UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
| For
the quarterly period ended |
| 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:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
| (Address of principal executive offices) | (Zip Code) |
(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 | ||
| 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.
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).
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 | ☐ | |||
| ☒ | 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 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 ☐
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of November 14, 2022 the issuer had shares of common stock, $0.001 par value, outstanding.
PROLUNG, INC.
TABLE OF CONTENTS
| 2 |
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ProLung, Inc.
Condensed Balance Sheets
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash | $ | $ | ||||||
| Total Current Assets | ||||||||
| Property and equipment, net | ||||||||
| Operating lease right-of-use asset | ||||||||
| Intangible assets, net | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities and Stockholders’ Deficit | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued liabilities | ||||||||
| Operating lease liability - current | ||||||||
| Payable for research and development - current | ||||||||
| Convertible notes payable, related party, net - current | ||||||||
| Convertible notes payable - current, net | ||||||||
| Total Current Liabilities | ||||||||
| Long-Term Liabilities | ||||||||
| Operating lease liability – net of current portion | ||||||||
| Total Long-Term Liabilities | ||||||||
| Total Liabilities | ||||||||
| Stockholders’ Deficit: | ||||||||
| Preferred stock, $ par value; shares authorized; issued and outstanding | ||||||||
| Common stock, $ par value; shares authorized; and shares issued and outstanding | ||||||||
| Additional paid-in capital | ||||||||
| Subscription receivable | ( | ) | ||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Stockholders’ Deficit | ( | ) | ( | ) | ||||
| Total Liabilities and Stockholders’ Deficit | $ | $ | ||||||
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, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenues: | ||||||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Total revenue | ||||||||||||||||
| Cost of revenue: | ||||||||||||||||
| Gross margin | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Research and development expense | ||||||||||||||||
| Selling, general and administrative expense | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Gain on settlement of liabilities | ||||||||||||||||
| Total other expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ( | ) | ( | ) | ||||||
| Basic and diluted loss per share | $ | ( | ) | $ | ( | ) | ( | ) | ( | ) | ||||||
| Weighted-average common shares outstanding, basic and diluted | ||||||||||||||||
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, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash flows from operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of right of use asset | ||||||||
| Stock-based compensation - share issuance and options/warrants | ||||||||
| Amortization of loan discount | ||||||||
| Gain on settlement of liabilities | ( | ) | ||||||
| Change in assets and liabilities: | ||||||||
| Prepaid expenses | ||||||||
| Accounts payable | ( | ) | ||||||
| Accrued liabilities | ||||||||
| Operating lease liability | ( | ) | ||||||
| Net cash flows used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Net cash flows used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Payment for placement of convertible notes payable | ( | ) | ||||||
| Payment on convertible notes payable | ( | ) | ||||||
| Proceeds from exercise of warrants | ||||||||
| Proceeds from convertible notes payable - related party | - | - | ||||||
| Proceeds from convertible notes payable | ||||||||
| Net cash flows provided by financing activities | ||||||||
| Net increase (decrease) in cash | ( | ) | ||||||
| Cash at beginning of period | ||||||||
| Cash at end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Supplemental disclosure of non-cash investing and financing activities: | ||||||||
| Exercise of warrants where funds yet received | $ | $ | ||||||
| Common stock issued for cashless exercise of warrants | $ | $ | ||||||
| Right of use asset | $ | |||||||
| Transfer of short term loans payable to convertible note payable | $ | $ | ||||||
| Discount recorded on convertible debt issuance | $ | $ | ||||||
| Non-cash partial settlement of research and development liability | $ | $ | ||||||
| Transfer of accrued interest to convertible notes payable | $ | $ | ||||||
| Conversion of debt to equity | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed financial statements
| 5 |
ProLung, Inc.
