10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2022

or

 

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: 001-39334

 

 

Biora Therapeutics, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

27-3950390

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

4330 La Jolla Village Drive, Suite 300, San Diego, CA

 

92122

(Address of principal executive offices)

 

(Zip Code)

 

(855) 293-2639

(Registrant’s telephone number, including area code)

 

Progenity, Inc

(Former name, former address and former fiscal year, if changed since last report)

 

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 Stock, par value $0.001 per share

 

BIOR

 

The Nasdaq Global Market

 

 

 

Indicate by check mark whether the registrant (1) has 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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

 

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

 

Large accelerated filer

 

 

Accelerated filer

 

Non-accelerated filer

 

 

Smaller reporting company

 

Emerging growth company

 

 

 

 

 

 

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 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☒ No

As of May 4, 2022, the registrant had 184,198,929 shares of common stock, par value $0.001 per share, outstanding.

 

 


 

Biora Therapeutics, Inc.

INDEX

 

PART I—FINANCIAL INFORMATION

 

 

 

 

 

Item 1.

 

Financial Statements (unaudited)

 

1

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets

 

1

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations

 

2

 

 

 

 

 

 

 

Condensed Consolidated Statements of Stockholders’ Deficit

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows

 

4

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

6

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

25

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

33

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

34

 

PART II—OTHER INFORMATION

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

35

 

 

 

 

 

Item 1A.

 

Risk Factors

 

37

 

 

 

 

 

Item 6.

 

Exhibits

 

70

 

 

 

 

Signatures

 

71

 

 

EXPLANATORY NOTE

As previously disclosed, on April 22, 2022, Biora Therapeutics, Inc., formerly known as Progenity, Inc., filed a Certificate of Amendment to its Eighth Amended Restated Certificate of Incorporation with the Secretary of State of the State of Delaware to effect a change of the Company’s name from “Progenity, Inc.” to “Biora Therapeutics, Inc.” effective as of April 26, 2022.

TRADEMARKS AND CERTAIN TERMS

In this Quarterly Report on Form 10-Q, “Biora,” “Biora Therapeutics,” “we,” “us” and “our” refer to Biora Therapeutics, Inc., and our wholly-owned subsidiaries on a consolidated basis, unless the context otherwise provides.

Biora Therapeutics® is a registered service mark of Biora Therapeutics, Inc. Any other brand names or trademarks appearing in this Quarterly Report on Form 10-Q are the property of their respective holders.

 

 

i


 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Biora Therapeutics, INC.

Condensed Consolidated Balance Sheets

(In thousands, except share and per share data)

(Unaudited)

 

 

 

March 31,
2022

 

 

December 31,
2021

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

67,234

 

 

$

88,397

 

Accounts receivable, net

 

 

 

 

 

653

 

Prepaid expenses and other current assets

 

 

5,639

 

 

 

7,232

 

Current assets of disposal group held for sale

 

 

2,147

 

 

 

2,147

 

Total current assets

 

 

75,020

 

 

 

98,429

 

Property and equipment, net

 

 

2,742

 

 

 

4,012

 

Right-of-use assets

 

 

2,578

 

 

 

 

Other assets

 

 

326

 

 

 

326

 

Goodwill

 

 

6,072

 

 

 

6,072

 

Total assets

 

$

86,738

 

 

$

108,839

 

Liabilities and Stockholders' Deficit

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

5,380

 

 

$

8,709

 

Accrued expenses and other current liabilities

 

 

31,603

 

 

 

34,157

 

Warrant liability

 

 

9,742

 

 

 

18,731

 

Current portion of capital lease obligations

 

 

 

 

 

12

 

Total current liabilities

 

 

46,725

 

 

 

61,609

 

Convertible notes, net of unamortized discount of $5,989 and $6,333 as of March 31, 2022
   and December 31, 2021, respectively

 

 

126,736

 

 

 

126,392

 

Other long-term liabilities

 

 

6,462

 

 

 

5,814

 

Total liabilities

 

