NOTES TO THE FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)
NOTE 1. - BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Description -
Gyrotron Technology, Inc. (the "Company") is incorporated under the business laws of Delaware. The Company develops and seeks to license unique industrial technologies primarily to the glass, semiconductor, food, footwear, adhesives and plastics industries, providing a novel method for heating for industrial processing. It also develops, licenses, and seeks to sell autoclave-free laminating systems. The Company is organized and managed as a single operating segment.
Basis of Presentation -
The accompanying unaudited financial statements have been prepared in accordance with United States generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 8.03 of Regulation S-X for smaller reporting companies. Accordingly, these statements do not include all of the information and footnotes required by United States generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary to fairly state the financial position, results of operations and cash flows with respect to the interim financial statements have been included. Operating results for the three and nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. The financial statements should be read in conjunction with the audited financial statements and footnotes included in the Company’s Form 10-K for the fiscal year ended December 31, 2015.
Liquidity and Management Plans -
As shown in the accompanying financial statements, the Company incurred a net loss for the three and nine months ended September 30, 2016 of $131,106 and $420,981, respectively, and had negative working capital of $2,204,018 and stockholders' deficiency of $9,882,850 at September 30, 2016. Further, cash used in operating activities during the nine months ended September 30, 2016 amounted to $282,688. The Company is expected to continue to incur losses throughout the remainder of 2016. These factors raise substantial doubt as to the ability of the Company to continue as a going concern.
The Company's business strategy is to overcome these losses through commercialization and continued development of (i) applications for the gyrotron beam which will be marketed and monetized through licensing, engineering consulting and servicing and (ii) the lamination system.
The Company's management and Board of Directors have obtained additional funding after September 30, 2016 (see Note 4) and intend to obtain additional funding for general working capital needs and professional fees through private placement of its equity securities. The Company will continually evaluate funding options including additional offerings of its securities to investors. There can be no assurance as to the availability or terms upon which such financing alternatives might be available.
Accounts Receivable -
The Company grants credit to substantially all of its customers, and carries its accounts receivable at original invoice amount less an allowance for doubtful accounts. On a periodic basis, the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts based on history of past write-offs, collections, and current credit conditions. The allowance for doubtful accounts amounted to $3,218 at September 30, 2016 and December 31, 2015.
Machinery and Equipment -
Machinery and equipment are stated at cost net of accumulated depreciation. Depreciation is provided over the estimated useful lives of the assets using straight-line and accelerated methods for both financial statement and income tax reporting purposes. Maintenance and repairs are charged to operations as incurred; significant betterments are capitalized.
GYROTRON TECHNOLOGY, INC.
NOTES TO THE FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)
NOTE 1. - BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Patents -
The Company capitalizes costs relative to patent applications. Patents are recorded at acquired cost and amortized over their estimated useful economic life of 15 years, beginning at the date of issuance. Costs incurred to renew or extend the term of recognized patents, including annuities and fees, are expensed as incurred.
Impairment of Long-Lived Assets -
Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the undiscounted future cash flows of the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Fair value is determined based on discounted cash flow or appraised values, depending on the nature of the assets. There was an impairment of a patent during the nine months ended September 30, 2015 in the amount of $6,168 included in operating expenses in the accompanying statement of operations. There was no impairment of long-lived assets during the three and nine months ended September 30, 2016.
Accrued Expenses - Related Parties
- Included in accrued expenses is approximately $143,000 in fees due to two members of the board of directors as of September 30, 2016. As of December 31, 2015 this amount was approximately $79,000.
Income Taxes -
The Company recognizes estimated income taxes payable or refundable on income tax returns for the current year and the estimated future tax effect attributable to temporary differences and carry-forwards. Measurement of deferred income items is based on enacted tax laws including tax rates, with the measurement of deferred income tax assets being reduced by available tax benefits not expected to be realized.
Share-Based Payments -
The Company accounts for stock option awards granted in accordance with Share-Based Payments Topic of the FASB Accounting Standards Codification (ASC) 718. Under ASC 718, compensation expense related to stock based payments is recorded over the requisite service period based on the grant date fair value of the awards. The Company uses the Black-Scholes option pricing model for determining the estimated fair value for stock-based awards. The Black-Scholes model requires the use of assumptions which determine the fair value of stock-based awards, including the option's expected term and the price volatility of the underlying stock.
