a cytogenetics laboratory to imitate in-vivo conditions. The four groups of cell lineages cultured are:
| ● | Myeloid cells – indicating myeloid neoplasms (myelodysplastic syndromes, or MDS, acute myeloid leukemia, or AML, chronic myeloid leukemia, or CML); |
| ● | B-cells – indicating B-cell neoplasms (Chronic lymphocytic leukemia, mantle cell lymphoma, etc.); |
| ● | T-cells – indicating T-cell neoplasms (T-cell lymphoma); and |
| ● | Plasma cells – indicating plasma cell neoplasms (Multiple myeloma) |
IV-Cell, our proprietary media, enables the lab technician to begin culturing all four cell lineages simultaneously, effectively mimicking human biology. IV-Cell media ensures that ultimately the correct cell lineage is cultured, avoiding the risk of misalignment caused by current market media, which may result in a compromised diagnosis. Our advanced IV-Cell technology replaces the current time-consuming lengthy process whereby the cytogeneticist must decide up front which cell lineage to select for culturing. In most cases, due to specimen limitation, low cellularity, or cell viability, the cytogeneticist can select only one of the above cell lines to culture. Often, the initial clinical suspicion is not in line with the final diagnosis determined by the pathologist based on the rest of the work up. Our internal data from testing within our commercial lab has shown that this occurs in approximately 55% of malignant blood or bone marrow samples. If the wrong cell lineage is selected, the diagnosis may be compromised (or return a false negative diagnosis) because the lab will be culturing and investigating the wrong cells.
IV-Cell was validated in our laboratory in parallel with existing commercially available reagents and has successfully demonstrated superior results. Subsequently, IV-Cell has been used at our laboratory for the past three years
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on more than 1,000 clinical specimens, producing superior diagnostic results. IV-Cell also produces chromosomes with an average band resolution of 500, approximately 25% higher than achieved with standard culture media.
We are marketing this technology by providing major laboratories with access to the media. The IV-Cell technology and media can be purchased via a direct supply contract, whereby we are contracted with a manufacturer (under license and non-disclosure) to produce the media.
| 2. | HemeScreenTM |
We initially developed HemeScreen technology to target Myeloproliferative Neoplasms, or MPN, but we have evolved HemeScreen into a “suite” of robust genetic diagnostic panels. Today, we are marketing MPN, AML and Anemia panels and project the release of additional diagnostic panels during 2022. It is estimated that 140,000 patients are diagnosed with blood cancer diseases annually. The National Comprehensive Cancer Network, or NCCN, guidelines require that these patients be tested for genetic mutations in five key exons/genes:
| ● | JAK2 (exon 12); |
| ● | JAK2 (exon 13); |
| ● | JAK2 14 (including V617F); |
| ● | CALR; and |
| ● | MPL. |
The additional available panels include the following genes:
AML
| ● | IDH1; |
| ● | IDH2; |
| ● | FLT3; |
| ● | KIT; |
| ● | CEBPA; and |
| ● | NPM1. |
Anemia
| ● | ASXL1; |
| ● | TERT; |
| ● | WT1; |
| ● | DNMT3A; and |
| ● | RUNX1. |
We are in the process of filing a provisional patent application on our proprietary screening panel for the above genes. Our technology enables screening to be completed in one rapid scanning process. The HemeScreen test screens for the presence of these mutations. In developing HemeScreen, we focused on improving the economics of providing blood cancer diagnostic tests and reducing laboratory technician time consumed in the testing process. By using our HemeScreen media laboratories can:
| 1. | Consolidate the platforms required to test all the genes; |
| 2. | Reduce the threshold of expertise required to perform these tests; |
| 3. | Reduce the batch requirements for the test; |
| 4. | Significantly reduce the turnaround time for results; |
| 5. | Provide improved clinical service to physicians; and |
| 6. | Yield significant costs savings. |
In addressing the diagnostic results it is very important to understand that the clinical significance of these mutations is substantial to patient treatment. Case in point, a mutation in the JAK2 gene indicates the patient may be
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eligible for a targeted therapy. A positive result in the CALR or MPL gene indicates a good prognosis, meaning the disease is less aggressive, and the physician may therefore choose to treat the patient in a less aggressive manner. The results of these genetic tests are critical to determining a treatment plan, and therefore the importance, and the speed of which the results are delivered, may significantly impact patient care. HemeScreen represents exactly what our technology and focus is all about, targeting misdiagnoses.
Today, for this type of cancer testing we believe physician ordering patterns for the test are encumbered by the economics (reimbursement less costs to test) and length of time (2 to 4 weeks) for results to be reported. As a result of the costs and length of test reporting time, we believe, patients needing this exact type of testing, to assist in determining therapeutic options, may not be afforded the opportunity. We believe the HemeScreen technology addresses both issues by providing substantial reductions in both time and cost to test for these genetic mutations. A significant number of hospital laboratories don’t have the volume and patient frequency to economically justify running the currently available commercial test, and therefore they send the test out. This has created an industry average turnaround time for results of between 2-4 weeks (depending on the lab providing the test).
We introduced the HemeScreen Reagent Rental, or HSRR, program to high-end commercial labs, regional hospital groups, large oncology practices and smaller office based oncology practices. The HSRR program is a turn-key solution offering appropriately sized diagnostic equipment, training on the equipment and new technology, and a research use only, or RUO, reagent purchase program sized to the account. Additionally, as a certified CLIA laboratory, we offer HemeScreen testing and 48 hour turnaround to all customers. We believe HemeScreen is a leading-edge testing technology and has the capability of impacting physician use of the test in the physician’s testing regimen for cancer diagnoses. Building on our initial technology, HemeScreen has evolved into a suite of screening and diagnostic products addressing numerous other cancers and related blood abnormalities.
| 3. | ICE COLD PCR |
ICE COLD PCR, or ICP, technology was developed at Harvard and is licensed exclusively to us by the Dana-Farber Cancer Institute, or Dana-Farber. ICP is a unique, proprietary, patented specimen enrichment technology that increases the sensitivity of molecular based tests from approximately 90-95% to 99.99%. Traditional molecular testing is performed on tumor biopsies. These tests are typically conducted at disease onset, when the patient undergoes a biopsy. In the typical course of treatment, a patient is rarely re-biopsied, and therefore, genetic information is based solely on the initial biopsy. Tumors are known to shed cells into the patient’s bloodstream where they circulate alongside normal cells; however, existing testing methodologies are not sufficiently sensitive to differentiate between tumor and normal cells. The increased sensitivity provided by ICP allows for testing of genetic mutations that occur within tumors to be conducted on peripheral blood samples, termed liquid biopsies. This technical capability enables physicians to test for genetic mutations through a simple blood test rather than an invasive biopsy extracted from the actual tumor. The results of such tests can be used for diagnosis, prognosis and therapeutic decisions. The technology is encapsulated within a chemical (reagent) used during the specimen preparation process, which enriches (amplifies) the tumor DNA detected within the blood sample while suppressing the normal DNA. In addition to offering this technology as a clinical service, we are developing panels that will be sold as reagent kits to other laboratories to enable this testing in their facilities, thereby improving their test sensitivity and more accurate diagnoses via liquid biopsies. The business model of selling reagents to other laboratories expands the reach and impact of our technology while eliminating the reimbursement risks from running the tests in-house.
Gene sequencing is performed on tissue biopsies taken surgically from the tumor site in order to identify potential therapies that will be more effective in treating the patient. There are several limitations to this process. First, surgical procedures have several limitations, including:
| ● | Cost: surgical procedures are usually performed in a hospital environment; |
| ● | Surgical access: various tumor sites are not always accessible (e.g. brain tumors), in which cases no biopsy is available for diagnosis; |
| ● | Risk: patient health may not permit undergoing an invasive surgery; therefore, a biopsy cannot be obtained at all; |
| ● | Time: the process of scheduling and coordinating a surgical procedure often takes time, delaying the start of patient treatment; and |
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| ● | Biopsy size: often the size of the tissue biopsy obtained hinders the ability to conduct molecular or genetic testing after it has been used up for the morphologic and immunohistochemical evaluation. |
Second, there are several tumor-related limitations that provide a challenge to obtaining such genetic information from a tumor:
| ● | Tumors are heterogeneous by nature: a tissue sample from one area of the tumor may not properly represent the tumor’s entire genetic composition; thus, the diagnostic results from a tumor may be incomplete and non-representative; and |
| ● | Metastases: in order to accurately test a patient with metastatic disease, ideally an individual biopsy sample should be taken from each site (if those sites are even known). These biopsies are very difficult to obtain; therefore, physicians often rely on biopsies taken only from the primary tumor site. |
We license the ICP technology from Dana-Farber through a license agreement referred to herein as the License Agreement. The License Agreement grants us an exclusive license to the ICP technology, subject to a non-exclusive license granted to the U.S. government, in the areas of mutation detection using Sanger (di-deoxy) sequencing and mitochondrial DNA analysis for all research, diagnostic, prognostic and therapeutic uses in humans, animals, viruses, bacteria, fungi, plants or fossilized material. The License Agreement also grants us a non-exclusive license in the areas of mutation detection using DHPLC, surveyor-endonuclease-based mutation detection and next generation sequencing techniques. We paid Dana-Farber an initial license fee and are required to make milestone payments with respect to the first five licensed products or services we develop using the licensed technology, as well as royalties ranging from high single to low double digits on net sales of licensed products and services for sales made by us and sales made to any distributors. The License Agreement remains in effect until we cease to sell licensed products or services under said agreement. Dana-Farber has the right to immediately terminate the License Agreement if (i) we cease to carry on our business with respect to licensed products and services, (ii) we fail to make any payments under the License Agreement (subject to a cure period), (iii) we fail to comply with due diligence obligations under the License Agreement (subject to a cure period), (iv) we default in our obligations to procure and maintain insurance as required by the License Agreement, (v) any of our officers is convicted of a felony relating to the manufacture, use, sale or importation of licensed products under the License Agreement, (vi) we materially breach any provision of the License Agreement (subject to a cure period), or (vii) we or Dana-Farber become insolvent. We may terminate the License Agreement for convenience upon 180 days’ prior written notice.
Competition
Our principal competition in clinical pathology services comes largely from two groups. The first group consists of companies that specialize in oncology and offer directly competing services to our diagnostic services. These companies provide a high level of service focused on oncology and offer their services to oncologists and pathology departments within hospitals. Competitors in this group include NeoGenomics Laboratories, Inc., also known as NeoGenomics or Neo, GenPath Diagnostics and Inform Diagnostics. The second group consists of large commercial companies that offer a wide variety of laboratory tests ranging from simple chemistry tests to complex genetic testing. Competitors in this group include LabCorp (NYSE: LH) and Quest Diagnostics (NYSE: DGX). Within the liquid biopsy market, our competitors include Foundation Medicine and Guardant Health.
Competitive Advantage
Our competitive advantage is derived from our ability to identify real-world clinical challenges in the laboratory; develop technology-based solutions to those challenges; test them within our lab on real clinical samples; and then convert the technology to products we commercialize to the market. Our model gives us a unique capability to identify and create products within the clinical setting, ensuring the product is relevant, reliable, and workable within the laboratory setting. Furthermore, given the hands-on experience we have as first-users of our own products, we have unparalleled experience and expertise required to support our customers and help them maximize the value of our technologies that they use.
As cancer diagnostic testing continues to evolve, laboratory testing has become extremely complex, requiring even greater diagnostic precision, attention to process and a more appropriate evaluation. Our organizational structure enables Management and R&D resources to efficiently focus on laboratory economics (time and material); the delivery of
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complex results (technical processing); and proprietary analysis (gather data, considerations, determination and information presentation) for the physician - all ultimately leading to minimizing misdiagnoses and better patient care. Embedding R&D personnel into a collaborative workflow within our commercial laboratory operations results in a very cost effective development environment enabling identification of issues, the isolation of causes and the creation of proprietary product solutions to mitigate misdiagnoses.
Government Regulation
The healthcare industry is subject to extensive regulation by a number of governmental entities at the federal, state and local level. Laws and regulations in the healthcare industry are extremely complex and, in many instances, the industry does not have the benefit of significant regulatory or judicial interpretation. For example, the U.S. federal transparency requirements under the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or the PPACA, including the provision commonly referred to as the Physician Payments Sunshine Act, and its implementing regulations, which requires applicable manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program to report annually to CMS, information related to payments or other transfers of value made to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors) and teaching hospitals, as well as ownership and investment interests held by the physicians described above and their immediate family members. Effective January 1, 2022, these reporting obligations extend to include transfers of value made to certain non-physician providers (physician assistants, nurse practitioners, clinical nurse specialists, certified registered nurse anesthetists and anesthesiologist assistants, and certified-nurse midwives).
Our business is impacted not only by those laws and regulations that are directly applicable to us but also by certain laws and regulations that are applicable to our payers, vendors and referral sources. While our management believes we are in compliance with all of the existing laws and regulations applicable to us, such laws and regulations are subject to rapid change and often are uncertain in their application and enforcement. Further, to the extent we engage in new business initiatives, we must continue to evaluate whether new laws and regulations are applicable to us. There can be no assurance that we will not be subject to scrutiny or challenge under one or more of these laws or that any enforcement actions would not be successful. Any such challenge, whether or not successful, could have a material adverse effect upon our business and consolidated financial statements.
Our current active laboratory certifications can be found on http://www.precipiodx.com/accreditations.html. The laboratory operations are governed by Standard Operating Procedure manuals, or SOPs, which detail each aspect of the laboratory environment including the work flow, quality control, maintenance, and safety. These SOPs are reviewed and approved annually and signed off by the laboratory manager and medical director.
Among the various federal and state laws and regulations that may govern or impact our current and planned operations are the following:
Reimbursement
As blood-related cancers are more likely to be developed later in life, the largest insurance provider is Medicare, which constitutes approximately 40% of our patients’ cases. Non-Medicare patients are typically insured by private insurance companies who provide patient coverage and pay for patients’ health-related costs. These private insurance companies will often adjust their rates according to the insurance rates annually published by the Center for Medicare and Medicaid Services, or CMS. We, and other providers, typically bill according to the codes relevant to the tests we conduct.
Medicare and Medicaid Reimbursement
Many of the services that we provide are reimbursed by Medicare and state Medicaid programs and are therefore subject to extensive government regulation.
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Medicare is a federally funded program that provides health insurance coverage for qualified persons age 65 or older, some disabled persons, and persons with end-stage renal disease and persons with Lou Gehrig’s disease. Medicaid programs are jointly funded by the federal and state governments and are administered by states under approved plans.
Medicaid provides medical benefits to eligible people with limited income and resources and people with disabilities, among others. Although the federal government establishes general guidelines for the Medicaid program, each state sets its own guidelines regarding eligibility and covered services. Some individuals, known as “dual eligibles”, may be eligible for benefits under both Medicare and a state Medicaid program. Reimbursement under the Medicare and Medicaid programs is contingent on the satisfaction of numerous rules and regulations, including those requiring certification and/or licensure. Congress often enacts legislation that affects the reimbursement rates under government healthcare programs.
Approximately 43% of our revenue for the year ended December 31, 2021 was derived directly from Medicare, Medicaid or other government-sponsored healthcare programs. Also, we indirectly provide services to beneficiaries of Medicare, Medicaid and other government-sponsored healthcare programs through managed care entities. Should there be material changes to federal or state reimbursement methodologies, regulations or policies, our direct reimbursements from government-sponsored healthcare programs, as well as service fees that relate indirectly to such reimbursements, could be adversely affected.
Healthcare Reform
In recent years, federal and state governments have considered and enacted policy changes designed to reform the healthcare industry. The most prominent of these healthcare reform efforts, the PPACA, has resulted in sweeping changes to the U.S. system for the delivery and financing of health care. As currently structured, the PPACA increases the number of persons covered under government programs and private insurance; furnishes economic incentives for measurable improvements in health care quality outcomes; promotes a more integrated health care delivery system and the creation of new health care delivery.
Since its enactment, there have been judicial, Congressional and executive challenges to certain aspects of the PPACA. On June 17, 2021, the U.S. Supreme Court dismissed the most recent judicial challenge to the PPACA brought by several states without specifically ruling on the constitutionality of the PPACA. Prior to the Supreme Court’s decision, President Biden issued an executive order to initiate a special enrollment period from February 15, 2021 through August 15, 2021 for purposes of obtaining health insurance coverage through the ACA marketplace. The executive order also instructed certain governmental agencies to review and reconsider their existing policies and rules that limit access to healthcare, including among others, reexamining Medicaid demonstration projects and waiver programs that include work requirements, and policies that create unnecessary barriers to obtaining access to health insurance coverage through Medicaid or the PPACA. It is unclear how other healthcare reform measures of the Biden administration or other efforts, if any, to challenge, repeal or replace the PPACA will impact our business.
U.S. Food and Drug Administration Regulation
We offer our products as research use only (RUO) products. An RUO product is one that is not intended for clinical diagnostic use and must be labeled “For Research Use Only. Not for use in diagnostic procedures.” Products that are intended for research use only and are properly labeled as RUO are exempt from compliance with the requirements of the U.S. Food and Drug Administration (FDA) applicable to medical devices. A product labeled RUO but intended to be used diagnostically may be viewed by the FDA as adulterated or misbranded and is subject to FDA enforcement activities. The FDA may consider the totality of the circumstances surrounding distribution and use of an RUO product, including how the product is marketed, when determining its intended use. In November 2013, the FDA issued a guidance document entitled “Distribution of In Vitro Diagnostic Products Labeled for Research Use Only or Investigational Use Only” (RUO Guidance), which highlights the FDA’s interpretation that distribution of RUO products with any labeling, advertising or promotion that suggests that clinical laboratories can validate the test through their own procedures and subsequently offer it for clinical diagnostic use as a laboratory developed test is in conflict with RUO status. The RUO Guidance further articulates the FDA’s position that any assistance offered in performing clinical validation or verification, or similar specialized technical support, to clinical laboratories, conflicts with RUO status.
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Additionally, our CLIA laboratories offer testing utilizing our laboratory developed tests (LDTs). LDTs are defined by the FDA to be tests that are designed, developed, and used within a single laboratory. The FDA takes the position that it has authority to regulate LDTs as medical devices, and historically, it has exercised enforcement discretion with respect to most LDTs and has not required laboratories that offer LDTs to comply with the FDA’s requirements for medical devices. However, the FDA has stated it intends to end its policy of enforcement discretion and to actively regulate LDTs. For example, on October 3, 2014, the FDA issued two draft guidance documents, entitled “Framework for Regulatory Oversight of Laboratory Developed Tests (LDTs)” and “FDA Notification and Medical Device Reporting for Regulatory Oversight of Laboratory Developed Tests (LDTs)”, that set forth a proposed risk-based regulatory framework that would apply varying levels of FDA oversight to LDTs. The draft guidance documents have not been finalized. In January 2017, the FDA issued a “Discussion Paper on Laboratory Developed Tests (LDTs),” which includes a possible approach to LDT oversight that is intended to advance public discussion on the topic. Additionally, legislative proposals have been introduced in Congress or have been publicly circulated. Such proposals would implement differing approaches to the regulation of LDTs, including in certain instances to require marketing authorization from the FDA.
Medical devices are subject to extensive regulation by the FDA. The FDA regulates, among other things, the research, design, development, preclinical and clinical testing, manufacturing, safety, effectiveness, packaging, labeling, storage, recordkeeping, marketing authorization, adverse event reporting, marketing, promotion, sales, distribution and import and export of medical devices. The FDA has broad regulatory compliance and enforcement powers. If the FDA determines that a manufacturer has failed to comply with applicable regulatory requirements, it can take a variety of compliance or enforcement actions, including the following:
| ● | issuance of warning letters, untitled letters, fines, injunctions, consent decrees and civil penalties; |
| ● | requesting or requiring recalls, withdrawals, or administrative detention or seizure of products; |
| ● | imposing operating restrictions or partial suspension or total shutdown of production; |
| ● | refusing or delaying requests for marketing authorization or new products or modified products; or criminal prosecution. |
Research and Development Expenses
For the years ended December 31, 2021 and 2020, we recorded $1.3 million and $1.2 million, respectively, of research and development expenses. More information regarding our research and development activities can be found in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Item 7 of this Annual Report.
Human Capital
Employees.
As of March 25, 2022, Precipio employed fifty-five (55) employees on a full-time basis and one (1) employee as part-time. Of the total, eleven (11) were in Finance, General and Administration, twenty-seven (27) were in laboratory operations, nine (9) were in Sales and Marketing, four (4) were in Customer Service and Support and five (5) were in Research & Development.
All of our employees are based in the U.S. and a majority are based in Connecticut. None of our employees are represented by a labor union or covered by a collective bargaining agreement, and we believe our relationship with our employees is good.
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Executive Officers of the Registrant
Our executive officers, their ages as of March 25, 2022 and their respective positions are as follows:
Ilan Danieli, Chief Executive Officer, age 50
Mr. Danieli was the founder of Precipio Diagnostics LLC and was the Chief Executive Officer of Precipio Diagnostics LLC since 2011. Mr. Danieli assumed the role of Chief Executive Officer of Precipio, Inc. at the time of a June 2017 merger transaction with Transgenomic, Inc. (the “Merger”). With over 20 years managing small and medium-size companies, some of his previous experiences include COO of Osiris, a publicly-traded company based in New York City with operations in the US, Canada, Europe and Asia; VP of Operations for Laurus Capital Management, a multi-billion dollar hedge fund; and in various other entrepreneurial ventures. Ilan holds an MBA from the Darden School at the University of Virginia, and a BA in Economics from Bar-Ilan University in Israel.
Matthew Gage, Interim Chief Financial Officer, age 55
Mr. Gage was appointed Interim Chief Financial Officer of Precipio, Inc. effective March 21, 2022. Mr. Gage served as Director of Financial Reporting and Analysis of Precipio, Inc. since joining the Company in June 2017 following its acquisition of Transgenomic Inc., where he was Director of Financial Reporting and Analysis since 2014. Mr. Gage has over 30 years of experience in company finance, 25 years of which being with publicly traded companies. Mr. Gage holds a Bachelor of Science Degree in Business Administration from Bryant University.
Carl R. Iberger, Chief Financial Officer, age 69
Mr. Iberger retired from Precipio, Inc. effective March 21, 2022. He had been the Company’s Chief Financial Officer since October 2016. For the years 1990 through 2015, Mr. Iberger held the positions of Chief Financial Officer and Executive Vice President at Dianon Systems, DigiTrace Care Services and SleepMed, Inc. Mr. Iberger has significant diagnostic healthcare experience in mergers and acquisitions, private equity transactions, public offerings and executive management in high growth environments. Mr. Iberger holds a Master’s Degree in Finance from Hofstra University and a Bachelor of Science Degree in Accounting from the University of Connecticut.
Compliance with Environmental Laws
We believe we are in compliance with current environmental protection requirements that apply to us or our business. Costs attributable to environmental compliance are not currently material.
Intellectual Property
We license the ICP technology from Dana-Farber through the License Agreement. The License Agreement grants us an exclusive license to the ICP technology, subject to a non-exclusive license granted to the U.S. government, in the areas of mutation detection using Sanger (di-deoxy) sequencing and mitochondrial DNA analysis for all research, diagnostic, prognostic and therapeutic uses in humans, animals, viruses, bacteria, fungi, plants or fossilized material. The Company has filed provisional patent applications for its proprietary HemeScreen and IV-Cell technologies.
Corporate History
Precipio, Inc. was incorporated in Delaware on March 6, 1997. Our principal office is located at 4 Science Park, New Haven, Connecticut 06511.
Our internet address is www.precipiodx.com. Information found on our website is not incorporated by reference into this report. We make available free of charge through our website our Securities and Exchange Commission, or SEC, filings, including exhibits, furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.
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Item 1A. Risk Factors
The following risks and uncertainties, together with all other information in this Annual Report on Form 10-K, including our consolidated financial statements and related notes, should be considered carefully. Any of the risk factors we describe below could adversely affect our business, financial condition or results of operations, and could cause the market price of our common stock to fluctuate or decline.
Risk factor Summary
| ● | There is substantial doubt about our ability to continue as a going concern. |
| ● | We may require significant additional financing to sustain our operations and without it we will not be able to continue operations. |
| ● | We may need to raise substantial additional capital to commercialize our diagnostic technology, and our failure to obtain funding when needed may force us to delay, reduce or eliminate our product development programs or collaboration efforts or force us to restrict or cease operations. |
| ● | We have incurred losses since our inception and expect to incur losses for the foreseeable future. We cannot be certain that we will achieve or sustain profitability. |
| ● | We are subject to concentrations of revenue risk and concentrations of credit risk in accounts receivable. |
| ● | We have been, and may continue to be, subject to costly litigation. |
| ● | The commercial success of our products, including those we are developing, will depend upon the degree of market acceptance of these products among physicians, patients, health care payers and the medical community and on our ability to successfully market our products. |
| ● | If we cannot compete successfully with our competitors, including new entrants in the market, we may be unable to increase or sustain our revenue or achieve and sustain profitability. |
| ● | We may not be able to develop new products or enhance the capabilities of our systems to keep pace with rapidly changing technology and customer requirements, which could have a material adverse effect on our business and operating results. |
| ● | We face risks related to health pandemics and other widespread outbreaks of contagious disease, including the novel coronavirus, COVID-19, which could significantly disrupt our operations and impact our financial results. |
| ● | We may experience temporary disruptions and delays in processing biological samples at our facilities. |
| ● | We depend upon a limited number of key personnel, and if we are not able to retain them or recruit additional qualified personnel, the execution of our strategy, management of our business and commercialization of our product candidates could be delayed or negatively impacted. |
| ● | We will need to increase the size of our organization, and we may experience difficulties in managing growth. |
| ● | We currently have limited experience in marketing products. If we are unable to establish marketing and sales capabilities and retain the proper talent to execute on our sales and marketing strategy, we may not be able to generate product revenue. |
| ● | Cybersecurity risks could compromise our information and expose us to liability, which may harm our ability to operate effectively and may cause our business and reputation to suffer. |
| ● | Our ability to use net operating loss carryforwards to offset future taxable income for U.S. federal tax purposes is subject to limitation and risk that could further limit our ability to utilize our net operating losses. |
| ● | The testing, manufacturing and marketing of medical diagnostic devices entails an inherent risk of product liability and personal injury claims. |
| ● | All of our diagnostic technology development and our clinical services are performed at two laboratories, and in the event either or both of these facilities were to be affected by a termination of the lease or a man-made or natural disaster, our operations could be severely impaired. |
| ● | An impairment in the carrying value of our intangible assets could negatively affect our results of operations. |
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| ● | Governmental payers and health care plans have taken steps to control costs. |
| ● | Changes in payer mix could have a material adverse impact on our net sales and profitability. |
| ● | Our laboratories require ongoing CLIA certification. |
| ● | Our products that we sell as research use only products and as laboratory developed tests could become subject to government regulations requiring marketing authorization, and the marketing authorization and maintenance process for such products may be expensive, time-consuming and uncertain in both timing and outcome. |
| ● | Failure to comply with HIPAA could be costly. |
| ● | Our failure to comply with any applicable government laws and regulations or otherwise respond to claims relating to improper handling, storage or disposal of hazardous chemicals that we use may adversely affect our results of operations. |
| ● | We may become subject to the Anti-Kickback Statute, Stark Law, False Claims Act, Civil Monetary Penalties Law and may be subject to analogous provisions of applicable state laws and could face substantial penalties if we fail to comply with such laws. |
| ● | We cannot be certain that measures taken to protect our intellectual property will be effective. |
| ● | If any of our owned patent applications do not issue as patents in any jurisdiction, we may not be able to compete effectively. |
| ● | We depend on certain technologies that are licensed to us. We do not control these technologies and any loss of our rights to them could prevent us from selling some of our products. |
| ● | If we are unable to protect the confidentiality of our trade secrets, our business and competitive position may be harmed. |
| ● | If our trademarks and trade names are not adequately protected, then we may not be able to build name recognition in our markets of interest and our business may be adversely affected. |
| ● | Third-party claims of intellectual property infringement, misappropriation or other violations may prevent or delay our product discovery and development efforts and have a material adverse effect on our business. |
| ● | Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements. |
| ● | We may become involved in lawsuits to protect or enforce our patents or other intellectual property, which could be expensive, time-consuming and unsuccessful. |
| ● | Changes to the patent law in the U.S. and other jurisdictions could diminish the value of patents in general, thereby impairing our ability to protect our product candidates. |
| ● | Third parties may assert ownership or commercial rights to inventions we develop. |
| ● | Third parties may assert that our employees or consultants have wrongfully used or disclosed confidential information or misappropriated trade secrets. |
| ● | Intellectual property rights do not necessarily address all potential threats. |
| ● | The price of our common stock may fluctuate significantly, which could negatively affect us and holders of our common stock. |
| ● | The price of our stock may be vulnerable to manipulation. |
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| ● | If we cannot continue to satisfy Nasdaq listing maintenance requirements and other rules, our securities may be delisted, which could negatively impact the price of our securities. |
| ● | Increased costs associated with corporate governance compliance may significantly impact our results of operations. |
| ● | We have not paid dividends on our common stock in the past and do not expect to pay dividends on our common stock for the foreseeable future. Any return on investment may be limited to the value of our common stock. |
| ● | If securities or industry analysts do not publish research or reports about our business, or if they change their recommendations regarding our stock adversely, our stock price and trading volume could decline. |
| ● | The sale or issuance of our common stock to Alliance Global Partners may cause significant dilution and the sale of the shares of common stock acquired by Alliance Global Partners, or the perception that such sales may occur, could cause the price of our common stock to fall. |
| ● | The issuance of our common stock to creditors or litigants may cause significant dilution to our stockholders and cause the price of our common stock to fall. |
Risks Related to Our Business and Strategy
There is substantial doubt about our ability to continue as a going concern.
Our independent registered public accounting firm has issued an opinion on our consolidated financial statements included in this Annual Report on Form 10-K that states that the consolidated financial statements were prepared assuming we will continue as a going concern. Our consolidated financial statements have been prepared using accounting principles generally accepted in the United States of America applicable for a going concern, which assume that we will realize our assets and discharge our liabilities in the ordinary course of business. We have incurred substantial operating losses and have used cash in our operating activities for the past few years. As of and for the year ended December 31, 2021, we had a net loss of $8.5 million, an accumulated deficit of $80.1 million, working capital of $9.3 million and net cash used in operating activities of $6.6 million. Our consolidated financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should we be unable to continue as a going concern. We also cannot be certain that additional financing, if needed, will be available on acceptable terms, or at all, and our failure to raise capital when needed could limit our ability to continue our operations. There remains substantial doubt about the Company’s ability to continue as a going concern for the next twelve months from the date the consolidated financial statements were issued.
To date, we have experienced negative cash flow from development of our diagnostic technology, as well as from the costs associated with establishing a laboratory and building a sales force to market our products and services. We expect to incur substantial net losses for the foreseeable future to further develop and commercialize our diagnostic technology. We also expect that our selling, general and administrative expenses will continue to increase due to the additional costs associated with market development activities and expanding our staff to sell and support our products. Our ability to achieve or, if achieved, sustain profitability is based on numerous factors, many of which are beyond our control, including the market acceptance of our products, competitive product development and our market penetration and margins. We may never be able to generate sufficient revenue to achieve or, if achieved, sustain profitability.
Because of the numerous risks and uncertainties associated with further development and commercialization of our diagnostic technology and any future tests, we are unable to predict the extent of any future losses or when we will become profitable, if ever. We may never become profitable and you may never receive a return on an investment in our securities. An investor in our securities must carefully consider the substantial challenges, risks and uncertainties inherent in the development and commercialization of tests in the medical diagnostic industry. We may never successfully commercialize our diagnostic technology or any future tests, and our business may fail.
We may require significant additional financing to sustain our operations and without it we will not be able to continue operations.
At December 31, 2021, we had working capital of $9.3 million. We had an operating cash flow deficit of $6.6 million for the year ended December 31, 2021 and a net loss of $8.5 million for the year ended December 31, 2021. We
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do not currently have sufficient financial resources to fund our operations or those of our subsidiaries. Therefore, we need additional funds to continue these operations.
To facilitate ongoing operations and product development, on April 2, 2021, the Company entered into a sales agreement with A.G.P./Alliance Global Partners (“AGP”), pursuant to which the Company may offer and sell its common stock, par value $0.01 per share (the “Common Stock”) (the “Shares”), having aggregate sales proceeds of up to $22.0 million, to or through AGP, as sales agent (the “AGP Sales Agreement”), from time to time, in an “at the market offering” (as defined in Rule 415(a)(4) under the Securities Act of 1933, as amended) of the Shares (the “ATM Offering”). The Company is limited in the number of shares it can sell in the ATM Offering due to the offering limitations currently applicable to the Company under General Instruction I.B.6. of Form S-3 and the Company’s public float as of the applicable date of such sales, as well as the number of authorized and unissued shares available for issuance, in accordance with the terms of the AGP Sales Agreement.
The extent we rely on AGP as a source of funding will depend on a number of factors including, the prevailing market price of our common stock and the extent to which we are able to secure working capital from other sources. If obtaining sufficient funding from AGP were to prove unavailable or prohibitively dilutive, we will need to secure another source of funding in order to satisfy our working capital needs. Even if we sell all $22.0 million under the AGP Sales Agreement, we may still need additional capital to fully implement our business, operating and development plans. Should the financing we require to sustain our working capital needs be unavailable or prohibitively expensive when we require it, the consequences could be a material adverse effect on our business, operating results, financial condition and prospects. From April 2, 2021 through the date the consolidated financial statements were issued, we received approximately $15.4 million in gross proceeds through the AGP Sales Agreement from the sale of 4,501,000 shares of common stock, leaving us with an additional $6.6 million available for future sales pursuant to the AGP Sales Agreement.
We may need to raise substantial additional capital to commercialize our diagnostic technology, and our failure to obtain funding when needed may force us to delay, reduce or eliminate our product development programs or collaboration efforts or force us to restrict or cease operations.
As of December 31, 2021, we had cash of $11.7 million and our working capital was $9.3 million. Due to our recurring losses from operations and the expectation that we will continue to incur losses in the future, we may be required to raise additional capital to complete the development and commercialization of our current product candidates and to pay off our obligations. To date, to fund our operations and develop and commercialize our products, we have relied primarily on equity and debt financings. In future periods, when we seek additional capital, we may seek to sell additional equity and/or debt securities or to obtain a credit facility, which we may not be able to do on favorable terms, or at all. Our ability to obtain additional financing will be subject to a number of factors, including market conditions, our operating performance and investor sentiment. If we are unable to raise additional capital when required or on acceptable terms, we may have to significantly delay, scale back or discontinue the development and/or commercialization of one or more of our product candidates, restrict or cease our operations or obtain funds by entering into agreements on unattractive terms.
We have incurred losses since our inception and expect to incur losses for the foreseeable future. We cannot be certain that we will achieve or sustain profitability.
We have incurred losses since our inception and expect to incur losses in the future. As of and for the year ended December 31, 2021, we had a net loss of $8.5 million, working capital of $9.3 million and net cash used in operating activities of $6.6 million. For the year ended December 31, 2021, we have experienced negative cash flow from development of our diagnostic technology, as well as from the costs associated with establishing a laboratory and building a sales force to market our products and services. We expect to incur substantial net losses for the foreseeable future to further develop and commercialize our diagnostic technology. We also expect that our selling, general and administrative expenses will continue to increase due to the additional costs associated with market development activities and expanding our staff to sell and support our products. Our ability to achieve or, if achieved, sustain profitability is based on numerous factors, many of which are beyond our control, including the market acceptance of our products, competitive product development and our market penetration and margins. We may never be able to generate sufficient revenue to achieve or, if achieved, sustain profitability.
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We are subject to concentrations of revenue risk and concentrations of credit risk in accounts receivable.
We have had several customers who, from time to time, have individually represented 10% or more of our total revenue, or whose accounts receivable balances individually represented 10% or more of our total accounts receivable.
For the years ended December 31, 2021 and 2020, no customer individually represented 10% or more of our total revenue. We expect to maintain ongoing relationships with our customers, however, the loss of, or significant decrease in demand from, any of our top customers could have a material adverse effect on our business, results of operations and financial condition.
At December 31, 2021, two customers accounted for approximately 33% of our total accounts receivable. At December 31, 2020, no customer represented 10% or more of our total accounts receivable. The business risks associated with this concentration, including increased credit risks for these and other customers and the possibility of related bad debt write-offs, could negatively affect our margins and profits. Additionally, the loss of any of our top customers, whether through competition or consolidation, or a disruption in sales to such a customer, could result in a decrease of the Company’s future sales, earnings and cash flows. Generally, we do not require collateral or other securities to support our accounts receivable and while we are directly affected by the financial condition of our customers, management does not believe significant credit risks exist at December 31, 2021.
We have been, and may continue to be, subject to costly litigation.
We have been, and may continue to be, subject to legal proceedings. Due to the nature of our business and our history of insufficient capital resources to pay our obligations on a timely basis, we may be subject to a variety of regulatory investigations, claims, lawsuits and other proceedings in the ordinary course of our business. The results of these legal proceedings cannot be predicted with certainty due to the uncertainty inherent in litigation, including the effects of discovery of new evidence or advancement of new legal theories, the difficulty of predicting decisions of judges and juries and the possibility that decisions may be reversed on appeal. Such litigation has been, and in the future, could be, costly, time-consuming and distracting to management, result in a diversion of resources and could materially adversely affect our business, financial condition and operating results.
In addition, we may settle some litigation through the issuance of equity securities which may result in significant dilution to our stockholders.
The commercial success of our products, including those we are developing, will depend upon the degree of market acceptance of these products among physicians, patients, health care payers and the medical community and on our ability to successfully market our products.
Our products may never gain significant acceptance in the marketplace and, therefore, may never generate substantial revenue or profits for us. Our ability to achieve commercial market acceptance for our existing and future products will depend on several factors, including:
| ● | our ability to convince the medical community of the clinical utility of our products and their potential advantages over existing diagnostics technology; |
| ● | the willingness of physicians and patients to utilize our products; and |
| ● | the agreement by commercial third-party payers and government payers to reimburse our products, the scope and amount of which will affect patients’ willingness or ability to pay for our products and will likely heavily influence physicians’ decisions to recommend our products. |
In addition, physicians may rely on guidelines issued by industry groups, such as the NCCN, medical societies, such as the College of American Pathologists, or CAP, or other key oncology-related organizations before utilizing any diagnostic test. Although we have a study underway to demonstrate the clinical utility of our existing products, none of our products are, and may never be, listed in any such guidelines.
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We believe that publications of scientific and medical results in peer-reviewed journals and presentations at leading conferences are critical to the broad adoption of our products. Publication in leading medical journals is subject to a peer-review process, and peer reviewers may not consider the results of studies involving our products sufficiently novel or worthy of publication. The failure to be listed in physician guidelines or to be published in peer-reviewed journals could limit the adoption of our products. Failure to achieve widespread market acceptance of our products would materially harm our business, financial condition, and results of operations.
If we cannot compete successfully with our competitors, including new entrants in the market, we may be unable to increase or sustain our revenue or achieve and sustain profitability.
