Notes to Condensed Financial Statements (Unaudited)
NOTE 1 DESCRIPTION OF BUSINESS
Great Basin Scientific, Inc. (the “Company”) (d.b.a., Great Basin Corporation) is a Delaware corporation headquartered in Salt Lake City, Utah. The Company was originally incorporated as Diagnostic Micro Arrays, Inc., a Nevada corporation, on June 27, 2003. The Company changed its name to Great Basin Scientific, Inc. on April 19, 2006. On August 12, 2008, the Company took steps to change its corporate domicile from Nevada to Delaware by forming Great Basin Scientific, Inc., a Delaware corporation, and on August 29, 2008, Great Basin Scientific, Inc., a Nevada corporation, was merged with and into Great Basin Scientific, Inc., a Delaware corporation, wherein the Delaware corporation was the sole surviving entity.
The Company is a molecular diagnostic testing company focused on the development and commercialization of its patented, molecular diagnostic platform designed to test for infectious disease, especially hospital-acquired infections. The Company believes that small to medium sized hospital laboratories, those under 400 beds, are in need of simpler and more affordable molecular diagnostic testing methods. The Company markets a system that combines both affordability and ease-of-use, when compared to other commercially available molecular testing methods, which it believes will accelerate the adoption of molecular testing in small to medium sized hospitals. The system includes an analyzer, which is provided for our customers’ use without charge in the United States, and a diagnostic cartridge, which is sold to our customers. The testing platform has the capability to identify up to 64 individual targets at one time. If the test identifies one to three targets, they are referred to as low-plex tests, or tests, and if they identify four or more targets they are referred to as multi-plex panels, or panels. The Company currently has two commercially available tests, the first for clostridium difficile, or
C. diff
, which received clearance from the Food and Drug Administration, or FDA, in April 2012 and the second for Group B Strep, which received clearance from the FDA in April 2015 and launched commercially in June 2015. The Company received FDA clearance on two more tests in March 2016, Staphylococcus Identification and Resistance Panel, or Staph ID/R panel and Shiga toxin producing E. coli, or STEC, each of which is not yet available for commercial sale. Our customers consist of hospitals, clinics, laboratories and other healthcare providers in the United States, the European Union and New Zealand.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
These condensed unaudited financial statements have been prepared to reflect the financial position, results of operations and cash flows of the Company as of March 31, 2016 and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. The accompanying condensed financial statements and notes are unaudited. In management’s opinion, the unaudited interim financial statements have been prepared on the same basis as the audited financial statements for the year ended December 31, 2015 and include all adjustments, which include only normal recurring adjustments, necessary for the fair presentation of the Company’s financial position as of March 31, 2016 and its results of operations and cash flows for the three months ended March 31, 2016 and 2015. The results for the three months ended March 31, 2016 are not necessarily indicative of the results expected for the full fiscal year or any other interim period.
Net Income (Loss) per Common Share
Basic loss per share (“EPS”) is computed by dividing net loss (the numerator) by the weighted average number of common shares outstanding for the period (the denominator). Diluted EPS is computed by dividing net loss by the weighted average number of common shares and potential common shares outstanding (if dilutive) during each period. Potential common shares include convertible preferred stock, convertible notes, stock options and warrants. The number of potential common shares outstanding is computed using the treasury stock method.
As the Company has incurred losses for the three months ended March 31, 2016 and 2015, the potentially dilutive shares are anti-dilutive and are thus not added into the loss per share calculations. As of March 31, 2016 and 2015, there were 5,732,109 and 18,495 potentially dilutive shares, respectively
.
Reverse Stock Split
On March 30, 2016, the Company effected a reverse stock split of the Company’s common stock whereby each thirty-five shares of common stock was replaced with one share of common stock (with no fractional shares issued). The par value and the number of authorized shares of the common stock were not adjusted. All common share and per share amounts for all periods presented in these financial statements have been adjusted retroactively to reflect the reverse stock split. The quantity of Series E Preferred Stock,
6
Common Warrants, Class A, Class B, Series A, Series B and Series C Warrants as well as employee and other options were not
included in the reverse stock split and their outstanding quantities have not been adjusted. However, the conversion and exchange ratios were adjusted for the effect of
the
reverse stock splits such that upon conversion each 2,100 shares of Series E Prefe
rred Stock will now be converted into four shares of common stock and upon exercise each 2,100 warrants or options will now be converted into one share of common stock. The quantity of Series D and Subordination Warrants were not included in the reverse st
ock split and their outstanding quantities have not been adjusted. However, the conversion ratio has been adjusted such that upon exercise each 35 of the Series D and Subordination Warrants will now be converted into one share of common stock (see NOTE 10
WARRANTS).
