PREDICTIVE TECHNOLOGY GROUP, INC. Unless otherwise noted, all of the financial information in this Report is consolidated financial information for the Company.
GeneralPredictive Technology Group, Inc. , aSalt Lake City, UT life sciences company, is a leader in the use of data analytics for disease identification and subsequent therapeutic intervention through unique novel gene-based diagnostics, biotechnology treatments and companion therapeutics. Through its wholly-owned subsidiaries, Predictive Biotech,Predictive Laboratories , and Predictive Therapeutics, the company focuses on clinical categories such as: Endometriosis, Degenerative Disc Disease and Human Cell and Tissue Products ("HCT/P"). In addition to Predictive Biotech's efforts to advance regenerative medicine,Predictive Laboratories is committed to assisting women in overcoming the devastating consequences of endometriosis via appropriate early-stage diagnosis and subsequent treatment. During the year endedJune 30, 2020 , we reported total revenues of$24,441,424 and net loss attributable to common stockholders of$85,769,266 resulting in a$(0.30) loss per share. During the year endedJune 30, 2019 , we reported total revenues of$43,493,589 and net loss attributable to common stockholders of$15,305,169 resulting in a$(0.06) loss per share. Our business units have been aligned with how the Chief Operating Decision Maker reviews performance and makes decisions in managing the Company. The business units have been aggregated into two reportable segments: Human Cell and Tissues Products (HCT/Ps) and diagnostics and therapeutics. Predictive Biotech's HCT/Ps are processed in our FDA registered lab. Our minimally manipulated tissue products are prepared utilizing proprietary extraction methods that reduce the loss of important scaffolding, growth factor and general cytokines and are intended for homologous use.Predictive Laboratory's diagnostics and therapeutics uses data analytics for disease identification and subsequent therapeutic intervention through unique novel gene-based diagnostics, biotechnology treatments and companion therapeutics. COVID-19 Pandemic
The global COVID-19 pandemic has had, and will continue to have, a material impact on our business. Towards the end of the third quarter of fiscal 2020 we began to experience, and through the date of this filing we are continuing to experience, impacts to our business and operations related to the COVID-19 pandemic, including the impact of stay-at-home mandates and related safety measures such as the delay of elective medical procedures, resulting in a decline in the volume of procedures using our products and a resulting decline in sales. We cannot predict the magnitude or duration of the pandemic's impact on our business. As a result of the COVID-19 pandemic, we undertook a thorough analysis of all of our expenses and reduced discretionary expenses where practicable. InApril 2020 , we reduced headcount in our HCT/P segment by approximately 50%. We can give no assurances that we will not have to take additional cost reduction measures if the pandemic continues to adversely affect the volume of procedures using our products. -37- Business Highlights Diagnostics and Therapeutics
OnFebruary 25, 2020 , we announced preliminary results from a collaborative genomics analysis from our collaboration partner,Atrin Pharmaceuticals , that will be used to optimize patient selection for Atrin's upcoming ATRN-119 clinical trial. This genomics analysis was a result of Atrin's collaboration with us to utilize next-generation genomics capabilities to improve predictive selection of clinical study patients most likely to respond and least likely to experience side effects from treatment with Atrin's DDR drug candidates. We and Atrin have been jointly developing proprietary approaches to better identify patients with specific mutations that drive cancer tumor growth, regardless of tumor type, and who are most likely to clinically respond to synthetically-lethal anti-cancer therapies. Our genomics capabilities were added to Atrin's existing proprietary proteomic and medicinal chemistry technologies to improve targeting of DDR proteins that are active in cancer cells and relatively inactive in healthy cells, ahead of Atrin's initiation of a Phase 1/2a clinical study of ATRN-119, Atrin's lead oral drug candidate. We are using a genomic data base analytics approach to help with patient selection, to increase efficiencies and quality of clinical trials, and to shorten time to market for Atrin's drug candidates. Atrin's pipeline also includes preclinical drug candidates in development for glioblastoma and hematological disorders that are being advanced towards IND enabling studies. This genomics analysis is already resulting in improved targeting of eligible patients for the upcoming Phase 1/2a ATRN-119 clinical study, and could potentially result in adoption of a new diagnostic for this type of anti-cancer treatment. Our unique genomic insights and modeling provide Atrin with enhanced diagnostic tools to accelerate Atrin's DDR therapies and studies. Atrin currently expects initiation of