Depreciation and amortization expense on property and equipment for the six months ended June 30, 2020 and 2019 was $73,784 and $83,329, respectively; and was $157,952 and $163,751, for the years ended December 31, 2019 and 2018, respectively.

4.

Intangible Assets

Intangible assets consisted of the following as of:

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Lineagen, Inc.

Notes to Financial Statements

Continued

7.

Convertible Notes Payable

In several tranches throughout 2019 and 2018, the Company executed a total of $10,278,099 in convertible note agreements with existing preferred investors, accruing interest at 8% per annum on the principal balance (the Convertible Notes). The outstanding balance of the Convertible Notes plus accrued interest will convert into Series C-1, D, or E preferred stock at a price of $1 per share at the earlier of the following events: (1) upon the maturity date of the respective promissory note unless the date is extended by the Company and agreed to by a majority of the participating investors (2) upon consummation of an equity financing for capital raising purposes  in addition to the Convertible Notes, (3) upon a liquidation event, acquisition or asset transfer.   If while the Convertible Notes are outstanding, other indebtedness or securities of the Company are issued with material terms more favorable than the terms of the Convertible Notes from the perspective of the Convertible Note investors, the obligations under the Convertible Notes will be amended and restated to be substantially identical to the new securities. In the event that “pay-to-play” terms or conditions are triggered in connection with a subsequent financing, the principal amount of each investor’s Convertible Note(s) shall count toward such investor’s pro-rata amount of the pay-to-play financing. Each Convertible Note holder was either issued a warrant to purchase shares of common stock, or a warrant to purchase shares of preferred stock. Pursuant to the Convertible Note agreements, the Company has issued warrants to purchase 8,334,369 share of common stock and 1,522,140 shares of preferred stock. The Company estimated the fair value (at the time of issuance) of the preferred and common stock warrants issued during the years ended December 31, 2019 and 2018 to be $854,101 and $1,044,472, respectively. For Convertible Notes issued with common stock warrants, the proceeds from the Convertible Notes were allocated between the Convertible Notes and the common stock warrants based on the relative fair values of the Convertible Notes and the common stock warrants. A beneficial conversion feature totaling $21,895 and $1,044,472 was also recognized during the years ended December 31, 2019 and 2018. For Convertible Notes issued with preferred stock warrants a warrant liability of $832,206 and $0 for the years ended December 31, 2019 and 2018, respectively, was recorded equal to the fair value of the preferred warrants.

7.	Convertible Notes Payable Continued	The fair value of the preferred stock warrants and the relative fair value of the common stock warrants plus the beneficial conversion feature were recorded as a debt discount and are being amortized into interest expense through the maturity date of the notes using the effective interest method. The outstanding balance of convertible notes payable as of June 30, 2020 was $10,278,099 and was $10,278,099 and $4,571,647 as of December 31, 2019 and 2018, respectively. The carrying balance of the notes included accrued interest of $1,154,553 as of June 30, 2020; and $742,890 and $128,084 as of December 31, 2019 and 2018, respectively. The carrying balance also included debt discounts of $0 as of June 30, 2020; and $0 and $1,239,610 as of December 31, 2019 and 2018, respectively.
8.	Commitments and Contingencies	Contingent Liability During 2019, the Company received a letter outlining findings from an external audit completed by a third-party insurance payor. The Company did not have a contractual obligation with the payor during the audit period, nor does it have a contractual obligation currently; however, the Payor has claimed the Company is responsible for potential financial damages based on their audit findings. After negotiation, the Company received a settlement offer from the third-party insurance payor. The Company accrued the proposed settlement amount of $600,000 as of June 30, 2019. The settlement agreement requires 24 monthly installment payments of $25,000 beginning on May 15, 2020. As of June 30, 2020, the settlement balance (included in accrued expenses in the balance sheets) was $590,000; and was $600,000 and $0 as of December 31, 2019 and 2018, respectively. Operating Leases The Company leases office facilities under non-cancelable operating leases. As of June 30, 2020, future minimum lease payments due in one year under non-cancelable operating leases total $40,053. The lease agreement expired in September 2020.   Employee Agreements The Company has entered into employment agreements with one or more members of management. The terms of each agreement are different. However, one or all of these agreements include stipulated base salary, bonus potential, vacation benefits, severance, and non-competition agreements. These agreements also provide certain benefits if there is a change in ownership of the Company.