Fair Value of Financial Instruments
FASB ASC 820 defines fair value, establishes a framework for measuring fair value under GAAP and enhances disclosures about fair value measurements. Fair value is defined under FASB ASC 820 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under FASB ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, with the first two inputs considered observable and the last input considered unobservable, that may be used to measure fair value as follows:
|
·
|
Level one
— Quoted market prices in active markets for identical assets or liabilities;
|
|
·
|
Level two
— Inputs other than level one inputs that are either directly or indirectly observable; and
|
|
·
|
Level three
— Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that a market participant would use.
|
Determining which category an asset or liability falls within the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each quarter. The Company issued certain common stock warrants, employee stock options and convertible notes that are required to be recorded at fair value measured at the transaction date. In addition certain other warrants to purchase common stock and convertible notes qualify as derivative liabilities and are therefore required to be recorded at fair value measured at the transaction date and again at each reporting period end. The fair value of these warrants and conversion was determined using estimates and assumptions that are not readily available in public markets and the Company has designated this liability as Level 3. The assumptions used for the fair value calculation as well as the changes in the value of the derivative liability are shown in NOTE 11 DERIVATIVE LIABILITY.
Derivative Instruments
The Company accounts for derivative instruments under the provisions of ASC 815
Derivatives and Hedging
. ASC 815 requires the Company to record derivative instruments at their fair value. Changes in the fair value of derivatives are recognized in earnings. As a result of certain terms, conditions and features included in certain common stock warrants granted by the Company as well as the conversion features in the convertible notes, those provisions are required to be accounted for as derivatives at estimated fair value, with changes in fair value recognized in earnings.
New Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the FASB that are adopted by the Company as of the specified effective date. If not discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on the Company’s financial statements upon adoption.
In February 2016, the FASB issued ASU No. 2016-02
Leases
, which requires recognition of leased assets and liabilities on the balance sheet and disclosing key information about leasing arrangements. This update is effective for annual periods and interim periods with those periods beginning after December 15, 2018. The Company is evaluating the impact of this standard on its financial statements.
In July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-11
Simplifying the Measurement of Inventory
, that simplifies the subsequent measurement of inventories by replacing the current lower of cost or market test with a lower of cost or net realizable value test. The ASU is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted. The Company is still evaluating the impact this standard will have on its financial statements and related disclosures.
7
In April 2015, the F
ASB
issued ASU No. 2015-03
Interest – Imputation of Interest, Simplifying the Presentation of Debt Issuance Cost.
This standard provides guidance on the balance sheet presentation for debt issuance costs and deb
t discounts and debt premiums. To simplify the presentation of debt issuance costs, this standard requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of t
hat debt liability. This ASU is effective for fiscal years beginning after December 15, 2015. The Company
has adopted this standard and the effects are reflected in its financial statements and related disclosures.
In August 2014, the FASB issued ASU No. 2014-15
Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern
, which provides guidance on determining when and how to disclose going concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern. The update is effective for annual periods ending after December 15, 2016, and interim periods thereafter. Early adoption is permitted. The impact on the Company’s financial statements of adopting ASU 2014-15 is currently being assessed by management.
In May 2014, the FASB issued ASU No. 2014-09
Revenue from Contracts with Custo
mers, which supersedes nearly all existing revenue recognition guidance under GAAP. The core principle is that a company should recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing GAAP. The standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, and shall be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. In April 2015, the FASB deferred the effective date of ASU 2014-09 to fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company is currently in the process of determining the impact of adoption of the provisions of ASU 2014-09 on its financial statements.
NOTE 3 GOING CONCERN
The Company’s condensed unaudited financial statements have been prepared on a going concern basis which contemplates the realization of assets and the liquidation of liabilities in the ordinary course of business. The Company has incurred substantial losses from operations and negative operating cash flows which raise substantial doubt about the Company’s ability to continue as a going concern. The Company sustained a net loss for the three months ended March 31, 2016 of $33.7 million and a net loss for the year ended December 31, 2015 of $57.9 million, and has an accumulated deficit of $155.6 million as of March 31, 2016. Whether and when the Company can attain profitability and positive cash flows from operations is uncertain.
The Company intends to continue to develop its products and expand its customer base, but does not have sufficient realized revenues or operating cash flows in order to finance these activities internally. As a result, the Company intends to seek to obtain financing in order to fund its working capital and development needs. In February 2016 the Company obtained financing by completing another follow-on offering for net proceeds of $5.0 million.
The Company has been able to meet its short-term needs through private placements of convertible preferred securities, an initial public offering (“IPO”), additional follow-on offerings, convertible debt financing and the sale and leaseback of analyzers used to report test results. The Company will continue to seek funding through the issuance of additional equity securities, debt financing, the sale and leaseback of analyzers, or a combination of these items. Any proceeds received from these items could provide the needed funds for continued operations and development programs. The Company can provide no assurance that it will be able to obtain sufficient additional financing that it needs to alleviate doubt about its ability to continue as a going concern. If the Company is able to obtain sufficient additional financing proceeds, the Company cannot be certain that this additional financing will be available on acceptable terms, if at all. To the extent the Company raises additional funds by issuing equity securities, the Company’s stockholders may experience significant dilution. Any debt financing, if available, may involve restrictive covenants that impact the Company’s ability to conduct business. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. If the Company is unable to obtain additional financings, the impact on the Company’s operations will be material and adverse.