The medical diagnostic industry is intensely competitive and characterized by rapid technological progress. We face significant competition from competitors ranging in size from diversified global companies with significant research and development resources to small, specialized firms whose narrower product lines may allow them to be more effective in deploying related PCR technology in the genetic diagnostic industry. Our closest competitors fall largely into two groups, consisting of companies that specialize in oncology and offer directly competing services to our diagnostic services, offering their services to oncologists and pathology departments within hospitals, as well as large commercial companies that offer a wide variety of laboratory tests that range from simple chemistry tests to complex genetic testing. The technologies associated with the molecular diagnostics industry are evolving rapidly and there is intense competition within such industry. Certain molecular diagnostics companies have established technologies that may be competitive to our product candidates and any future tests that we develop. Some of these tests may use different approaches or means to obtain diagnostic results, which could be more effective or less expensive than our tests for similar indications. Moreover, these and other future competitors have or may have considerably greater resources than we do in terms of technology, sales, marketing, commercialization and capital resources. These competitors may have substantial advantages over us in terms of research and development expertise, experience in clinical studies, experience in regulatory issues, brand name exposure and expertise in sales and marketing as well as in operating central laboratory services. Many of these organizations have financial, marketing and human resources greater than ours; therefore, there can be no assurance that we can successfully compete with present or potential competitors or that such competition will not have a materially adverse effect on our business, financial position or results of operations.
We believe that many of our competitors spend significantly more on research and development-related activities than we do. Our competitors may discover new diagnostic tools or develop existing technologies to compete with our diagnostic technology. Our commercial opportunities will be reduced or eliminated if these competing products are more effective, are more convenient or are less expensive than our product candidates.
We may not be able to develop new products or enhance the capabilities of our systems to keep pace with rapidly changing technology and customer requirements, which could have a material adverse effect on our business and operating results.
Our success depends on our ability to develop new products and applications for our diagnostic technology in existing and new markets, while improving the performance and cost-effectiveness of our systems. New technologies, techniques or products could emerge that might offer better combinations of price and performance than our current or future products and systems. Existing or future markets for our products, as well as potential markets for our diagnostic product candidates, are characterized by rapid technological change and innovation. It is critical to our success that we anticipate changes in technology and customer requirements and successfully introduce new, enhanced and competitive technologies to meet our customers’ and prospective customers’ needs on a timely and cost-effective basis. At the same time, however, we must carefully manage the introduction of new products. If customers believe that such products will offer enhanced features or be sold for a more attractive price, they may delay purchases until such products are available. We may also have excess or obsolete inventory of older products as we transition to new products and our experience in managing product transitions is very limited. If we do not successfully innovate and introduce new technology into our product lines or effectively manage the transitions to new product offerings, our revenues and results of operations will be adversely impacted.
Competitors may respond more quickly and effectively than we do to new or changing opportunities, technologies, standards or customer requirements. We anticipate that we will face increased competition in the future as
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existing companies and competitors develop new or improved products and as new companies enter the market with new technologies.
We face risks related to health pandemics and other widespread outbreaks of contagious disease, including the novel coronavirus, COVID-19, which could significantly disrupt our operations and impact our financial results.
The ongoing COVID-19 pandemic is evolving, continues to spread globally, and to date has led to the implementation of various responses, including government-imposed quarantines, closure of non-essential business, work-from-home directives, travel restrictions, physical distancing, shelter-in-place orders and other public health safety measures. Despite recent progress in the administration of vaccines, both the outbreak of recent variants, including Delta and Omicron, and the related containment and mitigation measures that have been put into place across the globe, have had an adverse impact on the global economy and our business, the severity and duration of which are uncertain. The COVID-19 pandemic continues to have a significant impact, both direct and indirect, on businesses and commerce, as worker shortages have occurred; supply chains have been disrupted; facilities and production have been suspended; and demand for certain goods and services may be slow to return to pre-pandemic levels, if they return to pre-pandemic levels. In response to the COVID-19 pandemic, many of our employees are continuing to work remotely outside of our offices. Additionally, while our laboratory operations resumed to near-normal capacity, we may continue to experience challenges in procuring materials and supplies in a consistently timely manner due to COVID-19-related supply chain issues. The demand for COVID-19 vaccines and potential for manufacturing facilities and materials to be commandeered under the Defense Production Act of 1950, or equivalent foreign legislation, may make it more difficult to obtain materials or manufacturing. If any of our third-party manufacturers is adversely impacted by the COVID-19 pandemic or if they divert resources or manufacturing capacity to accommodate the development or manufacture of COVID-19 coronavirus vaccines, our supply chain may be disrupted, limiting our ability to produce our diagnostic tests.
Going forward, we expect that challenges to our business will continue. We have been and will continue to be prudent in managing through this economic crisis. Digital connectivity is now fundamental to the continuity of our business operations. We continually engage our employees and customers in keeping safe. We monitor adherence to governmental guidelines. We have employed remote work where possible. In this unchartered time, we recognize the need for frequent and transparent communication to all parties. As necessary, we will provide additional information related to this economic condition, including the impact to our future operating results due to downturns in global economies and financial markets.
We may experience temporary disruptions and delays in processing biological samples at our facilities.
We may experience delays in processing biological samples caused by software and other errors. Any delay in processing samples could have an adverse effect on our business, financial condition and results of operations.
We depend upon a limited number of key personnel, and if we are not able to retain them or recruit additional qualified personnel, the execution of our strategy, management of our business and commercialization of our product candidates could be delayed or negatively impacted.
Our success is largely dependent upon the continued contributions of our officers and employees. Our success also depends in part on our ability to attract and retain highly qualified scientific, commercial and administrative personnel. In order to pursue our test development and commercialization strategies, we will need to attract and hire additional personnel with specialized experience in a number of disciplines, including assay development, laboratory and clinical operations, sales and marketing, billing and reimbursement. There is intense competition for personnel in the fields in which we operate. If we are unable to attract new employees and retain existing employees, the development and commercialization of our product candidates and any future tests could be delayed or negatively impacted. If any of them becomes unable or unwilling to continue in their respective positions, and we are unable to find suitable replacements, our business and financial results could be materially negatively affected.
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We will need to increase the size of our organization, and we may experience difficulties in managing growth.
We are a small company with 55 full-time employees and 1 part-time employee as of March 25, 2022. Future growth will impose significant added responsibilities on members of management, including the need to identify, attract, retain, motivate and integrate highly skilled personnel. We may increase the number of employees in the future depending on the progress of our development of diagnostic technology. Our future financial performance and our ability to commercialize our product candidates and to compete effectively will depend, in part, on our ability to manage any future growth effectively. To that end, we must be able to:
| ● | integrate additional management, administrative, manufacturing and regulatory personnel; |
| ● | maintain sufficient administrative, accounting and management information systems and controls; and |
| ● | hire and train additional qualified personnel. |
We may not be able to accomplish these tasks, and our failure to accomplish any of them could harm our financial results.
We currently have limited experience in marketing products. If we are unable to establish marketing and sales capabilities and retain the proper talent to execute on our sales and marketing strategy, we may not be able to generate product revenue.
We have developed limited experience in marketing our products and services. We intend to continue to develop our in-house marketing organization and sales force, which will require significant capital expenditures, management resources and time. We will have to compete with other diagnostic companies to recruit, hire, train and retain marketing and sales personnel.
If we are unable to further grow our internal sales, marketing and distribution capabilities, we may pursue collaborative arrangements regarding the sales and marketing of our product candidates or future products, however, we may not be able to establish or maintain such collaborative arrangements, or if we are able to do so, they may not have effective sales forces. Any revenue we receive will depend upon the efforts of such third parties, which may not be successful. We may have little or no control over the marketing and sales efforts of such third parties and our revenue from product sales may be lower than if we had commercialized our product candidates ourselves. We also face competition in our search for third parties to assist us with the sales and marketing efforts of our product candidates.
Cybersecurity risks could compromise our information and expose us to liability, which may harm our ability to operate effectively and may cause our business and reputation to suffer.
Cybersecurity refers to the combination of technologies, processes and procedures established to protect information technology systems and data from unauthorized access, attack, or damage. We rely on our information systems to provide security for processing, transmission and storage of confidential information about our patients, customers and personnel, such as names, addresses and other individually identifiable information protected by the Health Insurance Portability and Accountability Act, (“HIPAA”), other privacy laws. Cyber-attacks are increasingly more common, including in the health care industry. The regulatory environment surrounding information security and privacy is increasingly demanding, with the frequent imposition of new and changing requirements. Compliance with changes in privacy and information security laws and with rapidly evolving industry standards may result in our incurring significant expense due to increased investment in technology and the development of new operational processes.
We have not experienced any known attacks on our information technology systems that compromised any confidential information. We maintain our information technology systems with safeguard protection against cyber-attacks including passive intrusion protection, firewalls and virus detection software. However, these safeguards do not ensure that a significant cyber-attack could not occur. Although we have taken steps to protect the security of our information systems and the data maintained in those systems, it is possible that our safety and security measures will not prevent the systems’ improper functioning or damage or the improper access or disclosure of personally identifiable information such as in the event of cyber-attacks.
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Security breaches, including physical or electronic break-ins, computer viruses, attacks by hackers and similar breaches can create system disruptions or shutdowns or the unauthorized disclosure of confidential information. If personal information or protected health information is improperly accessed, tampered with or disclosed as a result of a security breach, we may incur significant costs to notify and mitigate potential harm to the affected individuals, and we may be subject to sanctions and civil or criminal penalties if we are found to be in violation of the privacy or security rules under HIPAA or other similar federal or state laws protecting confidential personal information. In addition, a security breach of our information systems could damage our reputation, subject us to liability claims or regulatory penalties for compromised personal information and could have a material adverse effect on our business, financial condition and results of operations.
Our ability to use net operating loss carryforwards to offset future taxable income for U.S. federal tax purposes is subject to limitation and risk that could further limit our ability to utilize our net operating losses.
Under U.S. federal income tax law, a corporation’s ability to utilize its net operating losses, or NOLs, to offset future taxable income may be significantly limited if it experiences an “ownership change” as defined in Section 382 of the Internal Revenue Code, as amended. In general, an ownership change will occur if there is a cumulative change in a corporation’s ownership by “5-percent shareholders” that exceeds 50 percentage points over a rolling three-year period. A corporation that experiences an ownership change will generally be subject to an annual limitation on the use of its pre-ownership change NOLs equal to the value of the corporation immediately before the ownership change, multiplied by the long-term tax-exempt rate (subject to certain adjustments). The annual limitation for a taxable year generally is increased by the amount of any “recognized built-in gains” for such year and the amount of any unused annual limitation in a prior year. On December 22, 2017, a law commonly known as the Tax Cuts and Jobs Act, or the TCJ Act, was enacted in the United States. Certain provisions of the TCJ Act impact the ability to utilize NOLs generated in 2018 and forward; any limitation to our annual use of NOLs could require us to pay a greater amount of U.S. federal (and in some cases, state) income taxes, which could reduce our after-tax income from operations for future taxable years and adversely impact our financial condition. Beginning in 2018, under the TCJ Act, federal loss carryforwards have an unlimited carryforward period, however such losses can only offset 80% of taxable income in any one year.
The testing, manufacturing and marketing of medical diagnostic devices entails an inherent risk of product liability and personal injury claims.
To date, we have experienced no product liability or personal injury claims, but any such claims arising in the future could have a material adverse effect on our business, financial condition and results of operations. Potential product liability or personal injury claims may exceed the amount of our insurance coverage or may be excluded from coverage under the terms of our policy or limited by other claims under our umbrella insurance policy. Additionally, our existing insurance may not be renewed by us at a cost and level of coverage comparable to that presently in effect, if at all. In the event that we are held liable for a claim against which we are not insured or for damages exceeding the limits of our insurance coverage, such claim could have a material adverse effect on our cash flow and thus potentially a materially adverse effect on our business, financial condition and results of operations.
All of our diagnostic technology development and our clinical services are performed at two laboratories, and in the event either or both of these facilities were to be affected by a termination of the lease or a man-made or natural disaster, our operations could be severely impaired.
Laboratory and R&D facilities located in New Haven, Connecticut and Omaha, Nebraska house development teams that collaborate on new products and services. The Company operates CLIA laboratories in both the New Haven, Connecticut and Omaha, Nebraska locations providing essential blood cancer diagnostics to office-based oncologists in many states nationwide. Despite precautions taken by us, any future natural or man-made disaster at these laboratories, such as a fire, earthquake or terrorist activity, could cause substantial delays in our operations, damage or destroy our equipment and testing samples or cause us to incur additional expenses.
In addition, we are leasing the facilities where our laboratories operate. We are currently in compliance with all and any lease obligations, but should the leases terminate for any reason, or if at any time either of the laboratories is moved due to conditions outside our control, it could cause substantial delay in our diagnostics operations, damage or destroy our equipment and biological samples or cause us to incur additional expenses. In the event of an extended
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shutdown of either laboratory, we may be unable to perform our services in a timely manner or at all and therefore would be unable to operate in a commercially competitive manner. This could harm our operating results and financial condition.
Further, if we have to use a substitute laboratory while our facilities were shut down, we could only use another facility with established state licensure and accreditation under CLIA. We may not be able to find another CLIA-certified facility and comply with applicable procedures, or find any such laboratory that would be willing to perform the tests for us on commercially reasonable terms. Additionally, any new laboratory opened by us would be subject to certification under CLIA and licensure by various states, which would take a significant amount of time and result in delays in our ability to continue our operations.
An impairment in the carrying value of our intangible assets could negatively affect our results of operations.
A significant portion of our assets are intangible assets which are reviewed at least annually for impairment. If we do not realize our business plan, our intangible assets may become impaired resulting in an impairment loss in our results of operations.
Reimbursement and Regulatory Risks Relating to Our Business
Governmental payers and health care plans have taken steps to control costs.
Third-party payers, including private insurers and governmental entities, have implemented and will continue to implement measures to control the cost, utilization, and delivery of healthcare services, including products and services we offer. These changes have adversely affected and may in the future adversely affect coverage for our services. We also believe that healthcare professionals may not use our services if third-party payers do not provide adequate coverage and reimbursement for them. These changes in federal, state, local, and third-party payer regulations or policies may decrease our revenues and adversely affect our results of operations and our financial condition. Occasionally, legislative pauses and changes impact our products that are reimbursed under the Medicare Physician Fee Schedule, MPFS, or the Clinical Laboratory Fee Schedule, CLFS. Further, CMS and state Medicaid agencies may adopt regulations and policies that change, limit or exclude coverage for our products and services.
We expect that efforts to contain costs will continue and that coverage and reimbursement for our products and services may be impacted. These efforts, including changes in law or regulations that may occur in the future, may each individually or collectively have a material adverse impact on our business, results of operations, financial condition, and prospects.
Changes in payer mix could have a material adverse impact on our net sales and profitability.
Testing services are billed to physicians, patients, government payers such as Medicare, and insurance companies. Tests may be billed to different payers depending on a particular patient’s medical insurance coverage. Government payers have increased their efforts to control the cost, utilization and delivery of health care services as well as reimbursement for laboratory testing services. Further reductions of reimbursement for Medicare and Medicaid services or changes in policy regarding coverage of tests or other requirements for payment, such as prior authorization or a physician or qualified practitioner’s signature on test requisitions, may be implemented from time to time. Reimbursement for the laboratory services component of our business is also subject to statutory and regulatory reduction. Reductions in the reimbursement rates and changes in payment policies of other third party payers may occur as well. Such changes in the past have resulted in reduced payments as well as added costs and have decreased test utilization for the clinical laboratory industry by adding more complex new regulatory and administrative requirements. As a result, increases in the percentage of services billed to government payers could have an adverse impact on our net sales.
Our laboratories require ongoing CLIA certification.
The Clinical Laboratory Improvement Amendments of 1988, or CLIA, extended federal oversight to virtually all clinical laboratories by requiring that they be certified by the federal government or by a federally-approved accreditation
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agency. The CLIA requires that all clinical laboratories meet quality assurance, quality control and personnel standards. Laboratories must also undergo proficiency testing and are subject to inspections.
The sanctions for failure to comply with the CLIA requirements include suspension, revocation or limitation of a laboratory’s CLIA certificate, which is necessary to conduct business, cancellation or suspension of the laboratory’s approval to receive Medicare and/or Medicaid reimbursement, as well as significant fines and/or criminal penalties. The loss or suspension of a CLIA certification, imposition of a fine or other penalties, or future changes in the CLIA law or regulations (or interpretation of the law or regulations) could have a material adverse effect on us.
We believe that we are in compliance with all applicable laboratory requirements, but no assurances can be given that our laboratories will pass all future certification inspections.
Our products that we sell as research use only products and as laboratory developed tests could become subject to government regulations requiring marketing authorization, and the marketing authorization and maintenance process for such products may be expensive, time-consuming and uncertain in both timing and outcome.
A number of our products are currently, and in the future will be, labeled and sold as research use only (RUO) products. Even though our products are labeled and sold as RUO products, the United States Food and Drug Administration (FDA) could question whether our products are intended for research use only. For example, in August 2021, we were contacted by the FDA regarding HemeScreen, and we have subsequently revised the labeling for HemeScreen. Should the FDA disagree with our conclusion that our products are intended for research use only or deem our sales, marketing and promotional efforts as being inconsistent with RUO products, our products could be subject to government regulation as diagnostic products. Diagnostic products are regulated as medical devices by the FDA and may require marketing authorization through clearance following the 510(k) premarket notification process, authorization following a request for de novo classification or premarket approval from the FDA, in each case prior to marketing. Obtaining the requisite marketing authorizations can be expensive and may involve considerable delay. Moreover, if the FDA believed we inappropriately labeled our products as RUO products, it could allege that we had misbranded or adulterated our RUO products.
Additionally, our CLIA laboratory offers testing utilizing our laboratory developed tests (LDTs). Historically, the FDA has exercised enforcement discretion with respect to most LDTs and has not required laboratories that offer LDTs to comply with the FDA’s requirements for medical devices, such as the FDA’s requirements pertaining to marketing authorization, establishment registration, device listing, the Quality System Regulation, and other post-market controls. However, the FDA has stated it intends to end its policy of enforcement discretion and to actively regulate LDTs. For example, on October 3, 2014, the FDA issued two draft guidance documents, entitled “Framework for Regulatory Oversight of Laboratory Developed Tests (LDTs)” and “FDA Notification and Medical Device Reporting for Regulatory Oversight of Laboratory Developed Tests (LDTs)”, that set forth a proposed risk-based regulatory framework that would apply varying levels of FDA oversight to LDTs. The timing of when, if at all, the draft guidance documents will be finalized is unclear. In January 2017, the FDA issued a “Discussion Paper on Laboratory Developed Tests (LDTs),” which includes a possible approach to LDT oversight that is intended to advance public discussion on the topic. Additionally, legislative proposals have been introduced in Congress or have been publicly circulated. Such proposals would implement differing approaches to the regulation of LDTs, including in certain instances to require marketing authorization from the FDA. We cannot predict whether any of these legislative proposals will be enacted into law or the impact such new legal requirements would have on our business.
If the FDA asserts that our RUO products or LDTs are subject to marketing authorization, or that our RUO products or LDTs are adulterated or misbranded, our business, financial condition or results of operations could be adversely affected.
Failure to comply with HIPAA could be costly.
HIPAA and associated regulations protect the privacy and security of certain patient health information and establish standards for electronic health care transactions in the United States. These privacy regulations establish federal standards regarding the uses and disclosures of protected health information. Our laboratories are subject to HIPAA and
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its associated regulations. If we fail to comply with these laws and regulations we could suffer civil and criminal penalties, fines, exclusion from participation in governmental health care programs and the loss of various licenses, certificates and authorizations necessary to operate our patient testing business. We could also incur liabilities from third party claims.
Our failure to comply with any applicable government laws and regulations or otherwise respond to claims relating to improper handling, storage or disposal of hazardous chemicals that we use may adversely affect our results of operations.
Our research and development and commercial activities involve the controlled use of hazardous materials and chemicals. We are subject to federal, state, local and international laws and regulations governing the use, storage, handling and disposal of hazardous materials and waste products. If we fail to comply with applicable laws or regulations, we could be required to pay penalties or be held liable for any damages that result and this liability could exceed our financial resources. We cannot be certain that accidental contamination or injury will not occur. Any such accident could damage our research and manufacturing facilities and operations, resulting in delays and increased costs.
We may become subject to the Anti-Kickback Statute, Stark Law, False Claims Act, Civil Monetary Penalties Law and may be subject to analogous provisions of applicable state laws and could face substantial penalties if we fail to comply with such laws.
There are several federal laws addressing fraud and abuse that apply to businesses that receive reimbursement from a federal health care program. There are also a number of similar state laws covering fraud and abuse with respect to, for example, private payers, self-pay and insurance. Currently, we receive a substantial percentage of our revenue from private payers and from Medicare. Accordingly, our business is subject to federal fraud and abuse laws, such as the Anti-Kickback Statute, the Stark Law, the False Claims Act, the Civil Monetary Penalties Law and other similar laws. Moreover, we are already subject to similar state laws. We believe we have operated, and intend to continue to operate, our business in compliance with these laws. However, these laws are subject to modification and changes in interpretation, and are enforced by authorities vested with broad discretion. Federal and state enforcement entities have significantly increased their scrutiny of healthcare companies and providers which has led to investigations, prosecutions, convictions and large settlements. We continually monitor developments in this area. If these laws are interpreted in a manner contrary to our interpretation or are reinterpreted or amended, or if new legislation is enacted with respect to healthcare fraud and abuse, illegal remuneration, or similar issues, we may be required to restructure our affected operations to maintain compliance with applicable law. There can be no assurances that any such restructuring will be possible or, if possible, would not have a material adverse effect on our results of operations, financial position, or cash flows.
Anti-Kickback Statute
A federal law commonly referred to as the “Anti-Kickback Statute” prohibits the knowing and willful offer, payment, solicitation or receipt of remuneration, directly or indirectly, in return for the referral of patients or arranging for the referral of patients, or in return for the recommendation, arrangement, purchase, lease or order of items or services that are covered, in whole or in part, by a federal healthcare program such as Medicare or Medicaid. The term “remuneration” has been broadly interpreted to include anything of value such as gifts, discounts, rebates, waiver of payments or providing anything at less than its fair market value. The PPACA amended the intent requirement of the Anti-Kickback Statute such that a person or entity can be found guilty of violating the statute without actual knowledge of the statute or specific intent to violate the statute. Further, the PPACA now provides that claims submitted in violation of the Anti-Kickback Statute constitute false or fraudulent claims for purposes of the federal False Claims Act, or FCA, including the failure to timely return an overpayment. Many states have adopted similar prohibitions against kickbacks and other practices that are intended to influence the purchase, lease or ordering of healthcare items and services reimbursed by a governmental health program or state Medicaid program. Some of these state prohibitions apply to remuneration for referrals of healthcare items or services reimbursed by any third-party payer, including commercial payers and self-pay patients.
Stark Law
Section 1877 of the Social Security Act, or the Stark Law, prohibits a physician from referring a patient to an entity for certain “designated health services” reimbursable by Medicare if the physician (or close family members) has a
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financial relationship with that entity, including an ownership or investment interest, a loan or debt relationship or a compensation relationship, unless an exception to the Stark Law is fully satisfied. The designated health services covered by the law include, among others, laboratory and imaging services. Some states have self-referral laws similar to the Stark Law for Medicaid claims and commercial claims.
Violation of the Stark Law may result in prohibition of payment for services rendered, a refund of any Medicare payments for services that resulted from an unlawful referral, civil monetary penalties for specified infractions, criminal penalties, and potential exclusion from participation in government healthcare programs, and potential false claims liability. The repayment provisions in the Stark Law are not dependent on the parties having an improper intent; rather, the Stark Law is a strict liability statute and any violation is subject to repayment of all amounts arising out of tainted referrals. If physician self-referral laws are interpreted differently or if other legislative restrictions are issued, we could incur significant sanctions and loss of revenues, or we could have to change our arrangements and operations in a way that could have a material adverse effect on our business, prospects, damage to our reputation, results of operations and financial condition.
False Claims Act
The FCA prohibits providers from, among other things, (1) knowingly presenting or causing to be presented, claims for payments from the Medicare, Medicaid or other federal healthcare programs that are false or fraudulent; (2) knowingly making, using or causing to be made or used, a false record or statement to get a false or fraudulent claim paid or approved by the federal government; or (3) knowingly making, using or causing to be made or used, a false record or statement to avoid, decrease or conceal an obligation to pay money to the federal government. The “qui tam” or “whistleblower” provisions of the FCA allow private individuals to bring actions under the FCA on behalf of the government. These private parties are entitled to share in any amounts recovered by the government, and, as a result, the number of “whistleblower” lawsuits that have been filed against providers has increased significantly in recent years. Defendants found to be liable under the FCA may be required to pay three times the actual damages sustained by the government, plus civil penalties for each separate false claim.
There are many potential bases for liability under the FCA. The government has used the FCA to prosecute Medicare and other government healthcare program fraud such as coding errors, billing for services not provided, and providing care that is not medically necessary or that is substandard in quality. The PPACA also provides that claims submitted in connection with patient referrals that result from violations of the Anti-Kickback Statute constitute false claims for the purpose of the FCA, and some courts have held that a violation of the Stark law can result in FCA liability, as well. In addition, a number of states have adopted their own false claims and whistleblower provisions whereby a private party may file a civil lawsuit in state court. We are required to provide information to our employees and certain contractors about state and federal false claims laws and whistleblower provisions and protections.
Civil Monetary Penalties Law
The Civil Monetary Penalties Law prohibits, among other things, the offering or giving of remuneration to a Medicare or Medicaid beneficiary that the person or entity knows or should know is likely to influence the beneficiary’s selection of a particular provider or supplier of items or services reimbursable by a federal or state healthcare program. This broad provision applies to many kinds of inducements or benefits provided to patients, including complimentary items, services or transportation that are of more than a nominal value. This law could affect how we have to structure our operations and activities.
Intellectual Property Risks Related to Our Business
We cannot be certain that measures taken to protect our intellectual property will be effective.
We rely upon patents, trade secrets, copyrights and trademarks, as well as non-disclosure agreements and other contractual confidentiality provisions to protect our confidential and proprietary information for which we are not seeking patent protection for various reasons. Such measures, however, may not provide adequate protection for our trade secrets or other proprietary information. If such measures do not protect our rights, third parties could use our technology and our
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ability to compete in the market would be reduced. Our intellectual property portfolio with respect to certain aspects of our technology and product candidates is at an early stage. We have one company-owned, pending patent application directed to our HemeScreen test. This provisional patent application is not eligible to become an issued patent until, among other things, we file a non-provisional patent application within 12 months of the filing date of the applicable provisional patent application. Any failure to file a non-provisional patent application within this timeline could cause us to lose the ability to obtain patent protection for the inventions disclosed in the associated provisional patent applications.
If any of our owned patent applications do not issue as patents in any jurisdiction, we may not be able to compete effectively.
Changes in either the patent laws or their interpretation in the United States and other countries may diminish our ability to protect our inventions, obtain, maintain and enforce our intellectual property rights and, more generally, could affect the value of our intellectual property or narrow the scope of our owned patents. We cannot predict whether the patent applications we are currently pursuing will issue as patents in any particular jurisdiction or whether the claims of any issued patents will provide sufficient protection from competitors or other third parties.
The patent prosecution process is expensive, time-consuming and complex, and we may not be able to file, prosecute, maintain, enforce or license all necessary or desirable patents and patent applications at a reasonable cost or in a timely manner. Disruptions at the United States Patent and Trademark Office (USPTO) or other government agencies may also slow the time necessary for patent applications to be reviewed by the USPTO, which could adversely affect our patent portfolio. It is also possible that we will fail to identify patentable aspects of our research and development output in time to obtain patent protection. Although we enter into non-disclosure and confidentiality agreements with parties who have access to confidential or patentable aspects of our research and development output, such as our employees, corporate collaborators, outside scientific collaborators, CROs, contract manufacturers, consultants, advisors and other third parties, any of these parties may breach such agreements and disclose such output before a patent application is filed, thereby jeopardizing our ability to seek patent protection.
In addition, our ability to obtain and maintain valid and enforceable patents depends on whether the differences between our inventions and the prior art allow our inventions to be patentable over the prior art. Furthermore, publications of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until 18 months after filing, or in some cases not at all. Therefore, we cannot be certain that we were the first to make the inventions claimed in any of our owned or pending patent applications, or that we were the first to file for patent protection of such inventions
We depend on certain technologies that are licensed to us. We do not control these technologies and any loss of our rights to them could prevent us from selling some of our products.
We have entered into a license agreement with Dana-Farber pursuant to which we license our ICP technology and may enter into other license agreements with third parties for certain licensed technologies that are, or may become, relevant to the products we market, or plan to market. In addition, we may in the future elect to license third party intellectual property to further our business objectives and/or as needed for freedom to operate for our products. We do not and will not own the patents, patent applications or other intellectual property rights that are the subject of these licenses. Our rights to use these technologies and employ the inventions claimed in the licensed patents, patent applications and other intellectual property rights are or will be subject to the continuation of and compliance with the terms of those licenses.
We might not be able to obtain licenses to technology or other intellectual property rights that we require. Even if such licenses are obtainable, they may not be available at a reasonable cost or multiple licenses may be needed for the same product (e.g., stacked royalties). We could therefore incur substantial costs related to royalty payments for licenses obtained from third parties, which could negatively affect our gross margins. Further, we could encounter delays in product introductions, or interruptions in product sales, as we develop alternative methods or products.
In some cases, we do not or may not control the prosecution, maintenance, or filing of the patents or patent applications to which we hold licenses, or the enforcement of these patents against third parties. As a result, we cannot be
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certain that drafting or prosecution of the licensed patents and patent applications by the licensors have been or will be conducted in compliance with applicable laws and regulations or will result in valid and enforceable patents and other intellectual property rights.
If we are unable to protect the confidentiality of our trade secrets, our business and competitive position may be harmed.
In addition to the protection afforded by patents, we rely upon trade secret protection, know-how and continuing technological innovation to develop and maintain our competitive position. We seek to protect our proprietary technology and processes, in part, by entering into confidentiality agreements with our contractors, collaborators, scientific advisors, employees and consultants and invention assignment agreements with our consultants and employees. However, we may not obtain these agreements in all circumstances, and individuals with whom we have these agreements may not comply with their terms. The assignment of intellectual property rights under these agreements may not be self-executing or the assignment agreements may be breached, and we may be forced to bring claims against third parties, or defend claims that they may bring against us, to determine the ownership of what we regard as our intellectual property. In addition, we may not be able to prevent the unauthorized disclosure or use of our technical know-how or other trade secrets by the parties to these agreements despite the existence of confidentiality agreements and other contractual restrictions. Monitoring unauthorized uses and disclosures is difficult and we do not know whether the steps we have taken to protect our proprietary technologies will be effective. If any of the contractors, collaborators, scientific advisors, employees and consultants who are parties to these agreements breaches or violates the terms of any of these agreements, we may not have adequate remedies for any such breach or violation. As a result, we could lose our trade secrets. Enforcing a claim against a third party that illegally obtained and is using our trade secrets, like patent litigation, is expensive and time-consuming and the outcome is unpredictable.
Moreover, our trade secrets could otherwise become known or be independently discovered by our competitors or other third parties. Competitors and other third parties could purchase our product candidates and attempt to replicate some or all of the competitive advantages we derive from our development efforts, willfully infringe our intellectual property rights, design around our protected technology or develop their own competitive technologies that fall outside of our intellectual property rights. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor or other third party, we would have no right to prevent them, or those to whom they communicate it, from using that technology or information to compete with us. If our trade secrets are not adequately protected or sufficient to provide an advantage over our competitors, our competitive position could be adversely affected, as could our business. Additionally, if the steps taken to maintain our trade secrets are deemed inadequate, we may have insufficient recourse against third parties for misappropriating our trade secrets.
If our trademarks and trade names are not adequately protected, then we may not be able to build name recognition in our markets of interest and our business may be adversely affected.
Our registered or unregistered trademarks or trade names may be challenged, infringed, circumvented or declared generic or determined to be infringing on other marks. We may not be able to protect our rights to these trademarks and trade names, which we need to build name recognition among potential partners or customers in our markets of interest. At times, competitors or other third parties may adopt trade names or trademarks similar to ours, thereby impeding our ability to build brand identity and possibly leading to market confusion. If we assert trademark infringement claims, a court may determine that the marks we have asserted are invalid or unenforceable, or that the party against whom we have asserted trademark infringement has superior rights to the marks in question. In this case, we could ultimately be forced to cease use of such trademarks. In addition, there could be potential trade name or trademark infringement claims brought by owners of other registered trademarks or trademarks that incorporate variations of our registered or unregistered trademarks or trade names. Over the long term, if we are unable to establish name recognition based on our trademarks and trade names, then we may not be able to compete effectively and our business may be adversely affected. Our efforts to enforce or protect our proprietary rights related to trademarks, trade secrets, domain names, copyrights or other intellectual property may be ineffective and could result in substantial costs and diversion of resources and could adversely affect our business, financial condition, results of operations and prospects.
Third-party claims of intellectual property infringement, misappropriation or other violations may prevent or delay our product discovery and development efforts and have a material adverse effect on our business.
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Our commercial success depends in part on our avoiding infringement, misappropriation and other violations of the patents and proprietary rights of third parties. There is a substantial amount of litigation involving patents and other intellectual property rights in the diagnostic industries, as well as administrative proceedings for challenging patents, including interference and reexamination proceedings before the USPTO or oppositions and other comparable proceedings in foreign jurisdictions. Recently, under U.S. patent reform, new procedures including inter partes review and post grant review have been implemented. As stated above, this reform will bring uncertainty to the possibility of challenge to our patents in the future. Numerous U.S. and foreign issued patents and pending patent applications, which are owned by third parties, exist in the fields in which we are developing our product candidates. As the diagnostic industry expands and more patents are issued, the risk increases that our product candidates may give rise to claims of infringement of the patent rights of others.
Third parties may assert that we are employing their proprietary technology without authorization. Patents issued in the U.S. by law enjoy a presumption of validity that can be rebutted only with evidence that is “clear and convincing,” a heightened standard of proof. There may be third-party patents of which we are currently unaware with claims to materials, formulations, methods of manufacture or methods for treatment related to the use or manufacture of our products or product candidates. Because patent applications can take many years to issue, there may be currently pending patent applications which may later result in issued patents that our product candidates may infringe. In addition, third parties may obtain patents in the future and claim that use of our technologies infringes upon these patents. If any third-party patents were held by a court of competent jurisdiction to cover the manufacturing process of our product candidates, constructs or molecules used in or formed during the manufacturing process, or any final product itself, the holders of any such patents may be able to block our ability to commercialize the product candidate unless we obtained a license under the applicable patents, or until such patents expire or they are finally determined to be held invalid or unenforceable. Similarly, if any third-party patent were held by a court of competent jurisdiction to cover aspects of our formulations, processes for manufacture or methods of use, including combination therapy or patient selection methods, the holders of any such patent may be able to block our ability to develop and commercialize the product candidate unless we obtained a license or until such patent expires or is finally determined to be held invalid or unenforceable. In either case, such a license may not be available on commercially reasonable terms or at all. Even if we obtained such a license, it may only be non-exclusive, which would permit third parties to use the same intellectual property and compete with us. If we are unable to obtain a necessary license to a third-party patent on commercially reasonable terms, or at all, we may be unable to commercialize our product candidates or such efforts may be impaired or delayed, which could in turn significantly harm our business.
Parties making claims against us may seek and obtain injunctive or other equitable relief, which could effectively block our ability to further develop and commercialize our products or product candidates. Defense of these claims, regardless of their merit, would involve substantial litigation expense and would be a substantial diversion of employee resources from our business. We may not have sufficient resources to bring these actions to a successful conclusion. There could also be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a material adverse effect on the price of shares of our common stock.
In the event of a successful claim of infringement against us, we may have to pay substantial damages, including treble damages and attorneys’ fees for willful infringement, obtain one or more licenses from third parties, pay royalties or redesign our infringing products, which may be impossible or require substantial time and monetary expenditure. We cannot predict whether any such license would be available at all or whether it would be available on commercially reasonable terms. Furthermore, even in the absence of litigation, we may need to obtain licenses from third parties to advance our research or allow commercialization of our product candidates. We may fail to obtain any of these licenses at a reasonable cost or on reasonable terms, if at all. In that event, we would be unable to further develop and commercialize our product candidates, which could harm our business significantly. Any of the foregoing may have a material adverse effect on our business, financial condition, results of operations and prospects.
Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.
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Periodic maintenance fees on any issued patent are due to be paid to the USPTO and foreign patent agencies in several stages over the lifetime of the patent. The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. While an inadvertent lapse can in many cases be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. Noncompliance events that could result in abandonment or lapse of a patent or patent application include, but are not limited to, failure to respond to official actions within prescribed time limits, non-payment of fees and failure to properly legalize and submit formal documents. In such an event, our competitors might be able to enter the market earlier than would otherwise have been the case, which would have a material adverse effect on our business.
We may become involved in lawsuits to protect or enforce our patents or other intellectual property, which could be expensive, time-consuming and unsuccessful.
Competitors may infringe our patents, trademarks, copyrights or other intellectual property. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time-consuming and divert the time and attention of our management and scientific personnel. Any claims we assert against perceived infringers could provoke these parties to assert counterclaims against us alleging that we infringe their patents, in addition to counterclaims asserting that our patents are invalid or unenforceable, or both. In any patent infringement proceeding, there is a risk that a court will decide that a patent of ours is invalid or unenforceable, in whole or in part, and that we do not have the right to stop the other party from using the invention at issue. There is also a risk that, even if the validity of such patents is upheld, the court will construe the patent’s claims narrowly or decide that we do not have the right to stop the other party from using the invention at issue on the grounds that our patent claims do not cover the invention. An adverse outcome in a litigation or proceeding involving our patents could limit our ability to assert our patents against those parties or other competitors, and may curtail or preclude our ability to exclude third parties from making and selling similar or competitive products. Any of these occurrences could adversely affect our competitive business position, business prospects and financial condition. Similarly, if we assert trademark infringement claims, a court may determine that the marks we have asserted are invalid or unenforceable, or that the party against whom we have asserted trademark infringement has superior rights to the marks in question. In this case, we could ultimately be forced to cease use of such trademarks.
Even if we establish infringement, the court may decide not to grant an injunction against further infringing activity and instead award only monetary damages, which may or may not be an adequate remedy. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during litigation. There could also be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a material adverse effect on the price of shares of our common stock. Moreover, there can be no assurance that we will have sufficient financial or other resources to file and pursue such infringement claims, which typically last for years before they are concluded. Even if we ultimately prevail in such claims, the monetary cost of such litigation and the diversion of the attention of our management and scientific personnel could outweigh any benefit we receive as a result of the proceedings. Any of the foregoing may have a material adverse effect on our business, financial condition, results of operations and prospects.
Changes to the patent law in the U.S. and other jurisdictions could diminish the value of patents in general, thereby impairing our ability to protect our product candidates.
