NOTES TO FINANCIAL STATEMENTS
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Continuance of Operations
Skyline Medical Inc. (the "Company") was incorporated under the laws of the
State of Minnesota in 2002. Effective August 6, 2013, the Company changed its name to Skyline Medical Inc. As of December 31, 2015,
the registrant had 208,259 shares of common stock, par value $.01 per share, outstanding, adjusted for a 1-for-75 reverse stock
split effective October 24, 2014, and then a 1-for-25 reverse stock split effective October 27, 2016. In this Report, all
numbers of shares and per share amounts, as appropriate, have been stated to reflect the both reverse stock splits. Pursuant to
an Agreement and Plan of Merger dated effective December 16, 2013, the Company merged with and into a Delaware corporation with
the same name that was its wholly-owned subsidiary, with such Delaware Corporation as the surviving corporation of the merger.
The Company has developed an environmentally safe system for the collection and disposal of infectious fluids that result from
surgical procedures and post-operative care. The Company also makes ongoing sales of our proprietary cleaning fluid and filters
to users of our systems. In April 2009, the Company received 510(k) clearance from the FDA to authorize the Company to market and
sell its STREAMWAY FMS products.
The accompanying financial statements have been prepared assuming the Company will continue
as a going concern. The Company has suffered recurring losses from operations and had a stockholders’ deficit until August
31, 2015 whereupon the Company closed its public offering of units of common stock, Series B Convertible Preferred Stock and Series
A Warrants (the “Units”). There remains though, substantial doubt about its ability to continue as a going concern.
The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Since inception to December 31, 2015, the Company raised approximately $22,732,961 in
equity, inclusive of $2,055,000 from a private placement of Series A Convertible Preferred Stock, $13,555,003 from the public offering
of Units and $5,685,000 in debt financing. See “Management’s Discussion and Analysis of Financial Condition and Results
of Operations - Liquidity and Capital Resources.”
Recent Accounting Developments
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU
2014-09,
Revenue from Contracts with Customers
and created a new topic in the FASB Accounting Standards Codification ("ASC"),
Topic 606. The new standard provides a single comprehensive revenue recognition framework for all entities and supersedes nearly
all existing U.S. GAAP revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model
is that an entity should recognize revenue in a manner that depicts the transfer of promised goods or services to customers in
an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The
standard is designed to create greater comparability for financial statement users across industries and also requires enhanced
disclosures. The amendments are effective for annual reporting periods beginning after December 15, 2017, including interim periods
within that reporting period. Early application is not permitted. We are currently evaluating the impact this guidance may have
on our financial statements and related disclosures.
In June 2014, the FASB issued ASU 2014-12,
"Compensation - Stock Compensation"
providing explicit guidance on how to account for share-based payments granted to employees in which the terms of the award
provide that a performance target that affects vesting could be achieved after the requisite service period. The amendments in
this Update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015.
Early adoption is permitted. We are currently evaluating the impact this guidance may have on our financial statements.
In August 2014, the FASB issued ASU 2014-15,
Disclosure of Uncertainties about an
Entity’s Ability to Continue as a Going Concern
. The new standard requires management to assess an entity’s ability
to continue as a going concern, and to provide related footnote disclosures in certain circumstances. The standard is effective
for public entities for annual and interim periods beginning after December 15, 2016, with early adoption permitted. We are currently
evaluating the impact this guidance may have on our financial statements.
In April 2015, the FASB issued ASU 2015-03,
Simplifying the Presentation
of Debt Issuance Costs
. Debt issuance costs related to a recognized debt liability will be presented on the balance sheet as
a direct deduction from the debt liability, similar to the presentation of debt discounts, rather than as an asset. Amortization
of these costs will continue to be reported as interest expense. ASU 2015-03 is effective for annual and interim reporting periods
beginning after December 15, 2015. Early adoption is permitted. The adoption of this ASU is not expected to have an impact on our
financial statements.
In July 2015, the FASB issued ASU No. 2015-11
, Inventory
(Topic 330): Simplifying the Measurement of Inventory
, requiring that inventory be measured at the lower of cost and net realizable
value. Net realizable value is defined as estimated selling price in the ordinary course of business, less reasonably predictable
costs of completion, disposal and transportation. This ASU is effective within annual periods beginning on or after December 15,
2016, including interim periods within that reporting period. We are currently evaluating the impact this guidance may have on
our financial statements.
In November 2015, the FASB issued ASU 2015-17,
“Income Taxes
(Topic 740)”
providing guidance on the balance sheet classification of deferred taxes. The guidance requires that deferred
tax assets and liabilities to be classified as noncurrent in the Balance Sheet. The guidance is effective for fiscal years beginning
after December 15, 2016 and for interim periods within those fiscal years, with early adoption permitted. We are currently evaluating
the impact this guidance may have on our financial statements.
We reviewed all other significant newly issued accounting pronouncements
and determined they are either not applicable to our business or that no material effect is expected on our financial position
and results of our operations.
Valuation of Intangible Assets
We review identifiable intangible assets for impairment in accordance with ASC 350 —
Intangibles —Goodwill and Other, whenever events or changes in circumstances indicate the carrying amount may not be recoverable.
Our intangible assets are currently solely the costs of obtaining trademarks and patents. Events or changes in circumstances that
indicate the carrying amount may not be recoverable include, but are not limited to, a significant change in the medical device
marketplace and a significant adverse change in the business climate in which we operate. If such events or changes in circumstances
are present, the undiscounted cash flows method is used to determine whether the intangible asset is impaired. Cash flows would
include the estimated terminal value of the asset and exclude any interest charges. If the carrying value of the asset exceeds
the undiscounted cash flows over the estimated remaining life of the asset, the asset is considered impaired, and the impairment
is measured by reducing the carrying value of the asset to its fair value using the discounted cash flows method. The discount
rate utilized is based on management’s best estimate of the related risks and return at the time the impairment assessment
is made.
Accounting Policies and Estimates
The presentation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make 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. Actual results could differ from those estimates.
Presentation of Taxes Collected from Customers
Sales taxes are imposed on the Company’s sales to nonexempt customers. The Company
collects the taxes from customers and remits the entire amounts to the governmental authorities. The Company’s accounting
policy is to exclude the taxes collected and remitted from revenues and expenses.
Shipping and Handling
Shipping and handling charges billed to customers are recorded as revenue. Shipping and
handling costs are recorded within cost of goods sold on the statement of operations.
Advertising
Advertising costs are expensed as incurred. Advertising expenses were $8,220 in 2015,
and $19,394 in 2014.
Research and Development
Research and development costs are charged to operations as incurred. Research
and development costs were approximately $261,000 and $394,000 for 2015 and 2014, respectively.
Revenue Recognition
The Company recognizes revenue in accordance with the SEC’s Staff Accounting Bulletin
Topic 13 Revenue Recognition and ASC 605- Revenue Recognition.
Revenue is recognized when persuasive evidence of an arrangement exists, delivery has
occurred, the fee is fixed and determinable and collectability is probable. Delivery is considered to have occurred upon either
shipment of the product or arrival at its destination based on the shipping terms of the transaction. The Company’s standard
terms specify that shipment is FOB Skyline and the Company will, therefore, recognize revenue upon shipment in most cases. This
revenue recognition policy applies to shipments of the STREAMWAY FMS units as well as shipments of cleaning solution kits. When
these conditions are satisfied, the Company recognizes gross product revenue, which is the price it charges generally to its customers
for a particular product. Under the Company’s standard terms and conditions, there is no provision for installation or acceptance
of the product to take place prior to the obligation of the customer. The customer’s right of return is limited only to the
Company’s standard one-year warranty whereby the Company replaces or repairs, at its option, and it would be rare that the
STREAMWAY FMS unit or significant quantities of cleaning solution kits may be returned. Additionally, since the Company buys both
the STREAMWAY FMS units and cleaning solution kits from “turnkey” suppliers, the Company would have the right to replacements
from the suppliers if this situation should occur.
Receivables
Receivables are reported at the amount the Company expects to collect on balances outstanding.
The Company provides for probable uncollectible amounts through charges to earnings and credits to the valuation based on management’s
assessment of the current status of individual accounts, changes to the valuation allowance have not been material to the financial
statements.
Inventories
Inventories are stated at the lower of cost or market, with cost determined on a first-in,
first-out basis. Inventory balances are as follows:
|
|
December 31,
2015
|
|
December 31,
2014
|
Finished goods
|
|
$
|
30,237
|
|
|
$
|
88,362
|
|
Raw materials
|
|
|
162,623
|
|
|
|
237,556
|
|
Work-In-Process
|
|
|
38,880
|
|
|
|
41,449
|
|
Total
|
|
$
|
231,740
|
|
|
$
|
367,367
|
|
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization.
Depreciation of property and equipment is computed using the straight-line method over the estimated useful lives of the respective
assets. Estimated useful asset life by classification is as follows:
|
|
Years
|
Computers and office equipment
|
|
|
3
|
-
|
7
|
|
Leasehold improvements
|
|
|
|
5
|
|
|
Manufacturing Tooling
|
|
|
3
|
-
|
7
|
|
Demo Equipment
|
|
|
|
3
|
|
|
The Company’s investment in Fixed Assets consists of the following:
|
|
December 31,
2015
|
|
December 31,
2014
|
Computers and office equipment
|
|
$
|
153,553
|
|
|
$
|
123,708
|
|
Leasehold Improvements
|
|
|
23,874
|
|
|
|
23,874
|
|
Manufacturing Tooling
|
|
|
97,288
|
|
|
|
97,288
|
|
Demo Equipment
|
|
|
8,962
|
|
|
|
30,576
|
|
Total
|
|
|
283,677
|
|
|
|
275,446
|
|
Less: Accumulated Depreciation
|
|
|
144,079
|
|
|
|
78,967
|
|
Total Fixed Assets, Net
|
|
$
|
139,598
|
|
|
$
|
196,479
|
|
Upon retirement or sale, the cost and related accumulated depreciation are removed from
the balance sheet and the resulting gain or loss is reflected in operations. Maintenance and repairs are charged to operations
as incurred.
Intangible Assets
Intangible assets consist of trademarks and patent costs. These assets are not subject
to amortization until the property patented is in production. The assets are reviewed for impairment annually, and impairment losses,
if any, are charged to operations when identified.
Income Taxes
The Company accounts for income taxes in accordance with ASC 740-
Income Taxes (“ASC
740”)
. Under ASC 740, deferred tax assets and liabilities are determined based on the differences between the financial
reporting and tax bases of assets and liabilities and net operating loss and credit carryforwards using enacted tax rates in effect
for the year in which the differences are expected to impact taxable income. Valuation allowances are established when necessary
to reduce deferred tax assets to the amounts expected to be realized.
The Company reviews income tax positions expected to be taken in income tax returns to
determine if there are any income tax uncertainties. The Company recognizes tax benefits from uncertain tax positions only if it
is more likely than not that the tax positions will be sustained on examination by taxing authorities, based on technical merits
of the positions. The Company has identified no income tax uncertainties.
Tax years subsequent to 2012 remain open to examination by federal and state tax authorities.
Patents and Intellectual Property
On January 25th, 2014 the Company filed a non-provisional PCT Application No. PCT/US2014/013081
claiming priority from the U.S. Provisional Patent Application, number 61756763 which was filed one year earlier on January 25th,
2013. The Patent Cooperation Treaty (“PCT”) allows an applicant to file a single patent application to seek patent
protection for an invention simultaneously in each of the 148 countries of the PCT, including the United States. By filing this
single “international” patent application through the PCT, it is easier and more cost effective than filing separate
applications directly with each national or regional patent office in which patent protection is desired.
Our PCT patent application is for the new model of the surgical fluid waste management
system. We obtained a favorable International Search Report from the PCT searching authority indicating that the claims in our
PCT application are patentable (i.e., novel and non-obvious) over the cited prior art. A feature claimed in the PCT application
is the ability to maintain continuous suction to the surgical field while measuring, recording and evacuating fluid to the facilities
sewer drainage system. This provides for continuous operation of the STREAMWAY System unit in suctioning waste fluids, which means
that suction is not interrupted during a surgical operation, for example, to empty a fluid collection container or otherwise dispose
of the collected fluid.
The Company holds the following granted patents in the United States and a pending application
in the United States on its earlier models: US7469727, US8123731 and U.S. Publication No. US20090216205 (collectively, the “Patents”).
These Patents will begin to expire on August 8, 2023.
In July 2015, Skyline Medical filed an international (PCT) patent application for its
fluid waste collection system and received a favorable determination by the International Searching Authority finding that all
of the claims satisfy the requirements for novelty, inventive step and industrial applicability. Skyline anticipates that
the favorable International Search Report will result in allowance of its various national applications.
Credit Risk
Financial instruments which potentially subject the Company to concentrations of credit
risk consist principally of cash. The Company places its cash with high credit quality financial institutions and, by policy, generally
limits the amount of credit exposure to any one financial institution. The Company had a credit risk concentration as a result
of depositing $4,621,764 of funds in excess of insurance limits in a single bank.
Product Warranty Costs
In 2015, the Company incurred approximately $56,201 in current warranty costs.
Segments
The Company operates in one segment for the sale of its medical device and consumable
products. Substantially all of the Company’s assets, revenues, and expenses for 2015 and 2014 were located at or derived
from operations in the United States. There were no revenues from sales outside of the United States.
Risks and Uncertainties
The Company is subject to risks common to companies in the medical device industry, including,
but not limited to, development by the Company or its competitors of new technological innovations, dependence on key personnel,
protection of proprietary technology, and compliance with regulations of the FDA and other governmental agencies.
NOTE 2 – DEVELOPMENT STAGE OPERATIONS
The Company was formed April 23, 2002. Since inception through December 31, 2015, 208,259
shares of common stock have been issued between par value and $3,131.25. Operations since incorporation have primarily been
devoted to raising capital, obtaining financing, development of the Company’s product, administrative services, customer
acceptance and sales and marketing strategies.
NOTE 3 – STOCKHOLDERS’ EQUITY (DEFICIT), STOCK OPTIONS AND WARRANTS
Public Offering of Units
On August 31, 2015 (the “Issuance Date”), the Company completed a public
offering (the “Offering”) of 1,666,667 Units (the “Units”) as described below. The public offering price
in the Offering was $9.00 per Unit, and the purchase price for the underwriter of the Offering (the “Underwriter”)
was $8.28 per Unit, resulting in an underwriting discount and commission of $0.72 (or 8.00%) per Unit and total net proceeds to
the Company before expenses of $13.8 million. The Company had granted the Underwriter an option for a period of 45 days to purchase
up to an additional 250,000 Units solely to cover over-allotments. The Underwriter chose not to purchase any additional Units under
the over-allotment option. The Company paid to the Underwriter a non-accountable expense allowance equal to 1% of the gross proceeds
of the Offering and agreed to reimburse expenses incurred by the Underwriter up to $70,000.
On August 31, 2015, as a result of the communication of the Offering and the issuance
of the 228,343 Exchange Units in the Unit Exchange described below, the Company issued a total of 1,895,010 Units, comprised of
a total of aggregate of 75,800 shares of Common Stock, 1,895,010 shares of Series B Preferred Stock and 7,580,040 Series A Warrants.
Each Unit consisted of one share of common stock, par value $0.01 per share (the “Common
Stock”), one share of Series B Convertible Preferred Stock (“Series B Preferred Stock”) and four Series A Warrants.
The shares of Common Stock, the shares of Series B Preferred Stock and the Series A Warrants that comprise the Units automatically
separated on February 29, 2016.