Condensed Statement of Stockholders’ Deficit
For the Nine Months Ended September 30, 2022 and 2021
(Unaudited)
| Common Stock | Additional Paid-in | Subscription | Accumulated | Total Stockholders’ | ||||||||||||||||||||
| Shares | Amount | Capital | Receivable | Deficit | Deficit | |||||||||||||||||||
| Balance, December 31, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||
| Exercise of warrants for cash | ||||||||||||||||||||||||
| Cashless exercise of warrants | ( | ) | ||||||||||||||||||||||
| Exercise of warrants for acquired research and development | ||||||||||||||||||||||||
| Additional shares of common stock issued to warrant holders | ||||||||||||||||||||||||
| Exercise of warrants for subscription receivable | ( | ) | ||||||||||||||||||||||
| Issuance of common stock acquired research and development | ||||||||||||||||||||||||
| Stock-based compensation - options | - | |||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance, March 31, 2022 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Funds received for subscription receivable | - | |||||||||||||||||||||||
| Return of shares for settlement of subscription receivable | ( | ) | ( | ) | ||||||||||||||||||||
| Stock-based compensation - options | - | |||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance, June 30, 2022 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Stock-based compensation - options | - | |||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance, September 30 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||
| Balance, December 31, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||
| Exercise of warrants for common stock | ||||||||||||||||||||||||
| Warrants issued to convertible debt placement agent | - | |||||||||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance, March 31, 2021 | ( | ) | ( | ) | ||||||||||||||||||||
| Conversion of notes payable to common stock | ||||||||||||||||||||||||
| Warrants issued to convertible debt placement agent | - | |||||||||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance, June 30, 2021 | ( | ) | ( | ) | ||||||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance, September 30 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||
The accompanying notes are an integral part of these unaudited condensed financial statements
| 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 (dba) “IONIQ Sciences” and “ProLung.” The Company’s headquarters are located in Salt Lake City, Utah. The Company’s business is the development of a modern solution for the early detection of multiple cancers thereby expanding the therapeutic window, significantly improving survivability, and reducing the cost of healthcare. One in two Americans will be diagnosed with cancer during their lifetime and one in five will die. Clinical literature shows that early detection can save lives and money. IONIQ Sciences operates at the confluence of its Electrical Impedance Analytics (EIA) technology or bioimpedance and artificial intelligence (AI). The Company has active projects in lung, breast and gastro-intestinal (GI) cancers. The first planned product utilizing its proprietary analytic platform, the IONIQ ProLung Test™ for lung cancer, has been designated a Breakthrough Device by the U.S. FDA in February 2020. The Company submitted its de novo application to the U.S. FDA in February 2022. IONIQ Sciences remains fully committed to gaining U.S. FDA regulatory de novo clearance and subsequently commercializing the IONIQ ProLung Test for lung cancer.
Basis of Presentation
The accompanying condensed financial statements 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, 2021. The results of operations for the three and nine months ended September 30, 2022 may not be indicative of the results to be expected for the year ending December 31, 2022.
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”) clearance, the Company will not achieve its planned level of operations in the United States. New European medical device regulations known as the European Medical Device Regulation ((EU) 2017/745) or MDR has created challenges in obtaining and maintaining European medical device approval “CE Mark.” The Company’s prior CE certificates are no longer valid and the Company must re-certify to the new MDR regulation to be approved for sale in Europe. 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.
| 7 |
ProLung, Inc. and Subsidiary
Notes to Condensed Financial Statements
(Unaudited)
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. As of September 30, 2022, and 2021, the following items were excluded from the computation of diluted net loss per common share as their effect is anti-dilutive:
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| Warrants to purchase shares | ||||||||
| Stock options | ||||||||
| Convertible notes | ||||||||
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 equal to the intrinsic value of the conversion features which is credited to additional paid-in capital.
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 (ASC 842): Leases. ASC 842 requires companies to generally recognize on the balance sheet operating and financing lease liabilities and corresponding right-of-use assets. The Company formally adopted ASC 842 on January 1, 2022. The Company will use the modified retrospective basis. On September 1, 2022 the Company entered into a three-year lease agreement related to their office space. See the accompany balance sheet, statement of operations, statement of cash flows and Note 7 for the effect ASC 842 had on entering into this lease agreement.