$

179,923

 

 

$

193,815

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

Stockholders' deficit:

 

 

 

 

 

 

Common stock – $0.001 par value. 350,000,000 shares authorized as of March 31, 2022
   and December 31, 2021;
188,155,220 and 185,736,890 shares issued as of
   March 31, 2022 and December 31, 2021, respectively;
184,197,930 and 181,872,676
   shares outstanding as of March 31, 2022 and December 31, 2021, respectively

 

 

148

 

 

 

146

 

Additional paid-in capital

 

 

728,243

 

 

 

722,646

 

Accumulated deficit

 

 

(802,494

)

 

 

(788,686

)

Treasury stock – at cost; 3,957,290 and 3,864,214 shares of common stock
   as of March 31, 2022 and December 31, 2021, respectively

 

 

(19,082

)

 

 

(19,082

)

Total stockholders' deficit

 

 

(93,185

)

 

 

(84,976

)

Total liabilities and stockholders' deficit

 

$

86,738

 

 

$

108,839

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

1


 

Biora Therapeutics, INC.

Condensed Consolidated Statements of Operations

(In thousands, except share and per share data)

(Unaudited)

 

 

 

Three Months Ended
March 31,

 

 

 

 

2022

 

 

2021

 

 

Revenues

 

$

107

 

 

$

167

 

 

Operating expenses:

 

 

 

 

 

 

 

Research and development

 

 

6,558

 

 

 

11,673

 

 

Selling, general and administrative

 

 

13,457

 

 

 

19,958

 

 

Total operating expenses

 

 

20,015

 

 

 

31,631

 

 

Loss from operations

 

 

(19,908

)

 

 

(31,464

)

 

Interest (expense) income, net

 

 

(2,760

)

 

 

(3,520

)

 

Gain on warrant liability

 

 

8,989

 

 

 

2,650

 

 

Other (expense) income, net

 

 

(811

)

 

 

14,873

 

 

Loss from continuing operations

 

 

(14,490

)

 

 

(17,461

)

 

Gain (loss) from discontinued operations

 

 

682

 

 

 

(14,803

)

 

Net loss

 

 

(13,808

)

 

 

(32,264

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share from continuing operations, basic and diluted

 

$

(0.08

)

 

$

(0.30

)

 

Net gain (loss) per share from discontinued operations, basic and diluted

 

 

 

 

$

(0.26

)

 

Net loss per share, basic and diluted

 

$

(0.08

)

 

$

(0.56

)

 

Weighted average shares outstanding, basic and diluted

 

 

183,201,663

 

 

 

57,493,800

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

2


 

Biora Therapeutics, INC.

Condensed Consolidated Statements of Stockholders’ Deficit

(In thousands, except share data)

(Unaudited)

 

 

 

Common Stock

 

 

Additional
Paid-In

 

 

Accumulated

 

 

Treasury Stock

 

 

Total
Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Shares

 

 

Amount

 

 

Deficit

 

Balance at December 31, 2021

 

 

185,736,890

 

 

$

146

 

 

$

722,646

 

 

$

(788,686

)

 

 

(3,864,214

)

 

$

(19,082

)

 

$

(84,976

)

Issuance of common stock, net

 

 

2,130,327

 

 

 

2

 

 

 

3,624

 

 

 

 

 

 

 

 

 

 

 

 

3,626

 

Issuance of common stock upon vesting
   of restricted stock units

 

 

288,003

 

 

 

 

 

 

(80

)

 

 

 

 

 

(93,076

)

 

 

 

 

 

(80

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

2,053

 

 

 

 

 

 

 

 

 

 

 

 

2,053

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(13,808

)

 

 

 

 

 

 

 

 

(13,808

)

Balance at March 31, 2022

 

 

188,155,220

 

 

$

148

 

 

$

728,243

 

 

$

(802,494

)

 

 

(3,957,290

)

 

$

(19,082

)

 

$

(93,185

)

 

 

 

 

Common Stock

 

 

Additional
Paid-In

 

