10-Q 1 form10-q.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
   
  For the quarterly period ended September 30, 2020

 

[  ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
   
  For the transition period from ______________ to ______________

 

Commission file number: 001-38362

 

PROLUNG, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   20-1922768

(State or other jurisdiction of

incorporation or organization)

  

(I.R.S. Employer

Identification No.)

 

350 W. 800 N., Suite 214    
Salt Lake City, Utah   84103
(Address of principal executive offices)   (Zip Code)

 

(801) 736–0729

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common   None   None

 

Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [  ] No [X]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “accelerated filer”, “large accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act (Check one):

 

  Large accelerated filer   [  ] Accelerated filer [  ]  
  Non-accelerated filer   [X] Smaller reporting company [X]  
        Emerging growth company [X]  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]. Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of March 15, 2021, the issuer had 4,094,916 shares of common stock, $0.001 par value, outstanding.

 

 

 

 
 

 


PROLUNG, INC.

 

TABLE OF CONTENTS

 

  Part I – Financial Information 3
     
Item 1 Financial Statements 3
     
  Condensed Balance Sheets (Unaudited), September 30, 2020 and December 31, 2019 3
     
  Condensed Statements of Operations for the Three and Nine Months Ended September 30, 2020 and 2019-(Unaudited) 4
     
  Condensed Statements of Cash Flows for the Three and Nine Months Ended September 30, 2020 and 2019- (Unaudited) 5
     
  Condensed Statement of Stockholders’ Deficit for the Three and Nine Months Ended September 30, 2019 and 2020- (Unaudited) 6
     
  Notes to the Unaudited Condensed Financial Statements 7
     
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations 14
     
Item 3 Quantitative and Qualitative Disclosures about Market Risk 20
     
Item 4 Controls and Procedures 20
     
  Part II – Other Information  
     
Item 1 Legal Proceedings 21
     
Item 1A Risk Factors 21
     
Item 2 Unregistered Sales of Equity Securities And Use Of Proceeds 21
     
Item 3 Defaults Upon Senior Securities 21
     
Item 4 Mine Safety Disclosures 21
     
Item 5 Other Information 21
     
Item 6 Exhibits 21
     
Signatures   22

 

2
 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

ProLung, Inc.

Condensed Balance Sheets

 

   September 30,   December 31, 
   2020   2019 
   (unaudited)     
Assets
Current Assets          
Cash  $260,507   $207,421 
Prepaid expenses   5,427    5,427 
Total Current Assets   265,934    212,848 
           
Property and equipment, net   85,878    135,633 
Intangible assets, net   129,882    137,054 
           
Total Assets  $481,694   $485,535 
           
Liabilities and Stockholders’ Deficit          
Current Liabilities          
Accounts payable   140,866    387,739 
Accrued liabilities   903,404    636,207 
Short term loans payable   105,000    105,000 
Payable for research and development - current   240,000    200,000 
Notes and convertible notes payable - current, net   1,283,462    1,206,931 
Total Current Liabilities   2,672,732    2,535,877 
           
Long-Term Liabilities          
Payable for research and development agreement - long term   125,000    210,000 
Convertible notes payable, long-term, related party   266,339    193,346 
Notes and convertible notes payable, long-term, net   5,794,229    4,242,966 
Total Long-Term Liabilities   6,185,568    4,646,312 
           
Total Liabilities   8,858,300    7,182,189 
           
Stockholders’ Deficit:          
Preferred stock, $0.001 par value; 10,000,000 shares authorized; none issued and outstanding   -    - 
Common stock, $0.001 par value; 120,000,000 shares authorized; 4,083,557 and 4,068,557 shares issued and outstanding, respectively   4,084    4,069 
Additional paid-in capital   27,588,781    27,083,391 
Accumulated deficit   (35,969,471)   (33,784,114)
Total Stockholders’ Deficit   (8,376,606)   (6,696,654)
           
Total Liabilities and Stockholders’ Deficit  $481,694   $485,535 

 

The accompanying notes are an integral part of these unaudited condensed financial statements 

 

3
 

 

ProLung, Inc.

Condensed Statements of Operations

(Unaudited)

 

   For the Three Months Ended   For the Nine Months Ended 
   September 30,   September 30, 
   2020   2019   2020   2019 
Revenues:                
Revenue  $-   $-   $-   $- 
Total revenue   -    -    -    - 
Cost of revenue:   -    -    -    - 
Gross margin   -    -    -    - 
Operating expenses:                    
Research and development expense   165,891    144,817    555,830    494,745 
Selling, general and administrative expense   291,182    407,607    1,101,350    1,054,278 
Total operating expenses   457,073    552,424    1,657,180    1,549,023 
Loss from operations   (457,073)   (552,424)   (1,657,180)   (1,549,023)
Other income (expense):                    
Loss on debt extinguisment   -    -    -    (648,551)
Interest expense   (208,668)   (100,093)   (528,177)   (281,395)
Total other expense   (208,668)   (100,093)   (528,177)   (929,946)
Net loss  $(665,741)  $(652,517)  $(2,185,357)  $(2,478,969)
                     
Basic and diluted loss per share  $(0.16)  $(0.17)  $(0.54)  $(0.64)
                     
Weighted-average common shares outstanding, basic and diluted   4,083,557    3,861,849    4,075,783    3,861,849 

 

The accompanying notes are an integral part of these unaudited condensed financial statements 

 

4
 

 

ProLung, Inc.

Condensed Statements of Cash Flows

(Unaudited)

 

   For the Nine Months Ended 
   September 30, 
   2020   2019 
Cash flows from operating activities:          
Net loss  $(2,185,357)  $(2,478,969)
Adjustments to reconcile net loss to net cash flows from operating activities:          
Depreciation and amortization   60,515    28,113 
Stock-based compensation   355,756    402,897 
Loss on debt extinguishment   -    648,551 
Amortization of loan discount   109,384    5,828 
Change in assets and liabilities:          
Prepaid expenses   -    13,826 
Accounts payable   (202,746)   79,620 
Accrued liabilities   267,197    321,233 
Net cash flows used in operating activities   (1,595,251)   (978,901)
           
Cash flows from investing activities:          
Purchase of equipment   (3,588)   - 
Net cash flows provided by investing activities   (3,588)   - 
           
Cash flows from financing activities:          
Payment for placement of convertible notes payable   (223,575)   (25,000)
Payment for research and development payable   (45,000)   - 
Proceeds from notes payable - related party   82,000    50,000 
Proceeds from notes payable   1,838,500    745,000 
Net cash flows provided by financing activities   1,651,925    770,000 
           
Net increase (decrease) in cash   53,086    (208,901)
Cash at beginning of period   207,421    249,286 
           
Cash at end of period  $260,507   $40,385 
Supplemental disclosure of cash flow information:          
Cash paid for income taxes  $-   $- 
Cash paid for interest  $120,919   $- 
           
Supplemental disclosure of non-cash investing and financing activities:          
Discount recorded on convertible debt issuance  $329,099   $- 

 

The accompanying notes are an integral part of these unaudited condensed financial statements 

 

5
 

 


ProLung, Inc.

