The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.
Description of Business, Liquidity and Going Concern
Implant Sciences Corporation provides systems and sensors for the homeland security market and related industries. We have developed and acquired technologies using ion mobility spectrometry to develop a product line for use in trace explosives and narcotics detection. We currently market and sell our existing trace explosives and narcotics detector products while continuing to make significant investments in developing the next generation of these products.
Sale of Explosives Detector Assets and Bankruptcy Filing
On October 10, 2016, we and our subsidiaries entered into an asset purchase agreement to sell the explosives trace detection assets to L-3 Communications Corporation for $117.5 million in cash, plus the assumption of specified liabilities, subject to adjustment. The asset purchase agreement constitutes a stalking horse bid in a sale process being conducted under Section 363 of the U.S. Bankruptcy Code. As the Stalking horse bidder, L-3 will be entitled to a break-up fee and expense reimbursement if it does not prevail as the successful bidder at any subsequent Bankruptcy Court auction. L-3s role as the stalking horse bidder upon Bankruptcy Court Appeal, and the sale itself, are subject to approval by the Bankruptcy Court. In connection with the sale, on October 10, 2016, Implant Sciences Corporation and its subsidiaries IMX Acquisition Corp., C Acquisition Corp. and Accurel Systems International Corp. (together with the Company, the Debtors) filed voluntary relief petitions under Chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court for the District of Delaware (the Bankruptcy Court). We will continue to operate our businesses as debtors-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code. On the petition date, we filed several motions with the bankruptcy court, including a motion to have the Chapter 11 cases jointly administered.
On December 16, 2016, the Bankruptcy Court issued an order authorizing the sale of substantially all of our assets free and clear of liens, claims, encumbrances and other interests; authorized and approved our performance under the asset purchase agreement entered into with L-3; approved the assumption and assignment of certain of our contracts and unexpired leases. In conjunction with this order, on December 16, 2016, we amended the asset purchase agreement with L-3 whereby both parties agreed that the closing date will be January 5, 2017.
In connection with the Chapter 11 filings, we filed a motion seeking the approval of the bankruptcy court for a superpriority senior secured loan of $5.7 million (the DIP Loan) between the Company and DIP SPV I, L.P., as the debtor-in-possession lender ( the DIP Lender) pursuant to a senior secured superpriority debtor-in-possession loan and security agreement entered into by the Debtors and the DIP Lender on October 10, 2016. The DIP loan would bear interest at 12% and included a one-time closing fee of $199,500 on the closing date of the DIP Loan and an exit fee equal to $427,500, less any interest, other that default interest (which is at a rate of 24%), paid to the DIP Lender as of the termination date of the DIP Loan. The DIP Loan is payable in full upon the consummation of the sale under the asset purchase agreement with L-3 Communications Corporation or a sale to any other winning bidder in the Bankruptcy Court auction. On October 13, 2016, we borrowed $1,500,000 under the DIP Loan.
The use of proceeds from the DIP Loan would be limited to working capital and other general corporate purposes consistent with the budget that the Company presented to the DIP Lender, including payment of costs and expenses related to the administration of the bankruptcy proceedings and payment of other expenses as approved by the bankruptcy court. Unless otherwise extended, the DIP Loan would mature six months from the anniversary date of the agreement, subject to certain provisions that may lead to an earlier termination.
On November 7, 2016, we terminated the Senior Secured, Super-Priority Debtor-in-Possession Loan and Security Agreement, dated as of October 10, 2016 (as amended on November 3, 2016, the Original DIP Agreement), with the original lender, DIP SPV I, L.P. (the Original DIP Lender). In connection with such termination, the Company paid $1,610,769 to the Original DIP Lender and its advisors to satisfy outstanding obligations under the Original DIP Agreement, including $74,354 for expense reimbursement for the Original DIP Lenders advisors.
On November 7, 2016 (the Effective Date), we entered into a replacement Senior Secured, Super-Priority Debtor-in-Possession Loan and Security Agreement (the New DIP Agreement) with Tannor Partners Credit Fund, LP, the New DIP Lender, which DIP Agreement was approved by the Bankruptcy Court on an interim basis pursuant to an order dated as of the Effective Date for the initial loan amount of $5,700,000. Under the New DIP Agreement, subject to the terms and conditions thereof, the New DIP Lender agreed to lend up to a total of $8.0 million to the Borrowers, with the initial installment of $5,700,000 payable upon the Bankruptcy Court entering the interim order for the New DIP Agreement and the remaining $2,300,000 payable upon the Bankruptcy Court
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IMPLANT SCIENCES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
entering the final order for the New DIP Agreement. On November 8, 2016, we borrowed $5,700,000 under the New DIP Agreement and borrowed an additional $2,300,000 on November 30, 2016. As of December 9, 2016, our obligations under the New DIP Agreement for principal and for accrued interest were $8,000,000 and $25,600, respectively. The New DIP Agreement is substantially identical to the Original DIP Agreement, except for the amounts of the closing fee and the exit fee.
The loans under the New DIP Agreement will accrue interest of 12% per annum, and shall be subject to a default interest rate of 12% above the applicable non-default rate (i.e., an aggregate of 24% per annum) at any time when there is an event of default under the New DIP Agreement. We have agreed in the New DIP Agreement to pay fees to the New DIP Lender in an aggregate amount of 5.75% of the maximum loan amount, regardless of how long the New DIP Loan was outstanding consisting of a closing fee of $35,000 at the time the initial loan is made and an exit fee upon the termination of the New DIP Agreement of $425,000, minus any interest, other than default interest, paid to the New DIP Lender. We are also required to reimburse the New DIP Lender for its fees and expenses in connection with the New DIP Agreement and the loans thereunder. Interest on the loans and the expense reimbursement are payable monthly in arrears.
The loans under the New DIP Agreement have super-priority security status and are ahead of our other secured obligations owed to the investors under the Note Purchase Agreement, dated March 19, 2014, as amended, between the us, the investors named therein and BAM Administrative Services LLC, as administrative agent for the investors thereunder, and holders of the notes under each of the Credit Agreements, dated as of September 4, 2009, as amended, with DMRJ Group LLC and the Note and Warrant Purchase Agreement dated as of December 10, 2008, as amended, with DMRJ Group LLC, and Montsant Partners LLC, as partial assignee thereof.
The loans under the New DIP Agreement and all other obligations are due and payable (i) upon the occurrence of an event of default that is not cured within the applicable cure periods and for which the New DIP Lender has given notice to accelerate our obligations under the New DIP Agreement, (ii) the entry of an order converting the Chapter 11 Case to a case under chapter 7 of the Bankruptcy Code, (iii) the entry of an order in the Chapter 11 Case appointing a chapter 11 trustee or examiner, (iv) if the interim order for the New DIP Agreement is modified at the final hearing for the New DIP Agreement in a manner unacceptable to the New DIP Lender, (v) the effective date of a chapter 11 plan in the Chapter 11 Case, (vi) the approval by the Bankruptcy Court of an alternative financing transaction transferring the collateral other than the sale of the our assets to L-3 Communications Corporation (Buyer) under the asset purchase agreement, dated as of October 10, 2016 (as amended, the Purchase Agreement), by and among the Company and L-3 Communications Corporation or to another winning bidder in the Bankruptcy auction process (the Sale), (vii) the date of the closing of the Sale and (viii) the first business day after the 6 month anniversary of the New DIP Agreement. The loans can be prepaid at any time and mandatory prepayments are required upon the disposition of assets outside of the ordinary course, the receipt of extraordinary receipts or the incurrence of any additional indebtedness.
We believe that the proceeds from the sale of our explosives detection assets to L-3 and the assumption by L-3 of certain liabilities will be sufficient to pay the New DIP Loan, related expenses and $425,000 exit fee; all secured and unsecured creditor claims; financial advisor and legal expenses associated with the sale; payment due under our Change of Control Plan; and, legal fees and other expenses associated with the bankruptcy filing. The
Board of Directors is exploring opportunities to provide optionality to our shareholders following the anticipated successful completion of the ETD asset sale to L-3. We believe the economics of the sale will ensure that creditors and shareholders will receive economic benefit. We intend to provide alternatives as part of the plan to emerge from voluntary Chapter 11 bankruptcy that would recognize the value of a publicly listed shell. These alternatives may include the merger of an operating entity into the shell or a liquidation of the company, which determination is subject to approval by our shareholders.. A plan of reorganization
must be filed with the court on February 7, 2017.
Liquidity, Going Concern and Managements Plans
On December 10, 2008, we entered into a note and warrant purchase agreement with DMRJ Group LLC (DMRJ) pursuant to which we issued a senior secured convertible promissory note in the principal amount of $5,600,000 and a warrant to purchase 1,000,000 shares of our common stock. We have entered into a series of amendments, waivers and modifications with DMRJ. On July 20, 2016, we amended our credit agreements with DMRJ pursuant to which, amongst other matters, we extended the maturity date of all of our indebtedness to DMRJ to October 31, 2016.
On May 4, 2015, we entered into an assignment agreement with DMRJ and Montsant Partners, LLC (Montsant), wherein DMRJ assigned its rights, title and interest in the senior secured promissory note dated December 10, 2008 and appointed DMRJ as its collateral agent under the promissory note agreement. On July 20,
- 7 -
IMPLANT SCIENCES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2016, we amended our credit agreement with Montsant, extending the maturity date of our indebtedness to October 31, 2016.
DMRJ and Montsant are funds managed by Platinum Partners Value Arbitrage Fund LP.
On March 19, 2014, we entered into a note purchase agreement with a group of institutional investors and BAM Administrative Services LLC (BAM), an administrative agent for the investors, pursuant to which we issued senior secured promissory notes in the aggregate principal amount of $20,000,000. We used all of the proceeds from the sale of the notes to repay (i) $17,624,000 of our outstanding indebtedness to DMRJ under revolving promissory note (ii) $1,809,000 of interest outstanding under that facility and (iii) $567,000 of interest outstanding under our senior secured convertible promissory note (see Note 12 to the condensed consolidated financial statements). We have entered into several amendments, waivers and modifications with BAM. The notes bear interest at 16% per annum.
The maturity of our indebtedness to BAM was automatically extended to October 30, 2016 as a result of the extension of the maturity date of our indebtedness to DMRJ and Montsant.
The payment of our indebtedness to DMRJ, Montsant and BAM are stayed pending the conclusion of the bankruptcy proceedings.
The New DIP loans and all other obligations are due and payable (i) upon the occurrence of an event of default that is not cured within the applicable cure periods and for which the New DIP Lender has given notice to accelerate our obligations under the New DIP Agreement, (ii) the entry of an order converting the Chapter 11 Case to a case under Chapter 7 of the Bankruptcy Code, (iii) the entry of an order in the Chapter 11 Case appointing a chapter 11 trustee or examiner, (iv) if the interim order for the New DIP Agreement is modified at the final hearing for the New DIP Agreement in a manner unacceptable to the New DIP Lender, (v) the effective date of a chapter 11 plan in the Chapter 11 Case, (vi) the approval by the Bankruptcy Court of an alternative financing transaction transferring the collateral other than the sale of our assets to L-3 Communications Corporation (Buyer) under the asset purchase agreement, dated as of October 10, 2016.
Despite our projected sales, expense and cash flow projections to fund our operations and continue the development, commercialization and marketing of our products will require that we maintain our credit facilities with Tannor Partners Credit Fund, LP, DMRJ, BAM and Montsant. There can be no assurance that we will achieve the covenant test under our New DIP Loan, which would be deemed an event of default. Upon the occurrence of an event of default that is not cured within the applicable cure periods and for which the New DIP Lender can give notice to accelerate our obligations under the New DIP Agreement or that DMRJ is willing or is able to continue to make advances under our revolving line of credit. Our failure to achieve our projections and/or obtain sufficient additional capital on acceptable terms would have a material adverse effect on our liquidity and operations and could require us to convert our voluntary filing under bankruptcy laws from Chapter 11 to Chapter 7. Furthermore, we are incurring and will incur increased legal and financial adviser cost associated with the activities of the Official Committee of Equity Holders appointed by the U.S. Trustee and increased legal and administrative cost associated with the bankruptcy proceedings following the anticipated successful completion of the ETD asset sale to L-3. These conditions raise substantial doubt as to our ability to continue as a going concern.
Our common stock was delisted by the NYSE Amex LLC in June 2009 as result of our failure to comply with certain continued listing requirements. Our common stock has been quoted on the OTC Bulletin Board since May 2009 and is also quoted on the OTC Markets Groups OTCQB tier under the symbol IMSC. We believe that trading over the counter has limited our stocks liquidity and has impaired our ability to raise capital.
In addition, while we strive to bring new products to market, we are subject to a number of risks similar to the risks faced by other technology-based companies, including risks related to: (a) our dependence on key individuals and collaborative research partners; (b) competition from substitute products and larger companies; (c) our ability to develop and market commercially usable products and obtain regulatory approval for our products under development; and (d) our ability to obtain substantial additional financing necessary to adequately fund the development, commercialization and marketing of our products. For the three months ended September 30, 2016, we reported a net loss of $27,184,000 and used $40,000 in cash from operations.
As of September 30, 2016, the Company had an accumulated deficit of approximately $227,403,000 and a working capital deficit of $97,097,000. Management continually evaluates its operating expenses and its cash flow from operations.
As of September 30, 2016, our obligations to DMRJ under each of the three promissory notes and a revolving
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IMPLANT SCIENCES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
line of credit approximated $11,970,000, $17,523,000, $1,000,000 and $17,662,000, respectively. Further, as of September 30, 2016, our obligation to DMRJ for accrued interest under these instruments approximated $7,282,000 and is included in current liabilities in the condensed consolidated financial statements.
As of September 30, 2016, our obligations to Montsant under a promissory note approximated $5,284,000. Further, as of September 30, 2016, our obligation to Montsant for accrued interest under this instrument approximated was $203,000.