For a description of the terms of the Series B Convertible Preferred Stock included within
the Units, see “Certificate of Designation for Series B Preferred Stock” below. For a description of the terms of the
Series A Warrants included within the Units, see “Series A Warrants” below.
Series A Warrants
. The Series A Warrants separated from the Series B Convertible
Preferred Stock and the Common Stock included within the Units as described above and are currently exercisable. The Series A Warrants
will terminate on August 31, 2020. Each Series A Warrant is exercisable into one share of Common Stock at an initial cash exercise
price of $4.95 per share. The exercise price and number of shares of common stock issuable upon exercise is subject to appropriate
adjustment in the event of stock dividends, stock splits, reorganizations or similar events affecting the Common Stock and the
exercise price.
Holders may exercise Series A Warrants by paying the exercise price in cash or,
in lieu of payment of the exercise price in cash, by electing to receive a number of shares of Common Stock equal to the Black
Scholes Value (as defined below) based upon the number of shares the holder elects to exercise. The number of shares of Common
Stock to be delivered will be determined according to the following formula, referred to as the “Cashless Exercise.”
Total Shares = (A x B) / C
Where:
|
·
|
Total Shares is the number of shares of Common Stock to be issued upon a Cashless Exercise.
|
|
·
|
A is the total number of shares with respect to which the Series A Warrant is then being exercised.
|
|
·
|
B is the Black Scholes Value (as defined below).
|
|
·
|
C is the closing bid price of the Common Stock as of two trading days prior to the time of such exercise, provided that in no event may “C” be less than $10.75 per share (subject to appropriate adjustment in the event of stock dividends, stock splits or similar events affecting the Common Stock).
|
The Black Scholes Value (as defined above) as of March 11, 2016 was $108.115, and
the closing bid price of Common Stock as of March 11, 2016, was $4.50. Therefore, an exercise on that date would have resulted
in the issuance of 0.40 shares of Common Stock for each Series A Warrant. Approximately 3,390,935 Series A Warrants have been exercised
in cashless exercises as of March 11, 2016, resulting in the issuance of 1,362,147 shares of Common Stock. If all of the remaining
4,189,105 Series A Warrants that were issued as part of the Units sold in the Offering and part of the Units issued on August 31,
2015 were exercised pursuant to a cashless exercise and the closing bid price of our common stock as of the two trading days prior
to the time of such exercise was $10.75 per share or less and the Black Scholes Value were $4.3246 (the Black Scholes Value as
of March 11, 2016), then a total of approximately 1,685,229 shares of our common stock would be issued to the holders of such Series
A Warrants. The potential for such dilutive exercise of the Series A Warrants may depress the price of our common stock regardless
of the Company’s business performance, and could encourage short selling by market participants, especially if the trading
price of our common stock begins to decrease.
The Series A Warrants will not be exercisable or exchangeable by the holder of such
warrants to the extent (and only to the extent) that the holder or any of its affiliates would beneficially own in excess of 4.99%
of the common stock of the Company, determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended,
and the regulations promulgated thereunder.
In addition to (but not duplicative of) the adjustments to the exercise price and
the number of shares of Common Stock issuable upon exercise of the Series A Warrants in the event of stock dividends, stock splits,
reorganizations or similar events, the Series A Warrants provide for certain adjustments if the Company, at any time prior to the
three year anniversary of the Issuance Date, (1) declares or makes any dividend or other distribution of its assets (or rights
to acquire its assets) to all or substantially all of the holders of shares of Common Stock at any time after the Issuance Date,
or (2) grants, issues or sells any options, convertible securities or rights to purchase stock, warrants, securities or other property
pro rata to all or substantially all of the record holders of any class of shares of Common Stock. Further, if at any time
a Series A Warrant is outstanding, the Company consummates any fundamental transaction, as described in the Series A Warrants and
generally including any consolidation or merger into another corporation, or the sale of all or substantially all of our assets,
or other transaction in which the Common Stock is converted into or exchanged for other securities or other consideration, the
holder of any Series A Warrants will thereafter receive, the securities or other consideration to which a holder or the number
of shares of Common Stock then deliverable upon the exercise or exchange of such Series A Warrants would have been entitled upon
such consolidation or merger or other transaction.
Unit Purchase Option.
The Company, in connection with the Offering, entered
into a Unit Purchase Option Agreement, dated as of August 31, 2015 (the “Unit Purchase Option”), pursuant to which
the Company granted the Underwriter the right to purchase from the Company up to a number of Units equal to 5% of the Units sold
in the Offering (or up to 83,333 Units) at an exercise price equal to 125% of the public offering price of the Units in the Offering,
or $11.25 per Unit. The Unit Purchase Option expires on August 25, 2018.
Series B Preferred Stock.
Each share of Series B Preferred Stock is convertible
into one share of Common Stock (subject to appropriate adjustment in the event of stock dividends, stock splits, reorganizations
or similar events) on the six month anniversary of the Issuance Date or on the date of an Early Separation. In addition, the Series
B Preferred Stock will automatically convert into shares of common stock upon the occurrence of a fundamental transaction, as described
in the certificate of designations for the Series B Preferred Stock but including mergers, sales of the company’s assets,
changes in control and similar transactions. The Series B Preferred Stock is not convertible by the holder of such preferred stock
to the extent (and only to the extent that the holder or any of its affiliates would beneficially own in excess of 4.99% of the
common stock of the Company. The Series B Preferred Stock has no voting rights, except for the right to approve certain amendments
to the certificate of designations or similar actions. With respect to payment of dividends and distribution of assets upon liquidation
or dissolution or winding up of the Company, the Series B Preferred Stock shall rank equal to the common stock of the Company.
No sinking fund has been established for the retirement or redemption of the Series B Preferred Stock.
Unit Exchange.
On February 4, 2014, the Company raised $2,055,000 in gross
proceeds from a private placement of 20,550 shares of Series A Convertible Preferred Stock, par value $0.01, with a stated value
of $100 per share (the “Series A Preferred Shares”) and warrants to purchase shares of the Company’s common stock.
The Series A Preferred Shares and warrants were sold to investors pursuant to a Securities Purchase Agreement, dated as of February
4, 2014. On August 31, 2015, the Company issued a total of 228,343 Units (the “Exchange Units”) in exchange for the
outstanding Series A Preferred Stock which were then cancelled pursuant to an agreement with the holders of the Series A Preferred
Shares. The warrants that were issued in connection with the issuance of the Series A Preferred Shares remained outstanding; however,
the warrant amounts were reduced so that the warrants are exercisable into an aggregate of 3,391 shares of the Company’s
common stock. The Exchange Units were exempt from registration under Section 3(a)(9) of the Securities Act. On August 31, 2015,
the Company filed a termination certificate with the Delaware Secretary of State. Following that date there were no shares of Series
A Preferred Stock outstanding, and the previously authorized shares of Series A Preferred Stock resumed the status of authorized
but unissued and undesignated shares of preferred stock of the Company.
Redemption of Convertible Notes.
In connection with the closing of the Offering,
$933,074 aggregate principal amount of Convertible Notes plus interest and a 40% redeemable premium were redeemed for total payments
of $1,548,792. See Note 4. Of this amount, approximately $167,031 was paid to its affiliates in redemption of their Convertible
Notes.
Equity Incentive Plan
The Company has an equity incentive plan, which allows issuance of incentive and non-qualified
stock options to employees, directors and consultants of the Company, where permitted under the plan. The exercise price for each
stock option is determined by the Board of Directors. Vesting requirements are determined by the Board of Directors when granted
and currently range from immediate to three years. Options under this plan have terms ranging from three to ten years.
Accounting for share-based payment
The Company has adopted ASC 718-
Compensation-Stock Compensation
("ASC 718").
Under ASC 718 stock-based employee compensation cost is recognized using the fair value based method for all new awards granted
after January 1, 2006 and unvested awards outstanding at January 1, 2006. Compensation costs for unvested stock options and non-vested
awards that were outstanding at January 1, 2006, are being recognized over the requisite service period based on the grant-date
fair value of those options and awards, using a straight-line method. We elected the modified-prospective method under which prior
periods are not retroactively restated.
ASC 718 requires companies to estimate the fair value of stock-based payment awards on
the date of grant using an option-pricing model or other acceptable means. The Company uses the Black-Scholes option valuation
model which requires the input of significant assumptions including an estimate of the average period of time employees will retain
vested stock options before exercising them, the estimated volatility of the Company's common stock price over the expected term,
the number of options that will ultimately be forfeited before completing vesting requirements, the expected dividend rate and
the risk-free interest rate. Changes in the assumptions can materially affect the estimate of fair value of stock-based compensation
and, consequently, the related expense recognized. The assumptions the Company uses in calculating the fair value of stock-based
payment awards represent the Company's best estimates, which involve inherent uncertainties and the application of management's
judgment. As a result, if factors change and the Company uses different assumptions, the Company's equity-based compensation expense
could be materially different in the future.
Since the Company's common stock has no significant public trading history, and the Company
has experienced no significant option exercises in its history, the Company is required to take an alternative approach to estimating
future volatility and estimated life and the future results could vary significantly from the Company's estimates. The Company
compiled historical volatilities over a period of 2 to 7 years of 15 small-cap medical companies traded on major exchanges and
10 mid-range medical companies on the OTC Bulletin Board and combined the results using a weighted average approach. In the case
of ordinary options to employees the Company determined the expected life to be the midpoint between the vesting term and the legal
term. In the case of options or warrants granted to non-employees, the Company estimated the life to be the legal term unless there
was a compelling reason to make it shorter.
When an option or warrant is granted in place of cash compensation for services, the
Company deems the value of the service rendered to be the value of the option or warrant. In most cases, however, an option or
warrant is granted in addition to other forms of compensation and its separate value is difficult to determine without utilizing
an option pricing model. For that reason the Company also uses the Black-Scholes option-pricing model to value options and warrants
granted to non-employees, which requires the input of significant assumptions including an estimate of the average period the investors
or consultants will retain vested stock options and warrants before exercising them, the estimated volatility of the Company's
common stock price over the expected term, the number of options and warrants that will ultimately be forfeited before completing
vesting requirements, the expected dividend rate and the risk-free interest rate. Changes in the assumptions can materially affect
the estimate of fair value of stock-based consulting and/or compensation and, consequently, the related expense recognized.
Since the Company has limited trading history in its stock and no first-hand experience
with how its investors and consultants have acted in similar circumstances, the assumptions the Company uses in calculating the
fair value of stock-based payment awards represent its best estimates, which involve inherent uncertainties and the application
of management's judgment. As a result, if factors change and the Company uses different assumptions, the Company's equity-based
consulting and interest expense could be materially different in the future.
Valuation and accounting for options and warrants
The Company determines the grant date fair value of options and warrants using a Black-Scholes
option valuation model based upon assumptions regarding risk-free interest rate, expected dividend rate, volatility and estimated
term.
In January 2014 the Company issued 174 shares of common stock to the former CEO at $31.25
per share upon his exercising options.
In January through March 2014, 9 warrant holders exercised warrants through a cashless
exercise for a total of 618 shares of common stock.
In January and February 2014 the Company issued warrants to purchase 862 shares pursuant
to a February 4, 2014 private placement whereby the Company issued 20,550 shares of Series A Convertible Preferred Stock raising
gross proceeds of $2,055,000. The warrants are at an exercise price of $609.50.
In February 2014 the Company issued a warrant to purchase 60 shares of common stock at
an exercise price of $506.25 to a major shareholder Dr. Samuel Herschkowitz. The warrant is in consideration for a bridge loan
extended in December 2013 that has been paid in February 2014.
On March 31, 2014, the Company issued dividends to the Purchasers of the Preferred Shares
as described above. The dividends are at an annual rate of 6% of the stated value of the Preferred Shares paid on a quarterly basis
in the form of common stock per a stipulated $487.50 per share. As a result 39 shares of common stock were issued to 16 holders
of Preferred Shares.
In March 2014, the Company issued 178 shares of common stock to a warrant holder for
a partial cash exercise at $281.25 per share; issued 134 shares to the holder via the cashless exercise of the remainder of the
warrant.
In June 2014, the Company issued 149 shares of common stock to a warrant holder exercising
cashless warrants.
On June 30, 2014, the Company issued dividends to the Purchasers of the Preferred Shares
as described above. The dividends are at an annual rate of 6% of the stated value of the Preferred Shares paid on a quarterly basis
in the form of common stock per a stipulated $487.50 per share. As a result 63 shares of common stock were issued to 16 holders
of Preferred Shares.
On June 30, 2014, the Company issued a warrant to purchase 218 shares of common stock
at an exercise price of $309.50 to SOK Partners, LLC, in consideration for a bridge loan in the form of convertible notes. On September
9, 2014 the Resale Registration Statement went into effect. The convertible note agreement provided an immediate approximately
11% reduction to the warrant agreement. Therefore, the warrant has been adjusted to purchase 194 shares of common stock at an exercise
price of $309.50 to SOK Partners, LLC in consideration for a bridge loan.
In July 2014, the Company issued warrants to purchase 1,160 shares of common stock at
an exercise price of $309.50 to two lenders in consideration for a bridge loan in the form of convertible notes. The shares above
reflect approximately an 11% reduction resulting from the Resale Registration Statement that went effective September 9, 2014.
In August 2014, the Company issued warrants to purchase 2,462 of common stock at an exercise
price of $609.50 to the Purchasers of the Preferred Shares. The Securities Purchase Agreement with the Preferred Shareholders stipulated
that if the Company was not listed on either the NASDAQ Stock Market, the New York Stock Exchange or the NYSE MKT within 180 days
of closing the agreement then warrants to purchase the above additional shares would be issued in aggregate to the Preferred Shareholders.
In August and September 2014, the Company issued warrants to purchase 1,498 shares of
common stock at an exercise price of $309.50 to four lenders in consideration for a bridge loan in the form of convertible notes.
The shares above reflect the approximate 11% reduction resulting from the Resale Registration Statement that went effective September
9, 2014.
On September 30, 2014, the Company issued dividends to the Purchasers of the Preferred
Shares as described above. The dividends are at an annual rate of 6% of the stated value of the Preferred Shares paid on a quarterly
basis in the form of common stock per a stipulated $487.50 per share. As a result 63 shares of common stock were issued to 16 holders
of Preferred Shares.
In November 2014, the Company issued 548 shares of common stock, par value $0.01, in
escrow for debt settlement.
On December 31, 2014, the Company issued dividends to the Purchasers of the Preferred
Shares as described above. The dividends are at an annual rate of 6% of the stated value of the Preferred Shares paid on a quarterly
basis in the form of common stock per a stipulated $487.50 per share. As a result 63 shares of common stock were issued to 16 holders
of Preferred Shares.
For grants of stock options and warrants in 2014 the Company used a 1.44% to 2.75% risk-free
interest rate, 0% dividend rate, 59% or 66% volatility and estimated terms of 5 or 10 years. Value computed using these assumptions
ranged from $80.02 to $347.99 per share.
In January 2015, the Company issued a dividend adjustment to the Purchasers of the Preferred
Shares as described above. Certain previous dividends paid were calculated with an exercise price of $487.50 per share, but should
have been calculated at $243.75 per share. As a result 125 shares of common stock were issued to 16 holders of Preferred Shares.
On March 31, 2015, the Company issued dividends to the Purchasers of the Preferred Shares
as described above. The dividends are at an annual rate of 6% of the stated value of the Preferred Shares paid on a quarterly basis
in the form of common stock per a stipulated $243.75 per share. As a result 125 shares of common stock were issued to 16 holders
of Preferred Shares.