the ATRN-119 Phase 1/2a study in 2020, with a first interim clinical readout in 2021. We believe that the Atrin collaboration will result in improved design and faster clinical advancement of multiple individualized, precision oncology treatments. By combining our state-of-the-art proprietary screening assay and related artificial intelligence capabilities with Atrin's breakthrough DDR therapy candidates, we have the potential to become a leader in development of improved personalized oncology therapies. Cancer is genomic disease; cancer tumors typically develop when otherwise healthy cells acquire mutations in key "driver genes." These cancer-causing mutations alter pathways regulating cellular growth and interactions with surrounding tissues. Understanding the specific gene mutations underlying tumor formation is frequently more important than location of the cancer in selecting personalized anti-cancer therapies. The key to successful cancer therapy is matching specific cancer mutations with efficient and targeted therapies. Multiple benign diseases, cancer-predisposition syndromes, and cancers have now been linked to mutations in DDR genes. DDR is a clinically validated therapeutic approach, following the commercial approval of multiple blockbuster Poly ADP Ribose Polymerase (PARP) inhibitor products. DDR drugs already represent a multi-billion-dollar market, and it is expected that DDR drugs may ultimately be used to treat over 200 different cancer targets, if a full set of complementary patient-targeting biomarkers are successfully developed and adopted for commercial use. Preliminary results from the collaborative genomics analysis using our proprietary assays in patients with a specific tumor type found an excess of DDR mutations in cancer cells compared with normal tissue. The analysis identified 92 genes as protein responders to ATRN-119 treatment, of which 18 genes are known TIER 1 cancer-driver genes, and well-characterized mutations were found in three dominant genes. Both in vitro and animal studies have confirmed synthetically-lethal interactions between ATRN-119 treatment and alteration of these three key cancer-causing genes. The overlap between DDR genes responding to ATRN-119 and those mutated in cancer cells suggest that genetic markers underlying response and resistance will be critical to optimizing patient selection in ATRN-119 clinical studies, by increasing clinical efficacy and minimizing systemic toxicities. Under the terms of the original Atrin-Predictive collaboration agreement, both companies will continue to contribute to the identification of additional druggable targets and pathways, both inside and outside of DDR, to treat a broad group of target indications, particularly
in women's health.
OnJanuary 28, 2020 , we announced a potential collaboration agreement withAtrin Pharmaceuticals LLC to develop molecular diagnostic tools to facilitate improved selection of cancer patients who would most benefit from treatment with DNA Damage and Response (DDR) inhibitors, including Atrin's and other small molecule ATR inhibitors. Atrin and Predictive will jointly utilizePredictive Laboratories' state-of-the-art sequencing capabilities and genomics expertise to identify cancer patients with specific molecular markers that predict the level of clinical response to Atrin's, and other, targeted therapies. This is intended to improve patient outcomes as well as improve Atrin's ability to successfully progress its product pipeline, and upon commercialization, improve on the treatments for women with cancer. Predictive, with its proprietary list of already identified genes and state-of-the-art sequencing capabilities, believes it is the ideal molecular diagnostic partner to help Atrin successfully advance their therapeutic pipeline through clinical development. The companies believe that this collaboration may become a 'game changer' in oncology, as treatment continues to progress towards individualized precision medicine. As Atrin advances multiple Investigational New Drug (IND) applications and progresses their lead product candidate ATRN-119 into a first-in-human clinical study this year, Predictive's portfolio of genomic tests will help Atrin better identify cancer patient populations whose genetic profiles will likely have an optimal clinical response to Atrin's proprietary anti-cancer therapeutics. The collaboration will help optimize the safety and clinical efficacy of Atrin's targeted cancer therapeutics and other DDR drug candidates. Atrin will have access to Predictive's proprietary GenDB databases and women's health biobank to better understand the clinical spectrum of germline mutations in DDR pathways. The companies will also study common gynecologic disorders, such as endometriosis, associated with the development of cancers in affected patients. The goal of this collaboration is to develop actionable predictive molecular and companion diagnostics and therapeutics for these common disorders and related cancers. -38-