As of September 30, 2016, our obligations under the senior secured promissory notes for which BAM is the agent were $20,000,000. Further, as of September 30, 2016, our obligation under such notes for accrued interest amounted to approximately $3,200,000 and is included in current liabilities in the condensed consolidated financial statements.
As of December 9, 2016, our obligations to DMRJ under each of the three promissory notes and a revolving line of credit approximated $11,970,000, $17,523,000, $1,000,000 and $17,662,000, respectively. Further, as of December 9, 2016, our obligation to DMRJ for accrued interest under these instruments approximated $8,687,000. Please refer to Note 14 to the condensed consolidated financial statements for a discussion of the August 2016 conversions of principal indebtedness by DMRJ.
As of December 9, 2016, our obligations to Montsant under a promissory note approximated $5,284,000. Further, as of December 9, 2016, our obligation to Montsant for accrued interest under this instrument approximated $328,000.
As of December 9, 2016, our obligations under the senior secured promissory notes for which BAM is the agent were $20,000,000. Further, as of December 9, 2016, our obligation under such notes for accrued interest amounted to approximately $3,802,000.
On December 11, 2015, we entered into an Accounts Receivable Purchase Agreement (the Purchase Agreement) with Republic Capital Access, LLC (RCA), pursuant to which we may sell eligible accounts receivables relating to U.S. government prime contracts or subcontracts (as defined in the Purchase Agreement, Eligible Receivables) to RCA. The total amount of Eligible Receivables that we may sell to RCA is subject to a maximum limit of $2,000,000 of outstanding receivables at any given time. On April 11, 2016, we amended the Purchase Agreement (the Amended Purchase Agreement). As amended, the total amount of Eligible Receivables that we may sell to RCA is subject to a maximum limit of $3,500,000 of outstanding receivables at any given time.
Pursuant to the terms of the Purchase Agreement, we will receive from RCA, within two business days of the submission of the applicable invoice, an initial payment equal to 90% of the face value of an Eligible Receivable purchased by RCA. Following payment of such Eligible Receivable to RCA by the relevant customer, RCA shall pay the Company the residual 10% of such receivable, less transaction fees payable to RCA by the Company pursuant to the Purchase Agreement.
We have paid, or will pay, as applicable, the following fees, as applicable, to RCA pursuant to the Purchase Agreement: (i) an initial enrollment fee equal to $5,000.00; (ii) a discount factor equal to 0.35%, for U.S. government contracts (or 0.53% for U.S. government subcontracts), of the amounts of purchased receivables; (iii) a program access fee equal to 0.017% of the daily ending account balance for each day that receivables are outstanding; (iv) a commitment fee equal to 1% of Maximum Amount minus the amount of purchased receivables; and (v) expenses relating to the negotiation of the Purchase Agreement, which amount is not expected to exceed $1,000. As of September 30, 2016, RCA has purchased $16,913,000 of our receivables pursuant to the Purchase Agreement.
The Purchase Agreement terminated on October 10, 2016, as a consequence of our filing of
voluntary relief petitions under Chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court. As of that date, w
e are no longer able to sell eligible accounts receivable to RCA and we have collected all amounts owed under the Purchase Agreement from RCA.
These conditions raise substantial doubt as to our ability to continue as a going concern.
Our ability to comply with our debt covenants in the depends on our ability to to control expenses and may require that we seek additional capital through private financing sources. The payment of our secured obligations with DMRJ and Montsant will be stayed until such time that the Official Committee of Equity Holders has concluded their activities to assert certain estate claims and causes of action and challenge the validity, enforceability, and perfection of certain prepetition secured claims, which challenge period was extended by the bankruptcy court up to and including January 23, 2017. Interest on our debt obligations with DMRJ and Montsant
- 9 -
IMPLANT SCIENCES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
will continue to accrue until such time that the obligations are paid by us. There can be no assurances that we will achieve our forecasted financial results or that we will be able to raise additional capital to operate our business. Any such failure would have a material adverse impact on our liquidity and financial condition and could force us to curtail or discontinue operations entirely. Further, upon the occurrence of an event of default under certain provisions of our credit agreements with DMRJ, Montsant and BAM, we could be required to pay default rate interest equal to the lesser of 2.5% per month and the maximum applicable legal rate per annum on the outstanding principal balance. The occurrence of an event of default under certain provisions of our New DIP Loan would require us to pay default interest equal to 24% per annum on the outstanding principal loan balance. The failure to cure an event of default or negotiate further extensions of our obligations to our secured lenders would have a material adverse impact on our liquidity and financial condition and could force us to curtail or discontinue operations entirely and/or file for protection under Chapter 7 of the U.S. bankruptcy laws.
Based on projected cash flows, and the cash available from under the New DIP Loan, management believes there are plans in place to sustain operations during the bankruptcy process, provided that our credit facilities are maintained. These plans depend on a substantial increase in sales of our handheld trace explosives detector product and our desktop explosives and narcotics trade detector product and the prudent management of our resources. However, there can be no assurances that sales will materialize as forecasted, and/or that management will be successful in refinancing or extending our obligations to our secured lenders, which matured between October 30, 2016 and October 31, 2016. To further sustain us, improve our cash position, and enable us to grow while reducing debt, management plans to continue to seek additional capital through private financing sources. However, there can be no assurance that management will be successful in executing these plans or that we would receive permission from the New DIP Lender, BAM, DMRJ, Montsant or the bankruptcy court to obtain additional capital. Management will continue to closely monitor and attempt to control our costs and actively seek needed capital through sales of our products, government grants and awards and through our lending institutions.
On August 24, 2016, a Cayman Islands court appointed an insolvency specialist, RHSW Caribbean, to liquidate the assets of Platinum Partners Value Arbitrage Fund LP (Platinum). On October 18, 2016, RHSW Caribbean filed a Chapter 15 bankruptcy petition
with the United States Bankruptcy Court for the District of Southern New York,
which seeks to protect Platinum's U.S. assets from its creditors while an insolvency proceeding is underway in the Cayman Islands. Our ability to obtain additional funds under our credit agreements with DMRJ is unlikely given the pending liquidation of the funds and the Chapter 15 bankruptcy petition.
However, there can be no assurances that sales will materialize as forecasted, and/or that management will be successful in refinancing or extending our obligations to our secured lenders, which matured between October 30, 2016 and October 31, 2016.
The payment of our indebtedness to DMRJ and Montsant are stayed pending the conclusion of the bankruptcy proceedings.
We have suffered recurring losses from operations. Our condensed consolidated financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
There can be no assurances that our forecasted results will be achieved or that we will be able to raise additional capital necessary to operate our business. These conditions raise substantial doubt about our ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.
We have a history of being active in submitting proposals for government sponsored grants and contracts and successful in being awarded grants and contracts from government agencies. However, we have recorded no revenues from government contracts, due to the expiration of several contracts and our inability to secure new contracts. Management will continue to pursue these grants and contracts to support our research and development efforts primarily in the areas of trace explosives detection.
On October 16, 2014, the U.S. Department of Homeland Security (DHS) selected our proposal to develop next generation explosives trace detection screening systems for funding. We entered into a cost-plus fixed-fee contract with the DHS on August 24, 2016. The contract consists of a definitive task and an optional task, each valued at approximately $1.1 million. The total performance period will be twenty-four months, provided the optional task is exercised. The project commenced in the first quarter of fiscal 2017.
- 10 -
IMPLANT SCIENCES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
We are currently expending significant resources to develop the next generation of our current products and to develop new products. We will require additional funding in order to continue the advancement of the commercial development and manufacturing of the explosives detection system. We will attempt to obtain such financing by: (i) government grants, (ii) private financing, or (iii) strategic partnerships. However, there can be no assurance that we will be successful in our attempts to raise such additional financing.
We will require substantial funds for further research and development, regulatory approvals, and the marketing of our explosives detection products. Our capital requirements depend on numerous factors, including but not limited to the progress of our research and development programs; the cost of filing, prosecuting, defending and enforcing any intellectual property rights; competing technological and market developments; changes in our development of commercialization activities and arrangements; and the hiring of additional personnel, and acquiring capital equipment. Our failure to achieve our projections and/or obtain sufficient additional capital on acceptable terms would have a material adverse effect on our liquidity and operations and could require us to file for protection under bankruptcy laws.
Security product sales tend to have a long sales cycle, and are often subject to export controls. In an effort to identify new opportunities and stimulate sales, we have hired additional sales personnel during fiscal 2013 that have specific industry experience and have retained new distributors. However, there can be no assurance that these efforts will increase revenues.
2.
Interim Financial Statements and Basis of Presentation
Principles of Consolidation
The accompanying condensed consolidated financial statements include our operations in Massachusetts, California and Shanghai, China, and those of our wholly-owned subsidiaries. On March 25, 2015, our Board of Directors approved restructuring actions to better align costs with current and future geographic revenue sources and to improve efficiencies. Our San Diego, CA advanced technology office was relocated to our Wilmington, MA facility and our Shanghai office was closed. All intercompany transactions and accounts have been eliminated in consolidation.
Accounting Principles
The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP). In the opinion of management, the accompanying condensed consolidated financial statements include all adjustments (consisting only of normal recurring adjustments), which we consider necessary for a fair presentation of the financial position at such date and of the operating results and cash flows for the periods presented. The results of operations and cash flows for the three months ended may not necessarily be indicative of results that may be expected for any succeeding quarter or for the entire fiscal year. The balance sheet at June 30, 2016 has been derived from our audited consolidated financial statements at that date, but does not include all of the information and notes required by U.S. GAAP for complete financial statements.
The information contained in this Form 10-Q should be read in conjunction with our audited financial statements, included in our Form 10-K, as of and for the year ended June 30, 2016.
Use of Accounting Estimates
The preparation of these financial statements in conformity with U.S. GAAP 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 periods. Some of the more significant estimates include allowance for doubtful accounts, allowance for sales returns, inventory valuation, warranty reserves, and long-lived assets. Management's estimates are based on the facts and circumstances available at the time estimates are made, past historical experience, risk of loss, general economic conditions and trends and management's assessments of the probable future outcome of these matters. Consequently, actual results could differ from such estimates.
Significant accounting policies are described in Note 2 to the condensed consolidated financial statements included in Item 7 of our Form 10-K for the fiscal year ended June 30, 2016.
Foreign Currency Translation
The assets and liabilities of our Shanghai representative office were translated into U.S. dollars at current exchange rates as of the balance sheet date, expenses were translated at average monthly exchange rates. Net
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IMPLANT SCIENCES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
unrealized translation gains or losses associated with the Shanghai office were recorded directly to other comprehensive income. Realized gains and losses from foreign currency transactions were not material for any of the periods presented. We had short-term inter-company receivables from our Shanghai office which were adjusted each period for changes in foreign currency exchange rates with a corresponding entry recorded as a component of the consolidated statement of operations and comprehensive loss.
Reclassification
Certain prior year amounts have been reclassified for consistency with the current period presentation.
On October 10, 2016, we and our subsidiaries entered into an asset purchase agreement to sell the explosives trace detection assets to L-3 Communications Corporation for $117.5 million in cash, plus the assumption of specified liabilities, subject to adjustment.
We concluded that it was appropriate to classify the assets used in our explosives detection business as held for sale. as all of the criteria established under ASC 205 were met. Corresponding reclassifications have also been made to the balance sheet at June 30, 2016. These changes in classification had no effect on the previously reported condensed consolidated statement of operations for any period and did not materially affect previously reported cash flows in the condensed consolidated statement of cash flows.
Discontinued Operations and Assets Classified as Held for Sale
Accounting Standards Codification (Topic 205)
Presentation of Financial Statements Reporting Discontinued Operations
(ASC 205), establishes the criteria for a component of an entity classification as held for sale and reporting an entities financial statements as a discontinued operation. Under ASC 205, a component or group of components, or a business should be classified as held for sale in period in which all of the criteria are met.
·
Management, having the authority to approve the action, commits to a plan to sell the entity to be sold.
·
The entity to be sold is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such entities to be sold.
·
An active program to locate a buyer or buyers and other actions required to complete the plan to sell the entity to be sold have been initiated.
·
The sale of the entity to be sold is probable (the future event or events are likely to occur), and transfer of the entity to be sold is expected to qualify for recognition as a completed sale, within one year, unless events or circumstances beyond an entitys control extend the period required to complete the sale as discussed below.
·
The entity to be sold is being actively marketed for sale at a price that is reasonable in relation to its current fair value.
·
Actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
The Financial Accounting Standards Board issued Accounting Standards Update No. 2014-08,
Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity
(ASU 2014-08). Under ASU 2014-08, a disposal of a component of an entity, a component or group of components shall be reported in discontinued operation if the if the disposal represents a strategic shift that has or will have a major effect on an entitys operations and financial results, as determined when the component or group of components; meets the criteria to be classified as held for sale; is disposed of by sale; or, is disposed of other than by sale.
The sale of our explosive detection assets does not represent a strategic shift in our operations but will have a significant effect on our operations and financial results, given that we are disposing of essentially all of the assets used in our sole business or product line.