 

Accumulated

 

 

Treasury Stock

 

 

Total
Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Shares

 

 

Amount

 

 

Deficit

 

Balance at December 31, 2020

 

 

59,287,331

 

 

$

59

 

 

$

452,992

 

 

$

(541,274

)

 

 

(3,515,028

)

 

$

(18,771

)

 

$

(106,994

)

Issuance of common stock, net

 

 

4,370,629

 

 

 

4

 

 

 

11,258

 

 

 

 

 

 

 

 

 

 

 

 

11,262

 

Exercise of common stock options

 

 

71,284

 

 

 

 

 

 

88

 

 

 

 

 

 

 

 

 

 

 

 

88

 

Issuance of common stock upon vesting
   of restricted stock units

 

 

174,730

 

 

 

 

 

 

(228

)

 

 

 

 

 

(48,581

)

 

 

(1

)

 

 

(229

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

2,630

 

 

 

 

 

 

 

 

 

 

 

 

2,630

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(32,264

)

 

 

 

 

 

 

 

 

(32,264

)

Balance at March 31, 2021

 

 

63,903,974

 

 

$

63

 

 

$

466,740

 

 

$

(573,538

)

 

 

(3,563,609

)

 

$

(18,772

)

 

$

(125,507

)

 

See accompanying notes to unaudited condensed consolidated financial statements.

3


 

Biora Therapeutics, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Three Months Ended
March 31,

 

 

 

2022

 

 

2021

 

Operating Activities:

 

 

 

 

 

 

Net loss

 

$

(13,808

)

 

$

(32,264

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

(Gain) loss from discontinued operations

 

 

(682

)

 

 

14,803

 

Non-cash revenue reserve

 

 

96

 

 

 

187

 

Depreciation and amortization

 

 

322

 

 

 

445

 

Stock-based compensation expense

 

 

2,053

 

 

 

2,166

 

Amortization of debt discount and non-cash interest

 

 

343

 

 

 

386

 

Loss on disposal of property and equipment

 

 

254

 

 

 

 

Impairment of property and equipment

 

 

545

 

 

 

 

Change in fair value of derivative liability

 

 

 

 

 

(14,828

)

Change in fair value of warrant liability

 

 

(8,989

)

 

 

(2,650

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

2,060

 

 

 

(365

)

Accounts payable

 

 

(3,377

)

 

 

(2,183

)

Accrued expenses and other liabilities

 

 

(3,656

)

 

 

577

 

Other long-term liabilities

 

 

(451

)

 

 

(62

)

Net cash used in operating activities - continuing operations

 

 

(25,290

)

 

 

(33,788

)

Net cash provided by (used in) operating activities - discontinued operations

 

 

1,335

 

 

 

(14,776

)

Net cash used in operating activities

 

 

(23,955

)

 

 

(48,564

)

Investing Activities:

 

 

 

 

 

 

Purchases of property and equipment

 

 

(342

)

 

 

(425

)

Net cash used in investing activities - continuing operations

 

 

(342

)

 

 

(425

)

Net cash used in investing activities - discontinued operations

 

 

 

 

 

(38

)

Net cash used in investing activities

 

 

(342

)

 

 

(463

)

Financing Activities:

 

 

 

 

 

 

Proceeds from issuance of common stock, net

 

 

3,626

 

 

 

11,631

 

Proceeds from issuance of common stock warrants

 

 

 

 

 

12,804

 

Payment of deferred offering costs

 

 

 

 

 

(75

)

Payments for financing of insurance premiums

 

 

(480

)

 

 

(1,950

)

Principal payments on mortgages payable

 

 

 

 

 

(17

)

Principal payments on capital lease obligations

 

 

(12

)

 

 

(106

)

Net cash provided by financing activities - continuing operations

 

 

3,134

 

 

 

22,287

 

Net cash used in financing activities - discontinued operations

 

 

 

 

 

(60

)

Net cash provided by financing activities

 

 

3,134

 

 

 

22,227

 