Condensed Statement of Stockholders’ Deficit

For the Three and Nine Months Ended September 30, 2019 and 2020

(Unaudited)

 

   Common Stock  

Additional

Paid-in

   Accumulated  

Total

Stockholders’

 
   Shares   Amount   Capital   Deficit   Deficit 
Balance, December 31, 2018   3,861,848   $3,862   $25,582,996   $(29,164,227)  $(3,577,369)
Stock-based compensation   -    -    47,734    -    47,734 
Net loss   -    -    -    (1,138,140)   (1,138,140)
Balance, March 31, 2019   3,861,848    3,862   $25,630,730    (30,302,367)   (4,667,775)
Stock-based compensation   -    -    156,502    -    156,502 
Net loss   -    -    -    (688,312)   (688,312)
Balance, June 30, 2019   3,861,848    3,862   $25,787,232    (30,990,679)   (5,199,585)
Stock-based compensation   -    -    198,661    -    198,661 
Net loss   -    -    -    (652,517)   (652,517)
Balance, September 30, 2019   3,861,848   $3,862   $25,985,893   $(31,643,196)  $(5,653,441)
                          
Balance, December 31, 2019   4,068,557   $4,069   $27,083,391   $(33,784,114)  $(6,696,654)
Warrants issued to convertible debt placement agent   -    -    71,489    -    71,489 
Stock-based compensation   -    -    162,320    -    162,320 
Net loss   -    -    -    (712,876)   (712,876)
Balance, March 31, 2020   4,068,557    4,069    27,317,200    (34,496,990)   (7,175,721)
Shares issued for services   15,000    15    37,035    -    37,050 
Warrants issued to convertible debt placement agent   -    -    70,635    -    70,635 
Stock-based compensation   -    -    114,940    -    114,940 
Net loss   -    -    -    (806,740)   (806,740)
Balance, June 30, 2020   4,083,557    4,084    27,539,810    (35,303,730)   (7,759,836)
Warrants issued to convertible debt placement agent   -    -    7,525    -    7,525 
Stock-based compensation   -    -    41,446    -    41,446 
Net loss   -    -    -    (665,741)   (665,741)
Balance, September 30, 2020   4,083,557   $4,084   $27,588,781   $(35,969,471)  $(8,376,606)

 


6
 

 

ProLung, Inc. and Subsidiary

Notes to Condensed Financial Statements

(Unaudited)

 

Note 1 – Organization and Summary of Significant Accounting Policies

 

Organization

 

ProLung, Inc. (the “Company”), is a Delaware corporation that was incorporated on November 22, 2004 and is doing business as “ProLung.” The Company’s headquarters are located in Salt Lake City, Utah. The Company’s business is the development, marketing and sales of precision predictive analytical medical devices specializing in lung cancer. The Company’s principal activities are primarily developing and testing of products, seeking FDA clearance for its products, developing markets and securing strategic alliances and obtaining financing.

 

Principles of Consolidation

 

During the year ended December 31, 2012, the Company formed a wholly-owned subsidiary, Hilltop Acquisition Corporation, Inc., which has had no activity since its inception and was dissolved during 2020.

 

Basis of Presentation

 

The accompanying condensed financial statements are unaudited and have been prepared by management in accordance with rules and regulations promulgated by the U.S. Securities and Exchange Commission and therefore certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the accompanying condensed financial statements contain all adjustments necessary for them to be presented fairly, with those adjustments consisting only of normal recurring adjustments. These interim financial statements should be read in conjunction with the Company’s annual financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. The results of operations for the three and nine months ended September 30, 2020 may not be indicative of the results to be expected for the year ending December 31, 2020.

 

Going Concern

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has generated minimal revenues thus far from its operations and no revenue during the current period. Until the Company receives Food and Drug Administration (“FDA”) approval, the Company will not achieve its planned level of operations in the United States. The Company does have a Conformité Européene or CE mark for Europe and has licensed a portion of its technology to an entity located in China. The Company has incurred substantial and recurring losses to date from operations, continues to have a stockholders’ deficit and is currently dependent on debt and equity financing. These conditions raise substantial doubt about the Company’s ability to continue as a going concern for a period of one year from the issuance of these financial statements. The accompanying condensed financial statements do not include any adjustments that might result relating to the recoverability and classification of the asset carrying amounts or the amount and classification of liabilities that might result from the outcome of this risk and uncertainty.

 

The ability of the Company to continue as a going concern is dependent on the Company successfully obtaining additional funding, developing products that can be sold profitably, and generating cash through operating activities. Management’s plans include issuing equity or debt securities to fund capital requirements and developing ongoing operations.

 

Basic and Diluted Loss Per Share

 

The Company computes basic loss per share by dividing net loss by the weighted-average number of common shares outstanding during the period. The Company computes diluted loss per share by dividing net loss by the sum of the weighted-average number of common shares outstanding and the weighted-average dilutive common share equivalents outstanding. The computation of diluted loss per share does not assume exercise or conversion of securities that would have an anti-dilutive effect. For the three and nine months ended September 30, 2020 and 2019, the following items were excluded from the computation of diluted net loss per common share as their effect is anti-dilutive:

 

   September 30, 
   2020   2019 
Warrants to purchase shares   1,288,896    1,228,434 
Stock options   644,022    508,135 
Convertible notes   2,432,336    1,515,961 

 

7
 

 

ProLung, Inc. and Subsidiary

Notes to Condensed Financial Statements

(Unaudited)

 

Adoption of New Accounting Policies

 

Stock Compensation – In June 2018, the FASB issued ASU No. 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The new ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost. Since the Company is an Emerging Growth Company this standard is applicable fiscal years beginning after December 15, 2019. The Company adopted this standard on January 1, 2020 and has not materially impacted the Company.