Treasury Stock -
The Company accounts for treasury stock under the cost method, which requires the Company to record the shares as a reduction to equity at the purchased amount.
Revenue Recognition -
In accordance with Revenue Recognition Topic of the FASB Accounting Standards Codification (ASC) 605, the Company recognizes revenue when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the Company's price to the customer is fixed or determinate, and collectability is reasonably assured.
Research and Development Expenses -
Research and development expenses are charged to operations as incurred. Customer funded research and development is included within operating expenses in the accompanying statements of operations as a reduction of research and development expense.
GYROTRON TECHNOLOGY, INC.
NOTES TO THE FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)
Loss Per Common Share -
Basic loss per common share is computed using the weighted average number of common shares outstanding. Diluted loss per common share gives effect to dilutive convertible preferred stock, options and warrants outstanding during the period. Shares to be issued upon the exercise of these instruments have not been included in the computation of diluted loss per share as their effect is anti-dilutive based on the net loss incurred.
As of September 30, 2016, there were the following common shares underlying securities that could potentially dilute future earnings:
Preferred A stock
|
|
|
1,637,903
|
|
Preferred A-1 stock
|
|
|
232,163
|
|
Preferred A-2 stock
|
|
|
93,612
|
|
Preferred B stock
|
|
|
1,410,315
|
|
Preferred B-1 stock
|
|
|
2,391,173
|
|
Preferred B-2 stock
|
|
|
50,350
|
|
Warrants expiring 12/15/16
|
|
|
91,225
|
|
Warrants expiring 10/1/18
|
|
|
60,000
|
|
Options
|
|
|
60,000
|
|
Total
|
|
|
6,026,741
|
|
Accounting Estimates -
The process of preparing financial statements in conformity with accounting principles generally accepted in the United States of America requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Accordingly, actual results may differ from estimated amounts.
Fair Value of Financial Instruments -
The carrying amount of cash, receivables, accounts payable and accrued expenses and other liabilities are reasonable estimates of their fair value due to their short maturity.
Redeemable Convertible Preferred Stock
- The Company classifies conditionally redeemable convertible preferred shares, which includes preferred shares subject to redemption upon the occurrence of uncertain events not solely within control of the Company, as temporary equity in the mezzanine section of the balance sheet, in accordance with the guidance enumerated in FASB ASC No. 480-10 “Distinguishing Liabilities from Equity”, FASB ASC No. 210-10 “Balance Sheet” and Rule 5-02.27 of Regulation S-X, when determining the classification and measurement of preferred stock.
The Company evaluated the detachable warrants in accordance with FASB ASC No. 470-20, “Debt with Conversion and Other Options” and FASB ASC 815, “Derivatives and Hedging” and determined they were not considered a liability. As a result, proceeds from the preferred stock are allocated to the detachable stock purchase warrants based on the relative fair value of the preferred stock and warrants at issuance and recorded as additional paid-in capital.
GYROTRON TECHNOLOGY, INC.
NOTES TO THE FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)
The Company evaluated the conversion feature of the redeemable convertible preferred shares in accordance with FASB ASC No. 470-20, “Debt with Conversion and Other Options”. A convertible financial instrument includes a Beneficial Conversion Feature (“BCF”) when the fair market value of the preferred stock is lower than the value of common stock when the preferred stock converts to common stock at the issuance date. The BCF shall be recognized separately at issuance by allocating a portion of the proceeds equal to the intrinsic value of the feature to additional paid-in capital.
Redeemable securities initially are recorded at their fair value minus the detachable warrants, BCF and preferred stock issuance costs. The Company recognizes discounts from the redemption value of the preferred stock immediately as they occur and adjusts the carrying amount to equal redemption value at the end of each reporting period. The Company recognizes accumulated dividends as an increase to redeemable convertible preferred stock in the mezzanine section of the balance sheet and increase of stockholders’ deficiency.
Recent Accounting Pronouncements -
In November 2014, the FASB issued ASU No.2014-16,
Derivatives and Hedging (Topic 815): Determining whether the
host contract in a hybrid financial instrument issued in the form of a share is more akin to debt or to equity
, ("ASU 2014-16"). The amendments of ASU 2014-16 clarify how U.S. GAAP should be applied in determining whether the nature of a host contract is more akin to debt or equity and in evaluating whether the economic characteristics and risks of an embedded feature are "clearly and closely related" to its host contract. The guidance in ASU 2014-16 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The Company adopted the standard effective January 1, 2016 and the adoption of this standard did not impact the Company's results of operations, cash flows or financial position. The adoption of ASU 2014-16 did not impact the Company's existing financial instruments.