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IMPLANT SCIENCES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following balance sheet provides the major classes of our explosives detection business held for sale assets and liabilities and is reconciled to our condensed consolidated balance sheet as of September 30, 2016 and June 30, 2016.
|
|
|
|
|
|
| |
Implant Sciences Corporation
|
Condensed Consolidated Balance Sheet
|
As of September 30, 2016
|
(in thousands)
|
|
|
Held for Sale
|
|
Continuing
|
|
Total
|
|
ASSETS
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
1,282
|
|
$
-
|
|
$
1,282
|
|
Restricted cash and investments
|
367
|
|
-
|
|
367
|
|
Accounts receivable-trade, net
|
4,993
|
|
-
|
|
4,993
|
|
Inventories, net
|
6,108
|
|
-
|
|
6,108
|
|
Prepaid expenses and other current assets
|
237
|
|
233
|
|
470
|
|
Total current assets
|
12,987
|
|
233
|
|
13,220
|
|
Property and equipment, net
|
843
|
|
-
|
|
843
|
|
Other non-current assets
|
98
|
|
-
|
|
98
|
|
Total assets
|
$
13,928
|
|
$
233
|
|
$
14,161
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
Senior secured promissory note BAM
|
$
-
|
|
$
20,000
|
|
$
20,000
|
|
Senior secured convertible promissory note Montsant Partners
|
-
|
|
5,284
|
|
5,284
|
|
Senior secured promissory note DMRJ
|
-
|
|
1,000
|
|
1,000
|
|
Second senior secured convertible promissory note DMRJ
|
-
|
|
11,970
|
|
11,970
|
|
Third senior secured convertible promissory note - DMRJ
|
-
|
|
17,523
|
|
17,523
|
|
Line of credit - DMRJ
|
-
|
|
17,662
|
|
17,662
|
|
Current maturities of obligations under capital lease
|
17
|
|
-
|
|
17
|
|
Warrant derivative liability
|
-
|
|
12,664
|
|
12,664
|
|
Accrued expenses
|
4,974
|
|
11,986
|
|
16,960
|
|
Accounts payable
|
4,705
|
|
1,673
|
|
6,378
|
|
Deferred revenue
|
859
|
|
-
|
|
859
|
|
Total current liabilities
|
10,555
|
|
99,762
|
|
110,317
|
|
Long-term liabilities:
|
|
|
|
|
|
|
Long-term obligations under capital lease, net of current maturities
|
32
|
|
-
|
|
32
|
|
Deferred revenue, net of current
|
615
|
|
-
|
|
615
|
|
Total long-term liabilities
|
647
|
|
-
|
|
647
|
|
Total liabilities
|
11,202
|
|
99,762
|
|
110,964
|
|
Commitments and contingencies
|
|
|
|
|
|
|
Stockholders' deficit:
|
|
|
|
|
|
|
Common stock;
|
-
|
|
80
|
|
80
|
|
Preferred stock; no stated value; 5,000,000 shares authorized
|
|
|
|
|
|
|
Series G Convertible Preferred Stock
|
-
|
|
-
|
|
-
|
|
Series H Convertible Preferred Stock
|
-
|
|
7,000
|
|
7,000
|
|
Series I Convertible Preferred Stock
|
-
|
|
-
|
|
-
|
|
Series J Convertible Preferred Stock
|
-
|
|
-
|
|
-
|
|
Additional paid-in capital
|
-
|
|
123,775
|
|
123,775
|
|
Accumulated deficit
|
-
|
|
(227,403)
|
|
(227,403)
|
|
Deferred compensation
|
-
|
|
(204)
|
|
(204)
|
|
Other comprehensive income
|
-
|
|
22
|
|
22
|
|
Treasury stock, at cost
|
-
|
|
(73)
|
|
(73)
|
|
Total stockholders' deficit
|
-
|
|
(96,803)
|
|
(96,803)
|
|
Total liabilities and stockholders' deficit
|
$
11,202
|
|
$
2,959
|
|
$
14,161
|
|
- 13 -
IMPLANT SCIENCES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
| |
Implant Sciences Corporation
|
Condensed Consolidated Balance Sheet
|
As of June 30, 2016
|
(in thousands)
|
|
|
Held for Sale
|
|
Continuing
|
|
Total
|
|
ASSETS
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
1,338
|
|
$
-
|
|
$
1,338
|
|
Restricted cash and investments
|
367
|
|
-
|
|
367
|
|
Accounts receivable-trade, net
|
7,123
|
|
-
|
|
7,123
|
|
Inventories, net
|
4,681
|
|
-
|
|
4,681
|
|
Prepaid expenses and other current assets
|
229
|
|
235
|
|
464
|
|
Total current assets
|
13,738
|
|
235
|
|
13,973
|
|
Property and equipment, net
|
874
|
|
-
|
|
874
|
|
Other non-current assets
|
98
|
|
-
|
|
98
|
|
Total assets
|
$
14,710
|
|
$
235
|
|
$
14,945
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
Senior secured promissory note BAM
|
$
-
|
|
$
20,000
|
|
$
20,000
|
|
Senior secured convertible promissory note Montsant Partners
|
-
|
|
5,284
|
|
5,284
|
|
Senior secured promissory note DMRJ
|
-
|
|
1,000
|
|
1,000
|
|
Second senior secured convertible promissory note DMRJ
|
-
|
|
18,970
|
|
18,970
|
|
Third senior secured convertible promissory note - DMRJ
|
-
|
|
17,523
|
|
17,523
|
|
Line of credit - DMRJ
|
-
|
|
17,662
|
|
17,662
|
|
Current maturities of obligations under capital lease
|
18
|
|
-
|
|
18
|
|
Warrant derivative liability
|
-
|
|
-
|
|
-
|
|
Accrued expenses
|
5,729
|
|
9,452
|
|
15,181
|
|
Accounts payable
|
3,143
|
|
1,512
|
|
4,655
|
|
Deferred revenue
|
406
|
|
-
|
|
406
|
|
Total current liabilities
|
9,296
|
|
91,403
|
|
100,699
|
|
Long-term liabilities:
|
|
|
|
|
|
|
Long-term obligations under capital lease, net of current maturities
|
35
|
|
-
|
|
35
|
|
Deferred revenue, net of current
|
479
|
|
-
|
|
479
|
|
Total long-term liabilities
|
514
|
|
-
|
|
514
|
|
Total liabilities
|
9,810
|
|
91,403
|
|
101,213
|
|
Commitments and contingencies
|
|
|
|
|
|
|
Stockholders' deficit:
|
|
|
|
|
|
|
Common stock;
|
-
|
|
79
|
|
79
|
|
Preferred stock; no stated value; 5,000,000 shares authorized
|
|
|
|
|
|
|
Series G Convertible Preferred Stock
|
-
|
|
-
|
|
-
|
|
Series H Convertible Preferred Stock
|
-
|
|
-
|
|
-
|
|
Series I Convertible Preferred Stock
|
-
|
|
-
|
|
-
|
|
Series J Convertible Preferred Stock
|
-
|
|
-
|
|
-
|
|
Additional paid-in capital
|
-
|
|
114,255
|
|
114,255
|
|
Accumulated deficit
|
-
|
|
(200,084)
|
|
(200,084)
|
|
Deferred compensation
|
-
|
|
(467)
|
|
(467)
|
|
Other comprehensive income
|
-
|
|
22
|
|
22
|
|
Treasury stock, at cost
|
-
|
|
(73)
|
|
(73)
|
|
Total stockholders' deficit
|
-
|
|
(86,268)
|
|
(86,268)
|
|
Total liabilities and stockholders' deficit
|
$
9,810
|
|
$
5,135
|
|
$
14,945
|
|
Warrant Derivative Liability
Accounting Standards Codification (ASC) 815-40-15 Derivatives and Hedging, requires freestanding contracts that are settled in common stock, including common stock warrants to be designated as an equity instrument, asset or liability. On July 20, 2016, we issued a warrant to purchase 50,657,894 shares of our common stock to DMRJ LLC. Under the provisions of ASC 815-40-15, a contract designated as an asset or a liability must be
- 14 -
IMPLANT SCIENCES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
carried at fair value until exercised or expired, with any changes in fair value recorded in the results of operations. The warrant derivative liability should initially and subsequently be measured at fair value with changes in fair value recorded in earnings in each reporting period.
The fair value is estimated using a binomial option pricing model, which includes variables such as the expected volatility of our share price, interest rates, and dividend yields. These variables are projected based on our historical data, experience, and other factors. Changes in any of these variables could result in material adjustments to the expense / income recognized for changes in the valuation of the warrant liability.
Beneficial Note Conversion Feature - DMRJ
Accounting Standards Codification (ASC) 470-20 Debt, addresses the accounting for financial instruments which have a beneficial conversion feature. In accordance with ASC 470-20, a conversion feature is beneficial, or in the money, when the conversion rate of the convertible security is below the market price of the underlying common stock. A beneficial conversion feature, calculated as of the commitment date, is the difference between the convertible instruments conversion price and the fair value of the companys common stock on that date multiplied by the number of common shares the debt converts into.
Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update 2014-09,
Revenue from Contracts with Customers
(ASU 2014-09), which supersedes the revenue recognition requirements in ASC 605,
Revenue Recognition.
The FASB issued ASU 2014-09 to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards. The core principle of this updated guidance
is that an entity should recognize revenue to depict 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 new rule also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract.
This guidance is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein, which is effective for our fiscal year beginning July 1, 2018, the first day of our 2019 fiscal year
. We are currently evaluating the impact of this accounting guidance and do not expect any significant impact on our consolidated financial statements.
In June 2014, the FASB issued Accounting Standards Update 2014-12,
Compensation-Stock Compensation
(ASU 2014-12). The FASB issued ASU 2014-12 to provide specific guidance on share-based payment awards that provide for achievement of a specific performance target that could be achieved after the requisite service period. ASU 2014-12 requires that a performance target that affects vesting and that could be achieved after the requisite service period should be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. This guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, which is effective for our fiscal year beginning July 1, 2016, the first day of our 2017 fiscal year. Earlier adoption is permitted. ASU 2014-12 may be applied prospectively to all awards granted or modified after the effective date or retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. If retrospective transition is adopted, the cumulative effect of applying this guidance should be recognized in the financial statements as an adjustment to the opening retained earnings balance at that date. The adoption of ASU 2014-12 did not have a material imp
act on our consolidated financial statements.
In August 2014, the FASB issued Accounting Standards Update 2014-15,
Presentation of Financial Statements-Going Concern (Subtopic 205-40)
(ASU 2014-15). ASU 2014-15 provides guidance to U.S. GAAP about managements responsibility to evaluate whether there is a substantial doubt about an entitys ability to continue as a going concern and to provide related footnote disclosures. This new rule requires management to assess an entitys ability to continue as a going concern by incorporating and expanding upon certain principles currently in U.S. auditing standards. Specifically, ASU 2014-15 (1) defines the term substantial doubt, (2) requires an evaluation of every reporting period including interim periods, (3) provides principles for considering the mitigating effect of managements plan, (4) requires certain disclosures when substantial doubt is alleviated as a result of consideration of managements plans, (5) requires an express statement and other disclosures when substantial doubt is not alleviated, and (6) requires an assessment for a period of one year after the date that the financial statements are
- 15 -
IMPLANT SCIENCES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
issued. This guidance is effective for annual periods ending after December 15, 2016, which is effective for our fiscal year beginning July 1, 2016, the first day of our 2017 fiscal year. The adoption of ASU 2014-15 did not have a material impact on our consolidated financial statements.
In July 2015, the FASB issued Accounting Standards Update 2015-11,
Inventory (Topic 330)
(ASU 2015-11). ASU 2015-11 was issued to more closely align the measurement of inventory in U.S. GAAP with the measurement of inventory in International Financial Reporting Standards. The core principle of this updated guidance is that an entity should measure inventory at the lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amendments in ASU 2015-11 apply to inventory that is measured using the first-in, first-out or average cost methods. ASU 2015-11 amends some of the guidance in Topic 330 to more clearly articulate the requirements for the measurement and disclosure of inventory, but the clarifications are not intended to result in any changes in practice other than the change in the subsequent measurement guidance from the lower of cost or market to the lower of cost or net realizable value for inventory. There are no other substantive changes to the guidance on the measurement of inventory. This guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, which is effective for our fiscal year beginning July 1, 2017, the first day of our 2018 fiscal year. We are currently evaluating the impact of this accounting guidance and do not expect any significant impact on our consolidated financial statements.
In August 2015, the FASB issued Accounting Standards Update 2015-15,
Interest Imputation of Interest (Subtopic 835-30) Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements (ASU 2015-15).
ASU 2015-15 states that Staff at the Securities and Exchange Commission would not object to an entity deferring or presenting debt issuance costs as an asset and subsequently amortizing deferred debt issuance cost ratably over the term of the line-of-credit arrangement, regardless of whether there were outstanding borrowings under the arrangement.
3.
Fair Value Measurement
Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures, establishes a three-level fair value hierarchy to classify the inputs used in measuring fair value, which are as follows:
Level 1 inputs to the valuation methodology are based on quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2 inputs to the valuation methodology are based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and
Level 3 inputs to the valuation methodology are based on unobservable inputs that reflect the companys own assumptions about the assumptions market participants would use in pricing the asset or liability.
Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
Our financial instruments at September 30, 2016 and June 30, 2016 include cash equivalents, restricted cash, accounts receivable accounts payable, derivative instruments, borrowings under our senior secured convertible promissory note, senior secured promissory note and a revolving line of credit. The carrying amounts of cash and cash equivalents, restricted cash, receivable and accounts payable are representative of their respective fair values because of the short-term maturities or expected settlement dates of these instruments. The fair value of debt, included in Note 12 to the condensed consolidated financial statements, is based on the fair value of similar instruments. These instruments are short-term in nature and there is no known trading market for our debt.