 

Recent Accounting Pronouncements

 

Emerging Growth Company – We are an “emerging growth company” under the federal securities laws and will be subject to reduced public company reporting requirements. In addition, Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.

 

Leases – In February 2016, the FASB issued ASU No. 2016-02: Leases ASU 2016-02 requires companies to generally recognize on the balance sheet operating and financing lease liabilities and corresponding right-of-use assets. ASU 2016-02 would be effective for the Company’s 2019 fiscal year; however, since the Company is an Emerging Growth Company and has made the election to adopt certain accounting standards when they would be applicable for private companies which is the fiscal year beginning January 1, 2022. The Company will use the modified retrospective basis. The Company entered into a three-year lease agreement in May 2019 and management is evaluating how the implementation of this standard will affect its balance sheet and statement operations.

 

Convertible Notes Payable–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),” which simplifies the accounting for convertible instruments, reduces complexity for preparers and practitioners and improves the decision usefulness and relevance of the information provided to financial statement users. ASU 2020-06 also amends the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions. ASU 2020-06 is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. The Company has not yet determined the impact of adoption this standard on our financial position, results of operations or cash flows.

 

The Company has reviewed other recent accounting pronouncements and has determined that they will not significantly impact the Company’s results of operations or financial position.

 

Note 2 – Research and Development Agreement

 

On July 29, 2019, the Company amended a license agreement dated April 10, 2013 between the Company and ProLung Biotech Wuxi / ProLung China (Wuxi). The original agreement allowed Wuxi to utilize the Company’s technology in China in return for royalty payments based on Wuxi’s revenues. Wuxi has yet to earn any revenue but has been conducting clinical trials. The license agreement was amended whereby Wuxi will provide the Company its clinical trial data, know-how and improvements which the Company will use outside the greater China area. This amendment further requires full collaboration (i.e., protocols and methodologies) between the two entities. In consideration for such trial data and know-how, the Company will make cash payments to Wuxi of up to $575,000 and issue up to 347,566 shares of common stock upon the completion of certain events.

 

Through December 31, 2019, the balance was $410,000 and 278,053 shares had been issued based on conditions being met. The final 69,513 shares will be issued once the final milestone is met. During the nine months ending September 30, 2020, the Company has made $45,000 in cash payments with the remaining $365,000 payable as follows: $40,000 currently due, $100,000 in October 2020; $100,000 in April 2021; $100,000 in October 2021; and $25,000 in April 2022.

 

8
 

 

ProLung, Inc. and Subsidiary

Notes to Condensed Financial Statements

(Unaudited)

 

Note 3 – Accrued Liabilities

 

Accrued liabilities consisted of the following at September 30, 2020 and December 31, 2019:

 

   September 30,   December 31, 
   2020   2019 
         
Accrued interest  $822,008   $524,136 
Accrued royalties   17,873    17,873 
Accrued settlement   21,875    55,000 
Accrued payroll and payroll taxes   41,648    39,198 
           
Accrued liabilities  $903,404   $636,207 

 

 

As disclosed in Note 8, in January 2020 the Company settled with the Utah Division of Securities for $55,000. The Company was aware of this situation at September 30, 2019 and has accrued the settlement amount as of that date.

 

Note 4 –Notes Payable

 

Convertible Notes Payable

During the nine months ended September 30, 2020, the Company issued $1,794,500 in convertible notes; $82,000 of which was from a current board member. These notes are unsecured, bear interest at 8% and are convertible at $3.20 per share. If at any time prior to the Maturity Date, the Company completes an initial registered public offering (IPO) of its common stock, all unpaid amounts shall automatically be converted into common stock at the lower of (i) $3.20 per share and (ii) 90% of the IPO price. The notes are due March 2022. Since these notes had a conversion price that was not “in the money” upon issuance there was no beneficial conversion feature recorded. On the date of issuance, the Company also assessed the conversion feature for possible derivative treatment (under ASC 815) and determined the conversion feature was indexed to the Company’s common stock and thus not a derivative.

 

The Company incurred $179,450 of loan costs and issued 56,093 warrants to a broker related to these loans. These warrants are exercisable at $3.20 and expire in ten years. The value of the warrants was $149,649 ($2.67 per warrant), derived utilizing the Black-Scholes Pricing Model with the following weighted average assumptions:

 

Expected life  5 years 
Exercise price  $3.20 
Expected volatility   188% - 205%
Weighted Average Volatility   188%
Expected dividends   n/a 
Risk-free interest rate   0.21% to 1.57%

 

The total loan costs incurred of $329,099 was recorded as a debt discount and will be amortized as a component of interest expense over the term of the convertible notes. During the three and nine months ended September 30, 2020, the Company recognized interest expense of $53,234 and $109,384 related to the amortization of the loan costs, respectively. As of September 30, 2020, the unamortized balance loan costs is $321,954.

 

SBA Loan

 

In April 2020, the Company entered into a Loan Agreement and Promissory Note (collectively the “SBA Loan”) with Zions Bank pursuant to the Paycheck Protection Program (the “PPP”) under the recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) administered by the U.S. Small Business Administration (the “SBA”). The Company received total proceeds of $126,000 from the SBA Loan. The SBA Loan is scheduled to mature in April 2022 and has a 1.00% interest rate and is subject to the terms and conditions applicable to loans administered by the SBA under the CARES Act.

 

9
 

 

ProLung, Inc. and Subsidiary

Notes to Condensed Financial Statements

(Unaudited)

 

The SBA Loan contains customary events of default relating to, among other things, payment defaults and breaches of representations and warranties. Subject to certain conditions, the SBA Loan may be forgiven in whole or in part by applying for forgiveness pursuant to the CARES Act and the PPP. The amount of loan proceeds eligible for forgiveness is based on a formula based on a number of factors, including the amount of loan proceeds used by the Company during the twenty-four week period after the loan origination for certain purposes, including payroll costs, interest on certain mortgage obligations, rent payments on certain leases, and certain qualified utility payments, provided that, among other things, at least 60% of the loan amount is used for eligible payroll costs, the employer maintaining or rehiring employees and maintaining salaries at certain level. The Company believes it has used entire loan proceeds to fund qualifying expenses and the loan will eventually be forgiven, However, as of September 30, 2020, the loan has yet to be forgiven and is currently reflected as a loan payable over two years.