In February 2016, the FASB issued an accounting standard update ASU 2016-02, “Leases“, which requires that lease arrangements longer than 12 months result in an entity recognizing an asset and liability. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018, and early adoption is permitted. The Company has not yet evaluated nor has it determined the effect of the standard will have on its financial statements and related disclosures.
NOTE 2. - MACHINERY AND EQUIPMENT
The components of machinery and equipment are as follows:
|
|
Estimated
|
|
September 30,
|
|
|
December 31,
|
|
|
|
Useful Life
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Machinery and equipment
|
|
5 to 7 years
|
|
$
|
1,239,665
|
|
|
$
|
1,018,231
|
|
Furniture and fixtures
|
|
5 to 7 years
|
|
|
25,874
|
|
|
|
25,874
|
|
Deposit on capital lease
|
|
|
|
|
-
|
|
|
|
40,000
|
|
|
|
|
|
|
1,265,539
|
|
|
|
1,084,105
|
|
Less accumulated depreciation
|
|
|
|
|
(908,283
|
)
|
|
|
(907,337
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
357,256
|
|
|
$
|
176,768
|
|
Depreciation expense amounted to $510 and $437 for the three months ended September 30, 2016 and 2015, respectively, and $946 and $6,049 for the nine months ended September 30, 2016 and 2015, respectively, and is included within operating expenses in the accompanying statements of operations.
GYROTRON TECHNOLOGY, INC.
NOTES TO THE FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)
NOTE 3. – PATENT
The components of patents are as follows:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Patents
|
|
$
|
159,148
|
|
|
$
|
156,419
|
|
Less accumulated amortization
|
|
|
(110,157
|
)
|
|
|
(103,063
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
48,991
|
|
|
$
|
53,356
|
|
Amortization expense amounted to $2,359 and $2,299 for the three months ended September 30, 2016 and 2015, respectively, and $7,094 and $7,394 for the nine months ended September 30, 2016 and 2015, respectively. For patents placed in service, amortization expense during the next five years is expected to be approximately $2,400 for the three months ending December 31, 2016, approximately $5,700 in 2017, approximately $3,000 in 2018, 2019, and 2020 and approximately $11,000 in aggregate thereafter.
NOTE 4. – STOCKHOLDER LOANS AND ADVANCES FROM STOCKHOLDERS
Gabriel Capital LP (“Gabriel”), a major stockholder of the Company, made two loans to the Company in 2014 in the amounts of $40,000 and $45,000, to purchase a gyrotron and a cryomagnet (see Note 8). There is no interest on these informal loans. The $40,000 loan was to be repaid on July 1, 2015, or earlier to the extent the Company has cash in excess of $250,000. The $45,000 loan was to be repaid on October 1, 2015, or earlier to the extent the Company has cash in excess of $250,000. In May 2015, Gabriel loaned the Company an additional $60,000 interest free to be repaid from 50% of the net proceeds of any equity financing obtained by the Company, and, in any event, to be repaid by September 30, 2015. As of October 2015, these loans had not been repaid and at that time Gabriel agreed to extend the maturity of all of the above loans to January 4, 2016 and to waive the obligation to repay the May 2015 loan from equity proceeds. In April 2016 Gabriel loaned the Company an additional $25,000 interest free to be repaid by December 31, 2016, and extended the maturity date of all its loans to the Company to December 31, 2016. Subsequent to September 30, 2016 Gabriel loaned the Company an additional $40,000 for payments related to the cryomagnet and gyrotron and to pay expenses needed to put them into service, and the Company agreed (a) to provide Gabriel a security interest in the gyrotron and cryomagnet for the related $125,000 in loans, (b) to use its best efforts to arrange for a sale-leaseback of the gyrotron and cryomagnet within 90 days of their being put into service (which the Company estimates will take place by January 1, 2017), and (c) to pay 20% of any testing revenue they generate to Gabriel to reduce the amount outstanding on the related $125,000 loans. Gabriel also agreed to extend the maturity date of all its loans to the Company to April 1, 2017.