8
NOTE 4 LEASE COMMITMENTS
Capital Leases
The Company has entered into two lease agreements for the sale-leaseback of molecular diagnostic analyzers. The first agreement was entered into in November 2013 and provided for the sale of 125 molecular diagnostic analyzers for a sales price of $2,500,000, which are being leased back for a base period of thirty-six monthly payments of $74,875. The second agreement was entered into in April 2014 for the sale of 75 molecular diagnostic analyzers for a sales price of $1,500,000, which are being leased back for a base period of twenty-four monthly payments of $64,665. At the end of each lease term, the leases shall automatically renew for twelve additional months unless certain conditions are met. As such, the Company is amortizing the capital lease over a forty-eight month period for the first agreement and a thirty-six month period for the second agreement. The lease is accounted for as a capital lease sale-leaseback transaction in accordance with ASC 840, “Leases”.
Operating Leases
The Company leases approximately 35,540 square feet of office space located in Salt Lake City, Utah for use as the executive offices and labs. Base rent payments due under the lease are expected to be approximately $3,472,875 in the aggregate over the term of the lease of 65 months beginning on December 1, 2015. The Company also leases approximately 33,000 square feet of building space at another location in Salt Lake City, Utah for use primarily as manufacturing space and labs. Base rent payments due under these leases total $21,226 per month. The leases expire on April 30, 2017. The Company also leases certain office equipment such as copiers and printers under operating lease agreements that expire at various dates.
Amounts charged to expense under operating leases were $165,045 and $74,268 for the three months ended March 31, 2016 and 2015, respectively.
NOTE 5 NOTES PAYABLE
The Company purchased certain machinery and equipment under two note payable agreements in January and February 2013. During the three months ended March 31, 2016, both notes were extinguished by making the final payments on the notes in the amount of $5,693.
NOTE 6 CONVERTIBLE NOTES PAYABLE
On December 30, 2015, the Company entered into a Securities Purchase Agreement (“SPA”) with certain investors pursuant to which it agreed to issue $22.1 million in senior secured convertible notes (“Notes”) and Series D Warrants (further described below). The Notes are convertible into 3,946,429 shares of Common Stock at a price equal to $5.60 per share, subject to adjustment for certain dilutive events. $20 million of the notes were issued for cash proceeds totaling $18.4 million with an original issue discount in the amount of $1.6 million which is equal to sixteen (16) months of simple interest at a rate of six percent (6.0%) per annum on the aggregate principal of the Notes (assuming, that the entire aggregate original principal amount remains outstanding through the maturity date). $2.1 million of the Notes were issued to extinguish 1,050,000 outstanding Series C Warrants at an extinguish value of $2.00 per warrant. The Notes are senior secured obligations of the Company and will rank senior to all outstanding and future indebtedness of the Company. They are secured by a first priority perfected security interest (subject to permitted liens as defined in the Notes) in all of the current and future assets of the Company. The Notes contain standard and customary events of default and the entire principal balance is subject to the default and redemption provisions contained in the Notes, regardless of whether or not any of the proceeds have been released from the Company’s restricted accounts.
In connection with the issuance of the Notes under the SPA, the Company issued Series D Warrants (the “Series D Warrants”), exercisable to acquire 100,090 shares of Common Stock, subject to a one time adjustment on December 31, 2016 under the terms of the Series D Warrants (see NOTE 10 WARRANTS). Each Series D Warrant is exercisable by the holder beginning six months after December 30, 2015 and continuing for a period five years thereafter. The Series D Warrants are exercisable at $5.60 per share of common stock, subject to adjustments for certain dilutive events.
The Company has agreed to make amortization payments with respect to the Notes in twelve (12) equal installments beginning four (4) months after the original date of issuance of December 30, 2015 (each, an “Installment Date”). On each installment date, assuming certain equity conditions are met, the installment payment shall automatically be converted into shares of Common Stock at a conversion rate defined in the agreement.
9
Under the terms of the Notes, at closing the Company received an initial tranche of
$4.6 million for immediate use for general corporate purposes. The remaining cash proceeds of $13.8 million are being held in a restricted account and will be released to the Company from the Company’s restricted accounts in subsequent equal tranches subj
ect to certain equity conditions
.
$20 million of the Notes were issued for cash proceeds of $18.4 million with an original issue discount in the amount of $1.6 million. The conversion feature in the Notes represents an embedded derivative that requires bifurcation due to the ratchet provision described above related to the conversion feature. The provisions in the Series D Warrants also require the Company to account for the warrants as derivative liabilities. The original issue discount, the fair value of the embedded conversion feature, the fair value of the Series D Warrants and the debt issuance costs are all together considered the debt discount. The Company recorded a debt discount in the amount of $20 million which is being amortized over the life of the note using the effective interest method. For the three months ended March 31, 2016, $6,107,467 of the debt discount had been amortized to interest expense.