- 16 -
IMPLANT SCIENCES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table provides the non-recurring fair value measurements of assets and liabilities as of September 30, 2016:
|
|
|
|
|
|
|
| |
|
|
|
|
Fair Value Measurements as of
September 30, 2016
|
(In thousands)
|
|
Carrying
Value at
September 30, 2016
|
|
Quoted Prices in Active Markets for Identical Asset
Level 1
|
|
Significant Other Observable Inputs
Level 2
|
|
Significant Unobservable Inputs
Level 3
|
Certificate of deposit
|
|
$
312
|
|
$
312
|
|
$
-
|
|
$
-
|
Senior secured promissory note BAM
|
|
20,000
|
|
-
|
|
-
|
|
20,000
|
Senior secured convertible promissory note Montsant
|
|
5,284
|
|
-
|
|
-
|
|
5,284
|
Senior secured promissory note DMRJ
|
|
1,000
|
|
-
|
|
-
|
|
1,000
|
Second senior secured convertible promissory note DMRJ
|
|
11,970
|
|
-
|
|
-
|
|
11,970
|
Third senior secured convertible promissory note DMRJ
|
|
17,523
|
|
-
|
|
-
|
|
17,523
|
Line of credit - DMRJ
|
|
17,662
|
|
-
|
|
-
|
|
17,662
|
The following table provides the non-recurring fair value measurements of assets and liabilities as of June 30, 2016:
|
|
|
|
|
|
|
| |
|
|
|
|
Fair Value Measurements as of
June 30, 2016
|
(In thousands)
|
|
Carrying
Value at
June 30, 2016
|
|
Quoted Prices in Active Markets for Identical Asset
Level 1
|
|
Significant Other Observable Inputs
Level 2
|
|
Significant Unobservable Inputs
Level 3
|
Certificate of deposit
|
|
$
312
|
|
$
312
|
|
$
-
|
|
$
-
|
Senior secured promissory note BAM
|
|
20,000
|
|
-
|
|
-
|
|
20,000
|
Senior secured convertible promissory note Montsant
|
|
5,284
|
|
-
|
|
-
|
|
5,284
|
Senior secured promissory note DMRJ
|
|
1,000
|
|
-
|
|
-
|
|
1,000
|
Second senior secured convertible promissory note DMRJ
|
|
18,970
|
|
-
|
|
-
|
|
18,970
|
Third senior secured convertible promissory note DMRJ
|
|
17,523
|
|
-
|
|
-
|
|
17,523
|
Line of credit - DMRJ
|
|
17,662
|
|
-
|
|
-
|
|
17,662
|
The following table summarizes the changes in the fair value of our Level 3 financial liabilities that are measured at fair value for each reporting period:
|
|
|
|
| |
|
|
Warrant Derivative Liability
|
(In thousands)
|
|
For the Three Months Ended September 30,
|
|
|
2016
|
|
2015
|
Balance at beginning of period
|
|
$
-
|
|
$
-
|
Fair value on date of issuance
|
|
15,703
|
|
-
|
Net change in fair value of financial instrument
|
|
(3,039)
|
|
-
|
Balance at end of period
|
|
$
12,664
|
|
$
-
|
- 17 -
IMPLANT SCIENCES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4.
Restricted Cash and Investments
As of September 30, 2016 and June 30, 2016, we had restricted cash and investments, with maturities of less than one year, of $367,000 and $367,000, respectively. Restricted cash and investments consisted of the following:
|
|
|
| |
(In thousands)
|
|
September 30, 2016
|
|
June 30, 2016
|
Current assets
|
|
|
|
|
Certificates of deposit
|
|
$
312
|
|
$
312
|
Cash maintained to secure corporate credit card
|
|
55
|
|
55
|
Total
|
|
$
367
|
|
$
367
|
The restricted investments of $312,000 held in certificates of deposit collateralize our performance under an irrevocable letter of credit issued in April 2010, aggregating to $297,000, in connection with our contract with the India Ministry of Defence, plus the bank required collateralization deposit of $15,000. The letter of credit provides warranty performance security equal to 5% of the contract amount under the terms of the contract with the India Ministry of Defence. We have amended the letter of credit, extending the expiration date to April 15, 2017.
In May 2015, we entered into a corporate credit card agreement with our primary bank, pursuant to which the bank reserves $55,000 of our available cash held in our operating account maintained with the bank to collateralize 105% of the credit limit that is available under the credit card agreement.
5.
Stock Based Compensation
For the three months ended September 30, 2016 and 2015, our consolidated statements of operations and comprehensive loss include $290,000 and $342,000, respectively, of compensation costs and no income tax benefit related to our stock-based compensation arrangements for employee and non-employee director awards, as follows:
|
|
|
| |
|
|
For the Three Months Ended September 30,
|
(In thousands)
|
|
2016
|
|
2015
|
Cost of revenues
|
|
$
25
|
|
$
30
|
Research and development
|
|
22
|
|
84
|
Selling, general and administrative
|
|
243
|
|
228
|
Total
|
|
$
290
|
|
$
342
|
As of September 30, 2016, the total amount of unrecognized stock-based compensation expense was approximately $795,000, which will be recognized over a weighted average period of 1.6 years.
As of September 30, 2016, there were options outstanding to purchase 20,488,984 shares of our common stock at exercise prices ranging from $0.08 to $2.30.
6.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following:
|
|
|
| |
(In thousands)
|
|
September 30, 2016
|
|
June 30, 2016
|
Inventory deposit
|
|
$
110
|
|
$
109
|
Insurance
|
|
224
|
|
128
|
Bank fees
|
|
8
|
|
12
|
Other prepaid expenses
|
|
128
|
|
215
|
Total
|
|
$
470
|
|
$
464
|
- 18 -
IMPLANT SCIENCES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7.
Inventories, net
We value our inventories at lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method, including material, labor and factory overhead. The components of inventories, net of reserves, consist of the following:
|
|
|
| |
(In thousands)
|
|
September 30, 2016
|
|
June 30, 2016
|
Raw materials
|
|
$
3,640
|
|
$
3,067
|
Work in progress
|
|
1,234
|
|
976
|
Finished goods
|
|
1,234
|
|
638
|
Total
|
|
$
6,108
|
|
$
4,681
|
As of September 30, 2016 and June 30, 2016, our reserves for excess and slow-moving inventories were $175,000 and $171,000, respectively.
8.
Property and Equipment, net
Property and equipment consist of the following:
|
|
|
| |
(In thousands)
|
|
September 30, 2016
|
|
June 30, 2016
|
Machinery and equipment
|
|
$
529
|
|
$
529
|
Computers and software
|
|
510
|
|
507
|
Furniture and fixtures
|
|
97
|
|
96
|
Leasehold improvements
|
|
178
|
|
178
|
Equipment under capital lease
|
|
94
|
|
94
|
Construction in progress
|
|
342
|
|
342
|
|
|
1,750
|
|
1,746
|
Less: accumulated depreciation and amortization
|
|
907
|
|
872
|
Total
|
|
$
843
|
|
$
874
|
For the three months ended September 30, 2016 and 2015, depreciation expense was approximately $43,000 and $54,000, respectively.
9.
Accrued Expenses
Accrued expenses consist of the following:
|
|
|
| |
(In thousands)
|
|
September 30, 2016
|
|
June 30, 2016
|
Current liabilities
|
|
|
|
|
Accrued interest
|
|
$
10,685
|
|
$
7,703
|
Accrued compensation and benefits
|
|
2,231
|
|
3,347
|
Accrued warranty costs
|
|
2,473
|
|
2,282
|
Accrued legal and accounting
|
|
268
|
|
533
|
Accrued taxes
|
|
218
|
|
106
|
Accrued dividends
|
|
135
|
|
-
|
Other accrued liabilities
|
|
950
|
|
1,210
|
Total
|
|
$
16,960
|
|
$
15,181
|
On January 16, 2015, Glenn D. Bolduc, resigned his positions as Chief Executive Officer and President of the Company), as well as his seat on the Companys Board of Directors and his position as Chairman of the Board. In connection with and prior to Mr. Bolducs resignations, Mr. Bolduc entered into a Separation Agreement and Release (the Separation Agreement) with the Company. The Separation Agreement provides that Mr. Bolducs resignation will be deemed an involuntary termination without cause pursuant to his Amended and Restated Employment Agreement dated as of June 25, 2013. In this regard, and subject to the terms contained in the Employment Agreement, Mr. Bolduc is entitled to receive: (i) annual base salary for 18 months on a regular payroll basis; (ii) a pro rata portion of any bonus earned in 2015; (iii) continuation of coverage under and contributions to
- 19 -
IMPLANT SCIENCES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
health care, dental and life insurance benefits for a 12 month period; and (iv) transfer of any key man life insurance. In connection with Mr. Bolducs resignation, we recorded a non-recurring charge of $725,000 in our consolidated statements of operations and comprehensive loss for the year ended June 30, 2015. As of September 30, 2016 and June 30, 2016, $0 and $55,000, respectively, of separation benefits are included in accrued expenses in our condensed consolidated financial statements.
10.
Deferred Revenues Current and Long-Term
Deferred revenues are recorded when we receive payments for product or services for which we have not yet completed our obligation to deliver product or have not completed services required by the contractual agreements.
As of September 30, 2016 and June 30, 2016, we had customer advance payment and extended warranty service agreements with maturities of less than one year, of $859,000 and $406,000, respectively, and extended warranty service agreements, with maturities of more than one year, of $615,000 and $479,000, respectively. Deferred revenues consisted of the following:
|
|
|
| |
(In thousands)
|
|
September 30, 2016
|
|
June 30, 2016
|
Current liabilities
|
|
|
|
|
Customer advance payments
|
|
$
264
|
|
$
42
|
Extended warranty service agreements
|
|
595
|
|
364
|
Total
|
|
$
859
|
|
$
406
|
|
|
|
|
|
Long-term liabilities
|
|
|
|
|
Extended warranty service agreements
|
|
$
615
|
|
$
479
|
Total
|
|
$
615
|
|
$
479
|
11.
Earnings Per Share
Basic earnings per share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted earnings per share are based upon the weighted average number of common shares outstanding during the period plus additional weighted average common equivalent shares outstanding during the period. Common equivalent shares result from the assumed exercise of outstanding stock options and warrants, the proceeds of which are then assumed to have been used to repurchase outstanding common stock using the treasury stock method and assumed conversion of certain convertible promissory notes and convertible preferred stock. In addition, the numerator is adjusted for any changes in income or loss that would result from the assumed conversion of potential shares. As of September 30, 2016 and 2015, potentially dilutive shares are excluded from the earnings per share calculation, because their effect would be antidilutive. Shares deemed to be antidilutive include stock options, warrants, convertible debt and convertible preferred stock.
|
|
|
| |
|
|
For the Three Months Ended September 30,
|
(In thousands, except share and per share amounts)
|
|
2016
|
|
2015
|
Basic and diluted loss per share
|
|
|
|
|
Numerator
|
|
|
|
|
Net loss
|
|
$
(27,184)
|
|
$
(911)
|
Denominator
|
|
|
|
|
Weighted average shares
|
|
79,658,953
|
|
76,206,953
|
Basic and diluted loss per share
|
|
$
(0.34)
|
|
$
(0.01)
|
- 20 -
IMPLANT SCIENCES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Common stock equivalents excluded from the diluted earnings per share calculation for the three months ended September 30, 2016 and 2015, were as follows:
|
|
|
| |
|
|
For the Three Months Ended September 30,
|
(In thousands, except share and per share amounts)
|
|
2016
|
|
2015
|
Common stock equivalents excluded:
|
|
|
|
|
Stock options
|
|
442,686
|
|
789,993
|
Warrants
|
|
15,577,160
|
|
56,538
|
Convertible debt
|
|
78,088,367
|
|
39,800,000
|
Convertible preferred stock
|
|
18,071,174
|
|
-
|
|
|
112,179,387
|
|
40,646,531
|
12.
Long-Term Debt and Credit Arrangements
Term Debt and Revolving Credit Facility with DMRJ Group, LLC and Term Debt with Montsant Partners, LLC
We are a party to several loan and credit agreements with DMRJ Group LLC (DMRJ), an accredited institutional investor. In December 2008, we entered into a note and warrant purchase agreement with DMRJ pursuant to which we issued a senior secured convertible promissory note in the principal amount of $5,600,000 and a warrant to purchase 1,000,000 shares of our common stock. Thereafter, we entered into a series of amendments, waivers and modifications of this facility. The note, which is collateralized by all of our assets, originally bore interest at 11.0% per annum.
The note contains restrictions and financial covenants including: (i) restrictions against declaring or paying dividends or making any distributions; against creating, assuming or incurring any liens; against creating, assuming or incurring any indebtedness; against merging or consolidating with any other company, provided, however, that a merger or consolidation is permitted if we are the surviving entity; against the sale, assignment, transfer or lease of our assets, other than in the ordinary course of business and excluding inventory and certain asset sales expressly permitted by the note purchase agreement; against making investments in any company, extending credit or loans, or purchasing stock or other ownership interest of any company; and (ii) covenants that we have authorized or reserved for the purpose of issuance, 150% of the aggregate number of shares of our common stock issuable upon exercise of the warrant; that we maintain a minimum cash balance of at least $500,000; that the aggregate dollar amount of all accounts payable be no more than 100 days past due; and that we maintain a current ratio, defined as current assets divided by current liabilities, of no less than 0.60 to 1.00.
On March 19 2015, we amended each of our credit instruments with DMRJ, pursuant to which the maturity of all of our indebtedness to DMRJ was extended from March 31, 2015 to March 31, 2016 and DMRJ waived our compliance with certain financial covenants contained in each of our promissory notes and all related credit agreements through the new maturity date.
On May 4, 2015, we entered into an assignment agreement with DMRJ and Montsant Partners LLC ( Montsant), wherein DMRJ assigned its rights, title and interest in the senior secured promissory note dated December 10, 2008 and appointed DMRJ as its collateral agent under the promissory note agreement.
DMRJ and Montsant Partners, LLC are funds managed by Platinum Partners Value Arbitrage Fund LP.
The note purchase agreement with Montsant contains restrictions and financial covenants including: (i) restrictions against declaring or paying dividends or making any distributions; against creating, assuming or incurring any liens; against creating, assuming or incurring any indebtedness; against merging or consolidating with any other company, against the sale, assignment, transfer or lease of our assets, other than in the ordinary course of business; against making investments in any company, extending credit or loans, or purchasing stock or other ownership interest of any company; and (ii) covenants that we maintain a minimum cash balance of at least $500,000; that the weighted average age of all accounts payable be no more than 100 days past due; and that we maintain a current ratio, defined as current assets divided by current liabilities, of no less than 0.60 to 1.00. Montsant waived our compliance with certain financial covenants in our promissory notes through the maturity date, consistent with the financial covenants which have been waived in each of our promissory notes and all related credit agreements with DMRJ.