As is the case with other diagnostic companies, our success is heavily dependent on intellectual property, particularly patents. Obtaining and enforcing patents in the diagnostic industry involve both technological and legal complexity, and is therefore costly, time-consuming and inherently uncertain. In addition, the U.S. has recently enacted and is currently implementing wide-ranging patent reform legislation. Recent U.S. Supreme Court rulings have narrowed the scope of patent protection available in certain circumstances and weakened the rights of patent owners in certain situations. In addition to increasing uncertainty with regard to our ability to obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents, once obtained. Depending on decisions by the
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Congress, the federal courts, and the USPTO, the laws and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain new patents or to enforce our existing patents and patents that we might obtain in the future. For example, in the case, Assoc. for Molecular Pathology v. Myriad Genetics, Inc., the U.S. Supreme Court held that certain claims to DNA molecules are not patentable. In addition, the case Amgen Inc. v. Sanofi affects the way antibody claims are examined and litigated. We cannot predict how future decisions by the courts, the Congress or the USPTO may impact the value of our patents.
Third parties may assert ownership or commercial rights to inventions we develop.
Third parties may in the future make claims challenging the inventorship or ownership of our intellectual property. For example, third parties that have been introduced to or have benefited from our inventions may attempt to replicate or reverse engineer our products and circumvent ownership of our inventions. In addition, we may face claims that our agreements with employees, contractors, or consultants obligating them to assign intellectual property to us are ineffective, or in conflict with prior or competing contractual obligations of assignment, which could result in ownership disputes regarding intellectual property we have developed or will develop and interfere with our ability to capture the commercial value of such inventions. Litigation may be necessary to resolve an ownership dispute, and if we are not successful, we may be precluded from using certain intellectual property, or may lose our exclusive rights in that intellectual property. Either outcome could have an adverse impact on our business.
Third parties may assert that our employees or consultants have wrongfully used or disclosed confidential information or misappropriated trade secrets.
Although we try to ensure that our employees and consultants do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we or our employees, consultants or independent contractors have inadvertently or otherwise used or disclosed intellectual property, including trade secrets or other proprietary information, of a former employer or other third parties. Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.
Intellectual property rights do not necessarily address all potential threats.
The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations and may not adequately protect our business or permit us to maintain our competitive advantage. For example:
•others may be able to make products that are similar to our product candidates or utilize similar technology but that are not covered by the claims of the patents that we hold rights to;
•we, or our licensors or collaborators, might not have been the first to invent or the first to file patent applications covering certain of our or their inventions;
•others may independently develop similar or alternative technologies or duplicate any of our technologies without infringing our owned intellectual property rights;
•it is possible that our current or future pending owned patent applications will not lead to issued patents;
•issued patents that we hold rights to may be held invalid or unenforceable, including as a result of legal challenges by our competitors or other third parties;
•our competitors or other third parties might conduct research and development activities in countries where we do not have patent rights and then use the information learned from such activities to develop competitive products for sale in the US;
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•we may not develop additional proprietary technologies that are patentable;
•the patents of others may harm our business; and
•we may choose not to file a patent in order to maintain certain trade secrets or know-how, and a third party may subsequently file a patent covering such intellectual property.
Should any of these events occur, they could have a material adverse effect on our business, financial condition, results of operations and prospects
Risks Related to Our Common Stock
The price of our common stock may fluctuate significantly, which could negatively affect us and holders of our common stock.
There has been, and continues to be, a limited public market for our common stock, and an active trading market for our common stock has not and may never develop or, if developed, be sustained. The trading price of our common stock may be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. These factors include:
These factors include:
| ● | actual or anticipated fluctuations in our financial condition and operating results: |
| ● | actual or anticipated changes in our growth rate relative to our competitors; |
| ● | competition from existing products or new products that may emerge; |
| ● | announcements by us, our academic institution partners, or our competitors of significant acquisitions, strategic partnerships, joint ventures, collaborations, or capital commitments; |
| ● | failure to meet or exceed financial estimates and projections of the investment community or that we provide to the public and the revision of any financial estimates and projections that we provide to the public; |
| ● | issuance of new or updated research or reports by securities analysts; |
| ● | fluctuations in the valuation of companies perceived by investors to be comparable to us; |
| ● | share price and volume fluctuations attributable to inconsistent trading volume levels of our shares; |
| ● | additions, transitions or departures of key management or scientific personnel; |
| ● | disputes or other developments related to proprietary rights, including patents, litigation matters, and our ability to obtain patent protection for our technologies; |
| ● | changes to reimbursement levels by commercial third-party payers and government payers, including Medicare, and any announcements relating to reimbursement levels; |
| ● | Government shut-down or partial shut-downs impacting the financial markets, the United States Securities and Exchange Commission and other related agencies; |
| ● | announcement or expectation of additional debt or equity financing efforts; |
| ● | sales of our common stock by us, our insiders, or our other stockholders; and |
| ● | general economic and market conditions |
These and other market and industry factors may cause the market price and demand for our common stock to fluctuate substantially, regardless of our actual operating performance, which may limit or prevent investors from readily selling their shares of our common stock and may otherwise negatively affect the liquidity of our common stock. In addition, the stock market in general has experienced price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. In the past, when the market price of a stock has been volatile, holders of that stock have instituted securities class action litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management.
The price of our stock may be vulnerable to manipulation.
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We believe our common stock has been the subject of significant short selling by certain market participants. Short sales are transactions in which a market participant sells a security that it does not own. To complete the transaction, the market participant must borrow the security to make delivery to the buyer. The market participant is then obligated to replace the security borrowed by purchasing the security at the market price at the time of required replacement. If the price at the time of replacement is lower than the price at which the security was originally sold by the market participant, then the market participant will realize a gain on the transaction. Thus, it is in the market participant’s interest for the market price of the underlying security to decline as much as possible during the period prior to the time of replacement.
Because our unrestricted public float has been small relative to other issuers, previous short selling efforts have impacted, and may in the future continue to impact, the value of our stock in an extreme and volatile manner to our detriment and the detriment of our shareholders. Efforts by certain market participants to manipulate the price of our common stock for their personal financial gain may cause our stockholders to lose a portion of their investment, may make it more difficult for us to raise equity capital when needed without significantly diluting existing stockholders, and may reduce demand from new investors to purchase shares of our stock.
If we cannot continue to satisfy Nasdaq listing maintenance requirements and other rules, our securities may be delisted, which could negatively impact the price of our securities.
Although our common stock is listed on the Nasdaq Capital Market, we may be unable to continue to satisfy the listing maintenance requirements and rules. If we are unable to satisfy The Nasdaq Stock Market, or Nasdaq, criteria for maintaining our listing, our securities could be subject to delisting.
On April 29, 2020, we received a letter from Nasdaq notifying us that for the past 30 consecutive business days, the closing bid price per share of our common stock was below the $1.00 minimum bid price requirement for continued listing on the Nasdaq Capital Market, as required by Nasdaq Listing Rule 5550(a)(2), or the Bid Price Rule. As a result, we were notified by Nasdaq that we were not in compliance with the Bid Price Rule. Nasdaq provided us until December 28, 2020 to regain compliance with the Bid Price Rule.
On June 29, 2020, the Company received a letter from Nasdaq stating that because the Company’s shares had a closing bid price at or above $1.00 per share for a minimum of ten (10) consecutive business days, the Company’s stock had regained compliance with the Minimum Bid Price Requirement for continued listing on Nasdaq, and that the matter is now closed.
We are currently in compliance with Nasdaq listing requirements, however, if Nasdaq were to delist our securities, we could face significant consequences, including:
| ● | a limited availability for market quotations for our securities; |
| ● | reduced liquidity with respect to our securities; |
| ● | a determination that our common stock is a “penny stock,” which will require brokers trading in our common stock to adhere to more stringent rules and possibly result in reduced trading; |
| ● | activity in the secondary trading market for our common stock; |
| ● | limited amount of news and analyst coverage; and |
| ● | a decreased ability to issue additional securities or obtain additional financing in the future. |
In addition, we would no longer be subject to Nasdaq rules, including rules requiring us to have a certain number of independent directors and to meet other corporate governance standards.
Increased costs associated with corporate governance compliance may significantly impact our results of operations.
As a public company, we incur significant legal, accounting, and other expenses due to our compliance with regulations and disclosure obligations applicable to us, including compliance with the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, as well as rules implemented by the SEC, and NASDAQ. The SEC and other regulators have continued to adopt new rules and regulations and make additional changes to existing regulations that require our
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compliance. In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, was enacted. There are significant corporate governance and executive compensation related provisions in the Dodd-Frank Act that have required the SEC to adopt additional rules and regulations in these areas. Stockholder activism, the current political environment, and the current high level of government intervention and regulatory reform may lead to substantial new regulations and disclosure obligations, which may lead to additional compliance costs and impact, in ways we cannot currently anticipate, the manner in which we operate our business. Our management and other personnel devote a substantial amount of time to these compliance programs and monitoring of public company reporting obligations, and as a result of the new corporate governance and executive compensation related rules, regulations, and guidelines prompted by the Dodd-Frank Act, and further regulations and disclosure obligations expected in the future, we will likely need to devote additional time and costs to comply with such compliance programs and rules. These rules and regulations will cause us to incur significant legal and financial compliance costs and will make some activities more time-consuming and costly.
The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file with the SEC is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that information required to be disclosed in reports under the Exchange Act is accumulated and communicated to our principal executive and financial officers. Our current controls and any new controls that we develop may become inadequate, and weaknesses in our internal control over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls could adversely affect the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting, which we may be required to include in our periodic reports that we file with the SEC under Section 404 of the Sarbanes-Oxley Act, and could harm our operating results, cause us to fail to meet our reporting obligations, or result in a restatement of our prior period financial statements. If we are not able to demonstrate compliance with the Sarbanes-Oxley Act, that our internal control over financial reporting is perceived as inadequate, or that we are unable to produce timely or accurate financial statements, investors may lose confidence in our operating results, and the price of our common stock could decline.
We are required to comply with certain of the SEC rules that implement Section 404 of the Sarbanes-Oxley Act, which requires management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of our internal control over financial reporting. This assessment needs to include the disclosure of any material weaknesses in our internal control over financial reporting identified by our management or our independent registered public accounting firm. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting or if we are unable to complete our evaluation, testing, and any required remediation in a timely fashion, we will be unable to assert that our internal control over financial reporting is effective.
These developments could make it more difficult for us to retain qualified members of our Board of Directors, or qualified executive officers. We are presently evaluating and monitoring regulatory developments and cannot estimate the timing or magnitude of additional costs we may incur as a result. To the extent these costs are significant, our general and administrative expenses are likely to increase.
We have not paid dividends on our common stock in the past and do not expect to pay dividends on our common stock for the foreseeable future. Any return on investment may be limited to the value of our common stock.
No cash dividends have been paid on our common stock. We expect that any income received from operations will be devoted to our future operations and growth. We do not expect to pay cash dividends on our common stock in the near future. Payment of dividends would depend upon our profitability at the time, cash available for those dividends, and other factors as our board of directors may consider relevant. If we do not pay dividends, our common stock may be less valuable because a return on an investor’s investment will only occur if our stock price appreciates. Investors in our common stock should not rely on an investment in our company if they require dividend income.
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If securities or industry analysts do not publish research or reports about our business, or if they change their recommendations regarding our stock adversely, our stock price and trading volume could decline.
The trading market for our common stock relies in part on the research and reports that equity research analysts publish about us and our business. We do not control these analysts. The price of our common stock could decline if one or more equity research analysts downgrade our common stock or if they issue other unfavorable commentary or cease publishing reports about us or our business.
The sale or issuance of our common stock to, or through, AGP may cause significant dilution and the sale of the shares of common stock acquired by AGP, or the perception that such sales may occur, could cause the price of our common stock to fall.
On April 2, 2021, we entered into a sales agreement with AGP, pursuant to which we may offer and sell our Common Stock, having aggregate sales proceeds of up to $22.0 million, to or through AGP, from time to time, in the ATM Offering. We are limited in the number of shares it can sell in the ATM Offering due to the offering limitations currently applicable to the Company under General Instruction I.B.6. of Form S-3 and the Company’s public float as of the applicable date of such sales, as well as the number of authorized and unissued shares available for issuance, in accordance with the terms of the AGP Sales Agreement. Sales to, or through, AGP by us could result in substantial dilution to the interests of other holders of our common stock. Additionally, the sale of a substantial number of shares of our common stock, or the anticipation of such sales, could make it more difficult for us to sell equity or equity-related securities in the future at a time and at a price that we might otherwise wish to effect sales.
From April 2, 2021 through the date the consolidated financial statements were issued, we received approximately $15.4 million in gross proceeds through the AGP Sales Agreement from the sale of 4,501,000 shares of Common Stock, leaving us with an additional $6.6 million available for future sales pursuant to the AGP Sales Agreement.
The issuance of our common stock to creditors or litigants may cause significant dilution to our stockholders and cause the price of our common stock to fall
We may seek to settle outstanding obligations to vendors, debtholders or litigants in any litigation through the issuance of our common stock or other security to such persons. Such issuances may cause significant dilution to our stockholders and cause the price of our common stock to fall.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We currently lease approximately 7,630 square feet of laboratory and office space in New Haven, Connecticut, which we occupy under a lease expiring in December 2026 with annual rental payments of $0.2 million. We also lease approximately 5,300 square feet of laboratory space in Omaha, Nebraska, which we occupy under a lease expiring in May 2022 with annual rental payments of less than $0.1 million. We believe that these facilities are adequate to meet our current and planned needs. We believe that if additional space is needed in the future, we could find alternate space at competitive market rates as needed.
Item 3. Legal Proceedings
The healthcare industry is subject to numerous laws and regulations of federal, state and local governments. These laws and regulations include, but are not limited to, matters such as licensure, accreditation, government healthcare program participation requirement, reimbursement for patient services and Medicare and Medicaid fraud and abuse. Government activity has increased with respect to investigations and allegations concerning possible violations of fraud and abuse statutes and regulations by healthcare providers.
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Violations of these laws and regulations could result in expulsion from government healthcare programs together with the imposition of significant fines and penalties, as well as significant repayments for patient services previously billed. Management believes that the Company is in compliance with fraud and abuse regulations, as well as other applicable government laws and regulations. While no material regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretation, as well as regulatory actions unknown or unasserted at this time.
The outcome of legal proceedings and claims brought against us are subject to significant uncertainty. Therefore, although management considers the likelihood of such an outcome to be remote, if one or more of these legal matters were resolved against us in the same reporting period for amounts in excess of management’s expectations, our financial statements for such reporting period could be materially adversely affected. In general, the resolution of a legal matter could prevent us from offering our services or products to others, could be material to our financial condition or cash flows, or both, or could otherwise adversely affect our operating results.
The Company is involved in legal proceedings related to matters, which are incidental to its business and is delinquent on the payment of outstanding accounts payable for certain vendors and suppliers who have taken or have threatened to take legal action to collect such outstanding amounts. See below for a discussion on these matters.
CPA Global provides us with certain patent management services. On February 6, 2017, CPA Global claimed that we owe approximately $0.2 million for certain patent maintenance services rendered. CPA Global has not filed claims against us in connection with this allegation. A liability of less than $0.1 million has been recorded and is reflected in accounts payable within the accompanying consolidated balance sheets at December 31, 2021 and 2020.
Item 4. Mine Safety Disclosures
Not Applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information. Since June 30, 2017, our common stock has traded on the NASDAQ Capital Market under the symbol “PRPO.”
Performance Graph. We are a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act, and are not required to provide the information required under this item.
Holders. At March 25, 2022, there were 22,708,708 shares of our common stock outstanding and approximately 53 holders of record.
Dividends. No cash dividends have been paid on our common stock. We expect that any income received from operations will be devoted to our future operations and growth. We do not expect to pay cash dividends on our common stock in the near future. Payment of dividends would depend upon our profitability at the time, cash available for those dividends, and other factors as our board of directors may consider relevant. If we do not pay dividends, our common stock may be less valuable because a return on an investor’s investment will only occur if our stock price appreciates. Investors in our common stock should not rely on an investment in our company if they require dividend income and should not purchase our common stock with the expectation of receiving cash dividends.
Issuer Purchases of Equity Securities. We made no purchases of our common stock during the year ended December 31, 2021. Therefore, tabular disclosure is not presented.
Recent Sales of Unregistered Securities. Not applicable.
Item 6. [Reserved]
Not Applicable.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Information
This Annual Report on Form 10-K, including this Management’s Discussion and Analysis, contains forward-looking statements. These statements are based on management’s current views, assumptions or beliefs of future events and financial performance and are subject to uncertainty and changes in circumstances. Readers of this report should understand that these statements are not guarantees of performance or results. Many factors could affect our actual financial results and cause them to vary materially from the expectations contained in the forward-looking statements. These factors include, among other things: the expected or potential impact of COVID-19 which is highly uncertain and will depend on future developments, our expected revenue, income (loss), receivables, operating expenses, supplier pricing, availability and prices of raw materials, insurance reimbursements, product pricing, sources of funding operations and acquisitions, our ability to raise funds, sufficiency of available liquidity, future interest costs, future economic circumstances, business strategy, industry conditions, our ability to execute our operating plans, the success of our cost savings initiatives, competitive environment and related market conditions, expected financial and other benefits from our organizational restructuring activities, actions of governments and regulatory factors affecting our business, retaining key employees and other risks as described in our reports filed with the Securities and Exchange Commission. In some cases these statements are identifiable through the use of words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “would” or the negative versions of these terms and other similar expressions.
You are cautioned not to place undue reliance on these forward-looking statements. The forward-looking statements we make are not guarantees of future performance and are subject to various assumptions, risks and other
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factors that could cause actual results to differ materially from those suggested by these forward-looking statements. Actual results may differ materially from those suggested by the forward-looking statements that we make for a number of reasons, including those described in Part I, Item 1A, “Risk Factors,” of this Annual Report on Form 10-K.
We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
Overview
We are a healthcare solutions company focused on cancer diagnostics. Our business mission is to address the pervasive problem of cancer misdiagnoses by developing solutions to mitigate the root causes of this problem in the form of diagnostic products, reagents and services. Misdiagnoses originate from aged commercial diagnostic cancer testing technologies, lack of subspecialized expertise, and sub-optimal laboratory processes that are needed in today’s diagnostic cancer testing in order to provide accurate, rapid, and resource-effective results to treat patients. Industry studies estimate 1 in 5 blood-cancer patients are misdiagnosed. As cancer diagnostic testing has evolved from cellular to molecular (genes and exons), laboratory testing has become extremely complex, requiring even greater diagnostic precision, attention to process and a more appropriate evaluation of the abundance of genetic data to effectively gather, consider, analyze and present information for the physician for patient treatment. Precipio sees cancer diagnostics as requiring a holistic approach to improve diagnostic data for improved interpretations with the intent to reduce misdiagnoses. By delivering diagnostic products, reagents and services that improve the accuracy and efficiency of diagnostics, leading to fewer misdiagnoses, we believe patient outcomes can be improved through the selection of appropriate therapeutic options. Furthermore, we believe that better patient outcomes will have a positive impact on healthcare expenses as misdiagnoses are reduced. Better diagnostic results – Better Patient Outcome – Lower Healthcare Expenditures.
To deliver its strategy, the Company has structured its organization in order to drive development of diagnostic products. Laboratory and R&D facilities located in New Haven, Connecticut and Omaha, Nebraska house development teams that collaborate on new products and services. The Company operates CLIA laboratories in both the New Haven, Connecticut and Omaha, Nebraska locations providing essential blood cancer diagnostics to office-based oncologists in many states nationwide. To deliver on our strategy of mitigating misdiagnoses we rely heavily on our CLIA laboratory to support R&D beta-testing of the products we develop, in a clinical environment.
In April 2020, we formed a Joint Venture with Poplar. Poplar provides specialized laboratory testing services to a nationwide client base of gastroenterologists, dermatologists, oncologists, urologists, gynecologists and their patients. The business purpose of the Joint Venture is to facilitate and capitalize on the combined capabilities, resources and healthcare industry relationships of its members by partnering, promoting and providing oncology services to office based physicians, hospitals and medical centers. Under the terms of the Joint Venture, Precipio SPV has a 49% ownership interest in the Joint Venture, with Poplar having a 51 % ownership. We have determined that we hold a variable interest in the Joint Venture and that we are the primary beneficiary of the Joint Venture. Due to this determination, we consolidate the Joint Venture. See Note 2 - Summary of Significant Accounting Policies to our consolidated financial statements appearing elsewhere in this report for further discussion.
The following discussion should be read together with our financial statements and related notes contained in this Annual Report. Results for the year ended December 31, 2021 are not necessarily indicative of results that may be attained in the future.
Going Concern
The consolidated financial statements have been prepared using accounting principles generally accepted in the United States of America (“GAAP”) applicable for a going concern, which assume that the Company will realize its assets and discharge its liabilities in the ordinary course of business. The Company has incurred substantial operating losses and has used cash in its operating activities for the past several years. As of December 31, 2021, the Company had a net loss of $8.5 million, an accumulated deficit of $80.1 million, working capital of $9.3 million and net cash used in operating activities of $6.6 million. The Company’s ability to continue as a going concern over the next twelve months from the date the consolidated financial statements were issued is dependent upon a combination of achieving its business plan, including
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generating additional revenue, and raising additional financing to meet its debt obligations and paying liabilities arising from normal business operations when they come due.
To meet its current and future obligations the Company has taken the following steps to capitalize the business and successfully achieve its business plan:
| ● | On April 2, 2021, the Company entered into a sales agreement with A.G.P./Alliance Global Partners (“AGP”), pursuant to which the Company may offer and sell its common stock, par value $0.01 per share (the “Common Stock”) (the “Shares”), having aggregate sales proceeds of up to $22.0 million, to or through AGP, as sales agent (the “AGP Sales Agreement”), from time to time, in an “at the market offering” (as defined in Rule 415(a)(4) under the Securities Act of 1933, as amended) of the Shares (the “ATM Offering”). The Company is limited in the number of shares it can sell in the ATM Offering due to the offering limitations currently applicable to the Company under General Instruction I.B.6. of Form S-3 and the Company’s public float as of the applicable date of such sales, as well as the number of authorized and unissued shares available for issuance, in accordance with the terms of the AGP Sales Agreement. The offer and sales of our shares of Common Stock to or through AGP, will be made pursuant to the registration statement (the “Registration Statement”) on Form S-3 (File No. 333-237445), which was declared effective by the Securities and Exchange Commission (the “SEC”) on April 13, 2020, for an aggregate offering price of up to $50.0 million. From April 2, 2021 through the date the consolidated financial statements were issued, we have already received approximately $15.4 million in gross proceeds through the AGP Sales Agreement from the sale of 4,501,000 shares of common stock, leaving the Company an additional $6.6 million available for future sales pursuant to the AGP Sales Agreement. |
Notwithstanding the aforementioned circumstances, there remains substantial doubt about the Company’s ability to continue as a going concern for the next twelve months from the date the consolidated financial statements were issued. There can be no assurance that the Company will be able to successfully achieve its initiatives summarized above in order to continue as a going concern. The accompanying financial statements have been prepared assuming the Company will continue as a going concern and do not include any adjustments that might result should the Company be unable to continue as a going concern as a result of the outcome of this uncertainty.
Outlook - COVID-19 related
The COVID-19 outbreak, which spread worldwide in the first quarter of 2020, has caused significant business disruption. The extent of the impact of the ongoing COVID-19 pandemic on the Company’s operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, public health crisis and actions taken to contain or prevent the further spread, including the development and deployment of any vaccine program and impact on the Company’s customers, employees and vendors, all of which are uncertain and cannot be predicted. These uncertainties could have a material adverse effect on our business, financial condition or results of operations. We have been actively monitoring the COVID-19 situation and its impact on the global economy and the Company. As the global pandemic evolves, we will continue to monitor the extent to which COVID-19 impacts our revenues, expenses and liquidity.
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Results of Operations for the Years Ended December 31, 2021 and 2020
Net Sales. Net sales were as follows:
Dollars in Thousands |
| |||||||||||
Years Ended | ||||||||||||
December 31, | Change |
| ||||||||||
| 2021 |
| 2020 |
| $ |
| % |
| ||||
Service revenue, net, less allowance for doubtful accounts | $ | 7,935 | $ | 5,872 | $ | 2,063 | 35 | % | ||||
Other |
| 914 |
| 220 | 694 | 315 | % | |||||
Net Sales | $ | 8,849 | $ | 6,092 | $ | 2,757 | 45 | % | ||||
Net sales for the year ended December 31, 2021 were $8.8 million, an increase of $2.8 million, as compared to the same period in 2020. During the year ended December 31, 2021, patient diagnostic service revenue had an increase of $2.4 million as compared to the same period in 2020 due to an increase in cases processed and a lower allowance for doubtful accounts that was recorded. We billed 4,345 cases during the year ended December 31, 2021 as compared to 3,677 cases during the same period in 2020, or an 18% increase in cases. Patient diagnostic service revenue accounted for 89% our total net sales for the years ended December 31, 2021 and 2020, respectively. The increase in patient diagnostic service revenue was partially offset by a decrease of $0.4 million in service revenue from contract diagnostics for the year ended December 31, 2021 as compared to the same period in 2020. Other revenues increased by $0.7 million for the year ended December 31, 2021 as compared to the same period in 2020, mostly resulting from increased revenue related to our HSRR program.
Cost of Sales. Cost of sales includes material and supply costs for the patient tests performed, costs related to HSRR products and other direct costs (primarily personnel costs, pathologist interpretation costs and rent) associated with the operations of our laboratory. Cost of sales increased by $1.5 million for the year ended December 31, 2021 as compared to the same period in 2020. The increase included an increase in patient diagnostic costs offset by a decrease in contract diagnostic costs which are in line with the changes in related revenues discussed above.
Gross Profit. Gross profit and gross margins were as follows:
| Dollars in Thousands |
| |||||||||
Years Ended | |||||||||||
December 31, | Margin % |
| |||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| |||
Gross Profit | $ | 2,392 | $ | 1,150 |
| 27 | % | 19 | % | ||
Gross margin was 27% of total net sales, for the year ended December 31, 2021, compared to 19% of total net sales for the same period in 2020 and the gross profit was approximately $2.4 million and $1.2 million during the years ended December 31, 2021 and 2020, respectively. The gross margin increased during the year ended December 31, 2021, as compared to the prior year period, as a result of increases in case volume and revenue. We operate a fully staffed CLIA and CAP certified clinical pathology and molecular laboratory. As such, it is necessary to maintain appropriate staffing levels to provide industry standard laboratory processing and reporting to ordering physicians. The increase in case volume enabled our laboratory to yield economies of scale and to leverage fixed expenses. We anticipate case volume to increase in 2022 and for our costs per case to improve as additional economies of scale are possible.
Operating Expenses. Operating expenses primarily consist of personnel costs, professional fees, travel costs, facility costs, stock based compensation costs and depreciation and amortization. Our operating expenses increased by $1.7 million to $12.0 million for the year ended December 31, 2021 as compared to $10.3 million for the year ended December 31, 2020. The increase included an increase of $1.3 million in general and administrative expenses due to a $0.4 million increase in personnel costs and a $1.1 million increase in legal and professional fees partially offset by a $0.2 million decrease in franchise and other tax expenses. Operating expenses also include an increase of $1.2 million in stock based compensation expenses for the year ended December 31, 2021 as compared to the prior year. These increases were partially offset by a decrease of $0.8 million in sales and marketing expenses resulting from a decrease in personnel costs due to a decrease in headcount.
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Other Income (Expense). We recorded net other income of $1.1 million and net other expense of $1.5 million for the years ended December 31, 2021 and 2020, respectively. The current year period other income of $1.1 million includes $0.3 million of income from warrant revaluations, $0.8 million of a gain on forgiveness of debt related to the forgiveness of our PPP Loan and $0.1 million from a gain on settlement of liabilities. These other income amounts were partially offset by less than $0.1 million of net interest expense.
During the year ended December 31, 2020, net other expense of $1.5 million includes $0.3 million of interest expense from the amortization of debt discounts, net of accretion of debt premiums, related to convertible notes, $0.2 million of other interest expense and $1.2 million expense for loss on extinguishment of convertible notes which was recorded in conjunction with the March 2020 Amendment to the securities purchase agreements entered into in April 2018 and May 2019. The expenses were partially offset by $0.2 million of gains on settlements of liabilities and other income. Approximately $0.1 million of the other income is funds we received from the U.S. Department of Health and Human Services (“HHS”). As part of the CARES Act, HHS distributed funds to healthcare providers that received Medicare fee-for-service reimbursements in 2019. The payments from HHS are not loans and will not be required to be repaid.
Liquidity and Capital Resources
Our working capital positions at December 31, 2021 and 2020 were as follows:
Dollars in Thousands | |||||||||
| December 31, 2021 |
| December 31, 2020 |
| Change | ||||
Current assets (including cash of $11,668 and $2,656 respectively) | $ | 13,478 | $ | 4,204 | $ | 9,274 | |||
Current liabilities |
| 4,213 |
| 4,656 |
| (443) | |||
Working capital | $ | 9,265 | $ | (452) | $ | 9,717 | |||
During the year ended December 31, 2021 we received net proceeds of $16.2 million from sale of 5,001,000 shares of our common stock and $0.4 million from the issuance of 74,000 shares of our common stock in connection with the exercise of 74,000 warrants.
Analysis of Cash Flows - Years Ended December 31, 2021 and 2020
Net Change in Cash. Cash increased by $9.0 million and $1.8 million during the years ended December 31, 2021 and 2020, respectively.
Cash Flows Used in Operating Activities. The cash flows used in operating activities of $6.6 million during the year ended December 31, 2021 included a net loss of $8.5 million, an increase in inventories and other assets of $0.6 million and a decrease in accrued expenses and operating lease liabilities of $0.3 million. These were partially offset by a decrease in in accounts receivable of $0.3 million, an increase in accounts payable of $0.1 million and non-cash adjustments of approximately $2.4 million. The non-cash adjustments included a $0.2 million change in provision for losses on doubtful accounts. We routinely provide a reserve for doubtful accounts as a result of having limited in-network payer contracts. Non-cash adjustments also included $0.8 million for a gain on forgiveness of debt. The other non-cash adjustments to net loss of approximately $3.3 million include, among other things, depreciation and amortization, warrant revaluations and stock based compensation. The cash flows used in operating activities in the year ended December 31, 2020 included the net loss of $10.6 million, an increase in accounts receivable of $1.6 million, an increase in inventories and other assets of $0.2 million and a decrease in accounts payable and operating lease liabilities of $0.5 million. These were partially offset by an increase in accrued expenses and other liabilities of $0.7 million and non-cash adjustments of $4.8 million.
Cash Flows Used In Investing Activities. Cash flows used in investing activities were $0.7 million and $0.1 million for the years ended December 31, 2021 and 2020, respectively, resulting from purchases of property and equipment partially offset by proceeds from sales of fixed assets.
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Cash Flows Provided by Financing Activities. Cash flows provided by financing activities totaled $16.3 million for the year ended December 31, 2021, which included proceeds of $16.2 million from the issuance of common stock and $0.4 million from warrant exercises. These were partially offset by payments on our long-term debt and finance lease obligations of $0.2 million and payments on common stock warrant liabilities of $0.1 million. Cash flows provided by financing activities totaled $9.3 million for the year ended December 31, 2020, which included proceeds of $8.9 million from the issuance of common stock and proceeds of $0.8 million from the PPP Loan. These proceeds were partially offset by payments on our long-term debt and convertible notes of $0.4 million.
Off-Balance Sheet Arrangements
At each of December 31, 2021 and December 31, 2020, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Contractual Obligations and Commitments
At December 31, 2021, our contractual obligations and other commitments were as follows:
| Payments Due By Period | ||||||||||||||
(in thousands) | Total |
| Less Than 1 Year |
| 1-3 Years |
| 3-5 Years |
| More than 5 Years | ||||||
Long term debt(1) | $ | 228 | $ | 35 | $ | 70 | $ | 71 | $ | 52 | |||||
Finance lease obligations(2) |
| 448 |
| 176 |
| 181 |
| 91 |
| — | |||||
Operating lease obligations(2) |
| 1,035 |
| 227 |
| 422 |
| 386 |
| — | |||||
Purchase obligations(3) |
| 1,484 |
| 1,046 |
| 388 |
| 50 |
| — | |||||
$ | 3,195 | $ | 1,484 | $ | 1,061 | $ | 598 | $ | 52 | ||||||
| (1) | Total payments include $205,000 in principal and $23,000 in interest. See Note 5 - "Long-Term Debt" to our accompanying consolidated financial statements included with this Annual Report on Form 10-K. |
| (2) | See Note 8 - "Leases" to our accompanying consolidated financial statements included with this Annual Report on Form 10-K. |
| (3) | These amounts represent purchase commitments, including all open purchase orders. |
Critical Accounting Policies and Estimates
The following discussion and analysis of financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America. The Company’s significant accounting policies are more fully described in Note 2 of the Notes to Consolidated Financial Statements included with this Annual Report on Form 10-K. Certain accounting estimates are particularly important to the understanding of the Company’s financial position and results of operations and require the application of significant judgment by the Company’s management and can be materially affected by changes from period to period in economic factors or conditions that are outside the control of management. The Company’s management uses its judgment to determine the appropriate assumptions to be used in the determination of certain estimates. Those estimates are based on historical operations, future business plans and projected financial results, the terms of existing contracts, the observance of trends in the industry, information provided by
41
customers and information available from other outside sources, as appropriate. The following discusses the Company’s critical accounting policies and estimates:
Revenue Recognition
The Company derives its revenues from diagnostic testing - histology, flow cytometry, cytology and molecular testing; clinical research from bio-pharma customers, state and federal grant programs; biomarker testing from bio-pharma customers and, from; diagnostic product sales.
Service revenues are comprised of patient diagnostic services for cancer as well as contract diagnostic services for pharmacogenomics trials. Service revenue is recognized upon completion of the testing process and when the diagnostic result is delivered to the ordering physician and/or customer. Net patient service revenue is reported at the estimated net realizable amounts from patients, third-party payers and others for services rendered, including retroactive adjustment under reimbursement agreements with third-party payers. Revenue under third-party payer agreements is subject to audit and retroactive adjustment. Provisions for third-party payer settlements are provided in the period in which the related services are rendered and adjusted in the future periods, as final settlements are determined.
Revenue from clinical research grant is recognized over time as the service is being performed using a proportional performance method. The Company uses an "efforts based" method of assessing performance. If the arrangement requires the performance of a specified number of similar acts (i.e. test), then revenue is recognized in equal amounts as each act is completed.
Other revenues are comprised of the Company’s ICP technology kit sales to bio-pharma customers, clinical research, HemeScreen and COVID-19 antibody tests.
For the year ended December 31, 2021, service revenue represented 90% of our consolidated revenues and other revenues represented 10%. For the year ended December 31, 2020, service revenue represented 96% of our consolidated revenues and other revenues represented 4%.
Allowance for Contractual Discounts
We are reimbursed by payers for services we provide. Payments for services covered by payers average less than billed charges. We monitor revenue and receivables from payers and record an estimated contractual allowance for certain revenue and receivable balances as of the revenue recognition date to properly account for anticipated differences between amounts estimated in our billing system and amounts ultimately reimbursed by payers. Accordingly, the total revenue and receivables reported in our financial statements are recorded at the amounts expected to be received from these payers. For service revenue, the contractual allowance is estimated based on several criteria, including unbilled claims, historical trends based on actual claims paid, current contract and reimbursement terms and changes in customer base and payer/product mix. The billing functions for the remaining portion of our revenue are contracted and fixed fees for specific services and are recorded without an allowance for contractual discounts.
Allowance for Doubtful Accounts
The allowance for doubtful accounts is based on estimates of losses related to receivable balances. The risk of collection varies based upon the service, the payer (commercial health insurance and government) and the patient’s ability to pay the amounts not reimbursed by the payer. We estimate the allowance for doubtful accounts based upon several factors including the age of the outstanding receivables, the historical experience of collections, adjusting for current economic conditions and, in some cases, evaluating specific customer accounts for the ability to pay. Collection agencies are employed and legal action is taken when we determine that taking collection actions is reasonable relative to the probability of receiving payment on amounts owed. Management judgment is used to assess the collectability of accounts and the ability of our customers to pay. Judgment is also used to assess trends in collections and the effects of systems and business process changes on our expected collection rates. We review the estimation process quarterly and make changes to the estimates as necessary. When it is determined that a customer account is uncollectible, that balance is written off against the existing allowance.
42
Accounts Receivable
Accounts Receivable results from diagnostic services provided to self-pay and insured patients, project based testing services, clinical research and miscellaneous product sales. The services provided by the Company are generally due within 30 days from the invoice date. Accounts receivable are reduced by an allowance for doubtful accounts. In evaluating the collectability of accounts receivable, the Company analyzes and identifies trends for each of its sources of revenue to estimate the appropriate allowance for doubtful accounts. For receivables associated with self-pay patients, including patients with insurance and a deductible and copayment, the Company records an allowance for doubtful accounts in the period of services on the basis of past experience of patients unable or unwilling to pay for service fee for which they are financially responsible. For receivables associated with services provided to patients with third-party coverage, the Company analyzes contractually due amounts and provides an allowance, if necessary. The difference between the standard rates and the amounts actually collected after all reasonable collection efforts have been exhausted is charged against the allowance for doubtful accounts.
Stock-Based Compensation
Stock-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the grantee’s requisite vesting period. For the purpose of valuing stock options granted to our employees, directors and officers, we use the Black-Scholes option pricing model. To determine the risk-free interest rate, we utilized the U.S. Treasury yield curve in effect at the time of the grant with a term consistent with the expected term of our awards. The expected term of the options granted is in accordance with Staff Accounting Bulletins 107 and 110, and is based on the average between vesting terms and contractual terms. The expected dividend yield reflects our current and expected future policy for dividends on our common stock. The expected stock price volatility for our stock options was calculated by examining the trading history for our common stock. We will continue to analyze the expected stock price volatility and expected term assumptions and will adjust our Black-Scholes option pricing assumptions as appropriate.
Impairment of Long-Lived Assets
We assess the recoverability of our long-lived assets, which include property and equipment and definite-lived intangible assets, whenever significant events or changes in circumstances indicate impairment may have occurred. If indicators of impairment exist, projected future undiscounted cash flows associated with the asset are compared to our carrying amount to determine whether the asset’s value is recoverable. Any resulting impairment is recorded as a reduction in the carrying value of the related asset in excess of fair value and a charge to operating results.
Recently Adopted Accounting Pronouncements
In December 2019, the FASB issued Accounting Standards Update (“ASU”) 2019-12 “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”, which is intended to improve consistent application and simplify the accounting for income taxes. This ASU removes certain exceptions to the general principles in Topic 740 and clarifies and amends existing guidance. The Company adopted this guidance on January 1, 2021. The adoption of this standard was not material to our consolidated financial statements.