During the nine months ended September 30, 2016, a director and his affiliates advanced $293,663 to the Company that bears no interest. Subsequent to September 30, 2016, he advanced $23,500 to the Company that bears no interest. The Company expects that a substantial portion of such advances will be converted into redeemable convertible preferred stock units (see Note 5). Additionally an unrelated party advanced $24,750 for the purchase of equity securities, with terms yet to be finalized.
GYROTRON TECHNOLOGY, INC.
NOTES TO THE FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)
NOTE 5. - REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Board of Directors has designated six series of redeemable convertible par value $.001 preferred stock: Series A, Series A-1, Series A-2, Series B, Series B-1, and Series B-2. Series A, Series A-1, and Series A-2 rank equal for all purposes. Series B, Series B-1, and Series B-2 rank equal for all purposes. Series A, A-1 and A-2 each rank senior to each of Series B, B-1, and B-2.
As further detailed below, holders of Series A, A-1, A-2, B, B-1, and B-2 redeemable convertible preferred stock can take control of the board of directors in the event the Company does not accept a redemption request or the Company fails to pay dividends. In addition, a majority of the current members of the board of directors own various classes of preferred shares. As a result, these instruments have conditions for their redemption that are not within the control of the Company. Accordingly, the fair value of the Series A, A-1, A-2, B, B-1, and B-2 redeemable convertible preferred stock are recorded outside of stockholders’ deficiency as temporary equity in the mezzanine section of the balance sheets. The Company recognizes changes in the redemption value of the redeemable convertible preferred stock immediately as they occur, and the carrying amount of the instrument is adjusted to equal the redemption value at the end of each reporting period. The adjustment to record preferred stock at its redemption value was charged to the redeemable convertible preferred stock carrying value and additional paid in capital for the nine months ended September 30, 2016 and is further detailed in the following schedule:
|
|
Series A
|
|
|
Series A-1
|
|
|
Series A-2
|
|
|
Series B
|
|
|
Series B-1
|
|
|
Series B-2
|
|
|
Total
|
|
Liquidation Preference of Redeemable Preferred Stock as of December 31, 2015
|
|
$
|
3,420,028
|
|
|
$
|
475,469
|
|
|
$
|
60,857
|
|
|
$
|
1,594,331
|
|
|
$
|
1,688,034
|
|
|
$
|
17,578
|
|
|
$
|
7,256,297
|
|
New issuances including dividends paid in kind
|
|
|
-
|
|
|
|
-
|
|
|
|
4,671
|
|
|
|
-
|
|
|
|
-
|
|
|
|
17,745
|
|
|
|
22,416
|
|
Dividends accumulated
|
|
|
353,787
|
|
|
|
50,147
|
|
|
|
-
|
|
|
|
161,833
|
|
|
|
192,071
|
|
|
|
781
|
|
|
|
758,619
|
|
Liquidation Preference of Redeemable Preferred Stock as of September 30, 2016
|
|
$
|
3,773,815
|
|
|
$
|
525,616
|
|
|
$
|
65,528
|
|
|
$
|
1,756,164
|
|
|
$
|
1,880,105
|
|
|
$
|
36,104
|
|
|
$
|
8,037,332
|
|
The terms of these preferred shares are summarized in the table below. All series carry an initial dividend rate of 10% payable quarterly and are convertible in the common stock of the Company. The holders of preferred stock have the right to one vote for each share of common stock into which such share of preferred stock could then be converted. The conversion ratio and price are subject to adjustment when the Company declares or pays dividends, makes a distribution on common stock payable in common shares, or affects a subdivision, split, consolidation, combination, or reverse split of outstanding common shares into a greater or lesser number of common shares.