The following table summarizes the convertible notes outstanding at March 31, 2016:
|
|
|
|
|
Convertible notes payable, principal
|
|
$
|
22,100,000
|
|
Debt discounts
|
|
|
(13,828,816
|
)
|
|
|
|
|
|
Net convertible note payable
|
|
|
8,271,184
|
|
Less current portion
|
|
|
(8,271,184
|
)
|
|
|
|
|
|
Convertible notes payable, long term
|
|
$
|
—
|
|
|
|
|
|
|
NOTE 7 NOTES PAYABLE – RELATED PARTY
In July 2014, the Company entered into a note agreement for $500,000 with Spring Forth Investments, LLC a company owned by Mr. David Spafford, a director. The original maturity date for the note was July 18, 2015, which was extended by the Company to July 18, 2016 by giving notice and paying an extension fee of $10,000. The note pays interest at an annual rate of 20% and is paid monthly. The Company prepaid the last three months of interest for a total of $25,000 at the time of issuance of the note. As additional consideration for the note, the Company issued 4,000,000 Series D preferred stock units (which were separable into 4,000,000 shares of Series D preferred stock, 20,000 Class A warrants to purchase 10 shares of common stock at $5.60 per share and 20,000 Class B warrants to purchase 10 shares of common stock at $5.60 per share) at a value of $100,000 or $0.025 per unit. The 4,000,000 shares of Series D Preferred Stock were converted into 10 shares of Common Stock. The Series D preferred stock units were accounted as a debt discount which has been fully amortized.
NOTE 8 PREFERRED STOCK
The Company had 5,000,000 shares of preferred stock authorized at a par value of $0.001 per share as of March 31, 2016. As of March 31, 2016 there were 74,380 shares of Series E Preferred Stock issued and outstanding which are convertible at the option of the holders into 142 shares of common stock. During the three months ended March 31, 2016, 13,967 shares of Series E Preferred Stock were converted into 27 shares of common stock.
NOTE 9 COMMON STOCK
The Company had 200,000,000 shares of common stock authorized at a par value of $0.0001 per share as of March 31, 2016. As of March 31, 2016 there were 3,292,683 shares of common stock issued and outstanding. The Company has reserved 2,428,572 of authorized but unissued shares of common stock for issuance pursuant to the convertible notes and associated Series D Warrants.
During the three months ended March 31, 2016, the Company issued 1,520,888 shares of common stock pursuant to the cashless exercise of 5,091,815 Series C Warrants.
During the three months ended March 31, 2016, the Company issued 354,899 shares of common stock pursuant to the cash exercise of 121,540 Underwriter Unit Purchase Options at an exercise price of $11.00 for total proceeds of $1,335,950. Upon exercise of these options, 121,540 shares of Series E Convertible Preferred Stock were issued and immediately converted into 232 shares of common stock and 972,320 Series C Warrants were issued and immediately exercised pursuant to the cashless exercise provision into 354,667 shares of common stock.
During the three months ended March 31, 2016, the Company issued 27 shares of common stock pursuant to the conversion of 13,967 shares of Series E Convertible preferred stock (see NOTE 8 PREFERRED STOCK).
10
On February 24, 2016, the Company compl
eted a public offering of 39.2 million Units. Each 35 units consisted of one share of common stock and 52.5 Series E Warrants. The Company received approximately
$
5.
0
million of net proceeds. Pursuant to the sale of the units, the Company issued 1,120,00
0 shares of common stock. Each 35 Series E Warrants are exercisable into one share of common stock at $8.75 per share. The Series E Warrants expire six years from the date of grant, are not exercisable for one year and which exercise is subject to a share
holder vote and an increase in the number of authorized shares of common stock the Company can issue.
NOTE 10 WARRANTS
The following table outlines the warrants outstanding and exercisable as of March 31, 2016:
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
Shares of
|
|
Aggregate
|
|
|
|
|
Outstanding
|
|
Warrant
|
|
Common Stock
|
|
Exercise Price
|
|
|
|
|
and
|
|
Exercise
|
|
Underlying
|
|
for One
|
|
|
Warrants
|
|
Exercisable
|
|
Price
|
|
the Warrant
|
|
Common Share
|
|
Expiration
|
Class A
|
|
1,532,598
|
|
$0.0027
|
|
755
|
|
$5.60
|
|
April 2021 - July 2021
|
Class B
|
|
1,310,956
|
|
$0.0027
|
|
640
|
|
$5.60
|
|
April 2012 - July 2021
|
Series B
|
|
1,074,082
|
|
$8.04
|
|
530
|
|
$16,873.50
|
|
March 2021 - July 2021
|
Series D
|
|
3,503,116
|
|
$0.0027
|
|
100,090
|
|
$5.60
|
|
June 2021
|
Series E
|
|
58,800,000
|
|
$0.25
|
|
1,680,000
|
|
$8.75
|
|
February 2022
|
Subordination
|
|
105,516
|
|
$0.0027
|
|
3,015
|
|
$5.60
|
|
June 2021
|
Common
|
|
463,356
|
|
$0.0027
- $32.00
|
|
230
|
|
$5.60 - $67,200.00
|
|
April 2016 - July 2021
|
Total Warrants
|
|
66,789,624
|
|
|
|
1,785,260
|
|
|
|
|
Class A Warrants
The Class A Warrants include a provision which provides that the exercise price of the Class A Warrants will be adjusted in connection with certain equity issuances by the Company. In February 2016, as a result of the February 2016 Unit Offering, the price adjustment provision was triggered and the exercise price was adjusted to $5.60 per share of common stock.
Class B Warrants
The Class B Warrants include a provision which provides that the exercise price of the Class B Warrants will be adjusted in connection with certain equity issuances by the Company. In February 2016, as a result of the February 2016 Unit Offering, the price adjustment provision was triggered and the exercise price was adjusted to $5.60 per share of common stock.