8.	Commitments and Contingencies Continued	Indemnification Agreements The Company has entered into indemnification agreements with certain officers and directors of the Company in order to protect the individuals against specified potential liabilities if and when asserted against them by third parties.
9.	Convertible Preferred Stock	The Company has authorized 39,657,339 shares of convertible preferred stock, issued in various individual series (Series Preferred). Information by class of Series Preferred stock as of June 30, 2020 is as follows:

The Company has issued convertible notes that are convertible into series D and E preferred stock. These series have not yet been authorized or designated, but are expected to have similar rights and preferences to the series C-1 preferred stock. The liquidation preference, dividend rate, conversion rates, and redemption price of the Series Preferred stock, in order of liquidation preference, as of June 30, 2020 are as follows:

Dividends The Series C-1 and B Preferred stockholders (the Series Preferred stockholders) have dividend preferences over common stockholders in the amounts disclosed in the previous table. Dividends on Series C-1 shares are cumulative, commencing on the date of original issuance, and payable when and if declared by the Board of Directors. Dividends on Series B preferred stock are non-cumulative, payable if and when declared by the Company’s Board of Directors, after payment of all dividends due to Series C-1 stockholders. Because dividends are only paid when and if declared by the Board of Directors and no dividends have been declared, no dividends have been accrued. Series A preferred stock does not receive any dividend preferences over common stockholders.

9.

Convertible Preferred Stock Continued

Conversion Each share of preferred stock is convertible into one share of common stock, subject to adjustments based on certain anti-dilution provisions, including stock splits, stock dividends, subdivision, combinations, recapitalization or similar events, as provided by the Company’s amended and restated articles of incorporation. Further, all preferred stock automatically converts into common stock upon 1) the vote or written consent of the holders of a majority of the outstanding shares of Series Preferred, voting as a single class on an as-converted basis, or 2) the closing of an initial public offering of the Company’s common stock with a price per share for the common stock of at least $3.00 and gross cash proceeds of at least $30,000,000. Redemption The holders of a majority of the then outstanding shares of Series Preferred and sixty six percent of the outstanding Series C-1, voting together as a separate class, may require the Company to redeem all of the then outstanding Series Preferred in cash in three annual installments beginning not prior to the fifth anniversary of the original issue date, and ending on the date two years from such first redemption date, at $1.00 per share plus any declared and unpaid dividends with respect to such shares, at the fair market value of a share of the applicable series of Series Preferred. If the Company does not have sufficient funds legally available to redeem all shares to be redeemed, then the Company shall so notify such holders and shall redeem such shares pro rata (based on the portion of the aggregate redemption price payable to them) to the extent possible and shall redeem the remaining shares to be redeemed as soon as sufficient funds are legally available.   Stockholder Rights   Holders of all series of preferred stock have protective provisions that require stockholders’ majority consent for specific actions including the following: changes in the corporation’s certificate of incorporation or bylaws that would affect, alter or change the preference or rights of the preferred stock, changes in the authorized number of shares, declaration or payment of dividends, repurchase of shares, amendment or adoption of any stock option plan or the number of authorized shares under any plan, changes in the size of the Board of Directors, creation of a new class or series of stock, or taking any action that would cause a liquidation event.

9.	Convertible Preferred Stock Continued	Voting The Series Preferred stockholders are entitled to the number of votes equal to the number of shares of common stock into which the preferred stock could be converted. The Series C-1 preferred elects two directors, voting as a class, and the Series B preferred elects two directors, also voting as a class. Common votes as a separate class to elect one director, defined as the CEO, and the Series C-1, Series B preferred and common, voting together, elect 3 independent directors.
10.	Stock Options and Warrants	Stock Options The Company’s stock option plan provides for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, and shares of restricted stock. The stock option plan was originally approved on December 4, 2007 and subsequently amended (the Original Plan). The Original Plan expired and was replaced by the 2017 Equity Incentive Plan (the Plan). Under the terms of the Plan, there are 6,438,882 common shares available for grant to employees, officers, directors and consultants. The Board of Directors determines the terms of each grant. Generally, the options have a vesting period of 4 years with 25% vesting after the first year of service and monthly thereafter and have a ten-year contractual life. Certain stock options have provisions to accelerate vesting upon the occurrence of certain events. There were 986,021 shares available for grant under the Plan as of June 30, 2020. Stock-based compensation expense for the six months ended June 30, 2020 and 2019 was $22,816 and $42,648, respectively; and was $94,363 and $78,597 for the years ended December 31, 2019 and 2018. Stock- based compensation expense is included in selling, general and administrative expenses in the statements of operations. As of June 30, 2020 the Company had approximately $99,000 of unrecognized stock- based compensation costs related to non-vested awards that will be recognized over a weighted-average period of 1.68 years.