Net decrease in cash and cash equivalents

 

 

(21,163

)

 

 

(26,800

)

Cash and cash equivalents at beginning of period

 

 

88,397

 

 

 

92,076

 

Cash and cash equivalents at end of period

 

$

67,234

 

 

$

65,276

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

4


 

Biora Therapeutics, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Three Months Ended
March 31,

 

 

 

2022

 

 

2021

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

Cash paid for interest

 

$

 

 

$

41

 

Cash paid for income taxes

 

 

1

 

 

 

7

 

 

 

 

 

 

 

 

Supplemental schedule of non-cash investing and financing activities:

 

 

 

 

 

 

Lease assets obtained in exchange for operating lease liabilities

 

 

2,962

 

 

 

 

Equity offering costs incurred but not paid

 

 

 

 

 

281

 

Purchases of property and equipment in accounts payable

 

 

47

 

 

 

89

 

Warrant issuance costs incurred but not paid

 

 

 

 

 

148

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

5


 

Biora Therapeutics, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Organization and Description of Business

Biora Therapeutics, Inc. (the “Company” or “Biora” or "Biora Therapeutics"), formerly known as Progenity, Inc. (“Progenity”), a Delaware corporation, commenced operations in 2010 with its corporate office located in San Diego, California. Progenity’s historical operations included a licensed Clinical License Improvement Amendment and College of American Pathologists certified laboratory located in Michigan specializing in the molecular testing markets serving women’s health providers in the obstetric, gynecological, fertility, and maternal fetal medicine specialty areas in the United States. Previously, Progenity's core business was focused on the prenatal carrier screening and noninvasive prenatal test market, targeting preconception planning, and routine pregnancy management for genetic disease risk assessment. Through its former affiliation with Mattison Pathology, LLP (“Mattison”), a Texas limited liability partnership doing business as Avero Diagnostics (“Avero”), located in Lubbock and Dallas, Texas, the Company’s operations also included anatomic and molecular pathology testing products in the United States.

In order to refocus efforts and resources on it's research and development pipeline, in June 2021, Progenity announced a strategic transformation ("Strategic Transformation") that included the closure of the Progenity genetics laboratory in Ann Arbor, Michigan, and indicated that Progenity was seeking strategic alternatives for Avero, together referred to as the Laboratory Operations. In December 2021, Progenity entered into an asset purchase agreement with Northwest Pathology to sell Avero. The Company has excluded from continuing operations for all periods presented in this report revenues and expenses associated with its Laboratory Operations, which are reported as discontinued operations. See Note 4 for additional information on the Laboratory Operations.

On April 12, 2022, Progenity announced that it would rebrand the Company to better reflect the current focus on its therapeutics pipeline, and would begin to operate as Biora Therapeutics, Inc., a Delaware corporation. The Company subsequently changed its name to Biora Therapeutics, Inc. on April 26, 2022.

Biora Therapeutics is a biotechnology company developing oral biotherapeutics. The Company's drug-device combinations could enable new treatment approaches in the delivery of therapeutics in two main areas:

Targeted delivery of therapeutics ("Targeted Therapeutics") to the site of disease in the gastrointestinal ("GI") tract, which are designed to improve outcomes for patients with Inflammatory Bowel Disease; and
Systemic delivery of biotherapeutics ("Oral Biotherapeutics"), which are designed to replace injections with needle-free, oral delivery technology.

The Company is also developing diagnostics devices to help characterize the GI tract and diagnose GI diseases, such as Small Intestine Bacterial Overgrowth, through the development of innovative technologies that are designed to diagnose at the site of the disease. Using these platforms, the Company intends to develop therapeutics and diagnostic solutions for a broad range of disorders.