Series B Warrants
The Series B Warrants include a provision which provides that the exercise price of the Series B Warrants is subject to reduction in connection with certain equity issuances by the Company that are below the then current market price. In February 2016, as a result of the February 2016 Unit Offering, the price reduction provision was trigged and the exercise price was reduced to $16,873.50 per share of common stock.
Series C Warrants
During the three months ended March 31, 2016, 5,229,973 Series C Warrants were exercised pursuant to the cashless exercise provision. The Company settled 5,091,815 of the Series C Warrant exercises through the issuance of 1,520,888 shares of common stock and the Company settled 138,158 of the Series C Warrant exercises with cash in the amount of $314,879.
On January 21, 2016 all outstanding Series C Warrants were mandatorily exercised utilizing the cashless provision of the warrants and the corresponding shares of common stock issued. As of March 31, 2016 there are 47,528 Series C Warrant certificates that have yet to be delivered to the Company representing 15,182 shares of common stock.
11
Series D Warrants
The Series D Warrants include a provision which provides that the exercise price of the Series D Warrants will be adjusted in connection with certain equity issuances by the Company subject to a floor exercise price of $7.00 per share of common stock. In February 2016, as a result of the February 2016 Unit Offering, the price adjustment provision was triggered and the exercise price was adjusted to the floor of $7.00 per share of common stock. In March 2016, pursuant to the approval of the Company’s stockholders of the removal of the exercise floor price, the exercise price was adjusted to $5.60 per share of common stock.
Series E Warrants
In connection with the February 2016 Unit Offering, the Company issued Series E Warrants to purchase 1,680,000 shares of common stock as part of the units sold in the offering (see NOTE 9 COMMON STOCK). Each 35 Series E Warrant will have an initial exercise price per share of $8.75, subject to certain adjustments. The Series E Warrants are exercisable beginning one year and one day from the date of issuance, but only if
the Company has obtained stockholder approval (i) for the issuance of shares of common stock issuable upon the exercise of the Series E Warrants pursuant to the applicable rules and
regulations of the NASDAQ Capital Market and (ii) to effect an additional reverse split of our common stock and/or increase our authorized shares
of common stock so as to permit the exercise in full of the Series E Warrants. The Series E Warrants will expire on the fifth anniversary of the date they first become exercisable. One year from the date of issuance, the number of shares of common
stock issuable upon the exercise of the Series E Warrants shall be increased to equal the difference, if positive, obtained by subtracting (x) the number of shares of common stock
issuable upon the exercise of the Series E Warrants on the date of issuance) , from (y) the lesser of (A) 7% of the sum of the number of shares of common stock actually outstanding one year from the date of issuance, plus the number of shares of
common stock deemed to be outstanding pursuant to the terms of the Series E Warrant, or (B) 200% of the shares of common stock issuable upon the exercise of the Series E Warrants on such date.
The Series E Warrants include a provision that for one year from issuance the exercise price per share will adjust if the Company has certain equity issuances for consideration per share that is less than the current exercise price of the Series E Warrants. The Series E Warrants are exercisable on a cashless basis in the event there is no effective registration statement registering the shares underlying the Series E Warrants.
Subordination Warrants
The Subordination Warrants include a provision which provides that the exercise price of the Subordination Warrants will be adjusted in connection with certain equity issuances by the Company subject to a floor exercise price of $7.00 per share of common stock. In February 2016, as a result of the February 2016 Unit Offering, the price adjustment provision was triggered and the exercise price was adjusted to the floor of $7.00 per share of common stock. In March 2016, pursuant to the approval of the Company’s stockholders of the removal of the exercise floor price, the exercise price was adjusted to $5.60 per share of common stock.
Common Warrants
Certain Common Warrants include a provision which provides that the exercise price of these certain Common Warrants will be adjusted in connection with certain equity issuances by the Company. In February 2016, as a result of the February 2016 Unit Offering, the price adjustment provision was triggered and the exercise price of these certain Common Warrants was adjusted to $5.60 per share of common stock.
The following table summarizes the common stock warrant activity during the three months ended March 31, 2016:
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remainder
|
|
|
|
Common
|
|
|
Average
|
|
|
Contractual
|
|
|
|
Stock
|
|
|
Exercise
|
|
|
Term in
|
|
|
|
Warrants
|
|
|
Price
|
|
|
Years
|
|
As of March 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants Outstanding as of January 1, 2016
|
|
|
13,219,597
|
|
|
$
|
2.71
|
|
|
|
4.7
|
|
Granted
|
|
|
58,800,000
|
|
|
$
|
0.25
|
|
|
|
5.9
|
|
Exercised
|
|
|
(5,229,973
|
)
|
|
$
|
2.55
|
|
|
|
—
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Warrants outstanding as of March 31, 2016
|
|
|
66,789,624
|
|
|
$
|
0.39
|
|
|
|
5.8
|
|
12
Underwriters’ Unit Purchase Option
During the three months ended March 31, 2016, 121,540 Underwriters’ Unit Purchase Options were exercised for cash in the amount of $1,335,950. Pursuant to the exercise of these options, 121,540 shares of Series E Convertible Preferred Stock were issued and immediately converted into 232 shares of common stock and 972,320 Series C Warrants were issued and immediately exercised pursuant to the cashless exercise provision of the Series C Warrants into 354,667 shares of common stock. There are no outstanding Underwriters’ Unit Purchase Options as of March 31, 2016.