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.
| 8 |
ProLung, Inc. and Subsidiary
Notes to Condensed Financial Statements
(Unaudited)
Note 2 – Accrued Liabilities
Accrued liabilities consisted of the following at September 30, 2022 and December 31, 2021:
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Accrued interest | $ | $ | ||||||
| Accrued royalties | ||||||||
| Accrued payroll and payroll taxes | ||||||||
| Accrued liabilities | $ | $ | ||||||
Note 3 – Convertible Notes Payable
In
March 2022, all of
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Convertible
notes payable; unsecured at | $ | $ | ||||||
| Unamortized
discount and loan costs (includes related party amounts of $ and $ | ( | ) | ||||||
| Notes payable, net | $ | $ | ||||||
| Less: current portion, net | ( | ) | ( | ) | ||||
| Convertible notes payable - long term, net | $ | $ | ||||||
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.
| 9 |
ProLung, Inc. and Subsidiary
Notes to Condensed Financial Statements
(Unaudited)
As
part of an agreement for their service during the nine months ended September 30, 2022 current Board members and advisors accepted the
issuance of options at an exercise price of $ per option. These options vested upon issuance. The fair value of these options
was $
In
July 2022, the Board’s approved the issuance of options to employees of the Company at an exercise price of $ per option.
These options vest quarterly over four years. The fair value of these options was $
| Expected life | years | |||
| Exercise price | $ | |||
| Expected volatility | % to | % | ||
| Weighted average volatility | % | |||
| Expected dividends | n/a | |||
| Risk-free interest rate | % to | % | ||
| Weighted | Aggregate | |||||||||||||||
| Weighted | Average | Intrinsic | ||||||||||||||
| Shares | Average | Remaining | Value of | |||||||||||||
| Under | Exercise | Contractual | Vested | |||||||||||||
| Options | Price | Life | Options | |||||||||||||
| Outstanding at December 31, 2021 | $ | years | ||||||||||||||
| Issued | $ | |||||||||||||||
| Exercised | $ | |||||||||||||||
| Forfeited/Expired | $ | |||||||||||||||
| Outstanding at September 30, 2022 | $ | years | $ | |||||||||||||
| Vested at September 30, 2022 | $ | years | $ | |||||||||||||
The Company recorded an expense of $ and $ for the three months ended September 30, 2022 and 2021 and $ and $ for the nine months ended September 30, 2022 and 2021 related to the amortization of options issued under the plan. The remaining unrecognized expense of $ will be recognized through June 2026.
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Research and development expense | $ | $ | $ | $ | ||||||||||||
| Selling, general and administrative expense | ||||||||||||||||
| Total share-based compensation | $ | $ | $ | $ | ||||||||||||
| 10 |
ProLung, Inc. and Subsidiary
Notes to Condensed Financial Statements
(Unaudited)
Note 5 – Common Stock Warrants
During the nine months ended September 30, 2022, warrant holders exercised warrants as follows:
| ● |
warrants were exercised for $ | |
| ● | ||
| ● | ||
| ● |
A summary of warrant activity for the nine months ended September 30, 2022 is presented below:
| Weighted | Aggregate | |||||||||||||||
| Weighted | Average | Intrinsic | ||||||||||||||
| Shares | Average | Remaining | Value of | |||||||||||||
| Under | Exercise | Contractual | Vested | |||||||||||||
| Warrants | Price | Life | Warrants | |||||||||||||
| Outstanding at December 31, 2021 | $ | years | ||||||||||||||
| Issued | $ | |||||||||||||||
| Exercised | ( | ) | $ | |||||||||||||
| Expired/Forfeited | ( | ) | $ | |||||||||||||
| Outstanding/Exercisable at September 30, 2022 | $ | years | $ | |||||||||||||
Note 6 – Stockholders’ Equity
Biomeridian License Purchase (OT Acceptance)
On
March 3, 2022, the Company acquired from OT Acceptance, LLC (“OT Acceptance”) certain intellectual property formerly licensed
to the Company by OT Acceptance. As a result of this acquisition, the Company now owns, rather than having license rights, to all of
the intellectual property used by it with respect to early cancer detection. The aggregate consideration paid by the Company to OT Acceptance
under the Agreement was $
Vine Medical Asset Purchase