- 21 -
IMPLANT SCIENCES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On March 31, 2016, we further amended each of our credit instruments with DMRJ and Montsant, which were entered into on April 6, 2016 and effective March 31, 2016, pursuant to which:
·
the maturity of all of our indebtedness to DMRJ under (i) a senior secured promissory note dated July 1, 2009 and (ii) a credit agreement dated September 4, 2009, was extended from March 31, 2016 to June 30, 2016;
·
the maturity of all of our indebtedness to (i) Montsant under an amended and restated senior secured convertible promissory note dated March 12, 2009 (the March 2009 Note), (ii) DMRJ under a senior secured convertible promissory note dated September 5, 2012 (the September 2012 Note) and (iii) to DMRJ under a senior secured convertible promissory note dated February 28, 2013 (the February 2013 Note and together with the March 2009 Note, the July 2009 Note, the September 2012 Note, the Notes), was extended from March 31, 2016 to December 30, 2016;
·
the provisions regarding the prepayment of the March 2009 Note were deleted;
·
the blocker provisions of the March 2009 Note limiting the number of shares of our common stock, par value $0.001 per share (Common Stock) to be issued upon the conversion of the March 2009 Note, when aggregated with the all other shares of Common Stock beneficially owned by the holder of the March 2009 Note at that time, to 4.99% of the then issued and outstanding shares of the Common Stock outstanding at such time were deleted;
·
the conversion provisions of the March 2009 Note were fixed to remove the limitations on the conversion to only upon prepayment of the note or during the 30-day period ending March 31, 2014;
·
we agreed to make the amendments to our Series H Convertible Preferred Stock (the Series H Preferred Stock), Series I Convertible Preferred Stock (the Series I Preferred Stock) and Series J Convertible Preferred Stock (the Series J Preferred Stock and together with the Series H Preferred Stock and the Series I Preferred Stock, the Amended Preferred Stock Series;
·
we agreed to prepay the interest due on each of the March 2009 Note, the September 2012 Note and the February 2013 Notes from the date of the amendment through June 30, 2016 by increasing the outstanding aggregate principal amount under each such Note;
·
all outstanding amounts due to DMRJ and Montsant shall be immediately due and payable if (a) we receive an offer from another person or entity with respect to a Major Transaction, (b) DMRJ notifies us that such offer is satisfactory to DMRJ (in its sole discretion), and (c) either (i) our Board of Directors does not approve such transaction within ten (10) days of our receipt of such notice from DMRJ, (ii) if such transaction is subject to stockholder approval, we do not file a preliminary proxy statement with the SEC within fifteen (15) days of the receipt of such notice from DMRJ or (iii) if such transaction is subject to stockholder approval, our stockholders do not approve such transaction within ninety (90) days of the receipt of such notice from DMRJ, that we shall be obligated to immediately forward to DMRJ any offer that we receive with respect to any Major Transaction;
·
we shall provide not less than thirty (30) business days written notice to DMRJ and Montsant, as applicable, of the our intent to repay all or any portion of the principal, interest and other amounts outstanding under our indebtedness and following receipt of any such notice, DMRJ and Montsant shall have the option to convert all or any portion of their Notes in accordance with the applicable conversion terms of the applicable Note;
·
each Note, plus all accrued and unpaid interest thereon at the time of any conversion, may be converted at the option of DMRJ or Montsant, as applicable, at any time and from time to time into such number of shares of the applicable preferred stock of the Company, upon one (1) business days notice to us, and upon Montsants conversion of the March 2009 Note, the shares of preferred stock shall be issued to Montsant or any designee(s) of Montsant;
·
we agreed that if there is any breach of the Comfort Letter , the interest rate under each term note and advances under the Credit Agreement will be increased by an additional fourteen percent (14%) per annum (pro-rated for partial years), not to exceed the maximum amount of such interest permitted by applicable New York law;
·
agreed that we will not, and will not permit any Subsidiary to, enter into, create, incur, assume, suffer, become or be liable for in any manner, or permit to exist, any indebtedness, or guarantee, assume,
- 22 -
IMPLANT SCIENCES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
endorse or otherwise become responsible for (directly or indirectly), any indebtedness, performance or obligations of any other person, and failure by us to comply with this clause shall be an immediate event of default;
·
we shall be obligated to provide DMRJ and Montsant with written notice of the anticipated record date with respect to any Major Transaction at least five (5) business days prior to such record date, and failure by us to comply with this clause shall be an immediate event of default;
·
we agreed not to amend the terms of any Amended Preferred Stock Series without the prior written consent of the DMRJ and Montsant, and any breach is an immediate event of default; and
·
we agreed not to issue any shares of any Amended Preferred Stock Series other than upon the conversion of the March 2009 Note, the September 2012 Note and the February 2013 Note or with the prior written consent of the Investor, and any breach of this provision is an immediate event of default.
The prepayment by us of all interest to be accrued from the March 31, 2016 through June 30, 2016, amounted to $119,400 on account of the March 2009 Note, $450,000 on account of the September 2012 Note and $450,000 on account of the February 2013 Note. Such prepayments were effected by increasing the outstanding aggregate principal amount under each of the March 2009 Note, the September 2012 Note and the February 2013 Note, respectively. Further, the accrued interest amount due under each of the March 2009 Note, the September 2012 Note and the February 2013 Note, as of March 31, 2016, of $1,980,000, $6,520,000 and $5,073,000, respectively, were added to the outstanding principal amount under each of the notes, as of March 31, 2016. Consequently, the new outstanding principal balance under (i) the March 2009 Note was $5,284,000, (ii) the September 2012 Note was $18,970,000 and (iii) the February 2013 Note was $17,523,000, as of March 31, 2016.
However, despite the best efforts of the Company, DMRJ and the Assignee, certain post-closing effectiveness conditions to the April 6, 2016 amendment with respect to the delivery of an opinion of counsel and payment of the fees and expenses of DMRJ and the Assignee were not satisfied, and the April 6, 2016 amendment was, therefore, never deemed effective, resulting in our being in default of our obligations to DMRJ and the Montsant since March 31, 2016.
On July 20, 2016, we further amended each of our credit instruments with DMRJ and Montsant, effective as of June 30, 2016, pursuant to which:
·
the maturity of all of our indebtedness to DMRJ under (i) the amended and restated senior secured convertible promissory note, dated March 12, 2009 (as amended, the March 2009 Note), (ii) the senior secured promissory note dated July 1, 2009 (as amended, the July 2009 Note), (iii) the credit agreement dated September 4, 2009 (as amended, the September 2009 Credit Agreement), (iv) the senior secured convertible promissory note, dated September 5, 2012 (as amended, the September 2012 Note), and (v) the senior secured convertible promissory note, dated February 28, 2013 (as amended, the February 2013 Note) were each extended to October 31, 2016;
·
the blocker provisions of the March 2009 Note held by the Assignee, limiting the number of shares of Common Stock, to be issued upon the conversion of such notes, when aggregated with the all other shares of Common Stock beneficially owned by the holders of such notes at that time, to 4.99% of the then issued and outstanding shares of the Common Stock outstanding at such time, were confirmed as never having been deleted by the April 6, 2016 Amendment and an identical blocker provision was added to the September 2012 Note held by DMRJ;
·
the conversion and anti-dilution provisions of the February 2013 Note held by DMRJ were deleted in their entirety, and the conversion provisions of the September 2012 Note were limited to an aggregate total of $7,000,000 in obligations thereunder;
·
the conversion price for the September 2012 Note was reduced from $1.09 to $0.19 per share for up to $7,000,000 of the obligations thereunder, DMRJ agreed to convert $7,000,000 of the principal under the September 2012 Note prior to the consummation of the Zapata Acquisition, and the remaining conversion rights under the September 2012 Note and the February 2013 Note were waived;
·
we agreed to amend our Series H Convertible Preferred Stock (the Series H Preferred Stock), Series I Convertible Preferred Stock (the Series I Preferred Stock) and Series J Convertible Preferred Stock (the Series J Preferred Stock and together with the Series H Preferred Stock and the Series I Preferred Stock, the Amended Preferred Stock Series) to correct and amend and reinsert the 4.99%
- 23 -
IMPLANT SCIENCES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
blocker provisions in lieu and in replacement of the similar provision that was added in the Articles of Amendment to the Restated Articles of Organization that was filed on July 18, 2016;
·
in connection with the Zapata Acquisition, we agreed, subject to the approval of our stockholders, to (i) re-domesticate from Massachusetts to Delaware and (ii) amend our Articles of Organization to increase its authorized share capital to 650,000,000 shares of Common Stock;
·
we agreed to issue to DMRJ a warrant to purchase 50,657,894 shares of our common stock (see Note 16 to the condensed consolidated financial statements); and
·
DMRJ and Montsant waived any defaults from the failure of the effectiveness of the March 31, 2016 amendment.
As of September 30, 2016, our obligations to DMRJ under each of the three promissory notes and a revolving line of credit approximated $11,970,000, $17,523,000, $1,000,000 and $17,662,000, respectively. Further, as of September 30, 2016, our obligation to DMRJ for accrued interest under these instruments approximated $7,282,000 and is included in current liabilities in the condensed consolidated financial statements.
As of September 30, 2016, our obligations to Montsant under a promissory note approximated $5,284,000. Further, as of September 30, 2016, our obligation to Montsant for accrued interest under this instrument approximated was $203,000.
As of December 9, 2016, our obligations to DMRJ under each of the three promissory notes and a revolving line of credit approximated $11,970,000, $17,523,000, $1,000,000 and $17,662,000, respectively. Further, as of December 9, 2016, our obligation to DMRJ for accrued interest under these instruments approximated $8,687,000. Please refer to Note 14 to the condensed consolidated financial statements for a discussion of the August 2016 conversions of principal indebtedness by DMRJ.
As of December 9, 2016, our obligations to Montsant under a promissory note approximated $5,284,000. Further, as of December 9, 2016, our obligation to Montsant for accrued interest under this instrument approximated $328,000.
The payment of our indebtedness to DMRJ and Montsant are stayed pending the conclusion of the bankruptcy proceedings.
Term Debt with BAM
On March 19, 2014, we entered into a note purchase agreement with a group of institutional investors and BAM Administrative Services LLC (BAM), an administrative agent for the investors, pursuant to which we issued senior secured promissory notes in the aggregate principal amount of $20,000,000. The notes bear interest at 15% per annum and mature on March 31, 2015. The proceeds from the sale of the notes were used to repay (i) $17,624,000 of our outstanding indebtedness to DMRJ under the amended and restated revolving promissory note dated September 29, 2011 (ii) $1,809,000 of interest outstanding under the amended and restated promissory note and (iii) $567,000 of interest outstanding under our senior secured convertible promissory note dated September 5, 2012.
On March 19, 2015, we extended our credit agreement with BAM pursuant to which, amongst other matters, the interest rate increased to 16% per annum, commencing on April 1, 2015 and we extended the maturity date of our indebtedness from March 31, 2015 to March 31, 2016. The maturity of our indebtedness to BAM was automatically extended to October 30, 2016 as a result of the extension of the maturity date of our indebtedness to DMRJ and Montsant.
The notes purchase agreement contains restrictions and financial covenants including: (i) restrictions against declaring or paying dividends or making any distributions; against creating, assuming or incurring any liens; against creating, assuming or incurring any indebtedness; against merging or consolidating with any other company, against the sale, assignment, transfer or lease of our assets, other than in the inventory ordinary course of business ; against making investments in any company, extending credit or loans, or purchasing stock or other ownership interest of any company; and (ii) covenants that we maintain a minimum cash balance of at least $500,000; that the weighted average age of all accounts payable be no more than 100 days past due; and that we maintain a current ratio, defined as current assets divided by current liabilities, of no less than 0.60 to 1.00. BAM waived our compliance with certain financial covenants in our promissory notes through the maturity date, consistent with the financial covenants which have been waived in each of our promissory notes and all related credit agreements with DMRJ.
- 24 -
IMPLANT SCIENCES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Further, upon the occurrence of an event of default under certain provisions of our agreements with BAM, we could be required to pay default rate interest equal to the lesser of 2.5% per month and the maximum applicable legal rate per annum on the outstanding principal balance outstanding.
On April 6, 2016, we extended our credit agreement with BAM, effective March 31, 2016 pursuant to which;
·
the maturity of our indebtedness to the investors extended from March 30, 2016 to June 29, 2016; provided that in the event we extend the maturity date on all obligations owed to DMRJ, to a date past June 30, 2016, the maturity date of the Secured Term Notes shall automatically extend to such business day as is immediately prior to such extended maturity date of the DMRJ obligations;
·
all outstanding amounts due to the under the notes shall be immediately due and payable if (a) we receive an offer from another person or entity with respect to a Major Transaction (as defined below under the heading Amendments to Preferred Stock), (b) BAM, on behalf of the investors, notifies us that such offer is satisfactory to the investors (in their sole discretion), and (c) either (i) our Board of Directors does not approve such transaction within ten (10) days of receipt of such notice from BAM, (ii) if such transaction is subject to stockholder approval, we do not file a preliminary proxy statement with the SEC within fifteen (15) days of receipt of such notice from BAM or (iii) if such transaction is subject to stockholder approval, our stockholders do not approve such transaction within ninety (90) days of receipt of such notice from BAM; provided, that we shall be obligated to immediately forward to BAM, on behalf of the investors, any offer that we receive with respect to any Major Transaction;
·
we shall provide not less than thirty (30) business days written notice to BAM, of our intent to repay all or any portion of the principal, interest and other amounts outstanding under our obligations to the investors;
·
agreed that we will not, and will not permit any subsidiary to, enter into, create, incur, assume, suffer, become or be liable for in any manner, or permit to exist, any indebtedness, or guarantee, assume, endorse or otherwise become responsible for (directly or indirectly), any indebtedness, performance or obligations of any other person, and failure by us to comply with this clause shall be an immediate event of default;
·
we agreed to make the amendments to our Series H Convertible Preferred Stock (the Series H Preferred Stock), Series I Convertible Preferred Stock (the Series I Preferred Stock) and Series J Convertible Preferred Stock (the Series J Preferred Stock and together with the Series H Preferred Stock and the Series I Preferred Stock, the Amended Preferred Stock Series.