 

Notes payable are summarized as follows:

 

   September 30,   December 31, 
   2020   2019 
Convertible notes payable; unsecured; interest at 8%; due March 2022 (includes related party amount of $282,000 and $200,000, respectively)  $6,333,053   $4,538,553 
           
Convertible notes payable; unsecured; interest at 8.00%; due November 2020   1,206,931    1,206,931 
           
SBA Loan Payable (PPP Loan); unsecured; interest at 1%; monthly payments of $7,091 commencing November 2020 through April 2022   126,000    - 
           
Unamortized discount and loan costs   (321,954)   (102,241)
Notes payable, net  $7,344,030   $5,643,243 
           
Less: current portion, net   (1,283,462)   (1,206,931)
           
Convertible notes payable - long term, net  $6,060,568   $4,436,312 

 

Note 5 – Equity Based Compensation

 

In May 2020, the Company issued 15,000 shares of common stock for consulting services received. The Company recorded an expense of $37,050 ($2.47 per share). The fair value was derived from a valuation done on the Company in April 2020.

 

Note 6 – Common Stock Options

 

Equity Incentive Plan

 

In April 2017, the Board, contingent on shareholder approval, approved the ProLung, Inc. Stock Incentive Plan (the “Plan”). The shareholders approved the Plan in July 2017. The Plan authorizes the Board compensation Committee to grant incentive stock options, non-incentive stock options, stock bonuses, restricted stock, and performance-based awards to directors, officers and employees and non-employee agents, consultants, advisers and independent contractors of the Company or any parent or subsidiary of the Company. In May 2020, the Plan was modified by the Board.

 

2020 Board and Employee Option Grants

 

As part of an agreement for their service during 2020 current Board members accepted the issuance of 44,000 options to Board members at exercise prices of $2.47 and $3.20 per option. These options vested upon issuance. The fair value of these options was $2.70 per option or $118,837 and was expensed upon grant.

 

In May 2020, the Board’s approved the issuance of 73,887 options to employees of the Company at an exercise price of $2.47 per option. These options vests quarterly over four years. The fair value of these options was $2.43 per option or $179,631 and will be expensed over the relative vesting period.

 

10
 

 

ProLung, Inc. and Subsidiary

Notes to Condensed Financial Statements

(Unaudited)

 

The above fair value was computed using the Black Scholes method using the following assumptions:

 

Expected life   6.1 years 
Exercise price  $2.47-3.20 
Expected volatility   182% - 206%
Weighted average volatility   187%
Expected dividends   n/a 
Risk-free interest rate   0.29% - 0.57%

 

A summary of option activity for the nine months ended September 30, 2020 is presented below:

 

   
 
 
 
 		 Shares
Under
Options		  
 
 
 
 		  
 
 
 
 		 Weighted Average
Exercise Price		  
 
 
 
 		  
 
 
 
 		 Weighted Average Remaining
Contractual Life		  
 
 
 
 		  
 
 
 
 		 Aggregate
Intrinsic Value of
Vested Options		  
 
 
 
 
Outstanding at December 31, 2019   526,135   $5.85    8.7 years                    
Issued   117,887   $2.58           
Forfeited/Expired   -   $   -            
Outstanding at September 30, 2020   644,022   $5.24    8.3 years    $ -  
Vested at September 30, 2020   570,135   $5.60    8.1 years    $- 

 

The Company recorded an expense of $41,446 and $190,371 for the three months ended September 30, 2020 and 2019 related to the amortization of options issued under the plan. The Company recorded an expense of $298,467 and $394,607 for the nine months ended September 30, 2020 and 2019 related to the amortization of options issued under the plan. The remaining unrecognized expense of $163,237 will be recognized through May 2024, with a weighted average term of 2.2 years.

 

Total stock-based compensation expense from amortization of options, warrants (Note 7) and common stock issuances (Note 5) have been included in the statements of operations as follows:

 

   For the Three Months Ended   For the Nine Months Ended 
   September 30,   September 30, 
   2020   2019   2020   2019 
                 
Research and development expense  $3,113   $30,139   $26,654   $84,799 
Selling, general and administrative expense   38,333    168,522    329,102    318,098 
                     
Total share-based compensation  $41,446   $198,661   $355,756   $402,897 

 

Note 7 – Common Stock Warrants

 

The Company has issued warrants to purchase its common stock for equity, debt and compensation reasons. See Note 4 for 56,093 warrants issued as part of loan issuance costs during the nine months ended September 30, 2020.

 

In August 2019 the Company and a former consultant reinstated a consulting agreement whereby this consultant, based on services rendered, will receive 1,875 warrants a month through May 2020. Through May 2020, 9,375 warrants have been issued to fulfill the contract. The warrants have an exercise price of $4.00 and vest upon issuance and expire October 2024. The fair value of the warrant shares issued was $20,238 and recorded as an expense during the nine month period; none of that expense was incurred during the three months ended September 30, 2020. The assumptions used for these warrant shares were risk-free interest rate of 0.18% to 1.31%, expected volatility of 143% to 163% (weighted average 155%), expected life of 2.5 years, and expected dividend yield of zero.

 

11
 

 

ProLung, Inc. and Subsidiary

Notes to Condensed Financial Statements

(Unaudited)

 

A summary of warrant activity for the nine months ended September 30, 2020 is presented below:

 

   
 
 
 
 		 Shares
Under Warrants		  
 
 
 
 		  
 
 
 
 		 Weighted Average
Exercise Price		  
 
 
 
 		  
 
 
 
 		 Weighted Average Remaining
Contractual Life		  
 
 
 
 		  
 
 
 
 		 Aggregate
Intrinsic Value of
Vested Warrants		  
 
 
 
 
Outstanding at December 31, 2019   1,255,667   $5.17    2.5 years                    
Issued   65,468   $3.31           
Exercised   -                
Expired/Forfeited   (32,239)  $3.93           
Outstanding at September 30, 2020   1,288,896   $5.11    1.9 years    $- 

 

Note 8 – Commitments and Contingencies

 

Lease Agreement

 

In May 2019 the Company entered into a new lease agreement for its office space. The lease amount is $3,600 per month and expires in April 2022. The Company inhabited the office in September and incurred $3,600 in lease expense as it relates to this lease.