OnOctober 16, 2019 ,Kenneth Ward , M.D., Chief executive officer ofJuneau Biosciences ; Rakesh Chettier M.S., director of biostatistics ofPredictive Laboratories ; andHans Albertsen , Ph.D., chief scientific officer ofJuneau Biosciences , received the 2019Endometriosis Special Interest Group (EndoSIG) Prize Paper in the "Best in Clinical/Population Science" category at theAmerican Society for Reproductive Medicine (ASRM) 2019Scientific Congress & Expo inPhiladelphia . The scientific breakthroughs reported in these award-winning discoveries provide us with insights into new non-hormonal therapies. The team's research is based on the genetic markers of endometriosis discovered by Juneau and Predictive scientists in recent years, and uncovers molecular pathways involved in the pathogenesis of endometriosis-induced lesions in women at risk for the disease.Dr. Ward , a board-certified physician in obstetrics and gynecology, perinatology, clinical genetics and molecular genetics, presented two scientific papers at the Annual ASRM meeting: a poster entitled, "Endometriosis risk allele in WNT4 may interact with rare mutations in HDAC2 gene" and an oral abstract entitled, "Somatic cancer driver mutations in endometriosis lesions contribute to secondary cancer risk." OnOctober 14, 2019 , we launched the full U.S. market availability of ARTguide™ to evaluate the risk for endometriosis and other genetic causes of infertility in women. Endometriosis can be a debilitating disease for many women as it can cause severe pelvic pain, inflammation, adhesions to the fallopian tubes and uterus, and often, infertility. ARTguide can predict a patient's risk of endometriosis early on so that women have a better understanding of their barriers to conception, and therefore their physician can create a more personalized infertility treatment plan. ARTguide is appropriate for all women considering use of ART to overcome difficulty conceiving or carrying a pregnancy. InOctober 2019 , we launched FertilityDX™, a comprehensive genetic testing service that identifies barriers to healthy pregnancy and birth, allowing doctors to tailor fertility treatments. The objective of FertilityDX™ is to provide couples considering ART with an understanding of the genetic and medical obstacles that may be affecting their fertility and provide doctors with genetically relevant information to help their patients have a healthy baby. FertilityDX™ provides information by evaluating three key areas: contributors to (or causes of) infertility, risks of pregnancy complications, and risks for serious genetic conditions in offspring. The test will be launched in select fertility clinics acrossthe United States . InAugust 2019 , we collected over 2,500 DNA samples along with comprehensive medical records since acquiring our CLIA operations inMarch 2019 . We broadened our research initiatives by acquiring new sample collections in chronic pain, pregnancy complications, autism, and both female and male infertility. Personalized medicine and the development of new therapeutics are expected to play a critical role in human health. Access to high-quality biospecimens from our biobank will be important for furthering our biomedical and translational research, and ultimately its development of personalized molecular diagnostics and clinical therapies. Current sample collection efforts are designed to strategically augment our existing library of over 300,000 DNA samples that we believe will produce valuable insights into future research and development projects. OnAugust 9, 2019 , we launched PGxPLUS+™, a pharmacogenomic test panel being marketed to pain clinics for patients with chronic pain. PGxPLUS+™ evaluates genetic factors that play a major role in an individual's response to medications. In parallel, we reached a milestone of enrolling 350 patients with chronic pain into anInvestigational Review Board -approved clinical study aimed at providing additional insight into the mechanisms of chronic pain and responses to pain therapies. We are approaching chronic pain and the opioid crisis on multiple fronts. We have developed and in-licensed important prognostic DNA tests and novel treatments for osteoarthritis, lumbar disc disease, endometriosis, and other conditions causing chronic pain. In 2016, theInstitute of Medicine estimated that up to one-third of theU.S. population lives with ongoing pain. Chronic pain is often triggered by one of these common conditions, and over time can develop into a chronic pain syndrome, which is a disease itself. The PGxPLUS+™ test evaluates 112 genetic variants across 38 genes that affect the metabolism of over 150 common medications, including pain medications. More than 90% of the population has one or more gene variants that affect the efficacy or safety of prescription drugs. -39- Variation in drug metabolism is largely determined by an individual's genetic profile, blood levels of a drug may vary up to 1,000-fold in similar patients taking identical doses of the same drug. Pharmacogenomics is the study of the role of our genome in drug responses. OnJuly 29, 2019 , we entered into an agreement with thePreeclampsia Foundation to expand the study of genetic factors associated with preeclampsia. The study will advance