|
|
Series A
|
|
|
Series A-1
|
|
|
Series A-2
|
|
|
Series B
|
|
|
Series B-1
|
|
|
Series B-2
|
|
|
Totals
|
|
Shares designated
|
|
|
450,000
|
|
|
|
125,000
|
|
|
|
8,750
|
|
|
|
40,000
|
|
|
|
80,000
|
|
|
|
30,000
|
|
|
|
733,750
|
|
Liquidation preference
|
|
$
|
6
|
|
|
$
|
6
|
|
|
$
|
35
|
|
|
$
|
30
|
|
|
$
|
35
|
|
|
$
|
35
|
|
|
|
|
|
Conversion price
|
|
$
|
1.600
|
|
|
$
|
1.600
|
|
|
$
|
0.700
|
|
|
$
|
1.000
|
|
|
$
|
0.700
|
|
|
$
|
0.700
|
|
|
|
|
|
Default conversion price
|
|
$
|
1.600
|
|
|
$
|
1.600
|
|
|
$
|
0.595
|
|
|
$
|
0.850
|
|
|
$
|
0.595
|
|
|
$
|
0.595
|
|
|
|
|
|
In default at September 30, 2016
|
|
YES
|
|
|
YES
|
|
|
NO
|
|
|
YES
|
|
|
YES
|
|
|
NO
|
|
|
|
|
|
Number of shares of common issuable upon conversion
|
|
|
3.75
|
|
|
|
3.75
|
|
|
|
50.00
|
|
|
|
35.29
|
|
|
|
58.82
|
|
|
|
50.00
|
|
|
|
|
|
Number of quarters in arrears that triggers default rate
|
|
|
4
|
|
|
|
4
|
|
|
|
4
|
|
|
|
6
|
|
|
|
6
|
|
|
|
6
|
|
|
|
|
|
Number of quarters in arrears at September 30, 2016
|
|
|
12
|
|
|
|
11
|
|
|
|
-
|
|
|
|
13
|
|
|
|
10
|
|
|
|
1
|
|
|
|
|
|
Repurchase date
|
|
6/30/2015
|
|
|
6/30/2015
|
|
|
6/30/2020
|
|
|
6/30/2016
|
|
|
9/30/2017
|
|
|
12/31/2019
|
|
|
|
|
|
May be paid in kind through and including
|
|
|
|
|
|
|
|
|
|
9/30/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mandatory conversion percentage
|
|
|
150
|
%
|
|
|
150
|
%
|
|
|
150
|
%
|
|
|
196.10
|
%
|
|
|
184.90
|
%
|
|
|
150
|
%
|
|
|
|
|
Dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate
|
|
|
18
|
%
|
|
|
18
|
%
|
|
|
10
|
%
|
|
|
18
|
%
|
|
|
18
|
%
|
|
|
10
|
%
|
|
|
|
|
Accrued during the three months ended September 30, 2015
|
|
$
|
117,929
|
|
|
$
|
16,716
|
|
|
$
|
1,152
|
|
|
$
|
53,945
|
|
|
$
|
35,569
|
|
|
$
|
-
|
|
|
$
|
225,311
|
|
Accrued during the three months ended September 30, 2016
|
|
$
|
117,929
|
|
|
$
|
16,716
|
|
|
$
|
1,575
|
|
|
$
|
53,944
|
|
|
$
|
64,024
|
|
|
$
|
860
|
|
|
$
|
255,048
|
|
Accrued during the nine months ended September 30, 2015
|
|
$
|
353,787
|
|
|
$
|
50,147
|
|
|
$
|
2,250
|
|
|
$
|
161,833
|
|
|
$
|
111,181
|
|
|
$
|
-
|
|
|
$
|
679,198
|
|
Accrued during the nine months ended September 30, 2016
|
|
$
|
353,787
|
|
|
$
|
50,147
|
|
|
$
|
4,671
|
|
|
$
|
161,833
|
|
|
$
|
192,071
|
|
|
$
|
2,181
|
|
|
$
|
764,690
|
|
Paid in kind during the three months ended September 30, 2015
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,155
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,155
|
|
Paid in kind during the three months ended September 30, 2016
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,575
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,575
|
|
Paid in kind during the nine months ended September 30, 2015
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,250
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,250
|
|
Paid in kind during the nine months ended September 30, 2016
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,671
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,671
|
|
Paid in cash during the three months ended September 30, 2016
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
791
|
|
|
$
|
791
|
|
Paid in cash during the nine months ended September 30, 2016
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,399
|
|
|
$
|
1,399
|
|
Cumulative unpaid dividends at December 31, 2015
|
|
$
|
799,384
|
|
|
$
|
104,009
|
|
|
$
|
-
|
|
|
$
|
395,560
|
|
|
$
|
265,286
|
|
|
$
|
78
|
|
|
$
|
1,564,317
|
|
Cumulative unpaid dividends at September 30, 2016
|
|
$
|
1,153,171
|
|
|
$
|
154,156
|
|
|
$
|
-
|
|
|
$
|
557,393
|
|
|
$
|
457,357
|
|
|
$
|
860
|
|
|
$
|
2,322,937
|
|
GYROTRON TECHNOLOGY, INC.