 

Utah Division of Securities

 

On April 23, 2019, the Utah Division of Securities (the “Division”) filed a Notice of Agency Action and an Order to Show Cause before the Division of Securities of the Department of Commerce of the State of Utah against the Company, Jared Bauer (Bauer) and former Board Members (Clark Campbell, Tim Treu, Todd Morgan and Robert Raybould).

 

In January 2020, the Division issued a Stipulation and Consent Order which set forth the following: 1) the Company agrees to settle the matter with the Division by way of the Stipulation and Consent Order; 2) the Stipulation and Consent Order fully resolves all claims the Division has against the Company pertaining to the Order to Show Cause; 3) the Division, the Company and Bauer, agree to promptly file a stipulation and joint motion to dismiss the Company and Bauer from this administrative action, with respect to Count 1 against the Company and Bauer (the only claim brought against Bauer); 4) In or about April 2014, the Company Board of Directors circulated a consent agreement regarding the issuance of 72,763 Company stock certificates to select members of the Company Board of Directors in connection with “financing services provided” by those members; 5) In or about April 2014, the Company issued stock grants of 27,000 shares to Robert W. Raybould, 2,044 shares to Steve Eror, 7,969 shares to Tim Treu; 24,188 shares to Clark Campbell; and 12,188 shares to Todd Morgan; 6) Subsequent to issuance of those shares, ProLung was informed by counsel of potential consequences for Pro Lung employing unlicensed agents and individuals receiving the shares as compensation directly for sale of securities without a securities license, as opposed to receiving shares as compensation for generalized board service. Subsequently, no further shares were issued as compensation for fundraising. Mr. Eror returned his shares to the Company. However, Raybould, Treu, Campbell and Morgan did not return their shares to the Company. The Company did not disclose the potential licensing violation until on or about December 3, 2018, in its Note Purchase Agreements.

 

As set forth by the Company in its Form 8-K dated November 27, 2019, Campbell, Treu, Morgan, and Raybould entered into Stipulation and Consent Orders wherein they returned shares of stock to the Company’s treasury and paid fines to the Division of Securities.

 

On January 9, 2020, the Division entered an order as follows: 1) entering certain Findings and Conclusions by the Division, which ProLung admitted via a Stipulation and Consent Order; 2) ordering ProLung to cease and desist from violating Utah Uniform Securities Act (the “Act”) and to comply with the requirements of the Act in all future business in the state of Utah; 3) ordering ProLung to disclose the contents of the order to investors and prospective investors in all future capital raising efforts and disclosure documents of ProLung; and 4) Ordering ProLung to pay a fine of $55,000 to the Division. Through September 30, 2020, the Company had paid $33,125 toward the fine leaving $21,875 still owed at September 30, 2020.

 

12
 

 

ProLung, Inc. and Subsidiary

Notes to Condensed Financial Statements

(Unaudited)

 

Note 9 – Subsequent Events

 

Consulting Agreement

 

The Company entered into agreements with certain consultants for future services to be rendered. Under the terms of the contract the Company will grant between 1,200 and 2,200 stock options per quarter during the term of the agreements. The term of the agreements are currently designated to be two years. The options will vest upon grant and will have an exercise price as determined by the Board of Directors each quarter as they are issued. Any Party may cancel these agreements at any time with written notice. A total of 5,994 options have been issued under this agreement subsequent to September 30, 2020.

 

Convertible Notes

 

In November 2020 a convertible note payable totaling $342,732 (“Kolob Note”) were assigned to note holders as part of $525,000 of new convertible notes. These new convertible notes pay interest at 8% and are due March 31, 2022. The notes are convertible as follows: $342,732 at $3.20 per share and $182,268 and is convertible at $10.53 per share.

 

In November 2020 convertible note payable totaling $864,199 (“Ensign Note”) was extended to May 31, 2021 and the conversion price was lowered from $6.00 per share to $3.20 per share. Subsequent to this extension, $345,924 in Ensign Notes were assigned to note holders as part of $1,925,500 of new convertible notes. These new convertible notes pay interest at 8% and are due March 31, 2022. The notes are convertible as follows: $345,924 at $3.20 per share and $1,054,576 is convertible at $10.53 per share. The due date of the remaining Ensign Notes totaling $518,275 was extended to March 31, 2022.

 

As part of the proceeds received mentioned above, the Company incurred $123,635 of loan costs and is to issue 11,746 warrants to a broker related to these convertible loans. These warrants are exercisable at $10.53 and expire in ten years.

 

SBA Loan

 

Subsequent to September 30, 2020 (November 10, 2020), the SBA notified the Company the SBA had forgiven the loan mentioned above.

 

Warrants Exercised

 

Subsequent to September 30, 2020, 11,359 of warrants were exercised at $3.60 per share for proceeds of $40,892.

 

13
 

 


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis should be read in conjunction with the financial statements and related notes that appear elsewhere in this Quarterly Report on Form 10-Q (this “Report”) and the Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Form 10-K”) of ProLung, Inc. (the “Company”).

 

The statements contained in this Report that are not purely historical are forward-looking statements. Our forward-looking statements include, but are not limited to, statements regarding our expectations, hopes, beliefs, intentions, or strategies regarding the future. In addition, any statements that refer to projections, forecasts, or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words “anticipates,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “should” and “would,” as well as similar expressions, may identify forward-looking statements, but the absence of these words does not mean a statement is not forward looking. The forward-looking statements contained in this Report are based on our current expectations and beliefs concerning future developments and their potential effects on us. There can be no assurance that future developments affecting us will be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties, or assumptions, many of which are beyond our control that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. Important factors that could cause these differences include the following:

 

  ● We are a development stage company with limited revenue and no assurance of earning significant revenue over the long term.
     
  ● We will need significant capital to execute our business plan, particularly as we continue to seek clearance from the FDA to market our IONIQ ProLung Test.
     
  ● We are dependent upon financings to fund our operations and may be unable to continue as a going concern.
     
  ● We have issued indebtedness and, if we are unable to repay or refinance it, our creditors could foreclose on our assets and force us into bankruptcy.
     
  ● We are in the early stages of commercialization, and our IONIQ ProLung Test may never receive marketing approval from the FDA or achieve commercial market acceptance.
     
  ● Our future growth depends, in part, on our ability to penetrate foreign markets, where we would be subject to additional regulatory burdens and other risks and uncertainties.
     