thePreeclampsia Foundation's database of collected preeclampsia medical information and will be utilized byPredictive Laboratories to develop a proprietary test for the early detection of women at risk for preeclampsia. Preeclampsia affects 5-8%, or approximately 300,000, pregnancies every year inthe United States , sometimes causing severe adverse maternal and fetal outcomes, including organ failure, massive blood loss, permanent disability or even death. Globally, preeclampsia is a leading cause of pregnancy complications, preterm births, and related disabilities. The deaths of approximately 76,000 mothers and 500,000 babies annually are attributable to preeclampsia. Healthcare providers, even in medically advanced countries, are hampered by imprecise diagnostic tools. The Preeclampsia Registry, a key program of thePreeclampsia Foundation's research mission, is a patient registry that collects paired medical information and biological samples. Using establishedInstitutional Review Board -approved protocols, we and thePreeclampsia Foundation will request samples from more than 2,500 existing and new registry participants for sequencing analysis. We have been granted a period of exclusive access to research data resulting from these new samples enrolled in the Preeclampsia Registry, after which samples and sequencing data will be available to other investigators for future research. This collaboration complements and extends our ongoing preeclampsia research initiatives. Over 20,000 DNA samples from our biorepository relating to preeclampsia and associated obstetric syndromes are being analyzed.
Human Cell and Tissue Products (HCT/P)
In
Results of Operations for the Years Ended
Revenue
Year ended
June 30,
2020 2019 Change
Revenue $ 24,441,424 $ 43,493,589 $ (19,052,165)
-40-
The decrease in revenue for the year ended June 30, 2020 is primarily due to the
decline in sales volume of allograft products compared to the year ended June
30, 2019 . The Company believes the decrease in sales volume is due to increased
United States Food and Drug Administration ("FDA") enforcement efforts affecting
the regenerative medicine industry as a whole, which has negatively impacted the
size of the market for regenerative medicine services and caused a contraction
of sales of allograft products. Specifically, the FDA has issued warnings to
competitors regarding their safety practices and increased regulatory scrutiny
of potentially inappropriate marketing practices of some providers of
regenerative medicine services. Predictive Biotech, Inc. continues to
demonstrate an excellent safety and quality record of over 100,000 allografts
implanted and no adverse events. In addition, sales during the second half of
March and the fourth fiscal quarter were significantly negatively impacted by
the decrease in elective medical procedures due to COVID-19. Our products are
administered by clinicians, and a reduction in visits to clinicians results in a
reduction in the sales volume of our products.
Revenues in our diagnostics and therapeutics segment were not material for the periods shown.
Cost of goods sold (Exclusive of Depreciation & Amortization)
Year ended
June 30,
2020 2019 Change
Cost of goods sold $ 20,585,537 $ 16,293,553 $ 4,291,984
Cost of goods sold as a % of sales 84.2 % 37.5 %
Cost of goods sold for the year ended June 30, 2020 increased to $20.6 million
from $16.3 million for the year ended June 30, 2019 . The increase is primarily
due to $5.5 million in scrap expense related to HCT/P product that did not pass
quality control, or that is not expected to pass quality control. The increase
in quality control failure rates above normal levels was primarily due to issues
with a component supplied by a specific vendor. In addition, $1.0 million of
idle capacity costs contributed to the increase. These increases were offset by
decreases in share-based compensation expense of $0.8 million , freight costs of
$0.9 million , and merchant fees of $0.3 million .
Cost of goods sold as a percentage of sales increased due to investments and
costs incurred to increase production capacity in anticipation of sales growth.
Due to the factors described above, the anticipated sales growth did not occur
and instead, sales declined. The increase in the numerator caused by the
investment in capacity and the decrease in the denominator caused by the decline
in sales caused the cost of sales as a percentage of revenue to increase
significantly.
During the second half of fiscal 2020, the Company implemented several cost saving measures including a reduction in force that are intended to reduce production costs in response to the decrease in sales.
Cost of sales in our diagnostics and therapeutics segment was not material for the periods shown.
-41-
Selling and marketing expenses
Year ended
June 30,
2020 2019 Change
Selling and marketing expense
Selling and marketing expense
as a % of sales 38.0 % 32.0 %
Selling and marketing expenses for the year ended June 30, 2020 decreased to
$9.3 million from $13.9 million for the year ended June 30, 2019 . The decrease
is due to a decrease in commissions expense of $4.7 million .