On June 30, 2015, the Company issued dividends to Purchases of the Preferred Shares as
described above. The dividends are at an annual rate of 6% of the stated value of the Preferred Shares paid on a quarterly basis
in the form of common stock per a stipulated $243.75 per share. As a result 125 shares of common stock were issued to 16 holders
of Preferred Shares.
For grants of stock options and warrants in 2015 the Company used a 1.63% to 2.35% risk-free
interest rate, 0% dividend rate, 59% to 66% volatility and estimated terms of 5 to 10 years. Value computed using these assumptions
ranged from $6.88 to $139.24 per share.
The following summarizes transactions for stock options and warrants for the periods
indicated:
|
|
Stock Options
|
|
Warrants
|
|
|
Number of
Shares
|
|
Average
Exercise
Price
|
|
Number of
Shares
|
|
Average
Exercise
Price
|
Outstanding at December 31, 2013
|
|
|
15,430
|
|
|
$
|
168.75
|
|
|
|
18,477
|
|
|
$
|
262.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
3,028
|
|
|
|
203.00
|
|
|
|
6,455
|
|
|
|
95.25
|
|
Expired
|
|
|
(316
|
)
|
|
|
589.50
|
|
|
|
(3,275
|
)
|
|
|
338.50
|
|
Exercised
|
|
|
(198
|
)
|
|
|
44.00
|
|
|
|
(1,629
|
)
|
|
|
209.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2014
|
|
|
17,944
|
|
|
$
|
187.75
|
|
|
|
20,028
|
|
|
$
|
198.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
14,171
|
|
|
|
69.00
|
|
|
|
303,269
|
|
|
|
123.75
|
|
Cancelled
|
|
|
(766
|
)
|
|
|
293.25
|
|
|
|
(79
|
)
|
|
|
283.50
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
(120
|
)
|
|
|
123.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
|
31,349
|
|
|
$
|
133.25
|
|
|
|
323,098
|
|
|
$
|
128.50
|
|
At December 31, 2015, 31,229 stock options are fully vested and currently exercisable
with a weighted average exercise price of $132.25 and a weighted average remaining term of 8.17 years. There are 323,098 warrants
that are fully vested and exercisable. Stock-based compensation recognized in 2015 and 2014 was $871,877 and $723,367, respectively.
The Company has $32,682 of unrecognized compensation expense related to non-vested stock options that are expected to be recognized
over the next 2 months.
The following summarizes the status of options and warrants outstanding at December 31,
2015:
Range of Exercise Prices
|
|
Shares
|
|
Weighted
Average
Remaining
Life
|
Options:
|
|
|
|
|
|
|
|
|
$18.75
|
|
|
293
|
|
|
|
5.52
|
|
$65.75
|
|
|
10,019
|
|
|
|
9.81
|
|
$73.50
|
|
|
1,225
|
|
|
|
10.01
|
|
$77.50
|
|
|
2,387
|
|
|
|
9.50
|
|
$80.25
|
|
|
250
|
|
|
|
9.76
|
|
$86.25
|
|
|
289
|
|
|
|
9.25
|
|
$121.88
|
|
|
6
|
|
|
|
7.20
|
|
$131.25
|
|
|
82
|
|
|
|
6.69
|
|
$140.63
|
|
|
7,679
|
|
|
|
7.21
|
|
$148.13
|
|
|
929
|
|
|
|
7.22
|
|
$150.00
|
|
|
4,959
|
|
|
|
6.63
|
|
$162.50
|
|
|
153
|
|
|
|
9.01
|
|
$206.25
|
|
|
145
|
|
|
|
8.76
|
|
$248.44
|
|
|
120
|
|
|
|
7.54
|
|
$262.50
|
|
|
130
|
|
|
|
7.54
|
|
$281.25
|
|
|
546
|
|
|
|
7.09
|
|
$318.75
|
|
|
3
|
|
|
|
7.36
|
|
$346.88
|
|
|
87
|
|
|
|
8.25
|
|
$431.25
|
|
|
1,610
|
|
|
|
8.19
|
|
$468.75
|
|
|
134
|
|
|
|
8.15
|
|
$506.25
|
|
|
198
|
|
|
|
8.01
|
|
$543.75
|
|
|
54
|
|
|
|
7.77
|
|
$596.25
|
|
|
51
|
|
|
|
7.75
|
|
Total
|
|
|
31,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants:
|
|
|
|
|
|
|
|
|
$123.75
|
|
|
303,081
|
|
|
|
4.67
|
|
$150.00
|
|
|
4,114
|
|
|
|
2.20
|
|
$225.00
|
|
|
107
|
|
|
|
2.07
|
|
$243.75
|
|
|
2,529
|
|
|
|
3.59
|
|
$281.25
|
|
|
8,152
|
|
|
|
2.02
|
|
$309.38
|
|
|
2,850
|
|
|
|
3.61
|
|
$309.50
|
|
|
222
|
|
|
|
3.85
|
|
$337.50
|
|
|
178
|
|
|
|
2.47
|
|
$371.25
|
|
|
944
|
|
|
|
2.41
|
|
$506.25
|
|
|
59
|
|
|
|
3.13
|
|
$609.38
|
|
|
861
|
|
|
|
3.10
|
|
Total
|
|
|
323,098
|
|
|
|
|
|
Stock options and warrants expire on various dates from June 2017 to December 2025.
On July 24, 2015, an amendment to the Certificate of Incorporation became effective,
pursuant to which the authorized common stock was increased to 4,000,000 shares of common stock and the authorized preferred stock
was increased to 20,000,000 shares.
Stock Options and Warrants Granted by the Company
The following table is the listing of stock options and warrants as of December 31, 2015
by year of grant:
Stock Options:
Year
|
|
Shares
|
|
Price
|
2011
|
|
|
467
|
|
|
|
|
18.75
|
|
|
2012
|
|
|
5,041
|
|
|
|
131.25
|
–
|
150.00
|
|
2013
|
|
|
9,310
|
|
|
|
121.88
|
–
|
596.25
|
|
2014
|
|
|
2,361
|
|
|
|
162.50
|
–
|
468.75
|
|
2015
|
|
|
14,170
|
|
|
|
65.75
|
–
|
86.25
|
|
Total
|
|
|
31,349
|
|
|
$
|
18.75
|
–
|
596.25
|
|
Warrants:
Year
|
|
Shares
|
|
Price
|
2012
|
|
|
2,792
|
|
|
|
281.25
|
–
|
375.00
|
|
2013
|
|
|
10,703
|
|
|
|
150.00
|
–
|
371.25
|
|
2014
|
|
|
6,455
|
|
|
|
309.38
|
–
|
609.38
|
|
2015
|
|
|
303,148
|
|
|
|
|
123.75
|
|
|
Total
|
|
|
323,098
|
|
|
$
|
123.75
|
–
|
609.38
|
|
NOTE 4 – SHORT-TERM NOTES PAYABLE
From July through September 2014, we entered into a series of securities purchase agreements
pursuant to which we issued approximately $1.8 million original principal amount (subsequently reduced to approximately $1.6 million
aggregate principal amount in accordance with their terms) of convertible promissory notes (the “2014 Convertible Notes”)
and warrants exercisable for shares of our common stock for an aggregate purchase price of $1,475,000. Of this amount, we issued
to SOK Partners, LLC, an affiliate of the Company, $122,196 original principal amount of the 2014 Convertible Notes and warrants
exercisable for 218 shares of our common stock for an aggregate purchase price of $100,000. In April and May 2015, we issued and
sold to a private investor additional Convertible Notes in an aggregate original principal amount of $275,000 for an aggregate
purchase price of $250,000, containing terms substantially similar to the 2014 Convertible Notes (the “2015 Convertible Notes”
and, together with the 2014 Convertible Notes, the “Convertible Notes”). No warrants were issued with the 2015 Convertible
Notes.
Under a provision in the existing agreements, upon effectiveness of a resale registration
statement covering certain shares, on September 9, 2014, the principal amount of the notes was reduced by 11%, to $1,603,260 and
the number of Warrants was reduced by 11%, to 2,851 shares.
As of June 30, 2015, $927,663 aggregate principal amount of Convertible Notes, plus accrued
and unpaid interest thereto, have been converted into shares of our common stock and $933,073 aggregate principal amount of Convertible
Notes remained outstanding.
In connection with the Offering, the holders of the Convertible
Notes agreed to not exercise their right to convert the Convertible Notes into shares of the Company’s common stock, in exchange
for the Company’s agreement to redeem all of the outstanding Convertible Notes promptly following the consummation of the
Offering at a redemption price equal to 140% of the principal amount, plus accrued and unpaid interest to the redemption date.
On August 31, 2015, the closing date of the offering, the Company redeemed the remaining $933,074 aggregate principal amount of
Convertible Notes plus interest and a 40% redeemable premium, for a total payment of $1,548,792. Of this amount, approximately
$167,031 was paid to its affiliates in redemption of their Convertible Notes. Each holder of the Convertible Notes agreed to the
foregoing terms and entered into an Amendment to Senior Convertible Notes and Agreement with the Company. As of December 31, 2015
none of the Convertible Notes were outstanding.
NOTE 5 - LOSS PER SHARE
The following table presents the shares used in the basic and diluted loss per common
share computations:
|
|
Year Ended
December 31,
|
|
|
2015
|
|
2014
|
Numerator:
|
|
|
|
|
Net loss available in basic and diluted calculation
|
|
$
|
(4,790,530
|
)
|
|
$
|
(6,833,568
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding-basic
|
|
|
155,234
|
|
|
|
119,619
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive stock options, warrants and preferred stock (1)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding-diluted
|
|
|
155,234
|
|
|
|
119,619
|
|
|
|
|
|
|
|
|
|
|
Loss per common share-basic and diluted
|
|
$
|
(30.86
|
)
|
|
$
|
(57.13
|
)
|
(1) The number of shares underlying options and warrants outstanding as of December 31,
2015 and December 31, 2014 are 354.447 and 37,972, respectively. The number of shares underlying the preferred stock as of December
31, 2015 is 75,921. The effect of the shares that would be issued upon exercise of such options, warrants and preferred stock has
been excluded from the calculation of diluted loss per share because those shares are anti-dilutive.
NOTE 6– INCOME TAXES
The provision for income taxes consists of an amount for taxes currently payable and
a provision for tax consequences deferred to future periods. Deferred income taxes are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective
tax bases. 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 be recovered or settled.
There is no income tax provision in the accompanying statements of operations due to
the cumulative operating losses that indicate a 100% valuation allowance for the deferred tax assets and state income taxes is
appropriate.
During September 2013, the Company experienced an "ownership change" as defined
in Section 382 of the Internal Revenue Code which could potentially limit the ability to utilize the Company’s net operating
losses (NOLs). The general limitation rules allow the Company to utilize its NOLs subject to an annual limitation that is determined
by multiplying the federal long-term tax-exempt rate by the Company’s value immediately before the ownership change.
At December 31, 2014, the Company had approximately $18.7 million of gross NOLs to reduce
future federal taxable income, the majority of which are expected to be available for use in 2015, subject to the Section 382 limitation
described above. The federal NOLs will expire beginning in 2022 if unused. The Company also had approximately $12.4 million of
gross NOLs to reduce future state taxable income at December 31, 2014, which will expire in years 2022 through 2034 if unused.
The Company's net deferred tax assets, which include the NOLs, are subject to a full valuation allowance. At December 31, 2014,
the federal and state valuation allowances were $8.1 million and $1.0 million, respectively.
At December 31, 2015, the Company had approximately $24.7 million of gross NOLs to reduce
future federal taxable income, the majority of which are expected to be available for use in 2016, subject to the Section 382 limitation
described above. The federal NOLs will expire beginning in 2022 if unused. The Company also had approximately $13.4 million of
gross NOLs to reduce future state taxable income at December 31, 2015, which will expire in years 2022 through 2035 if unused.
The Company’s net deferred tax assets, which include the NOLs are subject to a full valuation allowance. At December 31,
2015, the federal and state valuation allowances were $9.6 million and $1.1 million, respectively.
The valuation allowance has been recorded due to the uncertainty of realization of the
benefits associated with the net operating losses. Future events and changes in circumstances could cause this valuation allowance
to change.
The components of deferred income taxes at December 31, 2015 and December 31, 2014 are
as follows:
|
|
December 31,
2015
|
|
December 31,
2014
|
Deferred Tax Asset:
|
|
|
|
|
|
|
|
|
Net Operating Loss
|
|
$
|
10,338,000
|
|
|
$
|
7,919,000
|
|
Other
|
|
|
359,000
|
|
|
|
1,150,000
|
|
Total Deferred Tax Asset
|
|
|
10,697,000
|
|
|
|
9,069,000
|
|
Less Valuation Allowance
|
|
|
10,697,000
|
|
|
|
9,069,000
|
|
Net Deferred Income Taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
NOTE 7 – RENT OBLIGATION
The Company leases its principal office under a lease that can be cancelled after three
years with proper notice per the lease and an amortized schedule of adjustments that will be due to the landlord. The lease extends
five years and expires January 2018. In addition to rent, the Company pays real estate taxes and repairs and maintenance on the
leased property. Rent expense was $66,345 and $64,753 for 2015 and 2014, respectively.
The Company’s rent obligation for the next three years are as follows:
2016
|
|
$
|
38,000
|
|
2017
|
|
$
|
39,000
|
|
2018
|
|
$
|
3,000
|
|
NOTE 8 – LIABILITY FOR EQUITY-LINKED FINANCIAL INSTRUMENTS
The Company adopted ASC 815- Derivatives and Hedging (“ASC 815”) on January
1, 2009. ASC 815 mandates a two-step process for evaluating whether an equity-linked financial instrument or embedded feature is
indexed to the entity's own stock. It was effective for fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years, which was the Company's first quarter of 2009. Many of the warrants issued by the Company contain a strike
price adjustment feature, which upon adoption of ASC 815, changed the classification (from equity to liability) and the related
accounting for warrants with a $479,910 estimated fair value of as of January 1, 2009. An adjustment was made to remove $486,564
from paid-in capital (the cumulative values of the warrants on their grant dates), a positive adjustment of $6,654 was made to
accumulated deficit, representing the gain on valuation from the grant date to January 1, 2009, and $479,910 was booked as a liability.
The warrants issued in 2011 do not contain a strike price adjustment feature and, therefore, are not treated as a liability.
The January 1, 2009 valuation was computed using the Black-Scholes valuation model based
upon a 2.5-year expected term, an expected volatility of 63%, an exercise price of $862.50 per share, a stock price of $656.25,
a zero dividend rate and a 1.37% risk free interest rate. Subsequent to January 1, 2009 these warrants were re-valued at the end
of each quarter and a gain or loss was recorded based upon their increase or decrease in value during the quarter. Likewise, new
warrants that were issued during 2009 and 2010 were valued, using the Black- Scholes valuation model on their date of grant and
an entry was made to reduce paid-in capital and increase the liability for equity-linked financial instruments. These warrants
were also re-valued at the end of each quarter based upon their expected life, the stock price, the exercise price, assumed dividend
rate, expected volatility and risk free interest rate. A significant reduction in the liability was realized in 2010 primarily
due to a reduction from $937.50 to $412.50 per share in the underlying stock price. The Company realized a slight increase in the
liability for existing warrants during the first quarter of 2012. In 2013 there was a significant decrease in the liability primarily
due to current expirations and the amount of warrants reaching expiration in the near term. In 2014, all warrants expired and the
liability was reduced to zero.