Liquidity

As of March 31, 2022, the Company had cash and cash equivalents of $67.2 million and an accumulated deficit of $802.5 million. For the three months ended March 31, 2022, the Company reported a net loss of $13.8 million and cash used in operating activities of $24.0 million. The Company’s primary sources of capital have historically been the sale of common stock and warrants, private placements of preferred stock and incurrence of debt. As of March 31, 2022, the Company had $126.7 million of convertible senior notes ("Convertible Notes") outstanding (see Note 8). As a result of the Strategic Transformation, management believes that future operating expenses have been reduced. However, as the Strategic Transformation was announced in June of 2021 and the Company completed the sale of Avero in December of 2021, the Company has not eliminated the risks surrounding its ability to fund operations for at least 12 months from the issuance date of the condensed consolidated financial statements for the three months ended March 31, 2022, without relying on additional funding. As a result, there is substantial doubt about the Company’s ability to continue as a going concern for 12 months following the issuance date of the condensed consolidated financial statements for the three months ended March 31, 2022.

The Company’s ability to continue as a going concern is dependent upon its ability to raise additional funding. Management believes that the Company’s liquidity position as of the date of this filing provides sufficient runway to achieve critical research and development pipeline milestones. Management intends to raise additional capital through equity offerings and/or debt financings, or from other potential sources of liquidity, which may include new collaborations, licensing or other commercial agreements for one or more of the Company’s research programs or patent portfolios, or divestitures of the Company's assets. Adequate funding, if needed, may not be available to the Company on acceptable terms, or at all. The Company’s ability to raise additional funds may be adversely impacted by potential worsening global economic conditions and the disruptions to, and volatility in, the credit and financial markets

6


 

in the United States and worldwide resulting from the ongoing COVID-19 pandemic. If the Company is unable to raise capital when needed or on attractive terms, it would be forced to delay, reduce, or eliminate its research and development programs or other operations. If any of these events occur, the Company’s ability to achieve its operational goals would be adversely affected.

Uncertainties Related to the COVID-19 Pandemic

The ongoing COVID‑19 pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial markets. The Company has been materially and negatively affected by the COVID-19 pandemic; however, the extent of the continued impact of the COVID-19 pandemic on the Company’s operational and financial performance, including its ability to execute its business strategies and initiatives in the expected time frame, will depend on future developments, including the duration and continued spread of the pandemic, which is uncertain and cannot be predicted. The Company could be further negatively affected by the widespread outbreak of an illness or any other communicable disease, or any other public health crisis that results in economic and trade disruptions, including the disruption of global supply chains. An extended period of global supply chain and economic disruption could materially affect the Company’s business, results of operations, access to sources of liquidity and financial condition.

The estimates used for, but not limited to, determining the fair value of goodwill could be impacted by the pandemic. While the full impact of the COVID-19 pandemic is unknown at this time, the Company has made appropriate estimates based on the facts and circumstances available as of the reporting date. These estimates may change as new events occur and additional information is obtained.

2. Summary of Significant Accounting Policies

Basis of Presentation

The Company’s condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. These financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the Securities and Exchange Commission, (“SEC”), from which management derived the Company’s condensed consolidated balance sheet as of December 31, 2021. Certain amounts in prior periods have been reclassified to reflect the impact of the discontinued operations treatment of the Company's Laboratory Operations in order to conform to the current period presentation.

The condensed consolidated financial statements include the accounts of Biora Therapeutics, Inc., its wholly-owned subsidiaries, and, as of March 31, 2021, an affiliated professional partnership with Avero with respect to which the Company had a specific management arrangement (see Note 3). All significant intercompany balances and transactions have been eliminated in consolidation.

As a result of the divestiture of the Laboratory Operations, the Company has retrospectively revised the condensed consolidated statements of operations for the three months ended March 31, 2021 and the condensed consolidated statement of cash flows for the three months ended March 31, 2021 to reflect the operations and cash flows of the Laboratory Operations as discontinued operations.

Financial Statement Presentation Change

In order to more closely align with the Company’s business, and to better serve financial statement users, the Company has combined selling and marketing expenses with general and administrative expenses into a single selling, general and administrative expense line item. Prior period amounts have been reclassified to conform to the current presentation.