Recent Accounting Pronouncements Not Yet Adopted
In July 2021, the FASB issued ASU 2021-05, Lease (Topic 842), “Lessors - Certain Leases with Variable Lease Payments”. This guidance amends the lease classification accounting for lessors for certain leases with variable lease payments that do not depend on a reference index or a rate and would have resulted in the recognition of a loss at lease commencement if classified as a sales-type or direct financing lease. Under the new guidance, these leases will be classified as an operating lease. The amendments are effective for fiscal years beginning after December 15, 2021, with early adoption permitted. The Company is currently evaluating the impact that this ASU will have on its consolidated financial statements and related disclosures.
43
In May 2021, the FASB issued ASU 2021-04, “Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options” which clarifies the accounting for a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after a modification or exchange and the related EPS effects of such transaction if recognized as an adjustment to equity. This ASU becomes effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years, and should be applied prospectively to modifications or exchanges occurring on or after the effective date. The Company is currently evaluating the impact that this ASU will have on its consolidated financial statements and related disclosures.
In August 2020, the FASB issued ASU 2020-06 “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.” This ASU amends the guidance on convertible instruments and the derivatives scope exception for contracts in an entity’s own equity and improves and amends the related EPS guidance for both Subtopics. The ASU will be effective for annual reporting periods after December 15, 2023 and interim periods within those annual periods and early adoption is permitted in annual reporting periods beginning after December 15, 2021. The Company is currently assessing the potential impact that the adoption of this ASU will have on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13 “Measurement of Credit Losses on Financial Instruments”, which replaces current methods for evaluating impairment of financial instruments not measured at fair value, including trade accounts receivable and certain debt securities, with a current expected credit loss model. This ASU, as amended, is effective for the Company for reporting periods beginning after December 15, 2022. The Company is currently assessing the potential impact that the adoption of this ASU will have on its consolidated financial statements.
Impact of Inflation
We do not believe that price inflation or deflation had a material adverse effect on our financial condition or results of operations during the periods presented.
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
We are a smaller reporting company, as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended, and are not required to provide the information required under this item.
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Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
Precipio, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Precipio, Inc. (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of operations, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2021 , and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
Explanatory Paragraph – Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 1, the Company has incurred significant losses and needs to raise additional funds to meet its obligations and sustain its operations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
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Assessment of the estimation for collections over diagnostic testing for which revenue is recognized.
Description of Matter
As described in Note 2 to the financial statements, the Company records its service revenues from diagnostic testing net of contractual and collection allowances that are estimated based on historical trends and anticipated reimbursement from third party payers. As of December 31, 2021, the Company recognized gross revenue of approximately $17.6 million along with contractual allowances of approximately $8.9 million. The net revenue figure of approximately $8.7 million is recorded as net sales on the consolidated statements of operations.
The principal considerations for our determination that performing procedures over revenue recognition relating to the service revenue is a critical audit matter is based on the significant judgments by management in estimating the amount to be recognized as revenue as well as the effort and complexity in assessing audit evidence in performing procedures to evaluate the amount recognized. The calculation involves estimating adjustments to gross revenue based upon sales mix and third party contractual terms, such as Medicare rates or variations of Medicare rates.
How We Addressed the Matter
We obtained an understanding of the design of controls in place over the Company’s process to calculate the various allowances. Our audit procedures included the evaluation of significant inputs through the evaluation of the Company's retrospective analysis of allowances as compared to actual payments received, evaluation of estimates based on historical collections by payer, and performance of analytical procedures and sensitivity analyses over the Company’s significant inputs to assess the Company’s ability to accurately estimate the allowances. We also tested the underlying data used in management’s calculations for accuracy and completeness, which included detail testing of the service revenue.
/s/ Marcum LLP
We have served as the Company’s auditor since 2016.
March 30, 2022
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PRECIPIO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2021 and 2020
(Dollars in thousands, except share data)
| 2021 |
| 2020 | |||
ASSETS | ||||||
CURRENT ASSETS: | ||||||
Cash | $ | | $ | | ||
Accounts receivable, net |
| | | |||
Inventories |
| | | |||
Other current assets |
| | | |||
Total current assets |
| | | |||
PROPERTY AND EQUIPMENT, NET |
| | | |||
OTHER ASSETS: | ||||||
Finance lease right-of-use assets, net | | | ||||
Operating lease right-of-use assets, net | | | ||||
Intangibles, net |
| | | |||
Other assets |
| | | |||
Total assets | $ | | $ | | ||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||
CURRENT LIABILITIES: | ||||||
Current maturities of long-term debt, less debt issuance costs | $ | | $ | | ||
Current maturities of finance lease liabilities |
| | | |||
Current maturities of operating lease liabilities |
| | | |||
Accounts payable |
| | | |||
Accrued expenses |
| | | |||
Deferred revenue |
| | | |||
Total current liabilities |
| | | |||
LONG TERM LIABILITIES: | ||||||
Long-term debt, less current maturities and debt issuance costs |
| | | |||
Finance lease liabilities, less current maturities |
| | | |||
Operating lease liabilities, less current maturities |
| | | |||
Common stock warrant liabilities |
| | | |||
Total liabilities |
| | | |||
COMMITMENTS AND CONTINGENCIES (Note 9) | ||||||
STOCKHOLDERS’ EQUITY: | ||||||
Preferred stock - $ |
| |||||
Common stock, $ |
| | | |||
Additional paid-in capital |
| | | |||
Accumulated deficit |
| ( | ( | |||
Total Precipio, Inc. stockholders’ equity |
| | | |||
Noncontrolling interest in joint venture | | | ||||
Total stockholders’ equity | | | ||||
Total liabilities and stockholders’ equity | $ | | $ | | ||
See notes to consolidated financial statements.
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PRECIPIO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2021 and 2020
(Dollars in thousands, except per share data)
2021 |
| 2020 | ||||
SALES: |
|
|
| |||
Service revenue, net | $ | | $ | | ||
Other revenue |
| |
| | ||
Revenue, net of contractual allowances and adjustments |
| |
| | ||
Adjustment for allowance for doubtful accounts |
| |
| ( | ||
Net sales |
| |
| | ||
COST OF SALES: |
|
|
|
| ||
Cost of service revenue |
| |
| | ||
Cost of other revenue |
| |
| | ||
Total cost of sales |
| |
| | ||
Gross profit |
| |
| | ||
OPERATING EXPENSES: |
|
|
|
| ||
Operating expenses |
| |
| | ||
OPERATING LOSS |
| ( |
| ( | ||
OTHER INCOME (EXPENSE): |
|
|
|
| ||
Interest expense, net |
| ( |
| ( | ||
Warrant revaluation |
| |
| | ||
Gain on settlement of liability |
| |
| | ||
Gain on forgiveness of Paycheck Protection Program loan | | — | ||||
Loss on extinguishment of convertible notes |
| — |
| ( | ||
Other income |
| — |
| | ||
Total other income (expense) |
| |
| ( | ||
LOSS BEFORE INCOME TAXES |
| ( |
| ( | ||
INCOME TAX EXPENSE |
| |
| | ||
NET LOSS |
| ( |
| ( | ||
Less: Net income attributable to noncontrolling interest in joint venture | ( | ( | ||||
Deemed dividends related to beneficial conversion feature of preferred stock and fair value of warrant down round features |
| — |
| ( | ||
NET LOSS ATTRIBUTABLE TO PRECIPIO, INC. COMMON STOCKHOLDERS | $ | ( | $ | ( | ||
BASIC AND DILUTED LOSS PER COMMON SHARE | ( | ( | ||||
BASIC AND DILUTED WEIGHTED-AVERAGE SHARES OF COMMON STOCK OUTSTANDING |
| |
| | ||
See notes to consolidated financial statements.
48
PRECIPIO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Years Ended December 31, 2021 and 2020
(Dollars in thousands)
Preferred Stock | Common Stock | Additional | Noncontrolling |
| |||||||||||||||||||||
Outstanding | Par |
| Outstanding |
| Par | Paid-in | Accumulated | Total | Interest in |
| |||||||||||||||
| Shares |
| Value |
| Shares |
| Value |
| Capital |
| Deficit |
| Precipio, Inc. | Joint Venture |
| Total | |||||||||
Balance, January 1, 2020 |
| | $ | — |
| | $ | | $ | | $ | ( | $ | | $ | — | $ | | |||||||
Net loss |
| — |
| — |
| — |
| — |
| — |
| ( | ( | |
| ( | |||||||||
Conversion of convertible notes into common stock | — |
| — |
| |
| |
| |
| — | | — |
| | ||||||||||
Issuance of common stock in connection with purchase agreements | — | — | | | | — | | — | | ||||||||||||||||
Write-off beneficial conversion feature in conjunction with convertible note extinguishment | — | — | — | — | ( | — | ( | — | ( | ||||||||||||||||
Write-off debt premiums (net of debt discounts) in conjunction with convertible note conversions | — | — | — | — | | — | | — | | ||||||||||||||||
Non-cash stock-based compensation |
| — |
| — |
| — |
| — |
| |
| — | | — |
| | |||||||||
Balance, December 31, 2020 |
| | $ | — |
| | $ | | $ | | $ | ( | $ | | $ | | $ | | |||||||
Net loss |
| — |
| — |
| — |
| — |
| — |
| ( | ( | |
| ( | |||||||||
Issuance of common stock in connection with purchase agreements | — | — | | | | — | | — | | ||||||||||||||||
Issuance of common stock in connection with at the market offering, net of issuance costs | — | — | | | | — | | — | | ||||||||||||||||
Proceeds upon issuance of common stock from exercise of warrants | — | — | | | | — | | — | | ||||||||||||||||
Proceeds upon issuance of common stock from exercise of stock options | — | — | | — | | — | | — | | ||||||||||||||||
Write-off warrant liability in conjunction with warrant exercises | — | — | — | — | | — | | — | | ||||||||||||||||
Issuance of common stock for consulting services |
| — |
| — |
| |
| — |
| |
| — | | — |
| | |||||||||
Non-cash stock-based compensation |
| — |
| — |
| — |
| — |
| |
| — | | — |
| | |||||||||
Balance, December 31, 2021 |
| | $ | — |
| | $ | | $ | | $ | ( | $ | | $ | | $ | | |||||||
See notes to consolidated financial statements.
49
PRECIPIO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2021 and 2020
(Dollars in thousands)
| 2021 |
| 2020 | |||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||
Net loss | $ | ( | $ | ( | ||
Adjustments to reconcile net loss to net cash flows used in operating activities: |
|
|
|
| ||
Depreciation and amortization |
| |
| | ||
Amortization of operating lease right-of-use asset | | | ||||
Amortization of finance lease right-of-use asset | | | ||||
Amortization of deferred financing costs, debt discounts and debt premiums |
| |
| | ||
Gain on forgiveness of debt |
| ( |
| — | ||
Gain on settlement of liability |
| ( |
| ( | ||
Loss on extinguishment of convertible notes | — | | ||||
Stock-based compensation |
| |
| | ||
Value of stock issued in payment of services |
| |
| — | ||
Provision for losses on doubtful accounts |
| ( |
| | ||
Warrant revaluation |
| ( |
| ( | ||
Derecognition of finance lease right-of-use asset | | — | ||||
Gain from sale of fixed asset | — | ( | ||||
Changes in operating assets and liabilities: |
|
|
|
| ||
Accounts receivable |
| |
| ( | ||
Inventories |
| ( |
| ( | ||
Other assets |
| ( |
| ( | ||
Accounts payable |
| |
| ( | ||
Operating lease liabilities | ( | ( | ||||
Accrued expenses and other liabilities |
| ( |
| | ||
Net cash used in operating activities |
| ( |
| ( | ||
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
| ||
Purchase of property and equipment |
| ( |
| ( | ||
Proceeds from sale of fixed asset |
| — |
| | ||
Net cash used in investing activities |
| ( |
| ( | ||
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
| ||
Principal payments on finance lease obligations |
| ( |
| ( | ||
Deposits on finance lease right-of-use assets | ( | — | ||||
Issuance of common stock, net of issuance costs | | | ||||
Proceeds from exercise of warrants |
| |
| — | ||
Proceeds from exercise of stock options | | — | ||||
Proceeds from PPP Loan |
| — |
| | ||
Principal payments on long-term debt |
| ( |
| ( | ||
Payments on common stock warrant liabilities | ( | — | ||||
Net cash flows provided by financing activities |
| |
| | ||
NET CHANGE IN CASH |
| |
| | ||
CASH AT BEGINNING OF PERIOD |
| |
| | ||
CASH AT END OF PERIOD | $ | | $ | | ||
See notes to consolidated financial statements.
50
PRECIPIO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - continued
For the Years Ended December 31, 2021 and 2020
(Dollars in thousands)
Year Ended December 31, | ||||||
2021 |
| 2020 | ||||
SUPPLEMENTAL CASH FLOW INFORMATION | ||||||
Cash paid during the period for interest | $ | | $ | | ||
SUPPLEMENTAL DISCLOSURE OF CONSULTING SERVICES OR ANY OTHER NON-CASH COMMON STOCK RELATED ACTIVITY |
|
|
|
| ||
Purchases of equipment financed through accounts payable | | — | ||||
Equipment financed through finance lease obligations |
| — |
| | ||
Conversion of convertible debt, plus interest, into common stock |
| — |
| | ||
Prepaid insurance financed with loan | — | | ||||
Write-off of beneficial conversion feature in conjunction with convertible note extinguishment | — | | ||||
Operating lease right-of-use assets obtained in exchange for operating lease obligations | | — | ||||
Finance lease right-of-use assets obtained in exchange for finance lease obligations | | | ||||
Write-off warrant liability in conjunction with warrant exercises | | — | ||||
Write-off of (debt premiums) debt discounts, net, in conjunction with convertible note conversions | — | ( | ||||
See notes to consolidated financial statements.
51
PRECIPIO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2021 and 2020
1. BUSINESS DESCRIPTION
Business Description.
Precipio, Inc., and its subsidiaries, (collectively, “we”, “us”, “our”, the “Company” or “Precipio is a healthcare solutions company focused on cancer diagnostics. The Company’s business mission is to address the pervasive problem of cancer misdiagnoses by developing solutions to mitigate the root causes of this problem in the form of diagnostic products, reagents and services. Misdiagnoses originate from aged commercial diagnostic cancer testing technologies, lack of subspecialized expertise, and sub-optimal laboratory processes that are needed in today’s diagnostic cancer testing in order to provide accurate, rapid, and resource-effective results to treat patients. Industry studies estimate 1 in 5 blood-cancer patients are misdiagnosed. As cancer diagnostic testing has evolved from cellular to molecular (genes and exons), laboratory testing has become extremely complex, requiring even greater diagnostic precision, attention to process and a more appropriate evaluation of the abundance of genetic data to effectively gather, consider, analyze and present information for the physician for patient treatment. Precipio sees cancer diagnostics as requiring a holistic approach to improve diagnostic data for improved interpretations with the intent to reduce misdiagnoses. By delivering diagnostic products, reagents and services that improve the accuracy and efficiency of diagnostics, leading to fewer misdiagnoses, we believe patient outcomes can be improved through the selection of appropriate therapeutic options. Furthermore, we believe that better patient outcomes will have a positive impact on healthcare expenses as misdiagnoses are reduced. Better Diagnostic Results – Better Patient Outcome – Lower Healthcare Expenditures.
To deliver its strategy, the Company has structured its organization in order to drive development of diagnostic products. Laboratory and R&D facilities located in New Haven, Connecticut and Omaha, Nebraska house development teams that collaborate on new products and services. The Company operates CLIA laboratories in both the New Haven, Connecticut and Omaha, Nebraska locations providing essential blood cancer diagnostics to office-based oncologists in many states nationwide. To deliver on our strategy of mitigating misdiagnoses we rely heavily on our CLIA laboratory to support R&D beta-testing of the products we develop, in a clinical environment.
Our operating structure promotes the harnessing of our proprietary technology and genetic diagnostic expertise to bring to market the Company’s robust pipeline of innovative solutions designed to address the root causes of misdiagnoses.
Joint Venture.
In April 2020, the Company formed a joint venture with Poplar Healthcare PLLC (“Poplar”), which we refer to as the “Joint Venture”. The Joint Venture was formed by the Limited Liability Company Agreement of Precipio Oncometrix LLC, a Delaware limited liability company (“POC”), which was entered into as of April 11, 2020 (the “Effective Date”), by and among POC, Poplar, and Precipio SPV Inc. (“Precipio SPV”), a newly formed subsidiary of the Company, together with such other persons who from time to time become party to the Limited Liability Company Agreement by executing a counterpart signature page in accordance with the terms hereof. POC was formed as a limited liability company on April 2, 2020 in accordance with the statutes and laws of the State of Delaware relating to limited liability companies. Precipio SPV was incorporated in the State of Delaware on March 10, 2020 for the sole purpose of being a party to the Joint Venture.
Under the terms of the Joint Venture, Precipio SPV has a
52
(“VIE”). See Note 2 - Summary of Significant Accounting Policies for further discussion regarding consolidation of variable interest entities.
The business purpose of the Joint Venture is to facilitate and capitalize on the combined capabilities, resources and healthcare industry relationships of its members by partnering, promoting and providing oncology services to office based physicians, hospitals and medical centers. Operational services of the Joint Venture are performed entirely by its members and employees of its members. Precipio SPV’s responsibilities include product and account management services, selling & marketing, laboratory diagnostic services and general & administrative services. Precipio SPV is entitled to a management fee for the services it provides. This management fee is established through service agreements which were executed in conjunction with the formation of the Joint Venture. Poplar receives a similar fee for the billing services that it provides.
Going Concern.
The consolidated financial statements have been prepared using accounting principles generally accepted in the United States of America (“GAAP”) applicable for a going concern, which assume that the Company will realize its assets and discharge its liabilities in the ordinary course of business. The Company has incurred substantial operating losses and has used cash in its operating activities for the past several years. As of December 31, 2021, the Company had a net loss of $
To meet its current and future obligations the Company has taken the following steps to capitalize the business and successfully achieve its business plan:
| ● | On April 2, 2021, the Company entered into a sales agreement with A.G.P./Alliance Global Partners (“AGP”), pursuant to which the Company may offer and sell its common stock, par value $ |
Notwithstanding the aforementioned circumstances, there remains substantial doubt about the Company’s ability to continue as a going concern for the next twelve months from the date these consolidated financial statements were issued. There can be no assurance that the Company will be able to successfully achieve its initiatives summarized above in order to continue as a going concern over the next twelve months from the date of issuance of this Annual Report Form 10-K. The accompanying financial statements have been prepared assuming the Company will continue as a going concern and do not include any adjustments that might result should the Company be unable to continue as a going concern as a result of the outcome of this uncertainty.
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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation.
The consolidated financial statements include the accounts of Precipio, Inc. and our wholly owned subsidiaries, and the Joint Venture which is a VIE in which we are the primary beneficiary. Refer to the section titled “Consolidation of Variable Interest Entities” for further information related to our accounting for the Joint Venture. All inter-company balances and transactions have been eliminated in consolidation.
Use of Estimates.
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. The most significant estimates and assumptions with regard to these consolidated financial statements relate to the allowance for doubtful accounts, assumptions used within the fair value of debt and equity transactions and contractual allowances. These assumptions require considerable judgment by management. Actual results could differ from the estimates and assumptions used in preparing these consolidated financial statements.
Reclassifications.
Certain prior period amounts of property and equipment, net and operating lease right-of-use (“ROU”) assets have been reclassified to finance lease right-of-use assets to conform to the current period presentation. These reclassifications had no effect on previously reported net earnings or total assets. As of December 31, 2020, the amounts reclassified to finance lease right-of-use assets were $
Risks and Uncertainties.
Certain risks and uncertainties are inherent in our day-to-day operations and in the process of preparing our financial statements. The risks and uncertainties may be heightened by the COVID-19 pandemic and any worsening of the global business and economic environment as a result. The more significant of those risks are presented below and throughout the notes to the consolidated financial statements.
The Company operates in the healthcare industry which is subject to numerous laws and regulations of federal, state and local governments. These laws and regulations include, but are not necessarily limited to, matters such as licensure, accreditation, government healthcare program participation requirements, reimbursement for patient services, and Medicare and Medicaid fraud and abuse. Government activity has increased with respect to investigations and allegations concerning possible violations of fraud and abuse statutes and regulations by healthcare providers. Violations of these laws and regulations could result in expulsion from government healthcare programs together with the imposition of significant fines and penalties, as well as significant repayments for patient services previously billed. Management believes that the Company is in compliance with fraud and abuse regulations, as well as other applicable government laws and regulations. While no material regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretation as well as regulatory actions unknown or unasserted at this time.
Fair Value.
Unless otherwise specified, book value approximates fair value. The common stock warrant liabilities are recorded at fair value. See Note 12 - Fair Value for additional information.
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Other Current Assets.
Other current assets of $
Concentrations of Risk.
From time to time, we may maintain a cash position with financial institutions in amounts that exceed Federal Deposit Insurance Corporation insured limits of up to $250,000 per depositor per financial institution. We have not experienced any losses on such accounts as of December 31, 2021.
Service companies in the health care industry typically grant credit without collateral to patients. The majority of these patients are insured under third-party insurance agreements. The services provided by the Company are routinely billed utilizing the Current Procedural Terminology (CPT) code set designed to communicate uniform information about medical services and procedures among physicians, coders, patients, accreditation organizations, and payers for administrative, financial, and analytical purposes. CPT codes are currently identified by the Centers for Medicare and Medicaid Services and third-party payers. The Company utilizes CPT codes for Pathology and Laboratory Services contained within codes 80000-89398.
Inventories.
Inventories consist of laboratory supplies and are valued at cost (determined on an average cost basis, which approximates the first-in, first-out method) or net realizable value, whichever is lower. We evaluate inventory for items that are slow moving or obsolete and record an appropriate reserve for obsolescence if needed. We have an allowance for slow moving or obsolete inventory of less than $
Property and Equipment, net.
Property and equipment are carried at cost, net of accumulated depreciation and amortization. Expenditures for maintenance and repairs are expensed as incurred. Depreciation and amortization are computed by the straight-line method over the estimated useful lives of the related assets as follows:
Furniture and fixtures |
| years | |
Laboratory equipment |
| years | |
Computer equipment and software |
| years |
For assets sold or otherwise disposed of, the cost and related accumulated depreciation and amortization are removed from the accounts, and any related gain or loss is reflected in operations for the period. Expenditures for major betterments that extend the useful lives of property and equipment are capitalized.
Intangible Assets.
We review our amortizable long-lived assets for impairment annually or whenever events indicate that the carrying amount of the asset (group) may not be recoverable. An impairment loss may be needed if the sum of the future undiscounted cash flows is less than the carrying amount of the asset (group). The amount of the loss would be determined by comparing the fair value of the asset to the carrying amount of the asset (group). There were
Debt Issuance Costs, Debt Discounts and Debt Premiums.
Debt issuance costs, debt discounts and debt premiums are being amortized or accreted over the lives of the related financings on a basis that approximates the effective interest method. Costs and discounts are presented as a reduction of the related debt and premiums are presented as an increase to the related debt in the accompanying balance
55
sheets. The amortization amount recorded was expense, net of income, of less than $
Stock-Based Compensation.
All stock-based awards to date have exercise prices equal to the market price of our common stock on the date of grant and have
Net Sales Recognition.
Revenue recognition occurs when a customer obtains control of the promised goods and service. Revenue assigned to the goods and services reflects the consideration which the Company expects to receive in exchange for those goods and services.
The Company derives its revenues from diagnostic testing - histology, flow cytometry, cytology and molecular testing; clinical research from bio-pharma customers, state and federal grant programs; biomarker testing from bio-pharma customers and from other product sales including revenues from equipment leases and reagent sales associated with our HSRR program. All sources of revenue are recorded net of accruals for estimated chargebacks, rebates, cash discounts, other allowances, and returns. Due to differences in the substance of these revenue types, the transactions require, and the Company utilizes, different revenue recognition policies for each. See more detailed information on revenue in Note 14 – Sales Service Revenue, Net And Accounts Receivable.
The Company recognizes revenue utilizing the five-step framework of ASC 606. Control of the laboratory testing services is transferred to the customer at a point in time. As such, the Company recognizes revenue for diagnostic testing at a point in time based on the delivery method (web-portal access or fax) for a patient’s laboratory report. Diagnostic testing service revenue is reported at the estimated net realizable amounts from patients, third-party payers and others for services rendered, including retroactive adjustment under reimbursement agreements with third-party payers. Provisions for third-party payer settlements are provided in the period in which the related services are rendered and adjusted in the future periods, as final settlements are determined. For clinical research and biomarker services, the Company utilizes an “effort based” method of assessing performance and measures progress towards satisfaction of the performance obligation based upon the delivery of results per the contract. Control of reagents and other diagnostic products are transferred to the customer at a point in time and, as such, the Company recognizes these revenues at a point in time based on the delivery method. When we receive payment in advance, we initially defer the revenue and recognize it when we deliver the service.
Taxes collected from customers and remitted to government agencies for specific net sales producing transactions are recorded net with no effect on the statements of operations.
Accounts Receivable
Accounts Receivable result from diagnostic services provided to self-pay and insured patients, project based testing services and clinical research. The payment for services provided by the Company are generally due within 30 days from the invoice date. Accounts receivable are reduced by an allowance for doubtful accounts. In evaluating the collectability of accounts receivable, the Company analyzes and identifies trends for each of its sources of revenue to estimate the appropriate allowance for doubtful accounts. For receivables associated with self-pay patients, including patients with insurance and a deductible and copayment, the Company records an allowance for doubtful accounts in the period of services on the basis of past experience of patients unable or unwilling to pay for service fee for which they are financially responsible. For receivables associated with services provided to patients with third-party coverage, the
56
Company analyzes contractually due amounts and provides an allowance, if necessary. The difference between the standard rates and the amounts actually collected after all reasonable collection efforts have been exhausted is charged against the allowance for doubtful accounts.
Presentation of Insurance Claims and Related Insurance Recoveries.
The Company accounts for its insurance claims and related insurance recoveries at their gross values as standards for health care entities do not allow the Company to net insurance recoveries against the related claim liabilities. There were
Advertising Costs.
Advertising costs are expensed as incurred and are included in operating expenses on the consolidated statements of operations. Advertising costs charged to operations totaled approximately $
Research and Development Costs.
All costs associated with internal research and development are expensed as incurred. These costs include salaries and employee related expenses, operating supplies and facility-related expenses. Research and development costs charged to operations totaled $
Income Taxes.
Deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax basis of assets and liabilities at each balance sheet date using tax rates expected to be in effect in the year the differences are expected to reverse. The effect on the deferred tax assets and liabilities of a change in tax rates is recognized in the period when the change in tax rates is enacted.
A valuation allowance is established when it is determined that it is more likely than not that some portion or all of the deferred tax assets will not be realized. A full valuation allowance has been applied against the Company’s net deferred tax assets as of December 31, 2021 and 2020, due to projected losses and because it is not more likely than not that the Company will realize future benefits associated with these deferred tax assets.
Management’s conclusions regarding uncertain tax positions may be subject to review and adjustment at a later date based upon ongoing analysis of, or changes in tax laws, regulations and interpretations thereof as well as other factors. The Company’s policy is to record interest and penalties directly related to income taxes as income tax expense in the accompanying consolidated statements of operations, of which there was
Common Stock Warrants.
The Company classifies the issuance of common stock warrants as equity any contracts that (i) require physical settlement or net-stock settlement or (ii) gives the Company a choice of net-cash settlement or settlement in its own stocks (physical settlement or net-stock settlement). The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net-cash settle the contract if an event occurs and if that event is outside of the Company’s control), or (ii) gives the counterparty a choice of net-cash settlement or settlement in stock (physical settlement or net-stock settlement).
Certain of our issued and outstanding warrants to purchase common stock do not qualify to be treated as equity and accordingly, are recorded as a liability (“Common Stock Warrant Liability”). We are required to present these instruments at fair value at each reporting date and any changes in fair values are recorded as an adjustment to earnings.
57
Beneficial Conversion Features.
The intrinsic value of a beneficial conversion feature (“BCF”) inherent to a convertible note payable, which is not bifurcated and accounted for separately from the convertible note payable and may not be settled in cash upon conversion, is treated as a discount to the convertible note payable. This discount is amortized over the period from the date of issuance to the first conversion date using the effective interest method. If the note payable is retired prior to the end of its contractual term, the unamortized discount is expensed in the period of retirement to interest expense. In general, the BCF is measured by comparing the effective conversion price, after considering the relative fair value of detachable instruments included in the financing transaction, if any, to the fair value of the common shares at the commitment date to be received upon conversion.
Deemed dividends are also recorded for the intrinsic value of conversion options embedded in preferred shares based upon the differences between the fair value of the underlying common stock at the commitment date of the transaction and the effective conversion price embedded in the preferred shares. When the preferred shares are non-redeemable the BCF is fully amortized into additional paid-in capital and preferred discount. If the preferred shares are redeemable, the discount is amortized from the commitment date to the first conversion date.
Consolidation of Variable Interest Entities.
We evaluate any entity in which we are involved to determine if the entity is a VIE and if so, whether we hold a variable interest and are the primary beneficiary. We consolidate VIEs that are subject to assessment when we are deemed to be the primary beneficiary of the VIE. The process for determining whether we are the primary beneficiary of the VIE is to conclude whether we are a party to the VIE holding a variable interest that meets both of the following criteria: (1) has the power to make decisions that most significantly affect the economic performance of the VIE, and (2) has the obligation to absorb losses or the right to receive benefits that in either case could potentially be significant to the VIE.
We have determined that we hold a variable interest in the Joint Venture, have the power to make significant operational decisions on behalf of the VIE and also have the obligation to absorb the majority of the losses from the VIE. As such we have also determined that we are the primary beneficiary of the VIE. The following table presents information about the carrying value of the assets and liabilities of the Joint Venture which we consolidate and which are included on our consolidated balance sheets. Intercompany balances are eliminated in consolidation and not reflected in the following table.
(dollars in thousands) |
| December 31, 2021 |
| December 31, 2020 | ||
Assets: | ||||||
Accounts receivable, net | $ | | $ | | ||
Total assets | $ | | $ | | ||
Liabilities: | ||||||
Accrued expenses | $ | | $ | | ||
Total liabilities | $ | | $ | | ||
Noncontrolling interest in Joint Venture | $ | | $ | | ||
Total stockholders' equity | $ | | $ | | ||
Loss Per Share.
Basic loss per share is calculated based on the weighted-average number of common shares outstanding during each period. Diluted loss per share includes shares issuable upon exercise of outstanding stock options, warrants or conversion rights that have exercise or conversion prices below the market value of our common stock. Options, warrants and conversion rights pertaining to
58
The following table summarizes the outstanding securities not included in the computation of diluted net loss per share:
December 31, | ||||
| 2021 |
| 2020 | |
Stock options |
| |
| |
Warrants |
| |
| |
Preferred stock |
| |
| |
Total |
| |
| |
Recently Adopted Accounting Pronouncements.
In December 2019, the FASB issued Accounting Standards Update (“ASU”) 2019-12 “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”, which is intended to improve consistent application and simplify the accounting for income taxes. This ASU removes certain exceptions to the general principles in Topic 740 and clarifies and amends existing guidance. The Company adopted this guidance on January 1, 2021. The adoption of this standard was not material to our consolidated financial statements.
Recent Accounting Pronouncements Not Yet Adopted.
In July 2021, the FASB issued ASU 2021-05, Lease (Topic 842), “Lessors - Certain Leases with Variable Lease Payments”. This guidance amends the lease classification accounting for lessors for certain leases with variable lease payments that do not depend on a reference index or a rate and would have resulted in the recognition of a loss at lease commencement if classified as a sales-type or direct financing lease. Under the new guidance, these leases will be classified as an operating lease. The amendments are effective for fiscal years beginning after December 15, 2021, with early adoption permitted. The Company is currently evaluating the impact that this ASU will have on its consolidated financial statements and related disclosures.
In May 2021, the FASB issued ASU 2021-04, “Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options” which clarifies the accounting for a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after a modification or exchange and the related EPS effects of such transaction if recognized as an adjustment to equity. This ASU becomes effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years, and should be applied prospectively to modifications or exchanges occurring on or after the effective date. The Company is currently evaluating the impact that this ASU will have on its consolidated financial statements and related disclosures.
In August 2020, the FASB issued ASU 2020-06 “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.” This ASU amends the guidance on convertible instruments and the derivatives scope exception for contracts in an entity’s own equity and improves and amends the related EPS guidance for both Subtopics. The ASU will be effective for annual reporting periods after December 15, 2023 and interim periods within those annual periods and early adoption is permitted in annual reporting periods ending after December 15, 2020. The Company is currently assessing the potential impact that the adoption of this ASU will have on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13 “Measurement of Credit Losses on Financial Instruments”, which replaces current methods for evaluating impairment of financial instruments not measured at fair value, including trade accounts receivable and certain debt securities, with a current expected credit loss model. This ASU, as amended, is effective for the Company for reporting periods beginning after December 15, 2022. The Company is currently assessing the potential impact that the adoption of this ASU will have on its consolidated financial statements.
59
3. PROPERTY AND EQUIPMENT, NET
A summary of property and equipment at December 31, 2021 and 2020 is as follows:
| 2021 |
| 2020 | |||
Furniture and fixtures | $ | | $ | | ||
Laboratory equipment |
| |
| | ||
Computer equipment and software |
| |
| | ||
Construction in process |
| |
| | ||
| |
| | |||
Less—accumulated depreciation and amortization |
| ( |
| ( | ||
Total | $ | | $ | | ||
Depreciation expense was approximately $
4. INTANGIBLES
Intangible assets consist of the following:
Dollars in Thousands | |||||||||
December 31, 2021 | |||||||||
|
| Accumulated |
| Net Book | |||||
Cost | Amortization | Value | |||||||
Technology | $ | | $ | | $ | | |||
$ | | $ | | $ | | ||||
Dollars in Thousands | |||||||||
December 31, 2020 | |||||||||
|
| Accumulated |
| Net Book | |||||
Cost | Amortization | Value | |||||||
Technology | $ | | $ | | $ | | |||
$ | | $ | | $ | | ||||
| Estimated Useful Life | ||
Technology |
| years |
Amortization expense for intangible assets was $
5. LONG-TERM DEBT
Long-term debt consists of the following:
Dollars in Thousands | ||||||
| December 31, 2021 |
| December 31, 2020 | |||
Department of Economic and Community Development (DECD) | $ | | $ | | ||
DECD debt issuance costs |
| ( |
| ( | ||
Financed insurance loan |
| |
| | ||
Paycheck Protection Program | — | | ||||
Total long-term debt |
| |
| | ||
Current portion of long-term debt |
| ( |
| ( | ||
Long-term debt, net of current maturities | $ | | $ | | ||
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Department of Economic and Community Development
On January 8, 2018, the Company received gross proceeds of $
Due to the economic impact of COVID-19, DECD offered financial relief to all businesses with certain loans, including the Company’s DECD 2018 Loan. The relief includes the option to defer all payments from April 1, 2020 to August 1, 2020 and the deferred payments will be added to the end of the loan. The Company chose to defer its payments and the maturity date of the DECD 2018 Loan was extended to May 31, 2028. The payment deferral modification did not have a material impact on the Company’s cash flows.
Debt issuance costs associated with the DECD 2018 Loan were approximately $
Financed Insurance Loan.
The Company finances certain of its insurance premiums (the “Financed Insurance Loans”). In July 2019, the Company financed $
Paycheck Protection Program.
On April 23, 2020, the Company entered into a promissory note (the “Promissory Note”) evidencing an unsecured $
Under the terms of the CARES Act, PPP Loan recipients can apply for and be granted forgiveness for all or a portion of loans granted under the PPP. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for payroll costs and mortgage interest, rent or utility costs and the maintenance of employee and compensation levels.
On February 11, 2021, the Company filed its application for loan forgiveness with Webster Bank and was subsequently notified by Webster Bank that effective March 24, 2021 the PPP Loan, plus accrued interest, was considered fully forgiven. As a result, the Company recorded a gain on forgiveness of debt of $
The aggregate future maturities required on gross long-term debt at December 31, 2021 are as follows:
| 2022 |
| 2023 |
| 2024 |
| 2025 |
| 2026 |
| 2027 and thereafter |
| Total | ||||||||
DECD loan | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
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6. CONVERTIBLE NOTES.
Convertible Bridge Notes.
On April 20, 2018, the Company entered into a securities purchase agreement (the “2018 Note Agreement”) with certain investors (the “April 2018 Investors”), as amended on November 29, 2018 (the “Amendment Agreement”) and amended on April 16, 2019 (“Amendment No.2 Agreement”). The Company also entered into a securities purchase agreement on May 14, 2019. In connection with these securities purchase agreements, the Company issued Senior Secured Convertible Promissory Notes (the “Bridge Notes”) along with warrants during 2018 and 2019.
On March 26, 2020, the Company entered into an amendment agreement (the “March 2020 Amendment”) amending the terms of that certain Amendment No. 2 Agreement dated April 16, 2019 and the securities purchase agreement dated May 14, 2019. As a result of the March 2020 Amendment, (i) the maturity date of the Bridge Notes issued in April 2019 (the “April 2019 Bridge Notes”) and the Bridge Notes issued in May 2019 (the “May 2019 Bridge Notes”) was extended three months from April 16, 2020 to July 16, 2020, (ii) the floor price at which conversions may occur under the April 2019 Bridge Notes and the May 2019 Bridge Notes was amended from $
The Company reviewed the modifications and concluded that the March 2020 Amendment would be treated as an extinguishment of the related April 2019 Bridge Notes and May 2019 Bridge Notes. As a result, the Company recorded a debt premium on the post-modification debt of $
During the year ended December 31, 2020, $
During the year ended December 31, 2020, the change in Bridge Note debt discounts and debt premiums was as follows:
(Dollars in thousands) | For the Year Ended December 31, | |||||
2020 | ||||||
Debt Discounts | Debt Premiums | |||||
Beginning balance at January 1 | $ | ( | $ | — | ||
Additions: |
| — |
| | ||
Deductions: | ||||||
Amortization (accretion) (1) | | ( | ||||
Write-off related to note conversions (2) | | ( | ||||
Write-off related to note extinguishment (3) | | — | ||||
Balance at December 31 | $ | — | $ | — | ||
| (1) | Amortization/accretion is recognized as interest expense/income within the consolidated statements of operations based on the effective interest method. |
| (2) | Write-offs associated with note conversions are recognized as an offset to additional paid-in capital at the time of the conversion. |
| (3) | Write-offs associated with note extinguishment are recognized as a loss and included in loss on extinguishment of convertible notes in the consolidated statements of operations. |
There were
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7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES.