  ● We are reliant on a single product and if we are not successful in commercializing the IONIQ ProLung Test and are unable to develop additional products, our business will not succeed.
     
  ● We are subject to litigation risk for product liability if our IONIQ ProLung Test is not effective.
     
  ● We may incur substantial product liability expenses due to manufacturing or design defects, or the use or misuse of our products.
     
  ● We are subject to the risk of product recalls if our products are defective.
     
  ● We may not obtain any, or adequate, third-party coverage and reimbursement for our prospective customers.
     
  ● The absence of, or limits on, reimbursements may affect our revenues and our ability to achieve profitability.
     
  ● If the IONIQ ProLung Test is not accepted by physicians and patients, we will be unable to achieve market acceptance.
     
  ●

We are a small company and may be unable to compete with competitive technologies.

     
  ● We are dependent upon our suppliers to safely and timely manufacture our products.

 

14
 

 

  ● We are dependent upon third parties for marketing and other aspects of our business.
     
  ● Any clinical trials that we conduct, including our ongoing trial, may not be completed on schedule, or at all, or may be more expensive than we expect, which could prevent or delay regulatory authorization(s) of our products or impair our financial position.
     
  ● We engage in related party transactions, which result in a conflict of interest involving our management.
     
  ● Our clinical studies, including our ongoing clinical study, may produce unfavorable results.
     
  ● Our success depends upon our ability to effectively market our products.
     
  ● We are dependent on key personnel, whose employment may be terminated by the Company or the employee at any time, which could cause significant disruption in our business and lead to significant expenses.
     
  ● We must obtain regulatory clearance or approval in the US and other non-European Union markets to be able to commence marketing and sales in those markets.
     
  ● Even if we receive regulatory clearance or approval for the IONIQ ProLung Test, we still may not be able to successfully commercialize it and the revenue that we generate from its sales, if any, may be limited.
     
  ● If we obtain FDA clearance or approval, we will be subject to Medical Device Reporting.
     
  ● Recently proposed healthcare reform measures could hinder or prevent the commercial success of our products.
     
  ● We will be subject to healthcare fraud and abuse law regulations.
     
  ● Our business is subject to complex and evolving U.S. and international laws and regulation regarding privacy and data protection. Many of these laws and regulations are subject to change and uncertain interpretation and could result in claims, changes to our business practices, penalties, increased cost of operations, or declines in user growth or engagement, or otherwise harm our business.
     
  ● ProLung clinical study designs have not been reviewed by the FDA, and there is a risk that the FDA will not agree with our study designs or results.
     
  ● We may be unable to protect our intellectual property rights, which are important to the potential value of our products and company.
     
  ● We rely on an exclusive license maintained by the licensor, and if the licensor does not adequately defend the license our business may be harmed.
     
  ● We may incur significant costs and liability if we infringe, or are accused of infringing on, the intellectual property rights of others.
     
  ● We may need to market the IONIQ ProLung Test under a different name in the EU to avoid the risk of infringement.
     
  ● If outstanding warrants are exercised, or Convertible Debentures are converted, stockholders will be diluted.
     
  ● Our officers and directors have significant voting power and may take actions that may not be in the best interests of other stockholders.
     
  ● Our common stock is not quoted or traded in any market, limiting liquidity opportunities for investors.

 

In addition, please review the other, and more detailed, risk factors discussed in our 2019 Form 10-K.

 

Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements.

 

15
 

 

Forward-looking statements speak only as of the date they are made. You should not put undue reliance on any forward-looking statements. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions, or changes in other factors affecting forward-looking information, except to the extent required by applicable securities laws. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.

 

Overview

 

We are a medical technology company with a mission to dramatically improve cancer outcomes by the development of our modern screening technology for the early detection of multiple cancers, which has the potential to expand therapeutic windows, significantly improve survivability, and reduce treatment costs. Half of all Americans will be diagnosed with cancer during their lifetimes and one in five of those diagnosed with cancer will die from it. Clinical literature shows that early detection can save lives and money. The first planned product utilizing our proprietary analytic platform, the IONIQ ProLung Test™ for lung cancer, has been designated a Breakthrough Device by the U.S. FDA. We remain fully committed to gaining U.S. FDA regulatory de novo clearance and subsequently commercializing the IONIQ ProLung Test for lung cancer.

 

Lung cancer is the leading cause of cancer death in the US and the world according to American Cancer Society and World Health Organization. Current statistics reflect an average 17% survival rate at five years for those diagnosed with lung cancer. Early detection substantially improves rates of survival. Patients at high risk of lung cancer are recommended to undergo regular Computed Tomography “CT” chest scans to detect nodules. Due to the risks and costs associated with assessing malignancy by current technology, patients now normally wait from three months to 3.5 years to have the risk of malignancy assessed upon detection of a nodule by CT chest scan. Our IONIQ ProLung Test was developed to provide a non-invasive, rapid and radiation-free option for assessing the risk of malignancy in lung nodules found in the chest by CT scans.

 

We believe the IONIQ ProLung Test, in conjunction with the discovery of a nodule by CT scan, provides a more rapid assessment of the risk of malignancy, which must be determined prior to biopsy. Since a lung biopsy is invasive and may require life threatening thoracic surgery, physicians, patients, and insurance companies typically delay biopsy and therapy until the risk of malignancy outweighs the risk of further diagnostic procedures. For these patients, the delay can reduce the time available to treat the tumor and may cause sustained emotional trauma.

 

In February 2020, the FDA designated the IONIQ ProLung Test a Breakthrough Device. Through the Breakthrough Device program, the FDA will provide ProLung with expedited reviews and the Centers for Medicare & Medicaid Services (CMS) has provisions for a simpler and faster pathway to reimbursement. This is not a marketing clearance.

 

We are an “emerging growth company” and a “smaller reporting company” under the federal securities laws and will be subject to reduced public company reporting requirements.

 

Results of Operations

 

The following discussion is included to describe our financial position and results of operations. The financial statements and notes thereto contain detailed information that should be referred to in conjunction with this discussion.

 

Three Months Ended September 30, 2020 compared to the Three Months Ended September 30, 2019

 

Revenues and Cost of Revenue. During the three months ended September 30, 2020 and 2019 we had no revenues or cost of revenues.

 

Operating Expenses. Total operating expense for the three months ended September 30, 2020 was $457,073 compared to the total operating expenses for the three months ended September 30, 2019 of $552,424, representing a decrease of $95,351. Operating expenses have been classified by management as either research and development or selling, general and administrative based on an assignment of certain expenses directly to these classifications or based on management’s allocation of certain expenses between these classifications.