NOTES TO THE FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)
The dividends accrue and accumulate whether or not they have been declared by the board of directors and whether or not there are profits or other funds legally available. As specified in the certificate of designation for each series, the Company may have the option to pay dividends in kind for a specified period of time.
For each series any holder can request on the date specified for that series that the Company repurchase 30 calendar days thereafter (the “Repurchase Date”), all shares of that series held by the holder for cash equal to the liquidation preference per share plus accrued and unpaid dividends as of the Repurchase Date. The Company has the option whether or not to agree to the repurchase. In the event the Company fails to repurchase, or payment of dividends of a series is a number of quarters in arrears specified for that series (either being a Default), the dividend rate on that series increases to 18%, and the majority holders of that series, voting together with the holders of any pari – passu series, have the right to elect the majority of the board of directors, so long as the dividends continue to be the specified number of quarters in arrears. For Series A-2, B, B-1, and B-2, in the event of a Default the conversion price (“Default Conversion Price”) for that series permanently decreases 15%.
The Company, at its option, may require conversion of all or any pro-rata portion of shares of a series into common stock at the conversion price if at any time i) the common stock is listed for trading on a national securities exchange, an inter-dealer automated quotation system, or over the counter bulletin board (or for the series A-2 and B-2 the “OTC Pinks”), ii) the Company shall have prepared and filed with the Securities and Exchange Commission a registration statement covering the shares of common stock to be issued upon due conversion of preferred stock, and such registration statement shall have been declared effective under the Securities Act of 1933, as amended, and continues to be effective, iii) during any preceding period of twenty consecutive trading days (while i) and ii) are fulfilled) the closing price equals or exceeds a specified percentage (“Mandatory conversion percentage”) of the conversion price, and iv) the Company is current on its dividends for that Series.
Registration Rights -
In connection with its stock subscription agreements, the Company has agreed, on various dates since December 2009, to pay the various subscribers, commencing a specified time after the subscription date, 1/2% of the aggregate purchase price of shares acquired monthly until (i) with respect to the common shares underlying the related preferred stock, either (x) the Company has prepared and filed a registration statement with the Securities and Exchange Commission which has been declared effective under the Securities Act or (y) the holder is then able to sell such shares under Rule 144 promulgated pursuant to the Securities Act (in certain agreements also with the condition that said sale can be made without volume restriction), and (ii) the Company has obtained a ticker symbol and common shares are eligible to trade, as specified in the particular subscription agreement, on the OTCBB or OTC PINKS. At September 30, 2016 and December 31, 2015, the estimated liability under these agreements amounted to $566,044 and $558,872, respectively, and the change in such estimated liability of $20,329 for the three months ended September 30, 2015, and $7,172 and $33,932 for the nine months ended September 30, 2016 and 2015, respectively are included as other expense in the accompanying statements of operations. The agreements provide for no limitation as to the maximum potential consideration to be transferred. At September 30, 2016 the aggregate investment for which the right to registration rights payments had commenced and not terminated was $1,016,435.
Warrants -
The warrants contain customary terms for the adjustment of their exercise price and/or the consideration issued upon exercise upon the occurrence of certain corporate events such as mergers, splits and dividends.
The proceeds of the preferred stock unit offerings are allocated between the preferred stock and the warrants based on the relative fair value of each instrument. The assumed value of the preferred stock is determined based on the fair value of the underlying common shares and the fair value of the warrants was valued using a management estimate verified using the Black-Scholes option pricing model. For the nine months ending September 30, 2016, $1,236 was recognized as additional paid-in capital allocable to such warrants and immediately accreted to Fair Value of Redeemable Convertible Preferred Stock.
Sale of Equity Securities -
During the nine months ending September 30, 2016, the Company sold 507 units consisting of 1 share of Series B-2 preferred and 50 warrants to purchase one share of common stock at $1.00 expiring December 15, 2016 at $30/unit.
NOTE 6. COMMON STOCK
At September 30, 2016 and December 31, 2015, there were 14,414,058 shares of the issuer's common stock issued and outstanding. A portion of these shares were issuable but had not been issued for administrative reasons. Accordingly, the presentation in these financial statements considers these shares as effectively issued.
GYROTRON TECHNOLOGY, INC.