Accrued expenses at December 31, 2021 and 2020 are as follows:
(dollars in thousands) |
| 2021 |
| 2020 | ||
Accrued expenses | $ | | $ | | ||
Accrued compensation |
| |
| | ||
Accrued franchise, property and sales and use taxes | | | ||||
Accrued interest |
| |
| | ||
$ | | $ | | |||
The Company recorded certain settlement reductions in accrued expenses and accounts payable as gains which are included in gain on settlement of liability, net in the consolidated statements of operations. During each of the years ended December 31, 2021 and 2020, approximately $
8. LEASES
The Company leases administrative facilities and laboratory equipment through operating lease agreements. In addition we rent various equipment used in our diagnostic lab and in our administrative offices through finance lease arrangements. Our operating leases include both lease (e.g., fixed payments including rent) and non-lease components (e.g., common area or other maintenance costs). The facility leases include
Operating leases result in the recognition of ROU assets and lease liabilities on the balance sheet. ROU assets represent our right to use the leased asset for the lease term and lease liabilities represent our obligation to make lease payments. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Lease expense is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The primary leases we enter into with initial terms of 12 months or less are for equipment. On November 29, 2021, we extended the lease term for our office facility in New Haven, Connecticut by modifying the expiration date from December 31, 2021 to December 31, 2026. As a result of this lease extension agreement, we recognized an additional operating lease ROU asset and corresponding operating lease of $
The Company also recognizes ROU assets from finance leases in connection with its HSRR program. For certain customers in the HSRR program, the Company leases diagnostic testing equipment and then subleases the equipment to the customer. Finance lease ROU assets and finance lease liabilities are recognized at the lease commencement date, and at the sublease commencement date the finance lease ROU asset is derecognized and is recorded as cost of sales in the consolidated statements of operations. Derecognized finance lease ROU assets for the years ended December 31, 2021 and 2020 were $
The balance sheet presentation of our operating and finance leases is as follows:
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(dollars in thousands) | ||||||
Classification on the Consolidated Balance Sheet | December 31, 2021 | December 31, 2020 (1) | ||||
Assets: | ||||||
Operating lease right-of-use assets, net | $ | | $ | | ||
Finance lease right-of-use assets, net (2) | | | ||||
Total lease assets | $ | | $ | | ||
Liabilities: | ||||||
Current: | ||||||
Current maturities of operating lease liabilities | $ | | $ | | ||
Current maturities of finance lease liabilities | | | ||||
Noncurrent: | ||||||
Operating lease liabilities, less current maturities | | | ||||
Finance lease liabilities, less current maturities | | | ||||
Total lease liabilities | $ | | $ | | ||
As of December 31, 2021, the estimated future minimum lease payments, excluding non-lease components, are as follows:
(dollars in thousands) |
| Operating Leases | Finance Leases | Total | |||||
2022 | $ | | $ | | $ | | |||
2023 |
| |
| |
| | |||
2024 |
| |
| |
| | |||
2025 |
| |
| |
| | |||
2026 | | | | ||||||
Thereafter |
| — |
| — |
| — | |||
Total lease obligations |
| |
| |
| | |||
Less: Amount representing interest |
| ( |
| ( |
| ( | |||
Present value of net minimum lease obligations |
| |
| |
| | |||
Less, current portion |
| ( |
| ( |
| ( | |||
Long term portion | $ | | $ | | $ | | |||
Other information as of December 31, 2021 and 2020:
December 31, | December 31, | ||
2021 | 2020 | ||
Weighted-average remaining lease term (years): | |||
Operating leases | |||
Finance leases | |||
Weighted-average discount rate: | |||
Operating leases | |||
Finance leases |
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During the years ended December 31, 2021 and 2020, operating cash flows from operating leases was $
Operating Lease Costs
Operating lease costs were $
Finance Lease Costs
Finance lease amortization and interest expenses are included in the consolidated statements of operations for the years ended December 31, 2021 and 2020. The balances within these accounts are less than $
9. COMMITMENTS AND CONTINGENCIES
PURCHASE COMMITMENTS
The Company has entered into purchase commitments for reagents from suppliers. These agreements started in 2011 and run through 2025. The Company and the suppliers will true up the amounts on an annual basis. The future minimum purchase commitments under these and other purchase agreements are as follows:
Years ending December 31, |
| (dollars in thousands) | |
2022 | $ | | |
2023 |
| | |
2024 |
| | |
2025 |
| | |
2026 | — | ||
Thereafter | — | ||
$ | |
LITIGATIONS
The Company is involved in legal proceedings related to matters, which are incidental to its business. Also, the Company is delinquent on the payment of outstanding accounts payable for certain vendors and suppliers who have taken or have threatened to take legal action to collect such outstanding amounts. See below for a discussion on these matters.
CPA Global provides us with certain patent management services. On February 6, 2017, CPA Global claimed that we owe approximately $
LEGAL AND REGULATORY ENVIRONMENT
The healthcare industry is subject to numerous laws and regulations of federal, state and local governments. These laws and regulations include, but are not limited to, matters such as licensure, accreditation, government healthcare program participation requirement, reimbursement for patient services and Medicare and Medicaid fraud and abuse. Government activity has increased with respect to investigations and allegations concerning possible violations of fraud and abuse statutes and regulations by healthcare providers.
65
Violations of these laws and regulations could result in expulsion from government healthcare programs together with the imposition of significant fines and penalties, as well as significant repayments for patient services previously billed. Management believes that the Company is in compliance with fraud and abuse regulations, as well as other applicable government laws and regulations. While no material regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretation, as well as regulatory actions unknown or unasserted at this time.
10. INCOME TAXES
Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company’s net deferred tax assets relate primarily to its net operating loss carryforwards, allowance for doubtful accounts and stock-based compensation, offset by property and equipment and intangible assets. The Company has recorded a full valuation allowance to offset the net deferred tax assets, as it is more likely than not that the Company will not realize future benefits associated with these net deferred tax assets at December 31, 2021 and 2020.
At December 31, 2021 and 2020, the Company had net deferred tax assets of $
Dollars in Thousands | ||||||
| 2021 |
| 2020 | |||
Deferred tax assets: |
|
|
|
| ||
Net operating loss and credit carryforwards | $ | | $ | | ||
Allowance for doubtful accounts | | | ||||
Stock-based compensation |
| |
| | ||
Other |
| |
| | ||
Gross deferred tax assets |
| |
| | ||
Deferred tax liabilities: |
|
|
|
| ||
Property and equipment |
| ( |
| ( | ||
Intangible assets |
| ( |
| ( | ||
Other |
| ( |
| — | ||
Gross deferred tax liabilities |
| ( |
| ( | ||
Net deferred tax assets |
| |
| | ||
Less valuation allowance |
| ( |
| ( | ||
Net deferred liability | $ | | $ | | ||
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The Company’s provision for income taxes for the years ended December 31, 2021 and December 31, 2020 relates to income taxes in states and other jurisdictions and differs from the amounts determined by applying the statutory federal income tax rate to the loss before income taxes for the following reasons:
Dollars in Thousands | ||||||
2021 | 2020 | |||||
Benefit at federal rate | $ | ( | $ | ( | ||
Increase (decrease) resulting from: |
|
|
|
| ||
State income taxes—net of federal benefit |
| ( |
| ( | ||
Miscellaneous permanent differences |
| |
| | ||
Warrant liability revaluation |
| ( |
| ( | ||
Meals and entertainment | | | ||||
PPP Loan forgiven | ( | — | ||||
Income taxed to owners on Non-Controlling Interest (NCI) | ( | — | ||||
Change in valuation allowance |
| |
| | ||
Total income tax benefit | $ | — | $ | — | ||
The income tax expense consists of the following for the years ended December 31, 2021 and 2020.
Dollars in Thousands | ||||||
| 2021 |
| 2020 | |||
Federal: |
|
|
|
| ||
Current | $ | — | $ | — | ||
Deferred |
| — |
| — | ||
Total Federal | $ | — | $ | — | ||
State: |
|
|
|
| ||
Current | $ | — | $ | — | ||
Deferred |
| — |
| — | ||
Total State | $ | — | $ | — | ||
Foreign: |
|
|
|
| ||
Current | $ | — | $ | — | ||
Deferred |
| — |
| — | ||
Total Foreign | $ | — | $ | — | ||
Total Tax Provision | $ | — | $ | — | ||
The Company had available gross federal net operating loss (“NOL”) carryforwards of approximately $
67
At December 31, 2021, and as a result of the limitations under Section 382 of the Internal Revenue Code, the Company had a total of unused federal tax net operating loss carryforwards with expiration dates as follows:
Dollars in | |||
Thousands | |||
| 2021 | ||
2036 | $ | | |
2037 | | ||
Unlimited life |
| | |
Total Federal | $ | | |
The Company has adopted guidance on accounting for uncertainty in income taxes which clarified the accounting for income taxes by prescribing the minimum threshold a tax position is required to meet before being recognized in the financial statements as well as guidance on de-recognition, measurement, classification and disclosure of tax positions. There are no material uncertain tax positions that would require recognition in the financial statements. The Company is obligated to file income tax returns in the U.S. federal jurisdiction and various U.S. states. Since the Company had losses in the past, all prior years that generated NOLs are open and subject to audit examination in relation to the NOL generated from those years. Currently, there is an IRS exam in progress for 2019, which resulted in a change to the NOL carryforward. Our evaluation of uncertain tax positions was performed for the tax years open to examination.
11. STOCKHOLDERS’ EQUITY
Common Stock
Pursuant to our Third Amended and Restated Certificate of Incorporation, as amended, we currently have
During the year ended December 31, 2021, the Company issued
During the year ended December 31, 2021, the Company issued
During the year ended December 31 2021, the Company issued
During the year ended December 31, 2020, the Company issued
LP Purchase Agreement
On September 7, 2018, the Company entered into a purchase agreement (the “LP Purchase Agreement”) with Lincoln Park, pursuant to which Lincoln Park has agreed to purchase from the Company up to an aggregate of $
During the year ended December 31, 2020, the Company received $
68
LP 2020 Purchase Agreement
On March 26, 2020, the Company entered into a purchase agreement (the “LP 2020 Purchase Agreement”) and a registration rights agreement (the “LP 2020 Registration Rights Agreement”) with Lincoln Park pursuant to which Lincoln Park agreed to purchase from us, from time to time, up to $
As of the date of issuance of this Annual Report on Form 10-K, we have received an aggregate of $
At The Market Offering Agreement
On April 2, 2021, the Company entered into a sales agreement with A.G.P./Alliance Global Partners (“AGP”), pursuant to which the Company may offer and sell its common stock, par value $
The sale of our shares of Common Stock to or through AGP, will be made pursuant to the registration statement (the “Registration Statement”) on Form S-3 (File No. 333-237445), which was declared effective by the Securities and Exchange Commission (the “SEC”) on April 13, 2020, for an aggregate offering price of up to $
Under the AGP Sales Agreement, Shares may be sold by any method permitted by law deemed to be an “at the market offering.” AGP will also be able to sell shares of Common Stock by any other method permitted by law, including in negotiated transactions with the Company’s prior written consent. Upon delivery of a placement notice and subject to the terms and conditions of the AGP Sales Agreement, AGP is required to use its commercially reasonable efforts consistent with its normal trading and sales practices, applicable state and federal law, rules and regulations, and the rules of The Nasdaq Capital Market to sell the Shares from time to time based upon the Company’s instructions, including any price, time or size limits specified by the Company. AGP is not under any obligation to purchase any of the Shares on a principal basis pursuant to the AGP Sales Agreement, except as otherwise agreed by AGP and the Company in writing and expressly set forth in a placement notice. AGP’s obligations to sell the Shares under the AGP Sales Agreement are subject to satisfaction of certain conditions, including customary closing conditions. The Company is not obligated to make any sales of Shares under the AGP Sales Agreement and any determination by the Company to do so will be dependent, among other things, on market conditions and the Company’s capital raising needs.
69
The Company has agreed to pay AGP a cash fee of
During the year ended December 31, 2021, we received net proceeds of approximately $
Preferred Stock
The Company’s Board of Directors is authorized to issue up to
Series B Preferred Stock
The Company filed a Certificate of Designation of Preferences, Rights and Limitations of Series B Convertible Preferred Stock (“Series B Preferred Stock”) with the State of Delaware, which designates
The conversion price of the Series B Preferred Stock contains a down round feature. The Company will recognize the effect of the down round feature when it is triggered. At that time, the effect would be treated as a deemed dividend and as a reduction of income available to common shareholders in our basic earnings per share calculation.
The March 2020 Amendment, see Note 6 – Convertible Notes, triggered the down round feature of the Series B Preferred Stock and, as a result, the conversion price of the Company’s Series B Convertible Preferred Stock was automatically adjusted from $
There were
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Liquidation Preferences
The following is the liquidation preferences for the Company’s preferred stock;
Upon any liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary, the holders shall be entitled to receive out of the assets of the Corporation an amount equal to the par value, plus any accrued and unpaid dividends thereon, for each share of Preferred Stock before any distribution or payment shall be made to the holders of the Common Stock, and if the assets of the Corporation shall be insufficient to pay in full such amounts, then the entire assets to be distributed to the holders shall be ratably distributed among the holders in accordance with the respective amounts that would be payable on such shares. If all amounts were paid in full; and thereafter, the holders shall be entitled to receive out of the assets, whether capital or surplus, of the Corporation the same amount that a holder of Common Stock would receive if the Preferred Stock were fully converted to Common Stock which amount shall be paid pari passu with all holders of Common Stock.
Common Stock Warrants
The following represents a summary of the warrants outstanding as of December 31, 2021:
|
|
| Underlying |
| Exercise | ||||
Issue Year | Expiration | Shares | Price | ||||||
Warrants | |||||||||
(1) |
| 2017 |
| June 2022 |
| |
| $ | |
(1) | 2017 | June 2022 | | $ | | ||||
(2) |
| 2017 |
| June 2022 |
| |
| $ | |
(3) |
| 2017 |
| August 2022 |
| |
| $ | |
(4) |
| 2017 |
| August 2022 |
| |
| $ | |
(5) |
| 2017 |
| August 2022 |
| |
| $ | |
(5) | 2017 | August 2022 | | $ | | ||||
(6) |
| 2017 |
| August 2022 |
| |
| $ | |
(6) | 2017 | August 2022 | | $ | | ||||
(7) |
| 2017 |
| October 2022 |
| |
| $ | |
(8) | 2018 | October 2022 | | $ | | ||||
(9) | 2018 | April 2023 | | $ | | ||||
(9) | 2018 | April 2023 | | $ | | ||||
(10) | 2018 | October 2022 | | $ | | ||||
(11) | 2018 | July 2023 | | $ | | ||||
(11) | 2018 | July 2023 | | $ | | ||||
(11) | 2018 | August 2023 | | $ | | ||||
(11) | 2018 | August 2023 | | $ | | ||||
(11) | 2018 | September 2023 | | $ | | ||||
(11) | 2018 | September 2023 | | $ | | ||||
(12) | 2018 | November 2023 | | $ | | ||||
(12) | 2018 | December 2023 | | $ | | ||||
(13) | 2019 | April 2024 | | $ | | ||||
(14) | 2019 | May 2024 | | $ | | ||||
|
|
|
|
| |
|
| ||
| (1) | These warrants were issued in connection with the Merger. |
| (2) | These warrants were issued in connection with the Merger. |
| (3) | These warrants were issued in connection with an underwritten public offering completed on August 28, 2017 (the “August 2017 Offering”) and are the August 2017 Offering Warrants discussed below. |
| (4) | These warrants were issued in connection with the August 2017 Offering. |
| (5) | These warrants were issued in connection with the conversion of our Series A Senior stock, at the time of the closing of the August 2017 Offering. |
71
| (6) | These warrants were issued in connection with the conversion of convertible bridge notes, at the time of the closing of the August 2017 Offering, and are the Note Conversion Warrants discussed below. |
| (7) | These warrants were issued in connection with a waiver of default the Company received in the fourth quarter of 2017 in connection with certain convertible promissory notes and are the Convertible Promissory Note Warrants discussed below. |
| (8) | These warrants were issued in connection with the Debt Obligation settlement agreements and are the Creditor Warrants discussed below. |
| (9) | These warrants were issued in connection with the 2018 Note Agreement and are the April 2018 Warrants discussed below. |
| (10) | These warrants were issued in connection with the 2018 Note Agreement and are the Advisor Warrants discussed below. |
| (11) | These warrants were issued in connection with the 2018 Note Agreement and are the Q3 2018 Warrants discussed below. |
| (12) | These warrants were issued in connection with the 2018 Note Agreement, and subsequent Amendment Agreement, and are the Q4 2018 Warrants discussed below. |
| (13) | These warrants were issued in connection with the 2018 Note Agreement and subsequent Amendment No. 2 Agreement and are the April 2019 Warrants discussed below. |
| (14) | These warrants were issued in connection with the May 2019 Bridge Notes and are the May 2019 Warrants discussed below. |
During the years ended December 31, 2021 and 2020,
During the year ended December 31, 2021,
August 2017 Offering Warrants
In connection with the August 2017 Offering, the Company issued
As a result of the March 2020 Amendment, the exercise price of the August 2017 Offering Warrants was adjusted from $
Note Conversion Warrants
Upon the closing of the August 2017 Offering, the Company issued
As a result of the March 2020 Amendment, the exercise price of the Note Conversion Warrants was adjusted from $
Convertible Promissory Note Warrants
The Convertible Promissory Note Warrants had an original exercise price of $
72
As a result of the March 2020 Amendment, the exercise price of the Convertible Promissory Note Warrants was adjusted from $
Creditor Warrants
In the fourth quarter of 2017, the Company entered into Settlement Agreements with the Creditors pursuant to which the Company agreed to issue, to certain of its Creditors, warrants to purchase
April 2018 Warrants
In connection with the issuance of Bridge Notes in April 2018, the Company issued
During the year ended December 31, 2021,
Advisor Warrants
At the time of the 2018 Note Agreement, the Company issued
Q3 2018 Warrants
In connection with the issuance of Bridge Notes during the third quarter of 2018, the Company issued
There were
Q4 2018 Warrants
In connection with the issuance of the Bridge Notes during the fourth quarter of 2018, the Company issued
April 2019 Warrants
In connection with the issuance of the April 2019 Bridge Notes, the Company issued
May 2019 Warrants
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In connection with the issuance of the May 2019 Bridge Notes, the Company issued
Deemed Dividends
As discussed above, certain of our preferred stock and warrant issuances contain down round provisions which require us to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic earnings per share.
There were
Amount Recorded | |||
Deemed Dividends |
| (in thousands) | |
Dividends resulting from the March 2020 Amendment | |||
Deemed Dividend A | $ | | |
Deemed Dividend B | | ||
Deemed Dividend C | | ||
Deemed Dividend D | * | ||
For the year ended December 31, 2020 | $ | | |
* Represents less than one thousand dollars
12. FAIR VALUE
FASB guidance on fair value measurements, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements for our financial assets and liabilities, as well as for other assets and liabilities that are carried at fair value on a recurring basis in our consolidated financial statements.
FASB guidance establishes a three-level fair value hierarchy based upon the assumptions (inputs) used to price assets or liabilities. The three levels of inputs used to measure fair value are as follows:
Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2—Observable inputs other than those included in Level 1, such as quoted prices for similar assets and liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets; and
Level 3—Unobservable inputs reflecting our own assumptions and best estimate of what inputs market participants would use in pricing the asset or liability.
Common Stock Warrant Liabilities.
Certain of our issued and outstanding warrants to purchase shares of common stock do not qualify to be treated as equity and, accordingly, are recorded as a liability. We are required to record these instruments at fair value at each reporting date and changes are recorded as a non-cash adjustment to earnings. The gains or losses included in earnings are reported in other income (expense) in our consolidated statement of operations.
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2016 Warrant Liability
The Company has a warrant liability related to warrants issued in January 2016 (the “2016 Warrant Liability”) and it represents the fair value of such warrants, of which,
The 2016 Warrant Liability is considered a Level 3 financial instrument and was valued using the Black Scholes model. As of December 31, 2020, assumptions and inputs used in the valuation of the 2016 Warrant Liability include: remaining life to maturity of less than one month; annual volatility of
Bridge Note Warrant Liabilities
During 2019 and 2018, the Company issued warrants in connection with the issuance of Bridge Notes. All of these warrants issuances were classified as warrant liabilities (the “Bridge Note Warrant Liabilities”). See Note 6 - Convertible Notes for further discussion.
The Bridge Note Warrant Liabilities are considered Level 3 financial instruments and were valued using the Black Scholes model. As of December 31, 2021, assumptions used in the valuation of the Bridge Note Warrant Liabilities include: remaining life to maturity of
During the year ended December 31, 2021, the Company wrote-off $
During the years ended December 31, 2021 and 2020, the change in the fair value of the warrant liabilities measured using significant unobservable inputs (Level 3) were comprised of the following:
Dollars in Thousands | |||||||||
Year Ended December 31, 2021 | |||||||||
2016 Warrant | Bridge Note | Total Warrant | |||||||
| Liability |
| Warrant Liabilities |
| Liabilities | ||||
Beginning balance at January 1 | $ | | $ | | $ | | |||
Total losses: |
|
|
|
|
|
| |||
Revaluation recognized in earnings | – | ( | ( | ||||||
Deductions – warrant exercises and write-offs | ( | ( | ( | ||||||
Balance at December 31 | $ | – | $ | | $ | | |||
Year Ended December 31, 2020 | |||||||||
2016 Warrant | Bridge Note | Total Warrant | |||||||
| Liability |
| Warrant Liabilities |
| Liabilities | ||||
Beginning balance at January 1 | $ | | $ | | $ | | |||
Total losses: |
|
|
|
|
|
| |||
Revaluation recognized in earnings | | ( | ( | ||||||
Balance at December 31 | $ | | $ | | $ | | |||
13. EQUITY INCENTIVE PLAN
The Company currently issues stock awards under its 2017 Stock Option and Incentive Plan, as amended (the "2017 Plan") which will expire on June 5, 2027. The shares authorized for issuance under the 2017 Plan were
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lessor number of shares determined by the Company’s Board of Directors or Compensation Committee. During the year ended December 31, 2021, the shares authorized for issuance increased by
The Plan is administered by the Compensation Committee of the Board of Directors (the “Committee”), which has the authority to set the number, exercise price, term and vesting provisions of the awards granted under the Plan, subject to the terms thereof. Either incentive or non-qualified stock options may be granted to employees of the Company, but only non-qualified stock options may be granted to non-employee directors and advisors. However, in either case, the Plan requires that stock options must be granted at exercise prices not less than the fair market value of the common stock on the date of the grant. Options issued under the plan vest over periods as determined by the Committee and expire
Stock Options.
The Company accounts for all stock-based compensation payments to employees and directors, including grants of employee stock options, at fair value at the date of grant and expenses the benefit in operating expense in the consolidated statements of operations over the service period of the awards. The Company records the expense for stock-based compensation awards subject to performance-based milestone vesting over the remaining service period when management determines that achievement of the milestone is probable based on the expected satisfaction of the performance conditions as of the reporting date. The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option pricing model, which requires various assumptions including estimating stock price volatility, expected life of the stock option, risk free interest rate and estimated forfeiture rate.
During the year ended December 31, 2021, the Company granted stock options to purchase up to
The following table summarizes stock option activity under our plans during the year ended December 31, 2021:
| Number of |
| Weighted-Average | ||
Options | Exercise Price | ||||
Outstanding at January 1, 2021 |
| | $ | | |
Granted |
| |
| | |
Exercised | ( | | |||
Forfeited |
| ( |
| | |
Outstanding at December 31, 2021 |
| | $ | | |
Exercisable at December 31, 2021 |
| | $ | | |
As of December 31, 2021, there were
During the year ended December 31, 2020, there were
During the years ended December 31, 2021 and 2020, we recorded compensation expense for all stock awards of $
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14. SALES SERVICE REVENUE, NET AND ACCOUNTS RECEIVABLE
ASC Topic 606, “Revenue from contracts with customers”
The Company follows the guidance of ASC 606 for the recognition of revenue from contracts with customers to transfer goods and services. The Company performed a comprehensive review of its existing revenue arrangements following the five-step model:
Step 1: Identification of the contract with the customer. Sub-steps include determining the customer in a contract, initial contract identification and determining if multiple contracts should be combined and accounted for as a single transaction.
Step 2: Identify the performance obligation in the contract. Sub-steps include identifying the promised goods and services in the contract and identifying which performance obligations within the contract are distinct.
Step 3: Determine the transaction price. Sub-steps include variable consideration, constraining estimates of variable consideration, the existence of a significant financing component in the contract, noncash consideration and consideration payable to a customer.
Step 4: Allocate transaction price. Sub-steps include assessing the amount of consideration to which the Company expects to be entitled in exchange for transferring the promised goods or services to the customer.
Step 5: Satisfaction of performance obligations. Sub-steps include ascertaining the point in time when an asset is transferred to the customer and when the customer obtains control of the asset upon which time the Company recognizes revenue.
Nature of Contracts and Customers
The Company’s contracts and related performance obligations are similar for its customers and the sales process for all customers starts upon the receipt of requisition forms from the customers for patient diagnostic testing and the execution of contracts for biomarker testing and clinical research. Payment terms for the services provided are 30 days, unless separately negotiated.
Diagnostic testing
Control of the laboratory testing services is transferred to the customer at a point in time. As such, the Company recognizes revenue for laboratory testing services at a point in time based on the delivery method (web-portal access or fax) for the patient’s laboratory report, per the contract.
Clinical research grants
Control of the clinical research services are transferred to the customer over time. The Company will recognize revenue utilizing the “effort based” method, measuring its progress toward complete satisfaction of the performance obligation.
Biomarker testing and clinical project services
Control of the biomarker testing and clinical project services are transferred to the customer over time. The Company utilizes an “effort based” method of assessing performance and measures progress towards satisfaction of the performance obligation based upon the delivery of results.
The Company generates revenue from the provision of diagnostic testing provided to patients, biomarker testing provided to bio-pharma customers and clinical research grants funded by both bio-pharma customers and government health programs.
77
Reagents and other diagnostic products
Control of reagents and other diagnostic products are transferred to the customer at a point in time and, as such, the Company recognizes these revenues at a point in time based on the delivery method. These revenues include revenues from reagent sets for our HSRR program, COVID-19 antibody tests and other product sales and are included in other revenue in our consolidated statements of operations.
Equipment leasing
The Company accounts for sales-type leases within the scope of ASC 842, Leases, as ASC 606 specifically excludes leases from its guidance. The sales-type leases result in the derecognition of the underlying asset, the recognition of profit or loss on the sale, and the recognition of an investment in leased asset. Revenue from sales-type leases is recognized upfront on the commencement date of the lease, and is included in other revenue in our consolidated statements of operations. During the year ended December 31, 2021 and 2020, revenue from sales-type leases was $
Disaggregation of Revenues by Transaction Type
We operate in
For the Year Ended December 31, | ||||||||||||||||||
(dollars in thousands) | Diagnostic Testing | Biomarker Testing | Total | |||||||||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2021 |
| 2020 | |||||||
Medicaid | $ | | $ | | $ | — | $ | — | $ | | $ | | ||||||
Medicare |
| |
| |
| — |
| — |
| |
| | ||||||
Self-pay |
| |
| |
| — |
| — |
| |
| | ||||||
Third party payers |
| |
| |
| — |
| — |
| |
| | ||||||
Contract diagnostics |
| — |
| — |
| |
| |
| |
| | ||||||
Service revenue, net | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Revenue from the Medicare and Medicaid programs account for a portion of the Company’s patient diagnostic service revenue. Laws and regulations governing those programs are extremely complex and subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates will change by a material amount in the near term.
Revenue Recognition
Revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price using the expected value method based on historical experience. The Company does not typically enter arrangements where multiple contracts can be combined as the terms regarding services are generally found within a single agreement/requisition form. The Company derives its revenues from the following types of transactions: diagnostic testing (“Diagnostic”), revenues from the Company’s ICP technology and bio-pharma projects encompassing genetic diagnostics (collectively “Biomarker”), revenues from clinical research grants from state and federal research programs and diagnostic product sales, including revenues from equipment leases and reagent sales associated with our HSRR program.
78
Deferred revenue
Deferred revenue, or unearned revenue, refers to advance payments for products or services that are to be delivered in the future. The Company records such prepayment of unearned revenue as a liability, as revenue that has not yet been earned, but represents products or services that are owed to a customer. As the product or service is delivered over time, the Company recognizes the appropriate amount of revenue from deferred revenue. As of December 31, 2021 and 2020, the deferred revenue was $
Contractual Allowances and Adjustments
We are reimbursed by payers for services we provide. Payments for services covered by payers average less than billed charges. We monitor revenue and receivables from payers and record an estimated contractual allowance for certain revenue and receivable balances as of the revenue recognition date to properly account for anticipated differences between amounts estimated in our billing system and amounts ultimately reimbursed by payers. Accordingly, the total revenue and receivables reported in our consolidated financial statements are recorded at the amounts expected to be received from these payers. For service revenue, the contractual allowance is estimated based on several criteria, including unbilled claims, historical trends based on actual claims paid, current contract and reimbursement terms and changes in customer base and payer/product mix. The billing functions for the remaining portion of our revenue are contracted and fixed fees for specific services and are recorded without an allowance for contractual discounts. The following table presents our revenues initially recognized for each associated payer class during the years ended December 31, 2021 and 2020.
For the Year Ended December 31, | ||||||||||||||||||
(dollars in thousands) | Contractual Allowances and | Revenues, net of Contractual | ||||||||||||||||
Gross Revenues | adjustments | Allowances and adjustments | ||||||||||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2021 |
| 2020 | |||||||
Medicaid | $ | | $ | | $ | — | $ | — | $ | | $ | | ||||||
Medicare |
| |
| |
| — |
| — |
| |
| | ||||||
Self-pay |
| |
| |
| — |
| ( |
| |
| | ||||||
Third party payers |
| |
| |
| ( |
| ( |
| |
| | ||||||
Contract diagnostics |
| |
| |
| — |
| — |
| |
| | ||||||
| |
| |
| ( |
| ( |
| |
| | |||||||
Other |
| |
| |
| — |
| — |
| |
| | ||||||
$ | | $ | | $ | ( | $ | ( | $ | | $ | | |||||||
79
Allowance for Doubtful Accounts
The Company provides for a general allowance for collectability of services when recording net sales. The Company has adopted the policy of recognizing net sales to the extent it expects to collect that amount. Reference FASB 954-605-45-5 and ASU 2011-07, Health Care Entities: Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debt, and the Allowance for Doubtful Accounts. The change in the allowance for doubtful accounts is directly related to the increase in patient service revenues. The following table presents our reported revenues net of the collection allowance and adjustments for the years ended December 31, 2021 and 2020.
For the Year Ended December 31, | ||||||||||||||||||
Revenues, net of |
| |||||||||||||||||
(dollars in thousands) | Contractual Allowances | Allowances for doubtful |
| |||||||||||||||
and adjustments | accounts | Total | ||||||||||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2021 |
| 2020 | |||||||
Medicaid | $ | | $ | | $ | ( | $ | ( | $ | | $ | — | ||||||
Medicare |
| |
| |
| ( |
| ( |
| |
| | ||||||
Self-pay |
| |
| |
| — |
| — |
| |
| | ||||||
Third party payers |
| |
| |
| |
| ( |
| |
| | ||||||
Contract diagnostics |
| |
| |
| — |
| — |
| |
| | ||||||
| |
| |
| |
| ( |
| |
| | |||||||
Other |
| |
| |
| — |
| — |
| |
| | ||||||
$ | | $ | | $ | | $ | ( | $ | | $ | | |||||||
Costs to Obtain or Fulfill a Customer Contract
Sales commissions are expensed when incurred because the amortization period would have been one year or less. These costs are recorded in operating expenses in the consolidated statements of operations.
Shipping and handling costs are comprised of inbound and outbound freight and associated labor. The Company accounts for shipping and handling activities related to contracts with customers as fulfillment costs which are included in cost of sales in the consolidated statements of operations.
Accounts Receivable
The Company has provided an allowance for potential credit losses, which has been determined based on management’s industry experience. The Company grants credit without collateral to its patients, most of who are insured under third party payer agreements.
The following summarizes the mix of receivables as of December 31, 2021 and 2020:
(dollars in thousands) |
| December 31, 2021 |
| December 31, 2020 | ||
Medicaid | $ | | $ | | ||
Medicare |
| |
| | ||
Self-pay |
| |
| | ||
Third party payers |
| |
| | ||
Contract diagnostic services and other |
| |
| | ||
$ | | $ | | |||
Less allowance for doubtful accounts |
| ( |
| ( | ||
Accounts receivable, net | $ | | $ | | ||
80
The following table presents the roll-forward of the allowance for doubtful accounts for the year ended December 31, 2021:
|
| Allowance for | ||||
Doubtful | ||||||
(dollars in thousands) | Accounts | |||||
Balance, January 1, 2021 |
|
| $ | ( | ||
Collection Allowance: |
|
|
|
| ||
Medicaid | $ | ( |
|
| ||
Medicare |
| ( |
|
| ||
Third party payers |
| |
|
| ||
| |
|
| |||
Bad debt expense | $ | ( |
|
| ||
Total charges |
|
|
| | ||
Write-offs | | |||||
Balance, December 31, 2021 |
|
| $ | ( | ||
Customer Revenue and Accounts Receivable Concentration
Customer revenue and accounts receivable concentration amounted to the following for the identified periods.
Net sales | Accounts receivable, as of | ||||||||
Years Ended | |||||||||
December 31, | December 31, | December 31, | |||||||
2021 | 2020 | 2021 | 2020 | ||||||
Customer A | * | * | % | * | |||||
Customer B | * | * | % | * | |||||
* represents less than 10% | |||||||||
15. SUBSEQUENT EVENTS
The Company has evaluated events and transactions subsequent to December 31, 2021 through the date the consolidated financial statements were issued. Outside of the items noted below, there are no other events to report other than what has been disclosed in the consolidated financial statements.
Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers
On March 21, 2022, the Company announced the retirement of its Chief Financial Officer, Carl Iberger (age 69), effective immediately due to personal family reasons. Mr. Iberger did not advise the Company or the Board of Directors of any disagreement with the Company on any matter relating to its operations, policies or practices.
On March 21, 2022, the Company together with the Board of Directors of the Company promoted and appointed Matthew Gage (age 55) as the Company’s Interim Chief Financial Officer effective March 21, 2022. Mr. Gage previously held the position of Director of Financial Reporting and Analysis with the Company.
81
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
We maintain a system of disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Commission’s rules and forms, and to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
Our management, including our Chief Executive Officer and Interim Chief Financial Officer, does not expect that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) (“Disclosure Controls”) will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. We monitor our Disclosure Controls and make modifications as necessary; our intent in this regard is that the Disclosure Controls will be modified as systems change and conditions warrant.
An evaluation of the effectiveness of the design and operation of our Disclosure Controls was performed as of the end of the period covered by this Report. This evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Interim Chief Financial Officer. Based on this evaluation, we concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of December 31, 2021.
(b) Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). In order to evaluate the effectiveness of internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002, our management, with the participation of our principal executive officer and principal financial officer has conducted an assessment, including testing, using the criteria in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) (2013). Our system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. This assessment included review of the documentation of controls, evaluation of the design effectiveness of controls, testing of the operating effectiveness of controls and a conclusion on this evaluation.
Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2021.
82
(c) Changes in internal control over financial reporting
There were no changes in our internal control over financial reporting during the fiscal quarter ended December 31, 2021, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
As a smaller reporting company, the Company is not required to include in this Annual Report a report on the effectiveness of internal control over financial reporting by the Company’s independent registered public accounting firm.
Item 9B. Other Information
None.
Item 9C. Foreign Jurisdictions that Prevent Inspections
Not applicable.
83
Part III
Item 10. Directors, Executive Officers and Corporate Governance
We intend to file with the Securities and Exchange Commission a definitive Proxy Statement, which we refer to herein as the 2022 Proxy Statement, not later than 120 days after the close of the fiscal year ended December 31, 2021. The information required by this item is incorporated herein by reference to the 2022 Proxy Statement. The information required by this item related to the executive officers can be found in the section captioned “Executive Officers of the Registrant” under Part I, “Item 1. Our Business” of this Annual Report on Form 10-K, and is also incorporated herein by reference.
Item 11. Executive Compensation
The information required by this item is incorporated herein by reference to the 2022 Proxy Statement to be filed with the SEC within 120 days after the year ended December 31, 2021.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated herein by reference to the 2022 Proxy Statement to be filed with the SEC within 120 days after the year ended December 31, 2021.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated herein by reference to the 2022 Proxy Statement to be filed with the SEC within 120 days after the year ended December 31, 2021.
Item 14. Principal Accountant Fees and Services
The information required by this item is incorporated herein by reference to the 2022 Proxy Statement to be filed with the SEC within 120 days after the year ended December 31, 2021.
84
Part IV
Item 15. Exhibits, Financial Statement Schedules
| (a) | The following documents are filed as part of this report: |
1 Financial Statements. The following financial statements of the Registrant are included in response to Item 8 of this report:
Report of Independent Registered Public Accounting Firm.
Consolidated Balance Sheets of the Registrant and Subsidiary as of December 31, 2021 and 2020.
Consolidated Statements of Operations of the Registrant and Subsidiary for the years ended December 31, 2021 and 2020.
Consolidated Statements of Stockholders’ Equity of the Registrant and Subsidiary for the years ended December 31, 2021 and 2020.
Consolidated Statements of Cash Flows of the Registrant and Subsidiary for the years ended December 31, 2021 and 2020.
Notes to Consolidated Financial Statements of the Registrant and Subsidiary.
2 Financial Statement Schedules.
All financial statement schedules are omitted because the information is inapplicable or presented in the notes to the financial statements.
3 Exhibits. The following exhibits are filed as required by Item 15(a)(3) of this report. Exhibit numbers refer to the paragraph numbers under Item 601 of Regulation S-K:
2.1 | |
2.2 | |
2.3 | |
3.1 | |
3.2 | |
3.3 | |
3.4 | |
3.5 | |
3.6 |
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4.1 | |
4.2 | |
4.3 | |
4.4 | |
4.5 | |
4.6 | |
4.7 | |
10.1 | |
10.2† | |
10.3† | |
10.4† | |
10.5† | |
10.6 | |
10.7 | |
10.8# | |
10.9 | |
10.10 | |
10.11 | |
10.12 | |
10.13 | |
10.14† | |
10.15† | |
10.16† | |
10.17† | |
21.1 | |
23.1 | |
31.1 |
86
31.2 | |
32.1* | |
32.2* | |
101.INS | XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
101.SCH | XBRL Taxonomy Extension Schema Document |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
104 | Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
* This certification is not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Registrant specifically incorporates it by reference.
# Confidential treatment has been requested or granted for certain information contained in this exhibit. Such information has been omitted and filed separately with the Securities and Exchange Commission.
† Indicates a management contract or any compensatory plan, contract or arrangement.
Item 16. Form 10-K Summary
None.
87
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on this 30th day of March 2022.