Unaudited Interim Financial Information

The accompanying condensed consolidated financial statements are unaudited, have been prepared on the same basis as the audited annual financial statements and, in the opinion of management, reflect all adjustments, consisting of normal recurring adjustments, that are necessary to present fairly the results for the interim periods presented. Results are not necessarily indicative of results to be expected for the year ending December 31, 2022, any other interim periods, or any future year or period, particularly in light of the COVID-19 pandemic and its impact on domestic and global economies. The balance sheet as of December 31, 2021 included herein was derived from the audited financial statements as of that date. Certain disclosures have been condensed or omitted from the interim financial statements.

7


 

Use of Estimates

The preparation of 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 as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates include the estimate of variable consideration in connection with the recognition of revenue, the valuation of stock options, the valuation of goodwill, the valuation of the derivative liability associated with the Convertible Notes, accrual for reimbursement claims and settlements, the valuation of warrant liabilities, the valuation of assets held for sale, assessing future tax exposure and the realization of deferred tax assets, and the useful lives and the recoverability of property and equipment. The Company bases these estimates on historical and anticipated results, trends, and various other assumptions that the Company believes are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities and recorded revenues and expenses that are not readily apparent from other sources. Actual results could differ from those estimates and assumptions.

Assets Held for Sale and Discontinued Operations

Assets and liabilities are classified as held for sale when all of the following criteria for a plan of sale have been met: (1) management, having the authority to approve the action, commits to a plan to sell the assets; (2) the assets are available for immediate sale, in their present condition, subject only to terms that are usual and customary for sales of such assets; (3) an active program to locate a buyer and other actions required to complete the plan to sell the assets have been initiated; (4) the sale of the assets is probable and is expected to be completed within one year; (5) the assets are being actively marketed for a price that is reasonable in relation to their current fair value; and (6) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or the plan will be withdrawn. When all of these criteria have been met, the assets and liabilities are classified as held for sale in the condensed consolidated balance sheet. Assets classified as held for sale are reported at the lower of their carrying value or fair value less costs to sell. Depreciation and amortization of assets ceases upon designation as held for sale.

Discontinued operations comprise activities that were disposed of, discontinued or held for sale at the end of the period, represent a separate major line of business that can be clearly distinguished for operational and financial reporting purposes and represent a strategic business shift having a major effect on the Company’s operations and financial results according to Accounting Standard Codification (“ASC”) Topic 205, Presentation of Financial Statements.

Additional details surrounding the Company's assets and liabilities held for sale and discontinued operations are included in Note 4.

Revenue Recognition

Revenue is recognized in accordance with the Financial Accounting Standards Board (“FASB”) ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”). In accordance with ASC 606, the Company follows a five-step process to recognize revenues: 1) identify the contract with the customer, 2) identify the performance obligations, 3) determine the transaction price, 4) allocate the transaction price to the performance obligations and 5) recognize revenues when the performance obligations are satisfied.

Revenue was primarily derived from providing molecular testing products, which were reimbursed through arrangements with third-party payors, laboratory distribution partners, and amounts from individual patients. Third-party payors include commercial payors, such as health insurance companies, health maintenance organizations and government health benefit programs, such as Medicare and Medicaid. The Company’s contracts generally contained a single performance obligation, which was the delivery of the test results, and the Company satisfied its performance obligation at a point in time upon the delivery of the results, which then triggered the billing for the product. The amount of revenue recognized reflects the amount of consideration the Company expected to be entitled to (“transaction price”) and considered the effects of variable consideration. Revenue was recognized when control of the promised product was transferred to customers, in an amount that reflected the consideration the Company expected to be entitled to in exchange for those products.

The Company applies the following practical expedients and exemptions:

Incremental costs incurred to obtain a contract are expensed as incurred because the related amortization period would be one year or less. The costs are included in selling and marketing expenses.
No adjustments to amounts of promised consideration are made for the effects of a significant financing component because the Company expects, at contract inception, that the period between the transfer of a promised good or service and customer payment for that good or service will be one year or less.