NOTE 11 DERIVATIVE LIABILITIES
The derivative liability for our instruments classified as derivative liabilities are recorded at fair value at inception and subsequently re-measured to fair value as long as such instruments are classified as derivative liabilities. Changes in the fair value of the derivative liability was included as a component of Other income (expense) and has no effect on the Company’s cash flows. The valuation methodologies used vary by instrument and include a modified Black-Scholes option valuation model utilizing the fair value of the underlying common stock and a binomial model with Monte Carlo simulation. The Company has determined the fair value measurements to be a level 3 measurement (see NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES).
Class A Warrants, Class B Warrants, Series B Warrants and Certain Common Warrants
Our Class A Warrants, Class B Warrants, Series B Warrants and certain common warrants, have an exercise price adjustment provision that in the event the Company sells shares of any additional stock, subject to certain exceptions, at a price per share less than the original exercise price of the respective warrant, the exercise price shall be adjusted to a price equal to the price paid per share for such additional stock. Our Series B Warrants have an exercise price adjustment provision that in the event the Company sells shares of any additional stock, subject to certain exceptions, at a price per share less than the then current market price, the exercise price shall be adjusted to a price equal to the price paid per share for such additional stock. Such exercise price adjustments prohibit the Company from being able to conclude that the warrants are indexed to the Company’s own stock. Accordingly, these warrants are accounted for as derivative liabilities and are recorded at fair value at each reporting date with the change in fair value being recorded in earnings for the period. In February 2016, as a result of the February 2016 Unit Offering, the price adjustment provision was triggered for our Class A Warrants, Class B Warrants, Series B Warrants and certain common warrants and the exercise price per share was adjusted accordingly.
The fair value of these warrants was calculated using a modified Black-Scholes option valuation model utilizing the fair value of underlying common stock. Black-Scholes has inherent limitations for use in the case of a warrant with a price protection provision, since the model is designed to be used when the inputs to the model are static throughout the life of a security. Due to the significant variance between the fair market value of the stock and the exercise price, the Black-Scholes option-pricing model resulted in a fair value that equals the current market value of the stock. As such, the fair value of the Class A, Class B, Series B and certain other common warrants was estimated to be $7.17 per share, which was the closing price of the common stock on March 31, 2016. The Company determined the total fair value of these warrants at March 31, 2016 was $13,500.
Series C Warrants and Unit Purchase Option
Our Series C Warrants contained a cashless exercise provision using a predetermined Black Scholes Value. Such provision, if exercised by the holder, would require the Company to settle these warrants, at its option, either by cash payment or the granting of a variable number of common shares. This provision results in the potential for the Company to either have to net cash settle the warrant or potentially issue an indeterminate number of common shares which prohibits the Company from being able to conclude that the warrants are indexed to the Company’s own stock. Accordingly, the warrants and the unit purchase option are accounted for as derivative liabilities and are recorded at fair value at each reporting date with the change in fair value being recorded in earnings for the period. During the three months ended March 31, 2016 all of the remaining Series C Warrants and unit purchase options were exercised.
Convertible Notes Conversion Feature
The convertible notes issued in December 2015 contain provisions that protect holders from future issuances of the Company’s common stock at prices below such convertible notes’ respective conversion price. These provisions could result in modification of the conversion price due to a future equity offering and as such the conversion feature cannot be considered indexed to the Company’s own stock. The note also provides that the Company will repay the principal amount at an initial conversion rate subject to certain adjustments. These features represent an embedded derivative that requires bifurcation and are recorded at fair value at each reporting period with the change in fair value being recorded in earnings for the period.
13
The Company determined the fair
value of the conversion feature to be $
35,096,383
at March 31, 2016
using a binomial mod
el with Monte Carlo simulation to reflect different scenarios where reset may be triggered using the following assumptions
:
Trading price of common stock on measurement date
|
|
$
|
7.17
|
|
Conversion price (1)
|
|
$
|
4.05
|
|
Risk free interest rate (2)
|
|
|
0.59
|
%
|
Conversion notes lives in years
|
|
|
1.08
|
|
Expected volatility (3)
|
|
|
251
|
%
|
Expected dividend yield (4)
|
|
|
-
|
|
(1)
|
The conversion price of the convertible notes was calculated based on the formula in the Notes agreement as of the respective measurement date
|
(2)
|
The risk-free interest rate was determined by management using the 1-year Treasury Bill as of the respective measurement date.
|
(3)
|
The volatility factor was estimated by using the historical volatilities of the Company’s trading history.
|
(4)
|
Management determined the dividend yield to be 0% based upon its expectation that it will not pay dividends for the foreseeable future.
|
Series D Warrants and Subordination Warrants
In connection with the issuance of convertible notes in December 2015, the Company issued Series D Warrants to acquire 100,090 shares of common stock. In addition, the Company issued Subordination Warrants to acquire 3,015 shares of common stock. The Series D Warrants and Subordination Warrants contain provisions that will adjust the exercise price upon certain equity issuances. In addition, these warrants contain a provision for a one-time adjustment at December 31, 2016, to the number of warrants issued. The Company has determined that the provisions contained in the Series D Warrants and the Subordination Warrants could result in modification of the exercise price resulting in a variable number of additional common shares that could be issued. This prohibits the company from being able to conclude that the warrants are indexed to the Company’s own stock. Accordingly, the warrants represent a derivative liability that requires recording at fair value at each reporting period with the change in fair value being recorded in earnings for the period.