Precipio, Inc. | |||
By: | /s/ ILAN DANIELI | ||
Ilan Danieli, Chief Executive Officer (Principal Executive Officer) | |||
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature |
| Title |
| Date |
|
|
| ||
/s/ Ilan Danieli |
| Director and Chief Executive Officer | March 30, 2022 | |
Ilan Danieli |
| (Principal Executive Officer) | ||
|
|
| ||
/s/ Matthew Gage |
| Interim Chief Financial Officer | March 30, 2022 | |
Matthew Gage |
| (Principal Financial and Accounting Officer) | ||
|
|
| ||
/s/ Richard Sandberg |
| Chairman of the Board of Directors | March 30, 2022 | |
Richard Sandberg |
|
| ||
/s/ Kathleen LaPorte |
| Director | March 30, 2022 | |
Kathleen LaPorte | ||||
|
|
| ||
/s/ Ronald Andrews |
| Director | March 30, 2022 | |
Ronald Andrews |
|
| ||
|
|
| ||
/s/ Douglas Fisher, M.D. |
| Director | March 30, 2022 | |
Douglas Fisher, M.D. |
|
| ||
|
|
| ||
/s/ Jeffrey Cossman, M.D. |
| Director | March 30, 2022 | |
Jeffrey Cossman, M.D. |
|
| ||
|
|
| ||
/s/ David Cohen |
| Director | March 30, 2022 | |
David Cohen |
|
|
88
Exhibit 21.1
SUBSIDIARIES OF REGISTRANT
Name | State of Incorporation or Organization |
Precipio Diagnostics, LLC | Delaware |
Precipio SPV, Inc. | Delaware |
Exhibit 23.1
Independent Registered Public Accounting Firm’s Consent
We consent to the incorporation by reference in the Registration Statement of Precipio, Inc. on Form S-8 file nos. 333-222819, 333-41714, 333-69334, 333-139999, 333-71866, 333-196712 and 333-221804, and Form S-3 file nos. 333-200313, 333-201907, 333-205793, 333-209111, 333-209112, 333-229525 and 333-237445, of our report, which includes an explanatory paragraph as to the Company’s ability to continue as a going concern, dated March 30, 2022, with respect to our audits of the consolidated financial statements of Precipio, Inc. as of December 31, 2021 and 2020 and for the years ended December 31, 2021 and 2020, which report is included in this Annual Report on Form 10-K of Precipio, Inc. for the year ended December 31, 2021.
/s/ Marcum LLP
Marcum LLP
Hartford, CT
March 30, 2022
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Ilan Danieli, certify that:
| 1. | I have reviewed this Annual Report on Form 10-K of Precipio, Inc. (the Registrant); |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiary, is made known to me by others within those entities, particularly during the period in which this report is being prepared; |
| b) | Designed such internal control over financial reporting, or caused internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d) | Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and |
| 5. | The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the equivalent function): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. |
Date: March 30, 2022
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, Matthew Gage, certify that:
| 1. | I have reviewed this Annual Report on Form 10-K of Precipio, Inc. (the Registrant); |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | Designed such internal control over financial reporting, or caused internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d) | Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and |
| 5. | The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the equivalent function): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. |
Date: March 30, 2022
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
In connection with the accompanying Annual Report on Form 10-K of Precipio, Inc. for the period ended December 31, 2021, I, Ilan Danieli, Chief Executive Officer of Precipio, Inc., hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that:
| (1) | Such Annual Report on Form 10-K of Precipio, Inc. for the period ended December 31, 2021, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| (2) | The information contained in such Annual Report on Form 10-K of Precipio, Inc. for the period ended December 31, 2021, fairly presents, in all material respects, the financial condition and results of operations of Precipio, Inc. |
Date: March 30, 2022
A signed original of the certification required by Section 906 has been provided to Precipio, Inc. and will be retained by Precipio, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
In connection with the accompanying Annual Report on Form 10-K of Precipio, Inc. for the period ended December 31, 2021, I, Matthew Gage, Interim Chief Financial Officer of Precipio, Inc., hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that:
| (1) | Such Annual Report on Form 10-K of Precipio, Inc. for the period ended December 31, 2021, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| (2) | The information contained in such Annual Report on Form 10-K of Precipio, Inc. for the period ended December 31, 2021, fairly presents, in all material respects, the financial condition and results of operations of Precipio, Inc. |
Date: March 30, 2022
A signed original of the certification required by Section 906 has been provided to Precipio, Inc. and will be retained by Precipio, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
CONSOLIDATED BALANCE SHEETS (Parenthetical) $ in Thousands |
Dec. 31, 2021
USD ($)
$ / shares
shares
|
|---|---|
| Statement of Financial Position [Abstract] | |
| Preferred stock, par value (in dollars per share) | $ / shares | $ 0.01 |
| Preferred stock, shares authorized (in shares) | 15,000,000 |
| Preferred stock, shares issued (in shares) | 47 |
| Preferred stock, shares outstanding (in shares) | 47 |
| Preferred stock, liquidation preference | $ | $ 186 |
| Common stock, par value | $ / shares | $ 0.01 |
| Common stock, shares authorized (in shares) | 150,000,000 |
| Common stock, shares issued (in shares) | 22,708,442 |
| Common stock, shares outstanding (in shares) | 22,708,442 |
BUSINESS DESCRIPTION |
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| BUSINESS DESCRIPTION [Abstract] | ||||
| BUSINESS DESCRIPTION | PRECIPIO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 2021 and 2020 1. BUSINESS DESCRIPTION Business Description. Precipio, Inc., and its subsidiaries, (collectively, “we”, “us”, “our”, the “Company” or “Precipio is a healthcare solutions company focused on cancer diagnostics. The Company’s business mission is to address the pervasive problem of cancer misdiagnoses by developing solutions to mitigate the root causes of this problem in the form of diagnostic products, reagents and services. Misdiagnoses originate from aged commercial diagnostic cancer testing technologies, lack of subspecialized expertise, and sub-optimal laboratory processes that are needed in today’s diagnostic cancer testing in order to provide accurate, rapid, and resource-effective results to treat patients. Industry studies estimate 1 in 5 blood-cancer patients are misdiagnosed. As cancer diagnostic testing has evolved from cellular to molecular (genes and exons), laboratory testing has become extremely complex, requiring even greater diagnostic precision, attention to process and a more appropriate evaluation of the abundance of genetic data to effectively gather, consider, analyze and present information for the physician for patient treatment. Precipio sees cancer diagnostics as requiring a holistic approach to improve diagnostic data for improved interpretations with the intent to reduce misdiagnoses. By delivering diagnostic products, reagents and services that improve the accuracy and efficiency of diagnostics, leading to fewer misdiagnoses, we believe patient outcomes can be improved through the selection of appropriate therapeutic options. Furthermore, we believe that better patient outcomes will have a positive impact on healthcare expenses as misdiagnoses are reduced. Better Diagnostic Results – Better Patient Outcome – Lower Healthcare Expenditures. To deliver its strategy, the Company has structured its organization in order to drive development of diagnostic products. Laboratory and R&D facilities located in New Haven, Connecticut and Omaha, Nebraska house development teams that collaborate on new products and services. The Company operates CLIA laboratories in both the New Haven, Connecticut and Omaha, Nebraska locations providing essential blood cancer diagnostics to office-based oncologists in many states nationwide. To deliver on our strategy of mitigating misdiagnoses we rely heavily on our CLIA laboratory to support R&D beta-testing of the products we develop, in a clinical environment. Our operating structure promotes the harnessing of our proprietary technology and genetic diagnostic expertise to bring to market the Company’s robust pipeline of innovative solutions designed to address the root causes of misdiagnoses. Joint Venture. In April 2020, the Company formed a joint venture with Poplar Healthcare PLLC (“Poplar”), which we refer to as the “Joint Venture”. The Joint Venture was formed by the Limited Liability Company Agreement of Precipio Oncometrix LLC, a Delaware limited liability company (“POC”), which was entered into as of April 11, 2020 (the “Effective Date”), by and among POC, Poplar, and Precipio SPV Inc. (“Precipio SPV”), a newly formed subsidiary of the Company, together with such other persons who from time to time become party to the Limited Liability Company Agreement by executing a counterpart signature page in accordance with the terms hereof. POC was formed as a limited liability company on April 2, 2020 in accordance with the statutes and laws of the State of Delaware relating to limited liability companies. Precipio SPV was incorporated in the State of Delaware on March 10, 2020 for the sole purpose of being a party to the Joint Venture. Under the terms of the Joint Venture, Precipio SPV has a 49% ownership interest in the Joint Venture, with Poplar having a 51 % ownership. Pursuant to the Limited Liability Company Agreement, Poplar, at any time, has the right to require Precipio SPV to purchase all, but not less than all, of Poplar’s shares in the Joint Venture (the “Poplar Put Right”). The purchase price for Poplar’s shares shall be $1.00 per share, or fifty-one dollars, and Precipio SPV would, therefore, become the sole 100% owner of the Joint Venture at the time the Poplar Put Right became effective. The Company has determined that it holds a variable interest in the Joint Venture and is the primary beneficiary of the variable interest entity (“VIE”). See Note 2 - Summary of Significant Accounting Policies for further discussion regarding consolidation of variable interest entities. The business purpose of the Joint Venture is to facilitate and capitalize on the combined capabilities, resources and healthcare industry relationships of its members by partnering, promoting and providing oncology services to office based physicians, hospitals and medical centers. Operational services of the Joint Venture are performed entirely by its members and employees of its members. Precipio SPV’s responsibilities include product and account management services, selling & marketing, laboratory diagnostic services and general & administrative services. Precipio SPV is entitled to a management fee for the services it provides. This management fee is established through service agreements which were executed in conjunction with the formation of the Joint Venture. Poplar receives a similar fee for the billing services that it provides. Going Concern. The consolidated financial statements have been prepared using accounting principles generally accepted in the United States of America (“GAAP”) applicable for a going concern, which assume that the Company will realize its assets and discharge its liabilities in the ordinary course of business. The Company has incurred substantial operating losses and has used cash in its operating activities for the past several years. As of December 31, 2021, the Company had a net loss of $8.5 million, working capital of $9.3 million and net cash used in operating activities of $6.6 million. The Company’s ability to continue as a going concern, for the next twelve months from the date of issuance of these consolidated financial statements in this Annual Report on Form 10-K, is dependent upon a combination of achieving its business plan, including generating additional revenue and avoiding potential business disruption due to the novel coronavirus (“COVID-19”) pandemic, and raising additional financing to meet its debt obligations and paying liabilities arising from normal business operations when they come due. To meet its current and future obligations the Company has taken the following steps to capitalize the business and successfully achieve its business plan:
Notwithstanding the aforementioned circumstances, there remains substantial doubt about the Company’s ability to continue as a going concern for the next twelve months from the date these consolidated financial statements were issued. There can be no assurance that the Company will be able to successfully achieve its initiatives summarized above in order to continue as a going concern over the next twelve months from the date of issuance of this Annual Report Form 10-K. The accompanying financial statements have been prepared assuming the Company will continue as a going concern and do not include any adjustments that might result should the Company be unable to continue as a going concern as a result of the outcome of this uncertainty. |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
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| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation. The consolidated financial statements include the accounts of Precipio, Inc. and our wholly owned subsidiaries, and the Joint Venture which is a VIE in which we are the primary beneficiary. Refer to the section titled “Consolidation of Variable Interest Entities” for further information related to our accounting for the Joint Venture. All inter-company balances and transactions have been eliminated in consolidation. Use of Estimates. The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. The most significant estimates and assumptions with regard to these consolidated financial statements relate to the allowance for doubtful accounts, assumptions used within the fair value of debt and equity transactions and contractual allowances. These assumptions require considerable judgment by management. Actual results could differ from the estimates and assumptions used in preparing these consolidated financial statements. Reclassifications. Certain prior period amounts of property and equipment, net and operating lease right-of-use (“ROU”) assets have been reclassified to finance lease right-of-use assets to conform to the current period presentation. These reclassifications had no effect on previously reported net earnings or total assets. As of December 31, 2020, the amounts reclassified to finance lease right-of-use assets were $0.2 million of property and equipment, net and less than $0.1 million of operating lease right-of-use assets Risks and Uncertainties. Certain risks and uncertainties are inherent in our day-to-day operations and in the process of preparing our financial statements. The risks and uncertainties may be heightened by the COVID-19 pandemic and any worsening of the global business and economic environment as a result. The more significant of those risks are presented below and throughout the notes to the consolidated financial statements. The Company operates in the healthcare industry which is subject to numerous laws and regulations of federal, state and local governments. These laws and regulations include, but are not necessarily limited to, matters such as licensure, accreditation, government healthcare program participation requirements, reimbursement for patient services, and Medicare and Medicaid fraud and abuse. Government activity has increased with respect to investigations and allegations concerning possible violations of fraud and abuse statutes and regulations by healthcare providers. Violations of these laws and regulations could result in expulsion from government healthcare programs together with the imposition of significant fines and penalties, as well as significant repayments for patient services previously billed. Management believes that the Company is in compliance with fraud and abuse regulations, as well as other applicable government laws and regulations. While no material regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretation as well as regulatory actions unknown or unasserted at this time. Fair Value. Unless otherwise specified, book value approximates fair value. The common stock warrant liabilities are recorded at fair value. See Note 12 - Fair Value for additional information. Other Current Assets. Other current assets of $0.5 million as of December 31, 2021 include prepaid insurance of approximately $0.3 million and prepaid and other assets of $0.2 million. Other current assets of $0.3 million as of December 31, 2020 include prepaid insurance of $0.3 million and prepaid assets and other receivables of less than $0.1 million. Concentrations of Risk. From time to time, we may maintain a cash position with financial institutions in amounts that exceed Federal Deposit Insurance Corporation insured limits of up to $250,000 per depositor per financial institution. We have not experienced any losses on such accounts as of December 31, 2021. Service companies in the health care industry typically grant credit without collateral to patients. The majority of these patients are insured under third-party insurance agreements. The services provided by the Company are routinely billed utilizing the Current Procedural Terminology (CPT) code set designed to communicate uniform information about medical services and procedures among physicians, coders, patients, accreditation organizations, and payers for administrative, financial, and analytical purposes. CPT codes are currently identified by the Centers for Medicare and Medicaid Services and third-party payers. The Company utilizes CPT codes for Pathology and Laboratory Services contained within codes 80000-89398. Inventories. Inventories consist of laboratory supplies and are valued at cost (determined on an average cost basis, which approximates the first-in, first-out method) or net realizable value, whichever is lower. We evaluate inventory for items that are slow moving or obsolete and record an appropriate reserve for obsolescence if needed. We have an allowance for slow moving or obsolete inventory of less than $0.1 million and zero at December 31, 2021 and 2020, respectively. Property and Equipment, net. Property and equipment are carried at cost, net of accumulated depreciation and amortization. Expenditures for maintenance and repairs are expensed as incurred. Depreciation and amortization are computed by the straight-line method over the estimated useful lives of the related assets as follows:
For assets sold or otherwise disposed of, the cost and related accumulated depreciation and amortization are removed from the accounts, and any related gain or loss is reflected in operations for the period. Expenditures for major betterments that extend the useful lives of property and equipment are capitalized. Intangible Assets. We review our amortizable long-lived assets for impairment annually or whenever events indicate that the carrying amount of the asset (group) may not be recoverable. An impairment loss may be needed if the sum of the future undiscounted cash flows is less than the carrying amount of the asset (group). The amount of the loss would be determined by comparing the fair value of the asset to the carrying amount of the asset (group). There were no impairment charges on our amortizable long-lived assets during the years ended December 31, 2021 and 2020. Debt Issuance Costs, Debt Discounts and Debt Premiums. Debt issuance costs, debt discounts and debt premiums are being amortized or accreted over the lives of the related financings on a basis that approximates the effective interest method. Costs and discounts are presented as a reduction of the related debt and premiums are presented as an increase to the related debt in the accompanying balance sheets. The amortization amount recorded was expense, net of income, of less than $0.1 million and $0.3 million for the years ended December 31, 2021 and 2020, respectively. Debt discounts and debt premiums are amortized or accreted to interest expense and interest income on the consolidated statements of operations, respectively. See Note 5 – Long Term Debt and Note 6 – Convertible Notes for further discussion. Stock-Based Compensation. All stock-based awards to date have exercise prices equal to the market price of our common stock on the date of grant and have ten-year contractual terms. Stock-based compensation cost is based on the fair value of the portion of stock-based awards that is ultimately expected to vest. The Company utilizes the Black-Scholes option pricing model for determining the estimated fair value for stock-based awards. Unvested awards as of December 31, 2021 had vesting periods of up to four years from the date of grant. At December 31, 2021 and 2020, zero and 53,334 unvested awards outstanding are subject to performance vesting conditions, respectively. No awards outstanding at December 31, 2021 and 2020, respectively, are subject to market-based vesting. Net Sales Recognition. Revenue recognition occurs when a customer obtains control of the promised goods and service. Revenue assigned to the goods and services reflects the consideration which the Company expects to receive in exchange for those goods and services. The Company derives its revenues from diagnostic testing - histology, flow cytometry, cytology and molecular testing; clinical research from bio-pharma customers, state and federal grant programs; biomarker testing from bio-pharma customers and from other product sales including revenues from equipment leases and reagent sales associated with our HSRR program. All sources of revenue are recorded net of accruals for estimated chargebacks, rebates, cash discounts, other allowances, and returns. Due to differences in the substance of these revenue types, the transactions require, and the Company utilizes, different revenue recognition policies for each. See more detailed information on revenue in Note 14 – Sales Service Revenue, Net And Accounts Receivable. The Company recognizes revenue utilizing the five-step framework of ASC 606. Control of the laboratory testing services is transferred to the customer at a point in time. As such, the Company recognizes revenue for diagnostic testing at a point in time based on the delivery method (web-portal access or fax) for a patient’s laboratory report. Diagnostic testing service revenue is reported at the estimated net realizable amounts from patients, third-party payers and others for services rendered, including retroactive adjustment under reimbursement agreements with third-party payers. Provisions for third-party payer settlements are provided in the period in which the related services are rendered and adjusted in the future periods, as final settlements are determined. For clinical research and biomarker services, the Company utilizes an “effort based” method of assessing performance and measures progress towards satisfaction of the performance obligation based upon the delivery of results per the contract. Control of reagents and other diagnostic products are transferred to the customer at a point in time and, as such, the Company recognizes these revenues at a point in time based on the delivery method. When we receive payment in advance, we initially defer the revenue and recognize it when we deliver the service. Taxes collected from customers and remitted to government agencies for specific net sales producing transactions are recorded net with no effect on the statements of operations. Accounts Receivable Accounts Receivable result from diagnostic services provided to self-pay and insured patients, project based testing services and clinical research. The payment for services provided by the Company are generally due within 30 days from the invoice date. Accounts receivable are reduced by an allowance for doubtful accounts. In evaluating the collectability of accounts receivable, the Company analyzes and identifies trends for each of its sources of revenue to estimate the appropriate allowance for doubtful accounts. For receivables associated with self-pay patients, including patients with insurance and a deductible and copayment, the Company records an allowance for doubtful accounts in the period of services on the basis of past experience of patients unable or unwilling to pay for service fee for which they are financially responsible. For receivables associated with services provided to patients with third-party coverage, the Company analyzes contractually due amounts and provides an allowance, if necessary. The difference between the standard rates and the amounts actually collected after all reasonable collection efforts have been exhausted is charged against the allowance for doubtful accounts. Presentation of Insurance Claims and Related Insurance Recoveries. The Company accounts for its insurance claims and related insurance recoveries at their gross values as standards for health care entities do not allow the Company to net insurance recoveries against the related claim liabilities. There were no insurance claims or insurance recoveries recorded during the years ended December 31, 2021 and 2020. Advertising Costs. Advertising costs are expensed as incurred and are included in operating expenses on the consolidated statements of operations. Advertising costs charged to operations totaled approximately $0.1 million in 2021 and 2020, respectively. Research and Development Costs. All costs associated with internal research and development are expensed as incurred. These costs include salaries and employee related expenses, operating supplies and facility-related expenses. Research and development costs charged to operations totaled $1.3 million and $1.2 million for the years ended December 31, 2021 and 2020, respectively. Income Taxes. Deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax basis of assets and liabilities at each balance sheet date using tax rates expected to be in effect in the year the differences are expected to reverse. The effect on the deferred tax assets and liabilities of a change in tax rates is recognized in the period when the change in tax rates is enacted. A valuation allowance is established when it is determined that it is more likely than not that some portion or all of the deferred tax assets will not be realized. A full valuation allowance has been applied against the Company’s net deferred tax assets as of December 31, 2021 and 2020, due to projected losses and because it is not more likely than not that the Company will realize future benefits associated with these deferred tax assets. Management’s conclusions regarding uncertain tax positions may be subject to review and adjustment at a later date based upon ongoing analysis of, or changes in tax laws, regulations and interpretations thereof as well as other factors. The Company’s policy is to record interest and penalties directly related to income taxes as income tax expense in the accompanying consolidated statements of operations, of which there was none for the years ended December 31, 2021 and 2020. Common Stock Warrants. The Company classifies the issuance of common stock warrants as equity any contracts that (i) require physical settlement or net-stock settlement or (ii) gives the Company a choice of net-cash settlement or settlement in its own stocks (physical settlement or net-stock settlement). The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net-cash settle the contract if an event occurs and if that event is outside of the Company’s control), or (ii) gives the counterparty a choice of net-cash settlement or settlement in stock (physical settlement or net-stock settlement). Certain of our issued and outstanding warrants to purchase common stock do not qualify to be treated as equity and accordingly, are recorded as a liability (“Common Stock Warrant Liability”). We are required to present these instruments at fair value at each reporting date and any changes in fair values are recorded as an adjustment to earnings. Beneficial Conversion Features. The intrinsic value of a beneficial conversion feature (“BCF”) inherent to a convertible note payable, which is not bifurcated and accounted for separately from the convertible note payable and may not be settled in cash upon conversion, is treated as a discount to the convertible note payable. This discount is amortized over the period from the date of issuance to the first conversion date using the effective interest method. If the note payable is retired prior to the end of its contractual term, the unamortized discount is expensed in the period of retirement to interest expense. In general, the BCF is measured by comparing the effective conversion price, after considering the relative fair value of detachable instruments included in the financing transaction, if any, to the fair value of the common shares at the commitment date to be received upon conversion. Deemed dividends are also recorded for the intrinsic value of conversion options embedded in preferred shares based upon the differences between the fair value of the underlying common stock at the commitment date of the transaction and the effective conversion price embedded in the preferred shares. When the preferred shares are non-redeemable the BCF is fully amortized into additional paid-in capital and preferred discount. If the preferred shares are redeemable, the discount is amortized from the commitment date to the first conversion date. Consolidation of Variable Interest Entities. We evaluate any entity in which we are involved to determine if the entity is a VIE and if so, whether we hold a variable interest and are the primary beneficiary. We consolidate VIEs that are subject to assessment when we are deemed to be the primary beneficiary of the VIE. The process for determining whether we are the primary beneficiary of the VIE is to conclude whether we are a party to the VIE holding a variable interest that meets both of the following criteria: (1) has the power to make decisions that most significantly affect the economic performance of the VIE, and (2) has the obligation to absorb losses or the right to receive benefits that in either case could potentially be significant to the VIE. We have determined that we hold a variable interest in the Joint Venture, have the power to make significant operational decisions on behalf of the VIE and also have the obligation to absorb the majority of the losses from the VIE. As such we have also determined that we are the primary beneficiary of the VIE. The following table presents information about the carrying value of the assets and liabilities of the Joint Venture which we consolidate and which are included on our consolidated balance sheets. Intercompany balances are eliminated in consolidation and not reflected in the following table.
Loss Per Share. Basic loss per share is calculated based on the weighted-average number of common shares outstanding during each period. Diluted loss per share includes shares issuable upon exercise of outstanding stock options, warrants or conversion rights that have exercise or conversion prices below the market value of our common stock. Options, warrants and conversion rights pertaining to 3,584,688 and 1,846,989 shares of our common stock have been excluded from the computation of diluted loss per share at December 31, 2021 and 2020, respectively, because the effect is anti-dilutive due to the net loss. The following table summarizes the outstanding securities not included in the computation of diluted net loss per share:
Recently Adopted Accounting Pronouncements. In December 2019, the FASB issued Accounting Standards Update (“ASU”) 2019-12 “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”, which is intended to improve consistent application and simplify the accounting for income taxes. This ASU removes certain exceptions to the general principles in Topic 740 and clarifies and amends existing guidance. The Company adopted this guidance on January 1, 2021. The adoption of this standard was not material to our consolidated financial statements. Recent Accounting Pronouncements Not Yet Adopted. In July 2021, the FASB issued ASU 2021-05, Lease (Topic 842), “Lessors - Certain Leases with Variable Lease Payments”. This guidance amends the lease classification accounting for lessors for certain leases with variable lease payments that do not depend on a reference index or a rate and would have resulted in the recognition of a loss at lease commencement if classified as a sales-type or direct financing lease. Under the new guidance, these leases will be classified as an operating lease. The amendments are effective for fiscal years beginning after December 15, 2021, with early adoption permitted. The Company is currently evaluating the impact that this ASU will have on its consolidated financial statements and related disclosures. In May 2021, the FASB issued ASU 2021-04, “Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options” which clarifies the accounting for a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after a modification or exchange and the related EPS effects of such transaction if recognized as an adjustment to equity. This ASU becomes effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years, and should be applied prospectively to modifications or exchanges occurring on or after the effective date. The Company is currently evaluating the impact that this ASU will have on its consolidated financial statements and related disclosures. In August 2020, the FASB issued ASU 2020-06 “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.” This ASU amends the guidance on convertible instruments and the derivatives scope exception for contracts in an entity’s own equity and improves and amends the related EPS guidance for both Subtopics. The ASU will be effective for annual reporting periods after December 15, 2023 and interim periods within those annual periods and early adoption is permitted in annual reporting periods ending after December 15, 2020. The Company is currently assessing the potential impact that the adoption of this ASU will have on its consolidated financial statements. In June 2016, the FASB issued ASU 2016-13 “Measurement of Credit Losses on Financial Instruments”, which replaces current methods for evaluating impairment of financial instruments not measured at fair value, including trade accounts receivable and certain debt securities, with a current expected credit loss model. This ASU, as amended, is effective for the Company for reporting periods beginning after December 15, 2022. The Company is currently assessing the potential impact that the adoption of this ASU will have on its consolidated financial statements.
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PROPERTY AND EQUIPMENT, NET |
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| PROPERTY AND EQUIPMENT, NET | 3. PROPERTY AND EQUIPMENT, NET A summary of property and equipment at December 31, 2021 and 2020 is as follows:
Depreciation expense was approximately $0.2 million and $0.1 million for the years ended December 31, 2021 and 2020, respectively. |
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| INTANGIBLES [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| INTANGIBLES | 4. INTANGIBLES Intangible assets consist of the following:
Amortization expense for intangible assets was $1.0 million during the years ended December 31, 2021 and 2020. Amortization expense for intangible assets is expected to be $0.9 million for each of the years ending December 31, 2022, , , and , respectively. |
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LONG-TERM DEBT |
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| LONG-TERM DEBT [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| LONG-TERM DEBT | 5. LONG-TERM DEBT Long-term debt consists of the following:
Department of Economic and Community Development On January 8, 2018, the Company received gross proceeds of $400,000 when it entered into an agreement with DECD by which the Company received a grant of $100,000 and a loan of $300,000 secured by substantially all of the Company’s assets (the “DECD 2018 Loan”.) The DECD 2018 Loan is a ten-year loan due on December 31, 2027 and includes interest paid monthly at 3.25%. Due to the economic impact of COVID-19, DECD offered financial relief to all businesses with certain loans, including the Company’s DECD 2018 Loan. The relief includes the option to defer all payments from April 1, 2020 to August 1, 2020 and the deferred payments will be added to the end of the loan. The Company chose to defer its payments and the maturity date of the DECD 2018 Loan was extended to May 31, 2028. The payment deferral modification did not have a material impact on the Company’s cash flows. Debt issuance costs associated with the DECD 2018 Loan were approximately $31,000. Amortization of the debt issuance cost was approximately $3,000 and $2,000 for the years ended December 31, 2021 and 2020, respectively. Net debt issuance costs were approximately $19,000 and $22,000 at December 31, 2021 and 2020, respectively, and are presented as a reduction of the related debt in the accompanying consolidated balance sheets. Amortization for each of the is to be approximately $3,000. Financed Insurance Loan. The Company finances certain of its insurance premiums (the “Financed Insurance Loans”). In July 2019, the Company financed $0.4 million with a 5.0% interest rate and made monthly payments through May of 2020. In July 2020, the Company financed less than $0.1 million with a 5.0% interest rate and made monthly payments through May 2021. As of December 31, 2021 and 2020, the Financed Insurance Loan outstanding balance of zero and less than $0.1 million, respectively, was included in current maturities of long-term debt in the Company’s consolidated balance sheets. A corresponding prepaid asset was included in other current assets. Paycheck Protection Program. On April 23, 2020, the Company entered into a promissory note (the “Promissory Note”) evidencing an unsecured $787,200 loan under the Paycheck Protection Program (the “PPP Loan”). The Paycheck Protection Program (or “PPP”) was established under the recently congressionally-approved Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and is administered by the U.S. Small Business Administration. The PPP Loan to the Company was made through Webster Bank, N.A.
Under the terms of the CARES Act, PPP Loan recipients can apply for and be granted forgiveness for all or a portion of loans granted under the PPP. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for payroll costs and mortgage interest, rent or utility costs and the maintenance of employee and compensation levels. On February 11, 2021, the Company filed its application for loan forgiveness with Webster Bank and was subsequently notified by Webster Bank that effective March 24, 2021 the PPP Loan, plus accrued interest, was considered fully forgiven. As a result, the Company recorded a gain on forgiveness of debt of $0.8 million in the consolidated statements of operations for the year ended December 31, 2021. The aggregate future maturities required on gross long-term debt at December 31, 2021 are as follows:
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CONVERTIBLE NOTES |
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| LONG-TERM DEBT [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| CONVERTIBLE NOTES | 6. CONVERTIBLE NOTES. Convertible Bridge Notes. On April 20, 2018, the Company entered into a securities purchase agreement (the “2018 Note Agreement”) with certain investors (the “April 2018 Investors”), as amended on November 29, 2018 (the “Amendment Agreement”) and amended on April 16, 2019 (“Amendment No.2 Agreement”). The Company also entered into a securities purchase agreement on May 14, 2019. In connection with these securities purchase agreements, the Company issued Senior Secured Convertible Promissory Notes (the “Bridge Notes”) along with warrants during 2018 and 2019. On March 26, 2020, the Company entered into an amendment agreement (the “March 2020 Amendment”) amending the terms of that certain Amendment No. 2 Agreement dated April 16, 2019 and the securities purchase agreement dated May 14, 2019. As a result of the March 2020 Amendment, (i) the maturity date of the Bridge Notes issued in April 2019 (the “April 2019 Bridge Notes”) and the Bridge Notes issued in May 2019 (the “May 2019 Bridge Notes”) was extended three months from April 16, 2020 to July 16, 2020, (ii) the floor price at which conversions may occur under the April 2019 Bridge Notes and the May 2019 Bridge Notes was amended from $2.25 to $0.40, and (iii) guaranteed interest on the April 2019 Bridge Notes and the May 2019 Bridge Notes was amended from twelve months to eighteen months. The Company reviewed the modifications and concluded that the March 2020 Amendment would be treated as an extinguishment of the related April 2019 Bridge Notes and May 2019 Bridge Notes. As a result, the Company recorded a debt premium on the post-modification debt of $0.8 million and a loss on extinguishment of convertible notes of $1.2 million in the consolidated statements of operations during the year ended December 31, 2020. During the year ended December 31, 2020, $2.2 million of Bridge Notes, plus interest, were converted into 3,908,145 shares of common stock of the Company. During the year ended December 31, 2020, the change in Bridge Note debt discounts and debt premiums was as follows:
There were zero convertible notes outstanding at December 31, 2021 and 2020, respectively. |
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ACCRUED EXPENSES OTHER CURRENT LIABILITIES |
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| ACCRUED EXPENSES OTHER CURRENT LIABILITIES [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||
| ACCRUED EXPENSES OTHER CURRENT LIABILITIES | 7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES. Accrued expenses at December 31, 2021 and 2020 are as follows:
The Company recorded certain settlement reductions in accrued expenses and accounts payable as gains which are included in gain on settlement of liability, net in the consolidated statements of operations. During each of the years ended December 31, 2021 and 2020, approximately $0.1 million, respectively, was recorded as a gain. |
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LEASES |
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| LEASES [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| LEASES | 8. LEASES The Company leases administrative facilities and laboratory equipment through operating lease agreements. In addition we rent various equipment used in our diagnostic lab and in our administrative offices through finance lease arrangements. Our operating leases include both lease (e.g., fixed payments including rent) and non-lease components (e.g., common area or other maintenance costs). The facility leases include one or more options to renew, from 1 to 5 years or more. The exercise of lease renewal options is typically at our sole discretion, therefore, the renewals to extend the lease terms are not included in our right-of-use (“ROU”) assets and lease liabilities as they are not reasonably certain of exercise. We regularly evaluate the renewal options and, when they are reasonably certain of exercise, we include the renewal period in our lease term. As our leases do not provide an implicit rate, we use our collateralized incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments. Operating leases result in the recognition of ROU assets and lease liabilities on the balance sheet. ROU assets represent our right to use the leased asset for the lease term and lease liabilities represent our obligation to make lease payments. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Lease expense is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The primary leases we enter into with initial terms of 12 months or less are for equipment. On November 29, 2021, we extended the lease term for our office facility in New Haven, Connecticut by modifying the expiration date from December 31, 2021 to December 31, 2026. As a result of this lease extension agreement, we recognized an additional operating lease ROU asset and corresponding operating lease of $0.8 million which equals the present value of the remaining payments due under the lease extension. The Company also recognizes ROU assets from finance leases in connection with its HSRR program. For certain customers in the HSRR program, the Company leases diagnostic testing equipment and then subleases the equipment to the customer. Finance lease ROU assets and finance lease liabilities are recognized at the lease commencement date, and at the sublease commencement date the finance lease ROU asset is derecognized and is recorded as cost of sales in the consolidated statements of operations. Derecognized finance lease ROU assets for the years ended December 31, 2021 and 2020 were $0.1 million and zero, respectively. Where Precipio is the lessor, customers lease diagnostic testing equipment from the Company with the transfer of ownership to the customer at the end of the lease term at no additional cost. For these contracts, the Company accounts for the arrangements as sales-type leases. The lease asset for sales-type leases is the net investment in leased asset, which is recorded once the finance lease ROU asset is derecognized and a related gain or loss is noted. The net investment in leased assets was $0.2 million and less than $0.1 million as of December 31, 2021 and 2020, respectively, and is included in other current assets and other assets in our consolidated balance sheets. The balance sheet presentation of our operating and finance leases is as follows:
(1)As of December 31, 2020, $175 of property and equipment, net and $29 of operating lease right-of-use assets were reclassified to finance lease right-of-use assets to conform to the current period presentation. (2)As of December 31, 2021 and 2020, finance lease right-of-use assets included $61 and $29, respectively, of assets related to finance leases associated with the HSRR program. As of December 31, 2021, the estimated future minimum lease payments, excluding non-lease components, are as follows:
Other information as of December 31, 2021 and 2020:
During the years ended December 31, 2021 and 2020, operating cash flows from operating leases was $0.2 million, respectively, and operating lease ROU assets obtained in exchange for operating lease liabilities was $0.8 million and zero, respectively. Operating Lease Costs Operating lease costs were $0.3 million and $0.2 million during the years ended December 31, 2021 and 2020, respectively. These costs are primarily related to long-term operating leases for the Company’s facilities and laboratory equipment. Short-term and variable lease costs were less than $0.1 million for the years ended December 31, 2021 and 2020, respectively. Finance Lease Costs Finance lease amortization and interest expenses are included in the consolidated statements of operations for the years ended December 31, 2021 and 2020. The balances within these accounts are less than $0.1 million, respectively. |
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COMMITMENTS AND CONTINGENCIES |
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| COMMITMENTS AND CONTINGENCIES | 9. COMMITMENTS AND CONTINGENCIES PURCHASE COMMITMENTS The Company has entered into purchase commitments for reagents from suppliers. These agreements started in 2011 and run through 2025. The Company and the suppliers will true up the amounts on an annual basis. The future minimum purchase commitments under these and other purchase agreements are as follows:
LITIGATIONS The Company is involved in legal proceedings related to matters, which are incidental to its business. Also, the Company is delinquent on the payment of outstanding accounts payable for certain vendors and suppliers who have taken or have threatened to take legal action to collect such outstanding amounts. See below for a discussion on these matters. CPA Global provides us with certain patent management services. On February 6, 2017, CPA Global claimed that we owe approximately $0.2 million for certain patent maintenance services rendered. CPA Global has not filed claims against us in connection with this allegation. A liability of less than $0.1 million has been recorded and is reflected in accounts payable within the accompanying consolidated balance sheets at December 31, 2021 and 2020. LEGAL AND REGULATORY ENVIRONMENT The healthcare industry is subject to numerous laws and regulations of federal, state and local governments. These laws and regulations include, but are not limited to, matters such as licensure, accreditation, government healthcare program participation requirement, reimbursement for patient services and Medicare and Medicaid fraud and abuse. Government activity has increased with respect to investigations and allegations concerning possible violations of fraud and abuse statutes and regulations by healthcare providers. Violations of these laws and regulations could result in expulsion from government healthcare programs together with the imposition of significant fines and penalties, as well as significant repayments for patient services previously billed. Management believes that the Company is in compliance with fraud and abuse regulations, as well as other applicable government laws and regulations. While no material regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretation, as well as regulatory actions unknown or unasserted at this time. |
INCOME TAXES |
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| INCOME TAXES [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| INCOME TAXES | 10. INCOME TAXES Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company’s net deferred tax assets relate primarily to its net operating loss carryforwards, allowance for doubtful accounts and stock-based compensation, offset by property and equipment and intangible assets. The Company has recorded a full valuation allowance to offset the net deferred tax assets, as it is more likely than not that the Company will not realize future benefits associated with these net deferred tax assets at December 31, 2021 and 2020. At December 31, 2021 and 2020, the Company had net deferred tax assets of $15.2 million and $13.5 million, respectively, against which a full valuation allowance has been recorded. The increase in the valuation allowance for the years ended December 31, 2021 and 2020 is $1.7 million and $2.8 million, respectively, resulting from additional net operating losses generated in the year. The deferred tax liabilities associated with the book versus tax basis difference of intangible assets are the result of an asset step-up pursuant to a June 2017 merger transaction (the “Merger”). Significant components of the Company’s deferred tax assets at December 31, 2021 and 2020 are as follows:
The Company’s provision for income taxes for the years ended December 31, 2021 and December 31, 2020 relates to income taxes in states and other jurisdictions and differs from the amounts determined by applying the statutory federal income tax rate to the loss before income taxes for the following reasons:
The income tax expense consists of the following for the years ended December 31, 2021 and 2020.