Substantially all of our selling and marketing expenses were incurred in the HCT/P segment.
General and Administrative Expenses
Year ended
June 30,
2020 2019 Change
General and administrative expense
General and administrative expense
as a % of sales 100.1 % 41.9 %
General and administrative expenses for the year ended June 30, 2020 increased
to $24.5 million from $18.2 million for the year ended June 30, 2019 .
Approximately $3.0 million of the increase is due to increased share-based
compensation expense. Additionally, personnel costs increased by $1.6 million
due to increased average headcount. Legal and consulting costs increased by $1.6
million , primarily due to increased utilization of our intellectual property
attorneys.
Research and Development Expenses
Year ended
June 30,
2020 2019 Change
Research and development expense
Research and development expense
as a % of sales 24.4 % 13.4 %
-42-
Research and development expenses for the year ended
Depreciation and amortization expense
Year ended
June 30,
2020 2019 Change
Depreciation and amortization
expense$ 10,801,435 $ 9,150,184
Depreciation and amortization
expense as a % of sales 44.2 % 21.0 %
Depreciation and amortization expense increased compared to the same period in
the prior fiscal year primarily due to an increase in our intangible asset
portfolio arising from the business combinations and asset acquisitions
described in Note 2 to the accompanying consolidated financial statements.
Capital expenditures to acquire property, plant, and equipment in connection
with our laboratory expansion also contributed to the increase.
Loss on impairment
Year ended
June 30,
2020 2019 Change
Loss on impairment $ 10,041,556 $ - $ 10,041,556
Long-lived intangible assets acquired through the acquisition of Regenerative
Medical Technologies, Inc. (see Note 2) were determined to have become impaired.
See Note 5 to the accompanying consolidated financial statements for a full
discussion of the impairment.
Other loss
Year ended
June 30,
2020 2019 Change
Other loss $ 39,853,745 $ 841,315 $ 39,012,430 Other loss for the year endedJune 30, 2020 increased to$39.9 million from$0.8 million for the year endedJune 30, 2019 . The increase was primarily driven by the$37.9 million impairment charge recognized related to our equity method investment inJuneau Biosciences, LLC . -43-
Liquidity and Capital Resources
The Company incurred a net loss attributable to common stockholders of$85,769,266 and net cash outflows from operations of$13,058,837 for the year endedJune 30, 2020 . AtJune 30, 2020 , the Company had$331,228 of cash and negative working capital of$13,132,688 . The Company's historical and current use of cash in operations combined with limited liquidity resources raise substantial doubt regarding the Company's ability to continue as a going concern. Management may seek additional capital through debt financings, collaborative or other funding arrangements with partners, sale of assets, or through other sources of financing. Should the Company seek additional financing from outside sources, the Company may not be able to raise such financing on terms acceptable to the Company or at all. If the Company is unable to raise additional capital when required or on acceptable terms, this could have a material adverse effect on liquidity. In such a case, the Company may be required to scale back or to discontinue the promotion of currently available products, scale back or discontinue the advancement of product candidates, reduce headcount, file for bankruptcy, reorganize, merge with another entity, or cease operations.
The following table represents the consolidated cash flow statement:
Year ended
June 30,
2020 2019 Change
Cash provided by (used in) operating
activities $ (13,058,837) $ 3,494,771 $ (16,553,608)
Cash used in investing activities (1,554,777) (3,907,163) 2,352,386
Cash provided by financing
activities 13,326,598 824,497 12,502,101
Net increase (decrease) in cash and
cash equivalents (1,287,016) 412,105
Cash and cash equivalents at the
beginning of the Year 1,618,244 1,206,139
Cash and cash equivalents at the
end of the period $ 331,228 $ 1,618,244 Cash Flows from Operating Activities
The increase in cash used in operating activities for the year endedJune 30, 2020 compared to the year endedJune 30, 2019 was primarily due to a$70.5 million increase in net loss and a$5.3 million increase in deferred income tax benefits, offset by increases of non-cash addbacks for loss on equity method investment of$38.1 million , loss on impairment of$10.0 million , share based compensation of$4.0 million , depreciation and amortization of$1.5 million , and changes in operating assets and liabilities of$4.9 million . -44-
Cash Flows from Investing Activities
The decrease in cash used in investing activities for the year endedJune 30, 2020 compared to the year endedJune 30, 2019 was primarily due to a decrease in cash paid on our subscription payable of$1.5 million and a decrease in capital expenditures of$1.7 million . These changes were partly offset by$0.9 million in cash received from the acquisitions ofInceptionDX, LLC andTaueret Laboratories, LLC in fiscal 2019.