The Company determined the fair of the Series D Warrants and Subordination Warrants to be $9,019,277 at March 31, 2016 using a binomial model with Monte Carlo simulation to reflect different scenarios where reset may be triggered and to project the range of the additional shares to be issued on December 31, 2016 using the following assumptions:
Trading price of common stock on measurement date
|
|
$
|
7.17
|
|
Exercise price (1)
|
|
$
|
5.60
|
|
Risk free interest rate (2)
|
|
|
1.21
|
%
|
Warrant lives in years
|
|
|
5.25
|
|
Expected volatility (3)
|
|
|
230
|
%
|
Expected dividend yield (4)
|
|
|
-
|
|
(1)
|
The exercise price of the Series D and Subordination Warrants as defined in the warrant agreement.
|
(2)
|
The risk-free interest rate was determined by management using the 5-year Treasury Bill as of the respective measurement date.
|
(3)
|
The volatility factor was estimated by using the historical volatilities of the Company’s trading history.
|
(4)
|
Management determined the dividend yield to be 0% based upon its expectation that it will not pay dividends for the foreseeable future.
|
Series E Warrants
In connection with the February 2016 Unit Offering, the Company issued Series E Warrants to purchase 1,680,000 shares of common stock as part of the units sold in the offering (see NOTE 9 COMMON STOCK). The Series E Warrants contain a provision
that for one year from issuance
the exercise price per share will adjust if the Company has certain equity issuances for consideration per share that is less than the current exercise price of the Series E Warrants.
In addition, these warrants contain a provision for a one-time adjustment one year from date of issuance, to the number of warrants issued.
The Company has determined that the provisions contained in the Series E Warrants could result in modification of the exercise price resulting in a variable number of additional common shares that could be issued. This prohibits the company from being able to conclude that the warrants are indexed to the Company’s own stock. Accordingly, the warrants represent a derivative liability that requires recording at fair value at issuance and again at each reporting period with the change in fair value being recorded in earnings for the period.
14
The Company determined the fair of the Series E Warrants to be $1
1,390,400
at issuance and $1
1,978,400
at March 31, 2016 using a
Black Scholes valuation
model using the following assumptions:
|
|
February 24, 2016
|
|
|
March 31, 2016
|
|
Trading price of common stock on measurement date
|
|
$
|
6.82
|
|
|
$
|
7.17
|
|
Exercise price (1)
|
|
$
|
8.75
|
|
|
$
|
8.75
|
|
Risk free interest rate (2)
|
|
|
2.73
|
%
|
|
|
2.75
|
%
|
Warrant lives in years
|
|
|
6.01
|
|
|
|
5.91
|
|
Expected volatility (3)
|
|
|
225
|
%
|
|
|
230
|
%
|
Expected dividend yield (4)
|
|
|
-
|
|
|
|
-
|
|
(1)
|
The exercise price of the Series E Warrants as defined in the warrant agreement.
|
(2)
|
The risk-free interest rate was determined by management using the 5-year Treasury Bill as of the respective measurement date.
|
(3)
|
The volatility factor was estimated by using the historical volatilities of the Company’s trading history.
|
(4)
|
Management determined the dividend yield to be 0% based upon its expectation that it will not pay dividends for the foreseeable future.
|
The following summarizes the total change in the value of the derivative liabilities during the three months ended March 31, 2106:
As of March 31, 2016:
|
|
|
|
|
Balance at January 1, 2016
|
|
$
|
43,181,472
|
|
Issuance of warrants
|
|
|
5,091,677
|
|
Exercise of warrants and options
|
|
|
(12,384,852
|
)
|
Change in fair value of warrant and option liability
|
|
|
20,219,263
|
|
Balance at March 31, 2016
|
|
$
|
56,107,560
|
|
NOTE 12 EMPLOYEE STOCK OPTIONS
The Company has three stock based employee compensation plans pursuant to which stock option grants have been made. Under the Great Basin Scientific, Inc. 2014 Omnibus Plan, the 2014 Stock Option Plan and the 2006 Stock Option Plan certain employees and non-employee directors have been granted options to purchase common stock. The Company has 792,034 employee stock options exercisable into 419 shares of common stock outstanding as of March 31, 2016. All options vest in installments over a three to four year period and expire ten years from the date of grant.
Any future employee stock option grants will be made pursuant to the 2014 Omnibus Plan. As of March 31, 2016, employee stock options exercisable into 125 shares of common stock have been granted pursuant to the 2014 Omnibus Plan and options exercisable into 1,275 shares of common stock remain available for issuance under that plan.