The inputs to the Black-Scholes model during 2009 through 2014 were as follows:
Stock price
|
|
$93.75
|
to
|
$937.50
|
|
Exercise price
|
|
$18.75
|
to
|
$609.50
|
|
Expected life (years)
|
|
2.0
|
to
|
6.5
|
|
Expected volatility
|
|
|
59%
|
|
|
Assumed dividend rate
|
|
|
- %
|
|
|
Risk-free interest rate
|
|
.13%
|
to
|
2.97%
|
|
The original valuations, annual gain (loss) and end of year valuations are shown below:
|
|
Initial Value
|
|
Annual Gain (Loss)
|
|
Value at 12/31/09
|
|
2010 Gain (Loss)
|
|
Value at 12/31/10
|
|
2011 Gain (Loss)
|
|
Value at
12/31/2011
|
|
2012 Gain
(Loss)
|
|
Value
at 12/31/2012
|
|
2013 Gain
(Loss)
|
|
Value
at 12/31/2013
|
|
2014 Gain
(Loss)
|
|
Value at
12/31/2014
|
January 1, 2009 adoption
|
|
$
|
479,910
|
|
|
$
|
(390,368
|
)
|
|
$
|
870,278
|
|
|
$
|
868,772
|
|
|
$
|
1,506
|
|
|
$
|
(88,290
|
)
|
|
$
|
89,796
|
|
|
$
|
(21,856
|
)
|
|
$
|
111,652
|
|
|
$
|
100,053
|
|
|
$
|
11,599
|
|
|
$
|
11,599
|
|
|
$
|
-
|
|
Warrants issued in quarter ended 6/30/2009
|
|
|
169,854
|
|
|
|
20,847
|
|
|
|
149,007
|
|
|
|
147,403
|
|
|
|
1,604
|
|
|
|
(4,689
|
)
|
|
|
6,293
|
|
|
|
6,293
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Warrants issued in quarter ended 9/30/2009
|
|
|
39,743
|
|
|
|
(738
|
)
|
|
|
40,481
|
|
|
|
40,419
|
|
|
|
62
|
|
|
|
(1,562
|
)
|
|
|
1,624
|
|
|
|
910
|
|
|
|
714
|
|
|
|
714
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Warrants is used in quarter ended 12/31/2009
|
|
|
12,698
|
|
|
|
617
|
|
|
|
12,081
|
|
|
|
12,053
|
|
|
|
28
|
|
|
|
(724
|
)
|
|
|
752
|
|
|
|
415
|
|
|
|
337
|
|
|
|
337
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Subtotal
|
|
|
702,205
|
|
|
|
|
|
|
|
1,071,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued in quarter ended 3/31/2010
|
|
|
25,553
|
|
|
|
|
|
|
|
|
|
|
|
25,014
|
|
|
|
539
|
|
|
|
(5,570
|
)
|
|
|
6,109
|
|
|
|
3,701
|
|
|
|
2,408
|
|
|
|
2,408
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Warrants issued in quarter ended 6/30/2010
|
|
|
31,332
|
|
|
|
|
|
|
|
|
|
|
|
30,740
|
|
|
|
592
|
|
|
|
(6,122
|
)
|
|
|
6,714
|
|
|
|
6,083
|
|
|
|
631
|
|
|
|
631
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Warrants issued in quarter ended 9/30/2010
|
|
|
31,506
|
|
|
|
|
|
|
|
|
|
|
|
20,891
|
|
|
|
10,615
|
|
|
|
(44,160
|
)
|
|
|
54,775
|
|
|
|
1,338
|
|
|
|
53,437
|
|
|
|
53,437
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
790,596
|
|
|
$
|
(369,642
|
)
|
|
$
|
1,071,847
|
|
|
$
|
1,145,292
|
|
|
$
|
14,946
|
|
|
$
|
(151,117
|
)
|
|
$
|
166,063
|
|
|
$
|
(3,116
|
)
|
|
$
|
169,179
|
|
|
$
|
157,580
|
|
|
$
|
11,599
|
|
|
$
|
11,599
|
|
|
$
|
-
|
|
NOTE 9 - RELATED PARTY TRANSACTIONS
The Audit Committee has the responsibility to review and approve all transactions to
which a related party and the Company may be a party prior to their implementation, to assess whether such transactions meet applicable
legal requirements. Rick Koenigsberger, a director, is a holder of membership units in SOK Partners.
In connection with the sale of the Series A Preferred Shares on February 4, 2014, Joshua
Kornberg, our President, Chief Executive Officer and Interim Chairman of the Board, was one of the purchasers. Mr. Kornberg purchased
19,231 Series A Preferred Shares for a purchase price of $25,000 and received warrants to purchase 3 shares of common stock.
SOK Partners, LLC (“SOK”), a 10% stockholder with Mr. Kornberg and Dr. Samuel
Herschkowitz as managing partners, invested in the July 2014 offering of convertible notes and warrants. In November 2014, the
convertible noteholders agreed to convert certain balances of the convertible notes in connection with the public offering of the
Existing Units, in consideration of the agreement to issue certain additional shares. See “Management’s Discussion
and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – History Financing
– 2014 Sales of Convertible Notes and Warrants.” In connection with the Unit Offering in August 2015, all such convertible
notes were redeemed at a redemption price of 140% of the principal amount thereof, plus accrued and unpaid interest. The Company
paid approximately $163,000 to SOK in redemption of its convertible note. In addition, Ricardo Koenigsberger, a former director
who resigned on June 5, 2015, is a holder of membership units of SOK Partners.
In connection with the Unit Exchange that was consummated on August 31, 2015, 250 shares
of Series A Convertible Stock held by Mr. Kornberg were exchanged for 2,778 Exchange Units.
NOTE 10 – RETIREMENT SAVINGS PLANS
We have a pre-tax salary reduction/profit-sharing plan under the provisions of Section
401(k) of the Internal Revenue Code, which covers employees meeting certain eligibility requirements. In fiscal 2014, and again
in 2015, we matched 100%, of the employee’s contribution up to 4.0% of their earnings. The employer contribution was $39,916
and $37,730 in 2015 and 2014. There were no discretionary contributions to the plan in 2015 and 2014.
NOTE 11 – SUPPLEMENTAL CASH FLOW DATA
Cash payments for interest were $246,620 and $47,111 for the fiscal years ended December
31, 2015 and December 31, 2014, respectively.
NOTE 12 – SUBSEQUENT EVENTS
In January 2016 we commenced a registered offer (the “Exchange Offer”) to
exchange, on a one-for-one basis, new units (the “New Units”) in exchange for the 1,895,010 outstanding units (the
“Existing Units”) that were issued in the Offering and the Unit Exchange. Each New Unit, if issued, would have consisted
of shares of common stock and certain warrants to purchase common stock. On March 2, 2016, we announced the termination of the
Exchange Offer. None of the Existing Units were accepted for exchange in the Exchange Offer.
Schedule II
Valuation and Qualifying Accounts
(None)
SKYLINE MEDICAL INC.
CONDENSED BALANCE SHEETS
(Unaudited)
|
|
September 30, 2016
|
|
December 31, 2015
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
|
$
|
634,478
|
|
|
$
|
4,856,232
|
|
Marketable Securities (Note 11)
|
|
|
576,888
|
|
|
|
-
|
|
Accounts Receivable
|
|
|
45,017
|
|
|
|
38,283
|
|
Inventories
|
|
|
289,249
|
|
|
|
231,740
|
|
Prepaid Expense and other assets
|
|
|
163,188
|
|
|
|
271,579
|
|
Total Current Assets
|
|
|
1,708,820
|
|
|
|
5,397,834
|
|
|
|
|
|
|
|
|
|
|
Fixed Assets, net
|
|
|
110,910
|
|
|
|
139,598
|
|
Intangibles, net
|
|
|
97,335
|
|
|
|
94,987
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
1,917,065
|
|
|
$
|
5,632,419
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts Payable
|
|
$
|
648,061
|
|
|
$
|
650,413
|
|
Accrued Expenses
|
|
|
820,114
|
|
|
|
864,295
|
|
Deferred Revenue
|
|
|
5,000
|
|
|
|
5,000
|
|
Total Current Liabilities
|
|
|
1,473,175
|
|
|
|
1,519,708
|
|
|
|
|
|
|
|
|
|
|
Accrued Expenses
|
|
|
432,376
|
|
|
|
-
|
|
Total Liabilities
|
|
|
1,905,551
|
|
|
|
1,519,708
|
|
Commitments and Contingencies
|
|
|
-
|
|
|
|
-
|
|
Stockholders’ Equity:
|
|
|
|
|
|
|
|
|
Series B Convertible Preferred Stock, $.01 par value, 20,000,000 authorized, 79,246 and 1,895,010 outstanding
|
|
|
792
|
|
|
|
18,950
|
|
Common Stock, $.01 par value, 8,000,000 authorized, 3,404,860 and 208,259 outstanding
|
|
|
34,048
|
|
|
|
2,080
|
|
Additional paid-in capital
|
|
|
46,257,774
|
|
|
|
44,584,118
|
|
Accumulated Deficit
|
|
|
(46,285,679
|
)
|
|
|
(40,492,437
|
)
|
Accumulated Other Comprehensive Income
|
|
|
4,579
|
|
|
|
-
|
|
Total Stockholders' Equity
|
|
|
11,514
|
|
|
|
4,112,711
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders' Equity
|
|
$
|
1,917,065
|
|
|
$
|
5,632,419
|
|
See Notes to Condensed Financial Statements
SKYLINE MEDICAL INC.
CONDENSED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME
(Unaudited)
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Revenue
|
|
$
|
134,605
|
|
|
$
|
85,792
|
|
|
$
|
316,931
|
|
|
$
|
471,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
26,481
|
|
|
|
19,773
|
|
|
|
149,130
|
|
|
|
199,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
|
108,124
|
|
|
|
66,019
|
|
|
|
167,801
|
|
|
|
271,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expense
|
|
|
733,074
|
|
|
|
861,098
|
|
|
|
4,684,130
|
|
|
|
1,589,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations expense
|
|
|
292,856
|
|
|
|
202,799
|
|
|
|
928,062
|
|
|
|
375,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing expense
|
|
|
137,784
|
|
|
|
66,720
|
|
|
|
348,848
|
|
|
|
439,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
3
|
|
|
|
51,804
|
|
|
|
3
|
|
|
|
394,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expense
|
|
|
1,163,717
|
|
|
|
1,182,421
|
|
|
|
5,961,043
|
|
|
|
2,799,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common shareholders
|
|
|
(1,055,593
|
)
|
|
|
(1,116,402
|
)
|
|
|
(5,793,242
|
)
|
|
|
(2,527,524
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) from marketable securities
|
|
|
(1,299
|
)
|
|
|
-
|
|
|
|
4,579
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(1,056,892
|
)
|
|
$
|
(1,116,402
|
)
|
|
$
|
(5,788,663
|
)
|
|
$
|
(2,527,524
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share - basic and diluted
|
|
$
|
(0.32
|
)
|
|
$
|
(7.09
|
)
|
|
$
|
(2.57
|
)
|
|
$
|
(18.39
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in computation - basic and diluted
|
|
|
3,320,139
|
|
|
|
157,445
|
|
|
|
2,250,315
|
|
|
|
137,428
|
|
See Notes to Condensed Financial Statements
SKYLINE MEDICAL INC.
STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
|
|
Preferred
Stock
|
|
Shares
|
|
Amount
|
|
Paid-in
Capital
|
|
Deficit
|
|
Other
Comprehensive
Income
|
|
Total
|
Balance at 12/31/2014
|
|
$
|
206
|
|
|
|
123,711
|
|
|
$
|
1,237
|
|
|
$
|
30,123,435
|
|
|
$
|
(35,641,105
|
)
|
|
|
|
|
|
$
|
(5,516,227
|
)
|
Shares issued to 16 shareholders of Series A Convertible
Preferred Stock Adjustment as converted to common shares at $243.75 per share
|
|
|
|
|
|
|
125
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Reduction in escrow account per settlement agreement
|
|
|
|
|
|
|
(356
|
)
|
|
|
(4
|
)
|
|
|
(6,663
|
)
|
|
|
|
|
|
|
|
|
|
|
(6,667
|
)
|
Shares issued for a note conversion at $72.50 per
share
|
|
|
|
|
|
|
138
|
|
|
|
1
|
|
|
|
9,999
|
|
|
|
|
|
|
|
|
|
|
|
10,000
|
|
Shares issued for a note conversion at $74.00 per
share
|
|
|
|
|
|
|
270
|
|
|
|
3
|
|
|
|
19,997
|
|
|
|
|
|
|
|
|
|
|
|
20,000
|
|
Shares issued for a note conversion at $72.75 per
share
|
|
|
|
|
|
|
413
|
|
|
|
4
|
|
|
|
29,996
|
|
|
|
|
|
|
|
|
|
|
|
30,000
|
|
Shares issued for a note conversion at $69.25 per
share
|
|
|
|
|
|
|
484
|
|
|
|
5
|
|
|
|
33,473
|
|
|
|
|
|
|
|
|
|
|
|
33,478
|
|
Shares issued for a note conversion at $56.25 per
share
|
|
|
|
|
|
|
622
|
|
|
|
6
|
|
|
|
34,994
|
|
|
|
|
|
|
|
|
|
|
|
35,000
|
|
Shares issued to 16 shareholders of Series A Convertible
Preferred Stock Dividends as converted to common shares at $243.75 per share
|
|
|
|
|
|
|
125
|
|
|
|
1
|
|
|
|
30,399
|
|
|
|
(30,401
|
)
|
|
|
|
|
|
|
(1
|
)
|
Shares issued for a note conversion at $50.00 per
share
|
|
|
|
|
|
|
1,400
|
|
|
|
14
|
|
|
|
69,986
|
|
|
|
|
|
|
|
|
|
|
|
70,000
|
|
Shares issued for a note conversion at $56.82 per
share
|
|
|
|
|
|
|
3,520
|
|
|
|
35
|
|
|
|
199,965
|
|
|
|
|
|
|
|
|
|
|
|
200,000
|
|
Shares issued for a note conversion at $50.45 per
share
|
|
|
|
|
|
|
595
|
|
|
|
6
|
|
|
|
29,994
|
|
|
|
|
|
|
|
|
|
|
|
30,000
|
|
Shares issued for a note conversion at $48.10 per
share
|
|
|
|
|
|
|
520
|
|
|
|
5
|
|
|
|
24,995
|
|
|
|
|
|
|
|
|
|
|
|
25,000
|
|
Shares issued for a note conversion at $46.45 per
share
|
|
|
|
|
|
|
646
|
|
|
|
6
|
|
|
|
29,994
|
|
|
|
|
|
|
|
|
|
|
|
30,000
|
|
Shares issued to 16 shareholders of Series A Convertible
Preferred Stock Dividends as converted to common shares at $243.75 per share
|
|
|
|
|
|
|
125
|
|
|
|
1
|
|
|
|
30,401
|
|
|
|
(30,401
|
)
|
|
|
|
|
|
|
1
|
|
Vesting Expense
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
871,877
|
|
|
|
|
|
|
|
|
|
|
|
871,877
|
|
Shares issued in public offering; net
|
|
|
16,667
|
|
|
|
66,667
|
|
|
|
667
|
|
|
|
13,043,546
|
|
|
|
|
|
|
|
|
|
|
|
13,060,880
|
|
Preferred stock conversion
|
|
|
2,077
|
|
|
|
9,134
|
|
|
|
91
|
|
|
|
(2,168
|
)
|
|
|
|
|
|
|
|
|
|
|
(0
|
)
|
Series A warrant exercise
|
|
|
|
|
|
|
120
|
|
|
|
1
|
|
|
|
9,899
|
|
|
|
|
|
|
|
|
|
|
|
9,900
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,790,530
|
)
|
|
|
|
|
|
|
(4,790,530
|
)
|
Balance @ 12/31/2015
|
|
$
|
18,950
|
|
|
|
208,259
|
|
|
$
|
2,080
|
|
|
$
|
44,584,118
|
|
|
$
|
(40,492,437
|
)
|
|
|
|
|
|
$
|
4,112,711
|
|
Shares issued for two options exercised at $65.75
per share
|
|
|
|
|
|
|
1,312
|
|
|
|
13
|
|
|
|
86,240
|
|
|
|
|
|
|
|
|
|
|
|
86,253
|
|
Shares issued for preferred stock conversion into
common stock per the break-up of the Unit from the 2015 public offering
|
|
|
(18,158
|
)
|
|
|
66,396
|
|
|
|
664
|
|
|
|
17,494
|
|
|
|
|
|
|
|
|
|
|
|
(0
|
)
|
Shares issued for cashless Series A warrant exercises
per the break-up of the Unit from the 2015 public offering
|
|
|
|
|
|
|
2,318,663
|
|
|
|
23,187
|
|
|
|
556,479
|
|
|
|
|
|
|
|
|
|
|
|
579,666
|
|
Shares issued for cashless Series B warrant exercises
per the tender offer exchange
|
|
|
|
|
|
|
628,237
|
|
|
|
6,282
|
|
|
|
150,777
|
|
|
|
|
|
|
|
|
|
|
|
157,059
|
|
Shares issued at $3.75 per share, to an investment
banker per contractual agreement
|
|
|
|
|
|
|
135,995
|
|
|
|
1,360
|
|
|
|
508,620
|
|
|
|
|
|
|
|
|
|
|
|
509,980
|
|
Shares issued at $4.50 per share to former CEO
per severance agreement
|
|
|
|
|
|
|
20,000
|
|
|
|
200
|
|
|
|
90,151
|
|
|
|
|
|
|
|
|
|
|
|
90,351
|
|
Vesting Expense
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
147,158
|
|
|
|
|
|
|
|
|
|
|
|
147,158
|
|
Unrealized gain from marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,579
|
|
|
|
4,579
|
|
Shares issued at $4.50 per share to investor relations
consultant
|
|
|
|
|
|
|
26,000
|
|
|
|
260
|
|
|
|
116,740
|
|
|
|
|
|
|
|
|
|
|
|
117,000
|
|
Corrections due to rounding for reverse split
|
|
|
|
|
|
|
(2
|
)
|
|
|
2
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,793,242
|
)
|
|
|
|
|
|
|
(5,793,242
|
)
|
Balance @ 9/30/2016
|
|
$
|
792
|
|
|
|
3,404,860
|
|
|
$
|
34,048
|
|
|
$
|
46,257,774
|
|
|
$
|
(46,285,679
|
)
|
|
$
|
4,579
|
|
|
$
|
11,514
|
|
See Notes to Condensed Financial Statements
SKYLINE MEDICAL INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Nine Months Ended
September 30,
|
|
|
2016
|
|
2015
|
Cash flow from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(5,793,242
|
)
|
|
$
|
(2,527,524
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
62,427
|
|
|
|
57,512
|
|
Vested stock options and warrants
|
|
|
147,158
|
|
|
|
320,334
|
|
Equity instruments issued for management and consulting
|
|
|
717,331
|
|
|
|
(6,667
|
)
|
Issuance of common stock in cashless warrant exchange
|
|
|
736,724
|
|
|
|
-
|
|
Amortization of debt discount
|
|
|
-
|
|
|
|
219,097
|
|
Penalty on debt provision
|
|
|
-
|
|
|
|
10,031
|
|
Loss on Sales of Equipment
|
|
|
(2,387
|
)
|
|
|
16,917
|
|
Gain from sale of marketable securities
|
|
|
(2,309
|
)
|
|
|
-
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(6,734
|
)
|
|
|
43,353
|
|
Inventories
|
|
|
(57,509
|
)
|
|
|
130,477
|
|
Prepaid expense and other assets
|
|
|
108,391
|
|
|
|
(23,208
|
)
|
Accounts payable
|
|
|
(2,352
|
)
|
|
|
(1,056,006
|
)
|
Accrued expenses
|
|
|
388,195
|
|
|
|
(1,845,850
|
)
|
Deferred Revenue
|
|
|
-
|
|
|
|
24,180
|
|
Net cash used in operating activities:
|
|
$
|
(3,704,307
|
)
|
|
$
|
(4,637,354
|
)
|
Cash flow from investing activities:
|
|
|
|
|
|
|
|
|
Purchase of marketable securities
|
|
|
(850,000
|
)
|
|
|
-
|
|
Proceeds from sale of marketable securities
|
|
|
280,000
|
|
|
|
-
|
|
Purchase of certificates of deposit
|
|
|
(1,000,000
|
)
|
|
|
-
|
|
Redemption of certificates of deposit
|
|
|
1,000,000
|
|
|
|
-
|
|
Purchase of fixed assets
|
|
|
(25,127
|
)
|
|
|
-
|
|
Purchase of intangibles
|
|
|
(8,573
|
)
|
|
|
(23,739
|
)
|
Net cash used in investing activities
|
|
$
|
(603,700
|
)
|
|
$
|
(23,739
|
)
|
Cash flow from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from long-term and convertible debt
|
|
|
-
|
|
|
|
250,000
|
|
Principal payments on debt
|
|
|
-
|
|
|
|
(933,074
|
)
|
Issuance of preferred stock
|
|
|
-
|
|
|
|
18,950
|
|
Issuance of common stock
|
|
|
86,253
|
|
|
|
13,041,930
|
|
Net cash provided by financing activities
|
|
$
|
86,253
|
|
|
$
|
12,377,806
|
|
Net increase in cash and cash equivalents
|
|
|
(4,221,754
|
)
|
|
|
7,716,713
|
|
Cash and cash equivalents at beginning of period
|
|
|
4,856,232
|
|
|
|
16,384
|
|
Cash and cash equivalents at end of period
|
|
$
|
634,478
|
|
|
$
|
7,733,097
|
|
Non cash transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for accrued interest/bonus
|
|
|
-
|
|
|
|
-
|
|
Common stock issued to satisfy debt
|
|
|
-
|
|
|
|
483,478
|
|
See Notes to Condensed Financial Statements
SKYLINE MEDICAL INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Amounts presented at and for the three and nine months ended
September, 2016 and September, 2015 are unaudited)
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Continuance of Operations
On October 27, 2016, the Company effected a 1-for-25 reverse stock split of its common
stock. All share information in the financial statements for fiscal years 2016 and 2015 reflect the impact of the reverse stock
split.
Skyline Medical Inc. (the "Company") was incorporated under the laws of the
State of Minnesota in 2002. Effective August 6, 2013, the Company changed its name to Skyline Medical Inc. As of September 30,
2016, the registrant had 3,404,860 shares of common stock, par value $.01 per share, outstanding. Pursuant to an Agreement and
Plan of Merger dated effective December 16, 2013, the Company merged with and into a Delaware corporation with the same name that
was its wholly-owned subsidiary, with such Delaware Corporation as the surviving corporation of the merger. The Company has developed
an environmentally safe system for the collection and disposal of infectious fluids that result from surgical procedures and post-operative
care. The Company also makes ongoing sales of our proprietary cleaning fluid and filters to users of our systems. In April 2009,
the Company received 510(k) clearance from the FDA to authorize the Company to market and sell its STREAMWAY® FMS products.
The accompanying financial statements have been prepared assuming the Company will continue
as a going concern. The Company has suffered recurring losses from operations and had a stockholders’ deficit until August
31, 2015 whereupon the Company closed its public offering of units of common stock, Series B Convertible Preferred Stock and Series
A Warrants (the “Units”). There remains though, substantial doubt about its ability to continue as a going concern.
The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Since inception to September 30, 2016, the Company raised approximately $22,325,091 in
equity, inclusive of $2,055,000 from a private placement of Series A Convertible Preferred Stock, $13,555,003 from the public offering
of Units and $5,685,000 in debt financing. See “Management’s Discussion and Analysis of Financial Condition and Results
of Operations - Liquidity and Capital Resources.”
Recent Accounting Developments
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU
2014-09,
Revenue from Contracts with Customers
and created a new topic in the FASB Accounting Standards Codification ("ASC"),
Topic 606. The new standard provides a single comprehensive revenue recognition framework for all entities and supersedes nearly
all existing U.S. GAAP revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model
is that an entity should recognize revenue in a manner that depicts the transfer of promised goods or services to customers in
an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The
standard is designed to create greater comparability for financial statement users across industries and also requires enhanced
disclosures. The amendments are effective for annual reporting periods beginning after December 15, 2017, including interim periods
within that reporting period. Early application is not permitted. We are currently evaluating the impact this guidance may have
on our financial statements and related disclosures.
In June 2014, the FASB issued ASU 2014-12,
"Compensation - Stock Compensation"
providing explicit guidance on how to account for share-based payments granted to employees in which the terms of the award
provide that a performance target that affects vesting could be achieved after the requisite service period. The amendments in
this Update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015.
Early adoption is permitted. We are currently evaluating the impact this guidance may have on our financial statements.
In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s
Ability to Continue as a Going Concern. The new standard requires management to assess an entity’s ability to continue as
a going concern, and to provide related footnote disclosures in certain circumstances. The standard is effective for public entities
for annual and interim periods beginning after December 15, 2016, with early adoption permitted. We are currently evaluating the
impact this guidance may have on our financial statements and related disclosures.
In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance
Costs. Debt issuance costs related to a recognized debt liability will be presented on the balance sheet as a direct deduction
from the debt liability, similar to the presentation of debt discounts, rather than as an asset. Amortization of these costs will
continue to be reported as interest expense. ASU 2015-03 is effective for annual and interim reporting periods beginning after
December 15, 2015. Early adoption is permitted. The adoption of this ASU is not expected to have an impact on our financial statements.
In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the
Measurement of Inventory, requiring that inventory be measured at the lower of cost and net realizable value. Net realizable value
is defined as estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal
and transportation. This ASU is effective within annual periods beginning on or after December 15, 2016, including interim periods
within that reporting period. We are currently evaluating the impact this guidance may have on our financial statements.
In November 2015, the FASB issued ASU 2015-17, “Income Taxes (Topic 740)”
providing guidance on the balance sheet classification of deferred taxes. The guidance requires that deferred tax assets and liabilities
to be classified as noncurrent in the Balance Sheet. The guidance is effective for fiscal years beginning after December 15, 2016
and for interim periods within those fiscal years, with early adoption permitted. We are currently evaluating the impact this guidance
may have on our financial statements and related disclosures.
In January 2016, the FASB issued ASU No. 2016-01,
Financial Instruments-Overall (Subtopic
825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
("ASU 2016-01"). The standard
changes how entities measure certain equity investments and present changes in the fair value of financial liabilities measured
under the fair value option that are attributable to their own credit. Under the new guidance, entities will be required to measure
equity investments that do not result in consolidation and are not accounted for under the equity method at fair value and recognize
any changes in fair value in net income unless the investments qualify for the new practicability exception. The standard is effective
for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company does not believe
that the adoption of this guidance will have a material impact on the Company's consolidated financial statements and disclosures.
In February 2016, the FASB issued ASU No. 2016-02, “Leases
(Topic 842
”
(“ASU 2016-02”), which requires lessees to put most leases on their balance sheets but recognize the expenses on their
income statements in a manner similar to current practice. The standard states that a lessee would recognize a lease liability
for the obligation to make lease payments and a right-to-use asset for the right to use the underlying asset for the lease term.
The standard is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2018. Early
adoption is permitted. We are currently evaluating the timing of our adoption and the impact that the updated standard will have
on our consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, “
Compensation - Stock Compensation
(Topic 718): Improvements to Employee Share-Based Payment Accountin
g” (“ASU 2016-09”). ASU 2016-09 simplifies
several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of
awards as either equity or liabilities, and classification on the statement of cash flows. The standard is effective for fiscal
years and interim periods within those fiscal years beginning after December 15, 2016. Early adoption is permitted. We are currently
evaluating the timing of our adoption and the impact that the updated standard will have on our consolidated financial statements.
During August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic
230): Classification of Certain Cash Receipts and Cash Payments,
to address diversity in how certain cash receipts and cash
payments are presented and classified in the statements of cash flows. The amendments are effective for public business entities
for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The amendments should be applied
using a retrospective transition method to each period presented. If retrospective application is impractical for some of the issues
addressed by the update, the amendments for those issues would be applied prospectively as of the earliest date practicable. Early
adoption is permitted, including adoption in an interim period. The Company does not expect the adoption of ASU 2016-15 to have
a material impact on its consolidated financial statements.
We reviewed all other significant newly issued accounting pronouncements and determined
they are either not applicable to our business or that no material effect is expected on our financial position and results of
our operations.
Valuation of Intangible Assets
We review identifiable intangible assets for impairment in accordance with ASC 350 —
Intangibles —Goodwill and Other, whenever events or changes in circumstances indicate the carrying amount may not be recoverable.
Our intangible assets are currently solely the costs of obtaining trademarks and patents. Events or changes in circumstances that
indicate the carrying amount may not be recoverable include, but are not limited to, a significant change in the medical device
marketplace and a significant adverse change in the business climate in which we operate. If such events or changes in circumstances
are present, the undiscounted cash flows method is used to determine whether the intangible asset is impaired. Cash flows would
include the estimated terminal value of the asset and exclude any interest charges. If the carrying value of the asset exceeds
the undiscounted cash flows over the estimated remaining life of the asset, the asset is considered impaired, and the impairment
is measured by reducing the carrying value of the asset to its fair value using the discounted cash flows method. The discount
rate utilized is based on management’s best estimate of the related risks and return at the time the impairment assessment
is made.
Accounting Policies and Estimates
The presentation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make 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. Actual results could differ from those estimates.
Presentation of Taxes Collected from Customers
Sales taxes are imposed on the Company’s sales to nonexempt customers. The Company
collects the taxes from customers and remits the entire amounts to the governmental authorities. The Company’s accounting
policy is to exclude the taxes collected and remitted from revenues and expenses.
Shipping and Handling
Shipping and handling charges billed to customers are recorded as revenue. Shipping and
handling costs are recorded within cost of goods sold on the statement of operations.
Advertising
Advertising costs are expensed as incurred. Advertising expenses were $10,343 and $57,004
in the three and nine months ended September 30, 2016 and were $500 and $1,917 in the three and nine months ended September 30,
2015.
Research and Development
Research and development costs are charged to operations as incurred. Research and development
expenses were $79,936 and $302,330 in the three and nine months ended September 30, 2016 and were $58,792 and $179,739 in the three
and nine months ended September 30, 2015.
Revenue Recognition
The Company recognizes revenue in accordance with the SEC’s Staff Accounting Bulletin
Topic 13 Revenue Recognition and ASC 605-Revenue Recognition.
Revenue is recognized when persuasive evidence of an arrangement exists, delivery has
occurred, the fee is fixed and determinable and collectability is probable. Delivery is considered to have occurred upon either
shipment of the product or arrival at its destination based on the shipping terms of the transaction. The Company’s standard
terms specify that shipment is FOB Skyline and the Company will, therefore, recognize revenue upon shipment in most cases. This
revenue recognition policy applies to shipments of the STREAMWAY FMS units as well as shipments of filters and fluids. When these
conditions are satisfied, the Company recognizes gross product revenue, which is the price it charges generally to its customers
for a particular product. Under the Company’s standard terms and conditions, there is no provision for installation or acceptance
of the product to take place prior to the obligation of the customer. The customer’s right of return is limited only to the
Company’s standard one-year warranty whereby the Company replaces or repairs, at its option, and it would be rare that the
STREAMWAY FMS unit or significant quantities of cleaning solution or filters may be returned. Additionally, since the Company buys
the STREAMWAY FMS units, cleaning solution and filters from “turnkey” suppliers, the Company would have the right to
replacements from the suppliers if this situation should occur.