As of September 30, 2016, our obligations under the senior secured promissory notes for which BAM is the agent were $20,000,000. Further, as of September 30, 2016, our obligation under such notes for accrued interest amounted to approximately $3,200,000 and is included in current liabilities in the consolidated financial statements.
As of December 9, 2016, our obligations under the senior secured promissory notes for which BAM is the agent were $20,000,000. Further, as of December 9, 2016, our obligation under such notes for accrued interest amounted to approximately $3,802,000.
The payment of our indebtedness to BAM is stayed pending the conclusion of the bankruptcy proceedings.
13.
Convertible Preferred Stock
Series H Convertible Preferred Stock
In connection with the September 7, 2012 amendment to our credit instruments with DMRJ we issued to DMRJ a second senior secured convertible promissory note in the principal amount of $12,000,000 (the September 2012 Note). The September 2012 convertible promissory note is convertible in whole or in part, at DMRJs option, into shares of Series H Convertible Preferred Stock at an initial conversion rate of $1,000 per share (as adjusted in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the Series H Preferred Stock, the Series H Original Issue Price). The number of shares of our Preferred Stock, par value $0.10 per share (the Preferred Stock), designated as Series H Preferred Stock was 15,000.
The holders of the Series H Preferred Stock will be entitled to receive, prior to the payment of any dividends with respect to our Common Stock and/or Series G Convertible Preferred Stock, cumulative dividends on each share of Series H Preferred Stock at a rate equal to 15% of the Series H Original Issue Price per annum, (i) when, as and if declared by our Board of Directors, (ii) upon a liquidation, dissolution or winding up of the Company (a
- 25 -
IMPLANT SCIENCES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Liquidation Event), or (iii) upon the repurchase or conversion of the Series H Preferred Stock. All dividends accruing on the Series H Preferred Stock are payable by the issuance of additional shares of Series H Preferred Stock.
Each share of Series H Preferred Stock will be convertible, at the option of the holder, into that number of shares of Common Stock as is determined by (i) dividing the Series H Original Issue Price by the Series H Conversion Price (as defined below) in effect at the time of conversion and (ii) multiply the result by 1,000. The Series H Conversion Price will initially be equal to $1,090, and is subject to adjustment in the event that (a) we issue additional shares of Common Stock as a dividend or other distribution on outstanding shares of Common Stock, (b) there is a split or subdivision of outstanding shares of Common Stock, or (c) there is a combination or reverse stock split of outstanding shares of Common Stock into a smaller number of shares of Common Stock. Assuming no adjustments to the Series H Original Issue Price or the Series H Conversion Price, the New Note will be convertible indirectly, at DMRJs option, into shares of Common Stock at an effective conversion price of $1.09 per share, which represents a discount of approximately 20% from the daily volume weighted average price of the Common Stock over the 20 trading days preceding the date of the amendment.
Upon a Liquidation Event, the holders of shares of Series H Preferred Stock then outstanding will be entitled to be paid out of the assets of the company available for distribution to its stockholders, before any payment is made to the holders of Common Stock and/or Series G Preferred Stock in respect of such stock, an amount per share equal to the Series H Original Issue Price, plus any accrued but unpaid dividends thereon, whether or not declared. At the option of holders of a majority of the outstanding Series H Preferred Stock, (i) a consolidation or merger of us with or into another entity or person, or any other corporate reorganization, in which our stockholders immediately prior to such consolidation, merger or reorganization do not hold at least a majority of the resulting or surviving entities voting power immediately following such consolidation, merger or reorganization, or (ii) a sale or transfer of all or substantially all of our assets for cash, securities or other property, will be deemed to be a Liquidation Event.
The holders of the Series H Preferred Stock will have no voting rights except as required by applicable law. However, without the consent of the holders of a majority of the outstanding Series H Preferred Stock, we may not (i) amend, alter or repeal any provision of its Articles of Organization or By-laws in a manner that adversely affects the powers, preferences or rights of the Series H Preferred Stock; (ii) authorize or issue any equity securities (or any equity or debt securities convertible into equity securities) ranking prior and superior to the Series H Preferred Stock with respect to dividends, distributions, redemption rights or rights upon liquidation, dissolution or winding up; or (iii) consummate any capital reorganization or reclassification of any of its equity securities (or debt securities convertible into equity securities) into equity securities ranking prior and superior to the Series H Preferred Stock with respect to dividends, distributions, redemption rights or rights upon liquidation, dissolution or winding up.
On July 18, 2016, in anticipation of the Purchase Agreement Amendment, the Company adopted and filed Articles of Amendment to the Restated Articles of Organization of the Company (the July 18 Preferred Stock Articles of Amendment), pursuant to which the initial conversion price of the Series H Preferred Stock was reduced from $1,090 per share to $190 per share; and the blocker provisions of the Amended Series H Preferred Stock Series limiting the number of shares of the Common Stock to be issued upon the conversion of the applicable Amended Preferred Stock Series, when aggregated with the all other shares of Common Stock beneficially owned by the holder of such Amended Preferred Stock Series at that time, to 4.99% of the then issued and outstanding shares of the Common Stock outstanding at such time, which the Company purported to delete in the Articles of Amendment filed in connection with the Fourteenth Amendment, were reinserted.
Between August 11, 2016 and August 23, 2016, DMRJ converted $7,000,000 of principal into 7,000 Series H Convertible Preferred Stock shares, of which DMRJ assigned 4,401.54 shares of Series H Convertible Preferred Stock to Platinum Partners Value Arbitrage Fund LP and distributed 1,467.18 shares to ED&F Man Capital Markets Limited and 1,131.28 shares to Prime Capital (Bermuda) Limited.
As of September 30, 2016, 7,000 shares of Series H Convertible Preferred Stock were issued and outstanding.
Series I Convertible Preferred Stock and Series J Convertible Preferred Stock
In connection with the February 28, 2013 amendment to our credit instruments with DMRJ we issued to DMRJ a third senior secured convertible promissory note in the principal amount of $12,000,000 (the February 2013 Note). The February 2013 Note is convertible in whole or in part, at DMRJs option, into shares of Series I Convertible Preferred Stock at an initial conversion rate of $1,000 per share (as adjusted in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the Series I Preferred Stock, the
- 26 -
IMPLANT SCIENCES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Series I Original Issue Price). The number of shares of our Preferred Stock, par value $0.10 per share (the Preferred Stock), designated as Series I Preferred Stock was 15,000.
As amended, the March 2009 Note is convertible in whole or in part, at DMRJs option, into shares of Series J Convertible Preferred Stock at an initial conversion rate of $1,000 per share (as adjusted in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the Series J Preferred Stock, the Series J Original Issue Price). The number of shares of our Preferred Stock, par value $0.10 per share (the Preferred Stock), designated as Series J Preferred Stock was 6,000.
Each share of Series I Preferred Stock will be convertible, at the option of the holder, into that number of shares of Common Stock as is determined by (i) dividing the Series I Original Issue Price by the Series I Conversion Price (as defined below) in effect at the time of conversion and (ii) multiplying the result by 1,000. The Series I Conversion Price will initially be equal to $1,180.00, and is subject to adjustment in the event that (a) we issue additional shares of Common Stock as a dividend or other distribution on outstanding shares of Common Stock, (b) there is a split or subdivision of outstanding shares of Common Stock, or (c) there is a combination or reverse stock split of outstanding shares of Common Stock into a smaller number of shares of Common Stock. Assuming no adjustments to the Series I Original Issue Price or the Series I Conversion Price, the February 2013 Note will be convertible indirectly, at DMRJs option, into shares of Common Stock at an effective conversion price of $1.18 per share, which represents premium of approximately 3% over the closing price of the Common Stock on the trading day preceding the date of the February 28, 2013 amendments.
The holders of the Series I Preferred Stock will be entitled to receive, prior to the payment of any dividends with respect to our Common Stock and/or Series G Preferred Stock, cumulative dividends on each share of Series I Preferred Stock at a rate equal to 15% of the Series I Original Issue Price per annum, (i) when, as and if declared by our Board of Directors, (ii) upon a Liquidation Event, or (iii) upon the conversion of the Series I Preferred Stock All dividends accruing on the Series I Preferred Stock are payable by the issuance of additional shares of Series I Preferred Stock.
The holders of Series J Preferred Stock will be entitled to participate on an as converted basis in all dividends or distributions declared or paid on our Common Stock.
Upon a Liquidation Event, the holders of shares of Series I Preferred Stock and Series J Preferred Stock then outstanding will be entitled to be paid out of the assets of the company available for distribution to its stockholders,
pari passu
with distributions made with respect to the Series H Preferred Stock but before any payment is made to the holders of Common Stock and /or Series G Preferred Stock in respect of such stock, (i) an amount per share of Series I Preferred Stock equal to the Series I Original Issue Price, plus any accrued but unpaid dividends thereon, whether or not declared, and (ii) an amount per share of Series J Preferred Stock equal to the Series J Original Issue Price, plus any dividends declared but unpaid thereon. At the option of holders of a majority of the outstanding Series I Preferred Stock, (i) a consolidation or merger of the company with or into another entity or person, or any other corporate reorganization, in which the stockholders of the company immediately prior to such consolidation, merger or reorganization do not hold at least a majority of the resulting or surviving entities voting power immediately following such consolidation, merger or reorganization, or (ii) a sale or transfer of all or substantially all of our assets for cash, securities or other property, will be deemed to be a Liquidation Event.
Upon any such Liquidation Event, and after all payments described in the preceding paragraph are made in full in respect of the Series H Preferred Stock, the Series I Preferred Stock and the Series J Preferred Stock, the holders of the Series G Preferred Stock will be entitled to be paid out of the assets of the company available for distribution to its stockholders an amount equal to $8.00 per share of Series G Preferred Stock, plus any declared but unpaid dividends, prior to the payment of any amounts to the holders of our Common Stock by reason of their ownership of such stock.
Each share of Series J Preferred Stock will be convertible, at the option of the holder, into that number of shares of Common Stock as is determined by dividing the Series J Original Issue Price by the Series J Conversion Price (as defined below) in effect at the time of conversion. The Series J Conversion Price will initially be equal to $0.08, and is subject to adjustment in the event that (a) the Company issues additional shares of Common Stock as a dividend or other distribution on outstanding shares of Common Stock, (b) there is a split or subdivision of outstanding shares of Common Stock, or (c) there is a combination or reverse stock split of outstanding shares of Common Stock into a smaller number of shares of Common Stock. Assuming no adjustments to the Series J Original Issue Price or the Series J Conversion Price, the March 2009 Note will be convertible indirectly, at DMRJs option, into shares of Common Stock at an effective conversion price of $.08 per share. Prior to the execution of the
- 27 -
IMPLANT SCIENCES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
amendment, the March 2009 Note was convertible directly into shares of Common Stock at a conversion price of $0.08 per share. Accordingly, we do not believe this change to be material.
The holders of the Series I Preferred Stock and the Series J Preferred Stock will have no voting rights except as required by applicable law. However, without the consent of the holders of a majority of the outstanding Series I Preferred Stock or Series J Preferred Stock, as the case may be, with each such series voting as a separate class, we may not (i) amend, alter or repeal any provision of our Articles of Organization or By-laws in a manner that adversely affects the powers, preferences or rights of the Series I Preferred Stock or Series J Preferred Stock, as the case may be; (ii) authorize or issue any equity securities (or any equity or debt securities convertible into equity securities) ranking prior and superior to the Series I Preferred Stock or Series J Preferred Stock, as the case may be, with respect to dividends, distributions, redemption rights or rights upon liquidation, dissolution or winding up; or (iii) consummate any capital reorganization or reclassification of any of its equity securities (or debt securities convertible into equity securities) into equity securities ranking prior and superior to the Series I Preferred Stock or Series J Preferred Stock, as the case may be, with respect to dividends, distributions, redemption rights or rights upon liquidation, dissolution or winding up.