The following table summarizes the Company’s total option activity for the three months ended March 31, 2016:
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Aggregate
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
|
Shares of
|
|
|
Exercise
|
|
|
Average
|
|
|
|
|
|
|
|
Average
|
|
|
Common
|
|
|
Price
|
|
|
Remaining
|
|
|
|
|
|
|
|
Option
|
|
|
Stock
|
|
|
for One
|
|
|
Contractual
|
|
|
|
|
|
|
|
Exercise
|
|
|
Underlying
|
|
|
Common
|
|
|
Term in
|
|
|
|
Options
|
|
|
Price
|
|
|
the Option
|
|
|
Share
|
|
|
Years
|
|
As of March 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding as of January 1, 2016
|
|
|
792,534
|
|
|
$
|
2.84
|
|
|
|
420
|
|
|
$
|
5,964.00
|
|
|
|
8.0
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited
|
|
|
500
|
|
|
$
|
2.00
|
|
|
|
1
|
|
|
$
|
4,200.00
|
|
|
|
—
|
|
Options outstanding as of March 31, 2016
|
|
|
792,034
|
|
|
$
|
2.84
|
|
|
|
419
|
|
|
$
|
5,964.00
|
|
|
|
7.8
|
|
15
Outstanding and exercisable stock options as of
March 31, 2016
are as follows:
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
Number of
|
|
|
Remaining
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
Options
|
|
|
Life
|
|
|
Exercise
|
|
|
Options
|
|
|
Exercise
|
|
|
|
Outstanding
|
|
|
(Years)
|
|
|
Price
|
|
|
Exercisable
|
|
|
Price
|
|
March 31, 2016
|
|
|
792,034
|
|
|
|
7.8
|
|
|
$
|
2.84
|
|
|
|
376,925
|
|
|
$
|
3.04
|
|
The estimated fair value of the Company’s stock options, less expected forfeitures, is amortized over the options vesting period on the straight-line basis. The Company recognized $37,045 in equity-based compensation expenses during the three months ended March 31, 2016. There were $371,862 of total unrecognized compensation cost with a remaining vesting period of 2.46 years and $0 in intrinsic value of outstanding and vested stock options as of March 31, 2016.
NOTE 13 LEGAL PROCEEDINGS
We are not currently a party to any material pending or threatened legal proceeding or regulatory or government investigations. We may become involved in litigation from time to time relating to claims arising in the ordinary course of our business. We do not believe that the ultimate resolution of such claims would have a material effect on our business, results of operations, financial condition or cash flows. However, the results of these matters cannot be predicted with certainty, and an unfavorable resolution of one or more of these matters could have a material effect on our business, results of operations, financial condition and cash flows.
NOTE 14 SUBSEQUENT EVENTS
On April 7, 2016, the Company entered into certain warrant exchange agreements (the “Exchange Agreements”), each by and between the Company and a holder of its outstanding Series E Warrants, pursuant to which the Company and each such holder agreed to exchange outstanding Series E Warrants for shares of common stock of the Company. Pursuant to the Exchange Agreements, the Company issued 650,160 shares of common stock of the Company in exchange for the surrender by the holders to the Company of 58,800,000 Series E Warrants exercisable to acquire approximately 1,680,000 shares of common stock of the Company (representing an exchange ratio of one share of common stock for each 2.584 shares of common stock underlying the surrendered Series E Warrants). The surrendered Series E Warrants were immediately cancelled by the Company and there are no Series E Warrants issued and outstanding.
On April 5, 2016, the Company received notification from the Utah Labor Commission, Occupational Safety and Health Division (ULC) that a former employee filed a claim with the ULC alleging wrongful termination in violation of the Utah Occupational Safety and Health Act, Utah Code. The Company has performed an investigation and believes the claim is without merit.
On May 2, 2016, the holders of the senior secured convertible notes of the Company voluntarily removed restrictions on the Company’s use of an aggregate of $1 million previously funded to the Company and authorized the release of those funds from the restricted cash accounts of the Company.
On May 11, 2016, the Company and certain of the buyers. as set forth in the Schedule of Buyers attached to the Securities Purchase Agreement, dated December 28, 2015 (the “SPA”), in relation to the issuance and sale by the Company of $22.1 million aggregate principal amount of senior secured convertible notes (the “Notes”) and related Series D common stock purchase warrants (the “Warrants”), holding enough of the Notes and Warrants to constitute the Required Holders under Section 10 of the Registration Rights Agreement by and between the Company the Buyers (the “Registration Rights Agreement”) entered into December 30, 2015, entered into Amendment Agreement No.3 to the Registration Rights Agreement (the “Third Amendment Agreement”), whereby the Company and the Buyers agreed to extend the deadline for bringing the initial registration statement required thereunder registering our shares of common stock issuable upon conversion of the Notes and exercise of the Warrants to the date which is the earlier of May 31, 2016 and the fifth (5th) business day after the date the Company is notified (orally or in writing, whichever is earlier) by the SEC that such initial registration statement will not be subject to further review.
Under the Third Amendment Agreement, the Buyers also waived any (i) any breach of the Registration Rights Agreement prior to May 11, 2016 under Section 2(a) of the Registration Rights Agreement for the Company’s failure to have the initial registration statement brought effective by the initial effectiveness deadline, prior to the date of Third Amendment Agreement and (ii) the Holder’s right to Registration Delay Payments (as defined under the Registration Rights Agreement) prior to the date of the Third Amendment Agreement for the Company’s failure to have the initial registration statement brought effective by the initial effectiveness deadline.
16