On
March 30, 2022 the Company acquired from Vine Medical LLC (“Vine”) certain intellectual property and designs that are expected
to accelerate IONIQ Sciences’ product development efforts. The aggregate consideration paid by the Company to Vine Medical LLC
under the Agreement was $
| 11 |
ProLung, Inc. and Subsidiary
Notes to Condensed Financial Statements
(Unaudited)
Common Shares Issued to Warrant Holders
On
March 31, 2022 the Company issued common shares valued at $
NOTE 7 – RIGHT OF USE ASSETS AND LIABILITIES
In September 2022, the Company renegotiated their office space lease from a month-to-month lease to a long-term operating lease agreement. The lease agreement is for 36 months requires monthly payments as follows:
On
January 1, 2022, the Company adopted Topic 842, Leases which requires a lessee to record a right-of-use asset and a corresponding
lease liability at the inception of the lease initially measured at the present value of the lease payments. The Company determined that
the fair value of the lease asset and liability at the inception of the leases was $
| Beginning Date | Ending Date | Payment | |||||||
| - | $ | ||||||||
| - | $ | ||||||||
| - | $ | ||||||||
During
the nine-months ended September 30, 2022, the Company made payments resulting in a $
The lease expense related to this lease for the three month and nine months ended September 30 2022 and 2021, which includes the portion under a month-to-month agreement, are as follows:
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||
| September 30, | September 30, | |||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||
| $ | $ | $ | $ | |||||||||||
Maturities of the Company’s lease liability is as follows:
| Year Ending December 31, | |||||
| 2022 (three months) | $ | ||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
Less: Imputed interest/ present value discount | ( | ) | |||
| $ | |||||
The above liability is presented on the accompanying balance sheet as follows:
| Lease liability - current | $ | |||
| Lease liability - long-term | $ |
| 12 |
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, 2021 (the “2021 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. |
| 13 |
| ● | 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. |
| ● | 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 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. |
| ● | IONIQ Sciences 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 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 trademark infringement. |
| ● | If outstanding warrants are exercised, or Convertible Debentures are converted, stockholders will be diluted. |
| ● | Our common stock is not quoted or traded in any market, limiting liquidity opportunities for investors. |
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Provisions in our charter documents and under Delaware law could discourage a takeover that stockholders may consider favorable and may lead to entrenchment of management.
| ● | Our officers and directors have significant voting power and may take actions that may not be in the best interests of other stockholders. |
| ● | We are subject to various regulatory regimes, and may be adversely affected by inquiries, investigations and allegations that we have not complied with governing rules and law. |
| ● | If a market develops for our common stock, we expect the market price to be volatile and trading in our common stock to be of limited volume. |
| ● | We have never paid, and do not intend to pay in the future, dividends on our common stock. |
| ● | Although we are capable of internally manufacturing to meet foreseeable demand, we may at some time be dependent upon contract manufacturers to safely and timely manufacture our products. |
| ● | There is no guarantee that FDA clearance will lead to the IONIQ ProLung Test being approved by payors for reimbursement. |
| ● | Our IONIQ ProLung Test may produce false positive and false negative results. In addition, please review the other, and more detailed, risk factors discussed in our 2021 Form 10-K. |
In addition, please review the other, and more detailed, risk factors discussed in our 2021 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.