In connection with the March 31, 2016 amendment to our credit agreements with DMRJ and Montsant, we agreed to amend certain terms of each of the Amended Preferred Stock Series as follows, which amendments were set forth in Articles of Amendment adopted on April 6, 2016:
·
the number of shares of our Preferred Stock, par value $0.10 per share (the Preferred Stock), designated as Series H Preferred Stock was increased from 15,000 shares to 22,500 shares, Series I Preferred Stock was increased from 15,000 shares to 21,000 shares and Series J Preferred Stock was increased from 6,000 shares to 6,500 shares;
·
the Series J Preferred Stock was amended so that its holders are entitled to receive preferred dividends equal to fifteen percent (15%) of the original issue price (subject to certain adjustments) of such shares of Preferred Stock, which is paid by the issuance of additional shares of Series J Preferred Stock;
·
the Series J Preferred Stock was amended so that it has the same dividend rights as the Series H Preferred Stock and the Series I Preferred Stock wherein we cannot declare, pay or set aside any dividends on any shares of Common Stock unless the holders of the Series J Preferred Stock then outstanding shall simultaneously receive a dividend on each outstanding share of Series J Preferred Stock in an amount at least equal to that dividend per share of Series J Preferred Stock as would equal the product of (i) the dividend payable on each share of Common Stock and (ii) the number of shares of Common Stock issuable upon conversion of a share of Series J Preferred Stock, in each case calculated on the record date for determination of holders entitled to receive such dividend;
·
we agreed that if there is any breach of the Comfort Letter, the preferred dividend rate under each Amended Preferred Stock Series will be increased by an additional fourteen percent (14%) per annum (pro-rated for partial years), not to exceed the maximum amount (if any) permitted by law;
·
each Amended Preferred Stock Series was amended so that in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company (a Liquidation Event), instead of receiving just the original issue price (subject to certain adjustments) of such shares of Preferred Stock, the holders of such Preferred Stock receive the greater of the original issue price (subject to certain adjustments) of such shares of Preferred Stock and the amount that they would have received if all such shares of such Amended Preferred Stock Series were converted into Common Stock in accordance with the terms of such Amended Preferred Stock Series immediately prior to such Liquidation Event;
·
the Series J Preferred Stock was amended so that its holders have the same rights as the holders of Series H Preferred Stock and Series I Preferred Stock to, at the option of the holders of a majority of the outstanding applicable Amended Preferred Stock Series, have a Liquidation Event also include (i) a consolidation or merger of the Company with or into another entity or person, or any other corporate reorganization, in which the stockholders of the Company immediately prior to such consolidation, merger or reorganization do not hold at least a majority of the resulting or surviving entities voting power immediately following such consolidation, merger or reorganization (solely in respect of their equity interests), or (ii) a sale or transfer of all or substantially all of the Companys assets for cash, securities or other property;
- 28 -
IMPLANT SCIENCES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
·
each Amended Preferred Stock Series was amended to give their respective holders voting rights on any Major Transaction that is approved by our board of directors and presented to the our stockholders for their action or consideration at any meeting of our stockholders (or, if applicable, by written consent of stockholders in lieu of meeting) (a Major Transaction Stockholder Vote), entitling them to cast the number of votes equal to the number of whole shares of Common Stock into which the shares of the applicable Amended Preferred Stock Series held by such holder are convertible as of the record date for determining stockholders entitled to vote on such matter (irrespective of whether any such conversion would result in economic gain or loss to the holder) and shall be entitled to notice of any such meeting of stockholders in accordance with our by-laws, which holders of the applicable
Amended Preferred Stock Series, except as provided by law or as otherwise provided therein, vote on any Major Transaction Stockholder Vote together with the holders of Common Stock as a single class;
·
the blocker provisions of each Amended Preferred Stock Series limiting the number of shares of the Common Stock to be issued upon the conversion of the applicable Amended Preferred Stock Series, when aggregated with the all other shares of Common Stock beneficially owned by the holder of such Amended Preferred Stock Series at that time, to 4.99% of the then issued and outstanding shares of the Common Stock outstanding at such time were deleted; and,
·
we shall be obligated to provide each holder of an Amended Preferred Stock Series with written notice of the anticipated record date with respect to any Major Transaction at least five (5) business days prior to such record date, where Major Transaction means (i) the consolidation, merger or other business combination by us with or into another entity or person (other than (x) pursuant to a migratory merger effected solely for the purpose of changing the our jurisdiction of incorporation or (y) a consolidation, merger or other business combination in which holders of the Companys voting power immediately prior to the transaction continue after the transaction to hold, directly or indirectly, the voting power of the surviving entity or entities necessary to elect a majority of the members of the board of directors (or their equivalent if other than a corporation) of such entity or entities); (ii) the sale or transfer of more than fifty percent (50%) of our assets (based on the fair market value as determined in good faith by the Board of Directors) other than inventory in the ordinary course of business in one or a related series of transactions; or (iii) the closing of a purchase, tender or exchange offer made to the holders of more than fifty percent (50%) of the outstanding shares of Common Stock in which more than fifty percent (50%) of the outstanding shares of Common Stock were tendered and accepted.
Further, we adopted on July 20, 2016, and filed on July 21, 2016, Articles of Amendment to the Restated Articles of Organization of the Company (the July 21 Preferred Stock Articles of Amendment), pursuant to which each of the Amended Preferred Stock Series was corrected and amended to reinsert the blocker provisions of each Amended Preferred Stock Series limiting the number of shares of the Common Stock to be issued upon the conversion of the applicable Amended Preferred Stock Series, when aggregated with the all other shares of Common Stock beneficially owned by the holder of such Amended Preferred Stock Series at that time, to 4.99% of the then issued and outstanding shares of the Common Stock outstanding at such time, in lieu and in replacement of the similar provisions in the July 18 Preferred Stock Articles of Amendment.
As of September 30, 2016, there were no shares of Series I Preferred Stock or Series J Preferred Stock outstanding.
14.
Derivative Liabilities
Beneficial Note Conversion Feature - DMRJ
Accounting Standards Codification (ASC) 470-20 Debt, addresses the accounting for financial instruments which have a beneficial conversion feature. On July 20, 2016, we extended the maturity date of our obligations with DMRJ LLC. As amended, the conversion and anti-dilution provisions of the February 2013 Note held by DMRJ were deleted in their entirety, and the conversion provisions of the September 2012 Note were limited to an aggregate total of $7,000,000 in obligations thereunder. The conversion price for the September 2012 Note was reduced from $1.09 to $0.19 per share for up to $7,000,000 of the obligations thereunder. The market price of our common stock on the date of the note extension was $0.44 per share; therefore a beneficial conversion feature existed.
In accordance with ASC 470-20, a conversion feature is beneficial, or in the money, when the conversion rate of the convertible security is below the market price of the underlying common stock. A beneficial conversion feature, calculated as of the commitment date, is the difference between the convertible instruments conversion price
- 29 -
IMPLANT SCIENCES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
and the fair value of the companys common stock on that date multiplied by the number of common shares the debt converts into. For the three months ended September 30, 2016 we recorded a non-cash interest charge of $9,217,000 in our condensed consolidated statements of operations.
Between August 11, 2016 and August 23, 2016, DMRJ converted $7,000,000 of principal into 7,000 Series H Convertible Preferred Stock shares, of which DMRJ assigned 4,401.54 shares of Series H Convertible Preferred Stock to Platinum Partners Value Arbitrage Fund LP and assigned 1,467.18 shares to ED&F Man Capital Markets Limited and 1,131.28 shares to Prime Capital (Bermuda) Limited.
Warrant Derivative Liability
Accounting Standards Codification (ASC) 815-40-15 Derivatives and Hedging, requires freestanding contracts that are settled in common stock, including common stock warrants to be designated as an equity instrument, asset or liability. Under the provisions of ASC 815-40-15, a contract designated as an asset or a liability must be carried at fair value until exercised or expired, with any changes in fair value recorded in the results of operations. On July 20, 2016, we issued a warrant to purchase 50,657,894 shares of our common stock to DMRJ LLC at an exercise price of no lower than $0.19 per share with a five-year term, first exercisable on October 31, 2016. The specific exercise price shall be the higher of: (i) $0.19 per share; and (ii) in the event that we sell our existing business (which would not include any assets acquired by us) on or prior to October 31, 2016.
The warrant derivative liability was valued using a binomial option pricing model, with the following assumptions on the following dates:
|
|
|
| |
|
|
Warrant Derivative Liability Fair Value Calculation
|
|
|
|
|
July 20, 2016
|
|
September 30, 2016
|
Shares eligible to be purchased
|
|
50,657,894
|
|
50,657,894
|
Exercise price
|
|
$
0.19
|
|
$
0.19
|
Stock price on date of measurement
|
|
$
0.44
|
|
$
0.37
|
Expected volatility
|
|
61.9%
|
|
64.8%
|
Expected dividend yield
|
|
0.0%
|
|
0.0%
|
Risk free interest rate
|
|
1.17%
|
|
1.13%
|
Expected life (in years)
|
|
5.00
|
|
4.81
|
Fair value
|
|
$
15,703,000
|
|
$
12,664,000
|
The warrant derivative liability was initially and subsequently measured at fair value with changes in fair value recorded in earnings in each reporting period.
As of the date of grant, we recorded a warrant derivative liability of $15,703,000 and will accrete the fair value of the warrant derivative liability to non-cash interest expense in our condensed consolidated statements of operations over the least of the warrant vesting period or duration of the new note conversion feature. For the three months ended September 30, 2016, we accreted $15,703,000 to non-cash interest expense in our condensed consolidated statement of operations, given the new note conversion amount was converted to shares of our Series H Convertible Preferred Stock in August 2016 (see Note 13 to our condensed consolidated financial statements). At September 30, 2016, we recorded a non-cash benefit of $3,039,000 to recognize the change in the fair value of the warrant as of that date. The fair value is estimated using a binomial option pricing model, which includes variables such as the expected volatility of our share price, interest rates, and dividend yields. These variables are projected based on our historical data, experience, and other factors. Changes in any of these variables could result in material adjustments to the expense / income recognized for changes in the valuation of the warrants liability.
15.
Stockholders Deficit
Common Shares Authorized
On July 1, 2015, at an Annual Meeting of Stockholders, our stockholders approved an amendment to the Companys Restated Articles of Organization to increase the number of authorized shares of common stock by 50,000,000 shares to 250,000,000 shares. Articles of Amendment to our Restated Articles of Organization with the Commonwealth of Massachusetts were filed on July 20, 2016 to affect that increase. As a result of the stockholder approval, we are authorized to issue 250,000,000 shares of our common stock.
- 30 -
IMPLANT SCIENCES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Common Stock Options and Stock Purchase Warrants
In connection with various financing agreements and services provided by consultants, we have issued warrants to purchase shares of our common stock. The fair value of warrants issued is determined using a binomial or Black-Scholes option pricing model.
Common Stock Options
In December 2004, we adopted the 2004 Stock Option Plan (the 2004 Plan). The 2004 Plan provides for the grant of incentive stock options and non-qualified stock options to employees and affiliates. The exercise price of the options equa1 100% of the fair market value on the date of the grant or 110% of the fair market value for beneficial owners of more than 10% of our stock. Options expire between five and ten years from the date of the option grant and have various vesting periods. Options may be exercised by delivering to the company cash in an amount equal to such aggregate exercise price of the options exercised, or with the consent of the Committee, shares of our common stock having a fair market value equal to such aggregate exercise price, a personal recourse note issued to the company in a principal amount equal to such aggregate exercise price, other acceptable consideration including a cashless exercise/resale procedure, or any combination of the foregoing. A total of 500,000 shares were originally reserved for issuance under the 2004 Plan. In December 2005, our stockholders approved an increase in the 2004 Plan from 500,000 shares to 1,000,000 shares. In December 2007, our stockholders approved an increase in the 2004 Plan from 1,000,000 shares to 2,000,000 shares. In March 2012, our stockholders approved an increase in the 2004 Plan from 2,000,000 shares to 4,000,000. The 2004 Plan expired in May 2014, as such no further options grants may be issued under this plan. In September 2012, our Board of Directors adopted an amendment to our 2004 Stock Option increasing the total number of shares of our common stock issuable thereunder from 4,000,000 shares to 20,000,000 shares. On July 1, 2015, at the 2015 Annual Meeting of Stockholders, the September 2012 amendment was approved by our stockholders.
On July 2, 2014, our Board of Directors adopted the 2014 Stock Option Plan (the 2014 Plan). The 2014 Plan provides for the grant of incentive stock options and non-qualified stock options to employees and affiliates. The exercise price of the options equa1 100% of the fair market value on the date of the grant or 110% of the fair market value for beneficial owners of more than 10% of our stock. Options expire between five and ten years from the date of the option grant and have various vesting periods. Options may be exercised by delivering to the company cash in an amount equal to such aggregate exercise price of the options exercised, or with the consent of the Committee, shares of our common stock having a fair market value equal to such aggregate exercise price, a personal recourse note issued to the company in a principal amount equal to such aggregate exercise price, other acceptable consideration including a cashless exercise/resale procedure, or any combination of the foregoing. A total of 15,000,000 shares were originally reserved for issuance under the 2014 Plan. The 2014 Plan was approved by our stockholders on July 1, 2015 at the 2015 Annual Meeting of Stockholders.
As of September 30, 2016, there were options outstanding to purchase
20,488,984 shares of our common stock at exercise prices ranging from $0.08 to $2.30.
We issued no shares and 63,000 shares of common stock during the three months ended September 30, 2016 and 2015, respectively, as a result of the exercise of options by employees and consultants.
Stock Purchase Warrants and Stock Issuances
In connection with various financing agreements and services provided by consultants, we have issued warrants to purchase shares of our common stock. The fair value of warrants issued is determined using the Black-Scholes option pricing model.
In May 2015 we entered into two advisory and consulting services agreements, which provided for the issuance of an aggregate of 2,200,000 shares of our common stock as payment. In June 2015, we issued 550,000 shares of common and the advisory and services agreements provide for the issuance of the remaining 1,650,000 shares in equal monthly installments of 110,000 shares commencing in September 2015. During the three months ended September 30, 2016, we issued 440,000 shares of common stock having a value of $183,000 to these two advisors for services rendered under the advisory and consulting services agreement and issued 50,000 shares of our common stock to a third advisor having a value of $20,000.
As of September 30, 2016, there were warrants outstanding to purchase 52,832,894, shares of our common stock at exercise prices ranging from $0.19 to $1.22 expiring at various dates between May 1, 2017 and October 20, 2021.
- 31 -
IMPLANT SCIENCES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
16.
Income Taxes
We are required to file federal and state income tax returns in the United States. The preparation of these tax returns requires us to interpret the applicable tax laws and regulations in effect in such jurisdictions, which could affect the amount of tax paid by us. In consultation with our tax advisors, we base our tax returns on interpretations that are believed to be reasonable under the circumstances. The tax returns, however, are subject to routine reviews by the various federal and state taxing authorities in the jurisdictions in which we file tax returns. As part of these reviews, a taxing authority may disagree with respect to the income tax positions taken by us (uncertain tax positions) and, therefore, may require us to pay additional taxes. As required under applicable accounting rules, we accrue an amount for our estimate of additional income tax liability, including interest and penalties, which we could incur as a result of the ultimate or effective resolution of the uncertain tax positions. We account for income taxes using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributed to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carry-forwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established when necessary to reduce deferred tax assets to amounts expected to be realized.