8


 

Payor Concentration

The Company historically relied upon reimbursements from third-party government payors and private-payor insurance companies to collect accounts receivable. As a result of the Strategic Transformation, all revenue from Laboratory Operations has been classified as discontinued operations and there were no significant concentrations as of March 31, 2022. The Company’s significant third-party payors and their related accounts receivable balances and revenues as a percentage of total accounts receivable balances and revenues as of December 31, 2021 and for the three months ended March 31, 2021 are as follows:

 

 

Percentage of Accounts Receivable

 

 

 

December 31,
2021

 

Blue Shield of Texas

 

 

4.0

%

Government Health Benefits Programs

 

 

55.8

%

United Healthcare

 

 

7.2

%

 

 

 

 

Percentage of Revenue (1)

 

 

 

Three Months Ended

 

 

 

March 31, 2021

 

Blue Shield of Texas

 

 

22.7

%

Government Health Benefits Programs

 

 

23.4

%

Aetna

 

 

7.7

%

United Healthcare

 

 

6.8

%

 

(1) Percentage of revenue table shows amounts as a percentage of total revenue, including revenue classified as discontinued operations. Refer to Note 5 for details of the breakdown of revenue.

Leases

The Company determines if an arrangement is or contains a lease at inception. For leases with a term greater than one year, lease right-of-use assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. In determining the net present value of lease payments, the Company uses its incremental borrowing rate which represents an estimated rate of interest that the Company would have to pay to borrow equivalent funds on a collateralized basis at the lease commencement date. Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the statement of operations.

Net Loss Per Share

Basic net loss per share is computed by dividing the net loss by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share is computed by dividing the net loss by the weighted average number of shares of common stock and potentially dilutive securities outstanding for the period. As the Company has reported net losses for all periods presented, all potentially dilutive securities are antidilutive and, accordingly, basic net loss per share equals diluted net loss per share.

Recent Accounting Pronouncements Adopted

 

In December 2019, FASB issued Accounting Standards Update (“ASU”) No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplified income tax accounting in various areas. The Company adopted this standard on January 1, 2021, which did not have a material impact on the condensed consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes FASB ASC Topic 840, Leases (Topic 840), and provides principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The Company adopted the provisions of this guidance on January 1, 2022, using the effective date method. As a result of adopting ASC 842, the Company recognized right-of-use assets and lease liabilities of $2.2 million and $2.2 million, respectively, on January 1, 2022. The difference between the right-of-use assets and lease liabilities is attributed to the elimination of deferred rent and prepaid rent. There was no adjustment to the opening balance of accumulated deficit as a result of the adoption. The Company elected to use the package of practical expedients available in the new lease standard, allowing it not to reassess: (a) whether expired or existing contracts contain leases under the new definition of a lease; (b) lease classification for expired or existing leases; and (c) whether previously capitalized initial direct costs would qualify for capitalization under the new lease standard.

9


 

In May 2021, the FASB issued ASU No. 2021-04, Issuer's Accounting for Certain Modification or Exchanges of Freestanding Equity-Classified Written Call Options, which provides a principles-based framework to determine whether an issuer should recognize the modification or exchange as an adjustment to equity or an expense. The Company adopted this standard on January 1, 2022, which did not have a material impact on the condensed consolidated financial statements.

Recent Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses, which requires the measurement of expected credit losses for financial instruments carried at amortized cost, such as accounts receivable, held at the reporting date based on historical experience, current conditions and reasonable forecasts. The main objective of this standard is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financing Instruments–Credit Losses, which included an amendment of the effective date. The standard is effective for the Company for annual reporting periods beginning after December 15, 2022. The Company does not expect the adoption of this standard to have a significant impact on its consolidated financial statements.

 

In August 2020, the FASB issued ASU No. 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, which simplifies the accounting for convertible instruments, amends the guidance on derivative scope exceptions for contracts in an entity's own equity, and modifies the guidance on diluted earnings per share calculations as a result of these changes. The standard is effective for the Company for annual reporting periods beginning after December 15, 2023. The Company is currently evaluating the impact the adoption of this standard may have on its consolidated financial statements.