Cash Flows from Financing Activities
The increase in cash provided by financing activities for the year ended
Debt The proceeds of debt issuances were used for general corporate purposes, which may include, among other things, funding for working capital, capital expenditures, acquisitions, and repayment of existing debt. Refer to Note 8 - Debt of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K) for further discussion. Effects of Inflation
We do not believe that inflation has had a material impact on our business, sales, or operating results during the periods presented.
Off-Balance Sheet Arrangements
We currently do not have any off-balance sheet arrangements.
Contractual Obligations The following table represents our contractual obligations as ofJune 30, 2020 : Less Than 1-3 3-5 More Than (In millions) Total 1 Year Years Years 5 Years Purchase obligations (a)$ 693,355 $ 693,355 $ - $ - $ - Operating leases (a) 1,225,959 979,071 246,888 - - Finance leases (a) 1,656,877 748,361 908,517 - - Subscription payable (b) 7,206,610 5,150,000 2,056,610 - - Long term Debt: (c) Principal Payments 5,171,219 705,234 4,465,985 - - Interest Payments 563,972 7,934 556,038 - - Total$ 16,517,992 $ 8,133,955 $ 8,384,038 $ - $ - (a) - Refer to Note 13 - Commitment and contingencies of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K) (b) - Refer to Note 6 -Equity Method Investment of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K) (c) - Refer to Note 8 - Debt of the Notes to Financial Statements (Part II,
Item 8 of this Form 10-K)
-45-
The expected timing of payment for the obligations listed above is estimated
based on current information. Actual payment timing and amounts may differ
depending on the timing of goods or services received or other changes. The
table above only includes payment obligations that are fixed or determinable.
The table excludes royalties to third parties based on future sales of any of
our products, as the amounts, timing, and likelihood of any such payments are
based on the level of future sales and are unknown.
Critical Accounting Policies
Critical accounting policies are those policies which are both important to the portrayal of a company's financial condition and results and require management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our critical accounting policies are as follows: † Revenue Recognition † Inventory Reserve
† Long-Lived Assets, including Finite-Lived Intangible Assets
† Equity Method Investments
†Goodwill † Income Taxes Revenue Recognition. We derive our revenue primarily from sales of HCT/P products to clinicians. Revenue is recognized when control of the product passes to the customer, typically upon confirmation of delivery of the product to the customer. As our products must remain frozen during transit, we typically ship our products overnight. Revenue is recognized in an amount that reflects the expected consideration to be received in exchange for such goods or services. Generally, we require authorization from a credit card or verification of receipt of payment before we ship products to customers. From time to time we grant credit to our customers with normal credit terms (typically 30 days). We do not recognize assets associated with costs to obtain or fulfill a contract with a customer, as the amortization period for any such costs if capitalized would be one year or less. As such, customer orders are recorded as deferred revenue prior to delivery of products or services ordered. Long-Lived Assets, including Finite-Lived Intangible Assets. We review the recoverability of long-lived assets and finite-lived intangible assets whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the asset, an impairment loss is recognized by reducing the recorded value of the asset to its fair value measured by future discounted cash flows. This analysis requires estimates of the amount and timing of projected cash flows and, where applicable, judgments associated with, among other factors, the appropriate discount rate. Such estimates are critical in determining whether any impairment charge should be recorded and the amount of such charge if an impairment loss is deemed to be necessary. We identified indicators of impairment during the fourth quarter of the year endedJune 30, 2020 for certain intangible assets and performed a test for impairment as ofJune 30, 2020 . We recorded an impairment charge of$10,041,556 related to certain long-lived intangible assets acquired withRegenerative Medical Technologies, Inc. See Note 5 to the accompanying consolidated financial statements for a full discussion of the impairment. No impairments were recognized for the year endedJune 30, 2019 . -46- Equity Method Investments. The Company's investment inJuneau Biosciences, LLC is accounted for under the equity method. The Company reviews equity method investments for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment may not be recoverable in accordance with generally accepted accounting principles. This determination requires significant judgment. In making this judgment, the Company considers available quantitative and qualitative evidence in evaluating potential impairment of these investments. If it is determined that an indicator of impairment exists, the Company assesses whether the carrying value exceeds the fair value of the asset. If the carrying value of the investment exceeds its fair value, the Company will evaluate, among other factors, general market conditions, the duration and extent to which the carrying value is greater than the fair value, and the Company's intent and ability to hold, or plans to sell, the investment. The Company also considers specific adverse conditions related to the financial health of and business outlook for the investee, including industry and sector performance, changes in technology, and operational and financing cash flow factors. Once a decline in fair value is determined to be other-than-temporary, an impairment charge will be recorded and a new carrying basis in the investment will be established. The Company recorded impairment charges totaling$37,907,283 related to our equity method investment inJuneau Biosciences, LLC for the year endedJune 30, 2020 (see Note 6 to the accompanying consolidated financial statements). No impairments were recorded for the year ended June