Cash Equivalents
The Company considers all highly liquid debt instruments with a maturity of three months
or less when purchased to be cash equivalents. Cash equivalents are stated at cost, which approximate fair value.
Certificates of Deposit
Short-term interest bearing investments are those with maturities of less than one year
but greater than three months when purchased. Certificates with maturity dates beyond one year are classified as noncurrent assets.
These investments are readily convertible to cash and are stated at cost plus accrued interest, which approximates fair value.
Investment Securities
Readily marketable investments in debt and equity securities are classified as available-for-sale
and are reported at fair value with unrealized gains and losses recorded in other comprehensive income. Unrealized gains are charged
to earnings when an incline in fair value above the cost basis is determined to be other-than-temporary. Realized gains and losses
on dispositions are based on the net proceeds and the adjusted book value of the securities sold, using the specific identification
method.
Fair Value Measurements
Under generally accepted accounting principles as outlined in the Financial Accounting
Standards Board’s
Accounting Standards Certification
(ASC) 820, fair value is the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The
accounting standards ASC 820 establishes a three-level fair value hierarchy that prioritizes information used in developing assumptions
when pricing as asset or liability as follows:
Level 1 – Observable inputs such as quoted prices in active
markets;
Level 2 – Inputs other than quoted prices in active markets,
that are observable either directly or indirectly; and
Level 3 – Unobservable inputs where there is little or no market
data, which requires the reporting entity to develop its own assumptions.
The Company uses observable market data, when available, in making fair value measurements.
Fair value measurements are classified according to the lowest level input that is significant to the valuation.
The fair value of the Company’s investment securities were determined based on
Level 1 inputs.
Receivables
Receivables are reported at the amount the Company expects to collect on balances outstanding.
The Company provides for probable uncollectible amounts through charges to earnings and credits to the valuation based on management’s
assessment of the current status of individual accounts, changes to the valuation allowance have not been material to the financial
statements.
Inventories
Inventories are stated at the lower of cost or market, with cost determined on a first-in,
first-out basis. Inventory balances are as follows:
|
|
September 30,
2016
|
|
December 31,
2015
|
|
|
|
|
|
Finished goods
|
|
$
|
72,540
|
|
|
$
|
30,237
|
|
Raw materials
|
|
|
157,044
|
|
|
|
162,623
|
|
Work-In-Process
|
|
|
59,665
|
|
|
|
38,880
|
|
Total
|
|
$
|
289,249
|
|
|
$
|
231,740
|
|
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization.
Depreciation of property and equipment is computed using the straight-line method over the estimated useful lives of the respective
assets. Estimated useful asset life by classification is as follows:
|
|
Years
|
Computers and office equipment
|
|
3
|
-
|
7
|
Leasehold improvements
|
|
|
5
|
|
Manufacturing tooling
|
|
3
|
-
|
7
|
Demo Equipment
|
|
|
3
|
|
The Company’s investment in Fixed Assets consists of the following:
|
|
September 30,
2016
|
|
December 31,
2015
|
Computers and office equipment
|
|
$
|
164,319
|
|
|
$
|
153,553
|
|
Leasehold improvements
|
|
|
25,635
|
|
|
|
23,874
|
|
Manufacturing tooling
|
|
|
101,104
|
|
|
|
97,288
|
|
Demo Equipment
|
|
|
17,702
|
|
|
|
8,962
|
|
Total
|
|
|
308,760
|
|
|
|
283,677
|
|
Less: Accumulated depreciation
|
|
|
197,850
|
|
|
|
144,079
|
|
Total Fixed Assets, Net
|
|
$
|
110,910
|
|
|
$
|
139,598
|
|
Upon retirement or sale, the cost and related accumulated depreciation are removed from
the balance sheet and the resulting gain or loss is reflected in operations. Maintenance and repairs are charged to operations
as incurred.
Intangible Assets
Intangible assets consist of trademarks and patent costs. Amortization expense was $2,515
and $6,225 in the three and nine months ended September 30, 2016, and was $1,632 and $4,520 in the three and nine months ended
September 30, 2015. The assets are reviewed for impairment annually, and impairment losses, if any, are charged to operations when
identified.
Income Taxes
The Company accounts for income taxes in accordance with ASC 740- Income Taxes (“ASC
740”). Under ASC 740, deferred tax assets and liabilities are determined based on the differences between the financial reporting
and tax bases of assets and liabilities and net operating loss and credit carryforwards using enacted tax rates in effect for the
year in which the differences are expected to impact taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be realized.
The Company reviews income tax positions expected to be taken in income tax returns to
determine if there are any income tax uncertainties. The Company recognizes tax benefits from uncertain tax positions only if it
is more likely than not that the tax positions will be sustained on examination by taxing authorities, based on technical merits
of the positions. The Company has identified no income tax uncertainties.
Tax years subsequent to 2012 remain open to examination by federal and state tax authorities.
Patents and Intellectual Property
On January 25th, 2014 the Company filed a non-provisional PCT Application No. PCT/US2014/013081
claiming priority from the U.S. Provisional Patent Application, number 61756763 which was filed one year earlier on January 25th,
2013. The Patent Cooperation Treaty (“PCT”) allows an applicant to file a single patent application to seek patent
protection for an invention simultaneously in each of the 148 countries of the PCT, including the United States. By filing this
single “international” patent application through the PCT, it is easier and more cost effective than filing separate
applications directly with each national or regional patent office in which patent protection is desired.
Our PCT patent application is for the new model of the surgical fluid waste management
system. We obtained a favorable International Search Report from the PCT searching authority indicating that the claims in our
PCT application are patentable (i.e., novel and non-obvious) over the cited prior art. A feature claimed in the PCT application
is the ability to maintain continuous suction to the surgical field while measuring, recording and evacuating fluid to the facilities
sewer drainage system. This provides for continuous operation of the STREAMWAY System unit in suctioning waste fluids, which means
that suction is not interrupted during a surgical operation, for example, to empty a fluid collection container or otherwise dispose
of the collected fluid.
The Company holds the following granted patents in the United States and a pending application
in the United States on its earlier models: US7469727, US8123731 and U.S. Publication No. US20090216205 (collectively, the “Patents”).
These Patents will begin to expire on August 8, 2023.
In July 2015, Skyline Medical filed an international (PCT) patent application for its
fluid waste collection system and received a favorable determination by the International Searching Authority finding that all
of the claims satisfy the requirements for novelty, inventive step and industrial applicability. Skyline anticipates that the favorable
International Search Report will result in allowance of its various national applications.
Credit Risk
Financial instruments which potentially subject the Company to concentrations of credit
risk consist principally of cash. The Company places its cash with high credit quality financial institutions and, by policy, generally
limits the amount of credit exposure to any one financial institution. The Company has a credit risk concentration as a result
of depositing $454,369 of funds in excess of insurance limits in a single bank.
Product Warranty Costs
In the three and nine months ending September 30, 2016 the incurred approximately $2,102
and $33,083 in current warranty costs and incurred $12,084 and $39,688 in warranty costs for the three and nine months ending September
30, 2015.
Segments
The Company operates in one segment for the sale of its medical device and consumable
products. Substantially all of the Company’s assets, revenues and expenses for the three and nine months ending September
30, 2016 and for 2015 in entirety were located at or derived from operations in the United States. There were no revenue from sales
outside of the United States. The Company has recently attained its ISO 13485 certification and is applying to sell our products
in Canada.
Risks and Uncertainties
The Company is subject to risks common to companies in the medical device industry, including,
but not limited to, development by the Company or its competitors of new technological innovations, dependence on key personnel,
protection of proprietary technology, and compliance with regulations of the FDA and other governmental agencies.
Subsequent Events
The Company filed a Certificate of Amendment effecting a 1:25 reverse stock split (the
“Reverse Stock Split” with the Secretary of State of the State of Delaware, which became effective under Delaware law
at 5:00 p.m. New York time on October 27, 2016. The Company’s common stock opened for trading on October 28, 2016 on a post-split
basis. At the effective time (the “Effective Time”) of the Reverse Stock Split, the issued and outstanding Common Stock
of the Company was combined on a 1-for-25 basis such that every twenty-five shares of Common Stock outstanding immediately prior
to the Effective Time was combined into one share of Common Stock. The share combination was effected through the exchange and
replacement of certificates representing issued and outstanding shares of Common Stock as of the Effective Time, together with
immediate book-entry adjustments to the stock register of the Company maintained in accordance with the Delaware General Corporation
Law. In the event that the share combination would have resulted in a shareholder being entitled to receive less than a full share
of Common Stock, the fractional share that would so result was rounded up to the nearest whole share of Common Stock. The par value
of each share of issued and outstanding Common Stock was not affected by the share combination.
Interim Financial Statements
The Company has prepared the unaudited interim financial statements and related unaudited
financial information in the footnotes in accordance with accounting principles generally accepted in the United States of America
(“GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial
statements. These interim financial statements reflect all adjustments consisting of normal recurring accruals, which, in the opinion
of management, are necessary to present fairly the Company’s financial position, the results of its operations and its cash
flows for the interim periods. These interim financial statements should be read in conjunction with the annual financial statements
and the notes thereto contained in the Form 10-K filed with the SEC on March 16, 2016. The nature of the Company’s business
is such that the results of any interim period may not be indicative of the results to be expected for the entire year.
NOTE 2 – DEVELOPMENT STAGE OPERATIONS
The Company was formed April 23, 2002. Since inception to October 24, 2016, 3,804,860
shares of common stock have been issued between par value and $3,131.25 (as adjusted for the reverse stock split). Operations since
incorporation have been devoted to raising capital, obtaining financing, development of the Company’s product, and administrative
services, customer acceptance and sales and marketing strategies.
NOTE 3 – STOCKHOLDERS’ DEFICIT, STOCK OPTIONS AND WARRANTS
The Company has an equity incentive plan, which allows issuance of incentive and non-qualified
stock options to employees, directors and consultants of the Company, where permitted under the plan. The exercise price for each
stock option is determined by the Board of Directors. Vesting requirements are determined by the Board of Directors when granted
and currently range from immediate to three years. Options under this plan have terms ranging from three to ten years.
Public Offering of Units
On August 31, 2015 (the “Issuance Date”), the Company completed a public
offering (the “Offering”) of 1,666,667 Units (the “Units”) as described below. The public offering price
in the Offering was $9.00 per Unit, and the purchase price for the underwriter of the Offering (the “Underwriter”)
was $8.28 per Unit, resulting in an underwriting discount and commission of $0.72 (or 8.00%) per Unit and total net proceeds to
the Company before expenses of $13.8 million. The Company had granted the Underwriter an option for a period of 45 days to purchase
up to an additional 250,000 Units solely to cover over-allotments. The Underwriter chose not to purchase any additional Units under
the over-allotment option. The Company paid to the Underwriter a non-accountable expense allowance equal to 1% of the gross proceeds
of the Offering and agreed to reimburse expenses incurred by the Underwriter up to $70,000.
On August 31, 2015, as a result of the consummation of the Offering and the issuance
of the 228,343 Exchange Units in the Unit Exchange described below, the Company issued a total of 1,895,010 Units, comprised of
a total of aggregate of 75,800 shares of Common Stock (as adjusted for the reverse stock split), 1,895,010 shares of Series B Preferred
Stock and 7,580,040 Series A Warrants, (as adjusted for the reverse stock split).
Each Unit consisted of one share of common stock, par value $0.01 per share (the “Common
Stock”), one share of Series B Convertible Preferred Stock (“Series B Preferred Stock”) and four Series A Warrants.
The shares of Common Stock, the shares of Series B Preferred Stock and the Series A Warrants that comprise the Units automatically
separated on February 29, 2016.
For a description of the terms of the Series B Convertible Preferred Stock included within
the Units, see “Series B Preferred Stock” below. For a description of the terms of the Series A Warrants included within
the Units, see “Series A Warrants” below.
Series A Warrants.
The Series A Warrants separated from the Series B Convertible
Preferred Stock and the Common Stock included within the Units as described above and are currently exercisable. The Series A Warrants
terminate on August 31, 2020. Each Series A Warrant is exercisable into one share of Common Stock at an initial cash exercise price
of $123.75 per share. The Cash exercise price and number of shares of common stock issuable upon cash exercise is subject to appropriate
adjustment in the event of stock dividends, stock splits, reorganizations or similar events affecting the Common Stock and the
exercise price.
Holders may exercise Series A Warrants by paying the exercise price in cash or, in lieu
of payment of the exercise price in cash, by electing to receive a number of shares of Common Stock equal to the Black-Scholes
Value (as defined below) based upon the number of shares the holder elects to exercise. The number of shares of Common Stock to
be delivered according to the following formula, referred to as the “Cashless Exercise.”
Total Shares = (A x B)/C
Where:
|
·
|
Total shares is the number of shares of Common Stock to be issued upon a Cashless Exercise.
|
|
·
|
A is the total number of shares with respect to which the Series A Warrant is then being exercised.
|
|
·
|
B is the Black-Scholes Value (as defined below).
|
|
·
|
C is the closing bid price of the Common Stock as of two trading days prior to the time of such exercise, provided that in no event may “C” be less than $0.43 per share (subject to appropriate adjustment in the event of stock dividends, stock splits or similar events affecting the Common Stock).
|
The Black-Scholes Value (as defined above) as of September 30, 2016 was $108.115, and
the closing bid price of Common Stock as of September 30, 2016, was $4.125. Therefore, an exercise on that date would have resulted
in the issuance of 0.40 shares of Common Stock for each Series A Warrant. Approximately 6,141,115 Series A Warrants have been exercised
in cashless exercises as of September 30, 2016, resulting in the issuance of 2,318,663 shares of Common Stock. If all of the remaining
35,084 Series A Warrants that were issued as part of the Units sold in the Offering and part of the Units issued on August 31,
2015 were exercised pursuant to a cashless exercise and the closing bid price of our common stock as of the two trading days prior
to the time of such exercise was $123.75 per share or less and the Black-Scholes Value were $108.115 (the Black-Scholes Value as
of September 30, 2016), then a total of an additional approximately 564 shares of our common stock would be issued to the holders
of such Series A Warrants.
The Series A Warrants will not be exercisable or exchangeable by the holder of such warrants
to the extent (and only to the extent) that the holder or any of its affiliates would beneficially own in excess of 4.99% of the
common stock of the Company, determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and
the regulations promulgated thereunder.
In addition to (but not duplicative of) the adjustments to the exercise price and the
number of shares of Common Stock issuable upon exercise of the Series A Warrants in the event of stock dividends, stock splits,
reorganizations or similar events, the Series A Warrants provide for certain adjustments if the Company, at any time prior to the
three year anniversary of the Issuance Date, (1) declares or makes any dividend or other distribution of its assets (or rights
to acquire its assets) to all or substantially all of the holders of shares of Common Stock at any time after the Issuance Date,
or (2) grants, issues or sells any options, convertible securities or rights to purchase stock, warrants, securities or other property
pro rata to all or substantially all of the record holders of any class of shares of Common Stock. Further, if at any time a Series
A Warrant is outstanding, the Company consummates any fundamental transaction, as described in the Series A Warrants and generally
including any consolidation or merger into another corporation, or the sale of all or substantially all of our assets, or other
transaction in which the Common Stock is converted into or exchanged for other securities or other consideration, the holder of
any Series A Warrants will thereafter receive, the securities or other consideration to which a holder or the number of shares
of Common Stock then deliverable upon the exercise or exchange of such Series A Warrants would have been entitled upon such consolidation
or merger or other transaction.