3. Variable Interest Entity

In June 2015, the Company, through a wholly-owned subsidiary, entered into a series of agreements with Avero. The subsidiary entity entered into a purchase agreement to acquire certain assets from Mattison used in the operations of Avero. The purchase agreement was accounted for under the acquisition method in accordance with the provisions of ASC Topic 805, Business Combinations. The subsidiary entity also entered into a nominee agreement which provided it with the right, but not the obligation, to purchase, or to designate a person(s) to purchase, the stock of Avero at any time for a nominal amount.

In December 2021, the Company entered into an asset purchase agreement with Northwest Pathology to sell certain assets and liabilities of Avero for $10.9 million. The Company no longer has a controlling interest in Avero and therefore does not consolidate Avero beginning at December 31, 2021. Prior to the date of sale, Avero income statement activity is included in discontinued operations in the condensed consolidated statements of operations.

In June 2015, the Company's subsidiary entity entered into a management services arrangement that authorized the Company to perform the management services in the manner that it deemed reasonably appropriate to meet the day-to-day business needs of Avero. The management services included funding ongoing operational needs, directing activities related to contract negotiation, billing, human resources, and legal and administrative matters and processes, among others. In exchange for the management services provided, the Company's subsidiary entity was entitled to receive an annual management fee equal to the amount of the net operating income of Avero. The agreement had a 10 year term, but was terminated at the time of the sale of Avero.

Through the management services arrangement with Avero, the Company had (1) the power to direct the activities of Avero that most significantly impact its economic performance, and (2) the obligation to absorb losses of Avero or the right to receive benefits from Avero that could potentially be significant to Avero. Based on these determinations, the Company determined that Avero was a variable interest entity and that the Company was the primary beneficiary. The Company did not own any equity interest in Avero; however, as these agreements provide the Company the controlling financial interest in Avero, the Company consolidated Avero’s balances and activities within its consolidated financial statements.

4. Assets Held for Sale and Discontinued Operations

In June 2021, the Company announced its Strategic Transformation to reallocate resources to research and development to better position the business for future growth. The plan included the closure of the Progenity genetics laboratory in Ann Arbor, Michigan and the divestiture of Avero. This plan represents a strategic business shift having a major effect on the Company's operations and financial results. The Company classified the results of its Laboratory Operations as discontinued operations in its condensed consolidated statements of operations and consolidated statements of cash flows for the three months ended March 31, 2022 and 2021. Additionally, the remaining assets have been reported as assets held for sale in the Company’s condensed consolidated balance sheets as of March 31, 2022 and December 31, 2021.

10


 

The following table presents the combined results of discontinued operations of the Laboratory Operations (in thousands):

 

 

Three Months Ended
March 31,

 

 

 

 

2022

 

 

2021

 

 

Revenues

 

$

1,268

 

 

$

24,359

 

 

Cost of sales

 

 

 

 

 

22,233

 

 

Gross profit

 

 

1,268

 

 

 

2,126

 

 

Operating expenses:

 

 

 

 

 

 

 

Selling and marketing

 

 

 

 

 

12,790

 

 

General and administrative

 

 

586

 

 

 

4,120

 

 

Total operating expenses

 

 

586

 

 

 

16,910

 

 

Other income (expense), net

 

 

 

 

 

(19

)

 

Net gain (loss) from discontinued operations

 

$

682

 

 

$

(14,803

)

 

The following table presents the carrying amounts of the remaining assets held for sale related to the Laboratory Operations as of March 31, 2022 and December 31, 2021 (in thousands):

 

 

March 31,
2022

 

 

December 31,
2021

 

 

 

 

 

 

 

 

Current assets of disposal group held for sale

 

 

 

 

 

 

Property and equipment, net

 

 

2,147

 

 

 

2,147

 

Total current assets of disposal group held for sale (1)

 

$

2,147

 

 

$

2,147