NOTES TO THE FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)
The following is a summary of warrants outstanding and exercisable at September 30, 2016 and 2015 and activity during the nine months then ended:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
Warrants
|
|
|
Price
|
|
|
Warrants
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding January 1
|
|
|
2,064,825
|
|
|
$
|
.99
|
|
|
|
3,043,814
|
|
|
$
|
1.00
|
|
Issued during nine months ended September 30,
|
|
|
25,350
|
|
|
|
1.00
|
|
|
|
32,125
|
|
|
|
1.00
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Lapsed
|
|
|
(1,938,950
|
)
|
|
|
1.00
|
|
|
|
(1,044,864
|
)
|
|
|
1.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30,
|
|
|
151,225
|
|
|
|
0.90
|
|
|
|
2,031,075
|
|
|
$
|
0.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30,
|
|
|
151,225
|
|
|
$
|
0.90
|
|
|
|
2,031,075
|
|
|
$
|
0.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average months remaining
|
|
|
|
|
|
|
11.03
|
|
|
|
|
|
|
|
7.02
|
|
NOTE 7. - STOCK BASED COMPENSATION
During 2006, the Board of Directors authorized the creation of a pool of 1,200,000 stock options to purchase shares of the Company's common stock to officers and salaried employees of the Company, member of the Board of Directors, consultants, and any other key employees as determined by the Board of Directors as an incentive to remain in the service of the Company, enhance the long-term performance of the Company, and to acquire a proprietary interest in the success of the Company. Awards of these options shall be determined by the Board of Directors or an authorized committee thereof. The right to grant options under the plan expires in 2016.
In July 2014, the Company granted a director 60,000 five year options to purchase common stock at an exercise price of $0.725 per share, of which 12,000 options vested on the grant date, and 12,000 vested in each of October 2014, January 2015, April 2015 and July 2015. The value of the options was determined to be $16,962 using the Black Scholes pricing model. During the three and nine months ended September 30, 2015, $792 and $7,573, respectively, of that amount was recognized.
GYROTRON TECHNOLOGY, INC.
NOTES TO THE FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)
NOTE 8. - COMMITMENTS AND CONTINGENCIES
Leases -
The Company leased office and warehouse space under an operating lease which expired on July 31, 2016. In July 2016, the Company entered into a five year lease for the same space at a rate of $68,000 per year in rent and $31,600 per year in common area charges, included in rent expense
Rent expense for the three and nine months ended September 30, 2016 and the three and nine months ended September 30, 2015 amounted to $15,412 and $78,583, $31,392 and $90,584 respectively. At September 30, 2016 the aggregate future minimum lease payment under the non-cancelable operating lease was $481,400 with approximately $23,000 for the rest of 2016, $91,600 for the years ending December 31, 2017 through 2020 and $68,700 for the year ended December 31, 2021. The Company has made a $12,253 security deposit included within other assets in the accompanying balance sheets as of September 30, 2016 and December 31, 2015. An affiliate of a director is using a portion of the space on a temporary informal basis and reimbursing the Company $1,000 per month for such use, which is accounted for in the accompanying financial statements as a reduction in rent expense.
In July 2014, the Company entered into an agreement to lease a new gyrotron and associated equipment from a vendor pursuant to a capital lease. As amended in May 2016, the lease requires four payments aggregating $220,000, $40,000 of which was paid up-front and is included in machinery and equipment in the accompanying balance sheet as of December 31, 2015. An additional $45,000 was paid in July 2016, and $75,000 and $60,000, are due on January 31, 2017, and January 31, 2018, respectively. The lease contains a $1 bargain purchase option following the completion of payments made by the Company. As of September 30, 2016, on the accompanying balance sheet the gyrotron is included in machinery and equipment, and the remaining payment obligation is recorded as $75,000 in current portion of capital lease and $60,000 in other non-current liability.
In February 2015, the Company entered into an agreement to purchase a cryomagnet for a series of payments totaling $134,700 of which $40,410 was paid up front, $40,410 was paid in July 2016, $26,940 was paid in November 2016, and $26,940 will be due in May 2017. The two remaining payments are recorded in accounts payable as of September 30, 2016.
Claims -
The Company is subject to a claim arising in the normal course of business. In the opinion of management, the amount of the ultimate liability, if any, with respect this action will not have a material adverse effect on the financial position, results of operation or cash flow of the Company.
NOTE 9. – SUBSEQUENT EVENTS
See Note 4 regarding stockholder loans and advances subsequent to September 30, 2016, and Note 8 regarding the Company’s new office lease and payment on a purchase of a cryomagnet.