30, 2019.Goodwill . We test goodwill for impairment on an annual basis and in the interim by reporting unit if events and circumstances indicate that goodwill may be impaired. The events and circumstances that are considered include business climate and market conditions, legal factors, operating performance indicators and competition. Impairment of goodwill is evaluated on a qualitative basis to determine if using a two-step process is necessary. If the qualitative assessment suggests that impairment is more likely than not, a two-step impairment analysis is performed. The first step involves comparison of the fair value of a reporting unit with its carrying amount. The valuation of a reporting unit requires judgment in estimating future cash flows, discount rates and other factors. In making these judgments, we evaluate the financial health of our business, including such factors as industry performance, market saturation and opportunity, changes in technology and operating cash flows. Changes in our forecasts or decreases in the value of our common stock could cause book value of reporting units to exceed their fair values. If the carrying amount of a reporting unit exceeds its fair value, the second step of the process involves a comparison of the fair value and the carrying amount of the goodwill of that reporting unit. If the carrying amount of the goodwill of the reporting unit exceeds the fair value of that goodwill, an impairment loss would be recognized in an amount equal to the excess of carrying value over fair value. If an event occurs that would cause a revision to the estimates and assumptions used in analyzing the value of the goodwill, the revision could result in a non-cash impairment charge that could have a material impact on
the financial results.
We have recorded goodwill of$5,254,451 from the acquisition ofPredictive Biotech, Inc. (formerlyRenovo Biotech, Inc. ) that was completed onMarch 28, 2016 . We measured the fair value of Predictive Biotech utilizing the discounted cash flow method under the income approach. The income approach considered management's business plans and projections as the basis for expected cash flows for the next five years and a 3% long-term growth rate. We also used a weighted average discount rate of 20%. Other significant estimates used in the analysis include the profitability and working capital requirements of the reporting unit. We noted the fair value of the Predictive Biotech reporting unit exceeded its carrying value, as the carrying value of the reporting unit was negative on the date of the impairment test. The fair value also exceeded the carrying value of the total assets of the reporting unit. -47- Inventory Reserve. The preparation of our financial statements in accordance withU.S. GAAP requires us to make estimates and assumptions that affect the reported amount of assets at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our inventory primarily consists of finished HCT/P products and HCT/P products that are quarantined pending the completion of quality control procedures. We record a reserve for the estimated amount of quarantined inventory that is not expected to pass quality control. We analyze our historical production and quality control pass rates when evaluating the adequacy of inventory reserve. Income Taxes. Our income tax provision is based on income before taxes and is computed using the liability method in accordance with Accounting Standards Codification ("ASC") 740 - Income Taxes. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using tax rates projected to be in effect for the year in which the differences are expected to reverse. Significant estimates are required in determining our provision for income taxes. Some of these estimates are based on interpretations of existing tax laws or regulations, or the expected results from any future tax examinations. Various internal and external factors may have favorable or unfavorable effects on our future provision for income taxes. Those factors include, but are not limited to, changes in tax laws, regulations and/or rates, the results of any future tax examinations, changing interpretations of existing tax laws or regulations, changes in estimates of prior years' items, past levels of research and development spending, acquisitions, changes in our corporate structure, and changes in overall levels of income before taxes all of which may result in periodic revisions to our provision for income taxes. Developing our provision for income taxes, including our effective tax rate and analysis of potential uncertain tax positions, if any, requires significant judgment and expertise in federal and state income tax laws, regulations and strategies, including the determination of deferred tax assets and liabilities and any estimated valuation allowance we deem necessary to offset deferred tax assets. If we do not achieve and maintain taxable income from operations and deferred tax liabilities in future periods, we may increase the valuation allowance for our deferred tax assets and record material adjustments to our income tax expense. The Company currently records a full valuation allowance on deferred tax assets in excess of the taxable income provided by scheduled amortization of deferred tax liabilities. Our judgment and tax strategies are subject to audit by various taxing authorities. While we believe we have provided adequately for our uncertain income tax positions in our consolidated financial statements, adverse determination by these taxing authorities could have a material adverse effect on our consolidated financial condition, results of operations or cash flows. Estimated interest and penalties on income tax items are included as a component of overall income tax expense, if applicable.
