Note 2 - zPredicta Acquisition

12 Months Ended

Dec. 31, 2022

Notes to Financial Statements

Business Combination Disclosure [Text Block]

NOTE 2 – zPREDICTA ACQUISITION

On November 24, 2021, the Company entered into an Agreement and Plan of Merger (the “Agreement”) among the Company, a wholly-owned subsidiary of the Company (the “Merger Sub”), zPREDICTA, and a representative for certain parties who held interests in zPREDICTA. Also on November 24, 2021, the Company acquired zPREDICTA through the merger of Merger Sub with and into zPREDICTA, with zPREDICTA surviving as a wholly-owned subsidiary of the Company.

As consideration for the acquisition, the stockholders and certain holders of interests in zPREDICTA as of immediately prior to the transaction collectively received consideration of approximately $10.0 million in cash. The Agreement contains customary and negotiated representations, warranties, and indemnity provisions.

The acquisition costs of $895,297 related to the acquisition are presented in legal, accounting and consulting expenses within general and administrative expenses in the accompanying consolidated statements of net loss.

During the three months ended June 30, 2022, the Company identified an out-of-period error related to the application of ASC 606 with respect to the recognition of revenue associated with zPREDICTA customer contracts. As a result, the Company has recorded an adjustment to the purchase price allocation of zPREDICTA and the associated acquisition date fair values of assets acquired, and liabilities assumed. The Company has determined that $373,303 of additional contract liabilities should have been recorded which results in an increase to the fair value of goodwill acquired by the same amount to a value of $7,231,093. The Company corrected the error in the financial statements during the three months ending June 30, 2022 by increasing contract liability and goodwill by $373,303.

The Company evaluated the materiality of these errors both qualitatively and quantitatively in accordance with Staff Accounting Bulletin (“SAB”) No. 99, Materiality and SAB No. 108, Considering the Effects of Prior Year Misstatements in Current Year Financial Statements, and determined the effect of these corrections was not material to the consolidated financial statements as of and for the year ended December 31, 2021 and 2022.

The Company had previously disclosed the acquisition date fair values of assets acquired and liabilities assumed, and the consideration transferred, the following table reflects the adjustment discussed above:

Cash consideration	$	10,015,941
Assets acquired:
Cash		425,727
Accounts receivable		76,549
Prepaid expenses		25,733
Intangible assets		3,780,000
Liabilities assumed:
Accrued expenses		(408,825	)
Deferred tax liability		(661,658	)
Contract liabilities		(452,678	)
Goodwill	$	7,231,093

The purchase price allocation has been derived from estimates. The Company’s judgements used to determine the estimated fair value assigned to each class of assets acquired and liabilities assumed can materially affect the consolidated operations of the consolidated Company. The total purchase price has been allocation to identifiable assets acquired and liabilities assumed based upon valuation studies and procedures performed to date. The fair value and useful life for the intangible assets are (a) tradename $80,000 b) developed technology $3,500,000 and c) customer relationships $200,000 with useful lives of 4 years, 10 years and 10 years, respectively all using a straight-line method.

The Company acquired zPREDICTA through a non-taxable reverse triangular merger combination. As part of purchase accounting there was $3,780,000 in fair value assigned to purchased intangibles which the Company established a related deferred tax liability as a result of the stock merger combination that offset the acquired deferred assets including NOL’s and other temporary timing differences.

Identifiable Intangible Assets

The Company acquired intangible assets related to trademarks for the acquired zPREDICTA trade name with an estimated fair market value of $80,000. The fair values of the asset were determined by the relief-from-royalty method under the income approach. The Company determined the asset is a finite lived asset. The useful life of the tradename has a useful life of 4 years.

The Company acquired intangible assets with a useful life of 10 years and an estimated value of $200,000 related to customer relationships stemming from stable and predictable cash flow streams associated with customers. zPREDICTA’s customer base includes contract research partnerships with pharmaceutical, diagnostic, biotechnology, and research companies. The customer relationships were valued using the distributor method under the income approach.

The Company acquired intangible assets with a useful life of 10 years and an estimated value of $3,500,000 related to developed technology stemming from the 3D tumor model technology. Since the model technology was identified as the primary asset, this technology was valued using the multi-period excess earnings method under the income approach.

The Company prepared an undiscounted cash flow as of December 31, 2022 to evaluate long-lived assets based on a triggering event per ASC 360 and recognized and impairment loss of $3,349,375 for its long-lived intangible assets. See Note 8 – Goodwill and Intangibles.

Goodwill

Goodwill of $7,231,093, as adjusted, was recognized in the zPREDICTA acquisition and represents the excess of the consideration transferred over the fair values of assets acquired and liabilities assumed and represents the future economic benefits and synergies arising from the transaction. None of the goodwill will be deductible for income tax purposes.

In testing goodwill for impairment as of  June 30, 2022, the Company performed a quantitative impairment test and concluded that goodwill was impaired as of the testing date of  June 30, 2022.  The quantitative review as of  June 30, 2022 resulted in $7,231,093 of impairment expense related to goodwill. See Note 8 – Goodwill and Intangibles.

Financial Results

The unaudited financial results of zPREDICTA since the acquisition date have been included in the Company’s accompanying consolidated statements of net loss.

Pro Forma (unaudited)

The following unaudited pro forma information presents the combined results of operations of the Company and zPREDICTA as if the acquisition of zPREDICTA had been completed on January 1, 2020, with adjustments to give effect to pro forma events that are directly attributable to the acquisition and reflects the correction of application of ASC 606 as discussed above.

	Twelve months ended December 31, 2021			Twelve months ended December 31, 2020
	Unaudited			Unaudited
Revenue	$	2,056,484		$	1,815,560
Net loss attributable to common shareholders	$	(19,251,734	)	$	(26,946,564	)

The primary adjustments include the inclusion of the revalued amortization for zPREDICTA intangible assets. The unaudited pro forma results do not reflect any operating efficiencies or potential cost savings which may result from the consolidation of operations. Accordingly, these unaudited pro forma results are presented for informational purposes only and are not necessarily indicative of what the actual results of operations of the combined company would have been if the acquisition had occurred at the beginning of those respective time periods, nor are they indicative of future results of operations.

There are certain portions of purchase accounting, specifically Section 382 for Tax Loss Carryforwards, which take place after a company has undergone a shift in ownership, that the Company has not completed yet and may have a significant impact on the financial statements.