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 the cancer landscape with a modern solution for the early detection of multiple cancers thereby expanding the therapeutic window, significantly improving survivability, and reducing the cost of healthcare. One in two Americans will be diagnosed with cancer during their lifetime and one in five will die. Clinical literature shows that early detection can save lives and money. We operate at the confluence of our Electrical Impedance Analytics (EIA) technology and artificial intelligence (AI). We are developing an advanced multi-cancer screening technology for early detection that will expand the therapeutic window, dramatically improve survivability and reduce the cost of healthcare. 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.
Our non-invasive, rapid and radiation-free IONIQ ProLung Test has been developed to assess the risk of malignancy in lung nodules found in the chest by a Computed Tomography “CT” scan, which is currently the primary method used in the United States (“US”) for screening 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. Earlier detection makes a substantial improvement in survival in individuals at high risk of lung cancer. Timely identification of malignancy is essential for patients and their families. Currently, patients often wait from three months to three and one-half years to have the risk of malignancy assessed through periodic CT scan surveillance. Until malignancy is determined to be likely, invasive biopsy and treatment are typically delayed. Current statistics reflect an average 17% survival rate at five years for those diagnosed with lung cancer.
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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. 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, 2022 compared to the Three Months Ended September 30, 2021
Revenues and Cost of Revenue. During the three months ended September 30, 2022 and September 30, 2021 we had no revenues or cost of revenues.
Operating Expenses. Total operating expense for the three months ended September 30, 2022 was $775,622 compared to the total operating expenses for the three months ended September 30, 2021 of $719,465 representing an increase of $56,157. 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 relates to increased costs due to inflation and increasing overall business efforts.
Research and Development Expense. Research and development expense for the three months ended September 30, 2022, was $214,733 compared to research and development expense of $161,569 for the three months ended September 30, 2021; representing an increase of $53,164. This increase was due to increased costs due to inflation and increased efforts on developing and finalizing uses for the ProLung Test.
Selling, General and Administrative Expense. Selling, general and administrative expense for the three months ended September 30, 2022 was $560,889 compared to selling, general and administrative of $557,896 for the three months ended September 30, 2021; representing an increase of $2,993. This increase was primarily due to increased professional fees offset by a decrease in stock based compensation.
Other Expense. Other expense for the three months ended September 30, 2022 was $214,839 as compared to $335,515 for the three months ended September 30, 2021 representing a decrease of $120,676. Interest expense decreased by $123,428 during the three months ended September 30, 2022 compared to the previous three-month period. This decrease is due to previous year amortization of additional loan costs.
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Nine Months Ended September 30, 2022 compared to the Nine Months Ended September 30, 2021
Revenues and Cost of Revenue. During the nine months ended September 30, 2022 and 2021 we had no revenues or cost of revenues.
Operating Expenses. Total operating expense for the nine months ended September 30, 2022 was $2,911,175 compared to $1,859,150 for the nine months ended September 30, 2021 an increase of $1,052,025. 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 increased equity issuances for purchased research and development and expense recorded for additional shares issued to warrant holders. Also, the value of our common stock increased which made the value of options issued worth more than previously-issued equity instruments.
Research and Development Expense. Research and development expense for the nine months ended September 30, 2022, was $1,173,803, compared to research and development expense of $554,933 for the nine months ended September 30, 2021; representing an increase of $618,870. This increase was mostly due to research and development expenses from the acquisition of certain intellectual property from two entities paid for in cash and equity instruments.
Selling, General and Administrative Expense. Selling, general and administrative expense for the nine months ended September 30, 2022 was $1,737,372 compared to selling, general and administrative of $1,304,217 for the nine months ended September 30, 2021; representing an increase of $433,155. This increase was primarily due to shares issued to warrant holders for additional services. Also, the fair value of the options issued increased substantially due to the increase in value of our common stock when compared to previous issuances.
Other Expense. Other expense for the nine months ended September 30, 2022 was $752,310 as compared to $793,592 for the nine months ended September 30, 2021 representing a decrease of $41,282. This decrease was solely a combination due to a one-time gain on settlement of debt recorded last year offset by a decrease in interest expense. Interest expense decreased by $178,173 during the nine months ended September 30, 2022 compared to the previous nine-month period.