Unit Purchase Option.
The Company, in connection with the Offering, entered into
a Unit Purchase Option Agreement, dated as of August 31, 2015 (the “Unit Purchase Option”), pursuant to which the Company
granted the Underwriter the right to purchase from the Company up to a number of Units equal to 5% of the Units sold in the Offering
(or up to 83,333 Units) or the component securities of such Units at an exercise price equal to 125% of the public offering price
of the Units in the Offering, or $11.25 per Unit. The Unit Purchase Option was terminated in May 2016 in exchange for 135,995 shares
of common stock.
Series B Preferred Stock.
Each share of Series B Preferred Stock became convertible
into one share of Common Stock (subject to appropriate adjustment in the event of stock dividends, stock splits, reorganizations
or similar events) as of February 29, 2016. In addition, the Series B Preferred Stock will automatically convert into shares of
common stock upon the occurrence of a fundamental transaction, as described in the certificate of designations for the Series B
Preferred Stock but including mergers, shares of the company’s assets, changes in control and similar transactions. The Series
B Preferred Stock is not convertible by the holder of such preferred stock to the extent (and only to the extent that the holder
or any of its affiliates would beneficially own in excess of 4.99% of the common stock of the Company. The Series B Preferred Stock
has no voting rights, except for the right to approve certain amendments to the certificate of designations or similar actions.
With respect to payment of dividends and distribution of assets upon liquidation or dissolution or winding up of the Company, the
Series B Preferred Stock shall rank equal to the common stock of the Company. No sinking fund has been established for the retirement
or redemption of the Series B Preferred Stock.
Unit Exchange.
On February 4, 2014, the Company raised $2,055,000 in gross proceeds
from a private placement of 20,550 shares of Series A Convertible Preferred Stock, par value $0.01, with a stated value of $100
per share (the “Series A Preferred Shares”) and warrants to purchase shares of the Company’s common stock. The
Series A Preferred Shares and warrants were sold to investors pursuant to a Securities Purchase Agreement, dated as of February
4, 2014. On August 31, 2015, the Company issued a total of 228,343 Units (the “Exchange Units”) in exchange for the
outstanding Series A Preferred Stock which were then cancelled pursuant to an agreement with the holders of the Series A Preferred
Shares. The warrants that were issued in connection with the issuance of the Series A Preferred Shares remained outstanding; however,
the warrant amounts were reduced so that the warrants are exercisable into an aggregate of 3,391 shares of the Company’s
common stock. The Exchange Units were exempt from registration under Section 3(a)(9) of the Securities Act. On August 31, 2015,
the Company filed a termination certificate with the Delaware Secretary of State. Following that date there were no shares of Series
A Preferred Stock outstanding, and the previously authorized shares of Series A Preferred Stock resumed the status of authorized
but issued and undesignated shares of preferred stock of the Company.
Redemption of Convertible Notes.
In connection with the closing of the Offering,
$933,074 aggregate principal amount of Convertible Notes plus interest and a 40% redeemable premium were redeemed for total payments
of $1,548,792. See Note 4. Of this amount, approximately $167,031 was paid to its affiliates in redemption of their Convertible
Notes.
Registered Exchange Offer for Warrants.
On March 25, 2016, the Company commenced
a registered exchange offer (the “Exchange Offer”) to exchange Series B Warrants (the “Series B Warrants”)
to purchase shares of our common stock, par value $0.01 per share (the “Warrant Shares”), for up to an aggregate of
3,157,186 outstanding Series A Warrants (the “Series A Warrants”). On March 31, 2016, each Series A Warrant could be
exercised on a cashless basis for 0.40 shares of common stock. Each Series B Warrant may be exercised on a cashless basis for one
twenty-fifth of one share of common stock (subject to further adjustment for stock splits, etc.). For each outstanding Series A
Warrant tendered by holders, we offered to issue 10.2 Series B Warrants. The Exchange Offer expired at midnight, Eastern time,
on April 21, 2016. 1,770,556 Series A Warrants were tendered by holders. The Company delivered an aggregate of 18,059,671 Series
B Warrants pursuant to the terms of the Exchange Offer. In addition, between March 31, 2016 and July 6, 2016 1,251,510 Series A
Warrants were exercised in cashless exercises, resulting in the issuance of 503,034 shares of common stock.
Accounting for share-based payment
The Company has adopted ASC 718- Compensation-Stock Compensation ("ASC 718").
Under ASC 718 stock-based employee compensation cost is recognized using the fair value based method for all new awards granted
after January 1, 2006 and unvested awards outstanding at January 1, 2006. Compensation costs for unvested stock options and non-vested
awards that were outstanding at January 1, 2006, are being recognized over the requisite service period based on the grant-date
fair value of those options and awards, using a straight-line method. We elected the modified-prospective method under which prior
periods are not retroactively restated.
ASC 718 requires companies to estimate the fair value of stock-based payment awards on
the date of grant using an option-pricing model or other acceptable means. The Company uses the Black-Scholes option valuation
model which requires the input of significant assumptions including an estimate of the average period of time employees will retain
vested stock options before exercising them, the estimated volatility of the Company's common stock price over the expected term,
the number of options that will ultimately be forfeited before completing vesting requirements, the expected dividend rate and
the risk-free interest rate. Changes in the assumptions can materially affect the estimate of fair value of stock-based compensation
and, consequently, the related expense recognized. The assumptions the Company uses in calculating the fair value of stock-based
payment awards represent the Company's best estimates, which involve inherent uncertainties and the application of management's
judgment. As a result, if factors change and the Company uses different assumptions, the Company's equity-based compensation expense
could be materially different in the future.
Since the Company's common stock has no significant public trading history, and the Company
has experienced no significant option exercises in its history, the Company is required to take an alternative approach to estimating
future volatility and estimated life and the future results could vary significantly from the Company's estimates. The Company
compiled historical volatilities over a period of 2 to 7 years of 15 small-cap medical companies traded on major exchanges and
10 mid-range medical companies on the OTC Bulletin Board and combined the results using a weighted average approach. In the case
of ordinary options to employees the Company determined the expected life to be the midpoint between the vesting term and the legal
term. In the case of options or warrants granted to non-employees, the Company estimated the life to be the legal term unless there
was a compelling reason to make it shorter.
When an option or warrant is granted in place of cash compensation for services, the
Company deems the value of the service rendered to be the value of the option or warrant. In most cases, however, an option or
warrant is granted in addition to other forms of compensation and its separate value is difficult to determine without utilizing
an option pricing model. For that reason the Company also uses the Black-Scholes option-pricing model to value options and warrants
granted to non-employees, which requires the input of significant assumptions including an estimate of the average period the investors
or consultants will retain vested stock options and warrants before exercising them, the estimated volatility of the Company's
common stock price over the expected term, the number of options and warrants that will ultimately be forfeited before completing
vesting requirements, the expected dividend rate and the risk-free interest rate. Changes in the assumptions can materially affect
the estimate of fair value of stock-based consulting and/or compensation and, consequently, the related expense recognized.
Since the Company has limited trading history in its stock and no first-hand experience
with how its investors and consultants have acted in similar circumstances, the assumptions the Company uses in calculating the
fair value of stock-based payment awards represent its best estimates, which involve inherent uncertainties and the application
of management's judgment. As a result, if factors change and the Company uses different assumptions, the Company's equity-based
consulting and interest expense could be materially different in the future.
Valuation and accounting for options and warrants
The Company determines the grant date fair value of options and warrants using a Black-Scholes
option valuation model based upon assumptions regarding risk-free interest rate, expected dividend rate, volatility and estimated
term.
In January 2014 the Company issued 174 shares of common stock to the former CEO at $31.25
per share upon his exercising options.
In January through March 2014, 9 warrant holders exercised warrants through a cashless
exercise for a total of 618 shares of common stock.
In January and February 2014 the Company issued warrants to purchase 862 shares pursuant
to a February 4, 2014 private placement whereby the Company issued 20,550 shares of Series A Convertible Preferred Stock raising
gross proceeds of $2,055,000. The warrants are at an exercise price of $609.50.
In February 2014 the Company issued a warrant to purchase 60 shares of common stock at
an exercise price of $506.25 to a major shareholder Dr. Samuel Herschkowitz. The warrant is in consideration for a bridge loan
extended in December 2013 that has been paid in February 2014.
On March 31, 2014, the Company issued dividends to the Purchasers of the Preferred Shares
as described above. The dividends are at an annual rate of 6% of the stated value of the Preferred Shares paid on a quarterly basis
in the form of common stock per a stipulated $487.50 per share. As a result 39 shares of common stock were issued to 16 holders
of Preferred Shares.
In March 2014, the Company issued 178 shares of common stock to a warrant holder for
a partial cash exercise at $281.25 per share; issued 134 shares to the holder via the cashless exercise of the remainder of the
warrant.
In June 2014, the Company issued 149 shares of common stock to a warrant holder exercising
cashless warrants.
On June 30, 2014, the Company issued dividends to the Purchasers of the Preferred Shares
as described above. The dividends are at an annual rate of 6% of the stated value of the Preferred Shares paid on a quarterly basis
in the form of common stock per a stipulated $487.50 per share. As a result 63 shares of common stock were issued to 16 holders
of Preferred Shares.
On June 30, 2014, the Company issued a warrant to purchase 218 shares of common stock
at an exercise price of $309.50 to SOK Partners, LLC, in consideration for a bridge loan in the form of convertible notes. On September
9, 2014 the Resale Registration Statement went into effect. The convertible note agreement provided an immediate approximately
11% reduction to the warrant agreement. Therefore, the warrant has been adjusted to purchase 194 shares of common stock at an exercise
price of $309.50 to SOK Partners, LLC in consideration for a bridge loan.
In July 2014, the Company issued warrants to purchase 1,160 shares of common stock at
an exercise price of $309.50 to two lenders in consideration for a bridge loan in the form of convertible notes. The shares above
reflect approximately an 11% reduction resulting from the Resale Registration Statement that went effective September 9, 2014.
In August 2014, the Company issued warrants to purchase 2,462 of common stock at an exercise
price of $609.50 to the Purchasers of the Preferred Shares. The Securities Purchase Agreement with the Preferred Shareholders stipulated
that if the Company was not listed on either the NASDAQ Stock Market, the New York Stock Exchange or the NYSE MKT within 180 days
of closing the agreement then warrants to purchase the above additional shares would be issued in aggregate to the Preferred Shareholders.
In August and September 2014, the Company issued warrants to purchase 1,498 shares of
common stock at an exercise price of $309.50 to four lenders in consideration for a bridge loan in the form of convertible notes.
The shares above reflect the approximate 11% reduction resulting from the Resale Registration Statement that went effective September
9, 2014.
On September 30, 2014, the Company issued dividends to the Purchasers of the Preferred
Shares as described above. The dividends are at an annual rate of 6% of the stated value of the Preferred Shares paid on a quarterly
basis in the form of common stock per a stipulated $487.50 per share. As a result 63 shares of common stock were issued to 16 holders
of Preferred Shares.
In November 2014, the Company issued 548 shares of common stock, par value $0.01, in
escrow for debt settlement.
On December 31, 2014, the Company issued dividends to the Purchasers of the Preferred
Shares as described above. The dividends are at an annual rate of 6% of the stated value of the Preferred Shares paid on a quarterly
basis in the form of common stock per a stipulated $487.50 per share. As a result 63 shares of common stock were issued to 16 holders
of Preferred Shares.
For grants of stock options and warrants in 2014 the Company used a 1.44% to 2.75% risk-free
interest rate, 0% dividend rate, 59% to 66% volatility and estimated terms of 5 to 10 years. Value computed using these assumptions
ranged from $80.015 to $347.9864 per share.
In January 2015, the Company issued a dividend adjustment to the Purchasers of the Preferred
Shares as described above. Certain previous dividends paid were calculated with an exercise price of $487.50 per share, but should
have been calculated at $243.75 per share. As a result 125 shares of common stock were issued to 16 holders of Preferred Shares.
On March 31, 2015, the Company issued dividends to the Purchasers of the Preferred Shares
as described above. The dividends are at an annual rate of 6% of the stated value of the Preferred Shares paid on a quarterly basis
in the form of common stock per a stipulated $243.75 per share. As a result 125 shares of common stock were issued to 16 holders
of Preferred Shares.
On June 30, 2015, the Company issued dividends to Purchases of the Preferred Shares as
described above. The dividends are at an annual rate of 6% of the stated value of the Preferred Shares paid on a quarterly basis
in the form of common stock per a stipulated $243.75 per share. As a result 125 shares of common stock were issued to 16 holders
of Preferred Shares.
For grants of stock options and warrants in 2015 the Company used a 1.63% to 2.35% risk-free
interest rate, 0% dividend rate, 59% to 66% volatility and estimated terms of 5 to 10 years. Value computed using these assumptions
ranged from $6.8745 to $139.2386 per share.
On March 25, 2016, the Company commenced the Exchange Offer which was completed on April
20, 2016, as described above.
On July 1, 2016, the Company issued inducement stock options in accordance with NASDAQ
listing rules for 40,000 shares of common stock, par value $0.01, at $3.75 per share to the Company’s newly hired Vice President
of Sales. The options will vest in six equal increments: on the first, second, third, fourth, fifth and sixth quarters of the hiring
date anniversary.
On October 4, 2016, the Company issued 400,000 shares of common stock, par value $0.01,
to be held in escrow in connection with the Company’s Partnership and Exclusive Reseller Agreement with GLG Pharma, LLC.
For grants of stock options and warrants in 2016 the Company used a 1.46% to 1.78% risk
free interest rate, 0% dividend rate, 66% volatility and estimated terms of 10 years. Value computed using these assumptions ranged
from $1.6329 to $3.7195 per share.
The following summarizes transactions for stock options and warrants for the periods
indicated:
|
|
Stock Options
|
|
Warrants
|
|
|
Number of
Shares
|
|
Average
Exercise
Price
|
|
Number of
Shares
|
|
Average
Exercise
Price
|
Outstanding at December 31, 2014
|
|
|
17,945
|
|
|
$
|
187.75
|
|
|
|
20,029
|
|
|
$
|
198.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
14,171
|
|
|
|
69.00
|
|
|
|
303,269
|
|
|
|
123.75
|
|
Expired
|
|
|
(766
|
)
|
|
|
293.25
|
|
|
|
(79
|
)
|
|
|
283.50
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
(120
|
)
|
|
|
123.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
|
31,350
|
|
|
$
|
133.23
|
|
|
|
323,099
|
|
|
$
|
128.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
100,837
|
|
|
|
3.329
|
|
|
|
730,882
|
|
|
|
1.44
|
|
Expired
|
|
|
(22,377
|
)
|
|
|
122.132
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
(1,312
|
)
|
|
|
65.750
|
|
|
|
(939,879
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2016
|
|
|
108,498
|
|
|
$
|
15.652
|
|
|
|
114,102
|
|
|
$
|
369.06
|
|
At September 30, 2016, 64,542 stock options are fully vested and currently exercisable
with a weighted average exercise price of $23.46 and a weighted average remaining term of 9.57 years. All warrants are fully vested
and exercisable. Stock-based compensation recognized for the nine months ending September 2016 and September 2015 was $1,393,862
and $320,334, respectively. The Company has $132,675 of unrecognized compensation expense related to non-vested stock options that
are expected to be recognized over a period of approximately 18 months.