 

The overall decrease in operating expense is primarily due to a reduction in stock based compensation. In June 2019 we issued stock options to certain employees that vested over one year compared to the stock based options we issued in May 2020 that vests over four years. Thereby having an amortization during the three months ended September 30, 2019 which was much larger than the amortization during the same period in 2020. This decrease was offset by us having sufficient funds in 2020 to refocus our attention on our research activities, including hiring a new employee to research additional uses for our test.

 

16
 

 

Research and Development Expense. Research and development expense for the three months ended September 30, 2020, was $165,891, compared to research and development expense of $144,817 for the three months ended September 30, 2019; representing an increase of $21,074. This increase was primarily due to us having sufficient funds in 2020 to refocus our attention on our research activities, including hiring a new employee to research additional uses for our test. This increase was offset by lower stock based compensation due to 2020 employee option issuances having a four year vest compared to the 2019 employee issuances having a one year vest. We would expect our research and development costs to remain relatively constant for the remainder of 2020 unless we do not receive additional funding.

 

Selling, General and Administrative Expense. Selling, general and administrative expense for the three months ended September 30, 2020 was $291,182 compared to selling, general and administrative of $407,607 for the three months ended September 30, 2019; representing a decrease of $116,425. This decrease was due to the substantial decrease in amortization of stock based compensation as discussed above. Also, we have implemented various cost controls and a shift of our funds being utilized for developing our IONIQ ProLung Test rather than unneeded administrative costs.

 

Other Expense. Other expense for the three months ended September 30, 2020 was $208,668 as compared to $100,093 for the three months ended September 30, 2019 representing a decrease of $108,575. This increase is largely due to interest related to increased debt levels and the associated amortization of additional cash and non cash loan costs.

 

Nine Months Ended September 30, 2020 compared to the Nine Months Ended September 30, 2019

 

Revenues and Cost of Revenue. During the nine months ended September 30, 2020 and 2019 we had no revenues or cost of revenues.

 

Operating Expenses. Total operating expenses for the nine months ended September 30, 2020 were 1,657,180 compared to the total operating expenses for the nine months ended September 30, 2019 of $1,549,023 representing an increase of $108,157. Operating expenses have been classified by management as either research and development or selling, general and administrative based on an assignment of certain expenses directly to these classifications or based on management’s allocation of certain expenses between these classifications.

 

The overall increase in operating expense is primarily due to the timing of the stock based compensation as well as better cash flows which allowed us to hire an additional person to further our research and development. Overall, our cash expenses are substantially lower than in prior years due to a focus on developing our IONIQ ProLung Test rather than unneeded administrative costs. Our stock based options to our employees have included longer vesting terms than in prior issuances.

 

Research and Development Expense. Research and development expense for the nine months ended September 30, 2020, was $555,830, compared to research and development expense of $494,745 for the nine months ended September 30, 2019; representing an increase of $61,085. This increase was primarily due to us having sufficient funds in 2020 to refocus our attention on our research activities, including hiring a new employee to research additional uses for our test. This increase was offset by lower stock based compensation due to 2020 employee option issuances having a four year vest compared to the 2019 employee issuances having a one year vest. We would expect our research and development costs to remain relatively constant for the remainder of 2020 unless we do not receive additional funding.

 

Selling, General and Administrative Expense. Selling, general and administrative expense for the nine months ended September 30, 2020, was $1,101,350 compared to selling, general and administrative of $1,054,278 for the nine months ended September 30, 2019; representing an increase of $47,072. This slight increase is due to slight increase in amortization of stock based compensation. We increased the size of our Board during the end 2019 and compensate them with stock options. As a result, there were more options issued to the Board during 2020.

 

Other Expense. Other expense for the nine months ended September 30, 2020 was $528,177 as compared to $929,946 for the nine months ended September 30, 2019 representing a decrease of $401,769. This decrease was primarily due to our loss on debt extinguishment. During the nine months ended September 30, 2019, the holders of certain convertible debt were given the opportunity to extend the maturity date of their notes and receive a lower conversion rate. Since the adjustment was so significant we considered the notes extinguished and subsequently reissued. As a result, we recognized a $648,551 loss on the extinguishment. This decrease is offset by increased interest expense during 2020 due to increased debt levels and the associated amortization of additional loan costs.

 

17
 

 

Liquidity and Capital Resources

 

The following is a summary of our key liquidity measures at September 30, 2020 and December 31, 2019:

 

   September 30,   December 31, 
   2020   2019 
         
Cash  $260,507   $207,421 
           
Current assets   265,934    212,848 
Current liabilities   (2,672,732)   (2,535,877)
           
Working (deficit) capital  $(2,406,798)  $(2,323,029)

 

We need additional capital to continue our operations. We issued $1,794,500 in convertible notes during the nine months ended September 30, 2020. Also, we received $126,000 in PPP loans. In order for us to continue operations we will need additional capital which will require us to issue equity securities, debt securities and rights to acquire equity securities. We have no existing commitment to provide capital, and given our early stage of development, we may be unable to raise sufficient capital when needed and, in any case, will likely be required to pay a high price for capital.

 

Our future capital requirements and adequacy of available funds will depend on many factors including:

 

  ● Our ability to find a commercial market for our IONIQ ProLung Test and obtain needed regulatory clearance
  ● Our financial results;
  ● the cost and availability of capital generally; and
  ● the occurrence of unexpected adverse expenses or events.

 

Cash provided by (used in) operating, investing and financing activities

 

Cash provided by (used in) operating, investing and financing activities for the three months ended September 30, 2020 and 2019 is as follows:

 

   Nine Months Ending September 30, 
   2020   2019 
         
Operating activities  $(1,595,251)  $(978,901)
Investing activities   (3,588)   - 
Financing activities   1,651,925    770,000 
           
Net increase (decrease) in cash  $53,086   $(208,901)

 

Operating Activities

 

For the nine months ended September 30, 2020, the differences between our net loss and net cash used in operating activities were due to net non-cash charges totaling $525,655 for stock-based compensation, amortization of debt discount and depreciation.

 

For the nine months ended September 30, 2019, the differences between our net loss and net cash used in operating activities were due to net non-cash charges totaling $1,085,389 for loss on debt extinguishment, stock-based compensation, amortization of debt discount and depreciation.