Recent Accounting Pronouncements
InJune 2016 , the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326)" which introduces new guidance for the accounting for credit losses on instruments within its scope. The new guidance, as amended by subsequent ASUs, introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. For trade receivables, the Company will be required to use a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses which reflects losses that are probable. For public business entities that meet the definition of aU.S. Securities and Exchange Commission (SEC) filer, excluding entities eligible to be smaller reporting companies as defined by theSEC , the amendments in this Update are effective for fiscal years beginning afterDecember 15, 2019 , including interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for fiscal years beginning afterDecember 15, 2022 , including interim periods within those fiscal years. Early adoption is permitted. Application of the amendments is through a cumulative-effect adjustment to retained earnings as of the effective date. The Company is currently evaluating the impact of this update on the consolidated financial statements. -48- InDecember 2019 , the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes" (ASU 2019-12), which eliminates certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocation and calculating income taxes in interim periods. This ASU also includes guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. ASU 2019-12 is effective for annual and interim periods in fiscal years beginning afterDecember 15, 2020 . Early adoption is permitted. The Company is currently assessing the impact of ASU 2019-12 on its consolidated financial statements.
Certain Factors That May Affect Future Results of Operations
The Securities and Exchange Commission encourages companies to disclose forward-looking information so that investors can better understand a company's future prospects and make informed investment decisions. This Annual Report on Form 10-K contains such "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All statements in this report, other than statements of historical fact, are forward-looking statements for purposes of these provisions, including any projections of earnings, revenues or other financial items, any statements of the plans and objectives of management for future operations, any statements concerning proposed new products or services, any statements regarding future economic conditions or performance, and any statements of assumptions underlying any of the foregoing. All forward-looking statements included in this report are made as of the date hereof and are based on information available to us as of such date. We assume no obligation to update any forward-looking statement. In some cases, forward-looking statements can be identified by the use of terminology such as "may," "will," "expects," "plans," "anticipates," "intends," "believes," "estimates," "potential," or "continue," or the negative thereof or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained herein are based upon reasonable assumptions at the time made, there can be no assurance that any such expectations or any forward-looking statement will prove to be correct. Our actual results will vary, and may vary materially, from those projected or assumed in the forward-looking statements. Future financial condition and results of operations, as well as any forward-looking statements, are subject to inherent risks and uncertainties, many of which we cannot predict with accuracy and some of which we might not anticipate, including, without limitation, product recalls and product liability claims; infringement of our technology or assertion that our technology infringes the rights of other parties; termination of supplier relationships, or failure of suppliers to perform; inability to successfully manage growth; delays in obtaining regulatory approvals or the failure to maintain such approvals; concentration of our revenue among a few customers, products or procedures; development of new products and technology that could render our products obsolete; market acceptance of new products; introduction of products in a timely fashion; price and product competition, availability of labor and materials, cost increases, and fluctuations in and obsolescence of inventory; volatility of the market price of our common stock; foreign currency fluctuations; changes in key personnel; work stoppage or transportation risks; integration of business acquisitions. All subsequent forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. In light of these assumptions, risks and uncertainties, the results and events discussed in the forward-looking statements contained in this Annual Report or in any document incorporated by reference might not occur. Stockholders are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this Annual Report. We are not under any obligation, and we expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. All subsequent forward-looking statements attributable to us or to any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section.
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