The Company had available gross federal net operating loss (“NOL”) carryforwards of approximately $73 million, and state NOL carryforwards of $2 million as of December 31, 2021. Beginning in 2018, under the TCJ Act, federal loss carryforwards have an unlimited carryforward period, however such losses can only offset 80% of taxable income in any one year. Included in the total NOLs for 2021 are $45 million of federal losses that fall under these new rules. For state NOL expiration dates, it varies from 2021 to unlimited. Section 382 of the Internal Revenue Code, and similar state regulations, contain provisions that may limit the NOL carryforwards available to be used to offset income in any given year upon the occurrence of certain events, including changes in the ownership interests of significant stockholders. In the event of a cumulative change in ownership in excess of 50% over a three-year period, the amount of the NOL carryforwards that the Company may utilize in any one year may be limited. The Company reduced its tax attributes (NOLs and tax credits) and generated a limitation on utilization of such attributes resulting from the Merger. At December 31, 2021, and as a result of the limitations under Section 382 of the Internal Revenue Code, the Company had a total of unused federal tax net operating loss carryforwards with expiration dates as follows:
The Company has adopted guidance on accounting for uncertainty in income taxes which clarified the accounting for income taxes by prescribing the minimum threshold a tax position is required to meet before being recognized in the financial statements as well as guidance on de-recognition, measurement, classification and disclosure of tax positions. There are no material uncertain tax positions that would require recognition in the financial statements. The Company is obligated to file income tax returns in the U.S. federal jurisdiction and various U.S. states. Since the Company had losses in the past, all prior years that generated NOLs are open and subject to audit examination in relation to the NOL generated from those years. Currently, there is an IRS exam in progress for 2019, which resulted in a change to the NOL carryforward. Our evaluation of uncertain tax positions was performed for the tax years open to examination. |
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STOCKHOLDERS' EQUITY |
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| STOCKHOLDERS' EQUITY [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| STOCKHOLDERS' EQUITY | 11. STOCKHOLDERS’ EQUITY Common Stock Pursuant to our Third Amended and Restated Certificate of Incorporation, as amended, we currently have 150,000,000 shares of common stock authorized for issuance. On December 20, 2018, the Company’s shareholders approved the proposal to authorize the Company’s Board of Directors to, in its discretion, amend the Company’s Third Amended and Restated Certificate of Incorporation to increase the total number of authorized shares of common stock from 150,000,000 shares to 250,000,000 shares. The Company has not yet affected this increase. During the year ended December 31, 2021, the Company issued 74,000 shares of its common stock in connection with the exercise of 74,000 warrants. The warrant exercises resulted in net cash proceeds to the Company of approximately $0.4 million during the year ended December 31, 2021. During the year ended December 31, 2021, the Company issued 55,147 shares of its common stock in connection with consulting services of approximately $0.2 million. During the year ended December 31 2021, the Company issued 1,379 shares of its common stock in connection with the exercise of 1,379 stock options. The stock option exercises resulted in net cash proceeds to the Company of $3,000 for the year ended December 31, 2021. During the year ended December 31, 2020, the Company issued 3,980,145 shares of its common stock in connection with the conversion of convertible notes, plus interest, totaling $2.2 million. See Note 6 – Convertible Notes. LP Purchase Agreement On September 7, 2018, the Company entered into a purchase agreement (the “LP Purchase Agreement”) with Lincoln Park, pursuant to which Lincoln Park has agreed to purchase from the Company up to an aggregate of $10,000,000 of common stock of the Company (subject to certain limitations) from time to time over the term of the LP Purchase Agreement. During the year ended December 31, 2020, the Company received $1.4 million from the sale of 1,040,654 shares of common stock to Lincoln Park under the LP Purchase Agreement. The LP Purchase Agreement terminated during our second fiscal quarter of 2020. LP 2020 Purchase Agreement On March 26, 2020, the Company entered into a purchase agreement (the “LP 2020 Purchase Agreement”) and a registration rights agreement (the “LP 2020 Registration Rights Agreement”) with Lincoln Park pursuant to which Lincoln Park agreed to purchase from us, from time to time, up to $10,000,000 of our common stock, subject to certain limitations, during the 24 month term of the LP 2020 Purchase Agreement. Pursuant to the terms of the LP 2020 Purchase Agreement, on the agreement date, the Company issued 250,000 shares of its common stock to Lincoln Park as consideration for its commitment to purchase shares of common stock of the Company under the LP Purchase Agreement (the “LP 2020 Commitment Shares”). Pursuant to the terms of the LP 2020 Registration Rights Agreement, on March 27, 2020, as amended on April 8, 2020, the Company filed with the SEC a registration statement on Form S-1 to register for resale under the Securities Act of 1933, as amended, or the Securities Act, 1,770,000 shares of common stock, which included the LP 2020 Commitment Shares. The Form S-1 was declared effective by the SEC on April 13, 2020. As of June 22, 2020, all shares registered under this S-1 had been sold and/or issued to Lincoln Park. On June 26, 2020, the Company filed with the SEC a registration statement on Form S-1 to register for resale under the Securities Act of 1933, as amended, or the Securities Act, an additional 4,500,000 shares of common stock that could have been issued to Lincoln Park under the LP 2020 Purchase Agreement. The Form S-1 was amended on July 7, 2020 and declared effective by the SEC on July 7, 2020. During the years ended December 31, 2021 and 2020, 500,000 and 2,960,000 shares registered under this S-1 had been sold and/or issued to Lincoln Park.
As of the date of issuance of this Annual Report on Form 10-K, we have received an aggregate of $8.8 million from the sale of common stock to Lincoln Park under the LP 2020 Purchase Agreement, including approximately $1.3 million and $7.5 million from the sale of 500,000 and 4,480,000 shares of common stock during the years ended December 31, 2021 and 2020, respectively. The Company terminated the LP 2020 Purchase Agreement effective June 14, 2021. At The Market Offering Agreement On April 2, 2021, the Company entered into a sales agreement with A.G.P./Alliance Global Partners (“AGP”), pursuant to which the Company may offer and sell its common stock, par value $0.01 per share (the “Common Stock”) (the “Shares”), having aggregate sales proceeds of up to $22.0 million. Shares can be sold either directly to or through AGP as a sales agent (the “AGP Sales Agreement”), from time to time, in an “at the market offering” (as defined in Rule 415(a)(4) under the Securities Act of 1933, as amended) of the Shares (the “ATM Offering”). The Company is limited in the number of shares it can sell in the ATM Offering due to the offering limitations currently applicable to the Company under General Instruction I.B.6. of Form S-3 and the Company’s public float as of the applicable date of such sales, as well as the number of authorized and unissued shares available for issuance, in accordance with the terms of the AGP Sales Agreement. The sale of our shares of Common Stock to or through AGP, will be made pursuant to the registration statement (the “Registration Statement”) on Form S-3 (File No. 333-237445), which was declared effective by the Securities and Exchange Commission (the “SEC”) on April 13, 2020, for an aggregate offering price of up to $50.0 million.
Under the AGP Sales Agreement, Shares may be sold by any method permitted by law deemed to be an “at the market offering.” AGP will also be able to sell shares of Common Stock by any other method permitted by law, including in negotiated transactions with the Company’s prior written consent. Upon delivery of a placement notice and subject to the terms and conditions of the AGP Sales Agreement, AGP is required to use its commercially reasonable efforts consistent with its normal trading and sales practices, applicable state and federal law, rules and regulations, and the rules of The Nasdaq Capital Market to sell the Shares from time to time based upon the Company’s instructions, including any price, time or size limits specified by the Company. AGP is not under any obligation to purchase any of the Shares on a principal basis pursuant to the AGP Sales Agreement, except as otherwise agreed by AGP and the Company in writing and expressly set forth in a placement notice. AGP’s obligations to sell the Shares under the AGP Sales Agreement are subject to satisfaction of certain conditions, including customary closing conditions. The Company is not obligated to make any sales of Shares under the AGP Sales Agreement and any determination by the Company to do so will be dependent, among other things, on market conditions and the Company’s capital raising needs.
The Company has agreed to pay AGP a cash fee of 3.0% of the aggregate gross proceeds from the sale of the Shares on the Company’s behalf pursuant to the AGP Sales Agreement. The AGP Sales Agreement contains representations, warranties and covenants that are customary for transactions of this type. In addition, the Company has provided AGP with customary indemnification and contribution rights. The Company has also agreed to reimburse AGP for certain specified expenses, including the expenses of counsel to AGP. The offering of the Shares pursuant to the AGP Sales Agreement will terminate upon the termination of the AGP Sales Agreement by AGP or the Company, as permitted therein. During the year ended December 31, 2021, we received net proceeds of approximately $14.9 million from the sale of 4,501,000 shares of common stock through AGP. There were no sales of common stock through AGP from January 1, 2022 through the date of this Annual Report on Form 10-K. Preferred Stock The Company’s Board of Directors is authorized to issue up to 15,000,000 shares of preferred stock in one or more series, from time to time, with such designations, powers, preferences and rights and such qualifications, limitations and restrictions as may be provided in a resolution or resolutions adopted by the Board of Directors. The authority of the Board of Directors includes, but is not limited to, the determination or fixing of the following with respect to shares of such class or any series thereof: (i) the number of shares; (ii) the dividend rate, whether dividends shall be cumulative and, if so, from which date; (iii) whether shares are to be redeemable and, if so, the terms and amount of any sinking fund providing for the purchase or redemption of such shares; (iv) whether shares shall be convertible and, if so, the terms and provisions thereof; (v) what restrictions are to apply, if any, on the issue or reissue of any additional preferred stock; and (vi) whether shares have voting rights. The preferred stock may be issued with a preference over the common stock as to the payment of dividends. We have no current plans to issue any additional preferred stock. Classes of stock such as the preferred stock may be used, in certain circumstances, to create voting impediments on extraordinary corporate transactions or to frustrate persons seeking to effect a merger or otherwise to gain control of the Company. For the foregoing reasons, any additional preferred stock issued by the Company could have an adverse effect on the rights of the holders of the common stock. Series B Preferred Stock The Company filed a Certificate of Designation of Preferences, Rights and Limitations of Series B Convertible Preferred Stock (“Series B Preferred Stock”) with the State of Delaware, which designates 6,900 shares of our preferred stock as Series B Preferred Stock. The Series B Preferred Stock has a stated value of $1,000 per share and a par value of $0.01 per share. The Series B Preferred Stock includes a beneficial ownership blocker but has no dividend rights (except to the extent dividends are also paid on the common stock). On August 28, 2017, the Company completed an underwritten public offering (the “August 2017 Offering”) consisting of the Company’s Series B Preferred Stock and warrants. The conversion price of the Series B Preferred Stock contains a down round feature. The Company will recognize the effect of the down round feature when it is triggered. At that time, the effect would be treated as a deemed dividend and as a reduction of income available to common shareholders in our basic earnings per share calculation. The March 2020 Amendment, see Note 6 – Convertible Notes, triggered the down round feature of the Series B Preferred Stock and, as a result, the conversion price of the Company’s Series B Convertible Preferred Stock was automatically adjusted from $2.25 per share to $0.40 per share. In connection with the down round adjustment, the Company calculated an incremental beneficial conversion feature of approximately $3.3 million which was recognized as a deemed dividend at time of the down round adjustment (“Deemed Dividend A”). There were no conversions of Series B Preferred Stock during the years ended December 31, 2021 and 2020, respectively. At December 31, 2021 and 2020, the Company had 6,900 shares of Series B designated and issued and 47 shares of Series B outstanding. Based on the stated value of $1,000 per share and a conversion price of $0.40 per share, the outstanding shares of Series B Preferred Stock at December 31, 2021 were convertible into 117,500 shares of common stock. Liquidation Preferences The following is the liquidation preferences for the Company’s preferred stock; Upon any liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary, the holders shall be entitled to receive out of the assets of the Corporation an amount equal to the par value, plus any accrued and unpaid dividends thereon, for each share of Preferred Stock before any distribution or payment shall be made to the holders of the Common Stock, and if the assets of the Corporation shall be insufficient to pay in full such amounts, then the entire assets to be distributed to the holders shall be ratably distributed among the holders in accordance with the respective amounts that would be payable on such shares. If all amounts were paid in full; and thereafter, the holders shall be entitled to receive out of the assets, whether capital or surplus, of the Corporation the same amount that a holder of Common Stock would receive if the Preferred Stock were fully converted to Common Stock which amount shall be paid pari passu with all holders of Common Stock. Common Stock Warrants The following represents a summary of the warrants outstanding as of December 31, 2021:
During the years ended December 31, 2021 and 2020, 239 and 2,692 warrants expired. These warrants had been issued in connection with transactions which were completed between October 2014 and January 2016. During the year ended December 31, 2021, 357 warrants were settled for cash of approximately $0.1 million. For further discussion, see the 2016 Warrant Liability in Note 12 – Fair Value. August 2017 Offering Warrants In connection with the August 2017 Offering, the Company issued 178,666 warrants at an exercise price of $45.00, which contain a down round provision. The August 2017 Offering Warrants were exercisable immediately and expire 5 years from date of issuance. As a result of the March 2020 Amendment, the exercise price of the August 2017 Offering Warrants was adjusted from $2.25 per share to $0.40 per share. At the time the exercise price was adjusted, the Company calculated the fair value of the down round provision on the warrants to be approximately $6,000 and recorded this as a deemed dividend (“Deemed Dividend B”). Note Conversion Warrants Upon the closing of the August 2017 Offering, the Company issued 23,999 warrants to purchase the Company's common stock (the “Note Conversion Warrants”). The Note Conversion Warrants have an exercise price of $45.00 per share, a five year term and contain a down round provision. As a result of the March 2020 Amendment, the exercise price of the Note Conversion Warrants was adjusted from $2.25 per share to $0.40 per share. At the time the exercise price was adjusted, the Company calculated the fair value of the down round provision on the warrants to be approximately $5,000 and recorded this as a deemed dividend (“Deemed Dividend C”). Convertible Promissory Note Warrants The Convertible Promissory Note Warrants had an original exercise price of $45.00 per share and contain a down round provision. As a result of the March 2020 Amendment, the exercise price of the Convertible Promissory Note Warrants was adjusted from $2.25 per share to $0.40 per share. At the time the exercise price was adjusted, the Company calculated the fair value of the down round provision on the warrants to be less than $1,000 and recorded this as a deemed dividend (“Deemed Dividend D”). Creditor Warrants In the fourth quarter of 2017, the Company entered into Settlement Agreements with the Creditors pursuant to which the Company agreed to issue, to certain of its Creditors, warrants to purchase 7,207 shares of the Company’s common stock at an exercise price of $112.50 per share (the “Creditor Warrants”). The Creditor Warrants were issued in February 2018. April 2018 Warrants In connection with the issuance of Bridge Notes in April 2018, the Company issued 243,224 warrants with an exercise price of $11.25 at time of issuance. At issuance, half of these April 2018 Warrants had a five-year term and half had a one-year term. In April 2019, as a result of the Amendment No.2 Agreement, the exercise price of the April 2018 Warrants was adjusted to $5.40 per share and all April 2018 Warrants that had a one-year term were amended to have a five-year term. During the year ended December 31, 2021, 43,138 April 2018 Warrants were exercised for proceeds to the Company of approximately $0.2 million and the intrinsic value of the April 2018 Warrants exercised was less than $0.1 million. Advisor Warrants At the time of the 2018 Note Agreement, the Company issued 15,466 warrants with an exercise price of $11.25 per share to a financial advisor. Q3 2018 Warrants In connection with the issuance of Bridge Notes during the third quarter of 2018, the Company issued 196,340 warrants with an exercise price of $11.25 per share at time of issuance (the “Q3 2018 Warrants”). At the time of issuance, half of these Q3 2018 Warrants had a five-year term and half had a one-year term. In September 2018, the exercise price was modified to $7.50 per share. In April 2019, as a result of the Amendment No.2 Agreement, the exercise price of the Q3 2018 Warrants was adjusted to $5.40 per share and all Q3 2018 Warrants that had a one-year term were amended to have a five-year term. There were 30,862 Q3 2018 Warrants exercised during the year ended December 31, 2021 for proceeds to the Company of approximately $0.2 million and the intrinsic value of the Q3 2018 Warrants exercised was less than $0.1 million. Q4 2018 Warrants In connection with the issuance of the Bridge Notes during the fourth quarter of 2018, the Company issued 300,115 warrants with an exercise price of $5.40 per share at time of issuance and a five-year term (the “Q4 2018 Warrants”). April 2019 Warrants
In connection with the issuance of the April 2019 Bridge Notes, the Company issued 147,472 warrants with an exercise price of $5.40 per share and a five-year term. May 2019 Warrants
In connection with the issuance of the May 2019 Bridge Notes, the Company issued 154,343 warrants with an exercise price of $9.56 per share and a five-year term. Deemed Dividends As discussed above, certain of our preferred stock and warrant issuances contain down round provisions which require us to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic earnings per share. There were no deemed dividends recorded in 2021. The following represents a summary of the dividends recorded for the year ended December 31, 2020:
* Represents less than one thousand dollars |
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FAIR VALUE |
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| FAIR VALUE [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| FAIR VALUE | 12. FAIR VALUE FASB guidance on fair value measurements, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements for our financial assets and liabilities, as well as for other assets and liabilities that are carried at fair value on a recurring basis in our consolidated financial statements. FASB guidance establishes a three-level fair value hierarchy based upon the assumptions (inputs) used to price assets or liabilities. The three levels of inputs used to measure fair value are as follows: Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities; Level 2—Observable inputs other than those included in Level 1, such as quoted prices for similar assets and liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets; and Level 3—Unobservable inputs reflecting our own assumptions and best estimate of what inputs market participants would use in pricing the asset or liability. Common Stock Warrant Liabilities. Certain of our issued and outstanding warrants to purchase shares of common stock do not qualify to be treated as equity and, accordingly, are recorded as a liability. We are required to record these instruments at fair value at each reporting date and changes are recorded as a non-cash adjustment to earnings. The gains or losses included in earnings are reported in other income (expense) in our consolidated statement of operations. 2016 Warrant Liability The Company has a warrant liability related to warrants issued in January 2016 (the “2016 Warrant Liability”) and it represents the fair value of such warrants, of which, 357 warrants were settled for cash of approximately $0.1 million in January 2021. The balance of the 2016 Warrant Liability was zero as of December 31, 2021. The 2016 Warrant Liability is considered a Level 3 financial instrument and was valued using the Black Scholes model. As of December 31, 2020, assumptions and inputs used in the valuation of the 2016 Warrant Liability include: remaining life to maturity of less than one month; annual volatility of 135%; and a risk-free interest rate of 0.08%. Bridge Note Warrant Liabilities During 2019 and 2018, the Company issued warrants in connection with the issuance of Bridge Notes. All of these warrants issuances were classified as warrant liabilities (the “Bridge Note Warrant Liabilities”). See Note 6 - Convertible Notes for further discussion. The Bridge Note Warrant Liabilities are considered Level 3 financial instruments and were valued using the Black Scholes model. As of December 31, 2021, assumptions used in the valuation of the Bridge Note Warrant Liabilities include: remaining life to maturity of 0.3 to 2.4 years; annual volatility of 61% to 199%; and risk free rate of 0.06% to 0.73%. As of December 31, 2020, assumptions used in the valuation of the Bridge Note Warrant Liabilities include: remaining life to maturity of 1.3 to 3.4 years; annual volatility of 162% to 201%; and risk free rate of 0.10% to 0.17%. During the year ended December 31, 2021, the Company wrote-off $0.3 million of the Bridge Note Warrant Liability in connection with the exercise of 74,000 warrants. During the years ended December 31, 2021 and 2020, the change in the fair value of the warrant liabilities measured using significant unobservable inputs (Level 3) were comprised of the following:
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EQUITY INCENTIVE PLAN |
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| EQUITY INCENTIVE PLAN [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| EQUITY INCENTIVE PLAN | 13. EQUITY INCENTIVE PLAN The Company currently issues stock awards under its 2017 Stock Option and Incentive Plan, as amended (the "2017 Plan") which will expire on June 5, 2027. The shares authorized for issuance under the 2017 Plan were 2,717,431 at December 31, 2021 of which 80,845 were available for future grant. The shares authorized under the 2017 Plan were increased by 925,000 shares by stockholder vote on June 18, 2021 and are subject to annual increases on January 1 by 5% of the number of shares of common stock issued and outstanding on the immediately preceding December 31, or such lessor number of shares determined by the Company’s Board of Directors or Compensation Committee. During the year ended December 31, 2021, the shares authorized for issuance increased by 1,803,845 shares. The Plan is administered by the Compensation Committee of the Board of Directors (the “Committee”), which has the authority to set the number, exercise price, term and vesting provisions of the awards granted under the Plan, subject to the terms thereof. Either incentive or non-qualified stock options may be granted to employees of the Company, but only non-qualified stock options may be granted to non-employee directors and advisors. However, in either case, the Plan requires that stock options must be granted at exercise prices not less than the fair market value of the common stock on the date of the grant. Options issued under the plan vest over periods as determined by the Committee and expire 10 years after the date the option was granted. Stock Options. The Company accounts for all stock-based compensation payments to employees and directors, including grants of employee stock options, at fair value at the date of grant and expenses the benefit in operating expense in the consolidated statements of operations over the service period of the awards. The Company records the expense for stock-based compensation awards subject to performance-based milestone vesting over the remaining service period when management determines that achievement of the milestone is probable based on the expected satisfaction of the performance conditions as of the reporting date. The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option pricing model, which requires various assumptions including estimating stock price volatility, expected life of the stock option, risk free interest rate and estimated forfeiture rate. During the year ended December 31, 2021, the Company granted stock options to purchase up to 1,907,347 shares of common stock at a weighted average exercise price of $2.89. These awards have vesting periods of up to four years and had a weighted average grant date fair value of $2.77. The fair value calculation of options granted during 2021 used the follow assumptions: risk free interest rates of 0.50% to 1.02%, based on the U.S. Treasury yield in effect at the time of grant; expected life of six years; and volatility of 162% to 167% based on historical volatility of the Company’s common stock over a time that is consistent with the expected life of the option. The following table summarizes stock option activity under our plans during the year ended December 31, 2021:
As of December 31, 2021, there were 2,057,726 options that were vested or expected to vest with an aggregate intrinsic value of less than $0.1 million and a remaining weighted average contractual life of 8.7 years. During the year ended December 31, 2020, there were 433,550 options granted with a weighted average exercise price of $2.01 and 100,888 options forfeited with a weighted average exercise price of $12.64. During the years ended December 31, 2021 and 2020, we recorded compensation expense for all stock awards of $1.9 million and $0.7 million, respectively, within operating expense in the accompanying statements of operations. As of December 31, 2021, the unrecognized compensation expense related to unvested stock awards was $4.8 million, which is expected to be recognized over a weighted-average period of 3.1 years. |
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SALES SERVICE REVENUE, NET AND ACCOUNTS RECEIVABLE |
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| SALES SERVICE REVENUE, NET AND ACCOUNTS RECEIVABLE [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SALES SERVICE REVENUE, NET AND ACCOUNTS RECEIVABLE | 14. SALES SERVICE REVENUE, NET AND ACCOUNTS RECEIVABLE ASC Topic 606, “Revenue from contracts with customers” The Company follows the guidance of ASC 606 for the recognition of revenue from contracts with customers to transfer goods and services. The Company performed a comprehensive review of its existing revenue arrangements following the five-step model: Step 1: Identification of the contract with the customer. Sub-steps include determining the customer in a contract, initial contract identification and determining if multiple contracts should be combined and accounted for as a single transaction. Step 2: Identify the performance obligation in the contract. Sub-steps include identifying the promised goods and services in the contract and identifying which performance obligations within the contract are distinct. Step 3: Determine the transaction price. Sub-steps include variable consideration, constraining estimates of variable consideration, the existence of a significant financing component in the contract, noncash consideration and consideration payable to a customer. Step 4: Allocate transaction price. Sub-steps include assessing the amount of consideration to which the Company expects to be entitled in exchange for transferring the promised goods or services to the customer. Step 5: Satisfaction of performance obligations. Sub-steps include ascertaining the point in time when an asset is transferred to the customer and when the customer obtains control of the asset upon which time the Company recognizes revenue. Nature of Contracts and Customers The Company’s contracts and related performance obligations are similar for its customers and the sales process for all customers starts upon the receipt of requisition forms from the customers for patient diagnostic testing and the execution of contracts for biomarker testing and clinical research. Payment terms for the services provided are 30 days, unless separately negotiated. Diagnostic testing Control of the laboratory testing services is transferred to the customer at a point in time. As such, the Company recognizes revenue for laboratory testing services at a point in time based on the delivery method (web-portal access or fax) for the patient’s laboratory report, per the contract. Clinical research grants Control of the clinical research services are transferred to the customer over time. The Company will recognize revenue utilizing the “effort based” method, measuring its progress toward complete satisfaction of the performance obligation. Biomarker testing and clinical project services Control of the biomarker testing and clinical project services are transferred to the customer over time. The Company utilizes an “effort based” method of assessing performance and measures progress towards satisfaction of the performance obligation based upon the delivery of results. The Company generates revenue from the provision of diagnostic testing provided to patients, biomarker testing provided to bio-pharma customers and clinical research grants funded by both bio-pharma customers and government health programs. Reagents and other diagnostic products Control of reagents and other diagnostic products are transferred to the customer at a point in time and, as such, the Company recognizes these revenues at a point in time based on the delivery method. These revenues include revenues from reagent sets for our HSRR program, COVID-19 antibody tests and other product sales and are included in other revenue in our consolidated statements of operations. Equipment leasing The Company accounts for sales-type leases within the scope of ASC 842, Leases, as ASC 606 specifically excludes leases from its guidance. The sales-type leases result in the derecognition of the underlying asset, the recognition of profit or loss on the sale, and the recognition of an investment in leased asset. Revenue from sales-type leases is recognized upfront on the commencement date of the lease, and is included in other revenue in our consolidated statements of operations. During the year ended December 31, 2021 and 2020, revenue from sales-type leases was $0.2 million and less than $0.1 million, respectively. Disaggregation of Revenues by Transaction Type We operate in one business segment and, therefore, the results of our operations are reported on a consolidated basis for purposes of segment reporting, consistent with internal management reporting. Service revenue, net for the years ended December 31, 2021 and 2020 was as follows:
Revenue from the Medicare and Medicaid programs account for a portion of the Company’s patient diagnostic service revenue. Laws and regulations governing those programs are extremely complex and subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates will change by a material amount in the near term. Revenue Recognition Revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price using the expected value method based on historical experience. The Company does not typically enter arrangements where multiple contracts can be combined as the terms regarding services are generally found within a single agreement/requisition form. The Company derives its revenues from the following types of transactions: diagnostic testing (“Diagnostic”), revenues from the Company’s ICP technology and bio-pharma projects encompassing genetic diagnostics (collectively “Biomarker”), revenues from clinical research grants from state and federal research programs and diagnostic product sales, including revenues from equipment leases and reagent sales associated with our HSRR program. Deferred revenue Deferred revenue, or unearned revenue, refers to advance payments for products or services that are to be delivered in the future. The Company records such prepayment of unearned revenue as a liability, as revenue that has not yet been earned, but represents products or services that are owed to a customer. As the product or service is delivered over time, the Company recognizes the appropriate amount of revenue from deferred revenue. As of December 31, 2021 and 2020, the deferred revenue was $18,000 and $6,000, respectively. Contractual Allowances and Adjustments
We are reimbursed by payers for services we provide. Payments for services covered by payers average less than billed charges. We monitor revenue and receivables from payers and record an estimated contractual allowance for certain revenue and receivable balances as of the revenue recognition date to properly account for anticipated differences between amounts estimated in our billing system and amounts ultimately reimbursed by payers. Accordingly, the total revenue and receivables reported in our consolidated financial statements are recorded at the amounts expected to be received from these payers. For service revenue, the contractual allowance is estimated based on several criteria, including unbilled claims, historical trends based on actual claims paid, current contract and reimbursement terms and changes in customer base and payer/product mix. The billing functions for the remaining portion of our revenue are contracted and fixed fees for specific services and are recorded without an allowance for contractual discounts. The following table presents our revenues initially recognized for each associated payer class during the years ended December 31, 2021 and 2020.
Allowance for Doubtful Accounts The Company provides for a general allowance for collectability of services when recording net sales. The Company has adopted the policy of recognizing net sales to the extent it expects to collect that amount. Reference FASB 954-605-45-5 and ASU 2011-07, Health Care Entities: Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debt, and the Allowance for Doubtful Accounts. The change in the allowance for doubtful accounts is directly related to the increase in patient service revenues. The following table presents our reported revenues net of the collection allowance and adjustments for the years ended December 31, 2021 and 2020.
Costs to Obtain or Fulfill a Customer Contract Sales commissions are expensed when incurred because the amortization period would have been one year or less. These costs are recorded in operating expenses in the consolidated statements of operations. Shipping and handling costs are comprised of inbound and outbound freight and associated labor. The Company accounts for shipping and handling activities related to contracts with customers as fulfillment costs which are included in cost of sales in the consolidated statements of operations. Accounts Receivable The Company has provided an allowance for potential credit losses, which has been determined based on management’s industry experience. The Company grants credit without collateral to its patients, most of who are insured under third party payer agreements. The following summarizes the mix of receivables as of December 31, 2021 and 2020:
The following table presents the roll-forward of the allowance for doubtful accounts for the year ended December 31, 2021:
Customer Revenue and Accounts Receivable Concentration Customer revenue and accounts receivable concentration amounted to the following for the identified periods.
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SUBSEQUENT EVENTS |
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Dec. 31, 2021 | |
| Subsequent Events [Abstract] | |
| SUBSEQUENT EVENTS | 15. SUBSEQUENT EVENTS The Company has evaluated events and transactions subsequent to December 31, 2021 through the date the consolidated financial statements were issued. Outside of the items noted below, there are no other events to report other than what has been disclosed in the consolidated financial statements. Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers On March 21, 2022, the Company announced the retirement of its Chief Financial Officer, Carl Iberger (age 69), effective immediately due to personal family reasons. Mr. Iberger did not advise the Company or the Board of Directors of any disagreement with the Company on any matter relating to its operations, policies or practices. On March 21, 2022, the Company together with the Board of Directors of the Company promoted and appointed Matthew Gage (age 55) as the Company’s Interim Chief Financial Officer effective March 21, 2022. Mr. Gage previously held the position of Director of Financial Reporting and Analysis with the Company.
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies) |
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| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Principles of Consolidation | Principles of Consolidation. The consolidated financial statements include the accounts of Precipio, Inc. and our wholly owned subsidiaries, and the Joint Venture which is a VIE in which we are the primary beneficiary. Refer to the section titled “Consolidation of Variable Interest Entities” for further information related to our accounting for the Joint Venture. All inter-company balances and transactions have been eliminated in consolidation. |
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| Use of Estimates | Use of Estimates. The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. The most significant estimates and assumptions with regard to these consolidated financial statements relate to the allowance for doubtful accounts, assumptions used within the fair value of debt and equity transactions and contractual allowances. These assumptions require considerable judgment by management. Actual results could differ from the estimates and assumptions used in preparing these consolidated financial statements. |
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| Reclassifications | Reclassifications. Certain prior period amounts of property and equipment, net and operating lease right-of-use (“ROU”) assets have been reclassified to finance lease right-of-use assets to conform to the current period presentation. These reclassifications had no effect on previously reported net earnings or total assets. As of December 31, 2020, the amounts reclassified to finance lease right-of-use assets were $0.2 million of property and equipment, net and less than $0.1 million of operating lease right-of-use assets |
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| Risks and Uncertainties | Risks and Uncertainties. Certain risks and uncertainties are inherent in our day-to-day operations and in the process of preparing our financial statements. The risks and uncertainties may be heightened by the COVID-19 pandemic and any worsening of the global business and economic environment as a result. The more significant of those risks are presented below and throughout the notes to the consolidated financial statements. The Company operates in the healthcare industry which is subject to numerous laws and regulations of federal, state and local governments. These laws and regulations include, but are not necessarily limited to, matters such as licensure, accreditation, government healthcare program participation requirements, reimbursement for patient services, and Medicare and Medicaid fraud and abuse. Government activity has increased with respect to investigations and allegations concerning possible violations of fraud and abuse statutes and regulations by healthcare providers. Violations of these laws and regulations could result in expulsion from government healthcare programs together with the imposition of significant fines and penalties, as well as significant repayments for patient services previously billed. Management believes that the Company is in compliance with fraud and abuse regulations, as well as other applicable government laws and regulations. While no material regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretation as well as regulatory actions unknown or unasserted at this time. |
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| Fair Value | Fair Value. Unless otherwise specified, book value approximates fair value. The common stock warrant liabilities are recorded at fair value. See Note 12 - Fair Value for additional information. |
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| Other Current Assets | Other Current Assets. Other current assets of $0.5 million as of December 31, 2021 include prepaid insurance of approximately $0.3 million and prepaid and other assets of $0.2 million. Other current assets of $0.3 million as of December 31, 2020 include prepaid insurance of $0.3 million and prepaid assets and other receivables of less than $0.1 million. |
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| Concentrations of Risk | Concentrations of Risk. From time to time, we may maintain a cash position with financial institutions in amounts that exceed Federal Deposit Insurance Corporation insured limits of up to $250,000 per depositor per financial institution. We have not experienced any losses on such accounts as of December 31, 2021. Service companies in the health care industry typically grant credit without collateral to patients. The majority of these patients are insured under third-party insurance agreements. The services provided by the Company are routinely billed utilizing the Current Procedural Terminology (CPT) code set designed to communicate uniform information about medical services and procedures among physicians, coders, patients, accreditation organizations, and payers for administrative, financial, and analytical purposes. CPT codes are currently identified by the Centers for Medicare and Medicaid Services and third-party payers. The Company utilizes CPT codes for Pathology and Laboratory Services contained within codes 80000-89398. |
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| Inventories | Inventories. Inventories consist of laboratory supplies and are valued at cost (determined on an average cost basis, which approximates the first-in, first-out method) or net realizable value, whichever is lower. We evaluate inventory for items that are slow moving or obsolete and record an appropriate reserve for obsolescence if needed. We have an allowance for slow moving or obsolete inventory of less than $0.1 million and zero at December 31, 2021 and 2020, respectively. |
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| Property and Equipment, net | Property and Equipment, net. Property and equipment are carried at cost, net of accumulated depreciation and amortization. Expenditures for maintenance and repairs are expensed as incurred. Depreciation and amortization are computed by the straight-line method over the estimated useful lives of the related assets as follows:
For assets sold or otherwise disposed of, the cost and related accumulated depreciation and amortization are removed from the accounts, and any related gain or loss is reflected in operations for the period. Expenditures for major betterments that extend the useful lives of property and equipment are capitalized. |
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| Intangible Assets. | Intangible Assets. We review our amortizable long-lived assets for impairment annually or whenever events indicate that the carrying amount of the asset (group) may not be recoverable. An impairment loss may be needed if the sum of the future undiscounted cash flows is less than the carrying amount of the asset (group). The amount of the loss would be determined by comparing the fair value of the asset to the carrying amount of the asset (group). There were no impairment charges on our amortizable long-lived assets during the years ended December 31, 2021 and 2020. |
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| Debt Issuance Costs, Debt Discounts and Debt Premiums. | Debt Issuance Costs, Debt Discounts and Debt Premiums. Debt issuance costs, debt discounts and debt premiums are being amortized or accreted over the lives of the related financings on a basis that approximates the effective interest method. Costs and discounts are presented as a reduction of the related debt and premiums are presented as an increase to the related debt in the accompanying balance sheets. The amortization amount recorded was expense, net of income, of less than $0.1 million and $0.3 million for the years ended December 31, 2021 and 2020, respectively. Debt discounts and debt premiums are amortized or accreted to interest expense and interest income on the consolidated statements of operations, respectively. See Note 5 – Long Term Debt and Note 6 – Convertible Notes for further discussion. |
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| Stock-Based Compensation | Stock-Based Compensation. All stock-based awards to date have exercise prices equal to the market price of our common stock on the date of grant and have ten-year contractual terms. Stock-based compensation cost is based on the fair value of the portion of stock-based awards that is ultimately expected to vest. The Company utilizes the Black-Scholes option pricing model for determining the estimated fair value for stock-based awards. Unvested awards as of December 31, 2021 had vesting periods of up to four years from the date of grant. At December 31, 2021 and 2020, zero and 53,334 unvested awards outstanding are subject to performance vesting conditions, respectively. No awards outstanding at December 31, 2021 and 2020, respectively, are subject to market-based vesting. |
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| Net Sales Recognition | Net Sales Recognition. Revenue recognition occurs when a customer obtains control of the promised goods and service. Revenue assigned to the goods and services reflects the consideration which the Company expects to receive in exchange for those goods and services. The Company derives its revenues from diagnostic testing - histology, flow cytometry, cytology and molecular testing; clinical research from bio-pharma customers, state and federal grant programs; biomarker testing from bio-pharma customers and from other product sales including revenues from equipment leases and reagent sales associated with our HSRR program. All sources of revenue are recorded net of accruals for estimated chargebacks, rebates, cash discounts, other allowances, and returns. Due to differences in the substance of these revenue types, the transactions require, and the Company utilizes, different revenue recognition policies for each. See more detailed information on revenue in Note 14 – Sales Service Revenue, Net And Accounts Receivable. The Company recognizes revenue utilizing the five-step framework of ASC 606. Control of the laboratory testing services is transferred to the customer at a point in time. As such, the Company recognizes revenue for diagnostic testing at a point in time based on the delivery method (web-portal access or fax) for a patient’s laboratory report. Diagnostic testing service revenue is reported at the estimated net realizable amounts from patients, third-party payers and others for services rendered, including retroactive adjustment under reimbursement agreements with third-party payers. Provisions for third-party payer settlements are provided in the period in which the related services are rendered and adjusted in the future periods, as final settlements are determined. For clinical research and biomarker services, the Company utilizes an “effort based” method of assessing performance and measures progress towards satisfaction of the performance obligation based upon the delivery of results per the contract. Control of reagents and other diagnostic products are transferred to the customer at a point in time and, as such, the Company recognizes these revenues at a point in time based on the delivery method. When we receive payment in advance, we initially defer the revenue and recognize it when we deliver the service. Taxes collected from customers and remitted to government agencies for specific net sales producing transactions are recorded net with no effect on the statements of operations. |
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| Accounts Receivable | Accounts Receivable Accounts Receivable result from diagnostic services provided to self-pay and insured patients, project based testing services and clinical research. The payment for services provided by the Company are generally due within 30 days from the invoice date. Accounts receivable are reduced by an allowance for doubtful accounts. In evaluating the collectability of accounts receivable, the Company analyzes and identifies trends for each of its sources of revenue to estimate the appropriate allowance for doubtful accounts. For receivables associated with self-pay patients, including patients with insurance and a deductible and copayment, the Company records an allowance for doubtful accounts in the period of services on the basis of past experience of patients unable or unwilling to pay for service fee for which they are financially responsible. For receivables associated with services provided to patients with third-party coverage, the Company analyzes contractually due amounts and provides an allowance, if necessary. The difference between the standard rates and the amounts actually collected after all reasonable collection efforts have been exhausted is charged against the allowance for doubtful accounts. |
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| Presentation of Insurance Claims and Related Insurance Recoveries | Presentation of Insurance Claims and Related Insurance Recoveries. The Company accounts for its insurance claims and related insurance recoveries at their gross values as standards for health care entities do not allow the Company to net insurance recoveries against the related claim liabilities. There were no insurance claims or insurance recoveries recorded during the years ended December 31, 2021 and 2020. |
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| Advertising Costs | Advertising Costs. Advertising costs are expensed as incurred and are included in operating expenses on the consolidated statements of operations. Advertising costs charged to operations totaled approximately $0.1 million in 2021 and 2020, respectively. |
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| Research and Development Costs | Research and Development Costs. All costs associated with internal research and development are expensed as incurred. These costs include salaries and employee related expenses, operating supplies and facility-related expenses. Research and development costs charged to operations totaled $1.3 million and $1.2 million for the years ended December 31, 2021 and 2020, respectively. |
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| Income Taxes | Income Taxes. Deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax basis of assets and liabilities at each balance sheet date using tax rates expected to be in effect in the year the differences are expected to reverse. The effect on the deferred tax assets and liabilities of a change in tax rates is recognized in the period when the change in tax rates is enacted. A valuation allowance is established when it is determined that it is more likely than not that some portion or all of the deferred tax assets will not be realized. A full valuation allowance has been applied against the Company’s net deferred tax assets as of December 31, 2021 and 2020, due to projected losses and because it is not more likely than not that the Company will realize future benefits associated with these deferred tax assets. Management’s conclusions regarding uncertain tax positions may be subject to review and adjustment at a later date based upon ongoing analysis of, or changes in tax laws, regulations and interpretations thereof as well as other factors. The Company’s policy is to record interest and penalties directly related to income taxes as income tax expense in the accompanying consolidated statements of operations, of which there was none for the years ended December 31, 2021 and 2020. |
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| Common Stock Warrants | Common Stock Warrants. The Company classifies the issuance of common stock warrants as equity any contracts that (i) require physical settlement or net-stock settlement or (ii) gives the Company a choice of net-cash settlement or settlement in its own stocks (physical settlement or net-stock settlement). The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net-cash settle the contract if an event occurs and if that event is outside of the Company’s control), or (ii) gives the counterparty a choice of net-cash settlement or settlement in stock (physical settlement or net-stock settlement). Certain of our issued and outstanding warrants to purchase common stock do not qualify to be treated as equity and accordingly, are recorded as a liability (“Common Stock Warrant Liability”). We are required to present these instruments at fair value at each reporting date and any changes in fair values are recorded as an adjustment to earnings. |
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| Beneficial Conversion Features | Beneficial Conversion Features. The intrinsic value of a beneficial conversion feature (“BCF”) inherent to a convertible note payable, which is not bifurcated and accounted for separately from the convertible note payable and may not be settled in cash upon conversion, is treated as a discount to the convertible note payable. This discount is amortized over the period from the date of issuance to the first conversion date using the effective interest method. If the note payable is retired prior to the end of its contractual term, the unamortized discount is expensed in the period of retirement to interest expense. In general, the BCF is measured by comparing the effective conversion price, after considering the relative fair value of detachable instruments included in the financing transaction, if any, to the fair value of the common shares at the commitment date to be received upon conversion. Deemed dividends are also recorded for the intrinsic value of conversion options embedded in preferred shares based upon the differences between the fair value of the underlying common stock at the commitment date of the transaction and the effective conversion price embedded in the preferred shares. When the preferred shares are non-redeemable the BCF is fully amortized into additional paid-in capital and preferred discount. If the preferred shares are redeemable, the discount is amortized from the commitment date to the first conversion date. |
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| Consolidation of Variable Interest Entities | Consolidation of Variable Interest Entities. We evaluate any entity in which we are involved to determine if the entity is a VIE and if so, whether we hold a variable interest and are the primary beneficiary. We consolidate VIEs that are subject to assessment when we are deemed to be the primary beneficiary of the VIE. The process for determining whether we are the primary beneficiary of the VIE is to conclude whether we are a party to the VIE holding a variable interest that meets both of the following criteria: (1) has the power to make decisions that most significantly affect the economic performance of the VIE, and (2) has the obligation to absorb losses or the right to receive benefits that in either case could potentially be significant to the VIE. We have determined that we hold a variable interest in the Joint Venture, have the power to make significant operational decisions on behalf of the VIE and also have the obligation to absorb the majority of the losses from the VIE. As such we have also determined that we are the primary beneficiary of the VIE. The following table presents information about the carrying value of the assets and liabilities of the Joint Venture which we consolidate and which are included on our consolidated balance sheets. Intercompany balances are eliminated in consolidation and not reflected in the following table.