The following summarizes the status of options and warrants outstanding at September
30, 2016:
|
Range of Prices
|
|
|
|
Shares
|
|
|
|
Weighted Remaining Life
|
|
Options
|
|
|
|
|
|
|
|
|
|
$
|
2.25
|
|
|
|
293
|
|
|
|
9.90
|
|
$
|
2.42
|
|
|
|
37,152
|
|
|
|
9.89
|
|
$
|
3.75
|
|
|
|
44,000
|
|
|
|
9.76
|
|
$
|
4.125
|
|
|
|
3,636
|
|
|
|
10.00
|
|
$
|
4.1975
|
|
|
|
7,147
|
|
|
|
9.97
|
|
$
|
4.25
|
|
|
|
3,529
|
|
|
|
9.50
|
|
$
|
5.125
|
|
|
|
3,902
|
|
|
|
9.94
|
|
$
|
65.75
|
|
|
|
342
|
|
|
|
9.06
|
|
$
|
73.50
|
|
|
|
1,157
|
|
|
|
9.26
|
|
$
|
77.50
|
|
|
|
2,323
|
|
|
|
8.75
|
|
$
|
80.25
|
|
|
|
187
|
|
|
|
9.01
|
|
$
|
86.25
|
|
|
|
232
|
|
|
|
8.50
|
|
$
|
121.875
|
|
|
|
5
|
|
|
|
6.45
|
|
$
|
131.25
|
|
|
|
81
|
|
|
|
5.94
|
|
$
|
148.125
|
|
|
|
928
|
|
|
|
6.47
|
|
$
|
150.00
|
|
|
|
1,760
|
|
|
|
5.88
|
|
$
|
162.50
|
|
|
|
123
|
|
|
|
8.26
|
|
$
|
206.25
|
|
|
|
121
|
|
|
|
8.01
|
|
$
|
248.4375
|
|
|
|
121
|
|
|
|
6.79
|
|
$
|
262.50
|
|
|
|
130
|
|
|
|
6.79
|
|
$
|
281.25
|
|
|
|
529
|
|
|
|
6.30
|
|
$
|
318.75
|
|
|
|
3
|
|
|
|
6.60
|
|
$
|
346.875
|
|
|
|
72
|
|
|
|
7.50
|
|
$
|
431.25
|
|
|
|
306
|
|
|
|
7.44
|
|
$
|
468.75
|
|
|
|
133
|
|
|
|
7.40
|
|
$
|
506.25
|
|
|
|
188
|
|
|
|
7.25
|
|
$
|
543.75
|
|
|
|
53
|
|
|
|
7.02
|
|
$
|
596.25
|
|
|
|
42
|
|
|
|
7.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
$
|
93.75
|
|
|
|
2,255
|
|
|
|
1.45
|
|
$
|
123.75
|
|
|
|
94,084
|
|
|
|
3.92
|
|
$
|
150.00
|
|
|
|
4,114
|
|
|
|
1.45
|
|
$
|
225.00
|
|
|
|
107
|
|
|
|
1.32
|
|
$
|
243.75
|
|
|
|
2,529
|
|
|
|
2.84
|
|
$
|
281.25
|
|
|
|
5,897
|
|
|
|
1.20
|
|
$
|
309.375
|
|
|
|
2,850
|
|
|
|
2.86
|
|
$
|
309.50
|
|
|
|
222
|
|
|
|
3.10
|
|
$
|
337.50
|
|
|
|
178
|
|
|
|
1.72
|
|
$
|
371.25
|
|
|
|
944
|
|
|
|
1.66
|
|
$
|
506.25
|
|
|
|
59
|
|
|
|
2.38
|
|
$
|
609.375
|
|
|
|
862
|
|
|
|
2.34
|
|
|
|
|
|
|
114,102
|
|
|
|
|
|
Stock options and warrants expire on various dates from June
2017 to September 2026.
On July 24, 2015, an amendment to the Certificate of Incorporation became effective,
pursuant to which the authorized common stock was increased to 4,000,000 shares of common stock and the authorized preferred stock
was increased to 20,000,000 shares.
Under a Separation Agreement effective June 13, 2016, all of our former CEO Josh Kornberg’s
22,085 outstanding stock options were canceled.
On September 16, 2016, an amendment to the Certificate of Incorporation became effective,
pursuant to which the authorized common stock was increased to 8,000,000 shares of common stock.
Stock Options and Warrants Granted by the Company
The following table is the listing of stock options and warrants as of September 30,
2016 by year of grant:
Stock Options:
Year
|
|
Shares
|
|
Price
|
2011
|
|
|
173
|
|
|
|
0.00
|
-
|
281.25
|
|
2012
|
|
|
1,841
|
|
|
|
131.25
|
-
|
150.00
|
|
2013
|
|
|
1,612
|
|
|
|
121.88
|
-
|
596.25
|
|
2014
|
|
|
969
|
|
|
|
162.50
|
-
|
468.75
|
|
2015
|
|
|
4,240
|
|
|
|
65.75
|
-
|
86.25
|
|
2016
|
|
|
99,661
|
|
|
|
2.25
|
-
|
5.13
|
|
Total
|
|
|
108,498
|
|
|
|
$0.00
|
-
|
596.25
|
|
Warrants:
Year
|
|
Shares
|
|
Price
|
2012
|
|
|
2,792
|
|
|
|
|
281.25
|
|
|
2013
|
|
|
10,703
|
|
|
|
93.75
|
-
|
371.25
|
|
2014
|
|
|
6,455
|
|
|
|
243.75
|
-
|
609.38
|
|
2015
|
|
|
94,152
|
|
|
|
0.00
|
-
|
243.75
|
|
Total
|
|
|
114,102
|
|
|
|
$0.00
|
-
|
609.38
|
|
NOTE 4 – SHORT-TERM NOTES PAYABLE
From July through September 2014, we entered into a series of securities purchase agreements
pursuant to which we issued approximately $1.8 million original principal amount (subsequently reduced to approximately $1.6 million
aggregate principal amount in accordance with their terms) of convertible promissory notes (the “2014 Convertible Notes”)
and warrants exercisable for shares of our common stock for an aggregate purchase price of $1,475,000. Of this amount, we issued
to SOK Partners, LLC, an affiliate of the Company, $122,196 original principal amount of the 2014 Convertible Notes and warrants
exercisable for 218 shares of our common stock for an aggregate purchase price of $100,000. In April and May 2015, we issued and
sold to a private investor additional Convertible Notes in an aggregate original principal amount of $275,000 for an aggregate
purchase price of $250,000, containing terms substantially similar to the 2014 Convertible Notes (the “2015 Convertible Notes”
and, together with the 2014 Convertible Notes, the “Convertible Notes”). No warrants were issued with the 2015 Convertible
Notes.
Under a provision in the existing agreements, upon effectiveness of a resale registration
statement covering certain shares, on September 9, 2014, the principal amount of the notes was reduced by 11%, to $1,603,260 and
the number of Warrants was reduced by 11%, to 2,851 shares.
As of September 30, 2016 $927,663 aggregate principal amount of Convertible Notes, plus
accrued and unpaid interest thereto, have been converted into shares of our common stock and no aggregate principal amount of Convertible
Notes remains outstanding.
In connection with the Offering, the holders of the Convertible
Notes agreed to not exercise their right to convert the Convertible Notes into shares of the Company’s common stock, in exchange
for the Company’s agreement to redeem all of the outstanding Convertible Notes promptly following the consummation of the
Offering at a redemption price equal to 140% of the principal amount, plus accrued and unpaid interest to the redemption date.
On August 31, 2015, the closing date of the offering, the Company redeemed the remaining $933,074 aggregate principal amount of
Convertible Notes plus interest and a 40% redeemable premium, for a total payment of $1,548,792. Of this amount, approximately
$167,031 was paid to its affiliates in redemption of their Convertible Notes. Each holder of the Convertible Notes agreed to the
foregoing terms and entered into an Amendment to Senior Convertible Notes and Agreement with the Company. As of September 30, 2016,
none of the Convertible Notes were outstanding.
NOTE 5 - LOSS PER SHARE
The following table presents the shares used in the basic and diluted loss per common
share computations:
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Numerator:
|
|
|
|
|
|
|
|
|
Net loss available in basic and diluted calculation
|
|
$
|
(1,055,593
|
)
|
|
$
|
(1,116,402
|
)
|
|
$
|
(5,793,242
|
)
|
|
$
|
(2,527,524
|
)
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) from marketable securities
|
|
|
(1,299
|
)
|
|
|
-
|
|
|
|
4,579
|
|
|
|
-
|
|
Comprehensive (loss)
|
|
|
(1,056,892
|
)
|
|
|
(1,116,402
|
)
|
|
|
(5,788,663
|
)
|
|
|
(2,527,524
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding-basic
|
|
|
3,320,139
|
|
|
|
157,445
|
|
|
|
2,250,315
|
|
|
|
137,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of diluted stock options, warrants and preferred stock (1)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Weighted average common shares outstanding-basic
|
|
|
3,320,139
|
|
|
|
157,445
|
|
|
|
2,250,315
|
|
|
|
137,428
|
|
Loss per common share-basic and diluted
|
|
$
|
(0.32
|
)
|
|
$
|
(7.09
|
)
|
|
$
|
(2.57
|
)
|
|
$
|
(18.39
|
)
|
(1) The number of shares underlying options and warrants outstanding as of September
30, 2016 and September 30, 2015 are 222,600 and 343,554 respectively. The effect of the shares that would be issued upon exercise
of such options, warrants and preferred stock has been excluded from the calculation of diluted loss per share because those shares
are anti-dilutive.
NOTE 6 – INCOME TAXES
Availability and Utilization of Net Operating Losses
During September 2013, the Company experienced an “ownership change” as defined
in Section 382 of the Internal Revenue Code which could potentially limit the ability to utilize the Company’s net operating
losses (NOLs). The general limitation rules allow the Company to utilize its NOLs subject to an annual limitation that is determined
by multiplying the federal long-term tax-exempt rate by the Company’s value immediately before the ownership change.
During the first quarter of 2016, the Company likely had another ownership change that
could further limit the Company’s ability to fully utilize its NOLs however, the determination of the annual limitation has
not yet been made.
Income Taxes
At December 31, 2015, the Company had approximately $24.7 million of gross NOLs to reduce
future federal taxable income, the majority of which are expected to be available for use in 2016, subject to the Section 382 limitation
described above. The federal NOLs will expire beginning in 2022 if unused. The Company also had approximately $13.4 million of
gross NOLs to reduce future state taxable income at December 31, 2015, which will expire in years 2022 through 2036 if unused.
The Company’s net deferred tax assets, which include the NOLs, are subject to a full valuation allowance. At December 31,
2015, the federal and state valuation allowances were $9.6 million and $1.1 million, respectively.
At September 30, 2016, the Company had approximately $29.2 million of gross NOLs to reduce
future federal taxable income, the majority of which are expected to be available for use in 2017, subject to the Section 382 limitations
described above. The federal NOLs will expire beginning in 2022 if unused. The Company also had approximately $15.0 million of
gross NOLs to reduce future state taxable income at September 30, 2016, which will expire in years 2022 through 2037 if unused.
The Company’s net deferred tax assets, which include the NOLs, are subject to a full valuation allowance. At September 30,
2016, the federal and state valuation allowances were $10.1 million and $0.3 million, respectively.
The components of deferred income taxes at September 30, 2016 and December 31, 2015 are
as follows:
|
|
September 30,
2016
|
|
December 31,
2015
|
|
|
|
|
|
Deferred Tax Asset:
|
|
|
|
|
|
|
|
|
Net Operating Loss
|
|
$
|
10,271,000
|
|
|
$
|
10,338,000
|
|
Other
|
|
|
166,000
|
|
|
|
359,000
|
|
Total Deferred Tax Asset
|
|
|
10,437,000
|
|
|
|
10,697,000
|
|
Less Valuation Allowance
|
|
|
10,437,000
|
|
|
|
10,697,000
|
|
Net Deferred Income Taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
NOTE 7 – RENT OBLIGATION
The Company leases its principal office under a lease that can be cancelled after three
years with proper notice per the lease and an amortized schedule of adjustments that will be due to the landlord. The lease extends
five years and expires January 2018. In addition to rent, the Company pays real estate taxes and repairs and maintenance on the
leased property. Rent expense was $16,356 and $50,106 for the three and nine months ended September 30, 2016 and was $15,900 and
$50,156 for the three and nine months ended September 30, 2015 respectively.
The Company’s rent obligation for the next three years is as follows:
2016
|
|
$
|
9,500
|
|
2017
|
|
$
|
39,000
|
|
2018
|
|
$
|
3,600
|
|
NOTE 8 – RELATED PARTY TRANSACTIONS
The Audit Committee has the responsibility to review and approve all transactions to
which a related party and the Company may be a party prior to their implementation, to assess whether such transactions meet applicable
legal requirements.
In connection with the sale of the Series A Preferred Share on February 4, 2014, Josh
Kornberg, our former, and then President, CEO and Interim Chairman of the Board, was one of the Purchasers. Mr. Kornberg purchased
770 Preferred Shares for a purchase price of $25,000 and received warrants to purchase 3 shares of common stock.
SOK Partners, LLC (“SOK”), a large stockholder with Mr. Kornberg and Dr.
Samuel Herschkowitz as managing partners, invested in the July 2014 offering of convertible notes and warrants. In November 2014,
the convertible noteholders agreed to convert certain balances of the convertible notes in connection with the public offering
of the Existing Units, in consideration of the agreement to issue certain additional shares. See “Management’s Discussion
and Analysis of Financial Conditions and Results of Operations – Liquidity and Capital Resources – History Financing
– 2014 Sales of Convertible Notes and Warrants.” In connection with the Unit Offering in August 2015, all such convertible
notes were redeemed at a redemption price of 140% of the principal amount thereof, plus accrued and unpaid interest. The Company
paid approximately $163,000 to SOK in redemption of its convertible note. In addition, Rick Koenigsberger, a former director who
resigned on June 5, 2015, is a holder of membership units of SOK Partners.
In connection with the Unit Exchange that was consummated on August 31, 2015, 250 shares
of Series A Convertible Stock held by Mr. Kornberg were exchanged for 2,778 Exchange Units.
NOTE 9 – RETIREMENT SAVINGS PLAN
We have a pre-tax salary reduction/profit-sharing plan under the provisions of Section
401(k) of the Internal Revenue Code, which covers employees meeting certain eligibility requirements. In fiscal 2016 and 2015,
we matched 100%, of the employee’s contribution up to 4% of their earnings. The employer contribution was $7,401 and $28,196
for the three and nine months ending September 30, 2016 and was $7,021 and $21,735 for the three and nine months ending September
30, 2015, respectively.
NOTE 10 – SUPPLEMENTAL CASH FLOW DATA
There were $3 in cash payments for interest for the three and nine months ended September
30, 2016 and were $226,960 and $237,121 for the three and nine months ended September 30, 2015.
NOTE 11 – INVESTMENT SECURITIES AND OTHER COMPREHENSIVE INCOME (LOSS)
The cost and fair values of investment securities available-for-sale at September 30,
2016 were as follows:
|
|
September 30, 2016
|
Description
|
|
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual Funds
|
|
$
|
572,309
|
|
|
$
|
4,579
|
|
|
$
|
-
|
|
|
$
|
576,888
|
|
1,925,00 Units, Each Unit Consisting of One Share
of Common Stock and One Series D Warrant to Purchase 0.2 Shares of Common Stock
385,000 Shares of Common Stock Underlying the Series D Warrants
______________________________
PROSPECTUS
______________________________
Dawson James Securities, Inc.
The date of this Prospectus is , 2016