 

Investing Activities

 

During the nine months ended September 30, 2020 the Company purchased equipment totaling $3,588. We had no cash flows from investing activities during the nine months ended September 30, 2019.

 

18
 

 

Financing Activities

 

During the nine months ended September 30, 2020, cash flows from financing activities totaled $1,651,925. Part of the cash flows were related to proceeds received from the issuance of convertible notes net of offering costs. Also, the Company entered into a SBA Loan pursuant to the Paycheck Protection Program (the “PPP”) under the recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) administered by the U.S. SBA. The Company received total proceeds of $126,000 from the SBA Loan. The SBA Loan is scheduled to mature in April 2022 and has a 1.00% interest rate. Subject to certain conditions, the SBA Loan may be forgiven in whole or in part by applying for forgiveness pursuant to the CARES Act and the PPP. The amount of loan proceeds eligible for forgiveness is based on the loan proceeds used by us during the twenty-four week period after the loan origination for certain purposes, including payroll costs, interest on certain mortgage obligations, rent payments on certain leases, and certain qualified utility payments. We believe we have used the entire loan proceeds to funding qualifying expenses and the loan will eventually be forgiven, However, as of September 30, 2020, the loan has yet to be forgiven.

 

During the nine months ended September 30, 2019, cash flows from financing activities totaled $770,000. The cash flows were related to proceeds received from the issuance of convertible notes.

 

Critical Accounting Policies and Estimates

 

The accompanying discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (GAAP). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and contingencies as of the date of the financial statements and reported amounts of revenues and expenses during the reporting periods. We evaluate our estimates on an on-going basis. We base our estimates on historical experience and on other assumptions that are believed to be reasonable under the circumstances. However, future events may cause us to change our assumptions and estimates, which may require adjustment. Actual results could differ from these estimates. We have determined that for the periods reported in this Quarterly Annual Report on Form 10-Q the following accounting policies and estimates are critical in understanding our financial condition and results of operations.

 

Long-lived Assets – Long-lived assets, including property and equipment, and intangible assets are tested for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. When such events occur, we compare the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group to the carrying amount of the long-lived asset or asset group. If this comparison indicates that there is an impairment, the amount of the impairment is calculated based on fair value.

 

Convertible Debt – The Company records a beneficial conversion feature (“BCF”) related to the issuance of convertible debt that has conversion features at fixed or adjustable rates that are in-the-money when issued. The BCF for the convertible instruments is recognized as a discount equal to the intrinsic value of the conversion features, which is also recorded as an increase to additional paid-in capital.

 

Stock-based Compensation – The Company measures the cost of employee and consulting services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The awards issued are valued using a fair value-based measurement method. The resulting cost is recognized over the period during which an employee or consultant is required to provide services in exchange for the award, usually the vesting period.

 

Emerging Growth Company – We are an “emerging growth company” under the federal securities laws and will be subject to reduced public company reporting requirements. In addition, Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. Although we have not delayed the adoption of any accounting standards, we may choose to take advantage of the extended transition period for complying with new or revised accounting standards in the future.

 

Off Balance Sheet Arrangements

 

The Company has not had any off-balance sheet arrangements.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

This item is not applicable to the Company because the Company is a smaller reporting company.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of September 30, 2019. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

 

Based on that evaluation, our interim chief executive officer concluded as of September 30, 2020 that our disclosure controls and procedures were not effective to ensure that the information required to be disclosed in the reports filed or submitted by us under the Exchange Act was recorded, processed, summarized and reported within the requisite time periods and that such information was accumulated and communicated to our interim chief executive officer, as appropriate to allow for timely decisions regarding required disclosure.

 

The Company did not maintain effective disclosure controls and procedures as defined by the framework issued by COSO. Specifically, the Company did not effectively segregate certain accounting duties due to the small size of the Company’s accounting staff. In order to mitigate these material weaknesses regular meetings are held with the audit committee and the audit committee approves all audit functions. If at any time, we determine a new control can be implemented to mitigate these risks at a reasonable cost, it is implemented as soon as possible.

 

Changes in Internal Control over Financial Reporting

 

There has been no change in our internal control over financial reporting that occurred in the three months ended September 30, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II—OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

None pending currently.

 

ITEM 1A. RISK FACTORS

 

We are a smaller reporting company and, as a result, are not required to provide the information under this item.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

The offer and sale of the Notes, and shares of common stock issuable upon conversion of the Note (the “Conversion Shares”) have been effected in reliance upon the exemptions for sales of securities set forth in Rule 506(c) under the Securities Act, based upon the following: (a) we have confirmed in a manner consistent with the requirements of Rule 506(c) that each investor is an “accredited investor,” as defined in Rule 501 promulgated under the Securities Act, (b) each investor has represented to us that the investor has such background, education and experience in financial and business matters as to be able to evaluate the merits and risks of an investment in the securities; (c) the investors have been provided with certain disclosure materials and all other information requested with respect to our company; (d) the investors have acknowledge that all Notes and Conversion Shares being purchased are “restricted securities” for purposes of the Securities Act, and agreed to transfer such securities only in a transaction registered under the Securities Act or exempt from registration under the Securities Act; (e) there are restrictions on transfer on the Notes, and any Conversion Shares are subject to restrictions and a legend, providing that the respective security can be transferred only if subsequently registered under the Securities Act or in a transaction exempt from registration under the Securities Act; and (f) a Form D has been filed with respect to the offering.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None

 

ITEM 6. EXHIBITS

 

Exhibit

Number

   Description
3.1   Third Amended and Restated Certificate of Incorporation, as amended by Certificate of Amendment dated October 10, 2017(1)
3.2   Amended and Restated By-Laws(1)
31.1   Certification Pursuant to Rule 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as Amended*
32.1   Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
101 INS   XBRL Instance Document*
101 SCH   XBRL Schema Document*
101 CAL   XBRL Calculation Linkbase Document*
101 LAB   XBRL Labels Linkbase Document*
101 PRE   XBRL Presentation Linkbase Document*
101 DEF   XBRL Definition Linkbase Document*

 

* Filed herewith

(1) Incorporated by reference from our Current Report on Form 8-K filed with the SEC on July 19, 2017.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

    PROLUNG, Inc.
       
March 15, 2021   By: /s/ Jared Bauer
Date     Jared Bauer,

 

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