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| Loss Per Share | Loss Per Share. Basic loss per share is calculated based on the weighted-average number of common shares outstanding during each period. Diluted loss per share includes shares issuable upon exercise of outstanding stock options, warrants or conversion rights that have exercise or conversion prices below the market value of our common stock. Options, warrants and conversion rights pertaining to 3,584,688 and 1,846,989 shares of our common stock have been excluded from the computation of diluted loss per share at December 31, 2021 and 2020, respectively, because the effect is anti-dilutive due to the net loss. The following table summarizes the outstanding securities not included in the computation of diluted net loss per share:
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| Recent Accounting Pronouncements | Recently Adopted Accounting Pronouncements. In December 2019, the FASB issued Accounting Standards Update (“ASU”) 2019-12 “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”, which is intended to improve consistent application and simplify the accounting for income taxes. This ASU removes certain exceptions to the general principles in Topic 740 and clarifies and amends existing guidance. The Company adopted this guidance on January 1, 2021. The adoption of this standard was not material to our consolidated financial statements. Recent Accounting Pronouncements Not Yet Adopted. In July 2021, the FASB issued ASU 2021-05, Lease (Topic 842), “Lessors - Certain Leases with Variable Lease Payments”. This guidance amends the lease classification accounting for lessors for certain leases with variable lease payments that do not depend on a reference index or a rate and would have resulted in the recognition of a loss at lease commencement if classified as a sales-type or direct financing lease. Under the new guidance, these leases will be classified as an operating lease. The amendments are effective for fiscal years beginning after December 15, 2021, with early adoption permitted. The Company is currently evaluating the impact that this ASU will have on its consolidated financial statements and related disclosures. In May 2021, the FASB issued ASU 2021-04, “Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options” which clarifies the accounting for a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after a modification or exchange and the related EPS effects of such transaction if recognized as an adjustment to equity. This ASU becomes effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years, and should be applied prospectively to modifications or exchanges occurring on or after the effective date. The Company is currently evaluating the impact that this ASU will have on its consolidated financial statements and related disclosures. In August 2020, the FASB issued ASU 2020-06 “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.” This ASU amends the guidance on convertible instruments and the derivatives scope exception for contracts in an entity’s own equity and improves and amends the related EPS guidance for both Subtopics. The ASU will be effective for annual reporting periods after December 15, 2023 and interim periods within those annual periods and early adoption is permitted in annual reporting periods ending after December 15, 2020. The Company is currently assessing the potential impact that the adoption of this ASU will have on its consolidated financial statements. In June 2016, the FASB issued ASU 2016-13 “Measurement of Credit Losses on Financial Instruments”, which replaces current methods for evaluating impairment of financial instruments not measured at fair value, including trade accounts receivable and certain debt securities, with a current expected credit loss model. This ASU, as amended, is effective for the Company for reporting periods beginning after December 15, 2022. The Company is currently assessing the potential impact that the adoption of this ASU will have on its consolidated financial statements. |
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Tables) |
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Dec. 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Estimated Useful Lives of Property and Equipment |
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| Schedule of Variable Interest Entities |
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| Outstanding Securities not Included in the Computation of Diluted Net Loss | The following table summarizes the outstanding securities not included in the computation of diluted net loss per share:
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PROPERTY AND EQUIPMENT, NET (Tables) |
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Dec. 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| PROPERTY AND EQUIPMENT, NET [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Summary of Property and Equipment, Net | A summary of property and equipment at December 31, 2021 and 2020 is as follows:
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INTANGIBLES (Tables) |
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Dec. 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| INTANGIBLES [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Intangible Assets | Intangible assets consist of the following:
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| Intangible Assets, Estimated Useful Life |
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LONG-TERM DEBT (Tables) |
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Dec. 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| LONG-TERM DEBT [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of debt | Long-term debt consists of the following:
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| Schedule of Maturities of Long-term Debt | The aggregate future maturities required on gross long-term debt at December 31, 2021 are as follows:
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CONVERTIBLE NOTES (Tables) |
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Dec. 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Debt Instrument [Line Items] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of debt | Long-term debt consists of the following:
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| Convertible Bridge Loan | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Debt Instrument [Line Items] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Summary of change in Bridge Note debt discounts and debt premiums |
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ACCRUED EXPENSES OTHER CURRENT LIABILITIES (Tables) |
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Dec. 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| ACCRUED EXPENSES OTHER CURRENT LIABILITIES [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Accrued expenses | Accrued expenses at December 31, 2021 and 2020 are as follows:
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LEASES (Tables) |
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Dec. 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| LEASES [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Summary of balance sheet presentation of our operating and finance leases |
(1)As of December 31, 2020, $175 of property and equipment, net and $29 of operating lease right-of-use assets were reclassified to finance lease right-of-use assets to conform to the current period presentation. (2)As of December 31, 2021 and 2020, finance lease right-of-use assets included $61 and $29, respectively, of assets related to finance leases associated with the HSRR program.
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| Summary of estimated future minimum lease payments for operating leases |
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| Summary of estimated future minimum lease payments for finance leases | As of December 31, 2021, the estimated future minimum lease payments, excluding non-lease components, are as follows:
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| Schedule of other information |
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COMMITMENTS AND CONTINGENCIES (Tables) |
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Dec. 31, 2021 | |||||||||||||||||||||||||||||||||||||
| COMMITMENTS AND CONTINGENCIES [Abstract] | |||||||||||||||||||||||||||||||||||||
| Purchase Obligations |
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INCOME TAXES (Tables) |
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Dec. 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| INCOME TAXES [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Deferred Tax Assets And Liabilities |
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| Reconciliation of the Provision for Income Taxes |
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| Schedule of Income Taxes by Jurisdiction |
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| Summary of Operating Loss Carryforwards |
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STOCKHOLDERS' EQUITY (Tables) |
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| STOCKHOLDERS' EQUITY [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of stockholders' equity, including warrants and rights | The following represents a summary of the warrants outstanding as of December 31, 2021:
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| Summary of dividends recorded | There were no deemed dividends recorded in 2021. The following represents a summary of the dividends recorded for the year ended December 31, 2020:
* Represents less than one thousand dollars |
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FAIR VALUE (Tables) |
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| FAIR VALUE [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Changes in Fair Value of Liability |
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EQUITY INCENTIVE PLAN (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Dec. 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| EQUITY INCENTIVE PLAN [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Summary of stock option activity | The following table summarizes stock option activity under our plans during the year ended December 31, 2021:
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SALES SERVICE REVENUE, NET AND ACCOUNTS RECEIVABLE (Tables) |
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Dec. 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SALES SERVICE REVENUE, NET AND ACCOUNTS RECEIVABLE [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Net Revenues |
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| Schedule of Gross to Net Sales Adjustments |
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| Schedule of Reported Revenues Net of Collection Allowance |
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| Schedule of Receivables | The following summarizes the mix of receivables as of December 31, 2021 and 2020:
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| Schedule of Allowance for Doubtful Accounts | The following table presents the roll-forward of the allowance for doubtful accounts for the year ended December 31, 2021:
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| Schedule of Customer Revenue and Accounts Receivable Concentrations |
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Narrative) (Details) - USD ($) $ in Thousands |
12 Months Ended | |
|---|---|---|
Dec. 31, 2021 |
Dec. 31, 2020 |
|
| Finite-Lived Intangible Assets [Line Items] | ||
| Other current assets | $ 549 | $ 324 |
| Prepaid insurance | 300 | 300 |
| Prepaid assets and other receivables | 200 | 100 |
| Inventory Valuation Reserves | $ 100 | $ 0 |
| Awards outstanding | 0 | 0 |
| Impairment of intangible assets | $ 0 | $ 0 |
| Amortization expense of converted debt issuance costs | 100 | 300 |
| Insurance claims, recoveries | 0 | 0 |
| Income tax, interest and penalties | $ 0 | 0 |
| Share-based compensation arrangement by share-based payment award, expiration period | 10 years | |
| Advertising expense | $ 100 | 100 |
| Research and development expense | $ 1,300 | $ 1,200 |
| Securities not included in the computation of diluted net loss per share | 3,584,688 | 1,846,989 |
| Performance Based | ||
| Finite-Lived Intangible Assets [Line Items] | ||
| Awards outstanding | 0 | 53,334 |
| Maximum [Member] | ||
| Finite-Lived Intangible Assets [Line Items] | ||
| Stock options, unvested options, vesting period | 4 years | |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (VIE) (Details) - USD ($) $ in Thousands |
Dec. 31, 2021 |
Dec. 31, 2020 |
Dec. 31, 2019 |
|---|---|---|---|
| Assets: | |||
| Accounts receivable, net | $ 697 | $ 874 | |
| Total assets | 30,439 | 20,713 | |
| Liabilities: | |||
| Accrued expenses | 1,918 | 2,036 | |
| Total liabilities | 5,835 | 6,551 | |
| Total stockholders' equity | 24,604 | 14,162 | $ 13,205 |
| Variable Interest Entity, Primary Beneficiary [Member] | |||
| Assets: | |||
| Accounts receivable, net | 180 | 538 | |
| Total assets | 180 | 538 | |
| Liabilities: | |||
| Accrued expenses | 36 | 27 | |
| Total liabilities | 36 | 27 | |
| Noncontrolling Interest in Joint Venture | 40 | 27 | |
| Total stockholders' equity | $ 79 | $ 53 |
PROPERTY AND EQUIPMENT, NET (Summary of Property and Equipment) (Details) - USD ($) $ in Thousands |
12 Months Ended | |
|---|---|---|
Dec. 31, 2021 |
Dec. 31, 2020 |
|
| Property, Plant and Equipment [Line Items] | ||
| Property, Plant and Equipment, Gross | $ 1,669 | $ 928 |
| Less-accumulated depreciation and amortization | (833) | (651) |
| Property, Plant and Equipment, Net, Total | 836 | 277 |
| Depreciation expense | 200 | 100 |
| Furniture and Fixtures [Member] | ||
| Property, Plant and Equipment [Line Items] | ||
| Property, Plant and Equipment, Gross | 12 | 12 |
| Laboratory Equipment [Member] | ||
| Property, Plant and Equipment [Line Items] | ||
| Property, Plant and Equipment, Gross | 794 | 330 |
| Computer Equipment and Software [Member] | ||
| Property, Plant and Equipment [Line Items] | ||
| Property, Plant and Equipment, Gross | 725 | 533 |
| Construction in Progress [Member] | ||
| Property, Plant and Equipment [Line Items] | ||
| Property, Plant and Equipment, Gross | $ 138 | $ 53 |
INTANGIBLES (Narrative) (Details) - USD ($) $ in Millions |
12 Months Ended | |
|---|---|---|
Dec. 31, 2021 |
Dec. 31, 2020 |
|
| INTANGIBLES [Abstract] | ||
| Amortization expense for intangible assets | $ 1.0 | $ 1.0 |
| Amortization expense, 2022 | 0.9 | |
| Amortization expense, 2023 | 0.9 | |
| Amortization expense, 2024 | 0.9 | |
| Amortization expense, 2025 | 0.9 | |
| Amortization expense, 2026 | $ 0.9 | |
INTANGIBLES (Schedule of Intangible Assets) (Details) - USD ($) $ in Thousands |
Dec. 31, 2021 |
Dec. 31, 2020 |
|---|---|---|
| Finite-Lived Intangible Assets, Net [Abstract] | ||
| Cost | $ 18,990 | $ 18,990 |
| Accumulated Amortization | 4,273 | 3,323 |
| Net Book Value | 14,717 | 15,667 |
| Technology [Member] | ||
| Finite-Lived Intangible Assets, Net [Abstract] | ||
| Cost | 18,990 | 18,990 |
| Accumulated Amortization | 4,273 | 3,323 |
| Net Book Value | $ 14,717 | $ 15,667 |
INTANGIBLES (Intangible Assets, Estimated Useful Life) (Details) |
12 Months Ended |
|---|---|
Dec. 31, 2021 | |
| Technology [Member] | |
| Finite-Lived Intangible Assets [Line Items] | |
| Intangible assets, estimated useful life | 20 years |
LONG-TERM DEBT (Schedule of Debt) (Details) - USD ($) $ in Thousands |
Dec. 31, 2021 |
Dec. 31, 2020 |
|---|---|---|
| Debt Instrument [Line Items] | ||
| Total long-term debt | $ 186 | $ 1,010 |
| Current portion of long-term debt | (26) | (648) |
| Long-term debt, net of current maturities | 160 | 362 |
| Department of Economic and Community Development (DECD) | ||
| Debt Instrument [Line Items] | ||
| Total long-term debt | 205 | 233 |
| Debt issuance cost | (19) | (22) |
| Financed Insurance Loan [Member] | ||
| Debt Instrument [Line Items] | ||
| Total long-term debt | $ 0 | 12 |
| Paycheck Protection Program | ||
| Debt Instrument [Line Items] | ||
| Total long-term debt | $ 787 |
LONG-TERM DEBT (Department of Economic and Community Development) (Details) - Department of Economic and Community Development (DECD) - USD ($) |
12 Months Ended | ||
|---|---|---|---|
Jan. 08, 2018 |
Dec. 31, 2021 |
Dec. 31, 2020 |
|
| Debt Instrument [Line Items] | |||
| Gross proceeds from grant received and loan | $ 400,000 | ||
| Proceeds from grant | $ 100,000 | ||
| Debt instrument, term | 10 years | ||
| Debt instrument, maturity date | Dec. 31, 2027 | ||
| Interest rate (as a percent) | 3.25% | ||
| Term loan | |||
| Debt Instrument [Line Items] | |||
| Proceeds from long-term debt | $ 300,000 | ||
| Debt issuance costs, net | $ 31,000 | $ 19,000 | $ 22,000 |
| Amortization of debt issuance cost | 3,000 | $ 2,000 | |
| 2022 | 3,000 | ||
| 2023 | 3,000 | ||
| 2024 | 3,000 | ||
| 2025 | 3,000 | ||
| 2026 | $ 3,000 | ||
LONG-TERM DEBT (Financed Insurance Loan) (Details) - USD ($) $ in Thousands |
Dec. 31, 2021 |
Dec. 31, 2020 |
Jul. 31, 2020 |
Jul. 31, 2019 |
|---|---|---|---|---|
| Debt Instrument [Line Items] | ||||
| Total debt | $ 186 | $ 1,010 | ||
| Financed Insurance Loan [Member] | ||||
| Debt Instrument [Line Items] | ||||
| Debt instrument, face amount | $ 100 | $ 400 | ||
| Interest rate (as a percent) | 5.00% | 5.00% | ||
| Total debt | $ 0 | 12 | ||
| Minimum [Member] | Financed Insurance Loan [Member] | ||||
| Debt Instrument [Line Items] | ||||
| Total debt | $ 100 |
LONG-TERM DEBT (Paycheck Protection Program.) (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2021 |
Apr. 23, 2020 |
|
| Debt Instrument [Line Items] | ||
| Gain on forgiveness of Paycheck Protection Program loan | $ 794,000 | |
| Unsecured Debt [Member] | Paycheck Protection Program | Promissory notes | ||
| Debt Instrument [Line Items] | ||
| Debt instrument, face amount | $ 787,200 |
LONG-TERM DEBT (Aggregate Future Maturities on Long-Term Debt) (Details) - Department of Economic and Community Development (DECD) $ in Thousands |
Dec. 31, 2021
USD ($)
|
|---|---|
| Debt Instrument [Line Items] | |
| 2022 | $ 29 |
| 2023 | 30 |
| 2024 | 31 |
| 2025 | 32 |
| 2026 | 33 |
| 2027 and thereafter | 50 |
| Total | $ 205 |
CONVERTIBLE NOTES - Bridge Notes (Details) - USD ($) $ / shares in Units, $ in Thousands |
12 Months Ended | |||
|---|---|---|---|---|
Mar. 26, 2020 |
Mar. 25, 2020 |
Dec. 31, 2020 |
Dec. 31, 2021 |
|
| Debt Instrument [Line Items] | ||||
| Loss on extinguishment of convertible notes | $ (1,225) | |||
| Convertible notes | 0 | $ 0 | ||
| April 2019 Bridge Notes And May 2019 Bridge Notes | ||||
| Debt Instrument [Line Items] | ||||
| Guaranteed interest period | 18 months | 12 months | ||
| April 2019 Bridge Notes And May 2019 Bridge Notes | Convertible Debt [Member] | Amendment Agreement | ||||
| Debt Instrument [Line Items] | ||||
| Floor price | $ 0.40 | $ 2.25 | ||
| Debt premium on debt | 800 | |||
| Loss on extinguishment of convertible notes | 1,200 | |||
| Convertible Bridge Loan | Convertible Debt [Member] | ||||
| Debt Instrument [Line Items] | ||||
| Warrant liability canceled due to settlement of equity instruments | $ 2,200 | |||
| Number of shares converted from debt instrument (in shares) | 3,908,145 |
CONVERTIBLE NOTES (Bridge Note debt discounts and debt premiums) (Details) - Convertible Debt [Member] - Convertible Bridge Loan $ in Thousands |
12 Months Ended |
|---|---|
|
Dec. 31, 2020
USD ($)
| |
| Debt discounts | |
| Beginning balance | $ (1,796) |
| Deductions: Amortization/accretion | 703 |
| Deductions: Write-off related to note conversions | 138 |
| Deductions: Write-off related to note extinguishment | 955 |
| Debt premiums | |
| Additions: | 793 |
| Deductions: Amortization/accretion | (385) |
| Deductions: Write-off related to note conversions | $ (408) |
ACCRUED EXPENSES OTHER CURRENT LIABILITIES (Accrued Expenses) (Details) - USD ($) $ in Thousands |
Dec. 31, 2021 |
Dec. 31, 2020 |
|---|---|---|
| ACCRUED EXPENSES OTHER CURRENT LIABILITIES [Abstract] | ||
| Accrued expenses | $ 1,033 | $ 906 |
| Accrued compensation | 718 | 685 |
| Accrued franchise, property and sales and use taxes | 148 | 426 |
| Accrued interest | 19 | 19 |
| Accrued expenses | $ 1,918 | $ 2,036 |
ACCRUED EXPENSES OTHER CURRENT LIABILITIES (Narrative) (Details) - USD ($) $ in Millions |
12 Months Ended | |
|---|---|---|
Dec. 31, 2021 |
Dec. 31, 2020 |
|
| ACCRUED EXPENSES OTHER CURRENT LIABILITIES [Abstract] | ||
| Reduction in Certain Accrued Expense and Accounts Payable | $ 0.1 | $ 0.1 |
LEASES - Narrative (Details) $ in Thousands |
12 Months Ended | ||
|---|---|---|---|
|
Dec. 31, 2021
USD ($)
item
|
Dec. 31, 2020
USD ($)
|
Nov. 29, 2021
USD ($)
|
|
| Lessee, Lease, Description [Line Items] | |||
| Operating leases | $ 200 | $ 200 | |
| Operating lease right-of-use assets obtained in exchange for operating lease obligations | 771 | 0 | |
| Operating lease right-of-use assets, net | 858 | 306 | $ 800 |
| Operating Lease, Liability, Noncurrent | 697 | 92 | $ 800 |
| Finance lease ROU assets | 94 | 50 | |
| Net investment in leased assets | $ 200 | ||
| Minimum [Member] | |||
| Lessee, Lease, Description [Line Items] | |||
| Facility leases | item | 1 | ||
| Renewal term | 1 year | ||
| Maximum [Member] | |||
| Lessee, Lease, Description [Line Items] | |||
| Renewal term | 5 years | ||
| Net investment in leased assets | 100 | ||
| Right of Use Asset | |||
| Lessee, Lease, Description [Line Items] | |||
| Finance lease ROU assets | $ 100 | $ 0 | |
LEASES - Future Minimum Lease Payments (Details) - USD ($) $ in Thousands |
Dec. 31, 2021 |
Nov. 29, 2021 |
Dec. 31, 2020 |
|---|---|---|---|
| Operating leases, estimated future minimum lease payments | |||
| 2022 | $ 227 | ||
| 2023 | 218 | ||
| 2024 | 204 | ||
| 2025 | 191 | ||
| 2026 | 195 | ||
| Total lease obligations | 1,035 | ||
| Less: Amount representing interest | (172) | ||
| Present value of net minimum lease obligations | 863 | ||
| Less, current portion | (166) | $ (225) | |
| Long term portion | 697 | $ 800 | 92 |
| Finance leases, estimated future minimum lease payments | |||
| 2022 | 176 | ||
| 2023 | 101 | ||
| 2024 | 80 | ||
| 2025 | 65 | ||
| 2026 | 26 | ||
| Total lease obligations | 448 | ||
| Less: Amount representing interest | (67) | ||
| Present value of net minimum lease obligations | 381 | ||
| Less, current portion | (222) | (48) | |
| Long term portion | 159 | 116 | |
| 2022 | 403 | ||
| 2023 | 319 | ||
| 2024 | 284 | ||
| 2025 | 256 | ||
| 2026 | 221 | ||
| Total lease obligations | 1,483 | ||
| Less: Amount representing interest | (239) | ||
| Total lease liabilities | 1,244 | $ 481 | |
| Less, current portion | (388) | ||
| Long term portion | $ 856 |
LEASES - Other Information (Details) |
Dec. 31, 2021 |
Dec. 31, 2020 |
|---|---|---|
| LEASES [Abstract] | ||
| Operating leases (in years) | 4 years 8 months 12 days | 1 year 10 months 24 days |
| Finance leases (in years) | 3 years 1 month 6 days | 3 years 7 months 6 days |
| Operating leases discount rate | 8.00% | 8.00% |
| Finance leases discount rate | 10.03% | 8.28% |
LEASES - Operating and Financing Lease Cost (Details) - USD ($) $ in Millions |
12 Months Ended | |
|---|---|---|
Dec. 31, 2021 |
Dec. 31, 2020 |
|
| Lessee, Lease, Description [Line Items] | ||
| Operating lease costs | $ 0.3 | $ 0.2 |
| Maximum [Member] | ||
| Lessee, Lease, Description [Line Items] | ||
| Short-term lease costs | 0.1 | 0.1 |
| Finance leases, amortization expense and interest | $ 0.1 | $ 0.1 |
COMMITMENTS AND CONTINGENCIES (Narrative) (Details) - USD ($) $ in Millions |
Feb. 06, 2017 |
Dec. 31, 2021 |
Dec. 31, 2020 |
|---|---|---|---|
| Loss Contingencies [Line Items] | |||
| Class of Warrant or Right, Outstanding | 357 | ||
| CPA Global | |||
| Loss Contingencies [Line Items] | |||
| Loss contingency, damages sought | $ 0.2 | ||
| CPA Global | Minimum [Member] | |||
| Loss Contingencies [Line Items] | |||
| Loss contingency accrual | $ 0.1 | $ 0.1 |
COMMITMENTS AND CONTINGENCIES (Purchase Commitments) (Details) - Inventories [Member] |
Dec. 31, 2021
USD ($)
|
|---|---|
| 2022 | $ 1,046 |
| 2023 | 218 |
| 2024 | 170 |
| 2025 | 50 |
| Total | $ 1,484 |
INCOME TAXES (Narrative) (Details) - USD ($) $ in Millions |
12 Months Ended | |
|---|---|---|
Dec. 31, 2021 |
Dec. 31, 2020 |
|
| Increase in valuation allowance | $ 1.7 | $ 2.8 |
| Deferred Tax Assets, Net of Valuation Allowance | 15.2 | $ 13.5 |
| Federal | ||
| Gross federal and state net operating loss ("NOL") carryforwards | 73.0 | |
| Federal losses | 45.0 | |
| State and Local Jurisdiction [Member] | ||
| Gross federal and state net operating loss ("NOL") carryforwards | $ 2.0 | |
INCOME TAXES (Schedule of Deferred Tax Assets And Liabilities) (Details) - USD ($) $ in Thousands |
Dec. 31, 2021 |
Dec. 31, 2020 |
|---|---|---|
| INCOME TAXES [Abstract] | ||
| Net operating loss and credit carryforwards | $ 17,604 | $ 15,941 |
| Allowance for doubtful accounts | 403 | 986 |
| Stock-based compensation | 915 | 461 |
| Other | 127 | 39 |
| Gross deferred tax assets | 19,049 | 17,427 |
| Property and equipment | (257) | (94) |
| Intangible assets | (3,589) | (3,849) |
| Other | (18) | |
| Gross deferred tax liabilities | (3,864) | (3,943) |
| Net deferred tax assets | 15,185 | 13,484 |
| Less valuation allowance | (15,185) | (13,484) |
| Net deferred liability | $ 0 | $ 0 |
INCOME TAXES (Reconciliation of the Provision for Income Taxes) (Details) - USD ($) $ in Thousands |
12 Months Ended | |
|---|---|---|
Dec. 31, 2021 |
Dec. 31, 2020 |
|
| INCOME TAXES [Abstract] | ||
| Benefit at federal rate | $ (1,788) | $ (2,231) |
| State income taxes-net of federal benefit | (289) | (379) |
| Miscellaneous permanent differences | 62 | 48 |
| Warrant liability revaluation | (97) | (3) |
| Meals and entertainment | 19 | 18 |
| PPP Loan forgiven | (192) | |
| Income taxed to owners on Non-Controlling Interest (NCI) | (3) | |
| Change in valuation allowance | 2,288 | 2,547 |
| Income Tax Expense (Benefit), Total | $ 0 | $ 0 |
INCOME TAXES (Schedule of Income Taxes by Jurisdiction) (Details) - USD ($) $ in Thousands |
12 Months Ended | |
|---|---|---|
Dec. 31, 2021 |
Dec. 31, 2020 |
|
| INCOME TAXES [Abstract] | ||
| Income Tax Expense (Benefit), Total | $ 0 | $ 0 |
INCOME TAXES (Summary of Operating Loss Carryforwards) (Details) - Internal Revenue Service (IRS) [Member] $ in Thousands |
Dec. 31, 2021
USD ($)
|
|---|---|
| Operating Loss Carryforwards | $ 72,513 |
| Tax Year 2036 [Member] | |
| Operating Loss Carryforwards | 14,277 |
| Tax Year 2037 [Member] | |
| Operating Loss Carryforwards | 13,641 |
| Unlimited life | |
| Operating Loss Carryforwards | $ 44,595 |
STOCKHOLDERS' EQUITY (At The Market Offering Agreement) (Details) - USD ($) $ / shares in Units, $ in Thousands |
12 Months Ended | |||
|---|---|---|---|---|
Apr. 02, 2021 |
Dec. 31, 2021 |
Dec. 31, 2020 |
Apr. 13, 2020 |
|
| Class of Stock [Line Items] | ||||
| Common stock, par value | $ 0.01 | $ 0.01 | ||
| Proceeds from issuance of common stock | $ 16,207 | $ 8,929 | ||
| AGP | At The Market Offering Agreement | ||||
| Class of Stock [Line Items] | ||||
| Common stock, par value | $ 0.01 | |||
| Aggregate sales proceeds of common stock | $ 22,000 | |||
| Aggregate authorized offering price | $ 50,000 | |||
| Percentage of cash fee | 3.00% | |||
| Proceeds from issuance of common stock | $ 14,900 | |||
| Shares issued (in shares) | 4,501,000 | |||
STOCKHOLDERS' EQUITY (Preferred Stock) (Details) - shares |
Dec. 31, 2021 |
Dec. 31, 2020 |
|---|---|---|
| STOCKHOLDERS' EQUITY [Abstract] | ||
| Preferred stock, shares authorized (in shares) | 15,000,000 | 15,000,000 |
STOCKHOLDERS' EQUITY (Offering Warrants) (Details) - USD ($) |
1 Months Ended | 12 Months Ended | |||
|---|---|---|---|---|---|
Mar. 31, 2020 |
Aug. 31, 2017 |
Dec. 31, 2021 |
Dec. 31, 2020 |
Feb. 29, 2020 |
|
| Class of Stock [Line Items] | |||||
| Deemed dividend | $ 0 | $ 3,344,000 | |||
| Offering Warrants [Member] | |||||
| Class of Stock [Line Items] | |||||
| Stock rights issued (in shares) | 178,666 | ||||
| Exercise price (in dollars per share) | $ 0.40 | $ 45.00 | $ 2.25 | ||
| Class of warrant or right, term | 5 years | ||||
| Offering Warrants [Member] | Deemed Dividend B | |||||
| Class of Stock [Line Items] | |||||
| Deemed dividend | $ 6,000 | ||||
STOCKHOLDERS' EQUITY (Note Conversion Warrants) (Details) - USD ($) |
1 Months Ended | 12 Months Ended | |||
|---|---|---|---|---|---|
Mar. 31, 2020 |
Aug. 31, 2017 |
Dec. 31, 2021 |
Dec. 31, 2020 |
Feb. 29, 2020 |
|
| Class of Stock [Line Items] | |||||
| Deemed dividend | $ 0 | $ 3,344,000 | |||
| Note Conversion Warrants | |||||
| Class of Stock [Line Items] | |||||
| Exercise price (in dollars per share) | $ 0.40 | $ 2.25 | |||
| Note Conversion Warrants | Deemed Dividend C | |||||
| Class of Stock [Line Items] | |||||
| Deemed dividend | $ 5,000 | ||||
| Common Stock [Member] | Note Conversion Warrants | |||||
| Class of Stock [Line Items] | |||||
| Conversion of convertible notes into common stock (in shares) | 23,999 | ||||
| Exercise price (in dollars per share) | $ 45.00 | ||||
| Class of warrant or right, term | 5 years | ||||
STOCKHOLDERS' EQUITY (Convertible Promissory Note Warrants) (Details) - USD ($) |
1 Months Ended | 12 Months Ended | |||
|---|---|---|---|---|---|
Mar. 31, 2020 |
Dec. 31, 2021 |
Dec. 31, 2020 |
Feb. 29, 2020 |
Aug. 31, 2017 |
|
| Class of Stock [Line Items] | |||||
| Deemed dividend | $ 0 | $ 3,344,000 | |||
| Convertible Promissory Note Warrants [Member] | |||||
| Class of Stock [Line Items] | |||||
| Exercise price (in dollars per share) | $ 0.40 | $ 2.25 | $ 45.00 | ||
| Maximum [Member] | Convertible Promissory Note Warrants [Member] | Deemed Dividend D | |||||
| Class of Stock [Line Items] | |||||
| Deemed dividend | $ 1,000 | ||||
STOCKHOLDERS' EQUITY (Deemed Dividends) (Details) - USD ($) $ in Thousands |
12 Months Ended | |
|---|---|---|
Dec. 31, 2021 |
Dec. 31, 2020 |
|
| Class of Stock [Line Items] | ||
| Amount Recorded | $ 0 | $ 3,344 |
| Purchase Agreement 2018 [Member] | Deemed Dividend A | ||
| Class of Stock [Line Items] | ||
| Amount Recorded | 3,333 | |
| Purchase Agreement 2018 [Member] | Deemed Dividend B | ||
| Class of Stock [Line Items] | ||
| Amount Recorded | 6 | |
| Purchase Agreement 2018 [Member] | Deemed Dividend C | ||
| Class of Stock [Line Items] | ||
| Amount Recorded | $ 5 | |
EQUITY INCENTIVE PLAN (Summary of Stock Option Activity) (Details) - Stock Options [Member] - $ / shares |
12 Months Ended | |
|---|---|---|
Dec. 31, 2021 |
Dec. 31, 2020 |
|
| Number of Options | ||
| Outstanding at beginning of period (in shares) | 822,992 | |
| Granted (in shares) | 1,907,347 | 433,550 |
| Exercised (in shares) | (1,379) | |
| Forfeited (in shares) | (93,673) | (100,888) |
| Outstanding at end of period (in shares) | 2,635,287 | 822,992 |
| Exercisable at end of period (in shares) | 755,610 | |
| Weighted-Average Exercise Price | ||
| Outstanding at beginning of period (in dollars per share) | $ 4.46 | |
| Granted (in dollars per share) | 2.89 | $ 2.01 |
| Exercised (in dollars per share) | 2.06 | |
| Forfeited (in dollars per share) | 2.82 | 12.64 |
| Outstanding at end of period (in dollars per share) | 3.38 | $ 4.46 |
| Exercisable at end of period (in dollars per share) | $ 4.62 | |
SALES SERVICE REVENUE, NET AND ACCOUNTS RECEIVABLE (Narrative) (Details) |
12 Months Ended | |
|---|---|---|
|
Dec. 31, 2021
USD ($)
segment
|
Dec. 31, 2020
USD ($)
|
|
| SALES SERVICE REVENUE, NET AND ACCOUNTS RECEIVABLE [Abstract] | ||
| Number of segments | segment | 1 | |
| Revenue from sales-type leases | $ 200,000 | $ 100,000 |
| Deferred revenue | $ 18,000 | $ 6,000 |
SALES SERVICE REVENUE, NET AND ACCOUNTS RECEIVABLE (Schedule of Receivables) (Details) - USD ($) $ in Thousands |
Dec. 31, 2021 |
Dec. 31, 2020 |
|---|---|---|
| Accounts receivable, gross | $ 3,181 | $ 4,887 |
| Less allowance for doubtful accounts | (2,484) | (4,013) |
| Accounts receivable, net | 697 | 874 |
| Medicaid [Member] | ||
| Accounts receivable, gross | 45 | 131 |
| Medicare [Member] | ||
| Accounts receivable, gross | 727 | 1,054 |
| Self-Pay [Member] | ||
| Accounts receivable, gross | 139 | 276 |
| Third-Party Payor [Member] | ||
| Accounts receivable, gross | 2,111 | 3,373 |
| Contract Diagnostic Services [Member] | ||
| Accounts receivable, gross | $ 159 | $ 53 |
SALES SERVICE REVENUE, NET AND ACCOUNTS RECEIVABLE (Schedule of Allowance for Doubtful Accounts) (Details) - USD ($) $ in Thousands |
12 Months Ended | |
|---|---|---|
Dec. 31, 2021 |
Dec. 31, 2020 |
|
| Allowance for doubtful accounts, Beginning balance | $ (4,013) | |
| Adjustment for allowance for doubtful accounts | 152 | $ (1,339) |
| Bad debt expense | (2) | |
| Write-offs | 1,379 | |
| Total charges | (150) | |
| Allowance for doubtful accounts, Ending balance | (2,484) | (4,013) |
| Medicaid [Member] | ||
| Adjustment for allowance for doubtful accounts | (5) | (53) |
| Medicare [Member] | ||
| Adjustment for allowance for doubtful accounts | (58) | (387) |
| Third-Party Payor [Member] | ||
| Adjustment for allowance for doubtful accounts | $ 215 | $ (899) |
SALES SERVICE REVENUE, NET AND ACCOUNTS RECEIVABLE (Schedule of Customer Revenue and Accounts Receivable Concentrations) (Details) - Accounts Receivable [Member] - Customer Concentration Risk [Member] |
12 Months Ended |
|---|---|
Dec. 31, 2021 | |
| Customer A [Member] | |
| Concentration Risk [Line Items] | |
| Concentration risk, percentage | 21.00% |
| Customer B [Member] | |
| Concentration Risk [Line Items] | |
| Concentration risk, percentage | 12.00% |