10.

Stock Options and Warrants Continued

Stock Options - Continued The following sets forth the outstanding common stock options and related activity:

The following summarizes information about stock options outstanding as of June 30, 2020:

As of June 30, 2020, the aggregate intrinsic value of options outstanding and options exercisable were $90,474.

There were no options granted during the six months ended June 30, 2020.   The following table includes assumptions that were used to calculate fair value using the Black-Scholes option-pricing model for stock option grants issued during:

Expected option lives and volatilities are based on historical data of the Company and comparable companies in the industry. The risk-free interest rate was calculated using similar rates published by the Federal Reserve. The Company has no plans to declare future dividends.   Warrants In connection with debt issuances, the Company has issued warrants to purchase preferred and common stock. See Note 5 for further discussion related to preferred stock warrants, which are accounted for as liabilities.

The following summarizes information about preferred and common stock warrants as of December 31, 2019:

11.

Fair Value

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs according to valuation methodologies used to measure fair value: Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. Level 2: Unobservable prices that are based on inputs not quoted in active markets, but corroborated by market data.   Level 3: Unobservable inputs that are used when little or no market data is available. The warrant liability is measured at fair value on a recurring basis using Level 3 inputs. The Company uses a Binomial option-pricing model to estimate the value of its warrant liability. The following tables set forth information summarizing the changes in fair value of the Company’s warrant liability for the six months ended June 30, 2020 and for the years ended December 31, 2020 and 2019:

12.

Benefit Plan 401(k) Retirement Plan

The Company sponsors a defined contribution 401(k) retirement plan (the Retirement Plan). All employees who are 21 years of age are eligible to participate in the Retirement Plan. Employees may elect to contribute to the Retirement Plan up to 25% of their annual compensation to a maximum of $19,000 per year. As set forth in the Retirement Plan document, a fixed 3% contribution is made by the Company each year for each eligible employee. The Company made contributions of $52,694 and $89,316, during the six months ended June 30, 2020 and 2019, respectively, and $185,856 and  $318,073 during the years ended December 31, 2019 and 2018, respectively.

13.

Income Taxes

The benefit (provision) for income taxes differs from the amount computed  at federal statutory rates due primarily to state income taxes, the change in the deferred tax rate and the change in the valuation allowance. Significant components of the Company’s deferred income tax assets (liabilities) are as follows as of December 31:

The tax provision for interim periods is determined using an estimate of the Company’s effective tax rate for the full year adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter the Company updates its estimate of the annual effective tax rate, and if the estimated tax rate changes, the Company makes a cumulative adjustment. As of December 31, 2019, the Company has net operating loss (NOL) carryforwards   available   to   offset   future   taxable   income,   if   any,  of $77,408,472,   of  which  $57,421,418  will  begin  to   expire  in  2028  and $19,987,054 has an indefinite life. The utilization of the NOL carryforwards is subject to annual limitations under Section 382 of the Internal Revenue Code. Section 382 imposes limitations on a corporation’s ability to utilize its NOL carryforwards if it experiences an “ownership change.” In general terms, an ownership change results from transactions increasing the ownership of certain stockholders in the stock of a corporation by more than 50% over a three-year period. The Company has concluded that there are no significant uncertain tax positions requiring disclosure, and there are no material amounts of unrecognized tax benefits. The Company is subject to routine audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress.

13.	Income Taxes Continued	Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. The Company considers the need for a valuation allowance against its net deferred income tax assets at the end of each year. Factors considered include recent and expected future taxable earnings, and the Company’s liquidity position. As of June 30, 2020, December 31, 2019 and 2018, the Company determined that a full valuation allowance is necessary.
14.	Related Party Transactions	The Company expensed $30,000 and $60,000 during each of the six months ended June 30, 2020 and 2019, respectively; and $120,000 in each of the years ended December 31, 2019 and 2018, for consulting services from a consulting firm which is under the direction of one of the Company’s board members. As of June 30, 2020, December 31, 2019, and December 31, 2018, the Company had accrued $85,000, $55,000 and $0, respectively, in consulting expenses related to this agreement. The Company also expensed consulting fees to certain board members, totaling approximately $48,000 during the six months ended June 30, 2020 and 2019, respectively; and $96,000 for each of the years ended December 31, 2019 and 2018. During the six months ended June 30, 2020, the Company received forgiveness of approximately $52,000 of accrued board member fees, no other amounts have been forgiven. As of June 30, 2020, December 31, 2019, and December 31, 2018, the Company had accrued $164,000, $168,000 and $72,000, respectively, in board member fees.