We account for uncertain income tax positions by accruing for the estimated additional amount of taxes for the uncertain tax positions when the uncertain tax position does not meet the more likely than not standard for sustaining the position. We review and update our accrual as more definitive information becomes available from taxing authorities, upon completion of tax audits, upon expiration of statutes of limitation, or upon occurrence of other events. This requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. Significant judgment is required in assessing the timing and amounts of deductible and taxable items and the probability of sustaining uncertain tax positions. The benefits of uncertain tax positions are recorded in our consolidated financial statements only after determining a more-likely-than-not probability that the uncertain tax positions will withstand challenge, if any, from tax authorities. When facts and circumstances change, we reassess these probabilities and record any changes in the consolidated financial statements as appropriate.
Deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amounts and the tax basis of the assets and liabilities using the enacted tax rate in effect in the years in which the differences are expected to reverse. A valuation allowance has been recorded against the deferred tax asset as it is more likely than not, based upon our analysis of all available evidence, that the tax benefit of the deferred tax asset will not be realized.
A valuation allowance has been established for our tax assets as their use is dependent on the generation of sufficient future taxable income, which cannot be predicted at this time. Included in the valuation allowance is approximately $800,000 related to certain operating loss carryforwards resulting from the exercise of employee stock options, the tax benefit of which, when recognized, will be accounted for as a credit to additional paid-in capital rather than a reduction in income tax.
As of September 30, 2016, the Company has the following unused net operating loss and tax credit carryforwards available to offset future federal and state taxable income, both of which expire at various times as noted below:
|
|
|
|
|
|
| |
(In thousands)
|
|
Net Operating Losses
|
|
Investment AMT & Research Credits
|
|
Expiration Dates
|
|
Federal
|
|
$
115,701
|
|
$
1,615
|
|
2022 to 2036
|
|
State
|
|
$
81,872
|
|
$
1,099
|
|
2017 to 2036
|
|
We have recorded a full valuation allowance against our net deferred tax assets of $52,892,000 as of September 30, 2016, due to uncertainties related to our ability to utilize these assets. The valuation allowance is based on our estimates of taxable income and the period over which our deferred tax assets will be recoverable.
Potential 382 Limitation
Our net operating loss and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service. Our ability to utilize our net operating loss (NOL) and alternative minimum tax (AMT) and research and development credit (R&D) carryforwards may be substantially limited due to ownership changes that
- 32 -
IMPLANT SCIENCES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
may have occurred or that could occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended (the Code), as well as similar state provisions. These ownership changes may limit the amount of NOL, AMT and R&D credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an ownership change, as defined in Section 382 of the Code, results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50% of the outstanding stock of a company by certain stockholders or public groups.
We have not completed a study to assess whether one or more ownership changes have occurred since we became a loss corporation as defined in Section 382 of the Code, but we believe that it is likely that an ownership change has occurred. If we have experienced an ownership change, utilization of the NOL, AMT and R&D credit carryforwards would be subject to an annual limitation, which is determined by first multiplying the value of our common stock at the time of the ownership change by the applicable long-term, tax-exempt rate, and then could be subject to additional adjustments, as required. Any such limitation may result in the expiration of a portion of the NOL, AMT or R&D credit carryforwards before utilization. Until a study is completed and any limitation known, no amounts are being considered as an uncertain tax position or disclosed as an unrecognized tax benefit under ASC 740. Any carryforwards that expire prior to utilization as a result of such limitations will be removed from deferred tax assets with a corresponding adjustment to the valuation allowance. Due to the existence of the valuation allowance, it is not expected that any potential limitation will have a material impact on our operating results.
From time to time we may be assessed interest or penalties by major tax jurisdictions, namely the states of Massachusetts and California. We adopted the accounting standards related to accounting for uncertainty in income taxes recognized in an enterprises financial statements on April 1, 2007. As of June 30, 2016, we had no material unrecognized tax benefits and no adjustments to liabilities or operations were required. No interest and penalties have been recognized by the Company to date.
Tax years 2013 through 2016 are subject to examination by the federal and state taxing authorities. There are no income tax examinations currently in process.
For the three months ended September 30, 2016 and 2015, we provided for no taxes in our consolidated statement of operations as we have significant net loss carryforwards.
Our net operating loss carryforwards are subject to review and possible adjustment by the Internal Revenue Service and are subject to certain limitations in the event of cumulative changes in the ownership interest of significant stockholders over a three-year period in excess of 50%.
17.
Commitments and Contingencies
On April 1, 2013, we entered into a lease for manufacturing, research and office space in Wilmington, Massachusetts, the lease of which expires on June 30, 2020. Under the terms of the lease, we are responsible for our proportionate share of real estate taxes and operating expenses relating to this facility. We leased research and office space in San Diego, California and leased 300 square feet of office space in Shanghai, China. On March 25, 2015, our Board of Directors approved restructuring actions to better align costs with current and future geographic revenue sources and to improve efficiencies. We have exited from our leases in San Diego, CA and Shanghai, China in November 2015. Total rent expense, including assessments for maintenance and real estate taxes for the three months ended September 30, 2016 and 2015, was $182,000 and $219,000, respectively.
License Agreements
We are obligated under one license agreement, assumed in connection with the acquisition of Ion Metrics, whereby we were granted rights to use certain intellectual property for safety, security and narcotic applications, which we intend to incorporate into future security product offerings for certain minimum guaranteed annual payments. The license agreement expired on September 30, 2016 and as of September 30, 2016; we have no obligation under this license agreement for future minimum guaranteed payments.
18.
Financial Information By Segment
Operating segments are defined as components of an enterprise about which separate financial information is available that is regularly evaluated by the chief operating decision maker or decision making group, in determining how to allocate resources and in accessing performance. Our chief operating decision making group is composed of the chief executive officer and members of senior management. Based on qualitative and quantitative criteria, we have determined that we operate within one reportable segment, which is the Security Products Segment.
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IMPLANT SCIENCES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
19.
Legal
On March 23, 2015, Bernard Miller (Mr. Miller), individually and on behalf of all others similarly situated shareholders of the company, filed a complaint against Dr. William J. McGann, Messrs. Glenn D. Bolduc, John H. Hassett, John A. Keating, Robert P. Liscouski, Howard Safir and Michael C. Turmelle and the Company in the Suffolk Superior Court of the Commonwealth of Massachusetts, seeking derivative action as a result of director breaches of fiduciary duty and unjust enrichment. Amongst other things, the plaintiff requested that the court compel the Company to hold an annual stockholders meeting; subject the September 2012 Amendment to the 2004 Plan to a vote at the next annual stockholders meeting; rescind the stock option awards granted under the September 2012 Amendment to 2004 Plan in the event that the amendment is not approved by a majority of our stockholders; impose a trust, in favor of the Company, for any benefits improperly received; and award costs and expenses, including reasonable attorney fees.
On July 1, 2015 we held our 2015 Annual Meeting of Stockholders. Stockholders approved an amendment to the Companys 2004 Stock Option Plan to increase the aggregate number of shares of the Companys common stock, par value $0.001 per share available for issuance under the Plan by 16,000,000 shares to 20,000,000 shares and approved the Companys Amended and Restated 2014 Stock Option Plan.
On May 22, 2015, a motion to dismiss the Complaint with prejudice was served on the plaintiff and subsequently filed with the Court. On July 21, 2015, the Court endorsed an Order of Stipulation the parties entered into. The Stipulation provides, among other things, that the Complaint is dismissed with prejudice and the Motion to Dismiss is moot. On December 17, 2015, the Court ruled that the Plaintiffs counsel was entitled to a fee of $70,000 together with costs of approximately $6,000. During the fiscal year ended June 30, 2016, we recorded a charge of $76,000 in our condensed consolidated statement of operations and comprehensive loss.
We are not currently a party to any other legal proceedings, other than routine litigation incidental to our business that which we believe will not have a material effect on our business, assets or results of operations. From time to time, we are subject to various claims, legal proceedings and investigations covering a wide range of matters that arise in the ordinary course of our business activities. Each of these matters may be subject to various uncertainties.
20.
Subsequent Events
Sale of Explosives Detector Assets, Bankruptcy Filing and Court Order Authorizing Sale
On October 10, 2016, we and our subsidiaries entered into an asset purchase agreement to sell the explosives trace detection assets to L-3 Communications Corporation for $117.5 million in cash, plus the assumption of specified liabilities, subject to adjustment. The asset purchase agreement constitutes a stalking horse bid in a sale process being conducted under Section 363 of the U.S. Bankruptcy Code. As the Stalking horse bidder, L-3 will be entitled to a break-up fee and expense reimbursement if it does not prevail as the successful bidder at any subsequent Bankruptcy Court auction. L-3s role as the stalking horse bidder upon Bankruptcy Court Appeal, and the sale itself, are subject to approval by the Bankruptcy Court. In connection with the sale, on October 10, 2016, Implant Sciences Corporation and its subsidiaries IMX Acquisition Corp., C Acquisition Corp. and Accurel Systems International Corp. (together with the Company, the Debtors) filed voluntary relief petitions under Chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court for the District of Delaware (the Bankruptcy Court). We will continue to operate our businesses as debtors-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code. On the petition date, the Debtors filed several motions with the bankruptcy court, including a motion to have the Chapter 11 cases jointly administered.
On December 16, 2016, the Bankruptcy Court issued an order authorizing the sale of substantially all of our assets free and clear of liens, claims, encumbrances and other interests; authorized and approved our performance under the asset purchase agreement entered into with L-3; approved the assumption and assignment of certain of our contracts and unexpired leases. In conjunction with this order, on December 16, 2016, we amended the asset purchase agreement with L-3 whereby both parties agreed that the closing date will be January 5, 2017.
Debtor-in-Possession Financing
In connection with the Chapter 11 filings, we filed a motion seeking the approval of the bankruptcy court for a superpriority senior secured loan of $5.7 million (the DIP Loan) between the Company and DIP SPV I, L.P., as the debtor-in possession lender ( the DIP Lender) pursuant to a senior secured superpriority debtor-in-possession loan and security agreement entered into by the Debtors and the DIP Lender on October 10, 2016. The DIP loan
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IMPLANT SCIENCES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
would bear interest at 12% and shall pay a one-time closing fee of $199,500 on the closing date of the DIP Loan and an exit fee equal to $427,500, less any interest, other that default interest (which is at a rate of 24%), paid to the DIP Lender as of the termination date of the DIP Loan. The DIP Loan is payable in full upon the consummation of the sale under the asset purchase agreement with L-3 Communications Corporation or a sale to any other winning bidder in the Bankruptcy Court auction. On October 13, 2016, we borrowed $1,500,000 under the DIP Loan.
The use of proceeds from the DIP Loan would be limited to working capital and other general corporate purposes consistent with the budget that the Company presented to the DIP Lender, including payment of costs and expenses related to the administration of the bankruptcy proceedings and payment of other expenses as approved by the bankruptcy court. Unless otherwise extended, the DIP Loan would mature six months from the anniversary date of the agreement, subject to certain provisions that may lead to an earlier termination.
On November 7, 2016, we terminated the Senior Secured, Super-Priority Debtor-in-Possession Loan and Security Agreement, dated as of October 10, 2016 (as amended on November 3, 2016, the Original DIP Agreement), with the original lender, DIP SPV I, L.P. (the Original DIP Lender). In connection with such termination, we paid $1,610,769 to the Original DIP Lender and its advisors to satisfy outstanding obligations under the Original DIP Agreement, including $74,354 for expense reimbursement for the Original DIP Lenders advisors.
On November 7, 2016 (the Effective Date), we entered into a replacement Senior Secured, Super-Priority Debtor-in-Possession Loan and Security Agreement (the New DIP Agreement) with Tannor Partners Credit Fund, LP, the New DIP Lender, which DIP Agreement was approved by the Bankruptcy Court on an interim basis pursuant to an order dated as of the Effective Date for the initial loan amount of $5.7 million. Under the New DIP Agreement, subject to the terms and conditions thereof, the New DIP Lender agreed to lend up to a total of $8.0 million to us, with the initial installment of $5.7 million payable upon the Bankruptcy Court entering the interim order for the New DIP Agreement and the remaining $2.3 million payable upon the Bankruptcy Court entering the final order for the New DIP Agreement. On November 8, 2016, we borrowed $5,700,000 under the New DIP Agreement and borrowed an additional $2,300,000 on November 30, 2016.
Termination of Zapata Industries SAS Letter of Intent
On November 21, 2016, the Letter of Intent (the LOI), dated July 18, 2016, between us and Zapata Industries SAS (
Zapata
) was terminated.
Counsel for Zapata filed a Notice of Appearance and Request for Service of Papers with the U.S Bankruptcy Court, District of Delaware, on December 2, 2016. The Company disputes any payment obligations it may have to Zapata in connection with the LOI or the termination thereof.
New DIP Loan Debt Covenant Non-Compliance
On December 8, 2016, we notified the Tannor Partners Credit Fund that our cash collections for the month ended November 30, 2016 were lower than the amounts contained in the DIP Budget. As such we were not in compliance with the New DIP Loan Covenants, which constitutes an event of default under the New DIP Loan. We expect to submit an order of stipulation with the Bankruptcy Court and have agreed to pay an additional $96,000 of interest in full and final satisfaction of any entitlement of Tannor under the New DIP Loan Agreement through January 5, 2017. This additional interest shall not be credited against the exit fee.
Robert Liscouski Agreement
On October 8, 2016, we entered into an agreement with Mr. Robert Liscouski pursuant to which we agreed to pay a success fee of $300,000 upon the completion of the sale of the ETD business and our purchase of Zapata. In the event that the sale of the ETD business is not completed and the Bankruptcy Court does not permit the payment of the success fee, we agreed to pay Mr. Liscouski $300,000 upon the liquidation of our assets.
We have evaluated subsequent events after the balance sheet date through the date these financial statements were issued.
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Item 2.