Liquidity and Capital Resources
The following is a summary of our key liquidity measures at September 30, 2022 and December 31, 2021:
| September | December 31, | |||||||
| 2022 | 2021 | |||||||
| Cash | $ | 732,676 | $ | 745,003 | ||||
| Current assets | 732,676 | 745,003 | ||||||
| Current liabilities | (13,241,924 | ) | (12,435,011 | ) | ||||
| Working capital (deficit) | $ | (12,509,248 | ) | $ | (11,690,008 | ) | ||
We need additional capital to continue our operations. We received $1,825,582 from the exercise of warrants during the nine months ended September 30, 2022 and subscription receivables totaling $162,500. 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:
| ● | 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. |
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Cash provided by (used in) operating, investing and financing activities
Cash provided by (used in) operating, investing and financing activities for the nine months ended September 30, 2022 and 2021 is as follows:
| Nine Months Ending September 30, | ||||||||
| 2022 | 2021 | |||||||
| Operating activities | $ | (1,834,005 | ) | $ | (1,398,616 | ) | ||
| Investing activities | (3,904 | ) | (2,137 | ) | ||||
| Financing activities | 1,825,582 | 2,361,409 | ||||||
| Net increase (decrease) in cash | $ | (12,327 | ) | $ | 960,656 | |||
Operating Activities
For the nine months ended September 30, 2022, the differences between our net loss and net cash used in operating activities were due to net non-cash charges totaling $1,188,137 for stock-based compensation, share issuances, amortization of debt discount and depreciation.
For the nine months ended September 30, 2021, the differences between our net loss and net cash used in operating activities were due to net non-cash charges totaling $752,847 for stock-based compensation, amortization of debt discount, a gain on settlement of R&D, and depreciation. We also had a large increase in our accrued interest due to increased debt levels offset by a decrease in accounts payable due to payment and settlement.
Investing Activities
During the nine months ended September 30, 2022 and 2021 we purchased equipment totaling $3,904 and $2,137, respectively.
Financing Activities
During the nine months ended September 30, 2022, cash flows from financing activities totaled $1,825,582. This was solely due to the exercise of warrants for cash.
During the nine months ended September 30, 2021, cash flows from financing activities totaled $2,361,409. The cash flows were related to proceeds received from the issuance and payment of convertible notes and the exercise of stock warrants.
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.
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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.
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, 2022. 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 chief executive officer concluded as of September 30, 2022 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 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 nine months ended September 30, 2022 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.
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.
The Company also had the following unregistered common shares issuances:
| ● | 253,601 warrants were exercised for $1,318,722 in cash proceeds. |
| ● | 19,414 warrants were exercised as partial settlement ($113,750) related to the Company’s acquisition of research and development. |
| ● | 128,890 warrants with a value of $670,234 have signed exercise agreements, the shares have been issued but the cash proceeds were not initially received. During the 2nd quarter the Company received $506,860 related to these agreements and 167 shares with a value of $874 were returned. The remaining $162,500 is still receivable on September 30, 2022. |
| ● | 120,000 warrants with exercise prices of $5.20 were exercised cashless based on the fair value of common stock of $9.20, resulting in 52,174 common shares being issued. Also, for professional services rendered by these warrant holders an additional 27,671 shares valued at $254,574 ($9.20 per share) were issued. |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
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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 | Inline XBRL Instance Document* | |
| 101 SCH | Inline XBRL Schema Document* | |
| 101 CAL | Inline XBRL Calculation Linkbase Document* | |
| 101 LAB | Inline XBRL Labels Linkbase Document* | |
| 101 PRE | Inline XBRL Presentation Linkbase Document* | |
| 101 DEF | Inline XBRL Definition Linkbase Document* | |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL 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. | |||
| November 14, 2022 | By: | /s/ Jared Bauer | |
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